I thought those specs with children might be interested in checking out the following economic related comic books for kids that the Federal Reserve will send out for free (no, this isn't some twisted joke). I have no idea what the actual content is, like in terms of accuracy or propaganda; let me know what your thoughts are if anyone actually orders these.



I came across this Morningstar article regarding indexes valuation. The author used a bottom-up approach and calculated the true value of S&P by adding the fair values of the constituents as calculated by Morningstar analysts covering the stocks. Based on their focus on ROC and from what I can tell, Morningstar analysts' valuations are based on a discounted EVA (or variation thereof) combined with Sage's moats. The results came in surprisingly close to the market prices: S&P500 1.7 points overvalued, DJIA 3.6 points undervalued, NASDAQ 4 points overvalued

If 70% of the market is institutional indexing, and sector-rotation has such a big influence on the index level, how come the S&P price is within 2 points to a quantitative, bottom-up technique combining 500 stocks? Can the wisdom of the crowds truly be that powerful?



This could be interesting since it describes non-market influences on the economy as a result of the computing/web revolution. Read Wealth Without Markets?



If you're standing around a warm barbecue pit with the smell of back straps roasting over an open charcoal fire, and can hear the coyotes howling in the distance and feel the cold crisp air on your face and can not only see an infinity of stars, but also see the haze of the Milky Way … you need a good sound track to back it up…

Here are some songs that sound good in hunting camp.

Please Go All The Way….The Raspberries

Time Passages….Al Stewart

Cats in the Cradle…..Harry Chapin

There are many, many more songs that sound good in hunt camp, from piano concertos, to country music, to classical music played by a full orchestra…

But no list of hunting songs would be complete without these two:

Great White Buffalo…..Ted Nugent

And the best hunting camp song ever…

Fred Bear … by Ted Nugent

Unfortunately, I can't find a good youtube version of it … so if any of you know of a good version, please email it to me.



The heater is worn out and broken, and it is cold for winter even in California. There is ice outside on the walk, but it is toasty inside.

Today the college daughter travels back east after the holiday to complete her freshman year; one of those bitter-sweet times when the cycle of life shows itself.

The girls were little when we got this old house, and one of the first projects was to replace the heating and air-conditioning system. It was an industrial strength unit which was billed as "The Only One You Will Ever Need." Winters are not often harsh but summer can be brutal; especially many years ago when the numerous trees were too small to make much shade. Over the years, both air conditioning and heating were used to much advantage tempering the little women.

A few summers ago, we set up a badminton net in the yard under a large pine tree which cast a good playing shade. Sometimes the tree caused interference, and with considerable effort and ladder-balancing, errant limbs were cut to clear a path for the shuttlecock (favorite risk-related thoughts while juggling the chainsaw involved the inner voice "What a Shame He Didn't Hire Someone"). Like other family sports, this little investment diffused many teen crises, and led to much togetherness and memories sweet like the air from the pines. Often while playing, we would discuss where to apply to college and about all the different schools. Looking back, it is strange how at the time, these plans seemed so fantastic and remote.

The big pine was rooted on a hill over the yard in direct view of the kitchen window. Each year we watched the tree grow vigorously. It is so impressive how these living things reach up and thrive on just a little water, air, and sun. A wooden birdhouse hung from one of its branches and was used as a bird feeder. Over time, the tilt of the house confirmed what was happening: the tree was leaning. By now, the pine was 30 feet tall, had an 18 inch trunk, and was listing precariously toward the roof of our home. The hill where it was rooted was rocky, and it was decided that we should not risk testing the tree through the next storm season, so I had it cut down.

They were a crew of Hispanic men with ropes, chainsaws, and a chipping truck. They grappled, climbed, and dismembered our old friend within an hour. As instructed, they made him into fire logs, and stacked them neatly along the deck. Some were so large that they served as benches by the hammock. Now after two years, the wood has dried sufficiently to fuel an excellent fire, which has given respite from the current cold snap. The stored energy of sunny days spent swatting the badminton, chatting and laughing, now pours back into the living room where I just said goodbye to a young lady until another summer day.



… the cross-sectional variation of liquidity commonality has increased over the period 1963-2005. In particular, the sensitivity of large-cap firms' liquidity to market liquidity has increased, while that of small-cap firms has declined. This increased polarization of systematic liquidity can be explained by patterns in institutional ownership over the sample period. The analysis also indicates that the ability to diversify aggregate liquidity shocks by holding large-cap stocks has declined. The evidence, therefore, suggests that the fragility of the U.S. equity market to unanticipated liquidity events has increased over the past few decades. [Read more here]



Bill Haynes' comment that "we and China have our arms wrapped around each other, and probably will continue to for the foreseeable future" has a direct parallel with the relationship between U.S. and Britain in the beginning and middle of the 19th century. Then, as now, the U.S. had a chronic trade deficit. The difference between the cost of U.S. purchases of British parasols, railway engines and steel and the value of our cotton exports was financed by British and Dutch banks' acceptance of U.S. paper. The paper was denominated in $ but its valuation was based on the gold standard. The traditional explanation of the periodic slumps in U.S. was that American borrowing was curtailed when the London and Amsterdam markets had questions about the ultimate acceptance of U.S. paper. I think, in fact, the causal arrow went in the opposite direction. Whenever American enthusiasm for parasols, railway engines and steel waned, optimism about the growth prospects for Britain's biggest customer also diminished. There had always been a "gold" market - i.e. one where paper was discounted against bullion; but the fluctuation in the spread between paper and "money" - i.e. sterling coin - depended far more on faith in the U.S. ability to continue to grow as a customer than it did on the credit-worthiness of the U.S. Treasury. There is no other explanation for the willingness of British and Dutch banks to continue to finance exports to the North during the Civil War after the U.S. had lost its primary "money" export and begun printing greenbacks.

I would love to know whether Mr. Haynes thinks that the parallel with 150 years ago will extend to the "solution" of the "trade deficit" problem. When, in the 1870s and 1880s, watches from Connecticut, agricultural machinery from Illinois and Rockefeller's kerosene turned the U.S. into a capital exporter for the first time in its history, the British faced a political crisis. The city banks lost their lucrative market for the discounting of American paper. Their response was to shift almost overnight from being believers in free trade to supporters of Imperial Preference. Attention shifted from trading partners in the Americas to colonial accumulation in Africa and Asia and a literal explosion in the issuance of Imperial paper, primarily from India.



Based on my own thinking as well as the Chair's emphasis on games in his writings, I have decided to study Game Theory. I have looked into the basics where available online. As with a lot of math, it seems that in an effort to spell out and/or prove their own theories, most authors end up using more mathematical language, more decision trees and etc. than is really needed. I find that after I study a subject, the details aren't really that important to me anymore. What is important, and what sticks, is an overall philosophy learned while studying the subject.

I went through the same thing while studying Bayesian Statistics. After reading hundreds of pages and going over and over mind-numbingly complex mathematical formulae, I still feel Bayesian statistics can be described, not only adequately, but completely, in a paragraph or so. Maybe something like this:

Future probabilities can be directly predicted from past occurrences. What happened the majority of the time in the past should continue to happen. If it stops occurring, to the point that in all recorded occurrences, it turns the corner from happening the majority of the time to happening the minority of the time, then it will continue to be the minority into the future.

Now maybe some of the more learned here can tell me what great parts of Bayes I have left out. But it seems silly to me to give someone a 500 page book to study from when the above paragraph and a bit of common sense serve to be just as well, unless of course, that someone is planning to become a professor of statistics on a college level.

Anyway, I came across this book while researching game theory: Game Theory: Analysis of Conflict by Roger B. Myerson

It garnered rave reviews on Amazon.com:

To find the best way to present various materials, I went through virtually every game theory book in existence. For the presentation of the basic material on normal and extensive form games, nothing even came close to this book in clarity of presentation and depth of understanding of the issues. Most textbooks, even highly touted ones that are mathematically challenging, do not even come close, and rarely even present the material in a coherent form at all.

This sounds promising, has anyone read this? But still, I wonder if there is a book out there that covers, instead of how to dissect all possible games and create the most intricate strategies, something more like "lessons learned" from game theory, and something that covers the "philosophy" more than the math per se.

Does anyone know of anything like this?



Gurus have always found fertile ground in the financial markets. The early 20th century brought us esoteria like Gann and his geometric lines combined with astrology. It also supposedly brought common sense gurus like Livermore with his simple rules and pivot points. Later on in the century, even more bizarre market seers arose, and Joe Granville comes to mind. One of my earliest memories of the market is reading about Granville promoting his "Books of Granville" dressed as the Biblical Moses. In fact, my first hands on exposure to the market was after I met a financial astrologer while fishing back in 1990. He claimed to have called the crash of 1987 and profited wildly by buying way out of the money OEX puts with his college fund. He became obsessed with repeating this feat and astrology in general. I remember his purchase of J. Paul Getty's astrologer Evangeline Adams library containing all types of esoteric tomes. Needless to say, to the best of my knowledge, this story does not have a good ending.

Recently, I have noticed a proliferation of gurus trolling the internet for memberships in various chat room type websites or seminars. They are generally traders of stock index products like the mini SP500, the mini Dow contract and the Russell 2000 mini product. They all have some type of indicator, method, or system that will enable their subscribers to easily extract profits by just following along. Some claim to use logic, others write in such an obscure manner that just about anything can be read into their words. I have divided the Neo Gurus into three main types:

1. The plain talking regular Joe: This type claims to have been just like you, prior to finding the holy grail, which due to his altruistic nature will share with you for a small fee.

2. The Esoteric Intellectual: This type of guru was never like his followers existing on a higher plane. However, he is generous and is gladly sharing his knowledge for a stipend of what you will earn by joining his flock.

3. The Mystic: This type, although related to #2, is very different. He claims supernatural chart reading ability and general future reading skills.

My contention is that this recent proliferation of market gurus is an indication of a near short term top. The last of the public is being drawn in to lubricate the machine for a rapid descent. The only unknown is when.



There are many uses of the lognormal distribution of price changes in markets, and most of them are untested and non-predictive.

There is the use by experts to try to show that options are not fairly priced. There is the use by doomsdayists to show that catastrophe is much more common than might be predicted. There is the use by ignoramuses who don't know the meaning of the term at all, but use it as a catch word to back up their ideas. They think that it is de rigeur to lose 90% every few years because this is counterbalanced by the fantastic upsides from trend following and capturing the big moves that the large people are always ready to engulf.

There is the use by academics who would somehow adjust for the possibility of negative changes in a normal distribution that is not possible with a lognormal distribution.

There is a use by other academics to create a smoke screen of complexity about such things as in the enclosed article to back up statements like, "this means that an observed path of trailing historical volatility fluctuates around its mean with % difference to the mean of order 1/ square root of n. For example, a graph of trailing 30 day historical volatility on a perfectly lognormal stock price with actual volatility 0.30 will fluctuate around a mean value within a few $ if it's 0.30. Also, more than half the time, it will be within a band approximately given by 0.25 and 0.35." Apparently the variance of the variance is calculated, a central limit theorem is applied and cutoff points related to this approximation upon approximation is pulled out of the hat.

As always in such self aggrandizing presentations of quantitative knowledge ("the professor is a good trader," they say among the academics and "the trader is a Professor," they say on the trading floor after the rout), the hidden agenda is that one will not complete that sentence.

But one posits that the lognormal distribution of prices is not more predictive of the distribution of price changes of the indexes between days than a model based on a normal distribution of % price changes. Furthermore, a normal distribution of yearly % price changes gives as good a fit as a lognormal % distribution.

The test for this would have to be a predictive one, using rolling predictions based on a back window of say the last year for the daily % price changes or the last 20 years for the yearly predictions. But as a first step, random drawings should be taken of % price changes. They should be compared with the actual predictions of the distributions that would be created by a retrospective normal and lognormal model. Measures of the departure from the predictions should be evaluated.

One wonders in the absence of such tests what it will take for the lognormal boys to ever falsify their predictions. How many years will be gone without big % changes before they conclude that fat tails are not anymore likely than would have been predicted by a normal model? How long will they rely on the 1987 move in stock prices to prove that things are highly kurtotic and thus justify their pretensions and livings?



Although coffee farming is a part time job, being a philosopher, just as being a speculator, is a 24 hour day job. On our subsistence coffee farm, January is the end of the picking and the season for pruning and fertilizing. Pruning clears away the dead wood, and leaves room and energy for the young shoots, which have the most flowers and the most beans. Fertilizer helps the formation of new shoots and flowers so that next season there will be beans to pick. It is work in the hot sun for no reward, except a season away. So during the manual labor, there is time to philosophize.

Farmers seek their reward in the future, despite the present labor, and the risks of the weather and of price fluctuations. In the fullness of the seasons, his crop comes to fruition and can be harvested. There is no rushing it. He depends on the vagary of the rains, and he is confident that he will produce. He hedges his risks in various ways: in land, in futures, in other crops, in his family, in community activity. It is a good life.

The speculator's job is to clear away the dead wood, the non-productive uses of capital to make way for young growth that will bear flowers and fruit. The speculator is the fertilizer that contributes capital to produce new products and efficient systems of capital use. He works hard and seeks his reward in the future. There is no rushing a trade. He depends on the vagaries of the markets, of world events, of politics, and even the weather, confident that his speculation will bear fruit. He hedges his risk in many ways: in his lands, in a steady portfolio of bonds, in his family and community activity. It is a good life.



It's a hard life trying to outperform the stock market indexes. Most of the time these traders do not have tested systems or, if they have done some testing, it is likely that the methodology used has some shortfalls. But let's suppose that everything is fine, and that they have managed to find a niche of market inefficiency which can be exploited by a small flexible trader in and out of the market very quickly. The problem is that a part time trader goes to work in the morning, participates in meetings, travels, etc. Sometimes the boss calls him/her right when the setup is there to be traded! When the system gives a buy/sell signal, he/she is not there to trade it. The lack of consistency is the main issue. For a European trader, it is even worse. Markets in the US open 15:30 European time and close at 22:00. The European part time trader goes home when US markets are open and finds the family "requirements" to be met often more demanding than those of the office work. He/she has to help the kids with their homework, the wife/husband with things to do, dinner time, friends after dinner, etc. Being consistent with the trading plan is almost impossible even for the most determined and focused part time trader. Moreover, when they go on holiday, no trading is possible unless they want to divorce. At the end of the day, although their system works fine and they are very disciplined traders, there is no way to outperform the market simply because they were not there to trade their systems.

Maybe the solution is to give up trading, buying an ETF and spend more time with the family.

Kim Zussman comments:

Yes, but there can be advantages to the part-time vantage:

1. Not looking at markets all day reduces over-trading. The more you look at moment-to-moment moves, the more tempting it is to mistake them for opportunities.

2. Long-term patterns and anomalies are generally more profitable because they integrate more risk and less vig.

3. Personal diversification: Necessarily, frequent losing trades are extremely painful, and it is nice to have other concurrent professional activities which are rewarding. Be a portfolio with a mix of risky and low risk assets, balanced to suit your psyche.

3a. Cover: Being ridiculed and berated by family and friends is diluted when the income stream is not at stake, and they can more easily forgive difficulties of a second vocation if the first is intact.

4. You can easily run your own hedge or mutual fund while drastically reducing cost and customizing risk to fit your temperament.

4a. If you are certain there are others who can invest much better than you, get past your ego and use them.

5. The market needs you, especially if you trade a lot and make many mistakes, to provide liquidity and profits for smart guys on the other side of your trades.

6. The golf rule: Investing/trading can be more frustrating than golf, but it is 1.5 million times more interesting and will make you a babe magnet.

George Criparacos adds:

As a part time trader, I identify completely with the problems outlined and with the response of Dr. Z. I would humbly like to add that there should not be a target to outperform the market.

Scott Brooks offers:

This is a great post by Kim! There is wisdom here for everyone, even those who are not part time traders. Everyone, even pros and day traders, should cut this out and put it in their playbook. I know I am!

Thanks for this Kim!

Scott Brooks further adds:

It is important to remember that outperforming the market (usually thought of as the S&P 500 … the cap weighted index) is difficult. Most pros don't beat the index.

Maybe your goal would be to create an income stream of 3%/year to live on with a moderate amount of growth to offset some of the effects of inflation.

Maybe your goal is to beat a composite index of stocks and bonds (pick the indices that you think are appropriate).

Maybe you're good enough as a personal trader to accomplish the return goals your looking for and to receive satisfaction from managing your money (kind of like a hobby … but one that is profitable).

I have several clients that have me run a portion of their portfolio while they run the rest. The reason in many cases is that one spouse has nothing to do with the money (usually the wife) and the other spouse likes to invest and is really into it (usually the husband). The husband realizes that if something happens to him, his wife is not just going to take over the portfolio and all of a sudden become an expert in something that she has no interest in. So he has me run a portion of the money so that he can be comfortable with my competence and the wife can have a relationship with someone that she knows and has come to trust.

People can have many goals in the markets. It is imperative that you:

1. Identify what your goals are
2. Figure out a methodology that can accomplish those goals
3. Figure out if you have the time to work that methodology
4. Make sure that a fail safe is in place (i.e. work with a professional if your spouse is not interested, or work with your spouse)
5. Figure out if you have the competence to accomplish your goals
6. Be able to back test your system in the bad times (everyone was bragging about their genius in the 90's … but seem to have lost half their new found IQ since)
7. Have a playbook for how to handle different scenarios (especially what I call lifeboat drills)
8. Be willing to admit that they may not be able to do it
9. Other things that are important that I'm sure I'm missing
10. Make sure that you're having fun if you meet all the above criteria

Steve B. adds:

The part time trader is not the problem or the issue. The part time trader has at his disposal an arsenal of conditional orders that are set to fire on almost any imaginable market condition. It is the conditions that the part time trader has not taken the time to identify.

The issue in this case is the strategy. A part time trader will trade like "the trend is your friend." In this case the trend is what is hot and what strategy is in vogue. With the ever-changing cycle of trends, there is no possible way to get ahead in this type of trading. I would also argue that the part time trader is price focused - he does not care about volatility, interest rates, currency fluctuations, emerging markets, etc. due to the nature of his game "part time."

The part timer finally is apt to find shortcuts in order to make up the difference in time. The problem with shortcuts is that they run near to the edges of steep cliffs.

Dylan Distasio responds:

The issue in this case is the strategy. A part time trader will trade like "the trend is your friend." In this case the trend is what is hot and what strategy is in vogue. With the ever-changing cycle of trends, there is no possible way to get ahead in this type of trading. 

I would disagree with this statement as someone who has traded both fulltime as an intraday trader, and who now trades part time with a different vocation during business hours (and a longer trading time frame for a number of reasons). The part time trader is not tied to trend following strategies, and is certainly not obligated to follow what is hot and in vogue. They are just as capable of fading the herd as a full time trader or coming up with any other strategy to try within an interday time frame.

I would go on to argue that trend following strategies are capable of making money long term. The No Load Fund X newsletter which combines a relative strength trend following strategy with mutual funds (or more recently ETFs) has consistently beaten the S&P 500 since 1980 as audited by Hulbert Financial Digest.

In any case, they are not tied to the trend. There's nothing preventing them from following whatever strategy they wish. Practical considerations usually exclude the intraday time frame as an option for the part time trader, but they can use their ability to sit on their hands and cherry pick within a longer time frame as a strength.

I would also argue that the part time trader is price focused - he does not care about volatility, interest rates, currency fluctuations, emerging markets, etc. due to the nature of his game "part time."

I would argue that the part time trader should care about all of these things. Speaking for myself, I certainly do.

The part timer finally is apt to find shortcuts in order to make up the difference in time. The problem with shortcuts is that they run near to the edges of steep cliffs.

The part timer who is serious about attempting to beat the market should realize the amount of work required to do so. I think most of the ones who are able to trade part time and consistently beat the market are combining a lot of hard work after hours with their experience, and a willingness to constantly learn.

J. Klein offers:

Respectfully, I would tend to disagree. Part time vs. full time is not a question of strategy. It is, I feel, an acknowledgment of one's limitations.

Many will disagree, but I find that trading is mainly hard work. If you work hard on learning the market and about yourself, eventually you will work out some small strategies that leave you with a few more coconuts in the evening than you had in the morning. I am old enough to have seen more than one dumb young person get decent rewards, if they hung around long enough and are honest and hardworking.

The market is very large and there are many opportunities, but a part timer may take a relaxed view and let most of those golden opportunities flow away. Existing in a less pressurized environment, he may engage in only a few situations, and follow them more carefully. He trades part time, but his mind keeps working full time (how can one avoid it?) so he may be doing more thinking on each trade. More thinking, less pressure, less fear = better results, hopefully.



I came across Gray Television, which operates CBS and NBC television stations, and which was recommended in Barrons this week. Its philosophy of operating stations in state capitals seems to me the soundest thing I've heard since such capitals always increase in population, influence, and commerce. According to Nock's idea, the only job that matters in the U.S. is the Secretary of the Interior. When I visited Brussels in 2001 and saw the E.C. starting there, I predicted similar growth to Washington. I thought that the real estate market there would have similar growth to that of Washington from the 30's, as more and more plucking of geese was done there. I wonder what other companies are so situated to profit from increases in capital activity.

