A few weeks ago Apple said that the next release of their operating system, Leopard, would be delayed because they were pulling engineers to work on the iPhone, scheduled for release in June. I predicted at that time that the iPhone would also be late, mostly due to Brooks' Law that adding manpower to a late project makes it later.

On Wednesday, Engadget reported (incorrectly) that the Apple iPhone would be delayed three months. The result $4b wiped off Apple's capitalization in a few minutes.

Engadget was forwarded an internal Apple email by an Apple employee. Apparently Apple's email servers were hacked and the internal email announcing the iPhone delay was forged. Be that as it may, we (along with Apple's management) can now see the likely stock market reaction to an iPhone delay.

I'm sure Apple's engineering dept is praying for a repeal of Brooks's Law. But what I see is that an on-time launch is already priced into the stock, and we've now seen a dress rehearsal of a delay announcement.



 I ran across a poem by Alexander Pope today titled, "An Essay on Criticism." As I read the poem I came along four particular lines that reminded me of the Daily Spec.

"A little Learning is a dang'rous Thing; Drink deep, or taste not the Pierian Spring: There shallow Draughts intoxicate the Brain, And drinking largely sobers us again."

According to the Oxford dictionary the definition of Pierian is "a district in northern Thessaly, the reputed home of the muses."

The American Heritage Dictionary defines it as "a region of ancient Macedonia. It included Mount Olympus and Mount Pierus, seat of the worship of Orpheus and the Muses."

So, if one is to drink from the Daily Spec, don't sip. Drink deep or don't taste it at all. Personally, I'm still in the intoxicated stage hoping to chug down as much as I can so I can sober up again.




Daily Speculations is a benevolent forum to encourage good thinking about the market. Material is provided free by us and our readers. Because incentives work, and to augment the mutual benefits of participating in the forum, we offer awards each month for top contributions. Our most recent winners are Stefan Jovanovich, Nigel Davies, Tom Ryan, Jack Tierney, and Kim Zussman (for two posts), who will each be getting $500 in the mail. Brett Steenbarger, who also won a prize for his post "Second Handers" has kindly donated it to another contender in honor of his son and futures spec., Macrae Steenbarger. The winning posts can be seen on the Letters Prize Page which is linked on the right hand side bar under Resources and Links.



 When water boils, it hits 100 C, but doesn't immediately turn to steam and change state to the higher energy level. Instead it requires additional energy at 100 C staying at the same temperature, until finally it breaks out into a boil. The various convective currents within the pot swirl around in interesting patterns during that time.

In the market system, how does heat in the form of capital get transferred? On the tick level of course there are individual transactions. The overall energy level of the system is the price. There are holders of capital at various prices. The inside price is like the convection as it comes down to various levels and stirs up the holders at the lower levels with energy to spur capital transfer.

On 5/17, the boundary layer at the top, above 1420, required more energy than was available to change phase. Perhaps more convective action is needed, and more stirring to transfer capital. The convective current swirled around the top but that did not seem to gather enough energy or tip the balance. Nuclear engineers study such currents when transferring energy to water to create steam for power.

Vincent Andres adds: 

Imagine a set of nodes. Each node may have some value. Those nodes are interconnected via constraints, e.g., node1+node5+node25 < 5, etc.

Let's call alpha the ratio: number of constraint per variable. When alpha varies, there is a phase transition phenomenon quite analogous to the water phase's transitions.

Alpha small = system with many solutions, may stabilize easily

Alpha too big = no solutions, erratic system

Alpha near the alpha limit = maybe/maybe no solutions, let's be : node1 = bonds, node2 = stocks, node3= real estate, etc., and we are not too far from "markets dynamically related".



 I have witnessed the Darwinian, dog-eat-dog world on numerous occasions. It is truly a world of fang, claw, might, and brawn. There is very little tenderness in the wild; there is mainly an indifferent or fearful view of other animals towards each other.

There might be some tenderness in higher mammals towards their young, but that doesn't last long. Adults will take care of themselves first and foremost and eventually try and dominate the young who will someday return the favor.

As a hunter I can appreciate the unpleasant side of the contract. But I'm not sure that is an apt description. For me it is not unpleasant. I actually enjoy the hunt, the whole hunt. I enjoy the process of getting ready, the exactness of detail to be truly prepared if the moment of truth were to arise, and the beauty and relaxation provided by Mother Nature.

There is one unpleasant side the hunt, though. Every so often, you're going to be involved in an ugly kill. I don't like it when these happen. I don't like it all. I figure that somewhere around 5 to 8% of kills are ugly kills. I define an ugly kill as one in which I don't make a clean killing shot.

But after years of hunting, hunts that have included ugly kills, I can tell you this with great certainty: I am the most humane killer in the woods. All deer/turkey will die. The best death they can have is at the point of my arrow or the point of my gun.

Jim Sogi writes:

Before we get too bleary-eyed, animals can be vicious in their quest to propagate. It's vicious out there in the wilds and the markets. Rarely is quarter offered in reality. 

Laurence Glazier writes:

HirogenThe comments about the turkey are not dissimilar to actions of humans to humans in distressed parts of the world, e.g., Sierra Leone. We are fortunate enough to be domesticated animals, but the wild human being is fearsome.

Now, the creatures sharing Scott's wonderful land are fortunate to have such a considerate steward, but though they are usually unaware of the moment of their transition, perhaps they live their lives in a more heightened sense of insecurity than otherwise, observing other members of their group being removed from their tribe, and being sorely missed if they too are taken. How is a balance kept between animal and human interests, both the good and the gory episodes?

The sound of a cow bellowing for days on end after its calves are taken is testament to the anguish of separation animals can feel.

So the question is, how do we act to animals? And that depends on our perception. In what way were aboriginals perceived to enable "wise and intelligent" people to hunt them?

I would also note that the tools and practice of hunting and warfare go hand in hand, and wonder if these histories will always be linked. Without wishing to sound like Kenny Schikler, of Goodnight Burbank, Star Trek dealt with this well in its allegory of the Hirogens.

Scott Brooks replies:

I'm not sure the cow is bellowing from anguish over the loss of its calf. Calves are frisky, much like small children, and want to run and play and explore. They have a tendency, like small children, to wander off. The mother calls them back with her bellowing. If a calf disappears the mother will keep looking and bellowing to call the calf back in. It may be instinctual or hormonal. She calls the calf because it's bred into her genes. Or maybe as her udder/teets burgeon with milk, she may be compelled to call the calf to come eat.

On my farm, calves are able to wander onto the grass between their fence and roads — "grass is always greener on the other side of the fence" situation. But they won't wander too terribly far from mom, who will eventually call them back. And every year there are a few calves that are rejected by their mothers and have to be hand-fed by the farmer/rancher.

I can't say for sure that cows don't feel anguish, but from what I've seen, I doubt they do. 

[Editor's comment: There is a fascinating discussion available online, on research in this field, which is called Cognitive Ethology.]



 One of the giveaways of imposters is their use of highly technical terms, as if they are on a loftier plane of understanding higher math than you and I. For instance, the Fake Doctor said today "at the moment, I still say as I said before, by algebraic implications, the odds are 2 to 1 we won't have a recession," referring to some probabilities from Fed researchers about the odds of a business slowdown, when the yield curve is inverted or when the expansion has run X quarters or more.

There are so many problems with such "algebraic" implications, starting with changing cycles, retrospection, multiple comparisons, the part-whole fallacy, and the general impossibility of predicting from retrospective small numbers of observations. But it brings up the general subject of key semantic indicators of poseurs and imposters. What key words do CEOs, advisers, et al, use when attempting to appear rigorous and profound and smart? Words that should act as a leading indicator of staying away and avoiding such poseurs? To start off, I would propose lognormal and neural networks as two other key semantic posings.

Martin Lindkvist adds:

Greenspan has been all over the media today, but I saw the headline yesterday evening, so perhaps some people got frightened and used it as a reason to sell. He now says there is "a 2 to 1 chance that the US avoids a recession." But he said something like "a 1 in 3 risk of a recession" in February. Is he trying to be funny? Or maybe he just wants to avoid being called a pessimist? Why is it that he always is in the headlines talking about recession as soon as the market goes down? Does he miss the limelight?

Victor Niederhoffer remarks:

Yes. I believe he suffers from the old lion displaced from the pride syndrome that so many other old men suffer from. It is limned in grotesque detail in the indie movie, Little Miss Sunshine. 

George Zachar adds:

Another old lion scandalized by youth:

May 16 (Bloomberg) — Nothing in John Whitehead's 37-year career at Goldman Sachs Group Inc. prepared him for the excesses of today's Wall Street. "I'm appalled at the salaries," the retired co-chairman of the securities industry's most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are "shocking,'' Whitehead said. "They're the leaders in this outrageous increase.''

From Gordon Haave: 

I have always thought the #1 way to spot a fraud would be based on the percentage of falsifiable statements per total words spoken/written. The issue you raise, i.e., speaking on a plane above others, would count to total words but not towards falsifiable statements. The general point of such statements is "until you have my level of education on this subject, you are unqualified to falsify my statements". Of course, one can't attain that level of education, because part of the education would be agreeing with them.

An example in the world of trading would be a discussion of Elliot wave theory. The Elliot wave folks defend themselves by taking it deeper and deeper into the theory to a level that you can't attain without spending years studying it. If you study it with an open mind, you will quit studying it after a few weeks. If you push on, you will have a heavy bias towards believing it in order to justify the amount of time you put in.

This is also very prevalent in academia. The most useless of all professors tend to just make up entire new words, and speak in the most complicated of matters solely to keep you from pointing out that the emperor has no clothes.

Now, you ask how to quantify and test? I have given a shot at quantifying, but you can't test. That is the whole point. They prevent you from testing because the statements are always non-falsifiable.

From Sushil Kedia: 

Regarding the Chair's posting, focusing back upon CEOs and their ilk operating or claiming to operate at a higher plane:

1. Descriptive handles: for example when on CN*C market analysts / advisors start describing market as a tough animal, as G_d etc., etc., and not answering to the point, that is, where do they think the analysis is going.

2. Deflective handles: words like in spite of, despite, even after, in the face of a hostile, or for example a Chairman's report / comment in corporate annual reports saying that despite competitive challenges your company has done well.

3. Picking the Fly: secondary variables of valuation like market share, cost management, planning. An example is,"We have chosen to push for a continued growth in market share and are certain that in the long run this would continue to accrue value to our shareholders." [Oh I thought returns in excess of the cost of funds created value, unless you believe in today's age and times you would one day become a monopoly while continuing to feed the expansion of your ego.]

4. Shifting in Time: that brings to mind another key handle called, "In the long run". Would a bad trade qualify to become a good investment? Oh, often it would if you are in the presence of an advisor. In the long run, none of them have died.

John Floyd writes:

This may get off the track of the question's intent but I think there are a number of facets of this to explore that are of use in vetting imposters, as well as helping to find profitable trading opportunities. There is choice of words, clothes, cars, etc. that all give clues.

Beyond the actual word choices and phrases, I think one should look at the number of times certain words are used and word choices changed. The currency markets, for example, have had a fixation on Trichet of the ECB's use of the words "strong vigilance". Another example would be the number of times certain words such as "slower" are used in U.S. Fed comments. The degrees to which these words are expected and unexpected by markets as well as the shifts in language often expose opportunities. Yesterday for example the fact that the market had become calloused to "strong vigilance" yielded no reaction and the Euro actually weakened in part on the comments.

Steven Pinker has done some interesting work on linguistics and cognition. I have also heard that both Mark Frank and Paul Ekman have done some worthwhile work on non-verbal communication. Marc Salem, while some of his work is clearly of the "fun" and non-scientific variety, is entertaining and I would recommend his live shows when he is in town. 

Vic replies:

I had in mind terms such as "Pareto distribution" and "infinite variance" and "closed-form solutions" or attempts to absorb prestige from academic institutions like Stanford, Caltech, MIT, or Princeton, through their "luster" and "close encounters" thereto, a la the magician who can bend keys and spoons at will. 

From Easan Katir: 

There was a certain bond trader in London who was horrible at trading, but could talk such a good story he was able to move from one high-paying desk to another. He was head of trading for a Japanese Bank, last I checked. Anyway, his favorite word to throw into a conversation was "hypersclericity". I don't know how to test prospectively, but retrospectively, when the secret account where he hid his losses came to light, it was game over. 

Vincent Andres writes: 

As a programmer working with algorithms, I must say that I'm a bit distressed seeing algorithms often blamed as faulty rather than the users. Every morning I use my razor. Yet in the hand of a baby, a razor would clearly be horrible. Should I throw my razor away?

It's exactly the same thing with algorithms, though this is not to say that there aren't bad algorithms. Hundreds are invented every day (mainly rococo useless constructions). But generally those algorithms don't reach the news.

Jason Ruspini remarks:

For many people, even "bootstrapping methods" is buzzwording. It does come back to the user/context. "Correlation" can be a buzzword, and often is. Count the unnecessary syllables. On Friday's 8pm show a CEO cited a "one hundred basis point" improvement in margins. 

Vic comments again:

Part of the pseudo-math is using a terms when one does not know the first thing about what it means. The idea that the frequency distribution of some aspect of market prices or paths more closely fits a normal distribution than a log-normal distribution, and that this explains long tails/isn't properly priced, is so complicated that it would take the most competent of practicing statisticians to unravel it.

When the person who has never had a statistics course uses it, and pretends that he has the same understanding as great 'mathletes' such as the mediaval liberal fund, or the Harvard opera fundist, or the math arbitragers from Columbia use it — why that's transference and flimflammery squared.

It amazes me that it is so easy to fool so many with these high sounding words. The other aspect of course, is that those who know math and use the words properly often lack the wisdom to consider why such exact and precise and computationally intensive methods are completely useless except as a marketing tool, due to such things as the law of simplicity, the principle of ever changing cycles, and multiple comparisons.



 I note a positive bias for Australian Equity Futures on recent Mondays after falling Fridays.

The average Monday return, for S&P ASX 200 futures, after a negative Friday is 35 basis points versus 5 basis points for all other nonconditional days. The win rate of over 75% is impressive when compared to 53% for all other data. The t stat of 2.2 is suggestive of this phenomena occurring by chance in the order of 1 in 25.

Intuitively, I suspect that these recent phenomena may be the result of market players either unintentionally or subconsciously reducing risk before the weekend. Then come Monday morning, risk is increased & equity prices rise. The Monday open to close data provide some slight evidence that my intuition may have merit. The Monday closing price has been higher than the Monday opening price 70% of the time since September 2005.



 On May 16th, Terrance Odean and Steve Ross debated behavioral versus neoclassical finance at the New York Academy of Sciences.

Both agreed that markets are largely efficient. Ross described the "migration of anomalies" where "sharks" capitalize on and thus mitigate inefficiencies. But procedurally, Odean echoes Larry Harris in asking "who is on the other side of your alpha" and focuses on the psychological mistakes individual investors make (overtrading, selling winners/holding losers etc.). As an economist, Ross has difficulty ascribing pricing to one particular psychological malady or another and instead urges investors to follow the money and discern the incentive structure. Rick Bookstaber, who moderated the discussion, was optimistic that a biological model that incorporated feedback might provide additional explanatory power. In all, it was an interesting discussion about the nature of the elusive edge.

I strive to document the rationale for including explanatory variables and while some studies incorporate a behavioral (recency), economic (cobweb) or domain (market structure or environment) framework, most of my studies rely on theory-less statistical modeling which the private equity crowd refers to as "correlations". Is there a theory to explain why data driven investing might succeed?



 It has often been said by traders that fear is one of the most dreaded diseases of trading. In the movie, Rocky 3, there is a conversation between Rocky and Adrian, his wife. Rocky had just raced against Apollo on the beach and not only did Apollo smoke him but Rocky quit about half way through the race. They could tell by the look on his face that there was something terribly wrong. Apollo said that it was all over. Adrian walked to him and the following dialogue took place.

Adrian: Can I talk to you? I wanna ask you something important, and I want you to tell me the truth.
Rocky: What?
A: Why did you come here?
R: I just don't want it anymore.
A: If it's over cos you want it to be, I'm glad. - I do. It's just, you've never quit anything since I've known you.

R: I don't know what you want me to say. I mean, what happened? How did everything that was so good get so bad?
A: What's so bad? Tell me. What?
R: I wrecked everything by not thinking for myself. Why couldn't Mickey tell me where it was really at from the start? He didn't have to
carry me and lie and make me think I was better than I was.

A: He never lied.
R: Those fights weren't right. I never fought anybody in their prime. There was always some angle to keep the title longer than I shoulda had it. Do you understand?
A: You've gotta understand, he loved you! That was his job, protecting you.
R: Protectin' don't help nothin'. It makes things worse. You wake up one day thinking you are a winner, but you're not. You're a loser. So we wouldn't have had the title as long. So what? At least it would have been real.
A: It is real.
R: Nothing is real if you don't believe in who you are. I don't believe in myself no more! When a fighter don't believe, he's finished. That's it.

A: That's not it. Why don't you tell me the truth?
R: What are you puttin' me through? You wanna know the truth? I don't wanna lose what I got. At first I didn't care what happened. I'd go in the ring, get bust up. But now there's you and the kid. I don't wanna lose what I got!
A: What do we have that can't be replaced? What? A house. We got cars, money. We got everything but the truth. What's the truth, dammit?!
R: I'm afraid! All right? You wanna hear me say it? You wanna break me down? I'm afraid. For the first time, I'm afraid.
A: I'm afraid too. There's nothin' wrong with that.
R: There is. For me, there is.
A: Why? You're human.
R: I don't know what I am. I know I'm a liar, and because of that, Mickey ain't here.

