I have been listening to this book on Audible all day.

A Mad Catastrophe: The Outbreak of World War I and the Collapse of the Habsburg Empire

We all knew from basic history the state of the Austro-Hungarian empire prior to WW1, but this book really drives home just how dysfunctional it was.

The meal for a lifetime is how ideology can cause you to eschew the practical solution.

From the basic narrative, both the Ottomans and Austrians were vying for the title of sickest empire. The Ottomans and successor Turkish state survived everything intact and with a foothold in Europe because the Young turks were willing to give up that which they couldn't hold to keep the body strong. That is, they were willing to chop off the diseased arms so that the body would be healthy.

My interpretation of the AH Empire from the book is that they could have done the same and retrenched from their weak position back to their core, but they were unwilling due to a strong belief in the pride and honor of their once strong empire, which not only kept them from retrenching but forced them into a war they couldn't win in order to avoid the non-stop embarrassments of their collapsing empire.

The lesson of course is to get rid of your ideology and always analyze if you are over-extended.

I highly recommend the book.



 The dictator of Turkey. He's not a dictator.  He's been duly elected every time.

Gibbons Burke writes: 

Lots of dictators have been selected by the people in elections (Hitler, Chavez), or appointed and granted dictatorial powers by democratic representative bodies (Mussolini). One of the great concerns of the founding fathers of the United States was the tendency of democracies to devolve into dictatorial tyrannies.

Pete Earle writes: 

Democracy is the lowest rung on the collectivist ladder and an essential precursor to socialism. The idea that a pulse, and nothing more, would qualify an individual to take part in the political process is ludicrous to anyone who has spent even a cursory amount of time in the real world. 

Stefan Jovanovich writes: 

The G Boys are retailing another of those lessons from history that is really a bad sermon about the awful citizenry. No one in Philadelphia in 1787 was concerned about democratic tyranny. They gave control of the Union to the House of Representatives and to the appointees of the States' own popular houses. The Senate exists, not as a check on democratic impulses, but as a scheme that gave small states a reason to believe that they would not be surrendering their own popular sovereignties. Hitler did not win an electoral majority; his dictatorial powers came from the emergency legislation adopted after the Reichstag fire. There is nothing in the record of German aristocracies to suggest that they would have been any more temperate in their judgment than "the people" we're in 1933; after all, they were Hitler's party's principal source of campaign funds.

What is wrong with Venezuela and Turkey and the EU, for that matter, is that their democracy is an ideology for giving the state absolute authority in the name of "the people", not what our American democracies - state and Federal - were agreed upon to be: the legal mechanism for the exercise by individuals of their own particular rights as citizens.



 Tesla's bid for Solar City should be interesting. SCTY is up 20%. I wonder if Chanos will roll his short over to Tesla.

Gordon Haave writes: 

It's impossible to know which companies shareholders are getting screwed, but with this massive conflict of interest where neither board can really expect to be acting faithfully, you can be assured that one of the companies' shareholders is getting a raw deal.

anonymous writes: 

Hypothetically, if SCTY was an Enron, then was this not a masterstroke in staying off the regulators? If there were no public shareholder or lender losers then there is nobody who is going to sue. They all got paid out at a premium. That action was far cheaper than a defense Musk would have had to have worked to defend his main entity. He paid cheap early without settling with regulators or losing his reputation. He also looks to have hurt the man who had it in for him.

Now Musk can turn around and sue for not knowing what he just bought and recoup some of the premium he paid. That will pay his costs when the shorts go after him again. He gained time and space.

Maybe the Chairman figured it right that shorting is a losing game that will lead to an early grave. Musk's server will not have email on it but Solarcity's will. I doubt you can sue for shortsale profits that you did not rightfully earn due to Musk's actions. There will have to be a roll as suggested.

Paul Marino writes: 

The lesson for me is to not short bad credits like SCTY during a bull market in playgrounds where billionaires like Musk play unless you have Chanos' AUM.

anonymous writes: 

I think the lesson should be "don't bet against those with fat wallets". The short game is not one about logic or company earnings, but about supply and demand for outstanding shares. A few years ago we saw a similar scenario play out between those shorting OPK and Phillip Frost, a very wealthy majority owner of OPK. Frost won.



 I was at the Burj Khalifa last week. I am told even before the world's tallest tower currently got completed, the Royals of Dubai went bankrupt.

Yes! The Tower had to change its name from Burj Dubai to Burj Khalifa since the Royals of Abu Dhabi had to buy it out to ensure it reaches commercial delivery!

Now I am told the tallest tower of the world is coming up in Saudi Arabia! What can it do to crude oil? What can it mean for geopolitics?

Since the hubris indicator has a 100% hit rate, I shudder to think of the implications of Saudi Arabia choosing to embrace it now.

anonymous writes:

Could this arguably be different than the other towers as a hubris indicator (I'm aware of the dangers of "this time is different")?

I say this in that the other tallest buildings were built when things were seemingly remarkable.

In this case, it's known the issues of oil and the implications it causes. Instead of hubris is this a last ditch effort?

Gordon Haave writes: 

My opinion is that it is not economics, but rather politics. The wind has been blowing strongly against the Saudis for the last few years. Meanwhile, the Saudis have noticed that the political class and the banks do, literally, whatever they want in the US without consequences. This is just an attempt to tie Aramco into the western financial system so that there will never be any embargoes or political actions against it.



 The last time ten year german bonds went negative

Orson Terrill writes: 

No. Every episode of hyperinflation involved government essentially going to debt markets, spending it all, going to debt markets to cover interest and raise new money, spending it all….each iteration increases inflation, reduces demand for the debt, and undermines the perception of the currency as a store of value (all equivalents in this case). The plummeting value of the of the currency (hyperinflation) is the end game.

Stefan Jovanovich writes:

The German, Austrian, Hungarian and Italian currency collapses after World War I had nothing to do with "going to debt markets" because the domestic markets for private debt had literally disappeared. In each case the collapse of the exchange value of the currency began with wage indexing; payments to government workers and all those covered by union labor agreements were linked to price indexes, and the governments literally printed the money for those increased payments.
There is one part of the suggested parallel to the present that is accurate. The governments "borrowed" the money from the central bank in the same way the Japanese and American Treasuries now cover all current fiscal deficits.

But there was no problem for these nations' Treasuries to "cover the interest" on their domestic debts; while tax revenues fell behind price increases, they were still more than enough to cover the "old" coupon interest charges on the government debt issued before wage indexing had begun.

As for "the plummeting value of the currency" the German central bankers and Treasurer were completely convinced that their funding the government's wage increases had had absolutely no effect on prices; after all, the price level in Germany as measured by the pre-war gold standard had not gone up at all and German exports were thriving! What stopped the wage indexing was the realization that German domestic assets were not keeping pace; at one point, the entire value of Daimler Benz as a company was reduced to the price the factory was charging in dollars for sending 4 of its phaetons to America.

Bresciani-Turroni's book, Economics of Inflation, is essential reading on the subject. The Mises Institute has a PDF; but one should ignore their own explanation by Thorsten Polleit. He refers to B-T's book but does not seem to have actually read it.

Peter Tep writes: 

Have you read Martin Armstrong's work? He relates Weimar Germany to previous episodes of hyperinflation, which is just collapse in confidence of government and then currency.

Look at Argentina, well at least few years ago. You could go to the street "cambio" to get better rates than the bank. That's loss in confidence.

Don't mean to sound condescending because you gents are far smarter than me! Doesn't hyperinflation require a high velocity of money?

Seems gold bug narrative is fixed to the issue of "money printing", and I don't know the specifics of how repo market works but I thought QE was a swap of bonds for cash and not helicopter money, hence US velocity of money down due to the banks parking at Fed, or in this case the ECB.

Just my two cents, but an interesting conversation for sure!

Gordan Haave writes: 

Stefan, you said "Here in the bleachers we have a hard time understanding the fine distinctions of the forms of central bank lending/purchasing in a fiat currency scheme."

This is by design.

Anyway, it reminds me of art history. When I went to Greenwich High School I spent my senior year in a program called "shapers of the world" which was a western core art, music, and literature program. Then I went to Columbia which had, and still has, the finest western civ core curriculum.

I studied art history for years. One day, sophomore year we were looking at slides in an art history class. I wish I remember the name of the artist and painting, but anyway, it was a landscape painting with a tree in the foreground. One of the secondary branches of the tree was crooked, and the professor said that it was the artists way of rebelling against the conformist society he lived in.

Bear in mind that prior to this I liked my identity as a high-class protestant western civ genius. But, when he said that something clicked. A lightbulb went off in my head that said "you know Gord, this is all bullshit".

Anyway, later in life I studied economics for years and years. I can tell you all the mainstream answers about why creating money left and right is not, in fact, "printing money" as Mr. Tep said above.

However, my conclusion about it is the same as my conclusion about art history. "It's all bullshit".

They are creating money and giving it to themselves to print first, no differently than the way roman emperors called in coins and re-issued the with less silver content.

The rest is all obfuscation.

The key in all of this is not to become a paranoid permabear, but rather to learn to accept reality for what it is and learn to play the game.



 When does a western movie become a horror movie. Or, when does a horror movie become a western?

I just watched Bone Tomahawk at the suggestion of Scott Brooks. (87% on rotten tomatoes)

Many years ago on the spec list I wrote about the movie 1900, which is a great movie despite only having a 47% Rotten Tomatoes rating.

At the time I likened 1900 to the wedding scene in Deer Hunter, where you get sucked deeply into a cultural scene that you have to want to be a part of or else you find it boring.

Bone Tomahawk
is a two and a half hour movie. The first 1:45 is like 1900 or the wedding scene of Deer Hunter. There isn't much action but if you cut out other distractions you are deeply sucked into the time and place. The last 45 minutes however is sheer horror.

The movie has Kurt Russel at his best, along with Matthew Fox, the star of the best TV show ever and like myself and Omega Fiji.

I am a big fan of the Adam Carolla podcast, the number one podcast on the internet. During the time I have listened to him he has made two movies, both apparently break-even.

Between him and his guests he talks a lot about the process of making a movie. That is, having an idea, getting it funded, produced, etc. A lot of hollywood is about minimizing risk and only going with idea that have already been proven, which is why you see part 2's and 3's of series even when the part 3's are lame on the surface.

When I watched Bone Tomahawk part of what I was thinking is whose idea was this movie? Who pitched it to a studio? Who at the studio gave it a greenlight? Who approved the 2.5 hour cut? Who accepted some of the incredible violence? Whoever these people were they had incredible balls and should be applauded.

It's really a sight to see and appreciate.



 (I understand that Shkreli has announced that he will reduce the price but has not said what the new price will be. This is no matter. This analysis stands whether the price is $100 or $750 per pill.) The vilification of Martin Shkreli, who the Internet has dubbed "The World's Biggest Asshole", raises a number of interesting issues.


1. What is the proper price for the drug Daraprim?

2. Why was it selling for far less very recently?

3. Is Shkreli, in fact, an asshole?

4. Who is more moral, Shkreli or the Internet Masses?


1. Roughly $750 per pill.

2. Because the previous owners were more concerned about their reputations than Shkreli is.

3. Yes, he is, that is why he was able to realize the revenue maximizing price.

4. Shkreli

Let's examine the issue: Daraprim (despite being called an HIV drug in the media) is a drug that treats toxoplasmosis, which is caused by a T. Gondii infection. Some of these patients are sickened because their immune system is weak from HIV. T. Gondii hospitalizes approximately 9,000 people in the U.S. per year. It kills about 700 of those 9,000. It is preventable as long as you wash your hands after exposure to cat excrement. It is also important to properly prepare your food.

Congenital Toxoplasmosis effects about 3 per 100,000 live births. Turing has stated that at $13.50 per pill revenues are about $5 million per year. $5 million/ $13.50 = ~370,000 pills produced per year. At roughly 9,000 patients hospitalized per year, that equals 41 pills per patient.

What's the right price for these pills? For many years Glaxo sold them for $1 per pill. Glaxo sold the rights to Core Pharma in 2010. Core Pharma over a few years raised the price up to $13.50. Core than sold to Turing, which raised the price to $750 per pill.

So, in a relatively short period the price went from $1 per pill to $750 per pill. Why is that? From the drug marketer's point of view, there is a pricing sweet spot that maximizes revenue. The payors (mostly insurance companies, and various government programs) do a cost benefit analysis on treatments to decide which treatments they are going to cover.

The analysis can be complicated, but for the purposes of this article it comes down to "is it cheaper for us to pay for this treatment, or to pay for an alternate treatment and/or the side effects of not treating at all?" Ideally a drug marketer would price his drug at the perfect price where it is just high enough that the payors are willing to cover that price.

What is the ideal price point for Turing? I sure don't know, but I do know this: Shkreli has done this before, and backed with $90 million of venture capital money has surely done the most in-depth analysis of the matter, considering all the many variable involved. So, in answer to question 1, the revenue-maximizing price is $750. From the standpoint of the business owner, that is what the price "should" be.

If that is the case, why didn't Glaxo or Core raise the price that high? Were Glaxo analyst's idiots who could not figure out that the sweet spot was well over $1 per pill? Were Core Pharmaceuticals analysts slightly better than Glaxo analysts, raising prices from $1 to $13.50 but not realizing that it could have been raised to $750? When analyzing the price to sell Daraprim at that analysis must take into account not just the potential revenues but also the liabilities. As this case has proven there is a downside to sharply raising drug prices, namely, the wrath of the public and politicians.

In this case it is not a surprise that the price that the three companies were willing to sell Daraprim at is inversely proportional to their size. Glaxo is a massive company that carefully navigates public opinion and the halls of Washington to maximize it's profits, which includes doing things that make it look bad to the public for little or not gain. Core Pharma is a smaller company. I can't find the financials at the moment (appears to be private), but it is far smaller than Glaxo, although it has a few big drugs such as Adderall. Core was willing to take some reputational risk as an expanding company that needed the revenues, but again not wanting to bring the wrath of Washington or the public down upon it.

So just who exactly could wring the last cent of value out of Daraprim? Why, none other than the internet's Asshole of the Year, Martin Shkreli, who has shown over the years that he is not concerned in the least about his reputation. And besides, for a company his size the money to be made here is such that even if forced out of business after a few years he would retire a very wealthy man.

So, in essence, (and in answer to question 3) all of this happened because Martin Shkreli is an asshole, and doesn't care if the public hates him. Having settled that Shkreli is an asshole, does that make him more or less moral than the Internet masses? Let's examine this for a moment. We have already determined that the best guess for the revenue-maximizing price for the drug is $750 per pill. The Internet masses insist that the drug should be sold for $13.50. That is, society wants Turing to bear a loss of 736.50 per pill. There are three groups of people who can possibly bear this cost.
1. The payors (most of them huge insurance companies or government medical care).

2. The marketing, Shkreli

3. Society at large.

Morality is of course subjective, but I see no reason why it is more moral for society to demand that Shkreli bear this cost while not demanding that the payors bear some of it, and, more importantly, for outraged individuals not being willing to bear some of it themselves.

Further, let's not forget that Core Pharmaceuticals could very well have kept marketing this drug at 13.50 per pill as a sleepy little operation, but decided to cash in instead, knowing full well what Turing was going to do. The same goes for Glaxo when it decided to sell to Core.
I for one could not have done what Shkreli did, but I am also not demanding that anyone else pay to alleviate my outrage.

Solutions: This entire episode is already grist for more government regulation. However, if society is as outraged as it claims then there are some fairly easy free-market solutions.
There is no reason why the insurance companies, perhaps with the assistance of large charities, can't band together to buy the marketing rights to out-of-patent rare drugs and market them at a more "normal" profit margin. The outraged of the Internet could also chip in as well, as could companies like Glaxo and Core. Ehen they want to get rid of marketing an old drug such as this instead of selling out they could simply contribute it for free or at a reasonable price to such an organization.

Instead, expect to see the Pharmaceutical companies engage and rent seeking and look for government subsidies in order not to raise the prices on these drugs too much.



 Scott Sumner, of Bentley University talks with EconTalk host Russ Roberts about interest rates. Sumner suggests that professional economists sometimes confuse cause and effect with respect to prices and quantities. Low interest rates need not encourage investment for example, if interest rates are low because of a decrease in demand. Sumner also talks about possible explanations for the historically low real rates of interest in today's economy along with other aspects of monetary policy, interest rates, and investment.

Jim Sogi writes: 

If real interest rates are in fact negative, then the FED rate is still high and offers the best return. Rates at banks are in fact negative when you subtract bank fees the return is negative. Its not real clear what negative interest rates are to me. I suspect it has something to do with international currencies and the strengthening of the US dollar, and the FEDs warning on the global situation. Maybe the US doesn't want a flood of foreign (Chinese) money.

Martin Armstrong writes: 

The Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money. The Fed is also caught between domestic policy objectives that dictate that they MUST raise rates or they will bankrupt countless pension funds internationally and emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the U.S. national debt. 

Gordon Haave writes: 

Perhaps I am not understanding something. Is this saying:

A. We can't raise rates or emerging market economies will be hurt due to their dollar debt, and; B. We must raise rates because if not emerging markets will go into default?

This makes no sense to me but perhaps I am misunderstanding what he is saying.

Stefan Jovanovich writes:

The presumption of central banking in the late 19th century was this: through adjusting the discount rate on its own good as gold credit, the Bank of England could literally regulate how much net foreign exchange (specie) flowed into or out of Britain. The presumption was believable, provided that no one questioned that the Bank of England would redeem all its own paper in gold. After 1914 there were nothing but questions.

Central banks now have two presumptions: by talking about adjusting the discount rate and by actually writing checks to their national treasury they can control not only foreign exchange flows but also how much credit its citizens and domestic companies will use in the immediate future.

Montagu Norman went to an early grave precisely because he knew there was now way for Britain to have its cake and eat it, too. If the Bank of England's own paper was going to continue to be priced based on private demand and not ability to pay out specie, on demand, then either the Empire would have to restrict trade to its own colonies or counter-parties would be the ones who determined the discounts at which foreign exchange could balance (translation: the Americans would have to let their gold go overseas by running a persistent deficit).

3 Trillion in U.S. IOUs is supposed to give the Chinese "power" but that pile of another central bank's money only has use if it is spent abroad. Like the Americans' gold in the 1920s, it is worth nothing if it is not allowed to be drained away. There is no reason to think that anyone with a higher education will allow that to happen in China or, if that miracle occurs, that the politicians in this country will not respond with the same imperial preference mercantilism that guaranteed Britain would win the war and lose its empire.

Larry Williams writes: 

So you really think we at Dailyspec are smarter and have more information on our fingers than the people at the Fed? I don't. In retrospect over many many years the Fed has done a remarkable job. I know, you people dis them at every turn, claim you know the answer, we know the answer, but the truth is year in and year out compared to what could've happened they have not done a terrible job. Probably I should explain something called upward drift for those who are not aware of it. It seems to be pretty important.



 I thought the specs would find interest in this given past discussions on coal. Japan is decreasing LNG use in favor of Coal.

Carder Dimitroff writes: 

This is interesting. Thank you for posting.

Not mentioned in the article is nuclear. Japan is restarting some of their nuclear units. Nuclear displaces LNG, even at $7 per MMBtu.

From NEFTE Compass:

Baltic Republics Get to Grips With First LNG Terminal

The new LNG vessel moored in Lithuania's Klaipeda harbor represents for millions of Baltic consumers the end of a quarter-century of Russia's natural gas monopoly.

It appears European demand may be increasing as Japan's demand falls. Helpful news for $D and $LNG



 P. J. O'Rourke, of all people, has a quote that has gotten me thinking.

"There is a simple rule here, a rule of legislation, a rule of business, a rule of life: beyond a certain point, complexity is fraud. You can apply that rule to left-wing social programs, but you can also apply that rule to credit derivatives, hedge funds, all the rest of it."

Does this contain some truth, in the areas that this list is most interested in? Or does it reflect the suspicion people have for things they can't understand?

Gordon Haave writes:

I've held this view for a long time about the Fed and most economic matters. The basics are easy, they are then made more complex primarily so that people don't understand them.

Another good example of this, by the way, is trade policy/stagnant real wages. Why are real wages stagnant? Well, NAFTA and trade policy. If you increase the supply of labor, you decrease the market clearing price. It's simple stuff. Very simple. Econ 101.

However, if the people understood it that clearly they would revolt against it, which is why it is presented as being complex, when it isn't.

That is not to say that I am anti-free trade per se, but the average american would be if he understood the short to medium run implications.



 We have a summer intern with us from a university where he has been taught that prices are random and markets not predictable, EMT, anyone have any data, studies etc I can show this poorly educated fellow to enlighten him?

Rocky Humbert writes: 


It sounds like you picked a summer intern from a university that is using obsolete textbooks.

Virtually no academics (including Fama) still believe in the gospel of strong-from EMH. I don't think it's possible to "disprove" semi-strong and weak-form EMH because the theories are constructed in such a way as to leave wiggle room.

If you are suggesting that all forms of EMH are incorrect, then I beg to differ.

Lastly, data mining to find low probability events (as some speclisters have suggested) does not necessarily prove nor disprove a hypothesis anymore than pointing to Winston Churchill as proof that cognac and cigars lead to a long and vigorous life. Most of the time, the market is darn efficient. And that's one reason that markets are the best way to allocate resources.

Russ Sears writes: 

Perhaps the best set of data I can think of to disprove ALL forms of the EMH is the interest rates over the last 50-60 years. In the 60's the Phillips curve took over the feds interest rate models since then the bias has been more control of the interest rates is always right. Likewise from 85 to now feds have stopped both inflation and any liquidity crisis (real or imagined). Granted it is a bit of cherry picking to calculate the chance of randomly reaching 85's interest rate levels from 1960 and then multiple that by the chance of coming from 85's levels to 2014/15 levels

I lost a job because in the interview I told the guy in charge of the modeling for a one of the biggest insurance companies that I thought he was wasting the companies money having 2 Phd's calculate the interest rate scenarios using the random walk. The company hadn't even tested any of their correlation of their interest rates competitiveness to their change in lapse rates. But they wanted to have a risk neutral yield curve monthly binary tree model built 30 year out quarterly nodes with several orders of accuracy. If you used such a model for the past 2 X 30 year periods each actual outcome would at best been so remotely possible that only a naive statistician would not see the coin flips were rigged.

I was told that the interviewer thought I was too simply and couldn't handle the sophistication of the math they wanted. Academia seems to thrive on sophistication for job creation sake, not money making sake. Not coming from the Ivies or having a Phd I assume that the only reason I got the interview in the first place was that I had made my past two companies millions betting on long term gamma, for almost nothing. So what do I know.

Even the idea behind the Feds "control" screams non-random walk. If you stifle the short term natural swings it is bound to have long term consequences. 

Gordon Haave writes: 

"I was told that the interviewer thought I was too simply and couldn't handle the sophistication of the math they wanted. Academia seems to thrive on sophistication for job creation sake, not money making sake."

That very accurately describes all of economics and everything surrounding the Fed, although it is not for job creation sake but rather for obfuscation sake. There is nothing more satisfactory than telling an economist that the fed is printing money only for them to rant and rave that the fed doesn't actually print money, and then saying "I know, but the effect is the same".

Then the response is always "it's more complicated than that". But they will never really tell you why in a meaningful way.

Russ Sears writes: 

Perhaps I should read the paper before I comment but my bigger point was to actually be a "science", actuaries and other modelers need to form a hypothesis/model and THEN look at the actual results to at least adjust that model if not scape it altogether. The math is made to predict the data. Not the predictions must be based on the beauty of the math theory Otherwise it is a philosophy not an art.

Academia loves philosophy because it implies the philosopher should be in charge. They dispose science because it implies academia must be humble to the wisdom of the crowd. If you're predicting rate of change long term then it is not enough to validate your models using first order changes such as lapse rates. You must validate second order effects such as shock lapse rates and long term drifts. It shows it gets messy when the philosophers are in charge.



 "Widened Suez Canal to Open in August"

This is the first significant expansion of the canal's carrying capacity in its 145 year history.

Paolo Pezzutti writes:

The Panama Canal is also expanding. The size of ships has increased. They need important changes also to port infrastructure.

"The Panama Canal expansion project (also called the Third Set of Locks Project) is intended to double the capacity of the Panama Canal by 2016 by creating a new lane of traffic and allowing more and larger ships to transit."

anonymous writes:

This latest development is positive for Israeli stocks. The project was underwritten by Egyptian citizens and they are making a bet on the absence of events that will threaten the revenue from the widened canal like and Egyptian attack on Israel or a nuclear bomb exploding in the region. And the fact the Sisi's government decided to undertake it and declared it "military led" is a concrete (no pun intended) sign that their rhetoric of being business-oriented (as opposed to say oriented to destroy Israel).

anonymous writes:

Egypt is a military dictatorship, as such there is of course no "free will" exercised by "the people" of Egypt, but it's certainly a polity. Usually when a dictatorship wants to create an investment by someone other than the core clique it has two choices: coercion or guarantees of repayment of questionable quality. After all, they can change their mind at any time and all the guarantees will be gone with the wind. So observing a non-coercive investment process in a dictatorship is useful to estimate the confidence in the dictatorship by either foreign or local investors. Often large foreign investors have substantially more leverage since they can threaten a military or political retaliation via their own government. In this case, Egyptian citizens, of their own free will, trusted the military to repay them by buying the investment certificates that sold faster than expected. While this is certainly no example of Western property rights, this means that some relatively savvy citizens in a very impoverished country (thus no money to waste) trust their leaders. This is a useful datapoint in evaluating investment and other stability-related prospects in that part of the world.

Gordon Haave writes: 

What everyone is missing because (per our discussion last week) the watch and read US propaganda media is that last week the Deputy Crown Prince of Saudi Arabia, The Saudi defense minister, the Saudi foreign minister, and more importantly the Saudi Oil Minister met in Russia and inked 6 new deals including defense, nuclear, and energy deals with a goal towards a "petroleum alliance".

But hey, an Al Jazeera columnist was once quoted as saying something he shouldn't have 15 years ago, so by all means keep reading US media.

Gary Rogan writes: 

Gordon, as the likely target of the last comment, let me respond. While this bit of news from All Jazz TV is valuable in it's own right (and most certainly no propaganda) and is likely to have major worldwide implication from the war in Syria, to Russia supplying Iran, to Israel, to the Saudi relationship with the US, the price of oil, Egypt, and more specifically Suez Canal, it is unlikely to have had an impact on why the Suez canal project was started many months ago. If it did, the world is even more convoluted than I could ever imagine.