There is much talk about this being the longest period in market history without a 10% decline, and that it's going to come soon. Noticeably absent is the testing relative to survival statistics that of course shows a hazard rate decreasing after a threshold. But all are waiting for a 10% decline and presumably they will be ready to buy when it comes. Of course, like the 9% decline in May, it will probably come just short of that, not to give them a chance, but if it does come, there should be some nice buying there. There is also talk about the Bernanke put not being as high a strike price as the Greenspan put. Hickey and Faber and R. Forsyth are also very bearish, and this time it is not because of Iraq-as in the previous Abelson world's record for consistent bearishness, comparable to the Caltech streak, or the first rounds lost in Tennis streak–but because of declining world liquidity caused by oil price declines. Discussions of the broken window effect are there, but there is a total obliviousness to the fact that when goods get cheaper, real income and real wages increase, and this raises individual and total wealth. Similarly it's not the GNP measurement problem that the broken window effect is designed to capture, but it is rather the loss in total output that occurs when a broken window is replaced with a new one due to the opportunity cost of fixing it.

With all the talk about mechanical systems that find overvalued stocks–which are all as we have posited many times broken because of faulty data, ever-changing stocks, and low priced effects–it would seem apt to find groups of stocks that are sold down hard by such things as mechanical signals triggered by earning lapses, so that a bull move similar to those by Drew (when he was on the long side, based on and triggered by Little's bearishness before his bankruptcy) in the 19th century could be engendered. The statistics on moves in short interest classified by individual stocks would seem to be a good foundation for such maneuvers.

I am reading Our Brave New World by GaveKal Research and it contains a mass of untested assertions from a money making persona similar to their view that companies that don't manufacture but are designers do much better than manufacturers. This would seem capable of testing via changes in asset levels, and return on capital figures, and one doubts that it would bear out the GaveKal thesis. But their idea that intangibles, knowledge and education, and free trade are the key to prosperity seems to put them on the weather gage.

Vic further adds:

Read this chapter on lognormality, which shows the intricacies of even preliminary work.

Steve B. comments: 

Discussions of the broken window effect are there, but there is a total obliviousness to the fact that when goods get cheaper, real income and real wages increase, and this raises individual and total wealth. Similarly it's not the GNP measurement problem that the broken window effect is designed to capture, but it is rather the loss in total output that occurs when a broken window is replaced with a new one due to the opportunity cost of fixing it.

With all the talk about mechanical systems that find overvalued stocks–which are all as we have posited many times broken because of faulty data, ever-changing stocks, and low priced effects–it would seem apt to find groups of stocks that are sold down hard by such things as mechanical signals triggered…

"The government's statistic is broken" is often heard from the caves of bears as they run out of hard evidence and resort to mud slinging and conspiracy theories. Just last week, the ADP data showed a market with jobs lost only to be replaced by the official numbers of job growth. The latter propelled the markets as the ADP shook out willing sellers and those who thought they were getting some kind of inside information from the ADP numbers.

Some mechanical systems are the shortcuts of part time traders and the sellers of fortune. There are opportunities in stocks that trade away from their peers only because they have been sold hard due to some trivial news event that caused a large enough price move to trigger mechanical systems. The price based trader will always be with us and I suspect some have already found some of their trigger points, such as was done years earlier by Market Makers holding the "book."



Concerning stock-type, in explanation of value and size effect (if they did or do exist, usual CSRP tapes caveats apply): Read here

Evidently the high-language of scholarship is evolving, as evidenced by (formerly known as) the conclusion:

III. Bottom Line

Our results on how migration leads to the size and value premiums in average returns are easily summarized. The size premium is due almost entirely to the extreme returns of small stocks that move to a big stock portfolio from one year to the next. Three factors contribute to the value premium. (i) A relatively large fraction of value stocks improve in type (Plus transitions, with high returns), while few growth stocks do. (ii) A relatively large fraction of growth stocks deteriorate in type (Minus transitions, with low returns), while few value stocks do. (iii) Value stocks that remain in the same portfolio from one year to the next have higher average returns than the matching (small or big) growth stocks.



Reading the talk about Verizon Fiber Optic (FIOS) Internet/TV bundles brings two thoughts to mind:

1. When you get FIOS, you lose your copper.
2. If the power goes out, you are relying on a small backup battery in the premises equipment that they give you. It only lasts a few hours (a Verizon tech told a friend that it lasts 6-8 hours). Implications of #2 are obvious. Your normal phone line is powered by the central office which has lots of backup batteries which will last much longer.

So back to the story:

About two years ago, after suffering with ISDN for eight years, I was able to obtain a cable modem. It was great except that the cable modem went down sometimes; like yesterday when a contractor cut a cable a few houses away from me. Fortunately, about a year ago, Verizon finally brought DSL to me ($15/mo for 768Kbps). It's an embarrassment of riches. This brings me to this lifesaver and very cool tech product:

Xincom Twin-WAN Router XC-DPG502 ~ $175.00

Now, this is for wired networks, but it saved my tush yesterday. The router connects to both the cable modem and the DSL modem (the WANs or Wide Area Networks), and then you connect the home network to the router. You can have it set to aggregate the bandwidth, but the cable modem has more than enough and so I have it set up to use the cable modem and only to switch to the DSL modem as a backup. It also has a very nice web-based interface as well as a good firewall, etc.

So yesterday at about 10:00 AM, Tradestation (what I use daily) blinked out for a second and then reloaded the data. I didn't think much about it. At 11:00 I decided to turn on the TV and watch the news. No TV! I logged into the router's web interface and hey! The cable modem was down too, and the router had switched to using the DSL backup. The cable was out until 11:00 PM (we now have an orange wire snaking down the street). It's just luck I guess, that they didn't cut the phone line as well.

I can't tell you how hosed I would have been yesterday if I didn't have this gadget.

J.T. Holley comments: 

The other option, if you want to further embarrass your richness (I can't afford), is to get a wireless card from Verizon for $49.95 a month for a notebook as back-up. That'll run you 35 more bucks, but at least you'll be mobile while traveling to a hotel that has power and a router.

Last week was the first time in my neighborhood that I had to call 911. I purposefully chose my house due to the fact that it has a cul-de-sac. In this cul-de-sac there are only three homes where usually there are five to six. The reason is that from ten o'clock to one o'clock, there is a Tot Lot that is part of my community, and from one o'clock to four o'clock there are modified wetlands. I live at nine o'clock, which is the house closest to the Tot Lot. Due to this, it is dark at night with no major street lights other than those of my house and neighbors.

When we first built it four years ago, no one would drive in our cul-de-sac. However, two years ago, I'd look out randomly and notice a single car parked in the darkest curve outside my house. I usually wrote it off as teenagers doing what teenagers do, so I'd flick my lights and that would flush them out. Last week, I had a car pull up around 1:30 A.M. and I watched the young man get out and take a leak on the other side of his car. He got back in and left the car running with the lights on. I thought nothing of it and then went back to crunching numbers. I looked out at 2:00 A.M. and noticed that the car was still there. I turned on the light above the garage door and the one outside and he drove away and then immediately came back. I went to bed finally a little later with the car still running outside. My wife woke up at 4:00 A.M. to use the bathroom, and I asked her to look outside to see if the car was still there. It was and that's when I said enough is enough and I dialed 911. I didn't turn any lights on, barely moved, and my wife never hits the blinds or anything. To my amazement the guy left as soon as I hung up with the 911 call. It was like he knew I was talking and had a scanner in his car.

Back to the point, later I shared this with my neighbors in our close community and one lady spoke up and said that in the wee hours of the morning, this happened to her. She said that they pulled into her driveway at 3:00 A.M. and parked behind her car. She walked out to the car and the person had a laptop on, surfing the net. She said that the police told her that they have caught kids between the ages of 16-18 sitting in cars in neighborhoods after sneaking out at night, using "wireless routers" and surfing the internet more than likely for porn! Geez. I called the police department to verify and they said you'd be amazed at how many people haven't encrypted their routers and have upgraded to wireless networks that are giving them more range.

Now I make it a habit to peek out of my window at night before I go to bed and I've personally helped three neighbors in the past week encrypt their routers!



"High surf advisory remains in effect for north and west facing shores. Surf along north facing shores will be 15 to 17 feet, with occasional sets to 22 feet through Saturday," said the surf report. The waves were big and so after the market closed I looked at the surf spots from my house to see which ones were breaking best with the least surfers. Honokohau National Park looked best. Paddling out the quarter mile out to the break, a guy yells out to me and says, "Aren't you James?" This was funny because the only time I see this guy is out in the ocean. There was just this other guy, me, and this guy on a stand up surf board with a paddle, which is a new thing.

The guy's name was Jack. Jack, being on the stand up board, could see better because he was standing. While we were out, he saw a shark cruising by. Honokohau is the sharks' favorite place to go to eat the fish guts the fisherman throw out.

We don't freak out, and here's why. For one, they usually cruise on the ledge just outside the surf since they can't handle the big waves. Second, they are usually just cruising through for food and looking for weak wounded fish or blood. They won't mess with an adult guy paddling a board aggressively and flying along the surface of the big waves at 25 miles an hour over the water. Even still, I kept a good look out under my feet, which were dangling in the water. It's a good thing to know the risks and to know the predators in the area when you are the prey not the hunter. The trick (I've heard) is to punch them hard, right in the nose to make them go away if they charge at you. So despite the threat, the waves were nice, the weather was nice and it was a good day.



I don't even know how to tell this story … so I'll just give it my best shot. What happens is incredible … but it has a twist that is unbelievable! 

A young boy (Ben Ownby) was abducted five days in a small town just outside of St. Louis, called Beaufort (pronounced BU-fert). A young neighbor boy, Mitchell Holts, who got off the school bus with Ben (and went a different way), noticed a white Nissan pickup with a camper shell with two black handles, NISSAN written on the back bumper, and slightly rusty fenders. 

Mitchell says he doesn't know why he paid attention to the pick up truck, but something told him that he should. Later when it was discovered that Ben was missing, Mitchell relayed his story. He took a voluntary lie detector test to confirm the story and his lack of involvement. 

The police released pictures of what the truck would look like to the news media, including pictures of Ben. 

Five days later, in a suburb of St. Louis (Kirkwood), another man was bothered by the fact the he saw a white Nissan pick up in his apartment complex. He said he never saw it move, but after a few days, he decided to call the police. Just then, the police came up to the apartment complex, and this man went out to see them. He asked them if they were there for the white Nissan. They looked puzzled. They said, "No, we're here to serve a warrant on someone" (who was totally unrelated to the case). 

The gentleman told them about seeing the white Nissan and showed it to them. The police were stunned. They blocked the truck and called for back up. 

What happens over the next several hours is still hazy from the reports, so I'll skip that. Let’s just say that the police got into the apartment and they found the 11 year old Ben Ownby alive! 

But that's only half the story. 

Four and a half years ago, there was another 11 year old boy who was abducted. His name was Shawn Hornbeck. It was an open case. They never solved it. 

When the police stormed the apartment and rescued little Ben, there was another boy there too. 

When the police had the suspect (Michael Devlin, 41 … registered sex offender who had not registered in the state of Missouri) in custody, they asked the teenager what his name was. He said … Shawn Hornbeck! 

Shawn had been held captive for four and a half years! 

Both of these boys were abducted just southwest of St. Louis. Apparently, when the news broke, the Wal Mart in the area where both of these boys were from announced over the loud speaker that they had been found. The store erupted with cheers. People were hugging and crying with joy! 

As I drove down the road this evening to go to the gym, I turned on my radio to KSHE 95 (the world famous Rock Station). The DJ was gushing with joy. I figured he was all excited about something stupid like a big rock concert coming to town (DJ's get stupid excited about that kind of thing sometimes). Then he announced what happened. I felt a sense of joy and excitement come over me. 

I believe that this rescue is really not the end of this ordeal for these boys and their families. The horror of a five day abduction for Ben Ownby will likely scar him for life. But a four and a half year abduction for Shawn Hornbeck … my heart aches for this boy and what's ahead of him. 

I felt connected to this for several reasons. The small suburb of St. Louis, Kirkwood, where they found this animal, was right next to where I grew up. He worked as a manager at a local pizza parlor franchise in Kirkwood (Imo's Pizza … great pizza by the way). I worked at the Imo's franchise in Maplewood, right down the road. These abductions took place out in Washington and Franklin Counties … where I used to hang out with friends as a teenager. 

The families that played a role in the rescue, from the boy that "just felt there was something wrong with that truck" to the guy at the apartment complex who "just had to check on that white Nissan," were all very familiar to me. No, I've never met any of them, but I know their kind. I've written posts about them before (see my post about my son, Hunter, cutting his leg and how these kinds of people jumped to the rescue to help). 

I've been known to ridicule these kinds of people from time to time. But in the end, most of them are salt of the earth, fiercely loyal, kind, courageous, honest and will ultimately do the right thing. 

As a parent, I can't even imagine any greater pain than what these families went through. I said a silent prayer of joy. 

I almost feel a bit guilty that my analytical mind was fast at work thinking of lessons to be learned from this ordeal, as I pounded away my hour on the elliptical trainer. But nonetheless, I can't help but think of some. 

That young man, Mitchell Holts, reminded me of how important it is to pay attention to what is going on around you. His "mindfulness" saved the lives of both of these boys. There was a book I read several years ago called The Gift of Fear. The premise of this book is that our sub-conscience is able to assimilate clues around us so that we know when something is right or wrong, sometimes called a gut feeling or a "hunch." This is a good book and worth a read. 

Paying attention to the little things, learning to heed that "inner voice" is a skill that can be infinitely helpful to us all. 

Another thing that jumped out at me was that we should take advantage of opportunities when they are presented to us. That gentleman in the apartment complex who saw the white Nissan … he said he never saw it move, so he didn't know if he should say anything. But when he saw the police in the parking lot, rather than assuming that they were there for the Nissan, he went out and told them about it. Good thing, because they were there for a completely unrelated purpose and would have probably never seen the Nissan. Sometimes you just have to have the courage to act. 

As for Michael Devlin … there is a special place in hell reserved for animals like him. In the meantime, I look forward to knowing he's going to prison. I hope they put him with the general population … a friend of mine, who is a psychologist in a Missouri prison, says that "he will discover what hell on earth is, out in the general population. There is no greater punishment we Americans give to a man like this." Even criminals despise his kind … and they will extract their pound of flesh. 

On a lighter note: 

In our church, we have a thing we do called Family Home Evening. We gather once a week as a family, take care of family business, read scriptures, say family prayers, play games, put on skits, sing songs and teach lessons. This week we will revisit a lesson we teach at least once a year. We'll teach our kids how to handle strangers, how to protect themselves, and how, if they are abducted, to handle themselves. 

In the meantime, I will say a prayer of thanks for this miracle. And I will pray for another miracle to occur … that both of these boys and their families can find peace and happiness again … and find a sense of security. 

I don't want any miracles in my life … just the blessing of being able to raise my kids safely and have them healthy and secure.



In chess it is vital to be a good loser, much more so than being a good winner. You often get players who, on losing or missing a win, become bad tempered and attempt to blame things around them, from the spectator who rattled his change to the size and shape of their pieces. The number of possibilities is endless.

Briefly speaking, what all these things have in common is that they allow the player concerned to avoid responsibility, and the subtle element of self deceit can damage both the learning process and the player's decision making ability. This is why the best players tend towards brutal self honesty and objectivity. Anything less than that can be a fatal flaw.



For a core holding component of your portfolio, that is, if you run a "core and satellite" strategy like we generally employ at Chippewa Partners, you will want to own the Rydex S&P Equal Weight ETF. This fund weights its portfolio in equal amounts vs. rewarding larger positions to companies with the biggest market capitalization. This difference means that the smaller members of the S&P 500 can influence returns just as much as its largest constituents like General Electric, Microsoft, or WalMart. And that adds up: This exchange-traded fund has returned 12.5% over the last three years, two-and-a-half percentage points better than the S&P 500. I pitch this name to everyone, everywhere, in every meeting, in every seminar. When I tell stockbrokers or financial planners to own it, they usually look at me with the same blank stare that I get when somebody mentions the word "calculus" to me. It is a market beater. Do the math, run the historical returns. Small beats big over time, even in the S&P names.



We’re proud to feature 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.

Tru Restaurant - 676 N. St. Clair Street, Chicago, IL 312-202-0001

James Bond lives here; he always has and always will. Some restaurants try to be all things to everyone; sometimes it works, but many times it turns out to be nothing more than an overpriced meal with stuffy waiters. Not here, never here. You sense it in Tru, starting from the dialing of the last three digits of the phone number (001), to the nondescript entrance (no signs anywhere, just darkened majestic doors next to a brass square foot plaque with the TRU logo on marble), to the quiet light-bending anteroom with a single cobalt blue statuette of a female nude. You're here, but so is Bond. 

Whisked away to your table that has been memorized by the maitre d', you find yourself in a dining room with high ceilings and curtained windows (little light gets in, nothing gets out). White drapes taper to rich blue velvet banquettes, all floating off a rough black European mosaic tile and charcoal carpet. In one corner you might find the chairman of an exchange that recently merged with another exchange; in another you might find the scion of a Broadway theater mogul, here in town with his mistress, and along the back walls the moneyed crowd with their enhanced physiques, new hair, new tans, and fine jewelry. Tru is razor sharp in etiquette and makes no apologies for it; there are maitres d', majordomos, head waiters, assistant waiters, apprentices, busboys, apprentice busboys (a little like The Remains of the Day meets Gordon Gecko) and then there is caviar and Dom. 

Tru is known for its caviar staircase, an eight-step curved glass and mirror staircase sprinkled with caviar and its accoutrements. Chef Rick Tramonto takes you on a colorful palette of sophisticated culinary delights with a decidedly Cubist slant (most plates are square, rectangular, or some other variation of bounded geometry). Your dinner will consist of intermittent voyages from the water (as in Japanese Sashimi-Grade Fish with Complementary Garnishes), to the land (as in Elysian Fields Lamb, Coffee Lemon, Cardamom, Butternut Squash), to the air (as in Pheasant Consomme, Chestnuts, Butternut Squash), and finally to the cheeses. For desserts, pastry chef Gale Gand (she has a show on Food TV called "Sweet Dreams") brings out a dessert cart fit for a Tahitian Prince; this is like Richie Rich's version of the Good Humor truck. 

And though you might not see James Bond here, you know that he was here, scooping up the (now) illegal Beluga caviar or (now) illegal fois gras, sipping Dom Perignon '95 ('95 was better than '98, but it is $1,200/bottle). Stay long enough at Tru and birthday parties in Sardinia, $9,000 shower curtains, and interior decorators for private jets become de rigeur. For business types, this is your spot — if your company can handle it. An intimate dinner for four will easily breach most public companies' T&E limits. Attendance at this fine institution is mandatory at least every 18-24 months; but so is a viewing of any James Bond movie.



In considering support systems in markets, one would certainly not wish to overlook Thigmomorphogenesis ( which I believe formed the basis of the modern boy wonder's systems) which are height and thickness responses to strong winds to make the tree more stable.

One often finds that after a big move in an individual stock or market, there is much backing and filling, reversals, and gravitational moves to the close of the big move, before further growth or decline ensues. The question is whether such phenomena are predictive and how to test. Perhaps in the spirit of David Brooks, who better to ask then the specs. We have foresters and technicians among us.

Vic further adds:

Many trees are supported by roots attached to the trunk as seen here. I am wondering if this natural phenomenon, used widely in architecture and engineering, has its counterpart in markets, and whether this can be quantified and whether it creates for more stability. I wonder what other support systems exist, their prevalence and function.

J.T. Holley comments: 

As mentioned before on the List, while I was in Wilmington, NC a few years back, the Bald Cypress trees have a wonderful support system and are a great metaphor for the markets. Not only do they have the buttressing effect with their bottom trunk, but they also possess "knees" that serve both to get oxygen to the roots and to further support the tree in the silt laden waters. 

Mentally, picture the bids and asks around the market price of a stock. They too are the "knees" that feed oxygen to the price. I will try to type a rudimentary picture:

b = bid      a = ask      x = price

       X     a
 b     X     a
b b b b X a a a a

As the bids and asks move together in compromise they feed the price, adjusting upwards and also downwards. The bids and asks can form the "knees" by having a larger size than that on either side of it, bringing either strength or weakness towards the price inwards. The key in attempting to quantify might be to see how "fat" the price attributing to the buttressing effect is. Do round numbers have more of a buttressing effect and stability? Do low beta stocks have fat buttressing? 

For what it's worth, the Bald Cypress lives along the water's edge. I've been told that trees that have large and big leaves act as "sails on a boat" when hurricanes blow through and they get easily knocked down. The Bald Cypress seems to be well adjusted in the South in combating Mother Nature's breath by having well adapted leaves for this theory and the buttressing is the kicker. They are the most amazing trees next to the Sequoia's that I've witnessed in my life.

Scott Brooks adds:

Based on the link Vic provided, we've learned that trees don't collapse on their weight. This is incongruent with trading as stocks collapse all the time from their own weight (i.e. tulip mania, .com bubble, etc.)

What I found interesting in the wikipedia search is that the more a tree limb is rubbed, the more their growth pattern is altered and as a result the limb gets thicker (and stronger I assume). This may be analogous to a stock building a base before moving up (growing). There seems to be a disconnect here as a stock that is heavily traded (rubbed) would likely move strongly in one direction. Stocks seem to build bases when there is a lack of excess interest in one direction or another (interest in buying is equal to interest in selling). It's not until there are more buyers lined up to buy than there are sellers willing to sell that the base is broken to the top side. The inverse is true for breaking to the downside.

Thigmomorphogenesis is the response by plants to mechanical sensation (touch) by altering their growth patterns. In the wild, these patterns can be evinced by wind, raindrops, and rubbing by passing animals.

M.J. Jaffe discovered in the 1970s that regular rubbing of bending of stems inhibits their elongation and stimulates their radial expansion, resulting in shorter, stockier plants.

