He was good for the economy, but bad for the lower and middle class. My wife is not mourning, but some of her friends and family are. She was involved first hand on the streets of Santiago in the demonstrations and fighting that led to Allende’s overthrow. She was in her first year of University and was suddenly studying with many Cubans who didn’t open their books much. Of course, you know that Allende committed suicide on the runway with a machinegun given to him by Fidel Castro. This truly was a battle of left and right with landowner’s parcels being expropriated by a socialistically elected president who turned to communism.

Pinochet would be a hero today if he had done as promised and helped the return of the country to democracy in the two years he and the rest of the Junta promised. Instead he went on a campaign of terror and fist-tightening control for nearly 17 years. Anyway, I first lived in Chile in 1981. Then I knew Marco Antonio Pinochet (his youngest son) when I worked in Portillo in 1982. There is a long story here which I always wanted my wife to put down. Her father was with Pinochet — a longtime landowner/barone in Chile. Her mother, Swedish and French, was a second cousin to Allende. Interesting.

Take care, ######



Prof. Aliber’s marvelous essay on the housing market includes an aside that bears a little investigation. He writes that Canada “is the only Anglo-Saxon country that has not experienced a significant increase in the price of residential real estate.”

According to’s index of overall US home prices, single family homes rose by about 100% from 2000-2006. There was, of course, substantial variation across different geographic areas. Los Angeles, for instance, saw an increase closer to 160% in that time period.

However, data on Canadian single-family home prices indicates the following increase in 2000-2006 (source):

Increase in nominal prices in $CDN:

Halifax 54.2%
Montreal 69.7%
Ottawa 67.8%
Toronto 51.3%
Winnipeg 78.7%
Edmonton 92.2%
Calgary 115.3%
Vancouver 75.4%

But if you also factor in a healthy increase in the value of the $CDN against the $US, you get these figures:

Price increase adjusted to $US:

Halifax 69.6%
Montreal 89.4%
Ottawa 87.0%
Toronto 65.9%
Winnipeg 101.0%
Edmonton 118.3%
Calgary 148.0%
Vancouver 96.7%

Maybe the keyword in Prof. Aliber’s aside was “significant”. Certainly London and New York are leaving Toronto behind. But when even Halifax is up almost 70%, you have to say that Canada has been along for this ride too. Not to mention West Van or Whistler.



The Eskimos have 26 names for snow. They live in it, are immersed in it, and die by it. Sailors have the Beaufort scale and dozens of names for the water, wind and weather conditions. Musicians have notation for pianissimo, crescendos, fortissimo, contrapuntal, waltzes, marches, for time signatures, keys, clefs, rhythms, shuffles, triplets, all as a way to record and communicate and create. It is a way to predict, to communicate, teach, understand. The market has different and changing conditions. We should create a better standard classification in terms for the market, a Taxonomy of the Market, a periodic table for the markets.There are the Opens, the mornings, the closes, pre-market, pre announcement, announcement, ranges, trend days, narrow ranged days, wide range days, no change days, pre holiday days, days of the week, quiet markets, slow markets, fast markets, panics, bull runs, expansion bars, gaps, closed markets, reversal bars, Z days. Each can be quantified or qualified in a manner of choosing, but rather than numbers, a good name is always good to have in mind, especially where survival is at stake, in order to know what equipment to bring, what techniques to use, how to avoid danger, how to communicate with each other, to teach, to learn. Any scientific discipline should have a good taxonomy. The process itself of classification gives insight and requires hard analysis and understanding. Seeing how the conditions change from one to the other, when, and how, are steps toward a more scientific approach to the markets rather than the typical hand waving we eschew. Please suggest other possible classifications.

Larry Williams mentions:

Price can open in one of four zones:

Open < prior low
Open > prior low < prior close
Open > prior close < prior high
Open > prior high

It does matter.



Here we are, early December. That can only mean one thing. That’s right dear readers it is time for Tim’s annual holiday classic. Each year, for some twisted reason know only to myself… well, to be honest, I don’t even know why I do it, I bastardize, plagiarize and just generally rip off some well known beloved holiday yarn, giving it a speculative, capitalist, libertarian and just plain weird spin. I of course insert characters from the spec world and sometimes from the real world to make it entertaining to all, or just because I think its funny. I like to do this early in the month so everyone has time to print it off for their holiday bedtime reading. Surely even Mr. Brooks needs a holiday classic to read this time of year, eschewing those classics his kids love, the ‘NRA Manual’ and ‘Bambi — She’s What’s for Dinner’. The quest for a new story gets harder every year… We have done ‘Yes, Virginia’, ‘It’s a Wonderful Life’, naturally ‘The Night Before Christmas’, and my all time favorite, last years immortal yet easily forgettable rewrite of ‘the Grinch Who stole Christmas’. This year, I shall tackle the Granddaddy Christmas tale of them all — ‘A Christmas Carol’ — And stand it firmly on its head. So without further ado, all the while begging the chair and da Wizz for posting a non quantitative, non musical and, well I do not know if it is kind of a BBQ’ed edition of the story, I give you A Christmas Carol of a Different sort.[Read the Rest of the Story]



Motivated by Mr. McCauley’s article Market Irony and the October 1987 Crash, I inquired whether stock indices might exhibit non-random behavior around “significant” dates. More specifically, I investigated the returns of the S&P500 index around the 4th of July as a major secular US holiday.

In the years between 1950 to 1977, S&P500 percentage returns on the trading day before 4th of July have been significantly positive, on average by 0.43%. Percentage returns on the trading day after Independence Day (”ID”) have also been positively correlated to pre-ID returns by 0.40, albeit no significance of those returns is found. The late 70’s however present a break for this relationship. Between 1978 and 2006 neither pre-ID nor post-ID returns are significant. Similarly, correlation between both returns is merely 3.6% whereby both return series exhibit significantly higher variances than between 1950 and 1977.

Had I not investigated the robustness of my results, I might have inferred that S&P500 pre-ID returns are significantly positive, even nowadays. In fact, testing for the whole period 1950 to 2006 would support this: returns lie between 0.08% and 0.42% with 95% confidence. Pre-ID returns would not significantly differ from zero, had it not been for the pre-’78 period with a 0.45% return on average.

This short study of equity returns around Independence Day once again illustrates the nature of market phenomena and the notion (not theory) of ever-changing cycles and the resulting necessity to investigate the robustness of estimates. What was a profitable strategy till the late 70’s no longer works today (post-’78 returns are positively biased solely by the previous sample interval). I found it furthermore striking to observe S&P500 pre-ID returns to be positive for 17 consecutive years (’53 - ‘69).

Before opening the discussion to the floor, it might be of interest to investigate equity or bond returns around “significant” days, be they major secular or religious holidays or certain anniversaries. Similarly, perhaps fellow DailySpecs might want to expand on my findings, testing various other US indices for perhaps a longer sample period to see whether we can establish corresponding return behavior.

Appendix: Data



Just about the finest man that has ever lived, the modern reincarnation of Father Bach in the 20th century, is the great piano player and teacher Robert Schrade, the founder of the Sevenars Concert Series in Worthington, Massachusetts. He was a frequent soloist at Carnegie Hall and other great venues before he gave up the life for teaching, giving in home lessons to kids learning to play, and doing numerous other jobs that only a musician could appreciate.

We have a tradition of meeting to see how each other is doing over a game of Laskers which he likes to play. Laskers is an early 20th century checkers-like game, except the rule is that when you jump a piece you only take the top man. You do not remove any checkers from the board, and while you jump pieces, you stack them on top of each other. The kings get turned over so that when you have four men on top of each other you have to remember if the ones below are kings or not. I cannot ever remember the rules or visualize what happens when you jump, but I am a good checkers player, and yesterday when we played I was up about nine checkers to three.

We had previously spoken about the five levels of species counterpoint, and in honor of David Bronstein’s life, I told him that I was going to try to win the game a la Bronstein by displaying a few species of counterpoint. While I was expanding on this to his family, I found that all the sudden he had eight checkers on top of each other on one square. The next thing I knew, he followed me with this one unit into his side of the board, where I had kings, and I resigned. The moral of the story is never to be over confident, never to talk during a game, never try to win with a flourish, and never forget about mopping up — never skin the bear until it is caught. I profited enormously from this loss, and will have to make a suitable contribution to his festival in the Rockefeller spirit based on the lessons I learned.



About 15-20 years ago a number of academic articles were published (by Fama-French and Shiller among others) claiming that aggregate stock market returns are partly predictable using variables such as P/B, dividend rates, the term structure of interest rates and so on. This is the ‘market predictability’ literature. More recently a number of articles have appeared that claim this ‘predictability’ is weak and not useful from a practical point of view. This article by Giot & PetitJean, entitled International Stock Return Predictability: Statistical Evidence and Economic Significance, belongs to the strand of the literature that grants that predictability may have existed in the past but doubts that it will continue and/or finds that it is of no practical value. I’ll call it the ‘predictability is pretty useless’ school. There is also another line of criticism to which you can subscribe, that is more radical and I will call the ’statistical malpractice’ school, that believes the apparent predictability does not exist even in the past data and is an artifact of flawed statistical procedures such as overlapping multi-year stock returns and/or too few degrees of freedom for proper inference when the procedures for overlap-adjustment are known to give bad result in small samples, etc., etc..

The two little known Belgian authors examine five variables: dividend yield, earnings/price ratio, short term interest rate, long term interest rate, and interest rate spread. They look at the stock markets of 10 major countries, and they use an ‘Out of Sample’ methodology in which the relationship is estimated over a period and then applied to the following period, i.e. a predictive study. They use a statistical test I am not familiar with, due to McCracken (2004), which is apparently a variant of the Diebold-Mariano test that I discussed with Professor Diebold the other day.

The conclusion in their words:

The short-term interest yield and, to a lesser extent, the long government bond yield are the best out-of-sample predictors of stock returns. However, the out-of-sample predictive power of these variables does not appear to be economically meaningful across countries and investment horizons.

This is all I could glean from a quick and partial reading of the article.



When you try to play sharply and creatively you start to realize just how good Bronstein [Read David Bronstein’s New York Times Obituary] was, and why he was somewhat contemptuous of the ‘modern style’ of milking just a few openings and having long time controls. My opponents below are much weaker than those Bronstein had to play, but I still had the most fun I’ve had playing chess in ages. I was showing the knight and queen sacrifice against Peacock to anyone who would listen. In my other White games I successfully tried one Wing Gambit (1.e4 c5 2.b4) and one Fantasy Caro (1.e4 c6 2.d4 d5 3.f3), but there were plenty of anxious moments.

Davies,N - Peacock,M [C00]
Bury Quickplay, 2006

1.e4 e6 2.Qe2 Be7 3.b3 Nc6 4.Bb2 e5 5.f4 d6 6.Nf3 Bg4 7.h3 Bh4+ 8.Kd1 Bxf3 9.Qxf3 Bf6 10.f5 h5 11.c3 Nge7 12.Na3 d5 13.Bd3 d4 14.Nc2 dxc3 15.dxc3 Qd7 16.Ke2 0-0-0 17.Rhd1 Qe8 18.b4 Kb8 19.a4 Nc8 20.a5 Nd6 21.b5 Ne7 22.c4 Bg5 23.Kf1 g6 24.a6 gxf5 25.exf5 b6 26.Bxe5 Nec8 27.Nb4 Rd7 28.Nc6+ Ka8 29.Nxa7+ Kxa7 30.Qb7+ Nxb7 31.axb7+ [31.axb7+ Kxb7 (31…Kb8 32.Ra8+ Kxb7 33.Be4+ Rd5 34.Bxd5+ c6 35.bxc6+ Kxa8 36.Ra1+ Na7 37.c7+) 32.Be4+ Rd5 33.Bxd5+ c6 34.bxc6+ Qxc6 35.Bxc6+ Kxc6 36.Bxh8] 1-0

Hague,B - Davies,N [B21]
Bury Quickplay, 2006

1.e4 c5 2.d4 cxd4 3.c3 d3 4.Bxd3 d6 5.f4 Nf6 6.Nf3 e6 7.0-0 Be7 8.h3 Nbd7 9.Be3 Qc7 10.Nbd2 b6 11.Qe1 Bb7 12.Qg3 g6 13.f5 gxf5 14.exf5 e5 15.Bc4 Rg8 16.Qh4 d5 17.Bb3 0-0-0 18.a4 Nc5 19.Bg5 Nce4 20.Nxe4 dxe4 21.Ne1 e3 22.Bxf6 Bxf6 23.Qxf6 Rd2 24.Rf3 Rdxg2+ 25.Nxg2 Bxf3 26.Bd1 Rxg2+ 27.Kf1 Qc4+ 28.Ke1 Rg1# 0-1



The following article from the Boston Globe reads like a checklist of logical real world outcomes you’d expect from the implementation of textbook liberal nostrums … minimum wage laws, strict environmental controls, government control over K-12 education …

Bay State’s labor force diminishing Low-skilled men hard hit, study reports — By Michael Levenson, Globe Staff | December 10, 2006

Massachusetts’ workforce is shrinking at an alarming rate, as thousands of low-skilled men drop out of the labor force because they cannot find jobs or are too discouraged to keep looking, according to a new report.

The report, released today by the Massachusetts Institute for a New Commonwealth, warns that as the state expands rapidly in high-tech and life sciences industries, a significant segment of its population is being left behind.

Between 2003 and 2005, Massachusetts was the only state to lose workers for three consecutive years, according to the report. During that period, the nation’s workforce grew 3.1 percent, while the state’s declined by 1.7 percent.

Early indications suggest that 2006 might be Massachusetts’ fourth straight year of decline. The last time the state experienced such a prolonged drop was during World War II, when men were called to fight.

The study blames the workforce decline in part on the widely discussed exodus of college-educated young people who are leaving the state because they cannot afford housing here. But it highlighted a less explored trend: Health, retail, and service jobs, which are traditionally filled by women, are growing, while factory and manual labor jobs are disappearing, leaving lower-skilled men with few options.

[Read More]



Most of these have been implemented here, for most of the listed stocks in the world, when the data are available (freely available or bought). It requires a nice database and information system to handle daily calculations; but this is easy; the only part that really takes time is being creating a meaningful and coherent picture (back to beginning). And if we did it here, I have no doubt that it exists in many places.



Specs, may have something more to add here, but flat tax certainly seems to be riding the wave. Below is an article from The Global Guru entitled ‘How to Profit From the Flat Tax Revolution.’

Steve Forbes is probably the most public advocate of flat tax regimes around. In his book Flat Tax Revolution, Forbes discusses how simple flat tax regimes cut taxes, spur economic growth, and put a stop to a culture of tax loopholes. Forbes recently discussed his ideas at the London Junto — a monthly gathering of leading London investment professionals that I sponsor.

The philosopher Arthur Schopenhauer observed that: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” The ‘truth’ of the flat tax is self-evident to every country that has adopted it. It’s ironic that it is most ridiculed in developed Western economies. A recent IMF report dismissed the flat tax as “something of a craze,” adding that “the flat tax has been marked more by rhetoric and assertion than by analysis and evidence.”

That’s just bunk. Countries that have implemented flat tax regimes have seen both tax revenues and economic growth rates explode. They also have been home to some of the best performing stock markets in the world.

In the first half of the 19th century, the flat tax was the norm. The first calls for a “heavy progressive or graduated income tax” came from Karl Marx in his 1848 Communist Manifesto. That the majority of countries that have flat tax regimes today are the former Communist countries probably has Karl Marx turning in his grave in Highgate Cemetery here in London.

The contemporary flat tax movement got its start in the mid-1980s with the publication of the book, Flat Tax, by two Stanford and Hoover Institution economists Alvin Rabushka and Robert Hall — the latter my macroeconomic theory professor at the time. Perhaps no economic policy of the last 20 years offers a better example of John Maynard Keynes’ much quoted observation that:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly is understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

That the idea of a flat tax could spread from Silicon Valley to Estonia — within a decade, no less — is remarkable. At the time Rabushka and Hall’s book was published, Estonia was still part of the Soviet Union.