 Some good books one is reading after a hurried visit to the Seminary Book Store in Chicago.

The Best of Ed Zern by Ed Zern, a hilarious and deep book by a writer with part Ring Larnder, part Mark Twain, with all the stories relevant to trading.

Somewhere For Me, a bio of Richard Rodgers by Meryle Secrest, a lugubrious account of a great musical composer, great businessman, son of a gun.

Why Capitalism by Allan Meltzer, an excellent update of Free to Choose and Capitalism and Freedom by a monetary economist with many deep thoughts appropriate for introductions to free markets for kids.

Karl Pearson: The Scientific Life in a Statistical Age by Theodore Porter, a bio that shows how philosophy and morality led to the foundation of frequency statistics, a disciple of Galton.

The Roman Market Economy by Peter Temin, some nice charts and diagrams showing the importance of economic variables, prices, labor, land in the history of Rome up to 300 AD.

Modeling Binary Data by D. Collett, everything you'd want to know about how to explain binary data using logistic models and maximum likelihood. The simple dependent variable makes the book a good intro to variables whose magnitudes go all over the map.

Europe by Brendan Simms, a 700 page intro to European history from 1500 to the present emphasizing the importance of Germany with many pithy and seemingly deep summaries.

 Magnificent Trees of the the New York Botanical Garden, a beautiful pictorial and descriptive journey through the Bronx Garden we will be visiting September 4 with Adrian Bejan, who says it's replete with constructal trees.

Crony Capitalism by Hunter Lewis, a surprisingly informative view of bribery, double dealing and insider activity in the financial crisis written surprisingly by an agrarian reformer.

Top Dog by Po Bronson and Ashley Merryman, shows how competition, incentives, and motivation effect winning in many psych experiments and sports outcomes.

The Improbability Principle by David Hand, a deep book explaining the reasonable probability of coincidences and extreme events by a profound and erudite scientist, good for the layman and the expert.

Chemistry: Science Double Award by B. Earl and L wilford. A secondary school intro to chemistry about my speed in developing a foundation for this fascinating and useful subject.

Gordon Haave adds: 

 I wrestle with reading non-fiction and fiction. I have been reading so much non-fiction for work that I have been trying to read fiction when I can to unwind.

Recently I have finished, for the 2nd, time, three of my favorite books:

Growth of the Soil, by Kunt Hamsun.

Independent People
, by Halldor Laxness

And Chronicles In Stone, by Ismail Kadare

All three are great. After I read Chronicles in Stone I had to go and visit Girokaster, Albania, where it is set.

Here are the pictures I took. The WW2 items are inside the castle which is the focus of the book (the book takes place under Italian occupation in early WW2).

The above is a public link that everyone should be able to see. There is also a picture of Enver Hoxha's house in there.

David Lillienfeld writes: 

I've been reading Supreme City by Donald L. Miller. The book discusses the development of Manhattan during the 1920s. It includes the development of radio networks (Paley vs Sarnoff), the rise of organized crime in the wake of Prohibition, the building of such icons as the Chrysler Building and other buildings, the creation of the Park Avenue residential district (43rd to 96th Streets), and so on. A fun read.

anonymous writes: 

It's been quite a while since I last recommended a book. However, "The Boys in the Boat" by Daniel James Brown deserves consideration. It traces the course of a group of young men attending the University of Washington through their (Depression) years of crewing (eight man) and their quest to represent the U.S. in the 1936 Olympics. We don't produce guys like this anymore– unless you can name a recent college team (any sport) that achieved athletic greatness while all acquired degrees in engineering, science, or law.

anonymous recommends: 

I'm really enjoying Conn Iggulden's 5 book series on Genghis Kahn, starting with Ghengis: Birth of an Empire.



  While Dr. Lillienfeld and other baseball fans get ready for spring training, I had the opportunity to go to a baseball game in Panama last Friday. It was the best game I have ever been to.

There are, it seems, 3 leagues in Panama.

Fedebeis runs a "juvenile" league and a Major league. ()

There is also a pro league.

The pro league ended in January. The major league is rumored to start up at the end of the month. However you will notice from the web page that they don't actually tell you when it starts which is par for the course in these parts.

I went to the semi-finals in the juvenile league. The players didn't appear to be "juveniles" i.e. little league but are seemingly at least 17 or so. You can read the rules for the league on the website but I sure can't find what the age limit is.

Arriving at the game is not very difficult. The Stadium is not far outside of the city center, although on a Friday afternoon on the day before Carnvinal starts it took an hour in the taxi to get there as everyone was leaving the city for the holiday. It should normally take 20 minutes.

At the game were a buddy of mine, his taxi driver, and two German tourists we had met a few days before at my restaurant and who and wanted to come as they had never been to a baseball game.

Anyway, onto the game. It was Panama Metro versus Chiriqui Occidente. The game was a good one with Panama Metro winning 2-1. While the stadium itself was not up to american standards (see pics here and here)

What was special was the atmosphere:

First of all, there were no commercial breaks. The game moved along at it's natural speed. The more important point however was the Panamanian flair brought to the experience.

I have often made the point that baseball is a lot like soccer. Now, before you choke on what you are eating let me explain:

For most of my life growing up and living in the United States although I played soccer as a kid I thought watching it on TV was boring. That all changed for me on my first trip to Africa. I had a 12 hour layover in the airport in Accra. While there Ghana was playing in the World Cup. I was sitting at the bar with another American guy I met and every time Ghana scored the airport basically stopped as everybody celebrated and airport employees ran through the airport jumping up and down and hugging each other. This was the first time I understood how passionate some people were about soccer and I wanted to understand why.

I finished watching the rest of that world cup with friends in Kenya. Later on, while watching matches on TV in restaurants or cafes in Italy, Albania, and now Panama I have come to like and enjoy soccer.

In essence, it's a cultural thing. It's something you do with your friends and your family and that you follow and talk about at work, at the bar, etc.

In that sense, baseball is the same thing. Although the nature of the game is totally different than soccer it is by and large something learned culturally that you learned from your father and talked about with your friends.

Just as Americans don't understand why anyone would watch 90 minutes of Soccer, Europeans don't understand why anyone would sit through a baseball game.

Both games suffer from long stretches of nothing really interesting happening. Baseball makes up for this with it's obsession over stats to fill the gap, soccer does it with drinking, crowds singing songs, and the like.

Here's what's great about Panamanian baseball:

It's a baseball game with a soccer crowd, only instead of singing there are bands. Two of them. Each team brings it's own band - and the bands don't ever stop playing. In fact, they usually play at the same time.

Here is a video of the Chiriqui Occidente band close-up.

And here is a video that captures the effect of the two bands playing at the same time and also shows a few pitches.

The beers are a dollar, and when the beer guy comes he leaves you the cooler.

Here is what happens when the game ends… flying beer.

And here is the must see post-game celebration out on the concourse. I've never seen anything like this at a baseball game in the US.

When all is said and done, it was a great time and it is a reason why baseball fan should consider Panama for their winter vacations, especially when you consider the prices.

Ticket: $4 Beer: $1 Hat: $5

Here's my obligatory selfie wearing my new hat.



 This article "14 Ways An Economist Might Say 'I Love You" seems appropriate for the day. Personally, I'll go with an orchid. No lines, no trumped up cost. (The line on 86th used to go from 2nd Avenue over to Lex before turning south for 1+ blocks back when I was living in Manhattan. And a dozen red long stems was $44. Ouch.)

Gordon Haave writes: 

The best move to make on Valentine's Day is the single red rose, presented elegantly. That way it looks like you put some thought into it to make it special when really you are just trying to save money.

Ralph Vince writes: 

But you don't just give it to her. Now, is where the REAL thought has to happen and the magic transpires. But most men can't figure that out.

anonymous writes: 

The technique I have had great success with is to engineer events so that it looks like I was not thoughtful, had no plan, forgot, etc. This causes a growing sense of letdown and frustration, which of course seems a counter-intuitive intent. The key is in the swing to euphoria that can occur from this low level. When it is discovered that rather than "forgetting", you had instead been very thoughtful and utilized foresight well in advance (the opposite of what had previously lead to her sinking feeling), the elation can be intense on the lady's part, which leads to a very solid return from the male perspective. I think in the markets, you often get this same euphoric reaction after a test lower has cleaned out the stops– nowhere to go but up.



 Leaving aside the issue of the house's edge, if you make a mistake you have no recourse. If the house (or in this case one of it's suppliers) makes a mistake the Casino will get its money back.

In markets there is something similar in the form of "clearly erroneous trades"

While theoretically this policy could be used to protect you, I would imagine that it really only protects the big boys. However, I have no experience in this.

Does anyone have any experience that they can share?



Why do markets naturally gravitate to a state where things that are good are considered bad and vice versa. The idea that deflation is bad is a horse from that garage. When deflation and prices goes down that means that the stock of wealth is increased in real terms. That's good. How have we been cowed into thinking that when our real wealth goes down, that's bad, and we should encourage our central banks and governments to create inflation.

Etali writes:

The Chair of course knows the answer to his own question. Deflation is good for savers and bad for debtors. There are more debtors than savers. Inflation helps debtors by devaluating their claims. Governments, for example, the Swiss and the Luxembourgers, are the biggest issuers of IOUs. Why, the Dutch mathematician asked, "do government clerks and bailiffs become rich, yet leave their offices in great debt and financial chaos?".

Gordon Haave writes: 

1. The banks have an interest in inflation. They get zero percent loans and invest in things that pay interest.

2. Everyone is obsessed with GDP numbers and deflation can make GDP look "worse". There has been little to no research into GDP and how it's calculated in the last 50 years and people take it for gospel that GDP going up is good, GDP going down is bad. They are having trouble however explaining why GDP has been up but the average person's financial picture hasn't really improved in 20 years. They also can't explain they GDP in southern europe is flat to down, but the average person is vastly worse off.

The answer lies in the two things going together. Deflation is the cure to the world's economic problems. In order to prevent the cure the government and central banks have enacted policies that make the GDP number look ok, or stable, but it isn't doing anything for the average person.

Incidentally, this is also the cause for the "wealth disparity" issue.

anonymous writes: 

Finance-based (collateral) deflation and technological progress based deflation are not the same thing, exactly. The fact that we can buy a computer cheaper this year does not cause banks to fail or a contraction in the money supply/ability to pay interest.




 QEe (QE euro) seems to be moving forward. So why did gold, which has had some strength over the past month, not budge at the news the way currencies did?

anonymous writes: 

The theory I am working on in my head and was hoping to have time to write about tonight is as follows:

QE depends upon a central bank "cartel" all agreeing to do it in unison and or in staggered phases. The cartel allows them to get away with this absurd policy without immediately wrecking the currency as compared to other currencies they don't seem to be devaluing.

Switzerland broke the cartel.

This means that the future of QE is in fact in jeopardy and will be more limited than otherwise.

anonymous writes: 

Isn't that the path off all cartels of > 1 players (Debeers),

Look at OPEC post 1974.

Like the prisoner's dilemma, the "cartel participant," game would call for a certain, upside price where the first member jumps ship, with a phony justification for their greed trumping the purpose of the cartel.

anonymous replies: 

Yes of course. Only in this case instead of restricting the supply, the deal was to expand the supply.

In the old days when Kuwait broke from the cartel and cheated it brought oil down more than just by the amount of Kuwait's extra production because once one member of the cartel cheats everyone else is going to.

It's the same thing here. Once SNB broke, others will be tempted to as well.

This isn't talked about in the press because of the insane and incorrect notion that your currency going up is somehow a bad thing, so the mainstream all think that the Swiss are somehow hurting themselves.

Alston Mabry writes: 

But the alt version is that they weren't playing along because their EUR purchases were putting upward pressure on EUR, counter to ECB's strategy.

anonymous replies: 

What ECB, US, and Japan would have wanted is for the SNB to devalue along with them. SNB wasn't going to do that.

Now, all of QE depends on the big lie that you are not really printing money and not really devaluing the currency.

Any time someone says "you're printing money" the response is met with "you just don't understand" followed by a description of the complicated process of QE and how it's not really printing money.

But the fallback position for the QE'ers is "look, there's no inflation (no consumer inflation.. it's in assets) and "the currency isn't being devalued".

The SNB's peg kept the ECB being able to claim they weren't destroying the currency. The SNB undoing of the peg reveals that the emperor has no clothes and they are, in fact, going to destroy the currency.

Alston Mabry responds: 

It may be true that claims were made about the EUR on the basis of the CHF cross. But I find compelling the narrative that Mario called up Thomas Jordan and said "look, unless you're willing to print tens of B of extra SFrs a month, you're not gonna be able to keep up." And Jordan, knowing that technically the SNB could do it but politically internally couldn't, said "you're right" and they dropped the cap. 



The RSP (equal-weighted) S&P index ETF is well-known. Less known is the RYE (equal-weighted energy sector ETF). It has only existed since about 2006.

Equal-weighted ETF's give a larger weighting to smaller-capitalization stocks and, to the extent that individual stocks approach zero, they engage in the Rocky pastime of "scaling down to oblivion". That is, If cap weighted indices "ride the trend," equal-weighted indices sell the winners and add to the losers on each rebalancing.

Might anyone have some insights about whether such a practice is inherently superior or inferior over time? And especially for a (distressed) sector index?

Kora Reddy writes: 

But the academic literature suggest otherwise: "equal-weighting is a contrarian strategy that exploits the "reversal" in stock prices" (see this pic).

Except in Australia, equi-weighted outperformed the cap-weighted in major countries.

Gordon Haave writes:

I wrote about this 6-7 years ago when the first Wisdom Tree stuff came out and they were talking about how equal weighted was superior to cap weighted and showed the back-tested numbers. All they were really saying is that "over time small caps beat large caps" which isn't exactly news.

To call a equal weighted index and "index" is itself misleading. A cap weighted index is "the market" or some approximation thereof. Theoretically every single market player could go passive and be in it. You can't do that with an equal weighted index (or at least not without distorting prices).

As to your idea of how they have to double down on the loses that is somewhat limited by the fact that once the name falls out of the index it is dropped.

Larry Williams comments: 

Along that line Our work shows it is better to invest equal dollar amounts vs equal share amounts

Gibbons Burke adds: 

I know a fund which used to invest 90% of client stake in SPX via SPY.  A couple of years ago they switched to 10% equal dollar investment in each of the nine sector select spdr ETFs, with the intent of rebalancing to equal dollar allocation annually. They found, in testing, the strategy provided an average of 200 bps of boost each year over the cap-weighted all-SPY investment.

anonymous writes: 

Regarding a depressed sector, is there any truth to the adage: "Buy the stock that has gone down the least, and also the one that has gone down the most". The strong stock will come back smartly and the oversold weak stock will come up from being smashed on a higher percentage then the middle of the pack.

So if this is true you could design your own basket of strong stock leaders in the depressed sector mixed with oversold beaten down stocks that pass a screening survival test.

Erich Eppelbaum adds: 

Theoretically speaking, re-balancing a portfolio by using the winnings to buy more of the losers is at the heart of the only portfolio selection methodology that I know of that mathematically guarantees to asymptotically outperform the best stock included in the portfolio (See Thomas Cover's Universal Portfolio seminal 1991 paper): pdf link.

I don't know if in real life the portfolios resulting from this methodology are inferior or superior over time to those created by rebalancing based on allocating more to the winners (such as a market cap weighted portfolio); I would assume that any result would depend heavily on the rebalancing costs and slippage (the liquidity of big vs small stocks matter, especially when trying to push size), and I would assume that the slippage incurred in a market cap weighted portfolio would be less than that incurred in a equal weight portfolio (less small company shares to buy/sell).

In reference to a previous post, another thing to consider is that perhaps there are many effects at play other than the small-cap "more-risk-more-reward" effect. For example, a sell-the-winners-buy-the-losers methodology could be profiting partly by say the volatility harvesting effect described by Claude Shannon.

This brings up another question: The volatility harvesting effect becomes greater as the volatility of the portfolio's underlying stocks increases. In the stock market, volatility usually increases when the market falls. Could this mean that an equal weighted/rebalanced portfolio would outperform a market cap weighted portfolio during bad times? and would the opposite be true during good times? Would be interesting to test… 



 The recent events at Petrobras have taken the investment community by storm, and there is much discussion about when the right time is to get in. Bulls figure that given the reserves and the potential that the current price is cheap and will work out well in the long term despite the current scandals. I am usually an "asset based" contrarian, but in this case I am not so sure. Let me give you my perspective:

I've worked at both Devon and Kerr-Mcgee and had many friends at Chesapeake.

To preface this post, I have never been a fan of "management guru" books and find them to mostly be trash with little insight. That being said, an excellent book could be written about the resurgence of Oklahoma City and the contrasting fortunes of Kerr-McGee, Devon, and the one-time high-flying Chesapeake Energy over the years and the differing management styles at each company. Perhaps I should write it. However with the protagonist of this post now working for one of the antagonists the final chapter cannot yet be written.

If you don't want to read a few thousand words and just want the punchline it is this: Management and management culture matters, and Devon's former CFO Jeff Agosta is one of the main reasons for Devon's success whereas Kerr-McGee has disappeared and Chesapeake goes through recurring crises. Interestingly enough, Jeff is no longer at Devon and now works for former Chesapeake founder Aubrey McClendon's new company, American Energy Partners. I will write more on that later on in this post.

The story for me begins in the mid to late 1990's when I was working for my father's money management firm. Chesapeake (CHK) was a high flying driller based on horizontal drilling in the Austin Chalk.

Wall Street was heavily promoting CHK and it was one of the biggest "momentum plays" on the street. My father didn't believe it. Frankly, anyone with experience in the austin chalk knew that the decline curves were massive. This time it was supposed to be different because of CHK's horizontal drilling. Horizontal drilling, however, wasn't going to change the nature of the austin chalk as a play, it was just going to make the initial production bigger. The problem however was that these were new wells and there wasn't much history.

At the time getting well data was a pain. We had to subscribe to a Petroleum Institute service for around 10,000 dollars per year that sent us CD's with county well data from Louisiana which was months out of date. Sure enough, the decline curves were massive. We talked to wall street analysts, and of course they didn't care. CHK was everyone's favorite.

A few years later CHK almost went out of business as sure enough the decline curves were massive. That was the first time I heard the name Aubrey McClendon.

The next time was the summer of 2003. I was sitting at my desk at the Zurich office of Kerr-McGee Luxembourg, (thank you IRS for creating such inefficiencies). I had very little to do. I was in Zurich for 2 months for a paid internship that was put together at the last minute because the employee whose job I was doing had a stroke and Kerr-McGee needed someone to take his place while he recovered.

The head of the office was an American hired in 1999 (a rare outside the ranks hire). The rest of the staff was Swiss and/or German. The European marketing team from the Chemicals unit (later spun off as Tronox) also shared these offices. European Chemicals marketing was run by a Kerr-Mcgee old timer who was one of the few still around from the Karen Silkwood days.

The first sign that Kerr-McGee had issues was that I didn't really have anything to do all day. By and large I was done with my job by 10am. In addition to my day job I was given a project to research the possibility of issuing euro-denominated bonds in Europe. The project didn't take long. Other than that I had a lot of spare time. Someone in IT at the main office in Oklahoma City seemed to have the sole job of tracking my web surfing and blocking every site that wasn't work or finance related.

The Swiss like to take long lunches and usually have a few beers at lunch as well. A directive had come down from HQ that nobody was allowed to drink at lunch but my boss told us to do what I wanted as long as he didn't see it. So, sometimes we would take 90 minute lunches by the seaside and have a couple of beers, but that still left the entire afternoon with little to do. I had brought a lot of textbooks with me to Zurich to study finance and economics but I burned through those pretty quickly.

If I could do it all over again I would have spent the time learning German, although it was also when I first started to really study body language as I could not communicate verbally. It is really the subject of another post but from my time in Panama, Switzerland, Italy, Albania, Poland, etc. I have become somewhat of an expert in reading body language. Body language doesn't lie. People do. I now like to sit in restaurants and watch body language. It is fun to spot which woman doesn't like her date and just wants to get out of there as quickly as possible even vs. which guy is going to get lucky that night. I'm also good now at knowing when I am being lied to - although I have had a few spectacular failures in that regard.

Back to Zurich: So I started spending my spare time looking for a permanent job. Simply searching "energy companies in Oklahoma City" got by my IT censors and I quickly gathered up the names of all the big energies companies and their officers. By googling around the domain names you can always come up with the structure of corporate email addresses (i.e. firstname.lastname or whatever) because some employee somewhere has always used his or her work address to post on a random message board.

So I sent out some emails to some Oklahoma City energy company executives. The emails read as follows:

Hello, my name is Gordon Haave. I am currently working for Kerr-McGee in Zurich in the corporate Treasury department. Previously I have served as Vice-President of a $300 million money management firm and as the CFO of a $20 million residential construction firm. I am returning to Oklahoma City in August and am looking for a full time job if you have any available."

Short and simple appeals work with some people and not with others. I got replies from both Jeff Agosta (then SVP of Finance and Treasurer of Devon) and Aubrey Mclendon (CEO of Chesapeake) Aubrey was very nice as everyone always says he is. We had a brief back and forth and after inquiring around the company he told me that there was nothing available but to stay in touch.

Jeff responded basically with a "yes we are looking for someone, come and see me when you get back to Oklahoma". That's how I ended up working for Devon.

However, I was still working at Kerr-Mcgee. Every day was frustrating as there was little to do, and everything I did have to do basically had zero value added. Let me explain:

My primary job was ensuring the accurate cash forecast of Kerr-McGee's North Sea oil and gas operations, and to ensure that cash balances were kept at a minimum so that they could be invested in time deposits. In the morning I had to make sure time deposits were properly received that were due that day, and in the afternoon all cash had to be swept up into new time deposits. These were often overnight or just 2-3 day investments.

The process was based off of the weekly cash forecast which was stored on the Kerr-McGee mainframe and accessed by everyone via Citrix. The weekly forecast started on Monday at the operating units. The operators would have to forecast DOWN TO THE PENNY every single expenditure or receipt they knew about. At the end of the day Monday the information would go to one higher level up, where it would be compiled. It would then move on to one level higher up on Wednesday to a treasury analyst for that unit. On Thursday morning I had all of the information for every unit and would complete the overall spreadsheet which presumably someone reviewed on Friday. It was a pain-staking process that took the time of at least 10 people over the course of the week to do. And to what end?

Of course a Treasury department needs to be able to forecast cash, but down to the penny? There were times where somewhere along the way the info would be recalled because someone let out an anticipated $500 expenditure. What difference did it make if $500 was invested one day or two days?

Ideally if you have the exact cash balance down to the penny you can invest better. For example, if you have $1 million dollars extra and you know you can invest it for and extra 4-5 days instead of just overnight you will earn more interest. But how much? Enough to have 10 people working on the thing? Enough to harass operating units into worrying about that instead of worrying about their operations? Of course not.

I once said something to my boss about it and his response was "you are lucky, when I first started here they were doing this by carbon paper and fedexed around. We only changed to spreadsheet because they couldn't buy the carbon paper anymore".

I was in a good position to learn many other things about the corporate culture. As the young American guy there by myself the chemicals sales force guys would take me out at night on their expense accounts when they passed through town and they expressed how hampered they were by the corporate culture.

Also, at the time, Kerr-McGee was spending literally millions of dollars per year on outside consultants whose job it was to change the corporate culture. One of these consultants spent a week or so in Zurich and I went out to eat and have a few drinks with him a few times. I'll spare you the details of the horror stories but his conclusion was pretty straight-forward: "It's utterly hopeless."

I don't want to name names but I remarked to him once that a certain person in our division seemed to be the real brains of the operation, yet he was not the head of it and I was wondering why. The answer: "Because X joined the company two weeks later than Y 20 years ago".

So let's review what I learned about Kerr-Mcgee:

A. A massive number of employees doing useless jobs.

B. A culture where seniority is all that matters.

C. The corporate tail wagging the operating dog.
After Kerr-McGee it was on to Devon in Jeff Agosta's unit. I ran the "cash management" function which included the investment of excess assets as my primary job but I also performed as somewhat of an overflow worker for other corporate finance projects as needed.

What was the corporate culture at Devon? Well, it depends on what part of it you worked in. In accounting it was just as bad as as Kerr-McGee. There were massive, bloated staffs of people who did their job the way they did it and simply wanted it to stay that way and didn't want anything to change. That didn't really matter too much except that corporate expenses were higher than they should be and landowners would be pissed off because they got their checks late. More than a few times in social settings when telling someone I worked at Devon the response would be "why can't you send your checks on time?"

Corporate finance, however was a lean and mean operating machine. We had less people performing the finance and treasury functions than Kerr-McGee had working on the weekly cash forecast - and we did a good job of it too. This was all under Jeff's leadership and direction.

How did the cash forecast work?

When I started there was already a cash forecast spreadsheet which I later revamped. Here is how it worked:

We pulled production estimates from an existing database. We pulled gas and oil prices from Bloomberg and applied a discount to them for what Devon would actually receive for oil and gas sales.

We knew corporate overhead data and when payroll was due, and we knew interest and swap payments already.

As to the level of accuracy achieved it was pretty straightforward. The conversation went something lie this:

Me: "Jeff, given interest rates and what we can do with extra cash in terms of investments (or lack thereof) and the manpower that we will have to expend in order to get a more detailed forecast it is cheaper to just leave an extra 100 million laying around than expend the effort to harass people so that we can do more detailed forecasts like Kerr-McGee does. Plus, we don't have to harass people who have other things they are working on."

Jeff: "Agreed"

And that was that.

A rational and efficient decision was made, without regard to "how things are always done" and taking into account that there is no need to be harassing operating units.

Not harassing the operating units was a theme that Jeff reinforced a few times.

I recall one event when a decision was made by an operating unit to bid on some blocks off of Brazil. The email I got was basically "We have to have $40 million dollars in an account in Brazil in three days". The $40 million wasn't a problem - remember we always had more than that just laying around. The problem was opening the account. This is was after 9/11 and the government was imposing all sorts of new Know Your Customer rules on the banks.

