While bonds rally on the subprime mess, one should note the historical tendency for the SOX index to be a leading indicator. A modern day blast furnace index!



 Nature.com Published online: 13 July 2007

China had more wars in cold weather
Reduced agricultural productivity seems to trigger armed conflict.

Between 1000 and 1911, there were 899 wars in eastern China, where most of the country's food is grown. Zhang's team classified each decade as a time of either very high (more than 30 wars), high (15-30 wars), or low (less than 15 wars) conflict.

Over the same period, climate data for the Northern Hemisphere show six major cycles of warm and cold phases. Crop and livestock production dropped significantly during the cold phases.

All four decades of very high conflict, and most periods of high conflict, coincided with cold phases, they found.



Mugabe's price cuts bring cheap TVs today, new crisis tomorrow

Chris McGreal in Harare Monday July 16, 2007

Zimbabweans are shopping like there's no tomorrow. With police patrolling the aisles of Harare's electrical shops to enforce massive government-ordered price cuts, the widescreen TVs were the first things to go, for as little as GBP20. Across the country, shoes, clothes, toiletries and different kinds of food were all swept from the shelves as a nation with the world's fastest shrinking economy gorged itself on one last spending spree.

President Robert Mugabe's order that all shop prices be cut by at least half, and sometimes several times more, has forced stores to open to hordes of customers waving thick blocks of money given new value by the price cuts. The police and groups of ruling party supporters could be seen leading the charge for a bargain.



The federal tax on each cigar could rise from 5 cents to $10
Published July 17, 2007

It's no mathematical error: The federal government has proposed raising taxes on premium cigars, the kind Newman's family has been rolling for decades in Ybor City, by as much as 20,000 percent.

As part of an increase in tobacco taxes designed to pay for children's health insurance, the nickel-per-cigar tax that has ruled the industry could rise to as much as $10 per cigar.

Now they are trying to take my cigars away! The maximum tax of $10 would destroy most of the manufacturers who rely on relatively high volume sales of $5-$10 cigars. Some good friends of mine will be instantly out of business.

The high-end Fuentes (Opus-X, Forbidden-X, God of Fire, and the Ashton VSG and ESG Lines), Padrons, Davidoffs, and, of course, the $500 Ghurka stick dipped in billion year old cognac, will not be as adversely effected.

A consequence of the higher tax will be even greater demand for the finest Havanas, which would mean everything you buy in Mexico and Canada will be either fake or seconds (lower quality cigars). London, Spain, Switzerland and Dubai are the best in that arena. 

Ryan Carlson muses:

Can cigar smokers tell different brands apart?

Recreational smokers (a few cigars/month) probably couldn't distinguish between most brands but they can definitely tell the difference between a good or bad cigar. There is a large difference in the strength of brands so perhaps that'd be a better reference point.

I have a few favorites and could probably pick them out of a large selection but try not to go beyond a few brands, so I'd be clueless on the rest. 

David Hillman explains:

 I don't know of anyone who can tell brands apart blind, even experts. Cigars are rated in blind tests; the properties are evaluated, just like wine, but that's merely subjective. They're also like wine in that they're made of tobacco of different vintages, from different origins, often blended, and though manufacturers attempt to maintain some consistency, there can be substantial variation, even from cigar to cigar within a box. The proliferation of seed worldwide, such as Honduran tobacco grown from Cuban seed, and variations in aging make the task more difficult as well.

For instance, one of my favorites, Perdomo's La Tradicion Cabinet Series, is constructed of Cuban-seed fillers grown in the Dominican Republic, Honduras, and Nicaragua, with an Ecuadorian binder and wrappers from Connecticut. Their milder line, Tobaccos San Jose, uses a blend of fillers from the Dominican Republic, Honduras, Nicaragua, and Brazil, binders from the Dominican Republic and Connecticut wrappers. The bolder Dos Rios line is primarily Nicaraguan filler with some Dominican Republic tobacco as well, the binder is Nicaraguan, the wrappers Ecuadorian. There are sub-series within the Cabinet Series, as well as the limited Champagne sub-sub-editions, so there's great variation within brands, too.

Moreover, cigars can/will acquire aromas and tastes of those they're next to in the humidor, so it's important to separate them from one another. Also, as with wine, good cigars improve over time, becoming smoother, more flavorful and complex with age if stored properly. I believe it might possible to tell a frequently smoked cigar with a reasonable consistency apart from others in the blind. I'm nowhere near good enough and don't smoke enough to with regularity, but I might have a better chance than the average Swisher Sweets smoker of batting, let's say, 2%. On the other hand, expert Grade seven rollers and master blenders are certainly capable of carefully examining a cigar and determining the type of tobacco used and its origin — is it a Cuban Cohiba or a Nicaraguan El Fako?

A novice wanting a good, reasonably priced smoke might sample a Monte Cristo #3, the Perdomo La Tradicion Cabinet Series R Champagne Robusto, or the La Flor Dominicana #100 (Tubo), all about $8.00 per. There are many others, these are simply a few that suit me.

All this talk of puros has gotten me fired up, but one last thing in this regard before I head out to the deck to chomp on one of the said Tubo #100s: It would be wise to refrain from entering into a high-stakes blind cigar tasting with a certain former world leader (whom I revere for his ingenuity in tobbaconistic matters). He may very well have found a sure-fire way to gain an advantage in distinguishing his 'brand' from all others in a blind taste test.

Aaron Krizik responds:

A lot of parallels can be drawn to oenology. I am highly confident I can tell the difference between branded cigars from Nicaragua vs. the Dominican Republic and certainly Cuba, but I doubt I could tell the difference between 10 randomly selected Cubans. It's easy to tell the difference between a Merlot and a Cabernet Sauvignon, but 10 randomly selected Merlots would be a challenge for most wine drinkers.

A Nicaraguan cigar like a Padron is just completely different from an Ashton with Dominican filler and a gorgeous "shade" wrapper from Connecticut. I could easily tell the difference between the two — or any other cigar I regularly smoke. Tobacco from Esteli, Nicaragua is simply very different from Vuelta Abajo tobacco from Cuba.

Larry Williams remarks:

With appologies to Guy Clark

Too much smoking gives you cancer
Too much cocaine's not the answer

Too much invested just on margin
Too many lawyers come in chargin'

 Mike Desaulniers extends:

I got back from two weeks in the motherland on Sunday. Caught some excellent weather in Vancouver, and not one local offered me any BC smoking material. My record for unsolicited offers walking through Washington Square Park in New York (granted, on the diagonal) was five.

There were huge displays of patriotism on Canada Day, more than I ever remember on previous visits. Everyone in the West End (downtown residential) had flags out windows. I saw more than one group walking on Robson St. shopping district, singing Oh Canada. It was quite striking. The Canadian dollar's rally must be going to their heads, eh?



 A few weeks ago my wife and I took a day trip to Shipshewana, an Amish community in northern Indiana specializing in agribusiness and tourism. Along the drive there I noticed many fields with monstrously large portable/movable irrigation spraying systems. Some of them were in operation, spraying water in mass quantities on crops. The fields using this method were nice and green. Those that weren't were stunted.

The corn crops we drove past had their uppermost leaves pointing straight up, which is a sign the corn needs water. We saw "tasseling" but few ears of corn on the stalks. We had heard some farmers are getting ready to plow under their existing crops and wait it out until next year, but didn't see any evidence of this yet. My drive to work takes me through about 20 miles of farmland, so it'll be easy to see this happen.. if it does.

Scott Brooks explains:

It's when corn is tassling that rain is most critical. When corn tassles is a largely a function of when it was planted. The amount of rain it gets in the pre-tassling stage also plays a role in when it will tassle, but not as much as when it was planted. Tassling occurs most often in July. 



 Every night after the U.S. markets close I get the tube out of the London Square Mile, to my home in London’s West Side. The problem is that there are four alternate destinations and if you are not lucky enough to get your correct tube, then it’s usually better to get off and get the bus half way to your destination, then mess around with some untidy station changes.

The bus I get comes every 10 minutes, and for the last three weeks, I have been in constant draw-down. I get off the tube and every bus but mine comes past, with my number 22 finally showing up on or about the 10 minute mark. But I knew it! This is a numbers game! The longer I stick at it, the more chance I'll hit pay day. And finally it happened. Last night as I strolled up the escalators and crossed the street, the 22 pulled up at the bus stop. After three whole weeks of pain there was my savior; there couldn’t have been a quicker transition.

Good things await those who are prepared to stay in the market.



 I read a fascinating article on the BBC website about a self-learning, dynamic robot, which has been built around the theories of Nikolai Bernstein; the main concept could very well be part of a trading system (though I hate that "trading system" name!).

Runbot can adapt to changes in the terrain!

Roboticists are using the lessons of a 1930s human physiologist to build the world's fastest walking robot. RunBot is a self-learning, dynamic robot, which has been built around the theories of Nikolai Bernstein. (…) Bernstein said that animal movement was not under the total control of the brain but rather, "local circuits" did most of the command and control work. The brain was involved in the process of walking, he said, only when the understood parameters were altered, such as moving from one type of terrain to another, or dealing with uneven surfaces.

The basic walking steps of RunBot, which has been built by scientists co-operating across Europe, are controlled by reflex information received by peripheral sensors on the joints and feet of the robot, as well as an accelerometer which monitors the pitch of the machine. These sensors pass data on to local neural loops - the equivalent of local circuits - which analyse the information and make adjustments to the gait of the robot in real time.

Information from sensors is constantly created by the interaction of the robot with the terrain so that RunBot can adjust its step if there is a change in the environment. As the robot takes each step, control circuits ensure that the joints are not overstretched and that the next step begins. But if the robot encounters an obstacle, or a dramatic change in the terrain, such as a slope, then the higher level functions of the robot - the learning circuitries - are used.

About half of the time during a gait cycle we (humans) are not doing anything, just falling forward. We are propelling ourselves over and over again - like releasing a spring.



I recently came across some old Clients Letters from Tweedy, Browne, and almost ten years later they are still a delight to read. Hereby some excerpts around the peak of the tech bubble:

March 2, 1999:

A rising tide lifts all boats. However, the gains experienced by the S&P 500 were concentrated in a small number of stocks dominated by technology companies. Of the 500 stocks in the S&P 500, 3% of the issues, 15 stocks, accounted for 52% of the Index's return. Of those 15 stocks, 9 were either technology or communications companies. If you owned only those 15 stocks, you had a stellar year. Most value investors did not.

In a year like 1998, the overall performance of an index is not indicative of the performance of stocks in general. For example, the performance of the equal weighted version of the S&P 500 shows a gain of only 13%, or less than one-half of the overall index (.) This disparity is much more pronounced in the NASDAQ Composite Index. Although the Index is comprised of nearly 4,700 separate stocks, only 5 stock account for 50% percent of the Index's performance. Microsoft alone represents approximately 27% of the Index.

March 23, 2000:

On Priceline.com: The company went public in March 1999 at $16 per share and shot up to a peak of $138 on May 7, 1999 (.) By October of last year, the stock had plummeted to around $7 per share, and some Wall Street analysts were saying the company's business plan may have been "flawed." Amazingly enough, no Wall Street analyst rated the stock a "sell"; its worst rating was "hold," and many buy recommendations still existed. Today the stock sells for less than $3. A decline from $138 per share to $3 is nearly 98%.

Little did we know that as we were finishing last year's client letter and trying to explain why we had not participated in one of the greatest gold rushes in Wall Street history, the party was about to end.



 There is a new scientific study reported on a recent ABC newscast that suggests that excessive discussion of problems by teenage girls does more harm than good. One particular malady that can manifest itself is low self esteem and depression. When one realizes that women tend to talk approximately three times more than men, one soon realizes that there is a lot of discussion of problems that teenage girls are focusing on.

Personally speaking, when I visit my sister in Jacksonville I notice that my niece spends an inordinate amount of time on her my space account or even with various I.M. services such as A.O.L. instant messenger. It soon becomes obvious that girls have a lot to talk about and use up a lot of time to do their talking either verbally or virtually. The question becomes who do they end up talking to and ultimately what is it that they are talking about.

This got me to thinking that raising a child in today's world is light years from when I raised my first over 15 years ago. The challenges are great and the risks are far greater to youth than they were a decade and a half ago. The advance of technology and the proliferation of the internet and websites, chat rooms and other sites can become a great challenge to the youth of today not to become seduced by this and in fact in some cases to become a victim of the predators who lurk in a dark netherworld ready to attack the unsuspecting and the vulnerable. Shouldn't we as parents be more aware of this and prepare and protect our children from harmful and dangerous solicitations.

Also, another thought that comes to mind is what do we as parents do to help our child through this veritable minefield of new and shifting challenges that they face. Are we doing as much as we can or as much as we should and when and where do we do our work to prepare our children for an extremely complex and everchanging world. Where will they receive proper advice and develop true values if they do not receive it in the home.

How much actual quality time does the parent of today spend with their children as opposed to the parent of 30 or even 10 years ago. Where are the opportunities to form the bonds that arise from social interaction with a child. If a child has questions or issues that they face if they can not find it in their parents where will they turn. Once again, from the cheap seats, look at what is available to the teen of today and even the parent of today.

Computers and unrestricted use of the internet Video games, dvd's and rental programs such as Netflix and Blockbuster, hundreds and hundreds of cable channels, cd's with graphic lyrics, movies on demand, music on demand, Ipod's, Iphones, cell phones, text messaging, mega movie theaters with 16 and 24 movies, the list continues …

James Lackey comments: 

It has never been easier to be a parent. Kids today are the best and brightest due to specialization. Besides riding a bicycle on the street, I believe it's generally safer today than when I was a kid. All the new technology makes it so easy for kids to learn and parents to monitor their progress and safety.

It’s never been harder to be a petty criminal. I can’t imagine even getting away with even a fist fight now a days. There are security cameras, and cell phones with 911 and picture cams, everywhere.

Not to mention the illnesses, like flu or pneumonia, that killed kids even 30 years ago. A hundred years ago many kids died before they were teens. How about the ability for kids to take extreme risks on the fields of play? There is much less worry about debilitating injuries from sports. I have had several fractures from racing that took me out for three to six months, that 30 years ago would have affected me for life. Today kids have outpatient procedures and are back in six weeks. Not to mention all the knee injuries that 20 years ago ended careers, ACl type injuries today are fixable.

Finally, there have been times over the last 100 years where segments of society were not certain about, diet, exercise, training and drugs. Just 30-40 years ago too many people smoked, ate too much bad food, didn't exercise, and so called 'experimented' with drugs and alcohol.

It is without a doubt that a higher than usual percentage of people that experiment with any drugs, destroy their lives. If you eat too much you will eventually be sick and unhappy. If you smoke, you are now a social outcast, and there is a very high chance you will be very sick in 20-50 years.

It must have been much tougher to be a parent in and after the depression. Your kid could get sick and die. Your kid could, not knowing any better, find an opium den, get sick and die. Kids could get sick and die from a shortage of food. During WW2 a huge percentage of young kids were forced into war with a high risk of death.

Yet usually, in the agrarian society of 100-200 years ago, they simply worked our kids to death.

George Zachar adds:

Parenting seems daunting now because of all the choices we have to make. It's no longer one neighborhood school, one community newspaper, the local church, three TV channels, etc.

The range of educational/recreational/informational choices means parents have to process a lot more material to exercise their role. This is on top of a stressful work life for most.

Raising kids in the same town I grew up in, I can't say the risks are appreciably higher. Sex 'n drugs 'n rock 'n roll were ubiquitous when I was teen too.

I am in Lack's camp. The upsides are vastly greater now than for prior generations.

John de Regt writes:

There are new opportunities and new risks, and some of the old risks are less. While the threats of wars and sports/play injuries may be fewer, the traps of drugs, video games/Internet, sexual predators, AIDS, and drunken drivers justifiably keep us up at night.

Parenting is a lifelong activity, in any era, and we as parents always need to be aware of possible threats and risks to our kids. 

Alex Forshaw suggests:

The "big bad culture that's out to eat our children" idea is silly and exaggerated. Sheltered kids will have a marginally higher "survival" (i.e. reaching all the socioeconomic checkpoints their parents set out for them) rate until they get into a good college, at which point they will go nuts. If they don't go nuts.

Humans are a lot more adaptive than our feel-sorry-for-everything culture gives them credit for, and social mechanisms (feeling copiously sorry for someone who is down, granting all kinds of exceptions to people who are depressed, etc.) are responsible for as much harm as real dangers from the wider world.

Given the human memory's selection bias of preserving good memories and killing bad ones, better awareness of current problems (which are biased towards negativity) gives older generations absurdly rose-tinted hindsight.

J.T. Holley adds:

I'll second Alex's points. Having eight, six and four year olds I can assure you that I spend more time with my children than my parents ever dreamed of — and I mean quality time.

Now to think that there is the "mean cruel world" out there that wants to tear into, tear apart, corrupt, and diminish the lives of our children is just plain foolish. It's protectionism on a family level.

Kids today have lead-paint-free cribs, childproof lids, moms who don't smoke and drink during pregnancy, bike helmets and bottled water. Are they really worse off than we were? Can you think of one technological advance that doesn't make you and your children better?

And why do people think that there is a greater percentage of pervs, pedophiles, sex offenders or others who prey on children than back in the 50s - 80s? The population has grown, but the distribution of them in society is the same, and our police forces have better technology to combat them.

As far as schooling, the level of public education is not as bad as everyone makes it out to be, although there are isolated problems in specific geographic areas. Plus, to pay $35,000 to have my child learn to finger paint seems a little foolish.

Mark Goulston offers:

In my article Potential is a Terrible Thing to Waste I make the connection between coaching and parenting.

Russell Sears writes:

In one sense child rearing is much more demanding today. Freedom, and how to use it responsibly, is almost always demanding. Many parents find it easiest simply to let the media, in all its many forms, be the parent. But this leads to absent parent syndrome.

Peer pressure is on the parent. Most children fantasize no parental authority. Indeed, authors of "Nanny Diaries" said they never saw the father of kids in their care. It’s not just the poor ghetto parent who use TV for babysitting. Parents go to tragic lengths not be parents, just to top their friends as "free spirits". Absentee parent put children at risk for drug dealers and pedophiles.

I limit my children’s access to TV, movies, and Internet. My kids go to public school; nobody would call them sheltered. Why? Because they have spent time with a five-year-old who was given narcotics by his parents, and other children raised in abusive homes.

Sheltered kids only see a romanticized version of life, not the consequences of mistakes. 



(UPI) Edwards retraces Robert Kennedy trail

The US left's "stations of the cross"..


Downside of cheap mass storage…

(BN) Washington Post Accused of Violating Labor Laws at the Onion

Recursive 0nionesqueness?


It's bad enough the Spice Girls are getting back together.

(CBS) 2008 Democrats To Take Part In 'Gay Debate'

My jaw hung down when I read the story.. Too perfect in every way.


Haven't we suffered enough?

(UPI) Amato says wife beating is Sicilian tradition

"Tradition"? Cue Zero Mostel!



VitaliyIn the long run, the performance of a stock in isolation (ignoring the external environment, i.e. interest rates, risk, inflation) is the product of fundamentals (i.e. earnings and cash flow growth) and valuation ( i.e. P/E, P/CF).

Google and Apple may have great fundamentals: their innovation has led and may continue to lead to high earnings and cash flow growth. But are they good stocks? They may or may not be. But, more importantly, will they be good stocks at any price? No! If I were to follow the above conclusion, that since Google and Apple are great companies they are great stocks at any price, at any valuation – at 50, 500, 5000 times earnings, then I'd walk into an overvaluation trap.

Take a look at eBay in the late 90s: it was a great company (it still is), but it was grossly overvalued. So, if you bought it in the late 90s and held it until today, despite its earnings going up 100-fold, the stock is roughly at the same level it was then. I'd argue few would have the patience and conviction to hold it through the downturn the stock took in the early '00s. Most investing in the stock in the late 90s lost money on it.

One of the biggest mistakes investors make in investing is failing to separate a good company and a good stock. A great company's (fundamental) performance is wiped out by valuation compression. This is the battle of two winds: the tailwind of earnings growth and the headwind of P/E compression.

Also, with a high growth priced appropriately (even to perfection) there is no room for even a small mistake (no margin of safety) left in the valuation - a small disappointment (it doesn't have to be much) will lead to a substantial decline in price. The latest performance of Starbucks and Whole Foods stocks is a great example of being priced for perfection and delivering slightly less-than-perfect results.

This myopia in differentiating between good companies and good stocks is not just limited to wonderful, exciting, larger-than-life (Google comes to mind here), fast-growing internet companies. The bluest of the blue chip stocks, like GE, Coca Cola, Home Depot, Amgen, Johnson and Johnson (and the list goes on) were all great companies that one "had to own" but were terrible (overvalued) stocks in the late 90s. Their earnings have doubled or tripled since but the stocks have not gone anywhere.

I think it was Benjamin Graham who said that "price is what you pay, value is what you get."

Kim Zussman adds:

What are the parameters which make a good company or stock? Here are some good stock categories from the literature:

1. Large five year decline in price (DeBondt and Thaler)
2. Large one year price gain (-large 1 year price decline.) Momentum (Jegadeesh)
3. Small cap stocks (Lakonishok and others)
4. Valuation: Low P/E, P/B, P/cash flow, high dividend yield, and
various concatenations thereof
5. High (low?) short interest
6. Put/call ratio (especially when options orders are placed by grandmas in Serbia)
7. Value line timliness (used to be more timely)
8. Double tops and wiggle bottoms above and below 10 minute panting average

The problem is that they all work sometimes; actually, just often enough to keep people interested in them.

Vitaliy Katsenelson adds:

I spent a good portion of my soon to be published book called, Active Value Investing: Making Money in Range Bound Markets, discussing what constitutes a good company and a good stock. I created the QVG framework (Quality, Valuation, and Growth).

A good company should get high scores on Quality and Growth dimensions. For instance a high quality company will have high return on capital, strong balance sheet, a sustainable competitive advantage, competent, shareholder friendly management, significant free cash flows. A Growth dimension encompasses predictable (high recurring) revenue growth, multiple sources of growth, a nice dividend, etc.

If a company received high scores on Quality and Growth dimensions, for it to be a good a good stock it should pass get a passing grade on Valuation dimension - be undervalued (have a appropriate margin of safety).

As anything in investing this analysis is very subjective, but I find this framework is very beneficial to maintaining a rational head and helps me to stick to an analytical process. 

Steve Leslie comments: 

On June 28th (post number ?p=1834) I mentioned that one year ago, when Google was $350, Vic and Laurel went all-in on the search engine provider. I also remarked that Apple and Garmin were both $50 then. Today GOOG is $550, AAPL $137, GRMN $80.

When one finds a great company with a great product line and great prospects, selling at a reasonable price, it is time to buy. Strike when the iron is hot! And eschew the short-term gain for the much larger pot o' gold that lies at the end of the rainbow.

