# Market Completeness, from Vinh Tu

January 31, 2008 | 2 Comments

"…Left off the balance sheet is the value of the asset that Gary Becker, Nobel Laureate in Economics, calls human capital. Professor Becker says that the skills and experience of our people are worth more than half a million dollars per person. By this calculation, traditional assets comprise less than 25 percent of the national balance sheet, which means that true U.S. assets exceed \$180 trillion…" Mike Milken

I haven't had my morning coffee yet but here's an attempt at arithmetic along Beckerian lines:

A recent FT article put Japanese assets at 75% of its GDP. Pulling a totally random number out of nowhere, if the return on assets is 5%,

GDP = 5%*(total assets)

GDP = 5%*75%*GDP+5%*humancapital

19.25*GDP = humancapital

Looking at World Bank statistics

World GDP 2006 = 48.2 trillion

World financial assets = 170 trillion

Return on assets = 5% (can someone give me a better number?)

Return on financial assets = 8.5 trillion

Return on human capital = 39.7 trillion

Human capital = 794 trillion

population = 6.6 billion

Average human capital per capita (hheh..) = 120303.3

Anyway, very rough calculations with numbers plucked from the ether, but the order of magnitude at least is in line with Prof. Becker.

(Also, I left out something important - GDP is not just a return on capital (even human capital) because human ingenuity produces excess profits and increases the value of the capital. So you'd have to adjust the calculation of human capital to account for growing return. And risk adjustments. Etc. etc.)

Any real macro economists care to point me in the direction of more accuracy?

## Phil McDonnell replies:

Rather than pulling an imaginary growth rate out of our … armpit, perhaps a better approach can be found. GDP is the goods and services produced by a society. However much of that is consumed as well. The number we are really seeking is the net 'profit' figure that can be carried forward into the next year. It is good to remember that any 'profit' carried over must be held in the form of an asset. Thus a reasonable measure of the rate of return would be the net increase in total assets year over year.

## Yishen Kuik counters:

Maybe I'm too classical, but I've always thought that GDP is a flow measure of all the goods and services we produce, of which one portion is consumed to give us present utility and the remaining portion is invested to enhance our ability to increase GDP in the next period.

Presumably all goods have some aspect of both utility and investment ("school is fun and you learn something" or "bridges are beautiful and enable transportation"), but we can think of the investment portion of GDP as flowing into a stock of accumulated capital.

The stock of capital deteriorates over time, so some of that flow is just running to keep still. Part of the stock is human, part of it is physical plant, and part of it is institutional arrangement of society (courts, laws etc). The dollar figure we attach to capital stock is just a very rough attempt at measurement, and doesn't take into account the importance of having the right arrangement of the 3 kinds of capital stock. The right arrangement catalyzes a \$100mm investment to return 15%, while the wrong arrangement will have no such catalyzing effect. That is why \$100mm produces such different results when invested in America versus Africa.

I think it is this accumulated capital stock (human/physical/institutional) which is the right place to discuss big picture returns on investment. Unfortunately much of it is unquantified and unquantifiable.

## Adi Schnytzer brings up the stock market aspect:

Surely the real issue here is that, however, we define GDP, it's notoriously unpredictable? After all, why has the market been shooting up and down so furiously lately? In part it's because every one has been wondering whether or not the US economy is moving into a recession. Well, if we could agree on a way to to measure and predict GDP, we'd have solved that issue for the market pretty quickly, wouldn't we?

## Derek Gard dissents:

This assumes the market moves based on GDP at all.

From 1950 to 1960 GDP went from 1696.765 to 2517.365 (48%) and the DJIA went from 198.89 to 679.06 (241%)

From 1960 to 1970 GDP went from 2517.365 to 3759.997 (49%) and the DJIA went from 679.06 to 809.2 (19%)

From 1970 to 1980 GDP went from 3759.997 to 5221.253 (39%) and the DJIA went from 809.2 to 824.57 (2%)

From 1980 to 1990 GDP went from 5221.253 to 7112.100 (36%) and the DJIA went from 824.57 to 2810.15 (240%)

From 1990 to 2000 GDP went from 7112.100 to 9695.631 (36%) and the DJIA went from 2810.15 to 11357.01 (304%)

GDP during the 60s was higher than the 50s and yet the market barely budged. And GDP during the 60s and 70s surpassed the growth rates of the 80s and 90s, yet what decades saw the greatest gains in stocks? Stock market moves do not correlate well with actual GDP data over decades or even years, let alone the daily thoughts and musings of financial pundits.

To say stocks move on GDP data, or confusion thereof, is not supported by raw data. This is the same logic that says, "Stocks rose on a drop in oil prices" one day and then the very next day says, "Stocks fall despite a decline in oil prices." It is a fallacy promulgated by the same people who earned 3.5% per year in stocks during the 80s and 90s when the market was earning more than triple that.

My argument was not that the market moves in line with GDP, rather that lately the market has been reacting to news suggesting either an imminent recession or not. To measure the relevance of this assertion you need to check whether or not the market falls some months before a recession (thus anticipating it) and not whether over a long period the market tracks GDP.

## Nigel Davies opines:

As a simple chess player I must admit to being confused by the apparent
implication (seen everywhere right now) that positive GDP is good and
negative GDP is bad. In my own admitedly primitive pursuit one rarely
gets the opportunity to play expansive moves on a continuous basis,
there are periods when one must regroup in order to increase the
potential energy of a position.

So if I were an economist I would not be looking for answers in simple
linear relationships. Instead I'd try to study the interplay between
'potential energy' (one might try to define this in many ways, for
example by defining debt in 'real' terms) and GDP. And I'd hypothesise
that one of the most bullish economic times would be during a recession
in which personal debt was being reduced.

## Vinh Tu tries to sum up and conclude:

Whether more GDP is "good" or "bad" is a normative judgment. To an
economist, however, since GDP by definition refers to the production of
"goods", it has to be good. (It is generally assumed that utility is
monotonically increasing with goods.) Whether the increase in goods
produced corresponds to an increase in share prices is an entirely
different matter. A share represents a claim on assets which, in turn,
yield a stream of goods (or money which can be exchanged for goods.)
Whether an increase in GDP is beneficial for share prices has
everything to do with where that increase comes from. An increase in
efficiency, whereby the return on existing assets increases, would
probably increase share prices, all else being equal. On the other
hand, the creation of new capital assets would not increase the value
of pre-existing assets if it resulted in the assets being less
efficient.

# Risk Management, from “R.S.”

January 31, 2008 | 2 Comments

Risk Management

(for the French)

.

The flowers must be fresh,

The wine and food superb,

And dont forget to,

Bring a nice trinket or two,

For a fine lady whos not afraid of

Playing both sides.

.

Forget everything she told you

Remember everything left unsaid

And dont forget to,

Give a kind word or two,

For a fine lady whos not afraid of

Playing both sides.

.

She'll flirt with disaster,

She'll lay with a brute,

Lest you forget to,

Alter the vases water,

For a fine lady whos not afraid of

Playing both sides.

.

Dont let'em comfort you,

Lest you forget the

Hunger a row under

For a fine lady whos not afraid of

Playing both sides.

.

# Wrongly Accused of Sportmanship, by Nigel Davies

January 31, 2008 | 3 Comments

Last Sunday I was accused of 'sportsmanship'. Frankly I felt like a mug. What happened was that in a crucial tournament game in a rapidplay event the minute hand on my opponent's clock stopped moving when he had 5 minutes left. This meant that he effectively had unlimited time and I saw a better position and time advantage evaporate into a loss. Immediately after the game it was established that this had indeed been a defective clock but that my resignation had to stand. I didn't kick up a fuss because then I stood to lose more than just the point. This is why my 'sportsmanship' later got praised.

Naturally I've been thinking about what I should have done, this was the first time I've had this situation. It's difficult to know because calling the arbiter means losing concentration and thinking time, not to mention the fact that you're in the lap of the gods once officials are involved. One could simply ask for a new clock, providing there's someone there to hear this request. But given the potential for argument a better approach may be to knock the clock to the floor, by 'accident' of course. Hopefully the thing will more obviously break and at the very least you can ask for a new clock 'just in case'.

Shouldn't the organisers have ensure that all the clocks were working? In theory, yes of course. But this is the kind of naive attitude that means you always get shafted. It's better to leave 'challenging authority' out of the battle plan.

It is difficult to know what to do. This happens in real trading situations all of the time, and I've been on both sides. There have been many times where I've seen a trader at a Nice Yokel Scum Exchange appear to not honor a posted market. Do I take time out from my trading to call surveillance and have it tracked down, knowing that they are inclined to take the other guy's side?

As a market-maker I've been on the other side too. On the ARCA options exchange, for example, a customer has 30 minutes, I think, to ask for a trade-break on an "obvious" error. The exchange would then look at it, then make a ruling, then call me. So 45 minutes or so after a trade, I get call on something that has already been hedged, on an option that has been up 50% and down 50% in value on the day. I then have to decide do I lose yet more time fighting the ruling, knowing I'm going to lose but that precedent matters, or just eat it? Of course, these customers challenging are never Grandma from Des Moines, but usually a "customer" account at Large Hedge Fund or Mega-Bucks Bank. They buy an option at the market on the open in something that just had earnings. ARCA is electronic, and they take whatever offer I'm sending. Being a good-little liquidity provider, I'm providing liquidity at the moment of the opening in an event-driven stock. 25 minutes later, the initial euphoria is over, volatility is in 50%, and the call they paid \$2.50 for is now offered @\$0.75. They call to bust the trade because the price is "obviously" an error. The cynic would say they are just taking a free look on the open, but I, of course, would never accuse LHF or MBB of such tactics. I did ask ARCA what they would do if I opened Free Look Trading, a division of Customer Capital…

# Hero Trading, from Kim Zussman

He hoped to be a hero

One day atop the hill

Surviving all the bullets

Expert at the kill

.

But then one day he noticed

How they all try and die

The sacrifice was futile

Objective was a lie

.

The experts at the killing

Drop them one and all

Friend, foe, and family

One by one they fall

.

Until the hill is barren

The hero stands alone there

Above the boiling mud

.

A dark and empty home

Her face the mirror changing

Her hair pulled in the comb

.

A war without an end

Will it be reversing

Or is this now a trend

.

All the men who loved her

soldiers through and through

Killed in the great battle

Wet skin all grey and blue

.

He couldn't be a killer

And didn't run too fast

They noticed he was thinking

So saved his shot for last

.

His final thoughts ran from him

Fanning into space

The last thing he would ever see

Was her lovely face

# Basketball and Markets, from Victor Niederhoffer

January 30, 2008 | 12 Comments

It's been a long time since I considered what we might learn from basketball . Like most former Knick fans, I was so turned off by the surly and ugly play of Patrick Ewing, including his bumping of teammates when they didn't give him the ball for the crucial shorts, his inability to get a rebound after a shot, and the depth from the basket he shot from , that when he didnt accept my proposal to trade places with "Doc Greenspan", I called it a day.

But I recently tuned in to a few Knick games to see the structure of what makes a team that bad, with their record 14 wins of 44, as if they're that bad you might learn from them in other fields. I found that there is a general air of malaise that surrounds the team. They like to come out to the scorer's table en masse as if for a gang rumble, and q loves to pick fights with people twice his size, the coach likes to bump referees, and if you beat them too bad they threaten you with a locker room brawl, to say nothing of the elbows. This general air of viciousness always leads to losses in basketball or markets.

The Knicks on paper, man for man are a good team. But as Clyde says, they pick the wrong time to take their shots. They fire from 100 feet out when the opposing team is sure to get the rebound, and the game is on the edge. They run around madly trying to find an isolated player from Downtown with no inside game. The movement to high risk trades to bail one out at the close is sure to lose.

There is no rudder to the team. The big men are fighting with each other and the coach. When Curry scores, he doesn't bother to go back to defend. They chew each other out in public with the coach shaming the players, and vice versa. A movement from one market to another, from day trading to long term, from big margin to low margin is sure to cause the same results as the Knicks.

The off court antics of the Knicks show that they are deeply disturbed. They seem to hang on to each other for fear that word about their shortcoming might lead to wholesale losses in litigation say in the harassment front. The fans are admonished to go crazy at the games, but when they berate the coach, they are thrown out. The inability to accept censure and to get feedback from what you're doing wrong is a sure sign of failure.

They use up their energy with fruitless movements and attempts to improvise plays while their opponents conserve theirs while waiting for the tried an true that is part of their game plan.  Indeed, the Knicks seem to have no steady game plan, even to the point of not knowing who they are going to put in the game at any time. When they do score an unusual short, like Balkman's three against Los Angeles, they get so excited they use up all their energy in congratulating themselves. Anyone who talks about their great wins in speculation is like the Knicks and destined to fade like a shooting star.

The woe of the Knicks is typified by their captain. He's a man paid a few hundred thou a game, but after being out for 4/5 of the season, and paid, he's suing for the one game he didnt show up for after a heated converse with the coach where the coach may or may not have told him he didn't care if he showed up or some such. Like Ewing, the captain is an egomaniac, as typified by his remarks to the intern about whether or not she was going to go into the truck, immediately, and his wild shooting from outside with no rhyme or reason to it.

Any team that has a loose cannon like that for a captain who takes shots that are so non-percentage because they disrupt the flow of the whole team, is designed to slip into the nether world.

They have a tendency to fall apart at crucial moments which is typical of a team that has a flimsy foundation. Time and time again, they can bring the game close, but when the other team tried harder near the end, the Knicks fall apart and lose by a few points. The market that can't make it big by near the end of the period is likely to move the other way.

I don't know too much about basketball, never having been good at using the left of the jump, so I would appreciate more erudite analyses of the technical aspects of what's wrong with the Knicks and how it can teach us what not to do

# Parasites, Markets and Host Behavior, from Victor Niederhoffer

January 29, 2008 | 8 Comments

The parasite T. Gondii lives in rats but must get transmitted to cats to complete its life cycle. It does this by changing the rat brain so that it seeks out cats. When the cat eats the rat, the parasite gets transmitted through droppings to other mice and humans. The incidence of schizophenia in humans is about 25% higher in those 7% of the human population that have contracted the parasite than the rest of the population.

This parasite and other parasites play a large role in determining the behavior of their hosts. For example the fluke d. dendriticum changes the behavior of ants so that instead of spending time in its nest, it climbs on top of a blade of grass, so that it will eaten by a grazing aminmal. Other flukes cause fish to jump up so that predators will eat them. And hairworms cause grasshopers to drown themelves, transmitting the worms through water as they die.

Parasites attack the body without the host knowing it, and the virulence of their attack is related to their method of transmission. Factors that determine their activity include their ability to reproduce, the mobility of their host, the costs of dying and the costs of sickness. In general, if the probability of transmission is high as it is in crowded conditions, for example in foxholes or planes, then then severity of the illness increases.  Where the parasite needs a mobile host who sneezes, or has sex with induced increased frequency then the parasite becomes relatively mild in its impact, especially during the first stage of its impact, so that it has more time to reproduce and survive.

All this and much more is contained in the layman's book "Survival of the sickest" by Sharon Moalem. The basic thesis is that many diseases that we now have once served to help us survive when a short term solution like preventing freezing during an ice age or gaining energy during a famine were imperative. They served a function then, but now cause diseases like diabetes, Alzheimer, and cancer.

In looking at the recent disclosure of an 8 billion loss from a hidden agent in its Delta One unit, I found that the insights I gained from the study of infectious agents and their transmission method were very helpful. The agent was hidden in a hard to find part of the hosts structure, it stayed invisible for several years while it was acting with little impact, it acted mainly during the evenings, in anonymity, without alerting the immune system through margin calls, or seemingly unbalanced positions. Indeed, like many parasites, it had turned the host immune system against the host by copying the methods of healthy traders within the system. But most important of all, the parasite was finally expunged from the system, and this left the host, and the market it acted within in a much healthier state.

I would be interesting to consider what other parasites are acting upon the market system , and how they coevolve with their hosts.

Attenborough's Trials of Life videotape series has incredible, and ghastly, footage of several of these parasites and their actions ontheir hosts.

## Sushil Kedia writes in:

Separation of Corporate Management from Corporate Ownership that was hailed as a quantum progress in the management of businesses, heralding an era of objective decision making by profesisonal managers, has brought in its wake massive Agency Costs.

Regular earnings announcements every quarter were made mandatory to fulfill compliance with the agency relationship corporate managements have with the stakeholders. Over shorter periods the volatility in announcements is perhaps affecting the valuation of the stakeholders' equity.

Fundamental Valuation Research driven brokerage and investment banking services were initially celebrated to have brought greater professionalism to markets to only finally ending up in being forced to have Chinese Walls and arms length existence from their Research Divisions.

The Margining System when introduced to the Clearing Houses of Exchanges was a boon for their existence and sustenance. However, when catastrophic moves occur the Portfolio VaR shoots up because the benefit of diversification dwindles as asset correlations increase. The very same margins thus shoot up unexpectedly bringing down the trading & clearing system of exchanges.

Similarly, all of the risk management technology that has come up to manage risk within tolerable ranges ends up making it intolerable, even more so as risk goes out of the tolerable range.

Banks and Investment Banks were required to operate in different segments of financial services to keep the systemic risk under check. Finally, competition in risk taking brought about a necessity for banks and investment banks to be brought back into the same circle.

The Reflexivity perspective of markets itself is akin to a virus that was initially required for our progression but has started affecting the progression itself. Markets came into existence to help us allocate resources by anticipating future events. Now often times markets are shaping future events.

The law of Diminishing Utility of Returns itself operates as if there are viruses of the types Vic  describes here, embedded within any pursuits inside the markets. A local maximum exists in the progression of each process in the market system. It is appealing to imagine that such viruses are perhaps  Nature's way of making change the only permanent process.

# Drug Research and Drug Stocks, From Bill Egan

Gregg wrote a nice comment: "This NYT editorial story is not good for drug stocks which depend on revenues from cholesterol lowering drugs. That is good and bad. Good from a moral-philosophic point of view, bad for my portfolio."

Drug stocks will become much more volatile in the next 5 years. Many billion dollar patents are expiring and the pipelines are not there to replace them. Big pharma will downsize more and more in US/EU, and throw money at all biologicals as well as small molecules designed for cancer to fill pipelines, and shift research projects (and esp. regulatory testing) for small molecules to cheaper chemists in China/India. Why?

Labor costs. Wu Xi in China (WX on NYSE) a great example of the last. WX is also getting into cheaper regulatory/development testing. Many big pharmas opening R&D centers in China, too (Shanghai). Biologics are harder to make but easier to develop (usually less toxic). Small molecules for cancer are more likely to get approved. Big pharma has made billions on small molecule drugs for chronic conditions. Double whammy here - a) many good drugs coming off patent for those conditions, so unless the new drug is much superior, it has no chance cost-wise, b) FDA is now much tougher on the safety of drugs for chronic conditions, especially if the condition is not life-threatening. Cancer is still hard to treat and life-threatening.