To open the account Bank of America wanted endless documentation that there was basically know way I could do within 3 days. In the end I just said to our representative at B of A "look, this is Devon energy opening an account for a Devon subsidiary, we have 120+ accounts with you. This account need to be opening tomorrow. I will send you whatever documentation you want later, but this account has to be open tomorrow. If you don't know your customer well enough to open the account then we will have to find someone who does".

He opened the account.

At some point during or after this event I said to Jeff "Hey, these guys (the operating unit) really have to give us more heads up next time". Jeff's response was "It is fine for you to send them an email asking them to give you a better heads up when they can, but always remember they are the one's who make the money. We work for them, not the other way around".
Meanwhile let's get back to Chesapeake. Aubrey McClendon the well liked and flamboyant founder had his own management approach. I can't speak too much to the internal culture as I was not a part of it, but Aubrey was generally highly regarded by his employees. The problem was as follows: He ran the company like it was his own as opposed to running it on behalf of the shareholders.

Although it is difficult to quantify this was apparent by the massive amount of money that Chesapeake through around the community in what appeared to me to be one big dose of self-promotion. Chesapeake funding was all over Oklahoma City, and the news articles praising McClendon were legion as he achieved celebrity status. Companies need to distribute money in their communities from time to time for their long run success, but Chesapeake's giving far outstripped anything Devon or Kerr-McGee was doing. I was constantly thinking to myself "I wonder how any of this benefits shareholders"?

Later events that are quantifiable proved me correct that indeed the company was being run in his own interested instead of the interest of the shareholders.

In short, McClendon has a sweetheart deal where, after shareholders paid to acquire land McClendon got an ownership stake of 2.5% of every well drilled. He had to pay 2.5% of the drilling costs. How did he come up with the 2.5%? He borrowed against his interest in the wells.

Here is the problem with that:

1. McClendon was competing with Chesapeake for access to capital.

2. Let's say the price of natural gas goes down and Chesapeake needed to curtail it's drilling or shut-in some wells. What decision should be made? Well, if McClendon has massive personal interest payments to make on his personal debt, he suddenly has a conflict of interest with the company.

McClendon of course denied any conflict of interest, but it is ludicrous to believe that shareholders ever would have approved such a situation had they known about it. One defense perhaps is that the board of directors (who represent the shareholders) knew, but this is the same board of directors that bailed McClendon out of his personal financial problems buy buying his private map collection from him and awarding him a massive bonus while Chesapeake's own fortunes were in decline.

In addition McClendon was using CHK employees to do personal work for him and also never disclosed that he had a hedge fund on the side which traded in the same energy markets that CHK did.

In short, he ran the company on behalf of himself, instead of on behalf of the shareholders.

To contrast this behavior to what I saw at Devon: One time a senior manager operating out of Houston donated $10,000 to a charity without prior approval. As Jeff relayed to me the manager was told "that is the shareholders money, either get it back or pay it back yourself".

All of this leads to an interesting situation:

Aubrey McClendon is the last person in the world I would want to look after my interests as a shareholder. Jeff Agosta is the first.

Now, Jeff works for Aubrey.

In January 2014 Jeff was fired as the CFO at Devon. I don't know the scoop and have not spoken to Jeff in 6 years, but as someone with more knowledge than I do tells me:

"He f****d up on a forecast/reporting issue, plus he alienated virtually everyone who worked under him with his management style, it seems."

I have no idea myself, but that he might have alienated people under him would not be a surprise. I for one liked working in his unit. With Jeff would always knew where you stood. If you did a good job you knew it, and if you did a bad job you knew it. Not everyone is like me however. Some people care more about the 5 minutes of pleasantries that need to occur when a conversation starts and need criticism of their idea in a roundabout manner. Jeff was not that guy.

More importantly, I would bet that Jeff attempted to impose his efficiency viewpoint on the rest of the company and got a lot of pushback.

American Energy Partners is said to be getting ready for an IPO. My advice: figure out who is really calling the shots on the finances. If it is McClendon then take a pass. If it is Agosta then go for it if you otherwise like the company and it's valuation.


So what does all this have to do with Petrobras? In the end and after years and years of attempted reform Kerr-McGee called it quits. The stock had basically gone nowhere for 20 years and eventually the chemicals unit was spun off and the Oil & Gas assets sold to Anadarko. The archaic corporate culture just couldn't be overcome.

In all companies the allocation of capital is incredibly important. The difference between Energy companies and many other companies is that the economic consequences few key decisions will be apparent in short order. Proctor and Gamble can make bad decisions and the result will just be a slow decline in overall market share over a long period of time - this is not the case with an energy company.

Petrobras can have all of the reserves in the world, but if management and the corporate culture are no good shareholders will never realize a profit from it.



 With the price of oil down from 120 a few months ago to 66 today, what do the energy boys on this site think about the prospects for oil and oil industry in the future, near and middle. I am interested in a forecast for the next 3 months particularly.

Gordon Haave writes:

Mine is that oil will continue to collapse. The whole boom was a creation of the commodities index industry and it is starting to unwind and also nobody gives a shit anymore about the Americas and Israel's wars.

Orson Terrill writes:

Sorry about the delay, quite busy, we're planning to take advantage of a slow down.

Saudi Arabia is the Fed in oil. Don't fight them. They said 50% of production in TX would be effected about a month ago. That was a promise not a description. The models I've used suggest we are getting close to that.

It is not far fetched that TX WTI production is showing signs of leveling off in 3 months.

Crude rough models (double entendre) for TX suggest that WTI Production should be down by at least 25% or more in 18 months given current prices, the initial production curves in TX relative to the price of WTI, the decline rate, and the total cost completing a well. I can go back and find the work I did on that, if someone wanted to take my back of envelope work more seriously.

Re-pressurizing presents a threat to that drop in production, but there is some evidence that zipper fracturing is reducing the returns to re-pressurizing wells, which is an expensive process. They can merely stabilize the well, pack up and come back later.

Given that most tools and equipment are leased, the land is leased, the well is drilled by contractors, and it can be done in 30 days…. The short run price elasticity of supply for land based shale plays is very high; they can just send everything and everyone one home, and wait.

The larger companies own rigs; EOG owns about 22 rigs in the Eagle Ford (I use EOG as a yardstick to measure others with).

That is what might catch people by surprise. Just how fast they can and will stop, and how quickly the production comes down to the extremely high decline rates (45%-90% in the first year, roughly 50% in the second, and 30% in the third).

FACT: drilling is slowing down already. FACT: The two merged companies are demanding less of certain services related to drilling. FACT: EOG is one of the, if not the best company in TX at drilling in these complicated shale formations; at these prices many of their wells will not be profitable. I know that is true. FACT: CHK wanted to unwind their aggressive push towards gas under the last CEO, and has been pushing hard in TX for Oil…. The wells they developed in the summer were more expensive than EOG's in the summer. EOG averaging about 6.7 million a well in total cost, it looked like CHK was closer to 8. They need to get initial production rates of twice the average to make sure they are doing better than breaking even. FACT: Saudi Arabia said they believe about 50% of production will be affected by the current price. On Speculation: I advised that was as a promise, not a description of the price at the time… and sure enough OPEC, on Thanksgiving, was not good for TX.

SPEC: I think that its just the beginning for the oil field services companies, because there are some planning and services that go into drilling a well, cementing, fracturing, re-pressurizing, plugging and abandoning.

SPEC: The oil field services that have heavy equipment which is rented out will suffer proportionately.

SPEC: Some E&Ps may generate huge cash flow as they substantially reduces CAPEX on new wells,relative to the next year of flowing oil…



Why does the Fed have a mandate to insure 2% inflation. Perhaps the better question is who benefits from inflation. The average Joe 6pack has no savings, rents an apartment, leases his truck, owns no assets, no stocks. He gets his paycheck and spends it. He wants lower prices. When gas goes below $2 he's happy. When beer goes down he's even happier, and the more he drinks the happier he is and the more he saves. Who wants higher inflation? Big debtors. Who is the biggest debtor: US govt. Who has the most assets at the most leverage: Big banks.

Orson Terrill writes: 

I disagree with the Feds own explanation, and I think many economists would too.

The Fed doesn't have a mandate for any target rate, and the dual mandate puts employment at odds with inflation. Their stated concern about falling wages is disingenuous.

While they talk about falling prices, the fact is that the Fed is powerless if rates hit zero and deflation persists. The Fed wouldn't have control over the money supply or the economy. Though there are experimental tools that could be used.

The Fed will never say they are powerless. That creates a game theoretic situation where in deflationary panics The Fed could lose credibility in the markets, and deflation with rates at zero could become a Suboptimal Nash Equilibrium.

Why 2%: There's not really a good reason, and what the the Fed published is moronic….

Theoretically, you can have very stable 10% inflation target, and life would be no different than at 2% inflation target, because REAL prices would be same, so as long as inflation expectations were stable. Most monetary economists would probably agree with this….

Gordon Haave writes: 

There are two things going on here really:

The first is the idea that price stability is a good thing in that it aids in long term decision making. The most important point though is the fed view that deflation is a bad thing. The origin of that line of thinking is the Keyensian notion that the market for labor doesn't clear because wages are sticky.

To elaborate: Classical economics would dictate that you would never have ~25% unemployment because the price of labor would fall until it hit equilibrium. However Keynes said that during the great depression this did not happen because wages are "sticky". Due to contracts and other things the price of labor does not fall. Hence, to reach equilibrium the government needs to stimulate demand. There is at some level some amount of truth to the "Wages are sticky proposal" however the cure is much worse than the diseases. The primary policy of both the fed and the federal government is to prevent markets from clearing at all. Hence, when homes are overbuilt and a crash occurs the powers that be actually think that building more houses is a good idea.

The reason for this is the second reason why the fed targets 2% inflation: The idea that deflation is a bad thing. Main stream economists believe that if the economy enters a general deflation that it will enter a "deflationary spiral" where prices will keep going down. Under this theory nobody will ever buy anything because why would you buy something if you know the price will be less next year?

A funny thing is that the Keynesians like to scoff at "Austrians" and other free market theorists for having ideas that don't hold up under scrutiny yet the deflationary spiral nonsense is easy to examine.

First: We know that flat-screen TV prices have gone down every year for the past 15 years. Yet, is it the case that nobody bought them because everyone knew that they would be lower the next year? So, with that one example alone we already know that the entire theory is bogus.

2nd, the deflationary spiral theory poses that basically there is no way out of it. Yet, society still exists as a whole despite many bouts of deflation, so we know that the markets have a way of righting themselves.

This entire theory explains the seeming disconnect between GDP numbers and how the average person sees himself in the economy. In order to keep housing prices up, for example, millions of homes were being built due to false price signals by the Fed while millions of homes sit unoccupied. Everything is being done to keep markets from clearing.

When markets are not allowed to clear and prices not allowed to fall what you get is what currently exists in Japan - the death of civilization as young people, priced out of marriage, home ownership, children, etc. simply check out of society. It is coming here.



A good indicator of an over-valued, or at least fully valued, market: "Insider Buying Dries Up Defying $275 Billion of Buybacks"

On the other hand, if prices are high, why not sit on the cash until they come in a bit? Are insiders not buying in a risk diversification move?

Gordon Haave:

One wonders if insiders are really immune to errors that individual investors make. Individual investors see their neighbors portfolios going up and wish they had owned more stocks and then jump in. In the case of insiders they actually see other directors/executives making a fortune from owning shares. I would have to think that the psychological pressure of "missing out" would be even greater that that of the average guy.



 Tyler Cowen recently wrote and article about "how and why bitcoin will plummet in price".

I think the argument is 100% flawed. A currency works because everyone agrees that it does — nothing more and nothing less. Even the Gold Bugs don't seem to understand that. That is, you accept dollars for your product or service because you think that you can use the dollars to pay employees and vendors and then use the leftover money to buy stuff for yourself. People accept Bitcoin's now because at some level at least they are confident that they can spend them on goods that they want. (and that there won't be a Zimbabwe like debasing of the currency in the meantime).

From his post he writes: "For purposes of argument, let's say that a year from now Bitcoin is priced at $500. Then you want some Bitcoin, let's say to buy some drugs. And you find someone willing to sell you Bitcoin for about $500."

And he follows up with an explanation of a theoretically superior digital currency and says: "So you buy some newly minted QuitCoin for $400, and its price springs up pretty quickly, at which point you buy the drugs with it."

Here's the flaw: No, you don't. Why not? Because the drug dealer isn't going to take the Quitcoin because he hasn't heard of it and doesn't know what he will do with it when he gets it. Tyler than argues that the Quitcoin isn't going to work either because a digital coin superiorior to the Quitcoin is going to come along, and so it goes.

But that only supports the Bitcoin, actually. People will keep taking bitcoins and keep transacting in Bitcoins because people take them now. The thought that there is an infinite other amount of digital currencies that will just come along is only going to get people to just stick with what they already know.

Bitcoin is simply an agreed upon medium of exchange.

That being said I don't personally think that it will survive in the long run. I can't imagine any government allowing it to succeed. With the total market value of bitcoins outstanding it wouldn't cost all that much for a government to engineer massive run-ups followed by crashes in order to scare people away from them. I wouldn't be surprised if that is what we are in the middle of right now, but I don't want to get too political in this forum.



Alan Millhone writes: 

Dear Chair,

You think we have problems.

Yesterday I took my house guest back to Columbus to catch his flight back to PE, South Africa. There are problems. He lives in the largest and poorest province. No jobs. Little food. Rent the movie KING ME on iTunes or Amazon and if in USA be thankful for what we have. Lubabalo says we have the best food and plenty of it. It was a pleasure having this poor but exceptionally talented Checker player in our home and I roomed with him for a week at our National Tournament.

Depends on who you are on what you can openly say. That is very sad.

My remarks above can be published as anyone deems fit.



Here is Gordan Haave's Story: 

Some time ago my now ex-wife decided that my daughter's sleep away camp should be 11 hours away in Eastern Tennessee. How it got to be that way is a long and convoluted story, sort of like my first marriage. But in any event she has been going there for years now and loves it, and my daughters sheer desire to get me to leave the second I drop her off and her tears upon pickup has me convinced of it's merit as a character building month of her life that is worth the money and hassle. Plus in the many years of drop off and/or return we have developed our own ritual of spending the night at the Hilton in Memphis and walking across the street to Benihana for dinner.

This year was my son's first year for sleep away camp, and of course it was in Eastern Tennessee about 20 miles away from my daughters camp, only they didn't start or end on the same day.

So the end result was my having to drop my daughter off one week and then pick up my son a week later in Tenn. Since it is actually closer to Connecticut than it is to my starting point in Oklahoma I decided to drive on to Connecticut and spend a week with family and friends rather than go back to Oklahoma in between the drop-off and pickup.

One sign that I am getting older is of course that I can't do the drive like I used to. Back in the day I would do the Oklahoma to Connecticut drive with one stop in Indianapolis (half way). Once, when my mother had to go straight into surgery for her cancer I drove it straight through without stopping.

This time on the way out I did Oklahoma City –> Memphis –> Harrisonburg, VA–> to my dad's house in Stamford.

On the way back I did Stamford –> Harrisonburg –> Knoxville –> Memphis –> OKC

The podcast of course is the greatest friend to the long distance driver. This time around I listened to The History of Rome which was once a weekly podcast (but still available) that ran from 2007 to
2012. Here is the wiki page.

I highly recommend it.

It was from this podcast that I fist heard the term Vespasian Sponge.

According to the podcast when Vespasian became emperor he was still dealing with the horrible fiscal mess left by Nero. One of his solutions was to let the tax collectors run rampant. He looked the other way while the tax collectors robbed the citizenry. Then, when they were wealthy, he would become the champion of the people and arrest the tax collectors and seize their ill-gotten gains, which he would of course deposit in the treasury.

As described by Suetonius in "The Twelve Ceasars": "They were, at any rate, nicknamed his sponges — he put them in to soak, only to squeeze them dry later. "

For some time now I (like any regular reader of Washington's blog) have viewed the banks and the government as essentially one and the same, and the two political parties as representing one pro-bank and pro-war party, that then squabbles over meaningless things in order to have us think they are in effect two different parties.

While I still feel the same way about the political parties, the recent fines and criminal inquires against JP Morgan have me wondering if perhaps I was wrong. Instead of the banks owning the government (or being one and the same) that in fact the banks are simply Vespasian Sponge's.

Having bankrupted the country in all manners of spending (particularly raining bombs down on people on the other side of the world) the politicians figured that it was easier to let the banks steal from the population, (and then to squeeze the money out of them) then it was to just take the money directly from taxpayers.

In any event, on a website with a wonderful history of nicknames for certain business figures, I propose that we start referring to certain eminent flexions and bank pres's as "The Sponge".



There was some VPIN discussion on this list last summer. This might be of interest:

"Markets crash, and so does a paper explaining why"

Markets undergo flash crashes — when stocks or bonds rapidly nosedive in value and then just as rapidly recover — every day. On May 6, 2010, for example, the entire equity market flamed out and then nearly recovered its value all in the matter of hours.

Economic papers can do the same, apparently. Take the recent withdrawal of an paper from the Journal of Financial Markets:

"This article has been withdrawn at the request of the authors and editor. The Publisher apologizes for any inconvenience this may cause. Here is the full Elsevier Policy on Article Withdrawal.



 Since I married an Albanian, I have become an olive fanatic, and I have to say the upcoming Californian olive industry is going to be a real challenge to Greece. Californian olives are fantastic, and presumably harvested much more efficiently than the Greek ones.

Bruno Ombreux writes: 

I've read Spain produces about four times as much olive oil as Greece, so if there is a threat to anyone its to Spain. Italy produces over 50% than Greece too. Greece is only third ranked producer (about 15% of World production) in what is a niche commodity market. Also, almost half of Greek production is consumed locally.

I do not think California is ever going to be a threat to Spain or Italy. Consumption is growing. The world is short olive oil. California can fill part of the growing needs.

If competitors should arise, it would be more the Southern Mediterranean countries if they ever get their acts together and increase quality and quantity.

At the top end side of the business, a niche within a niche, nothing is ever going to compete in terms of prestige and quality with oils like Nunez de Prado's Flor or some Italian oils or even some obscure French ones (which are a niche within a niche within a niche).

Olive Oil, an Eyewitness Guide is a great book about olive oil. Most of the other books on olive oil are more about showing beautiful pictures of Mediterranean landscapes. This one talks about cultivars and brands.



 Often times I wonder If I am the only sane person in the world. For most of my career I have never understood why a corporate seller or I-banker should be praised because an IPO zoomed in the first few days of trading. By and large we praise people who buy low and sell high, but with IPO's the conventional wisdom is that we should praise those (and their agents) who sell low.

Imagine you hired a real estate agent to sell your house. He/She advises you to sell it for 300K. You do. The next day after you sell it sells for 500K. Are you happy? Of course not. Yet, when I-bankers do that very thing, they are praised, and so are the seller who sold at a low price.

The two decades of my career have seen only the following dynamic:

Stock goes up after IPO: Seller and Seller Agent good Stock goes down after IPO: Seller and Seller Agent bad.

Now, good and bad are subjective terms. If I were a buyer of an asset, I would want it to go up in price afterward. Of course, If I were a seller, I would want it to go down.

Conventional wisdom would probably say that it is in the interest of sellers and their agents as a whole if IPO's perform well, as that makes sure that buyers are around in the long term. However, shouldn't the seller's agent have a fiduciary responsibility to the seller, and not to the market as a whole?

The simple fact is this: This is the most successful IPO ever, and if I am ever in a position to IPO my company, I would want the stock price to plummet the day after I sold. That is how I would know that the investment banker(s) on the deal did a good job.

Yishen Kuik comments: 

I am sure there are other people who have been in and around the equity capital markets, but let me take a stab at Gordon's question.

1. An investment bank needs to have a stable of happy buyers and happy sellers to stay in business. All issuers like FB (the sellers) want to sell their equity for as high as possible - greed is universal among issuers. What investment banks will say in rebuttal is that you want to give the buyers a pop to make them happy, this way when you want to do a secondary down the road, your chances of successfully building a book is enhanced. Every businessman understands this — you have to leave a little on the table for the other guy, so that when you really need their cooperation, you can cash in those goodwill chips. This is why most IPOs are priced to pop a little. It's a goldilocks game - not too high and not too low is where both sides are happy.

Sometimes like Google, they thumb their noses up at Wall St and go their own way. But from what I understand the Google IPO was a mess.

2. At an investment bank during an IPO, the institutional sales coverage is the buyer's advocate and the ECM desk is the banks advocate. No salesguy who wants to stay in business wants to burn his client on a bad deal (although they are not adverse to inserting fat fees into a deal that won't burn the client - cue the selling of rich vol in creative re:opaque ways). The ECM desk however sometimes needs the buyers to take one for the team and support a weak deal. This is then repaid by participation in a good deals. Keeping track of favours owed and granted is the job of the respective heads of sales and capital markets, and this is what keeps the circus going, and how IPO books are built. The ability of an investment banks to raise stupendous amounts of capital very quickly is a non-substuitable service, and why they can charge substantial fees. A ECM desk that does not have the investment banking deal flow, does not have access to a top sales force, does not have skilled market makers, does not have the marketing power of a good research team and does not know how to manage favours with institutional investors will see it's ability to raise capital for clients degraded. And that ability is the engine room of an investment bank.

CFOs and CEOs usually have careers that span several companies, all of which will need to go to market now and then. Therefore it is in their long term interest to cultivate good relationships with investment bankers. They will give a little, not much though, in order to get a little when they really need it. So when the ECM guy says he wants to price in a 10% pop, they will acquiese.

Buyers want to align themselves with a bank that will feed them IPOs that have a high probability of popping. It's a sure strategy to pad their annual returns. But there is a dance here as well - buyers need to know that the investment bank is able to do a good job in pricing so that between the competing interests of the seller and the buyer, it is resolved slightly in favour of the buyer so that the health of the long term game is preserved. Buyers also want to know that their favours in swallowing bad deals are at least fairly noted and repaid. A good ECM professional therefore gets paid 7 figures, and the head can clear 8 figures.

This is why an IPO that goes up a little on opening day is viewed as a success by all parties. If it goes up too much it is viewed as a success by buyers & a mixed bag by investment banks ( the seller is pissed off, but then the industry is excited so more paper comes to market). If it tanks, it is viewed as a failure by buyers and the investment bank. The sellers have a mixed reaction.

This is also why I think it is very difficult to create an investment bank — there are many very expensive moving parts (teams of highly paid professionals) that need to come together. The Europeans and the Japanese have been trying for decades with very mixed track records and most recently Ken Griffith tried and failed.



 The last straight-up default was Argentina, and investors still got .35 cents back. There are still some vulture funds out there going for full recovery,

While of course there have been defaults that have gone to zero, the historical recovery is actually much higher than .35 cents.

Anyway, it's important to understand why Argentina paid the .35 cents rather than nothing:

In this modern world, there are all sorts of things that spurned investors can do to harm a country that defaults. So, if you want to maximize the present value of your default, you are not going to pay zero. Rather, you are going to pay enough to that investors choose to take your payout rather than to pursue decades of litigation and other methods of recovery.

So, given the possibility of European bailouts or even sponsored restructurings, Investors at least ought to get the .25 cents back, and most likely much more.

Stefan Jovanovich comments: 

Europe needs Henry Pelham, but there is no chance that she will get him. Pelham is the U.S. Grant among British Prime Ministers. No one among the official keepers of history has a good word for him; yet his Consolidation Act of 1749 was the fulcrum point for the explosion of production and finance that is now laughably described as The Industrial Revolution. Like Grant's Resumption bill the Consolidation Act - which replaced all outstanding government debt - established a permanent benchmark against which all markets could trade - the Consol - i.e. Consolidated Annuity– that had no maturity date.

As part of the Consolidation Act, the Royal Navy was reorganized so that the system of purchasing commissions and supply contracts was opened to examination and audit. Pelham - like Grant - was criticized for allowing a far lesser corruption to continue rather than praised for eliminating a "spoils" system so rotten that it left British merchantmen at the hands of Spanish privateers (perhaps the only time in the history of the Royal Navy when the score was Spain 1, Britain 0).

"A man can accomplish anything he sets his mind to once he decides that he does not care who gets the credit for its accomplishment."



 In a survey of doctors on a website I follow, 80% of responding doctors answered no way would they allow their patients to email them.

This was the response I posted:

To the 80% of responding docs who say "No way": If you wonder why many patients develop major hostility to doctors' office procedures and to doctors themselves, and why the public is happy to stay silently on the sidelines while the government and insurance companies take over control of doctors' working lives, could it be that doctors (who for 100 years had control of their practices and refused to make them patient-friendly and efficient) have failed to enter into the 21st century? And regard it as perfectly acceptable to impose inefficiency, frustration and wasted time on patients by not letting them communicate with the doctor but requiring them to make an office appointment (probably 3 or 4 hours with travel to and fro, long office waits, etc) for every question or matter?

I see nothing wrong with a doc charging for email or telephone time. Those patients wishing to use email or telephone should be willing to pay the time charge, regardless of whether such charge is covered by insurance. But if our profession continues to lord it over patients by refusing to allow them what every other profession and all of modern life does, doctors will deserve what they get in the way of government and insurance oversight and regulation.

Charles Pennington writes: 

Chiming in, that is a pet peeve of mine. What other profession won't take email? Lawyers, dentists, accountants, etc. all communicate by email, of course. Doctors make it even worse by making you communicate with them only via a voice-mail maze that begins with "If you are a physician, press 1; otherwise, your call is very important to us so please remain on the line…"

Russ Herrold comments:

I'm with the doc's here.

When the tears are flowing, everyone says they are willing to pay, but without getting into the business of FIRST AND AT THE ONSET, having a Retainer Agreement, unilateral right to draw it down upon presentation of statement, Mandatory Arbitration clause, deposit for fees in the Trust Account, all one does is lay a background for a fee dispute complaint or malpractice counterclaim to a suit to collect those fees. It's not gonna happen as a general practice. The doc is caught between the rocks of patient desire for immediacy and convenience; the professional obligation 'not to miss' something that in hindsight seemed obvious; and the fact that insurer reimbursement for web and email oriented 'treatment' lag.