Charles Pennington responds:

I can find nothing in the original post of Mr. Leslie stating any requirement that the stock be bought at a reasonable price (let alone any definition of what a "reasonable price" would be). The concluding quote was:

".. most importantly the speculator should be willing to hold onto the companies eschewing the quick buck in search of the really big gains that can be achieved through diligence and patience."

I'm sure it was an oversight not to have included some kind of requirement of "reasonable price" in the original message. The vehemence of the reaction is because, I think, the post's assertions were untested, apart from anecdote, and Daily Speculations is supposed to be reserved for ideas that are tested.

An example among many of the way the assertions could be tested is to go back to old issues of magazines, newspapers, etc., and find the companies that were rated at the time as highly admired, and then look at their performance afterwards. If you do this exercise, you might find that highly admired companies do well.

However, it is not at all obvious. Many companies which were once highly admired are not so highly admired now, and their stocks have not done well. Enron, for example, was once highly admired.

Barry Gitarts comments:

Haven’t many value experts said Google has been overvalued since its IPO, and Apple for several years now, however both stocks have significantly outperformed the market.

Driving looking out the rearview vs. the windshield could also be the difference between over and under valued perception.



 Muir Woods is 500 acres of coastal redwood forest, twelve miles north of San Francisco, and is a setting that is relatively unchanged over the last 50 million years. The trees in Muir Woods are the oldest living things on earth, and having visited the woods recently I have been thinking of what lessons they might hold for markets and for life. My thoughts on the subject have been helped by reading the following books: Muir Woods by James Morley, Life in an Old Growth Forest by Valerie Rapp, Trees by Roland Ennos.

Lesson One: While from a distance, all the trees look very similar, up close they are each different, showing the effects of fires, exposure to light, roots damaged or spared by floods, wind, storms, landslides, disease, and predation from insects. Many of the current trees have lived since the times of the Vikings. If only the trees could tell their story of what they have seen and witnessed, and what adaptations they have had to make to prosper, we could learn so much about the past present and future.

Looking at an individual stock or a market at a point in time, without regard to the major events that have shaped it leaves much information out of the mix that could be used to project the future.

Lesson Two: The forest thrives and benefits after many seemingly disastrous events. Fires clear the underbrush. Dead trees still standing provide cover for much flora and fauna. Trees contain so much water that there is still much biomass left when they die, and they contain the nutrients and moisture that other plants or fungi need for survival. This situation is called a biological legacy by the scientists, but is just known as a gift by the laymen.

The number of, the amount of time in between, and the extent of watershed declines that the market has witnessed in the last year, as well as the resilience of the market to these declines, is a good measure of the health of a system. It is often good for future growth, to see decimated parts of the market landscape, such as the US real estate sector which has currently taken it on the chin, or the Saudi Arabian market that is down 75%.

Lesson Three: A strong root structure is key. The roots of the redwood trees often stretch horizontally 30 yards from the center of the tree, and they can be as much as one foot in diameter. They mix with the roots of neighboring trees which provides greater strength to all. Seedlings also sprout from the roots, so the same sources are used for multiple outputs. If the tree is unfortunate enough to die, the roots can produce more trees of the same genetic material. The roots of the redwood tree are remarkable in that they are not deep, but they stretch so far horizontally, allowing the tree to grow in different conditions.

The importance of roots to the coastal redwoods leads me to consider the functions of the roots of a company — the sources of capital necessary to build its infrastructure. The money reaches the various divisions of the company and is turned into profits which are then circulated back to the trunk.

Lesson Four: Being tall keeps out competition and gets more light. The choice that a tree makes to invest its energy in upwards growth, and raise its canopy above that of its competitors, is apparently a very successful one in nature, because the different genera of trees, cones,cycloids, hardwoods, have all come to it independently. The redwood trees are able to reach the sun above any competition, and they are able to shade out and prevent any other trees that need sun for growth.

The big companies, those that say have a share price above $100, or a market value above 25 billion, have an advantage over the smaller ones. They are not as subject to dying, yet they have the ability to shed many older divisions to help their earnings statements along. They also do not have to worry as much about random shocks from the environment that might level smaller companies.

I hypothesize that the returns of companies that have a price above $100 is higher than the returns from average companies, and that their volatility is less. Also, that markets at higher levels are less volatile than those at lower levels.

Lesson Five: Trees depend on other flora and fauna.The diversity of the flora that help the basic functions of the tree provides resilience in case of disaster. The ground of Muir Woods is covered by sorrel which retains the moisture and nutrients necessary for the redwoods to grow during the dry summers. The roots of the tree are dependent on lichens that help them get water and nitrogen. Mites helps to recycle a fallen tree by eating the rotting wood, and chewing the litter that falls on the forest floor, and voles living in the canopy spread the fungi that the trees need for survival.

The health of a individual market or stock component, like GE, is dependent on the health of its environment. The healthiest market environments are those that have witnessed many varieties of stress and strain, and exposures to good and bad news.

Conclusion: There are many other lessons that I have learned from Muir Woods, like building a strong bark resistant to insects rather than growing leaves immediately, shading out your competitors, thinking long term, sending your leaves out on strong branches, and changing with the seasons. I can think of no better place in the world than Muir Woods to visit with a view to improving the quality of one's trading or living.

Charles Sorkin writes:

The slopes of White Mountain Peak are home to the ancient bristlecone pine forest, which contains the oldest living things on earth. Such trees are perhaps the reductio ad absurdum of adaptation, making do with diminished oxygen, extremely harsh weather, few nutrients, and highly alkaline rock/soil matrix in which to sink modest roots. The Methuselah of this grove is in excess of 4000 years old, and I'm sure they offer their own lessons. 

Bill Rafter adds: 

Redwoods need an exceptional amount of water to prosper. The rainfall in northern California is not always up to that requirement. However the height of the redwood comes to the rescue. Moisture in the atmosphere collects on the high leaves and the tree creates its own rainfall. 

Steve Ellison notes: 

Cook, Sillett, Jennings, and Davis, writing in Nature in 2004, estimated the maximum feasible height of a tree at about 130 meters (the tallest redwood is about 112 meters). "As trees grow taller, increasing leaf water stress due to gravity and path length resistance may ultimately limit leaf expansion and photosynthesis".

Adam Robinson adds: 

Those interested in the seminal work on Chair's musings might want to pursue Thompson's On Growth and Form, written nearly a century ago, I believe the first attempt to analyze biological phenomena quantitatively.

Also, re: Chair's Lesson 2 on resilience of a system, one of the ironies forest rangers learned was that their attempts to put out any and all forest fires resulted in a huge buildup of flammable undergrowth, so that the inevitable fires, when they finally occurred, were uncontrollable conflagrations. A sobering thought for the Fed and other market interventionists.

Which thought reminds me, apropos of Chair's point on the cataclysmic decline in the Saudi market, the Saudi market, perhaps for religious reasons, lacks mechanisms for short selling (I believe), so that market lacks the ability to "incorporate" divergent opinion, so the inevitable buildup of selling pressures, when finally vented, is massive and uncontrollable. 

Steve Ellison remarks:

Adam makes an excellent point that one should keep in mind the next time the Challenger, Gray, and Christmas layoff report is in the news. The process of decomposition, the breaking apart of complex organisms into simple components that can be used by other organisms, is very important in biology. Similarly, business failures and layoffs move people from performing work that customers or employers do not want to activities that add more value. 

James Sogi writes: 

Today's quiet market at recent highs are like the lofty tree tops of the forest. The tree tops seem to know where the top levels are and it takes some extra energy and exposure to extra risk to break above the tree tops. The boughs and branches are slender and sway up there.

Sept CME SP Futures

The quiet growth pushed upwards to make new incremental highs and an incremental daily gain. As with trees and plants, the upward growth of markets is always incremental, but steady. The rate of growth varies with the climate, the weather and season. The transactions approaching the top are always a good study of dynamics. There are many buys at the very top, hopeful buyers either hoping for the breakout, or seeing the new high as a sign of further gains.

These buyers have been rewarded in the past few years of benign climate, good weather, and rich soils. As with slender reeds, rapid growth is not sturdy and might suffer damage, breakage, wind, insects. Sometimes the boughs break, but with a strong organism, the branches grow back. The gains seem stronger and more protected when supported by steady and sold growth rather than thin shoots shooting upward.

Study of the rings in old trees can give much information about weather patterns in past years and relate to tree growth. It is a worthwhile study. The strongest moves in the market seem to be the steady marches upward, grinding, growing slowly but steadily upward. Even bamboo can crack through the strongest concrete. It’s hard to believe how tall the redwoods can grow. My friend has tree climbers, and we go up trees on these ropes. It feels pretty high up there, but is actually safe. We usually don't go out on limbs.

In the markets, as in the wild, it is always good to see the forest, not just the trees.

Russell Sears writes: 

The giant trees are made of mostly dead wood in the center. The incredible heavy lifting of water is even more amazing when you consider, it is just the outer layer, just under the bark. The efficiency and simplicity is reminiscent of the invisible hand of the market. The part that is growing or expanding sustains the whole tree while the dead wood just lends support. 



 'No Sun link' to climate change
By Richard Black
BBC Environment Correspondent

A new scientific study concludes that changes in the Sun's output cannot be causing modern-day climate change. It shows that for the last 20 years, the Sun's output has declined, yet temperatures on Earth have risen. It also shows that modern temperatures are not determined by the Sun's effect on cosmic rays, as has been claimed. 

The "greenhouse" hypothesis is that the increased CO2 levels are preventing the sun's heat from being radiated back out into space. There is no doubt that this is true. What is still in question is the magnitude of the effect and the likelihood that there are other contributing causes to the fluctuations in earth's surface temperatures.

The hypothesis about cosmic rays is a theory about another contributing cause. The difficulty with both the hypothesis about cosmic rays and its rebuttal is that neither side has a time series of data with sufficient length to be a reasonable basis for any robust conclusions.

In the last 20 years the data show that there has been a negative correlation between the sun's energy output and the earth's surface temperatures. But (the economist's other hand) the data from the period leading up to 1980 show a strong positive correlation. So, the debate has hardly been settled either way. Saying "we still don't know" is probably the bravest of all positions to take on these matters; you can be guaranteed to have arrows in your back and your chest. 

Craig Mee notices:

Read the sunspots.

The mud at the bottom of B.C. fjords reveals that solar output drives climate change — and that we should prepare now for dangerous global cooling 



What are the chances that IBM, currently at 109.66, not having closed above 110 since year-end 2001, will not break through with psychological impact? Also, the Dow hit a high of 13,989 today. What are chances it won't break 14,000? And what are the chances the 10-year bond yield, now 5.04%, won't break 5%?

Many goals are near, and I sense a buildup ready to play out to consonance.



Young Adults Are Giving Newspapers Scant Notice

Most teenagers and adults 30 and younger are not following the news closely at all…

The end of the Cold War triggered an erosion in news following by the US public. With nearly a generation of ingrained disinterest, reacquisition of the habit seems unlikely. Add in the explosion of decentralized information sources now available on the web, and I am driven to wonder how folks from Rove to Ickes will be able to plant and propagate the memes necessary to steer public opinion for political purposes.

Throttling the outlets where govt can dictate terms (the "Fairness Doctrine"), using legislation to target enemies (as the Swimmer did with Murdoch's Boston Herald), etc., won't work in a world of Drudges.

A descent into Putinesque bloodshed, mercifully, represents an unlikely trajectory.

I think I'll make time to learn what the media was like before the Civil War, when anyone with a press and an idea had free rein to saturate street corners with their ideas.

Stefan Jovanovich writes:

In 1840 Cincinnati was the largest source of publications west of the Alleghenies, and the third largest in the country after Philadelphia and Boston. Imagine: launch parties for the latest John Updike screed down by the hog rendering yards on the Ohio.



PIMCO's homepage URL seems like bad karma, or maybe an inside joke:




 There is a nice interview with Nick Faldo that mentions his "dark years" in mid 1980s after a series of blowups. He had to relearn his swing, endure his sponsors dumping him and pass other golfers at the airport on his way to a B list event, while they were heading to the Masters. He said, "But you have to turn it into motivation. Either you crumble or you go."

One thing he did was practice, practice, practice and then practice some more. "I worked really hard during some of those winter spells in Florida, hitting 1,500 balls a day." That's 10 hours of standing on a practice ground hitting a golf ball every 24 seconds, a mind-blowing regime. "I used to go and swim in the afternoon. Then, like an idiot, I would think, 'There is another hour's daylight so I'll go and hit some more.'"



 A short article in the July 12 issue of The Economist, When the Wells Dry Up, takes an upbeat look at future prospects from deep-sea oil field technologies developed in Aberdeen, Scotland, around North Sea oil operations. The story surveys Aberdeen's subsea technology industry that now earns half its total $3.4 billion from exported technology and services.

But the title of the article and the background claim of North Sea oil running dry is curious. The Economist cites a recent International Energy Agency statement that the drop in North Sea production has been "steeper than expected." The next expert quoted is a "former offshore worker" who opines: "There'll be nothing here in 15 years time." Britain was the world's sixth-largest oil producer in 1998 and has now fallen to 12th place.

This chart
shows the steep drop. The sky is apparently falling on North Sea oil production. But wait, what is that shaded part that starts right after the uptick in actual oil production? Was the uptick forecast in earlier projected declines of North Sea production? Oil production also fell significantly from 1985-87 or so. Were further production declines predicted then? (Or maybe the projected declines reflect the British government recent decision to raise corporate taxes on oil firms to 50%, while other firms are charged 30%.)

A sidebar story, "Every Last Drop," explains that though total North Sea production so far has been 34 billion barrels, some 20 billion remain untapped deep under the sea. "Big finds are the exception" assures The Economist, "and the rise in output will be only a small blip in the downward trend." Production this year is up to 3.1 million barrels a day from 2.9 million in 2006 as the new 500 million barrel "Buzzard" field went into production. Nearby, the 170 million barrel Jura field is due to start producing in 2008.

"Every Last Drop" notes that oil companies are considering exploring west of the Shetland Islands where "billions of barrels of hydrocarbons, mostly natural gas" are thought to reside.

Is it at least possible that oil exploration and technology development are influenced by oil prices? I realize this is wild speculation on my part, but what if we compare the North Sea production chart with one of world oil prices?

North Sea production peaked in 1998. You can find 1998 on the chart of Crude Oil prices, it is the downward spike that thrust deep into the exploration budgets of world oil companies. Oil dropped below $15 a barrel in 1998, after jumping above and below $25 for ten years. At $15 a barrel for oil, how enthusiastic were oil companies to expand North Sea production, or exploration and production anywhere else in the world?

Most companies stopped or slowed research and development of the kind of cutting-edge (!) technologies needed to develop difficult oil fields. The steep rise in oil prices in recent years looks a lot like the steep rise from 1973 to 81. As oil companies commit tens (or hundreds?) of billions of dollars for new exploration and development services and technologies, they must still cast a wary eye on the 1981-87 downside of the last upward crude oil spike.

The oil industry is a technology industry more than a natural resource industry. There is not much "natural" about extracting hydrocarbons from thousands of feet under the sea or boiling them from tar sands in frozen Canada. Technology responds to prices, though with a lag as scientists and engineers are pulled off other projects (or out of retirement!) to focus again on extracting hydrocarbons from deep earth and sea. (For realistic and optimistic articles on the energy and the environment, I recommend Robert Bradley's EnergyRealism website. And for a sound energy textbook, see his Energy: The Master Resource). 



 For a great mix of entrepreneurial spirit, interesting technology, risk-taking for outsized rewards, gallows humor, and plain old testosterone (and heck, I'll bet they like BBQ, too), check out Ice Road Truckers on the History Channel:

The History Channel embarks upon an unparalleled adventure revealing the virtually unknown occupation of ice road trucking, considered to be one of the world's most dangerous jobs. Ice Road Truckers charts two months in the lives of six extraordinary men who haul vital supplies to diamond mines over frozen lakes that double as roads. The livelihood of many depends on these tenuous roads, which through the years have been responsible for the deaths of dozens of men.



The existence of self awareness arises from the brain’s amygdala, and the cortex. Both have separate perceptual structures and awareness creating an illusion of self awareness. Cartoons portray the little devil and the little angel. Descartes framed it as, "I think, therefore I am". This is the amygdala's perception of the operation of the cortex. These two physical structures and their operations battle during every trade, and one of the minimum barriers to trading success is to establish the dominance of the cortex over the amygdala, a task which few humans are able to accomplish.

Janice Dorn adds:

A portion of the above was published in the July, 2007 issue of Stocks, Futures and Options Magazine. I present the article in its entirely in response to remarks about brain interactions in the decision making process of trading. It is my first attempt to conceptualize this process from a neuroanatomical/neurophysiological/neurobehavioral viewpoint. This is a work in progress, as I am presently writing an update, refinement, and extension of it. 



 My best friend is Greek, and he has been in Greece for a month now. He emailed me today that roast corn on the grill in Athens is two euros a cob ($2.70 US)! The smog and acid rain in Athens are terrible, but at those prices one cannot imagine any of their corn will go towards alternative fuels!

Cliff Roche replies:

My brother-in-law just vacationed in Corfu. He had a great time and said prices were dirt cheap. And the pictures showed it was a beautiful location. Like most places, I guess it all depends on where you are in Greece.



 The claims imputed by how-to book titles ought to impinge sharply enough to discourage shoppers in the how-to shelves at book stores.

It takes a long time, maybe 10 years, to learn to discriminate among titles. Discernment, that's the word.

I've found how-to books useful if they teach practical skills like wiring, plumbing, cement mixing, roofing, carpentry — all of which helped me maintain my home for the past 37 years.

These books provide a foundation for trial-and-error experiments. After a few trials most such skills develop fast. You blunder a few times, but if your brain cells are healthy you will quickly learn to do-it-yourself.

Other skills, however, like learning to write, play music, or paint a picture worthy of an art gallery — these must begin with genes, I believe.



 I take the subway to work daily. While not the most prestigious means of transportation, it is definitely in my case the most practical, economical, and time saving. I happen to live three subway stops from the beginning of the line.

By the time I catch the subway, it is usually full with no seats available. Sometimes, I am in dire need for a seat to get a little nap, especially if I am caught trading overnight. An hour nap can do wonders in my case.

Out of this need I become more creative about finding this precious vacant seat. Knowing that the previous two subway stops to my own have only two sets of stairs closer to the front end of the train, I started walking all the way to the opposite end in hope that most people will go for the closer compartments. This is in fact the case except oddly enough that the farthest compartment is always packed.

My reasoning in this case is that most people play the same game I do hoping for the precious nap and seat. However, three cars away from the far end seems to be day after day the optimum solution to this game. Now that I choose the optimum car successfully, sometimes I still am not lucky enough to get a seat unless one of the passengers gets off the train.

I start analyzing the passengers’ profiles trying to figure out which ones are likely to get off the train first to sit in his or her place. This is not an easy task but some knowledge of the city and behavior can do the trick. For instance, I stay away from all people over 30 in business suits as chances are that they are headed to my same destination. Once this category is eliminated, I try to eliminate all university students by guesstimating their ages simply because four out of five universities are located downtown (at the end of the line) so the odds are clearly not in my favor there either. I try to spot two age groups. High school students and under since parents most likely prefer to send their kids to nearby schools so it is unlikely that this group will travel all the way downtown for schools. Also, the elderly group is most likely not traveling far either. This whole process usually takes few seconds since I usually get lucky enough to get a seat before we reach the next stop.

This process is very similar to gaming the mistress although I admit it's never this straight forward with her. Incentive, incentive and incentive. I play the market for monetary profits and only profits. I don't care what philosophical reasoning a speculator would give you a la George Soros; the bottom line is that it is all about the monetary reward. It is all about the nap in the case of my subway trip.

I always try to figure the line of least resistance in speculation, the car with the fewest passengers. This is usually the road least followed by the public. In search for prosperity, I have to copper the public play at all times (by going to the opposite end in the case of the subway), but sometimes the simple contrary play is not good enough to win the game. A little tweaking is often needed. In the subway example I had to go to the third car from the opposite end and not the last since some smart passengers figured out the "simple" contrary play by going straight to the last car.

Timing is also a very critical factor and can make all the difference between a win and a loss. In the case of the subway one has to process some information and position oneself accordingly in a few seconds before reaching the following stop. Flexibility is also a key to successful speculation as no fixed system will beat the market forever. In the subway example, my game plan is different on the way back home since a different crowd is taking the subway at that time.

Ever-changing cycles also plays a great role in this game. The last car was full as the public got wiser and I am sure the third will be one day and a new game plan and system will have to be developed.

Knowing who you are playing against is critical to any speculative game as is the case of the passengers' profiles of this subway. An extensive knowledge of the markets you participate in is essential to your success as is a knowledge of the different subway stops and what they represent to different passengers.

I will end this post here as I reached my subway stop and have to vacate my seat for the next player.

Sam Humbert comments:

In my Manhattan years, I'd often give up my seat to a person of gender or age. For me, the psychic pain of sitting whilst a pregnant woman or pensioner is standing outweighs the benefit of sitting down. Often I'd get the fish-eye from my fellow New Yorkers — they were silently thinking "he must be mentally ill." I'd sometimes make eye contact and explain "I'm not originally from New York," and this would calm them.

Craig Mee adds:

Watching commuters pile into the tubes in London, there is sheer brawn! Doors open at the station and boom, some people are fixed on the destination, i.e., empty seats and God help anyone getting in there road. Funnily enough this is usually concentrated to a certain gender. Some people like to try and muscle markets around too!

Chad Humbert adds:

 1. Watch for mothers with small children. Sometimes a child will scurry, and the mother will have to leave her seat to retrieve him. Voila! Open seat!

2. The elderly are often slow. I've found I can often simply beat them to the open seat by walking somewhat faster. If I'm careful, I can make it appear that I passed them inadvertently. "Oh, were you going to sit here? I'm sorry! Do I need to move?" Most of them want to be polite, and they insist that I keep the seat. Copper the elderly.

3. I've found that the handicapped seating rules are rarely enforced, and when they are, it's just a small fine. I pay that fine many times over with the extra trading profits I generate from feeling refreshed after a nice nap.

Yishen Kuik offers:

Mr Saad's comment on how the farthest caboose is not the optimal choice because of gamesmanship, but rather some not so inconvenient caboose reminds me of a well known behavioral finance game.

Ask 100 people in the audience to pick a number between zero and 100. The winner is the one whose number is closest to two thirds of the average.

Eggheads will zero in on zero, but that answer merely demonstrates deductive abilities without canniness.

People with a more limited appreciation of convergent series might pick 33 instead, based on the assumption that the average will be 50. People able to think one more step ahead might pick eleven. People able to think one more step in the convergence series might pick nine, and so on.

The real challenge of the game is to guess the distribution of this gradient of deductive powers among the audience and weight one's answer accordingly.

e.g. If you think half the people in the room will guess 33 and the other half are extremely bright but guileless and will guess zero, you should guess eleven.

So perhaps if the challenge is given in a lecture room at MIT, guess one (zero is pointless because of the likely pot split). If the challenge is given to the general public, guess between ten and fifteen.