Growth responses are caused by changes in gene expression. This is likely related to the calcium-binding protein calmodulin, suggesting Ca2+ involvement in mediating growth responses.

Mark Goulston offers:

Here is another interpretation of thigmomorphogenesis. “The more a tree or plant is rubbed, the more its radial vs. elongated growth increases” is a metaphor for "the more hits that life smacks you with, the wider your stance better be to endure subsequent ones." This is not unlike cowboys circling the wagons when under attack, or animals hunkering down to diminish their exposed area to repeated attacks. The question is how much this is a reaction to attacks vs. an anticipation of future attacks where the most Darwinian evolved to withstand future attacks (that actually occur vs. merely a bubbameister) will out survive peers. On the other hand, if there are no future attacks, such an increased girth or widened stance will limit your movement and flexibility.

The interpersonal equivalent is that when nobody is attacking you and you act defensively, you are perceived by the other as being on the offensive.

No wonder the world will always needs shrinks and lawyers.

John Kuhn comments:

There is a giddy feeling when one of one's holdings experiences the "long bar" lurch. One is almost helpless to push the sell button. Yet as with those vomitous feelings engendered by unimpeded collapse, so with the inebriating joys of rapid equity advance … many an optimal moment for action is signaled in the emotion. As a counting incompetent, many of my best moves are in fading the long bar, and more of my worst, by failing to do so.

Jack Tierney adds:

What I found interesting in the wikipedia search is that the more a tree limb is rubbed, the more their growth pattern is altered and as a result the limb gets thicker (and stronger I assume).

I wasn't aware of this (or of much else), but this comment triggered a memory that goes back to a high school literature class. One day one of my fellow students popped up with the following rhyme: 

A woman, a dog and a walnut tree, the more you beat them, the better they be. 

As I recall, Mrs. Rigsby wasn't terribly amused and even less so when the offender couldn't name the source. The rest of us didn't much concern ourselves with that - instead we pondered how such treatment could benefit a tree (it was an accepted truism for the other two). 

Scott's remark moved me to Google the line which remained buried in the recesses of my mind. It's attributed to Thomas Fuller, a "British Clergyman and Writer, one of the most prolific authors of the 17th century. 1608-1661." 

So it only took 50 years or so to find a possible answer; I'm not sure that there's any market applicability involved.



Given the multiple parameters by which stocks are valued, I would posit that price should not be the only measure used to count Giffen equities. Earnings growth rates, various price/X ratios and relative strength metrics could be studied for Giffen characteristics. 

Of course, many commodities were Giffen goods until a few weeks ago, as were "commodity currencies." 

There are also Giffen bonds. Look at how tight credit spreads are.



A Spec much wiser than I pointed out that Hillary has drifted back down "to support," to 50/50 odds of taking the 2008 Democratic nomination. The thought is that the media want to sell papers, and the ideal level for her to trade is 50, the point of maximum uncertainty, maximum gamma — thereby maximum interest. When she was in the 40s and needed a boost, the media fell in behind her "I'm a centrist" meme. And when she rallied to the 60s, the media unleashed a barrage of Obama puffpieces, causing her to stumble. 

If I were a Tradesports bettor with nothing else to guide me, I'd go with the a priori thesis that she will homeostatically be pulled to the 50 level by the media for another year, and can be "range traded" thusly.   




Forgive me for not making a tie to Denny's and the market. I had gotten used to your old site where you posted comments on a separate section. I will exercise more care when responding in the future to show a 'tie' as Mr. Brooks and others have in their responses. 

At the Denny's I visited, I noticed that one way they held down costs was through the careful use of labor. They run a bare bones operation and have as few table servers as possible, waiting on as many tables as possible.  



A few weeks back, Prof. Marion Dreyfus presented a poem about a soldier who dove onto a grenade to save the lives of his buddies. Our list's best historian had some technical objections about the plausibility of this story, which I'm sure were true. Nevertheless, occasionally something like this happens. Jason Dunham (1981-2004), on January 11, was posthumously awarded the Medal of Honor after he dove onto a live grenade and covered it with his kevlar helmet, saving the lives of two of his men.

In April 2004, during an attack near Iraq's Syrian border, Corporal Dunham was assaulted by an insurgent who jumped out of a vehicle that was about to be searched. As Corporal Dunham wrestled the man to the ground, the insurgent rolled out a grenade he had been hiding. Corporal Dunham did not hesitate. He jumped on the grenade, using his helmet and body to absorb the blast. Although he survived the initial explosion, he did not survive his wounds. But by his selflessness, Corporal Dunham saved the lives of two of his men, and showed the world what it means to be a Marine. [Read more here]

Stefan Jovanovich comments:

My objection was about the physical impossibility of diving on an IED, not the implausibility of any story of heroism. I have been blessed to know three WW II veterans who were truly heroic. My uncle George was a paratrooper with the 82nd Airborne at the Battle of the Bulge, and he spent three days of the battle with a carbine bullet in his right foot. The Army Medical Corps was able to save his leg, but for the rest of his too short life he walked like the Elephant Man and had one shoe twice the size of the other. He never once mentioned any awards he received; to this day I don't even know if he received any. My father-in-law, Buster Turner, was on a minesweeper at Saipan and Okinawa. That may not sound particularly heroic until you consider that the mine sweepers went in before the landing craft and worked their way parallel to the beaches (which tends to simple any problem the enemy has about ranging its target). In the 40+ years I knew him, Buster never talked about what he had done or seen. I think he put up with me in large measure because I had the good sense never to ask him. My CO at the Fleet Sonar School was a cruiser sailor in WW II at Ironbottom Sound and a survivor of two sinkings. The first time anyone on the base knew what he had done was at his retirement ceremony after 30 years. Watching him sitting on the podium squirming in his chair as the speaker recited his awards is the only time I ever saw him flustered. Marion may well know WW II veterans who "bragged about their spit shines to their children" but the only ones I have ever met were right out of the movies - they had shoveled shit in Louisiana and lied about it ever since. It might interest the List members to know that, measured against the total number of combat days (# of men and women being shot at x number of days), there have been fewer MOH awards granted in this war than there were in the first Gulf War and far, far fewer (less than a third as many) than there were in Viet-Nam. The record for MOH awards relative to combat days remains the Spanish-American War. That does not make those Spanish-American War MOH awards gedunk ribbons, but it does confirm what any thinking person should already know: the truth is always in the "technical" details.



 Boise State's game-winning two-point conversion in the Fiesta Bowl against Oklahoma was a Statue of Liberty play in which quarterback, Jared Zabransky, faked a pass to the right sideline while holding the ball behind his back. When he was running back, Ian Johnson took the ball and ran left into the end zone without being touched. The play worked because Zabransky's fake was convincing enough to get the Oklahoma defense running the wrong direction. Other football plays such as play action passes also rely on getting the defense to "buy" a fake. If the defense does not buy the fake, the play does not work. 

The hourly chart of the S&P 500 since New Year's Day looked like a series of misdirected plays for six consecutive days, up to and including yesterday, with the open down five points, further downside to a 20-day low, then a rally to a positive close. After six consecutive fakes, one might expect the defense to wise up, so today was the real deal: straight up from the open and a six point gain.



 As usual for the beginning of the year, the weak and rigid made a contribution to the strong and flexible. In markets the best of recent years performed the worst, and the worst performed the best. The NASDAQ was up a mere 7% last year, versus the S&P 500 's 15%, but now is up 4 % this year already, whilst the S&P is struggling along unchanged. Oil, the best performing market over the previous two years, is down 10%, and the dollar which was, at the worst of last year relative to its normal variability, down 10%, is now up 3%.

It is a similar story for the ten best individual stocks in the S&P 500 last year — ati, nvda, cmx, cbs.v, big, merq, bls, pd, hpc, nue — they are down 2% so far this year. The ten worst stocks last year — donaq, apol, adct, amd, jbl, ebay, bsx, novl, kbh, stj — are now up about 2%. Good old blue.

In Japan when a big stock sets a milestone there is singing on the exchange. There should have been an opera for IBM yesterday as it broke through 100 for the first time since April 2002. What a show of resilience — a milestone for the market, similar to the Dow breaking 12,000. This show of strength had a gravitational pull enough to outweigh the pseudo event of Gov. Moskow in Iowa stating that the Fed. would have to remain vigilant on inflation and raise rates again if economic growth quickens in 2007. When will someone explain to Fed. Governors that the stronger the economy, the less likelihood there is of inflation, as there is expansion to absorb the money supply.

pt (price times trade) = a constant to a first approx., and if t is up then p is down.

But of course the Iowa speech was a staged classic pseudo event of the kind that Boorstin would have used as a cardinal example, if his interests were not so aligned with the collective and it would not have offended his sponsors. Nevertheless, it was picture perfect. At precisely 12:30 e.s.t., the market swooned to 1415, down a nice 1% on the year, when the word "vigilant " came across the tape, and within 4 hours, the market had recovered the full 1% so it could play footsie with unchanged levels again, and get the boys who anticipated the pseudo Jan. barometer to reverse.

The major mistake that they make in fundamental statistical research, in my opinion, even above and beyond the use of retrospective files and out of date data, is to assume that the number of independent observations is somehow related to the company years in the study. If you are considering 1000 stocks say, value versus growth, over ten years, then you have ten independent observations, not 10,000. That is because in any given year, a certain style does well or badly, and the rising tide lifts all boats designed in such a way, and therefore the results in that year are completely predictable from five of six of the company years, and the rest of the 995 are redundant and non-informative.

I always get a kick from the key level boys who say "1398 is the key level." They do not tell you whether it's bullish or bearish, when you should act on it, or which index they're talking about. But if five days later the index or the futures is well above 1398, why then they say "we were on record with that 1398 was the key level to buy." If 5 days later it's 1350 then they tell you that the big boys got you again.

Now someone is going to tell me that 1398 was not a key level but the problem is that the key levels that I have heard talk of never got near for the futures, and were broken below for the index by three, so my goodness, what fools they must think we mortals are. What a terrible Upas tree of self destruction is wrought by such key level analysis.

Kevin Eilian comments: 

When will someone explain to Fed Governors that the stronger the economy, the less likely there is for inflation as there's expansion to absorb the money supply pt( price times trade) = a constant to a first approx and if t is up then p is down.

This concept that real economic growth reduces the likelihood of inflation is something that is rarely explicitly mentioned. In fact, even on this list, this is the first I've heard it put this way, and it makes sense. The only other place I've seen it is in Wanniski's works and essays.

Growth is a result of "demand for liquidity," which is defined as demand for liquid funds (money) to be invested directly into the economy. Lower taxes increase demand for liquidity, since it lowers the cost of capital (and rewards to capital).

The result is an "expansion to absorb the money supply." Now, if the money supply increases, but the desire to invest decreases or goes away (say, because of new regulations or suddenly sharp, higher marginal tax rates), there is a) less expansion (investment) and b) higher inflation (less supply of goods and services).

In the case of this higher inflation, the money bids up the prices of goods and services, and/or is stashed away in "inflation hedges" (or perceived inflation hedges), as people observe increases in nominal prices.



1/10/07 Momentum

The drop in the price of crude picked up in early Tuesday morning trading with the low below $54 a barrel. This caused selling by chartists and the bearish sentiment increased. As I looked at my positions, the losses grew, and even though natural gas was holding up, the portfolio took it on the chin. It's not the first time, and I'm patient. [Read more here]

Eric Ross comments:

I'm a bit confused. Why would one trade oil futures/gas futures when one could invest in "oil drilling/gas wells" and pull in a far better return for his buck? Risk/Reward … it makes sense to own an actual "piece" of oil/gas real estate than bet on futures. But what do I know, I'm just surrounding myself with some of the biggest oil/gas families in Texas.

Andrea Ravano adds: 

I cannot understand the logic behind the performance of oil companies such as Total, Exxon, Eni, Conoco and others alike: the market always bids up the stock along with the price of oil. If the companies make money by transforming crude oil into other products, why should their profit grow along with the increase in price of their main raw material? I understand that inventory pricing can make a big difference at $70/barrel vs. $50/barrel, but I'm sure there must be a better explanation for the case. Oil experts, please be patient with my ignorance.  

Stefan Jovanovich comments:

I am not an oil expert but am fortunate enough to know a few who tolerate my persistent ignorance. Their opinion is that the stock market presently values energy companies - including those that do not own oil and gas properties - as proxies for the oil price itself and does not value the companies' profitability at all. Those of us who remain unprofitably long in oil & gas & refining stocks keep hoping that the industry will someday be viewed as an actual business, but we may have to wait a lifetime or two. When Hubbert's Peak theories were first popular (in the late 70s), a friend from New England asked my wife, who was working for Getty at the time, and what she would do for a job when the oil ran out. The notions that petroleum is somehow peripheral to economic activity and that it should and will be replaced easily by an alternative seem to be two adult fairy tales that get told again and again.



I heard that a chess colleague had lost everything except his house with sports betting. I must say that I'm quite surprised as he has always been quite cautious with his commitments, certainly on the chess board. And as it happened quite suddenly, it wouldn't have been a death of a thousand cuts.

Chasing a bad bet? Probably. It's unlike the S&P, which can only go down to zero (which it probably won't) and there's no drift.



Miss Reversion is baking her cake. Having last year's worst INTC already, early first and last year's first, GM is already in the bottom half for the DOW 30 layer chocolate cake.



Try to start each morning thinking of something and someone you're grateful to in your personal and professional lives, and think specifically what you are grateful about. You will discover that you can't be earnestly and sincerely grateful in a heartfelt way and at the same moment in time feel that anything is wrong or missing in your life. It is from that position that one can often make the best decisions that will stand the test of time.

Every time you make decisions from scarcity, fear, jealousy, etc. they are often as flawed as those mindsets are poisonous to your mind.

By the way, try to find the people involved in what you are grateful about and express it to them. It will not only make their day, it will make you a little bit more deserving of success and happiness because you were temporarily able to leave your self-absorption that can very easily become a black hole.

Nigel Davies comments: 

In chess, to coin a phrase, it depends on the position. Sometimes there's a second chance, sometimes there isn't. Schlechter and Bronstein came very close to winning the World Championship and the point at which they missed their opportunities has been traced to single moves. In Schlechter's case the outcome was particularly tragic as he subsequently died of starvation. A Bronstein win probably would have improved his situation also, no matter what he said in retrospect.

Of course most of the moves we make in life are not usually so critical. If we miss one, we go on living even if it was some kind of key moment, and things then take a different course. They may be better or worse depending on which variation we find ourselves in. And probably we should not dwell on 'what might have been' for it distracts the attention from the game we're actually playing.

But the thought that haunts me is that our choices may be more limited than we think; it is difficult to be anything other than ourselves and most of the outcomes will be an extension of this. Perhaps we can learn to make better decisions and I believe that my struggle with the chessboard (and now markets) has been largely about this. As I like to tell my students, a genius is a man who only makes the same mistake five or six times, most of us do it for our entire lives. 



They say that the greatest regrets people have at the end of their lives are not what they did, but what they didn't do, especially when you have another chance (James).

That might be true for those who are 'they.' My experience is lamenting what I did do. I could also lament what I did not do. I suppose a psychologist, psychiatrist and mental health worker would say I am guilt-ridden and over-taken by sorrow.

To the point of the discussion, however, I can attest to the value of gratitude. Mrs. Smith smiles a hundred times a day, and most of those smiles are in our conversations, in our togetherness. I've witnessed her in social circumstances among other people and observed the frequent smiles there too.

Mrs. Smith, my spouse of 36 years, begins every day with a meditation period, part of which is to write down 100 things she is grateful for. She says I am at the top of the list every day.

According to Mark, her smiles are in part a result of her daily practice of listing what she is grateful for. This is worth a try for anyone who wishes for a better experience of life.

I don't do the morning list but I do it mentally, and silently express gratitude whenever I embrace Mrs. Smith. This practice saves my life perhaps.

You could say I am dependent on the smiles Mrs. Smith brightens the world with. In that way I am sort of a co-dependent. I used to think co-dependency was for people who were not able to be independent. I think the pop-psychology that brought on the tarnish to dependency in relationships is a symptom of deterioration in all societal interchange of this era.

I am actually grateful for my co-dependency. And as Michael Savage said in one of his books, "I am grateful for my parents' co-dependency, because that gave me a stable childhood." (Maybe not an exact quote, see his books for clarification)

For list members, please know I am grateful to be here among those who share many of my interests; interests that have kept me sane through many years of troubling circumstances.



 Denny's is my kids favorite restaurant. They've noticed that the Denny's by our house is always at least 1/2 full, or more, no matter when we go. David seems to think that they have a steady clientele that is growing.

The kids like the fundamentals they've researched from the analyst.

They think the food is good, served quickly and has catchy names (Moon's over MyHammy … who can argue with that name … and Hunter likes the kid's menu).

Mr. Russell (their teacher) likes the senior menu (Mr. Russell bought Denny's in his trading portfolio two weeks ago).

David is very excited about doing this trade, but I told him we should do more research. He said, "Let's ask the spec list, they'll know what to do" (who can argue with that)

So … what is the list's opinion of Denny's?

Tom Larsen replies:

Maybe the kids should try to find someone that doesn't like Denny's and ask why.

Maybe the kids could estimate what it costs to make a specific meal at Denny's and then compare that to the price. They could count how many customers are in the restaurant. They could see what people are eating. Maybe they could have a short conversation with the local manager about how he manages the restaurant.

They could learn about the different jobs at Denny's. They could learn what a franchise is. They could also think about the company's advertising and whether it works or not. They could try to determine which restaurants are "the competition," and test the food at these establishments as well. This research could get really expensive, Scott, but if you are taking kids out to eat, Denny's is a good place to go.

David Wren-Hardin Adds:

I would have them analyze the upcoming increase in minimum wage and its possible impact on Denny's costs.

Martin Lindkvist Suggests:

 The stock could work great, but I would ask one more question: Do other investors already know this, and is it discounted? By discussing whether a restaurant that stinks and has bad food actually could be a better investment one stands a better chance not investing in something that "should" work great but that others have already invested in and driven up the price. Compare with Birinyi Research that just showed that the five least liked companies by analysts (Dow components) beat the 5 most liked by analysts in each of the five or so last years. They also beat the average of the thirty years. As I said, it can be a great investment, that restaurant you are discussing, but I think the discussion could give more meals for a lifetime including expectations.

J. T. Holley Contributes:

 A few years ago when I got to go to one of those “pat on the back” conferences w/ Paine Webber they had Lou Holtz come speak. He spoke to a crowd of folks that more than most liked modern portfolio theory and randomness. The best part was when he started to speak about investing and speculation. One day back in the 70’s or 80’s a guy asked him if he’d like to invest in a McDonald’s franchise. Lou said that he had been plenty of times but went by one that night and had a meal. He looked up at the Arches and underneath it read at the time “Millions Served”. He thought at that time that it had saturated the marketplace and probably wasn’t a good investment. Now the sign reads “Billions Served” so he said take that for what his skills were worth in speculation.

The other thing Lou mentioned in the spirit of “Racquet Sports” was when he came onto campus one day when Rocket Ismael first came to Notre Dame. He said that he knew Rocket was going to be one of the fastest players that he’d ever coach when he looked over and saw him playing Tennis. After a subtle pause he exclaimed “by himself”. I’ve probably missed out on a ton of good companies in my short investment life so far, but I had an older man tell he upon entering the “Speculative” business to stay away from Airplane, Restaurant, and Mining stocks and to this day I’ve done that (untested out of blind obedience to the unnecessary fixed rule to obey your elders).

Scott Brooks further adds: 

I just thought I'd update the group on the Brooks Kids Question on Denny's from the other day:

David is driving me crazy. He wants to buy Denny's stock and buy it now.

He is very excited about making this trade. He is cajoling, pushing, negotiating … and just short of begging me to make this trade for him. He has made up his mind and wants it now … however, I want him to wait.

I've told him that we need to do more research and figure out if this is a stock he wants to buy. He says, "Dad, you buy stocks a lot quicker than this … you don't spend this much time doing research …".

Of course he's right. I pull the trigger a lot quicker. But, as I've told him, I've been doing this a long time and I think I have a pretty good handle on what I'm doing (or at least I'd like to think I do).

I've told him that we need to wait until he gets more questions answered about the stock. I've told him that this is going to be a research project for him and the other kids. They should research this out, prepare a list of vital questions and get them answered before making the trade … or not making the trade … (as I've tried to tell him, some of the best things I've done in investing are the trades I didn't make).

But still he wants it. I've decided to wait and make him and the other kids do their research. I've concluded that it will be of more value to them to learn the details of the process (from the fundamentals on up) than to just make the trade on a little more than a whim and then see what happens.

I was tempted to let them make the trade, but decided to wait. I am not so worried about them making the trade and then losing money … I think that would teach them a great lesson. I am worried about them placing the trade and then making money … I think making money on a poorly planned and thought out trade would be far more detrimental to them.

So the trade waits for the research to be done.

Russell Sears adds:

Perhaps I missed the post, but did anybody else suggest counting, besides fundamental analysis?

While complex stats may be beyond the young ones, reading a chart and then doing some math on money should be a clear lesson when it is their own money.

A quick look at DENN max on yahoo shows they tanked big time in '98 to mid 2000 from $10 to below $1, apparently after recapitalization due to heavy debt.

You should have them count what could have happened back then.

Also I would suggest that you mark the dates of their ten Q release on the chart for the last ten quarters.

Perhaps stat significance is beyond them but I think the ideas can be grasped with some visual help. 