Having had poor service (breaches of patient confidentiality, outright prevarication by nursing staff, and failures of delivery of test results repeatedly and after specific instruction) in the care of a wound, all since May of this year, from the standpoint of the patient, I want there to be a formal paper trail (not email; not call center notes in some database, forgotten and closed; not some other ephemeral media) … a well drafted letter explaining the issue, a file CC, and a cc to the supervising agency (hospital system privacy officer, nursing board, 'authorized provider' certification entity), and an equally formal response (or in its absence, proper escalation on my part).

Unreasonable, I know, but progress is made on the backs of unreasonable people.

The same goes for lawyering. If a client cannot keep and will not pay for an office visit, or meeting at other venue of their choice, to permit the open-ended probing that proper representation requires, they won't be MY client very much longer, as I cannot properly represent them.

Alex Forshaw writes:

The fact stands that interacting with doctors is a pain in the ass from the second you enter the door. They do not face nearly enough competition. There is no bigger beneficiary of protectionism in the entire country. The lack of competition has meant they face no evolutionary pressure. I hate "socialized medicine" as much as anyone but US doctors are as much culprits in their own demise as the tort bar and all of doctors' other favorite bogeymen.

George Zachar adds: 

In my conversations with doctors, I've been told the potential legal and regulatory liabilities risked by patient email contact are vague and large, leading them to simply shun the practice.

Phil McDonnell writes: 

Regular email is not a secure medium. Privacy regs hamper a Doc's ability to use email. Most will call you on the phone and/or write a letter with results. That is why expensive software with encryption is required that often the smaller practices cannot afford.

Gordan Haave responds: 

Sure that's what they say. But it's BS. How is the fax or telephone somehow more secure than email?

If the issue is confidentiality, why is it that Lawyers will email you but not Doctors?

There is one other group that won't send emails: The IRS.

I am in the middle of a personal and business audit, and you can't email the IRS. It's very inefficient.

To me this is just further proof that Dr's collectively are not the saints they claim to be, but rather just a cartel that uses wildly inefficient systems to extract rent's from consumers.

Dan Grossman writes:

I am surprised that a few otherwise highly astute Speclisters so easily accept doctors' excuses for refusing to permit email. As a service to the medical profession and to our country (and in time for inclusion in the President's speech tonight as a new regulation under the Patient Protection and Affordable Care Act), I have drafted and present below a few simple groundrules that a doctor can require a patient to accept as a prerequisite for emailing him.

"A Patient wishing to email Doctor must indicate his acceptance of the following:

1. Complex or detailed matters require an office visit. This email is for minor procedural, scheduling and prescription renewal matters.

2. Doctor will attempt to look at reasonable numbers of emails as time permits but because of his busy schedule cannot commit to read or deal with every email. Any information Patient wishes to convey with certainty must be conveyed by other means.

3. Emails are not secure and should not include sensitive personal information. They will not necessarily be presevered or included in Patient's medical file or record.

4. Patient agrees to pay $20.00 for each ten minutes or part thereof Doctor spends reading or dealing with emails from Patient, regardless of whether the amount is reimbursable to Patient by his insurer. Medicare and Medicaid Patients unfortunately are not eligible to use this email since such programs do not permit email charges. (Doctor regrets this and asks that you please take up such inefficiency with the Government rather than with him.)"

With regard to 3, doctors or their office assistants can instead spend 15 minutes setting up free encryption, as others on the List have already pointed out.






 A while back, someone asked about the value of doing nothing. I had two positions on going into this morning - short S&P, and short natural gas. Had I not turned on a computer today, I would have made enough money to forgive many a sin of the first quarter. As it is, I ended the day breaking even when I had started out being significantly short two markets that gapped in my favour and then later basically went over a cliff. I won't go into the gory details of what and why I traded - nor share my feelings - but I'm pretty convinced that I'm going to have to hire a guy with a gun who, after I've set up the trade and the risk management, under contractual obligation is required to say to me "Sir, step away from the keyboard, or I'm going to have to shoot you in the head."

I would say there is value in doing nothing.

Speaking of doing nothing, the hockey game is on and the couch beckons.

Alston Mabry comments:

 One sympathizes. It brings to mind this proverb.

Kim Zussman writes:

 Randomly speaking, the market might have just as easily shot up and you could have avoided regret.

Gordon Haave writes:

Whenever I am in a business meeting and someone has come to it with some pressing need we have to react to right away, I always ask "what if we do nothing?". Everyone is always stunned.. they haven't even considered not doing anything. After asking that usually the consensus become to, in fact, do nothing.

Alston Mabry writes: 

 I would say that the over-arching issue is that the Market Mistress can torment her lovers in many, many ways. And experience would lead one to believe that tormenting her lovers is, in fact, her main obsession.

George Parkanyi replies:

Oh sure, Kim, you're right about that. But I had my risk management in place. Stops. But the point is, I had my idea right, and the method of executing basically set up to exploit the anticipated scenario. That would have played out very well, since there was nothing more that I needed to do at that point. Then I started changing stuff …

I don't mind being wrong, because that always happens in the markets, and you plan for it. What really gets me angry at myself is when I'm right and then I get in my own way. What other people do, I can't control, but what I do I SHOULD be able to control. Not being able to maintain self-discipline is a character flaw that has to be actively managed, and today it got the best of me. Doesn't always, but today it did. (Tomorrow may not be so good either, because before the close I went long a little silver.)

Jim Sogi writes:

Well, the next best thing to doing nothing is doing just a little to see what happens. If you're wrong, not such a big deal, but a small sample gives a good sign. Like Commodore when the guy gives him a hot tip in Reminiscences of a Speculator. See how it gets swallowed up.

Jeff Watson writes:

Jim mentioned probably the best thing I ever learned in my speculation game which is still going since 1973. "See how it gets swallowed up." Second best lesson I ever learned, but it only works with big orders and can tell so much about the markets, where they are, where they're going, who want's what, etc. Many things can be said with words, but until the order is put to the market, one can't say anything. The order getting digested is where the rubber hits the road and contains so much information(even in these electronic days), almost 10,000 pages per order if one is willing to keep an open mind and analyze it. The Commodore's system still works well in the grains, more than any other market I've seen and has been responsible for much of my limited success.

Vince Fulco writes:

The multi-day swing boys and the deep pockets are the big winners in GC1 so far tonight. Late afternoon, the contract came in like a ton of bricks as ES tumbled, with modest movement in equities after hours, zoom goes Gold as if the latter part of the day didn't even matter. The solid long moves all seem to be held "in reserve" till the day traders are flat.

Jim Sogi responds: 

I know its so minuscule, but the market knows when I put in my and my order makes it harder for Globex to move to the price and for a fill. I try to stealth even my limit orders keeping them mental until the price is where I want, ambush like. It puts me near the end of the queue, but at least its the right queue at the right price tick. Less chance of the hunter becoming the hunted, less exposure.



 In Kenya when you go for nyama choma there are no napkins but you wash your hands before eating out of your shared bowl.

The sinks are outside by the tables.

If you don't wash your hands people won't eat with you.

The idea that Africa is less hygienic than the West is as much BS as be idea that Africa is more corrupt than the west.



UPDATE 1/31/2011:

Contestants Summary:

- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.

- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.

- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.

- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.

- The most creatively expressed entry of course has come from Rocky Humbert.

- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.

- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):

- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.

- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)

- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.

- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.

Contracts Summary:

- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.

- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.

- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.

- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.

- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.

- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.

Victor Niederhoffer wrote:

One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.

May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.

My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.

I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.

I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.

What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.

David Hillman writes: 

"I do know that a sagging Market keeps my units from being full."

One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference. 

Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:

 1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).

4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.

5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.

The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.

Market direction picks are wanted:

Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.

The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.

Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.

Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".

All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".

Bill Rafter adds: 

Suggestion for contest:

"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.

"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.

Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.

Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.

I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.

Ralph Vince writes:

A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.

If I were a Roman General I would take that as a sign to sit for next few months and do nothing.

I'm going to sit and do nothing.

Sounds like an interim top in an otherwise bullish, long-term backdrop.

Gordon Haave writes: 

 My three predictions:

Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.

The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.

Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.

The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.

The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.

In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of

Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.

Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.

Factor                  Prediction      t       N    R sq
US Treasury yield curve      1.162    2.17      30   0.143
30-year change               1.052   -2.28      52   0.094
Trailing 5-year E/P          1.104    0.92      18   0.050
US unemployment rate         1.153    0.90      30   0.028

Weighted total               1.118
SPY 12/30/10               125.72
Predicted SPY 12/30/11     140.52

Jan-Petter Janssen writes: 

PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.

PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.

PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.

Vince Fulco predicts:

 This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.

Additional points/guesstimates are:

1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.

2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.

3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.

4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.

5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.

6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.

Potential negatives:

1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.

2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.

3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.

4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.

A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).

Mr. Albert enters: 

 Single pick stock ticker is REFR

The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.

Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).

Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.

Dan Grossman writes:

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,


Gary Rogan writes:

 1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.

Wildcard: Short Netflix.

Jack Tierney, President of the Old Speculator's Club, writes: 

Equal Amounts in:

TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)

(Wild Card)
BONXF.PK or BTR.V (Long junior gold)

12/30 closing prices (in order):


Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today

I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.



Ken Drees writes:

Yes, they have been going up, but I am going contrary contrary here and going with the trends.

1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.

2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.

3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)


Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

My forecast for the S&P 500 for the year ending Dec 31, 2011;

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011

VXX Short moc 1-21-2011, buy to cover moc 12/30/2011

UBT Short moo 1-3-2011, buy to cover moc 12/30/2011

Scott Brooks picks: 


Evenly between the 4 (25% each)

Sushil Kedia predicts:


1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky

Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):

My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.

2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.

Tim Melvin writes:

Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"

Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.

 Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.

Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.

Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.

I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.

I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.

I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.

I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.

PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.

I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.

Other than that I am clueless.

Kim Zussman comments: 

Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).

Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)

short GLD (looks like a bubble and who needs gold anyway)

short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)

Alan Millhone writes:

 Hello everyone,

I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.

For myself I will stick with what I know a little something. No, not Checkers —

Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.

I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.

Happy New Year and good health,



Jay Pasch predicts: 

2010 will close below SP futures 1255.

Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.

99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.

SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.

SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.

The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.

Chris Tucker enters: 

Buy and Hold


Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

Mr. Ed Seykota once outlined for me the four essential rules of trading:

1) The trend is your friend (till it bends when it ends.)

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.



John Floyd writes:

In no particular order with target prices to be reached at some point in 2011:

1) Short the Australian Dollar:current 1.0220, target price .8000

2) Short the Euro: current 1.3375, target price 1.00

3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70

A Mr. Krisrock predicts: 

 1…housing will continue to lag…no matter what can be done…and with it unemployment will remain

2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3

3…with every economist in the world bullish, stocks will underperform…

4…commodities are peaking ….

Laurel Kenner predicts: 

After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.

Short the 30-year bond futures and cover at 80.

Pete Earle writes:

All picks are for 'all year' (open first trading day/close last trading day).

1. Long EUR/USD
2. Short gold (GLD)

MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)

PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8

J.T Holley contributes: 


The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.

Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.

Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.


Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.

Long lithium related or raw if such. Technology demands such going forward.


Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.

Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.

Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.


Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.

Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.

Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.

Sex and Speculation:

Look to see go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.


This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.


Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.

Long - Counting, you need it now more than ever. It's as important as capitalism.

Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.

Long - Common Sense.

Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.

Short - Politics. It isn't a spectator sport and it has been made to be such.

Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.

Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.

I had to end on a Long note.

Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.

Russ Sears writes:

 For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.

Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.

The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.

Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.

The stability or even elevated food prices will have some big effects on the heartland.

1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.

2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?

3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.

4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year. 

5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…

Yanki Onen writes:

 I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.

Now the ideas;

-This year's lagger next year's winner CSCO

Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.

You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)

-Sell contango Buy backwardation

You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.

Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.

- Leveraged ETFs suckers play!

Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!

If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!

Vic, thanks again for providing a platform to listen and to be heard.


Yanki Onen

Phil McDonnell writes: 

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.

George Parkanyi entered:

For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open

BUY SILVER at open

BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open

SELL and then SHORT SILVER at open

SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open

COVER and then BUY SILVER at open

COVER and then BUY CORN at open
Hold all positions to the end of the year

3 JAN BUY PLATINUM and hold to end of year.


. Markets to unexpectedly carry through in New Year despite correction fears.

. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2

- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)

. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas

. Also assuming seasonals will perform more or less according to stats

If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.

Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency. 

Marlowe Cassetti enters:

FXE - Currency Shares Euro Trust

XLE - Energy Select

BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:


VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than



 Titanic Thompson by Kevin Cook is a deeply flawed book about a reprehensible man that has many lessons for market people. The deep flaws in Ty's persona are ably expressed by Herman Keiser, a former masters winner, who was just one of Ty's hired stooges, hired to pretend to be a caddy. "He was a thief," Kaiser said. "One day, at 80 he shows up at my house with a partner and two young girls. Herman, I've got a plan that's gong to make you rich. Give me 5,000, Herman." I tell him, "Ty, stay here. I'll be right back." I go to the house and get my 22 pistol. I come out and tell him, "Get outta here right now or I'm gonna shoot you."

Ty had no shame in cheating his best friends. When he was a sergeant in the army, he cheated all the soldiers under him out of their pay check. When in an old age home, he cheated all his fellow patients out of all their money. His father stole his mother's last money, and Ty treated his wives similarly. Worst of all, he fixed the game that Arnold Rothstein lost his fortune in and that led to Rothstein being murdered, when he welched on the deb on the grounds that he had been cheated.

And yet, there are many things we can learn from him. The first is the importance of practice. He practiced card throwing, dice throwing, horse shoes, shooting, and golf in line with the 10,000 hour rule and became the best in each of them. He kept records of the throws and was able to reduce the odds of throwing a 7 in dice with various dodges. He always made his proposition bets the kind that he had fixed before hand, and that could not be tested afterwards. I like the one where he offers to retrieve a golf ball from Lake Michigan 100 yards out in the winter where he marks many balls with an x before hand, and then retrieves one with an x, but no one is likely to swim into Lake Michigan and dive in to the bottom to test him. Or the time he bet that he could hit a golf ball 500 yards and he did on a frozen Lake Michigan, but he had the rules of the bet set down in writing before hand so he didn't have to hit it 500 yards on the course.

Also good was his trick of throwing loaded lemons and peanuts over a roof where the object he was throwing would disappear. His numerous proposition bets make you realize that you should never take the opposite side of a derivatives bet, as there is always something you don't know. The advice in Guys and Dolls about a jack squirting you in the eye if someone bets you it will, is a good one. Never accept a deal that looks too good to be true.

What a waste. He was so skilled. About the best golfer, horse shoe thrower, shooter in his day. He could throw a key through a key hole, and chip a put into a cup loaded with water so the ball wouldn't fall out from 15 feet, or flip 50 cards in a row into a hat 10 feet away.

What evil lied in this man, and how many men were ruined by him.

The best thing anyone ever said about him was that he would never steal or hustle all the money from someone who would kill himself afterwards. How fortunate that he died broke, hated by everyone including his son. And how the biographies show that evilness is inherited. His father and he were both the most evil of men, who thought of nothing but themselves and gaining money by any means and it runs in his family with his kids.

My favorite con of his: 

He dresses the best golfer of his generation up as a farmer. Has him driver a tractor around a gold course for a month, pitching manure, and chopping trees. Then he goes to the golf club where they've seen the farmer doing his rounds routinely and says he'll challenge the best two player in the club to a match, and they can choose any partner for him in the world. They choose the farmer. The farmer is a -4 handicap and they win and rush out of town.

Ty was very good with the gun, had to kill many people, and was often in jail and left for dead by thugs. Had to travel with a body guard as he was always cheating to win, and his fellow gamblers were as adept at marking cards, and using wires as him.

One con that he tells is hiring Harry Lieberman to feed him checker moves in a checker match against the best in Kansas city through a wire. Hard to believe that a checker player would do that, and the story doesn't ring true as supposedly the wire told him when a move was bad as he was wavering and touch move must have been played.

His cons remind me so much of the kind that the brokers play when they send you a big research report on a company or industry or country and then offer to take the other side of your trade. You are in the same position as the club people who insisted the farmer be his partner.

Gordon Haave comments: 

My experience when they offer to take the other side of the trade, if you press them, is that they say they are just a middleman and are offloading the risk on someone else. Or course as they own the fed, treasury, congress, CFTC, and FINRA they can pretty much do whatever they want.

Pitt T. Maner III writes:

A fellow Arkansan and famous pinup girl who also used the results of hours of practice to advantage :

'Jeanne Carmen was born in Arkansas in 1930 into a family of poor cotton sharecroppers. She ran away at 13, first to St. Louis, then to New York City, where she eventually landed a job as a fashion model. In 1949 she got an assignment to model clothing for Jack Redmond, a local golf pro and shop owner. Carmen, who had never seen a golf course, was modeling different outfits at Redmond's indoor golf range when he playfully asked her to take a swing at the ball. A lefty, she spun the right-handed club around in her hand and, with the back side of the club face, smacked the ball into the canvas backdrop, knocking it off its support.

"You sure you haven't played before?" asked Redmond. He then set up the backdrop again. "He had me stand on the other side of the ball and hit right-handed," Carmen recalls, "which was harder, but I knocked the drape down again."

Redmond asked her to come in the next day: "I'd like someone to see you."

The next day Redmond had the golf champion Jimmy Demaret watch as Carmen hit balls.

"They were oohing and aahing," she says, "and I thought, 'What's the big deal?' I don't think this is a very difficult thing."

Finally, Redmond said, "I think I can make a trick-shot artist out of you," and asked if she would mind coming in two or three times a week.

"Sure," she said. She hit nearly every day, sometimes for hours on end, for six months. Then she was ready.

"I could stack three balls on top of each other, which itself is very hard to do. I'd hit the middle ball 200 yards, the top ball would pop up and I'd catch it, and the bottom ball would rest, untouched. I could hit the ball 200 yards while standing on a chair on one leg. I could hit a flagpole 150 yards out."

She and Redmond traveled up and down the East Coast, putting on three shows daily at various clubs and earning upward of $1,000 per day. For their finale, she would have a volunteer from the gallery lie flat on his back and tee a golf ball between his lips; then she would drive it 200 yards without disturbing so much as a whisker.

Within a year personal differences ended this lucrative partnership. Carmen then met a dapper young man from Chicago, John Roselli, and moved with him to Las Vegas. Roselli was a lackey in the Chicago mob who helped run the Sands Hotel. When he found out about Carmen's golfing talents, he told her, "Look, honey, we're going to play a little game here." The way he described it, she says, "He said we're never going to take a nice guy. We're only going to take the assholes, and I know who they all are."

"I could hit the ball 200 yards while standing on a chair on one leg. I could hit a flag- pole 150 yards out…."
"Well, that sounds good to me," Carmen recalls saying. "What did I know?"

Roselli would plant her in a lounge reading a magazine. He'd sit at the bar, scouting for pigeons. Eventually he'd strike up a conversation and steer it toward golf and gambling."That's not so great," Roselli might say. "Even I could beat that." Then, pointing at Carmen, "Hell, even she could beat that."
Says Carmen: "And the guy might say something like 'Maybe in the bedroom but not on the golf course.'"

Wanna bet?

The group then would go over to Carmen, who, pretending to be a stranger, would innocently agree to be a pawn to their betting proposition. Dressed as provocatively as the era would permit, she would stand on the first tee and spin the club around in her hand, feigning to have never played before.

"I'd hold the club all wrong and then duff it, or slice it, whatever. After a couple of holes the guy would say, 'This is getting to be a bore. I'm going to win this hands down.' And John would say something like, 'Give the lady a chance. Give it a few more holes.' And then I'd get a little better and a little better. Until right at the end, when I'd start reeling them in. We'd win every time. They never knew what hit them."

The two worked the scam for about a year, until one day when Carmen slipped. She'd had a drink while waiting for Roselli to set up the mark, and, a bit tipsy, started playing too well too soon. The man knew he had been set up. "He was carrying on, complaining," Carmen says, "and Johnny said, 'Look, pay up, you lost the bet. Pay up and let's call it a day.' But this guy refused."

Roselli told Carmen to go to her room; he'd call her later.

"He then roughs this guy up. He calls me and tells me to get to the roof of the Sands Hotel. I get up there and open the door to see Johnny toss this guy over the side. Oh, my God. I'm in shock. I'm crying. So Johnny says, 'Come over here and look.' I didn't notice that the guy had a rope tied around his ankle. I go over and see this guy dangling down there… . He pulls the guy up and … Johnny's got his money and cuts the guy loose.

"Right then I decide I'm in too deep. I had to get out of there. I go pack my things." She moved to Los Angeles and became a star in B-movie potboilers such as Guns Don't Argue, Reckless Youth, and Born Reckless. '

Jeff Watson writes:

 I'm not a chess player, never have and never will be one. I know how each piece moves, a little strategy and that's it. However, school my best friend was a solid chess player and a member of the chess club, however ranked kind of low on the totem pole. I heard of a surefire method to beat a whole group at chess without cheating and ran a proposition against him and a bunch of the guys in the club. I bet him and the guys that I could play chess against the club and win at least 50% of the games, no draws allowed, play each game to the conclusion, and also beat the process;. We commandeered a classroom and set up 16 chess boards on desks in a circle around the room with me in the center. I assigned different numbers to different tables and when one would make a move, I'd make that exact move on another player. In reality, they were playing each other, and I was just the mailman. I won exactly 50% of the games and I beat my roommate by having him play the club champion. I couldn't believe that they fell for that one, but I made the bet so high that their greed made them irrational and the took the bet hook line and sinker. If that is cheating, that's up to someone above my pay grade. I thought it a clever bet, like most of my props but never used gaffs only percentages, exact terms, paradoxes, math, or physics to win. The lesson here is that one can make a bet so high that people will take it, especially when they think they have the edge. If one makes a really, really high bet, the edge better be huge. The best prop hustlers play games that they have an edge in, play it for freeze out, and let old man vig grind away at their opponents stack. Small prop games like flipping coins can be played for loose change, you will have a very high edge, and your friends will be delighted and amused, thinking you're clever, while you take their money. Gotta let your opponents win sometime as someone once said, maybe it was Runyon that "While you can shear a sheep all the time, you can skin him only once."

Nigel Davies comments: 

This is an old con that was repeated on TV by Darren Brown. I'm sure that the assembled titled players knew very well what was happening but they must have been getting well paid to get them to wear suits! 



Geithner is learning about trying to negotiate without leverage. Either that or doing some creative role-playing.

Gordon Haave writes:

The whole concept of the "competitive devaluation" is a farce. No country has ever gone broke because it's currency was strong. A competitive devaluation is the equivalent of burning down your own house so that now you are so desperate for work you will work for less than anyone else. 

Gary Rogan adds:

I am no expert on the history of monetary standards and I'm not interested in or prepared to advocate the gold standard, but I have seen and read enough to claim that a system that severely limits the variability in the quantity of money in circulation by some decentralized feedback mechanism would work better than a few voting members of the FOMC being able to decide to target higher inflation, buy trillions of whatever securities strike their fancy, and just in general behave like a bull in a china shop while citing questionable economic theories and their discredited judgment as justification.

And are they politically motivated? I can't read their minds, but all indications are that they owe allegiance to whomever happens to be President at the moment. Overall I consider them an un-democratic (small d) and anti-democratic institution and one in the long list of poster children of how bad centralized control of anything economic really is.



 Took my daughter to Cleveland and the Browns game last night.

I told her cell phones are an epidemic observing from my seat all the texting etc. and noticed all the fans around us covered in tattoos.

Inking is expensive. Makes me ponder if the economy is really so bad.

Fireworks show after the game were unreal and made the evening complete.



Peter Earle writes:

Actually, like the market for shoes, the skin inking enterprise is a great example of the economic possibilities of a virtually unregulated market.

Typically relegated to prisons, the backs of bars/liquor stores, and other venues which the political parasites aren't wont to enter or be concerned with, the market for tattooing has seen explosive growth over the past 15 years; I personally attribute the growth to both (a) the social acceptance, later encouragement, of women to get tattoos, at least doubling the size of the market; and (b) the growth of musical and sports "gangsterism", in which an arms race for flesh adornment has led to "sleeves" and neck/head/facial tattoos to grow in prominence and, again, broadening acceptance of the undertaking.

With that explosive demand, from a fairly small number of parlors and side-venues I note the arrival of small entrepreneurs, ranging from affordable, storefront tattoo shops in malls to artist partnerships offering extremely high level quality and service: a virtually unfettered capitalism resulting in a wide range of various (sometimes bundled) services across a gamut of specialties and levels of talent, availability and differentiation resulting in a lowering of cost and huge product diversity.

Thus has arisen the inarguable ubiquity of the illustrated populace.

Marion Dreyfus comments:

My friends and I personally find tattoos artistic, executed in the main with extraordinary skill, and yet horrendous on a human being. I would not date a man with tattoos, and I avoid females who have indulged.

One always muses: What will happen in 10 years? How hideous will you find what you have done?

I surmise the followers of this unfortunate craft will subscribe to that existential philosophy: Live fast, leave a pretty corpse.

Peter Earle replies:

But from a broader perspective– the growth of tattooing is not only, in a market or business sense, a great example of the potential of free markets, but also illustrative of the social effects of what this country is in fact evolving into economically -hampered, intervention belabored, highly-regulated and increasingly socialist.

The social consequences arising of a credit-inflated, saving-disinclined, personal responsibility-defenestrated environment is/tends to be an immense high-time preference inclination of society; people thinking of the next 10 minutes, ten weeks or four years, and less of the long term picture.

In 60 years, elderly women with sagging, blotchy lower-back tattoos will crowd shorelines, and men's biceps/forearms/backs will murkily herald rock bands, songs, products and memes long since discredited and in any case extinct.

Pitt T. Maner writes:

Temporary tattoos made with henna were seen available near Manhattan east side docks where tour boats to Statue of Liberty are located. Advertised as an approximate 2-week tattoo experience. You could get the vicarious sailor tatoos around Halloween time as a good addition to your costume. Some might be allergic to henna though.

Indian bridal henna tatoos can quite elaborate and beautiful in some cases.

But I'll pass on anything permanent.

I also thought the 3-D photo images available at the docks where they holographically put your image in a block of plastic were kinda of neat if not a bit touristy. Good for a paperweight. Sort of dates the old photo booths. Evidently you can spend more on a real portrait. What tourists are being sold and what they buy is an interesting study in itself. It has to be a highly studied field.