A: You didn't push him into anything. He was a grown man. He did what he had to do. And you have no right to feel guilty. You don't! You were a champion. You did what you were expected to do. You did what everybody thought you should do. And you wanna tell me that those fights weren't real? I don't believe it! It doesn't matter what I believe. You've got to carry that fear inside you, afraid everybody'll take things away, that you'll be remembered as a coward, that you're not a man any more. Well, none of it's true. It doesn't matter if I tell you because you're the one that's got to settle it. Get rid of it! Cos when the smoke clears, and they stop chanting your name, it's just gonna be us. And you can't live like this. We can't live like this. Cos it's gonna bother you for the rest of your life. Look what it's doing to you now. Apollo thinks you can do it. So do l. But you gotta wanna do it for the right reasons. Not for the guilt over Mickey. Not for the people, not for the title, not for money, or me -but for you. Just you. Just you alone.
R: And if I lose?
A: Then you lose. But at least you lose with no excuses. No fear. And I know you could live with that.
R: How'd you get so tough?
A: I live with a fighter.

For all those who know how to count, can fear be quantified?

For me there are so many applicable lines to trading in this dialogue it would be an injustice by stating one or two and leaving out the rest. However, the line from Rocky about his fear of losing everything, and that when he first started fighting he didn't care what happened seems to be one of the best. He had no fear of losing at first; then, as he got more comfortable he began to lose that edge by fearing what he could lose by continuing to fight.



 Its is my hypothesis that overnight markets are not as efficient as day sessions, which leaves certain opportunities to gain an edge.

It appears overnight market are used heavily, by the big money to contain risk, with any left field events bringing the resident allocated night hedger into the frame. Certainly it seems that this person will quickly size up the situation, and usually will take the safest option to hedge the desk book.

When all traders are back on deck the next morning, a group decision can be reached about the state of the "book" and what the best way forward is, however an individual without the collective input of his peers is reluctant to push any boundaries. Whether this book is being covered by a person, who is allocated to do the job overnight in the home country, or is passed to an overseas desk, (to a certain extent this is inconsequential), no one will usually trade against the status quo, and risk having to explain themselves.

In Australia, once a month, there is the same" jouno guy", who mentions his thoughts about the immediate interest rate environment, in the the financial papers — released about midnight Sydney time. The local overnight bond market will react in line with the risk, regardless of whether any credible sources are quoted. However the next morning board meetings are held, the collective view is exchanged, and surprise surprise, more often than not, the previous night's hedges are lifted.

This must be tested with specific numbers, and not withstanding the size of the overnight market and its draw on overnight participants from different regions … but one view against many can become quite intimidating.



 The book, The Improving State of the World, by Indur M. Goklany, published in 2007, provides a foundation for those who wish to know how the quality of life compares to the past. It is valuable for kids who wish to have a rudder and some facts to understand how much better conditions are today than the old days. It's valuable for adults as it provides a complete menu of the reasons that the world is so much better today due to trade, and economic development and technology, and how this has improved our environment. It's valuable for scientists in that it debunks specious arguments against modernity so rampant and accepted today that they threaten to prevent future progress. It's valuable for investors in that it provides a backdrop to understand the forces and conditions that have led to the incredible profusion of increased wealth and 10,000-fold per century returns that long-term investors have been visited with and that they can expect to be enhanced in the next century.

This book is the latest, most complete, and modern update to a long line of optimistic works that started with Julian Simon's The State of Humanity and continued with Bjorn Lomborg's The Skeptical Environmentalist. It contains data updated through 2005 in almost every area where the quality of life or the environment can be measured.

It starts with a quote from Dickens's The Old Curiosity Shop, typical of the bleak view of the world propagandized by Dickens, comparing a 19th century industrial town, where not a blade of grass was seen to grow unfavorably to Hades. It ends with a paean to the good that trade can accomplish: "trade is part of the web of institutions necessary for helping to satisfy the needs and wants of a large and mobile affluent global population while limiting environmental impacts. Such trade in good, services, ideas, and knowledge enhances economic growth, helps diffuse technology worldwide, ensures efficient movement for food, natural resources and capital from surplus, reduces pressures on marginal lands and other natural resources."

Chapter two presents 6 tables and 18 figures showing that any way you measure it, human well being has improved almost everywhere in the world. This includes longevity, education, hours worked, health, access to sanitation, safe water, infant mortality, and nutrition. The main source of the improvement has been the increased wealth that has enabled improved technology to better life.

Chapter 3 shows that globalization has reduced poverty in all countries and that the gap between the high income and low income countries has been decreasing because of globalization and mainly due to trade and information transfer. Within countries, the gap between rural and urban welfare has been decreasing. "The poor are better off because they have benefited from the technologies developed by the rich, and their situation would have been further improved" had there been more globalization, and less subsidies and import barriers

Chapter 4 contains the main original contribution of the book. Its main theme is a cyclical theory of take off due to technology that explains why human well-being has improved more in the past two centuries ever before.

The first thread in the argument is that human well-being is a direct function of the increases in income over time. Also, it argues that the higher the income in a country, the higher the well-being.

The second thread is that additional income gives more benefits to human well-being at the lowest levels of wealth.

Finally with great leaps and little empirical data and completely faulty statistical methodology of how not to use regressions, Goklany comes up with his grand theory of cyclical benevolent circles. "Progress in human well-being in the past two centuries was sustained if not put into motion by a cycle consisting of the mutually reinforcing co evolving forces of economic growth, technological change, and free trade. A self-explanatory diagram of the main linkages is contained in his box 4-1.

 The rest of the book shows how technology and improved income improves the environment mainly through more efficient use of cropland.

The book has the facts and figures, and the rudiments of analyses that provide the most modern framework available for documenting the improving state of the world.

Finally, in spite of many areas where the authors reach is much greater than his grasp, especially his use of regression methods, and adjustment for where the state of human welfare would be without rises in income and technology, this is an excellent and relatively current book that I highly recommend. I bought copies for each of my seven children and all of my colleagues at the office.



 I wanted to comment on how some old men grow old gracefully whilst others grow old grotesquely, and to look at how this effects their take on the markets. I believe that those who age worse often exhibit worse trading symptoms! 

Ayn Rand used to talk of second-handers: those who derive their self esteem from the perceptions of others, not from objective achievements.One virulent form of second-handedness masquerades as virtue: the need to be needed. I suspect it's behind the overly chivalrous and boastful demeanor, but also behind the pessimism.

The doomsayer needs followers who feel endangered and vulnerable. The forecasts of doom make the prophet needed to get through the pending calamity. No one needs a savior if the forecast is for sunny times ahead. By undercutting the sense of security of others, the doomsayer carves out a niche for himself: I will get you through the market panic, the economic collapse, etc. The same dynamic is at work with the seemingly solicitous and chivalrous man who wants his woman dependent upon him.

I'm thinking of a couple I once saw in counseling. He refused to let her work outside the home, insisting that he must be the breadwinner. She was bright and talented and, now that the children were older, wanted to work. She took up a hobby (quilting) and became quite expert at it. Eventually her quilts became collector items and she was a hot item on the art festival circuit. He was increasingly threatened by her success and tried to derail it by belittling its importance — all the while maintaining his love for her and his willingness to provide for her.

He needed to be needed: his greatest threat was an independent woman. The doomsayer similarly needs to be needed. The confident, optimistic investor is his greatest threat. To become needed, they must make others needy. Such is their benevolence.

She divorced him, by the way, and went on to become a successful instructor of quilting and crafts, owning her own business.

And 20 years after 1987, we stand at new highs and the doomsayers continue to beat their drum. Odd how we excoriate those who encouraged people to buy stock in 2000, but say nothing about those who counseled against equity ownership for the last 10,000 Dow points. If a physician sickened his patients in order to have a steady stream of revenues, no one would hesitate to call it malpractice. But what of investment advisors who fill their clients with fear in order to sell them services and seminars?

"You need not examine a folly", Rand once wrote; "you merely need to identify what it accomplishes". Pessimism and negativity create dependency and a psychological crippling. The need to be needed is a need to undercut the certainty and security of others. That's why it's a "symptom of something worse".



 As bearishness is surfacing in our midst, I thought I better refer to Ken Fisher's latest column in Forbes.

Nigel Davies comments:

There is no doubt that over a long period of time stocks go up. This is not the issue. The problem is that 20% of the time the market is lower five years hence, and 26% of the time two years hence. I also believe that serious housing declines hit stocks.

This has nothing to do with bearish propaganda; these are hard facts. Now there may well be reasons why this is not the case, not least of which is the GaveKal thinking. But I should point out that the GaveKal approach has not been quantified and therefore, unless I'm mistaken, qualifies as 'mumbo'.

But the real issue here is in why any counter-arguments are ignored or shouted down as 'bearish propaganda', even when they are reasonable. Now there is no doubt that bearish propaganda exists, but delusion is not a one-way street.

Ken Fisher's view is untested mumbo, as one can see from the title 'Never Before'. And as I'm quite enjoying playing a bear (albeit one who only ever takes the long side), the obvious answer to this is that if the consumer spending spree comes to an end (because they can no longer use their new found housing wealth as a checking account), earnings yields will shortly be heading south.

Vic mentions:

During the last several years, many chronic bears have submitted original pieces to our site, and if they have a strong point, and argue it well, we are always happy to publish it.

I can't agree with Nigel’s point about some of the two and x year changes being down, as the studies of Fisher and Lorie show that when you look at the distribution of returns by holding periods, that almost all of the seven year returns are up, and an extraordinarily high percentage of them yield returns of more than 15% a year compounded.

These results are completely consistent with those that would be expected from a 10% a year drift with a standard deviation between years of about that much. Many people try to grind against the house in Vegas and we know they all end up broke. To try to grind against a drift like this is sure to end up in the 97% yearly loss that one of the chronic bears (who claims he caught the Feb. 27th debacle) actually experiences. Imagine what the fate of those who actually followed the advice and views of the weekly financial columnist have been — how many times would they have lost 97% in a year while they waited for events like the Oct. 19th, 1987 landslide to occur. How terrible it was that rather than receiving a heads up to cover their shorts and get back in the market, the weekly financial columnist told them that the Oct. 19th, 1987 decline of 25% was just a beginning.

The same is true of the key level boys who state that this or that level, down 5% from the current, is what the pros are watching closely. Are they bullish then or bearish, and what happens to the 10% a year drift against them as they wait for that 'level the pros are watching' to actually occur in the fullness of time?

They will all end up ghosts in Trinity Church, whilst they wait for their key levels, and as it has so often been in the past, my pocket book will always be open to them, whether for a lunch or otherwise.

Hanny Saad offers:

I am one who writes naked puts very frequently and find them very profitable. I am aware of the dangers (or some of the dangers) associated with this practice including specialists gunning for certain active strikes the same way the do with stops, etc., and I sometimes modify the pos. to credit spreads. I even use them instead of limit orders in some cases when I am more aggressive and look for assignment.

Could Vic and Laurel kindly clarify the dangers of this? I am under the impression that writing puts is consistent with the 10%drift and is generally taking a bullish stance to the markets. I am particularly interested in this as I am very active with this strategy and it has been very rewarding in the past, but I hope that the mistress is not hiding behind the curtain to take it all back in one blow. 

Craig Mee adds: 

There was one particularly gifted option trader on the Sydney futures exchange trading floor, who regularly, generated considerable monthly returns trading options, (selling puts, just one of his many strategies) — however each year for many years he would blow up and blow up big, only for a new underwriter to get him back in to trading, (maybe lulled in by his solid monthly record, up until the time it took him out of the game).

Maybe his risk management left a lot to be desired, but as one trader said me after Sept. 11th, for every dollar in the market, you need 10 in the bank (to cover not getting squeezed out of positions and to cover extended and added margin requirements by the clearing houses when volatility goes through the roof).

That one little black swan can kick up some dust.

Gordon Haave comments:

Selling naked puts is not the only strategy where, in essence, you are receiving income in exchange for assuming the risk of very unlikely events. What is great about them is that these events are so rare, that when they happen you (the manager) can shrug them off as a one time event that you have now learned from … and get back in business with new capital.

Chris Cooper responds:

Prof. Haave's words strike me as true. On the other hand, it seems likely that in a market subject to a 10% drift, where that drift is not modeled in the option pricing formulas, there may very well be some positive expectation in selling naked (or semi-naked) puts. Since I have assiduously avoided options in the past because of concerns about liquidity and execution costs, perhaps it is time to reevaluate, but I have several concerns.

A skewed distribution of gains, such as one receives by selling OTM puts, is undesirable for one trading his own money. The market crashes are so rare that it will take many years to see enough of them to trust that you can model their frequency/amplitude. It is thus easy to fool yourself about the expectation of your model, and it is also easy to get wiped out. By hedging you can transform the fat left-side tail into a better-behaved distribution function. Is this what people do in practice, or do they very often run mostly unhedged, since any hedge costs money?I can imagine various ways to hedge, such as: stop-loss on the naked puts; sell futures; buy further OTM puts; and probably many more creative strategies. These can be dynamic or static. What is the best practice, assuming that you need to have good liquidity and keep your hedging costs at a minimum?

Isn't selling a put a combination of a directional bet on the market plus a bet that volatility will not be rising? If so, then does it make sense to separate the two? Buying futures would be the directional component, and one could sell volatility by selling both calls and puts. Am I seeing this correctly, or is there a better way?Is it better to let your OTM puts expire worthless, or does it make sense to sell them before expiration to free up capital?

What about execution costs? The spreads in options always seem high compared to futures or stocks. Am I looking at this in the wrong way? Does it help to sell puts by entering a limit order on the ask, and adjust it based on delta and the underlying? How is liquidity in these markets, compared to futures?

It has always seemed to me that the derivatives markets are obfuscated by jargon.

Russel Sears comments:

The bears' argument is built on the relatively recent housing boom and its extraordinary recent returns, 2000-2005. It is as if the "old economy" insisted its importance in a post dotcom bubble. The bears' argument boils down to: stock market returns are dependent on housing market returns. This may very well have been case recently. But should we be shocked to find a regime change, just as the housing market slumps? Obviously the 100 year drift in the stock market, cannot always be dependent on a 10% drift in the housing market. This is because the housing market is limited by the income level of the typical buyer.



 Brian J. Haag wrote that it's more than 12% more likely that on a given day the market is up rather than down.

For every 100 down days (SP500 since 1980) there were 112.2 up days, so the uncertainty component in predicting daily returns strongly favored the long side.

However another possibly more important aspect of prediction is whether it is easier to forecast bullish or bearish periods. If bearish patterns were easier to find than bullish, this might out-weigh the 112/100 odds for longs. But in the real market panic sell-offs (of various incarnations) test consistently bullish subsequently, whereas there do not seem to be predictive antecedents to big declines. If this remains true, then there will still be profits as long as one is brave enough to buy earlier than everyone else (who also know that panic is bullish) and endure the pain of intermediate-term losses, and risk that they continue deeper.

In light of recent market behaviour these arguments are easier to make (and take) than (say) 2002. It would be a lot more fun to invest if up and down days were homogeneously dispersed. But the problem is that upward drift comes in streaks (like recently), is taken away in lumps, and human nature is hard to ignore. How many traders, in the face of increasing losses or even going under, got more and more bullish in 00-03?

"Gee, hun, sorry we lost the house and owe all that money to your dad's homebuilding company. But the good news is that there is high probability it will go up from here!"

Vincent Andres writes: 

I would posit (to avoid one-line questioning) that:

  1. There are fewer bearish situations than bullish ones and hence, mechanically, fewer predictive patterns to find, so the task is harder.
  2. Bearish situations are sharper than bullish ones and hence perhaps the predicting patterns are also sharper, (kind of homeopathic reasoning), i.e., easier to detect (perhaps more contrast). I try a parallel: I see a snake, and I quickly get my hand away. The move is sharp, and so is the pattern/snake.
  3. Bearish patterns maybe come with short or very short notice (think of the snake threat), while bullish patterns may be seen with enough notice. So bullish patterning might be bit easier.

Kim Zussman responds:

My (not well stated) hypothesis is that, due to the immutable nature of human fear/panic reaction, people are generally over-reactionary and bullish for the future. However there do not seem to be similarly predictive preconditions of bearish futures; prior neither to sharp declines nor gradual ones. Or alternatively, there are such preconditions but they are harder to find

2nd hypothesis: Even though the probability of up and down days is close to the same in historic totals, the way days aggregate in actual ordered series is non-random to an extent not explained by actual 0.52/0.48.

I am thinking about other ways to test this (the pairs study was a first step) such as comparing runs in actual series to randomly shuffled days from actual series. As always suggestions and amplifications are encouraged. 



 I have heard that the cause of Cyril Burt's death was gallantry to women. He insisted on walking a lady back to the subway in the rain, and died of flu a few days later.

We often see this trait in old men; an unholy courtliness to women, especially attractive ones, that borders on fixation and would be inappropriate for anyone under 70.

Certainly the Greenspan transcript on 9/11, with him showing off that he does not like the cutoff in a certain chart and that he has been fooling with his short wave radio, even as the tragedy unfolds, is a sign of sickness.

What is the general tendency of men to be overly chivalrous and boastful? This is something that is a certain mark of decay in people like the Sage, the weekly financial columnists, and the fake doctor.

I wonder if this tendency is more prevalent among chronic pessimists, and is it a symptom of something much worse?

Vincent Andres adds: 

It makes me think strongly about so many mothers who infantalize their children consciously or unconsciously? This point is not clear to me. Some women may have a real pathological and uncontrollable drive to remain mothers. Their goal seems very clear. Remain a mother. Remain a needed mother. Remain young.