“New Europe” has been the pioneer adopting flat taxes. With the exception of Hong Kong, every country in the world adopting the flat tax has come from the fringes of the old continent. Celtic Tiger Ireland was first out of the gates lowering corporate taxes to zero in the 1960s. The result? In less than a generation, Ireland’s per capita GDP now exceeds that of Germany, France and the UK.

The Baltic countries of Estonia, Latvia and Lithuania adopted flat tax regimes in the mid-1990s and have recorded Asian Tiger-like economic growth rates ever since. Russia introduced a flat tax in 2001 and tax revenues doubled. Others like Ukraine followed in 2003, Slovakia in 2004, and Romania in 2005. The tiny Former Yugoslav Republic of Macedonia adopted the flat tax regime only a month ago. The flat tax remains on the agenda in several countries including Costa Rica, the Czech Republic, Mauritius, Mongolia, Poland, Slovenia, Greece and Croatia.

Yet opposition to flat tax regimes in “Old Europe” remains intense. Angela Merkel was forced to back down from her flat tax position to win her post as German Chancellor. Germans associate flat tax regimes with “Amerkanische Verhältnisse” (”American circumstances”) — what they perceive as armies of workers condemned to a life of poorly paid indentured servitude at McDonald’s. In the UK, both the opposition Tories and the Liberal Democrats considered briefly incorporating flat tax policies into their party platforms. Sadly, both have backed away ahead of elections in spring 2007. Ireland’s success raised jealous hackles in the necks of EU bureaucrats. But after the EU forced it to raise taxes in the 1990s, Ireland eventually stood up to EU bullying and cut corporate taxes back to 12.5%.

The bottom line? “Old Europe” will budge only when its hand is forced. When neighboring Slovakia adopted a 19% flat tax in 2003, the Austrian government cut corporate income tax rates first from 50% to 34% and then to 25%. This policy not only kept companies in Austria about to defect across the border, but also attracted new ones. Today, Austria’s economic growth rate is double that of Germany and perhaps explains the presence of 50,000 German guest workers in the country.

But if Slovakia and Austria got it right, neighboring Hungary has gotten it remarkably wrong. Hungary recently raised corporate taxes. The results have been predictable. One entrepreneur I know simply closed his Hungarian company and incorporated in Wyoming over the Internet. If taxes were, say, a flat 19% as in Slovakia, he would not have bothered.

The flat tax is about more than just economic growth. Flat tax countries also have been a terrific place for investors to make money. The Russian stock market has been the best-performing market in the world since it adopted a flat tax of 13%. The Austrian market has been the #1 market in New Europe over the past five years. Turns out making money is about good policy and not geography. I’d invest in “Flat Tax Fund” over an “Asian Tiger Fund” any day. To me, that truth is self-evident.



May I present a recent find:

ZMATH - The Zentralblatt MATH Database The ZMATH Database contains about 2.3 million entries drawn from about 3500 journals and 1100 serials from 1868 to present.

ZMATH costs about USD $90 for a personal subscription, and has been invaluable to my work over the last couple of weeks that I have been subscribed.



I can’t remember these sites being mentioned (beinsync, foldershare), but they allow you to synchronize data between different computers. I don’t know about anyone else but this has caused me a lot of bother in the past.



Only a counter would notice that when people are defending the real estate market they use “median” prices and when they are bashing the markets they use “average” prices of homes sold. The difference of course is the highest outliers get heavier in the average than the median.

Which makes me wonder, is this really the demise of the “flipper”. Sure the guy that bought the beach front mansion to flip is in a world of hurt. But the guys buying the fixer-upper to flip, well they don’t need to sell the place, simply rent it.

Traditionally hasn’t this been the real estate speculators market? The place he fixes up hoping to flip to make a quick kill, but if not, to rent out. Didn’t he most likely get a sweet deal locking in interest rates? Now that the Prof. says buying is out of range for the first timers, won’t they be forced to rent and pay higher rent?

Could it be that many of the highest end markets are artificially highly priced due to regulations? Regulations that are set up to exclude those driving the demand… the immigrants. And will it mean that housing demand really goes down, or simply that it shifts?

All this makes me wonder if the bottom quartile going up? And what the top 10% in the various markets look like? Also in the doomsday articles, the focus always seems to be on the poor fool that bought too much house.

All this implies of course that if the upper half is feeling the pain, how much more pain must the poor guy that actually has to get his hand dirty to make a living feel … surely he didn’t think through every $ of that purchase as the guy smart enough to have money to spare.

May I suggest that the typical high net worth investor is giving the down-turn too much weight simply because it is happening to him and his friends rather than to the lower half buyers.

George Zachar adds:

This is a deep point at a rhetorical level, with parallels in many aspects of markets and politics. There is a stable framework of deception that persists in public arenas despite the transparency of the falsehoods.

The weekly Barrons doomster, the populist pols who un-employ the working stiff via regulation, etc. etc. are part of this. Rigid willful stubborn stupidity resists counting, and thus frustrates.



As I write, the GBP/USD is 500 pips away from the very visible 2.000 mark. Are we close enough to speculate that this mother of all round numbers will be hit. If we do get there, will it be one of the best shorting opportunities of the decade. Not since Soros’ most famous trade in 1992 has this market flirted with this level.

Historically, most of my current short volatility systems have performed best over the Dec - Feb period. I feel excited about the opportunities over the next few months.



I was watching some golf on television one day and remember how one commentator explained the secret of one particular players unorthodox swing, and why it turned out OK despite all his bad habits. The one thing he did right, I recall, was his great follow-through.

There are some analogies with chess here too. There’s always a truckload of advice about how someone should study/play/live but so many players seem to ignore this and succeed despite their many sins. What is the essential element? Probably nothing more than to concentrate and fight during the game, yet this one thing is often drowned out by all the other well-intentioned but meaningless advice.



There are many approaches to measuring the health of the stock market:

Readers can feel free to suggest a few others from the endless list.

I have long thought an alternate approach might be apt. The basic idea is to see how individual stocks respond to day-to-day things that are part of the fray.

Start with earnings reports. How do companies perform on the day they report earnings, taking into account how the earnings compare to expectations, and how the expectations are changing? Then expand to specialized things that are always happening. When big company like Pfizer loses a product and the stock drops 15% at the opening, as it did on Dec. 4, how quickly is the drop retraced over the next one to four days? What is the average premium on acquisitions, and how frequent are they? What is the daily volume of reported insider buys and sells, and how did the stocks perform in the days before the purchases and disclosures? What is the relation of value to growth on a particular day, and of big versus small (this is the easiest question because a glance at a few indexes provides the answer.) How many stocks close at various high or low parts of their ranges, relative to the stock market as a whole? How did the Value Line Group 1 champs do on the days preceding their earnings reports? How are the big moves in big option stocks distributed?

It would be laborious to construct such a series, and it would require skill to use it for estimates. The beauty is that because of the cost and extent of the input required, one might come up with something that actually has not already been discounted by the hundreds of thousands of excellent minds always looking for an edge.



An interesting undergraduate paper, is looking at the New-York phone directory. And… No, it is not about the Benford law. It is about subsequences.

The same approach can be applied to markets. For this, we will consider random mappings between two ordered finite sets: time [1,2,3…..t] and ranked asset returns [r1, r2, r3….rt].

The longest subsequence in asset returns should converge to a Tracy-Widom distribution. It is a beautiful distribution that seems rather ubiquitous. Unfortunately, it is relatively new also, with few implementations. There is some code in S-Plus, but it is using a S-Plus function, ivp.ab, with no obvious equivalent in R. If someone knows of an R module solving ODEs at point B, knowing the solution at point A, please let me know.

So we won’t be checking the asymptotic behavior of any asset. Instead, we will content ourselves with the study of the longest subsequence in subsets of length 15, for which exact frequencies are provided in the New-York directory article. It is easy to extend the study to other lengths, by generating random sequences in R.

We’re using the daily DJIA since 1896 for illustrative purposes, but as explained often on DailySpec, this doesn’t make sense. It would be better to look at more recent returns, preferably intraday, because many observations are required.

Intuitively, longest increasing subsequence behavior could be useful to know. For instance, if it is longer than dictated by randomness, it means that big drops are followed by smaller drops and big rises are followed by bigger rises, than would occur in a random walk. This evokes a “U” shape where it would make sense to buy sharp drops.

Please note that consecutive drops or rises don’t necessarily occur the following day. Subsequences are not defined by consecutive returns. They are an entirely different concept from the one of runs. Instead, they are defined by returns distributed all over the interval. We are looking at some form of market local curvature. But it is a distributed curvature, not a continuous one. This kind of stuff is not captured by usual tests and certainly not by the eyeball.

A chart of realized frequencies against exact frequencies seems to indicate that actual longest subsequences are longer than theoretical ones. At the 5% level, a Kolmogorov-Smirnov goodness-of-fit test rejects the null hypothesis in favor of non-randomness.

Two-sample Kolmogorov-Smirnov test:

data: LN0 and Sexact
D^+ = 0.4667, p-value = 0.03813
alternative hypothesis: greater

Buying sharp drops is a good thing … But that’s for 15-day subsets only and needs more work.

The R code is appended. Peer-reviews are needed due to my propensity to counting mistakes.

# #   Longest increasing subsequences #   # Patience sorting    patience <- function(x,s=NULL)    {    s[1] <- x[1]        for (i in 2:length(x))        {            for (j in 1:length(s))            {if (x[i] <= s[j]) {s[j] <- x[i]; break}}        if (x[i] > s[length(s)]) {s[j+1] <- x[i]}        }    return(s);    }  # data loading    S15exact <- scan("S15exact.txt")    testdata <- read.table("testdata.txt",sep=",",header=T)    testdata <- diff(log(testdata$close))     # to change if need be, eg replacing S15exact by random numbers frequencies    data <- testdata    Sexact <- S15exact  # data ranking, data split, Q samples of length N    N <- 15    Q <- trunc(length(data)/N)     data <- data[1:(Q*N)]    data <- rank(data)    datasplit <- 1:Q    datasplit <- rep(datasplit, each=N)    samples <- split(data,datasplit)  # increasing subsequences     LN <- numeric()    for (i in 1:Q)        {        samples[[i]] <- patience(samples[[i]])        LN[[i]] <- length(samples[[i]])        }    LN <- tapply(LN, factor(LN),sum)  # adding increasing subsequences with zero observed frequencies # there must be a more elegant way     LN0 <- tapply(rep(0,N), factor(1:N),sum)    for (i in 1:dim(LN0))        {        for (j in 1:dim(LN))        {        if (names(LN0)[i] == names(LN)[j]) {LN0[[i]] = LN[[j]]}        }        }    LN0 <- array(LN0)/sum(LN0)  # graphs     plot(LN0, type ="l", col="brown")    lines(Sexact, col="red")  # Kolmogorov-Smirnov  kstest <- ks.test(LN0,Sexact,alternative = c("greater")) kstest

Bruno later adds:

I did a bit more research on Tracy-Widom this week-end. Among a great many other things, it is also measuring the probability of explosion for a random-walk with drift. This makes a lot of sense intuitively. Explosion, the right hand side bar in a “U” shape, and longest increasing subsequences are more or less the same thing.

The fact that it measures probability of explosion for a random walk ‘with drift’ is reassuring. I was a bit worried by the possibility to be capturing only positive drift, and not adding any new information, since subsequence computation is drift-independent.



Allow me to present to you this great wine, an expression of the Italian tradition and culture. Maybe you can have a chance to taste it during the Christmas holidays.Montalcino is a small town in Tuscany. The region’s farmers have made wine for centuries. Sangiovese grape provides a superior variety, carefully handled and extra-aged superior wine.

Market success began in the 1960s when regulations in Italy gave quality a chance. Brunello became the first of the elevated DOCG wines in 1980. The wine is superb, but of course it is not cheap. Prices can vary from 25 Euro up to 60 Euro and more depending on many factors. Brunello usually is aged for a total of up to five years, including a minimum of two years in oak barriques. With a ruby-red color complemented by a rich bouquet, Brunello di Montalcino is a wine of robust character. It possesses a depth and complexity softened by an elegant, lingering aftertaste.



I thought I was exempt from hitting Deer until a few years ago. For 15 years I drove nearly weekly (300 miles round trip) on the Taconic parkway (no fencing, always surrounded with woods, no gas stations) to and from my Mass. country house. I am a speedy driver but extremely vigilant for all the telltale signs of danger. It was snowing and there was snow pack on the road and 4′ foot snow embankments along the side. Nonetheless, three years ago, an adult deer leapt over a snow bank and landed in front of me. There was no possibility to avoid hitting him. Now here is the key to survival (I read about this maneuver years earlier and had rehearsed it mentally several times).I avoided swerving, braked (got down to about 45mph), then eased off the brake as I was about to hit him to get the nose of my Volvo cross country back up — this is to prevent him sliding up the hood and come through the windshield. I hit him square; split him open, and propelled him ahead. A trooper came by. We pulled the carcass off to the side and, yes, the Volvo survived with only one headlight out and I continued the next 120 miles home. There is no doubt luck helped as well. And, the AWD was also equipped with four studded winter tires; that helped too.

Rod Fitzsimmons Frey adds:

When my brother was 17, he had a season pass to a ski hill about 3.5 hours drive from our home. He would drive there every Friday and return every Sunday night with his friend who also had a season pass. They were in a Chevy Sprint.

Being 17, they were foolish. One of the games they played to pass the time was: sometimes when they were passing a car on the fairly deserted highway one or the other would yell “DUCK!”, whereupon both would duck below the dashboard for three seconds or so, just as they passed the other car. In their imagination, the other driver would see a driverless car passing on the highway. Great fun.

In any event, one Sunday they were driving back about 11pm. My brother’s friend catches a glimpse of a running moose out of the corner of his eye. “DUCK!” Because of this foolish game, reflexes take over, and they both duck under the dash as the moose shears off the top of the Sprint. Both boys unhurt: car now completely lacking any metal above the windshield wipers.



The boom/bubble/froth in the U.S. housing market that started in 2001 and 2002 has led to an “excess supply” of 750,000 unsold homes, about twenty five percent larger than the average inventory of four to five months sales. (The data that have led to this conclusion are at the end of this abstract.) These homes were produced in response to the demands of investors who anticipated large speculative profits from “flipping” these properties-and until recently they attained these profits. These speculative purchases directly and indirectly (through the purchase of furniture and appliances, real estate brokerage services, title insurance, etc.) added three or four tenths of one percent to the rate of growth of U.S. GDP between 2002 and 2006. Moreover the U.S. GDP growth rate was boosted by a comparable amount from the increase in household spending financed with the cash obtained through equity withdrawals with re-financings and home equity loans.

The U.S. home price bubble has burst in many metropolitan markets, especially those that have had the most rapid price increases. Excess supply in housing-as in all markets–places downward pressure on prices. Housing starts have declined sharply, perhaps by thirty percent; nevertheless starts still remain higher than the average in the previous several decades. Moreover the excess supply will increase for perhaps six to nine months or more as home developers complete construction on units that were started from three to twelve to twenty months ago, before the surge in the inventory. Moreover many would-be buyers are “on strike” and delaying their purchases until prices decline further. Finally the excess supply will increase in response to the surge in foreclosures, the increase in unemployment as the implosion of the housing bubble leads to a significant economic slowdown, and as individuals who purchased second homes for their own use encounter financial hardship.

The excess supply will begin to shrink only after housing starts declines sharply relative to sales of new homes. The decline in housing starts is the primary cause of the slowdown in the rate of economic growth of about one percent that became strikingly evident in the third quarter of 2006. The rate of economic growth in 2007 and 2008 will depend on how rapidly the excess supply of houses declines; as long as there is an excess supply, prices will trend downward, and housing starts will decline below their average rate in the years before the froth developed in the housing market. The more rapid the decline in starts, the more rapid the decline in the excess supply, the more rapid the decline in the GDP growth, and the greater the likelihood of a recession in 2007. The non-recession scenario involves a slower decline in housing starts and a more prolonged economic slowdown.