 The deer season ends on January 15th, but my season ended last Sunday morning with my last hunt of the year. It was a great year with many adventures and many new stories. Time spent in hunting camp with friends is an experience that you simply must have at least once in your life.

There's something about hunting camp that makes the food taste better, the jokes funnier, the stories more entertaining, the laughter hardier, the friendships warmer, and the cares of the world almost non-existent. The warmth of the barbecue, the cold crispness of the air, coupled with the howl of the coyote's and the endless haze of the stars in the backdrop.

Laughter, jokes, and stories are the main course. Stories that are retold every year … and are always just as funny … seem to be more embellished with time. We would stand around the barbecue pit and listen to music in the background…maybe a Ted Nugent song (Fred Bear, or Great White Buffalo), or South City Midnight Lady (The Doobie Brothers), Cats in the Cradle (Harry Chapin), Time Passages (Al Stewart), Indian Summer (Poco), anything from the Eagles, a Toby Keith song or a George Strait one, maybe Alabama, mixed with an occasional Elvis and a Bee Gees … an eclectic mix to be sure … but it all sounds so perfect and seems to fit.

There is the beautiful dark night sky before the sunrise, and the symphony of colors as the sun breaks a new day. You can hear the sounds of the day coming to life. The beauty of this wonder world is seen in all its glory.

The ability to turn the problems of the world over to my subconscious and just let go of them … trusting that my "inner mind" will continue to mull them over, looking for solutions. Then when it finds a solution, it will reveal the solution to me as an epiphany … but otherwise, it won't bother me.

This past weekend, I was walking out of the woods with a client (Gary) I took hunting. A transformation took place over the weekend and he became more than a client … he became a friend (that's just what hunting camp does). As we walked out of the woods on this particular evening in the darkness, broken only by the 3/4 moon and star light, I stopped and just took in the moment. He stopped next to me … and I could tell he was doing the same. I took a deep breath and just held it in. I closed my eyes and concentrated on what I was feeling inside.

I let out the breath and watched it float upwards in the moonlight. I said to Gary, "I just love being up here." He said, "I know what you mean!" He then said, "Why do you love it so much?"

He then told me not to answer now, but just to think about it. You see, I believe that Gary and I knew both the same thing. Gary has his own farm and has experienced the same thing. What we both have experienced is the answer to his question. Although the answer may vary from person to person, the feelings it exudes are the same.

There is a sense of contentment, a sense of inner peace, and a sense of accomplishment. It's a symbol of success that only comes from hard work and dedication … the literal fruit of my labor. It is a place to rest from the daily battles fought to achieve material success, yet at the same time, it is a place that challenges and tests me … a place that doesn't just give me its respect, but makes me earn it.

There are so many connections between hunting and investing. There is so much to learn from spending time in the outdoors trying to tame the land and outwit that smart old buck, that savvy old doe, or that wily turkey … I consider myself blessed from having experienced it first hand and having the ability to experience it on an ongoing basis.

The next season coming up is the spring turkey season. I'll renew the Brooks Farms Hunt Updates then.

In the meantime, I want to express my gratitude for having this wonderful forum of the spec list to express these thoughts. I've learned from the introspection that has come from making these hunting posts and from having to delve deeper into my personal psyche and see things that I've never seen before and learn lessons that I otherwise may have missed.



Talk about a pseudo event scheduled for 12:30 pm EST! This one would seem to be a classic. There is concern that during an interview, someone, whose duty is to keep inflation down, will state that he is concerned with inflation. Another fed personage said, "it was too early to relax." Has anyone at the Fed ever said that we should relax and let inflationary expectation take its course, and that we, Governors, are not important at all? If oil had been going up, we could have expected them to say that they were seeing some upside risks from energy price spillover. But energy is down ten percent and the commodity indexes are at one year lows. Forget that. That's not a pseudo event. A senior currency strategist, doubtless with a position at a bank, says that the dollar will rise to 129 euro within a week. Former Fed Chair, Alan Greenspan, has also weighed in, and said that he sees signs of reacceleration if the current governors don't do their job. The speech will be in Iowa and it is anticipated that he will say something hawkish. If he says it, will that have an impact? All we need are ghosts to try and fan the flames and talk about Saudi or Venezuela being down or terrorism threats in Boston or Asia or such pseudo events on Drudge et al and we'll have another opportunity for reality lovers.

Dollar Rises to 7-Week High Versus Euro on Inflation Concerns

2007-01-09 21:23 (New York)

By Chris Young and Kosuke Goto Jan. 10 (Bloomberg) — The dollar rose to an almost seven-week high against the euro on speculation Federal Reserve Bank of Chicago President Michael Moskow will today reiterate concern about inflation. The U.S. currency also held near a two-month high against the yen as traders reduced bets the Fed will cut its key interest rate this quarter. Signs of a stronger labor market prompted Fed Vice Chairman Donald Kohn this week to say it was “too early to relax'' on inflation. Former Fed Governor Alan Greenspan said the economy is showing signs of reacceleration. “I expect to see further U.S. dollar strength,'' said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney. “Moskow will toe the Fed line, saying he still sees upside risks to inflation.'' The dollar rose to $1.2959 per euro at 11:22 a.m. in Tokyo from $1.3001 yesterday, the strongest since Nov. 24. The U.S. currency traded at 119.38 yen compared with 119.37 yen late in New York yesterday, when it reached 119.54. It will rise to $1.2900 per euro and 120 yen within a week, Grace forecast. Moskow is scheduled to speak on the U.S. economy at a luncheon in Iowa at 11:30 a.m. local time. Losses in the euro accelerated after it dropped below $1.2980 against the dollar where traders had orders to sell the currency, said Koichi Kano, a foreign-exchange trader in Tokyo at Citigroup Inc. Traders sometimes place automatic orders to limit losses in case their bets go the wrong way. The euro may fall to $1.2950 today, Kano said. The dollar appreciated against the yen and euro since a Jan. 5 U.S. government report showed employers added 167,000 workers in December, exceeding the median forecast of 100,000 in a Bloomberg News survey.

ECB Rate Decision

The Fed has kept its target overnight lending rate between banks at 5.25 percent since June, halting a two-year run of increases. The BOJ's key rate is 0.25 percent after a quarter-percentage-point increase in July, the first in almost six years. The European Central Bank's benchmark is 3.5 percent. Interest-rate futures show traders see a 6 percent chance the Fed will lower rates in March, down from 100 percent last month. The Fed next sets rates on Jan. 31. Losses in the euro may be limited on speculation ECB President Jean-Claude Trichet will signal policy makers intend to keep raising rates after holding them unchanged at a meeting tomorrow. “Trichet won't be able to make any dovish comments,'' said Nobuaki Tani, a senior currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender by assets. “He will remain alert to inflation risks. The euro will be bought.'' The euro may rise to $1.3150 against the dollar and 156 yen this week, Tani said.

Strength in Europe

Economic reports this week in Germany, Europe's largest economy, supported the case for higher rates. Industrial production gained the most in seven months in November and manufacturing orders climbed for the first time in three. Futures trading shows investors expect the Frankfurt-based ECB to increase its main lending rate to 3.75 percent as soon as March. The yield on the three-month Euribor futures contract for that month was 3.93 percent yesterday, up from 3.75 percent on Dec. 4. The December contract yielded 4.12 percent. The dollar gained yesterday as crude oil touched the lowest since 2005, spurring optimism about U.S. economic growth. Crude oil for February delivery fell 0.8 percent to $55.64 a barrel on the New York Mercantile Exchange, the lowest close since June 15, 2005. Prices are down 12 percent from a year ago. “There's a reasonable correlation between the dollar and the crude oil price,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. “A fall in crude oil prices reduces the U.S. trade deficit and also increases the disposable income of U.S. consumers.'' The currency will trade between $1.2980 and $1.3060 per euro today, he said.

U.S. Trade Deficit

A government report today will probably show the U.S. trade deficit widened to $60 billion in November from $58.9 billion the previous month, according to the median estimate of 63 economists surveyed by Bloomberg. The yen may fall as the drop in oil prices will also reduce pressure on inflation in Japan, reducing the need for the Bank of Japan to raise interest rates at a Jan. 18 meeting. “A BOJ rate increase is unlikely in January, given the recent drop in oil prices,'' said Ryohei Muramatsu, a manager of Group Treasury Asia at Commerzbank in Tokyo. “The yen may fall'' to 119.70 per dollar and 155.30 a euro today, he said. Investors see a 58 percent chance the BOJ will raise rates next week, down from 74 percent yesterday, according to Credit Suisse Group data based on contracts for the exchange of interest payments.



If you have ever been around an Alzheimer patient, one of the most troubling aspects of the diseases is the patient's inability to make sense of the present. You would think that this frustrating incompetence would be the victim's main concern. You would think that this confusion would make them submissive and accept the care of others.

I believe much of the confusing, frustrating, even belligerent behavior of the Alzheimer patient can be better understood as a desperate, intense search for self. Memory is closely linked to our personal identity. Their geographic roots, family (especially intimate partners), culture and religion become intensely important to them in this search.

It seems that much of their behavior is declaring their unique perspective as an individual since they are overwhelmed by their sense of confusion. While acknowledging it, often through fear, they don't know what is happening. They relish the ability to interpret events and personalize them, which is foundational in our perception of our selves as individuals. Therefore, while they are completely confused, and are trying to assert themselves as individuals, they often becoming belligerent, defiant or they make decisions in spite of their fears. While acknowledging they are completely confused, they still refuse to give up the right to make choices and to interpret the events themselves. The ability to make decisions is fundamental to our identity of self. They would rather make a terribly wrong decision than give up that right.

It would seem that many of their decisions are made through their intuition rather than through their understanding of the facts. "Fight or Flight" instills intuition within us as the primitive response to fear. Furthermore, Alzheimer patients often exhibit a child-like urge to engage in art and creative endeavors. If you, like me, believe that intuition is a subset of inspiration, then you will agree that they exhibit a need to sharpen their intuition.

As is clearly exhibited by the Alzheimer patient, I suggest that there is an intense battle of the legitimacy of our concept of self within each of us. Much of this focus is placed on our personal ideas and perspective. Often we use our intuition, in spite of the common sense dangers in doing so in many situations, to validate our identity or self.

Perhaps one of the most dangerous aspects of pseudo events is not just the staging of the event, but the staging of the audience. Often, the audience is staged to control his intuition, and then these pseudo events make it easy for him to rely on his intuition and the internalization of the event.

Consider porn, clearly the event and target audience is staged. But the personal internalization of the event leads to the wrong conclusion: the exhibitionist relates to our personal perspective. Magazines, web sites and other pseudo event outlets will gladly take your money to help you validate your personal perception with the glaring evidence to the contrary that there is nothing personal about the event.

And many millionaires have poured countless dollars in pursuit of the porn star trophy wife.

Acting on intuition derived from pseudo events is often like the Alzheimer patient. It's an action based on validating your personal perspective, rather than making money. Pseudo events for investors stage your intuition by staging a "Fight or Flight" event, and like the porn events, this reaction is irresistibly natural.

Here are some suggestions on how to prevent this.

1. Always be aware of whom the target audience is and the path the event is leading you down or painting, to make it look like your own intuition. Ignore your gut response if you are the target audience.

2. Try getting facts from outlets in which you are not the target audience. Vic and The Enquirers come to mind.

3. Get your information from the enemy.

4. Fear mongers. They will try to relate to you personally. Politics is a favorite. This causes you to trust them, and this also isolates you from the herd. Then they puff up the problem, and finally whisper, "run … run far, far away." They hate it when you turn and fight. But I've had some of my best ideas fighting fear mongers.

5. Seek out, do your own investigation, especially when you have personal expertise or attachment, such as regional companies. Don't rely on other like minded individuals.

6. Be well aware of the new ease to specifically target you. Niche marketing pseudo events are especially effective due to our personalization, and therefore implied uniqueness, of these mass marketers' message.

7. Recognize your vulnerability to pseudo events in times of personal trouble.

8. Seek sources of intuition from the distant past. There are pseudo events that have stood the test of time. Form your own interpretation of these views from the original source.

Janice Dorn comments:

I would refer anyone who is interested in understanding what might be occurring in an Alzheimer patient to the concept of Lifeworld. This has been articulated well in a paper entitled: The Lifeworld as a Phenomenon and as a Research Heuristic Exemplified by the Study of the Lifeworld of a Person Suffering Alzheimer's Disease by Ann Ashworth and Peter Ashworth. I do not have a link for the full article, but I do have the original article published in The Journal of Phenomenological Psychology, Sept. 22, 2003.

This work describes, among other things, the essential features of a Lifeworld:

Temporality (and its events)
Spatiality (and its objects)

As regards the person suffering from Alzheimer's disease and the caregiver, re: Self, the following are concluded, in part:

Self includes the attributions of identity as well as the person's experience of his or her presence, agency and voice within a situation. Perhaps, most fundamentally, it is plain that a person with dementia is a self in the sense of being the center-the point of view-of his or her psychological world. In the phraseology of Sabat (The Experience of Alzheimer's Disease-Life through a Tangled Veil, 2001 and Surviving Manifestations of Selfhood in Alzheimer's Disease: A Case Study, 2002), the person can say "I." However, the world of spatiality and temporality is not segmented in the conventional way (for example, with thresholds and boundaries) so the limits of self are not self-evident. Certainly, distinctions of ownership may be lacking, so that the self is associated with some objects (my robe, my slippers) and disassociated from other objects.

Putting aside the fact that the concept of "self" is a highly debated subject (ala. Satre, Hesserl, etc.), one may find quite useful, per the work of Sabat, to distinguish between three notions of self: Self One who is capable of saying "I." Self Two which claims, as it were, self-attributions, and Self Three, which is enacted in day to day relationships. If caregivers and others focus on deficiencies due to Alzheimer's such that they constitute much of a Second Self, then ongoing relationships are subverted. The Third Self is thus particularly vulnerable to deleterious and unnecessary social effects, specifically excess disability (prejudiced attitudes and behavior).

For example, a person suffering with dementia may find that a main way in which agency can be exercised is indirectly through requests for others to act. A time delay in response by the caregiver when asked to ask on behalf of the person with dementia can be enormously frustrating in the following way: the caregiver is seen as part of the sense of agency of the patient. Thus, it is as if the person with dementia had set off to walk, and found that her legs would not respond in the instantaneous way that their membership of her bodily self required them to act.

Additionally, there is a great need for presence and voice.

The concept of compassionate or right speech is one which cannot be overemphasized here. In fact, a study and adoption of compassionate listening is, in my opinion, critical reading for anyone who is dealing with persons with dementia. The best overall paper on this is by Gisela Webb and entitled: Imitations of the Great Unlearning: Inter-religious Spirituality and the Demise of Consciousness which is Alzheimer's.

What remains after the unraveling of mind, body, language and knowledge in Alzheimer patients, is what was there in the beginning.

If I had to read one paper on how to conceptualize and actualize interaction with a person suffering from dementia, it would be the work of Webb, as it is a wellspring of wisdom, enlightenment and acceptance that what we are, at the deepest level, dealing with in those suffering from dementia is a progression toward death, both for the patient and for the caregiver.



Studying the factors that determine consumer demand is a fruitful area for sharpening stock and market pickings. The usual ideas are summarized in the Slutsky equation, which states that the change in demand with respect to price depends on the sum of the substitution and income effects. The substitution effect is greater to the extent that one good, (or the good under consideration relative to the market basket) is a close substitute for another. The effect is lower if the goods are complements. Indifference curves between two goods that are close look like straight lines and indifference curves between goods that are substitutes look like right angles.

The income effect of a change in price also depends on the percentage of the total income spent on the good, and whether the good is a normal or an inferior good. Inferior goods are those like potatoes or busrides, or in the old days, Spam, which we buy more of as our income decreases. Normal goods are things like cars or other durables, which we buy more of as our income increases. All these factors vary for different consumers as a function of their changing tastes, income levels, and preferences for risk. Such factors are all well covered in most good books on Price Theory, with the late Professor's book (Peter Pashigian's book, Price Theory and Applications) as my favorite. It has a very nice graphical analysis of almost all factors that determine consumer choice, and it gives many real life examples of industries and business situations where analysis of consumer and producer activity through the framework of choice and incentives leads to great insights into what is happening in the economy. I find the sections on inferior goods (demand for them increases as income falls) and Giffen goods (demand for them increases as price increases) are relevant to stock analysis. Stocks are often said to be Giffen goods because demand for them increases as the price goes up due to momentum, trend following and general herding.

To put some specifics on it, I propose to consider the inferior and Giffen stocks each day and week. I look at which ones go down when the market goes up, and which ones go up when the market goes down. How does this change over time in an individual stock? What are the inferior and normal goods relative to interest rates and GNP? How does the situation change with respect to changes in VIX? All these factors must be considered relative to their predictive properties, for example, what the future performance of the inferior, normal and Giffen goods are relative to this or that index?



 There is no one else who is saying anything about it, so naturally I will. How about those Gators? Florida whipped the ever-loving bejezus out of Ohio State last night to become the BCS college football champions. I love it when the underdog not only wins, but it also does so convincingly. Having been an underdog most of my life, I love to see a team that is told that they simply can't do something, and actually go out and do it well … Well guess what? Just as high school drop outs aren't supposed to be able to achieve a level of success in the financial industry or have several articles and a book published, Florida wasn't thought to be worthy of even being on the field with the brutes from Ohio State. Crown them champions.

There are lots of trading, market and life lessons here.

1. As always, you should have an edge. Florida found the passing seam in OSU's zone defense and exploited it.

2. When it's clear that your edge is working, exploit it ruthlessly. Once Florida knew where the seam was, it pushed the point and went back to it over and over again.

3. Respond to adversity by attacking. When OSU's phenomenal player, James Ginn Jr., ran back the opening kick for a touchdown, Florida could have been demoralized by falling behind such a heavily favored team. Instead they got a runback of their own and calmly drove in for the score.

4. Play great defense. Florida's defense refused to make mistakes last night. The Heisman trophy winner was 4 of 14 passing for 35 yards and they could never get going. Protect your bankroll at all times. Don't be afraid to push it when you have the edge (the continual blitzing last night kept Smith running for his life), but not until you know you have the edge. There have been a lot of times in the past few years where playing good defense, such as having cash on hand and selling as the market went higher, allowed me to jump on opportunities that led to profits.

5. Loyalty counts. Florida's kicker, after being all SEC last year, has had a difficult year. They stuck with him. He booted two from over 40 yards. OSU's head coach, Jim Tressel, refused to allow Troy Smith take the blame for the loss, and instead took it all for himself. People remember things like that and think better of you for it.

6. If you do lose, be gracious about it. Learn from it. Nobody likes to lose but it will happen. Jim Tressel's post game interview was a lesson in the behavior of a gentleman. There is no doubt in my mind that he will review, learn from this and be back with a top ten program again next year despite the humbling nature of being beaten so badly.

7. Know when the risk is too great. When asked about Boise State, Urban Meyer stated that he loved those guys, but he wasn't going to play them. Boise, by whipping Oklahoma, proved that they are indeed a top flight school. Florida is relieved they don't have to do a one playoff game with that tricky high octane offense.

8. When the odds are against you, study, prepare and believe in yourself. Nobody thought Florida had a chance, and that could have demoralized the gators. Instead they were there to prove a point. They practiced, and they studied film (no one else found the seam in the zone all year, so they studied hard). They believed, they studied, and they worked. Call them a champion.

Michael Covel comments: 

These are all good points. But was Florida really an underdog? Or were sportswriters in love with OSU, Michigan and Notre Dame all year to the exclusion of SEC schools? LSU had the speed to whip OSU too. Speed is the dividing line. Over the last 30 years, speed has generally been located in Florida schools and the SEC schools.



 Here's an example of life and death in the wild.

Bucks fight each other to establish dominance and to gain breeding rights. In a case like this, there is usually a "hot doe" (a doe in estrus) nearby that is receptive to be bred. Sometimes the end result falls into the "unintended consequences" category.

I have personally witnessed, on several occasions, bucks fighting in the wild. The tussles that I've seen have ranged from friendly sparring to minor tussles to establish dominance. I've never seen a knock down drag out fight.

Sometimes you've just got to be careful which fights you pick. The speculating lessons are:

1. You better make sure you pick a game you can win in an arena that you are comfortable with.

2. If you're going to risk big, you'd better be ready to lose big.

3. Even though it may puff up your ego to win against a big and strong opponent, you're better off fighting those battles you know you are likely to win (wilderness translation: It wasn't necessary for these two bucks to fight. Since in most areas there is a 3 to 1 doe to buck ratio (and that's on the low end), and there are also other areas with a 10 to 1 or more ratio, you should walk away from the fight and go breed the doe on the next ridge. If the goal is to breed the doe, then breed the doe … while taking the course of least resistance). Remember, it's not about crushing a foe, or extracting every possible penny out of every trade … it's about making money.

4. Don't let your ego get in the way of a profitable trade.

5. Make your money on the trade (wilderness translation: breeding the easy way does), and then get out while the gettin's good!



 I'm reading a book, the Hidden Messages in Water by Masaru Emoto, about snowflakes. The author claims that thoughts affect the creation of snowflakes and the patterns of the water crystals. It reminded me of symmetries in nature. Snowflakes are constructed in a binary process. Similar are the formation of cellular automata described by Wolfram in A New Kind of Science whose ideas have been trashed on this list in past years. In each of the processes, a simple binary process is used to generate complex structures, each with a strong degree of symmetry in the multitude of generated forms. It is said that no two snowflakes are alike. In addition to the broad claims of the authors, the symmetry principles also apply well to the market, which is constructed in a binary process similar to the cellular automata and snowflakes.