Such mothers what to show the neighborhood "see how well I educate my child," and doing in fact exactly the opposite. They actually poorly socialize their kids to keep them dependant on their mom, the "only one able to understand them". The number of very precise and efficient tricks and tactics used to accomplish this is amazing.

Of course the concerned child also remain young. At 30 always at mom's home (or in jail), depending on mom's money, etc. Could any child escape this kind of situation? How? It's so cool to stay a child. This seems much more common today than 20 years ago.

Janice Dorn replies:

It is my experience that this situation differs from person to person with aging. Men of an older age tend to view themselves and women in a framework which exaggerates that which they held when younger. In essence, personality tendencies of youth are magnified in adulthood.

A depressive tends to become more depressive, a person with obsession or compulsion tends to become more obsessive and compulsive. There are certainly instances where dementia and other sorts of degenerative brain injury can lead people to behave erratically (go naked in public, go after young boys, other inappropriate behavior).

For the most part, however, "normal" aging appears to reflect exacerbation of qualities present when they were younger. You will always find those who are a sucker for a pretty face and youthful body (think of any number of women and men who use this and exploit it as a lifestyle).

By the same token, misogynists become more so. I believe that these are normal so-called defense mechanisms which individuals use in an attempt to not lose themselves.

In other words, the magnification of the personality traits with aging represents the strong need to hold on to those aspects of self which the person senses they are losing.

George Vaillant from Harvard has done some very nice lifestyle through the ages work, including study of the ego. I believe his earlier work was a bit more serious than that recently where he appears to be directing more to the masses, happiness and spirituality.

David Hillman mentions:

"Becoming a caricature of oneself," as I'm fond of calling it, was evident in corresponding for some time with a famous author who had written his magnum opus and done other good work in the '60's.

For the next 40 years, he continued to hammer away at the same off-beat theme to anyone who would listen. Increasingly fewer would. His reaction was to pump up the volume. The longer he kept it up, the more tiresome he and his theme became.

Rather than appearing to be the life-sized, thoughtful guy with interesting theoretical ideas he once was, he looked to be a ranting, bloated, washed up, parade-balloon-sized radical who hadn't had an original idea in years and couldn't let go.

At the time of our last correspondence, he was actually still quite a vital and active near-nonagenarian, and a really nice guy, but who would have known? It makes a pretty strong argument for introspection and re-inventing oneself from time to time.

Also, in this respect to 'an unholy courtliness to women,' I highly recommend Memories of My Melancholy Whores by Gabriel Garcia Marquez.

….García Márquez's slim, reflective contribution to the romance of the brothel, his first book-length fiction in a decade, is narrated by perhaps the greatest connoisseur ever of girls for hire. After a lifetime spent in the arms of prostitutes (514 when he loses count at age 50), the unnamed journalist protagonist decides that his gift to himself on his 90th birthday will be a night with an adolescent virgin. But age, followed by the unexpected blossoming of love, disrupts his plans, and he finds himself wooing the allotted 14-year-old in silence for a year, sitting beside her as she sleeps and contemplating a life idly spent….. —

Laurel Kenner quotes:

SENEX AMANS (from Latin "ancient lover"; also spelled senex amanz in Old French):

A stock character in medieval fabliaux, courtly romances, and in classical drama, the senex amans is an old, ugly, jealous man who is married to a younger, attractive but unhappy woman. He is often a poor lover (or even impotent) with bad breath, wrinkled skin, and grey hair.

He is frequently cuckolded by a younger, handsome, virile man who secretly seduces his wife. We find examples of the senex amans in Chaucer's "Miller's Tale" and "The Merchant's Tale," and in various other fabliaux. Likewise, the motif also appears in the medieval French lais such as Marie de France's "Guigemar" and similar works such as Tristan and Iseult.

The motif of the senex amans often becomes useful for fast characterization, since it often can quickly cast a predatory light on an elderly male antagonist. An example of such use would be the old king of Ghana pursuing the young Imoinda in Aphra Behn's Oronooko, or any of the aging aristocrats sadistically pursuing young innocent girls in Gothic novels. [Read More]



Dr. Rafter discussed smoothing some time ago. One of his techniques was to take a regression and project the regression line forward at each point in the time series. I have been interested in trying this technique, but have found it very time-consuming to implement in E****, in which one must go to a dialog window to run a single regression. I looked for a better way.

Below is a rough piece of R code that calculates a "moving regression projection" for a daily price series (in this case a 20-period regression projected 2 periods forward). For input, I use a CSV file with date, open, high, low, and close prices, plus a sequence number (1 for the first row, 2 for the second row, etc.) to be used as the independent variable in the regression.


dailyPrices<-read.csv('cotton.csv',header=TRUE,sep=",",quote="\"") arrSize<-dim(dailyPrices) numrows<-arrSize[1] regressCol<-array(0,c(numrows,1)) combined<-cbind(dailyPrices, regressCol)

for (i in 20:numrows)
# Get a regression of the last 20 closes last20<-subset(dailyPrices[(i-19):i,]) regression<-lm(Close ~ X, last20) # Extend the regression line by 2 additional points predictedValues<-predict(regression) combined[i,7]<-(2*predictedValues[20])-predictedValues[18]


 The output looks like:
   Date         Open    High      Low      Close     X   RegressCol
 5/3/2007     48.59   48.95    48.35    48.4     84  47.98565
 5/4/2007     48.4     48.65    48.21    48.28   85  47.73247
 5/7/2007     48.58   48.75    48.45    48.6     86  47.50965
 5/8/2007     48.6     49.19    48.45    48.7     87  47.37444
 5/9/2007     49.1     49.24    48.65    48.82   88  47.36022
5/10/2007    48.9     49.15    48.9      49.03   89  47.37723
5/11/2007    48.35    48.7     47.58    48.11   90  47.29259
5/14/2007    48.15    48.2     46.9      46.92   91  46.91736
5/15/2007    47.1      47.9     47.1      47.75   92  46.75521
5/16/2007    48.8      50.2     48.4      49.19   93  47.05242



Arnold SchoenbergI have often tried to figure this out. Using harmony means there are lots of cycles of fifths that often intersect each other, and pivot chords with dual harmonic contexts, so it is hard to make a geometric picture. Schoenberg had his "regions" but these shift like mirages if one goes through different keys. But I have not found mathematical structures like groups or rings sufficient. Perhaps this explorer has found something that works? Given time I will try out the software.

Usually such things (which crop up from time to time) are Procrustean beds; but I always review them.



 These numbers have not been tested yet but recent moves in break even inflation expectations as measured by TIPS and nominals, industrial and commodity metals like gold and copper, and inflation as measured by the Bureau of Labor statistics turning lower (and likely to continue to do so given a host of things including rents, etc.) may portend the turn in the U.S. dollar to higher levels particularly versus the European currency pairs. There is a host of other factors that seemingly should support this that would make capital flow to the U.S. versus Europe.



 The average child spends 34 hours watching television a week.

A recent poll indicated that over 90 percent of the population of the United States never reads a newspaper. Fewer read more than one book a year.

There are 1440 minutes in a day. If one spends 15 minutes reading, one can read a 300 page book in a month.

Question: What is the difference between someone who can't read and someone who won't?
Answer: Nothing!

Alan Millhone asks:

 I had not heard these terrible statistics before. The United Negro College Fund coined the slogan "a mind is a terrible thing to waste." Children today sit endlessly in front of the boob tube, which serves as a babysitter for many parents. Thirty-four hours per week is staggering.

Recently my daughter took her cable TV back to "basic" and has no Internet for her two young sons. Solomon makes all A's and Forest is a B student. She is conscious of the time they spend on video games and TV, and she makes sure they are involved in school and after-school sports (currently soccer). They also have to do their homework as soon as they are home from school.

Pizza Hut and Tim Hortons in our area have a book program once a month for students, where they read and have their reading certified by a parent. My daughter says Pizza Hut is under fire for this because they are, in a way, encouraging bad eating habits for children. I suppose Tim Hortons will come under the axe next for selling donuts!

I am lucky that my parents encouraged me to read and I enjoy learning new words to this day. I wonder what can be done to change the terrible trend amongst our nation's youth?

Tom Ryan replies:

I really hate to be the park ranger, but is there really a study that actually has data about kids and 34 hours of TV a week, and what poll was it that indicates less than 10% read one book a year? Can we get back to numbers on the table?

Conversations on how "things are going to heck these days" only bring us all down and serve no purpose, not to mention that I don't believe in the premise in the first place. I, for one, am very encouraged by what I see going on with young kids these days. 

George Zachar offers:

When technology permitted advertisers to study viewership with greater detail than the old Nielsen diaries, they discovered that having a TV on counted as watching, whether there was anyone in front of the box or not. Cooking, chatting, copulating, sleeping all counted as viewing, as long as the tube was clicked on. 

Stefan Jovanovich adds:

The periodic release of alarming statistics about the decline and fall of literacy in America is one of our country's most enduring traditions. It usually coincides with the discovery by publishers that they are losing market share to another medium. Forty-five years ago the new scandalous fact of America's illiteracy (prompted by the rise of color television) was that Americans were now spending more on pet food than on books. When I told my father the book publisher of this alarming fact, his comment was that it confirmed the obvious: dogs and cats eat more than they read. I think that (yet again) the apocalypse may be a bit farther off than the New York Times fears.

Jim Sogi writes: 

As our esteemed resident philosopher states, "happiness is the end that alone meets all the requirements for the ultimate end of human action." The distinction between wants and needs makes it harder to make a concrete rule for action. For example the desire for honor is not something that is needed, but is a worthy aspiration. The more concrete way to frame the dichotomy is to put it terms of "stuff". If the goal is to get a lot of stuff, the wants never end. If the goal is to get rid of stuff, and end up with a wooden bowl and a robe, there is a finite goal. Once the stuff is gone, only the needs are left and true happiness is possible.

Regarding television: it is evil and promotes the acquisition of stuff, thus fostering unhappiness. Those who seek happiness in stuff are never happy, for there is always more. Eliminating television will improve life. The least benefit is the added 14 hours per week available for self-improvement; the greatest is the freedom from incessant exhortations to feed a desire for more stuff. For children, it avoids the frenetic programming of the brain into 3-second sound bites, which can destroy the ability to concentrate and focus.



 I found the following on a blog called Samizdata, and it reminded me of Captain Jack Aubrey, of the O'Brian Aubrey/Martin series:

A few years after Trafalgar - in which he did not take part - Thomas Cochrane, who was not a popular man with his jealous and pompous Admiralty governors, led a fire ship raid on the west coast of France.

Although the raid was a general success, several ships that could and should have been destroyed were left intact because the admiral in overall charge of the operation, Lord Gambier, was overcautious, arguably to the point of cowardice. Cochrane later made harsh comments about Gambier and the whole affair ended up in a very unpleasant court martial.

Cochrane's public career went into freefall; he was framed in a fraud case and sent to jail. He had a political career as a radical MP; and later, in an astonishing revival of his naval career, Cochrane went south to help form the Chilean navy, and played a full part in the overthrow of the old Spanish empire. He lived to a ripe and contented old age.

Victor Niederhoffer adds: 

All the exploits of Lord Cochrane are beautifully told in a little-known book, which would have been one of Getty's favorites. It is With Cochrane the Dauntless, the Exploits of Lord Cochrane in South American Waters. This book should be read to all kids, perhaps every evening. 



 The book The One Minute Manager by Kenneth Blanchard and Spencer Johnson has sold more than seven million copies and has influenced many for the good. As far as I can see its message is to have those you manage set goals (on which you agree), then praise them for a minute when they behave in a way that will help them achieve there goals, and reprimand them for a minute when they don't. ("The One-Minute Manager" recommends to touch the person you are managing when giving your one-minute compliment or reprimand. I would suggest that you be careful with this as it can lead to unintended consequences, especially with the opposite sex.)

I wonder if there is a one-minute way to manage an investor's stock investments. I would suggest to read Dimson, et. al., and the threads on Daily Speculations on how incentives, respect for property, rule of law, and encouragement of innovation work to create returns for investors.

On the other side of the ledger, read the posts on chronic pessimism and note that all those who populate same tend to be visited with -97% or worse returns of people like the weekly bearish financial columnist.

Read mine and Tom Downings' work on the fed model, and note what its yearly forecast is and if this has changed over the past quarter.

Decide what percentage of your net worth you wish to have in the market at all times, and how much you wish to borrow when you want your exposure to increase — choose between adding when the chronics have a winning day, week, or month, or just constantly adding or subtracting, depending on your liquidity and lifestyle needs as they vary over time.

Figure out how to maximize the after-service amount you get to keep, through compounding and cap gains, with your accountant, and see if there is a field where you have an edge that can augment buy and hold with individual stocks, or that you can buy when everyone else wishes to throw in the towel, or is not suitably optimistic about them.

Finally, be sure your frictional costs and grind are at a minimum. Pay attention to ever-changing cycles and never believe a guru. Keep records in a logbook of your good and bad moves.

That's how I would teach someone in one minute to be a good stock market investor.

Tim Hewson writes: 

I would suggest to be prepared for those inevitable down days. They will happen at times, so come up with a plan to handle them so it doesn't unduly impact your morale. Personally I have found reading interviews with other traders like some of those in the market wizard series have a useful motivational component. Anything really, which reminds one you have to take a few knocks trying to climb up the stairs. 

Steve Leslie adds: 

In my faith, we are encouraged to spend a quiet time at the beginning of each day, to pray, to read the Bible for 15 minutes and reflect upon the wonder of the universe and the many blessings that have been bestowed upon us.

Other faiths and secular teachings recommend an "altar" or special place that one visits at the beginning of each day to offer their prayers and positive affirmations to strengthen one for the upcoming day.

I recommend along with this a handheld recording device or writing pad, to immediately record any relevant thoughts. And to always have the recorder available to add additional thoughts that might be inspiring. Once recorded, this releases the mind to pursue other things.

If you think this is unnecessary let me remind you that once a day and for his entire life Thomas Edison practiced this ritual and allowed no interruptions during this time. No further comment necessary.

Finally, I recommend a timeless classic by Napoleon Hill, Think and Grow Rich. It is a short but incredibly powerful book that should be read time and time again.

Scott Brooks adds: 

Another book to that I consider a must read every few years is Dale Carnegies's, "How to Win Friends and Influence People". Every time I read this book, I pick up another tip to apply to my life and interaction with others. I keep a copy of it in my lobby as it has short, concise and to the point chapters. 

David Lamb suggests: 

Perhaps one could change the term "one minute" into the term "one mistake". And by keeping records in a logbook of all of these one mistakes one could go back and read of what not to do and how not to trade. I have hundreds of recordings of one mistakes in my recordings. I know hundreds of ways how not to trade. In fact, I'm a genius in the ways of trader error.

It has been said that Thomas Edison failed in thousands of attempts at producing a better light bulb. He recorded these failures and never repeated them. But oh! How many cousins do types of failures have! I hope I don't have to record too many more one mistakes in my record book. I'm running out of room. 



 Hi Laurel,

Given your extensive background in financial journalism I was hoping your could offer insight into an investigative journalism project I've been assigned for a class at UCLA. I'd be grateful to hear your thoughts and wisdom relating to a few questions I have. The questions are followed by my thoughts and experience thus far.

How did you learn to manage the news writing process to not always write about doomsday or sounding alarmist? Are there ways to able to spin a story to appear that you are selling doomsday, but between the lines you are actually speaking truth? Is a story "news" if people don't read it, read it and but don't consider it news, or disregard it because it doesn't coincide with their chosen bias?

I started with the idea of a story on Sharesleuth, a venture funded by Mark Cuban, created to use investigative journalists to dig up corporate dirt, write up a report on the findings, trade on the information, and then release the report. Some consider this unethical and some even mention insider trading. I didn't believe this represented either of these, and because people want negative news, a story on this concept would probably not be interesting to many. Like you and Vic say, people are optimists and want the negative news. They don't want to hear from the Miles and the Beckys of the world.

I paired up with a woman investigating deaths and injuries on amusement park rides. At first I didn't think this was a problem worth paying attention to. And after an hour of research I realized this was the smallest problem of all mankind. She refused to comprehend the numbers. There has not been an increase in deaths since the mid-80s, and the trend has been 1 to 2 deaths a year. I could go no further with this.

Clinical trials seem ripe for investigative journalists to rip. Take, for example, Gerson Lehrman consultants and the doctors leaking info. Then I saw a story written by David Evans of Bloomberg, an in-depth series on his view of the shady dealings of clinical trials and taking advantage of participants. After more research, and a surprise visit to a clinical trial facility here in LA, I knew I couldn't write about this side of the story either. There will be bad companies out there in every industry, but clinical trials are a critically important necessity to the process of bringing drugs to market. I also just read an article documenting (though not tested through the scientific method) the corresponding decreases in trial participants after seeing numerous negative articles in the paper.

I was thinking of doing a number of numerical studies on the percentage of bad clinical trial sites, ones that had been sanctioned, ones with the most consumer complaints, and showing what a minuscule percentage it is. Maybe tie in that it's not the Contract Research Organizations specifying that participants be low-income immigrants, but rather an equation of supply and demand. If these people have no better income alternatives then they chose to go and sign up for a trial for financial benefit. They say how bad the consent forms are. Is that supposed to be unique to this industry? All consent forms are barely readable. They are legalese because if they weren't they would be worthless in a court.

Do you have any suggestions where I could take one of these stories? What perspectives do you find interesting surrounding any of these topics? Thanks so much and any of your thoughts on the subject would be greatly appreciated and thought about deeply.