The sharpness and the duration of this economic slowdown will have significant “knock off” impacts on the other sectors of the economy that in turn will impact housing. Corporate profits will decline and stock prices will be negatively affected. Monetary history suggests the shock will be sufficiently severe to have major impacts on firms in the financial sector– even though there is no ability to foresee the industries that will be hit, except for the firms that sell and hold sub-prime mortgages.

Now for the background: Analysts of financial behavior have been elaborating models of asset price bubbles for more than two hundred years. Some good news perhaps a reduction in interest rates or an easing of credit restrictions leads to an increase in the price of an asset usually residential real estate. Real estate is the largest component of wealth for most households and the increase in price of real estate leads to a surge in the household wealth that in turn leads to greater willingness to spend. Individuals become more optimistic. The lenders relax their credit standards, often to dampen the decline in their market share to more aggressive lenders. Asset prices increase further. An increasingly large number of investors begin to buy assets to profit from capital gains, the anticipated rates of return on their invested cash are phenomenally high because the down payments are so modest, especially when they buy real estate. The economy booms as real estate construction surges; growth accelerates.

The dominant explanation for the recent surge in U.S. house prices is the unprecedented expansive monetary policy that Chairman Greenspan’s Federal Reserve adopted in 2001to dampen the impacts of the sharp decline in stock prices. Real estate prices had increased by x percent between 1993 and 2000; between 2001 and 2006 they have increased by x percent. Moreover in the last few years U.S. real estate lenders have become both more imaginative and more aggressive in developing new types of mortgages that reduced the home buyers’ monthly debt service payments-and thus enabled them to purchase buy more expensive homes relative to their incomes.

The remarkable phenomenon of the last five years has been the sharp increase in the prices of residential real estate in Great Britain, Australia, New Zealand, and South Africa as well as in Spain and several other European countries. (Canada is the only Anglo-Saxon country that has not experienced a significant increase in the price of residential real estate.)

One possible explanation for the increase in home prices in these different countries is that the Fed’s monetary policy inflated real estate prices abroad. A competing view is that the flow of Asian money into the U.S. and foreign security markets has contributed to asset price inflation; virtually all of the countries that have experienced sharp increases in the prices of residential real estate also have large trade and current account deficits. The two views may be complementary.

The changes in the prices and new construction in the U.S. housing market in the last five years seem part of a pattern that is almost biologic in its regularity and predictability (if not in the timing.) Between 2001 and 2006 real estate prices increased four or five times more rapidly than household incomes, in part in the last two or three years because an increasingly larger number of buyers were purchasing homes and condos in anticipation of short-term speculative gains. In the “hot markets” in Arizona and Florida, annual price increases were six or eight times the interest rate on the money borrowed to finance purchases. The increase in home prices relative to construction costs led to a boom in number of units produced; Toll Brothers and KB Homes and the other large developers were in financial heaven.

Now each day’s news seems to have a story about the decline in housing starts, year-on-year fall in home prices, changes in the size of the inventory of unsold homes, and the increase in home foreclosures. The inventory of unsold homes is larger than at any time since the early 1990s. Home prices peaked one or two quarters ago, although there are significant differences among regions in the price changes. The price declines in the Red states generally have been larger than in the Blue states-but the price increases in the previous several years were larger in the Red states. (For this purpose, Southern California is a Red state.)

Dow Jones Real-Estate Index
Town Zip Code Year-To-Date % Price Change
Stamford, CT (06903) 6.9
Mountain Lakes, NJ (07046) -5.8
Manhasset, NY (11030) 16.1
Old Westbury, NY (11568) -0.1
Villanova, PA (19085) 0.9
Fairfax, VA (22039) -0.2
Glencoe, IL (60022) -17.9
Lake Forest, IL (60045) 11.5
Los Angeles, CA (90077) -20.6
Menlo Park, CA (94025) -23.8
* Source: Wall Street Journal, November 24, 2006

[Read the Rest of the Post]

Steve Leslie replies:

I wish to thank Prof. Aliber for his most excellent explanation of the housing market, with particular reference to the boom/bust cycle we are currently experiencing in this country and the inevitable fallout from such an event.

This is unquestionably one of the finest essay that I have witnessed on DailySpec since I began investing time in visiting the site.

This shows in irrefutable detail the high quality of writing, the amazing intellect of the contributors and the depth of thought available here. Prof. Aliber displays in thorough and logical progression why DailySpec should be a part of the daily diet of serious speculators.

I almost feel guilty in being exposed to such remarkable writing.



A common fallacy regarding stable ratios that market people have, that makes them lose much more than they have to at all times, is the belief is that the ratio of the stock market to some other things such as GNP or assets is too high. The former Tennessee multiple comparison people always had many such ratios to show that stocks were overvalued after 1960. The Tobin price to book value ratio is another indicator favored by the chronic bear weekly columnists, and it is always pulled out by those who hate enterprise, as one of the arguments to sell stocks when prices rise.

I recently came across two variants of this fallacy at a junta I host. The statistic adduced was that the ratio of the stock market to money supply is vastly over-inflated now. Also, the ratio of the financial part of the stock market to the non-financial part is much greater than it was 10 years ago.

The fallacies here are manifold. It is easiest to see in another context where a plaintiff sued the owner of two restaurant chains because he sold one restaurant chain for a higher value relative to sales than the second was valued at.

Some of the reasons that Tobin ratios, money supply ratios, reduced inequality through taxes, etc. are fallacies are as follows:

  1. Companies are not valued based on sales.
  2. Consumers do not have stable desires as to proportions of things that they buy.
  3. The income elasticity of demand for different products varies. As people get richer they choose more service products and leisure and financial products relative to food and durables.
  4. The value of an asset is determined by the income stream that it yields, discounted, and this is dependent on the degree of proprietariness of the product and marketing, its insulation from competition, and the value of intangible assets such as reputation and customer loyalty. Such values change over time and what was extant in 1970, or in the Shiller case, 1900, has no relevance to today.
  5. The expected future growth rate of companies is always changing, and when that growth rate translates to a higher growth in profits, the value of the numerator in price to asset ratios increases more than the denominator. It is the same idea for a reduction in expected interest rates.
  6. Physical assets time series show a high degree of macroscopic inertia, whereas price series are usually highly erratic relative to the physical series. Service firms, since they are less like physical assets, tend to show much more variability in price than firms that have heavy physical assets.

Many of these fallacies also apply to those who try to value companies based on p/e, and it is one of the major reasons that prospective studies, such as those of Value Line, always show that growth beats value. But I am sure I will have to present my detailed evidence on this before the agrarians give it up.



Dec. 8 (Bloomberg) — Scott Davies, a principal in Harrington Park, New Jersey, slept on the roof of his school after students there read 10,000 books, the Hackensack Record reported.

Davies promised to spend a night on the roof if children at the school for grades kindergarten through 8, read 10,000 books, the newspaper reported. Davies told the Record he had expected the children to meet the challenge in warmer weather.

Sam Humbert comments:

Life imitates art. This idea — wacky stunts by the Principal if the students achieve a goal — was probably inspired by Dan Gutman's popular Weird School series of chapter-books.

Principal Klutz was hanging upside down from the school flagpole! He kissed a pig on the lips! He painted his bald head orange! And now he wants to bungee-jump off the roof of the school, dressed like Santa Claus!



Rev. Thomas W. Armitage warned me that it was worse than folly to extend our plans and our operations. He was sure we were running unwarranted risks, that our oil supply would probably fail, the demand would decline, and he, with many others, sometimes I thought almost everybody, prophesied ruin. None of us ever dreamed the magnitude of what proved to be the later expansions. We did our day’s work as we met it, looking forward to what we could see in the distance and keeping well up to our opportunities, but laying our foundation firmly. As I have said, capital was most difficult to secure, and it was not easy to interest conservative men in this adventurous business. Men of property were afraid of it, though in rare cases capitalists were induced to unite with us to to a limited extent. If they bought our stock at all, they took a little of it now and then as an experiment, and we were painfully conscious that they often declined to buy new stock with many beautiful expressions of appreciation. — “Random Reminiscences of Men and Events,” by John D. Rockefeller (Tarrytown, N.Y.: Sleepy Holly Press and Rockefeller Archive Center)

Steve Ellison responds:

This is an interesting quote in light of recent posts about hubris. There are so many nay-sayers ready to give a thousand reasons that any new venture will fail, that exceptionally high confidence is an advantage to an entrepreneur. Such a person might easily cross the line into hubris given enough success. I once worked with a man who had been a high school classmate of a well-known entrepreneur. My colleague recalled, “He was the most arrogant SOB I ever knew.”



The employment announcement caused the type of big spike up and down this morning that the FED day used to cause, but since it happened pre-market, the market is thin the effect was exaggerated. The micro structural effects reveal information relating to longer term price. As with the fat finger spike earlier this year that led to the eventual retracement in full of the spike and extension beyond. For example a spike reveals that people are trying to trade news which is good to know especially when one knows when there will be market moving news and that the market is thin in advance. The orders are purposefully hidden and only a few ticks on Globex are shown at each price, but, as with the prior fat finger, the quick excursion revealed hidden information faster than the eye could see. The day session eventually retraced much of the pre-market spike. The spike may have a purgative Roto Rooter type effect and cleansing with salubrious effect. Traditionally the Doji shooting star candle technical pattern was interpreted to be a reversal if at a relative top and when at 20 day , but the spike does not seem to add more oomph than any 20 day high of any shape. Nison explains however that its occurrence in the middle of a range reduces the effect, but actually recently the “spikes” have been very bullish.



He’s back! Last night, here I was, minding my own business on the cold linoleum floor, drinking cheap tequila, when the telephone rang. It was Boca Biff!

Boca Biff has been licking his wounds. When we last heard from him, Boca Biff’s largest trading position was long crude oil futures in August, 2005 — just in time to witness a $13 drop to below $60 per barrel by year’s end!

Though he also purchased Google (GOOG) (”It’s going to $500, Dougie”) at around $300 per share, last summer, his largest individual equity position at that time was in the (all too) common shares of Pulte Homes (PHM) (which he virtually top-ticked at $46 per share at the same time), and coupled with the disastrous crude oil futures trade, this left him without coin.

He promised his family — who apparently could no longer tolerate the ups and downs — that he wouldn’t again venture into the stock market. Nor would he speculate in homes and land. However, after casually responding to one of those spam emails to refinance his home from an eager mortgage broker that was about to go out of business (he’s got a beautiful old Mizner-style home in Boca!), he found himself, very soon thereafter (in early 2006), with about $1.5 million of loose change.

His wife forced him to give the proceeds of the refinancing cash out to a mutual friend, Baron von Broker, who dutifully put these monies in a money market account and far from the hands of Boca Biff. When the market bottomed in the spring, Baron Von Broker turned bullish and encouraged Boca Biff to buy oil and gold stocks (two sectors that he correctly felt had promise). True to his promise to his wife, Boca Biff demurred and kept his monies in the money market account.

As Boca Biff related in our telephone conversation last night, he watched and watched the market’s unrelenting rise through the summer and into the fall until he couldn’t take it any more and finally made the plunge last week … on margin! Stated simply, Boca Biff is trying to make back his accumulated $20 million+ (this is the truth!) by purchasing a package of out-of-the-money calls on a group of high beta stocks that recently have made a 52-week high, including Apple Computer (AAPL), Goldman Sachs (GS), Merrill Lynch (MER), Google, First Marblehead (FMD), Fairfax Financial (FFH), Research in Motion (RIMM), Allegheny Technologies (ATI), U.S. Steel (X), (BIDU) and Las Vegas Sands (LVS).

His Rationalization? Global Liquidity and a Tip From His Driver He tells me the notional value of his calls (if exercised) exceeds $30 million! When asked why now, Boca simply said, “Don’t be a moron, Dougie: It’s global liquidity. Don’t you get it?” And then he actually said to me that he heard from his driver that General Electric (GE) will receive a bid by a private equity sometime in the next six months. I should add that Boca Biff transferred all his money from the money market fund from Baron Von Broker (who being a conservative and intelligent fiduciary, refused to accept Buff’s aggressive strategy) and purchased the call positions from a newly formed, Boca Raton, Florida-based brokerage, Penny, Shark & Oakmont. I should also add that Boca Biff is currently being divorced by his wife.

Stay tuned.



… empirically observed power law distribution of limit order prices. In the framework of the model, the most likely proximate cause of this power law is a power law heterogeneity of traders’ investment time horizons.



I was in a meeting a couple of days ago, discussing possible and likely investments in auto stocks. The clients I was talking to are pilots or ex-pilots and close to being pros in terms of financial awareness. At one point I noticed that all the attention was on the quality and the looks of the cars built by this or that carmaker. None was even considering if the prices the companies were trading at, were reflecting and discounting present or future profits. I tried to focus everybody’s attention on the fact that, it is not necessary to like the product a company sells, in order to invest in that company. Indeed I had a very hard time. The question is, are we capable of clearing our prejudices in such a way that we will be able to invest in a company even if we dislike its products? Take the recent Alx@xel-Lucx@x merger — If you have ever operated with an Alx@xel telephone you probably want to sell the company short, yet at prices below 10 and widespread bloggers bearishness, I was keen to like the stock with an upward bias (By the way are bloggers a good contrarian indicator?)

The point is not to pat myself on the shoulder because the stock is trading at 10.5. As I have often pointed out, I am always ready to recognize and talk about my mistakes, past and present.



This paper has an interesting comment:

We find interesting systematic shifts over the business cycle in the size of the market betas of so-called value stocks relative to growth stocks, suggesting that the former are systematically perceived as more risky than the latter, which may help to explain the puzzling ‘value premium.’

Of course, if value stocks were not perceived as more risky, their risk premium would be lower, and hence the stocks would be higher priced and no longer value stocks. Nevertheless, the overwhelming majority of investors believe that growth stocks are more risky than value stocks.

Allen Humbert comments:

Steve Ellison’s post reminds me of a study I have always wanted to conduct, but have failed to get around to (I don’t know why, I guess I have ADD) that would look to adjust returns by the underlying leverage of the companies (I suspect the debt to equity ratios of the average value stock are significantly higher than a typical growth stock). Since debt increases the probability of bankruptcy, since a low profit company with no debt cannot be driven into bankruptcy, value stocks are in fact riskier. I therefore hypothesize, and experience suggests, that value stocks outperform the most coming out of a recession when default rates are high. It is this fact, that I think makes high flying stocks, no matter how inflated the prices, poor shorts. A debt heavy company in trouble leaves everyone fighting for the last piece of flesh, hence the massive declines in the last dying days like when I lost $1 a share in the 15 minutes before the Enron bankruptcy (at least I didn’t loose the final $2.85).



Key in rescue of stranded family (CBS news):

Searchers rescued Kati Kim, 30, and her daughters Penelope, 4, and Sabine, 7 months, along a remote forest road Monday afternoon. The key to finding them, police said, was a “ping” from one of the family’s cell phones that helped narrow down their location. Though cell phone signals are rare in the area, reports Blackstone, the family’s phone connected briefly to a distant tower as it received a text message. That gave searchers a place to look.

According to one of two cell phone engineers who honed in on the Kims, the chance of the split-second signal making it through the rugged mountains was “very slim.”

“It was just a hunch that we could help. And we followed up on the hunch,” said Eric Fuqua, 39, an engineer for Edge Wireless LLC who contacted authorities to offer his services in the search. Edge Wireless provides cell phone coverage in southern Oregon, and is a member of Cingular Wireless’ network.