Take Friday's drop and range and look at today's morning range and afternoon pop and see the symmetry being formed. The process of winding down buys and sells within a system, and the subsequent release of those same energies in a consistent system tend to form symmetrical structures. There is of course a random element and also new sources of energy which add a noise factor, but there is some tendency towards symmetry in the markets which could be tested. It could be considered the hidden messages in the price data.

 Kim Zussman comments:

Speaking of the space telescope and symmetry, here are some images of (rather symmetrical) planetary nebulae from HST:

These are luminous shells of gas expelled by average stars (like our sun) at the end of their lives. The gas of spent stars can be swept up into nebulae capable of forming new stars.

Large stars end their lives as supernovae. There is a huge explosion following an implosion, in which elements heavier than oxygen are formed.

The biggest stars blaze short and brilliant, and in their corpses germinate the seeds of new beginnings.

(now hum the 2001 Space Odyssey tune…)



Daniel Boorstin's 1961 book The Image described the illusions, contrivances, simulations, and unreality — what he calls pseudo events — in news, travel, heroic ideas, books, celebrity worship, desire for prestige, advertising, business practises, etc.. He shows how one pseudo event can lead to another, and can become a self-fulfilling prophecy in which more falsity must follow. He attributes the growth of pseudo events to a chain started by the graphics revolution, which began with faster newspaper printing and telegraphs in the early 1800's. Boorstin characterises a pseudo event as one that is not spontaneous, and is planned primarily for the purpose of being communicated and replicated. It is ambiguously relative to reality, and designed to become self fulfilling. The news leak and the press interview are often prime recurring examples of pseudo events. He distinguishes pseudo events from propaganda by pointing out that the former is ambiguous whilst the latter is an appealing falsehood.

One finds that many pseudo events occur in the market, such as all the events that are leaked by actors in the fray, with a view to eliciting behavior that will help them in their jobs, happiness and wealth. The best example of this would be leaks by the various powerful boards and agencies related to the markets which support their favored news reporters and former or prospective brokerages. Other examples could be a leak of earnings or sales numbers to a reporter, the expansive modality that a high official takes when trying to show importance to a reporter of the opposite sex, the interview of a fund-manager or some great like the Palindrome or the Sage to describe his feelings concerning the dollar, gold, the market, or the likelihood of a crisis. Also the appearance at an investors conference of some elite system seller, the article written by an academic describing various anomalies he has discovered in a major retrospective file, the speech at an industry conference by the promoter of one technology or the other, the report of a hedge fund manager that he sees a 30% chance of a disaster to rival 1929, the theoretical mathematico-econometric arguments boiled down for the public of this or that academic showing that the solution to our problems would be less inequality, the prohibitions against cut throat competition or freedom of entry in all its forms so that no economic agent will be induced to offer anything but a Cadillac product, the protection of the public from using a product that is unsafe without regard to the benefits, the rules of thumb concerning following the trend, the buy and sell recommendations provided by star financial news people. The list of pseudo events in the markets is greater than the list that Boorstin elicits in our cultural life! I propose that a classification scheme for market events be developed in terms of their pseudo or actual occurrence, and that this should take into account whether each event has a definite time of occurrence and magnitude, as well as the information value of any ambiguous messages making up or relating to its content. I would be interested in other ideas as to how to navigate the minefield of pseudo-ness we are exposed to, with a view to precluding the public from losing so much more than they have to, as well as going about life as puppets beset by false strings.

George Zachar comments:

When I taught a course called "The Politics of Communication" in a remote town in upstate New York, that book and the concept of "pseudo events" were literally at the top my syllabus.

It is a crucial concept, and must be central to anyone's use of any information that is subject to prior filtration.

The types of infomercials enumerated by the chair should be transparent to market professionals. The dangerous ones are those that appear to be untainted, leaving specs with their mental guards down.

One useful test is to google the board members of any research outfit one is unfamiliar with. Within seconds, the agendas and motives become clear.

To pick an obvious example from today, I poked around the background of a Yale professor whose anti-inequality schtick is the meme-du-jour. In about a minute I traced him to a think tank chock-a-block with Clintonites.

George Zachar further adds:

Following up on the chair's discussion of pseudo events and the need to categorize them, I would like to suggest a related game.

This link goes to a program that generates bingo cards using buzz-phrases related to Apple media events.

Why not have Doomster Bingo(tm)? Each card needs 24 phrases or concepts, and the first player getting five in a row wins.

Now, what should go in the boxes on the cards?

Options Scandal
Executive Compensation
Consumer debt
Savings rate
The dollar
Inverted yield curve
Housing prices
Peak oil
Carbon tax

…no doubt there are dozens of other better, candidate phrases.

Perhaps we can have a party game where one reads a random Abelson column aloud as folks check their cards…

Professor Charles Pennington offers:

This is just a start, but I predict that at least six will be found in next week's Abelson column.

"Those who don't remember history …"
bubble (extra points for "South Sea")
tulip mania
dead cat bounce
rising dollar
falling dollar
overheated economy
March 2000
"predicted 1987 crash"
stock tips from shoe-shine boys
"sentiment well off the lows"
"the smart money"
"This time it's different." (this is used in an ironic sense to mean "this time it's not different; it's going down just like in 1929.")
a double negative, as in "One might not be uninclined to take profits."
"October is a bad month to buy stocks … others are November, December, January …"
"more concerned about return of capital than return on capital"
"Rule Number 1: Don't Lose Money; Rule Number 2: Don't Forget Rule Number 1"
margin of safety
Keep some powder dry.
Look out below.
"an esteemed economist/stockpicker/broker/proprietor at X, but we won't hold that against him"



The problem is predicting behavior in the money markets using conditional probability. One theory, though not a necessary one, is that the path of prices directly reflects the underlying psychological states or utilities of the participants. There are non-random patterns that can be identified that are predictive of future price paths, just as three shouts might lead to a hit in a coercive family. It's the scientific approach. Qualitative models are used to create statistical models. We have looked at various models of frustration aggression in the markets, war, strategy, sports, survival, revulsion and release, evolutionary adaptive models, game theory, physics, mechanics, electrical theory, hunting, Tversky and Bayes. I believe that you have some theories about war and broader human tendencies using a statistical analysis. The markets and market data capture these broad human characteristics in an amazing way and the data is there ready made.

Jerry Patterson comments:

It had never occurred to me that the frustration aggression theory might have some relevance to behavior in the money markets. I was intrigued by your approach of applying conditional probability analyses to the problem. My understanding of economics is that one of their major problems in prediction is that none of the parameters in the prediction models contain terms based on measures of human behavior.

This comes close to laying out a problem that would interest a psychologist. In fact the Nobel prize in Economics last year went to Kahneman and Tversksy–two psychologists who spent their life calculating conditional p values describing risky choice.

Russ Sears adds:

From last week's performance, I believe the question for 2007 will be "how does the market perform 'when good news is bad'?" Psychology mixed with counting should get you far.

Vincent Andres mentions:

One prior side of the "patterning" job is quantitative statistics–finding non-random behaviors. Another side concerns the "whys" of the behaviors of the "mass market" entity. Concerning this second point, I found the following books of K. Lorenz very penetrating and enlightening: The Foundations of Ethology (For example, you should read II.I.7, which discusses stimuli levels reduction. The French version of this book can be found here.), Studies in Animal and Human Behavior (Many thoughts also concern fear, aggression, frustration, etc.)

I believe that the non-randomness of the mass markets, for example, its behaviors as an entity, emerges precisely at common denominator points of all its individual human components. Common denominator points are not cultural/sophisticated ones, but primitive, for example, animal ones. That's why ethology, and especially the work of Lorenz, may concern those of us interested in the "whys."

Trying to answer the "whys" may be useless, but it could help to define/find patterns we won't think about otherwise (and understanding, at least trying, cannot harm).



 A few quick thoughts on George Gilder's talk on Thursday …

Gilder's comments on the randomness/unpredictability of the creative process (and its resistance to central planning) reminded me of The Fountainhead because of the obvious intrinsic motivation of Howard Roark.

From a conversational exchange between Ellsworth Toohey and Peter Keating:

Does he like money? No. Does he like to be admired? No.

Gilder discussed the impossibility of modeling creativity. But there are some guesses at the distributional arrangement of total output:

Lotka, Price, Pareto and, most recently, in his wonderful book, Human Accomplishment, Charles Murray have studied the extremes of human accomplishment in literature, science, and the arts. Murray also developed some of the statistics of sports accomplishment. The models of these authors are power law statistical distributions of the form … [Read more here]

 There's also some indication of predictabilities in the individual timing and cross-sectional clustering of creative acts [Read article here]

Claude Shannon was a protagonist of Gilder's talk. Here's an excerpt about him that I just read in Fortune's Formula:

Shannon was the not the first great scientific mind to suppose that his talents extended to the stock market. Carl Friedrich Gauss, often rated the greatest mathematician of all time, played the market. On a salary of 1,000 thalers a year, Euler left an estate of 170,587 thalers in cash and securities. Nothing is known of Gauss's investment methods.

Gilder's remarks about how supposed "deflation" harmed the telecom sector were parallel to an economic theme Bill Gross considers in his Investment Outlook this month:

Since almost all yields reflect a real plus an inflationary component, it stands to reason that the ability to pay debts expressed in nominal terms should be viewed in a similar fashion when analyzing growth. By so doing one can understand, for instance, why a deflationary environment can be so deadly to a modern-day, debt-ladened economy … the U.S. economy has gravitated to an average nominal growth rate of 5% or so as disinflation has taken hold. Because 5% has become so 'standardized,' government, mortgage, and corporate bond yields have centered around that level as well - the Lehman Aggregate index now yielding approximately 5.30%. 5% is how fast we grow and 5% is what we owe; the two rates are thus symbiotic, one feeding off the other when the economy is in balance. Problems arise however when nominal growth rises …too far below 5% - usually indicative of declining real growth … [Read more here]

Professor Charles Pennington comments:

My comments on George Gilder and his talk at the Junto on Jan 4:

He was very forthright and abject about the many subscribers who started buying his stocks in early 2000. He had lost 94% from peak to trough. He also showed (using data from a third party provider, Mr. Dick Sears) that his stocks had actually outperformed the S&P and Nasdaq from 1996 to present, even including the gigantic decline.

His big idea is kind of paradoxical. He believes that in order to earn big returns, returns much higher than you'd make from bonds, you've got to be in companies that have intrinsically unpredictable future profit streams. The paradox is that he must think that he can at least partially predict them. His aim is to have a few of the companies he owns go up by 100-fold or even 1000 fold, and by doing so, they will make up for the ones that failed. He may be correct, but let there be no confusion–this is not in sync with conventional "efficient market theory," which states that you don't get paid for the "idiosyncratic" component of your risk, the component that can be diversified away.

He does not believe in "reductionism" or "materialism," which is the prevalent idea in science that states that everything is all ultimately explained by the deterministic laws governing microscopic physics. He believes in "emergence" in which new laws emerge as one goes to a larger scale; that quantum electrodynamics is not the relevant thing to think of when approaching something like child psychology. His belief could be either very obvious or very controversial, depending on how it's interpreted. He mentioned an essay that he wrote for the National Review on intelligent design, which unfortunately requires a subscription.

In my opinion, his understanding of science and engineering does not deserve the criticism that he sometimes gets. No one can understand all of science and technology. His thoughts and studies are very wide ranging. He takes in a lot, and he thinks about it clearly and often originally.

Will his strategy be successful over the long term? I don't know. As discussed above, it's been fairly successful since 1996, though few could stomach the volatility. It may be more successful going forward. It might be more orthogonal from the growth/value axis than you might think at first glance. For example, he might do well going forward even if "growth," defined in other ways, does not.

I agree with the Chair that adding a new guy just to monitor PE's or something like that is not promising. That looks like a very rear-view-mirror kind of move. The guy does seem like a bright guy, but individuals can also appear to be misleading themselves about how easy it is to predict things in advance.

Personally, Mr. Gilder is quite a nice guy, very humble and optimistic. He was very gracious and patient with all the questions from the Junto members.



This essay was written for American Machinist Magazine in 1931 by Tom White. When I read it, I felt chastened and humbled, and I have redoubled my resolve to spend 2007 studying and learning, rather than trading in a frenzy like the market will disappear tomorrow. I've omitted several paragraphs extolling the machinist trade, although they are lovely. The tie between the later paragraphs and speculation are too obvious to belabor.

Stealing the Trade

As far as I know, there is but one statue of a machinist, as a machinist, in the United States today. This is the statue of Seth Boyden. Boyden was a machinist and an inventor, but the artist has depicted him in the leather apron of a blacksmith, standing at an anvil. This, I suppose, is the average sculptor's conception of a machinist. However, we will not quarrel about a little thing like that. The fact that gear wheels are seldom made with a hammer and anvil does not alter the fact that a lot of people think that is the way they are produced. But speaking of the blacksmith, what a breed he has sired! Wherever one has settled, civilization has blossomed. The machinist is the legitimate son of the blacksmith and like his mighty sire he bends the fractious metal to his will. Look where you will, wherever men congregate, the work of the machinist is visible. In all fields of war, transportation, communication, farming, building, mining, in fact in every phase of our modern civilization, the machinist has supplied the means to carry on.

Most good machinists have served their time, but some others manage to "steal the trade". These men, unless they have a tremendous aptitude and a willing disposition, pass through a terrible ordeal before they acquire enough knowledge of the business to have the other men accept them as machinists. I would not advise anyone to try to steal the trade, though I have known some excellent machinists who took this route, either by accident or design. One whom I know well got into the business quite accidentally, and he got much amusement out of his own ludicrous mistakes.

One morning, about 7 a.m., he joined a group of about 25 or 30 men outside the gate of a large machine shop. He was then about 21 or 22 years old, and was looking for any kind of work that he could get. The employment agent singled him out of the crowd and said, "We need a lathe hand; you're a lathe hand ain't you? Come on in. That's all we need this morning, men, come around tomorrow." He then sent Herman up to the small lathe department, and the boss put him to work. The first job he took on was a shaft about an inch in diameter and six or seven feet long, to be cut in two. The shaft was centered on one end and as there was a chuck on the lathe, he chucked one end and put the center up to the other end. He then put the parting tool in, and started the lathe up. The lathe was speeded up pretty fast but that meant nothing to him. He jammed the tool into the job and started to cut.

He said that he noticed that all the men near him suddenly found important business somewhere else, and that they all seemed in a hurry to get there, but he steamed merrily along and cut the shaft off without a mishap. He said that afterward someone told him that they all expected to see the shaft wrap itself around his neck, but as he put it, "There is a special providence that watches over children and fools, and it was on the job that day." I asked him how he happened to chuck one end of the shaft, and he said he didn't know that the chuck was removable. He said also that he learned about a steady rest some six months afterward.

Herman told me of another fool stunt he pulled off in the next shop he worked in. He hired out as a machinist, and the boss put him on a planer. He got along all right for a few days, then he got a job that was quite particular. After he had squared the job up and clamped it down, the boss told him that he didn't trust the square he had used, and to get the new square from the tool crib, and check it. He went to the crib and asked for the new 12-inch square. The boy handed him a wooden box shaped like a square with the square inside. He never suspected that there was a square inside, but thought it was rather strange that the boss wouldn't trust the steel square, even if it was old, rather than a wooden one, but who was he to question the boss's judgment, so he shoved the wooden box up to the job, found it was OK, and proceeded to finish the job. Fortunately the job turned out all right so that there was no harm done. About a week later he saw someone pull a fine new steel square out of the same wooden box.

Notwithstanding the inauspicious start, this man eventually became one of the best machinists I ever had the good fortune to meet. But he was one in a thousand.



 A few days ago my travels took me to Buenos Aires and I met with a friend I haven't seen for a few years. We met in a Beijing hostel as the Argentinian peso was devalued in January 2002, and months later I took up his offer to visit his country but I haven't returned until this week.

I was asking him about the changes since "the crisis" (his words) which he mostly noted were positive but spoke of some lingering aspects. Regarding the banking system, I was told that many people have been turning pesos into dollars/euros and simply putting the cash into safety deposit boxes rather than deposit the funds in a bank. Seriously, I replied, who does that? He told me that he does and so do many of those he knows.

I think it's troubling to hear that from someone who I feel represents the average Argentinian. There's an angle for speculators but I don't know what exactly, maybe a rush of deposits if Latin American bank credibility is ever restored. Just joking …. Buenos Aires is such a beautiful and inexpensive city that I'd like to return soon and investigate it further.



This is a fascinating story that I've known about for some time with much wider implications than the rehabilitation of back injuries.

The idea that one might learn to use alternative muscle groups is close in spirit to the economic way of thinking (substitution) and a similar process might take place with, for example, those on the autistic spectrum who 'cure' themselves by 'learning' social skills with other parts of their minds.

From Strongman Sells Determination in Spinal Clinic

"In the past 10 years, more than 7,000 people who were not able to walk left my clinics on their own two feet," he said.

If you want to read about Valentin Dikul and his VDM method, check it out here.



The Fed Model postulates that if the forward earnings yield of the S&P Index is higher than the 10-year treasury yield, stocks are “undervalued“, and vice versa. As of January 4, the S&P was at 1418.34 and expected forward S&P 500 earnings for the next 12 months were 90.38, making the forward earnings yield 6.37 percent (90.38/1418.34). The yield on the 10-year T-note was 4.6 percent.

Historically, subsequent market returns have been correlated with the differential between the S&P forward earnings yield (estimated 12 months earnings divided by the S&P 500 level) and the 10-year treasury yield. On the 9 occasions when this differential has been greater than 1 percent, the S&P 500 has risen nine out of nine times for an average of 14.7 percent in the subsequent 12 months. (This differential currently stands at 1.77 percent).

We have found that the best way to specify the Fed model relationship for forecasting purposes is with a linear regression in the form:

S&P Return[t+1] = a + b * ( Forward Earnings Yield[t+1] - 10 Year Yield[t] )

Estimating this regression using yearly data since 1980, we obtained the following equation:

S&P Return[t+1] = 0.0834 + 4.8839 * ( Forward Earnings Yield[t+1]  -   10 Year Yield[t] )

t-stat   2.72      2.05

p-values   1.17%     5.07%

The R-Squared of 0.14 is quite high for a predictive regression in the financial markets and indicates that almost 15 percent of variation in subsequent returns was explained by the independent variable over the time period studied.

To determine current Fed Model forecast:
Current S&P (as of 01/04/07) stands at 1418.34
Forward Earnings = 12 months consensus forward earnings for the S&P 500 = 90.38
Forward Earnings Yield = Forward Earnings / S&P = 90.38/1418.34 = 6.37 percent
10 Year Yield = The Current Yield on 10-Year government note is 4.6 percent
The Differential (Earnings Yield - 10 Year) = 1.77 percent
Substituting these numbers into the regression formula :
0.084 + 5.027 * (0.0637 – 0.046 ) = 0.173

Therefore, Fed Model yields a forecast of about 17.3 percent for next 12 months. See full details.



After reading The Wall Street Journal link supplied by Prof. Haave on drbobsports, I went to his site and read his articles. I found the one, shown below, to be a nice take on "beware of the switches." I thought the full article also had good insight into money management and other topics relevant to risk taking and trading. For those who have not already done so, the link is here.

I can’t tell you how many times I’ve had a decent winning week on my Best Bets only to hear on Monday from some clients that they lost money. The problem was not the games that I recommended betting, but rather it was the way that they bet them. Here’s an example. On Saturday I give out 5 Best Bets that are all rated that same, 3 of which are in the morning and 2 at night. One client wagers $200 each on the 3 morning Best Bets and all 3 of them are winners. This client, feeling like I’m hot, doubles his bets for the 2 night games, wagering $400 on each only to have both of them lose. Another client with the same bankroll plays all 5 games at $200 each, as he should. Both clients won 3 plays while losing 2, but the first client is down $280 (wins $600 in the morning and loses $880 by doubling up on that evening’s two plays), while the second client is up $160. On Sunday I give out 4 morning games as Best Bets and 3 afternoon games plus the Sunday night game is a Best Bet (let’s assume that all of the Best Bets have the same rating). The first client goes back to his $200 per game wagers and plays my 4 morning games while the second client does the same, betting $200 on all 4 of the Best Bets. Unfortunately, those Best Bets go 1-3 and both clients are down $460 in the morning. I have now lost 5 of my last 6 games, and the first client (now down $740) backs off and decides not to bet my 3 afternoon games. The second client (down $300) bets all 3 games at $200 each, sticking to his plan. All 3 afternoon Best Bets are winners and I head into the Sunday night Best Bet with a respectable 7-5 Best Bet record so far for the weekend (3-2 on Saturday and 4-3 so far on Sunday). The first client (still down $740) decides to jump back in and bet my Sunday night Best Bet for his standard $200 and the second client (now up $300) once again wagers $200 on that Best Bet. The Sunday night Best Bet is a winner and I am now 8-5 for the weekend on my Best Bets following Sunday’s action. However, the first client is just 5-5 on those Best Bets because he was afraid of betting the 3 Sunday afternoon Best Bets after losing in the morning. Actually, 5-5 is no disaster but because of doubling up on his bets for the 2 losses on Saturday night, he is down $540. The second client bet the same on each and every Best Bet I released and he is now up $500 for the weekend. As it turns out, I also have a Monday night Best Bet. The first client realizes that I have no won 4 straight NFL Best Bets and this is his last chance to get even for the weekend, so he bets to win $550 (risking $605). The second client also realizes that I’ve won 4 straight Best Bets, but he sticks to the plan and wagers his standard $200. The Monday night game turns out to be a losing bet and the first client ends the weekend down $1145 while the second client, betting $200 on each and every Best Bet, is up a modest $280 on my Best Bet record of 8-6 (57%) for the weekend. There are a few lessons to be learned from the actions of the first client. His first mistake was raising his betting amount from $200 a game to $400 a game after my 3-0 start on Saturday morning. My winning those 3 games does not change the chance of winning either of the 2 Saturday night Best Bets, just as losing all 3 of those games would have had no effect on the later Best Bets. The second mistake was that he let fear interfere with his thinking after losing 3 of 4 Best Bets on Sunday morning (and now 5 of 6 going back to Saturday night). This client either thought that my recent losses had some effect on the Sunday afternoon Best Bets or he was afraid to lose any more money that weekend. If the latter was the case, then he shouldn’t have been betting as much per game as he was (I’ll approach the subject of amount to bet per game in a bit). And, of course, the final mistake is probably the most common. The first client bet almost 3 times his normal amount on the Monday night Best Bet in a effort to make up for his losses. Never bet on a game to bail yourself out of a hole, just accept the fact that you had a losing week and move on to the next week. Losing is part of the process of winning and the most successful sports bettors handle losing weeks in stride and move on to the next week without changing their time-tested method of handicapping. Also, never bet extra when you are up to try to make a big score. Like I said before, the percentage of games won up to that point in the weekend has no bearing on the chance of winning your next game and it is silly to raise your betting amount because you feel “hot”. The point here is not to let greed or fear interfere with your decision making. Your best decisions are made prior to the start of the weekend, so decide which games you are going to bet prior to the start of the weekend and stick to that list. Decisions made during the course of the weekend are to often influenced by results up to that point and fear and greed can get in the way of making good decisions. Prepare for the weekend by doing work during the week to isolate the Best Bets. If you are not good at deciding which games are good bets and you still insist on betting sports, then seek the help from an honest source with a proven track record (consider my Best Bets available on this site).