VCs seem to be putting less money into traditional US small molecule startups. If I were a VC, I would move money to China/India, but also look for plays for pipeline fillers. Big pharma execs have to be seen "doing something" or lose their jobs.

Their real problem is the length of the R&D cycle. Research averages 5 years, clinical testing in humans averages 7 years, and FDA approval time is ~14 months. So 13 year cycle.

Fail rates are huge. Take 10 research projects. Each makes 2,000 molecules on average to produce a clinical candidate (drug to test in man). One of those ten projects will produce a drug. So about 1 in 20,000 molecules becomes a drug after 13 years. Why the fail rate is so huge is another essay.

Consequences are that big pharma execs reorganize alot and buy pipeline fillers while cutting costs and praying the pipeline gets better randomly (and they fire the research head, too). Changes made back in research may or may not affects the success rates. Doesn't matter much, either, from the CEO viewpoint. Even if a research process change/new technology tripled the success rate, you couldn't tell easily. 3x better means 1 in 6,667 molecules succeeding after 13 years… So big pharma execs "do something now" even if it has little chance of fundamentally changing the odds in order to save their own necks. Likely more shenanigans like hiding of bad data on Vioxx and new Vytorin ethics scandal.

This means lots of volatility. The problem is the high fail rates mean it is tough to tell which small companies are any good. Interesting times ahead.

# Pulling Money from the Pit, from Jeff Watson

January 29, 2008 | 3 Comments

Having spent a considerable amount of time trading in the pit, I came up with many methods to wring out a little extra money, which meant the difference between winning and losing on many days. I earlier recounted the method of finding a loser and fading his trades. That was a great way to make a net average profit. I also alluded to mechanical methods that I used to make money. All of these methods required strict concentration and quick thinking.

Pit brokers are only human, and most of them are just tradesmen. When a pit broker would get an order, I'd carefully watch which direction his eyes moved as he read the order. As all paper orders were made in the same format, one could see if it was a buy or sell just by his eye movement. If he had a buy order, I'd bid at the market price, maybe even bid it up a quarter cent, just to see what he'd do. If he bid the price up in front of me, I'd turn around and sell him the wheat. I'd then offer wheat at that price, sometimes a pr etty large amount, just to try to get some more locals to offer it down a quarter cent, in which I'd buy it back. If the broker didn't do anything with the paper, I'd usually assume that it was a limit order, and was usually right. This was a good piece of information, as I knew that there would be a price where I could pitch out wheat at a certain price after he put the order in his deck. I'd memorize those price points with as many of the brokers as I could, and this greatly lowered my risk.

I learned the individual methods of brokers, such as the brokers that worked for hedging companies. As they were usually sellers, I would try to entice them to sell by offering in front of them in order to move the market. Many of those hedging brokers used to like to sell at 10 cent intervals, and I found that there would sometimes be selling pressure at the dime which was very useful. Back then, I found that there were many brokers that would just let us have the wheat at whatever pr ice we wanted…all they wanted to do was to fill the order, and they didn't really care at what price they filled it. I treated these guys like gold, sometimes giving them trades in distant months, just so they could fill the order. Of course, I'd immediately spread that month, and try to work it out later. All in all, I was a net loser on those trades, but considered it to be a cost of doing business. Some brokers wanted all of the money for themselves, and were very tight. I tried to avoid them like the plague. The brokers that represented the big commercials were very useful, as if you could figure what was in their deck, you could see what they were doing, and at what price. The big commercials did volume, and knowing what and where their order flow was going allowed me to put on sizable scalps with a good guesstimate as to where I could exit the trade, which would also limit risk. During my tenure in the pit, I learned how to read upside down, and to also read the writing through the orders if the light conditions were good. I used to watch brokers put unfilled orders in their decks, and if I had an idea of what price was on the order, and if it was a buy or sell, I could figure out their hand like a good gin rummy player does.

Some brokers were very careless with their order decks, and would accidentally flash their order, much like a careless poker player accidentally flashes his cards. I found it advantageous to sometimes stand behind careless brokers, peeking over their shoulder. I learned to watch what all the players were doing, especially if the big commercials were trying to move a spread. They'd battle it out, and I'd pick up the scraps, some of which were pretty tasty. I had to learn the art of deception as a lot of locals would try to follow me. Sometimes, I had to put on positions through other brokers to disguise my intentions and strategy. In quiet times, if Chicago started moving a couple of cents, I'd sometimes try to fake a rally just to get people sucked in. Unfortunately for me, sometimes I'd start to believe the rally I faked was for real. That would cost me money in the long run. I found a real good indicator for market opens. If the market was poised to open higher, people would get into the pit 5-10 minutes early, whereas a lackluster or down opening would find people arriving at the pit at the last minute.

Unfortunately, as the electronic markets replace the pits, all of these mechanical techniques will be destined to the dustbin of history. I personally feel bad about the impending demise of the open outcry method, and often wonder what will happen to the electronic markets if there's ever a big internet shutdown.

# Numerology, from Ken Smith

With Biblical numerology 911 is a curious date.

The number of the Beast is crucial — 666:

# A Brief History of Recession Time, From Stefan Jovanovich

The first recession I remember was the one that came shortly after Dad had his first heart attack during Eisenhower's second term. Although it was relatively short, it was pretty severe. I remember several of my friends' fathers losing their jobs in the New York printing trade, which slumped badly and never really recovered.

There have been 7 more recessions since then (not counting the one which may or may not be officially happening now). The median decline in real GDP for the 8 slumps has been 1.91%; their average duration has been 10 1/2 months.

Aug.1957 - Apr. 1958 8 months -3.75%

Apr. 1960 - Feb. 1961 10 months -1.64%

Dec. 1969 - Nov. 1970 11 months -0.64%

Nov. 1973 - Mar 1975 16 months -3.10%

Jan 1980 - Jul 1980 6 months -2.18%

Jul 1981 - Nov 1982 16 months -2.87%

Jul 1990 - Mar 1991 8 months -1.26%

Mar 2001 - Nov 2001 8 months -0.17%

# Bear Market? from Victor Niederhoffer

January 26, 2008 | 24 Comments

There has been much talk recently about the many bear markets that have been achieved. The way it's usually defined is that a market has declined 20% from a recent peak. There are many ways of quantifying that, but let's say the definition is that the current month's close is less than a monthly close in the last five years by more than 20%, and is also not more than 10% above a close preceding it in the last five years by 10%.

In November 1968 the S&P 500 closed at 108 and in January 1970 it closed at 85. Subsequently the S&P 500 rose, to 118 on December 1972, then fell continously to 64 in September 1974. It then rose continously to 1400 in December 1999 and then fell to 815 in September 2002.

During 1929 the market rose to 31 in August, then fell to 4.8 in June 1932. In June of 1921 there was a 40% drom from tge high of 10.2 in 1916. Those are the only major drops.

There are many questions. There were three declines of more than 40%. Were these offset by the many drops of 20% that bounced back? Have conditions changed since 1929 when the market dropped by 83%? What would proper exit and entry points be? What happens when the market drops by 20% within various periods? How does the interest rate environment affect it? Have declines associated with big drops in real estate been any different? is there such a thing as a bear market?

I have always looked at the bear markets that ended in 1970 and 1974 as two distinct bear markets. What characterized both the major periods of down markets in the 1930s and 1970s were inappropriate monetary and other government policies. This is what appears to turn modest periods of market and economic setback into major ones. In the 1930s monetary policy was too restrictive and other government policies were also the absolute wrong way to go. Because these mistakes were on the downside of economic policy decision making, I have tended to view that as one protracted bear market interrupted by a rally. Following the 1970 episode the Fed was much too expansive, which compounded the underlying inflation problem. That in turn led to the 1973-1974 debacle and subsequent ones until this stop-go policy finally ended under Volcker and Reagan. The lesson seems to be that market downturns caused either by market (not just equity markets) imbalances and/or mistaken government policies may remain moderate unless further government mistakes in reacting to the events are badly mistaken ones. One just has to hope that the government and central bank have learned from past mistakes and do not stumble into some new variation of mistaken policies. If they can do that the prospects for the equity markets are much better. The low probability major downside risk I see here is the whole structure of derivatives and other new products that spread out risk to those willing to bear it. The problem comes if enough of those ultimate risk takers are not able to bear it and take down those who lent to them and those who were counting on their ability to pay up when the time comes. If this goes into major financial institutions that are not just short of liquidity but suffering from major negative equity positions that cannot be baled out without special government legislation, we could have a new version of mistake — one that perhaps cannot be blamed on government actions as opposed to inaction, unless one wants to place the blame on monetary policy that too expansive in the past for asset markets.

## Jim Sogi remarks:

There are many ways of quantifying a bear market.

For the sake of argument, let's call it a one or more down months. Looking at Dow monthly from 2/1945 to 11/2006, 309 months were down and 424 were up.

If we say two or more down months in a row is a bear market then we have the following count of consecutive up and down months. Under this definition we are 40% of the time in a bear market. Three down months are close to 40%.

Months in a row, down, up

```2 39 50
3 21 32
4  4 11
5  2  3
6  4  6```

If we look at first 360 months the situation is much darker with close to 50% of the time in a down market.