Fuqua and co-worker Noah Pugsley started digging through computer records of cell phone traffic Saturday and learned that one of the Kims’ cell phones had received two text messages around 1:30 a.m. on Nov. 26, the day after the family was last seen at a restaurant in Roseburg, Ore.

The engineers were able to trace a “ping” from the Kims’ phone when it received the text messages. They located not only the cell tower in Glendale, Ore., from which the messages were relayed, but a specific area west of the town where the phone received them.

With the family’s possible location narrowed down, the pair used computer software to create a map predicting what parts of the mountainous region received any cell phone coverage at all.

Fuqua then relied on his extensive experience traveling the heavily forested back roads as both a fisherman and a technician, he said, to guess the course the family may have taken as they headed from the mountains toward the coast.

The engineers’ sleuthing led searchers to focus on Bear Camp Road.

Kati Kim and her daughters were found with their snowbound car just off that road, which Fuqua called “impossible” terrain to navigate for anyone with no knowledge of the area.

The complicated network of roads in the area is commonly used by whitewater rafters on the Rogue River or as summer shortcuts to Gold Beach - the Kims’ destination when they went missing. The roads are not plowed in winter.

Searchers were lucky that the Kims received a cell phone signal at all in an area with “very, very sparse coverage,” Fuqua said. “Every now and then, if you go slow enough, you’ll hit our towers for just one second in that one spot,” he said.

Details of the contents of the text messages and who sent them have not been released.

But law enforcement officials said the engineers’ analysis of the messages was the critical breakthrough that searchers needed to ultimately spot three of the Kims by helicopter as Kati Kim waved an umbrella marked “SOS.”

“From what I understand about (Fuqua’s) help in this case, as far as I’m concerned he’s a hero to me,” said Inspector Angela Martin, who led the San Francisco police’s investigation into the Kim’s disappearance.”



We’re proud to welcome Nemo Lacessit, a Chicago boulevardier and bon vivant. Nemo will periodically review notable New York, London and Chicago restaurants for the edification of DailySpec readers.

My Credo: Food and restaurants have nothing in common; if you’re looking for one you won’t find it with the other. If you seek food as sustenance you have no business in a restaurant — go to the grocery story, fast food joint, buy something and eat it. The language of restaurants can be used to accentuate life. Among many things restaurants can be sensual, strict, joyous, pragmatic, irreverent, as well as conformist. They can provide a source of importance escapism and giving us pause from our daily life. My attempt here is not to review restaurants in the neo-classical way but to leave the reader with the theme of the establishment against the backdrop of its cuisine.

DeLaCosta (312-464-1700) 465 E. Illinois Street, Chicago

If one were lucky enough to date a Brazilian supermodel the first dinner would have to be here. Chef Douglas Rodriguez (who neither knows me nor I him, but I decided to drop his name in a vain attempt to gain gastric legitimacy) must have a “sexiness ratio” for waitresses as part of his business plan. The 12,000 sq. ft., three-sectioned rectangle consists of two ceviche bars, a solarium and private cabanas (each with its own bar and bartender). The idea is Vegas plus Miami lounge with a restaurant sprinkled in the middle; all set on Brazilian tigerwood flooring with marble/glass separations. A little like Ian Schrager meets Giselle Bundchen on their way to Victoria’s Secrets.

Cocktails are irreverent by design: mojitos, sangrias and martinis are the staples, followed by variations on the same themes. On the higher end are various champagnes and pinots that have made their way to “Latin fusion” restaurants everywhere. Again I revert to the Brazilian supermodel’s basic needs: fruity expensive liquor, small portions of “unique” foods, and sexy ambiance. The food is mostly tapas-like and ceviche, with more substantial fish plates (oil poached halibut and adobo rubbed tuna) as well some meat dishes found in the southern provinces of Brazil/Argentina.

If you had a bad day, DeLaCosta is where you want to be afterwards. In town, but wanting to get away from Chicago’s meat & potatoes centric fare, this will give your palate a change. For business types, leave the ties behind and have a caipirinha and a mojito, smile at the waitress (yes, they smile back!) and don’t spoil the mood by talking about whatever it is you think you do. This is not the best business/power dinner spot in town. You can eat a full meal at this restaurant but what’s the point? You are really there for the ambiance. And what a wonderful one it is.




Neither does it take into account the quantity theory of money, where if one sector is reduced, that is because another has risen: p1 x Delta q1 + p2 x Delta q2 = 0. The declining share of our GNP that manufacturing holds is part of a secular trend of less skilled manual labor requirements being replaced by more highly skilled, humanistic roles. Because outsourcing is a common part of this trend, as well as just-in-time inventory management, the normal statistical problems of assessing monthly figures can become confounding. The mistake that “Doc” Greenspan and his 90 year old followers make is in believing that the value of the American economy can still be measured in the blast furnace statistics they used to study in their youth, and still look at in the bathtub…

This pessimism on the US economy and the need for manufacturing is based on many other fallacies too, and what an opportunity it provides, when durable orders or factory orders go down, for Doomsdayists who have not studied choice and substitution to try and bear down the markets. This is all for much the same reasons that Doomsdayists hate immigration — the more obvious/material things are so much easier for them to try to understand.




Here’s the header:

New EIA Outlook Reflects Energy Market Shift towards Nuclear, Biofuels, Coal-to-Liquids, and Accelerated Efficiency Improvements.

But …

Despite the projected rapid growth of biofuels and other non-hydroelectric renewable energies and the expectation of the first new orders for nuclear power plants in over 25 years, oil, coal, and natural gas are nonetheless projected to provide roughly the same 86 percent share of the total U.S. primary energy supply in 2030 as they did in 2005 absent changes in existing laws and regulations.

And in Julian Simonesque fashion, prices will be very much the same in 2030 as they are now. For just about all forms of energy except natural gas which will be cheaper.

An interesting read with the only disturbing factor being the number of times the EIA must qualify its predictions with the potential impact of “Possible future changes in energy or environmental policies…”

Along those lines, the Senate today pulled the bill meant to make more of the Gulf available to oil and gas companies — largely as August members being hammered by the Greens lost their nerve. And, my wife tells me, Mr. Green himself, the man who would president if he could have carried his own state, Al Gore, is spouting off on Oprah’s daily piece of puff.

Read More



Manhattan Apartment Prices Jump 6% in Third Quarter

Dec. 6 (Bloomberg) — There’s no housing slump in Manhattan, according to a survey from the Real Estate Board of New York. The median price of an apartment in the most expensive urban real estate market in the U.S. rose 6 percent in the third quarter to $767,000, the board said in a statement. The East Side led the way with the highest median price per square foot. Manhattan prices rose even as they declined in rest of the country. Nationwide, the median price of a previously owned home fell 3.5 percent in October to $221,000, the biggest year-over- year decline on record, according to the National Association of Realtors, the largest industry trade group. Today’s New York figures contradict an October report by Miller Samuel Inc., the borough’s largest appraiser. Its data showed median prices fell 4 percent to $845,147 for the quarter. The real estate board’s numbers are compiled from a confidential survey of brokers and from public records. The board represents commercial and residential landlords in the city.

The neighborhood with the highest median price per square foot was the East Side, where it was $1,100, a 9 percent increase. The West Side came in second at $1,050 per square foot. There may be no end to rising New York prices thanks to low unemployment, low crime rates and rising population, said Michael Slattery, senior vice president of the real estate board, in an interview. “There’s no area where new investment is not likely to occur.” New York’s crime rate plunged 71 percent since 1993, according to police department data. Manhattan’s population rose 1.8 percent to 1.6 million from 2000 to 2003, the U.S. Census Bureau reported. Real estate prices are strong throughout the city. Median prices for East Side condominiums soared 45 percent to $1.35 million. First-time buyers seeking a toe-hold in the surging New York market pushed the median price in northern Manhattan neighborhoods to $558,000, a 60 percent spike, the board said. Northern Manhattan includes areas such as Washington Heights and Inwood.

“What they are getting up there may be a larger apartment for less money,” Slattery said. “They are willing to be pioneers in an emerging neighborhood.” The median cost of East Side co-ops rose 13 percent to $856,000 and downtown the number jumped 20 percent to $662,000. Two-thirds of the Manhattan market is made up of co- operative apartments, where tenants own shares in a corporation that owns the building. Residents of those properties elect board members who vet the finances and personal circumstances of applicants before they can buy a unit. By contrast, condominium residents own their apartments rather than shares. New York co-op boards twice rejected former U.S. President Richard M. Nixon in 1979 because of concerns about having Secret Service agents in the lobby, according to Steven Gaines, author of “The Sky’s the Limit: Passion and Property in Manhattan”



Some of us are kicking ourselves for not having slavishly followed the Almanac, which shows that November has historically been a bullish month.To what extent are the Almanac observations predictive, and how would we have done over the years if we had used Almanac-like data as it was available at the time, to guide our market bets? The following study takes a quick look at that question.

I looked at monthly returns of the Dow Jones Industrial Average (ignoring dividends) going back to January, 1959. Each month, I paired that month’s percent return (”Y”) with the average percent return (”X”) of the previous 10 instances of that same month. For example, I paired the October, 2003 return with the average of the returns from October 2002, October 2001, October 2000…October 1993. An Almanacian approach would be to say that if the prior 10 Octobers have been good, then this one is likely to by good as well.

It turns out that there seems to be some value in this approach. The regression is of the form:

Y = m*X + b


(This month’s percent return) = m*(average of prior 10 instances of the month) + b, and the result is:

Y = 0.184*X + 0.495

There were 573 months under observation (That’s about 46 years times 12 months/year). The adjusted R-squared was about 0.2%, meaning that the prediction “explains” only about 0.2% of the observed variation. The observed slope has a t-score of about 1.5, which indicates that there’s about a 14% chance that a slope this large or large would come about through randomness alone. That doesn’t meet most thresholds for “statistical significance”, but it’s not too far from it.

Below are the few most recent rows of data.

Date Month Dow close Dow % change Avg Dow % change over prior 10 instances of that month
08/31/2006 8 11381.150 1.748 -1.809
09/30/2006 9 11679.070 2.618 -2.162
10/31/2006 10 12080.730 3.439 2.965
11/30/2006 11 12221.930 1.169 3.750
12/31/2006 12 NA NA 1.489

For the month of December, the predicted return is 0.495+0.184*(1.489), or about 0.77%. This approach was correctly bullish in October and November but missed the rallies in August and September.

I’d conclude that it looks like there might be a little bit of value in this particular Almanac-like approach, but not much.

Stephan Kraus Responds:

Thanks for that interesting article. Since I find it hard to evaluate such effects on their own, I calculated the sum of absolute deviations between the seasonality-based forecast and the actual performance, using the same data set and 10-year period as you did. In addition, I calculated a non-seasonal forecast based on all monthly returns during the previous ten years, i.e. 120 observations. Surprisingly, the sum of absolute deviations for the non-seasonal forecast is smaller than that of the seasonal one, even though the difference is small and probably not statistically significant (though I didn’t test that yet). The seasonal forecast is the better one in only 210 out of 456 months, or 5.5 months per year. Using a 5-year look back period, that spread widens, and the seasonal forecast is only better in 211 out of 516 months, or less than 5 months per year.



Economic geography plays a major role in world affairs. Geography is critical to whether a group can survive independently.

Water in quantity, during specific seasons that coordinate with sunshine, is extremely important to whether sufficient grain can be grown to support a group, a tribe, a nation.

Soil is another component to consider in the survival equation. Soil quality is not equally distributed around this planet.

So for Russia to have leverage over other geopolitical entities in regard to grain exports Russia must have the necessary conditions to grow grain in the quantities necessary. The geography of Russia puts the lie to any story maintaining that Russia can use grain as leverage in political and economic areas.

Soil, rainfall, sunshine, these are the ingredients in cereal. Russia does not have these in an efficient mix.

America does.

On the oil issue, I have no idea what our native reserves are. But Russia can’t operate oil and gas fields on an empty stomach.



Russia named its price yesterday for providing help in the investigation into the death by poisoning of Alexander Litvinenko. It demanded that Britain hand over the enemies of President Putin who have been given asylum in London. [Read More]



Last year about this time, during a growth versus value debate, I put together a list of all the companies you could buy for the market capitalization of Google. I thought it might be fun to take a look at the results. Here’s the list of stocks that last December you could have purchased in entirety for the cost of owning Google:


All of these were stocks with one of more of the value characteristics, i.e. low price to earnings, low price to free cash, low price to book value, and were down in price and were on my watch list at the time. As a group they returned over 24% for the year.

Google? Not bad. Up about 17% over the same time.

More interesting to is what you got for your money. Google has reported earnings over the time of $2.4 billion and operating earnings (operating earnings + depreciation - capex) of about $1.8 billion. The portfolio had reported earnings of almost $9 billion and operating earnings of over $15 billion.

And Here is the list for this year. For the Google market cap of $150 billion, one could today buy in entirety:


Google has about $3.5 billion in operating earnings, whereas the portfolio sports $16.5 billion or so. If Google can continue to grow at 30% a year for seven years their operating cash flow will surpass that of the portfolio… providing the portfolio rate of return remains stagnant and none of the excess $13 billion of operating cash flow is reinvested at any reasonable rate. Should the portfolio rate grow at the 10% level, not unrealistic considering the amount of excess available for reinvestment, it takes Google 10 years to surpass in operating cash flow. Again, assuming Google can grow at 30% for 10 years and no one comes along with better or new technology and reduces their competitive advantage. Of course we all know that in the stable world of technology that is unlikely to happen.

This is a very back of the envelope study, and the portfolio companies are picked because I know them and they all have one or more value characteristics.



It would have to start like an Oklahoma sunrise, all encompassing and full of promise. You would be surrounded by miraculously brilliant hues illuminating and energizing the days work.It would have to captivate the mind like the Trans-Siberian Orchestra playing Christmas Eve in Sarajevo; harmonies and cadence that pound in your head long after the music stops. Your steps throughout the day quicken to complete that last beat of the “Merry, Merry, Merry Christmas” as it repeats over and over in your head.

All this would have to be done with the millions of commonplace everyday transactions.

Yes, some chapters would have to plummet like the air temperature on a clear winter night. But even then each transaction is like the runner drawing in the frigid fresh air to power each step. To fully understand, you must trace each dollar effect, like the frosty mist dispersing on the exhale, to the four corners of the earth. Each particle’s bouncing path would have to be followed, so we could see that every break-through thought contained some of the same oxygen of our runner.

But most chapters would illustrate the steady progress and beauty of each step in the myriad of trails man has run. Like a December marathon, win/lose, finish or crumble, each individuals story would have to be told. Why they choose to battle the elements to understand their hopes, dreams and needs.

The morale of the story would have to be as clear and revealing as a full Christmas Eve moon, telling which families has been naughty and which have been nice. For each price, the book would have to illuminate how the millions of Moms and Dads had worked extra hard, which of them had dreamed the biggest, and who were the most creative throughout the past year.



I recently read Victor’s review of  Escape from Hunger, and the item which intrigues me the most is the increase in life span in the last 100 years. I believe, unfortunately anecdotally, that improved dental care plays a huge role in this improvement.Why do I assert this? I am a practicing veterinarian who has observed an increase in lifespan of dogs and cats since 1988-89. At that time veterinary medicine became aware of the role of dental health in pets (and the ability to make money there from.) Before that time, the average lifespan of older dogs seemed to have been 12-13 years. We now expect the same pets to live 14-15 years.

The underlying medical reason is fairly simple. Infected teeth are a source of bacteria which get filtered in the kidney, heart, lungs and liver causing those essential organs to fail. Better dental care delays problems in those organs and thus adds to lifespan and overall good health.

Of course, other causes must be studied also. Not the least important is the fact of young age spaying and neutering (which I strongly suspect is not a cause of increased human life span!)

Perhaps someone in an academic setting could document the statistics to substantiate this assertion.