I couldn't resist the Mexican jumping beans at JFK. Hadn't seen them in 40 years. You end up paying about a $1 a bean if you count only the alive ones! A nice markup there.

Gordon Haave writes:

A friend of mine who had tattoos and now is getting them removed says there is big competition and the laser removal guys are quick to cut rates. Apparently GE financed the purchase of the lasers the last few years and now people have defaulted and the lasers have hit the market cheap.

Just one date point, I don't know this firsthand.



 Ford E-350 Super Duty 12-passenger vanI've noticed that every time I have sold a car, the dealer told me how flooded the market is with my make and model, and that the prices are much lower than I would expect. I take the dealer's words with a grain of salt, but am still not going to beat him in his own market. The equities and futures markets are much the same (and although this is anecdotal), it seems whenever I need to pitch out a position, there is a lot of whatever I own offered for sale at that moment. Conversely, whenever I wish to buy something, there is never enough around. I usually end up paying too much and selling too cheap.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MasterOfTheUniverse.

Bill Egan writes:

You need a new van. A large one. By the end of February.

Ford E-350 Super Duty 12-passenger vans look good.

Prices for 2009 models

new MSRP: $36,325

new Invoice: $32,184

new Edmund's "What Others are Paying": $30,459


Edmunds used retail price: $25,808

Kelley Blue Book used retail price: $24,710


What is the distribution of true prices? Attached is the histogram of prices of 168 used 2009 Ford E-350 vans listed on within 500 miles of my house. Yes, the same basic vehicle is selling for $16,477 to $32,995. This took about ten minutes for me to make. (Yes, some options did vary, and there were a few misclassified vehicles, but overall this is really useful)

It is even faster to look at the most useful percentiles. Just sort by price on Then go to the last page to get the total number of vehicles that actually have a price. In this case there were 168 vans with prices. Scrolling through the four web pages and quickly counting allows you to figure out the percentiles. For example, the midpoint or median is at the 84th van (168/2). That price is $21,495. The 25th percentile is at the 42nd van (168/4) priced at $19,998.

Used list price at the closest Ford dealer: $21,695 (just over 50th percentile)

Used "best price" at closest Ford dealer after we had a chat about other dealers' prices: $19,495 (18th percentile).

For a fleet vehicle manufactured in March, 2009, auctioned in October, 2009, clean CarFax, with 13,200 miles and almost all the options.

Kim Zussman replies:

Don't you think the distribution of prices attributes less to mispricing than +/- valuation factors estimated by sellers — mileage, condition, options? They ought to know the going prices, and attempt to price theirs competitively modified by their knowledge of condition.

As with romance, if condition is held constant then price should vary based on ignorance and desperation.

Gordon Haave writes:

Car selling is all about one thing: price discrimination. The good salespeople do one thing: size up the maximum that you are willing to pay and make sure that is how much you pay. They do this through a number of techniques but most notably the questions about what you do for a living, how much your current car payment is, etc.

All the confusion around pricing and monthly payments and such is just to give them wiggle room to be able to charge you the most you are willing to pay.

Alan Millhone adds:

I pass a used car lot daily in Belpre and have been noticing the strategy this fellow uses to push his lot vehicles. He calls 89,000 miles LOW mileage ! One car he lists on window as a LOCALLY owned car — So? Occasionally he puts a HOLD sign on the windshield — who cares? Across the street is a strip plaza that a man owns that I know. On the front that is not used you can set your vehicle or boat or trailer and pay him 20.00 a month for that parking spot. Lots of traffic flows by each day. You list details on your vehicle and make your own deal. One new car dealer of KIA has his own clunker program and will give you 5,000.00 on your trade. My best friend traded in his car and a van he had towed in and the dealer allowed him 4,000.00 each towards a new KIA auto. I note gas in my area creeping up again so the economy cars are selling well.



In his WSJ article this weekend, Prof. Boudreaux argues that insider trading shouldn't be illegal, as price-movement from such trading transmits better information about company value to the public. Presumably this also extends to legalizing burglary, as burglars perform valuable tests on home penetrability of use to homeowners not yet foreclosed on.

Relatedly, one thought the currently unfolding grand experiment in US socialism would have been considered bad for free-markets and the securities used to capitalize on them. Current and planned government control, confiscation, and regulation appears to be the biggest since the New Deal (bigger not adjusting for inflation). To put a little lip-gloss on this porcine, here is comparison between SP500 (via tradeable SPY, including dividends) weekly returns under Democrat and Republican presidencies since 1993 (Clinton + Obama so far, vs GWBush):

Two-sample T for DEM WK vs REP WK

.         N     Mean   StDev  SE Mean

DEM WK  457   0.0036  0.0228   0.0011  T=2.41 P=0.016

REP WK  415  -0.0005  0.0265   0.0013

Michael Moore would pop a suspender to learn that not only do stocks do better under recent Democrats, but ALL the positive returns since inception of SPY (Jan 1993) occurred under Clinton and Obama. Note, as is often the case, this happened with less volatility:

Test for Equal Variances: DEM WK, REP WK

95% Bonferroni confidence intervals for standard deviations

.          N      Lower  StDev   Upper

DEM WK   457  0.0212  0.022  0.024

REP WK   415  0.0246  0.026  0.028

F-Test (normal distribution)

Test statistic = 0.74, p-value = 0.002

How can this be? Shouldn't high taxes, government spending, socialized medicine, pay controls, huge deficits, and trading restrictions reduce profits and stock returns?

Then on this morning's run, the Homer Simpson (DUH) moment hit in the form of a question: Who does better as government deepens its grip on the means to production, and un-levels the playing field? Not the public - at least not mom and pop 401K. The smart people do better. The ones with the brains and resources to find loopholes in a byzantine regulatory and tax environment. Wall Street firms. Hedge funds. Large banks able to package off bad bets to taxpayers.

OK if that doesn't Liberate you, listen to this while thinking about who gets to pay for political bubble remediation:

Phil Collins: Another Day in Paradise

Springsteen/REM: Man on the moon

Alston Mabry replies:

I always thought it would be interesting to make insider trading legal, within a framework that included real-time reporting of trades made by those registered as "insiders". (And perhaps any employee of a company would be considered an insider.) Then the information contained in the trades would at least get transmitted to the markets quickly and overtly. You could extend it so this system would apply to any trades made by insiders in their industry.

Laurel Kenner notes:

The Loeb Award has been the most prestigious in financial journalism since it began in 1957. It's ironic that the founder's methods are now against the law…

Gerald Loeb, co-founder of E.F. Hutton, created the award to encourage methods that "inform and protect" individual investors. He himself relied almost exclusively on working his contacts for information. He would then publish the information for his clients. It's all there in his book, "The Battle for Investment Survival."

My goodness, how else are you supposed to get tradeable information? Are we all supposed to wait with our hands out for handouts? I guess that is the socialist model: handouts and no work.

Gordon Haave objects:

Legalize insider trading? Sure, in theory — but in reality nobody is going to play in a game where he feels his opponent has an edge on him. All you have to do to see how this works is to look at a place like Mexico [& many other emerging markets], where insider trading is rampant and blatant. The average person doesn't play.

Gregory Rehmke writes:

Some years ago Virginia Postrel argued that "insider trading" rules should be left to companies and to the various exchanges to decide. Exchanges will want to reassure investors and would fine members who broke the rules. I also think it is interesting that we only hear when "insider trades" make money. Such information is usually imperfect, so many trades based on this information lose.



What is the theme of The Trees by Rush, is it Americans (oaks) vs Canadians (maples) or is it about inequality in general ? — a Reader

It is an attack on those obsessed with equality, pointing out that you can make people equal only by chopping down those who are above others.

Vincent Andres adds:

I first read that song/poem on Sardanapale, a very interesting French/English language outside-the-box thinking site.

Nick White warns:

But how do you define being "above" or — to strip away the euphemism — "better than" others? Are there not also plentiful examples whereby those whom one might consider "inferior" in one domain eventuate themselves to be superior to the original observer in another?

Such talk is dangerous. Libertarian values can all too easily be conflated with thinly-veiled elitism. Not that I am suggesting that of anyone here – just an observation from the tone of the piece.

Gordon Haave replies:

That's the point. You can't. So you chop everyone down to zero because it is the only way to make everyone equal.

J. T. Holley jokes:

Not to zero, only up to the point where all the Oaks uproot themselves and leave the Maples in their own forest and move to Colorado.

Chris Tucker concludes:

Is it not fair to say that some are better than others in a particular field of endeavor? Some are better tennis players, some are better traders, some are better friends, some have better (more) integrity, some are better at cheating. Some are definitely members of certain elites — GM Davies is an elite chessplayer, for example. The elitism that Nick refers to arises from a more broad or general sense of superiority in many ways or every way. That is the dangerous kind that leads to exclusionary thinking. The point of Neil Peart's lyrics is that we are not all equal at everything, but governments would treat us as such in order to make legislation play to the lowest common denominator, in much the same way as a teacher must teach to the slowest student in the class or the team is hamstrung by the slowest member. It is simply the distillation of one important idea, that equality can be brought about by trying to force everyone to be the same and since you definitely cannot make everyone faster or smarter or nicer or more sensible, you just might be able to make the fast ones slower, the smart ones dumber and the sensible ones senseless.



On Friday I saw Anvil: The Story of Anvil.

It was the most interesting movie I have seen in a long time. It is an independent film I saw at the Oklahoma City Museum of Art. Anvil was an up-and-coming heavy metal band in the early 1980s. I vaguely recalled the name… I myself was an Iron Maiden and Judas Priest fan. Anyway, unlike Maiden, the Priest, Scorpions, and others, Anvil never made it big time.

The lead two member of Anvil, however, never gave up, and they have been playing together for thirty years. They are broke and work regular jobs, yet they still think that one day they will have a hit album and become world-wide rock stars.

The film is a documentary about Anvil, and their quixotic quest to become world-renowned stars. At first it is amusing – almost like watching Spinal Tap as the lead singer and guitarist "Lips" lives in his fantasy rock and roll world. As they movie progresses, it becomes a bit depressing. The third part is the culmination of their attempt to launch a new album with a new producer, and an attempt to get a contract with a major label. The last scene is fantastic, but I will not tell the readers how it ends.

I spent most of my time thinking about my own life, and the lives of others that I know. When is the appropriate time to give up? Most second rate metal bands from the 80s gave up a long time ago. Are they better off for it? Or should they have kept living the dream? The same could easily be applied to traders and money managers. I for one gave up trading last year. Should I have? How long should I have kept at it before quitting?

This is of course an unanswerable question.

Duncan Coker recalls:

When I was 18 I had dreams of forming and being a part of the next Allman Brothers band and pursed this the first few years of college — much to the detriment of my GPA and class attendance. That dream ended in my early 20s. But I still play and enjoy guitar to this day and my musical friends of earlier days are still among my closest. So I will always be a guitarist, but never a rock star.

GM Nigel Davies analyzes:

There is an answer, but it requires thinking in terms of the journey rather than the perceived destination. As long as someone experiences personal growth as a result of his endeavours (and this manifests itself in a feeling of passion) then the activity is worth continuing. But when it becomes all about destinations (ambition, money, power) then the odds are high that an accident will happen.



It has been my experience with the wiser gender that mother and wife have a superior sense about when mocking fear turns into the overconfidence of mocking risks.  Which may explain why the motherly bank analyst has had superior analysis of late.  Further, it may give insight into why a certain trader's ex wished she knew all his trades… not that he was wrong so often as she bitterly proclaimed, but because she had the good sense to know when he had erred.  Finally, it may be a better explanation of why Iceland failed and why sufficient women on a board signal better returns, if the reporting is accurate.

Gordon Haave replies:

G HThe mother and the wife are like Wall Street.  They privatize the rewards (wife — i need a new house, mother — my son is so great) and socialize the risks (mother — you should have listened to me and been a lawyer, wife — see ya later).

They are both a necessity at some point, but don't let them influence your self-esteem.  Men are defined by their actions, what they accomplish, and what they impart to their children (which includes how they treat their wife and mother).  However, never put your self-esteem in the vise of your wife or mother.



Lydian coin, 610 BC, Bundesbank collectioThe money supply misleads lots of people. If the money supply was cut in half today, it would not cut the economy in half. Why would it? It would simply mean that every dollar is now worth half as much more.

Well, that's in theory.

The reality is that there is a whole class of people (bankers, homebuilders) who have benefited from the illusion that more paper money means more wealth. Those people get wiped out when money stops growing (LEH, C, UBS, et. al.).

Those people thus spend huge amounts of money lobbying the government to make sure that their non-productive economic activity never stops, and obviously they have been successful.

The most basic concept in economics is that markets are necessary because of the signals that prices send.

Well, we overbuilt housing, so now the market sends the signal, through prices, that no more housing needs to be built.

Yet, ~95% of the country thinks that propping up home prices and distorting the signal that the market is sending is somehow good for the economy. It's not.

Stefan Jovanovich comments:

Gordon's polling numbers are unusually pessimistic. Most of the surveys of likely voters indicate that a majority think propping up home prices will not work and is not a good idea. The argument between the people who have benefited from the expansion of credit and those who question its wisdom is not a new one. It is at the heart of the debates of the 19th century over the legal tender status of state bank notes, the monetization of silver and the establishment of a Federal Reserve system that accepted government debt as backing for demand notes. In the 19th century the hard money advocates of both parties (Jackson, Buchanan, Cleveland for the Democrats; Grant, Garfield, McKinley for the Republicans) won the argument. For the last hundred years soft money has called the tune. What is remarkable about the present moment is that, for the first time since the establishment of the Federal Reserve, the debate over what should control the growth of credit - the market or the government - is actually an open question.

P.S. In a world where half the income is paid to or for the benefit of people whose work is never tested by the market, the use of monetary aggregates as a measure of anything other than themselves becomes increasingly suspect. Jean-Marie Eveillard has a wonderful phrase for Dr. Phil's money=size of the economy syllogism — "mechanical monetarism". The wisdom of the gold standard was that it divorced money from credit and left credit free to grow based on the increase in wealth — property, skills, enterprise — and the fluctuations in people's appetites for risk. What even the Paulistas seem unable to understand about the gold standard that was written into the U.S. Constitution was that it defined money by its physical property — so many grains of gold — and not by its exchange value. The money was the gold; the prices were the exchange values. That essential wisdom is one that even Adam Smith had trouble with and that only Thornton and Cantillon, those monetary theorists who actually dealt in trade and banking, understood. It is almost universally ignored now. Any monetary system that defines money by itself is fatally unstable.



The touchdown interception in the last second of the first half, changing the score from a likely 10-14 to 17-7, immediately brought to mind whether sports imitates the market. And of course the mistress had already thought of this going from -1/2% at 350 to +1/2 % at the 415 close on two occasions in the last 10 years, and the reverse on four occasions. In each case, the mistress gave the final outcome the next day, to the side that had the 3 50 advantage. perhaps to make it more realistic I should have reported 1150 to 1200 reversals.

Jim Sogi comments:

Don't forget the bad calls being reversed and changing the outcome. And the multiple fakes out of the hike. It just needs to fake one defender out to work. The full field reversals, like the 100 yard interception, feel like recent markets. Even at the last minutes of the game or quarter.

James Lackey adds:

As the regulators throw too many flags.

Gordon Haave responds:

I was thinking about the game in terms of stupid behavior that people engage in, over and over again. In football it is the "prevent defense. Teams play great D all game, then in the last five minutes shift to "prevent" defense, where they take out linebackers in favor of more backfield players. All it ever does in prevent the team from winning. This is why the endings of games are so high-scoring.

In the markets, people do all sorts of things to prevent them from losing lots of money, which only insure that they lose the game. Such examples include most of the technical rules, and the dollar-cost-averaging.

Scott Brooks replies:

What Prof. Haave is saying about dollar cost averaging is true if someone has a lump sum to invest. In that case, unless he thinks he can time the market, he should go all in. American Funds had a nice piece on this a few years ago showing two people who invested a lump sum each year. One did at the market high, the other did it the market low every year for a long time. Of course the person who invested at the market low each year got the best return, but the one invested at the market high still got an exceptional return.

However, DCA is not a marketing ploy for the masses, it is a salvation for them. It encourages them to invest on a monthly basis and be in the market each month no matter what the market is doing. It allows them to invest without worrying about the highs and lows of the market. It gives them peace of mind to invest when times are bad. It, quite literally, gets them excited about investing when the market is not so good.

DCAing is very important to Johnny and Sally Lunchbucket… even if they don't know it!

Also, Kurt Warner has been to three Superbowls. He's lost two and barely won one (see "The Tackle")

In both cases where he lost, it was the defense that let him down. I can't say for sure, but I believe it was the "Prevent Defense" that was at fault. In the case of "The Tackle", a porous defense came within 1 foot of losing the game as the clock ran out.

In each of his three Super Bowls, he played against one of the most highly rated defenses in NFL of that year. He and the offense did their job and scored enough points to win.

Kurt Warner should have three Super Bowl Rings in his collection instead of just one. Unfortunately, his defenses let him down.

Phil McDonnell adds:

The reason Dollar Cost averaging works is because it benefits from volatility. Individual stocks are more volatile than the averages so we would expect it to work better on the 30 individual Dow stocks than just on the Dow average itself. The fatal flaw in any strategy is that one needs to invest in stocks that do not go down. For DCA sideways is OK, it will actually make a little money. But if you put all your eggs in the Enron basket you are still broke, DCA will not save you.

About half of the returns of all the stock markets over the last 100 years are due to DCA. Reinvestment of dividends is a form of DCA. The average return in prices has been about 6%/annum. The dividend yield has been about 3% overall. So one would think that the returns if dividends are reinvested will be about 50% higher. In fact dividend reinvestment outperforms by 100% because of the subtle contribution of DCA.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008



G HaaveIt's important to note that deflation has happened many, many times in the history of this country. It was a regular feature of the business cycle. Demand goes down, prices go down. Simple stuff. Markets equilibrate, and things get going again. There are three examples of prolonged deflation that I will mention here.

First, the great deflation of 1875-1896. For thirty years, prices decreased an average of 1.7%. Also there was a prolonged deflation for three years, 1930-1933. Finally there was a prolonged deflation in Japan, from the 1990s until recently, although Japan may slip back into deflation.

What are the points to be learned? Those unfamiliar with the great deflation of 1875-1896 might automatically assume that those must have been tough times in the economy, as the great depression saw output plummet, and Japan has seen its economy stagnate. That could not be further from the truth. The great deflation was a time of great economic growth for the US.

What is the difference then, between the Great Deflation, and the Great Depression/Japan Slump?

The difference is that Macroeconomics had not yet been invented by 1875, and therefore the government didn't try to do anything about it. The government, and economists, never imagined that they could possibly model the endless millions of individual actors in the economy on a few simple graphs, and then conduct sweeping policy changes to "fix" the problem of falling prices.

F D RBy the 1930s all that had changed. Modern macroeconomics was forming, and in all its hubris thought it could accurately model the economy in simplistic terms. Those of a more conspiratorial bent will note that the Federal Reserve was now in existence, and controlled by those who most hated falling asset prices, the bankers.

So, the US government/Fed did everything that they could to prevent falling prices. FDR's government even allowed industries to fix prices to keep them from falling further. Hence, the economy was unable to equillibrate, and millions of people could not even afford food.

Japan also decided to try to prevent falling prices, when falling prices are exactly what an aging country needs. It is assumed that the generational problem in Japan is solely a matter of culture. Then again, who is going to have kids when one can hardly afford a one bedroom apartment? Falling prices are exactly what Japan needs, but the economists think they know better.

I thumb my nose at all the economists, politicians, and journalists who fear a "deflationary spiral." Ye of so little faith in the common man, and his ability to interact with his fellow man in mutually beneficial transactions. Get out of the way! Asset prices falling is not a bad thing. Their having gone up too far was the bad thing. Their coming down is what will fix the problem of them having gone up too far.

Assuming, however, that the politicians and bankers do not take my advice, what to do?

First, the record of the Great Depression and Japan's Slump is that the government can't in fact prevent deflation very well. Second, the UK did not do as well during the Great Deflation, owing to its heavy industrial asset base during a time of asset deflation.

The United States is a mixture of heavy and low asset base industries. My advice: buy the latter, sock 'em away for a few years.



AltmanIn the March 3 edition of Barron's there was an article by A. Bary entitled "Risky Bets". The author cites a number of stocks that are down 40% or more from their highs; he believes investing in these companies could be very profitable if the credit markets begin to normalize and the economy recovers.

There are a number of companies other than those he cites that are down 40-50% or more that may be two or three baggers when the stock market comes back. The question is, "Are they reliable companies or future bankrupts"? I've been using Value Line and Morningstar to determine the financial risk of some of these beaten down companies.

However, I'm also aware of a formula called Altman's Z-Score that predicts future bankrupts with 85% accuracy among stocks with a low Price to Book Value. A Google search yields a number of articles describing the approach and financial data to use.

The data to use are:

1) Earnings Before Interest and Taxes (EBIT)

2) Total Assets

3) Net Sales

4) Market Value of Equity

5) Total Liabilities

6) Current Assets

7) Current Liabilities

8) Retained Earnings

I have, with varying degrees of success found these data in the Yahoo, CNBC-MSNBC, and Morningstar Financial Pages. But the data are 6 or more months old or incomplete. Value Line was a big disappointment.

1) Is anyone aware of where more up-to-date and complete financial data may be found on the web?

2) Or is there a web page that lists companies along with their Z-Scores ?

Gordon Haave replies:

For those of you with Bloomberg (the system, not the mayor), there is a Z-Score function built in.

Larry Williams suggests:

For more up to data company financial data try: MSN Money or Kiplinger.

Allen Gillespie cautions:

Altman Z-Scores is designed to work for certain industries. You might have to use several different scoring methods to cover all industries.

Eric Falkenstein offers:

I just created a website with free default probabilities for public companies, US and worldwide. Better than anything else I've seen, and I've seen 'em all.



Prof. HaaveOn the margin, buying to rent should become a marginally more attractive investment going forward. A normal real estate decline, caused by a general slowdown in the economy, should affect buying and renting equally.

But in this case: Take a guy who makes 75k per year. He went in leveraged himself in a subprime to buy a 500k house. He can't afford that now, and he is being foreclosed on. But, he still has his job, and needs a place to live, and he will be entering the rental market to find a roof for his family.

James Lackey replies:

My sister is in that biz, and its amazing how far prices have to fall to make deals cash flow positive. Florida wasnt since 2001 and it's now near break even for investment rentals. Close, but not there yet. We are talking nice houses near towns, schools, shopping, roads to beaches etc. — a house a guy that makes 75k would rent. And any nice apartment complex was converted in 2005-06, so rentals are scarce.

Nigel Davies writes:

Professor Haave's point is a good one and I for one will certainly be a real estate buyer when UK rental income rises to decent levels. But I don't think that this necessarily signals a 'bottom' as demand will also be a function of the overall state of the economy and can contract considerably if push comes to shove.

A major argument in favour of a 'strong rental market' is that people need somewhere to live. But there seems to be an assumption that an individual's space requirements cannot possible contract, which is nonsense. It's worth remembering that 100 years ago extended families of 20 or more would live in a houses of the size that are currently occupied by singles, and you still get this in many countries.



HGHGiven the remarkable performance of older players like Clemens and Pettitt, has anyone pointed out that perhaps one of the main thrusts of investigation should be whether there would be a beneficial effect for all of us in using moderate replacement quantities of substances like steroids and HGH that decline significantly with age?

I for one would like to know more and would appreciate article citations, book recommendations, and information on physicians specializing in the field.

Chris Cooper replies:

Such beneficial effects are apparent to anybody with an open mind. Nevertheless, the idea that a performance-enhancing drug might actually make you healthier is the kind of message that is not acceptable to the mainstream.  Aging is not "normal", it is a disease, and should be attacked like any other disease, with an eye to minimizing the deleterious effects.

What you are referring to is often called hormone replacement therapy (HRT).  The approach is to use drugs and nutrients to bring the body's hormonal balance back to what it was when you were a young man.  Is it surprising that if you achieve this, you actually feel much more like a young man?  Why does our culture consider this to be undesirable?  My goal is not simply to be healthy as it is commonly defined, but to strive for optimal health, a very different concept.

A good book to start with was written by my doctor Philip Lee Miller, called Life Extension Revolution: The New Science of Growing Older without Aging. Dr. Miller is in the SF Bay area. Also I've heard good things about the Kronos Centre in Phoenix.

Janice Dorn writes:

One of the contributors to my just-released book is a world-renowned authority on optimal health.  I took nine years of my life, and traveled 1.5 million miles outside of the United States to every country in the world (some many times) in search of life extension and radical wellness methods. Needless to say, it was an incredible journey, and it continues to this day.

Caveat Emptor. There are many charlatans out there, and we are in largely-uncharted waters. It is a passion for me, and I believe that the goal in this area of life is to delay, avoid and eventually reverse death.

Jim Sogi suggests:

SurfPerhaps a better way is hard effort. I still get out and surf 20 foot waves last week and take time to surf at least four times a week and train when there is no surf. No pill will keep you in shape without effort. Just the thought of a pill is enough to kill the will to motivate effort required to maintain and build strength, flexibility and stamina. It's like technical analysis, it offers an easy way without the work, and will lead to more harm than good. I see many men really going downhill. They don't stay active. Laird Hamilton says, "Keep Moving!" That is the best way to stay fit. I compete with the young guys everyday in a competitive lineup in the water for waves. I can't outperform them, but have other strengths which give advantage.  It's hard work. It takes hours everyday to stay moderately fit, and more to build strength. That's the problem, most don't and won't take the time and effort to maintain and build strength and gradually lose it. Strength from a pill won't help without the agility, flexibility and stamina that are the other components of fitness. Don't worry about the pill, just get out and spend the hours everyday to stay fit.

Chris Cooper responds:

BodybuilderYes, a better way is hard effort. I have gotten more benefit from the sports that I train for than I have from the drugs that I take. The drugs are an incremental benefit, though, and I am certain that I am better off with them than without them. And you may find, as I do, that instead of being de-motivating, they actually increase one's desire to participate.As an example, suppose you are taking testosterone. If you are not exercising, it will do little to build muscle. You still get the other benefits, such as general feeling of wellbeing, increased libido, increased optimism. It enables you to build muscle faster, because that only happens if you put in the effort. It's not magic, you still have to do the work — but testosterone also makes it possible for older men to train as hard as they did when they were younger, because your body will recover more like it used to. 