```2 20 20
3 11 17
4  2  6
5  2  0
6  2  3
7  0  1
8  0  1
11  0  1
12  0  1```

The last half is brighter, but there are a number of downdrafts.

```2 19 30
3 10 15
4  2  5
5  0  3
6  2  3
7  0  1
8  0  1```

So yes, there are bear markets. Lots of them.

As to magnitude: mean down month is -80.8, mean up is +84.2

This shows the drift, but also that the downs months can be bad. This study highlights the skew in the data.

# Good as Gold, from Pitt T. Maner III

January 26, 2008 | 3 Comments

One of the best gold stories from the 1970s was when Arthur Ashe beat 19 year old Bjorn Borg in the WCT tournament in Dallas and won a solid gold tennis ball worth \$33,000. Ashe kept it and it wasn't too long before gold was selling around \$800 dollars an ounce and the ball was worth close to 1 million dollars.

## Jeff Watson reminisces:

I bought a lot of physical gold back in 1979-80 and my position has been underwater ever since. My gold-bug friend told me that I'm finally making money in the gold market, as it's taken out its old highs. I explained to him that with inflation, storage and cost of carry, I'd never get out from being underwater. Luckily, I still find looking at and feeling the actual gold to be rather invigorating.

## Alan Millhone agrees:

Yep, nothing like feeling the heft of a roll of Maple Leafs in ones hand.. I knew an old barber years ago from Middleport, Ohio who went West every year to prospect on his vacation and made enough each trip to pay for his expenses and his vacation. He was a coin collector as well and he is long gone, as is his fine collection.

# Market Moves, from Jim Sogi

January 25, 2008 | 6 Comments

I remember the 1960s through the 1970s (Chart). There were 50% price swings. Though I cannot test it, I hypothesize the recent 20 year sample won't be predictive in that 1960s out sample. In the 1970s and early 1980s apparently simple trend following strategies worked, but in the last several years such tactics have not worked. Successful trend followers became extinct. But today we are seeing 20% trend moves which might be defined as multiple 100 point moves without an equal bounce. Bollinger wondered whether old things might have their comeback. I do too. To quantify this, we have had a 200 points down with no 100 point bounce. In 2001-2002 there were several 300 point down moves without a bounce.

In 2000 and 2001 mechanical day trading tactics worked. Strategies such as trailing stops, breakout/down buy/sell stops, buy prior x bar high breakouts, pyramiding etc. These have not worked well the last five years. Also note that ranges, gaps, absolute volatility are all non-significant for 15 years data. Today entries and exits almost had to have been at market to get in or out in time. There were no retracements on the runs up or or down runs. Today's 68 point bounce was the biggest up move open to close since 1994.

Referring back to our discussion of stop/no stop/leverage tactics, the no-stop method does not work well in a trending situation and one trend, whether random or not can hurt a no-stop leveraged account. Larry Williams is right on this. No stops may have been right before, but things have changed, again.

The non-significance of current moves indicates climatic changes. Only adaptability will prevent extinction. In evolution theory, fixed or slow moving characteristics or non-adapters were wiped out when climates or conditions changed rapidly. Even the mighty dinosaurs disappeared after ruling the earth for hundreds of millions of years. The question is, are the data becoming stale? Hurricanes build when energy is released. All this stimulus is going to keep these storms going strong. What about a 50% trading range like the 1960s-1980s? There were weird government maneuvers going on then too, price controls, the dollar off the gold standard, Vietnam, Savings and Loans, inflation pre-Volcker, assassination of presidents, impeachment, war, race riots. All very weird. I remember getting out of investments in October 2001 after some stiff losses thinking, things are changing. Glad I did. It saved me.

The market will come back eventually.

What is amazing is how quickly you can give back your hard gained money. Especially, what happens to small traders is that even if you do recognize situations like this one as buying opportunities you are under capitalized to enter the market. You are caught by surprise, when you consider selling it is too late, your gains have already gone, you decide to hold because it will go back up, but you are unable to profit from the "On Sale!" prices. You cannot participate in the party and you get only the crumbs. End of story.

When trading short-term you do not have these problems, you are in and out often, but the small trader, part time trader is not consistent, does not have time, has high commissions, may have a not-perfectly-tuned strategy and the results most of the times are at best underperforming.

In all these years, I have learned that when volatility is above a certain level, I have to stay out. One loss can be so big as to eat all the profits I made in two months. Normally volatility does not increase so abruptly that you cannot tell that  the environment has changed.

# Market Moves II, from Vince Fulco

January 25, 2008 | 1 Comment

Speaking of rarities, one of the issues I have been grappling with as the market decline continued is that this period reminds me of a combo of the 1989-1990 junk bond debacle and the Oct 2002 US accounting "crisis"; current conditions are worse than in the former case and better than in the latter. Mix them together and what do you have? I continue to search for the answer daily.

On the one hand, as the bond insurers are impacted by downgrades and fears of possible bankruptcy, billions and billions of previously AAA rated securities (thanks to bond insurance) now have to stand on their own merits. Who is to say what the average rating of many of these instruments is, BBB, BB? By default (no pun intended), the removal of insurance or ratings causes forced liquidations by parties which can only hold the highest rated paper. Given all the structured product created in say the last 3-5 years, where is the home for all this paper? It was one thing when the S and L's of old held Milken's junk and had to sell it without regard to price: there were adequately capitalized parties which could absorb the inventory with the proper markdowns. Will the newly downgraded structured products overwhelm even the vulture funds and opportunistic hedge funds' ability to buy? And are we seeing equities decline because the competition for return is swinging to the newly created fixed income opportunities with better implied ROR? I'm told plain vanilla junk is now trading around +1100 from +400 to +600 in the last few years; historically wide by most accounts but not at max spread to previous distress periods.

What reminds me of the accounting crisis period is the disgorging of US equities in buckets as we've witnessed the last few weeks; very little discernment of company by company fundamentals. I can remember at my old fund, in the height of the accounting debacle, seeing Kroger (KR) among many, many others, drift down from 23 to 15 in a matter of days and within 1 day trade "in the hole" to 10.75 briefly. Within 8 hours the stock was back to 14.50 and proceeded to drift back up to the low 20s within a few months. I mention this as an example because as I recall this was a single A issuer with NO accounting issues whatsoever, recession proof and a steady income stream trading at 5 to 7x EBITDA depending on where you marked it. I can look back and point to example after example of similar situations in that period. I'm sure many others can mention a laundry list of current stocks which should not be impacted by bond market turmoil other than that the equity risk premium is increasing "because it is". Aside from the realization that US and global GDP are slowing rapidly, these are some of the other ingredients for this manic depressive market.

I remain optimistic especially after the severe markdown we've had but the unique qualities of this period do give me pause. Would welcome any comments.

# Complex Numbers, Risk Management and Poison, from Russ Sears

January 25, 2008 | 1 Comment

The fundamental theory of asset allocation/ risk management is that diversification (increasing the number of assets invested in) decreases the total risk. The amount of the decrease is generally reckoned solely based on the correlation of the new asset to the total portfolio and the weight given to the new asset. The specific risk is assumed to go to zero as you increase the assets.

However, what if the asset added is poison… such as subprime? What happens is risk is raised not lowered no matter how small the amount added. Its total negative risk. or: The vol rather than lowering is raised, or the square root of -1 cancels the negative to positive.

Likewise for time, in most instances Vol(2t) = 2^1/2 x Vol(t). It is less than 2 X Vol(t) since the autocorrelation is assumed zero.

But what if the vol of one of the time periods is poison, such as on Rogue MLK Monday. The Vol adds to, not decreases, proportionally to time.

I will leave it to the reader to deduce what determines a "poison" time period and asset class… but I would suggest fraud seems to me to be the reoccuring theme, in both my examples.

# Sleeping, Dreaming and Trading, from Riz Din

If anyone is passing through London over the coming weeks, I urge a visit to the 'Sleep & Dreaming' exhibition by the Wellcome Trust , just outside Euston Station. The exhibition looks at our understanding of sleeping and dreaming through the ages from a scientific, social, and artistic perspective, and as with many of the museums and galleries in London, admission is free.

Here are some take-aways from my visit:

- Doing without sleep: In 1959, radio DJ Peter Tripp managed to go 201 hours without sleep. However, Tripp suffered from hallucinations and paranoia, and perhaps even brain damage as a result. The record was beaten in 1963-64 by Randy Gardner, who went a full 11 days without sleep and had no lasting side effects. I've read that this record was since beaten by Tony Wright from the UK in 2007 and that David Blaine is also planning to break the record as his next feat of endurance.

- There exists a rare genetic condition called fatal familial insomnia, in which the patient develops incurable insomnia usually in their middle age and dies as a result.

- Drivers of vehicles often suffer from microsleep, when they dose off for a few seconds at the wheel or start day dreaming. Car manufacturers are working on technologies that monitor blink patterns and alert drivers when they are too tired. I imagine such a technology would be useful to day traders working double shifts.

- On dreaming: We dream while we are sleeping, not only during the rapid-eye-movement stage of sleep (there are five stages of sleep and the whole sleep cycle lasts about ninety minutes before repeating). Listening to audio tapes while sleeping does not appear to be effective but sleeping and dreaming seems to play a crucial role in the formation of the days memories and knowledge: an experiment was conducted on rats whereby the rats were placed in a maze and their brain activity monitored as they worked their way around. It was found that the same parts of the rats brains kept firing away while they were asleep, supporting the idea that 'sleeping on it' really helps. Human studies have had similar results, supporting the idea that sleep is a kind of revision. Some suggest that the days knowledge not only gets remembered but that it consolidates with other knowledge. For traders, this could be particularly important. Indeed, with the market see-sawing all over the place I imagine many traders view sleep time as 'dead time' when they could be doing something productive. as for me, I'm off to sleep.

# Predator vs. Prey, from Greg Calvin

January 25, 2008 | 1 Comment

An observation from watching the Kruger Battle is the difference in speed and resolve of predators vs prey. The lions, and the alligator for that matter, move in fast for the kill. The predators may wait hours or days, but when attack is decided upon, it happens in the blink of an eye.

Note in contrast the fits and sputtering attempts of the herd to defend its offspring. Even the largest bulls are hesitant and fearful initially to confront the predators, but only lunge in here and there, risking life it seems when fully engaging a lion with physical contact, as the vulnerable head and neck of the bull are in such close proximity to those deadly horns. The defense of the calf takes time, as the courage of individual bulls emboldens others, and the lions one by one get the message.

## Movie Fan reminisces:

From Jaws:

"Quint: Y'all know me. Know how I earn a livin'. I'll catch this bird for you, but it ain't gonna be easy. Bad fish. Not like going down to the pond and chasing bluegills and tommycocks. This shark, swallow you whole. No shakin', no tenderizin', down you go. And we gotta do it quick, that'll bring back your tourists, put all your businesses on a payin' basis. But it's not gonna be pleasant. I value my neck a lot more than three thousand bucks, chief. I'll find him for three, but I'll catch him, and kill him, for ten. But you've gotta make up your minds. If you want to stay alive, then ante up. If you want to play it cheap, be on welfare the whole winter. I don't want no volunteers, I don't want no mates, there's too many captains on this island. Ten thousand dollars for me by myself. For that you get the head, the tail, the whole damn thing. "

# Another Rant, from James Lackey

January 25, 2008 | 1 Comment

One good up day… One reversal day… One "good date" night and an "O" sure does not make up for all the reprehensible behavior in the markets… Price fixing, rigged deals… Fed emergency rate cuts… It does remind me of all of the old books about 19th century financial markets…

Hey, on Monday night let's say 3am when we were limit down… who do you think was in there buying? Yes and .25 off the limit I am sitting there long too much, thinking am I really this nuts to hope or think we really are going to get an emergency Fed cut? What the hell kinda trader is that?

No that is not why I bought… But why I sold… I had no idea how much lower it would have gone once the limit came off later in the day, maybe not much at all, 10 SNP points for a joke on the Stop Boys. Yet, what I do know is we all should have had that opportunity to find out… the limit down deprived us of that.

If it falls below 1255.30 later this year… every point it does falls below, all the pain you take, blame the Feds for the bailouts, not me. If they let it fall this time, the next time we start buying before the old low and "hope" for a panic or a new low to buy more from the stops. No, next time down I'll be there commenting… "where is your bailout now. Don't ask the traders for help."

It wasn't this time that upset me so much… Hades we are down 20% in a few weeks. I am long anyways. Yet for the past many months how many stupid plans and bailouts have we had? You all know damn well years from now we are all going to look back and say, that wasn't good.

TODAY: MBIA, Ambac Likely to Get Bailout, UniCredit Says

MBIA Inc. and Ambac Financial Group Inc., the biggest bond insurers, are likely to be bailed out to avert worsening credit-market turmoil, according to analysts at UniCredit SpA.

AIG Bails Out \$2.2 Billion Nightingale Finance SIV

American International Group Inc., the world's biggest insurer by assets, will bail out its Nightingale Finance structured investment vehicle, according to Moody's Investors Service.

Bank of America Plans \$6 Billion Preferred Offering

Fed 75BPS Emergency rate cut more to come next week (yea, right!) Bernanke to Cut Rates Further, Faster to Buoy Growth

Citigroup Trial May Double Enron Creditors' Payout

Don't forget the 150-200 billion stimulus package!

And don't forget the treasury department Super SIV.

And Subprime mortgage reform and price fixing!

# The Bulls and the Bears, from Craig Mee

January 23, 2008 | 5 Comments

I get the feeling on days like we have seen recently, that it is a total battle between the bulls and the bears, ie who is going to win on the day, with this being signified by being on the positive side of unchanged or the negative side at the close.  Coming back from a strong deficit will not be seen as win for the bulls unless they make it over the line- and vice versa. The acceleration of the market into unchanged and away from unchanged throughout the sessions is brutal on the turn.

## Vince Fulco ponders:

One wonders what the approximate level of blended Treasury rate is that is low enough to bring out the asset re(allocators). I don't think pension funds can meet long term liabilities with a 3.45% ten year!

# The Battle of Ramree Island, from James Bitumen

January 22, 2008 | 16 Comments

Today is one of those tremendous days in the market that reminds me of the Battle of Ramree Island that took place in Burma between January and February of 1945.

I have not seen a first half of month decline in the market this severe for many years. Vic and Laurel have frequently discussed symmetry and V-shaped recoveries, and I'd add that I have never seen an earnings season beginning with a decline that has not been met with a sharp recovery.

The above picture shows what the shorts, like the fighters at Ramree Island, are going to face very soon.

## Caroline Valetkevitch notices:

NEW YORK (January 23, 2007. Reuters) - The Dow and the S&P 500 rose late on Wednesday, rebounding from earlier losses of more than 2 percent each, as investors bought back shares they had bet against and the banking sector gained. "It looks like it's short-covering and also all financials are really, really running right now," said Todd Clark, managing director of stock trading at Nollenberger Capital Partners in San Francisco.

# Leather Jacket, from Ken Smith

Bo Keely wrote me once when I made a comment about an expensive leather jacket that I intended to wear to my trip to his little village in the desert.  Keely admonished me, saying upscale dress was a good way to get mugged when traveling.

Of course if you are traveling first class, staying in five-star hotels, using limos to shuttle between airport and hotel, taxi to shuttle from event to event, then the journey is safe.  But I can't travel first class, I stay in motels not hotels, I walk around to avoid taxi charges, I  use public transportation systems.

So I took Keely's advice — put the leather jacket back on the closet hanger.  I have two fine leather jackets — except one is pigskin, made in China. I do not like pig, did not think of what animal the jacket skin might be when I bought it on sale — just thought of the price, was a steal; except it is pig.

The other jacket is tailored, fits like an Eisenhower. Maybe off a Kentucky Derby animal. Bought it at Nordstrom 30 years ago and it's a grand style to wear.  Only thing about it is I wore it to an AA meeting once and a recovering female alcoholic commented "Jesus, we don't need another leather jacket in this group."  I guess she was making a statement about gay dress, seeing the style for gays at that time was to dress in leather.

## Steve Leslie remarks:

In the movie American Gangster there is a scene where Denzel Washington, who plays the gangster Frank Lucas, wears a mink coat with a mink hat to Madison Square Garden for a heavyweight boxing match. Detective Richie Roberts, played by Russell Crowe, takes pictures of people in the front rows around the ring. This helps Crowe in identifying Denzel as the drug kingpin that he is looking for. Up to this point, Denzel had always kept a low profile, thus allowing him to fly beneath the radar of the police. This one gaffe ultimately leads to a subsequent investigation, arrest and conviction.

In addition to its functional role, clothing clearly acts as a signaling mechanism. Another place where it is may be better to dress down is when taking one's car to the garage for repairs; dressing smartly signals a wealthy person who probably doesn't know his manifold sprocket from his flux capacitor.

## Bruno Ombreux extends:

This is a very European attitude. In France, there is a saying: "pour vivre heureux, vivons cachés." That is: to live happily, live stealthly. I had a great aunt which had a lot of money. She dressed so poorly that one day she went to place Vendôme to one of those luxury jewelers with the intention of buying some trinkets. She was denied entrance by the bouncer: "Sorry Madam, we don't think you can afford the merchandise in this place".

In England, really old blue-blooded money consider it a lack of taste to display wealth. They'll go as far as having domestics wear their new clothes so that the clothes acquire quickly the aged patina that makes them wearable to the wealthy.

# Two Thumbs Down, from Scott Brooks

January 20, 2008 | 1 Comment

I watched a couple of movies last week up at the farm. Since I was alone for a couple of days, I decided to rent some movies that my wife wouldn't want to watch, but that were also off the beaten path of mainstream video fare.

The first movie was Shoot'em Up starring Clive Owen and Paul Giamatti. I had not heard of this movie prior to seeing it on the shelf, but I have enjoyed both Owen and Giamatti in the past and decided to take a flyer on it.

It wasted no time jumping into action. And it was constant action from the moment it started till the moment it ended. The plot was completely beyond belief, the actors were endowed with superhuman capabilities, performing feats of strength that defied the laws of physic. The s-xuality of the movie was so overdone as to make it nearly soft-psychological porn. The gore and violence factor was a high 10.

But the premise of the plot was utterly and completely awful, mixed with a message that guns are bad and guns do bad things and people that make guns are bad people only out for blood.

This movie looks like it was torn from the pages of a comic book directed towards s-xually frustrated adolescent losers who probably fit the profile of growing up to be a serial killer living in mom's basement.

There was not a single redeeming quality to this movie. It was completely and utterly without any redeeming value. A complete and total waste of 90 minutes.

The second movie that I rented was Tracks . The premise is that a group of friends who drink too much, smoke too much dope, live on the fringes of society in their lower class neighborhood and suffer from more than their fair share of teenage angst are bored one day, and flip the switching mechanism on a commuter train track in NJ. The result is a train wreck that kills the conductor. The boys are sentenced as adults and sent to prison.

The focus of the movie is one young man and what he goes through. There are flashbacks to his troubled past, as well as glimpses here and there into his life outside of prison. The main focus is time in prison and its trials and tribulations. He tries to push away those that love him. Why these people love him (except his mother) is not made clear. He's a loser, a troubled young man, with a history of violence and a bad attitude and is disrespectful to most around him. He goes through some difficult times in prison, as would be expected of a 17 year old boy in adult prison. He makes friends with one guard (played by Ice-T), who gives him some guidance. But Ice-T is a painfully bad actor and his plastic strained performance in the flick further cements his inability to act.

The young man finally achieves parole and ends up in a halfway house for a short stay, only to end up back in prison after earning his first day pass and failing to follow the very simple rules (call to check in every hour).

The plotline surronding this young man is very conflicted, as if the director couldn't decide if he wanted to portray this young man in a sympathetic light or as the troubled hoodlum moron that he ended up coming across as.

In one scene he's portrayed as a smart kid helping the prison guard (Ice-T) with his junior-college homework. In the next scene, we see the young man behaving like a total and complete loser making absoutely awful decisions, the kind of bad decisions that make you feel no sense of compassion for him.

The ending of the movie was extremely disappointing and left me hanging. Now, don't get me wrong, I don't expect every movie to end like a nice neat package all wrapped up. But this movie just ended. It left me completely hanging.

I found myself just not caring about the main character. He was a real loser with real problems and there was nothing about him to like. I didn't hate him. I didn't like him. I simply didn't care! He had no redeeming qualities and I was never able to connect with him . Maybe it's because I knew too many guys like him in my youth and I know how the vast majority of them turned out (most are still losers and the ones that aren't are most likely dead). Regardless, this movie left me with a void.

I can't say anything nice about the movie. The bad stuff I could say is pretty run of the mill. It was bad, but not awful (Shoot'em Up was utterly awful). This movie left me feeling like I wasted 90 minutes. I didn't gain a thing from watching, but most importantly, it was simply was not an entertaining movie.

Tracks is chooked full of violence, nudity, s-xual content, and vulgar language. Don't waste your time with this one, either.

# Diversity, from Stefan Jovanovich

January 20, 2008 | 1 Comment

During the run-up to a crash, population diversity falls. Agents begin to use very similar trading strategies as their common good performance begins to self-reinforce. This makes the population very brittle, in that a small reduction in the demand for shares could have a strong destabilizing impact on the market. The economic mechanism here is clear. Traders have a hard time finding anyone to sell to in a falling market since everyone else is following very similar strategies. In the Walrasian setup used here, this forces the price to drop by a large magnitude to clear the market. The population homogeneity translates into a reduction in market liquidity.

Blake LeBaron, "Financial Market Efficiency in a Coevolutionary Environment," Proceedings of the Workshop on Simulation of Social Agents: Architectures and Institutions, Argonne National Laboratory and University of Chicago, October 2000, Argonne 2001, 50.

## Riz Din remarks:

Reminds me of the extreme robustness of the naturally diverse rainforest, and of how relatively small changes can destroy single crop plantations.

## George Parkanyi writes:

I'm not so sure that's as true anymore. There are many new instruments such as commodity and short ETFs that create more possibilities for risk mitigation and alternative strategies. Perfect opposite correlation is an asset-allocator's dream. I would think most trading volume comes from mutual and pension funds. If they change their charters, or simply interpret short ETFs to be another asset class, then the herd mentality may dissipate somewhat as there is now less reason to sell in a panic. Hedge funds and individual investors already have the bi-directional option available to them. For example, I recently used short ETFs to blunt the decline of the past couple of weeks. I felt less pressure to sell my stocks that did go down — in fact I bought more — because I had money working in the other direction. I'm theorizing that markets will tend to become more choppy and less smoothly trending, even in a broad decline, for this reason.