Programming languages are cool. Love them. Like them. The most important languages are Prolog, ML, and Haskell. The best ideas are represented there. The problem being that people imagine that somehow a language makes programming easier. It does not. But the hope remains. The major abstractions are function calls, garbage collection, exceptions and objects. Once one leaves the safety of the fire, there are language features like monitors, first order types, first order functions, functors/module systems, dynamic scoping, unification (Prolog only), annotations and then one gets into the really rare toy features. Way back when, garbage collection was considered a toy feature. (The chip provides the number, operation and memory abstractions.) The language exists for the writer, not the computer. So many language features are written with the expectation that somehow the author's task is made easier. In order to do this, the features have to be "different" (orthogonal) rather than just syntactic sugar. Reducing keystrokes is nice in the beginning but the real power is doing stuff that simple keystroke reduction cannot do! Like creating functions at runtime. Or creating interconnected packages of classes and objects at runtime by inserting meta-parameters of types and data. (Macros on steroids.) Features like that permit one to not have to create all the support code to make it happen in your own way. One can look at the source code and go "oh, this is what is happening" as the language demarcates the parts that truly vary and the parts that are simply different! A handy library can do all this work. But then the library better be a standard library so that it is not just some other pile-o-junk with suggestive function names. So the difference between a well developed library and a language feature is minimal. In fact, the only language feature that cannot be implemented as a function is short-circuiting AND and OR… C++ has too many language features. (Arguments ensue). And C has so few it is amazing that is all one really needs. But without their standard libraries for string manipulation, I/O, POSIX compliance, etc., these languages would be nothing but curios. I really want to spend my time writing in ML, the funkiest. It is has great libraries but not enough to keep me from having to write library wrappers. Haskell provides the highest meta-abstractions I know of but it is not widely used so its practicality is lessened (but oh, one can show how smart one is by orchestrating amazing meta-programming abstractions to make the compiler write the program for you). Prolog is prolog, if the problem is expressible in prolog there is no reason not to use it, the debate rests on whether anything useful is expressible in Prolog… In conclusion, the best advice find tight library functionality and stay close to C/C++/Java. C# is more marketing than stable. Behemoth libraries get spooky. If you are trying to write web services, then Ruby-On-Rails is way cool. But if you are hankering for a real server, then C/C++/Java are mandatory. Java servers are freakish mounds of code to the uninitiated. A good old C server was demonstrable in 200 lines but the expectation of servers has increased infinitely since the Internet Bubble!

Sam Humbert adds:

A good, practical intro to Haskell has been rolling out on Mark Chu-Carroll's blog. The tone of it isn't "for dummies," but it's clear and direct. Even I can make some sense of it. Haskell is arguably the most important of the newer (i.e., non-Lisp) "functional languages". It's kinda-sorta like Python visually, and has some similarities to R, which has itself been accused of being a functional language.



I have spent one week of my life in an Amish home. I was the guest. That family appeared to me to be wholesome, content, perhaps quite happy, and solidly into their lives. The lifestyle questions you might ask may well require you to be an Amish man to understand. And from the joy in that household, that Amish husband gave me to understand the nature of joy was robust. He knew how to keep an Amish woman happy. She was most loving to all in that home. You need to understand Amish cultural life.

Fred Crossman quips:

How do you keep an Amish woman happy?

Two Mennonite.



Not too many days ago the New York Times published an article by Mark Hulbert which claimed some credibility for certain phases of the Moon’s cycle to be more profitable than others. In particular the academic paper cited claimed to show evidence that buying the market during new Moon phases was more profitable than full moons.

The Moon has the following cycles besides the roughly 12 hour daily tidal cycles:

To evaluate whether this cycle was even plausible, the correlation between market days 18, 19, 20 and 21 day s apart were considered. These would correspond to calendar day lags of 26 through 30 days. Data used were the Dow Industrials ln of the price relatives based on adjusted closes going back to 1950. This was a total of a little over 14000 daily observations.

Lag Correlation
18 -.24%
19 -.71%
20 .11%
21 -.81%

All of the above correlations are less than 1% and are clearly quite consistent with randomness.

A review of the Saros cycle of 6585 days using trading day lags of 4545 through 4558 yielded the following correlations:

Lag Correlation
4545 -.84%
4546 -.36%
4547 1.21%
4548 .85%
4549 -.64%

Again we have a result which is completely consistent with randomness. One wonders if studying moonbeams too long can lead to lunacy.



One of the biggest things you hear discussed in deer hunting, is that certain lunar cycles are more conducive to deer hunting. Most fisherman should be familiar with these cycles as they’ve been discussed in the fishing arena for years.

The basic tenet is this: Animals tend to feed when the moon is either overhead or underfoot. I would say that there seems to be some anecdotal evidence to support this theory, but my personal experience is such that I can neither confirm or deny the theory.

I have noticed though, in reference to the moon, that the brighter (fuller) the moon is, the less I see deer during the day. My theory for this is that deer feed more on nights when they can see better than on nights when they can’t see well.

What seems to matter the most, though is the weather. If it’s a night when the bright full moon is obscured by clouds, it has the same effect on deer feeding cycles as does a clear night when there is a new moon (no moon).

If the wind is blowing hard during the supposedly peak moon phase feeding times, the deer will lay low. If the wind lets up during a supposedly bad feeding time, the deer will move.

I wonder if there is any correlation between weather and human behaviors in the market. Intuitively, there seems to me that there would have to be. For instance, I’ll bet that there was a lull in trading activity from Missouri due to the ice storm.



Well I was shortin’ the spooz
Down in the pit with the blues,
Had some sells on the NASDAQ too,
When in walked a man
With some buys in his hand
And he was looking for you know who
He said, hey there fellow,
With the hair colored yellow,
Watcha tryin’ to prove?
Cause that’s my market there
And we’re all bulls down here
So this might be it for you.

I was scared and fearing for my life.
I was shakin’ like a leaf on a tree.
cause he was lean, mean,
Big and bad Bull just
Buyin’ those spooz from me.
I said, wait a minute, mistress
She didn’t even listen.
Don’t want no trouble with you.
And I know you don’t owe me
But I wish you’d let me
Ask one favor from you.

Won’t you give me three points,
Gimme three points mistress
Gimme three points towards the floor?
Gimme three points
Gimme three points mistress,
And I’ll never short you no more.

Well the crowd cleared away
And I began to pray
As the spooz moved toward the floor.
And I’m telling you son,
Well, it ain’t no fun
Bein short from a ninety-four.
Well she turned and dropped them to new lows
And that’s the break I was looking for.
Yea, you could hear me screaming a mile away
As I was headed out towards the door.

Won’t you give me three points,
Gimme three points mistress
Gimme three points towards the floor?
Gimme three points
Gimme three points mistress,
And I’ll never short you no more.



What is the limit between a sane passion for something, let’s say trading, and some form of obsession, not to say dependence. How do we discern the scientific quest for markets’ inefficiencies, conducted with determination, and the dream of a Don Quixote fighting the windmills without either skill or knowledge? It is difficult to say.

You do not reach significant results if you do not have significant objectives. You do not have significant objectives if you are not a dreamer.

Success might be a way to measure and define the difference between passion and determination. If you are successful you can say that your passion and determination brought you to understand the one market inefficiency sufficient enough to make a living.

After several years of frustrating tests and losses the same determination might be defined as obsession and dependence — the dream of a better life searched for without method and skill.

Dr. Mark Goulston adds:

GM Nigel Davies comments:

I think that people become passionate about what brings them success, appreciation by others and therefore self-respect. The ‘winner’ concerned will most likely become dependent on that feeling and the activity that produces it, working passionately to maintain or increase it.

Of course you will hear many other reasons for the pursuit of excellence in something, but probably these are more carriage than horse. And the glorification of the field concerned is usually just more fuel for the ego, whatever they say.

This might explain why trading success is so elusive. The drive to succeed is ego based whilst the ego itself must be subverted to logic and method. Not an easy trick to pull off.

Russel Sears mentions:

Often the line between insanity and passion is when the effort and work becomes the goal instead of the outcome.

For runners they often become obsessed with “mileage” and have to run so much per day or week regardless of physical condition. Ron Hill, was the prime example of this. He was a British marathoner who never really achieved his best, and his obsession to mileage cause a very up and down career. Now rather than his performances, he is best known for having the longest documented running streak for consecutive days. Running through sickness, car accidents, even knee surgery, hobbled on crutches for 2 miles.

Again the obvious connection to overtraining and over trading. Learn to rest and recover.

The other line is being objective enough about your talents that your passion does not blind you to opportunities.



The first Swede in space knows just what to serve his astronaut colleagues for dinner: moose and crisp bread. Christer Fuglesang, who is set to become the first Swedish astronaut to embark on a space mission next month, said Thursday he will bring a decidedly Scandinavian flavor to the food menu aboard the International Space Station … [Read More]

Fuglesang completed training as astronaut at the European Space Agency in 1993, and at Nasa in 1998. He has since been the poster boy for always being in the back up crew or not getting flights, and then when he finally got scheduled a flight with the shuttle, there was the accident which threw his entrance into space back another few years. He has been a target of endless jokes from standup comedians and such in Sweden for almost a decade now. Well, no more, now he is getting press as the guy who never gave up, as he is bound for space on thursday … [Read More]



Faced with the din of a booming metropolis, urban birds sing shorter and faster songs than their rural counterparts, according to a new study. These city dwellers even adjust the pitch of their voices to make sure they’re heard above the ruckus. Read more here …



In the absence of news, the markets will continue to move. This makes volatility an important market valuing tool/counter. Further, volatility is not the simplest concept to grasp, it is counter intuitive. Unlike the laws of motion that stay in place until changed by an outside force or friction, this does not apply to volatility. In some ways the market acts internally, generating its own swings, but people have a tendency to assume some sort of causation/correlation with events around the same time.

The conservation of volatility may come from the number of players/population of market participants. When prices gyrate it attracts attention. As the group of traders increases they are likely to arrive at an average price at a faster rate than the previous fewer players who kept trading (as opposed to holding positions/cash).



Probably one is the last to know, a sure sign of the top, but as of this week I now spell ‘prosperity’ K-u-a-l-a L-u-m-p-u-r. From the moment I looked out the plane window at the endless new construction, to anecdotal evidence during dinner with the Deputy Trade Minister, and several “Datos” (the equivalent title to a British knighthood, bestowed by the Sultan), it is everywhere. The big news here is the merger of three palm oil plantations to create a US$9.8 billion behemoth, suitable for world-scale institutional investment. Palm oil seems to have acquired new respect as a healthy cooking ingredient, as well as a suitable bio-additive to diesel.One hears, of course, the boom is happening all over India as well, but reading about it in the WSJ in my overstuffed armchair vs. feeling the buzz up close are viscerally dissimilar …

Ryan Carlson adds:

Perhaps a lot of the construction in Kuala Lumpur is the lead up to the 50th anniversary of Malaysian independence which will be celebrated in 2007.

From a short visit to K.L. earlier in January this year, I never encountered an honest cab driver, and as a rule wouldn’t invest in a country with such experiences. If I can’t trust the local population with a $5 transaction, I wouldn’t sink thousands into their stock market. However, I’m a huge bull on Singapore.



If an all seeing eye could write a book about just one day in the life of the S&P, it would cover the gamut of emotions, strengths and weaknesses, goals and values of millions of people. Let me suggest a few chapters.

The next chapter would be the surprise. The book started the like a Louis L’Amour pulp novel, making sure that the reader was scared out of his wits with action so that he did not turn to the next chapter, (going down 19 points), the most exciting symphony you’ve written since July of 2006. But then, as always, everyone who was scared out loses money, and the big boys who like to snore as a fine art, make money by buying and holding, or taking out the canes on Monday at the close.

The third chapter would be about how, in the country of good fishermen, the technical traveler handballist, prize fighting, archaeologist, swing trading, buying the dividend yield, 800 winning trades in a row, ‘how to turn 1 buck into a million in a years’, person never fishes in the same spot twice because the crocodile has a very good memory. It gets hungry every week or so, and knows where you were fishing the last time, and then jumps out of the river at 1000 miles an hour to drag you under. By buying at the lows on a Monday or at down 5 on a Wednesday or Thursday, like at 1395ish last week, you were greeted with a nice 10 point profit. But then of course, never fish there again, because when you try to buy at 1395 on Friday, like you did on Thursday, Ha Ha, the joke is on you. Margin call, margin call, the little woman is not happy and cancel the vacation. You are immediately confronted with an 8 point loss when you do that.

The fourth chapter is about higher physical laws that are universal in all fields, and apply to human actions, the way Banks — the Abelson of fluid dynamics — says they do. Let us start with the universal law of gravity. The earth weighs so much more than you, and you are attracted to it — the same way that 1400 weighs so much more than 1403, which is why we have to play the round number game. So far there have only been 5 swings back and forth, above and below this round number, so of course let us end at 1400.40 for the week, just because there is a little error of measurement. The market mistress likes to pretend that she is unfathomable, so does not give you exactly 1400 or else you might think that she is losing her luster.

The fifth chapter would be in honor of our friend Mr. Rumpole — “Why is it always romance?” Yes, “Why is it always bonds?” They closed at a 20 day high, 5 days out of 6 last week, at 113 .47, 113.59, 113.88, 113.69 (but a high of 14.06), 114.41, and 114. 56 respectively, the last being an 11 month high, but still 1/2 a point below the high for the year. All good men must exceed this on the last day of the year, just for the sport of it all. But oh, what secrets lie in these new highs in bonds, and what strength it puts in to pulling the related iceberg along to its ultimate destination, to the cries of agony from the bears..

The sixth chapter would of course be the agony, the utter torture that the bears are being put to. Just when they were totally on their backs, at least the ones that trade, and Alan Abelson himself was sent out to vacation and recuperation because he had been wrong every week since he came back from his last holiday in mid July, ( He had been calling for a secular and cyclical bear market again and again, and finding one friend after another to be bearish — even a friend who was bearish because the frequency of the use of the word “Goldilocks” had shown variations from week to week — giving each other new hope). Is that not always the way. The old man at 85 still makes a pass at the nurse . Yes, the Monday move, was beautiful to the bears. It was the biggest decline since the Israeli-Lebanese War broke out, and it showed as far as they are concerned, among other things, that the plunge protection team was out of work after the election, and how nefarious their efforts had been in the past. Widely disseminated by their Elizabethan and prudent followers, the bears hope was that this was just the beginning. But the hopes, the hopes… Why did the bond yield have to fall so low, and why does it always happen that when you can make 6% more on equities than bonds, some institutions are going to opt for the former?!

The simplest chapter of the book would be “There is no such thing as a free lunch.” All the easy ways of making money are hard. The fixed systems are ephemeral, they are discounted and anticipated. Seasonality do not work, nor do such things as the ‘average low in October is 8%.’ The September close is non-predictive, nor can you make money by finding a 5 day period in which the market goes up, even though the only thing the Almanatarians and the Elizabethans agree on is that the market will hit 500 because of all the bad things in the world and because seasonality works.

It is well known that the total move in the stock market futures over the last 7 years of some 300 points is accounted for by a certain day of the month. And it was well known last year, and before the first revolution in the list, when the Agramacatarian left, how his subscribers made money by buying at the close of that day. And the Elizabethan would tell us the week after it happened in June or July how 11 of the last 11 expirations were down et al., and yet, here are the first days of the month this year:

Date Change Date Change
1/3 20 2/1 04
3/1 10 4/1 02
5/1 -08 7/3 09
8/1 -05 9/1 07
10/1 -05 11/1 -10
12/1 -03    

Anything that has not worked in 7 months, one is tempted to call dead in water.

I believe that you get the picture of what a great book this would be.