Philip Tetlock, whom I'm reading currently, reports that the most common winning answer is thirteen.

Barry Gitarts contributes: 

 Here are a few of my subway gaming experiences as they relate to the market.

Gain an edge by counting - I use the grip mats markers to note where the train doors open when the train stops, so next time I will be standing there well in advance of the train arriving. This prevents others from being the first in the door. This takes several observations, because the train never stops in exactly the same spot, but it’s remarkable how close to the doors you can be. Standing on different parts of the platform to observe which cars are the emptiest helps in figuring out which car you would want to focus on.

Work harder then the next guy and be prepared in advance - Even if you are the first in at your door, there will be others coming into the same car through other doors, competing for the same seats as you, this is why you must start looking for empty seats through the windows as the train is still pulling in so you know exactly which seat you need to go for, instead of walking in, looking around and then going for a seat. Those two seconds are the difference between sitting and standing.

Know the relationships between markets - I find that sometimes, especially during rush hour, it makes sense to take a different train one stop away from your destination so one can catch the transfer one stop before the mob boards.

Capitalize on the public fears long after the threat is gone - Unlike Mr. Saad, in my case the last two cars are the emptiest, because the train I take starts in a more unfriendly part of the city where people wouldn't want to be caught sleeping in the last car, so when the train gets to midtown, every car is packed like sardines except the last two which are near empty.

George Zachar strategizes:  

As someone who sits most of the day in front of screens, my subway priority is not getting a seat but minimizing total transit time. I have a mental map of where the stairs are at my destination, and maneuver to get closest to the doors that will open nearest to my exit route.

Market lesson? Different players have different goals. Absolute or relative return? Style box restriction? etc. 

John Floyd adds: 

 I spent one of my school day summers as a messenger in Manhattan. To increase efficiency I learned the exact subways, waiting positions on platforms for door openings, and the correct cars to place me near an exit that would easiest to get me to my destination. I did this for as many of the routes I traveled as possible.

The numbers of possible routes in terms of subways, exits, etc. are myriad. The proper choice allowed me to be the first off the car and up the stairs, oftentimes placing me right inside the building I needed to reach. This was an added benefit as I avoided the often hot, humid, and crowded streets. I would estimate that this on average increased my efficiency by 20-30% at least. Conversely when I rode my motorcycle across the country I looked at the map once in the morning to get a general idea on the direction I wanted to head and roads I might want to take and then just drove. My efficiency of time probably dropped by 50% but my efficiency of pleasure went up by equal.

When traveling now I try to use the time to read, listen to books on tape, or use the time as a period of thoughtful reflection. I do this mostly because I find it most productive for me given I do not find the sleep comfortable or useful to me in modes of transport. I can understand others find it as a useful battery charger that allows them to be productive later.

So I would extend the logic and say that while the goals –profits, learning, etc., may be the same, the path and methods to getting there may be very different. I think another important point is that one needs to decide and focus on what works best for them, as it may not be the same as what works best for others. 

James Sogi comments:

 We don't have subways here in Hawaii, but I try to find the best time to find uncrowded waves for surfing. The best bet is to take my boat to spots such as the nearby national park that has nice waves, but only with a long walk and even longer paddle which weeds most out. The boat takes me to the front row spot and a short paddle, with refreshments waiting.

The other method is to go right after lunch, but before school is out and before workers get out. That seems to be the old guys’ slot, and usually only one or two old guys like me are left still surfing.

The other odd thing, is that even if its crowded, many in water can't see where and when the wave will form and break. If you calmly paddle to the spot where the wave will form as you see it coming over the horizon before anyone else realizes where or when it will come, you will be right at the right spot as it breaks without paddling and catch the perfect wave with a single stroke without effort at the perfect spot while all the crowd is scrambling around trying to catch the wave in the wrong spot.

This of course takes about 40 years water experience and have obvious market application as well. Study of the bottom, which many in water don't bother looking at, triangulation of shore navigation aids, like palm tree lined up with volcano peak and far point, and timing of the waves and sets all help find the ideal entry point. I guess it’s like standing at the right spot on the subway platform.

Another method if the waves are small, or really big, is to use a big board. All the kids ride short boards and only have one board, so if the waves are mushy they can't catch rides, or if the waves are big, they can't catch rides, and with 12 different boards for each micro category of waves it’s easier to catch the nice ones. So really good equipment helps.

Another method is to exercise and train even when the waves suck, so when the waves come, you are in great shape and can charge while the kooks are gasping for breath. Of course pros like Shane Dorian exercise all day long lifting weights, and after surfing five hours, swim around Tavarua Island twice. Geeze.

There are a million ways to beat the crowd. The last one is move a million miles away. The market still reaches here in about 89 milliseconds. 

Victor Niederhoffer extends:

These posts on how to get a good subway seat are a fine pyrotechnic display of native ingenuity. Presumably many of our readers, in their days as poor shavers, also had to apply these techniques to finding parking spaces, especially if they lived in urban areas and didn't want to pay $50 a day for a garage. What I'd like to ask, however, is how these ingenious delectations could be applied to getting a seat in the market. When someone is forced to get out at an unfavorable price, how do you know it's coming, like on the subway, and how can you take his place at a very favorable position to you? One hint is to study Michael Covel and his gurus.

Allen Gillespie replies:

In my experience, a sign of an open seat in the markets frequently presents itself when everyone sells a stock from news on a single company. A recent example is the retail selloff following SHLD's news — only to have WMT, HD, and retails sales numbers lead the market higher a few days later.

Questions I always try to ask myself in those situations:

1) Is the news company-specific or general?
2) Is the bad news the result of good play by a competitor?
3) Did the valuation make the news appear more important than it really is?
4) Which companies have future catalysts? 

Hany Saad contributes:

A fund manager using a trading system that has been losing for more than three consecutive reporting periods is usually a good bet, especially if the majority of fund managers trading the system fall into the switch trap by moving to a different system (usually a very thorough read of the fund prospectus is necessary in this case). They usually give up on the first system at the exact wrong time when it is on the verge of a big win, falling into what Rob Bacon warned against in his wise words "beware of the switches", leaving a seat wide open for the wise observant player.

The same reason I wager that trend following will make a killing next year with the only reservation being that it should be on the long side. 

Barry Gitarts adds:

I have tried to predict who would get up on the train, but such efforts have usually been futile. Instead I stand ready, knowing that anyone could be the next person to get up and I'll be ready to run for the seat. Of course this works better standing in the part of the car where there are fewer people, since there will be less competition for that seat when someone does get up.

In the market, this is like predicting the next big selloff. I can't predict when it will come, but I can be sure I have sufficient reserves for when the opportunity presents itself. As in the subway, this may work better where it is less crowded, and in stocks/markets with less media/analyst coverage. 



 For the past week I've been running Microsoft's Live Search and Google side-by-side and I found the comparative search results fascinating — Peter Norvig appears to have been a very good hire.

I've switched and am now comparing Yahoo Search and Google. At first glance the results are much more equal although the Yahoo results are taking about twice as long to be returned.

As the relationship between the value of the search results for Microsoft, Yahoo and Google change, comparing the relative value of the search results should make for some nice systematic trading opportunities.

Here's the pseudo code for a search engine trading system:

  1. Each week, download the top search terms from the web.
  2. Run each search term through each search engine, grab the results and compare identical items on the first page.
  3. Score each engine on its closeness to the Google results.
  4. As (if?) the gap with Google narrows, adjust the relative weighting of the two/three stocks, pairs trade, etc.

Philip McDonnell extends:

PoindexterGoogle has many advantages over its competitors. They are not standing still, but are expending more resources on their core search engine technology than the competition is. Google is getting better all the time. The competition is shooting at a rapidly moving target.

One of Big G's advantages is its large number of personal customized users. They can tailor your search query to your personal information if you have given them permission. The benefit is greatly enhanced search results. If you queried for 'movie schedules' you won't have to sift through the movie theater listings from Zimbabwe and Outer Mongolia to see what's playing. The top listings will all be in your area - no additional user input is required.

About a year ago they hired an intern who, within 90 days, was able to show the core engineering group a technique to improve search engine performance ten-fold. Initially there had been no interest in the proposal but when it was demonstrated by an actual prototype implementation, the new technology immediately became the top development priority in the company. It is impressive to see a big company that can turn on a dime when a good idea comes along.

Let me give another imaginative example where the company has an edge. Suppose Cramer comes on the air and recommends his latest Turkey Inc. (symbol: TURK) stock. Millions race to their favorite search engine to check it out. Because of their large sample and rapid search ability they can actually alter their search rankings based upon recent interest as correlated with user personal information. The investing parent will get the stock page, the cook will see a turkey recipe, and the school child will get a page full of information on the country Turkey. It is truly impressive technology that is advancing rapidly, perhaps faster than the competition can imagine.

It is often said that imitation is the sincerest form of flattery. It certainly applies in this case as there is a growing trend for competing search engines to simply scrape off Google's top results as their own. 

Alston Mabry adds:

Interesting essay on Norvig's site: Teach Yourself Programming in Ten Years

Researchers have shown it takes about ten years to develop expertise in any of a wide variety of areas, including chess playing, music composition, painting, piano playing, swimming, tennis, and research in neuropsychology and topology. There appear to be no real shortcuts: even Mozart, who was a musical prodigy at age 4, took 13 more years before he began to produce world-class music.



 Both of America's agenda-setting broadsheets — The Washington Post and The New York Times — have seen fit to allege the Harry Potter publishing phenomenon represents a failure to stem the decline in book reading:

Washington Post –

Shouldn't we just enjoy the $4 billion party? Millions of adults and children are reading! We keep hearing that "Harry Potter" is the gateway drug that's luring a reluctant populace back into bookstores and libraries. Even teenage boys — Wii-addicted, MySpace -enslaved boys! — are reading again, and if that's not magic, what is?

Unfortunately, the evidence doesn't encourage much optimism.

New York Times –

The truth about Harry Potter and reading is not quite so straightforward a success story. Indeed, as the series draws to a much-lamented close, federal statistics show that the percentage of youngsters who read for fun continues to drop significantly as children get older, at almost exactly the same rate as before Harry Potter came along.

I've read each of the six extant books no fewer than four times (once for myself, once aloud to each of my two kids, and once with my daughter as a learn-to-read exercise). There's simply no disputing the quality of the story-telling.

Similarly, there's no disputing the sheer magnitude of the global Potter publishing enterprise, which has earned its creator (who started out scratching longhand paragraphs in a Scottish coffeehouse) a billion dollars in barely a decade.

Given the undeniable success of the Harry Potter franchise, why then do the old lions of American letters wish to pooh-pooh its laurels?

I'd like to say it is cultural prejudice. The good-guy kids are, by and large, clean living independent thinkers who respect worthy grown-ups, love their families, distrust their government, and act ethically to preserve a society they value. Good and evil are clear.

Why, the economy of the wizard world is even based on gold! But I suspect the sneering .doc drafters aren't that high minded.

The success of Potter, like that of the squeaky-clean American Girl franchise, is a rebuke of the tawdry, PC moral relativism that's become the stock-in-trade of most US scribes, who now see their entire moral universe shunted to the back shelves and remainder bins of book stores around the world.

I expect to be sad when I finish the seventh Harry Potter book next week, but I'm sure jealous authors around the world can't wait for summer to end.

Stefan Jovanovich writes:

The Times used to be something you read because, like C-SPAN now, there were actual facts mixed in with the officially-sanctioned drivel. Gay Talese would actually go over to 10th Avenue or up to the Bronx and write about what he saw, and Homer Bigart would do the same. You could also read the shipping news.

Now, the Times is little more than a parody of itself — all the news that fits our ideology we (sometimes) print. I have not worked in publishing in 35 years, but I do keep in touch with my brother, who just retired from Pearson, and other now-aging Baby Boomers who know there was a Cerf named Bennett.

For what little it is worth, what we think is that young people do not read for the same reason that they always "did not read": as George points out, almost everything written for them is so infernally preachy that it's a wonder anyone reads it at all. Our Dad thought comic books were the secret explanation for the boom in standardized test scores in the early 1960s — the last time there was a measurable increase in literacy among school age children. "All of you kids were doing McGuffy drills each night under the covers trying to find out what happened to the Fantastic Four.



 The entire so called world energy demand/shortage, oil prices, gasoline prices, refinery maintenance on and on back and forth with the back drop of global warming impending doom, can't be too far off Y2k and tech. I am not comparing the two in bubble logic and anecdotes, like CISCO traded over 500 billion in market cap and crashed, therefore XOM reaching 500 billion is a tell. What is wild is back in 2002, it was stated perhaps the money flows might go to the Euro and real estate.

When to buy stocks is always a topic in the press. When to sell is obviously as interesting. How high oil prices, oil stocks down the food chain will spike up, then down at the inevitable end of the cycle is on one hand fun to watch. On the other the re-balance in the S&P 500, will it be fast and furious or as long and drawn out as the housing meme?

The housing meme was a pretty nice floor on stocks over the years. The gist was and is that the rapid rise in housing was ruinous. Once prices fell back to reality it would cause a recession. People seemed to be fighting the rise and seeking out contagion.

Oil and energy is seemingly a bit different. The gist of this meme is global growth, Hubert's peak and no available new supplies-ever, therefore energy is a long-term, as in forever bullish until it runs out. Yet the prices perhaps have yet to hit highs where the short sellers call a bubble. Or is it?

Who is the John Chambers of oil? In booms how is demand always overstated? In booms why is supply never estimated to grow fast enough? How many memes must overlay to create a tremendous boom in prices? There were many for tech, from the new economy to Y2k to create a boom for stock prices. For energies are the current memes enough?



A quick bit of Google research indicates that traffic deaths in 1972 were about 54500. Heres a chart from 1988 to 2005:

1988 42,130
1989 40,741
1990 39,836
1991 36,937
1992 34,942
1993 35,780
1994 36,254
1995 37,241
1996 37,494
1997 37,324
1998 37,107
1999 37,140
2000 37,526
2001 37,862
2002 38,491
2003 38,477
2004 38,444
2005 39,189

In other words, absolute fatalities declined after 1972, and have been more-or-less constant over the last 20 years. However, more cars are registered as we grow more prosperous. So the number of fatalities per 1000 registered vehicles has actually been declining steadily, from about 0.6 per 1000 vehicles in 1970 to about 0.08 today.



A few statistics and anecdotal evidence from the Aloha State. Tourism is down 15%. Japanese tourism is down significantly and mainland tourism down as well. Construction is down 46%. Appraisals on real estate are coming in lower; escrow closings are down; for sale signs are proliferating. Failed escrows are up. Prices are starting to approach mortgage balances requiring pay to close scenarios reminiscent of the last real estate cycle in the mid 90s.

At dinner last night at Jameson's, a nice restaurant by the sea serving plainly prepared, but cooked just-right fish and vegetables, the waiter must have overheard my trading musings and weekly stories and chimed in about how the market was up so big yesterday. I said to my wife, "Hmm, that's interesting." I remember early 2000 when I saw our waitress from dinner the next day at the broker buying all in on tech stocks. I don't know what the TV and all is saying about the recent highs in stocks, but it must be becoming a popular meme at recent all-time highs.



Here is a simple simulation about how easy it is to get lucky and rich trading futures. Continuous S&P 500 emini futures daily return 97-07 was used to find mean daily and standard deviation:

mean  0.126 pt
sd     13.452
count  2477 days

This mean and standard deviation were used to produce random series of daily changes (normally distributed), for 1000 days for each of 100 hypothetical traders (HTs). HTs don't have any skill predicting the market; they trade hypotheses in chat-rooms but buy and sell index futures at random. All the HTs start with $100,000 equity, and trade single emini contracts 1000 days until we check their performances. (This is about 0.75X leverage; $50 for 1 emini, less $6 vig for both sides of each trade. Effects of taxes, account fees, platform fees, research costs all = 0).

Of the 100 HTs trading just 1 emini at a time, the average final balance was $98,965; loss of about 1%. None went below $10,000 equity ("bust"); the lowest point for the worst trader was $41,500. The winner finished with $153,751; a gain of almost 54% (his hypotheses about markets was like Ayn's).

There was another group of 100 traders, the HRHTs (High-rolling-hypothetical-traders). This daring crew also started with $100,000 each, but traded five mini contracts each 1000 times (About 3.75X leverage; $250/pt, $30 vig round trip). The HRHTs average final balance was about $95,000, but this erroneously includes those with large negative equity at the end. Turns out 40/100 HRHTs busted somewhere along their 1000 trades (defined as equity < $10,000. OK they give up too easily, but if they were allowed to borrow from mom the worst HRHT would have ended with -$189,000). However the winner of the HRHT contest finished with $368,756!

Even without market prediction skill, leveraged trading in updrifting market can be profitable just by chance. And the more leverage used, the higher the possible return and risk of ruin.



 Three Essential Elementary Lessons from Running Many Miles for Modern Life

The first lesson is how far a mile is.

There are really two lessons in learning about the effort it takes to get from point A to B. Modern life allows you to forget about that effort. As the miles running slowly add up, it is clear magic and beauty of modern life is largely possible due to the modern communal spirit allowing the efficiency of commuting. Yet, this easily is taken for granted. The communal spirit of capitalism drives this intricate web of oil, trains, planes and automobiles. This great efficiency allows the governmental monopolies of public transportation, the roads and even the often terrible inefficient mandate of too many handicap spaces. These government "freebies" all imply we have forgotten that there is a price to pay for getting from point A to B.

The other lesson is that you get an intuitive feel for distance. The beginner often closely counts each mile, watching them add up to 100s then 1000s. The more you run, the closer your estimate gets to the actual correct distance, the more you know what pace you are going. The better shape you get in the more you understand how hard those that are in superior shape must work. The closer you get to the best of your abilities the more you understand the talent, effort, youthful vigor and luck it took for the race leaders to be there. Soon you dream of 10k runs or perhaps running a half marathon. Next you might start obsessing over your times or even step up to what most people can’t begin to comprehend, running a full 26.2 mile marathon. The lesson learned is how much effort and talent it takes to be great at anything, while at the same time learning how much potential is in almost anyone.

Numerical illiteracy is perhaps so rampant, because few can develop a mentally relevant personal relationship to the numbers. This relevancy can be fostered by attaching them to personal effort. Fostering such understanding of numbers to individual effort is dangerous to expansion of government.

The second lesson is effort produces contentment How great the most meager meal is when your body has earned it and needs it. Rice and beans after a marathon taste better than a five-star meal in New York. Modern life has allowed us to forget what a true need is and for most of us how simple satisfying those true needs could be.

The final lesson is nature’s intention for adrenaline.

Running teaches the true meaning of our fight and flight instinct. Clearly, running or flight is a natural outlet for the over-stimulation modern life can give. This shouldn’t be underestimated.

When there is real danger, I usually did something stupid, listened to the wrong guide, or tested my limits beyond the reasonable. Rather than panic, it is time to think. Often I can relate to the hobo’s tales. Perhaps not to the depths or as close to life and death. Nor can I claim the clever solutions that he has came up with. But I too have jumped a train or two, got caught in a few storms with lightning nearby, answered a few questions about trespassing, ended up dehydrated to confusion, felt hypothermia to exhaustion and felt the sting of frost bite.

Finally, if the there is a natural fight or flight moment, the answer almost always is what is the best path out, or flight. Who needs the barbaric, artificial, drunken adrenaline rush of running of the bulls? Try coming out of the woods into a pasture early at dawn in Montana awakening a herd of elk moms and calves resting, causing yourself to start a short stampede. Or even respectfully but unexpected close, facing the lone bison bull standing perfectly still. There are two exits or flight strategies, often the quick exit is best, but sometimes its a slow stealthy exit to avoid causing attention or the pounce on prey instinct.

What does this say to the trader/speculators? Perhaps, much of this is self evident or there are more important lessons, but in reverse order as listed:

Few modern jobs can have much adrenaline both in their depth and in their frequency as trading. Total immersion into this culture is not the answer. For most of us, trying to condition yourself to its effects by over-exposure will leave you with a burn-out, an empty wallet, and a nervous tick.

Learning to control adrenaline the way nature intended: exercise for an outlet; limit your exposure to artificially interjected adrenaline; shun gambling, especially gambling where you cannot out think the other. Don’t ever let those paid to scream BUY! BUY! or SELL! SELL! induce panic. Enjoy nature, and learn from it; nature respects man. Position yourself as the owner and you generally have a pleasant run. If you do test your limits expect to stay sharp.

Second, all is never lost if you still have hope, it takes very little to recover. A study of what this means, how to achieve this, is best found in studying The Chair’s life and philosophy in his low point. A study of the opposite of what this mean, but all too frequent for the speculators profession, is to learn from the mistakes of those loosing a fortune and committing suicide. But let me say I believe it begins with a respect for all those that take pride in their work. No matter how low rung they are.

Finally, while not totally quantitative, may I suggest that it’s not just about the fundamental analysis of a company? Rather, it is understanding the effort, the talent, the youthful vigor and even the luck that went into getting those numbers. My mistaken analysis of Google last year shows this. I completely missed their youthful vigor which the market keeps rewarding. And always consider the best path to the exit, not just planning your entry.



Symmetry is a basic characteristic of the universe and of the markets. Vic and Laurel have raised this concept in music, Lobogola, bridges. Weyl, in his book Symmetry, talks about symmetry in the history of human civilization, and how groups arise in the the study of symmetry. In Strange Curves, Counting Rabbits, and other Mathematical Explorations by Keith Ball, which Vic and Laurel recommended, is a discussion about the decimalization of fractions and how repetitive groups arise in the sequences. The combinations are endless as is the number of primes. There is a whole branch of math called Group Theory. The peculiarity is that a fraction is exactly stated, but most decimalization never are, and our digital computers never arrive at the proper result, only an approximation or rounding.

Such theory can be profitably applied to the markets, as we return to last week's S&P price after a Lobogola move of stampeding elephants charging down, and right back up over the same ground.

Dylan Distasio writes:

There is also a subset of evolutionary theory that points towards symmetry in nature as a sign of health, resulting in improved chances of mating for more symmetrical males across many species. The idea is that symmetry in living organisms requires a great deal of energy to be achieved, and hence the organism must be healthy if it has a pleasing symmetrical shape. And as an added bonus for symmetrical humans of the male (and by extension female) persuasion:

"Experiments have found that women are more attracted to men who have features that are more symmetrical than other men. One study even found that women have more orgasms during sex with men who were more symmetrical, regardless of their level of romantic attachment or the guys' sexual experience." 

As an aside, I would highly recommend "The Red Queen" as a fascinating primer on why sexual reproduction may have evolved as a means of reproducing.

Part of the theory is that plumage and symmetry in birds evolved as a sign of health, making them more attractive to females. It also deals with sexual reproduction as a panacea against the ebb and flow of parasites evolving in a constant battle across time with their host organisms.

I'm not sure what the equivalent of sexual reproduction would be in the markets, but I can see clear analogies between the parasites and market arbitrageurs (no offense intended) who are constantly in search of chinks in the armor of the market, looking for the fleeting free lunch before the opening is closed, and a new one has to be found.