Below are excerpts from two letters my younger sister, Bethany, recently sent me. She is a practicing artist and has been since her childhood. I believe the excerpts below inspired her current study, which is under one of the world's most accomplished realist artists/painters, who runs an Atelier in NYC. 

The spirit of accomplishment runs deep on the list, starting with the Chair, who has been inspirational as both a great practitioner and a teacher. It also includes everyone else who lives a life of continual learning and self-betterment. For this reason I thought others may enjoy reading the excerpts below, even if the full context may be missing. 

I think the late 20s, early 30s is the perfect time to focus one's energy on understanding how to master one's craft…

I finally figured out that things that matter in life are in fact lifelong pursuits that are to be obtained through years of study and devotion. One must grow, learn, and struggle. One must walk in one's own path at the right pace. I think it's awesome to understand this and to honor it. I think in doing so, it is the highest honor to the self, and to one's own life. I had spent a month working on a single pencil drawing, as the masters had done, and it's really awesome that I have this sort of patience now. I think that mastery is the sum of time, focus and love all put in.

I think it is the right time for persons in their 20s to experience unease, spirited desire and impatience. These years have certainly led me to some good discoveries about the limits of my skill and focus. I am not angry at my younger self but I am actually grateful for my shortcomings and the impatience of my early 20s. It was the right place to be at the time.

…And now I see that I had a deeper experience, a gradual process of lifelong development–I do not treat immediacy as god anymore.

Some may be surprised to learn that the techniques required for artistic mastery are no longer featured or prevalent in most art schools. Mastering one's artistic medium or tools is almost frowned upon or even acknowledged as a goal, as modern art typically does not require this … It is viewed as stifling or restrictive. In the mainstream of the art world, the mastery of traditional artistic mediums is almost a lost art itself. My sister has the following to say about her current studies:

This school is an incredible opportunity and for the first time in my life I actually feel like I belong somewhere. It feels like I am surrounded by like-minded people who are all quietly and intently studying a craft that they are really serious about. There is no b-ll—t in art school. This is not about self expression, it is about mastering an age old craft in order to have boundless skill someday at executing your ideas. It's humbling in the most inspiring way.

The best thing about it is that it is such a quiet, deeply focused technique of teaching. It's the rebirth of a classical style of learning/teaching of the old masters that has been all but completely extinguished in our day. J—- C—– is a true visionary. He has a vision of that rebirth, of classical realism being taught in the traditional atelier again. It is awesome. The amount of patience and focus and reverence it requires is awesome too. The fact is that it is not a bunch of self important art school teachers, rather it's these really cool, focused, breathtakingly talented guys–most of them in their 30s who all studied under J—- C—— for years throughout their 20s and mastered the technique–who are teaching.

 I for one found meals for a lifetime in her letters.

James Sogi comments:

One of life's greatest challenges is aging. Even in later years the thrill of learning new things such as statistics, programming, markets, new books, keeping the love of knowledge, new frontiers is fulfilling and give great meaning to life. The mastery of existing skills can be deeply satisfying.



Is this the best trading book of the past year?

No, but Blink by Malcolm Gladwell generated more ponderable and testable trading ideas for me than any other book in recent memory.

Blink is about how intuitive decisions are made. The book is composed of a series of scientific case studies, each of which brought an 'Aha! Trading' moment for me. The cumulative sum of these ideas easily filled a couple of notebook pages, the study of which will fill and influence months of work.

One example the book shows is how a simple, small factor algorithm surpassed ER doctors in determining if a patient was actually having a heart attack. The conclusion was that the judgment of ER doctors was affected too much by information.

As traders and market researchers, we are continuously confronted with too much information, and we usually end up going down paths like 'If (this and this) Then…' or 'If (this or this) Then…' but we rarely go down paths like 'If (this is not present) Then…'

That type of twist, from 'and/or' to 'not' is precisely what made Blink so interesting for me: the ideas it generated were more revolutionary and perspective-changing than evolutionary.

Sam Humbert comments:

…a simple, small factor algorithm surpassed ER doctors in determining if a patient was actually having a heart attack. The conclusion was that the judgment of ER doctors was affected too much by information.

I've been thinking about this lately. Since this fall/winter has been warm in New England, I've been out on my bike at least once a week. And I need to dress properly, given the winter temperatures and the self-generated windchill from riding reasonably fast.

What I've found through trial-and-error is that I'm better off going to weather.com and dressing based on a mechanical system (40s = jersey + 2 fleeces, 50s = jersey + 1 fleece, low 60s = jersey + windbreaker, high 60s = long sleeve jersey etc., adjusted for unusual wind or rain). Then I am by standing in my driveway to "see how it feels."

My subjective markings, it turns out, are prejudiced by ephemeral factors (sun is behind a cloud, a gust of wind blows through) and also by preconceptions ("it's winter, so it should be cold and windy," "it was warm yesterday").

I've sometimes gotten darned hot or cold by dressing by "how it feels," but I'm never too far off dressing by weather.com.

Rod Fitzsimmons Frey adds: 

I'm glad that others got good things out of Blink! I thought it was one of the most deceitful books I have ever read. Perhaps I judged too quickly (blink!) and read the rest through a negative filter, but I thought it was an anti-intellectual defense of emotional intuition over careful rationality.

As a remedy I suggest Think!: Why Crucial Decisions Can't Be Made in the Blink of an Eye by Michael LeGault, as a fast-and-dirty response, or The Closing of the American Mind by Allan Bloom as a much deeper criticism.

Dr. Aronson addresses the ER physicians example (or something like it) in Evidence Based Technical Analysis (around p.42). He cites many studies that show that human decision making is very effective for linear and sequential problems and hopeless for configural thinking. When faced with configural problems, humans tend to reframe them into linear or sequential problems. Often this works, but for some things (like medical diagnoses), it is disasterous. It was a much more satisfying analysis of the issue than given by Gladwell.

Nigel Davies adds:

One of Bent Larsen's favorite expressions was 'long think, wrong think.' I think there's a lot of truth in this. Many people seem to tie themselves in knots by thinking too deeply and by considering so much information that they simply confuse themselves. But there's a paradox here in that good intuition requires mastery of the medium concerned, and that requires extensive testing, revising and doubting of one's conclusions.

I'd suggest that it's easy to play a blinker, but it's hard to play a master who can blink.



This morning's Washington Post fronts an amazing article (In Mexico, 'People Do Really Want to Stay') that manages to discuss the internal Mexican economy without giving the U.S. any positive credit for acting as a customer, a labor outlet, and a source of inbound capital.

I was truly reminded of the translations of Pravda I read in college, where reality was twisted beyond recognition to fit the needs of the Kremlin.

They mopped floors in Fresno, poured concrete in Tempe and tended other people's children in Galveston, measuring their lives in dollars.

Up north, even though they pay more, you're not necessarily living as well

Mexican farms will compete directly with an American agribusiness nurtured by subsidies on the corn that feeds the birds.

What's going to happen? People are going to get fired. People are going to go north.

If the U.S. starts selling things extra cheap outside the U.S., then it won't just be small farmers and individuals who will be leaving. It will be people like me. 

Reading between the lines of this dreck, it looks like an article planted by Mexican lobbyists who are attacking U.S. agricultural subsidies, with the angle that they can recruit the anti-immigration folks to their side.

Of course, when the relevant bills are being marked up, we'll see a copy about the struggling American small farmer who can only stand up to cheap foreign competition with the help of subsidies. 

…and the news business barons remain puzzled at their ever-shrinking mindshare.



Recently I read an article somewhere describing a study showing that stocks with novel tickers outperformed those with humdrum tickers. One thinks, for example, of Southwest Airlines, with ticker "LUV." This is based on the name of Love Field, which was the first airport from which they ever flew. Southwest, of course, has done very, very well over the past few decades (I'm finding that it appreciated by 2900% since 1982, which corresponds to 14% compounded. This is actually less than I expected, but it is still nothing to sneeze at). This may lead someone to ask if stocks with clever tickers in general tend to do well. Unfortunately I've forgotten where I saw the original article on this topic, so I have decided to try a homemade version.

A difficulty arises in assessing without bias which tickers are "clever," but I did the best I could.

I took the members of the Russell 1000 as of 1997 and listed their names and tickers as of that date. A good starting point for finding clever tickers is to look for tickers which have a first character that does not match that of the company name. For example, the "L" in "LUV" doesn't match the "S" in "Southwest Airlines," and the "X" in "XRAY" doesn't match the "D" in "Dentsply." There were, however, some tickers that were obviously clever but didn't obey this rule. For example, the ticker for "Outback Steakhouse" is "OSSI," and I definitely thought that qualified. You can see an obvious problem–I recognized "OSSI" as significant only because I'm familiar with the Aussie theme of the steakhouse. I'm familiar with that only because it's a successful company. If it had fallen apart soon after 1996, I could have forgotten all about the chain and the "Bloomin' Onion" and all that. (As an aside, I've tried to visit the Outback in Norwalk, Connecticut about ten times, and the wait was always too long. It's not that good, is it?)

So here is the list of companies in the Russell 1000 as of 1/1/1997 that had clever tickers, as assessed by me, today.

Column 1: company name as of 1997
Column 2: company ticker as of 1997
Column 3: total return from 1997 to present (*) in percent

Franklin Resources        ben   445
Anheuser Busch            bud   197
Nextel                         call    410
Brinker                         eat   321
Callaway Golf                ely    -39
Sprint                          fon    28
NICOR                         gas   106
Santa Fe Pacific Gold     gld    0
Coca Cola                    ko     9
Southwest Airlines         luv    261
Philip Morris                 mo    279
Quaker Oats                oat    192
Bank One                    one   62
Outback                      ossi   132
Everest Reinsurance      re     264
Transocean Resources   rig    152
Panamsat                    spot  7
Lone Star Steakhouse   star   28
Toys R Us                    toy   -10
Dentsply                      xray  303

avg 157%    stdev 148%

Stats for all 1000 Russell 1000 companies:

avg 132%    stdev 200%

(*) I need to investigate the exact algorithm that my expensive software uses for calculating total return. That is especially important when there are mergers, spinoffs, etc. It is crucial that whatever it does for the novel-ticker companies, it also does for all the other Russell 1000 companies, so that our comparison is unbiased.

Results: The novel ticker companies on average made 157% and the average Russell 1000 stock made 132%. The standard deviation for the novel ticker returns was 148%, and there were 20 novel tickers. The standard statistical error then from taking 20 novel ticker companies is 148%/square root(20), or 33%. So the average novel ticker return of 157% is not significantly different from that of the average Russell 1000 stock, 132%.

The bias factor discussed earlier–which one would guess would make me prone to pick currently successful companies as having novel tickers–would tend to make the novel tickers appear to perform better. Even with that presumed bias they don't seem to perform much better.

Net result: I don't believe the idea that novel tickers tend to outperform.



Once upon a time, Elmer Jacinto was his nation's most promising young doctor. But doctors in the Philippines are not well paid, and so he boarded a plane to America.

He did this to make more money, and to become … a nurse.



I came across a refreshing and breezy piece which discussed the basic pitfalls of hypothesis creation and statistics. This seems highly applicable to the Spec world as well. Read Sinning in the Basement: What are the Rules? The Ten Commandments of Applied Econometrics 



The normal distribution is a poor fit to the daily percentage returns of the S&P 500 from 1950-2005. The lognormal distribution is a poor fit to single period continuously compounded returns for the S&P 500, which means that future prices are not lognormally distributed. However, sums of continuously compounded returns are much more normal in their distribution, as would be expected based on the central limit theorem. A t-distribution with location/scale parameters is shown to be an excellent fit to the daily percentage returns of the S&P 500 Index. [Read more here]



The stocks of the first three days of 2007 have been interesting. How does the H/L range for these three days compare with prior years, and do they have any predictive value?

By using SPY daily since 1993, I checked the H/L mean for the first three days, the return of the first three days, the return of the next three days, and the standard deviation of the subsequent 241 trading day returns (starting at day four of each year through late December).

The H/L mean of the first three days of 2007 is relatively tame compared to other years, which is in keeping with the current low-volatility regime. Here is the data by year, with the second column being the average H/L for the first three days of each year:

year   average H/L
2001   0.040
2000   0.031
2003   0.022
1999   0.020
1997   0.017
1996   0.015
2005   0.015
2002   0.014
1998   0.013
2007   0.011
2006   0.011
2004   0.009
1994   0.005
1995   0.004

Concerning prediction, here is the multiple regression with the dependent variable as the second three day return, and the independent variables as the first three day H/L average and the first three day return:

Regression Analysis: second three day return versus the first three day H/L average and the first three day return

The regression equation is the second three day return = 0.0052 - 0.189 first three day H/L average - 0.359 first three day return

  Predictor         Coef.      SE Coef.    T        P
  Constant         0.0052    0.0123    0.42   0.681
1st 3 day avg.  -0.1891    0.6244   -0.30   0.768
1st 3 day ret.   -0.3588    0.2444   -1.47   0.173

S = 0.0215894   R-Sq = 18.0%   R-Sq(adj) = 1.6%

The range of the first three days had no predictive value for the second three days, but there was a slight tendency (N.S) for the return of the first three days to be reversed by the second three days.

More interestingly is what the first three days had to say about the standard deviation of the rest of the year. In the multiple regression, the return of the first three days didn't matter, but the average H/L range did (see graph).

Regression Analysis: the year's standard deviation versus the first three day average

The regression equation is the year's standard deviation = 0.00645 + 0.233 first three day average

      Predictor       Coef     SE Coef    T        P
      Constant     0.0065   0.0018    3.61   0.004
1st 3 day avg.    0.2325   0.0929    2.50   0.029

S = 0.00322239   R-Sq = 36.3%   R-Sq(adj) = 30.5%

The significant slope coefficient says that the average range of the first three days has a positive correlation with the subsequent year's (daily return) standard deviation. 2007's average first three day range of 0.011 (1.1%) predicts another year of low volatility.

This probably relates to the persistence of volatility regimes, such that high (low) range early Januaries come amidst high (low) volatility years.



If you are banned from counting in the casino, you can always bet on sports' teams that are non-home field favorites: Read about Arbitrage Opportunities and Wining Strategies in the European Football Betting Market

Part of the problem is that there does not seem to be low-risk paths to wealth, as shown by the relationship between stock idiosyncratic (non-market) volatility and return: Read about Implied Idiosyncratic Volatility and the Cross-Section of Stock Returns

And if you are really risk-averse, you can use VIX futures to smooth returns of fixed-income portfolios: Read about Improving Risk-Adjusted Returns of Fixed-Portfolios with VIX Derivatives



You sometimes meet a very worthy adversary, and she beats you, but regardless of the outcome you respect and admire her for a very well played game. Such is how we all felt about the market this week. So many twists and turns, topsy-turvy patterns, fakes, dodges, lures, snares.

It started while the market was dormant, before the sharp people from the auctions could get involved with a up opening close to the six-year highs, and it ended with a down day — minus 11 points in the S&P futures, the first 20-day low since July 14, when it registered 1264 on an adjusted basis versus today's 1417. A long time between drinks for the bears.

When the week’s play had closed, the Nasdaq was up 1.5%, the S&P lost 1.5%, bonds rose 3/4 point, the dollar gained 1/2% (a staggering up move in the yen/dollar), oil declined some 10%, silver and gold had moved down some 6%, the grains slipped a few percentage points. Google and IBM were near the rounds of 500 and 100, and the VIX had a 15 day closing high of 12.14, coming off of a four month closing high of 12.99, set on the anniversary of that infamous day.

 It would be easy to quantify what happens when such divergences occur, and I am partial to what happens after a few up weeks in stocks are followed by a down week and nice minimums in January. That's certainly a propos and a proper thing for counters. But much more to the point is a bit of horse trading from Ben Green.

What caused the stock market to go up 15% last year? (Aside from the fact that stock yields (with growth) were 6 percentage points or so higher than bonds, as they are this year, and since 1980, there have been nine of nine big rises on such occasions.) It was certainly the big decline in May. It got everybody on the wrong foot. It set up hope among the bears and fear among the bulls. And it allowed the big brokers to make a fast profit before they raised their allocations of stocks and buy recommendations for the techs, the better to make a few billion for the bonus pool without making too much of a dent in the trillions of longs that they must carry at low borrowing rates, that must go up or else by the end of the year.

How would Ben have handed such a situation if he knew that he had to buy some stock before the end of year as they were very much wanted by the breeders in Texas? He would have said, "I think I'll wait until it gets a lot closer to the end of the year, and very much closer to summer before I ever even consider buying and I'm actually very much more interested in selling right now than buying." Yes, that's it. That has to happen, It's what happened in May, and thank goodness all those boys not interested in buying under any circumstances got some help from the Israeli situation in July or else they might not have profited as much last year as they would this year when they buy the stock.



The reaction to fear is invariable, but the duration and magnitude of panic and recovery cannot be known with certainty.

Vincent Andres comments: 

As noticed several times here, reactions to fear (short moves) are also swift, swifter than long moves. Picking a banana doesn't need much swiftness, but escaping a snake does (in an ethologic spirit).



What has struck me most since 2003 is that an increasing number of people (brokers, money manager, individual investors) seem to have become “do-it-yourself” little hedge fund managers (at least in their imagination). You notice it mainly in their use of market language: “CME, futures, shorting, active trading, modeling, soft commodity, stop-loss, technical analysis, macro this and that.”

It all brings me back to Vic’s good old theory on the “ever changing cycle,” as many smart people (again!) have been proven wrong since the post-2000 period.

Just as the crowd (doesn’t exclude investment banks’ analysts) got used to the new ‘99 economy of one-way price behavior (irrational only for those who didn’t participate!), and as (almost) everyone became a dot-com expert with a dot-com style language, the market began to … well, we all know the story.

Post 01′ everyone began to put their brain at work trying to adapt to a new environment (basically high volatility, one-way down with a few false starts). While the crowd finally repositioned away from equity into hedge-funds, bonds and structured products–there we go again: U-turn big time (low volatility, one-way up!). Most people found their portfolios on the wrong-side (again!).

Ironically, the best performers over the past three years have been the good-old fashioned money managers with a well diversified equity portfolio, watching their boring positions beat most hedge-funds (with a few exceptions) with probably much less work involved and more flexibility (liquidity).

This is oversimplifying of course, but somehow sadly true … and I can’t wait for the next cycle, as many investors are still stuck in real estate, hedge-funds and protected notes.



If you wish to check out the restaurants in Texas with the best barbecue cuisine, take the tour here .



When I feel like some self-flagellation I do on occasion repair to programming in the R statistical environment. This works depressingly well to deflate any hubris or the mis-appelation or appropriation of clever authorship, which completely fortuitous stock selection always, despite knowing better, engenders in me. When I’m done tussling with what for someone with even modest intelligence is probably the simplest of tasks in R, I inevitably long for something more direct and possibly less painful, such as a chain with a bunch of very sharp knives attached.

Backgammon victorys will go to the better player “in the long run,” but that can mean quite a long time and some suffering, if you play for too much money in the meanwhile. The other day, in a tantalizing but rare victory in R, i managed to roll a pair of dice six thousand times to determine the percentage of either seven or eleven coming up. That roll out gave the answer as 19.2%, 3% below the correct “long term” result. It kind of reminded me that in backgammon and in the markets “The best laid schemes o’ mice an’ men Gang aft a-gley.” Or as the Chair told me many years ago about the realities of statistical trading, “when they take you, they really take you.”