Abelson:: Not in. We hope he is well. Randall Forsyth writes instead: Various political intrigue around Iraq. Nothing you haven’t read elsewhere. The dollar is declining, tourists are all over NYC. Nobody really wants a weaker dollar since everybody depends on exporting to the US. Foreign Banks furiously buying dollars. Central Banks with large reserves face losing money on all of their dollar investments. Big carry trade in Swiss Francs. people borrowing at 1.75% to invest in other countries … threatens a big blow-up. Kind of like everybody borrowing when the Feds were targeting 1%, now they are paying the piper. Grants says foreclosures are up 42%. The ISM was down, but some guys says that its just a sign of a classic mid-cycle slowdown, and not a hard landing. this is good for stocks once the tightening stops. HD could be the target of a PE buyout. The bond market rallied. The sky is falling.Page 18: Follow-up section: P&C insurers are going to see big earnings gains, you should have listened to us and bought some in July when we told you to. Three years ago we told you to buy Ralph Lauren, it has done well since, and looks like it will continue to do well. Last year we told you to buy Direct TV, you should have, it is up. It’s still undervalued.

Page 20: advertisement by Bristol Myers Squibb: Big photo of Lance Armstrong. If you like him, you should like us.

Page 21: Copycats like to track what the hot hedge funds are doing and copy them. We tell you how to do it. The ones people copy most are Appaloosa, Greenlight Capital, Lone Pine, ESL, and Icahn Partners. You can copy them by looking at their 13-F reports.

Appaloosa’s 3 biggest holdings are Oracle, Micron, and Applied Materials, recent addition AMR, recent sale Mirant.

ESL’s 3 biggest are Sears, AutoZone, and AutoNation. no recent additions, no recent sales.

Greenlight’s 3 biggest are Ameriprise, Microsoft, and Hospira. Recent addition of First Data, recent sale of Live Nation.

Icahn’s 3 biggest are TWX, Imclone, and American Railcar. Recent add of Hilton, recent sale of Symantec.

Lone Pine’s 3 biggest are Brookfied Asset, GOOG, and Comcast. Recent add SLB, recent sale Research in Motion.

M3: In case you were hiking The Sneug last week, the market was all over the place. Stocks went up some, and down some, finishing down, and the ISM came in below 50. The housing market gave contrary signals, and it is weird that Bernanke expressed inflation fears on Tuesday but bond yields fell on Friday. Going forward, the market might go up, but it could also go down. Despite all the press of hordes of shoppers, the retail picture is looking fairly bleak. The dollar was down last week. Will the slide continue? Maybe, maybe not. Some people think this is good news for US multinationals.

M6: The business and political details surrounding Gaz de France and Suez continue. I find it too boring, so that’s it. Peugeot and Renault are having tough competition from Asia, and have seen a rise in their materials costs. Now their suppliers want to more favorable terms.

M7: Everyone thinks, at least superficially, that Vietnam is the hot new place to be. The problem is that there isn’t much liquidity and nobody really knows what will happen with OTC investments. In other words, it’s still very early.

M9: The housing market decline could be big news, as you already know. The CIO of TCW group thinks that the housing decline is still in the early innings, and his gut tells him that 2008 at the earliest will start the rebound.

M16: Oracle shares are up, and the premiums on its options are up, too. This means that traders think there could be some big moves ahead. Lots of option buying in the oil sector last week. The buying of cheap calls in the hops for a post-tax loss rally is over.

M17: Platinum is more expensive than gold. Demand should remain strong, for various reasons.

Page 23: Duke Energy is going to break up. The sum of its parts are worth more than the whole. You should buy Duke now and hole the parts, over time, at least, they will be big winners.

Page 24: IBM hasn’t done much for the past few years, but their new strategy is working. Software now provides the bulk of earnings. Nobody thought the new CEO Sam Palmisano would be very radical since he is an IBM lifer, but he is making big changes. Despite this turn around, the stock isn’t up much, and trades at 15 times earnings. This growth in software is the key to the turnaround because the margins for software are much better than for their other lines of business. IBM is going to try to change Wall Streets perception of IBM by emphasizing that IBM is changed, and how profitable the software is. They key to all this has been IBM’s software acquisitions, which brought in lots of talent. Services is doing a little better, but still not doing all that well.

Page 28: There was a conference about the secrets of good giving, where William Bowen, Rita Hauser, William Randolph Hearst and Jeffrey Sachs spoke. Bill Gates Sr. is also talking about this stuff. Bill Gates Sr. thinks that rich Americans are rich just because they were fortunate to be Americans i.e. don’t really deserve it, and therefore have an obligation to spread the wealth. Some people think its ok to give to things like the arts, others think you should give to starving people. Jeffrey Sachs says that if we give enough to Africa, we can keep them from starving.

Page 29:: Microsoft finally launched Vista. Shares are up lately. The Vista launch will probably succeed. There will be stock buybacks. A smart analyst at Friedman Billings & Ramsey figured out that Dell has been using the warranty accruals as a piggy bank for manipulating earnings. Also, the cost of actual warranty claims is steadily rising. He thinks this info isn’t in the consensus earnings estimates. Earnings restatements could be coming.

Page 30: A bunch of neat gadgets you might want to buy for yourself or someone else.

Page 32: Options are priced in 5 cent increments, soon, it will be 1 cent increments. This should be a cost savings for investors, and should help turn profits on smaller price movements. Fidelity launched a trading knowledge center that you can access from their website.

Page 33: Interview with Jeff Mortimer, the CIO of Equities of the Schwab Core Equity Fund: He lost some money in a biotech stock when he was 13, but it taught him a valuable lesson. He says “People think they know what they are doing, but they don’t”. Therefore, he prefers the Schwab Equity Ratings System, which, by the way, Barron’s featured last week. Doing so has resulted in strong performance for the Schwab Core Equity fund. The rest is pretty much a re-hash of last week, yet for some reason Barron’s though you should know about this guy, who apparently doesn’t actually do all that much himself.

Page 35: You might be shocked to learn that publicly traded mutual fund companies do better when their funds are getting inflows, and worse when they are experiencing outflows. This is in part due to the transaction costs that happen due to outflows. To fix this, a company called Reflow has come into being. If a mutual fund has resumptions, Reflow will buy the mutual fund shares, and then sell them back to the mutual fund as money comes back in. The result is that the mutual fund won’t incur transaction costs as money flows in and out. (Sounds like a great idea, but there is no mention what will happen if money just keeps flowing out).

Page 36: Identity theft is on the rise. Companies are losing laptops left and right, with all of their employees info on them. Don’t download stuff you shouldn’t, get virus protection, etc.

Page 37: The PMI has predicted four of the last one recessions. So don’t panic. Lou Dobbs is a fool and a hate-mongering, yet he has two books out, so lets talk about him: He lies about job growth to further his anti-immigration and anti-outsourcing agenda. He also constantly calls China “Communist China”.

Page 38: Interview with Tom Brown of Second Curve Capital: Nobody does as much to look under the hood of companies as he does. His hedge fund invests in financial services stocks. He goes around not making payments and stuff to see how the companies react. He think you should buy Compucredit. He also likes Capital One., and RenaissanceRe. He thinks that the financial conglomerates should all be broken up. He doesn’t like regional banks and is short some of them, but won’t say which. The flat yield curve is hurting them. However, he likes TNCC.

Page 39: There are two books out about emerging markets. One by Antoine van Agtmael, another by David Riedel. Basically, emerging markets stocks have been up big, and should continue to do well. The Riedel book tells you how to invest on an idea that you might have.

Page 40: China is exporting contemporary art like mad. It is so hot, however, that it might be getting out of hand. I didn’t read the whole article because I don’t care.

Page 42: The Wii is a great product, but Nintendo is over-priced at 25.6 times 2008 earnings.

Page 43: When a stock-picker is very good, everyone piles into his mutual fund until all abnormal returns are dissipated into management fees. Most of the article is trying to relate that simple concept to the tragedy of the commons and the fishing industry. You can skip all that and just read the last 4 paragraphs.



I am indebted once again to the best eye for economics in the 20th century, James Lorie, for introducing me to the cliometrician Robert Fogel, with the comment ” His work is brilliant and important”. Thus, when I saw a reference to Robert Fogel’s 111 page work, The Escape from Hunger and Premature Death, 1700-2100, published in 2004, I was predisposed to give it a read. It is one of the most rewarding and mind boggling short works I have ever read, and I would recommend it to all as a startling shooting star of light on the subject of the records, causes and prospects for longevity, as a beacon of proper methodology for historical studies, a debunker of numerous market fallacies, and a guide for proper thinking of about the industries most likely to prosper in the coming decades.

The main point of the book is that there has been an unprecedented increase of 15 years of life span per person in the last 100 years, for all countries, and that the gains have been much greater for the poor and underdeveloped, mostly coming from the combined co-evolution of better technology and better nutrition.

Fogel has the ideal background to be a cliometrician. He started out as a science major at Stuyvesant, then went into physical sciences at Cornell and History at John Hopkins, where he learned everything then known about economic time series. After 10 years working for his dad’s meat packing business, (his dad was a frustrated engineer — having emigrated penniless from Czarist Russia and having started out below the minimum wage as a janitor), he thought he could solve the problems of why the economy was not at full employment. Then he figured he better study smaller things first, like railroads and steel’s contribution to human progress. Along the way, he fought the battle with traditional statisticians and began to study the rate of return from slavery, based on discussions deriving from a classic paper by John Myers. In the course of studying it, he had to figure out what was known about life expectancies in the 18th and 19th centuries. He found several data bases in Union Army annals, and in Norway, that enabled him to construct time series to shed light on these life expectancies. Strangely he found cycles of increasing and decreasing life expectancy in the 19th century; just a temporary decline from various famines, a slight increase from the beginning of mankind to the end of the 18th century, and then a massive increase in the 20th century.

Fogel describes the central message of the book as technophysio evolution — the synergistic interaction between advances in the technology of production and improvements in human physiology. This evolution led to about a 30 year increase in life expectancy in the 20th century, 13 years in the 19th century and hardly any increase in the thousands of years before that.

whatever contributions the technological and scientific advances of the eighteenth and 19th centuries may have made, escape from hunger and high mortality did not become a reality for most ordinary people until the twentieth century.

Fogel attributes this to the improved productivity of agriculture which gave humans more calories to consume, and thus energy available for work. He places much reliance on global balance sheets of energy available as calories, less the amount needed for metabolism. There was not much left, on average, before the 19th and 20th century improvements in mechanization and transportation, refrigeration and communication.

Fogel believe that the increase in calories gives people a better change of having the right height relative to weight, the body mass index, which is height squared divided by weight. There are many interesting cross sectional tables that show that mortality is greater when the body mass or proper height is not reached.

There are several great leaps of faith in making this argument of causation of the decrease in mortality from these factors. I do not believe that the alternative explanation of better hygiene, and better antibiotics , i.e. better medicine, is adequately tested nor that longitudinal comparisons of causes over time can be based on cross sectional differences at any given time.

The second chapter of the book is devoted to why the twentieth century was so remarkable. Fogel notes that during our first 20,000 years, humans population increased at an exceedingly slow rate. The move from hunting to agriculture 11,000 years ago “made it possible to relieve 15% of the labor force from the direct production of food and gave rise to the first cities”, yet the advances in the technology of food production after the second agricultural revolution of 1700 were far more dramatic than in the first. The new technology’s breakthroughs in manufacturing, transportation, trade, communications ,energy production ,leisure time services and medical services, were in many respect even more striking than those in agriculture. Fogel in chapter 2 gives a beautiful chart of all the improvements of the 20th century, including airplanes, automobiles, penicillin, the discovery of DNA, nuclear energy, computers, cloning, the war on malaria, the man on moon, the genome project, and stem cell research, to prove that the 20th century had a much greater string of advances than other centuries (which look relatively lack luster with just 2 or 3 advances a century at most). But as in so much of chart work, the qualitative enumeration is subject to much debate as others could argue that the the 19th and 18th century were equally important and adduce charts that would look just as convincing.

The second chart in chapter two is crucial to the author’s argument. It shows that the relative mortality risk of Union Army Veterans at 64, 68 and 72 inches is 1.3 to 1 to 0.5 respectively. Similar, but not as strong results apply to relative mortality risk by body mass index, but here a BMI near the middle is very good, with a 0.9 relative risk — and as you get up to 30 or down to 20 the relative risk goes up by some 100%.

At this point Fogel’s training in mechanical drawing at Cornell comes into play and he lovingly presents and describes a Waaler diagram of Iso-Mortality Curves of Relative Risk for Height and Weight among Norwegian males aged 50-64 with a Plot of the Estimated French Height and Weight at four dates superimposed. Such a diagram is a nice example of visual statistics, but it is so crowded and hard to read and based on so few observations at the sharply up sloping points, that it is easy to be mislead. As always, I prefer the raw numbers to the three dimensional chart. Various tables in the rest of Chapter 2 show how specific diseases are getting much less common, and this militates against the main causal explanation for the declining mortality that Fogel gives as being due to nutrition, as for each disease modern medical procedures are associated with the cure.

Despite this, the ending part of chapter two is a tour de force where he presents his ideas on the Thermodynamic and Physiological factors in economic growth. The gist is that in the bad old days, workers lacked energy to work. When they had more calories due to better seeds and fertilizers, workers were able to work longer and at greater intensity.

Changes in health, in the compositions of diet, and in clothing and shelter can significantly affect efficiency. Reductions in the prevalence of infectious diseases increase the proportion of ingested energy available for work because of savings in the energy required to mobilize the immune system, and because the capacity of the gut to absorb nutrients is improved”

He also believes that Thermodynamic efficiency has increased because we eat more meats and sugars, an increase in the Atwater Factors, to use the language of nutritionists.

After summarizing qualitative factors like this, each one of which is highly controversial, Fogel is given to statements like “The average efficiency of the human engine increased in Britain by 53% between 1790 and 1980″, and yet, incentives, incentives, incentives. Without private property, without being able to keep the fruits of your own effort, none of this matters. People who have served as employers and employees know this.

The major contribution of the second chapter is to show that the lower classes gained much more than the upper classes since 1900, but that the upper classes gained more in the time before that:

From the beginning of the Industrial revolution to the end of the nineteenth century, the gap in life expectancy between the upper and lower classes increased by 10 years.

But after this, new variables like increased leisure time, the quality of hospitals and public health, more widespread education, and better water supply take effect, and the gains in standards of living and life expectancy are much greater for the poor and the lower classes from this point.

Despite the doubling of the Asian population in just a few decades, advances in seeds, dry farming techniques, improved fertilizer, new crops, and the expansion of arable land have permitted a vast increase in the world’s food supply. Not only has agricultural production kept pace with the population explosion for the past half century but the world’s per capita production of food has actually increased, rising by about 0.6 % per annum.

A related theme of these chapters is that inequality has been reduced considerably by the fantastic relative improvements in leisure time and life expectancy, and health and ease of living of the lower and middle classes relative to the upper.

The fourth chapter of the book talks about prospects for the future. He forecasts that leisure will increase from today to 2040 from 6 to 7 hours a day and that we will work about 60% as many hours in 2040 as we do today. In the final postscript he forecasts that life expectancy will increase by 2.4 years per decade for women and 2.2 year per decade for me. These equations lead to the prediction that by 2070, female life expectancy will be between 92.5 years, and 101.5 years.

In the society that Fogel sees, leisure activities will be the best to invest in, and durable goods and manufactured goods in general will be stagnating fields. In what I consider the most important investment conclusion of the book he states that:

The point is that leisure care activities, including lifelong learning and health care, are the growth industries of the twenty first century. They will will spark economic expansion during our age, just as agriculture did in the eighteenth and early nineteenth centuries, and as manufacturing, transportation, and utilities did in the late nineteenth and much of the twentieth century..

In total, this is a magnificent and thought provoking book. Almost every page gives you a foundation for understanding economic and social trends better. It will get you thinking about the incredible dynamism of the world economy, the resilience and innovativeness of it all, and the diffusion of material goods and improvements in quality of life that it provides. Never again will you believe the agrarian propaganda that the gains of the last century or the most recent decades have been concentrated in the financial sector or the upper classes. Never again will you believe such shibboleths as ‘manufacturing is the key to our prosperity’ or that the pace of innovation is slower now than before.