In any case, the book is a great read with a lot of food for thought. 



Ponder this OCLC entry while examining GE's earnings:

Title: Love is the answer.
Publication: General Electric Co.,; 1973.; Made by Gordon/Glyn Productions.
Year: 1973
Description: 20 min.; sd. color.; 16 mm.
Language: English
Standard No: LCCN: 74-700351

Abstract: Designed to increase sales of silicones by presenting a story which compares the way a girl makes her husband's life better with the way silicones improve products.

Descriptor: Selling — Silicones.
Class Descrpt: LC: HF5439; Dewey: 668
More Corp Auth: General Electric Company.
Document Type: Visual Material
Entry: 19740419
Update: 20010628
Accession No: OCLC: 5550645



 There is a kind of trap that is implicit in maintaining a constant leverage ratio. Note that when the market falls one must sell to rebalance the ratio. After the market has risen one must buy more to rebalance. In a negative daily autocorrelation environment, this is exactly the wrong thing to do from a trading perspective.

An example: Suppose a stock is $100 and we buy 2x for $200. The stock drops to $90 we have lost $10 x 2 = $20. We now have equity of only $80. So we rebalance to own only $160 worth of stock or 1.778 shares. The stock recovers to $100. We profit by 17.78 so our equity is now $177.78. We have lost $22.22.

In contrast, if we had bought for cash and the stock recovered to $100 we would break even. If we do not rebalance we also break even. But by not rebalancing we run the added risk that during a decline we are implicitly taking on a higher leverage ratio than the 2x originally intended.

Rebalancing frequency at higher leverage ratios such as 5x is fraught with danger. The best way to calculate the ratio at any given time is to find the leverage ratio and rebalance frequency which will optimize the log of the expected relative portfolio returns. Ideally one should use the empirical distribution of returns as the basis for this calculation.

Charles Pennington writes:

I've tried to answer this question using daily total return data for SPY since 2/1/1993. I tried a series of leverage ratios from 100% to 1400%.

I assume that you pay margin interest of 6% annually (0.024% per day) on your borrowings. Of course one could do a little better on the calculation by including the time dependence of the margin interest rate.

Column labels (in order):
leverage ratio
$1 grew to
compound annual % return

100%, $4.45, 10.8%
150%, $5.20, 12.0%
200%, $5.50, 12.4%
250%, $5.24, 12.0%
300%, $4.51, 10.9%
400%, $2.44,  6.3%
500%, $0.87, -1.0%
600%, $0.20,-10.5%
700%, $0.03,-21.5%
800%, $0.003, -33.3%
900%, $0.00015, -45.3%
1000%, $(5*10^-6), -56%
1400%, wipeout (lose more than everything)


– 200% leverage had the highest total return, but it was not much higher than the return for 100% or 150% leverage, and of course the risk and volatility was much higher.

– Wipeout occurred at 1400% leverage. However, this assumes that one rebalanced daily. If you only rebalanced once per year, then 500% leverage would have more than wiped you out during the 2002 S&P decline of 22.2%.

These are sobering findings that suggest you should not have steady-state S&P exposure exceeding about 150%. Possibly higher leverage ratios can be occasionally useful if you have some reason to think that the expectation is higher than average in the near future, but it doesn't look good to go above, say, 400% unless you have a real live crystal ball. 



Whenever I think about politics, I am reminded of this -

With dim lights and tangled circumstance they tried to shape their thought and deed in noble agreement; but after all, to common eyes their struggles seemed mere inconsistency and formlessness; for these later-born Theresas were helped by no coherent social faith and order which could perform the function of knowledge for the ardently willing soul.

– Middlemarch, by George Eliot



 Given yesterday's moves by the market mistress, I'm inclined to set up a passive investment account and wondering: What is the most leveraged way to play the indices, specially NASDAQ, long term? Any case for or against ProShares such as QLD? I believe the optimal leverage historically for indices has been calculated as 2x.

Kim Zussman replies:

Dr. Saad's post recalls dating days, when so much emotion and gravitas spins moment-to-moment around the affections and afflictions of the deadly fickle opposite sex. About 99% of her moves are random (to you), not attributable to knowable causation, and there is as little merit in crowing when you are chosen as crying when you are dumped.

"Am I clever and erudite?" Or does she just like to boogie? "Am I dashing and dapper?" Or does she just like to boogie? "They were all cruel - I will show her true valor!" Or does she just like to boogie? "She danced with the others, but says I'm the one!" Or does she just like to boogie? "She moans and she shrieks!" Or does she just like to boogie?

Hany Saad responds:

No, no more confusion. I am certain now that she likes to boogie.

Her dance yesterday came out of the clear blue sky. To add insult to injury, I left the dance floor on Tuesday after three long weeks with her in my arms, leaving her to perform her best dance ever all alone while I watched from afar, sipping on a tasteless drink.



 For years I've been meaning to make it to Pamplona to run with the bulls but I hadn't been able to until this week. It's regrettable that it didn't happen sooner because to show up younger and dumber would've made it even more exciting.

An hour before the run, the streets are washed clean and then about 30-45 minutes before, the runners are contained within a plaza to wait while the sweepers remove all debris. About five minutes before the run, the police allow everyone to leave the square and get into their preferred position. There aren't many rules except that cameras or backpacks aren't allowed and the runner must be at least 18. The police use the dispersion before the race to take any violators immediately off the raceway.

Positioning is extremely important and I opted to meet the bulls near the end of the run at the end Calle Estafeta as the route takes a soft left turn into an area called Telefonica and then to the tunnel of the bullring. My reasoning was that the bulls were slower after running uphill on Calle Estafeta, on the left side were wooden barriers I could escape through, the momentum of the turn would lead the bulls to my right, and that I could make it into bullring since it closes after the last bull gets in. Another precaution I made was not to run on the weekend when it's the most crowded.

From watching videos of the run, it seems that many of those injured are someplace they shouldn't be doing something they shouldn't be doing. What really surprised me was the complete ignorance and lack of planning many other tourists did as it's too dangerous a situation to just get out and run.

The most important safety rule is that if someone falls, to cover their head and stay down until another runner taps them and says it's all clear. The only foreign runner ever to die was an American about 10 years ago who fell, got up to look for the bulls and was gored. My plan was to stay on my feet and simply just keep moving forward and left until I got into the ring.

The few minutes leading up to the run and two minutes of the run itself were some of the happiest and most exciting of my life. Running up Calle Estafeta with the balconies filled with people cheering, not knowing what would come in a few minutes was exhilarating.

One rocket booms to let everyone know the starting gate for the bulls is open and then a second rocket follows once the last bull leaves the pen. As I was near the end of the course, I planned to count to 75 to begin running but took off at 60 since so many people sprinted by me with complete panic in their face.

I was equally concerned about other participants as I was of the bulls because of all the accidental shoving, tripping, and blocking which made it more dangerous. Luckily, I managed to stay on my feet and ran alongside the bulls from about three body widths away which is about where I wanted to be.

The run through the tunnel and into the bullring was a glorious moment to be met by all those cheering in the stands. High fives all around with my fellow runners and then we waited for the baby bull with rubber covering its horns to be brought out that everyone could play amateur matador. After the run, it was time to celebrate with a cigar that I picked up on a layover in London from the world's greatest humidor at Davidoff on St. James.

When I ran on the 9th, it was a pretty clean run and the bulls tended to stick together. When the bulls get separated, serious trouble begins because they'll hit anything that moves. The run on the 12th shows what happens when separation happens and how the confusion causes the bull to act.

Without a doubt the experience exceeded my imagination but I probably won't do it again. There are certain memories that I feel are so pristine that I can't recreate them because the additional times aren't nearly as good. For instance, hang gliding off the cliffs over Rio was so amazing that I won't spoil the memory even though I've gone hang gliding elsewhere since and been back again to Rio four times.

The atmosphere in Pamplona is definitely a party scene but more mature than say Bourbon St. in NOLA during Mardis Gras or the Lapa neighborhood during Carnival in Rio. Locals were extremely inviting, particularly those we met watching the bullfights in the evening.

The bulls which ran during the day are the ones which are to be killed in the evening bullfight. I was awed at the grace of a Spanish bullfight and it's worth the trip alone to see.

Steve Leslie counters:

Bull-fighting is the worst display of the barbaric nature of man. It ranks with cock-fighting and dog-fighting, and below fox hunting. It is cruel and horrid.

It is a bloodsport where the animal is led through a series of stages designed to weaken it and ultimately set it up for its demise.

First it is stabbed in the back with a lance by picadors to lower its blood pressure so the animal does not have a premature heart attack and thus shorten the spectacle.

Next a group of men called banderilleros stab the animal along its shoulders with lances to further weaken it through blood loss.

Finally, after the animal is severely weakened and defenseless, the matador enters the ring of death and performs a ritual of maneuvers with a cape –choreography of sordid and macabre design. Then he thrusts a sword through the shoulder blades of the spent animal and into the heart.

There is no majesty or glory in such a grotesque display. There is no redemption, as the end of the play is written before it is begun.

Ryan Carlson replies:

According to the book, Running with the Bulls: Fiestas, Corridas, Toreros, and an American's Adventure in Pamplona, the bulls that fight lead a life of freedom on the open range and are given the best food and quality of life. In exchange, they pay with their lives by dying in a bullfight. Counter that with all those animals which simply exist in a feedlot in order to fatten them up and die by getting stunned by electricity and their throats slit. I would certainly take the route of the toro bravo!  

Scott Brooks writes:

I can see both Steve's and Ryan's point of view. Bulls, and animals in general, are tools to be used by man as we see fit. However, that doesn't mean that we have the right to be cruel to them.

When I hunt deer on my farm, it is in my view an exchange of value. The animals on farm live a life of relative comfort, security and abundance. I create a habitat that is conducive to their needs, creating lots of quality cover including sanctuaries that are off limits to humans (except in very rare instances). There is plenty of water, and safe travel corridors to get from bedding to water areas. There is more food on my farm, planted specifically for wildlife use, than the wildlife can eat.

Some would say I do all this for the animals, but that's not the case. I do it for me, my family, my friends and my clients. I want a great place to hunt, to recreate, to watch and observe wildlife, and to get pure organic meat for my family. The benefit to the wildlife is simply a byproduct of my desire to create an environment that supports my desires.

So the wildlife benefits from my efforts, and all I ask each year is a few sacrifices.

But when one looks at the manner in which the sacrifice occurs, one will notice that it's a humane manner in which I, or my guest, inflict death on the animal we're hunting. Death in the wild is usually horrid. And to top it off, the end is usually the most hideous part, as other animals (the carnivores) zero in on the dying animals and attack. To be eaten to death is a slow and horrible process. Sure, smaller game animals may die quickly (as their backs are snapped in the jaws in a larger predator), but larger animals such as deer or bulls die slowly as Kipling states: under the tooth, fang and claw of predators.

I usually kill an animal quickly and virtually painlessly (many times it's painless and instantaneous). But there are times when it's not a good kill — what I call an ugly kill. I hate those, but they are a fact of life in the wild. And I can tell you from first hand experience, that most non-human inflicted death in the wild is hideous! So what keeps me coming back after an ugly kill? It's simple. I know that even my ugly kills are much more humane than the vast majority of non-human inflicted deaths in the wild.

So what is the connection to this and the bulls of Pamplona? Those bulls are killed in a manner that many would find offensive. It's off the beaten path of a quick humane death in a slaughterhouse. But when you compare their death to the alternative deaths in the wild, you will find, as I have, what looks like a draw-out spectacle of death inflicted by the matador is actually a better alternative to the myriad of horrid (and much more likely to occur) deaths in the wild.

Mother Nature is the older and crueler sister of the Market Mistress. The Market Mistress will just take your money and laugh at you. Mother Nature will slowly and cruelly kill you — while laughing at you! 



Something I have been listening to lately is More than Mozart by Richard Freedman, which is part of the Portable Professor Series put out by Barnes & Noble Audio. In this excellent course, Prof. Freedman says near the beginning:

"music stresses movement through time, and engages our suggestive sense of its passing. Music has a tendency to invoke goals of various sorts, both near and far. Music has closure, a sensation not just of ending but of expecting no more."

 I find this a very good way of looking at the markets also. Let's take the Dax futures for example, which were hovering above 8,000 on Tuesday at 13:50 with the tendency of staying around the round number until they are ready to move up. That tendency was so felt by the audience of traders that they immediately knocked the futures down to 7900 in a minute in order to profit from the rise. The goal was then to get back above 8,000, to Friday's close of 8,108, or Monday's close of 8,145. They are now back to 8,116, and that provides closure.

As the Prof. says, "music also has ascent," and today, the Dow set a quadruple top at 13,600, then went below 13,500 to set up further contrast. That done, the goal was to pass 13,650, which it did, getting all the way to 13,869. As I write, the target of the ascent would seem to be 14,000, and I don't doubt that it will be reached.

I can highly recommend Prof Freedman's course, not only for its market value, but for its humble presentation of musical textures, melody, rhythm and meter, and harmony.



I walked out of this man's latest film early. I had already read everything about it, and I was well aware of all of its arguments and positions. Many are valid, but the way in which he goes about making his point in his typical biased and construed fashion is absurd.

Just a few years ago I had an awful, but amazing, life experience living in a New York City hospital for approximately one month. I was literally on a death bed following a high speed collision with a yellow cab while traversing 2nd Avenue as a pedestrian. I was taken to Bellevue Hospital's trauma unit by a city ambulance and though I was unconscious, in time I learned that the facility was filled with victims of stabbings and gunshot wounds, fools suffering from self-induced drug overdoses, and so forth.

The health care I received was top notch. After all, I survived shattered left limbs and fractures to my skull, several bruised and ruptured internal organs, and some serious blows to my brain.

When I finally "came to" several days later - the coma was medically induced and extended to prevent additional swelling to the brain - my immediate thought process was to remain alert and focus on what was surrounding me. If I couldn't move my body (harnessed and tied down to a large degree to promote healing), I was at least going to keep a close watch of everything going on around me. I witnessed top notch health care being provided all over the place. Much of it to those uninsured whom Moore portrays as "victims" of the American medical establishment.

Early in my stay at Bellevue I had two roommates: Mr. D and Mr. N. Both uninsured I later learned. I believe Mr. D was working on a loading dock as a temp for cash money when a truck backed into him, knocking him down with his head landing on a cement block. No other bodily injury. But for all sense of the matter, he was ruined. The lengths to which the nurses would go to get him to focus on things as simple as putting a top on a shoe box, let alone tying a shoe, was incredible. I would watch for five minutes and pass out from my own frustrations for him. When I would wake 20 minutes later, there they would be, working on some similar elementary task with no success. He had been there for months prior to my arrival. Again, no insurance. If there was ever an unknown spirit of New York, this had to be it. But it says something much more (no pun intended).

Mr. N was another story - addiction problems. Again, the attention the nurses gave him when he would wake up in the middle of the night with seizures was incredible.

My time at the Bernard Baruch Rehabilitation physical therapy room was another fantastic experience. Again, the time and commitment the staff gave patients was incredible. Imagine watching someone learn to walk again. It can not be done alone.

The interesting part of my experience and how I challenge several of the filmmaker’s points is what I saw during several of my outpatient visits at Bellevue. I routinely had to go for internal organ scans, leg and arm check-ups, etc. Do not get me wrong, the lines and times spent to receive treatment were extremely long, even frustrating. People in considerable pain and discomfort could sit for hours, but not once did I see someone refused for care. This leads me to my main point: Personal responsibility.

Of all of the cases that I saw over my month stay at Bellevue and the several weeks worth of outpatient visits, almost all of the problems had negligence in some shape or form of an individual's responsibility to take care of his or her self: drug overdose, constipation, obesity, diet-influenced heart problems, etc.

I took a good hard look at what was going on around me, and in a fair estimation, two thirds of the problems came down to an individual's body weight one way or another. I wish the filmmaker would spend a little more time looking in the mirror, most solutions to the American medical dilemma would be found right then and there.

Yossi Ben-Dak writes:

Personal responsibility is something very different from what Moore understands or perhaps admires. His very selective use of statistics and ratings seems to be in his movies only to win an argument.

While correct in many ways concerning what can be produced in the USA for public health, it is difficult for me to forget his venom and unfairness vis-à-vis business and selecting government for solutions in some areas but not others, given his idiosyncratic taste and populist broadcasting style.

That includes his utter irresponsibility for his body and looks as James correctly points out. It makes it difficult for me to explain to my daughter that not everybody who feverishly preaches health must be eating and exercising his message. 

Steve Leslie adds:

Things that make you go hmmmm…

Michael Moore is grossly overweight, a prime candidate for heart disease, diabetes and other ailments, and laughably suggests that the health care system in Cuba is better than that of the United States.

Robert Kennedy Jr. screams out about global warming and then boards a private jet to travel to a speaking engagement.

Rosie O'Donnell raises money for the homeless and retreats to her mansion behind ten foot high walls.

Al Gore promotes a live earth concert to bring awareness on global warming and owns four homes.

Ted Kennedy wants to raise taxes on everyone, yet pays little federal tax himself. He accomplishes this through a complicated tax strategy involving offshore trusts.

The Big Dig starts out in 1985 with a $2.8 billion budget estimate and $14.6 billion of federal and state dollars have been spent to date. Recent revelations have uncovered that the epoxy glue used to support the ceiling is ineffective, causing a section of ceiling to fall, killing two people.

John Edwards speaks about the disenfranchised and poor and gets $400 haircuts.

Hillary Clinton talks about a nationalized healthcare system and Bill Clinton gets paid millions by Infosys who sells phone lists and marketing lists that target those with Alzheimer's.

Bill Clinton says "I feel your pain!" and charges the secret service $10,000 per month for security services to his compound in Chappaqua N.Y. which happens to be the same amount as the monthly mortgage on the house.

The Senate refuses to discuss privatization of social security yet has its own privately-managed pension plan.

Bill and Hillary decry the commutation of "Scooter" Libby's sentence yet refuse to discuss the Marc Rich pardon or the hundreds of other pardons handed out in the last 48 hours of the second Clinton administration.

Democrats scream about Attorney General Alberto Gonzalez and demand his firing yet forget to mention Janet Reno and Ruby Ridge, Waco, Texas, and Elian Gonzalez.

The Government suggests it can build a fence along the border between Mexico and the U.S. to keep out illegals from entering.

A new petroleum refinery has not been built in the U.S. in 30 years, yet legislation to build a refinery gets bogged down in committees. And the price of gasoline goes higher.

Charles Sorkin responds:

Should this jingoistic assortment be labeled as an example of propaganda, as a political parallel to the earnings and financial propaganda decried in the Vic and Laurel's literary works?

Does Al Gore's electricity usage imply that climate change is not real, or does not pose major problems? How does his power consumption per square foot compare to other politicians' homes?

Is Rosie is a hypocrite because she won't turn her estate into a homeless shelter? And if she did, would it really help combat homelessness? When I leave my office tonight, will I be retreating, or simply going home?

Isn't Bill Clinton entitled by federal law to charge the Secret Service $10,000 per month?

Waco, Ruby Ridge, and Elian are irrelevant to the fact that Al Gonzo is not performing in a manner suitable for his office.

John Edwards pays quite a bit of money for a haircut. How do his expenditures compare with what other politicians spend on cosmetic enhancements during their own public appearances? There are large make-up and wardrobe staffs backstage at the conventions of both parties, and at televised debates. I'll bet the services of those people are really expensive!

Alex Forshaw remarks:

If you're going to make yourself the locus of protest against carbon footprints, poverty or any other alleged injustice, you would do well to not exemplify the excesses of those most responsible for causing your "crisis" in the first place. There's a big difference between pointing out a problem ("nobody is perfect"), versus hectoring society to rise to a morally pure standard which you flout every day of your existence.



 I've often wondered why the epithets Bull and Bear are used to describe the particular directions of market movements.

For instance, I have witnessed firsthand how aggressive the Bear is every day, just to survive. The Bull, on the other hand, is lazy most of the day, grazes when he pleases, and is not often dependable on the one thing he is used for: breeding. In nature it seems to me that the Bear is a much more eccentric, powerful, and aggressive beast than the Bull. If I were to use the same epithets for the markets I think I would choose just the opposite of how they are used now.

Scott Brooks comments:

I have wondered the same thing for years. I agree with your assessment. It seems like it should be the other way around. There has to be some kind of a story as to why "Bulls and Bears" were chosen, but I don't know it.

I have looked deeper into this bull/bear dichotomy and have come up with these conclusions. Bears do hibernate each year for a long time. Contrary to what you see on the Discovery channel, bears aren't all that aggressive all the time and are pretty laid back most of the time. They have to work hard for their food, and there is great competition associated with food, and they never know where their next meal is coming from. Further, the fun activities (such as breeding) are highly competitive.

Bulls, which do lay around a lot, are actually pretty aggressive until they've established a pecking order (similar to bears), but then again once that's established they go about living their lives and get along pretty well. But then when you look at a bulls, you are only really looking at a "successful" bull. You see, most bulls are not successful, they're hamburger in your fridge! The successful ones live long prosperous lives, eating good food, getting pampered (by bovine standards), and their most important job is to propagate the species!

Just think about that! It's every school boy’s dream (and middle-aged guy’s dream)! Spend your life being pampered, being fed good food, and hanging out with the guys! And all we've got to do to keep that job is have copious amounts of sex!

I'll take the job of "successful bull" over being a bear any day!

Reminds me of the joke about a father bull and his son standing on top of a hill looking down at a herd of cows. Son says to dad, "Hey dad, lets run down the hill and have sex with one of those cows!" Dad says, "No son, lets walk down hill and have sex with all of them!"

Dylan Distasio notes:

According to Mortimer's definitions, it would appear that "bull" and "bear" had much more specific meanings in 1785 than they do today. A bull wasn't just someone who thought — and hoped — that the market would go up. He was the equivalent of a modern investor who uses margin, and lots of it! The bull of 1785 bought stocks with no money at all and hoped to sell them at a profit before payment became due.

In Mortimer's day, a bear wasn't just a pessimist — he was a short-seller. Mortimer claimed that you could tell bulls and bears apart just by looking at them. It's been 216 years since Mortimer wrote Every Man His Own Broker. But it sounds to me like he could show up on 21st century Wall Street and find his way around just fine. 

Marlowe Cassetti comments:

I remember reading in one of the Senator's books about the "sport" of staging bull and bear fights for the amusement of the early miners and frontiersmen. The bulls would try to toss the bear with its horns and the bear would claw the bull down. Thus the liking of this contest to the early markets. A grizzly contest indeed, then and now! 



 The following are the top 10 most read stories at marketwatch.com. Eight of the stories seem bearish and only two relate to actual company earnings.

I would presume that the readers of these stories must be individuals who have sold recently and are looking for comfort in having made the decision to exit the market at a triple top. I have no idea what that is or what the odds of it being true are but if earnings are rising at 41% for Genentech and profits up 34.5% at Infosys, that is reason enough to buy stocks.