I’ve played backgammon for over 40 years, a bit longer than I’ve been in the market. In my youth, there was easy money in the game. Now, also somewhat like the market, the dream of low lying fruit has attracted so many clever players that the free bucks are extremely hard for the average or slightly above average player to find. Years ago more than a few folks I know made a living from the game. Those that are still professional gamblers now play poker, and I imagine the freebies are fast vanishing in that arena as well.

Now I play vs. robots almost exclusively. They play very well, very fast, and don’t whine about improbable but inevitable adverse dice outcomes. In addition to being far better at calculations than I, some are even mischievously (I’d say malevolently) programmed to insult your particularly dumb plays with the one number that turns your error into instant and ignominious burial.

Fortunately in the stock market i get to wager with a few benefits not present when facing a powerful neural net. In backgammon I’m the idiot, but in the market even as an idiot i can buy brains, not compete against them. I can even buy “the grind” as holdings in AB and GS and MER over the past few years pleasantly demonstrate. So even in a world of giants, in the stock market there still is plenty of room and profit for lesser beings, thank goodness.

incidentally, for outstandingly good robot or human backgammon competition I’d recommend gamesgrid. There are also many free backgammon sites.



I had a conversation with a fellow the other day who just came back from a trip to the Beau Rivage in Biloxi, Miss., from a major poker tournament. He lost early in the tournament and was quite disillusioned as to his play. He felt that he played poorly and shared with me his feeling that he needs to go back to the beginning and get some help to improve his chances of success.

I shared with him a comment that I heard on TV the other evening from Mike Sexton, poker host of the WPT and himself a very accomplished poker player. Mike personally has seen every great, near great and former great poker player of the last 25 years play. He said that the goal of a poker player is to play each hand correctly. In a game that provides imperfect and limited information, along with the fact that you have little or no control over the events that happen during a tournament, including the cards you are dealt, that is all you can do. The rest is up to fate.

Daniel Negreanu says that his goal in playing in every tournament that he enters is to not make any mistakes that will cost him the tournament.

I had the honor of hearing John Wooden speak at a seminar some years back. For those who are not familiar with John Wooden, he is the legendary coach of the UCLA Bruins, who won 10 NCAA basketball titles in 12 years and coached such famous athletes as Kareem Abdul Jabaar and Bill Walton. His team once won 88 straight games, and he is one of only three people who are inducted into the basketball Hall of Fame as a player and as a coach.

He mentioned that during his tenure as coach, he never talked to his players about winning and losing, he always stressed the fundamentals of the game and playing to the highest possible level that they could. Their goal was always the same, to work as a team, play as a team, and the rest would take care of itself.

I find in life that the greatest obstacle we have in front of us is often ourselves, and the limitations we place upon us.

In 1968 at The Olympics in Mexico City, Bob Beamon shattered the world long jump record by an unbelievable leap of 29′2 1/2″. This bested the previous mark of 27′4 3/4″ by 21″. It was such an extraordinary achievement that Sports Illustrated analyzed the jump with state-of-the-art illustrations in their follow-up issue. Physicists and scientists who were interviewed were astounded by this and suggested that it was such an amazing and perfect feat, a stupifying confluence of form and fortune, that it might never be approached again. It wasn’t until the 1991 World Championships in Tokyo that Carl Lewis broke the record while leaping over 29′ three times in one day and setting the mark at 29′2 3/4″ wind aided and 29′2 1/4″ unaided. Unfortunately for Lewis that was not even the longest jump of the day. Mike Powell unleashed an unfathomable jump of 29′4 1/2″. A mark that stands until this day.

It was Vince Lombardi legendary coach of the Green Bay Packers who won five NFL Championships in seven years, and who has the Super Bowl trophy named after him who said:

The good Lord gave you a body that can withstand almost anything, it is your mind that you have to convince.



The inaugural USA Treasury Inflation Protected Security, TIPS 3.375% 1/15/2007, will mature next week on the 15th January 2007. This is an important event and allows us to answer the question “knowing what we know now, was it a good idea to buy TIPS in January 1997, instead of the more widely available nominal bond?” To find out, I did the math (with the help of my colleagues). The answer, although not shocking, reveals quite a bit. Firstly, the nominal bond returned 179.93 per 100 invested. That is an annual return of 6.05%. By comparison, the TIPS bond returned 175.56 per 100 invested. That’s an annual return of 5.79%. During the period, actual annual inflation averaged 2.44%. The TIPS were initially issued at a break even spread of 2.875%, so it’s no surprise that the nominal bond outperformed. In early 1997, the market overestimated expected inflation by a whopping 43 bp on an annualized basis. More interestingly, it only cost and investor 26 bp annualized to buy inflation protection and diversification benefits (6.05% less 5.79%). That seems like a pittance considering what you are getting.

My main conclusions are as follows:

1- Break even inflation expectations are poor predictors of actual inflation, at least by the U.S. example, even considering liquidity and other preferences.

2- another way of looking at it is to say that the market ultimately offered a very generous 43 bp risk premium (term + uncertainty) on nominal bonds back in 1997.

3- From a trading and investment perspective, it seems to make sense to hold your inflation expectations static (say 50 bp in Japan) and vary your risk premium. Right now, the risk premium on nominal Japanese government bonds is slightly less than zero. It’s been as high as +50 bp just six months ago.



Days with big a range between the high and low come in three types: Close near high, close near low, close not near either. In SPY, yesterday’s range was greater than 1.5% [ (H/L)-1 ], and the close was not that near to the high or low.

SPY daily since 1/2003 was used to check five day returns following:

1. Range > 0.015 (1.5%) and close within 0.002 (0.2%) of low
2. Range > 0.015 and close within 0.002 of high
3. Range >0.015 and close not within +/- 0.002 of H or L (middle
range, like today)

Here is ANOVA of means, comparing five day returns of the three conditions with non-overlapping five day returns (there is some overlap in the conditions, especially when market was more volatile, and in the case of a close near the low — So inference is limited):

S = 0.01823 R-Sq = 1.07% R-Sq(adj) = 0.19%

Individual 95% CIs For Mean Based on Pooled Standard Deviation:

Level                N          Mean         StDev
if >1.5,L<.2      40      0.00780       0.01947
if 1.5,h  <.2      31     0.00607       0.02111
if 1.5,mid         67     0.00503       0.02174
5d return        201     0.00254      0.01612

All three high-range days were followed by five day returns greater than average, with those closing near low being highest, and those near the mid (like now) being the lowest (all non-significant).

High-range days are not as common as a few years ago, and are highly correlated with volatility. I used the same SPY series from 1/2003 and looked at, for every 20 days counted, the number of H/L > 0.015 as well as standard deviation of daily returns. Here is the correlation:

Correlations: s.d. 20, countif

Pearson correlation of sd20 and countif (H/L>0.015) = 0.876
P-Value = 0.000



Does anyone have any comments or suggestions on breaking through psychological barriers? I have been stuck at a particular equity level now for an extended period and each time I start to break through I get sucked back down. So everyone can thank me for yesterday’s volatility, as I came in long the NASDAQ ran up to my wall, so I then sold at the peak, only to buy back too soon or else too heavily into the decline. I have tried sneaking through this wall with small trades. I have tried jumping through with larger trades. I have tried not even looking at my equity for a while.

I am beginning to feel as I did when I was a little kid and my brother (who is five years my senior) used to play goal line defense against me. I would try to make it over the couch while he pushed me back, but I never could.

Dr. Mark Goulston adds:

I think one of the keys to overcoming psychological barriers is to have a clear and specific a vision (vs. merely the desire) of where you want to get to, that is both compelling and convincing to you over a prolonged period of time. That is usually necessary to generate the requisite commitment (i.e. focus, concentration, persistence and perseverance when you hit walls). Then have a step by step plan for getting there with back up plans for any and every setback you can imagine. Then re-evaluate periodically whether you’re staying with that plan and don’t change it without good reason (especially true for plans you have checked with trusted advisors whose input you listen to).

My personal vision is to develop deep, sustained and mutually rewarding relationship with some of the most respected and powerful people and then influence them in a way to make the world better. Maybe a little idealistic, but I’ve become friends with Warren Bennis from USC and am working on relationships with Jim Sinegal from Costco, Bob Eckert from Mattel, Frances Hesselbein from the leader to leader institute (formerly Peter Drucker Foundation), and Marshall Goldsmith the internationally renowned executive coach, so I think I’m off to a pretty good start. A big help has been my partnering with Keith Ferrazzi, author of best selling book, Never Eat Alone which I urge all of you to buy and read.

Grandmaster Nigel Davies Comments:

I believe the key to psychological barriers in most fields is down to our expectations of ourselves. Kids and adolescents haven’t learned ‘their limits’ so they tend to improve very rapidly. Older folks (20+) have a problem in that they ‘learn their place’. So typically you see acts of self-sabotage by players who are outperforming (see Icarus) whilst those having a bad tournament will fight like tigers to reach their norm.

The feedback one gets from one’s peers can tend to reinforce these feelings. So to improve it’s useful to acquire an excellent peer group for whom success is normal. For this reason I always tried to hang out with the Russians rather than the weak Westerners, and they normally tolerated me because of wanting to improve their English. And I posit that we are in the right place for similar reasons.

But what you may be experiencing may not be this kind of psychological barrier. The problem I’ve found with markets is adjusting to the ‘phase shifts’ when it starts to behave quite differently. A model which suggests that individual striving is the key may be too one dimensional, and perhaps what is required is to dance.

Jim Sogi offers:

The New Year kicked off a new phase shift, or a return to the old. Anecdotally, regular people are starting to get interested again in the new market highs and small cap techs after having stayed away during the steady but slow gains of the last 4 years of worry. Even the hoodoo who lost all his money is getting people at the beach to trade on hot tips. Things that make you go Hmmm.

Different tactics may need to be considered and tested. The issue may not be psychological.

Steve Ellison adds:

In “Secrets of Professional Turf Betting,” Bacon proposed varying tactics through the year based on the improvements of 3-year-olds, variances in weight allowances, effects of mating season, etc. For phase shifts such as the shift from winter to summer tracks, Bacon proposed general methods that could be used at any time, but were particularly useful at times when data was insufficient to evaluate the new regime. One such method was to pick the horse with the highest percentage of races won in the past year. Another was to note which horses had begun working out earliest at a new venue and study their workout times.



Because of several large scale hacker attacks on U.S. military networks this year, a lot of attention has been paid to where these attacks are coming from. The clues always lead back to China. Apparently the culprits are Chinese government Cyber War units. But now some new players from China have been detected. In this case it’s a Chinese criminal organization that hires out its botnet (PCs that are secretly controlled by the crooks) for various Internet based scams. There are currently 4-5 million PCs that have been infiltrated by hackers, turned into “zombies”, and used by crooks for sending out spam, or performing other illegal acts. This has become a big business, with each PC in a botnet producing $300-$500 a year, or more, for those who control them. Botnets of 100,000 or more PCs are not unusual, and many of them are for “rent.” The Chinese gang is suspected of doing jobs for the Chinese government, including trying to infiltrate American military networks. China has very tight control over its Internet users (over 130 million at last count). Content filters software monitors, and a staff of over 30,000 “Cyber Cops” makes it difficult to do anything on the net, that the government does not like, and get away with it. Thus it is believed that some of the Chinese Internet gangs stay out of jail by not attacking Chinese targets, and doing contract jobs for the Chinese government. …..Meanwhile, the use of botnets for spamming has created the current situation, where over 90 percent of all email sent is spam. The botnet armies are not only powerful, and lucrative tools for criminals, but also powerful weapons for governments.



We’ve all seen the “1929 Dow vs. X” chart, where a doomster force-matches part of the 80 year old classic chart pattern to a contemporary time series, with the implicit forecast that a crash is imminent.

Here is such a chart, this time aligning the 2000 Nasdaq top with the Philly home builders index.

The source is a foreign-owned, Fairfield County, CT., dealer.

It is interesting how this template keeps resurfacing.



Fred and Mike are pals who both trade for the same hedge fund. Their compensations depend mostly on their individual efforts, but also on each other, because if both gain for the firm there is more profit to divide at year end. In addition to this, there is a competitive status hierarchy related to individual results.

This seems close to the “Liberal Paradox”, exemplified here (an excerpt from Wikipedia) by ranked desires of a couple contemplating a chick flick:

Suppose Alice and Bob have to decide whether to go to the cinema to see a chick flick, and that each has the liberty to decide whether to go themselves. If the personal preferences are based on Alice wanting to be with Bob and thinking it is a good film, and on Bob wanting Alice to see it but not wanting to go himself, then the personal preference orders might be:

Alice wants: both to go > neither to go > Alice to go > Bob to go Bob wants: Alice to go > both to go > neither to go > Bob to go There are two Pareto efficient solutions: either Alice goes alone or they both go. Clearly Bob will not go on his own: he would not set off alone, but if he did then Alice would follow, and Alice’s personal liberty means the joint preference must have both to go > Bob to go. However, since Alice also has personal liberty if Bob does not go, the joint preference must have neither to go > Alice to go. But Bob has personal liberty too, so the joint preference must have Alice to go > both to go. Combining these gives

Joint preference: neither to go > Alice to go > both to go > Bob to go and in particular neither to go > both to go. So the result of these individual preferences and personal liberty is that neither go to see the film.

Now back to the traders … (+ = up, - = down):

Fred wants: [I](F+/M+,F>M) > [II](F+/M+,F(F+/M-,F>M) > [III](F-/M-,F>M) > [IV](F-/M-,F(F+/M+,F>M) > [V](F-/M+,F(F-/M-,F(F-/M-,F>M)

In scenarios I - III, individual competition shows because concern about the firm is mooted, (both traders are up). II > (III and IV) shows that the trader prefers the community wins, even if he is beaten by his friend. And V is the least preferable, with the community losing and the trader losing to his buddy.

Individual vs. community relates to team sports, the question of individual achievement over the team, competitive sales groups, and the dynamics of group endeavors in general. Even if there are advantages to trading solo, ostensibly they are out-weighed by owning part of the “house” (working with other’s capital) and reduced risk resulting from multi-trader strategy diversification.



Recent evidence and posts to this site suggest there may be ’stars’ who obtain consistent out performance. We believe that some of these “stars” obtain their success from rigorous quantitative approaches. There may be other explanations for other investors. Since risk is such an important and enduring focus of this group the following may serve as a basis for some new directions of thought on the subject.

The term “power elite” was coined by C. Wright Mills (and later used by Noam Chomsky) to describe a conspiracy-type theory of how the direction of the US economy and polity is driven. The elite who make up this power structure are neither monolithic nor constant in the US, nonetheless they exist and confer and it is from amongst their number that many leadership roles are filled. The newly wealthy, powerful and brilliant are invited to join the circles.

In matters of this earth the working assumption of the “power elite” is that everything of consequence is knowable. The perception of risk, therefore is a form of admitted ignorance. Consequently the realization of risk is optional and avoidable if ignorance can be overcome. If we proceed from this assumption then the experience of risk, as opposed to the initial assessment of risk, possibly can be reduced to zero if you pick your spots. Zero risk might be achieved through hard research. But the preferable and quickest method of the “power elite” is to buy information and/or obtain quid pro quo — giving the appearance of doing a lot of research may be just cover. Once the essential knowledge is obtained positions in the market can be taken with confidence. The only risk remaining, which is statistical, is the noise associated with how the market will react to the order flow and the ultimate announcement of the development that is being exploited. All this works until, from time to time, the rules of the market change requiring the innovation of new methods and new sources.

The ability of any one person or group within the “power elite” to consistently succeed over time and across changing rule regimes is not guaranteed. It takes work. The cunning of competitors, hubris, fatigue, and possibly legal enforcement may do in the previously successful.

If this model operates selectively within markets then it suggests that risk is optional for some classes of investors because they are able to exploit unique sources of information which transform risk into reward directly. These are people who count but don’t count.



We have all had a new beginning at some point. Perhaps it was the first day of school, the first day on a job, or a first date. Perhaps it was the first game with a new world champion, the opening match of a big tournament, or the first time we try a new shot, pitch, or variation. You have to hand it to the Market Mistress, that she always gives us a truly extraordinary experience on the first day of the year. Just take the following:

She opened at 1231, just up two on the day, and down eight from the overnight low, then she promptly went down two in the first minute, and then up ten (to above the close of the last six years), and then down 22 to below the lowest close since December 1st, registering a price that would have been the first 20 day low that we have witnessed in six months. She then followed the path of least resistance, going up eight from there in a half hour, and finally closing down 3.6 on the day in futures, and down 1.7 on the day in the index.

It was truly a staggering, startling, scintillating opening day performance. Remember to bear in mind the life threatening moves, the emotions elicited, and the fortunes gained and lost — as the S&P e-minis alone trade 1.2 million contracts a day, a dollar volume of 85.5 billion .Take into consideration too that the hoariest adage is that the market in the first month of the year foretokens the rest, and multiply all these emotions a thousand fold for the poor public that follow such an idea.

Perhaps not so many would follow it if they were to look at the following:

Year Jan. Move Rest of Year Move

2006 32 138

2005 -31 67

2004 19 81

2003 -24 256

2002 -18 -250

2001 46 -217
This rule over the last six years has been wrong three times and right three times, and in totality would have lost you 70 points. This does not seem like the kind of rule to hang ones hat on. Needless to say, the only reason that the January barometer has cachet, aside from the thing that statisticians call multiple comparisons, is that in most years, January is up, and the rest of the year is up. For example, from 1980 to 1999 , the last 11 months of the year were down just three times, and January was down only five times, so any rule that most often predicts a rise is going to appear right.

It is much easier to describe than predict, so what does all this mean? We have had three down days in a row now going into the first day of the year. Down first days, this occurred as follows (while futures have been open).

Year First Day Rest of Month

2005 -7.4 -29

2004 -1.7 21

2001 -35 83

2000 -17 -96

1999 -4.6 37

1994 -1 13

1993 -2 +2

1991 -3 09

1989 -3 19

1986 -1 -3

1985 -2 11

1983 -3 +3

12 of last 24 years started with down days, so the first day of the year is not inordinately bullish. The rest nebulous squared.

Thanks to Mr. Owen Wilson for his timely calculations.



When magic of the markets is felt every moment, why is there no organized market for magic?

For New Years Eve, one chose to be at the Mela restaurant, (Mela a word from the Indian vernacular means the village fair). Among a host of activities from a village fair, the restaurant specializes in bringing a personal magic show to your table for a small fee, and the question arose right there at the dinner table as to why is there no organized market, not even a national or trans-national company that specializes in retail or wholesale magic?

There are several national and international companies with listed stock in the arena of restaurants, hotels, movie making, movie screening, bowling alleys, vacation organizing, vacation sharing, culture companies, etc., but there is not a single listed stock or organized magic company. Why?

Here are some possible explanations:

Many more ideas come to mind, but then the thoughts have stayed lingering around this one point about being personal. All other human endeavours in the arena of entertainment and services that have been able to overcome the personal factor and lend themselves to being productized, standardized, predictable, mass-emulated, mass-transported, mass-communicated etc. have come to evolve into giga-corporations. Individualistic personal pursuits of acting, dramatizing and magic have failed to turn the magic of the markets to their advantage.

So, is the magic really in the crowds rather than in the magic itself. What important lessons could one derive from the failure of magic to draw the magic of the markets to its advantages?

Easan Katir adds:

This weekend I had a front-row center seat amidst a sold-out house at the Geffen Theater in L.A., to view up close a talented sleight-of-hand master, Ricky Jay and his 52 Assistants, directed by David Mamet. Consequently, I have been contemplating similar corollaries between the conjuror’s art and the trader’s art. Certainly there is plenty of misdirection and deception in both arenas. There is also plenty of explanation to convince one that the impossible is normal. Mr Jay produced winning poker hands, and explained that a card cheat must not only give himself a good hand, but give the suckers good enough hands to inspire them to stay in the game.

Steve Ellison offers:

An important parallel between magic and the markets is the role of patter in distracting customers’ attention from the sleight of hand. A thing to which a magician is drawing the audience’s attention is almost certainly not the main event. The weekly enumeration of reasons to be bearish is an example of market patter.

Laurence Glazier comments:

Magic is also a matter of political or sociological point of view. Is our very existence magic, or the random walk of chemicals? If I construct a chord progression which moves the e-motions, is it science or something more? The magician who bends forks and keys - the process often continuing after after he has ceased touching them - wil never convince the “component parts” of science, and likewise neither would those who have vibhuti.

I am not sure that music works well in the market - where it is there the market - a la Adorno - may affect it adversely, and similar considerations may apply to real magic. If life is to be magical, it must have magical qualities. It is easier for children to see them, though, so let’s stay young.

Andres Vincent counters:

Forgive me for disagreeing, but DNA strands, crystal organization, life itself, a snow flake, clouds, animal life, glass, light, rainbows, electromagnetism, classical mechanics, relativity, etc., etc.. The whole universe is magical, so to see magic there is no need to hallucinate. Just read the book of nature. But to appreciate this beauty its complexity must be (at least a bit) understood, i.e. we have to observe, to work, to learn — in other words, try to become adults.

If adults stay young, and that’s unfortunately the case of the majority, the only magic provided today is overconsumption and/or religion, i.e. deceptions.

Bruno Ombreux mentions:

I would add geology and botany to your list. I got undergraduate classes in both of those, an it is incredible what learning about these subjects does for you.

After studying geology, for instance, one sees the world in a different way. Walking in the countryside — you don’t see the normal countryside any more. You can see how landscapes came to be, you can see millions of years of evolution, movement, shocks, erosion, chemical reactions. And you don’t see rocks anymore, you see names.

You can call a stone by its true name, that is magic. It actually kills all the poetry of a walk in the countryside though, so I am glad I forgot my geology classes.