Thanks again,

Kevin Kirkpatrick

Laurel Kenner replies: 

Dear Kevin,

Your questions are all excellent, and I got a kick out of the dead-end stories, So many editors try to unload such stories on the public by getting hacks to do the work. It takes courage to tell them that there is no story there, but at the end your integrity will earn respect.

I believe you could go far in journalism, but you may run into a lot of grief along the way. Journalism today is in a shameful state.

The important thing is to always seek and tell the truth. Don't worry about hiding your optimism. Don't be afraid to be different. Be bold and be big.

I would be happy to respond in greater detail. I happen to be in L.A. this week, and you would be welcome to join me for breakfast or lunch at Shutters in Santa Monica (Pico Boulevard at the beach) tomorrow, Thursday or Friday.



 One of the never-ending bearish ideas promulgated by the chronic pessimists is that the consumer was really punk in April 2007. The idea, according to a certain weekly financial columnist and his camp, is that whereas the 1990-1999 bull market (which he was consistently bearish during) just went up without raising warning flags, the rise in the markets in 2007 has raised a million warning flags. And that this is now bearish.

Some people have actually read the chronic bear columnist's columns in 1990-1999, and contrary to what is stated, there was nary a week during that period that warning signals of imminent decline were not hauled out by one or another of the curmudgeon's friends. Such bearish reasons are memorialized in Practical Speculation.

It seems petty on my part to constantly point out the fallacies in the chronic pessimists' (the Abelprecbuffgrosoros') arguments. Eventually they will be right, and I have no idea if the current market is more bullish or more bearish than at any other time, and I certainly don't find this a more than usually good time to establish positions — but the point is that there is no reason to think that the reasons for bearishness are greater today than at any other time in the last 100 years. Nor is a decline in previous or prospective consumer spending or real estate prices good or bad for the market — that would depend on the totality of market interrelations and forecasts of discounted earnings for the market for the indefinite future. All the chronic pessimists I know of who actually trade, (in contrast to the weekly financial columnist) and who must take responsibility for their calls, are scratching the backs of solvent members from their perches and living quarters in the vicinity of the Trinity Church graveyard. Such will continue into the indefinite future, because of the creative power of the individual when placed in a system with proper incentives and the protection of property rights, as memorialized in the work of Dimson, Marsh and Staunton.

Chronic pessimists often have surface reasons for being bearish. For example, several years ago they talked about how P/Es were too high. Of course this didn't take account of interest rates or growth or past prospective relations between P/Es and market moves. The bearish P/E relation is specious, based on retrospective, part/whole fallacious, out-of-date relations from the Shiller database. And these, by transference from the academic world, have so much more credibility (if you didn't know he's been saying the same thing since Dow 1000, like the weekly financial columnist).

The question is, whenever the ratio goes the other way, like P/Es, now the lowest in 20 years, or oil, down 5% over the past year, or now the dollar up against the yen over the past year, why do you never hear about the relation that was formerly bearish and is now bullish?

Another purported reason to be bearish is that the dollar is very low and when you look at things in terms of the Great Man sitting on a platform above the world with the lever, he's not really making money on his dollar holdings, and this is bearish. You could substitute any other market, like oil or food prices, that is going down or up when stocks are rising as a reason for bearishness. None of these putative reasons for bearishness is ever tested. Instead, vague qualitative statements are posited about the unwanted dollars piling up in foreign coffers that could create a landslide.

From Stefan Jovanovich:

There is at least one reason to think that the "record highs" in the stock market averages reflect faulty counting: those averages are being measured in U.S. dollars. Adjusted for the fluctuations in the Federal Reserve Bank's Broad and Major Currency Indices, the S&P 500 Index (excluding reinvestment of dividends) is still well below where it was in June 2000. Scaled to the Broad Index the S&P 500 is still 6.7% below where it was nearly 7 years ago.

The Major Currency Index is probably the more appropriate measure to use since it reflects the change in the value of the U.S. $ against the other currencies used in the world's capital markets. Scaled to the Major Currency Index the S&P 500 is right now at 72% of its June 2000 price.



TIC data show international counter-parties are adding to their holdings of US corporate debt and equities at a faster pace year-to-year than they're accumulating treasury obligations. Last month's net purchase number was revised up $43 billion, although the month-to-month data are very noisy.



Today the S&P index tanked to the 1501 level, with pseudo propaganda about runs on the Northeast branches of certain firms from a year ago on the tip of everyone's tongue (it was too much for chronic bears to resist). All this looked eerily familiar to last year's May 17th CPI release, when the S&P dropped 25 points.



Three Dog Nights is gone just like two down days. In SPY condition of two consecutive down cl-cl after an up day, it has been 11 days (Apr 30), and such have gotten quite rare. Looking back to Jan 2004Here is list of wait in days between 2 downs:

Date       Wait
03/09/05 33
04/30/07 23
10/30/06 21
11/27/06 19
09/09/04 19
03/27/07 17
01/26/07 17
05/06/05 16
06/01/04 16
04/29/04 15
11/15/05 14
06/24/05 14
07/13/06 13
01/20/05 13
11/29/04 13
03/09/04 13
05/11/06 12
03/21/06 12
09/02/05 12
04/07/04 12
09/22/06 11
09/07/06 11
08/22/06 11
02/21/06 11
01/31/06 11
10/26/05 11
07/18/05 11
11/09/04 11
10/08/04 11
06/17/04 11
02/09/07 10
10/04/05 10
08/01/05 10
09/23/04 10
06/19/06 9
06/06/06 9
01/13/06 9
12/30/05 9
11/29/05 9
04/14/05 9
12/31/04 9
12/17/04 9
03/22/04 9
02/22/07 8
12/07/06 8
04/07/06 8
03/03/06 8
08/17/05 8
05/25/05 8
04/01/05 8
07/15/04 8
12/18/06 7
08/01/06 7
12/08/05 7
06/06/05 7
08/04/04 7
07/26/04 7
02/13/04 7
03/02/07 6
07/21/06 6
04/25/06 6
12/16/05 6
09/13/05 6
08/12/04 6
06/25/04 6
05/07/04 6
12/29/06 5
09/29/06 5
04/17/06 5
03/28/06 5
10/11/05 5
09/20/05 5
05/13/05 5
03/16/05 5
12/06/04 5
10/20/04 5
07/02/04 5
02/04/04 5
08/07/06 4
06/23/06 4
05/23/06 4
05/17/06 4
08/05/05 4
06/30/05 4
12/21/06 3
02/03/06 3
03/21/05 3
10/25/04 3
10/13/04 3
02/19/04 3
01/28/04 3



 Just weeks before 'that' tournament, with Federer having conquered all but the French (before Roche joined), it's hard to imagine that the Aussie was not in the camp to get that title on the mantelpiece. How difficult it must be for a player of Federer's standing to put his faith in a coach, even one with such an exemplary history, in order to achieve what still eludes him.

It must be difficult to listen and trust someone else to help make you better when you are already going so good. Tiger Woods did exactly that several years ago when he was already the most dominant golfer ever seen, changing his swing to ensure he would have longevity, and in the process taking the risk that his rhythm would desert him. I wonder what game plan Roger will bring to Roland Garros this year.



 It is time we get our heads out of the sand and stop subtracting out food and energy and admit we have an inflation problem. Energy prices are up and are going to stay up. It has been going on for two years and we (the Fed) must stop fooling ourselves into thinking there is only transient inflation which will likely reverse itself and that there is no core inflation. The transient is now permanent, though volatile. We really have an inflation problem.

Michael Cook writes:

I disagree that we necessarily have an inflation problem just because energy prices are up and are going to stay up. The fact that they are up is sending a legitimate economic signal that supply and demand are not in balance, similar for food. Were the Fed to choke off this "inflation" by throwing us into a recession, these price signals would not be able to do their work of drawing out competitive supply in the form of nuclear, solar, biofuels, fuel cells, etc. - whatever the creativity of entrepreneurs comes up with.

Jim Sogi writes:

The other unidentified variables are the global currency/capital flows that render the "island model" obsolete. There are a number of well-tested empirical theories and studies. But early into the floating currency regime the dynamics are not well understood. There are various theories.

Productivity, things like hours per week are one measure. Other tested theories include comparisons of monetary conditions, fiscal policies, economic growth, central bank policies, portfolio balance, purchasing parity (McDonald's indicator) that seek to predict currency flows. The size of these capital flows are so significant as to render traditional measures of domestic economic conditions no longer reliable or as predictive as they were. Ignoring these variables is a mistake.

Charles Pennington adds:

This argument has been made repeatedly, but is there any empirical basis for it, or any rigorous theoretical basis?

Can it be stated in a falsifiable way, such as the following:

"If money supply measure X (M1? M2? M3? something else?) increases by Y percent, then price index Z (CPI? PPI? sum market caps of stocks, bonds, real estate?) will also change by Y percent."?

My understanding is that history shows that there are times when the value of "everything" drops or increases, without any change of comparable magnitude in the various measures of money supply.

The market cap of the U.S. stock and bond markets add up to about $30 trillion. For just residential real estate, I find numbers that are a few $10s of trillion. Meanwhile the most liberal definition of money supply has it on the order of $10 trillion.

From say 1995 to 2000 the stock market more than doubled, and real estate went up, too. Just the changes in value of stocks and real estate over that period clearly add up to more than the entire money supply. Prices of other things, in general (as measured for example by the CPI and PPI), certainly did not go down over the period. So it appears to me that there can be massive repricing of things in general, of magnitude that dwarfs not just the change in money supply (about $2 trillion over that period), but the money supply itself.

This tells me that pricing of things in general has pretty wide latitude to move around. The value of "everything" dwarfs all measures of money supply, and makes moves of magnitudes that dwarf changes in the money supply. One should never think of there being some kind of grand conservation law, though I'm sure there are useful correlations. 



 A striking feature of recent stock market moves is the weakness of the housing sector. For example, the S&P 400 Homebuilding Index, which is a cap-weighted index with six members (NVR, Toll Brothers, Ryland, MDC, Beazer and Hovnanian), with a base of 100 as of year end 1990, hit a high of 725 in July 2005, and now stands at 373, down from 450 as of three months ago.

Needless to say, this decline has been heralded as indicative of coming woes in the overall stock market. But as with most things widely disseminated by the media, shouted from their posts in Trinity Church by chronic bears (where they wait to hook a lunch from a member who's not broke from listening to them), such views are false and lead to the public's losing much more money then they have to.

Practical Speculation has a chapter on the relation between real estate prices and stock prices, following in the footsteps of Henry George. Studies show that boom/bust cycles in the economy and stocks are started when real estate prices get out of line with underlying economic activity. When real estate is too high, retailers can't make a profit and they downsize. When real estate falls, retailers and others who use property make more profit because their costs of real estate is lower. Henry George and others, such as Homer Hoyt, documented this phenomenon for many economic cycles up to the 1930s. David Ricardo first elucidated the theory.

Laurel and I documented that the cycles had continued vis a vis REIT prices, with declines in quarterly REIT prices forecasting gains in the overall market in the next quarter of about twice the normal rate, 7% versus the normal 3%. We recently updated the study to look at what happens to the overall market after changes in the S&P 400 Homebuilding index and found a highly negative predictive correlation of -20%. After quarterly declines in the Homebuilding index, such as we've just witnessed, the average gain in stock prices in the next quarter is 5%, with about a 75% chance of a rise. Once again, a commonly held fallacy leading the pubic to sell when they should buy bites the dust.

Kim Zussman writes: 

Here is a quick check of HMI this month change vs next month change in SP500 index (12/85-3/07):

Pearson correlation of HMI chg and nxt mo rt = -0.085
P-Value = 0.167

Regression Analysis: nxt mo rt versus HMI chg

The regression equation is nxt mo rt = 0.00889 - 0.0535 HMI chg

Predictor      Coef       SE Coef        T        P
Constant    0.00889    0.00260     3.42   0.001
HMI chg    -0.05353    0.03859   -1.39   0.167

S = 0.0424313   R-Sq = 0.7%   R-Sq(adj) = 0.3%

Negatively correlated, but not quite significant, on monthly frequency.

James Tar remarks:

Shorting real estate and housing is difficult. You can't go out in the housing market and get a borrow on a few million homes that you can then go out and short. So everyone in the market who wants to be short housing/real estate is crowded into the homebuilders and select REIT issues. REITs have high dividends, so you can imagine how expensive it to carry your bearish disposition. A few buddies of mine running fairly large funds are feeling the pinch.

A good way to make sense of it all is to step back and take a look at what is really going on. I believe inflation, just like alpha in the stock market, is a finite quantity. There is only so much inflation that can go around. My studies indicate that the deflation we are seeing in housing/select REITs/mortgage banks is just about the same amount in dollar terms as the inflation we are seeing in energy, precious metals and agriculturals. So there is an inflation/deflation cycle constantly at work in the marketplace. As some assets inflate, others deflate.

To make sense of a confusing cycle, look for smaller, more easily identifiable components within this difficult game. I am looking at firms such as Georgia Gulf Corporation. Till the middle of last week the market believed it was headed for Chapter 11. But now this key supplier to the housing market has a much different story unfolding, perhaps indicating the imbalances in the housing market are declining.

From Alan Millhone:

On a very local note, I was talking to a neighbor the other night who was chatting with a man we both know who wants to build a new home. My neighbor said the fellow had scheduled several appointments to meet several builders and none of them ever showed. He asked me if I wanted to meet with this person and I told him no.

Houses are hard to figure due to rising material costs and the volatile changes in prices, sometimes on a daily basis. Also, I am now figuring mileage for my employees into my jobs X-number of days I project we will be on a particular job. I am confident giant home builders are having a tough time getting a firm handle on material prices to 'lock in' their hard costs of building homes in vast subdivisions. At present I would want little to do with building stocks of any type. 

Roger Arnold writes:

The real estate pros who stepped out in 2005 are prepping to get back in and with big ideas about restructuring the entire industry. Gargantuan funds are prepping to get into the real estate game.



I notice all three major stock indices begin with a "1", as Benford's Law says they might tend to:

I N D U     1 3 3 2 6 . 2 2
S P X         1 5 0 5 . 8 5
N D X         1 8 9 8 . 7 9

Philip J. McDonnell notes:

A quick glance at a slide rule shows that the difference between the number 1 and the number 2 takes up about a third of the scale. The slide rule scale is logarithmic and thus enables adding the lengths of the logs to facilitate multiplication. If the underlying process of any stochastic process is multiplicative as opposed to additive, then the process will follow a lognormal distribution. So if the process is lognormal then one should not be surprised that the proportion of 1-digits is one third.

George Zachar adds:

The Wolfram Demonstrations Project is a new, cool, free math visualization tool. I've run it on both Windows and OS X. 

Gibbons Burke adds:

Wolfram seems to have borrowed some features (especially the parameter sliders) from Graphing Calculator, which was distributed free with every Mac since January 1994 (though no longer — Apple has its own now). Version 3 is available for free and it is enjoyable to play with. 



 Modern sciences must have created many emperors that have no clothes. I found one when I was a graduate student (Geology; March 2001; v. 29; no. 3). An important technique of Petrology is called crystal size distribution (CSD): after counting the numbers and measuring the sizes of crystals in a rock, the plot of crystal numbers vs. crystal sizes can be explained by important and hard-to-constrain parameters like crystal growth rate, nucleation density, and residence time. Fortunately, my acquired high learning in CSD did not prevent me from realizing the simple truth learned in elementary school that it is total crystal volume that fully determines crystal numbers and sizes, nothing else, not growth rate, not nucleation density, not residence time.

Unfortunately, the end of my career in sciences greeted me after I shouted the emperor has no clothes. At then I did not realize that I deserved the fate as I made so many professors miserable and that I really have a speculator's heart.

By the way, crystal number in CSD is actually called crystal population density, which is still crystal number but measured within a unit volume of system and within a unit crystal size. Confused? This is why CSD practitioners have published about one thousand papers and have spent quite sizable funding.



 Fat March, a reality-TV program currently in production (based, as usual, on a similar UK program) passed through Westport yesterday with no fanfare. The premise is to take several persons of size on a Bataan march from Boston to Washington, record their sufferings, and the survivors win prizes (and lose weight!).

I happened to pass the crew, on my bike headed eastbound, as they walked westbound on Beachside Ave. We crossed near Imus's beach house. As I approached, the soundman waved his arms wildly at me, but I couldn't tell if he meant "naff off, you're ruining a Kodak moment" or "hey, swing by for a photo op." Since I was looking dapper (yellow jersey/ yellow bike) I assumed the latter, and did a quick 360 around the group, calling out "good luck!" to contestant Will Millender, who returned a cheery grin despite his obvious distress — flushed, and sweating profusely, although conditions were ideal, shady and 70 degrees.

Those at points south (Darien, Greenwich, Larchmont, etc.) might expect to see the entourage soon.

Alan Millhone laments:

They will do whatever it takes to drive up TV ratings at overweight people's expense.

Mike Desaulniers remarks:

Speaking of Boston, where the March kicked off — from today's WSJ:

Last year, the Boston area counted at least 1,210 doughnut shops, or one for every 5,143 residents — five times the national average.



 Alba, spry at 70, was reborn ten years ago on settling in Sand Valley. All her previous life she aspired to be a nun. As a child, she begged at the nunnery steps and was told to scoot to school. After college with a business degree a Sister ordered her to ramrod the family million-dollar hardware chain. Twenty years later as a San Francisco CPA, the door was shut again in her face with a scolding to care for her aging mother. Some years later, after that death, the nuns conspired to update Alba that she was too old to convert and she ultimately repented, 'Go to hell!' She sold everything, gave away the hardware empire, stepped into a battered blue van that today full of dog food rests on blocks on her forty acres ten miles east of my Sand Valley Rancho, and drove south until she broke down.