One story is about earnings hopes but the two earnings stories are not hope but fact. Further, all bad news stories have been factored into the current market / index prices and the news in this case offers little factual information.

  1. U.S. stock futures choppy amid renewed housing jitters
  2. Is that a triple top forming in the Dow?
  3. Stocks rise as earnings hopes offset subprime woes
  4. For home-builder stocks, bad news just keeps piling up
  5. Wireless-phone industry tactics criticized
  6. Will stocks feel subprime sting as debt ratings are cut?
  7. Genentech quarterly earnings surge 41%
  8. Infosys profit rises 34.5%; full-year outlook pared on forex
  9. Dollar remains pressured as euro, pound hit highs; yen retreats
  10. Oil stocks weather downturn in crude, oil service downgrades



Despite chess being a game of 'perfect knowledge' (game theorists’ term, not mine) we are nonetheless beset by uncertainty. Even in relatively benign, 'typical' positions, it can be difficult if not impossible to assess outcomes with any accuracy.

But does one need to know, to have deep insights? Here the answer is much more clear, in fact it's a definite 'no'. The players who win tournaments are those who play good moves, not the ones who see very deeply. And as evidence I cite the example of Friedrich Saemisch, inventor of several important opening systems but famous for losing on time.

Interestingly Saemisch's impracticality went beyond the bounds of the chessboard, as illustrated by these stories related by Ludek Pachman:

'Isn't Hitler a fool? He thinks he can win the war with Russians!' Samish said completely aloud. Prague of those days was full of Gestapo and Samisch had to be overheard at least at the next few tables. I asked him to speak quietly. 'You don't agree that Hitler is a fool?' was Samisch unconcerned retort.

"Samish stayed 'afloat' untill the Summer of 1944. Then he let his mouth run off at the closing banquette after the Madrid tournament. Upon his return, Samisch was arrested right at the German border and shipped to a concentration camp. In Apr, 1946 I asked Samish in Switzerland what was his internment like. 'Unglaublich, uberhaupt nichts zu Rauchen!' Samish replied; and immediately added: 'Noch schlimmer ist es, dass ich jetzt volkommen frankelos bin!'…" (Unreliable GM translation: 'Unbelievable, above all nothing to smoke. Even worse is that now I'm completely broke.') 

Gabe Ivan remarks:

Bruce Pandolfini says:

Most people believe that great players strategize by thinking far into the future, by thinking 10 or 15 moves ahead. That's just not true. Chess players look only as far into the future as they need to, and that usually means thinking just a few moves ahead. Thinking too far ahead is a waste of time; the information is uncertain. The situation is ambiguous. Chess is about controlling the situation at hand. You want to determine your own future. You certainly don't want your opponent to determine it for you. For that, you need clarity, not clairvoyance. 



Bear GryllsI much enjoy watching Man vs. Wild , aired on the Discovery Channel. The host Bear Grylls (former member of SAS, a career that ended when he broke his back in three places, after rehabilitation became the youngest Brit to climb Mt. Everest and return alive) places himself where tourists might get lost. He then with very little equipment shows the viewer how to survive and find the way back to civilization.

It usually involves staying calm and not wasting energy, finding your directions (construct a simple compass, observe the sun, or follow a river), finding water (look for plants in desert, don't eat snow as it is not energy efficient), and food (he shows how to catch fish, birds etc), protecting yourself against the elements (he shows how to block the sun, keep warm in the snow, etc). Maybe some of you can find parallels of how to survive in the markets?

Some survival techniques from the show below taken from Wikipedia:

  1. Glissading down a glacier using a broken ski pole
  2. Using trousers as a flotation device by tying off the leg holes to trap air
  3. Climbing up a tree to survey the land
  4. Hunting a rabbit with a throwing stick
  5. Soaking his shirt in urine and using it as a headdress to cool down in the desert
  6. Climbing up a knotted rope using Prusik loops
  7. Fashioning a raft from bamboo and palm fronds

Scott Brooks adds:

This is a great show and my kids love it! They DVR every episode and watch them over and over! Bear doesn't just talk the talk, he dives right in and walks the walk, actually eats the bugs, catches fish and eats them raw, purposely breaks the ice and then jumps and shows you how to get out, then takes off his clothes in snow and shows you how to dry off in freezing cold weather, or drinks his own urine to survive.

I'm sorry for being so graphic, but you have to admire someone that actually does whatever it takes survive another day. He really teaches the right message and it's a simple message, yet the most important message that any of us can learn. There is no higher value than life, and life requires an optimistic thinking mind to survive.

I find it ironic that his nickname is "Bear". He is the complete antithesis of market bears. Market bears talk their negative talk, but don't walk the walk. Heck if they did, they'd be completely broke! Market bears talk endlessly about gloom and doom and give advice that leads only to disaster. Whereas Bear Grylls gets in and shows you how to avoid the gloom and doom, but if you happen to find yourself in a gloom and doom situation, he actually gives advice that will get you out!

Market bears give lessons of pessimism. Market bears are constantly screaming the sky is falling so you'd better duck and cover. They are anti-life and their methods lead to sure destruction at any cost, and the cost is very high! 

James Sogi writes: 

Many needless deaths are caused by mistakes in a critical, and sometimes not so critical situation. Many times an everyday situation can become critical as a result of compounded series of small errors that snowball into a death threatening situation. A day at the beach, a ski trip, a hike, a trade in the market can all turn into a survival situation in a short period of time as a result of lack of proper preparation, and mistakes of judgment compounding, and or panic or inappropriate responses. 



 In my latest Northwest Draughts Federation Newsletter is an article about English exhibition player William Strickland giving a draughts (checkers) exhibition in South Stockton in 1855, consisting of playing 10 boards simultaneously while blindfolded. After the games concluded he astonished everyone by repeating all of the moves played on the 10 different boards both forwards and backwards!

What an exceptionally well organized mind he must have possessed. A market trader of today could keep track of multiple trades and instantly recall previous trades, etc. The study of board games will enhance ones mind in many areas that carries over into many facets of life. Developing mental acuteness could save anyone from a serious blunder by doing something hurriedly that was not carefully planned.



 Transformers is new summer blockbuster with the weight of Steven Spielberg behind it. A few middle of the road stars, a completely unbelievable plot — no I'm not referring to the living transforming robots or the story about how they came to be or even the science fiction part in general. Oh no, that part is believable compared to the whole plot line of the movie. The premise of the plot strains credulity. It requires that you believe that the people in the movie were as dumb as they were made out to be.

Why is it so difficult to demonstrate a certain level of competence in people? Oh, I know. That would require the screenplay writers actually to have to think to come up with some kind of plot beyond just banal stupidity. Instead of writing a good plot, they substitute special effects and cut from scene to scene so quickly that only an MTV attention span idiot could even begin to follow what is going on.

But I digress. Let me cut to the chase: This movie was genuinely bad. A complete waste of my time and my money.

We took our boys to see it (8 and 12) and I was truly embarrassed. There were completely unnecessary scenes with inappropriate discussions and behaviors, especially for a movie aimed at kids.

Hollywood should be ashamed of this movie. I cannot recommend enough to miss this movie. If you must go do not take the kids! On my entertainment scale of 1 - 10, I give it a 2 (and that's because there was an occasional action scene that was pretty good).

On my "Prudish Dad" scale of 1 - 10, I give it a negative 1, not because it's so horrible for adults but because it's inappropriate for kids. Many scenes are only for shock value, to make up for a movie that was poorly written. I was embarrassed several times during the movie and wished that my boys weren't present.

Save your money.



 The Wimbledon Final between Federer and Nadal illustrates the importance of ever changing cycles in sport and the markets. Not only did each set alternate, but the break between the sets was key to a change of fortunes for the players. The first three games of the first set, which Federer won, were fatal for Nadal, as was his inferior stroke production, and how this tired him out in the end. I predict that Nadal will drop out of the top ten within the next two years as his athleticism regresses with old age.

The lessons from this match would all seem to have direct applicability to the markets:

Gravitation: If you looked through every world market as to its performance this year, you'd find the US below about 90% of them. This has been the case for the past three years, and could perhaps indicate that the hatred of the US that permeates the rest of the world carries over to investments, and leaves the US cheap relative to other countries. I hypothesize that there is a gravitational pull from all these other markets to the US.

Palindromic Lesson: People often ask me what I learned from the Palindrome during my 10 years of intimate association, aside from the value of using two cans of tennis balls in a match, being humble about your performance next year, and never admitting to a profit in the past. I would say that his idea that refuted hypotheses are the key to major market moves has much explanatory and predictive power. The most recent refuted hypothesis was that stocks couldn't go up when bonds are down. Last week bonds were down two points and stocks up 2%. Stocks are back to near their all time high, but are not there yet. I hypothesize that they need a refuted hypothesis to climb the last leg.

Death in the Woods: Much too little attention is paid to the death of companies and markets, as a prerequisite to renewed and bounteous growth in the future. A visit to Muir Woods, where fire and wind toppling a tree, leads to a profusion of new growth, from burls, roots, and stragglers, confirms the importance of this theory.

James Tar adds:

During yesterday's match coverage on NBC, there was a videotape comparison of the forehands of Borg and Federer. The strokes are frighteningly similar — the controlled loop backswing, the length and arc of the stroke, the extremely forward contact point, the angle of the racket at contact, and the follow-through just under the left shoulder. Their physiques, too, are almost identical. If you changed the hair and apparel of these players, you might have trouble identifying who was who. The real difference was the racket in each hand.

Borg's forehand was the most feared shot of its day, as is Federer's now. The point is that as technology changes, the foundations of competitive success remain constant. Nadal's strokes are completely different, even inferior. The power he generates is enhanced by the racket he uses. I recently tested the same racket. It does not favor smooth, traditional strokes. The balls flies — everywhere but into the court. Abbreviated, quick, jerky strokes, designed to create spin, must be used to harness the advanced technology in your hand. When the ability to make these incredibly timely movements diminish, so will the end result.

Barry Gitarts mentions:

One thing we can learn from Nadal is how far working harder then the next guy can take you.

Alfonso Sammassimo writes: 

Some points on the Wimbledon final:

1. Changing cycles. Just under thirty years ago one of the greatest ever baseliners won the title for the fifth consecutive occasion. Last Sunday one of the best ever all-court players in history did the same, playing predominantly baseline tennis. In between these two heroic feats, serve and volleyers have taken most of the spoils. Tennis, like markets, is a dynamic game where players discover new ways to counter present styles and tactics. It is a simple but perfect example of ever changing cycles. Greg Rusedski said it so well, "Tennis changes. If you look back in the past, they say it's too slow, then you have eras they say it's too quick. It always balances out."

2. Equipment best benefits those who best use it. While baseliners have benefited greatly from the power that comes with new racquets and strings, so too have the big servers. Nadal does indeed use a racquet that is very hard to control - the fact that he does so well is a testament to his talent, not the racquet. Roger Federer has his racquet strung at 50 pounds which is also extremely difficult to control and provides much power. They both have strings which can help generate a lot of spin. These are two superbly talented tennis players who maximize the benefits of available equipment. 'R' or a Bloomberg terminal doesn't help me trade any better unless I have the ability to utilize them expertly.

3. Speed and agility are often overlooked and under trained. From the first point the most obvious difference between this match and the lead up matches of the tournament was the speed of both players. They are in the right spot at the right time more than the other players. Not only better foot speed, but also better anticipation. Market analogy…

4. Never give up. Federer looked on the back foot for much of the match. Only one break point opportunity during the middle three sets, and down break points in two service games in the fifth. He hung in, and the opportunity came as nerves and possibly fatigue got to his opponent. He took it swiftly as a champion does.

5. Efficiency nurtures longevity. A style of compact strokes and taking the ball on the rise requires less physical effort, expends less energy, is less likely to lead to injury, and most of all can be continued for longer in a career. Agassi and Connors are examples. Fewer trades and less commission, and coming straight in after a decline might prolong my trading account. I would agree that Nadal will suffer as his athleticism regresses with age.

6. Have outs. Much advantage having an all-court game to fall back on, having something else available when you're in trouble. When he was down break points in the fifth Federer cranked out three aces in a row, so discouraging to an opponent who has to earn nearly all his points with longer rallies. It’s good to have mouse holes when in the market.

7. You have to work harder than anyone. Nadal's was an incredible effort, coming so close to winning the running double which has eluded previous champions who aspired for the Grand Slam. He is possibly the hardest worker on the tour and his obsessive and methodical approach to everything from training and practice to the placement of his water bottles might just help him maintain his place in the food chain for longer than might be expected. 



 Looking at the news today, there are several stories that reek of bearish propaganda. An article on Reuters talks about a ruthless sub-prime lender who talked a woman into signing for a mortgage as her husband underwent open heart surgery. Instead of perhaps discussing the ruthless behavior of the woman trying to get a death bed comp., the story is about the ruthless behavior of the lenders who make these high risk, high return mortgages.

Only 10% of sub-prime mortgages are apparently in arrears right now, with only 5% total under threat of foreclosure. On the other hand, how many low income families have been able to improve their status in last five years because of what this product offers? Enough to bring the home ownership rate to 70% of all families (2004), and presumably this is even higher now.

Most of the sub-prime mortgages are to low income people who would not have been able to improve their life style without the brokerage houses packaging these mortgages up, enabling all the new sub prime lenders to compete with the big banks. Just like the organized protests against fast food restaurants in fancy neighborhoods, the root cause of the trouble here is in part envy that the formerly low income people can now enjoy luxuries once reserved for those wealthier than them.

Another propaganda story for the bears is the news that Home Depot and Alcoa disappointed in early earnings reports. The hope that we will have a disappointing earnings season is always highest when the pre-earnings announcements are negative (which they have to be for legal purposes). Bear in mind that these are two companies suggesting that they may not meet expectations, amidst a sea of those that have hit or beaten their targets in each of the last twelve quarters.

The last bearish propaganda story I saw today was about Bernanke's talk today, and the fear he will talk about inflation. This is a man who wrote a Principles of Economics textbook, and chaired the Princeton Economics Department — clearly he is able to tell what inflationary expectations are from the bond rate, which is currently a little below 3%.

This orgy of negative news induced me to reduce my level of reticence, which was a naturally little high coming off a week like last week.

Thomas Miller replies:

Thank you for keeping your positive perspective, based on counting, in the current negative-news atmosphere. The bears are always trying to entice us to fall into their cesspool of negativity. We are fortunate to have a guide to help keep us out of financial danger.

Your comments on sub-prime are right on point. I know a 46 year old woman who was able to become a property owner thanks to sub-prime. She struggled to raise two straight-A students by herself. She was always a renter and would probably always be one without sub-prime loans. She is now very happy and proud, and is improving her financial situation. She will be able to refinance at a lower rate as her credit score improves.

This is what America is all about: a land where hard-working people have opportunities to improve their lot. The majority of sub-prime borrowers are like my friend. They now own property and they will do what it takes to keep it. Based on man's innate desire to improve his lot in life, the vast majority of sub-prime borrowers will not default.

Roger Arnold writes:

Congress is currently going through the process of increasing the FHA loan limits to match those of Fannie and Freddie and to increase the loan amount to up to 100% of purchase price from 97%.

That would increase the FHA loan limit about 15% from $362,790 to $417,000. That process should be completed within a few months.

They may also allow refinancing into FHA loans from non-FHA loans (now FHA loans may only be used for purchase transactions). This would allow borrowers in subprime loans to move out of the private lender space and essentially to a federally co-signed mortgage. Obviously this would also allow the holders of those loans, and the associated MBSs and CDOs to offload their risks to the federal government, thereby shunting the necessity for the normal process of defaults, foreclosures, evictions, bond market disruptions, etc.

The same is being considered for the VA loans.

The FHA and VA, however, have loan processing guidelines that are very paperwork-intensive and require lenders to be individually licensed to make FHA / VA loans.

Most lenders as a result, until recently, have avoided providing FHA / VA loans. Now, most are gearing up for these changes, educating their loan officers, going through the paperwork required to provide these loans, and creating marketing systems to go after them.

Once begun, this should alleviate much of the concerns in the sub-prime space, such as liquidity and contagion.



For those of the bearish persuasion, especially, perhaps you need a good therapy dog? 

Archie? He's the Dog Star

The 165-pound Newfoundland works his magic daily with abused and neglected children at Camarillo's Casa Pacifica. Only his drool is 'yucky!'



 At a certain age, one gets used to being dumb. But it's still annoying to be dumb over and over again in the same way.

A few weeks back I posted on a very high correlation between the volume of index options, on the one hand, and the volume of the leveraged long and short index ETFs. I used a moving average to smooth out the data, and, of course, that was a mistake.

The two moving average series have a correlation of +0.959, but each also has autocorrelation in the +0.6 area. R has a nice function for checking autocorrelation, (acf), and here is a graph of the autocorrelation of one of the series. Lots of non-random structure in that graph.

To eliminate the autocorrelation problem, the volume data for the ETFs and for the index options was summed for each three days, and then the percent changes from one non-overlapping three-day period to the next were used to create two series of what should be independent data points. These series each showed about -0.2 autocorrelation at the 1-lag.

These two series have a correlation of +0.348. Which looks good, but then the next issue is: What if some underlying factor is causing the correlation?

The volume data for the NYSE was taken and converted into non-overlapping 3-day totals to match the index option and ETF series. Interestingly enough, this NYSE series also had a 1-lag autocorrelation of about -0.2.

More important, its correlation with the ETF series was +0.451, and with the index option series, +0.539. So both the ETF and index options volume series are more highly correlated with overall market volume than with each other.

Philip J. McDonnell writes:

The Slutsky-Yule Theorem is quite old and says that taking a moving average of a time series induces periodic motion even though none existed in the data itself. This topic arises periodically in this forum as well. One need not feel to bad after falling into this trap.

There is the famous story of Holbrook Working, a big name economist and arguably the best statistician in the government's employ. His paper, published in the 1960s compendium Random Character of Stock Market Prices seemed to show positive serial correlation in monthly prices. Thus it was a counterpoint to the argument for the random walk. The trend following crowd was born and looked to papers by Working, Alexander and Levy as proof that trend following was the Holy Grail.

Eventually the Working paper was debunked because he had used monthly average prices as his data set. This technique created the Slutzky-Yule effect and artificially induced the apparent serial correlation. When the defect was corrected the correlations were negative. The Alexander and Levy papers were also discredited but for different technical flaws.

Apparently some trend following hedge funds and best selling investment authors still have not received the word. 



An astronomy podcast I'm listening to claims any issue in that field can be deliberately confused by asking one of two questions: How does X respond to a magnetic field, and how does X look in three dimensions?

There's no shortage of parallel obfuscatory inquiries in speculation. But what about the dollar? What about copper? What will the Democrats do to tax rates when they take the White House? What about that candlestick formation?



Wise men ne'er sit and wail their woes,
But presently prevent the ways to wail.
To fear the foe, since fear oppresseth strength,
Gives, in your weakness, strength unto your foe,
And so your follies fight against yourself.
Fear, and be slain; no worse can come to fight;
And fight and die is death destroying death;
Where fearing dying pays death servile breath.

(Richard II, Act 3: Scene 2)



Sources listed at end

Agents/Foghorns: The propaganda which accompanies the moves in the leading stocks may be supplemented by sending agents to dozens of brokerage houses to talk loudly of moves in the less prominent stocks. This policy may be a negligible factor in a move, but a "foghorn can walk into an office where there are 20 customers and several employees of the firm, buy 100 shares to back his statements and influence customers to buy. (Hickernell)

Agitation: It is only when misgovernment grows extreme enough to produce a revolutionary agitation among the shareholders that any change can be effected. (Spencer)

Army of Speculators: The army of speculators who form their battalions and charge up and down the field of the stock market is a motley crowd, and like the army of Xerxes, includes representatives from many nations — Americans from all sections of the Republic, Englishmen, Scotchmen, Welshmen, Irishmen, Germans, Frenchmen, Spaniards, Italians, Russians, Norwegians, Danes, Hungarians, Hebrews, Greeks and Ethiopians, masquerading under the guise of bulls and bears, swell the host and rush together in hostile combat. (Fowler)

Ballooning: To work up a stock far beyond its intrinsic worth by favorable stories, fictitious sales, or other cognate means. (Munsey's Magazine)

Bear Brigade: The old gentleman took an omnibus up town, with a serene smile playing on his venerable features at the thought of his Pittsburg. J.F. passed down William Street with the air of a man who had inflicted, or was about to inflict, a terrible revenge on his old enemy Pittsburg, and joined a group of sad but determined looking men who belonged to the bear brigade and used to stand in front of the office of D. Groesbeck & Co. During the two weeks then next ensuing, it was amusing to watch the goings, comings and general looks of the bear brigade. Every pleasant morning they could be seen roosting on the iron railings in William Street, and sunning themselves, or standing around like lay figures the inside entrance to the regular board. First they were loud-mouthed in their predictions that the market was just on the eve of panic. Then, as the prices rose, they grew stiller, and finally subsided into a sulky silence. (Fowler)

Bear Operators: Several years ago, during a general market reaction, practically all active stocks were attacked by bear operators. Nash Motors held at 52. The money to buy Nash at 52 in unlimited amounts may have been provided by officers of the company engaged in Factory Activities. (Hickernell)

Behind the Market: A laggard pool hopes to sell out to investors who have the habit of selling something which has advanced sharply and then looking around to buy something which is "behind the market." (Hickernell)

Blackingless: No one who has entered the precincts of the stock exchange will have failed to notice certain nondescripts who constantly frequent the market. They are men who have seen better days, but having dropped their money in the street, come there every day as if they hoped to find it in the same place. These characters are the ghosts of the market, fixing their lackluster eyes upon it, and pointing their skinny fingers at it, as if they would say, "Thou hast done this! They flit about the doorways, and haunt the vestibules of the exchange, seedy of coat, blackingless of boot, unkempt, unwashed, unshorn, wearing on their worn and haggard faces a smile more melancholy than tears. (Fowler)

Body Blow: (From Bernard Baruch?s testimony before Congress regarding the shorting of Steel Common in December 1916.)

Baruch: The next day I covered a third of the stocks I was short on.