# Risk Control in Trading, from Kim Zussman

January 20, 2008 | 5 Comments

In light of current market behaviour, what are some ideas on risk control? Someone is going to say Optimal F, or related, but here I was more thinking about what you do when flying by the seat of pants as always.

You can reduce risk by:

1. Staying out of market more (always?)
2. Setting stops (which get triggered right before huge rallies and increase probability of losses)
3. Trading small (too small to ever recoup losses)
4. Staying in only for prescribed short intervals (ensuring the miss of the rally a day later)

## Ken Smith replies:

I once concluded I should take the first option suggested by Dr. Zussman: stay out.

My idea was if I cannot predict then do not trade. But I often fool myself, thinking myself a magician, prognosticator of great moment. Under the sway of this illusion/delusion, I do not stay out and frequently prove myself wrong.

But the problem is I am frequently right. The balance between right and wrong has played out on the positive side for some time now.

You should know I do not have money to trade. I am advising without compensation, under a tacit marital contract. So when I am wrong I suffer emotionally more than if this coin of the market were out of my own pocket.

I suppose those knowledgeable about psychology, behaviorism, that sort of thing, will recognize this pattern as typical of some concept developed by the profession.

For me it means I have to risk going into the fog under steam and do so without radar, only a whistle blow to sound out what's ahead. Primitive tool.

## George Parkanyi writes:

According to Ken Fisher, the first 2/3 of bear markets are relatively mild. Typically the last 1/3 (about 6-8 months generally) is the brutal bit. If you think this is a bear market, we have approximately 12-18 months to go, with the worst yet to come. But is it a bear market? The nature of Dr. Zussman's question suggests uncertainty. If his anxiety has increased, then a good rule-of-thumb is reduce exposure (position sizes) until something more compelling, or some clarity, presents itself. He can always scale back up if the market suddenly starts going his way. No matter what the conditions, certain fundamentals and the tape should offer a few tradeable ideas in either direction. I think the risk-mitigation strategy should be whatever his methodology generally calls for. If his risk management approach is contingent on the type of market that he is in, by definition he's going to have to market-time successfully all the time or run the risk of a large hit. Best to have one consistent risk management approach for all seasons.

# “Cloverfield” Haiku-Reviews, from George Zachar

January 20, 2008 | 1 Comment

Alien re-done
in New York. Artsy, but lacks
Sigourney Weaver.

Manhattan. How did they know
not to touch Brooklyn?

# Thoughts on Bobby Fischer, from John Floyd

January 19, 2008 | 4 Comments

We have read a fair number anecdotes, biographies and controversies, but perhaps another way to look at Bobby Fischer is to think about what we can learn from him in terms of both life and any applications of his life and chess as they apply to the markets.

Independent thinking and willingness and adaptability to live in any number of places: Iceland, Japan, Philippines, and Hungary. Having been to or lived in all of them I can attest to the fact they are all vastly different. Fischer also demonstrated his ability and the longevity of his talents by making a comeback, on his own terms, as in his match with Boris Spassky in 1992. Or, when it seems as victory is improbable to make a dramatic and hard fought comeback as in his 1972 match against Spassky. How many times does the market make us question our own abilities and how needed it is to focus on ones methods and talents while still evolving and improving to achieve success? The need to be aggressive at all times whether it is attacking or using subterfuge as seems to be the case in his match against the grandmaster Robert Byrne.

This is not a suggestion to disregard or ignore his many faults but rather so that we can focus and learn from many of his positive attributes as well. Fischer's almost single-mindedness on Chess and his many transfers and incarnations also seem to have limited the scope of his achievements and therefore what could have been learned from him. As in nature when a tree grows, or is transplanted, it needs the root structure to support a broadening of the branch material and growth above.

Not being an expert on chess or Fischer, or life, I welcome all other suggestions and observations.

An icon of my youth gone, and the same applies for many of us.

It's a big question what to do about great artists who became antisemitic. Most notably in music, Wagner; and there is an open debate in Israel whether to hear his music.

I was never a fan of the recently late Karlheinz Stockhausen, but I listened to him no more after he psychopathically described 9-11 as a great work of art.

We have to take a broader view. Should we deprive ourselves of the works of DH Lawrence and TS Elliot because they were tainted as children with pervasive cultural prejudice? To boycott all literature by antisemitic English authors pre 1950 would leave very few (George Orwell a notable exception).

Bobby Fischer?

Probably not an Icarus, more a Narcissus who, lacking a mentor to grab his shoulder, fell - ever unaware - through the squared pool into muddy waters.

I think there are many things to be learned from Fischer. Here's what comes to my mind:

1) Work rate: Fischer's 'remarkable' comeback becomes more comprehensible when one realises that all he ever did during his 20 year break was to study chess. I heard stories about his time in Hungary, that anyone seeking an audience was well advised to send in some of the latest chess books and magazines as a peace offering.

If you read 'Bobby Fischer goes to War' the comparison with the Russians becomes clear. In their training camps they studied a little chess in the mornings and then got the cards and booze out at midday.

2) Ascetic Lifestyle: Bent Larsen told me a funny story once about how he had to rescue a bottle of cognac from Fischer when the latter was intent on pouring it down the sink. Fischer also took a lot of exercise during his best years, mainly swimming I understand.

3) Learning from history: Fischer had a remarkable breadth of knowledge, studying the old games as well as the new. Amongst the openings Fischer rehabilitated were the Bishop's Gambit, the Evans Gambit and the Exchange Spanish.

4) Will to win: Fischer's disdain for short draws is well documented, one of the most famous examples being to laugh when Geller (who had a big plus score against Fischer at the time) offered him a draw on move 7 in their game at the Sousse Interzonal.

5) Preparation: Fischer took opening preparation to new levels of excellence, a trait which Garry Kasparov was to emulate in later years.

A few more will probably occur to me, Fischer was a truly remarkable player whose play was greatly respected (feared) by his rivals.

# Nevada Caucus, from Steve Ellison

January 19, 2008 | 1 Comment

I had never attended a caucus before.  States I had previously lived in had primary elections.  Nevada also has primary elections for state and local offices later in the year, but scheduled an early presidential nominating caucus in an effort to increase its influence in the nominating process.

Nevada's inexperience with caucuses showed.  There was conflicting information on where voters should go.  I went to McQueen High School , based on information from the Republican Party website.  A post card I got in the mail said that I should go to Reed High School .

I arrived at the designated start time of 9:00 am and found a line extending 100 feet outside the doors.  Inside was chaos.  Thousands of people were there.  Voters were supposed to gather with others from their precincts.  Many people had no idea what precinct they belonged to and had to wait in a long line to find out.  Ron Paul volunteers called out asking for Paul supporters to identify themselves.  The volunteers helped the Paul supporters find their precinct locations.

Fortunately, I had the aforementioned post card that identified my precinct as 5034.  At some point I faintly heard a shouted announcement that all precincts with numbers above 5000 were in the cafeteria.

I made my way to the cafeteria, which was jammed with people.  I found a man and a woman standing on a table holding up signs saying "5034", with about 40 people gathered around the table.  A seated woman with a registration list called out asking whether anybody else needed to sign in.  I signed in.

The precinct leaders standing on the table were difficult to hear as other precincts carried on their business at neighboring tables.  At some point I figured out they were asking for candidates to run for precinct 5034 delegate to the upcoming Washoe County convention.  There was a voice vote for delegate.  I couldn't hear the question and didn't care.  I noticed a man and woman who looked familiar — members of my church.  I went over and said hello.

The precinct leaders handed out paper ballots with the names of the presidential candidates.  I marked my ballot and handed it back.  One of the precinct leaders asked the woman from my church to count the votes.  The winner of the initial count of precinct 5034 was Duncan Hunter with 10 votes.  I had barely remembered Duncan Hunter was running.  After the count was complete, the precinct leader took the ballots and announced the number of votes for each candidate.

I say it was an initial count because, as I left, there were still people in the hallway trying to figure out where to go.  I overheard a man walking out in front of me making a call on his cell phone. Commenting on the chaos, he said, "If you think the Democrats are total idiots, the Republicans have them beat."  Even so, I was out the door at 9:40.

# Well Anchored, from George Zachar

January 18, 2008 | 2 Comments

This morning's inflation surveys give succor to our monetary scientists. They can straight-face the microphones, intoning the "inflation expectations are well anchored" catechism, and roll their eyes at the mention of moral hazard.

# Briefly Speaking, from Victor Niederhoffer

January 18, 2008 | 4 Comments

Burton Fabricand wrote two interesting books: The Science of Winning and Non-Brownian Movement in the Stock Market. One of the major principles of the books, highly recommended as a supplement to Bacon, is that when a horse goes off at odds that are unusually unappealing, it's good to bet on it. He applies the method to a small sample of horse races, and finds that for specific applications of the principle, a slightly winning system can be developed.

I was reminded of this principle by the very unusual action of the stock market the last two overnights. Thursday evening and Friday morning, New York time, the market moved up about 1% overnight after yet another 40 day low on Monday. The optimism was broken by the Merrill announcement and the disappointing Fed testimony, as well as the credit downgrades. One of the worst declines in history occurred, 47 points from the open to close, exceeded only by the 66 point decline on 4/17/2000.

You would think that after such a decline, especially after an up opening, with fear in the air as never before, there would be a terrible fear about opening the market up again overnight. But no, it's up 2/3% overnight and Japan during the last two days, when the US market has been down 4%, is up some 1% from 13505 at Wednesday's close to 13650 as I write at 11:00 pm EST.

The insight of Fabricand is relevant, that this seeming underlay, this amazing courage in the light of the pessimism is not quite as amateurish , "boy, don't try too hard in the stretch unless you really are going to take it because I want the odds to be up next time" as it might seem.

I have been studying the intake of clay by lemurs and parrots so as to neutralize the alkaloids and other poisons in seeds that they eat and disperse. What are the comparable foods that the market must eat to neutralize bad events? What does the speculator have to do to neutralize the many uses of specialized information and unlimited capital that the trading houses can apply when they are not acting over and above the various Chinese Walls that they can climb whenever there is a merger or downgrade?

I found 38,000 articles on "underestimation of change" on Google and have not read them all yet. Victor Zarnowitz found that underestimation of change was a persistent aspect of his data on GNP forecasts although the rarity of predictions of declines made his data consistent with algebraic underestimates as well. I thought a realistic way to test this was to look at all the moves from close to 2:00 am EST to see if the big ones are underestimates. I found there were 18 big ups of more than 10 points as of 2:00 am, and 18 big declines of more than 10 points. Of these 36 big moves, 18 had reversed by 10:00 am and 18 had continued. Thus, there was no evidence in a real data set without revisions or biases or contrivances, that there was an underestimate of change.

Fabricand also wrote the books "Horse Sense" and "Beating the Street".
In both he explains the principle behind his systems: The principle of
maximum confusion. Writes Fabricand in "Horse Sense":

"The betting public is most likely to err in determining the winning
probability of the favorite in those races where the past performance
record of the favorite is very similar to that of one or more horses
in the race."

in "Beating the Street" he continues on the topic:

"For the races, the intuitive idea behind the principle is that
although the favorite appears very much like the other horses in
ability, there must be some reason or reasons not immediately obvious
for the betting public to make that horse favored. Yet, because the
two horses seem alike on the surface, the public may be confused
enough to bet too heavily on the other horse, making the favorite
underbet."

In "Beating the Street" Fabricand also lays out a stock trading system
based on the principle.

## Yishen Kuik reports:

A new word for today, Geophagy.  Wikipedia says:

Geophagy is the human practice of eating earthy or soil-like substances such as clay, and chalk, in order to obtain essential nutrients such as sulfur and phosphorus from the soil. It is closely related to pica, a classified eating disorder in the DSM-IV characterized by abnormal cravings for nonfood items.

Geophagy is most often seen in rural or preindustrial societies among pregnant women and children. However, it is practiced by members of all races, social classes, ages, and sexes. In other parts of the world the practice is less stigmatized, and geophagy is not studied as a pathology but rather as an "adaptive behavior" that supplements the diet with essential nutrients or treats a disorder such as diarrhea.

In some parts of the world, geophagia is a culturally sanctioned practice. In many parts of the developing world, earth intended for consumption is available for purchase.

## Bill Craft relates:

In the rural Southeastern US there exist deposits of Kaolin along the Oconee Group (formerly called the Tuscaloosa Formation). The locals and miners call it 'chalk' because of the white look and ability to stick when wet and permeate when dry any supposedly closed space.

Some of the residents have consumed the 'chalk' for centuries as it was a cure-all. Even the Creek Indians used it with Yaupon Holly (Ilex Vomitoria) for ritual 'cleansing.'

Mix some Washington State Apples with it and you get:

Kaopectin!

Ahh! Ritual Cleansing! Just what the mistress ordered!

## Phil McDonnell explains:

Most toxins are alkaloids, which in turn are bases. These toxins can usually be neutralized by ingesting acids. This is a practice which is not unique to backward civilizations. Check common condiment ingredient lists for vinegar. It is in ketchup, mustard and many other items. Chemically it is an acid. Oil and vinegar salad dressing is another example. When an acid and a base combine they neutralize each other and form a salt. Many salts are water soluble and can be readily flushed from the body.Even in modern society we have many minerals that are important to nutrition and are routinely used as remedies. Antacids such as Tums and Rolaids are simply calcium carbonate — chalk. Products such as Milk of Magnesia and Pepto Bismol are long-time mineral based remedies as well. Most so-called vitamin pills also contain a long list of minerals that are essential to our daily well being.

In the markets the toxins are the bad stocks at any given time. Recently the toxic stocks have been the big banks, most are down something like 50% over the last year. They continue to feel the worst effects of the current financial meltdown. Money usually goes somewhere. So when the banks are sold the good stocks are the beneficiaries. Google is a prime example. The high growth of earnings continue on track. So for a while GOOG continued to surge ahead. But toward the end of a panic the market acts more like the police when they raid a house of ill repute. They take the good girls with the bad. So even the formerly strong GOOG has seen a come down from well above 700 to a touch below 600. But there is nothing wrong with Google as a company. It is only that the big G has to act as an acid to neutralize the toxic base which is the subprime dependent stocks. So that salty taste in your mouth may not be just blood. It may be the act of a market neutralizing its toxins in order to return to good health.

## George Parkanyi writes:

To answer Victor's question about ingesting antidotes to poisonous markets, I eat 2x leveraged short ETFs, and I'll tell you why.

I live in Canada. Our family assets are tied up in tax-deferred registered retirement savings plans and registered education plans denominated in Canadian dollars. Although we can buy U.S. equities (and have to convert currency back and forth every trade), we can't buy options (we can write covered calls), we can't use margin, and we can't use futures. So there was a time when you had two choices in these conditions, sell or hold.

One morning last year I'm making my kids' school lunches, watching the Business News Network, when a commercial comes on proudly trumpeting three new pairs of long/short 2x leveraged ETFs. I remember thinking "Finally, something useful!". Later that day I researched those same Canadian ones, and found the U.S. ones. There was a wide range of available pairings, not only by indices, but by industry sectors as well. Some even paid dividends.

I use a specific strategy that requires full investment. By embedding (OK, eating) just a few of these ETFs on Jan 2, I was able to maintain my holdings, and keep my drawdown to only 3% as of today's close (despite all those NASDAQ stocks — ahem). It didn't take many; at most, 1/6 of the portfolio was in short ETFs, and I even scaled these back as the down-leg progressed.

Bottom line — your garage mechanic or plumber now has the ability to turn his retirement savings into a hedge fund.

If you can now so easily buy what is essentially market-catastrophe or profit-protection insurance, could this be changing the fearscape when markets fall? It makes being a contrarian more complicated. Reminds me of the Monty Python sketch where the people's bandit Dennis Moore is so successful stealing from the rich and giving to the poor that the poor become rich and lazy, leaving him confused and conflicted. Eventually he ends up holding up stage coaches and just re-distributing the wealth amongst the passengers.

# Today of All Days, from East Sider

January 17, 2008 | 2 Comments

Today of all days, we need to watch a two minute YouTube of Raquel Welch in her prime, dancing in a space girl outfit.

# Naked City, from Kim Zussman

January 17, 2008 | 1 Comment

As a boy on the south side of Chicago in the early 60s, mom would take me along on her shopping trips. We lived near 87th street, which had a nice Jewel market, banks, the dry cleaners, and White Castle. There was also Gordon's dress shop.
She only took me there a few times, but at 6 or 7 I recall interest in the smartly dressed mannequins. These maids smiled jauntily beneath their tipped caps in tight short skirts, and eventually the temptation was too much. It was a shameful moment when mom pulled me from beneath the plastic woman's skirt. "What are you doing!?" I didn't have the courage to answer that I just wanted a look. (Now I wonder how many times the sales girl thought about this).

A few years later there was a show on television, "Naked City." It came on pretty late, just before bedtime. I tried to stay up to watch, because I found the hope in the title irresistible. Unfortunately, it was about droll gangster stuff, and usually I fell asleep unrequited on the couch.

In 1966 we moved to California, near Van Nuys in the San Fernando Valley. Near our apartment was the grand Van Nuys Drive-In Theatre, with a mural of a cowgirl smiling down. It was great. Dad would hand the gateman a wad of bills for the carload, then we would park on a little incline next to a sound-speaker which he clipped securely to our open window. There was a snack shop at the center, which sold hot dogs, soda, and popcorn, and even at that age I noticed all the pimply teenagers out without parents. Why were they here?

Mom and dad would sit in the back seat, and my brothers and I were put in front to see better. But by then they were beginning to show nudity in films, and though we were at a family rated feature, the preview had a few glimpses of (gulp) bouncing bare breasted ladies! Mom shrieked, and reached up to cover my eyes. "Outrageous!" she cried, clawing me in the process. There was an argument with dad about her reaction, and I wasn't pleased either. The sense of it was I needed to be saved for greater things (parents can be egotists).

They are all gone many years now; mom, dad, and the drive-in. I Thought about them lately when, now and then, especially recently, I couldn't resist a look at the futures platform. The more I look, the stronger the irresistible draw to pull the trigger and… buy… sell… do something. Almost always, the wrong thing. "Outrageous!"

Sometimes I wish mom were still in the back seat.

# CSI Price Data, a query from Vince Fulco

Would anyone have observations re CSI's Unfair Advantage data service? Cleanliness of observations, etc. I am finding the IB <–> IbPy interface to be too trouble prone at this time for my needs.

## James Goldcamp replies:

I've used it for end of day data and its breadth of coverage (nearly all world futures markets) and flexibility in building continuous data series is very good (rolls X days before expiry, or volume/OI shifts, etc). In the times I've compared the daily change (since I usually "back adjust" comparing price levels is not meaningful) for major contracts it's been accurate, though that's far from a comprehensive study on accuracy. Option data for futures though is a little spotty for OTM strikes (or at least was in the past).

# Support and Resistance, from Hany Saad

January 16, 2008 | 3 Comments

The concepts of support, resistance and pivot points became such widely accepted market concepts that one is amazed how every market book mentions them freely as if the reader is supposed to know what they mean and how they should be traded.

In Alchemy of Finance, even the philosophic palindrome mentions them in his real time experiment and how he trades them. Same with, dare I say all the immortals including Paul Tudor Jones among others.

Now, I will not debate the validity of these concepts nor will I question the wisdom of the immortals here but I have a very genuine question about applying these ideas to indices.

You hear all the time that the (pick your index), let's say S&P500 hit a major support (pivot) point that should be watched very closely and if broken will signal the beginning of the bear market. A statement one hears frequently nowadays.

Now, if you consider that the S&P is made up of 500 companies, these 500 companies have each their own support and resistance levels that are tradeable in the same manner as the index, doesn't that mean that the S&P500 index resistance and support levels really reflect nothing and only represent arbitrary numbers that reflect where its components are at, and that the main premise of pivots, support and resistance levels on the index is a faulty concept?

In other words, if we take the extreme case where all the 500 companies are trading at a support level, this doesn't necessarily mean by definition that the representative index is trading at a support level on the chart. It can be trading at one arbitrary point on the chart with no significance to a chartist. Yet, this point is indirectly significant since it represents a colllective support (all the 500 companies are at a support level).

The other extreme case is where none of the companies is trading at a support level but the S&P is trading at what chartists call a support. In this case, what is the significance of the support level of the index (or the pivot point), if all the components of the index are trading in the more fluid level of no support.

For the sake of public disclosure I do not believe in support or resistance levels but am trying to get educated on how the other side thinks so one is well prepared to react or even change one's mind in extreme situations.

## Larry Williams chimes in:

I am a doubter of support and resistance, but I am a user or short term highs and lows as they can be mechanically constructed and tested.

And, furthermore, even something that does not work (in my book that would be Support/Resistance, Fibonacci, etc.) may be of value if it forces a trader to use those points as stops or targets. At least you have an approach and something that says get out; limit your losses, or well enough; take profits. Yes, even if they are meaningless they can be of value if they add some form of discipline.

## Steve Leslie offers:

I agree that the indices are fluid and not static. Individual stocks are added and subtracted all the time. Therefore it is quite difficult to draw conclusions based exclusively on this and across time. This is akin to comparing athletes across different generations. However two points can be made. First, they can be a good indicator of the general mood or tenor of the particular market that one is studying. The psychology if you will. And the psychology of the market is very critical to performance. Second, If one studies the overall market, one should study the various submarkets as well. The S&P 500, S&P 400, Transports, Utilities, Russell 1000, Russell 2000, NASDAQ, Value Line, Wilshire, etc. A composite can develop. A pastiche. Remember that as in all things, trading is a business of imperfect knowledge and imperfect information. Therefore nothing is absolute. Better to err on the side of caution at times and try not to extract too much from something that can not provide it. As we know, even the very exceptional traders have tough times and lose money. The key to trading is money management.