This is one book that you will want to read over the dinner table, be sure that is in every library, and that all of your kids and their teachers are exposed to.

Dr. Rudolf Hauser adds:

Having just recently read Fogel’s book myself, I concur with Vic’s favorable view of this work. I might note that it was written for a general audience so you do not have to be an economist to be able to understand it.

Recently we have seen increasing speculation about extending longevity by reducing calorific intake. It is my impression that this work was perhaps based on laboratory rats who live in nice sheltered conditions and do not have to avoid predators or the exposure to diseases that their free ranging relatives face. These are hardly the conditions of ordinary life. We have lots of examples of people with reduced caloric intake in places like Africa who do not seem to have better life expectancy. It should be stressed that I am talking about the idea of people who are not overweight to start with reducing their food intake. The evidence that being fat is not good for you seems clear enough and is not what is at question. (Do people who have faced starvation, say in concentration camps, live longer after they return to normal life than others? I knew one person who had faced food deprivation in a Russian prisoner of war camp who tended to eat too much afterwards because of that experience, so those who do that should perhaps be excluded from such a statistical examination.) In any case, Fogel’s historical data seem to raise additional questions about such a conclusion. In short, his book adds to my skepticism about any such conclusion, and I for one am not about to starve myself into becoming underweight. (As an aside, Fogel’s book has statistics that show that longevity has a positive correlation to height and that the ideal BMI for a tall person is lower than for a short person.)

Fogel’s work also shows the much better nutritional levels in America than in the UK or France at the time of the American Revolution. It resulted in dramatically higher longevity experience in the U.S. even with its risks of the frontier than were found in Europe. As Vic notes in referring to some of Fogel’s points better nutritional intake is related in part to better sanitation and such advances as antibiotics. To me his evidence suggests that nutritional intake (into the body not just intestines) is very important but made possible by many of these other advances. Vic neglected to note that higher BMI’s (up to the ideal point which is exceeded in only a few societies such as in the U.S. today) also result in major improvements in morbidity and that since nutrition of the mother during pregnancy and in the early life of the infant are particularly critical, we should continue to see improvements from those born later in the 19th century as they age compared to their ancestors.

Fogel’s work also gave me a totally different impression of the social changes of the industrial revolution. Clearly Dickens’s concerns about the conditions of the lower classes were not just those of a better-off society being able to care more about the poor who were always with them but also the actual conditions of life. It suggests that in a major period of innovation disparities between the elite and lower working classes might actually increase for some time. (Fogel argues that higher wages were just an offset to worse mortality and living conditions in crowded cities more susceptible to disease than living in less crowded country conditions for much of the 19th century.) This situation should not be as pronounced in developing countries today because of advances in public health (particularly sanitation) and medicine, but it might still be present. That suggests that the social nature of rapid advancement might have difficult transition periods before the full advantages of the advance are really felt at the lower levels of society.

In short, this book is a very impressive summary of much interesting research by Fogel and others that I would also recommend highly for a better understanding of past economic history and present day problems.

Stefan Jovanovich contributes:

As Vic noted, Fogel learned from Kuznets that “the central statistical problem in economics was not random error but systematic biases in the data”. Escape from Hunger is a masterwork, but I think its own data has the bias of relying too heavily on the experience of the British Isles in assessing whether the period of the Industrial Revolution created any actual improvement in nutrition and mortality for the average person.

The data for the British Isles is skewed by the effects of (1) the last great European famine not caused by war - the failure of the Irish potato crop - and (2) urbanization being forced on people by the enclosures of the commons. Even at the time of the Napoleonic War the enclosures were still putting pressure on the villagers in Jack Aubrey’s home district, and he was making trouble for himself by opposing the gentry who wanted to “improve” the common land for their own benefit.

The data for industrialization and urbanization in continental Europe gives a far kinder verdict to the effects of steam power, railroads, coal and steel. Using Dickens for testimony is equally problematic. He was, like so many geniuses, a terrible snob, and he nursed a grievance against having had to work in the blacking factory — not because the work was so arduous but because the experience itself marked him as someone who had actually spend time with the common people. He endured the far more arduous labor of being a “reporter” at Westminster without complaint, and his fright at the conditions of the factory and the city was matched by his horror at the slovenliness of pastoral America. In all Dickens’ comedies the happy ending comes with the good people securing their proper fortunes not from jobs or occupations but with income from unnamed but reliable sources of dividends.



One of the zillion articles about the Goldman hedge fund clone initiative quotes a whiteshoe as saying such a venture “may be a perfect match for institutional investors that don’t like the fact that it takes six months to put money in and to take it out again.”

If such sticky assets suddenly become less viscous, could this have an impact on volatility going forward?



We have often talked about the signaling effect of hubristic utterances like “We are the best”. “We are first in class, best in class, and I believe we will own this class for as long as it exists” said John La Mattina, Pfizer’s senior vice president for global research, in a November 30th, meeting with analysts. In retrospect, Mr. La Mattina must have known about the problems brewing with Torcetrapib, and this must have been troubling.One wonders about the statistical significance of 82 deaths out of 7,500 for the combined regime of Lipitor and Torcetrapib, versus 51 deaths among 7,500 people for the Lipitor regime alone. This is a statistic that should really be computed by re-sampling. One would take a 1.1% probability and a 0.7% probability and run 7,500 trials for each, noting the difference in proportions random numbers. Then repeat 10,000 times to come up with the probability of observing a difference of 31 in 2 groups of size 7,500. Not having the artful simulator around, one uses the formula below.

The standard error of difference between proportions is the square root of: p1 q1 / n1 + p2q2/n2, where p1 is close to 0.01 and q1 =0.99. Thus, the standard error is the square root of (1/100x 7500 + 99/100 x 7500), or 1/86, so the difference is some 22 standard errors away from expectations. This is a very big number, and re-sampling would not change it that much … but this is also an artifact of small standard errors for small proportions.

Despite this, this kind of exercise shows what is wrong with decision making based on the chances that something can do harm rather than based on the expected value of costs and benefits. One has seen many lines of evidence that these drugs have much life enhancing value. And is a difference of 31 deaths per 15,000 — let us say 150 years of total life expectancy — really comparable to the benefits that such a drug might have vis a vis reduced heart attacks, and enhanced life expectancy. Probably not even close.

Multiply this by the hundreds of drugs not approved, the thousands that do not get tested at all because they have risks, and the other tens of thousands that do not get invented because only the billion dollar companies can afford tests like this at all (consider the approximately 1 billion dollar cost to test a drug like this), and you see the incredible loss to life.

It would be like not using a system because it loses big 30 times out of 15,000 without taking into account how many times it makes big.

Roger Longman adds:

You heard, I suppose, that they have now completely abandoned Torcetrapib? No one knows the data, but the independent monitoring board killed it… apparently independent of the hypertension issue.

In any event, I completely concur about the predictive use of hubristic utterances, as we’ve seen with Rumsfeld, Cheney, Bush & Co. And it is particularly ridiculous with drugs.

Dan Grossman comments:

While I want to think further about the implications, my initial reaction centers on the massive misallocation to one fairly marginal drug category (anti-cholesterol) caused by the combination of dinosaur drug companies like Pfizer and overly expensive, overly time-consuming, mandated statistical testing and approval procedures, (This appears a fairly equal alliance and I am not blaming only the government.)

Anti-cholesterol (anti-lipids) is one of the only, actually the only, drug regimen where the favorable circumstance of government and medical recommendation, easy and understandable measurement through an annual blood test, and effective drugs and marketing, has been able to convince tens of millions of healthy consumers to take a drug every day at an annual cost of some $25 billion.

But this category has now succeeded. Cholesterol levels have fallen and, perhaps partially as a result although it is far from clear, so have heart attacks. And now there are generics (and Pfizer’s $12 billion Lipitor will in a couple of years also be a generic) that can bring about the same result for pennies a day. So the therapeutic problem is now taken care of at low cost, the $25 billion category can be cut to a couple of billion, with great cost saving and benefit to the public.

But Pfizer has not read Schumpeter, and with its $12 billion Lipitor grandly insists on “owning” this category “as long as it exists”, the way Proctor & Gamble or somebody might “own” the multi-billion dollar toothpaste category. It cannot give it up, even though there are probably only marginal advances in cholesterol lowering to be made in return for increasing billions of dollars chasing hoped-for slight advances, and any molecule with a slightly different mode of action that can desperately be combined with Lipitor and thus perhaps extend Lipitor’s patent life.

So Pfizer, and Merck, and Astra-Zeneca, and now Abbott with its multibillion dollar acquisition of KOS, will now spend a hundred billions dollars (literally, look at their research budgets) on this drug category that has already succeeded, instead of in a truly free, Adam Smith market where the natural incentives would be to spend the money in drug categories far more needed for the cure of disease and the advancement of human health.

John Tierney mentions:

What I would also like to know is the expected mortality rate for a study of this kind, a study involving subjects and drugs of these kinds. Clearly the Lipitor-only mortality rate of 0.68% must be well-below the threshold, otherwise there would be calls for it to come off the market as well. But there are none. And apparently the combination mortality rate of 1.09% is well over the expected mortality rate, and hence the rush to end the trials. Casino operations, I am told, make or lose money based on small differences in the percentage that the house is favored in games of chance. Pharma shouldn’t be reduced to such a state. For an interesting article on this …



After the market closes I head down to the beach for a surf in the sparkling blue ocean under sunny skies and waving palm trees. Every day the tide is different and as the cycles change, some weeks the high tide at a certain spot is in the afternoon. It is low tide in the afternoon this week. When the tide is too low the rocks stick out and it is too shallow to paddle a surfboard out. So instead of using a surfboard I take out an old bodyboard.

Normally we surfers look down on bodyboarders viewing them as a lower form in the surfing hierarchy. The demands of the changing cycle of tides required a different attack. Using the little plastic body board instead of a fancy surfboard, I went out, and had beautiful sparkling azure glassy waves all to myself, and got wave after wave all day. Well worth the change in tactics. When the tide changes, there is usually a short lull then a surge as the new tide rushes in. The waves get bigger after the turn.

Of course, while relaxing and having fun when out surfing I get market ideas. The changing cycles demand different tools to overcome obstacles and to adapt. Even adopting techniques and tools normally one might look down upon may result in numerous quick and small rides to ones profit when no one else is out. When the tide turns, there is a lull then a surge as the new tide rushes in and waves increase much like last week’s high narrow range, then the top and drop.

Tides and the daily ranges are similar. If we knew in advance what the ranges would be we would soon be rich. The daily and intraday ranges are more regular than random. Even knowing direction alone does not guarantee profits. Homing on the ranges might avoid slop on entry and milk more out of exits. Chair discussed time between big drops or large ranges and trend days. Then there is the clustering issue as today’s drop echoes Monday’s decline. There was last week’s low volatility preceding Monday’s big drop. Early May had narrow ranges as I recall. Thursday had a range with open and close about half way either side. Just as the tides and prices have patterns, ranges may have predictable patterns as well. Knowing when to expect ranges or trends is a big key to effective execution and can be a valuable tool in addition to direction.



…Bill Watkins, the mercurial, salty-mouthed Texan who runs the $15 billion hard-drive king Seagate Technology…was candid about his company’s ultimate mission: “Let’s face it, we’re not changing the world. We’re building a product that helps people buy more crap - and watch porn. [Read More]



I’ve been writing a lot about small town America and the capitalism that occurs there. I wanted to branch out of the small town where my farm is and write about some clients of mine that are in Kentucky.

Leo and Carol Repovich own a beautiful home on Kentucky lake. Leo is a builder and built it himself. Now that they are retired and their kids are grown, they’ve turned the downstairs into a lodge. It’s a beautiful place with all the amenities of home and its right on the lake with a boat dock and ramp!!p!!

Kentucky Lake (also Lake Barkley, as they are attached) are known for good fishing, and great recreation. I’ve been there and taken pontoon boat rides, fished and played on their beaches. It is a great time and a great getaway in the summer. But what most people don’t realize is that it’s a great place to go in the off season. In the winter, when the lake is down, you can have a great time riding ATV’s around the lake and thru the miles and miles of ATV trails beside the lake.

Or you can just get off your ATV and go hiking thru the wilderness of Kentucky!

There is something special about exploring the wilderness in the quietness of winter. A little forethought in clothing choices can make for a very pleasant and enjoyable winter hike. Walking along the waters edge, or hiking up the meandering rolling hills into the hardwood forests, being treated to dormant winter stillness of the beautiful Kentucky countryside. Wildlife sightings should abound as Kentucky is known for having a great White-tailed deer populations, as well as lots of turkeys, squirrels, and winter songbirds for the bird lovers to observe.

You can enjoy dinner at the local restaurants, many family owned for several generations. And while there, you will experience some of the greatest barbeque in the world! These people know how to cook. Also while you’re there, you should consider trying some of the local faire side dishes … things you just won’t find in the big city! Distinct taste treats that you can only find in the “hometown” America!

Craft shops and Antique shops with a distinct small town America touch will satisfy even the most ardent of shoppers. Within several miles there are several small towns, with typical “small town downtowns” to walk thru. Town squares with bandstands, sandwich shops, and friendly town folk who will gladly strike up a conversation with you are the norm.

For Civil War buff’s, there is a cornucopia of things to do, sites to see, and history to re-live.

Christmas in these small towns is a site to behold. It is an experience you owe to yourself, at least once in your lifetime. No hussle, no bussle. Just small town hospitality.

Leo and Carol Repovich have been good clients and good friends of mine for a long time. If you have a desire to experience the fun, beauty and joy of life in small town America, you should consider going to Kentucky Lake and staying with Leo and Carol. Tell ‘em Scott sent you — you won’t be disappointed!



Stock message board posts, if weighted by individual prior success, have significant predictive value:

  1. Somes got it, somes don’t
  2. Those who got it are being watched and probably arbed.



As a youth growing up in the buckeye state, I was quite fascinated with Science Fiction and the cutting edge television programs of the day. I had great interest in such programs as the Outer Limits, Rod Serling’s The Night Gallery and the Twilight Zone, and of course the most enduring of them all Star Trek.

Recently, I have noticed the return of the Star Trek original series to television, most notably CW 18. I have had the pleasure of reliving a most pleasant aspect of my youth by watching reruns of the 1966 series that ran for 3 years and spawned countless spin-offs and millions of Trekkies around the world..

One of my favorite episodes is season one episode five. This is the episode where the transporter malfunctions and splits objects into two personalities. After captain Kirk is beamed aboard, a few minutes later an evil Kirk materializes behind him unknown to those on the Starship.

When a space animal is beamed aboard the starship and splits into two entities; one tame and one vicious, it is discovered that the same thing has happened to Kirk. While one Kirk is good and honorable, the other is evil and runs amok on his ship, committing violent acts, including the attempted assault of Yeoman Janice Rand.

Meanwhile, the transporter continues to split objects into two entities, thus forcing the remainder of the ship’s landing party to remain on the planet’s surface. Alfa 177’s approaching night promises certain death from exposure and freezing temperatures to the unprotected landing party.

As time passes, the “good” Kirk is weakening, losing his ability to make decisions, while his “evil” half is dying. Neither Kirk can survive without his other half. Time is running out, not only for Captain Kirk, but for the landing party on the planet’s surface.

Scotty effects repairs on the transporter, but there’s no time to test it. McCoy is fearful because the “space dog” which had been split earlier, had gone through the repaired transporter and, while joined into one animal, was dead. Kirk takes the chance and beams down with his counterpart and returns to the U.S.S. Enterprise whole and alive. Quickly the landing party is beamed aboard, worse for the cold, but alive.

I find this episode most fascinating because it reveals the fact that deep inside us is a good half and a bad half. Ironically neither can survive without the other. This constant war within keeps us alive and vibrant and it is the delicate balance that allows us to make decisions and judgments. It also allows us to call upon the “good half” or the “evil half” predicated upon the circumstances at the time to effect the most positive outcome to an event.