Larry Williams opines:

The flap about HGH in baseball is pure propaganda, based on my personal extensive testing of it. I concluded it was expensive and of little, if any help, in waging the war against old man age — a view that is now also backed up by science.

Ken Smith responds:

Studies are studies and not reports from individuals. I am an individual. The studies cited older people. I am an older people. My individual report differs from the studies as reported.

I can tell you resistence exercise will promote better body tissue and that the same exercise will tear tendons, ligiments, induce on-going pain. There came a time when the benefits diminished and the pain increased.

I am reminded of a story told by an author about his last visit with his grandmother. She was quite old, in her 90s As they conversed during her feeble days, on one of those days, her last it turned out, she asked him for a small glass of wine, told him there was a time for everything, sipped the wine, closed her eyes and passed on to the next dimension.

Russ Humbert remarks:

I would not be so quick to rule it out Growth Hormone for enhancement. The Chinese women seemed to have had much success with using it for distance running in the mid 90s. Several of the women were running times better than the men. However, they also ran extreme high mileage and were practically starved while setting several women's world records before their coaches where caught transporting drugs through customs before an international competition. Several of the stars went insane under such a regiment. 

Charles Pennington enquires:

Dr AliI'm open-minded about this, and I went as far as to buy the book written by Chris's physician, who seems like a reasonable guy. But the Life Extension directory of doctors isn't re-assuring. There is just one doctor listed in Manhattan, Dr. Majid Ali, whose website is Featured there are "Hydrogen Peroxide Baths and Foot Soaks" "The Oxygen View of Pain Management," "Bowel Detox," "Water Therapy," and "Dr. Ali's Castor-cise."

I also checked for a practitioner nearby in Connecticut. Doctor Warren Levin, in Wilton CT, is at The general garishness of the site, the endless list of specialties — "Magnetic Field Therapy," "Juice Fasting Therapy," "Auriculotherapy" — and even the Ron Paul promotion (Ron Paul == more permissive environment for quacktitioners [which is fine]) all leave me skeptical.

I wonder if Chris's physician could recommend someone in Manhattan who has a more rigorous, scientific approach than these guys.

Chris Cooper replies:

Perhaps these links will be more productive:

American Academy of Anti-Aging Medicine

The American College for Advancement in Medicine

Steve Leslie extends:

Philip MorrisI think back to the 1960s when the medical profession and the tobacco industry discounted the evidentiary link between lung cancer and smoking as anecdotal. And for 40 years after that the tobacco industry still fights in courts as to smoking and COPD, lung disease, heart disease and emphysema — long after they have paid billions of dollars to settle various class action lawsuits and agreements with attorneys generals throughout the country and have watched 450,000 American citizens die every year from smoking related illnesses.

I watched my father wither away and die as a result of a lifetime of smoking cigarettes.

Now some want to debate that the beneficial effects of steriods and HGH in adults outweigh the anecdotal risk. And I think of those in professional wrestling such as Chris Benoitk who committed multiple murders of his family and then suicide, professional footballers such as Lyle Alzado, dead from brain cancer, professional baseball players such as Ken Caminiti, dead and an avowed steroid abuser, high school boys by the tens of thousands who experiment and take steroids and commit ‘roid rage and suicide, and the untold thousands of recreational users who develop enlarged hearts and forms of cancer such as prostate cancer while juicing just to get bigger muscles.

Chris Cooper clarifies:

Chris BenoitThere is no medically documented connection between suicide and anabolic steroids. The medical data also say, "Supraphysiological doses of testosterone, when administered to normal men in a controlled setting, do not increase angry behavior." 'Roid rage is a convenient media myth. Steroids may very well cause changes in feelings, but that is far from causing major behavioral changes like those suggested above.

Take Chris Benoit as an example. When doctors examined his brain they found that it resembled the brain of an 85 year-old Alzheimer's patient. It had suffered so much trauma and had so much dead tissue that normal function was not a possibility — while dangerous personality, behavior, and temperament changes were more than probable. During his time as a professional wrestler with the WWE, Benoit had subjected his body to head trauma hundreds of times, most notably with his signature "Flying Head Butt" as well as dozens of other highly flashy (and dangerous) moves.

Steroids are being unjustly demonized, just as marijuana was in Reefer Madness, followed by equivalent media behaviour regarding LSD, Ecstasy, and many other drugs. Certainly steroids have their downside, and just as with recreational drugs, should certainly not be used by minors. But perspective is not allowed in times like these, where fear is inflamed to further the objectives of those who will benefit. 

Steve Leslie continues: 

Taylor HootenI dispute Mr. Cooper’s assertion that the is no medical documentation connecting steroids and suicide or rage. That is ridiculous. At a Senate Caucus hearing Don Hooten testified that his son Taylor, while in high school, began using and abusing steroids and committed suicide.

Mr. Cooper furthermore claims that Chris Benoit murdered his family and then committed suicide because of years of suffering numerous concussions and possible dementia. Did he personally perform an autopsy on Mr. Benoit? Has he examined the autopsy report? Where does he draw his conclusions from? In short, what specific research does he quote? Furthermore, what are Mr. Cooper's qualifications in forensic pathology and/or psychiatry?

Mr. Cooper further argues that it is some sort of a myth, steroid usage and its association with massive mood swings and subsequent rage. He then compares steroids to marijuana and says that it is being demonized by an uninformed public. Not to stop there he equates such unfair demonizations with LSD and ecstacy and “other drugs.”

He diminishes the risks to an absurd level and I am severely shocked and alarmed.

Chris Cooper responds:

Don Hooten runs the Taylor Hooten Foundation, established after his son committed suicide. Now Mr. Hooten runs around the country telling everybody that it was because of steroids, when there is no evidence pointing to that. According to,

There had been no active anabolic steroids in Taylor's body for two months prior to his suicide (according to a report on the THF website) At 17, when he killed himself, his hormone levels had likely returned to completely normal, and only metabolites of nandrolone (not active compound) were still detectable.

And no, I didn't personally perform the autopsy. But here is a quote from the doctors who did, via,

SLI's tests showed that Chris Benoit's brain had large amounts of abnormal Tau protein in the form of Neurofibrillary Tangles (NFTs) and Neuropil Threads (NTs). Multiple NFTs and NTs were distributed in all regions of the brain including the neocortex, the limbic cortex, subcortical ganglia and brainstem ganglia, and were accompanied by loss of brain cells, a condition for which no other neuropathological evidence for any chronic or acute disorder could be found.

Gordon Haave adds:

QuoteIt is silly to say that one can't quote the work of someone else. That is, one can't comment on an autopsy unless one performed it himself. If we took such an approach all of the time, there would be nothing to write about.

Furthermore, in the interest of scientific inquiry, providing anecdotal stories to a statement about a lack of research does not prove anything. I have no dog in this fight, but I admire people who challenge orthodoxy.



Gordon HaaveWhat is a credit crunch?  At least in simplistic terms, one would think that it is a situation where credit is hard to come by.  Yet, per this graph prepared by the St. Louis Fed, bank lending is holding up just fine, despite a brief dip a few months ago. Yet, we hear constantly about a credit crunch, and the difficulty in borrowing money.

Let me explain something very, very clearly: If you put a lot of money on your credit cards, and default on them, you are going to have a hard time borrowing money shortly thereafter. That is not a credit crunch. Similarly, if you borrow a lot of money in order to lend to unworthy credits, you are going to have a hard time borrowing money shortly thereafter. That is not a credit crunch, it is the most basic works of a free market system, where capital is moved rapidly from productive uses to non-productive uses.

The capital markets have realized that it was a mistake to allocate vast amounts of capital to SIVs and hedge funds who added no value, but merely leveraged up loans to risky borrowers and/or sliced up assets a million different ways and passed them around in a daisy chain, while adding on a huge fees for their "genius".

Their losses have caused dislocations in the credit markets, and there me be worse things yet to come.  But, entities that don't actually add any value in the world should have a hard time borrowing money, that does not mean there is a credit crunch.

Alston Mabry explains:

A credit crunch is when I have trouble covering my action.

Anything else is natural market forces, clearing prices, etc., etc.

Russ Humbert writes:

While agreeing with much of what Prof. Haave said, there is a credit crunch of sorts, a loss of confidence in the rating agencies. A quick look at the investment grade ratings credit spreads confirms this. Going from year lows OAS spreads of 33, 54, 74, 104 for credits AAA, AA, A to Baa. (9 year lows ); Jumping to 84, 153, 179, 222 at end of 11/30, with AA reaching record spreads; higher than 2000 and 2002. The AA to Baa spreads seem to be moving in parallel while this occured. Hence rather than simply fleeing from poor credit, the risk premium has increased for most of the investment bonds equally. It would be as if, in your analogy, many deadbeats found how to sneak in an raise themselves to a very high FICO score — ruining your high credit rating.

Ken Smith ruminates:

Seems to me no one in government is producing a graph that extrapolates the above data to the future. What about that? Kurt Vonnegut inquired aloud "Why is there never a Secretary of the Future?" Government has Secretary of Defense, Secretary of Agriculture, etc. but no Secretary of the Future.

In short, no one is dedicated to plan for the future; every bureaucrat and every CEO and every householder is dedicated to short-term goals.

You might chime in to say everyone in the financial industry is dedicated to the future; with due respect I decline that argument. Yes savings are now in the form of 401k and IRA funds, these purportedly are future-thinking instruments. Purportedly. That's the joke. None of them have calculated taxes and inflation that occur in the future.

Taxes and inflation wipe out all gains that purportedly will occur in the future. A simple experiment with extrapolation will prove this to any and all who take on the task of proof. We cannot escape three things in life: taxes, inflation, death.

Three things. But of course there is more. Health, for one thing. A health issue can and does and provedly wipe people out — financially. Who can plan an individual future with such an issue? We don't know ahead of time if we will wake up one morning with dementia. 

Greg Van Kipnis critiques:

I am not sure who Prof. Haave is debating or criticizing, however,…

… a credit crunch usually can be defined by the result of a general drying up of short-term credit such that the yield curve inverts. Many things can cause such an outcome, but they are all destructive to economic activity in the near-term.

In the current situation we have something different happening which I am calling a mal-distribution of credit. Obviously the yield curve is not inverted in the treasury market, but it seems to be for poor credits as evidenced by the widening of credit spreads at the short end.

The leading issuers of credit are hemorrhaging equity due to mortgage-related asset write-downs more rapidly than new sources of equity are being tapped to create credit to satisfy the needs of traditional borrowers. Good credits are still able to offset lost access to money markets, e.g. witness the shrinking CP market, by raising money by other means, which currently are lumped by the Fed into the C&I category. As your graph shows that category is exploding. Poor credits are getting rationed out. Many anecdotes are showing up in recent weeks to underscore that development.

If everything happened simultaneously the negative effects of the mal-distribution would show up immediately. The squeeze is likely to intensify as more financial institutions are credit downgraded. To head this off the brighter firms are doing what UBS did and the rest will wither. The 4-fold Fed/Treasury actions of the past month (MLEC , mortgage-terms jawboning, FF/ Discount rate drop, TAF/Swap-Lines) are all attempt to speed the restoration of the mal-distribution of equity. Collectively these are unprecedented historical developments.

So far no one has been "bailed out", whether they are stupid derivative issuers or investors, or stupid mortgagees or mortgagors. There will be bankruptcies, shot-gun marriages, and arrangement of necessity before this is over. The key for the monetary/fiscal authorities is to replace destroyed credit with new credit so the general economy will not be crippled. To pull this off successfully will require extraordinary good luck and judgement.

Gordon Haave responds: 

I wasn't debating anyone in particular, but rather the global meme that the financial system is in collapse.  It's not. Credit is being denied to people who are bad risks.  Because those people tend to be somewhat powerful, they have created this credit crunch meme in order to try to get bailed out. So, I agree with almost everything that you wrote, except that I disagree re: the monetary and fiscal authorities having to replace destroyed credit with good credit.  They don't need to do anything. All they need to do is let the markets clear.  

A few months ago,everyone said that the monetary authorities needed to do something, meanwhile the markets have been clearing, the prices have been set (as seen by the equity injections into the banks).  There is nothing to do except let the markets clear.

There is a market rate for credit.  It reflects time preferences.  If the Fed creates extra credit, it distorts the markets, it makes it appear that people are demanding more investment than they really are (hence the real estate boom).  When it becomes clear that was not the case, that investment gets cleared out. The answer is not to keep distorting the market, but simply to let it clear.

Carlos Nikros remarks:

Like the definition of an asset price bubble, there's much subjectivity in the definition of crunchiness. Although I mostly agree with Prof. Haave, some aspects of the current economic backdrop are not favorable for borrowers with good credit, as opposed to impeccable credit. For instance, A2/P2 commercial paper isn't an easy sale right now. Yes, the corporate bond market is open for business, but if an issuer is not a well-known credit, it has to fight for attention in order to get its deals done smoothly.

Gregory van Kipnis concludes:

Amish BuggyFor an analogy for how we can be of the same moral-philosophic persuasion yet have significant differences, consider different 'sects' of Amish. One splinter group was called the 'motor-Amish' and another the 'electric Amish' and the third the 'mirror' or 'image Amish'. The first believed that using motor vehicles for certain applications was OK, the second condoned the use of refrigeration and phones for a subset of the congregation to satisfy the FDA rules for milk or getting emergency help, the third did not ban mirrors or any reflective metals from the household. They were all still Amish, but they fought like heck on Biblical interpretation.

Well, I do believe that markets will clear and should be left to clear. But, just as a winding mountain road without guardrails will clear itself of many foolish divers who will go off the cliff, many innocents will be carried away as well. If the damage were only limited to single drivers I'd be content to leave things as they are. Even the most ardent Austrian School adherents understand social costs and the proper limited role of government to address them, however. If markets were atomized with numerous buyer and sellers, no impediments to entry and exist, and wide distribution of information, the 'clearing' process would be swift and fair. Our markets are semi-rigid and relatively concentrated due to complex institutional arrangements. They won't clear neatly. Many innocents will be carried away.

So when I spoke of replacing destroyed credit with new credit, I had in mind the lessons learned and taught by Friedman and Bernanke (among others) in their studies of the causes of the Great Depression. They were clear that many stupid things were done to trip the economy into recession, but when credit was extinguished, partly due to loans' being called in to meet runs on banks, and was not temporarily replaced by some Governmental agency, the recessions cumulated into a disaster.

I know, I know, I can already hear a response from someone that "once you start with regulations to protect people in the name of the people (men united in councils), then lies and deceptions will begin" (I badly paraphrase Tolstoy and Leonard Read). That is the risk we take when we create government. If we are led by men of high standards, who vote their conscience and willingly take personal responsibility for their decisions, the risks are small. I believe the Fed, at least, is governed that way today.

Stefan Jovanovich voices his dissenting view:

The revised standard version of 20th century American history that Dr. van Kipnis is preaching is very much the current gospel. It is what William Poole means when he says that "(m)acroeconomists today do not believe that policies to stabilize the price level and aggregate economic activity create a hazard. Federal Reserve policy that yields greater stability has not and will not protect from loss those who invest in failed strategies, financial or otherwise. Investors and entrepreneurs have as much incentive as they ever had to manage risk appropriately. What they do not have to deal with is macroeconomic risk of the magnitude experienced all too often in the past." Poole quotes a passage from David Cannadine's recent biography of Mellon as an indication of how truly awful things once were before we had professional economic management. "Mellon constantly lectured the president on the importance of letting things be. The secretary belonged (as Hoover would recall) to the "leave it alone, liquidationist school," and his formula was "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

Alas, what Governor Poole fails to note is that this is very much Hoover's version of history. To the end of his life Hoover blamed Mellon for questioning Hoover's presumption that he could "re-engineer" the American economy in the same way that he planned food relief to Belgium and Holland after World War I. Governor Poole and Gregory would seem to share the former President's abiding faith that the application of science could domesticate the feral wildness that results from unregulated buying and selling. What they also share is a complete absence of any skepticism about the unintended effects of allowing "some Governmental agency" to "temporarily replace" "extinguished credit". When the government tries to manage economic risk, it either debases the currency by handing out far more money or promises of money than it can reasonably expect to take in or it establishes a world where prices are administered, not negotiated. In either case, the efforts of "men of high standards" (sic) to "stabilize the price level and aggregate economic activity" create a hazard that is far greater than any credit crisis. They destroy growth and pricing itself, and they risk turning nearly every citizen into a lobbyist or (worse) a lawyer. Friedman and Anna Schwartz are quite clear that the primary causes of the Depression were (1) the passage of the Smoot-Hawley Tariff (which Mellon literally begged Hoover to veto) and (2) the Federal government's attempt to administer the economy through the NRA, etc. Compared to Mellon's prescription (which was to let the markets find out on their own what stocks and farm land were worth), the Hoover-Roosevelt solution was the one that truly ended in liquidation.

There is no way that limited or unlimited government can "address" the problem we have right now without creating greater harm. The mountains of imaginary wealth created by loans against the security of 1800 sq. ft. stick and stucco 1950s bungalows in Pacoima are simply not worth what people thought they were - just as RCA stock was not worth what call loan supported buyers bid it up to in 1928. One does not have to be an economic fundamentalist to believe that common stock valuations usually have some discernible relationship to companies' cash flows from operations. It is also more than a matter of faith to think that, as wonderful as California real estate is, its prices most of the time have at least some distant connection to the ability of their owners to pay their mortgages. Until the homes in Pacoima once again have some vague relationship to what new buyers can afford to pay, the crisis will continue; but it will end - just as past real estate slumps have ended. But, if the wise men (and occasional women) of the Federal Reserve, the Treasury and the Federal government decide that they can "fix" the problem by legislating price levels for the paper issued on the security of those California bungalows and New York condos, we may see the People's Republic of Santa Monica bring the rent control to Iowa. "Credit creation" that tries to restore former unrealistic price levels in the midst of a panic is a bit like having alcohol for breakfast as a cure for hangover. It will - temporarily - take the edge off, but it only makes matters much worse later on.



Jeff DavisFrom "The Rise and Fall of the Confederate Government" by Jefferson Davis:

The issues of Treasury notes were increased until, in December, 1863, the currency in circulation amounted to more than six hundred million dollars, or more than threefold the amount required by the business of the country. The evil effects of this financial condition were but too apparent. In addition to the difficulty presented to the necessary operations of the government, and the efficient conduct of the war, the most deplorable of all its results was, undoubtedly, its corrupting influence on the morals of the people. The possession of large amounts of treasury notes led to a desire for investment; with a constantly increasing volume of currency, there was an equally constant increase of price in all objects of investment. This effect stimulated purchase by the apparent certainty of profit, and a spirit of speculation was thus fostered, which had so debasing an influence and such ruinous consequences that it became our highest duty to remove the cause by prompt and stringent measures.



LeverageAfter recent discussions on the site about the levered index ETFs, I became curious as to how well these products are tracking their targets. So, using daily data for 9 Nov 2006 through 9 Nov 2007, each 1-day, 2-day, 3- , 4- , 5- , 10- , 15- and 20-day % change was calculated for both the relevant index (either S&P 500 or Nasdaq 100) and the positive and inverse ETFs.

Then the ratio of "ETF % move / index % move" was calculated. For the positive ETFs, the ratio should be ideally 2, and -2 for the inverse products. (The only tricky part is that if the index move is close to zero, the ratio can go to infinity.  So, included were only x-day periods where the absolute value of the index move was at least 0.5%.)

Means and sd's were calculated for all the ratios in each x-day period. Below are the results for each of four ETFs:

length in days | mean ETF/index ratio | sd of ratios

Ticker SSO
1d   1.96   0.40
2d   1.96   0.38
3d   1.97   0.35
4d   1.99   0.28
5d   1.95   0.33
10d  1.94   0.31
15d  1.98   0.29
20d  1.97   0.30

Ticker SDS
1d   -1.98   0.42
2d   -1.95   0.45
3d   -1.92   0.39
4d   -1.97   0.35
5d   -1.91   0.34
10d  -1.87   0.43
15d  -1.84   0.40
20d  -1.81   0.42

Ticker QLD
1d   1.89   0.59
2d   1.91   0.45
3d   1.94   0.42
4d   1.98   0.36
5d   1.95   0.36
10d  1.96   0.38
15d  1.98   0.37
20d  1.99   0.53

Ticker QID
1d   -1.90   0.55
2d   -1.91   0.45
3d   -1.89   0.47
4d   -1.93   0.38
5d   -1.89   0.40
10d  -1.94   0.41
15d  -1.95   0.32
20d  -1.93   0.36    

Adi Schnytzer suggests:

Looks fairly good, but a more revealing test might be to regress daily % change in the relevant index (Y) on change in the relevant ETF (X). So we have Y=a+bX and the test would be not only b=0.5 (which is what you have done) but also the joint F test, a=0 and b=1. Why? Because if a is not zero, then there is a bias in the tracking, i.e. either there is an over/under-reaction to large changes in the index or to small changes in the index depending upon the sign of a.

Kim Zussman writes:

While waiting for this week's bombs to start flying, here is regression of (daily return = [c2/c1]-1 )SSO vs SPY since inception of SSO June 2006 (including dividends):

Regression Analysis: SSO versus SPY

The regression equation is
SSO = - 0.000217 + 2.00 SPY

Predictor        Coef    SE Coef       T      P
Constant   -0.00022  0.00013   -1.64  0.101
SPY          1.99573   0.01630  122.44  0.000

S = 0.00245947   R-Sq = 97.7%   R-Sq(adj) = 97.7%

Analysis of Variance

Source              DF        SS        MS         F           P
Regression        1  0.090682  0.090682  14991.23  0.000
Residual Error  348  0.002105  0.000006
Total                349  0.092787

Obviously a significant slope coefficient, with beta of 2. Notice however that the intercept is almost significantly negative (alpha), suggesting the ETF manufacturer is skimming something every day (probably in the prospectus). Recall that SPY is the SP500 ETF which levies its own (tiny) fee, so you are paying more for the leveraged ETF and might rather consider futures (unless you treasure your sanity).

Adi Schnytzer explains:

Adi SchnytzerWhat matters (in the way you have run it) is the joint F test a=0 and b=2, and I have no doubt you will be unable to reject it at any reasonable level of significance. Note also that 0.00022 is a teensy number. So it would seem that these are a good buy if one is bullish medium term and doesn't mind staying in the market. Mind you, there are those of us who got into the market just before the latest crash and so, mind or no mind, are in there till the recovery. That's the trouble with futures, unless you can pick your closing date far enough down the track.

Gordon Haave remarks:

Theoretically speaking, levered ETFs work in directional markets. That is, the constant leverage results in buying on up days and selling on down days. So, in certain market periods they work out just fine and are good short term trading vehicles.

Phil McDonnell summarizes:

There are three ways investors in leveraged ETFs incur costs. First, management fees, which are usually lower in non-leveraged ETFs, presumably because there is less juggling to do. Second, the leveraged half of the fund must pay interest at the going margin rate. Even if the fund uses futures or options the interest is implicitly built into the price of the derivative. Third, he constant leverage trap. The 2x funds are designed to give returns which are twice the daily return of the underlying. They rebalance daily, which means they sell low and buy high. In choppy markets and over multiple days this leads to slight under performance relative to the 2x benchmark. Mr. Mabry's study looked at multiple days and found this slight underperformance. In contrast, Dr. Zussman's study found a perfect 2.00 multiplier on a daily basis. That is exactly what they promise, 2x returns for the day. The negative alpha is due to the sum of all three costs above. Not to quibble with Prof. Schnytzer, but .00022 is about 5.5% per year in costs. Most of this is because of the leverage. It is either real or implied interest which must be paid.



Stonington BankPrior to the Federal Reserve, there were private bank notes. They traded freely, such that if a bank was deemed to have too few reserves, the notes traded at a discount. In the late 1800s there was a big information problem, not only on the quality of the banks, but also authenticity of notes, because of distance. Does someone in St. Louis recognize a bank in New York?

All those problems would be gone today. Citibank and B of A would issue currencies. They would be backed with real assets (like a money market fund, sort of). Everyone would have a real interest in bank solvency, and if banks did silly things, their notes would trade at discounts and their customers would be miffed.

Vitaliy N. Katsenelson replies:

By definition banks cannot have all of their debt backed by liquid assets, as banks have little equity (around 8-10%) and a good chunk of their loans are illiquid long-term loans that may or may not be salable on a secondary market at a fair price in a prompt way. To some degree this is the role the Federal Reserve is supposed to play, being a lender of last resort. If all customers came to their banks at once and demanded their money back, banks would simply go bankrupt overnight as they would not be able to pay off all the debt at once. This is a run on the bank. We just saw a mini version of it play out in the UK, where the UK's central bank bought loans from Northern Rock, thus granting instant liquidity and thus preventing a run on the bank, and actually a run on the whole banking system.

Gordon Haave explains:

Banks wouldn't need to have all of their debt backed by liquid assets. They could simply have the currency that they issue backed by liquid assets. And the currency needn't necessarily be backed 100%. The required reserves for people to accept the currency at face value would be set by the market.

Stefan Jovanovich writes:

Head TellerLong before common stocks became important enough in the public mind for American publishers to print their daily quotations, there were regular circulars assessing the discounted value of state-chartered bank notes. Merchants would subscribe to the circulars to determine how much of a discount to the value of specie was appropriate for accepting in payment the notes of the wildcat bank of Up In the Mountains, Name Your State. Theoretically, all bank notes were redeemable in specie when presented to the issuer; but the Sheriff in Up In the Mountains might be less than enthusiastic about having someone actually removing from the jurisdiction the four gold pieces held by his brother-in-law, the Head Teller.



CanadaCanada dollar at parity with $US… Lots of products, such as books, have the price listed in $US and $Canadian, based on old exchange rates. Buy products in US, rent van, take them to Canada, return them. Rinse and repeat. Consumer goods arbitrage increases market efficiency by forcing producers to stop being silly about their pricing.

Jason Schroeder adds:

eBay is a Canadian's best friend. Of course, the customs dudes are profiting from that arbitrage themselves. Getting goods across the border is taking a rather long time. Getting packages from the UK, on the other hand, is faster than in country.