## Eric Blumenschein writes:

The S&P financial contracts are traded for different reasons then the component companies that make up the S&P Index. I know it is obvious but it has not been stated yet. Certainly there are correlating movements some of the time and with some companies and often a lot of the time with a lot of the companies, but in the absence of a definable edge which may already be in use in some blackbox algorithm, it's all just noise. I suppose an edge worthy to explore for me as a daytrader is to know what percentage of the 500 companies currently register on some intraday interval, either above or below their previous day close. That may or may not be relevant to a trade I would take on the S&P eminis. It may make a difference to equally weight each of the 500 companies or slant the weighting to the largest ones or perhaps the smallest ones. If I was a position trader then perhaps there should be separate percentages to defensive issues vs speculative ones. That may or may not be valuable.

# Today’s Market Action, from Jim Sogi

January 16, 2008 | 3 Comments

Many current anecdotes are being heard on main street now of people bailing in panic, pessimism and fear, liquidating accounts to cash. Today's ( 1/16 ) flushing action reflects near August flush out prices. 16% down from highs is close to 20% bear when complete flush out is done. Typical of bottoming psychology. Yesterday's NYSE down volume exceeded 1.6M. Old Codgers starting to be seen hobbling about. Mumbly peg anyone?

"She was practiced at the arts of deception. I could tell by her blood stained hands"

From The  Rolling Stones, You Can't Always Get What You Want.

"Reports suggest that labor markets remained relatively tight overall, and especially for skilled workers…

BOSTON: "Manufacturers continue to adjust their U.S. headcounts only minimally. Average wage and salary increases are expected to remain in the range of 3 percent to 4 percent, but some firms employing mainly high-end technical workers are planning somewhat higher pay raises in 2008 than in 2007….

NY: "Manufacturers continue to adjust their U.S. headcounts only minimally. Average wage and salary increases are expected to remain in the range of 3 percent to 4 percent, but some firms employing mainly high-end technical workers are planning somewhat higher pay raises in 2008 than in 2007….

RICHMOND: "Fifth District temporary employment agents continued to report generally strong demand for workers in recent weeks. Contacts in Raleigh, N.C., and Richmond, Va., told us that labor markets in those areas remained firm, driving demand for temporary workers, while an agent in Hagerstown, Md., said demand had waned a bit since our last report. Warehouse, customer service, sales, and general computer skills were among the most highly sought over the past six weeks….

ATLANTA: "The demand for workers in some sectors continued to be quite strong through the end of the year. Steady demand was reported for workers in the healthcare, insurance, and energy sectors, while engineers, particularly in petrochemical fields, were in high demand. Hospitality workers were said to be hard to find in areas experiencing strong tourism activity. Housing-related industries continued to trim payrolls….

CHICAGO: "contacts cited union wage increases in the construction industry as a factor boosting building costs for new homes and a staffing firm reported that their clients were willing to accept higher prices in exchange for greater flexibility in the duration of employment contracts….

MINN: "Labor markets were stable with continued tightness in some areas. Bank directors noted a strong challenge finding qualified labor for skilled and unskilled jobs…

KC: "The number of hiring announcements significantly outpaced layoff announcements…

——

These are admittedly cherry-picked quotes, but they show the inflation tripwire buried lightly in the sand of "world to end, film at 11" headlines that are driving our masters in Washington to cobble together a turn of the ratchet clothed as "stimulus".

# Our Software is Watching You, from Jack Tierney

Do a Google search on "Hyperactive Bob."

It is being used in Zaxby's, a fast-food chain with 330 restaurants. Others are sure to follow, because it offers a competitive edge. The system:

1. Uses robotic vision to count cars and collect point-of-sale information.
2. Analyzes historical and current data about each restaurant, adjusting itself to the specific situation. (Reportedly, Hyperactive Technologies says Hyperactive Bob is better even than seasoned employees.)
3. Tells employees which foods to cook to meet current and expected orders.

Robots make ideal workers. But what of the displaced manual laborers? The traditional argument goes that they can return to school, learn new skills and perform work with higher value added. Historically, that may have been true. The argument made by Dr. Brain  and increasingly supported by hard evidence is that artificially intelligent robotic systems will be chasing these people right up the skill curve, in many cases faster than the people can cope.

# The Billionaire That Wasn’t, from Ryan Carlson

Here's part of the Economist's review of The Billionaire That Wasn't, the story of entrepreneur/philanthropist Chuck Feeney, which I recently read:

An Irish-American, born in New Jersey in 1931, Mr Feeney made a fortune by co-founding Duty Free Shoppers (DFS) which first sold tax-exempt goods to American soldiers abroad and then tapped into the rise of mass tourism. When DFS was sold in 1997, it had delivered nearly \$8 billion to its four main shareholders, of which Mr Feeney was the joint biggest, with 38.75%.

Tax avoidance is the flip side to Mr Feeney's philanthropic coin. He is addicted to it. “Chuck hates taxes. He believes people can do more with money than governments can,” says a friend. In 1964 a young New York lawyer, Harvey Dale, told Mr Feeney that changes in the tax laws threatened his business, which was running risks that could put the founders in jail. On his advice, Mr Feeney and his co-founder, Robert Miller, transferred ownership to their foreign-born wives, from France and Ecuador, respectively.

In 1974, through a deal with the American government, the firm turned the Pacific island of Saipan into a tax haven. Then, in 1978, Mr Feeney grouped his various investments, including his shares of DFS, in a holding company, General Atlantic Group Limited, in tax-free Bermuda. To escape the American taxman, everything was still registered in his wife's name.

Mr Feeney carefully shunned all outward evidence of wealth. But as soon as DFS became reliably profitable, he started the practice of giving 5% of his pre-tax profits to good causes. In 1982 he created a foundation, the Atlantic Philanthropies, based in Bermuda. Two years later he signed over his fortune to the foundation, except for sums set aside for his wife and children. His net worth fell below \$5m. When he broke the news to his children, he gave them each a copy of Andrew Carnegie's essay on wealth, written in 1889.

# Greedily and With Great Abandon, from Tim Melvin

So far the year has started off with a bang. A lot going on around Kent Island and of course the market is generating its own special sort of bang. 2007 is fading into the rearview mirror and it was quite a year. With the Island crew one never lacks for adventure. The year featured the usual assortment of trips with a lot of airplanes and at least one flying boat. Chicago and Kentucky figured heavily into my travels, as they seem to do every year. Melvin B’s is gone now, a casualty of urban renewal and it will be missed. We have plotted the overthrow of the financial system at the outside café bar, consoled each other over women, markets and bets gone bad and I have many great memories of the joint. It was the coldest racing weekend in Kentucky that I can remember but that little fact did not dissuade us from our usual weekend of degenerate behavior and wild eyed gambling. We did tone it down a touch this year since Tim bought his lovely bride to be. Jason bought Wendy as well but I am pretty sure she just ignores us all. New York of course was a frequent stop and we started the year in Naples, Florida enjoying the warm weather, old friends and at least one difficult damn woman. The tire guy married up — way up — at year end. There were great times with old friends and a lot of new ones found along the way. The kids both continue to do well and I haven’t threatened to kill my son in at least a month now. They are both working, going to school and thriving. The markets were horrendous for much of the year, especially in value and special situation stocks as financing for transactions died off quicker than one of my relationships. No real contender for the next incarnation of the one true love of my life but the interview process was as much fun as always. I spent time with several very attractive intelligent women but none who could fill my eyes with what I now call the Hillman Twinkle. It was one hell of a year by all counts. The local sports scene was a bit dismal with the Orioles and Ravens having terrible years, the Terps going out of the tournament early and the Maryland football team average at best. As usual Navy was a bright spot, beating Army and going to a bowl game and playing some very exciting football.

In 2008 there will new adventures, new books, new ideas all through the year. The Orioles will stink. News on the wire that they are probably trading the best ballplayer on the club to the Cubs. Think I might be a Cubs fan this year. At least they are trying to get better! As always, the Ravens will get a new look, Maryland basketball will be interesting and Navy turns a new corner with a new coach. There will be sunsets and setbacks, celebrations and defeats, first kisses and sad goodbyes. Some will be born, and some will pass on. There will be fast boats and slow summer evenings, rainy nights and hot summer days. We'll have a few poker games, I will do something stupid involving a ditch or a woman (let's hope there are no dog stories this year), we will laugh a lot, maybe cry a little at times but is should be one hell of a good year. Life has all its up and downs as we all know and 2008 is positioned to bring with it more than its share on both a professional and personal level. I look forward to it all. It should be a year full of life, full of surprises with opportunities to live life the way it should be, greedily and with great abandon.

# The Leopard, from Victor Niederhoffer

January 15, 2008 | 6 Comments

One of the old time favorite market proverbs of the 20th Century was that the market abhors a vacuum like nature the plague. I thought of this as the market hit its fourth consecutive 20 day minimum in eight trading days, moving down to adjusted futures levels not seen since the end of September 2006, the bonds at their fifth 20 day high of the last 10 trading days, and the granddaddy of tech, Intel, announcing bad earnings and the stock dropping 15%, Citi dropping 7% on the day, taking on more foreign ownership, with the Nasdaq futures down 5% in one day, dropping 9% on the year, and S&P falling 50 points in a day, and 6% since Christmas, and the Dow going below the round number of 12500 at the close, a nine month low, settling at a too smart 12501.

I recently returned from the Naples Zoo where I saw the leopard exhibit. The leopard is considered by some to be the most intelligent animal, since it has learned the lesson that we all know from the crocodile never to visit the same site twice, never to use the same hunting pattern, and never to accept an easy kill because it might be poisoned. It kills in an instant, in the time that a hunter might stoop to pick up a dropped object, and did so while Corbett was attempting to kill it over a three month period, after it had killed well over a hundred. The story is told in the Man-Eating Leopard of Rudraprayag and the Man-Eater of Kumaon. Jim Corbett, in tracking the man-eater of Rudraprayag, camped first in a tower over a bridge for three weeks without the leopard's crossing below, and the day he left the leopard came in for a kill and then Corbett camped in a mango tree for 10 days before winning the battle of wits.

The leopard is a solitary animal and kills in one bite of the jugular, which it teaches its young to find. I believe there is much to learn from the leopard when a series of cathartic events leaves a vacuum to be filled and I will apply these lessons.

# Hot Tea, from Alan Millhone

In my local Sunday paper is a half-page article about the benefits of drinking hot tea. January is National Hot Tea Month. Hot tea is believed to improve the heart, reduce cancer risk and help the skin. Tea is supposed to have better health benefits if heated (I like Constant Comment). The heat helps transfer the antioxidants in the leaves to the water.

Locally our Tim Horton's handles 10 different teas. Our local Panera Bread carries 10 types of Republic Tea. In my area we have Mother Earth's Foods that carries 200 herbs in bulk that can be made into tea. Vic and Laurel like Fauchon Tea. If hot tea does in fact help the heart, this in turn would improve circulation, helping the brain function more efficiently and thus you think better and make better trading choices as a result.

# Holy Grail? from Jeff Watson

January 15, 2008 | 2 Comments

When I was a grad student, I studied a lot of philosophical theories that could explain the market. When I first discovered Laplace, I thought I had discovered the Holy Grail that could have explained the future actions of the markets. This turned out to be mumbo jumbo. I tried to use probability waves to no avail, and the study of Heisenberg and many others offered me no help in my search to predict the market. I oftened wondered if the mere act of observing the market would change it as result of the "Observer Effect." After trying to correlate many different theories into predicting the markets, I finally gave up, much as I gave up trying to prove Fermat's Last Theorem. It's impossible to find a Holy Grail that will predict the markets. Our pattern recognition skills, unconscious thought process, use of statistics, and looking at fundamentals are what should guide our decisions. All the brainpower I wasted in my quest is why I ended up being a scalper, never destined for greatness, but being able to live another day to grind it out.

# Down and Up Decembers, from Steve Ellison

January 15, 2008 | 1 Comment

Standard and Poors's investment strategist is quoted as saying that the stock market has risen in 12 of the 15 years following a down December since 1946. Counting out the last 30 Decembers before 2007, I find that the index was indeed up in 6 of the 7 years following December losses (the only exception was that the index declined in 1981 after declining in December 1980). However, the index was also up in 18 of the 23 years following up Decembers. A regression of these 30 years shows a statistically insignificant slight negative correlation between the S&P 500 index change in December and the index's change the following year:

# A Diamond, from Sushil Kedia

A diamond pattern as described in the Encyclopedia of Technical Market Indicators by Colby & Meyers is established on the Brazilian Bovespa with today's slip under 60700. Given its rarity as a pattern no clarity has had established as to its statistical significance. But then a large number of Technical Analysts will be watching this in coming days. What do the coming emotions offer to a globally connected trader?

## Yashwan Tup writes:

Last time when you spoke on CNBC India about a diamond pattern forming in Brazilian Bovespa and it slipped below 60700 on 15 Jan 2008, now on 22 Feb 2008 closing at 64608. Any pattern which you could follow after the formation of the diamond triangle and the present day charts?

I also saw you speak on CNBC on 22 Feb 2008. Your observations are beyond imagination — probably very few in India have a mindframe and observations like yours. I'm a follower and a diehard fan of your observations.

# Commodity Oddities, from Mike Ott

January 14, 2008 | 2 Comments

I attended a talk by a few Iowa State University professors today. Every winter they travel the state talking about climate, crop, livestock and ag issues to a diverse audience. Here are some notes.

For the last 800 years, there has been a drought every 18-20 years. We haven't had a major drought in the Midwest since 1988 and several indicators mimic 1987-88 conditions. A very smart climatologist with a proven track record stated there is a 70% chance of below average crop performance due to weather. If we escape a drought this year and next year, it will break a cycle that has held for 800 years, so the odds favor a drought soon. Current predictions call for a wet spring, which could hamper planting, and then a bone-dry summer, which could hurt yields. This isn't good for farmers, but could drive prices higher.

New genetics traits and water management techniques can help mitigate a drought somewhat, perhaps leading to 10-20% decreases in productivity, rather than 30-40% decreases that have been seen in past years. Therefore, farmers are likely to apply for higher levels of crop insurance, and those premiums are likely to be paid out in the near term. Insurers may take a hit after a few years of good returns because we've been mostly disaster-free.
Demand for corn is high and it will continue to be planted in a large number of acres. Traditionally, farmers have planted corn and soybeans 1-1. That ratio has shifted to 2-1 and will likely stay that way for a few years. Bean prices are high, but they aren't high enough to sway farmers into planting more soybeans. Therefore I predict bean prices will rise into planting season, similar to the rise in corn prices last winter/spring.

Lower wheat, cotton and soybean carryover stocks will lead to higher prices in an attempt to buy acres, but will be unsuccessful. Farmers that do plant and get a decent crop will do well.

Several large index funds have deployed managers to the state, and I'm hearing that they are buying commodities as a hedge against inflation and to benefit from a presumed rise in the dollar by harvest time. South American soybean producers should produce well this year but be harmed by selling their commodities in weak dollars (they harvest in a few months, not in time to benefit from a rise in the dollar). Australian wheat should be much better after a disastrous drought last year.

The takeaway was that demand for commodities is going up for a number of reasons: biofuels, increased global consumption, etc. Supply could be harmed by a potential Midwest drought combined with already low stocks of key commodities. Prices of commodities, producers and processors are high and likely to go higher. This will be passed to the consumer and cause inflation in 6-12 months. Food has become relatively cheap over the last 40 years, perhaps even irrationally so due to a wide range of government programs and historically cheap energy. Now that energy prices and commodity prices are going up in conjunction, food will become much more expensive relative to income.

# Base 20, from Bruno Ombreux

It briefly studied Breton, a Celtic language surviving in Brittany, an area in Western France. This language has a base 20 counting system which was already used by the Gauls, the Celtic tribes that were conquered by Julius Caesar.

French inherited this Celtic substrate. Soixante is 3*20. Soixante-dix is 3*20 + 10. Quatre-vingt is 4*20. Quatre-vingt-dix is 4*20 + 10. There is also the "Hospital des Quinze-Vingt," created by King Saint Louis for 300 blind people. Quinze-vingt is 15*20 = 300.

Of course, base 20 is not the most efficient for counting. The most efficient base for counting is 12. Twelve is a low number with many divisors: 2, 3, 4, 6. Twelve is much more efficient for speed counting than something like 10.

# Eight Considerations for 2008, from Russell Sears

January 14, 2008 | 7 Comments

Consider that:

1. Sharp market downturns from highs are more often false positives than signs of impending meltdown.

2. Timing matters in making a market or economic prediction. If you miss a relief rally you miss the biggest gains. A relief rally is a stock rally from the foresight that fear, often of a recession, is abating.

3. Recessions do not always yield large, long term stock meltdowns. Big and long; pre- and post- recession meltdowns are not a given, just because that's what happened last recession. A paradoxical corollary: If most people think it will happen, it won't, it is already anticipated.

4. Wealth, if measured by real assets and growth of real assets (including human capital), makes the USA a very hard long term bet to beat.

5. Conspiracy and market manipulations are two-way streets. Just as stock market cheerleaders may have ulterior motives, so do the prophets of doom. Except, alarmists and media have a symbotic relationship. And journalists don't have worry about geting sued for causing you to worry too much. "Smart money" has a way of becoming "dumb money" when everybody is following the same guru and strategy. What are those strategies and who are the gurus?

6. The Fed's increasing money and Fed's decrease money may cause credit cycles but the Fed's diverting the normal flow destroys wealth. In a credit crisis few real assets are destroyed; only values are reassessed. Money, eventually, will flow to what is valued, not just what is safest, if the government does not divert that flow.

7. When you hear politicians talk of "change" the first thing you should ask is whether they are talking about downsizing or increasing government's power.

8. These topics will not be highlighted by the media.

Are you possibly one of those who reassured the herd that the NASDAQ meltdown of 2001 was merely a “correction,” and that smart money would hold for the rebound? My opinion differs. This market is nowhere near its bottom.

I’m personally holding 1460-strike S&P 500 puts. I plan to ride them all the way down to 1200. With all the fraud and chicanery relative to the sub-prime mess, this is not the moment for optimism.

## Russell Sears replies:

I did fine in 2001, but it may have been beginner's luck as this was my first year of running an S&P options portfolio, professionally. 2002 was not as good but OK.

I would agree that the market will get hit on those days where market senses “chicanery relative to the sub-prime mess” but we may disagree on how much of it is “fraud” and how much of it is uncertainty of the outcome, at least on the part of the banks. And note, the title was for all of 2008, not the next quarter.

Congrats on the 1460 puts. You sound like you did better than I in 2007. But I no longer run an options portfolio — perhaps this kept me out of too much trouble.

## John White writes:

1 - Define sharp. -9.5% from 10/9/07 to 1/14/08 took three times longer than -9.4% from 7/19/07 to 8/15/07. Sharp upturns in a bear market are more often false positives than the start of the next bull market.

2 - Timing does matter, but how much depends on your investment horizon. Timing strategies differ significantly with investment objectives, e.g. retirement funding vs. meeting quarterly numbers on the trading desk at Golden Slacks vs. putting food on the table for your family every night. If you miss a bear market you miss most of the losses. A bear market is a re-pricing of equities from the foresight that growth in corporate profits will slow/go negative in the near term.

3 - Recessions never yield large long-term stock meltdowns, depending of course on your definition of large and long-term. Depressions do and I sincerely hope we never have enough depressions to develop a statistically significant correlation. One was plenty enough. A question for your corollary: Most people think the market will return an average annual compound growth rate of around 10% over the next 20 years. Does that mean it won’t happen?

5 - Exactly why I’m responding with the “other side of the coin.” And anyone who listens to journalists for advice on trading or investing has already lost regardless of the bear or bull.

6 - Agreed with the added comment that the government often does divert the flow, the anticipation of the diversion can be profitable, and being oblivious to the diversion can be destructive.

7 - When you hear politicians talk, the first thing you should ask yourself is, “Are they a soggy #### sandwich, or just a #### sandwich?”

8 - The mainstream media are often a contrary indicator. By the time it is reported on the front page of non-financial publications, or parroted by talking heads on non-financial news shows, everyone always knows and a reversal is often around the corner.

Personally I think the S&P will have a greater return in ‘08 than it did in ‘07, but I thought I’d play devil’s advocate.

# Simulation, from Phil McDonnell

January 13, 2008 | 2 Comments

When working with spreadsheets and random numbers there are some techniques which can be helpful. For example suppose we used the real data of daily market changes but wished to randomly reorder them to see if the original order had different properties than the random order. We could perform 999 reorderings and compute some stat of interest for each reordering. Then sorting the 999 stats in order smallest to largest would give us a very nice table in which we could look up the p value of our stat of interest.

For example, suppose we wanted to test whether the recent trading ranges were wider than the should have been at random. We would take 999 reorderings and calculate the range for each. We then compare the range from the original empirical distribution to see where it falls in the sorted table of random ranges. If it is in the 50 it is too small at the 5% level (one tailed test). If it is in the top 50 it is too large for a 5% one tailed test. For a two tailed test we look for the bottom and top 25.

On an Excel spreadsheet if we use the RANDBETWEEN() function as an INDEX into the original table of numbers it will allow us to randomly sample from the original distribution to create our new random distribution. The VLOOKUP() function is often useful here as well. In R one can use the boot() function, from package boot, to do all the heavy lifting of randomization.  Easier than trying to do it in a spreadsheet.

In my book Optimal Portfolio Modeling I recommend a slight variation on this technique. The usual technique is to randomize each day. The thinking behind this is that the low autocorrelation usually present in markets implies that there is little or no linear relationship between successive days in a time series. But this says nothing about any non-linear relationships — patterns, cycles, mean reversion, conditional heteroskedasticity and many others. To capture these (if they exist) we can take random blocks of time, such as 20 days. We would randomize the start time of the block. So if our random number picked day 31 as the random time we would use the block from day 31 to day 50 as the block. The idea is to splice together these random blocks to see if they behave differently from the original.  Making the block length long relative to the granularity of the data (say 20:1) helps to preserve most of any putative non-linear behavior.

It is also instructive to compare the randomized daily design to the randomized 20 day block design. If there is a significant difference then something non-linear may be going on.