I spent 24 hours yesterday with Alba and am peeling the dust, sleep and three brands of pet food from my eyes. I stopped by her remote plot that morn to check her health and to see if the three trailers withstood a recent wind: a white one for fourteen dogs, brown one for as many cats, and her small camper. A 1' thermometer face said only 100-degrees but strangely the dogs rose not to greet me as Alba slurred French in the cat trailer. She heard my door slam and emerged beaming in a soiled blue dress, black sweatshirt, and orange stocking cap.

'How are you?' she asked, hinting trouble.

'Fine, and you?'

'I ran out of food and water two days ago and have been sucking ketchup to gather strength for the walk (eight miles) to the highway to hitch to town.' I offered her pudding and Gatorade but she snuffed, 'I don't eat until the puppies do.' At this, seven pups somersaulted from the trailer at us, and as quickly retreated out the sun.

She gestured with gnarled hands to a silver 100-gallon container. 'There's one inch of rusty water in the bottom but I can't open the faucet.' I took her steel cane, popped the rubber cap and used the open end as a pry lever to turn the faucet. Reddish water gushed into a pail now with fourteen lapping dogs about as Alba scooped a pan for the cats, and finally sipped the last drops.

She licked her lips, 'You just gave me a great idea! Two months ago I walked to town for supplies and two punks who watch seniors collect and cash their monthly checks rode up on bicycles. They cut my purse with a knife and groped me for more. I battered them with my cane until they screamed for mercy. 'Ha!' Next time I'll pop the rubber cap and really give them the business.'

'Good,' I cheered. 'I stopped by two months ago. Did you find the dead cat?' (I found it mauled by some creature.) Alba wagged her head, so I opened a drawer to an outdoor desk where it lay mummified.

'I wondered where Magdalene went.' We placed it into an underground pantry converted to a mausoleum.

'I'm going to town now,' I offered. 'Hop in.' She sat next to me and didn't look back.

An hour of hot dirt later we swung into the Blythe, Ca. post office where a half-dozen older citizens peered from their knees into PO boxes for the postmaster to push their checks at 9am on this first mail day of the month. Alba joined them and momentarily on pulling hers, I bid, 'Let's solve the supply problem once and for all. We'll rent a U-haul!'

'I can't see over the steering wheel because I've shrunk an inch a year for as long as I remember,' she smiled magically.

'I'll drive,' I agreed.

Down the road, the U-haul owner spotted Alba and whispered to the receptionist, '30% off,' so off we drove in a truck with a 20' box to Albertson's. The manager saw her and ordered an oversized shopping cart filled with Friskies Cat Food, and insisted, 'Keep the cart to wheel the kittens around.' Into the box, and then we stopped at a doctor's office where Bones asked Alba about a painful rib. 'A week ago,' she described, 'I heard a desert castanet, if you know what I mean.' 'I can't say I do,' admitted Doc. 'A rattlesnake that didn't like my Spanish. I spoke and it rattled; I quit and it ceased. So I rubbed garlic on my shoes and got a shovel and said softly, 'Come here, bitch'_ It rattled_ I talked Spanish and followed the clicks to a can but it smelled my garlic and squirted out. I brought that shovel down and cut off its tail but the handle jammed my rib so hard I could hardly lift the shovel again to chop off it's head!'

'Alba,' the Doc responded. 'You worry me. In fact, most of my patients have high blood pressure but yours is 110/70_ How do you do it?' She advised, 'I take one raw egg in ten drops of wine daily, and my animals eat first!'

The doc prescribed a painkiller for bruised ribs and soon we curbed at the Kitchen, a local soup line, where Alba began to act goofy on the pills. Nonetheless, the cook heaped more stew onto her plate than mine that she wouldn't eat. We drove on to Smart-and-Final where a stock boy reverently bowed behind a long cart and loaded 500-lbs. of Good Day dog food into the truck. Next stop, the Oasis Water Store, where a lackey with a wire brush shined nine brass faucets until they reflected sunshine, screwed them into nine 100-gallon used containers ($10 each), and piled them all into the U-haul box. We picked up a 50' hose at Ace Hardware, and continued along the town outskirt to Miller Park to fill up for two hours with free water.

I guess the trouble began about sunset as the laden truck turned at 10mph onto the last ten mile stretch to her compound, and slowed. Alba likes to talk but I don't. 'Bo,' she pleaded from the passenger side. 'I'm hungry, my rib hurts, the painkiller makes me odd, I didn't sleep a wink for the animals, and the sunset is blinding me.'

'Adjust,' I chided for I too had put in a hard day on little sleep and food. She rambled and I brooded over the washboard for an hour till the final turn and the truck was surrounded by barking mutts. We parked and they dashed to the box low corner that trickled water. 'Alba!' I shouted. 'We've sprung a leak…Bring the hose!' Instead, she stumbled over every little thing in the path to grope about her tiny camper for a flashlight. l sprang to the rear bumper, flung open the box and siphoned precious water from a dented container out 50' into pails, pots and cups.

The dog food bags lay on the floor sodden as I lifted the first to the bumper and the bottom blew and forty pounds of kibble bounced to the ground in a ten-foot radius. Alba approached with a flashlight to the circle of wolfing dogs and yelled, 'It doesn't grow on trees!'

'It wouldn't have burst if you'd stayed!'

'Don't talk to your neighbor that way!'

We threw dog food at each other to the great delight of everyone.

Some time later, the moon rose yellow over a U-haul truck on a remote toe of the Sonora speckled with dog food and puddles. We munched an early breakfast and barked about how long distance makes good neighbors. At sunrise I returned the truck to town leaving Alba self-contained with her light for a long, long time.



 The US is short by about 20,000 tractor-trailer drivers. I have a Class B license for my International dump truck with air brakes. Class A is much tougher to get and keep. Many drivers have too many fines, and trucking companies, for insurance reasons, will not hire those with a bad record. Fewer drivers will restrict supply, thus higher prices on trucked goods.

Ken Smith replies:

My brother died of truck driving. He owned two sleeping cab tractors, one 40' flatbed trailer, and two 40' boxes. He slept in the cab of his favorite tractor, urinated in a bottle, ate greasy food, smoked two packs a day to pass the lonely time away. He got home infrequently for sex and when he did, found someone else had already been there. Spouses of truckers are like spouses of sailors, soldiers, and traveling salesmen. Most of the money he made went to keep his equipment going.

Drivers are sometimes found dead behind the wheel of a big rig that has turned over in a ditch at the side of the road after tearing up a lot of dirt and ditch. Drivers stay behind the wheel long hours, keep two sets of books, one set for the inspectors and one set for real travel time that they get paid for. They are paid by the miles they drive. In the old Soviet Union, officials would move unemployed autoworkers into truck driving.

Drivers don't make a nickel sitting empty in a truckstop parking lot. When you own your own equipment the job is better but still a hassle waiting for a dispatcher to give you a load or a half load. I don't doubt there is a shortage of qualified drivers — if they can get something else they will; except for guys and dolls addicted to that lifestyle, as traders are addicted to what they do.



New low today in currency option implieds… via JayPeeEmm's index:

F     5/11  6.14
T     5/10  6.22
W    5/ 9  6.26
T     5/ 8  6.25
M     5/ 7  6.27
F      5/ 4  6.27
T      5/ 3  6.38
W     5/ 2  6.42
T      5/ 1  6.51
M     4/30  6.48
F      4/27  6.41
T      4/26  6.51
W    4/25  6.56
T     4/24  6.52
M    4/23  6.52



Smart Quant Discussion

Google Finance doesn't have an official API yet, but here's a way to get historical data from them. The data go back much further than Yahoo (40 years historical), and it's available in 5 minute increments. Broader, cleaner data than OpenTick (which I've found to be a bit flaky). However it's for equities & fixed income only — not much FX & derivative data. Nevertheless, it's better than Yahoo for a free feed of historicals.



 In an article by Bruno Dupire of Bloomberg titled "Optimal Process Approximation: Application to Delta Hedging and Technical Analysis" (July 7, 2005), he looks at price changes irrespective of time. I cannot speak for him, but in reading the article, I had the distinct impression that Mr. Dupire was unaware that he was really describing point and figure filtering. That's believable, as I doubt he would read the P&F literature, since it is considerably beneath him. I also doubt that anyone who is seriously into P&F would read Dupire. Most of the P&F crowd are unaware that P&F is a non-linear, adaptive (and in some cases asymmetric) filter.

In our shop we have done lots of work with filtering data. Universally we have found that using P&F techniques create unnecessary lag. I say unnecessary, as there are other filters that do not distort, and yet do not create lag. So we were vexed by the time we wasted in researching P&F.

But, critically, we never researched the patterns of P&F. Then Vic and Laurel mentioned it, which got us thinking we may have dismissed P&F too soon. So we have recently embarked on creating a library of frequently-recurring patterns, and using those to deselect some of the stocks on our daily lists. That is, using P&F filtering on price data.

But P&F may have other possible beneficial uses. In many ways it is the opposite of a moving median. Whereas the median discriminates against an abrupt move, P&F immediately recognizes moves beyond a certain size and ignores periods of inactivity. That makes it extremely interesting, and for more than price.

Victor Niederhoffer remarks:

The probabilities that Dr. Rafter found are completely non-random and form the base for a simple model that can be tested against extensions for reductions of variation relative to hypotheses concluded. The positive sequence of length 12 in the Dow overrides the normal difficulties with drift and heightened chance of momentum due to starting out in each case nearer the next sequence than the reversal due to randomness. 

Paolo Pezzutti asks:

Is this true also if the number of observations is quite limited for every pattern?

Victor Niederhoffer explains:

The numbers can be tested with a broad brush, with a standard variance of expected number of observations for each classification. There's enough there for the simple model to be highly significant.



 Hitchcock's SpellboundNeuroses are unconscious attempts to use what worked as a child in the changing adult landscape. This principle is at work in the markets as many lost opportunities result from attempting to use what was successful, even yesterday, in the current situation. Fixed systems are but one example.

Difficulties with overcoming personal issues are known to anyone who has overcome these things. The difficulty of adapting to the daily changing market cycles, the major difference between long and short, the difference in up days and down days, ranges and runs, are not like shifting gears in a car or wearing a different hat. The difficulty shifting to different analysis, different tools, different tactics, different markets, and the need to switch all these things on a dime cannot be overstated.

Some like to stick to just one mode, one system, and wait for the mountain to come to Mohammed, to avoid the switches. Just recognizing that the cycle has shifted is hard enough, but then to change course in the old battleship is even tougher.



 "Cheap" is a word that I have yet to embrace after 29 years of investing.

I always hear fundamental analysts use this word to support their reasons for owning their stocks. Or strategists use the phrase, "At X earnings the market is cheap here, and "based on a dividend discount model, our work indicates the market is relatively cheap here, or "with the long bond at X we think the market is cheap here."

Is this something that is taught in Market Strategist School or CFA classes? Or can one purchase a book that contains such sayings?

I have seen securities that are "cheap" get a lot cheaper before they became valuable. And there is an entirely separate school that teaches, "good things aren't cheap and cheap things aren't good."



The Sunday Times May 6, 2007: China aghast at `sacrifice' of 288 pupils

The schoolchildren perished because they were ordered to sit down in their theatre seats so that Communist party officials could leave first.

I attended a Barbra Streisand Madison Square Garden concert in 1994.

At its end, the vast crowd was compressed and channeled through a couple of narrow side exits, not the main corridors. Why? The VIPs — Madelaine Albright and ex-Mayor Dinkins' entourages — had priority.



 One would think commodities would have an ever upward drift in price (everything gets more expensive, right?). Yet, a quick check of historical charts show they are boom and bust; there is no upward drift as in stocks. Why?

My take on it is very basic. The first law of the universe is to survive, the second is to grow. Corporations must grow to survive. All organisms are driven by that basic tenet, unfortunately even government agencies.

Corporations are growing, expanding organisms that morph to change and adapt in their inherent drive to survive.

Commodities are not such an organism… just a price. There is no drive or motivation for an ear of corn to sell at a higher price, to take over the world or gain market share. This also should serve as a warning to commodity long-only index or basket funds. Again, look at those long term charts!

Stocks drift higher because the way of man is to improve, grow, get better. Nothing has been able to stop that; not dictators, nor Communists or Socialists. Stock prices will always advance long-term as corporations are in the business of expanding and taking advantage of opportunities.

It does help the averages that dying stocks are removed (there are only a handful of stocks in the Dow that were also there 20 years ago) yet growth and value are always there to be discovered.

Go forth and prosper is the motto of all corporations.

Gregory van Kipnis writes:

Your observation is correct. I saw the same thing when I analyzed the data 25 years ago. The arguments made then were:

  1. stocks rise because the have growing earnings; commodities have no earnings
  2. ceteris paribus inflation is offset by storage and financing costs
  3. quantity supplied grows along with demand growth, more or less, not so for individual stocks
  4. commodities are substituted when one becomes relatively too expensive

The long term indexes are usually geometric means of broad baskets of agricultural and industrial commodities. Over time there are substitutions, e.g., kerosene for whale oil.

Eli Zabethan adds:

One must consider carry when looking at futures. There is a world of difference between the non carry considered charts and those where carry is considered…

Greg Rehmke offers:

Commodities as “natural” resources goes down in price over the long term (only one resource, labor, goes up in price). As Julian Simon explained, man is The Ultimate Resource, and all others we call natural now were once just rocks.

Black gunk bubbling up in salt marches became oil after whales became scarce and people started looking around for substitutes. The early oil in Pennsylvania ran out quickly, and only after Rockefeller’s army of chemists discovered how to get the sulfur out of similar black gunk in Ohio did it become oil too.

Discovering resources requires reason, freedom, and hard work. Without these rocks stay rocks, tar sands stay buried and useless, penicillin stays mold, DDT stays banned.

Over recent decades more and more world oil and mineral supplies left the free world and fell into government hands. I am reading about Zambia in Robert Guest’s book “The Shackled Continent.” Copper production in Zambia peaked in 1969 at 825,000 tonnes a year. Then it was nationalized and production has since fallen by two-thirds.

Oil resources, nearly all discovered by free people in private firms, have been grabbed by governments around the world. (Oil reserves in Russia, during few years of relative freedom between Soviet control and Putin control, went up dramatically.)

The economic freedom finally reaching hundreds of millions in China and India is lifting wealth creation and the demand for natural resources. How fast entrepreneurs, engineers, and enterprises respond to higher prices with new discoveries, technologies, production, substitutes, and efficiency gains, is anyone’s guess.

But looking back at the inflation-adjusted prices for natural resources over the decades and centuries shows a steady trend.

Of course, as commodities are priced in dollars, it is not clear whether the genius of private industry in extracting natural resources from the earth will match the “genius” of governments in extracting value from fiat currencies.




 I had the opportunity to go to Tides Inn for a wine tasting. When our host initially said "Austrian" you can imagine the look on my face, but I did find one good one: Gruner Veltliner "Bergdistel" Tegernseerfof Wachua 2004. The rest tasted like apple Ripple…

And If you want to hear a catchy vocalist who is more appealing than Bjork (who is known more for her Emmy show swan outfit than her music) then check out Feist . Her new album with the song Sealion is very good — a bare-bones pop-folk-indie sound.

Jeff Sasmor adds:

In July I'm headed out to Rocklahoma '07, also being called MulletFest. It features White Lion, Slaughter, Quiet Riot, Ratt, Poison, Winger, Dokken, all the Hair Bands. 



Gong, Guojin; Louis, Henock; and Sun, Amy X., Earnings Management and Firm Performance Following Open-Market Repurchases (November 2006).

Abstract: We provide evidence suggesting that both the post-repurchase long-term abnormal returns and the reported improvement in operating performance documented in prior studies are driven, at least partly, by pre-repurchase downward earnings management, rather than genuine growth in profitability. The average firm reports significantly negative abnormal accruals prior to open-market repurchases. The extent of the downward earnings management increases with the percentage of the company that managers repurchase and CEO ownership. The pre-repurchase abnormal accruals are also significantly negatively associated with both future operating performance and future stock performance, and the negative associations are driven almost exclusively by those firms that report the largest income-decreasing abnormal accruals prior to the repurchases. The study suggests that one reason firms experience post-repurchase abnormal returns is that the post-repurchase realized earnings growth exceeds expectations formed on the basis of the pre-repurchase deflated earnings numbers.



At the founding of American scientific work on market movements in the 1910s, the standard way of looking at non-random properties was to compute the distribution of positive runs and negative runs of exactly 1, 2, 3, 10, et al. This approach when combined with expectations and comovements and lifetimes, a subject generally considered under the subject of survival statistics today (and well covered for example in the highly recommended book Regression Modeling Strategies by Frank Harrell in his chapter Parametric Survival Models) has always held great appeal to me.

Among its other virtues, the approach leads to some ready validations and generalizations of point and figure analysis. It also leads to models of changing probabilities of continuations as the length of the run varies. This has always been partial to me, as some 50 years ago in the JASA, Osborne and I found changing probabilities based on same, and posited this as a general phenomenon.