Q. What did you do in Steel on December 13th?

A. I sold 23,400 shares starting early in the day.

Q. Why?

A. I think the reason should be apparent to everyone. When I read the German Chancellor's speech, which, after the greatest war, was a declaration of peace, I realized what this meant to business and finance. My mind worked to the conclusion that a man of intelligence would act quickly and sell securities. The technical position was bad and this speech was a body blow. Peace would open an era of other activities but would raise trouble with the stock market. (Hickernell)

Carried; Booming Usually: A "foghorn" is not paid a salary. He is "carried" for 100 shares or more of the stock he is booming by the operators who give him instructions. (Hickernell)

Carrying Stock: To hold stock with the expectation of selling it at an advance .(Munsey's Magazine)

Caught on the Rallies: Every man with a dollar's interest in the market was broke, tied up or disgusted. The large traders, who made money on the way down, got the big-head, over-sold, and were caught on the rallies. ("A Specialist in Panics")

Chiseler: The pool manager of a stock little known will also pay money to the chiseler. The chiseler claims to have contacts which will enable him to publish propaganda in the right places, to introduce the pool manager to the right people, to arrange with financial editors of certain newspapers to comment favorably upon the stock, and to develop a public interest in the other ways. Money need not be paid to the chiseler unless he fulfills his bargain. (Hickernell)

Clique: A combination of operators controlling vast capital in order to expand or break down the market. (Munsey's Magazine)

Constitutional Bear: Somehow, the market is never more than 'barely steady' to the constitutional bear. When it is dull, he quotes it 'soft,' which, in his vocabulary, means declining, or in a condition suitable to be depressed. When it is rampant, then it is 'just on the verge of a severe break,' and when its tendency is upwards, it is only 'barely steady.' (Fowler)

Conversational Activity: Just before the unloading begins, the pool manager may send lieutenants to numerous brokerage houses to inquire whether they know of any large blocks for sale, 10,000 shares or more. They remark: "We offer a commission to anyone who can acquire such a large block. The stock is wanted by a capitalist who is keen to make an investment in the company, but who does not wish to push up the price in the open market." This offer becomes gossip in each brokerage house. Presently the whole country hears that the stock is good in the course of conversational activity at lunch clubs, dinner parties, hotels, golf clubs and other places where people congregate, and if only 500 people buy 100 shares each, the pool has sold 50,000 shares. (Hickernell)

Corners: The history of the Street, for the past thirty-five years, is one constant succession of these "corners," in which great fortunes have risen and fallen like the waves on a stormy sea. Among the more remarkable of these corners may be mentioned that in Canton, 1834 and 1835, when it sold up, from 60, its par value, to 300; that in Harlem, in 1864, which carried the price to 285, and that in Prairie du Chien, in 1865, which sold in three months, from 40 to 250. (Fowler)

Cover: A favorable day is selected when everything looks bright and sunny in the financial world, a plausible report relative to the prospects of the Railroad Company whose stock is under the control of the ring is noised abroad, and different brokers are employed to bid up the price in the market in order to frighten the bears, and at the same time they are notified to deliver the stock which they have borrowed of the ring. Thus, the bears are compelled to cover, that is, to close their contracts by buying and delivering the stock, which the ring alone can sell them. (Fowler)

Cross Currents: It is desirable not to have a fixed idea regarding the duration of pool cycles or the longer swings which are influenced by the business cycle. There are cross currents in every business cycle which prolong or shorten the prosperity period. (Hickernell)

Crowd; Sponsors: It is impossible to judge the daily ripples. Floor traders, the old Waldorf crowd, the new Palm Beach crowd and professionals generally are daily testing the market to ascertain whether sponsors are supporting stocks or retreating. (Hickernell)

Delmonico's: Hear them talk, and you would suppose they lived on hope, rather than on those delicious ragouts and choice wines which Delmonico, or Schedler, or some of the other famed restaurateurs furnish them.

Disquieted: The public was disquieted to see the Australian Agricultural Company run through all its capital of 41,900,000, with nothing to show for it. (Train)

Favoring Conditions of the Hour, The: In the commercial world it sometimes happens that injudicious purchases result in disaster; but this is also induced by excessive timidity or by slowness to seize upon the favoring conditions of the hour, which wait upon the convenience of no one. (Stock Exchange Investments)

Financial Writers You have walked through New Street: That is the common name for the Hall of Delusions. Retracing your steps, you will notice that all buildings, new and old, stand with their rear elevations to New Street. From that circumstance it derives a sort of privacy and other advantages, and is the more suitably devoted to the uses of brokers, traders, put-and-call dealers, financial writers, failures, touts, tipsters, moribund speculators, men of mercurial fortunes, and all the other accidental human phenomena of a great marketplace where wealth is continually changing hands. (Garrett)

Full Figures: 'I made the orders at 1/8 above the even marks, having noticed that in violent breaks the bottom prices were usually at full figures.' ("A Specialist in Panics")

Gilded Speculator: Let not the hard-working lawyer, the burdened and anxious merchant, or the hardy sons of manual labor, envy the gilded speculator, though he recline on silken couches, and dally with the daintiest of viands, and sip wines of the vintage of Waterloo, out of Bohemian glass. And yet…beneath his frontal sinuses, amid the convolutions of his brain, the vulture passions are at work, led on by their generals, ambition and avarice. Pining envy, fear of an evil which always impends, rage over injuries inflicted by others, or by his own weakness and incapacity, jealousy and hatred of successful rivals, all hold carnival in the space of an hour, and are kept active and sleepless by hope which quickens them with her enchanted wings."

Gunning a Stock: To use every art to produce a break when it is known that a certain house is heavily supplied and would be unable to resist an attack. (Munsey's Magazine)

Hammering: If a group of operators believe a decline is in order and think they can break the market, they first gently sell moderate amounts short at top prices. They put out short lines over a period of weeks. Hammering tactics do not begin until they are short of large amounts. Then stocks are hammered. (Hickernell)

Harrowing Career of a Speculator: One day he is lifted to dizzy heights, the next, plunged into black depths. He is hurried through dark labyrinths through paths where a single step is destruction. He climbs on the edge of a sword to a fool's paradise, where he tastes joys brief as a dream, and in an hour is abased to the earth where he drinks the full cup of humiliation and want. Blacksmiths' sparks flicker before his eyes. His blood regurgitates to his heart, which beats on his ribs like a trip-hammer. Paralysis, apoplexy and aneurysm are watching for their prey. Not long since, a great man of the "street lay for weeks in the clutches of this last disease, and the muffled door-bell told the results of this harrowing career of a speculator. When he died, they said he left four millions. But he had paid for this colossal fortune with a life worn out in middle age by the weary burdens and sharp vicissitudes of the stock market. (Fowler)

Heavy: It is remarkable how many stocks react 50% from the crest of each wave. A stock which reacts more than 50% is considered "heavy It may be desirable to shift from those which are "heavy into those which react only 10% or 20%, or not at all. (Hickernell)

Inferior Securities: In 1931 Washington believed that Wall Street had sold out control of America's gold to Europe in exchange for inferior securities. (Hickernell)

Insiders: It looked like a trade war, so I began to study these securities with a view to buying the best among them when these new-blown balloons busted. They were grossly over-capitalized, and their reports were made as glowing as possible so that insiders could make a market for the shares. ("A Specialist in Panics")

It Might Have Been: Those saddest words of tongue or pen, "It might have been, enter largely into the thoughts and conversation of the thoroughbred speculator. If and but are the most frequent conjunctions in his vocabulary. His whole life is a series of regrets, and strange to say, these regrets are more often for what he might have made, but did not, than for what he has actually lost. (Fowler, p. 34)

Kite Flying: Expanding one's credit beyond his limits. (Munsey's Magazine)

Learned a Valuable Lesson: Stock operator code for a sizable loss. (Tom Ryan, 12/29/04)

Magnanimous Proclamations: The prices which had been galloping up for ten days now closed the heat with a rush. When Pittsburg was struck on the morning call, Morse jumped into the center of the crowd and yelled at the top of his voice, 'I'll give 105 for the whole capital stock, or any part.' He bluffed the whole board. No one took him up on his liberal offers. But while he was holding up the market price by making these magnanimous propositions, his agents were busily at work selling Pittsburgh on every side. (Fowler, p. 234)

Mania for Speculation: He presented a singular psychological phenomenon — a distinct phase of the mania for speculation. He had got to look upon the market as a live thing — a fantastic monster. He spoke of it as of the feminine gender. 'She rises.' 'She falls.' He seemed to think of it as a debtor which owed him money. It was a question of revenge, however, with him, more than money. He hungered for revenge for his losses. His operations were undertaken in a spirit of vindictiveness against every stock in which he had lost. When he made a lucky hit, he would flourish certified checks, and boast like an Indian brave over the scalps which he had taken from an enemy. (Fowler)

Margin: Why do brokers' faces look black when their customers' margins have nearly run out? When stocks begin to break, they often quietly sell their customers' stocks. Then, after prices have declined so far as to leave little apparent margin on the account, the customer, quite unconscious that his stocks have been sold at a much higher price, finds himself subjected to various influences to induce him to give the order to sell. His broker looks glum, and talks of tight money, and the dangerous condition of the market. If the customer gives the order to sell, of course the broker puts into his own pocket the difference between the higher price at which he sold his customer's stock, and the order to sell given under the pressure of those glum looks and bear talk. We do not allege that all brokers are in the habit of doing this, but it is certainly one of the ways by which the public are fleeced."

Milking the Street: The act of cliques or great operators who hold certain stocks so well in hand that they cause any fluctuations they please. By alternating lifting and depressing shares they take all the floating money in the market. (Munsey's Magazine)

Mushroom Millionaires: The stock market began to fairly sizzle. All kinds of new industrials were floated and boomed. The Waldorf was thronged with mushroom millionaires. ("A Specialist in Panics")

Nameless Graves: As for the rabble of the unsuccessful, they cling to their illusions, till want or decrepitude, or both, drive them into obscurity, to ruminate over a misspent life, and be laid finally in nameless graves, by the hand of charity. (Fowler)

Nondescripts: No one who has entered the precincts of the stock exchange will have failed to notice certain nondescripts, who who constantly frequent the market. They are men who have seen better days, but having dropped their money on the street, come there every day as if they hoped to find it in the same place. (Fowler)

One Word Plastics: A phrase used to describe why seasoned portfolio managers own the latest high flying technology stock even if it conflicts with their investment style. (Tom Ryan, 12/29/04)

Operators: If a group of operators believe a decline is in order and think they can break the market, they first gently sell moderate amounts short at top prices. They put out short lines over a period of weeks. Hammering tactics do not begin until they are short of large amounts. Then stocks are hammered. (Hickernell)

Perturbations: The perturbations to which prices have been subjected on the New York Stock Exchange during the past year have naturally caused revulsions of feeling among those who have suffered from them, and much questioning of the wisdom of some of the recent operations of prominent American financiers. (Conant)

Pine Box: When they have once entered the street, they never leave it except in a pine box or a rosewood case, according to circumstances. (Fowler)

Plantigrade Bear: J.F. was the most plantigrade of bears. The panic of 1857 had changed him from an operator for a rise, into an operator for a fall. [OED: flat-footed.] (Fowler)

Pool Cycle: A business cycle, however, may cover a period of three years or more, while a pool cycle may last only three to six months. There may be five or six pool cycles in one business cycle. (Hickernell)

Pool Manager: If the pool manager of XYZ moves the stock upward, the floor traders will buy large blocks of XYZ if they think the move is just beginning. But the pool manager does not want to give these floor traders an opportunity to make a large profit. He changes his plans and breaks the stock down several points. This frightens the floor traders, and they sell out promptly at a loss, or when the stock recovers to the purchase levels. (Hickernell)

Post-Divestiture Flourish: Refers to the tendency for a security price to accelerate its move in the direction of one's position but only after one has exited the position leaving one with the regret that one could have doubled the profit if one had held on for only another hour/day/week. (Tom Ryan, 12/29/04)

Prodigious Oscillations: Nearly all those prodigious oscillations in the stock market which have startled the public for the past seven years have been due to the influence of those powerful combinations which have obtained control of certain stocks and made them dance up in long erratic jumps, or have hurled them down still more swiftly and strangely. Hardly a week goes by without a recurrence of these singular phenomena. Sometimes it has been Pacific Mail, sometimes Erie, or Old Southern, or Pittsburg, or Reading. (Fowler)

Proposition: Gates was in bed but in a mood to negotiate. He said to the Morgan partner, 'I will sell my L & N shares for ten million more than they cost me.' The proposition was accepted. (Hickernell)

Reaction: A trader who refuses to buy a stock at 70 when the market is dull, will buy on a reaction after the stock has risen to 82 and dropped to 76. (Hickernell)

Quotations: The public often seems to forget that quotations in Wall Street are only the mirror of their own estimate of the value of securities.

Rigging: The great and rapid development of railways in America has brought many securities on the English market. The powers exercised by presidents, with enormous salaries and with opportunities for making money out of contracts and by rigging the share market, are perilous to the interests of shareholders. Political influence is largely exerted, and politics form a lucrative trade with unprincipled adventurers in America. (Stock Exchange Investments)

To Sell Out a Man: To sell down a stock which another is carrying so low that he is compelled to quit his hold and perhaps to fail. (Munsey's Magazine)

Semi-Scientific: The swings of the pool cycles may have little relation to fundamentals or earnings. For this reason the semi-scientific study of price, action, top formations, resistance points and of other indicators of technical position is necessary. Even if the study of price formations and resistance points will never yield perfect conclusions and will never be an exact science, it is also true the manipulated swings in the market will always be in evidence and must be interpreted. (Hickernell)

Semi-Strong Form: An adjective used by financial academics when the currently accepted theory is obviously wrong but as yet no alternative hypothesis has been proposed. (Tom Ryan, 12/29/04)

Settled Investment: Some persons prefer a settled investment, such as Consols, or corporation stock, or railway debentures, from which a small but fixed income is derivable. Of late years the market prices of such securities have risen, and they yield only about 3 per cent, or even less. The tendency is toward yet higher prices, with a corresponding diminution in the return. It seems to be becoming ?fine by degrees and beautiful less,? until it threatens to reach the vanishing point. As a result, persons of this description spend their lives and resources in what Cowper describes as the profitless toil: Of dropping buckets into empty wells, And growing old in drawing nothing up. (Stock Exchange Investments)

Sick Market: When brokers very generally hesitate to buy. Usually consequent upon previous over-speculation. (Munsey's Magazine)

Solid Merchants; The Western Blizzard: A name applied by an ironical Wall Street to the panic of '57 - howled and blustered down that narrow lane on October 13th. Blowing a clean swath through the nation's top-lofty credit, it upended banks and solid merchants. (Davis, p. 93.)

Specter of Panic: Above him hovers, day and night, a vast, dark formless shape, threatening ruin and penury. This is the specter of panic. (Fowler)

Squeezed Out; Figure of Importance: [Jacob Little's] final failure was due to being right too soon. In 1856 he sold 100,000 shares of Erie short. The Erie crowd calculated how high they would need to push the stock to squeeze him and Little's brokers were forced to buy back 100,000 Erie at a high price. He never revived his fortune to a figure of importance after that. (Hickernell)

Spilling Stock: When great quantities of a stock are thrown upon the market, sometimes from necessity, often in order to break the price. (Munsey's Magazine)

Trifling Commission: One-eighth of one percent equals $12.50 on a transaction in a hundred shares of stock worth $10,000. Yet there are students of Wall Street who charge to this trifling commission all the losses of speculation. If, say these theorists, the speculator neither wins nor loses on his investments he will be a bankrupt after a brief experience, because all his money will be employed in paying commissions. (Munsey's Magazine)

Trinity Church: The 'whipsaw' market offered no rest and recuperation to the traders who wanted to get their money back where they dropped it, nor to the bankers who looked wearily up toward Trinity Church, expecting to see its green lawn extended through Wall and Broad streets. ("A Specialist in Panics")

Twist: When the stock price has risen from 20 to 40 per cent, it suddenly grows scarce. The bears find themselves troubled to make their deliveries. Now the ring prepare to "twist" their antagonists. (Fowler)

Unloading: Just before the unloading begins, the pool manager may send lieutenants to numerous brokerage houses to inquire whether they know of any large blocks for sale, 10,000 shares or more. They remark: We offer a commission to anyone who can acquire such a large block. The stock is wanted by a capitalist who is keen to make an investment in the company, but who does not wish to push up the price in the open market.? This offer becomes gossip in each brokerage house. Presently the whole country hears that the stock is good in the course of conversational activity at lunch clubs, dinner parties, hotels, golf clubs and other places where people congregate, and if only 500 people buy 100 shares each, the pool has sold 50,000 shares. (Hickernell)

Wall Street: It dates back, the antiquarians tell us, to the year 1653, for its first survey was in the palmy days of Petrus Stuyvesant when Schouts Burgomasters and Schepens lorded it over the little colony of New Amsterdam. Its name (one of the few remaining landmarks of the early Dutch possession) was derived from the wall built of palisades and earth on the northern line of the street to ward off the aborigines. But what contrasts has the light of two hundred years painted between the mimic life of New Amsterdam and this great, roaring, serious, tragic Babylon of today. No sign now of the quaint, peaked roofs covered with Dutch tiles, the fort flying the blue lions of Holland, the old stockade and half moon embankment at its lower end. But the ancient name of Wall Street still remains. Its name is something more than a shadow, too, for it is in fact Wall Street, still lined with a succession of fortresses, behind whose bastions are garrisons well disciplined and alert, guarding the treasures, if not the lives of a nation. Within its casements and vaults lie piles of coin enough to excite the cupidity of ten West India companies, or to lade a hundred Spanish galleons. Here the forces of commerce silently gather and equip themselves for distant expeditions from which they return again with the spoils of Ormus and of Ind. In these strongholds terms are dictated to the vanquished, and treaties made. Towering over all stands old Trinity, like a giant sentry, day and night, clashing out in peals and chimes of bells from his watch-tower, 'All's well.' (Fowler)

Weakly Margined People: It wasn't what you could call a panic; it was one of those ten- or twenty-point declines that come along every now and then, shaking out weakly margined people and badly scaring those provided with big margins. ("A Specialist in Panics")


Charles A. Conant, Wall Street and the Country (New York: G.P. Putnam's Sons, 1904)

Forrest Davis, Solid Merchants: What Price Wall Street? (New York: Goodwin Publishers, 1932)

William Worthington Fowler, Ten Years on Wall Street; or, Revelations of Inside Life and Experience on 'Change (Hartford, Conn.: Worthington, Duston & Co, 1870)

Garet Garrett, Where the Money Grows, first published 1911.

Walter Hickernell, What Makes Stock Market Prices, originally published 1932.

Edward G. Riggs, "A Wall Street Vocabulary: A simple guide to the technical terms of stock speculation," Munsey's Magazine, Vol. X, No. 4 (January 1894)

Herbert Spencer, "Railway Morals and Railway Policy (Edinburgh Review, 1854)

George Francis Train, "Young America in Wall-Street (London: Sampson, Low, Son & Co., 1857)

Stock Exchange Investments, Universal Stock Exchange, Ltd., 1897.

A Specialist in Panics, from Fourteen Methods of Operating in the Stock Marketing (Magazine of Wall Street, 1909, reprinted by Fraser Publishing Co., 1968)

"Wall Street, Munsey's Magazine, January 1894

Tom Ryan (A D'Spec Contributor): originals from the Sunbaked Speculator



 CNBC should be acquired by the Teleshopping Network. It would be more entertaining and honest if while the pitchman touted the product, they put up a Quantity Sold and an interview countdown: "We have sold 500k shares of AAPL. Only 20 seconds left of this fund manager spewing away, so get yours now while they are hot! And don't forget if you place the trade with our sponsor, we will send you a CNBC trading calendar!" That being said I must disagree with Vic's conclusion. "You" cannot get 6% on stock unless you own the control packet. "You" own whatever the market values that baseball card at, and if you don't own the 6% then the 10% growing in profits is meaningless. The enterprise will do just fine, without the public providers of capital. After the South Sea bubble they banned publicly traded stock in England for decades, and England continued to grow without it.

I read a few times over the empirical facts that Tom Downing, Laurel, and Vic reported in their columns and it's a fantastic work with a single caveat. They're based on the past. And "past performance is not indicative of future results". But 100 years of data must mean something, right? Maybe, if the underlying factors prevail, which might not be the case. Dividend yields three-times higher for the better part of the period, short supply of stock world wide combined with favorable demographics provided the 10% drift which is not sure to be replicated in the next 100 years, with or without innovation, entrepreneurship and human spirit.

You can't expect to win if you don't bring anything to the table anymore (buy and hold). One need only look at other fields (i.e sports, business) to notice the niches are getting narrower by the day and performance more difficult to achieve.



 The cocktail mix of pig disease, water shortage, and a few hundred million angry farmers in China could lead to a global jump in inflation and some nasty manufacturing disruptions.

According to a recent comment from Gavekal:

"At this stage, the number one constraint to China's impressive growth has to be water." Across the country, millions are experiencing serious water shortages, "and by one estimate, 22% of the nation's farmland is now being affected. The sad tails of droughts and water shortages have lately become a feature of newspaper articles both on the Mainland and in Hong Kong.

"It seems that China is currently facing a two-pronged water problem: First, there isn't enough of it, and the little that there is tends to be concentrated in the more agricultural South, while the desert in the West and the North continue to advance rapidly. Second, the water that China does have is increasingly polluted, and unfit to drink. The main problem is that water use for farmers is heavily subsidized in China: As a result, rural China gets water for only 16 US cents per cubic-meter, which is significantly less than the US$2.50/m3 paid in the US and does not come even close to communicating the scarcity and true cost of delivering the water."

Now comes the scary part:

"However, if the water subsidies were eliminated, a majority of farms would, all of a sudden, become economically unviable. Removing the water subsidies would thus most likely create serious social upheavals and possibly food shortages as well, the worst of both worlds as far as the central government is concerned. Nevertheless, the current system can't last either. Today, China requires more than 10x the amount of water used in the US to produce a dollar of GDP. Unfortunately, the recent spikes in food prices are likely to prevent any bold thinking from the government on this important issue. So the most likely policy response is to keep throwing money, and labor, at the problem (China is spending some US$80bn to build canals to bring water from the South to the North)."

On top of that you add the recent pig disease that swept through 10 provinces in China that decimated the swine population and ramped up pork prices. It has already affected more than two million pigs and killed 400 000 of them. It's also comforting to know that few thing are as essential to the Chinese diet as pork. And if you’re superstitious it's also good to know that 2007 is the Chinese Year of the Pig!

We will continue with an excerpt from The New York Times:

"Steep increases for pork loins and bacon are the most tangible sign that after a decade in which prices have fluctuated but not moved significantly upward, inflation is creeping back into China. In response to this pressure at home, Chinese companies are starting to raise prices for exports, removing what has been a brake on inflation in the West. The crisis over pork prices in China, like the jolt many Americans feel when gasoline prices jump, offers one example of how prices can suddenly soar.

"The Chinese government is struggling to cope - including deliberating whether to sell a snuffling, smelly strategic reserve of hundreds of thousands of live pigs kept at special subsidized farms for precisely the shortage the country is now facing. Chinese officials offer several reasons for the high pig prices. The cost of animal feed has risen by one-quarter in the last year, partly because more corn is being made into ethanol and partly because more prosperous workers are eating more meat. The cost of pig veterinary medicine has soared. Some pig farms, shut down because of low prices last year, were unprepared for strong demand this spring. And outbreaks of disease have killed many pigs, though no reliable estimates of how many are available.

"The most recent statistics from the Agriculture Ministry show that prices for live pigs rose 71.3 percent in April from March, while pork prices climbed 29.3 percent. The price of pork followed pig prices higher in May as well, to the dismay of shoppers."