# Work Family Balance — Quality Time on a Low Quantity Time Budget, from Mark Goulston

January 13, 2008 | 1 Comment

If you raise your children to be happy, they won't be happy; but if you raise your children well, they will be happy… and so will you.

I believe your most important responsibility as a parent is teaching your children self-reliance and preparing them to be effective in all aspects of their life. To do this keep in mind the principle that it is less important what you tell your children, than what they are able to tell you and then to instill in them the Three P's of preparation: perspective, perseverance, and patience do the following:

Perseverance: When your children tell you about a situation that has clearly upset, scared, angered, or hurt them, resist the temptation to quickly reassure them. Instead, give them a word for what they seem to be feeling by saying: "That must have scared/angered/hurt you, didn't it?" If they agree, then calmly ask them: "How scared/angry/upset, etc. did you feel?" They may only say, "Really bad" or "Very" but in that moment of saying it to you, they will feel safe, less alone, and relieved, and they may even cry. This is a great way of establishing a sense of comfort and calmness in your children after which they will be more open to suggestions and advice. The formula is: Comfort first, Coach second. This exercise will help your children develop the ability to comfort and calm themselves when they are older and enable them to persevere through rough times.

Patience: Do this exercise once a week with your entire family when you're having dinner together. Ask everyone to talk about something they did in spite of not wanting to do it. You should start the ball rolling. For example, you might say: "I went to this meeting I didn't want to go to, tried to make the best of it and actually met someone that might help me in my job, and I never would have met that person had I not gone to the meeting." Then have your husband and kids share something. This exercise helps your children develop tolerance, cooperation skills, and flexibility. It also will make them accept that people have to do things that they don't always want to do, and because everyone has to do this it's fair and part of life–and having pateince when things don't go your way works better than having a tantrum.

These steps do not excuse you from spending a certain amount of "face time" with your children (perhaps equal to the "face time" you need to spend with investors when a telephone call won't suffice) and even experts are not immune from your dilemma.

I remember years ago when my kids were small. They had a nickname for me: "Hi kids, bye kids, love you kids." I used to laugh when they would teasingly taunt me, but like you, I also realized it wasn't funny.

# Things That are Hard to Watch, from Jeff Rollert

1) A good-looking woman realizing she's no longer "hot"
2) An athlete whose doctor tells him his body can't handle the game any more
3) Listening to someone who used to be wealthy

# The Grizzled New York Times Paws Its New Stomping Grounds, a poem from Marion Dreyfus

January 13, 2008 | 1 Comment

The new New York Times glowers on 8th Avenue,

chill end of '07, since they moved last

month from their musky centenarian

digs on dingy W. 43rd, infamous

for streetworn lunch-pails and the deadcold

coffee styros of restive strikers.

Betimes, as you grind uptown nightly,

there it squats, the balky Times upright in its im-

ing virtual vegetable scraper

Pushy on its erratic, dit-dah horizontal

haunches, dispersing its jotted tremble-lights

for all the world, so mind-fill-

streaky:

Mostly, however, it glowers

like a stiff-backed,

pissed-off

peppermill.

# Briefly Speaking, from Victor Niederhoffer

January 10, 2008 | 5 Comments

A few shocking anomalist notes in honor of yet another virtuoso performance:

Once again the Nikkei predicted it, going up 0.3% after the US market declined 1.5%, its first such rise in seven days.

Tremendous negativism with the S&P index up 19 to 1409 but the futures up a mere 14.6 at 1411.6 for a 2.6 basis, about 1/3 of a percent prediction to down side.

The Dow went down to 12502 intradaym a nice 1000 since christmas and a continuous 1250 from 12/10 when it closed 13727. Same corresponding stuff for S&P, a run of eight open to close without a rise in S&P futures comes to an end with a measly up 13.

VIX finally goes above 25 on January 8 and gives a bullish signal sort of consistent with what the Spec Duo said in Daily Spec that it's bullish when above 25. Of course one had to wait five years, but during that time, continuous buying of futures would have lost money.

Bonds at a nice 1 1/2 year high at 119 making the total wealth of those who borrow trillions constant with the 10% decline in stocks offset by a 10% rise in bonds.

The terrible moves in last hour and the move to 1375 in the index and 1385 in futures, enough to wipe out gains of last 1 1/4 or 1 1/2 years .

Countrywide around 5 acting like other stocks in possible final stages below 5, with the market swinging from its signals as if it was the only stock even though it represents a 1/10 of 1% or so part of pie.

Ample opportunity for those who issued bearish recommendations to cover their shorts and reestablish positions in bellwethers like Intel and City. And so many other things; feel free to add some.

A 32 point up handle to match the 39 point down afternoon handle of prior day.

## Duncan Coker writes:

I hypothesize many fixed systems took a beating this first month of the year; mine certainly did. Perhaps another good reason not to use them. Improvisation comes to mind. Even after the two up days, we have had the worst start of the the year in last decade. How things can change, was it the employment number and a 35 point decline, or New Years' resolutions never to buy stocks again. Ranges of 34, 31, 45, 21, 25, 25 recently giving ample room for market to sweep all the chips off the table. Or the market saying it needs 2% wiggle room to decide where it want to reprice itself. It certainly makes for interesting trading.

# Markets and Pain, from Jeff Watson

January 10, 2008 | 3 Comments

One of the first lessons I learned from a wise old trader was that markets move in a way that will cause people the most pain. I have sometimes found markets will cause me a lot of pain on a personal level, sometimes more pain than I can bear. However, since markets usually move with the path of least resistance, how can I reconcile the old trader's statement with efficient market theory? I never did ask him to clarify that statement, and just put it into the back of my mind. The only way he could be right is if he were referring to "people" as the general public… I don't know. Any thoughts or opinions would be greatly appreciated.

## Vincent Andres replies:

"The Pareto distribution, named after the Italian economist Vilfredo Pareto, is a power law probability distribution that coincides with social, scientific, geophysical, actuarial, and many other types of observable phenomena."

– The biological world, eg jungle, is often paretian ie 10% of the jungle animals consume 90% of the jungle resources (the top of the pyramid) and 90% of the jungle animals consume 10% of the jungle resources.

– The markets are an extreme example of jungle, extreme, because since people rarely die from their failures, stupid behaviours may continue more than in a real jungle. I see the market as an extraordinary paretian machine. The normal, good working order of the machine, maintains/produces continuously a paretian distribution of the wealth among the players.

There are 90% of people who are easy to deceive and 10% of people less easy to deceive. … so the efficiency (if any), the "path of least resistance" goes exactly thru this 90/10 distribution, (and not thru an imaginary 50/50 distribution which simply doesn't exist (except maybe in some socio-communist idealized world)).

I would have rephrased your sentence as : "markets move in a way that will cause most people pain."

and this is not the fault of the "markets", the market is nothing else than the place where the people (with their 10/90 split) met. The market partition is just the people skill partition.

# McDonalds and Starbucks, from Alan Millhone

January 9, 2008 | 9 Comments

Just caught on the news that Mc Donalds will add a 'coffee bar' and make more dramatic changes to their drink menu than they have in the past 30 years. I enjoy their Bravo coffee and am sure I will enjoy the drink additions when they reach my area. Mc Donalds is apparently still setting the pace in many areas as it was also announced that Starbucks now plans to make changes.

Although Starbucks gets a different niche of customers, this not good news for Starbucks .

A coffee bar and wi-fi at McDonalds, then Starbucks really has a problem.

I've always believed that the ethos of a corporation pervades, DNA-like, throughout all manifestations of the corporation, however small the "cell." If you want to discover the values of a company, you can look anywhere, from its choice of stationery down to the cleanliness of its floors.

Back to Starbucks. It was telling for me regarding the company's values that, living as I do five blocks from the former World Trade Center, I was shocked that in the days following, when rescue workers, many of them volunteers, flooded the area to begin cleanup, the local Starbucks was selling bottles of water. I'm as much a capitalist as anyone, but the outrage this opportunism occasioned in the local community, and subsequent bad publicity — Starbucks quickly reversed its policy and began handing out bottles for free – rankles to this day. The positive publicity it could have garnered by donating the water to relief workers would have more than paid for the negligible profits "sacrificed."

Ray Kroc was fanatic about cleaning his stores, and making everything perfect. Moreover, McDonald's franchisees are a powerful force for innovation and market research. I doubt that Starbucks has any such credo. And were I a fundamental investor, I'd bet on McDonald's in the race with Starbucks.

A worthy read about McDonald's is Ray Kroc's Grinding It Out. My favorite passage:

The key element in these individual success stories and of McDonald's itself, is not knack or education, it's determination.  This is expressed very well in my favorite homily: 'Press On: Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.'

## Henry Gifford dissents:

Starbucks and McDonalds offer entirely different products in terms of the cultural experience they sell.

On Broadway in Manhattan, two blocks from me, there is usually a homeless person "working the door" at the McDonald's, opening the door for customers and asking for spare change. Once McDonald's put a guy with a bow tie there to open the door for free, but that didn't last long, and the homeless guy is there every day. Also, the workers in McDonalds don't hesitate to stand around and chat and ignore customers.

At Starbucks a block away I've never seen a homeless person "working the door," (nor at any of the other stores nearby), I don't see homeless people sitting there, and the workers have a spring in their step.

## Jim Rogers counters:

As someone whose first career was in the hospitality industry, I can state that McDonald's moves markets in more ways than one.

The difference in demographics, however, is a present condition and certainly not a necessary condition. McDonald's has always put its eggs in two baskets: families (especially those with small children) and value. In the past, their offerings were weighted more heavily on the family side of the spectrum. Now, thanks to a number of cultural shifts (including those driven by Starbucks), McDonald's has realized that they can capitalize on the public's perception of additional value. Before, it was all about quantity (the Super-size phenomenon). Now, it's about quality (better coffee, more aesthetically pleasing decor, fresher menu items). In the past 24 months, the majority of McDonald's top line revenue growth has been driven by menu items at the top of the price scale, especially new salad offerings. There are a couple of interesting points that McDonald's has embraced: the masses (or at least a historically large percentage of the masses) will pay for quality, and design makes a difference. It made a difference in attracting the kids thirty years ago, and now it's making a difference as it re-attracts adults (with or without children) with Wi-Fi, coffee, and more pleasing decor.

## Marion Dreyfus opines:

Whatever the relative merits or demerits of the individual loci, the Starbucks habituee will not 'descend' to the perceived downmarket of McD's, which is a brand-association drummed into our consciousness by millions of ad messages over decades. The food may be better, the prices definitively so, at McD's, but the smart set will not cotton to the overbright, plastic-dominated perceived lower-ranking environment of kid-friendly McD's.

The escalation of prices for a simple beverage to unheard-of stratospheres is one thing that has, to date, ensured the rarefied perception of Starbuck's as being compatible with the upward-striving status-jumper.

So unless McD's radically alters its branding, the trendoids will find it distasteful to step lively in those swinging doors, even if their coffee tastes more acidic and sets them back more by a factor of twice or thrice the McD's coffee.

Ronald McDonald is five blocks east of me in Seattle, a short walk downhill a ways. Property they have is also just a short walk uphill to Childrens' Hospital. Parents can stay at Ronald's place while visiting kids, many with cancer. Ronald's facility is commendable for its architecture. One can have nothing but praise for Mr. Ronald, whose plastic body is standing out front of the facility, smiling with welcome. Kids love him.

## Vitaliy N. Katsenelson analyzes:

SBUX stock is transitioning from 'growth' to 'value' investors. However, it is not cheap enough for value guys. At least not yet. Also, with current news cycle it will likely see the other extreme of its valuation. In the not so distant future it will probably have to rationalize its store base, close some underperforming stores and slow its growth expansion.

## Jim Rogers notes:

Fast-food restaurants, due to their staffing policies, are much more likely to employ legal immigrants than you might think. The biggest offenders in the food world for using illegal labor: high-end restaurants, because they lack the institutional oversight and back-office support to adequately check a lot of prep cook and porter staff applications (and some are simply dishonest). If you're looking for a trade opportunity in the event of some strict anti-immigration policy, short higher ticket restaurant groups.

## Scott Brooks writes:

McDonalds will have to work hard to overcome their persona. They have cultivated that image for a long time. I have often joked (with an air seriousness to it) that one of the greatest inventions/innovations of the 20th century was the McDonalds Playland!

I absolutely hate the food at McDonalds and will move heaven and earth to not eat there. But my kids like it. So when the wife needs a break and the kids want to go play, I'll take them to McDonalds, buy a few Happy Meals and let the kids play and eat.

Actually, they don't so much eat as graze. They play, come back and grab a few fries and bite or two of their burger/McNuggets and go back to playing.

As much as I don't like the food at McDonalds, they are an incredibly innovative company that I respect immensely. And with their distribution chain and the demographics of America changing, don't underestimate what McDonalds is capable of.

That clown may look stupid, but underneath there is a shrewd businessman!

## Nigel Davies ponders:

I'm just wondering what the real appeal of McDonalds is and what really gets people in the doors.

I often eat at McDonalds during tournaments because there's usually one around, probably they won't poison me and if they do (and I live) I can sue them.

On the other hand my five year old son much prefers the relatively civilised atmosphere of Pizza Hut, so much so that I can use the 'Would you like to go to McDonalds for lunch?' gambit as a threat. Now it turns out he quite likes pubs that do food, but the big thing here was getting him in the door and outside his comfort zone. Now he does miss the balloons but there again he's taken a liking to turkey.

So it seems to me that a lot of this is down to parental choice, the main driver here being cost. Of course most parents are going to be struck by severe pangs of guilt should there be even a whiff of a rumour that the food served up is unhealthy. So with BSE (Mad Cow Disease)/cholesterol etc appearing on the horizon, it was inevitable that McDonalds would take a hit until it overhauled its menus and image.

In this respect I see the coffee/WiFi as being a really clever means of making them look like Starbucks and feeding off the modern, trendy and healthy image of the coffee house chains. But are they a 'competitor'? I really don't see it, and I don't see a Starbucks denizen suddenly switching to McDonalds because of the cost. To me it looks more like an image thing to get the old customers back in the doors.

## Julian Rowberry submits:

Starbucks never really caught on here in Australia. Its brand name and attempt at exporting US culture is a tad brash for the local market. Plus there's already a vibrant cafe scene. The Maccas Cafe has been here for years. It's aiming at the fast and convenient 'healthy eating' market that companies such as Subway feed on. Not branded wanker latte drinkers.

## Alston Mabry recounts:

At Burger King the other day (I'm not a big fan of fast food, but I am a Coke addict, and my dogs love the burgers on the dollar menu), I hit the drive-thru, and when I pulled up to the window, the Latina there said they needed to cook the burgers and would I mind pulling into the parking lot in front for about three minutes (they know their cooking times). No problem. I don't mind waiting in the car because I always have a good book to listen to, this time Adventure Capitalist. I'm listening away, and the pooches are quiet in the back, when I notice it's been almost ten minutes. So I go back through the drive-thru, and there is a young guy at the window this time. I start to explain, and he thinks I'm placing an order. His English is good, but he is obviously from Mexico or Central America. I show him my drink and the ticket and he gets it and starts rattling away in Spanish with the staff. I realize he is the shift manager. He comes back, apologizing profusely, and explains that they accidentally gave my food to somebody else who was also waiting, that they will cook fresh burgers for me and that he will bring them out to me personally. I think he was worried that I would be angry, but I wasn't at all. We park again, and a few minutes later he appears with the food and apologized otra vez.

The point of the story is this young guy. He was a good-looking kid, maybe twenty. He was running the show, working hard on his English, taking reponsibility for the results, apologizing for mistakes and personally delivering the goods. And here was Burger King providing the structure for him to be successful. Not a dead-end job at all, not for this guy. I was very impressed.

I had an funny thing happen in fast food to me in about 1985. I was a manager of a Taco Bell, putting myself through college. We had hired a new girl who had previously worked at Burger King. It was her first day and I had her working the drive-thru.

The drive thru "dings" with her very first customer. She says into the microphone: "Welcome to Burger King, can I help you." I thought it was pretty funny, she thought it was pretty funny, but the guy in the drive-thru began laughing hilariously.

But he placed his order and pulled to the window. The reason he was laughing so hard? It turns out he was the guy who owned the Burger King where she used to work.

# Secure Drivers License? from Alan Millhone

January 9, 2008 | 1 Comment

My morning's paper shows a photo of Michael Chertoff at a conference on the REAL ID. The ACLU is against it — not surprising. Personally I feel any new type of license should also have a couple of fingerprints along for the ride.

A week ago I took my 16 year old nephew to the Columbus, OH airport for his trip back to Florida. That morning I went online and printed his boarding passes. We got him to the airport check-in for Southwest and the man at the counter asked him for his ID. My nephew told him he was 16 and did not need one. The counter man for the airlines agreed and processed him for his flight!

Congress passed the REAL ID law in 2005, but the effort has been delayed by opposition from states worried about the cost and civil libertarians upset about what they believe are invasions of privacy. A key deadline would come in 2011, when Federal authorities hope all states will be in compliance.

# Daddy, Can I Borrow the Jet?, from Stefan Jovanovich

January 9, 2008 | 1 Comment

This is going to be old news to the pros, but other amateurs may be interested in Michelle Leder's Footnoted.org , which reports on the details of SEC filings.

Qwest's amended employment agreements were recently voted "The 2007
Footnote of the Year" by the blogs readers. The amendment allows the
CEO's daughter to use the corporate jet to commute to high school from
Denver to our fair state.  As the Rocky Mountain News reported, the
stepdaughter attends high school in California and Qwest is based in
Denver. "The amendment reflects a great appreciation for his family
situation as his daughter wraps up her current schooling in California,"
the Qwest spokesman said.  Assuming normal charter rates for the Falcon
2000, this could be up to \$1 million extra in school fees that the
shareholders of Qwest are contributing to the general welfare.

# BAC/CFC, from Vitaliy N. Katsenelson

January 9, 2008 | 2 Comments

I welcome the Bank of America (BAC) acquisition of Countrywide (CFC), as for the first time I can remember BAC acts as a contrarian investor. I really don't know what CFC is worth but I know it is worth more in BAC's hands than as a standalone company.

BAC will be able to provide CFC with liquidity and staying power to survive through the current crisis. In other words it brings continuity to the table. Customers and partners that were having second thoughts about dealing with CFC are likely to stick around now.

I applaud this deal because typically these are done at the top of the market, but BAC found the restraint to wait till things went to hell. Yes, it was early with its first purchase, but picking bottoms is not easy, even for almighty BAC.

# Handicapping the Election, from Jeff Watson

January 8, 2008 | 4 Comments

I've had a fascination all of my life with the track, horses, and finding the elusive overlays. I've been going over to Ladbrokes to check their tote board on the US presidential election. I've been monitoring their line for the past few weeks, and have noticed Hillary going from a 3/7 favorite to an 11/4 underdog. Obama has had a meteoric rise in the past couple of weeks, with his odds actually moving in his favor the night before the Iowa Caucus. It seems that the betting line has been moving before the news, much like our beloved markets sometimes move before the news.

This morning, their opening line for the winner of the US presidential race is:
Do readers see any overlays here? Huckabee looks nice at 8/1, but he reminds me of the claimer that got bumped up in class.

## Craig Bowles writes:

If you look at the win/show ratio in horse racing, it acts like a P/E. The horse with the lowest W/S normally runs well and you see some suprising winners. It’s a great way to go to the track with a strategy even if you don’t know much about racing. Somebody is putting money on the horse and it’s not the general public or it would show up in the place and show betting. It’s harder in practice since so much money comes in close to the race, however. Another thing I notice is that the races are really unpredictable around full moons. Maybe some horses don’t sleep as well or whatever, but it looks like favorites win maybe twice as often around the new moon as around the full moon. You often see horses just die in the stretch around the full moon, like Discreet Cat at the Breeders Cup. It looked like the horse hadn’t slept.

# On the Campaign Trail in New Hampshire, from Marion Dreyfus

January 8, 2008 | 1 Comment

This weekend, we hit Portsmouth, Exeter, Manchester (of course), and rally at St. Anselm's — where it is all happening.

The feeling we get, traversing the state, is that Hillary has her people plumping on intersections, jockeying with sign holders from Edwards, even on very same four or five square feet! and many signs on traffic triangles and such, but we saw a huge tilt toward Obama among hoi polloi.

Don't recall a single Huckabee sign or poster or knob-hanger. There's the respect that maketh money of such great moment.

Not much evidence of Ron Paul, though I did meet up with very cute and sexy men/boys who told me they had "flown in from all over the states," using \$50K raised "mostly on the Internet" as one attractive Dakotan told me. They are staying "with families" and selling their guy hard, but the locals have not reported (to my hearing) a single vote for the guy.

McCain seems to have an edge, following their enchantment of 2000 (McCain by 20 points) and Romney is still very much in play. Rudy has his defenders and adherents. At the debate and thereafter (at our late-night party after St. Anselm's), people spoke approvingly of Rudy's bringing up Islamo-fascism as the key threat facing us, and that theme thence picked up by the others, including Romney and McCain. No sloughing it off as a "bumper sticker" (Edwards, 2007).

Edwards, with signage and lawncards everywhere, fighting with a few stragglers for Gravel (!), Richardson, even a stray Duncan Hunter yard sign, did not seem to have an operational machine working anywhere we were campaigning so hard on the retail-politiciking end.

Whether they wanted my guy or not, the people were sharp and informed, very friendly, except for some who groaned they "did not want to discuss politics, please!" because, as one guy shoveling his driveway grumbled with a rueful grin — "Don't ever move here…" "Why?" I asked, "too cold in winter? Too much snow?" "Naw, too many pollsters and politicos. We sometimes get as many as four people a day from different campaigners! Too much!" Every home is receiving cascading doorlit and mailers, and banks of callers unearth the vaguest tendril of a proponent with call after call, at all hours, even during live debates.

Again and again in the lanes and roadways and neatly laid out clapboard and shingled soapboxes and single-family homes of the state, people brought up the same trio: What about stopping those illegals and invading millions? What about Social Security - what's going to happen there? What about the cost of oil and fixed energy — how long are we going to be paying the Middle East for energy?