The one problem I have with all the distribution of runs studies, which are so much more meaningful and useful than the completely ad hoc work on power law distributions and fat tails, which make for great coffee table conversation (and opportunities to feather the nest and appear erudite and garner consulting fee, but in actuality have nothing to do with whether risk is properly priced) in my opinion is that there has been little attention paid to the distributions of reversals of length x. For example, everyone looks at the probability of a rise after two rises, but hardly anyone looks at the probability of a rise after a decline followed by a rise followed by a decline followed by a rise. That's what I would call a positive reversal of length four. Many of these considerations were in my mind yesterday as the Dow rocketed down 150 points and the S&P index rocketed down 21 points after huge continuous rises.

Without providing any meals for a day rather than a lifetime, here's how I've been looking at the Dow.

Runs of 100 against reversals of 100 considering round numbers only:

Date New Reference Achieved Level Current Position
3/13   12100 12075 Neg reversal 1
3/19   12200 12226 Pos reversal 2
3/21   12400 12447 Pos sequence 2
4/03   12500 12510 Pos sequence 3
4/13   12600 12612 Pos sequence 4
4/16   12700 12720 Pos sequence 5
4/18   12800 12803 Pos sequence 6
4/20   12900 12962 Pos sequence 7
4/25   13000 13089 Pos sequence 8
4/26   13100 13136 Pos sequence 9
5/2 13200 13211 Pos sequence 10
5/7 13300 13312 Pos sequence 11
Present:   13215  

There are many ways to analyze such data with pencil and paper or computer. I like a fuzzy augmentation of it, and I like it with smaller increments with such things as the S&P. However, one can say that this positive sequence of length 11 is the longest in history; the durations between the consecutive sequences are smaller and smaller. And one can wonder what a negative reversal of length one when and if it inevitably happen after such a move will augur. 

From Steve Ellison: 

I counted moves up and down in the S&P 500 futures since June 13, 2005 between predefined price points at 1% intervals. Presumably the probability of such a small move being up is close to 0.5. For each move, I tabulated the length of the run in progress and whether the move continued the run or reversed it.

length  Stopped   Continued     p
 1           45            47           0.46
 2           25            21           0.33
 3           11            10           0.50
 4            7              4            0.27
 5            3              1            0.31
 6            0              1
 7            1              0

From Michael Cohn:

The Chair recommended Regression Modeling Strategies. Mine just arrived today. I noted that many of the examples are in SPLUS. I recommend Robust Statistics: Theory and Methods, (Wiley Series in Probability and Statistics) by Ricardo A. Maronna, Douglas R. Martin, and Victor J. Yohai. The book comes with a very nice license for SPLUS for 1 year. Kind of an arbitrage of knowledge! 



The Times, May 11, 2007

Today the UN General Assembly, that unerring barometer of world opinion, will acclaim Zimbabwe's election to chair the UN Commission on Sustainable Development, the panel that deals with development and the environment.



 I know I'm a bit boring talking about bicycle racing. But we are racing a long one here, like a Milano-Sanremo, 250 km almost flat and the last 50 km bumpy. If you go too fast you reach the legendary capes with wooden legs and at the first counterattack the opponent leaves you behind.

On the other hand if you go too slow the race will not be hard enough and the sprinters will have too easy a time beating you at the stretch. The same applies in the markets. Lack of perspective leaves you with distorted images of reality. I do remember clients closing short positions for lack of margins in February of 2000 and long positions closed in the course of the last bearish week before the long-term bull resumed its run. At times the fog which arises in one's brain in times of fear has compelled opening or closing positions, which, with a bit of calm, should never have got out of one's head.

I think the same vicious virus as afflicts Vic and Laurel has hit me, namely utter optimism, and I share with them the feeling that the long run is not over yet. It could be one of the last chances for shorties to bail out before the next big one comes.



 Here are some elements of chess thinking that may be relevant to trading:

a) In considering patterns on the chessboard one does not select a single element (e.g. a doubled pawn) and then assess a position purely on the basis of previous examples (e.g. outcomes after x moves since the doubled pawn arose). It may indeed be the fulcrum for one's considerations, but one should also be on the lookout for patterns that might arise as a consequence.

At this point we start to get beyond static testing of patterns into the realm of simulation. Now I'm aware that there may be some advanced simulation programs around, but on the basis of what I've seen of chess programs they're going to be way too primitive. For day trading at least it needs a flexible organic mind to look ahead, synthesize patterns, adjust one's perspective along the way and work within available margin.

b) Even more important than considering one's own happy outcomes is to bear in mind what the opponent would like to do to us. Many beginners make the mistake of only considering ways the game will be won for them without bearing in mind the myriad ways in which they can lose. As a result they can play very badly in adversity, or build their positions so that they fall apart when things go wrong.

I have an example of this second point in that I've seen it mentioned numerous times that everyone is afraid of another decline like Feb 27th. But not once have I seen it mentioned that people may also be afraid of missing the kind of rally we saw out of last year's panic. This seems like an equally viable proposition and yet it hasn't been mentioned. Why not? Because it would raise the possibility that bulls can act irrationally.

Now we all know that stocks tend to go up, but this does not immunize bulls against irrational behaviour. A bull can go every bit as bankrupt as a bear if he's highly leveraged, operating on a short time frame and doesn't have some very fancy footwork. And he can turn round and say he was 'right' when the market goes back to new highs, but this is just another form of denial if meanwhile he went broke or didn't have the margin to exploit it.



 The first books every investor should read and study are Peter Lynch's One Up on Wall Street and Gerald Loeb's The Battle for Investment Survival. Although many of the examples are outdated, the ideas and suggestions are timeless and invaluable. Novice and veteran alike can benefit from them.

One of the great lessons from the books is how to build a shopping list of stocks.

Lynch suggests there is a 10 to 1 ratio for buying stocks. If one wants to buy one stock one needs to research 10. He believes the reason most people are not successful in investing is that they will not devote the necessary time and effort. They buy something, but they don't really know why they bought and are not really sure what to do with it once they own it.

I was struck by this idea in light of the pullback today. Plus I thought that today was a good day to take off from any trading so I had plenty of time to research my stocks.

Of the 50 stocks on my screen five are green while the rest are red. So I decided to review the stocks on my screens and try to determine why I own the ones that I own, and which ones I might like to own. I took out a legal pad and wrote a small research report on each one. Was it work? Yes. Did it take time? Yes. Was it fun? No. Will it be rewarding? I certainly hope so.

As Vic and Laurel like to say, it is very hard to gain an edge in trading and speculating. Imagine how hard it is to get an edge without doing the work.

I saw Floyd Mayweather Jr. on Jay Leno Monday evening after he defended his title against Oscar de la Hoya this past weekend. He commented that he would train four times a day to prepare for Oscar. He would even get up at 3am to do an early session. His belief was that if he would put the time in when his opponent was sleeping this would give him the edge he might need to win.

He won a split decision and the reason he won was that one judge voted for him in the 12th and final round. Otherwise the fight would have been a draw.



 Many years ago I paid the Big Apple a visit for a weekend, staying at the apartment of an uncle who spent the weekends in the country. It was an amazingly, even frighteningly, neat apartment. For some reason that Sunday morning, in the dining room, curtains closed to avoid sun damage to the antiques, I remember reading a lengthy article in the Sunday New York Times.

A doctor wrote it about his own father. It was about the end-of-life indignities and useless and seemingly unending expensive tests, the fitful flurry of prodigal procedures, and the futile activities. The motive, in the writer's opinion, is eagerness to get as much spent as possible before the patient expired.

It was a gripping tale, particularly as the son was a doctor himself, and still was unable to stem the tide of pre-last rite spending. Curious to read an article on Mahalanobis today, so little different from that of twenty, maybe even thirty, years ago.

Greg Rehmke adds:

This may not be the same article, but is probably a similar story and followed from the same poor incentives of government-regulated, third-party payer heath care.

I remember the article because health care reform was the national high school debate topic and we reprinted this article in our monthly publication for high school debate clubs.


Making a Living Off the Dying


It has been more than a year since my father died, and I have come to believe that the circumstances of his death demonstrate much of what is wrong with our medical system.

As I grew up, I heard so much about what a good and gentle physician my father was that at first I ran from the idea of becoming a physician myself. But at 35, I was well along in my own medical career and with pride brought him to Britain to hear me deliver a paper. He had trained there and wanted to find out what had become of his classmates. He seemed to lose some vitality when he heard they were all dead. In perfect health his whole life, he began to complain of back pain. … 



The machine-learning algorithm called "backpropagation" is a very beautiful algorithm.

An early (~1960) learning machine was the Perceptron by F. Rosenblatt. A Perceptron is a 1-layer neural network, a linear classifier. This path did not succeed very well. One reason was because the community working on it was unable to extend to 2-layer (and more) systems, which needed the backpropagation algorithm to work. And it hadn't been invented yet (although backpropagation algorithms on 1960s computers would also have been a challenge).

The sad part is that at the time of the Perceptron, perhaps even before, the backpropagation algorithm was already known in the physics community. Of course it didn't have this name and the same applications. So, having some people able to interface between different communities, able to speak/understand both, can sometimes be useful.

However, today the backpropagation algorithm works, and is doing many good jobs. 



 The only thing I like more than golf is trading. Both seem to always demand the very best that I have. There is never any easing up on a swing, placing a trade, focusing on a tough shot out of the rough, or trading on a volatile day.

When I started playing golf seriously years ago I had trouble with my short game. I felt then that it was the most unforgiving sport out there. I was pounding the drive 300 plus yards, but it would take me five more shots to get that little ball in the hole. Frustrating, to say the least. So, I asked my brother-in-law, who holds twelve Arizona course-scoring records, what is the hardest shot in golf. He told me that one of the most difficult is the lob shot.

This lob shot is used when the golfer doesn't have a lot of green to work with, or has a sand bunker or water hazard to pitch over to reach the green. I tried this shot, with a newly purchased sixty degree Cleveland wedge, and it was one of the most frustrating exertions I have ever tried. The other wedge shot is called the bump and run. A fifty-six degree wedge is used around the green to simply strike the ball that lands a few feet from where you hit it and then is supposed to roll to the hole, following the lie of the green.

The primary reason the lob shot is much more difficult to master is margin of error. The ball must be struck with almost absolute precision in order to put the proper backspin on it, not to mention the small target location. The margin of error with the bump and run shot is quite large compared with the lob shot. Therefore, it has a higher degree of forgiveness and is often mastered by many. But when one is in trouble, the bump and run is of no use.

So, for a week straight I hit 300 lob shots a day. I would spend a couple of hours a day striking that ball over and over, from every part of the practice green. I would pick the most difficult locations and lies that the practice green had to offer. I became so comfortable with this that I took fifteen strokes off my handicap because I became so adept at the lob shot. I would often use it even if it weren't necessary, much to the chagrin of the bump and runners.

It seems that the market is similar. When I first started out I traded everything, from cocoa to wheat, from lumber to beans. I was not skilled enough to become profitable, let alone phenomenal, in all of these markets. About this time I emailed Vic and Laurel out of the blue and told them what I was doing. What was shocking to me was they answered my email within an hour. Among other things, they told me to pick a market that was liquid and focus on it.

I picked a market that experienced a large amount of volume each day and studied and traded it for weeks. Ever since then I can say that have taken at least fifteen "strokes" off of my trading game, the most unforgivable "sport" extant.



 Sitting on your hands (in your mind) is a good skill to master. I am talking about not being in a rush to make a move on your keyboard in the way of trades.

As a checker player I imagine I am sitting on my hands each time it is my turn to move. It slows and calms me and enables me to see things more clearly.

The great Tommie Wiswell once remarked, "Move in haste and repent at leisure." Those quick and impulsive moves in the market and in checkers can be devastating to your positions.



The Low Bar Blues (Original by Jim Sogi)
B - E riff (With feeling) and repeat

Looking for the Low Bar blues
I'm searching for the low bar blues
Gonna turn my trade around
Lookin' for the those low bar blues
Those spus 'r taking me down.

Just sit and wait
Until you think its time
Press that button,
You spend a dime

Looking for the Low Bar blues
I'm searching for the low bar blues
Gonna turn my trade around
Lookin' for the those low bar blues
Oh spus,  don't  take me down.

Its gonna drop
You just bot the top
Gonna hurt
You just lost a lot

Looking for the Low Bar blues
I'm searching for the low bar blues
Gonna turn my trade around
Lookin' for the those low bar blues
Those spus are taking me down.

But wait, It'll turn around
Hang on, just stick around
forget the pain
Let me hear,  one more refrain

Looking, looking, looking for the Low Bar blues



 Out of the blue as I plant cactus in my front yard sounds a rumble and I gaze overhead at a 155-Howitzer. The 15-meter cannon, generally towed behind an Army truck, dangles on a thin cable under the green belly of a whack-a-whack Sea Stallion helicopter. It lumbers south above a cyclone of red dust and I drop the shovel to grab binoculars and ascend my library van to a crow's nest. I view the copter touch down the Howitzer a kilometer away and release the cable. My ten-acre plot in Sand Valley, California lays two kilometers off the Chocolate Mountain Gunnery Range and the military apparently has misjudged that distance. I descend the spiral stair into jogging shoes and take a camera.

While trotting I zero in on a ten-story dust cloud blown up by the blades. The copter ascends above it sans cannon, banks hard north over the Rancho and vanishes through the ringing valley hills. Soon a second chopper approaches and lowers a 10-meter coffin-like tin of ostensible shells, and lifts off as I peek around a barrel cactus with dust settling over a city block.

The long cannon perches on wheels next to a shallow dry wash where a Marine sentinel in camouflage looks the other way. In gym shorts with black duct tape on my nose as a sunshade, I quietly pad to 20-meters behind him and quietly ask, 'Aren't you a bit off range?'

He whirls, recovers a youthful grin and stutters, 'Wellla_.'

'It's okay. I won't tell.'

'Sir_' he insists.

'Really,' I raise a palm. 'Just don't point at my house.'

'Sir, clear out for that incoming copter!'

My turn to whirl as a black speck speedily enlarges to another Sea Stallion CH-53E. I scamper out the zone but, maybe to raise a scare, the pilot hovers over my head and descends. I jump from under the belly not a second too soon to avoid a hell of a headache. Pelted by clods, unable to stand, I go to one knee pressing my hat to my head like MASH. I squint through the brown swirl at the set copter ten steps away but turn as inch rocks zing at my face and the duct tape flies off at 40mph. The 15-meter blades whine to a standstill, dust falls heavily, and ten soldiers in camouflage file out the craft ignoring me and march with automatic weapons in the direction of the Howitzer toward the range. Maybe, I think, they deem me undercover.

I stand and brush off recalling the soldier's prayer that discretion is the better part of valor, and hike away from the barrel around Ironwoods to the Rancho. Scaling the spiral stair to my crow's nest, I peer through a spyglass to reckon this afternoon's field exercise. The Gunnery Range now bursts at the main target three miles to the south: 1000-lb. bombs rock the earth, rockets flare from jet noses, bullets snap from smaller choppers. Closer by, the ten Marines walk the wash in the direction of the barrel to the supposed shelling on the range as the sole sentry guards the Howitzer. The squad disappears into the wash, and in an hour a copter returns to pick up the cannon, and another lifts the ammo. They swing over the Rancho and disappear through the hills.

It's the first time since moving to Sand Valley eight years ago that I've seen a cannon roped from a helicopter to earth, and I judge the Marines just plum missed the coordinates to land near my Rancho. No shots are fired but it beats watching cacti grow.



 ….her name is Lili Von Shtupp…..


Here I stand, the goddess of desire
Set men on fire
I have this power.

Morning, noon, and night, it's dwink and dancing
Some quick womancing
And then a shower.

Stage door Johnnies constantly suwwound me
They always hound me, with one wequest.

Who can satisfy their lustful habits?
I'm not a wabbit.
I need some we… [Takes a breath] … est.

The Mistwess sings her sister's song today. Oh, it's twue, it's twue!



 On days like today, when I have been proven wrong by the market and I am down a considerable amount of coin — when my nose is completely shot off — I close my book, take my losses, and start looking at the market all over again. I might re-enter, I might pass on the remainder of the day completely.

What I am seeing today: nothing has changed. I have not seen the market this fearful of an additional sell-off since May 1, or April 12, or March 30. Who cares if some imaginary geometry on the SPX has suddenly come into question?

I pay close attention to what the market has become: fantastically efficient. I see the market doing its dirty work in a much more efficient manner than even a few months ago.

Alan Millhone adds:

The market ebbs and flows like the tides, sometimes every 24 hours. I note today the Dow is down 120 points, however what about all the past days it went higher and higher? A short time ago it fell 400 points, but it all came back and then some. It stands to reason that at certain points traders are going to sell off certain holdings and thus take a profit. Then the market settles down and begins to climb once more to a certain level. Mr. Tar is in the market every day and gets in and out all the time. I stand back and watch oils, precious metals, lumber, etc. 

Jim Sogi extends:

Blaise Pascal wrote in "The Philosophers" in 1623:

Continuous eloquence wearies. Princes and Kings sometimes play. There are not always on their thrones. They weary there. Grandeur must be abandoned to be appreciated. Continuity in everything is unpleasant. Cold is agreeable, that we may get warm.

Nature acts by progress, itus et reditus, It goes and returns, then advances further, then twice as much backwards, then more forward than ever. The tide of the sea behaves in the same manner, and so apparently does the sun in its course.

And so does the market. Pascal's quote brings to mind yesterday's pyrotechnics on an otherwise unremarkable FOMC plain talk release. The broker's quotes disappeared for a number of minutes, but at least they were busy filling orders in a timely manner. Globex seemed overwhelmed. Why the market goes through these circumlocutions is not clear, but a few things stand out. First, there is some sort of clearing function. Second, the action seems to stretch the capacity of both the Globex system and the trading platforms, which are not good signs. The PPI announcement led to a similar reaction in bonds, which dropped a point in three minutes, then rallied. This has the smell of a mechanical issue rather than an economic reality. It is the thorny path the S&P futures must take to their inevitable new highs. The appearance of a madhouse, of panic, so different than the market's normal stately mien, reminds me of the little chickens in the yard scattering, the mother squawking, all running this way and that from their cover in a panic as the hawks pick them off. Then ending right back where they started.