Maybe it will turn out to be a non-event at the end, but it still reminds us that China's success story could be more fragile than most investors are ready to bet. Stay tuned…

Greg Rehmke comments: 

“The Chinese government is struggling to cope…” Newspapers regularly report that governments or federal agencies working hard to deal with the crisis-of-the-week. We have a impending water shortage in China this week. Last week the headlines were of massive floods in China. This suggests an opportunity to improve infrastructure (though western environmentalists still oppose new dams).

When water is owned and has prices less will be wasted. If Chinese farms cannot compete without “free” water, they will shift to different crops. When farms pay more for water they economize and innovate, and some on the margins go out of business. Chinese farmers, starved of capital for generations, need far fewer workers as they gain access to modern farm machinery and methods. Workers naturally migration to village and city factories. ”Social upheaval” is more the consequence of Chinese government intervention in capital markets, restricting investment in some areas and subsidizing it in others. Chinese economic growth of 10% is celebrated, yet a free China would grow faster with less pollution and resource waste. Michael Cox offers this analogy. One man struggles to clear a path through the jungle. With a machete he can move ahead much faster (up to 10%, say). But when those behind him find the trail, they can go much, much faster. China found the capitalist trail and would have run along it much faster without the remnants of communist bureaucracies "struggling to cope."

An online source reports the U.S. imported 150,000 tons of apple juice concentrate from China in 2006. That takes a lot of water to grow. U.S. customers won’t notice slightly higher prices from less Chinese apple juice, though U.S. orchardists would. Ending water subsidies for apple production in China could benefit many, while harming some in the short term. Higher pork prices hurt the poor but encourage efficient pig farmers to expand, and to clean up their operations to better avoid disease. Will “social upheaval” follow higher pork prices, or just more fish for dinner?



While watching the Wimbledon final (what brilliant tennis it was!) I noticed that on every mis-hit the player doing the mis- hit won the point, usually within the next one to two strokes.

Point being — when a market changes its rhythm don’t believe you have a better winning situation. Cut the position, as the whole set up has now become an unknown.



Stu UngarWhen anyone talks about the greatest poker players of all time, Stu Ungar's name will surface immediately. If it doesn't, it should. His accomplishments in poker are legend. He is considered by many to be the greatest No Limit Hold'em player of all time.

He is a three-time World Series of Poker Champion winning his first championship at the age of 24 in 1980. He repeated as champion the next year and again in 1997 after essentially disappearing from the game for seven years, the last time he competed. Out of 30 major poker events he won 10 of them.

As great as he was in poker, he was better at Gin Rummy. Gin, at one time, was The Game that high stakes gamblers played. He started playing gin in New York moved to Miami and ultimately to Las Vegas. He was so good at the game, that eventually no one would play him.

He was virtually barred from playing blackjack anywhere forcing casinos to eliminate single deck blackjack, as he had a genius IQ and a photographic memory. He could count down multiple decks of cards a feat he would replicate upon demand or for a wager.

He never held a real job. From the age of 14 his was a life of high stakes cards and games of chance. He would gamble on anything and lived for the action. It was not uncommon for him to win a million dollars in cards and lose a million shooting dice.

On the surface, his was a marvelous life, a seductive life one of gambling, action and living. Some will suggest that he made over $30 million playing poker. There was virtually nothing he could not do at a poker table and seeing him at a final table, others resigned themselves to picking up the "left over change".

Unfortunately, there is not a happy ending to this story. After 20 years of leading a storied life of incredible ups and downs of fantastic swings in capital, it all came to a crashing halt in a cheap downtown Las Vegas motel. On November 22nd, 1998 Stu Ungar was found dead and broke. The coroner's report revealed a combination of cocaine, methadone and percodan caused a massive heart attack. All at the age of 42. What a complete waste of a life. Possibly the greatest natural card talent ever completely destroyed before middle age. Imagine what could have been. Where all that talent could have taken him. He could have traveled the world, done incredible things, could have had a life that but a small percentage can only dream of.

I tell this story because it is humbling and to illustrate that the battle in life is ultimately waged not on a card table, or on a quote machine or a trading floor, but within ourselves and within our minds. It is the balanced one, the one who keeps an even keel and a steady approach to life who becomes the victor instead of the victim the living and not a weak faded memory.



 For the last few days I have tried to follow the major story in Pakistan. Today's news flow contains words attributed to the leader of the Lal Masjid (Red Mosque) that shocked me. In the article, Abdul Rashid Ghazi is quoted as saying:"The boys are the first line of defence, then the girls," he said. "They have all sworn an oath on the Koran that they will fight to the death."

So this so-called religious scholar and leader, is teaching young children that death is preferable to life. The leaders of the mosque are using these innocent children as human shields. Ghazi's older brother attempted to escape a couple of days ago by leaving with 60 women who were surrendering. Of course, he wore a burqa and veil to try to hide himself from the Pakistani army who were waiting outside, but inevitably was caught.

The bravery, courage, and moral authority of such leaders leaves me in dismay and fear for the future of a country where illiteracy and poverty are often reasons to send young children to schools administered by unregulated religious authorities. 



 "At the corner of William street and Exchange Place, we met F. He was once a man of wealth, but he had left it all in that same unfathomable abyss. He was a harmless but very disagreeable lunatic, a Cassandra who predicted nothing but evil." Ten Years in Wall Street, by Worthington Fowler, 1870

It's much easier to learn and remember from stories than from more traditional ways. This among other things is the basis of the most successful language programs, our most popular friends, and much of children's activities. It is also the basis for much of the best selling literature including Louis L'amour who describes himself as a storyteller and whose Western books have sold more, about 500 million copies, than all other writers of Westerns combined from the beginning of time.

One can agree that stories are a great teaching tool, but one must also note that they can be used to illustrate any point. And the problem with such stories is that there are enough of them that even the most specious promoter can haul out a few great predictions and stocks that show his greatness. It would be good, therefore, in telling stock market stories to include a moral that perhaps could be tested. I'll start the ball rolling with two stories.

Jim Lorie was one of the most successful speculators I ever knew. He passed away with a vast estate and he did it mainly on a teachers salary which was very modest in those days. His method was always to ask his friends for a good stock, buy and hold it, letting go only when it was bought out. He didn’t believe much in technical analysis and when I told him that I planned to start a firm to speculate based on the multivariate analysis of the predictive properties on one market on another, he told me that he recommended against it and that I should stick to mergers and acquisitions.

When he came to New York for Merrill board meetings he liked to come to our offices to relax. He always was very eloquent, and facile, indeed, he was the only one that could stop a faculty gathering in its tracks and have a hundred people crowded around him to hear his bon mots. He always had five jokes of a free market nature to share, as well as five books he had read that he could recommend. We always talked like two brothers and there was never a halt in our dialogue, which usually subsumed our great victory 10 years earlier in the Western Squash doubles, where he said that he must have been the better player because the opponents hit 95% of the balls to me. Or perhaps the conversation would turn to the macaque monkey I had as a pet that I named after him.

But this day, just before going to a board meeting at 1 pm, he became a bit tongue-tied and reticent for the first time. Finally he blurted it out, "Vic, you don’t have to accept this. But I'd like to participate in just 1% of your action for the rest of today. What do you say?"

I can’t leave this call for stories without relating one from the times that Sam's was founded, circa April 15, 1864. "On the first of April, the bull leader, Morse was at the height of his glory. Every stock that he touched had turned into gold for the fortunate buyers. Rock Island, Erie, Fort Wayne, Pittsburgh Ohio, and Mississippi certificates responded in succession to the wand of the great enchanter. … He fought the bears as one would his natural enemies and now throughout the whole market, it was in vain to search for any of that tribe of bears…. Alas, how changed from that Morse, who but the year before, had led his dashing ranks to the summits of the market. He departed from the arena, a stripped, penniless, heartless, stricken man. Out of the troops of wealthy friends, which but lately clustered about him, only one or two still clung to him (like Doc and Wiz might cling to me) … An appalling stillness, like that which precedes a tornado, followed the words ‘Morse and company had failed.’ "The board room seemed suddenly transformed into a cyclopean workshop where a hundred great trip hammers were being plied. Pillar after pillar toppled over, till the dome fell. A three-month mad revelry of speculations, in which were concentrated all the emotions, all the incidents of a century of sober, legitimate traffic, — then the dark dawn of another melancholy awakening. … A crowd of ruined operators reeled and served up to the rostrum, half crazed by their losses, and stupefied or maddened by drink, and the whole room rang with yells and curses.

"The space outside the railing was jammed with weary faces, on which was written only the word "ruin." Above all the chorus of execrations was heard the word "Morse." Human nature now showed its basest side. No epithet too vile with which to couple the name of the prostrate financier, (you can still find many of these on Elite, traded about me today). He had fallen like Lucifer in one day (on April 15, 1864, sort of the same as me on Oct 27, 1997).

"The men who but yesterday extolled him to the skies, now vied with each other in cursing him. The king of the market was a lurking fugitive. Men calling themselves gentlemen met him in the street, and showered abuse upon him. Shoulder hitters, who had lost some of their ill-gotten gains by his fall, sought him out, and struck him like a dog…. A few month more, and he lay upon his death bed in a second-class boarding house, and without means to pay for the common necessities of life.

"Even when he died, his landlady held his body for trifling debt (perhaps one of Artie's predecessors had to forcibly take the body to the morgue, as he often told me that he had performed this duty for many failed gamblers and that all of them died broke). It was only when some friend stepped forward and paid the sum, that the funeral rites could be performed over all that remained of what was once a king of Wall Street."

I believe I could always count on Dan Grossman, and one of my wives or daughters, or a collection of friends to save me from that suspended state should a similar hiatus be visited upon me.

The moral of these two stories is that all gamblers die broke and you should never get in over your head. Let us have more stories with testable morals.

George Criparacos adds:

It was a clear day, late spring, and we decided to go horseback riding on a farm, a little outside of St. Louis. I had never ridden a horse before, and they gave me an old horse on the premise that this horse had so much experience with first timers it would follow the rest of the pack without giving me a lot of trouble. So we rode off and my horse followed the rest with me trying to hold on. It was a nice feeling and a first hand-on experience of all the cowboy stories I had read as a boy.

A half hour later, with my back starting to ache, I was enjoying the sense of being under the clear sky when suddenly the horse stopped. My friends started picking at me, that by now I should have learned how to. But the horse refused to move. Then, without notice, it turned and started galloping as fast as it could. It was really scary. To this day I do not know how I managed to stay on the horse for the five long minutes it took to run back to the barn, elongated by the fact that besides being out of control I did not know where we were going.

We entered the barn and the horse stopped. I jumped off with my heartbeat at 200 only to hear my friends laughing, as they entered the barn behind me. And then it happened.

Clouds as green as a cucumber filled the sky. It was then that I realized what the expression "out of the blue" means. A hail storm with hailstones as big as an apple started. For the next half an hour, no one was laughing. We all realized what the horse had done, and under the protection of the barn stories emerged of the secret senses animals have.

Since then, and this is the moral of the story for me, I have always paid attention to signs that are not easily identified. A muscle that starts twinkling on my right arm, a toothache that comes and goes. and I have read of the back pain a certain very successful trader has to warn him of something that cannot be seen or measured. 

Ali Meshkati comments:

Like many aspects of the financial markets, there is a razor thin line that separates the realm of speculation from the realm of gambling. It is most interesting that these two realms can become fatally intertwined as a result of poor judgment and/or strategy in speculation leading to a gamblers mentality of recouping gains as quickly as possible. It is all the more interesting that the average “speculator” will, in the heat of battle, fail to recognize when he has exited the universe of speculation and entered into the alien world of gambling. It is only after one has exited the battlefield - perhaps due to a fatal wound - that the participant realizes that the terrain in which he or she began the battle was not nearly the same as where it ended.

As a former hedge fund manager, who experienced quick success, followed by quick failure, it is true that, for a majority of mortals in the world of speculation, the greatest of failures will come after the greatest of success. The reasons are obvious, the core of which lies at the basic element of our nature, which is to survive. Success leads to a dulling down, so to speak, of our instinct to survive. With that dulling down comes a series of events that can occur in any order, but typically consist of the following:

1. Puffing of the chest, which, in modern times, comes in the form of acquiring large homes, fancy cars, expensive furniture and collector items that have little purpose or use, besides showing off to whoever is willing to look and listen.
2. Relaxed discipline, primarily in the form of enjoying yourself, to the detriment of the very vehicle (your mind and body) that got you to the point where you can enjoy or abuse the things that you are enjoying or abusing in the first place. Excessive eating, drinking, and sex, which serve to disrupt the harmony that enabled your success.
3. Lack of focus, which typically leads to an unrecognized crossing of one of the many thin lines that exist in the financial markets. Subsequently, this leads the speculator into an unknown realm, which, he or she will not recognize until steep losses ensue or perhaps even complete failure, if the survival instinct has been dulled down enough.

I know of very few speculators who have not succumb to basic human nature, which often works to the detriment of speculators, as the markets are heavily counter-intuitive and prey upon basic human emotions and nature. The only goal of the speculator then should be to always be paranoid, as the battle with yourself is never-ending.

Janice Dorn adds: 

A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, "How do I know you won't sting me?" The scorpion says, "Because if I do, I will die too."

The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp "Why"? The scorpion replied softly and calmly: "I can't help it, it's who I am, it's my nature., it's me being me."…from Aesop's Fables

No matter who you are, how intelligent or how much education you have, if you keep doing the same thing over and over again, expecting different results, you are suffering from the most insidious form of insanity. This is self-delusion of the highest degree. Many years ago, when I first started to trade, I was so optimistic that I could make money consistently. I was smart, more educated than almost anyone I knew, a successful brain scientist and physician, and always had been able to study hard and master anything I put my mind to. I could do it and nothing was going to stop me. I would work longer and more intensely than anyone else, and show wonderful profits month after month.

Little did I know what I was facing, and that I was about to come head on with the most challenging task of my lifetime. Simple, maybe, but not easy. Not easy at all. After a few months, I found myself dancing as fast as I could, yet running on a treadmill going nowhere and suffering from vertigo, headache and a severe case of tick-itis. I studied and read everything I could lay my hands on, subscribed to service after service looking for the Holy Grail and struggled to make consistently successful trades. Why couldn't I do it? What was wrong?

Is this so difficult? What about all the people who have returns of greater than 80% a years? They couldn't be exaggerating, could they? After all, it's in print and on a heavily subscribed website, so it must be true. Mustn't it? So I studied more, subscribed to more services, learned new indicators, bought books, joined some chat rooms and saturated myself with information. This produced more vertigo, headache and sleep deprivation. I was on total information overload. I started sleeping sitting up so that I would not sleep too deeply and could awaken more easily at 4:30 AM (having gone to sleep at around 1:30 AM) in order to study and watch the markets before they opened at 6:30 AM.

I was in total immersion, so why couldn't I make consistently successful trades? I became paranoid, thinking it was a kind of conspiracy since every time I took a position it went against me. I knew the stop and was stopped out in my minds, but we didn't take the stops because I had faith that the position would come back. It was some kind of a misunderstanding or misinterpretation by the market that was responsible for the price spiraling downward.

Buy more. That's it. Average down and keep averaging down and eventually, I will get it right. Eventually, the price will come back up and I will be justified. Why isn't the price coming back? I know it has to. After all, I studied it, charted it, listened to the gurus, read everything on every bulletin board, and it absolutely has to come back. Oh, that news that just came out… Ugh! Must be false or overstated because there is no reason that the stock should be selling off like that.

I know it is coming back, so I will buy more. Wow! Look at the size of the position now. Hmmmm. I better kick it up a notch and start participating in every message board and study every report and watch every tick every day for signs that life is returning and I can get back from underwater. Most of you know how this feels. I do. I have been there, lived it, and suffered losses from it. Life was miserable this way. I became depressed and irritable. I walled myself off from the rest of the world just trying to figure out what to do. I had dug a really deep hole and the only way out was to sell and take the losses, or waited and be in agony day after day, watching my account and my self-esteem (what was left of it) erode like sifting sands.

I tried too hard, studied too much, and pushed myself to the point of both physical and mental exhaustion. Why? Why did I not honor the stop, continue to hold on and even average down? I had to figuratively kill the frog and kill myself in the process. In order to be reborn, I had to destroy the internal self-defeating programming and start all over again. I had to step back, look at what I had done with a sharp and penetrating glare in the bright light of day. I decided to take the loss, to stop trading for a while, to take a vacation and center myself. My health returned. The dizziness and headache went away. I didn't care so much about watching the flickering ticks (so, at least, I was in remission from a severe case of tick-itis).

It was not the market, the charts, the software, the gurus or anyone/anything else. It was me! I was my worst enemy. Nothing was going to change until I got right with myself.

"The most exquisite paradox is that as soon as you give it all up, you can have it all. As long as you want power, you can't have it. The minute you don't want power, you'll have more than you ever dreamed possible." Ram Dass

Steve Leslie adds:

The depth of this fable is remarkable beyond belief. There is a meal that is worth a lifetime here alone. The speculator would be well served to read this several times and reflect on its enormity since we have all been guilty of doing something that we blame on "our nature" and ultimately suffer the consequences. It can be a convenient excuse.

I can think of so many illustrations of this that a book could be written on this one fable alone:

Phil Mickelson had all but won the 2006 U.S. Open by holding a two stroke lead with three holes remaining. He had played beautifully for 69 holes on Winged Foot in Mamaroneck N.Y. Winged Foot had lived up to its reputation of being a brutal challenge for the greatest players in the game. Mickelson came to the 16th hole and on the par five he bogeyed. He parred the 17th hole and came to the 18th hole needing a par to win the tournament. He had been struggling with his driver all week and Johnny Miller commented that all he needed to do is put his drive in the fairway and the tournament was his. He would become only the 2nd person in the last 50 years to win three major tournaments in a row. Miller suggested that he should take out a three wood and just smooth it into the fairway.

Inexplicably, he takes out his driver and pushes his shot to the left, it caroms off a hospitality tent, and lands in a trampled patch of dirt with an obstructed view to the green. He tries to pull of a Houdini-like shot and hits a tree leaving him with essentially the same shot. This time the ball is struck and flies into a bunker. From there the nightmare continues. He overcooks the sand shot and makes an up-and-in. His double-bogey practically gives the tournament to Geoff Ogilvy who had to chip in for par on the 17th hole himself to preserve a totally bizarre finish.

"I still am in shock that I did that," Mickelson said after his final round 5-over-par 75. "I just can't believe that I did that. I am such an idiot. I just couldn't hit a fairway all day. I tried to go to my bread-and-butter shot, a baby carve slice on 18 and just get into the fairway and I missed it left. It was still OK, wasn't too bad. I just can't believe I couldn't par the last hole. It really stings. I came out here and worked hard all four days, haven't made a bogey all week [on No. 18] and then double-bogeyed the last hole. Even a bogey would have gotten me into a playoff. I just can't believe I did that.

"So, it hurts because I had it in my grasp and just let it go, as opposed to somebody making a long putt or what have you."

Let us learn from this and remember that as Caesar remarked "The fault dear Brutus is not in the stars but in ourselves." 



 About a year after the Berlin wall fell, I found myself in Bucharest screwing around with the flying hydraulic knife of a continuous casting steel mill my dad had designed a dozen years before. I ran across an old buddy that had switched jobs and was tasked with finding investment opportunities for a FBC fund run by Mike Holland.

We meet in the lobby of the hotel he was staying at and he asks me if I want to go to Warsaw the next day. So we catch a morning Aeroflot flight to Warsaw. I ask the stewardess for OJ and my buddy asks for tomato juice. She pours out half a glass of orange juice and half a glass of tomato juice and then grabs a bottle of vodka that and poured a shot into both.

My buddy says, ''if the default on the breakfast flight is vodka, maybe eastern Europe isn't the next Singapore or Taiwan, maybe eastern Europe is the next Brazil or Uruguay.''

Nigel Davies adds: 

With the death of Maxim Sorkin (after being discharged from hospital) it's difficult not to notice the number of Russian Grandmasters who've died either during or after medical treatment, the two most notable ones being Leonid Stein and Paul Keres.

It's also difficult not to have noticed the number of domestic Russian plane crashes or the fact that my brief visit to a Russian dentist (whilst residing in Israel) came to a sudden end when I realized he'd been partaking in a few glasses of vodka that lunchtime (I ran like the wind). And this guy had been recommended.

Now does anyone want to speculate why India and China are emerging as powerhouse economies whilst the Russian bear seems to be somewhat confused, and at every level? Well here's a big clue, even according to the Kremlin's figures, 12% of deaths in Russia last year were directly attributable to alcohol. 



David Byrne 1991The Mojo Cable Channel (formerly INHD) has been showing David Byrne's "True Stories" (1986) in heavy rotation. The movie is a surreal look at the transformation of Texas into a high-tech Mecca that explores life in the fictional town of Virgil. A highpoint of the movie is a dinner table demonstration of the wonders of capitalism by the late Spaulding Gray, who plays the man who brought high-tech industry to Virgil.

While people still do not wear clothing made of Astroturf and vacuuming robots are not yet humanoid, much of the movie was prophetic, as a visit to Austin will confirm. Byrne was clearly torn between the collectivist leanings of his lower Manhattan milieu and the wonders of technology that came from capitalism and made much of his art possible. (One of Byrne's more recent creations is PowerPoint art.) While Byrne clearly mocks the excesses of consumerism, he marvels at technology and the entrepreneurs who brought it to the masses. At one point, a cosmic Steve Jobs pronouncement is directly quoted.

The movie is all about music and features several tunes by Byrne's band at the time, The Talking Heads. Interestingly enough, many old Heads' tunes have received a new lease on life through technology. All the studio recordings have been remixed and re-released in 5.1 surround on DVD-A. I've listened to "Speaking in Tongues" and it is absolutely stunning.

Rating: One invisible hand up.



 I recently read The Mickey Mantle Novel. Mantle was a hero of mine as a child. Although he played for the despised and dreaded Yankees his feats on the diamond were too spectacular to ignore. This book is the worst piece of trash I have ever read in my life. Done in the voice of the hero, the book focuses on off field adventures of Mickey and his friends. The author manages to make drinking, carousing, and sex boring. What he does to the baseball scenes is too awful to describe. It portrays Mantle as an arrogant drunken buffoon who only lived to screw and drink in a boorish fashion. The writing is bad, the plot is bad. A waste of money if it were free.

It brings forth a question. Who will our children look up to in awe if there are no heroes? There is not a single human who can stand such intense scrutiny of their personal life. Is it important to know that A-Rod went to strip bar, or should we just care that he is tearing up the league? Do we care who Tom Brady is having a baby with this week or should we focus on his leadership and football skills?

When I was a child we had Mantle, Brooks, and Johnny U. I am sure they had their bad habits but the press did not go looking for their mistakes and foibles. Do we leave the next generation with just Harry Potter and Frodo to look up to? Virtually every public figure form sports or politics has some stain on his public image. Can we not go back to what they accomplish with the body part not between their legs, with heroic athletic achievements or stirring speeches?

We have all behaved badly or lived in a way outside of so-called normal society at one point or another. Would we have that be our legacy, or should the focus be on what we accomplished at our best?