When a company like Apple decides to reward and motivate employees through grants of stock options, shouldn’t they be able to choose between the number of options granted and the date (thus price) of options? Shareholders want both effective ways to motivate employees, and minimal dilution of their holdings caused by new share issues via employee options. Apple can’t know when and by how much stock shares will rise or fall, so they have an incentive to issue options at the lowest possible price. They would naturally pick the lowest share price during the quarter.

Management’s goal is to both offer the least-cost compensation to employees and the least-impact-to-shareholders compensation and motivation. So if the goal is to provide $100,000 to an employee via options (and the marketplace of similar tech companies influences what employees expect or think just..without enough compensation, Microsoft hires away more key Apple employees), the fewer share options Apple offers to equal a $100,000 value, and the less the dilution to shares outstanding. Do New York Stock Exchange or SEC regulations require Apple to report on a day-by-day basis the number of share options granted? Or must they report potential “exposure” to shareholders from possible dilution that options grants might cause? Yesterday’s news report on Apple says:

“The company also said that the scale of the manipulation of share options grants was much wider than previously revealed, extending to 6,428 grants for executives and other employees on 42 separate occasions”

And continues:

“Apple is the highest-profile of more than 160 companies under investigation for turbo-charging executive pay by backdating share options. By pretending they were granted on dates when the share price was low, companies were able to artificially inflate the profit made when the options were exercised.”

Why can’t a company like Apple just issue 100,000 shares of stock to itself and dole out to employees options for that stock at any price the company wishes? I assume tax issues are key along with SEC regulations. Or are there major shareholder concerns? I would think the main Apple shareholder concern now is that federal government regulators will continue to distract Apple executives from their work. The whole thing should be a matter for the stock exchanges to deal with. No one knows what the ideal rules should be for granting options. Competing stock exchanges have an incentive to discover and enforce them. The SEC has no such motivation.



I was fortunate enough last night to see Eastwood's two films on the Battle of Iwo Jima back to back at the Jacob Burns Film Center in Pleasantville, NY. As an aside to anyone in that area, the Film Center is a fantastic resource for independent, art house, foreign, and classic movies.

It was a very interesting experience watching the two movies back to back. It was great being able to compare the second with the first so fresh in my mind. I enjoyed both movies greatly, and found them both incredibly moving. I found Letters from Iwo Jima, which tells the story of the battle from the Japanese perspective (and is entirely in the Japanese language) to be one of the most powerful anti-war pictures (in my opinion) that I've ever seen. It was also the better movie of the two in my opinion, although the emotional impact of Flags ran much deeper for me.

I suspect that was due to two reasons. The obvious first one is that I'm an American, and we tend to sympathize with our own countrymen. The second is that my deceased grandfather who I was very close to, was a fighter pilot in the European theater of WW II, and the movie brought back memories of him, and imaginings of the incredible sacrifices that must have been required of all during that time.

Anyways back to the movies … I found them to be two very different films for the most part. One thing they do have in common is an examination of the theme that war literally is hell, and that actions on the battlefield are often brutal, and amoral no matter which side claims the moral imperative.

'Flags' which purports to tell the story behind the famous picture of the flag raising over Iwo Jima will inevitably be compared to 'Saving Private Ryan' for its battle sequences. Eastwood manages to capture the randomness and chaos of war vividly in the battle scenes. In particular, the opening assault on the beach near Mount Suribachi (where the flag would eventually be planted) is very impressive.

'Flags' is shot as a series of flashbacks between the battle itself, the present day, and the war bond drive immediately after the battle where the three survivors of the flag raising captured in the photograph are trotted out by the US government to raise money for a near bankrupt US. The movie raises a lot of questions over what it means to be a hero, the reasons behind actions on the battlefield, and their often unthinkable nature, and shines an uncomfortable spotlight on the war propaganda machine. One can't help to have some thoughts of the current situation in Iraq, and Bush's infamous picture on the carrier with 'Mission Accomplished' overhead when watching the spin during the bond drive portions of the film.

Some reviews have complained about the way 'Flags' cuts back and forth between past and present, but it didn't bother me at all. I'm not sure it necessarily adds a great deal to an already powerful film though.

The acting in 'Flags' is generally very good, but I thought the actor who plays one of the flag raisers, a Native American named Ira Hayes, steals the show. His performance is heart wrenching. He is a soldier that has seen and done unthinkable things in the battle. He is literally dragged into the spotlight unwillingly and trotted out as a hero for the flag raising during a series of appearances with the other two survivors during the bond drive.

'Letters' begins in 1944 before the battle, during the early Japanese preparations on the desolate island of Iwo Jima (Sulfur Island in Japanese). Ken Watanabe does an incredible acting job as the general in command of the operation, Tadamichi Kuribayashi.

Kuribayashi had spent time in America before the war, and was against it but was obviously overruled. He knew that the industrial output of the US at the time was unmatched, and would likely be unbeatable. He certainly knew that he and his 20,000 troops were doomed going into battle, but he strategized for maximum impact on the American invasion. He turned a lot of traditional Japanese battle planning on its head, which led to dissension in the ranks of his underlings both before and during the battle, and definitely contributed in some cases to a quicker death for some Japanese units. By the end of the battle, there were around 1000 Japanese left between battle casualties and suicides to avoid surrender.

Watanabe captures a man torn between duty to family and country, and between his love of homeland versus a friendly view towards Americans in general.

The other star of the show is the actor who plays a simple baker with no interest in war, and is forcibly conscripted into the Japanese war effort and sent to Iwo Jima while his pregnant wife watches powerlessly. His performance, at times comedic, always powerful, is very well done.

'Letters' is clearly an anti-war picture. Its emotional impact is different in some ways because you know from the beginning that most if not all of the characters are going to be dead by the end of the film, and they all know it themselves. The island is inhospitable, and hot. There is little food or water, and dysentery everywhere. Yet, they manage to build a series of tunnels and reinforced positions that go so deep, they are eventually immune to American air bombing campaigns. Despite the brilliant strategy of Kuribayashi, the Japanese are far outnumbered, outmatched, and have been essentially abandoned by the Japanese mainland in terms of reinforcements. It is a very difficult movie to watch knowing the ultimate outcome.

It manages to humanize the face of the enemy like few war pictures have done. I would be interested to see the reaction to it in Japan.

Anyways, I would strongly recommend seeing both movies. As movies, they are both very well done, but I feel like 'Letters' is a crowning achievement for Eastwood, while 'Flags' is not quite at that same level. They will definitely give you many things to think about as we begin a new year.

Stefan Jovanovich comments:

I don't do war movies any more so I can't comment on the films that Dylan saw. The last uniform, splatter film I saw was "Saving Private Ryan." Compared to the memoirs and documentary photography made by the people who fought on D-Day and in the weeks after the landings, Spielberg's epic was so completely meretricious that it cured me permanently of any curiosity about what contemporary filmmakers have to say about WW II or any other war.

What I would like to question is the presumption that Americans were destined to win the war because of our material superiority or, as Dylan puts it, "the industrial output of the US at the time was unmatched and would likely be unbeatable." In the actual combat against the Japanese army and navy in the Pacific, the weight of numbers and equipment was rarely a decisive factor for the Americans who did the fighting. The reason for this is painfully simple: until the summer of 1945, the Pacific theater always had last priority. Supplies and reinforcements were first sent to Britain and North Africa and then - after 1944 - the European continent. Even Lend Lease to Russia usually had a greater priority than the Pacific theater.

It is only at the very end of the war, with the arrival of the B-29 and the invasion fleet for Okinawa that material superiority became a significant factor; and that was countered to a large degree by the Japanese use of kamikaze tactics. (The U.S. Navy lost more sailors in one month, off the island of Okinawa, than it had in its entire history before that time.)

The triumph of the Americans over the Japanese Empire came far more from intelligence and courage than it did from having more equipment. That eventual victory began with the neutralization of Japanese naval superiority at the Battle of Midway in 1942. 12 bombs destroyed 4 aircraft carriers and - far more important - the elite cadre of Japanese aviators on those ships.

Both Japanese and American scholars agree that, at Midway, the Japanese had more and better aircraft, ships and torpedoes. Their pilots and sailors had greater technical skills and far greater combat experience. Nevertheless, they lost - because of luck and the willingness of the American commanders, Nimitz and Spruance, to go against the odds. Even after the Japanese lost their absolute air superiority at Midway, they still retained the tactical advantages of being on defense. They assumed - not without cause - that the vast distances of the Pacific would make it impossible for the Americans to defeat them. What destroyed that assumption was the success of the American submarine forces in literally choking off supplies of fuel and other materials to the Japanese.

Like the United States Navy, the Army and Marines were able to capture territory for the establishment of forward bases in the mid and Western Pacific, and the submarine forces were able to reach the shipping lanes that converged in the seas around Luzon. The submariners were able to use the information, which the U.S. Naval Intelligence had gathered by successfully breaking the Japanese Naval cipher, to hunt down the Japanese merchant fleet. (The Japanese naval command cooperated by requiring each merchant ship to report to its position daily.)

By 1945 the naval blockade had been so successful that the only targets left were lighters and other coastal vessels; the entire oceangoing Japanese merchant marine - all 5 million tons - had been sunk.

When the battle of Iwo Jima began, the fuel supply to the entire home islands and the military was 10% of what the fuel requirements for the Japanese Navy alone had been in 1942. To suggest that the Japanese troops on Iwo Jima were "abandoned by the Japanese mainland in terms of reinforcements" is to fail utterly to understand how desperate the situation was for the Japanese. It is also to imply - yet again - that the Americans could have been expected to win because of their material advantage. Iwo Jima was - even more than Okinawa - considered part of Japan itself; and Japan's soldiers, sailors and airmen had sworn to protect the homeland at the cost of their lives. Defeating them required a sacrifice equal to their own.

What should also be remembered is the price paid for American submariners: 52 subs and 3,505 officers and crewmen. One last quibble: if, as the filmmakers imply, the U.S. was "near bankrupt" after the Battle of Iwo Jima, it must have been as part of a previously unreported planetary repo out of the pages of Douglas Adams. The near fatal hubris of post-WW II Federal Reserve and Treasury policy had its origins in 1945 - a time when the U.S. dollar was considered not only as good as gold but better. For the next 2 decades everyone in the world would take our checks without ever asking for ID.

Dylan Distasio responds:

Thanks to Stefan for the informative analysis. The above section in particular got me thinking about the validity of the statements in the movie. I happen to have a copy of Milton Friedman's A Monetary History of the US 1867-1960, which is an interesting tome in its own right. I'll quote some of the section in it on WW II deficits below (with the caveat that access to internal Fed documents from 1940 onwards during the war was apparently limited when Friedman was writing his book).

From A Monetary History:

Period of Wartime Deficits, December 1941-January 1946

…By early 1941, however, the deficit had begun to rise sharply. For calendar 1941, cash operating outgo exceeded cash operating income by $10 billion or nearly half of total expenditures. Pearl Harbor brought a sharp intensification of these tendencies. Government expenditures nearly tripled from calendar 1941 to calendar 1942, and rose a further 50 per cent from 1942 to 1943, reaching a peak of $95 billion in 1944. Tax receipts also rose but more slowly and in no greater ratio. As a result, the cash deficit rose to levels without precedent, either in absolute amount or as a percentage of national income; to nearly $40 billion in calendar 1942, over $50 billion in 1943, over $45 billion in 1944, and over $35 billion in 1945—sums averaging nearly 30 per cent of the contemporary net national product.

From the Atlanta Fed's website, here's another tidbit:

The war whipped Reserve Bank operations out of the doldrums of the late 1930s in a spectacular manner. A great deal of the war financing bypassed the old and suddenly cumbersome system of supplying credit through the Federal Reserve System by allowing member banks to rediscount eligible loans. In stark contrast to World War I and its postwar years, rediscounts dwindled and finally disappeared during World War II. The Atlanta Bank's portfolio of earning assets at the end of 1944, for example, consisted almost entirely of Treasury securities distributed from the System's account. There were no discounted loans from member banks. The Reserve Banks became almost exclusively holders of government debt. Commercial banks financed $95 billion of the $380 billion war debt, as the Fed augmented their asset capacity by supplying ample reserves. The money supply more than tripled between June 1940 and the end of 1945, and U.S. government debt increased from one-fourth to two-thirds of all U.S. debt. Thus a large portion of the banking resources of the nation, which had seemed so plentiful and so neglected in 1938, fueled the war effort, and both the activity as well as the assets of the Atlanta Fed soared.

It's also interesting to note that commercial banks were disallowed from most of the bond drives resulting in banks attempting to buy them from individuals on the black market.

Jim Sogi adds:

Stephan, have you read Embracing Defeat: Japan in the Wake of World War II (Hardcover) by John W. Dower?

It is an amazing, but quite depressing description of utter devastation to the cities, the economy, the industry, and the people and society of Japan during WWII. The fire bombs in Tokyo and in other industrial cities had an even greater capacity to kill and destroy than even those nuclear bombs, which destroyed over 40-80% of all residences and major industrial areas. Japan lost 1/3 of its net worth, and it suffered a 35% decline in urban living standards, and a 65% decline in rural living standards. It also lost 4/5th of all its ships. Furthermore, the feudal system ended. 4% of the entire population of 74 million was killed. In addition, 1/3 of the population of Okinawa was killed.

MacArthur's occupation force of 245,000 would have had great lessons for Iraq. Bremmer totally destroyed any hope and chance of stabilizing the Iraqi government by dismissing the entire bureaucracy and army in Iraq in three days with ill conceived and poorly planned action. In Japan, they kept the bureaucracy with tremendous efficacy.

It's quite amazing how prosperous they became. Now the Nikkei is 17245, which shows that it doubled in the last three years.

Stefan Jovanovich comments:

I share James Sogi's appreciation of Dower's book, Embracing Defeat; it is an extraordinary story. What the people of Japan have accomplished in 60 years is without historical parallel. To understand the extent of the devastation to Japan from the B-25 and B-29 raids at the end of WW II, you would have to take the recent hurricane devastation of Louisiana and Mississippi and multiply it 50-fold. You would then have to kill 3 million people from blast, disease and outright starvation, and leave the country with no fuel or food. Sadaharu Oh, the great baseball player, remembers sheltering with his mother in the canal near their home during one of the firestorms. They considered themselves lucky that the fires from the surrounding homes were not so intense that they raised the water temperature beyond the point of endurance. Others were not so fortunate; their bodies were found boiled to death. Oh was 5 years old at the time.

The blame for the failure of U.S. - Japanese relations in the 20th century has to be placed at the feet of Teddy Roosevelt, Woodrow Wilson and their fellow Social Darwinists (authors of that wonderful contribution to American jurisprudence - Plessey v. Ferguson). Their racism was eventually matched and exceeded by the members of the Kodaha and Tosei-Ha, but the Americans went first. In 1914, Japan was a more genuine democracy than the German Empire. The Emperor's political authority was far closer to that of George V than William II. Nevertheless, none of the Western allies - not the Americans, French, British or Italians - thought that their Japanese counterparts had the right to claim equal status at the conference table at Versailles. When that humiliation was followed by the Asian Exclusion Act of 1920 and the ending of the Anglo-Japanese alliance in 1922, the Socialist and Social Democratic parties in Japan and their policies of "Westernization" were deeply weakened. They might yet have prevailed, but the devastation of the Tokyo Earthquake and Fire created the same loss of faith and desire for a new, "strong" Japan that the Depression did in Germany.

I share James' scorn for the use of a civilian pro-consul instead of a military one in Iraq. Tommy Franks and the U.S. Army would have been a much better choice than Bremer and the State Department. But I think the historical analogy with Vietnam is the more appropriate one with regard to whether the Baathist bureaucracy and military in Iraq should have been left in place. In 1945 the Japanese forces in Indo-China had removed the French from all positions of military and civil authority just as the Germans had taken over in Italy in 1944. Roosevelt had wanted to require the Japanese forces there to formally surrender, as the Germans did in Italy; but he was persuaded to allow the Japanese to continue to govern the country until the French colonial authority could be reestablished. In the eyes of the Vietnamese, the French never overcame the double shame of defeat, followed by outright collaboration with a hated enemy. If the U.S. forces had allowed the Baathists to remain in power, the situation in Iraq would have been a second Indo-China War. I would offer instead the Philippines after the Spanish-American War as a historical comparison. The Spanish authorities were clearly discredited. Rather than leave them in place, the Americans established a joint military and civil authority. To T. Roosevelt's deep frustration, William Howard Taft, who was the pro-consul, committed the United States to granting the country political independence. (One of Roosevelt's strongest motivations for his later 3rd party run for President as a "Bull Moose" was his disdain for Taft's willingness to disestablish the fledging American Empire. He also thought Taft's fondness for baseball and his willingness to be seen throwing out the first pitch at an opening game was "common".) The U.S. Army and the Marines had to battle both the Moro and the Aguinaldo insurgents for nearly a decade after Dewey's dramatic success in Manila Bay. The chapters of General Pershing's memoirs dealing with his negotiations with village chiefs in the Philippine islands are being written again by successor American officers in the field in Afghanistan and the Western Provinces today.

From Roger Arnold: 

 I finally watched Flags of Our Fathers on Saturday at home with my 13-year-old daughter. As the movie was playing I was explaining the background of the story and of the men's lives to her. I knew some of the story because I was a Marine. The non-public parts of the story were told to me by James Bradley, even before he wrote the book. He had a passion for this story and for getting it told. This wasn't just a movie, made from a book, authored by a chop-shop writer.

Jim willed this movie into existence. Without his singular determination to tell the story it would have been lost to history. And that story too is worth hearing. As far as I can tell the movie relates the story pretty much as Jim told it to me 10 years ago, especially as pertains to Ira.

There were some peculiarities and omissions that raise questions for me. But as they pertain to private issues that readers and viewers would otherwise not be aware of, I will not relate them here.



As a kid growing up, I was taught that in order to be successful you had to work twice as hard as the next guy. Even as a child, I did not see that as being totally undoable. Most of the people around me simply settled for being average and ordinary, rather than working twice as hard as they already had in order to be successful. They were just unwilling to work that hard and make the perceived sacrifices associated with working twice as hard.

As a kid I recognized that there were a lot of people that were quite successful, and I couldn’t have imagined them working any harder than my friends and family were already working. I knew there had to be a better way. I also realized that there had to be an error of logic occurring in the thought process of my family and friends. As time progressed, I figured that the way they thought about things was poisoning their minds.

So I embarked upon a journey and tried to figure out what the answer was. Here are a few things that I learned along the way.

I had the privilege of being mentored by some very successful people early in my business career. One of them taught me something that I would never forget.

I heard him say it in meetings, and he personally told me on several occasions….. He said, “Scott, the difference between the guy who makes $50,000 and the guy who makes $500,000 is not that much. The guy who makes $500,000 does everything that the guy who makes $50,000 does, and then just a little bit more!” (he would hold his index finger and thumb about an inch apart to dramatize this point).

Inherently, I understood what he meant. I didn’t have to work twice as hard. I simply had to work “just a little harder”. I didn’t have to be much smarter, I just had to work “a little harder” “or study a little bit harder” to get a “little more” out of my intellect than I possessed. That little difference in my mind was like compound interest over time. We all know the story about how over a couple of years the difference between getting a 9% return and a 10% return isn’t that big of a deal, but over 40 years it’s an absolutely huge differential. That “little bit more” (1% in this case) made a huge difference over 40 years…..and over a lifetime, the difference becomes staggering!

So I vowed that I would work “just a little bit harder” than the next guy. I would study “just a bit harder”. That desire to study has given me the privilege to become part of this wonderful community called the spec list. It’s something that I wouldn’t be a part of if I hadn’t been willing to study….since studying led me to it.

With that privilege, I have been exposed to a whole new way of thinking, and thus I believe that I have “compounded” my abilities further.

Let me end by telling the story of Peter Vidmar.

Pete won a gold medal in the 1984 Olympics in Gymnastics. I had the privilege of having dinner with Pete one night around 5 years ago. I asked him to tell me the story of how he and the US team were able to finally beat the Chinese in gymnastics (the Chinese were almost always the winners of the Gold medal in gymnastics….it was almost a foregone conclusion that they would win).

Pete said that in gymnastics there is a saying. Whenever someone is asked if they are ready, the pat response is, “I wish I had just one more month to train” (it’s kind of like what actors always say, “break a leg”).

Pete and the other co-captain of the team decided that they were going to beat the Chinese and that getting in an extra month of training may actually be the key. But the Olympics were just 2 years away. How were they going to get an extra month of training in? That seemed to be an insurmountable task until they broke it down to its essence.

You see, they practiced 8 hours a day, 6 days a week (it was just like a job for them). Thus they figured they would practice 208 hours a month. They did the math and here’s what they found. In order to get in an extra month of practice over the next 24 months, all they needed to do was practice an additional 20 minutes a day!

They didn’t need to practice twice as hard, or twice as long. 8 hours a day was already quite a bit of practice, and the thought of practicing for 16 hours (twice as much) was daunting. So rather than doing an undoable task (and thus going into a mental shutdown like the people I grew up with) by practicing, working, or studying twice as hard as everyone else, they realized that in order to be successful, maybe 10 times as successful (like the guy making $500,000 instead of $50,000) or to be a world champion (like Peter Vidmar), you only need to do what everyone else is doing, and then a little bit more…

And maybe it’s as simple as 20 minutes a day!

So one of my New Years resolutions is to work “just a little bit harder” and to study “just a little bit harder”!

(My other resolution is to “live up to the standards of Joe”…..but that’s a whole different story for another post)

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