This lesson is particularly important to Speculators that in order to perform at the highest level one needs to learn to call upon the various “halves” to effectuate the highest return on our invested capital.

I would like to hear from others who might have a favorite Star Trek episode that they find remarkable and share a present day use for the lessons learned from it.



For those interested in pursuing investments in their IRAs which are not available through standard brokerage or mutual fund accounts (real estate, non-publicly-traded stock, businesses, etc.), the article “Self-Directed IRAs Can Offer Variety but Have Complex Rules” on p B4 of today’s WSJ offers some guidance, including a list of three investment companies which will provide the required administration of such accounts.



A chess player once told me that his purpose in playing was looking for the truth. A throw-away remark which stayed with me.

Time zones and the Pond enable me to spend some time composing before the Market opens. It is a quantum like world. One can start with virtually nothing, the simplest chord sequence like I V I. Then by opening a curtain from this “nothing” is revealed limitless opportunity to develop emotional themes and developments pursuant from the chord progression, each leading to other vistas. But — like a quantum measurement — the material is not available until noticed by the artisan, and is then fixed in its character, for ever affecting what is to be found next. Now what is more real (or more enduring - if these concepts are the same), the chair on which I sit or the musical ideas I thus frame?

Then comes the Market, another limitless sea. My spreadsheet securely lashed to the broker API, I watch the tide wash in and out, waves from each position move up and down tick by tick. I mainly watch the numbers change, using graphs only where it helps, and although I am now able to channel them into virtual reality I will do so only if/when it helps see what is going on. Some positions — generally the larger ones — are more prone to move up and down, and some more often than others, and this latter concept, a slightly different one from volatility, is not yet coming over visually.

It is a challenge to communicate the maximum meaning with the minimum components, which faces me every day in Music and Market.



Kuznets’ course was valuable not only for the substance of the material but also for the way that he used the material to transmit the art of measurement. He repeatedly demonstrated that the central statistical problem in economics was not random error but systematic biases in the data.

This is from Robert Fogel in A Life in Learning. Might one also say that the same applies to the fundamental studies of the low p/e group led by the twins FF, and the contrarian DD in individual stocks, as well as the much more blatant problems in the Shiller and Siegel work.



It’s a Crime What We Don’t Know About Crime

If last year’s crime increase represents the start of a trend and more incarceration is the only available response, by 2014, one in ten Americans would be locked up every year.

That’s a brief look at the crime data for the present and future. Written by those who study crime with an academic viewpoint. From ivory towers.

At the street level where I see the grand picture, down here where people live, there is dirty linen not viewable from the windows in those high academic towers. “What we don’t know about crime” is inferred to be a crime in itself. But we do know things about crime which we claim not to know.

We have crime in business. And we live in denial about it. The local media will focus on crime committed by the underclass and ignore crime by business, unless it is a very giant scheme by a corporate entity which so many already know about that it cannot be left unpublished.

The AARP has published articles about scams that take money away from senior citizens. As a senior of almost 78 years I know I would be more safe in a security retirement center than in a city neighborhood. But we are not in danger so much from thugs as we are from people who wear the garb, the attire, of business and professions, and speak fluent English.

The automobile industry is replete with scams, frauds, deceptions, and I have found no agency monitoring this industry. An auto repair garage has a license to steal. These are business licenses given to entrepreneurs for a small fee. In one hour of scheming they earn the fee back.

“Repair garage” owners have the attitude that since they are regarded as “businessmen” this status gives them impunity from the ordinary rules of ethics. Of course, since the state takes no interest in their nefarious practices they are emboldened to stretch theft to extremes.

Since cars have evolved mechanically to become cyborg machines, with a miniature computer built into two dozen components of the vehicle, I have been unable to do my own repairs and thus have been subjected to fraud and rip-off for many years.

What is worse, community colleges with technical schools have been teaching students how to increase the income for owners when they are graduated to wage-producing positions.

The techniques for increasing profits are not ingenious inventions but are old trade practices developed by criminally-minded garage owners in the beginning of the repair business in America.

But now these techniques are mainstream. Ubiquitous. They exist everywhere, from the gas station guy who only does spark plugs to the cyborg, computerized, technologically perfect spacious garages attached to major automobile dealerships.

The schemes, frauds, deceptions are in small details which can easily be enumerated. Anyone reading this report has been scammed many times by auto repair people, by car dealerships too.

However ubiquitous these scams are - just as ubiquitous is the denial that they exist. They are not monitored by any agency with sufficient staff and power to discipline and shut down.

This theme began with the notion we have crime that we do not know we know about. In just one area I can show crime that goes on unobserved daily, right under the noses of everyone, including the police. And nothing is done about it.

When the underclass takes this all in I suspect many individuals see that crime pays. You can make a lot of money and what’s more you can get away with it. We’ll never reduce recidivism in the underclass with examples of business “crime for profit” staring us in the face every day.

Newspapers are in on the auto scams in that a big chunk of advertising income is derived from the automobile industry. In my view, guilty by association.

Of course, advertising is not causing the ripoffs at the repair garages; but the papers are not going to touch an article about these, nevertheless.



Earnings Management and Firm Performance Following Open-Market Repurchases

…post-repurchase long-term abnormal returns and the reported improvement in operating performance documented in prior studies, are driven, at least partly, by pre-repurchase downward earnings management, rather than genuine growth in profitability. The average firm reports significantly negative abnormal accruals prior to open-market repurchases. The extent of the downward earnings management increases with the percentage of the company that managers repurchase, and CEO ownership.

This was in my ‘to read’ pile, and I do not recall where I first saw it.



I have heard, although I have not checked, that the average time it takes the Fed to ease after the ISM drops below 50 is ~2.5 months.

George Zachar responds:

Second humble gif. answers this question.




A twenty year inversion is what the forward swap curve is ‘predicting’ according to the humble gif. below. Starting 10 years from now, the forward swap curve becomes increasingly inverted, with 30 year rates below 2 year rates.

Of course, this relationship is an arbitrage artifact partially explained by the thin trading conditions in long-dated 30 year swapland. Nonetheless, folks who mechanistically claim “market prices” to be forecasts should be asked to explain what this means. A certain cohort whose offices face the Mall in Washington comes to mind.




A market moving through an entire day repeatedly between two prices, roughly encapsulating a daily normal volatility range, could imply a relatively quiet day for a long term investment manager, while the same market could mean an extremely volatile patch for a position trader over a few days, and yet also imply a great profit making spot for a scalper.

Does that not bring one to the question whether volatility is really different for different people? If indeed volatility were the same for all participants one could not have traded it in the form of a contract. What we are trading in the name of volatility is actually the price of volatility, the value of volatility similar to the value of the underlying is different for each.

If true, then to estimate an applicable calculation of volatility for oneself, one needs to first assess which layers of market flow one is most comfortable in. If markets were a giant ocean then am I most comfortable catching the long currents or am I more profitable surfing the waves that are arising from near the shores? Or am I more comfortable playing up in the waters that are getting thrusted in between a row of rocks?

Rather than define volatility over units of time, as measured in the real world over days weeks and months, am I better placed in assessing the length of moves that I am able to measure most, and what degree of variations over those lengths of moves are upsetting my plans — hence the defining unit of volatility for me? The whole issue of timing markets while not having a scientifically applicable definition of time itself to differentiate security price series is saddening. Does the approach of looking at different volatilities for different market objectives have a way of eliminating the indefinable time out?

If I do not understand time my approaches at timing are only partially rigorous attempts. Eliminating time and studying price versus price appeals as a method of timeless timing. This thought took over my mind recently yet again taking me back to reviewing all of the popular ways of plotting prices on the charts. One age old approach, not finding much favor at this moment however, is actually relying on not plotting prices against time but only against prices — it is the Point & Figure method. What possible improvements can one make on this loosely defined way of charting that takes into account a few logical constructs relating to one’s understanding or lack thereof, of volatility?

A lot of words I know, without a single formula, equation or quantifiable expression. But then a fog only turns into a raining cloud as electrical charge is induced. I am submitting this haze to the more electrical minds on the list, and hoping for a downpour.

Steve Ellison adds:

Mr. Bollingerr’s book presents an innovative approach to point and figure charting, building on earlier work by Frederick Macaulay and Arthur Merrill.

I find the point and figure approach a fertile source of ideas. For example, the forecasting literature generally argues that changes in stock prices cannot be forecast with accuracy; put another way, the best forecast of a future stock price is the current price. However, if one represents the price history as a series of moves, rather than a series of prices, one redefines the forecasting challenge to whether the next move will be up or down. Unchanged is not an option.

Point and figure data has much in common with a Galton box. For example, what is the probability that a ball that has moved three jumps to the right of its starting point will move X jumps farther to the right before moving three jumps to the left?

Since June 6, there have been 53 movements of 1% in the S&P 500 futures, 31 moves up and 22 moves down. After the 22 down moves, 14 of the next moves were up and 8 were down. After the 30 up moves excluding the most recent, 17 of the next moves were up, 13 were down.



After every big negative move, I receive much mail from propagandists of the end of world point of view, who are hoping to lay a little more foundation for their next foray into the bear side of investments. They tend to have been tapped out, literally or metaphorically, from their shorts, so as not even to be able to assuage a 1.5 percent profit, to offset what would have been 50 percent or so losses on shorts during the last 4 years. In any case, as part of what I consider their propaganda, or their hopeless backing and fillings to gain self esteem and profits*, they have concluded that that the Monday 11/27 down move of 19 points, which is the first large decline of more than 1% in 6 months, somehow this is illustrates that we are entering a new and bearish regime — or that the Plunge Protection Team has now has lost their mojo.

The essence of the post is:

It has been 917 trading days since we have had a 2% down day at the close. This is 6.13 standard deviations from the norm, and the second longest streak since 1942. The odds of this happening without the Fed’s intervention is one in 86,579,799.

There are so many things wrong with this point of view, especially at the most practical level on which it precludes the taking out of the canes just as they are most needed, but it also involves the misleading throwing around of misplaced technical terms, like standard deviations computed in a fuzzy way and slippery time schedules, and a poor imputation of motives behind the numbers.

I felt it was a good thing to share this so that good readers can be alert for it in the future, so that they can avoid derivative propaganda techniques that they may have been inadvertently exposed to through previous communiqués of a Elizabethan nature, and so they can teach their children how to avoid propaganda in the future.

* This is unlike the ghosts of Wall Street past, who frankly acknowledged their misfortune and scratched rich members on the back with tips of impending doom or mergers at Trinity Church, in exchange for a lunch.

Barry Ritholtz comments:

I enjoy your site and writings, and I wanted to bring to your attention some issues you may have overlooked regarding “XXX of days since a Y% correction.”

To begin with, your initial premise is factually wrong: those comments were posted on November 22 — prior to Monday’s 11/27 2% Nazz drop. This was not an after the fact rationalization, but rather, (someone else’s) interesting observation as to how long it had been, (I don’t know who wrote it).

Second, I neither endorsed nor disputed it, but threw it out there — it was an email circulating trading desks, and I thought that alone was interesting and curious.

Third, if you go through the reader’s comments on the post (I encourage broad debate on the site), you will see our cadre of mathematicians do a nice job taking apart the weak stats work. I have no idea how someone derived such precise odds — 1 in 86,579,799 — but the crew debunked that pretty quickly.

Next, people can argue all day long about the plunge protection team — My take is they do a lousy job. Perhaps the 78% drop in the Nasdaq from the 2000 peak to the 2002 low could be considered proof of that. Sure, there may be interventions occasionally, but ultimately, Mr. Market will determine for himself where he wants go, and there’s nothing a handful of Fed and Treasury officials can do about that. Oh, they can move things around short term. And Goldman Sachs, with their shift in the GSCI, and the subsequent drop in Oil/Gasoline, certainly was a factor in lighting the fuse this July of this rally. But in the end, the market will do what it needs to do — in both directions.

Lastly, as to losing profits / rationalizing bad shorts, I have been cautioning against shorting into the momentum strength and up trend of the market since this rally began. Tops — if this is one — are processes, and traders are much better off being late to short once the reversal is clear than being too early.

The Dow Transports divergence has gotten our attention, but it is only one signal, and insufficient to aggressively go short. After Friday’s lower intra-day low relative to the Monday drop, I did put out a small short (Qs and IYR). Nothing huge, just a placeholder in case Monday morning gapped down. This is our first short since May of this year.



Your site is invaluable. Thank you for doing so well at describing what the culture of honorable trading is about. I particularly found Barry Gitart’s referenced article about Somalia to be useful.

I have worked in Africa on five different occasions, in four different countries. I have also worked in Iraq on three different occasions. As I travel, I tend to analyze the dynamic of each location, and to reconcile the net environment against Natural Law. My views have only been reinforced by my experiences.

Within Barry’s referenced article I found some applicable lessons. Ultimately, however, each referenced attribute of anarchy, and the relative value of regulation within those certain environments only certifies the maxim that honorable trade is a beautiful thing. The key to understanding this assertion is that the definition of capitalism is much often taken out of context, and cited against red-herring scenarios. To clarify, it is best to provide some real life examples:

When a street vendor in Gabon attempts to keep the change, that is due his customer, through subterfuge and deception, he is not engaging in Natural Law transaction..

When a radio station in Bosnia broadcasts with un-coordinated and egregious levels of wattage, they are not seeking to develop mutually beneficial trade relationships. Neither are they participating in honorable, Natural Law capitalism.

When a village leader in Iraq lies to his benefactors regarding the use of the proceeds from certain donated goods, he is not engaging in Natural Law transaction.

Finally, when publicly held Russian energy assets are allocated to the private sector through hastened channels of oligarchy and influence, only the gritty rituals of lower needs and tribalism, are observed - certainly not Natural Law.

Naturally, there will continue to be many examples of ostensibly free trade environments, that are, in reality, a fusion of thuggery, and uncoordinated access to common resources with little measure of equity. Natural Law and its ultimate product, honorable capitalism, will continue to be misunderstood within many circles.

Daily Speculations is a healthy tool in the slow process of expediting mankind toward our inevitable destiny of one day understanding and embracing the dynamic of honorable trade with some degree of critical mass. Until that day arrives, your contribution to that process seems secured — great job.



It is interesting that there is no comment on currencies with respect to the dollar. Are there any specs that trade currency?

For months the dollar vs. G7 has been at vol. lows with very little activity. Just as the so called “experts” like BCA and Goldmans for example, started putting forth dollar bullish views, and the COT data analysis started showing that specs were record long EUR and GBP … and just as technicians were pointing out that the Dollar Index was at 10 year lows and should bounce, and the fundamentalists were pointing out that with economic growth slowing around the world the dollar would strengthen because it is a counter-cyclical currency … just as all this evidence was on balance pointing to the probability of the dollar strengthening — it then breaks out, giving us the strongest move in years from the GBP, which is making 15yr highs.

I wonder if the much talked about central bank diversification is not taking place (United Arab Emirates for example still has 98% of its reserves in USD, yet has targeted a 50% USD holding), and if currencies like the GBP are quietly becoming the new safe havens.

With vol. picking up and the outlook for rate cuts in the US to begin in June, the carry traders must be feeling pretty uncomfortable. So too the ‘commercials’ who have been buying dollars since April this year. The Fed fund futures are now pricing in a 70% probability of three .25% rate cuts starting in June next year. One of the more interesting currencies right now is the CAD which is weakening along with the dollar. This has got to do with the US government’s decision to change the taxation policies on Canadian Trusts. This will manifest itself in CAD weakness, as billions will now flow back out of these trusts to wherever they came from.

Larry Williams answers:

I trade the dollar index as well as currencies. There have been several great plays in the current market. The easiest is to be long the Australian Dollar or British Pound against the Swiss Franc or Japanese Yen.

Commercial activity and seasonals have a heavy influence in these markets… at least that is how I see it.

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