What will the Democrats do to address these issues? Their focus seems to be apart from these concerns. Even Democrats — as well as the famously "undecided independents" so beloved of pollsters and campaigners, seemed embarrassed to note that by far the leading resume on the Dem side was Bill Richardson, yet, in slightly embarrassed voices, they admitted they would be voting for Obama or Hillary — recognizing there were no great resumes on either of these two front-runners. The old "electability factor" determining a vote that would not ordinarily go to that default candidate.

No one could explain specifics of what, exactly, Hillary's "experience" consisted of, though she slings that "35 years of helping others" around the media airwaves like a rodeo cowgirl rehearses her lasso.

Saturday evening saw the last-minute switch of GOP/Dem debates, so that the GOP slate went first, followed by the Dems. Hillary was widely derided for her attempt at self-deprecating humor in answer to the "unlikable" question: "Gee, my feelings are hurt…"

Sunday: Loads and loads of people hors de combat at church, their cars missing from driveways that still boasted the semi or snow-plow on the alternate driveway. Fantastic, "War of the Worlds" massive silo in Exeter scared us half to death: Another Three-Mile Island manifestation? Turned out to be a water silo.

What is the value of distracting voters in the midst of listening to your guy answering live challenges by calling them away from the debaters and toward their ringing phones? Made little sense to us.

On the other hand: no taxes, crisp, clear, clean air; bracing neighbors; and a congeries of excellent little boites and eateries. Lots of independents actually still on the fence, two days before the vote. Surprising events: Coming across two other British women, cuties, from Manchester (my birthplace) out wandering around trying to promote Obama, with no clear idea why, precisely, except their vague, hand in the air tracing a loose flourish, "Change…?" And "…Maybe he can do something about global warming…?"

And the second: A new move-in, ex- of NYC, who was not even on our wavelength, invited us in for juice and cookies — and a needed loo break. Home-baked Toll Houses! Delightful runners, dog-walkers, snow-shovelers, slender citizens, all. We saw not a single portly Hampshirite in days, not a one.

# Take Another Look at Japan, from Jay Nelson

January 7, 2008 | 1 Comment

This is a country that very quietly has moved out of near-depression to having a growth rate competitive with ours for over 3 years now. And the country's performance is only going to get better relative to ours, as their investments in mobile communications, energy efficiency, miniaturization, use of MEMS technologies in robotics and smart houses, and other technologies, are really going to start paying dividends in the next three years.

There are also some big gains soon to be realized from licensing and commercializing much of their intellectual property which has to date been neglected…

Not only that, but they have \$14 trillion in savings, mostly in low-yielding bank and postal accounts, that will finally begin moving into equity markets over the next decade now that this month's full deregulation of selling insurance at the bank branches becomes effective.

As soon as China hits the wall (and it will), Japan will finally get the recognition it hasn't had since the 1980s.

Full disclosure: We publish a leading management publication on Japan.

# Lessons from Life, from Victor Niederhoffer

January 7, 2008 | 1 Comment

Avoid Boring People by James Watson contains 110 lessons that Watson has learned from his very full life in the competitive, challenging and creative worlds of science, education, politics, and research institutes. The lessons are drawn from each stage of the 79 years of his life except for the period when he was head of the Human Genome Project, which he resigned from because of his insistence that none of the discoveries be patented, coverage of which he felt would hurt too many living. It covers his primary education at the Lab School and Horace Mann High school, the University of Chicago, and Indiana University, his research interests in parisitic viruses called phages, his path in research, collaboration, and networking to the Nobel prize, his career in teaching at Harvard, his spearheading a rebirth in vitality in the Harvard biology department, and his transformation of the Cold Spring Laboratory from a \$200,000 a year just-surviving institution to an operation with assets now of the mid nine figures, that is generally regarded as the home of molecular biology in the United States. The Epilogue contains a discussion of the state of thinking on science at Harvard in the wake of Larry Summer's remarks that it would be appropriate to study whether genetic differences are partly responsible for the disproportionate influence of women in science. Regrettably, a former student at Cold Springs, Ms. Hunt Graff, interviewed him on tape for the London Times about his remarks on evolutionary differences in humans from different geographical areas, about a line of reasoning that Galton hypothesized about in Natural Faculty regarding Africa's prospects, and set him up for a big fall and after 40 years at Cold Spring he was eased out the door. Sadly, even those who were standing on his shoulders for many years are not in a position these days to even countenance the mere thought that genes that cause differences in individuals and groups might be worth studying as a contributing factor in human behavior.

The book is a scintillating mixture of the many strands of his laboratory, his theoretical work in exploring the structure and working of genes, his attempts at romance with younger women , especially pretty blond Radcliffe students, his efforts to improve himself and his students, his striving to be on the right path to achieve fame and glory in science, and his work habits. The book apparently was prepared from unpublished notes and handwritten manuscripts. After describing each stage of his life, he reflects on the good and bad that characterized that period, and in hindsight gives lessons he feels would help those climbing the ladder of success, especially in science. No matter what your field you'll find that the lessons are insightful and valuable. As he says, you should take only lessons that are based on successful experience. And he has had more successful experiences in his lifetime than almost anyone.

The worst part of the book is that his discussions of his research in biology is highly technical. There is no effort to make if accessible for the layman.There is no glossary of terms of concepts or index. Those who aren't molecular biologists will find it difficult to understand what his innovations, and variations, and studies are about. And most of us would be much more interested in that than his mainly unsuccessful efforts to romance almost every pretty Radcliffe undergraduate, although I found those discussions quite interesting because I had non-romantic contact with most of the women discussed as I was at Harvard the same time he was.

I will try to apply some of the lessons in each chapter to speculation and life. In Chapter 1 on childhood lessons he suggests that you should put spin on the ball, never put your life at risk, accept advice that comes from experiences, and find a heroic mentor. The importance of money management is underlined , and the question of how much leverage is relevant (my work, based on simulations, suggests that 2.5 to 4.0 times leverage is the ideal, and this would depend on whether there is rebalancing at the beginning of each year or each month). The importance of the indirect approach follows in the line of Liddell Hart and every good game player knows not to clash directly with a strong opponent but to look for deception and weaknesses. All markets moves are based on deception and feeding chains. Basing your trades on experience is another way of saying "have you tested that?" Finding a good mentor is another way of saying that you should learn from the successful and get a good education.

In Chapter 2 on college lessons he suggests narrowing your intellectual focus to the things that are important. Watson's interest was the gene. No one can be good at all markets and all kinds of trading. Try to pick a good field and then follow the path to success by improving yourself in all aspects that might be helpful to you.

In Chapter 3 on post grad work he suggest having expansive interests over and above your thesis topic. It will make you more interesting, give you more ports in a storm, and enable you to bring disparate disciplines into you thesis, life, or market.

In Chapter 4 on phage experiments, he suggests stopping research in the last days of August, working on Sundays, and getting exercise. He notes that beta endorphins, the human opium molecules, are released, and suggests that August is best for vacations because of water temperatures and leaf color. I find that most markets act mainly to force out the weak during August, and unless you have unlimited capital it's a good time to gather your rosebuds. As for Sunday work, it shows you love what you're doing, and it's a great signal for bosses like him who come into the offices on weekends to see who's really interested in his work.

In Chapter 5 he suggests leaving a research field before it bores you. I would say that it's good to get out of a market or craps game when you're ahead, not when you're forced out. He suggests avoiding boring people, and notes that many of the old faithful lose their vitality and are boring. Try to mix the gray hairs with the brown and black in your business, and enjoy your coworkers as you spend most of your time at work, and happiness is good. He also suggests sitting in the front row, when you are interested. That way you can find out what's happening. Do pay attention to the successful people in your field, and listen closely to what they say. He also suggests that irreproducible results are likely to contain large nuggets of gold. When you find that something doesn't work that's supposed to, like the 11 up opens in a row at the beginning of the year, that failed this Wednesday, try to step back and think what it means.

One lesson from life which Watson should have incorporated is the value of bird watching or any other systematic pursuit of nature at an early age. The habit of keeping notes, and differentiating between species, and appreciating structure and beauty, is helpful in all subsequent pursuits.

## Kim Sogi writes:

In the fields of biology and chemistry, James Watson is held with the utmost contempt for his short sighted, racist, sexist, and egoistic views. His first book, “The Double Helix”, was initially declined by Harvard Press because of the protests of those he wrote about, claiming wild inaccuracies about events and his claimed involvement with them. The only one who was not able to change his portrayal was Rosalind Franklin because of her death. Anyone interested in this man should look him up from other people's accounts for all of the controversial comments he has made.

I do not disagree with his great contributions as an advocate for the sciences and for publicizing his many accomplishments. But I disagree with his treatment of all of those around him as well as his blatant sexist and racist views.

I doubt that anyone would question that "genes cause differences in individuals and groups."  What he might wonder is how someone who supervised the study of the genome could be so blithely confident that the genes governing the central nervous system, many of which have yet to be isolated, are invariably linked to those regulating melanin expression. Perhaps some of the scientific geese at Harvard thought that President Summer's study of his daughters might have needed a bit more peer review before being released for publication. Perhaps those female faculty quacks also thought that the old gander's past predations on the young women naïve enough to want to study science deserved a generosity equal to the one he showed towards Ms. Franklin?

According to Mark Pagel,

Modern genomic studies reveal a surprising, compelling and different picture of human genetic diversity. We are on average about 99.5% similar to each other genetically. This is a new figure, down from the previous estimate of 99.9%. To put what may seem like miniscule differences in perspective, we are somewhere around 98.5% similar, maybe more, to chimpanzees, our nearest evolutionary relatives. The new figure for us, then, is significant. It derives from among other things, many small genetic differences that have emerged from studies that compare human populations. Some confer the ability among adults to digest milk, others to withstand equatorial sun, others yet confer differences in body shape or size, resistance to particular diseases, tolerance to hot or cold, how many offspring a female might eventually produce, and even the production of endorphins — those internal opiate-like compounds. We also differ by surprising amounts in the numbers of copies of some genes we have. Modern humans spread out of Africa only within the last 60-70,000 years, little more than the blink of an eye when stacked against the six million or so years that separate us from our Great Ape ancestors. The genetic differences amongst us reveal a species with a propensity to form small and relatively isolated groups on which natural selection has often acted strongly to promote genetic adaptations to particular environments. We differ genetically more than we thought, but we should have expected this: how else but through isolation can we explain a single species that speaks at least 7,000 mutually unintelligible languages around the World?

The irony is that the facts of genetic diversity have produced varieties in capabilities and tendencies among humans that make Watson and Summers' categories of "Africa" and "women" seem as laughably crude in their simplicity as my math skills.

# Open Outcry, from Jeff Watson

January 6, 2008 | 5 Comments

## Victor Niederhoffer remarks:

Many exotic options might have been triggered at \$100 in oil and the trade might have created massive fictitious losses or gains for interested parties.

## Larry Williams offers:

Jeff stikes a nerve with me on electronic vs open out cry.  I'd love to go back to open outcry or one session markets. If there were one session, electronic or pits, with defined time zones it would be a much easier game. Now, thanks the electronic wizadry we have three sessions; 1) the twilight zone after the pits close, no liqudity, lots of false moves — and lots of real moves, massive slippage; 2) volume picks up 1-3 hours before the pits, still erratic but trades better, a little less sloppage (I mean slippage); 3) the real deal hours, better fills, moves are for real.

## Anatoly Veltman recounts:

In open outcry Gold futures trading at the Comex in 1989, my volume equaled 10% of the total exchange volume on quiet days — although I was not in the pit, and didn't own a seat at the time. Contrary to popular belief, floor brokers and locals were not raping every customer order going into the pit. Things got progressively worse, as seat prices skyrocketed at the start of this century; it eventually cost \$1,000/day for floor rights alone, not to mention all kinds of overhead and error risks! And that's how demand destruction for floor trading took hold. Current electronic execution is much more disadvantageous, from where I stand. Black boxes at a handful of firms scan the exchange order books every millisecond and automatically execute algorithmic trades, ripping any conceivable advantage away from participating public. They are the casino, with structurally embedded multi-billion annual profits — leaving everyone else on the other side of the zero-sum game. Question is: what evolution event will lead to eventual demise of their empire?

# Feints in Soccer and Stocks, from Vincent Andres

Ramping can only be effected by a large trading desk that can act in concert within a few minutes. When they start the move by say, buying in unison, a few minutes later naive traders pile on thinking they have picked off another trading team's signals. Meanwhile the original trading desk dumps their stock for a quick profit at the expense of the traders who have fallen for the decoy signals. PMcD.

This comment (and many others in the same vein) remind me exactly of a soccer dribble.

Player A has the ball and is in front of player B. A plans to pass on the left side, and thus A will feint going on the right side. The feint must have the maximum visual effect to lure B, and simultaneously the minimum real effect, in order for A not to go too much in the feinted (wrong) side. With some maths, one would say that A's position will exhibit as positive, but with all derivatives being negative (A has no intention to continue the move, quite the contrary).

If/when the feint works, it provokes an overreaction from B, (which B feels is necessary in order to catch up the delayed/lost part of the move), ie 1st and 2nd derivatives for B strongly positive.

If the provoked inertia/momentum is great enough, this will put B in the zag when A is in the zig. Enough to extract a little profit.

Of course, in soccer good players are able to change/adapt their plan during the dribble, if things don't work immediately as expected.

Player A may well be a restricted group of people acting together, Player B = the crowd (the expression "sucker rally" comes also to mind).

Such description is alas strongly non-predictive. Apologies. How to calculate derivatives with such noisy functions as stock prices? Which are the adequates variables/functions to consider ?

On the other hand, I suspect the example database to be potentially huge !

# Gold Seasonality, from Alex Park

Lately I have been reading 'Simple Economic Concepts for Complicated Financial Markets' by GaveKal. In the section on 'Gold' the following paragraph appears, taken from an August 2nd 2004 article:

By most accounts, over half of global jewellery sales occur in November (Indian wedding season), December (Christmas and Hanukah), and January (Asian Lunar New Year). This simple fact might explain why nearly every peak in gold prices has been made in January-February and nearly every trough in July-August. Surprisingly, few investors take Gold's strong seasonal factors into account.

I looked at gold prices (continuously backward adjusted futures) from 1975 to 2007. I defined 'Sell' as selling on last day of Jan and 'Buy' as closing out short on last day of Jul.

The 23/33 win ratio looks interesting but I thought about checking that the gains from selling Jan and buying Jul are significantly different than picking any other arbitrary month combination.

Looked at all other six-month points changes, e.g. Feb - Aug, Mar - Sep, over the period 1976 - 2007 to compare against selling Jan and buying Jul:
So it appears that Jan/Jul returns are not significantly different from any other six-month combination.

# Embarking on One More Journey, from Kenneth Womack

It was going to happen. I have put it off in favor of other matters for decades. Yet, somehow, in the back of my mind, it never left my agenda as a priority through all these years. Today I purchased my first violin. I have been inspired by various individuals to embark on this journey, not the least of which was Vic, in his printed memories of his father.

The catalyst was my son's music teacher, who, each day, tolerates my standing by the salon door admiring the incremental progress of her diminutive understudies.

I am very excited. Somehow I know that it will make me a better speculator. A better thinker.

# Downdrafts & Bounces, from Jim Sogi

A back of the envelope count of the last handful of downdrafts and bounces. The New Year drop was about 92 points.

Triple jumps are the most dangerous, "decision makers" in dirt bike racing. Triple bottoms in trading?. The theme/meme from the home builders was "2007 was going to stink." Only good thing I can say about trading so far in 2008 is "we have all year" and it's much better to come back in racing then to crash on the last lap.

# Some Conspiracy Speculation, from Ronald Weber

This week in particular has all the signs of a collective manipulation scheme: Banks need extra cash to cover their loss but they can't place any new products with their clients, so what do you do? You ring the cashier at the prop desk! First you choose a week where many US/ most European/ all Japanese investors are still on holiday, you get some analysts to issue a few dubious downgrades on Intel (strange timing anyway!), you call your pals at in the media to back the market action with news and unproven causality; you get your oil trader to tick the magic \$100 level where you cash in on options and structured products triggers — and while you're at it, you might as well take advantage of the holiday in Tokyo to push the Yen. Meanwhile, Bernanke is as absent as ever, worrying more about transparency issues (who cares about that anyway?) than trying to display real leadership. Strange days indeed!

# Stock-Picking, from Kim Zussman

You can make the case that stock picking is actually market timing: There are entry and exit times for any stock which are profitable, were they knowable in advance. Another version of this is that even for a "bad stock" with lots of trading volume (eg, C, WM, CFC, SLM, AMD), there were investors who bought and sold (or — cough — sold then bought) at profitable times. It is hard to pick stocks (buy and sell points), with expectation of profits or beating some benchmark, because thousands of your betters have superior information, research, and reasoning. Timing based on cash flow? Valuation? Relative strength? Debt? Patent pipeline? They all work sometimes, but how many (including big fund managers with best resources, e.g. Bill Miller) beat the index year after year over time?

Furthermore, its hard to capture the "free lunch" of diversification (away of idiosyncratic risk) with fewer than dozens of stocks — and then how to follow them all sufficiently to time them? The meal seems to me to be use of leverage to time signatures of immutable human weakness; which winds up asking whether the fear/panic reaction is written deeper in the collective mind than it is in yours.

## Tom DeBolske replies:

I saw on CNBC the other day that the best hedge fund managers on the planet are right only 58% of the time. I don't see that my "betters" with their "superior information, research, and reasoning" have that significant an advantage. We all make our stock picks using whatever method we are comfortable with. With any stock at any time it's a 50:50 proposition. The trick to stock picking is to keep your losses to a minimum while letting the winners run.

## Vitaliy N. Katsenelson writes:

In my book book Active Value Investing: Making Money in Range-Bound Markets I argue the long-term (10 + years) secular trend of the market will be essentially flat.  However, it will likely comprise a lot of small bull, bear and range-bound markets.  I argue that timing the market (at least for fundamental investors) is a fruitless exercise.  Instead, time (price or value) individual stocks.  I provide a Quality, Valuation, Growth (QVG) framework.  Quality and Growth dimensions of analysis help you to identify good companies, and cheap valuation will make this good company a good stock.  Yes, time stocks.  Identify a couple hundred good companies (Q and G dimensions), buy them when they turn into good stocks (all QVG dimensions line up), sell them when them they stop being good stocks (Q and/or G dimensions deteriorate or stock reaches fair-value point — V is not there any longer).

# Buerger’s Disease, from Ken Smith

A military guy I used to drink with came down with Buerger's Disease. The docs at the Veteran's Hospital began cutting off extremities on his body. First came a toe or two. On the left foot. Then a toe or two on the right foot. Then the whole left foot, right foot after that.

He was footless. I kept visiting him at his home following these surgeries. Veteran's outfit bought him a wheelchair. Despite the severe pain he suffered because of the disease he kept on smoking, which is incident to the disease. Kept using alcohol too, along with a bottled concoction of pain medication prescribed by vet docs.

He told war stories mostly, laughed about many things others would cringe over. It would not be polite to repeat what I heard and perhaps his mind — recollections — were embellished by a bent to make a story better and then again by the drugged state of mind he was usually in.

Soon the surgeons removed one half of one leg and then most of what was left of the other leg. They took him from footless to legless.

His wife was Catholic and kept reminding him she wanted him to be baptized before he left this planet for another dimension of being. He put it off until one day I visited him with a gallon of wine and put a Catholic sacramental around his neck. Told him he would be saved if he surrendered to the magic of the sacramental.

Wife was happy — he was happy too, because the last time I drove by his house he was on the sidewalk doing circles with his wheelchair, twirling first one way then another. A wine bottle sticking out of a side pocket in the wheelchair. And he was wearing the sacramental around his neck.

Today he came to my mind as I watched the market cut off a piece of me, one little bit at a time. If this keeps up I won't have a foot to stand on.

## Martin Lindkvist replies:

In the market, toes grow back!

I was struck by how well Mr. Smith's post about his friend's being amputated toe by toe, leg by leg, gives color to how he himself felt during Friday's decline. However, while real toes do not grow back, perhaps in the market they do?

For the longer term, I think Dr. Castaldo's recent update of the Fed Model might be indication that the market will stop short of amputating Mr. Smith's legs.

Medium term? Well, as one can never be quite sure what will happen in the market, perhaps we should all keep some grog handy (or sherry for those in management) in case the market amputates a toe on us every now and then.

# WW1: Experiences of an English Soldier, noticed by Kim Zussman

WW1: Experiences of an English Soldier

This blog is made up of transcripts of Harry Lamin's letters from the first World War. The letters will be posted exactly 90 years after they were written. To find out Harry's fate, follow the blog!

# Fed Model Update, from Alex Castaldo

The Fed Model postulates that if the forward earnings yield of the S&P Index is higher than the 10-year treasury yield, stocks are “undervalued“, and vice versa. As of December 31, the S&P was at 1468.36 and expected forward S&P 500 earnings for the next 12 months were 101.86, making the forward earnings yield 6.94 percent (101.86/1468.36). The yield on the 10-year T-note was 4.02 percent.

Historically, subsequent market returns have been correlated with the differential between the S&P forward earnings yield (estimated 12 months earnings divided by the S&P 500 level) and the 10-year treasury yield. On the 10 occasions when this differential has been greater than 1 percent, the S&P 500 has risen ten out of ten times for an average of 13.5 percent in the subsequent 12 months. (This differential currently stands at 2.92 percent, which the highest it has ever been at year end).

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

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

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