To be a child today must be a little sad. There are no real live heroes in the world, and that’s a little sad.



We had eight new lows on the down swing in June and that marked a good bottom of that swing. Today marks the eighth new consecutive record session of new daily highs on the S&P Future Sept. And contrary to the bearish Candlestick analysis, the few times that this has occurred in this century have been in fact quite bullish.

Notably eight new consecutive highs was not seen in the last five years of the last century in the big run up. The paucity of data make conclusions difficult with any degree of confidence, but the tendency seems to be in line with the general upward trend and to extend upward runs. This also highlights the difference between longs and shorts. They are not symmetrical.



I noticed that advisers recommend rebalancing for several reasons:

1. It keeps target allocations in place.
2. What’s hot today may be cold tomorrow, and the reverse.
3. Accomplishes the goal of buying low and selling high by adding to underperforming assets and trimming outperforming assets.
4. Rebalancing can increase the consistency of returns and reduce the possibility of disappointing returns.

I wonder if this is propaganda to get the public to trade more than is necessary? If rebalancing is better than buy and hold for the reasons stated above, is it still better when taxes and transaction costs are factored in? Finally, if one did want to implement a rebalancing strategy, how would one determine the appropriate timeframe or trigger?



 There is always much debate whether to equal weight or cap weight indices. If there are 30 securities (country ETFs or stocks) in a portfolio, given that they have similar though different return distributions, what is a good way to estimate how frequently one would expect a cap weighted portfolio to outperform an equal weighted portfolio?

Scott Brooks writes:

It really comes down to what do you see doing better, the larger companies or the smaller companies (large or small in reference to that index/ETF that you are looking at).

If you expect the larger stocks in an index to do better, then go with the cap weighted. If you expect the smaller stocks to do better, then go with the equal weighted. For instance, RSP the SPEWI ETF has nicely outperformed the SPY SP cap weighted ETF for quite a few years now.

Alex Castaldo adds:

I would suggest a bootstrapping approach. Imagine the actual data arranged in a four column table:

Period Ticker  CapWgt  Return
1         GE        0.4     1.05%
1         IBM       0.2    -0.85%
1         …
1         XYZ       0.01   0.97%
2         …

From this table the cap weighted and equal weighted returns can be easily computed. Now generate artificial data by scrambling (i.e permuting) the entries in the return column while leaving the other columns unchanged; compute the cap weighted and equal weighted returns for the artificial table.

Repeat the process 10,000 times and see how the real-life returns stack up compared to the 10,000 artificially generated cases. Some details need to be filled in, but you get the general idea.

Charles Pennington adds:

Alex is sending you on a snipe hunt. It is obvious by symmetry that the required probability is 50%. 



Here is an easy way to check whether equal weight or cap weight index out performs:

Cap-weighted index emphasizes return of large-cap stocks over small, and thus differs from equal-weighted index in which all stocks make equal contribution to index returns. It is well known that small cap stocks have out-performed large-caps in recent years, here shown by regressing weekly returns of Russell 2000 index vs. S&P 500 from 1/01-present:

Regression Analysis: RUT versus S&P 500

The regression equation is
RUT = 0.000274 + 0.920 SP500

Predictor       Coef         SE Coef       T        P
Constant     0.00027    0.00047    0.58   0.563
SP500         0.91963    0.02226  41.32   0.000

S = 0.0151692   R-Sq = 62.3%   R-Sq(adj) = 62.3% 

The small stock advantage becomes very small and insignificant. One conclusion is that small caps may out-perform large caps in some periods, but there does not seem to be a sustained advantage (even including recent out-performance).

Also interesting to consider that (widely used in academic finance) FF regressions have a term for a presumed durable small-stock effect, which in combination with increased popularity of various ETF and equal-weighted index products could help explain recent small-cap strength. 



From Norman Vincent Peale's Treasury of Joy and Enthusiasm:

1. Engage in a business for which you have a talent.
2. Secure a suitable locality for your business.
3. Stick to your business. Do not assume that just because you are a success in one field that you can be so in any.
4. Be economical; not parsimonious, nor stingy, but never go into debt.
5. Be systematic. No man can succeed in business who neglects the strict observance of a system in his business.
6. Advertise. Have a good article and make it known in some way to the public that you have such a thing for sale.
7. Be charitable. It always pays a businessman to perform acts of benevolence.
8. Be honest. Honesty is the best policy. A man who lacks honesty will soon lack customers for his goods.

Jaime Klein writes: 

Interestingly, P.T. Barnum himself has a bad reputation. He used to work only in the early mornings, spending the rest of the day drunk, and his business was based on fake curiosities. But his century-old advice is still the best in its class. 



Today's Wall Street Journal had the US auto sales report for June. Of the four categories for cars, all sizes posted negative YoY YTD sales except for "small", which defied the trend with +3.2%. Of the four categories for SUV, again "small" was the only category with positive YoY YTD sales at +36.7%.

Nice to see textbook substitution effect at work.



 Something about communist countries making cars reminded me of this one and how so many ended up in dumpsters or were recycled into who knows what. How about resurrecting a hybrid Trabant? Lawnmower racing anyone?

"…With a body made of fiber-reinforced plastic, known as Duroplast, the Trabant really has more in common with a lawn mower than with a modern car. With its two-stroke engine, it accelerates from zero to 60 miles an hour in a leisurely 21 seconds." 

Allen Gillespie writes:

You just better make sure it comes with a great roadside assistance plan. US cars lost to the Japanese when they lost the perception of quality. Quality car companies are profitable (Porsche, BMW, etc.). Everyone thinks it is about costs, but it is really about costs relative to quality. High costs with bad quality makes for bad business. Low cost with low quality make for poor business. And high quality with low costs equals great business. As my tech guys tell me you can have it:

1) Right
2) Cheap
3) Fast

Pick two.



 The largest ever IPO in India listed today. DLF Limited that has "Building India" as its corporate slogan is a real estate company. An issue for about 2.2 billion USD worth of stocks witnessed total bids for about 7.4 billion USD. The company's website announces with pride, "The company could have priced the issue at the top end of the price band. However the company chose to price the IPO at Rs. 525 per share as a gesture of their appreciation to the tremendous response and keeping in mind the long term relationship with investors."

Now might one dare ask a company that comes into existence in public markets starting its career as one of the top 10 market capitalization companies on the day this market made an all-time high to figure out the rational of this one declaration of pride from any angle? If you are selling shares to new stockholders taking up 10% of your stock at prices less than you could have sold them at then are you being fair to the existing private promoter shareholders? If not, don't we understand business is business and there are no free lunches?

The company notes further on this webpage that subscription came in even measure from every corner of the globe in the institutional portion of the issue and that majority of the applications came in from long ("long" underlined) only funds. Now do we understand that fund managers who know and can short sell stocks did not find it worthwhile to apply for this issue?

Well, today the Indian equities market witnessed close to 10% of the volume in single stock futures segment coming from real estate stocks only. TV channels are proud of this arrival of the real estate stocks. Every commentator is finding more headroom ahead. Doesn't larger volume mean larger struggle for discovery of price? The markets here have discovered a new financial tool as a comforting aid to continue to believe real estate stocks are cheap. At 1.2 times Market Cap./NAV, most public commentators are suggesting there is no unfair pricing yet in these stocks!

My dear genius stock pickers, with real estate being a liquidity nightmare, what does the NAV as a denominator for this comforting ratio suggest other than the fact that the stock market pricing with its liquidity attraction is already 20% higher than the pricing of the illiquid land bank these companies hold? The relevance of P/E Ratios, ROCE, RONW having been left behind long ago, with relatively zero entry barriers in the business a price/book type Market Cap/NAV is suggestive of what? Desperation to justify the price?

Those hedge fund managers having avoided this largest ever IPO in India may have much to find comfort in one fact unique to India. In yesteryears, great companies like Dabur, Thermax, Jet Airways, BPL (a household consumer durables name then, extinct today), etc, all grew to be household names before coming out with an IPO. The other common fact that many other similar companies in India share is that each of these highly popular-named IPOs came at the peaks of their respective valuation cycles. For years a one-way hemorrhage of investment values continued.

If not a common mind playing the chords of price discovery, there certainly has existed a common mindset. The commentators have nevertheless several bullish arguments. Short term interest rates are likely to begin softening and hence real estate is still not looking bad, as if long term investing is to be done with a short term expectation. They will then hasten to tell you DLF is not a leader in any of the property segments it operates in and hence there is room for surprise, as if the franchise factor of a P/E multiple is higher for runners-up.

The large market cap is going to bring DLF into every major equity index, so buying will come in, as if all buying will happen without any matching selling. I asked my teammate who tracks the Indian Realty sector what is his take on the eight percent higher closing of this grand IPO and all he offered, with a chuckle, was "From a song by Roger Waters: What is the shelf life of a sixteen-year-old beauty queen?"



Regarding short interest as posted by Bloomberg, has this been tested? That IWM short interest being the highest, is that an indication for buying since a squeeze is possible. How would this be tested?

Bill Rafter replies: 

We have done considerable testing of short interest data. I am on vacation and must speak anecdotally, but let me give our generalizations. The results suggested that half the time the shorts were dead right and the other half they were dead wrong. Very little middle ground. An exceptionally large SI value had no particular significance. That is, it gave no edge to the trader to pick subsequent direction.

Our research was attempting to approach the data differently from the way Phil Erlanger approaches it. Erlanger first identifies market direction, and then looks for possible short squeezes that will extend a rally to a more substantial level. Since we found no edge doing it our way, we have to conclude that until shown otherwise, Erlanger's approach was valid. We did find that it took a long time for short interest to be covered. That is, the rally durations were substantial as to both price and time. The shorts were slow to believe they were wrong. Sell-offs of stocks with high short interest tended to be less substantial as to both price and time.

One might simply conclude that drops occur fast and rallies take longer, and that the SI figures were of no significance at all. We disagree. That is, we think SI is certainly a contributing factor. It may not be a meal, but it certainly is seasoning.

We also watch and calculate some other sentiment indicators, including a price-based intra-day sentiment value. Looking at subsequent market performance with it is identical to what we learned from observing and testing SI: Sentiment indicators have an extending effect when they are wrong and a moderating effect when they are correct. 

David Wren-Hardin writes:

In this case, you have to think about what IWM is. Most of the time when people short a company, they do so because they think it isn't very good, that it should be priced lower. IWM, however, isn't a company. It's an ETF tied to the Russell 2000 index. So now you have to ask "Why would someone sell this?"

Some sellers, I'm sure, think the Russell should be lower, and happily sell IWM. But others might just be doing it as a hedge. If you wanted to hedge your Russell 2000 exposure with a basket of stocks, getting clean fills would be a nightmare, as would tracking the 1900+ individual names, most of which trade by appointment. You think it's hard to borrow IWM, try borrowing some of these tiny names. But with IWM, you can get the entire index in one shot. One can even spin a tale that if people are selling IWM against a net long exposure, that the IWM short interest is, in fact, a reflection of overall long sentiment.

The other thing to consider is that you can't look at short-interest in IWM purely in terms of percentage short vs. amount out there. An ETF is created when someone hands the trust the complete basket of stocks, getting the ETF in return. Now, IWM may be short equal to the float of all the stocks in the index, but more likely, given the basket example I used above, it's simply a pain in the rear to assemble complete baskets of stock and turn them into more ETFs. 



 The basic theme of Victor Canto's Cocktail Economics, a book well worth reading, is that economic principles can be applied to pick the ideal times to shift your allocation between bonds and stocks. The main economic principles utilized are the elasticity of demand, the shifts of supply and demand curves, and the incentives and competition that lead to pricing power for individual companies.

Canto is an expert on the energy industry and has many analogies between the flexibilities of the oil, natural gas , and coal users and purveyors, and the proper variations that an investor should make in maneuvering a portfolio.

He pays much attention to lower tax rates and multiple locations as a prerequisite to flexibility, supply-side economics concepts popularized by Art Laffer and John Rutledge as a foundation for superior returns in stocks. The beginning chapter in the book on the economics of real estate sets the base for the book. It shows that transactions costs of say five percent round trip are an essential feature of the returns from real estate, and that holding period returns don’t vary much within a location. Thus, the returns from real estate are very much superior if a holding period of at least seven years is used.

It then compares transaction costs on stocks which are much lower, and variability among industries and investment styles which are much wider in stocks, and posits that there is a much better opportunity to garner returns from active management of stocks than real estate. Along the way to showing you how to garner these returns the author has many big ideas about how to accomplish it. He believe the Big Mac index is a key to superior stock returns and recommends that you buy companies where the Big Mac index is going to change in the right direction. He also believes that by looking at past movements during economic shocks that you can find groups of stocks that will do well the next time such shocks, like reductions in tax rates, disruptions in supply, or tightening Fed policy, are going to change the landscape.

When I was in elementary and secondary school, the principals often called me into the office and admonished me, "You should know better, you're father's a policeman. We expected more of you." I had a similar reaction to Canto's book. He's a Ph D from the University of Chicago Economics Dept. He runs a successful economics and investment consulting firm. He's a friend of John Rutledge, vetted as one of the smartest and most successful men he knows, and he's an expert on energy economics. I expected more of him. The book, however, is seriously deficient in that it assumes perfect knowledge of forthcoming events as a prerequisite to returns.

Regrettably, if you knew the exact real returns from treasury bills a few years in advance, or what the pricing of individual companies was going to be after a economic disruption was going to occur, or you knew which way the exchange rate was going to move, then it would indeed be possible to make superior profits. But we live in a world of uncertainty. And despite Canto's self-reported great predictions where he was able to see what the impacts of various economic events were going to be, it is virtually impossible for the economic everyman at whom the book is aimed to assume that he can beat the market with superior insights into future events that might give him an edge.

In addition to the defect of assuming perfect knowledge for most of his recommendations, the book suffers from many untested assertions. He presents no evidence whatsoever that the Big Mac index works with perfect or imperfect info for stocks, and he has many untested assertions that are a foundation for his recommendations, for example that when total profits for the economy are up, this will be bullish for stocks.

He also pays no attention to the law of ever-changing cycles, which belies the basic premise of many parts of the book, that looking at past moves when such things as energy prices go up, or the economy slows, is a guide to proper allocation between bonds and stocks, large and small caps, et al, in the future.

He states that if you know whether an increase in prices comes from a movement in the demand or supply curve, it is possible to predict whether it's bullish or bearish for stocks. But one doesn’t know whether there has been a move in either curve, or much more important, whether it was anticipated in previous price moves of the individual stocks.

As an example of one of many deficiencies in the author's arsenal of recommendations, I would point to his idea that there are cycles in the moves in large and small cap stocks, with persistence in superior performance, of one group versus the other. No estimates of variability, predictability, relation to predictable economic variables, or accord with randomness, or retrospection are given. The observations that throw the three or four large runs of superior performance out of kilter are put aside as ephemeral phenomena that should be dismissed.

With all it's defects, and its many self-serving assertions about the greatness of his past results, and its grab bag of very special chapters on such things as the similarities between returns and energy flexibilities, and I have just highlighted a small number of them, one must know this is a big book with big ideas. It is well worth reading for the discerning reader.



Time for another look at war's effect on the stock market (yes this is mercantile, but someone's got to pay for the BBQ), using DJIA monthly returns (w/o div), checked wartime against peacetime. Dates used for US involvement might be contestable (they’re from web timelines):

WWII 12/41-8-45
Korea 6/50-7/53
Vietnam 8/64-4/75
Iraq II 3/03-present (or until Democrats rescue us, whichever comes first)

First, I lined up monthly returns for the four wars starting at their first month through the 38th (the shortest was Korea at 38 months), and regressed monthly return vs. number of months into war:

Regression Analysis: ret versus Month

The regression equation is ret = 0.0093 - 0.000123 Month

Predictor     Coef    SE Coef       T          P
Constant   0.0093    0.005     1.85    0.066
Month      -0.00013  0.0002   -0.57   0.567

S = 0.0305157   R-Sq = 0.2%   R-Sq(adj) = 0.0%

There was no trend in returns as wars progress from the start. Next compare mean monthly returns in and out of war (peace back to 2/41):

Two-sample T for war vs peace

                  N      Mean     StDev     SE Mean
war            264  0.0050   0.0370   0.0023  T=-0.9
peace        533   0.0076   0.0419   0.0018

War months just a tick lower, but not significantly. What about volatility?

Test for Equal Variances: war, peace

95% Bonferroni confidence intervals for standard deviations 

             N      Lower      StDev      Upper
war      264  0.03370  0.03701  0.04099
peace   533  0.03921  0.04191  0.04499

F-Test (normal distribution)
Test statistic = 0.78, p-value = 0.022

Interestingly, war was less volatile than peace (maybe investor focus on war news or patriotism distracted them from looking too hard at the economy?). With war’s end possibly just an election away, traders pining for those volatile months may get their wish. 



 One can’t leave San Francisco without posting some comments on the two restaurants there that have been in continuous operation and under relatively the same ownership since the gold rush days, 1850 in Tadich’s case, and 1865 for Sam's Grill on Bush Street.

Both restaurants prove that supplying goods to a growing business is a very profitable way of prospering, as they were able to provide a small item to all who came in the gold rush days without being caught up in the speculative frenzy of the day. I first ate at these restaurants 45 years ago, and it was good to see that they were both going strong without any changes of consequence over the years.

A 1943 menu is posted for Sam's and almost all items are the same on both menus. The prices then for appetizers and main courses and desserts are about 10 times today what they were 65 years ago, with a petrale being about 10 dollars today and 1 dollar in 1943, a shoestring potatoes being four dollars today versus forty cents yesterday, and a Coke being 2.50 versus 0.15. The two exceptions are that a whole chicken is 10 dollars today versus 1.25 in 1943 and abalone is 50.00 today versus 75 cents in 1943.

Abalone today is farm raised around Monterey and loses much in comparison to the fresh product that was available before unintended consequences from environmental regulation depleted the supply. The prices illustrate that stocks which had gone up by some 150-fold during this period have realized about a 10 to 15-fold increase over labor and food costs during this period, and also provides indirect evidence concerning the vast improvement in standard of living during the period.

Both restaurants are still packed for lunch and dinner every day, and their longevity illustrates that a formula for great prosperity is to give the average person a superb product and value, and stick to your knitting, and if you do it better than anyone else you will prosper. Both restaurants are famous for concentrating on superb product and not caring that much about personal service. Indeed, the waiters at both places are known for their reticence and lack of glad handing their customers.

I found the Sand Dabs and Petrale, and the Oyster bellies at Sam's far superior to any fish dinner I have had at any other restaurant, with the exception of some turbot from the North Sea, about 18 inches in diameter, that I had in Venice, the Four Seasons, and Circo. The potato dishes at both places which presumably have evolved to perfection over 150 years were also highly superior and great values at three dollars each for the 10 varieties they offered. And I am told by Mr. Gibbs, of the food bus Gibbs McComick, and a 75-year customer whom I met there, whose in laws met there 100 years ago, that the Veal Chop, and Sam's other meat dishes are equally meritorious. He assures me nothing has changed at Sam's in 100 years.

He was not as high on Tadich’s saying that the service there was so bad that he felt they were resting on the laurels. I tend to agree with him, although I found the Oysters Rockefeller at Tadich’s a most superior concoction to most I have had elsewhere. Too many of the dishes at Tadich’s had succumbed to popular taste and were combo fish and turf, and fish medleys and bouillabaisses, and in my case tasteless turbot wrapped around listless shrimp in a turbot wraparound.

The cost in both establishments is about fifty dollars a head, and both restaurants apparently have three times as much lunch business as dinner business. Sam’s will always have a deep place in my heart as it was my custom to celebrate all my fine Berkeley student grad papers there with a dinner, and John Mcquown of Wells Fargo, introduced me to it some 50 years ago. Its been my favorite fish restaurant since then, and I expect it to remain so. I can highly recommend Sams' as one of life’s best dining experiences. 

The decor at Sam's and Tadich’s consist of wood paneling, white table cloths on wooden tables in booths, and the general look of an old-fashioned bus station. The waiters are knowledgeable and the service is fast. The entrees are grilled simply without any sauces except for the celery Victor and oyster stew at Sam's and the Oyster's Rockefeler at Tadich, which I found to be one of the best recipes and tasting versions I have sampled.

My favorite dish at Sam’s was the pancakes Anisette which I still remember with pleasure from 40 years ago. It gains much from a just flambéed presentation, which I had on two of three occasions I sampled it at Sam's on this trip. The price of a good dinner is $60-75 at Sam’s and $50 at Tadiches, great bargains in this day and age for perfect fish and meat dinners.

Alan Millhone writes: 

In 1972 the Army brought me back to Oakland, Ca. to be discharged. A buddy of mine learned in finance that we had two to three days before our names were called. We put our money together and decided to head to Frisco and see the City. We stayed in a round hotel called the Villa Roma. We beat around the city and I told him some day I would like to return.

In the late 90s I took Vickie and we booked a hotel on the waterfront called the Cable Car Inn for a week. We settled in and had a great time riding the cable cars, visiting China Town and dining there on several occasions, visited an old brewery near Height/Asbury and a turn-of-the-century bar. We took a side trip one day to Muir Woods and enjoyed the redwoods and the fresh air there.

We took a trip over to 'the rock' and a trip to wine country one day and savored the wines at each stop that day, and had supper one night near Pier 54. I was amazed at all the different oysters they offered. I decided to have a large platter with a varied selection and deliciously prepared fish for supper and enjoyed some Dungeness crab and the sour dough bread.

I brought back good family memories. The saddest part of our trip was our visit to the SF Zoo. It was pitiful to see, and I hope over the years the conditions there have improved. I remember a lady working there told us they were severely under funded for operating.

Your account brought back good memories of my visit and I enjoyed reading your account. 



 I was astonished to view a Disney movie with an individualist moral compass: the animated foodie flick Ratatouille.

Avoiding spoilers, here's a short list of relevant themes from the movie, which I heartily recommend to any and all kids/families:

1) The daring entrepreneur is key.
2) Passive acceptance of existing realities is for lazy losers.
3) Involuntary altruism is anathema.
4) Focused hard work is central to success.
5) Creation is vastly more important than commentary.
6) Great value can be added by conscious, creative recombination of existing elements.
7) Family/clan is important, but subordinate to the individual.
8) Property rights are inviolate.
9) Need does not justify theft.

There are even a couple of business-related truisms:

1) The customer's needs/opinions are paramount.
2) Cultivate/exploit core competence.
3) Avoid brand dilution.
4) Judge employees by ability, not pedigree.



 I was recently approached by a salesman who showed me a variable life insurance policy. Despite the high costs and limited investment options, it seems the tax advantages make up for it being that it’s like a Roth IRA without the limitations.

I know several people who have become wealthy as long-term investors in stocks, and know many similar stories that have been written about people I don't know. I wonder why you don't hear anecdotal stories about people becoming wealthy by investing in equities via life insurance?



Here is a pair of interesting links. One pertains to labor market efficiency (at least in baseball) that could be applicable to stocks. The other summarizes interesting recent research on synesthesia.

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