Gabe Carbone remarks:

There was a topic paper done by the economist at one of the Canadian banks in the past couple months on this. He listed off the top goods with arbitrage opportunities.

Sam Humbert extends:

A cross-pond arb I stumbled on: I bought a copy (UK version) of "The Seven-day Weekend: A Better Way to Work in the 21st Century" by Ricardo Semler, for a couple of dollars at a yard sale, and have been skimming it. I was curious to see how its AMZN reviews looked, so I checked AMZN/US, and was surprised to find the book is rare and valuable,

6 used & new available from $66.46

Then I noticed that at AMZN/UK, it's a penny + shipping,

58 used & new available from £0.01

A project for Prof. Haave: Buy all 58 UK copies and eBay them in the US..



Commodity trader who has been fantastically rich, and then broke, a few times, decides not to meet his margin calls, and, as a well-known adventurer, knows exactly where to say he's going, then disappears such that people will look for weeks and weeks, while he suns himself in Panama.

You heard it here first!



Oil, from Jeff Rollert

September 18, 2007 | 1 Comment

The difference between the current spot price for crude oil, and the moving average for one-month and three-month contracts is really wide. Crack spread is also out of whack. I would suggest that we may see a snap back post Fed on spot oil, with no change in gasoline prices. Or the next few weeks are going to get back in line with products moving up and/or spot coming down. Gas is already back up to $3 for regular in CA, after being 2.65 a week ago.

Gordon Haave remarks:

Large crack spreads are good for the producers, such as Devon, that also own midstream assets.



PiggyIt's a myth that US households have negative savings rate as a whole. Simply not true. Turn on the TV — all you see are ads for the investment industry. Minus the past few weeks, investments has been as big a boom industry as tech. How can it be that the savings rate is negative, yet the amount of money pouring into mutual funds and banks is so huge? The answer is that the data are no good. The savings rate is in fact very positive.

Riz Din adds:

General thinking on this issue amongst economists is considerably less alarmist than the journalists' version. Importantly, the official savings calculation completely ignores capital appreciation of household assets (housing, stocks), of which there has been much in recent years. This has a balance sheet effect of increasing households' net worth and also encourages further consumption; only the latter is caught by the savings calculation. Also, taxes paid on capital gains are included in the calculation with the effect of lowering disposable income. Oops!

Furthermore, work by economists has revealed that in the US, most debt is distributed amongst the better off segment of society, and it is these people who have experienced the greatest capital gains in recent years. All in all, if we incorporate measurement problems into our thinking and account for the distribution of debt across the population, we should be able to sleep better at night. One fewer 'end of the world' gremlin to worry about.



 I have heard discussion lately about the market shaking out weak positions on a decline, but I think that the whole concept of "shaking out" weak longs is, on its face, silly.

Let's say, for the sake of argument, the DOW is at 1500. That 1500 is made up of the shares outstanding of the Dow, times the prices per share.

So, the Dow falls to, say 1490. What has happened at an underlying basis is that net money has been pulled out of Dow component stocks.

Then, say it quickly bounces up to 1500. What does that represent? Net money flowing into Dow stocks.

The pundits will say that there was a "shakeout of the weak longs" on the drop, which somehow makes the market go up under some sort "a chain is only as strong as its weakest link" theory.

But what really happened? The same amount of money that flowed out flowed back in.

How can we possibly interpret what that means? Was the money that flowed out weak money, with the money that flowed back in "strong"? How is a guy that wouldn't buy at 1501 a "strong" sort of bull if he buys at 1499?

I don't buy it.

Charles Pennington replies: 

The only rigorous thing we can say about a 10-point down move followed by a 10-point recovery is that the magnitudes of the two changes in market capitalization are equal.

That doesn't preclude the idea that the down move might have been from something like forced selling due to margin concerns, or as one might put it, the sellout of the "weak longs". It's not silly to talk about weak longs; their selling could be different. It would be by definition hurried, and not reflecting the sellers' opinion of the market.

One could also speculate that once these margined-up traders have sold, they won't be selling again, and that that's bullish.

That may or not be correct, but it's not a silly idea.

James Sogi comments:

The market can drop like the breathtaking morning and midday airdrops Wednesday when buyers pull bids reducing liquidity. An example is when price skips over a price tick down when all the bids are pulled or the spread becomes .5. Here is a situation where no money is changing hands but price drops not due to selling pressure, but due to lack of a bid and Globex moving the inside market.

There is no "money flow", rather there is drying up of liquidity. This can be quantified rigorously in microstructure. This is the third and fourth dimensions behind most screens. The afternoon runs back up were even more violent and sudden than the drops, which had a measured quality to them except as it culminated.

It is ironic and a consummation of recent moves that after all the fireworks today we are just above where we were last night. 

Adam Robinson writes:

I understand the point Prof. Pennington is making about weak and strong longs, and while it may be useful as an explanatory or thinking construct for interpreting market action — I use it myself to distinguish the "strength" of conviction" (largely a function of capitalization, of course), I don't see how this notion has any predictive value.

More fundamentally, on reflection, the entire notion of weak vs. strong (as well as the notion of "smart money") seems suspect even as a construct.

Let's agree, arguendo, that a weak long is a trader less able or less willing (than a strong long) to tolerate adverse movements or adverse "noise" (i.e., random fluctuations against his position). (By the way, the notion of "noise" itself in trading is problematic since the analog, carried over from information theory, assumes the existence of a "true signal". That is to say, you can't have noise without having communication, just as you can't have dirt without having an underlying system in which the matter is considered dirt.) To return, let's say that the market moves against our "weak long" and he sells. He is forehead-slapping "weak" only if the market moves up shortly after he sells.

But if the market continues down, our bull was lucky he was weak. Had he been stronger and the market decline more protracted or precipitous, he'd have endured more pain before ultimately abandoning his position.

But even more fundamentally, these distinctions also confound process and outcome by ignoring the impact of random fluctuations (i.e., luck).

A speculator can analyze the market as "correctly" as his insights and statistics allow, put on a position, and yet the trade can be a loss.

More simply put, a "correct process" does not always guarantee a favorable outcome, owing to the intervention of luck — at least in the short run. In the long run, the correct process should prevail (although even that may be tautology).

As Damon Runyon said, "The race is not always to the swift, nor battle to the strong — but that's the way to bet." 

Ronald Weber adds:

Why don't we just call them margin-long and cash-long instead of weak/strong long, then everyone would be happy!

The fact that many names ended well off their lows could indicate that the shorts are "weak" (or "timid") and eager to close their positions, or that the margin-longs have been taken on a ride! We'll see…



Randy NewmanWhen Ulysses Grant said he knew two songs — one was Yankee Doodle Dandy and the other wasn't — he was being his usual wry self. The journalist he spoke to, a gentleman from the New York papers (who else?), took it as further proof of Grant's cultural inadequacies (the fact that Grant could read French and German somehow was ignored). What the President was saying was that, in matters of taste, there is ultimately only what you enjoy and what you don't, and disapproving of other peoples' tastes is a bit like cursing the darkness because you can't find a match.

One of the reasons that I love Randy Newman is that he writes the kind of songs that can clear a room of sanctimony. For lefties "Rednecks" always does the trick, and for everyone else "Short People" is usually enough. "Political Science" remains the ultimate test.

Charles Pennington replies:

I'm disappointed! Randy Newman's MO is this: a rant by a fat-target narrator (e.g. one who hates short people or foreigners) coupled with a sappy whispered or implied corrective ("Short people are just the same as you and I." Well, thank you very much.)

What am I missing?

Stefan Jovanovich responds:

For some of us the politics of smart people can be very, very funny. Who else could complain with a straight face that "I left Harvard with no real awareness of the awful inequities in the world" but Bill Gates? I don't think Mr. Newman is targeting the narrators of his songs nearly as much as you hope, Professor, and he really is satirizing the PC notion of "one big community" in offering his "correctives."

If you have spent as much time among the millionaire leftists of Beverly Hills and their children and grandchildren as the son of Alfred Newman (film composer, not MAD magazine icon) has, laughter becomes the primary defense against the undying hypocrisy that goes with so much "elite" (sic) opinion. It is the only way to wash away the anger.

Gordon Haave extends:

Having moved from Greenwich, CT to Oklahoma, I've noticed just how elitist the rest of the country's view of country music is. Here, walking into someone's home or business, one is more likely to hear country (or "contemporary Christian") than to hear "pop".

Country singer Dwight Yoakam created perhaps the only cover song ever that is better than the original.



 The basic reason for why there is a CDO problem is the same reason why there was a "derivatives problem" in the 1990s.

It lies in the principle-agent problem.

In many forms of investing, the agent is highly incentivized to take risks with others' capital. Sometimes, this is a good thing. Many investors seek out risky hedge funds, and want their capital at risk.

Often times, this is not the case. Pension funds, endowments, and insurance companies might place a high degree of importance on preservation of principle, and will seek to limit the amount of risk-taking.

Investment managers for these assets may still have an incentive to take excessive risk. Even if there is no direct performance fee, a manager (internal or external) will be rewarded for good performance. If there is bad performance, that manager can just walk away (it's not his capital at risk).

Thus, pools of money implement investment policies and various risk controls to try to minimize the principle-agent problem.

For example, the average pension fund (except for a carved-out piece that might be in hedge funds) will not allow its equity for fixed income managers to use leverage. That keeps the risk down. The pension fund might limit the amount of equity investment in tech stocks to keep risk down. The pension fund might limit the amount of money that fixed income managers can invest in low quality bonds.

But, the individuals doing the investing still have the desire to take risk at the expense of the beneficiaries of the assets.

So what happens? Wall Street invents new products that, while serving legitimate purposes, also serve to mask leverage.

So what is it about CDOs? By dividing them into tranches, one can take the same underlying credit, but magnify the returns based on the level of support in the tranche. From the perspective of the agent who seeks out leverage (since personal upside is big and downside small) the difference between the high support and a low support tranche is essentially leverage — a difference in expected return based upon the bet on how the loans will perform.

Since it is a relatively new product, the agents are able to pass these leveraged bets by the principals.

After this year, it won't happen any more.

Then Wall Street will come out with a new product and the cycle will start all over again.



 Computers crack famous board game Game of draughts (Eyewire)

Draughts has about 500 billion billion potential positions. It could be a case of game over for draughts - scientists say the ancient board game has finally been solved.

A Canadian team has created a computer program that can win or draw any game, no matter who the opponent is.

It took an average of 50 computers nearly two decades to sift through the 500 billion billion possible draughts positions to come up with the solution. Writing in the journal Science, the team said it was the most challenging game solved to date….

Nigel Davies writes: 

During my last visit to Chessbase I learned that they're working on a 'universal game program', by which the computer is told the rules of the game and then figures out the best strategy. Naturally I started wondering about market applications. 



I have a theory about the best movies (and also the best stocks): some really hate them, others really like them.

This is also true of movie scenes. The best example of this is the wedding scene in The Deer Hunter. It is either loved as beautiful, and as an extensive bit of character development that is important to understanding the film in its entirety or it is hated as long, boring, and of little consequence.

Recently I purchased the film 1900 from Amazon. Robert DeNiro, Gerard Depardiu, Burt Lancaster, Donald Sutherland, five hours long!

The film is historically, either loved or hated. Why? As it so turns out, the entire movie is like the wedding scene in The Deer Hunter, stunningly beautiful, a masterpiece of filmmaking. Yet, ultimately nothing really "happens".

So, let me give this advice: If you liked the wedding scene in The Deer Hunter, you will love this movie. If not, you will likely find it a bore.



 I have generally found that, except for a few people with the fastest computers and best algorithms, anybody who can't be away from the market for a few hours likely adds no value whatsoever.

The best investors I have known all find inefficiencies that persist, such that there are large windows for taking advantage of them. In fact, the reason why these inefficiencies persist tends to be precisely because it is not clear that one can make money on them in a few hours or a day.

But this analysis changes in the context of leverage. That is, the underlying ideas themselves don't require minute by minute monitoring, but when using a lot of leverage one has to monitor in order not to get destroyed as positions go temporarily against.

Cliff Roche adds:

That is a great argument in favor of limiting leverage for those who should do so. I no longer try to make money every minute, hour, or even day. I've tried it and it led to ulcers and chest pains. My congrats to those that have the emotional makeup to do it for a living! Of course, I also don't have clients who are demanding a fast buck or personal concerns over commissions.

I take positions in companies that are going down roads I think companies need to go down in the face of assured future governmental and societal idiocy, in my limited and admittedly biased way. I don't use leverage and sometimes I have to wait months or years for the payoffs. But they do come. Sometimes. I do sleep well, and that can be priceless.



 There is a proposal before congress (H.R. 2755) to abolish the Board of Governors of the Federal Reserve System and the Federal Reserve.

Jeff Sasmor adds:

This is the second time, it seems. The first time was in 2003.

Scott Brooks remarks: 

I'm starting to become a Ron Paul fan. But I'm worried about what I've referred to as the Russia effect, meaning that Russia melted down into chaos after they went straight from socialism to capitalism resulting in anything but a capitalist society.

As much as I want to abolish the IRS and 99.99% off all government agencies, what thoughts are there on us melting down into chaos if that were to occur, i.e., abolishing the fed?

Stefan Jovanovich writes:

"Russia melted down into chaos after they went straight from socialism to capitalism" is not a very good description of what happened after the U.S.S.R. formally dissolved.

Runaway drunkenness, near demographic suicide by abortion, absenteeism rates that made Lordstown look like a Toyota factory, extortion so much a part of ordinary life that someone's not demanding a bribe was cause for paranoia, had all been part of Russia life even before the defeatism and self-doubt that came after Afghanistan. Scott's post assumes that Soviet governmental authority had some moral force in 1988. It had none.

None of us can predict the future, but I would argue that the odds for Russia's future are as good as those were for what used to be known as West Germany in the 1950s. Then there were no local German politicians who could pass muster as anti-Nazis, and the new republic's democracy was a very brittle artifact. If Russia's current leadership seems tainted by associations with the old tyranny, that situation is little different from what was happening under Adenauer.

Ironically, Scott is far more likely to see Ron Paul's monetary regime created in Russia than in the U.S. I leave it to those who really know about currencies to correct my usual amateur errors, but it seems to me that the ruble is the one world currency that can currently be seen as being entirely backed by a gold/petroleum standard. 

Alex Forshaw writes:

Hmmm…with regards to Russia, the so-called "free/ democratic institutions" that "evolved" were anything but. It's one thing to have measured, organic evolution of a free press and robust markets as the US did. But in Russia, the robber baron tycoons immediately built up media machines to massage their public images.

Putin destroyed Russian "free media" because it was Boris Berezovsky's tool, and Berezovsky probably achieved greater control of the Russian economy than the Politburo did (with lots of help from Chechen gangsters, car bombs for his competitors, Russian government force, and other ridiculously coercive methods).

Stefan Jovanovich adds:

The admiration that the official American press (Time, WP, NYT - the usual suspects) showed for the "free/democratic institutions" that Professor Sachs helped "create" (sic) has its historical match in the obtusely wrong-headed enthusiasm that the Jeffersonian press showed for the progressive insanities of the French Revolution. 

Scott Brooks responds: 

Both Stefan and Alex are doing a better job of making the point I was trying to make. These countries were run by demagogues, despots, and gangsters who simply changed their styles, but ultimately remained in charge. They changed from being in charge in the form of a government to being in charge in the form of being the most powerful gangster. The gangsters, of course, whether under the guise of a legitimate government or as just plain gangsters, were able to manipulate powerless people because the gangsters had made them dependent on them.

In the US we don't have gangsters in charge per se, but we do have a system where a large group of people like welfare recipients (no offense intended) who are dependent on the government. So I ask if a country can go from a "dependent system" to one of independence overnight? If not, then how does one move away from that system? 

Alex Forshaw replies: 

If by "welfare recipients" you mean agribusiness, the tort bar (and to a lesser extent other unnecessary functionaries which use "the law" as an excuse to siphon money from businessmen who would otherwise have no need for them) then you're getting somewhere

Just in personal experience, I'm 21, I trade about 150k total in political futures (snobbier people would call it "gambling," I laugh at the pseudo-distinction). To get even the most rudimentary legal structure (a "pooling of interest") to facilitate moving the money offshore, (because it's simply stupid and/or prohibitively expensive to risk regulatory harassment over high-risk, novel securities trading in the United States, without the economy of scale of a tens of millions of dollars of a capital pool), I had to utilize the services of two accountants and a securities lawyer.

Fortunately I had friends of the family to do it for me, but what about someone who isn't as privileged as I am? Legal overcomplexity is an incredibly high fixed cost/ barrier to entry in this country.

And I don't even have day to day interactions with other people, unlike the Korean immigrants in DC who got sued for $100 million because they refused to give a lawyercrat a $1000 new suit, or the cerebral palsy doctor ruined by John Edwards.

Stefan Jovanovich writes:

I will let Alex speak for himself, but that is not the point I was making, Scott. No ordinary Russian thinks that the changes over the past 20 years have been merely a change of styles by "demagogues, despots and gangsters".

For one thing, there is now actual freedom of conscience. (Yes, I know the Russians are giving their own national faith preference and have been less than open to proselytizing by Westerners; but that is a world of difference from the situation that had Jews, Seventh Day Adventists, and devout Orthodox regularly jailed simply for what they believed.) It is also now possible for people to have savings that are not controlled by the government and private land ownership.

These are real changes for the better that have affected millions of people, and they are occurring. But at the same time the conditions of actual life continue to be dreadful. As for the question of dependency, that seems to me a near universal. I have never known a libertarian who actually turned down the offer of a good government job. As the first Mayor Daley once said, "Everyone wants a little honest graft."

No society has ever reached that peak of pure individualism that Ms. Rand dreamed about, but we can hope for a world with enough contending interests to limit the amount of loot that any one group can haul away. 

Gordon Haave remarks: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. Besides, there is no reason why abolishing the Fed would create a chaotic situation.

George Zachar writes: 

Russia went from a closed-economy kleptocracy to an open-economy kleptocracy. The commanding heights of Russian industry never saw capitalism. The looting, aggregation, and export of its wealth are well-chronicled. Using the word "capitalism" in the context of Russia is to deliberately smear the term as gangsterism. 

Peter Earle comments:

The Federal Reserve, when set up, was ostensibly created to maintain a stable value for the dollar. Looking at the 90%+ drop in the value of the dollar since the creation of the Fed, I'd say there's reason to doubt their somewhat self-serving perspective. A look at Panama, where there is only nominally a central bank, may be instructive as well. 

Stefan Jovanovich continues:

When Queen Elizabeth I came to visit the United States after WW II, my grandfather, who was born in Old Serbia, wrote about the news to my dad, who was born in the coal camp near Ludlow, Colorado that has now physically disappeared. In his letter Tata wrote to his American-born son that "your queen" is coming for a visit. What he meant was that Americans, regardless of their origins, end up having an Anglo-centric view of the world - at least as far as Eastern Europe is concerned.

The Hungarians, who were fervent Nazis and are more completely thorough anti-Semites than anyone to the east, got a better press in London and New York in 1946 than our allies, those awful Russians. They still do. The economic successes in Eastern Europe - Croatia, Slovenia, Poland, Hungary and the Baltic states - have far more to do with their proximity to Germany, Austria, and Scandinavia than with any special qualities of jurisprudence in "eastern" Europe.

For their citizens and for the average Rumanian, Serb, Bulgar, and Ukrainian, the rule of law is no better than it is for the average Russian. What is better for all of them is that now the police are merely corrupt; they are no longer true Marxist believers dedicated to liquidating all class enemies. 

Gordon Haave adds: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. 

J T Holley asks:

Can't we simply start with the IRS first as a warm-up? 

Gabriel Ivan writes:

Having spent the first 20+ years of my life in Eastern Europe (Romania) and being exposed to the first 13 years of transition from communism to capitalism, I can second Scott's comment about the melting into chaos in all Eastern Europe, not just Russia. The looting was mind-blowing and cannot be explained if you didn't live it.

With rampant inflation, no social net whatsoever for maybe 80% of the population and opaque legislation, I'm surprised things didn't get more explosive in all these years. I personally witnessed two national distribution companies with strong brand names and infrastructure vanishing in two weeks due to central bank's policies on the exchange rates. And this was '99 - '00 after 10 years of "free market economy".

Unfortunately, fundamentals haven't improved much despite the real estate boom and commodity prices run-up masking an economic growth that is not healthy. High profile businessmen - bank presidents - still get shot in daylight in Bulgaria, (the country is a member of EU for six months now… what a joke) due to their affiliation to organized crime (there is no other way to run a business). Imagine Sandy Weill getting whacked in a drive-by shooting to understand the strength of their banking system.

I expect the majority of "emerging markets" money managers to be separated from their wealth in the foreseeable future due to their lack of due diligence and reliance on official statistics.



 Investment Manager D.E. Shaw Set to Acquire Specialty Insurer James River

June 11, 2007

Global investment manager D. E. Shaw group has organized a Bermuda-based holding company to acquire James River Group, Inc. a North Carolina-based excess and surplus and workers' compensation insurer, in a transaction with a total equity value of approximately $575 million.

 I have been constructive on P&C shares generally. Think about it: You are an insurance company, you have set rates based on the probability of loss times the magnitude of the loss across your insured base. Along comes a big hurricane and you take the big loss.

Unless the calculation of probability of loss times the magnitude of loss increases, your rates should stay the same. Instead, rates along the Gulf Coast have gone through the roof — doubled, tripled, or more.

Were the insurance companies really that far off in their calculations pre-Katrina? Or is there an inefficiency in the market such that they have been able to raise rates due to limited competition in the heavily regulated industry, magnified by state insurance commissions willing to go along with the rising rates due to Gore-inspired panic?



 One of the giveaways of imposters is their use of highly technical terms, as if they are on a loftier plane of understanding higher math than you and I. For instance, the Fake Doctor said today "at the moment, I still say as I said before, by algebraic implications, the odds are 2 to 1 we won't have a recession," referring to some probabilities from Fed researchers about the odds of a business slowdown, when the yield curve is inverted or when the expansion has run X quarters or more.

There are so many problems with such "algebraic" implications, starting with changing cycles, retrospection, multiple comparisons, the part-whole fallacy, and the general impossibility of predicting from retrospective small numbers of observations. But it brings up the general subject of key semantic indicators of poseurs and imposters. What key words do CEOs, advisers, et al, use when attempting to appear rigorous and profound and smart? Words that should act as a leading indicator of staying away and avoiding such poseurs? To start off, I would propose lognormal and neural networks as two other key semantic posings.

Martin Lindkvist adds:

Greenspan has been all over the media today, but I saw the headline yesterday evening, so perhaps some people got frightened and used it as a reason to sell. He now says there is "a 2 to 1 chance that the US avoids a recession." But he said something like "a 1 in 3 risk of a recession" in February. Is he trying to be funny? Or maybe he just wants to avoid being called a pessimist? Why is it that he always is in the headlines talking about recession as soon as the market goes down? Does he miss the limelight?

Victor Niederhoffer remarks:

Yes. I believe he suffers from the old lion displaced from the pride syndrome that so many other old men suffer from. It is limned in grotesque detail in the indie movie, Little Miss Sunshine. 

George Zachar adds:

Another old lion scandalized by youth:

May 16 (Bloomberg) — Nothing in John Whitehead's 37-year career at Goldman Sachs Group Inc. prepared him for the excesses of today's Wall Street. "I'm appalled at the salaries," the retired co-chairman of the securities industry's most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are "shocking,'' Whitehead said. "They're the leaders in this outrageous increase.''

From Gordon Haave: 

I have always thought the #1 way to spot a fraud would be based on the percentage of falsifiable statements per total words spoken/written. The issue you raise, i.e., speaking on a plane above others, would count to total words but not towards falsifiable statements. The general point of such statements is "until you have my level of education on this subject, you are unqualified to falsify my statements". Of course, one can't attain that level of education, because part of the education would be agreeing with them.

An example in the world of trading would be a discussion of Elliot wave theory. The Elliot wave folks defend themselves by taking it deeper and deeper into the theory to a level that you can't attain without spending years studying it. If you study it with an open mind, you will quit studying it after a few weeks. If you push on, you will have a heavy bias towards believing it in order to justify the amount of time you put in.

This is also very prevalent in academia. The most useless of all professors tend to just make up entire new words, and speak in the most complicated of matters solely to keep you from pointing out that the emperor has no clothes.

Now, you ask how to quantify and test? I have given a shot at quantifying, but you can't test. That is the whole point. They prevent you from testing because the statements are always non-falsifiable.

From Sushil Kedia: 

Regarding the Chair's posting, focusing back upon CEOs and their ilk operating or claiming to operate at a higher plane:

1. Descriptive handles: for example when on CN*C market analysts / advisors start describing market as a tough animal, as G_d etc., etc., and not answering to the point, that is, where do they think the analysis is going.

2. Deflective handles: words like in spite of, despite, even after, in the face of a hostile, or for example a Chairman's report / comment in corporate annual reports saying that despite competitive challenges your company has done well.

3. Picking the Fly: secondary variables of valuation like market share, cost management, planning. An example is,"We have chosen to push for a continued growth in market share and are certain that in the long run this would continue to accrue value to our shareholders." [Oh I thought returns in excess of the cost of funds created value, unless you believe in today's age and times you would one day become a monopoly while continuing to feed the expansion of your ego.]

4. Shifting in Time: that brings to mind another key handle called, "In the long run". Would a bad trade qualify to become a good investment? Oh, often it would if you are in the presence of an advisor. In the long run, none of them have died.

John Floyd writes:

This may get off the track of the question's intent but I think there are a number of facets of this to explore that are of use in vetting imposters, as well as helping to find profitable trading opportunities. There is choice of words, clothes, cars, etc. that all give clues.

Beyond the actual word choices and phrases, I think one should look at the number of times certain words are used and word choices changed. The currency markets, for example, have had a fixation on Trichet of the ECB's use of the words "strong vigilance". Another example would be the number of times certain words such as "slower" are used in U.S. Fed comments. The degrees to which these words are expected and unexpected by markets as well as the shifts in language often expose opportunities. Yesterday for example the fact that the market had become calloused to "strong vigilance" yielded no reaction and the Euro actually weakened in part on the comments.