Victor Niederhoffer remarks:

You can't expect any market, even one with a six percent-a-year upward drift, to go up every day, especially after a series of maxima. The problem is that if you wait for just the truly high-Sharpe days, you'll miss the 10,000-fold-per-century rise.



We previously looked at the performance of five Bloomberg indexes of companies located in low tax states up until February 10, 2006.

We have now updated the study:

Bloomberg company indexes for low tax states (performance update)

State     PrevDate   PrevPrice  CurDate   CurPrice    PrcChg    PrcChg
——— ———- ———  ——–  ——–    ——    ——
Arizona    2/10/2006  529.92    5/7/2006  566.90       6.98%    19.14%
Nevada        N/A
North Caro 2/10/2006  127.56    5/7/2006  147.73      15.81%    19.14%
South Caro 2/10/2006  148.30    5/7/2006  162.23       9.39%    19.14%
Florida    2/10/2006  135.16    5/7/2006  144.51       6.92%    19.14%
Texas      2/10/2006  395.19    5/7/2006  465.81      17.87%    19.14%

The out performance we noted earlier has not continued in this most recent period. A result probably not inconsistent with natural variation. 

Steve Ellison adds:

Might I suggest the following ten stocks to represent Nevada?

        Market    Price     Price
       cap ($B) 2/10/2006 5/7/2007
MGM         18.3    38.58     63.71
HET         15.9    72.41     85.21
IGT         13.4    36.84     40.08
WYNN        10.1    59.50    101.85
STN          5.0    67.94     87.57
SRP          4.1    13.56     18.77
BYD          4.0    44.72     45.76
MDG          2.6    23.74     26.01
PNK          1.8    27.98     27.82
CDL          1.0    11.61      9.05

average             39.69     50.58

Change                        27.5%



 Insurance is sometimes mentioned in statistical books that contain a history of science chapter. A French-language stats book I keep handy mentions "Northampton lifetables" used by a life insurance company in 1763. The company employed statistician Richard Price. From the statistical point of view, the basis of how a life insurance company makes (or not!) money is quite well explained. I mention this since I often find that history of science is a didactic way (by returning to basics) of understanding concepts.

From the book:

Richard Price was also friendly with the mathematician Thomas Bayes. After Bayes's death in 1761, his relatives asked Price to examine his unpublished papers. Price realized their importance and submitted "An Essay Towards Solving a Problem in the Doctrine of Chances" to the Royal Society. In this work, Price, using the information provided by Bayes, introduced the idea of estimating the probability of an event from the frequency of its previous occurrences.

In 1765 Price was admitted to the Royal Society for his work on probability. He also began collecting information on life expectation and in May 1770 he wrote to the Royal Society about the proper method of calculating the values of contingent reversions. It is believed that this information drew attention to the inadequate calculations on which many insurance and benefit societies had recently been formed. 

Stefan Jovanovich extends:

Richard Price was also a founding member of the Unitarian Society. The Unitarians, for all of their intellectual influence, never succeeded in attracting many members. In the UK religious census of 1851 they were found to have 37,156 adherents while the total number of Christian church members of all denominations exceeded 6 million. The same census found that 42% of the population attended no church at all. Unlike Priestly (who preached the sermon at Price's funeral) and Bentham, Price never abandoned his lifelong belief in the divinity of Christ. That put him in the position of sharing neither the views of the Catholics, Anglicans or Non-Conformists (Wesleyan Methodists, Primitive Methodists, Quakers, Baptists, Unitarians, Congregationalists, and members of the Salvation Army) nor those of the majority view within his own minor sect. 

What I am trying to say is that Price stood apart — along with the Unitarians — in his belief that no particular ritual observance or doctrinal certainty was needed for one to be a Christian. At the same time he stood apart from his fellow Unitarians in believing that Jesus was divinely inspired by God and not merely a bright guy whose teachings should be followed. I could have put it much more simply: like his fellow Christian deist George Washington, Price was that rare creature who accepted all faiths and none without ever doubting his own. 



Just noticed that Detroit PMI came out today… Bad news for doomsters from an unexpected venue.

4/07   56.30
 3/07   54.20
 2/07   44.40
 1/07   43.20
12/06   47.40
11/06   51.30
10/06   46.20
 9/06   44.70



Hugo and Fidel whistling Some time ago I wrote that Venezuela bonds are overpriced. I still think that they are. There seems to be a bit of complacency in the world that communism is dead, and that Chavez just has a big mouth. Unfortunately, every incremental piece of information coming out of Venezuela suggests that Chavez is the real deal, and that he means what he says. He is on a more accelerated track than Mugabe was at this point in his reign.

What is going on right now is that Venezuela's dollar bonds have a provision that if Venezuela pulls out of the IMF, then they have defaulted, and bondholders can demand to be paid back. Certain bonds are trading below par, while others are trading well above par.

If the bondholders owning the bonds that are trading below par demand payment, it will be an interesting situation. If Chavez pays, the sub par holders are helped; the above par holders get creamed. The above par holders are likely going to lobby the US and Venezuela governments to see that the notes are not repaid.

At the same time, the US government might have its own interests, perhaps wanting a default judgment against Chavez in order to speed up his destruction of the country. In any event, one might want to look at going long the sub par bonds and short the above par bonds.



 I have a problem with this book, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.

It irritates me to no end that Richard Bookstaber made his money first at Salomon Brothers and then at a major hedge fund that goes out of its way to block hedge fund regulation of any form.

His career and fortune was made working at firms that use a lot of leverage and highly complex investment strategies to make money. And he was in charge of risk.

But now that he has become a long/short equity manager, a relatively simple strategy that does not require much leverage, he is saying leverage and complexity are bad things.

I find the whole thing a little disingenuous. Which is not to say the author does not make some valid observations.



 I was looking for bids to print some DVDs for my commodity trading course; tried the USA first, India second. They're cheaper in the USA, even before shipping! I would try China, but I'm concerned about quality control.

Nigel Davies adds:

I'd also be concerned about their making extra copies and selling them off on the cheap. This happened with one very nice Italian-Russian chess production which found its way into the suitcases of Russian chess players when they went to tournaments. You couldn't tell it from the real thing because it was the real thing — just half price or less. And when the Italian partner realised they couldn't sell many of the official copies they finally twigged what was happening. And not much chance of joy in the Russian courts… 

Barry Quigley remarks:

A friend of mine outside the US has a very successful little business duplicating and printing CDs and DVDs. I tried the exact same business model in the US and could not compete. Competition was unbelievable. Only the biggest mass-producing companies can pay for advertising, charge the lowest prices, and still make a profit. I also suspect quality control in the US is the best. 



 Rather than watch the paint dry on my screens, I am going to burn some calories at the gym, and return to watch the post-FOMC spasm. I'm sharing this seemingly pointless anecdote as a roundabout segue into my Fed meeting thoughts.

Like countless other bond geeks, I went over the last meeting's statement with a highlighter and pencil, ticking off the key Talmudic phrases.

I can see no reason they can't reissue identical wording this time around. Naturally, any change will be hyper-scrutinized, and there's always the possibility they'll be panicked/stampeded by the overwhelming doomsterism in the media.

But we get two more rounds of inflation data, and another jobs print, before the end-of-June two-day Fed confab, plus another round of data before the July Bernanke testimony on Capitol Hill.

Today, there's certainly no reason for them to do or say anything other than "adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

John Floyd adds:

Of the economic data released in the last month, eight indicators have been below consensus expectations, eight have been above expectations, and the rest have been on expectations. Financial market indicators such as stocks, the dollar, and spreads have been stimulating.

Since the last meeting on March 21, March 08 Eurodollars have moved from a 4.600 yield to 4.915 yield (this is just price change, doesn't include curve roll-down). Some subtle shifts in the growth and inflation tradeoff, but given the differences in Greenspan's and Bernanke's approaches, I would concur the probability of any changes seems low.

James Tar remarks:

Early in the tenure of the current Fed Chair, I was critical of his public discussion of inflation, interest rates, the dollar and the economy. And we all know of his gaffe with CNBC's poster girl.

Over the course of the last 12 months, I have become an adoring fan. Not once has he made a mistake in discussions and forecasts regarding the overall progress of the economy. He has not been wrong. Not once.

What we should all pay attention to in today's statement is the Fed's forecast for a continuation and recycling of strength in economic activity in the later part of this year. If GDP progress is going to continue, corporate profits can only go much further beyond present market expectations.



A friend recently sent me this article from the WSJ that attributes the rise of the markets to reduced stock supply. I have never liked this explanation, or the flow of funds ideas originated by the totally ignorant Henry Kaufman. If there is a rate of return involved, then demand will be infinite if it is too high, or will be zero if it is too low.

 I think one reason that stocks have been so bullish since 2003, over and above the earnings yield differential, et. al. is a variation of the regression effect (the real one as limned by Steve Stigler ). When stocks move there is always a random component to the move over and above the true golden mean. When stocks go down, the random component — the luck component — is on average negative, and people get unduly negative and pessimistic because of this and start delta hedging and long shorting and buying bonds.

People can point to how they would have actually done better in a period such as 2000-2002 using this strategy than they would have if they had been strictly buy and hold, and useful idiots such as Mr. Dow 5000, or the weekly columnist, or the libertarian prudent, or the ghost come forward to say that they see weaknesses in the economy, or the weather.

Retrospectively it fits in with the random component. This raises the required rate of return over and above the 50% a year i.p.o. return that underwriters foist on the companies they bring public, and it raises all other boats along with the normal drift, and the random component of the previous move that caused the excessive pessimism … and everything gives way to normality.



Mercantilism is a cancer of the mind.

9 May 2007

Editor, Washington Post
1150 15th St., NW
Washington, DC 20071

Dear Editor:

Robert Samuelson argues that free trade benefits Americans only when foreign governments practice free trade ("China's Trade Time Bomb," May 9). Not so. The case for free trade rests on the recognition that prosperity is enhanced by permitting consumers to spend their money as they choose. When foreign firms are subsidized, those subsidies (while they hurt foreign taxpayers and foreign economies) benefit American consumers and the American economy just as surely as when the attractive prices and qualities of foreign products result from foreign-producers' comparative advantage.

Sincerely, Donald J. Boudreaux Chairman, Department of Economics George Mason University



 There are four books I am reading now belong on the all-time essential reading list: Thedwick, the Big-Hearted
, by Dr. Seuss;
and Noble House, and Tai-Pan, by James Clavell (and I would recommend Martha Enright's article on them in The New Individualist of May 2007 as one of the best reviews of the businessman as hero ever); and PJ O'Rourke's, The Wealth of Nations. They belong with Monte Walsh, Atlas Shrugged, Larry Harris's, Trading, and Dimson, Marsch, and Staunton, and a good Damodorian book, a good statistics book, a good book on finite algebra, and Heyne, The Economic Way Of Thinking, and yes, one or two of mine as the best backdrop for a successful career in speculation.



James StockdaleThis paradox is named after Admiral Jim Stockdale who was the highest ranking US military officer imprisoned in Vietnam. He was held in the Hanoi Hilton and repeatedly tortured over eight years. The "paradox" lies in the way that he managed to survive where others perished.

"I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade."

Asked: "Who didn't make it out?"

"The optimists. They were the ones who said we're going to be out by Christmas. And, Christmas would come and Christmas would go. Then they'd say, We're going to be out by Easter. And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. Then they died of a broken heart.

"You must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be." 

Kim Zussman adds: 

This recalls Viktor Frankl's "Man's Search for Meaning", in which he describes Nazi concentration camp survivors and those who didn't. He was surprised that big, tough guys were usually among the first to go. The psychiatrist learned to function as a physician at the camp, and managed to avoid despair by remaining mentally active. The book he wrote had been destroyed, so he re-wrote it mentally and memorized it giving him an important goal to publish when it was all over.

How much does mental toughness correlates with volition and how much with genes, and to what extent you can improve it? Suffice it to say you can't choose your parents.

From Stefan Jovanovich:

To equate survival in a prison camp with "mental toughness" is to indulge in what the surviving Japanese military leaders of WW II came to describe as "victory disease". You assume that a happy result says something about your intrinsic superiority as a human being when it doesn't. Neither Lance Sijan nor Eric Liddell survived their imprisonments, yet dozens of the survivors from their camps have said that they owe their lives to the help and example of the bravest men they ever knew.

I know Frankl's book was immensely popular when it was published and still remains one of the bibles of secular humanism; but I find it chilling in its narcissism. When I did some minimal research on Frankl's own life, I found it odd that that there was no one from the camps who praised Frankl for what he had done for the other survivors. I would have expected that from Theresienstadt, of all places, there would have been at least one testimonial - given its importance as the Nazi's show camp.

Joseph Fabry, the person best known in America as a "fellow survivor" with Frankl, was held briefly in a detention camp in Belgium, but was never in Austria or Germany with Frankl himself. (If anyone on the List knows of any testimony from others who were in Auschwitz and Turkheim with Frankl, I would appreciate the reference or link.) The only survivor commentaries I have found that could relate to Frankl are the comments made about the Jewish camp doctors. Sadly, those affirm that most of the doctors, like the Sonderkommando, put their energies into working the system for their own survival, not into the care of their patients.

I don't imply that those general comments apply to Frankl, and I lack the necessary chutzpah to judge anyone who was ever imprisoned for more than an evening in the drunk tank. What I can say, without embarrassment, is that I wish that Frankl's desire to find profound meaning in his own random survival had not encouraged the temptation to rank others as somehow inferior just because, like Frankl's own wife, father and mother, they were given different numbers in the Nazi's insane lottery.

What Kim Zussman did not quote were Admiral Stockdale's many remarks about those - like Admiral Alvarez - who never gave up. They, like Stockdale himself, were the ones who always did their best to help and encourage others.

Nigel Davies adds:

I don't know anything about surviving prison camps but this did strike a chord with me vis-à-vis chess players. I've met lots of players who are perpetually optimistic and this shows in every decision that they make. One very noticeable facet is that they tend to be very poor at defending inferior positions, showing a tendency to lash out. In one case I've known the parents too, and they weren't optimistic at all.

This made me wonder about the value of 'state of mind' in survival. A direct application would be to draw up a matrix of returns during the last 100 years applying 1-10 times leverage in stocks. I hypothesize that mild optimism may be an advantage, but with a rapid falling off of efficacy in higher doses.

Admittedly this would be very tricky to do 'realistically', for one thing there are not many 100+-year-old stock investors around and for another margin requirements will have varied considerably. But it might nonetheless be interesting to know that just how optimistic one might be in order to still triumph.

Kim Zussman remarks:

Martin Seligman wrote about "learned optimism" (as opposed to the inherited kind, which is much easier to acquire). In scientific trading, there is "optimistic learning" (OL).

OL is a variation of the scientific method whereby you open trades during the day's churn based on gut, then go back at night and do enough statistical studies to find at least two in support your position. Then you share these studies with at least two friends, who for social reasons don't debate your conclusion, and you are fully prepared for tomorrow's shellacking. 



It occurred to me the other day (and probably years ago to those more astute than I) that the broad shift of assets into ETFs has the second-order effect of raising demand for stocks. An investor thinks $1 in a mutual fund is "the same" as $1 in an ETF. But in fact the ETF is (by definition) fully invested, whereas the fund might be 5% in cash (because of liquidity needs, or just because the spirit so moved the fund manager).

Something like $300-400b of new money has flowed into EFTs since the 2002 market bottom; 5% of that is $15-20billion of marginal extra buying, equivalent to buying all of SUNW.

From Yishen Kuik:

As a tangential point, daily shares traded on the NYSE Group have doubled from about 1E9 in the 1st week of 2000 to about 2E9 today. During this period, the SPX has been largely unchanged, the NYSE Comp (new method) has gone from 7000 to 9400.

As an aside, I assume all trades on crossing networks show up as prints on T&S and thus are captured by metrics such as NYSE Daily Shares Traded. If someone knows better, I would love to be educated.



 A seeker of knowledge inquires:

Q: Can you give me a good layman's term "working" definition of R squared? Questions that pop up are why is it important? What does it reflect? Is it predictive?

A: R Squared is simply the square of the correlation coefficient. As most will recall the correlation coefficient can range from +1 for a strong positive correlation to -1 for a strongly negative relationship between two variables. Two variables which are unrelated will usually have a correlation around zero.

So when we square the correlation coefficient we get a number between 0 and +1. Remember that the negative correlations become positive so there are no more negative numbers. We also almost always get a smaller absolute number because multiplying two numbers less than 1 always gives a small number (except for zero and 1).

There is another interpretation. The R^2 also generally associated with a regression model (but need not be). The R^2 can be thought of as representing the percent of variance which is explained by the model. Mathematically things are linear in the variance but not in the square roots such as the standard deviation and correlation. So we can decompose the total variance of a regression into the part that is explained by the model and the part that is unexplained (the error or residual variance). The three relationships are:

Total variance  =  Explained Variance  +  Unexplained variance
    100%       =        R^2           +       (1 - R^2)
Total SSq       =  Explained SSq       +  Unexplained SSq

In the last line the term SSq means the Sum of Squares. The sum of squares relationship simply comes about because the variance is simply the average sum of squares. The bottom line is that if you have an R^2 of 25% you know that it explains 25% of the variance in the variable you wish to predict. You also know that the correlation coefficient is +/-50% because .5 * .5 = .25. Conversely if you know that a correlation coefficient is 90% then you know the R Squared will be 81%.

From just the R Squared you do not know if the correlation is positive or negative however. For that you have to look at the beta coefficient of the regression which tells you which sign to choose for the correlation coefficient. 

Yishen Kuik adds:

I've found an intuitive interpretation of correlation coefficient (R) to be a measure of how in phase two datastreams are.

For two dataseries X and Y:

R = (sum of Zx * Zy)/(N-1), where Zx is the z-normalized series X and Zy is same for Y

Hence, the more the below-mean datapoints in X and Y coincide, the greater the value in the numerator, since the product of two negative Z scores is positive. The corollary is that above-mean datapoints will also coincide, and since the sumproduct of two positive numbers is also positive, also contributes to a larger numerator.

Hence I think of this coincidence of above/below mean datapoints as in phase.



Foreclosure Filings Take Double-Digit Drop in April

Foreclosures filings dropped significantly across the country last month. Just under 100,000 pre-foreclosures and notices of pending foreclosure auctions were filed nationwide in April, down 14.3 percent from the almost 115,700 filings in the previous month, according to the latest numbers from, a California-based real estate investment advisory firm and publisher of foreclosure and property information.

Another nearly 40,000 properties were taken back by lenders-known as REO or bank-owned real estate filings-in April, also down 14 percent from March numbers. 

Charles Kin replies:

An article in American Banker indicated some large lenders, particularly Washington Mutual, are taking steps to allow some problem borrowers to refinance into traditional fixed-rate loans, and are open to negotiating a 1-2 month payment holiday, depending on the equity situation of the borrower.

Note that Freddie Mac (which is now sporting a larger balance sheet than Fannie Mae ) has indicated increased capacity to purchase loans at the lower end of the FICO/LTV spectrum. 



 I can only speak for myself, but I take my life very seriously, and I have a lot of fun (which I take seriously).

For many people, work is their life, but not me. I work to have a life, specifically, the life I want.

I figured out a long time ago that I didn't want to be one of those guys who goes to work at 8 am and leaves at 5 pm (I was lucky). As a matter of fact, I don't think I could be happy being one of those guys. Now don't get me wrong; I have nothing but respect for those that do, and I have employees that work those hours. I just know that I'm not wired that way.

I knew I wanted to have a great life, full of fun, adventure and enjoyment, but I also knew that needed to have some way of earning a living to afford the lifestyle that I decided I was going to have. One of the criteria I set was that whatever I did, it was going to have to be fun.

I think of my business as fun. I think of the trading that I do as fun. Sure I get frustrated and I don't really enjoy the losses (even though they are great learning experiences), but all in all, it's fun.

But I arranged my business so that it's fun. So I arranged to do the kind of trading that met my criteria of "fun". Sure, there are times that I get frustrated, but all in all, I'm having fun.

I have a buddy who runs a firm similar to mine in Jackson Mississippi and we talk on a regular basis. We have been a good sounding board for each other, especially when we're frustrated. He said something to me one time that has become the mantra that we repeat to each other whenever we're frustrated. It goes: "No matter how frustrated or aggravated we get, remember, where else can a couple of guys like us go and earn ballplayer money?"

That about sums it up.

If you want a good life, then create that life. If you're not having fun, then change your attitude or rearrange your life to create the life you want.

Remember, you have created the exact life that you wanted (whether you realize it or not). And it's possible to change it. Believe me, I know!

Remember this: Life is too beautiful and too short to waste any time not having the maximum amount of joy possible.

There is a "fun" version of E=MC2. It's J=AM2.

J = Joy
A = Attitude
M = Mental state of mind (the things you choose to believe).

The amount of joy or unhappiness in your life is on a log scale. Your Joy increases or decreases exponentially with the your state of mind, belief system, and attitude squared!

The rich get richer The poorer get poorer happy people always seem to get more and more happiness in their life. Sad people always seem to attract calamity after calamity.

If you want to really know what your core values are, your core attitude, take some time and pay close attention to the kind of things you attract into your life.

But I warn you, don't take that challenge if you are the kind of person who is unwilling to face the reality of what you may find.



 Einstein's groundbreaking theory has been proven in so many instances that I thought it would be interesting, in my very limited way, to try to adapt the theory to trading in the markets. It is my intent to change the name of the variables in the famous equation, E=mc2, into known trading variables and see if there is any possibility to there being constants in the world of trading. And I feel this would allow me to understand how to manipulate my collected data in order to achieve better results.

If E = energy (the amount of work a physical system can do on another), m = mass (the invariant mass is an observer-independent quantity that is synonymous with mass), and c = speed of light, where c is the constant. Speed of light is the absolute in this formula, and nothing that I am aware of can reach this speed.

A consequence of the theory of relativity is the inevitable relation between energy and mass. Mass and energy are equivalent, or one will affect the other (although a relatively small amount of mass is equivalent to a large amount of energy, I do not say that they are equal in volume, only in affect).

As energy is exuded to increase the speed of anything, the mass of that object is increased, making it more difficult for further speed increases, or a continuation of the same speed. This, in turn, disables any further mass/energy accumulation and, in all probability, the very essence of this state is that the event will lose energy/mass. It is my understanding that everything in the measured universe, from the macro to the micro levels, is in a constant state of progression or regression, never stagnation. Therefore, as regression is experienced the ability to attract more mass/energy is enhanced and the cycle starts all over again.

As my goal is to draw comparisons of the energy/mass equation to the trading world, with what variables can I substitute E=mc2? Perhaps trading volume and forward propulsion of price is equal in influence, or one propagates the other. For instance, as forward propulsion of a particular price direction increases, trading volume should increase. And this should make it harder for the market to experience an increase in perpetual forward propulsion.

If this is true then the market should experience exhaustion phases which, in turn, should lose some trading volume and forward propulsion. The expected weeding out the weak is now experienced. These exhaustion phases should immediately (time is relative, however) attract trading volume from the more astute traders, which then sets in motion the forward propulsion again. This would offer an explanation of how it is possible that the stock market has experienced overwhelming bullish forward propulsion coupled with momentary exhaustion phases throughout the last century.

If trading volume and forward propulsion of price can be equaled to the "e" and the "m" of the Einstein equation, then what can I use for the absolute, or the constant, in the trading equation? Some possibilities are as follows:

1. Time values are always the same (i.e. seconds, minutes, hours, days, etc.) Depending on what type of trader one is, the time value needs to remain constant to see continuities. Hence, different values of time series analysis. 2. Price increments or values. For instance, the minimum tick move for t-bonds is 1/32 and this never changes. For some futures contracts there are limits to how much that market is allowed to move in one day, three. For every seller there is a buyer, and the slew of possible definitions of this statement, just as long as it remains constant.

The most important absolute variable that any trader can plug into this formula totally depends on the type of data that they collect. The three examples I offer above are very elementary and subject to manipulation. There are, I am most sure, a high amount of possible "absolutes" that other traders will find more important to them, which is to be expected.

Although this idea is far from complete, I look forward to testing this hypothesis and I thank the readers for allowing me to use them as a sounding board in my never-ending search for understanding of how the markets work.

Larry Williams adds: 

(E)motion in trading = (m)argin calls X number of (c)ontracts squared.



 There is a point of view out there that the best performance comes when you're having fun. In my lifetime I have played in more than 10,000 refereed squash matches, and won at least 50 national tournaments, and I never had fun in any of my matches. When I tried to have fun, it was disastrous, and I shudder at what a horse's ass I was on those occasions.

To someone who's a serious competitor, the idea of having fun in a tournament is ridiculous. There's so much work, and so many better athletes that you have to beat. So many officials working to do you in, and so much equipment to properly deploy. So much practice and preparation before and during the event. You might think that this is a matter of individual differences or different sports, and I grant that there are some so great that they can soar so high and so much better that it's possible for them to have fun.

I believe that Sharif Khan and Hashim Khan had fun when they beat me, but they didn't have that much fun when I beat them, on those much too rare occasions.

I do know it's totally wrong to try to have fun in the market — it's much too hard, and there are no naturals. The cycles are always changing.

One of the best things I've done in my operation is to make sure that no one has fun in my office. Every now and then, I catch someone who doesn't get the joke, and I upbraid them. 

I try to suppress all exuberance, and when I hear of some former trader who loves to have fun by trading I know he's a straw man waiting to be exposed, and I only wish I could short his fund. Normally I wouldn't comment on a subject like this but I am sure that all frivolity should forever be knoced out of the speculative arena, especially when even an iota of other people's money is involved. They should have their own fun with money you make for them through serious and scholarly discipline and improvement, with no fun whatsover.

Charles Pennington adds: 

I don't know whether he considered himself to be having fun, but I remember a quote from Rod Laver in which he said that he would just swing for his big shots until they started landing in. If they didn't, then he would lose. I guess he knew that losing when you're having a bad day was inevitable when you're playing at the top of the game.

Regardless, I remember that he was my favorite player to watch when I was a kid. It's difficult to find footage of those old matches now, except for a few minutes of a match with Borg in 1977. Laver is past his prime, but he's definitely holding his own with Borg. His modest height of 5'8'' makes the court look like a football field. Notice the beautiful drop shots he makes, even from near the baseline, which are so startling when mixed among his blasting drives. 

From Alan Millhone:

Your remarks carry over into competitive checkers with ease and are sound advice. When you play in a competitive tournament you had better be focused 100% or get crushed by your opponent. I have not had the proper time to devote to serious study for some time and my game has suffered accordingly. You have to spend time preparing for any tournament. The better players have obviously prepared with diligence.

Our World's 3-Move Champion, Mr. Alexander Moiseyev has often said that he is wary when making a move as his opponent (regardless of their strength) can make any reply move, and their reply may be a very good move. He is watchful in every game regardless if he is playing one of the top players or an average player as myself. You might play 'skittle' checkers at a party for fun on occasion, but in a tournament leave the fun outside of the playing room or suffer the consequences .

" Knowledge is power" in the market, checkers, chess, or any athletic event.

From Russell Sears:

At least in marathoning nobody comes to the line and expects to "have fun." The fans don't say, "look at how much fun he is having out there." The best they used to say of me was "he doesn't even look like he is trying." But believe me I was "trying." It's funny now that I am older, and much slower, they don't say that any more.

It's good to hear from Vic, that it's only the weekend warriors that think it's all about fun even for the serious competitor. The fun is left for after the finish. Or as the old country song goes, "time enough for counting, when the dealings done."

Nigel Davies writes: 

I think there must be a difference between how a games player or sportsman defines 'fun' and how the average person on the street does so.

Steve Leslie adds: 

Here is a profound clarification of fun that is so on the mark from my perspective.

I heard tournament poker pro Amir Fahidi say "If you are not willing to die you cannot live."

George Patton said, "Compared to war, all acts of human endeavor pale in comparison." In the movie Patton there is a dialogue between Omar Bradley played by Karl Malden and George C. Scott as Patton.

Bradley: "You know the difference between you and me George? I do this because it is my job. You do it because you love it."

Upon reflection Patton remarks: "God help me I do love it so."

From Alfonso Sammassimo:

Playing a tournament match with the aim of having fun has only occasionally entered my mind since junior days, simply because it has always been such a costly attitude to take onto the court. In particular I recall matches where I subtly tried to imitate players whose styles I admired and envied, especially when I had only recently watched them, and how badly it affected the score for me, cost me more matches than I can count.

I recently had my first competitive match (our annual club championships) in a while after a shoulder injury, meeting up in the second round against an older fellow who used to tour our satellite circuit and played a for a few years as a pro. He had been playing club matches for months and was in sharp form, typical Australian grass style player. I was very fit going into the match but hadn't played much, and my plan was to just enjoy myself. But after realizing my range was way out and seeing that the guy couldn't hit three high forehands in a row I decided to turn the match into a hack-fest, the only game plan I was capable of executing well on the day.

Fortunately fitness and concentration won the day for me, and as ugly as the game was it satisfying to win knowing that I managed to change plan, use my available strengths to make him push himself to hurt me - no fun involved until shaking hands.

The tournament player walks onto the court to win, and it's no fun losing no matter how fancy you looked - the fun is in the prize. With so many things that need to be done in consecutive matches to win a tournament and the concentration that is required, there is no room to think of enjoying it. My P&L tends to suffer the same fate when I trade for fun or try to get fancy, not playing the game that feels most natural to me. And I have more recently been prone to some imitation of market players, but that hasn't hurt me much.

From Stefan Jovanovich:

What poker has to do with either running or baseball, I have no idea. I do know that Don Schlitz wrote "The Gambler" in 1976, and Kenny Rogers' recording of it was a hit in 1978. As "old" wisdom, that is bit on the short side even for the more synthetic products of Nashville. I will defer to one of the many poker experts like SL to comment on whether players at the table count. My amateur observation tells me that they can tell you the history of every chip they have in the stacks in front of them.

Those of us whose sporting careers were limited to the John Kruk school of athletics ("M'am, I'm not an athlete; I am a ball player") have no way of understanding what Russell Sears knows as a marathon runner. We are even more puzzled by why he is so moved to anger when told that fun is a necessary part of baseball. Baseball is a game that you can only play well after 10 years of daily practice, study and good teaching. The first time a player gets to the major leagues he fails - either mostly or completely. (Tim Lincecum's debut yesterday with the Giants was a "mostly" so he may, in fact, be the next "pheenom".)

If, thereafter, you are hard working and talented and lucky enough to stick at the major league level, you get to fail only 3 out of every 4 tries. If you are that 1 in a million player whom God has truly blessed, you fail only 2 out of 3 tries instead. Precisely because it mostly about failure, baseball has one cardinal rule: you never "show the other guy up". If you do, the guy standing 60 feet 6 inches away holding a rock-hard ball has the right to aim it for your ribs instead of the inside corner; and even the players on your own team will think you had it coming. What almost all baseball players share, whatever their degree of success, is the capacity to find joy in its daily grind of failure and humor even in its worst moments of humiliation.

Rodger Bastien writes:

Have fun all of the time? Ha!! I think the struggle to excel is universal, in any sport. The idea that it's more "fun" in baseball or that the struggle is less is to me absurd. However, I would give anything to be able to enjoy that struggle again! 

Russell Sears adds: 

Perhaps there is an element of frustration, in what I wrote. The original reply was not meant in anger, but from a Spartan spirit. Nigel said it much better.

Age has forced me to run marathons for "fun" and feel many of the same sentiments Nigel expressed. However, unlike Nigel, my game suffers no matter the discipline I bring to it. But discipline can be exhilarating, even in defeat. Discipline can make the game fun.

Nigel Davies adds:

After some further thought I think I know exactly what the fun is in competitive sports (and trading) if you play for blood. It's the intensity of the experience which is completely off the spectrum of those we have in 'normal life'.

A chess game in which one puts everything in can lead one to feel either great highs or great lows, but always the feeling that one is more intensely alive because of the rich tapestry of emotions. Strong players will also tend to have feelings of pride and self-worth linked to good performance, and not necessarily to favorable outcomes, though the two tend to run side by side.

Those who can't bring themselves to play with much intensity are those I'd describe as dabblers. And they'll never be much good because they won't be able to fire on all cylinders.

Rodger Bastien adds:

My intent wasn't to diminish Mr. Jovanovich's knowledge or opinion pertaining to baseball as much as to respectfully disagree with the idea there are absolutes unique to baseball, especially regarding that difficult period at the beginning of a major league career.

I suspect that the first year in any sport at the major league level is especially daunting. The NBA is a prime example where the first or second year is often a year of learning. I'm convinced that these elite athletes do such a good job of making it look easy that we mere mortals can't begin to understand how gifted they are. When we relate our experience playing the game to the game they play at that level it is truly comparing apples to oranges, their game being that much more difficult.

That all said, I have always enjoyed Mr. J.'s musings and am partial to anyone who loves baseball and respectful to their opinions of it as it certainly is expressed from the viewpoint of greatest affection. Now Vic, I am still trying to figure out how you achieved such great success in the racquet sports without indulging yourself in a modicum of fun! Is it that to label it as fun is to infer a lack of seriousness? I know that at the moment of my most outstanding athletic achievement the almost orgiastic release would be defined in many ways, fun being nearing the top of the list.

Stefan Jovanovich replies:

Rodger: I think you are right. I was going to offer pitcher's WHIP stats as an example of baseball's uniquely absolute level of failure and compare that to the number of unforced errors in a tennis match. But, when I looked at the statistics for matches between professional players at the same level of excellence as the best major league hitters and pitchers (the top 25), their ratios of points won on service games vs. double-faults, unforced errors and winners by their opponents were roughly the same - 1 in 3 or 4. I am afraid that I got mesmerized by my memories of looking at the game through a mask and the joys of doing something well, at least at the orange level. 



Overcrowding, adaptation, supply and demand, and many other interesting points are present in this one article.



Severe traumatic events seem to have durable physical effects on brain, according to a recent imaging study.

In no way is the trauma from 9/11 studied in this paper comparable to market mishaps. But it is tempting to speculate about similar mechanisms following events (such as 10/87, 2000-2002, and 2/27/2007), and possible durable effects on investor psyche that play out subsequently. 

From Vincent Andres:

This reminds me about somebody speaking from the market before and after the last traders active in 1929 (ie traumatised in 1929) had disappeared, and positing that the market was not the same. (Of course there could be many other reasons.) The sum of all coincident individual trauma/psyche is certainly a big part of markets mistress's own trauma/psyche. 

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