Steven Pinker has done some interesting work on linguistics and cognition. I have also heard that both Mark Frank and Paul Ekman have done some worthwhile work on non-verbal communication. Marc Salem, while some of his work is clearly of the "fun" and non-scientific variety, is entertaining and I would recommend his live shows when he is in town. 

Vic replies:

I had in mind terms such as "Pareto distribution" and "infinite variance" and "closed-form solutions" or attempts to absorb prestige from academic institutions like Stanford, Caltech, MIT, or Princeton, through their "luster" and "close encounters" thereto, a la the magician who can bend keys and spoons at will. 

From Easan Katir: 

There was a certain bond trader in London who was horrible at trading, but could talk such a good story he was able to move from one high-paying desk to another. He was head of trading for a Japanese Bank, last I checked. Anyway, his favorite word to throw into a conversation was "hypersclericity". I don't know how to test prospectively, but retrospectively, when the secret account where he hid his losses came to light, it was game over. 

Vincent Andres writes: 

As a programmer working with algorithms, I must say that I'm a bit distressed seeing algorithms often blamed as faulty rather than the users. Every morning I use my razor. Yet in the hand of a baby, a razor would clearly be horrible. Should I throw my razor away?

It's exactly the same thing with algorithms, though this is not to say that there aren't bad algorithms. Hundreds are invented every day (mainly rococo useless constructions). But generally those algorithms don't reach the news.

Jason Ruspini remarks:

For many people, even "bootstrapping methods" is buzzwording. It does come back to the user/context. "Correlation" can be a buzzword, and often is. Count the unnecessary syllables. On Friday's 8pm show a CEO cited a "one hundred basis point" improvement in margins. 

Vic comments again:

Part of the pseudo-math is using a terms when one does not know the first thing about what it means. The idea that the frequency distribution of some aspect of market prices or paths more closely fits a normal distribution than a log-normal distribution, and that this explains long tails/isn't properly priced, is so complicated that it would take the most competent of practicing statisticians to unravel it.

When the person who has never had a statistics course uses it, and pretends that he has the same understanding as great 'mathletes' such as the mediaval liberal fund, or the Harvard opera fundist, or the math arbitragers from Columbia use it — why that's transference and flimflammery squared.

It amazes me that it is so easy to fool so many with these high sounding words. The other aspect of course, is that those who know math and use the words properly often lack the wisdom to consider why such exact and precise and computationally intensive methods are completely useless except as a marketing tool, due to such things as the law of simplicity, the principle of ever changing cycles, and multiple comparisons.



Hugo and Fidel whistling Some time ago I wrote that Venezuela bonds are overpriced. I still think that they are. There seems to be a bit of complacency in the world that communism is dead, and that Chavez just has a big mouth. Unfortunately, every incremental piece of information coming out of Venezuela suggests that Chavez is the real deal, and that he means what he says. He is on a more accelerated track than Mugabe was at this point in his reign.

What is going on right now is that Venezuela's dollar bonds have a provision that if Venezuela pulls out of the IMF, then they have defaulted, and bondholders can demand to be paid back. Certain bonds are trading below par, while others are trading well above par.

If the bondholders owning the bonds that are trading below par demand payment, it will be an interesting situation. If Chavez pays, the sub par holders are helped; the above par holders get creamed. The above par holders are likely going to lobby the US and Venezuela governments to see that the notes are not repaid.

At the same time, the US government might have its own interests, perhaps wanting a default judgment against Chavez in order to speed up his destruction of the country. In any event, one might want to look at going long the sub par bonds and short the above par bonds.



 Germany | 20.05.2005 The Year of the Locust

The insect metaphor is finding plenty of resonance in German media.

A senior politician sparked the current debate on capitalism in Germany by comparing foreign investors to a plague of locusts. But some say the use of such populist rhetoric masks a deep-seated aversion to capitalism.

The hum started in April, when SPD party secretary Franz Muntefering unleashed a stream of rhetoric likening foreign investors to a swarm of insects.

I must admit to being quite shocked at the similarity between the language and images used to describe private equity, and propaganda about Jews from the 1930s. What's going on here? Seems like a thinly veiled form of an ancient hatred.

Gordon Haave explains:

In Europe, at least relative to the US, there are a lot more stakeholders in public companies. First are the politicians, who get cash subsidies from the large corporations. See Societe Generale.

Then there are the workers who through various workers' committees try to influence corporate policy. Add to that journalists, Greens, and other sorts who, in essence, shake down the large public companies.

Companies run with ruthless efficiency by owners in London and NY threaten all of that.



 Last September I began lending on It has been nine months. The average interest rate on my loans has been 18%. All are current; none have defaulted.

There is a problem, though. It is very hard to stay fully invested. The Dutch auction method of offering to lend means that you never ultimately know if you will actually lend to any specific borrower. Plus, many of the loans repay early. Even when I was paying close attention, I was never more than 80% invested. Lately I have not been paying as much attention so I am only 60% invested.

This leads to a second problem. They don't pay interest on the cash. This is of course totally outrageous, and I will never fund my account with more dollars until they do.

Otherwise, I have been pleasantly surprised that I have not had any defaults yet.



I would like to compute the present value of a client to a financial services firm. The question is, "How much is this relationship worth to the firm?"

Here is the situation: The business has high fixed costs but low variable or service costs. About $5m in fees the past year. The client has been at the firm for 30 years and is one of the top five individual revenue generators. The client is "at risk" and threatening to find a better service provider.

What I am unsure of is how to determine the cash flow to discount. Would it be the $5m revenue, would it be revenue minus service cost, or would it be revenue minus service cost minus percentage allocation of the fixed costs?

It reminds me of the statement, "Each student costs $20k a year to educate," yet if you look at the marginal cost of a student, it is practically nothing, which leaves me unsure how to think about the issue I presented.

I am wondering, would it be best to present this as "keeping this client for X years would be worth Y to the firm," or would some other method be more insightful?

Gordon Haave replies:

You need to be more specific about the fixed costs. That is, will the fixed costs travel with him to the new firm? If yes, then you value it at revenue minus the various costs. If not, then revenue minus service costs. Although it is conceivable that the competitor can lower the service costs somehow, so you should take that into consideration. 

Nat Stewart responds:

The fixed cost is that this is a large financial services firm with hundreds of pension fund clients, with all the infrastructure that that implies.

The low variable or service cost is that no single customer creates a large additional marginal cost to service. Which perspective (or a hybrid?) would create greater insight when valuing cash flows? This situation is not as extreme as the "educating a child" example, but the same idea.

Once this was determined, I had a notion of projecting the value for finite periods (value of retaining an additional 5, 10, 15 years) and also doing a simulation using an estimate of the probability of leaving each year. Still not sure what gives the greatest insights in terms of "This client is worth Y to the firm."



Big-Box Watch tracks the growth of large retail stores. Unsurprisingly, the Southwest, Southeast, and Dallas areas figure prominently. What is surprising is the growth in the Great Lakes area. Is this a sign that the Rust Belt has turned, or is turning, the corner?



no one we knowChimps Are Champs of Genetic Changes, By Virginia Morell ScienceNOW Daily News 16 April 2007

Whose genome has evolved more, chimpanzee or human? You might answer "human." After all, with our nearly hairless skin and larger brains, it would surely seem that genetically we've outpaced our closest relatives since parting company 7 million years ago. But that anthropocentric view is mistaken, according to a new study by researchers from the University of Michigan, Ann Arbor.

The team was searching for genetic evidence of adaptive changes. These mutations are positively selected; that is, they confer a benefit that makes survival and reproduction more likely and have spread throughout a population via natural selection. Jianzhi Zhang, a population geneticist, and his colleagues compared nearly 14,000 protein-coding genes in humans and chimpanzees, which have about the same size genome. Using a statistical analysis, they identified 154 human genes that have been positively selected. In contrast, they found 233 such genes in chimpanzees, a 51% increase, they report online this week in the Proceedings of the National Academy of Sciences.

I recall in high school a good female friend of mine thought dolphins were the most evolved. Yet, she could never answer the question: If they are smarter than we, why can't they avoid getting caught in our tuna nets? And if chimps are so evolved, why were they our sidekicks in 70s and early 80s TV shows and movies, and not vice-versa?

Marion Dreyfus replies:

Prof. Haave's questions are not probative of anything, least of all our putative superior intelligence.

If humans are so smart, why are we continually destroying ourselves personally, tribally, and globally? Everyone on the planet knows smoking is deleterious, stupid, and expensive, guaranteed to produce horrendous medical consequences — yet, um, how many people are still smoking? Unbelted seatbelt, Mr Governor, on the way to a Rutgers confab? Another nightcap, Mr Putin? And what group of 15 chimps would have let themselves be hornswoggled by Iranian dingdongs?

Why does the evolutionary success on land of humankind vitiate the superior adaptation of dolphins to their own environment (eschewing the unfair advantages conferred by nasty weaponry and general mayhem indulged in by human predators lacking the kindness of a clear playing field)?

Again, those anecdotal, highly colored, situational responses or non-escapes by animals prove nothing about whether our animal companions are less clever or adaptively sharp than we.



 The Game of Life is like the real thing. It gets complicated over time. I bought it to play with my daughter, and it is a lot different than the one I played as a kid. Now, there are various careers, which creates a bit of complexity.

The worst aspect, however, is that they have functionally removed the "buying a house" angle to the game. Although I have not done the math, it would appear that the expected return for most of the houses is negative. Perhaps for one or two of the better houses (different kinds of houses is also an addition to the game) the expected return is slightly positive if you don't buy insurance, but with the risk of a massive loss. So, I just don't buy houses ever, and my daughter seems to have figured that out as well.

Some of the careers pay off depending on what number is spun. For example, if you are the artist you get 10,000 every time the spin is "1". Also, one can buy stock. Each stock certificate has a number on it, and whenever that number is spun, you get 10K.

This necessitates everyone paying attention to what number is spun, which causes arguments because people forget to ask for their money, and then someone else says "too late, etc".

Adding to the mix is that the spinner has apparently been outsourced to China, and is a piece of garbage. It is near impossible for a kid to spin without it spinning off of the track, getting stuck, etc.

So, I have a little excel sheet (really open office) that does a few things. First, it is a 1-10 random number generator, so instead of spinning the wheel, one hits F9. Next to that is a 100-100000 random number generator. This is a control number that makes it clear if when you hit F9 you got the same number again, or you hit F8 or something by accident and in fact did not "spin".

Also, I have a little matrix where I put in the numbers that people need to keep track of, like their stock certificates, and it flashes "pay Gordon" or pay whoever's number comes up.

Here is the help I need:

One of the careers is the entertainer. He starts out on a low salary scale, but if two 8s, two 9s, or two 10s are spun in a row, he "hit's it big" and gets a higher salary.

What is the best way in Excel (anything in Excel I can translate to open office) for tracking when two 8s, two 9s, or two 10s have been drawn in a row? It should be simple, but once I sat down to do it, I could not recall ever having to have the computer remember a previous random number. Any thoughts?



 A recent NY Times op-ed reminds me of your Junto remarks last Thursday about how insider buying can transmit a deceptive signal. Daniel Gilbert's op-ed has some examples of other potential false signals. Gilbert wrote:

"In an advertising campaign that began last week, Nissan left 20,000 sets of keys in bars, stadiums, concert halls and other public venues. Each key ring has a tag that says: "If found, please do not return. My next generation Nissan Altima has Intelligent Key with push-button ignition, and I no longer need these." …There is no selfish reason to bend down and pick up a key ring, but Nissan knows that we will bend without thinking because the impulse to help is bred into our marrow. Our best instinct will be awakened by a key ring and then punished by a commercial. Like rubes throughout the ages, we will be lured by a false cry of distress and quickly cured of our innocence and compassion. We are used to commercial tricks that play on our fears. The official-looking letter marked "Verification Audit" is actually a magazine subscription renewal form; the credit card company's ominous call to "discuss your account" is actually an attempt to sell new services…" 

Gordon Haave adds:

The biggest investment disaster I have been a part of was Edison Brothers Stores, which went to zero. A couple of months before it went under, all the directors bought some shares on the same day. After the fact, it was clear that it was doomed when they purchased. It was a clear head-fake.



 Last weekend I did the Richard Petty Driving Experience in Forth Worth After a tiny bit of training, eight laps around Texas Motor Speedway.

I am glad that I did it, but I would not do it again. It's very inefficient. Basically, for 20 minutes of action (including suiting up, getting latched in, learning and then forgetting all the things to do if the car catches on fire), you wait around for 3.5 hours or more. It is such a popular product that they just herd people into every class and make you wait, rather than trying to make it more efficient.

In the markets, people often use the wrong tools for the job, often due to habit and the lack of acceptance of new ideas. In the consulting industry, this is common. Consultants operate the same way that they did 20 years ago. Now, they won't say that. Every two years they invent a new ratio that they apply to past performance and claim that it is an important breakthrough. Nevertheless, in my time, I was the only consultant who actually used factor analysis and systematic statistical techniques to separate beta from alpha. I think this is because I started on the hedge fund side, so when I moved to consulting I looked at the tools and thought "these aren't the best tools for the job."

Anyway, the simple fact is that the steering wheel is the wrong tool for the job. This might sound strange, but bear with me: Normally in a car you might hold the wheel at 10:00 and 2:00. We were told to hold at 11:00 and 5:00. Why? Because the car only turns left, and by holding at 11:00 and 5:00 you never have to roll your hands over. My first thought was, "Rather than using a new tool, they changed the way they use the old tool!"

I found that driving is actually quite physical. I had always dismissed it when the NASCAR announcers said so, but I was wrong. It's quite tiring to constantly pull the wheel hard to the left, particularly as the G-forces rise (my top speed was ~140 mph). You have your arms extended about half way in front of you as you are yanking on the wheel.

Thinking about it later, the wheel is simply the wrong tool for the job. Old bombers use a wheel because they don't engage in physically exerting maneuvers, yet a fighter plan will use a stick. Think of passengers' cars as bombers, and stock cars as fighters. For the physically exerting maneuvers, it would be much less taxing to have a flight stick lower and in front of you than a wheel up high. If you had a flight stick, it would be much less tiring, and would free up a lot of attention and dashboard space for mirrors and understanding your surroundings.

From James Lackey: 

The Petty Driving Experience is only a quick ride. The anticipation is half of the fun. The smell of racing gas and burnt rubber, the roar of the engines, the butterflies before taking the wheel is all the fun. Run any 50-lap racecar driving school. Two each ten lap warm-ups then a 30-lap draft run. On lap 27, the heat, the stress had me say "get me out of this thing."

The physical strength it takes to turn the wheel of a car or slam on the brakes is all in the mechanical systems. A stick on an airplane is a full computer controlled hydraulic system. In your passenger car, with traction control, computer assist and anti lock brakes coupled with hydraulic assist power steering and brakes makes for an effortless drive. Rules and restrictions in racing keep the tech low. The reason often stated is to keep the costs down. Yet the real reason is to keep the drivers input relevant. New technologies make some forms of racing basically a remote controlled car, with a human along for the ride. The reason a racecar is hard to steer is so you can feel if the tires start to lose traction, to correct before a crash.

In the glory days of racecars, the 1960s, technology had not yet made drivers irrelevant. It was easier to make more horsepower than the traction of the tires and the track could hold. A driver needed the ability to control the engines power to control the car. Nowadays everything is restricted by either rules or computers. The worst is the bureaucracy of racecar sanction rule makers. A good result may be achieved by restricting engine size alone. Let all things in the car be unlimited, besides cubic inches.

Trading has seen the same technological advances that make individual traders as relevant as racecar drivers today. We all have a friend that scales in and out of the market using size, time, average range and price. When you point out that they could just as easy program a computer to do the job, they point out that every year is different; the markets constantly change. They can do a better job on the fly then a pre-programmed box.

Market rules seem to restrict technology. Years ago we had limit down rules. The old excuse was in 1987 computer program trades crashed the system. Funny thing since we removed the tight limit down rules, smart traders can't save the market from stupid computers and limit down opens. It's remarkable how much profit I have lost as a trader since that rule change.

Boy, was I happy after the fact on that down 500-point day a few weeks ago. No, not at all happy for the 5th day down being a 500 pointer, I was pleased to see that computers were blamed for the malfunction. We need humans in the markets. My kids need me in the market with the ability to profit. That is a much more honest answer than that the NYSE needs the specialist system to remain intact for public benefit.

When I was a little kid in the late 70s it not only took a fortune to make a drag race car run 8 flat in the quarter; it took knowledge. Money alone could not buy a fast car. The knowledge was not readily available. A few years ago I built a car for less than half of what it would cost 20 years earlier. The first day out the car ran with in 8% of perfect. On paper the car should have run 7.97 seconds at sea level. With in a couple weeks we had the car run 98% of perfect.

Yet in my class, super comp, I would guess that some 3,000 cars in the country run 99.9% perfect and any given race. A few cars have a perfect run down to the 10,000th of a second. Most of that ability to run the 99% of paper perfection is new technology. Yet that last one percent is knowledge. Let's put it this way, you can run your car with in one percent of potential and count on a loss the first round of competition.

In the markets we do not have to compete. We can in theory just buy the market and match the return. Lets call that trading not to lose. At races when conditions are good, to win you need to be with in 0.006% to win. The other day some one mentioned it was a stop run at 1424. A two-point drop on that stop run translates into only a bit over a tenth of a percent. That is tight competition.

A real stop run was last Feb when we broke down 2% on the day; the market dropped 20 more handles in an hour. After many sessions of not having a down one percent day, many were set for tight trading. In racing that would be a nice sunny summer day of practice, then rain and a 50-degree change in the temperature. The best racers have the ability to change set ups quickly.

After heavy weather, the cool air and low humidity, racecars or trading accounts, make much more power. After a big fall in the markets, the intra day moves can be wild. After the big cold front came through in Feb, if you revved your account to 5,500 rpms, dumped the clutch at the open you blew the tires right off your account.

Perhaps it is not the tools for the job, just the calibration. After the huge down it took weeks for risk mangers and funds to adjust. Two days after the fall traders adjusted and were making more than the weeks prior on half the size. If the markets can drop 50 again, they will move 20 points on any given day. It's much easier to make 8 points on a 20 point day than to make the entire 8 point range months prior, unless your investing.

Once conditions become stable at whatever temperature and pressure it becomes much harder to win. In low temperatures engines make more power. Once the car is set up to run at the increased power speeds will increase. It's the same with the markets and absolute daily returns. The problem is taking it easy until the weather and the markets become stable. You can easily crash your account. Yet once conditions are stable, everyone has adjusted, the new problem is being very aggressive with your set up.

If you are too conservative when the conditions are great a rookie will blow you away. That is to say a rookie with a good computer. It's remarkable how quickly the markets adapt vs. just five years ago.



 The best coffee is Arabica. You guys drink the worst coffee. I'll bring some good Kona stuff out when I come next.

I got a sampler of eight different international coffees with the new iRoast 2, in green bean from Mexico, Peru, Timor, Sumatra, Congo, Panama, Nicaragua, Guatemala, and a few others. I'm not sure if it's what they're trying to sell or just trying to get rid of, but none held a candle to fresh roasted homegrown hand-picked sun dried Kona Coffee. Most were bland. Peruvian was about the best of the bunch, but still rather bland. Some were close to undrinkable. Sumatra tasted like dirt, Panama very bland, Nicaragua very bitter, and Peru mellow, good to mix 10% with 90% Kona.

Sam Humbert asks:

Why does anyone voluntarily drink "flavored" coffee? I'm having a cup just now, because "hazelnut flavored" beans were all we had on hand in the office today. But I feel like the high-school stoner who's so desperate he'll smoke roaches. The stuff tastes like something the EPA would send HazMat-suited guys out to Jersey to detoxify.

Who buys it? Is it a ladies' drink? Would appreciate insight.

Yishen Kuik adds:

A coffee importer once told me that the flavoured coffee industry grew out of a desire to use cheaper robusta beans and yet avoid the inferior aftertaste that caused manufacturers to prefer arabica. But then flavoured coffee took off. 

J T Holley writes: 

Having earned and financed my college education working at various coffee shops such as Mill Mountain Coffee and Tea in the Roanoke Valley, and Food For Thought in Missoula, MT, I can tell you very few [buy flavored coffee]! Most coffeehouses have pots of coffee lined up on the counter of some sort for self pouring. The ratio to the best of my knowledge on refilling those was around 5 to 1 compared to regular coffees of many varieties.

Not that what you drank was good but there are two ways to flavor coffee. I have utilized both ways. One is with a horrible flavored oil and the other is via bottled syrup. The oiled way is to roast a rather cheap Columbian bean and then mix the oil and coat the beans (like applying chemicals to kill weeds). The other is much better and that is having an individual cup of coffee and adding a shot of flavored syrup. This seemed less toxic to me even though both are probably the same.

I witnessed very few people other than women that would order flavored coffee. Espresso drinks would be the exception to that. I would classify flavored coffee along the lines of 100 cigarettes. We used to joke that those extra long 100's were for people that like to ash not smoke. They don't smoke the cigarette they simply puff to be able to "ask" so they look sleek and sexy or something. Same with flavored coffee drinkers I've witnessed. They don't drink coffee like you and me, they sip and end up throwing half of it away in those plastic lined trash cans that weren't made to hold liquids!

My experience in the Navy taught me something about coffee as well. Cream and sugar were rarely added to a cup on my ship. Your sexual orientation back in the early 90s when I served was questioned if you had a stir stick in the cup. It was taunting or hazing thing on my ship. Words were slung at you in humiliating ways and made a man either quit drinking coffee altogether or go with the straight black cup of coffee to avoid the hassle.

It's amazing how psychological warfare works. I drank my coffee straight anyways so it wasn't a bother to me, but literally saw fights break out. Can't even imagine what would've come about if someone would have brought their own International Flavored Coffee onboard.

On a lighter note, I spent 6 to 8 years of my life roasting and serving coffee in all of its varieties. I have to confess that it is amazing how much caffeine is abused and that literal addicts consume the beverage. The mark-up on a cup of coffee from raw bean, to roasting, to brewing and serving is utterly amazing to me as well. The shops that I worked in did absolutely zero advertising as well, another fascinating fact of the coffee business.

Pitt Maner adds: 

I hate to think of the abuse one might get for using the following, but based on a crude experiment it does seem that cold brewing makes for a smoother (some say lack of) taste.

With respect to Nicaragua there seems to be a fair amount of variability in the taste of the coffee. The best coffee growing region is up around Matagalpa and Jinotega in northern Nicaragua.

The Nicas seem to like to drink it black with a fair amount of sugar.

Problem with all coffee though seems to be how long it has been sitting on the shelf. You don't always get a "born on date" on the package. Of course you can pay $9 a pound for some of the brands that are sealed with nitrogen gas.

I know of someone who actually was marketing small discs that you put in your coffee maker to flavor the coffee of your choice. Better living through chemistry indeed. 

Pamela Van Giessen writes: 

The Irish coffee flavored stuff is the worst. My mother served it to me once when I was visiting. Being sleepy I didn't focus on the malodorous nature but the second it hit my taste buds I literally spit it out. Thankfully we were outside. I think that stuff was made for older ladies. 

Scott Brooks writes: 

Chicory is a plant that I use in my food plots to feed and attract deer and turkey. It is highly desirable, palatable, and nutritious to deer and turkey as well as many species of birds, and other assorted animals.

Gordon Haave adds:

I am a big chicory fan. The only kind to get is Cafe Du Monde. Every other kind I have tried is terrible. That being said, I don't know that it mellows the flavor, unless the underlying coffee is much more harsh than regular. I drink it with sugar and cream. 



 I believe hedge fund strategies will be new frontiers in the ETF market. As we are seeing ETFs move into more active strategies, we have already seen the beginning of this trend. The quantitative backdrop for evolution can be found in these articles by hedge fund Bridgewater, on selling beta as alfa and levering betas.

My prediction is that the increased accessibility will make it harder to prosper for hedge funds that are currently selling beta as alpha. In effect I see no reason why it couldn't soon be as easy to access some of these strategies as it is to trade the QQQQ today.

Gordon Haave writes:

Yes, but the whole point of the ability to replicate these funds is that you don't need the lockup, or at least not as much of one. One can short volatility without a 1-year lockup.

From Bill Rafter:

The largest portion of hedge fund money is employed in long-short. Long-short is highly liquid and highly scalable, and could easily endure a zero-day lockup. For example, we have a long-only (in theory, less liquid that long-short) large-cap program that has a zero-day lockup. One might ask why. Our answer is "marketing." Investors (particularly pros) are a lot less reluctant to give you money if they can get out on an instant's notice.

Lockups are really only necessary for strategies such as event-driven or distressed assets. The hedge fund industry mostly uses lockups to keep control of its assets. Recall how the recent ('06) Greenwich-based fund went guts-up and tried to manipulate its reports to shareholders to have the latter miss a redemption deadline.

Brian Haag adds:

If the funds are algorithmically managed, they are a short. Fixed systems die. If the funds are actively managed, they are a short. They will not attract the talent that 2/20 type arrangements will, and will thus be the mark at the table.

This whole "you can replicate any hedge fund strategy by adding beta and a few formulas" meme is no different from the "You can beat Wall Street at its own game!" type hucksterism so prevalent in the late 90s. It's just marketing crapola. While the base idea may be sound, that you don't have to get involved in hedge funds to receive average returns, so what? The only possible outperformance in products like these is relative to managers with subpar returns. It's all just another way for the industry to sell average performance.

Managers who do add alpha are very happy about this whole development. It's another source of edge. One needs to look no further than the "Goldman roll" in commodities to see an example.

Charles Sorkin adds:

I have been offered structured notes (intended to be re-offered to our customers) that pay interest based on the Tremont hedge fund indices. Depending on the degree of index participation desired, investors have the option to have total return floored at zero percent (principal guaranteed, like a bank note). Naturally, the secondary market for such a thing is limited, but it's still better than a hedge fund lock-up. Moreover, the issuer is generally an AA-rated large European bank.

Need to get more aggressive? Just buy 'em on margin…

Henrik Andersson adds:

Some of these structured products, which are particularly popular in Europe, are selling with a participation rate of 100% and no Asian etc. This is strange since it seems you get the put for free; but in these cases the cost of the option is most likely taken from the fees of the underlying funds.

keep looking »


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