```S&P Return[t+1] = 0.082 + 4.172 * ( Forward Earnings Yield[t+1]  -   10 Year Yield[t] )

t-stat     2.66      1.85

p-values   1.32%     7.53%```

The R-Squared of 0.12 is quite high for a predictive regression in the financial markets and indicates that 12 percent of variation in subsequent returns was explained by the independent variable over the time period studied.

To determine current Fed Model forecast:
Current S&P (as of 12/31/07) stands at 1468.36
Forward Earnings = 12 months consensus forward earnings for the S&P 500 = 101.86
Forward Earnings Yield = Forward Earnings / S&P = 101.86/1468.36 = 6.94 percent
10.Year.Yield = The Current Yield on 10-Year government note is 4.02 percent
The Differential (Earnings Yield - 10.Year) = 2.92 percent
Substituting these numbers into the regression formula :
0.082 + 4.172 * (0.0694 – 0.0402 ) = 0.203
Therefore, Fed Model yields a forecast of 20.3 percent for next 12 months.

How does Dr. Castaldo counter the failings of the Fed model in other G10 countries? Japan has been horrible under that model. Germany has been OK, barely statistically significant. UK has been good, like the US.

## Alex Castaldo replies:

I believe Mr.Humbert is referring to the paper "The Fed Model: A Note" FRL (2006) by Javier Estrada who tested the Fed model in a number of foreign markets.   I have exchanged Emails with the professor but neither one of us was convinced by the other's arguments; we will just have to disagree.

# Greeting A New Dawn, from Scott Brooks

Let me start out by saying: 2007 was the worst year in my investing career in terms of performance relative to the market. But I am very positive about the future. Maybe I'm not smart enough to see all the bad news coming down the pike and all the gloom and doom it portends. But I can't help myself — maybe I'm cursed with a never ending positive attitude.

An article I was reading today mentioned that the loss of jobs last month was the worst since August of 2003. When one looks at the S&P on that date, you find that it was at 990. Today it sits at 1424. If you had bought into that "news" and held the S&P through today, you would have gotten an 8.2% return on your money, not including dividends.

Another bright side of increased unemployment is that employers have the opportunity to hire better employees. As a small businessman, I can tell you that as much as everyone likes hearing about low unemployment, there are problems associated with it. It's hard to hire good help when it's an employee's market. Potential employees can really ramp up their asking price and make it difficult for the small guys and "up and comers" to hire good people.

Another positive by-product of higher unemployment is that it releases trapped assets. Just as the death of a deer releases assets into ecosystem by feeding predators, scavengers, and fertilizing the ground at the point of death, as well as making more food available to other deer in the area (deer that are healthier and have more life and vitality ahead of them), releasing employees from the shackels of their current employment frees them up to succeed elsewhere.

Here's how. An employee can get stuck in a rut at a job. Eventually, a lot of employees change their work habits so that they do just enough to not get fired, and the employers pay them just enough so they don't quit. Not exactly a recipe for success! Further, sometimes, employees get complacent in their jobs and develop a fear of leaving and trying out their new great ideas. Most people have a modicum of creativity in them, and most people have, in their lifetime, at least one good/great idea that could not only make the world a better place, but could enrich their lives too!

But because they are complacent in their jobs and have developed a certain lifestyle as a result of their income, they are fearful to strike out on their own and make a go of it. They are fearful that they could lose what they've worked so hard to get.

Maybe they're fearful that they'll lose their home — which leads us to the subprime situation. Many people have lost their homes in the last year, and according to reports I've been reading, many more are likely to lose theirs this year.

What a great opportunity!

This economic contraction will force these people to use the power of their minds to create the money that they need get back what they had before. You see, once someone has a taste of a higher standard of living, he wants to keep it! Many of these people are going to now be forced to start their own businesses and implement those good/great ideas!

Many of them will use this opportunity to go back to school to further their education and better themselves to get that higher paying job! Many will take jobs at small businesses that they may viewed as too risky to work for in the past. And as we all know, small businesses offer greater freedom of thought and opportunities to be creative than do rigid established corporations.

The greatest wealth is created during the bad times. It's easy to make money and create wealth when things are going well. Think about all the wealth that was created just 10 short years ago with the dotcom explosion. Where are all those people today?

Economic contraction is creating opportunities for each of us to create real wealth for ourselves.

Does it bother me that 2007 was my worst year? Sure. But only for a minute! I can't afford to waste time having a pity party. I have to use the power of my mind to figure out what I could have done differently and falsify my previous belief structure and figure out how to create wealth for my clients and me. As a result, I have been spending money like crazy, dipping deep into my nest egg to improve myself, and hiring good people, even offering equity positions to some of these people in the different companies that I own. You see, I want to surrond myself with great people who will see the world differently than I, help me see where I — and now 'we' — can do better for my — now 'our' — clients. To create wealth for them, for me, and for my new employees and partners.

Maybe I'm crazy for doing this. Maybe spending my modest nest egg and giving away equity positions will break me. If that happens, I will be disappointed. But only for a little while.

You see, I'm not worried about losing it all (I've already had that happen to me in my life). I got it all once, I remember how I got it, and I'm more than capable of getting it all back!

The world is full of opportunity. Every contraction is filled with opportunity. 2008 will be a good year!

## Steve Leslie writes:

1) Backward looking and unstable.
2) Seasonal.
3) What does it truly measure, i.e, who is unemployed?

Someone once said “it is a recession when your neighbor is unemployed; it is a depression when you are.”

The unemployment rate is at 5%. Oldtimers will remember that 5% used to be a magical number that meant the job market was at full employment.

Thirty year mortgages are 5.5-6.0% for those who can get them. This number used to be very desirable.

The Fed has a scheduled meeting this month. Of course they do not have to wait until then to act.

This is the worst start to the year since 1932. The worst start of the S&P since 2000. NASDAQ had a terrible six days in a row.

A bad week by any measure for longs. One monkey does not close the show, however. Long way to go, over 360 days left in the year.

When fear sets in, time gets compressed.

# Creator of Incentives, from Vitaliy N. Katsenelson

January 4, 2008 | 1 Comment

When I was in the third grade, growing up in Murmansk, a city above the Polar Circle in (then) communist Russia, my buddy and I decided to start a business. We pooled our modest funds (mostly lunch money), bought photo paper and chemicals, and borrowed my older brother's photo camera and photo development machine. This was in the early 1980s, a time before scanners, laser printers and copying machines. We took pictures of music record covers from the likes of Iron Maiden, Jethro Tull and Kiss, developed those pictures and sold them in school during breaks.

The business was going well, we were onto something, there was nothing like this available. We recouped our costs, and had a small profit, until one dark day (it was always dark during long sunless winters in Murmansk). My buddy and I were taken into the principal's office. We were told a student stole money from another student, and when he was caught he said he stole money to buy our pictures. Suddenly, with this twisted logic we were at fault. Never mind that we were breaking copyright laws. There was no way in early 1980s to obtain copyright, even if we wanted to. We created the incentive to steal.

My father unapologetically told the principal that we were as much at fault as the movie industry and toy retailers — the creators of incentives. Of course, none of that mattered. To appease the school authorities I donated my profit to the World Peace Fund (still not sure where that money went, maybe ended the Cold War? Nah, I doubt it). My buddy and I received an "F" for the behavior, which was not a big downgrade for me since I rarely got a grade much above "C" for behavior.

# The Art of Speculation, from Steve Ellison

January 4, 2008 | 1 Comment

From Roy W. Longstreet, Viewpoints of a Commodity Trader, 1967:

The great philosopher Emerson stated that a man is as a tree and his wealth is as a vine. The vine can grow no higher than the tree.

The evidence is conclusive that commodity trading is an art. To be successful at it one must be an artist. Such a trader can scale the heights of accomplishment, realizing achievements comparable to those of a renowned concert pianist, or a painter whose works merit a place in the great galleries of the world.

What, then, are the attributes needed by one who would be a true artist in the world of commodities? There are many. A few are vital. Such men will be wise, be mighty, be already rich.

He who is wise learns from every man. He who is mighty has achieved control over his most formidable adversary, himself. He who is rich is satisfied with his lot. 'He who seeks silver only will never be satisfied with silver.'

# At 1444, from Kim Zussman

At 1444
Recession the fore
A bull without class
A bull on his a–
At 1444

At 1444
Real estate a bore
They bought sub-prime
Now it's a crime
At 1444

At 1444
The Fed ran out of more
They dropped the rate
Too little too late
At 1444

At 1444
ISM fell to the floor
Factories no make
Again a fake
At 1444

At 1444
Labor evens score?
Not enough jobs
Tape bomb again lobs
To 1444

The 4s remind me of a grave marker in Tombstone, AZ:

# As Many Shades as Joseph’s Coat, from Stefan Jovanovich

January 3, 2008 | 2 Comments

One of the measurable facts about S.A.T.s, I.Q.s and most other standardized tests is that test subjects can have their scores improved by 10% or more if they are allowed to intensively study for 6-10 weeks, take repeated practice tests and be coached on the keys (i.e. the tells) for the test. That is why cram schools have become a multi-billion dollar business.

When I asked Dad why he hadn't invested in cram schools for I.Q. test as he had for the other standardized tests, his answer was that I.Q. testing already had a limited market because people mistrusted the results; if they learned how malleable the results really were, it would ruin what little demand there was. Then he laughed and said that the irony was that the tests were not to be trusted not because study and hard work would change your score but because they diminished the actual range of difference in intelligence; like school itself they pushed people towards the social middle, when the reality was that there was as much distance between a genius and a near-genius as there was between the near-genius and "handicapped" child.

I had far more arguments with my father than I am happy to remember; and he was as capable of folly as any genius, but he knew the reality, practice and even the theory of standardized testing better than anyone. The vast majority of his customers wanted to believe that "intelligence" was a measurable quantity, like height or the atomic weight of copper. Many of them needed that belief to buttress their neo-Darwinian assumptions about the poor being poor solely because they were stupid.

By the end of his life, as the child of an illiterate, Dad felt more than a little disappointment and even shame at the fact that few, if any, curricula were founded on the assumption that intelligence came in as many shades as Joseph's coat and as many forms and rhythms as nature itself. A few months before his death, when the pain had begun to make him more than usually cranky, he gave me his last word on the subject: "There has always been a lot of talk about each child's reaching his potential; but the potential better be something that could be measured in 40 minutes and scored on a Scantron." Some shadows on the wall are produced by the sun shining on rocks that can be kicked; others are the pure projections of the faulty assumptions of social (sic) science.

Having hung around a lot of high IQ people for most of my life I think your Dad was spot on. Some have evident trouble with things like shoelaces. And they don't necessarily make the best chess players, which at first seems really baffling when one considers that a nice closed environment like chess should be perfect for someone with a high IQ. But when you play against these guys you start to realise the issues they have.

A common trait, for example, is for them to look at chess as a kind of mathematical puzzle in which their brilliant brain will eventually work out a solution The problem with this 'pure' view of the game is that it can make them highly predictable, so all you then need to do is find a problem with one of their lines.

Their solution based view also makes them highly vulnerable to provocation should you play a line which might be considered inferior. They'll want to punish your move (in their paradigm it is incorrect) and start to lose their objectivity. And then the problem is that they won't easily be able to pull themselves back from this state of mind because of a belief that their 'brilliant mind' is not capable of anything but objective, pure analysis.

De Bono also mentions the 'intelligence trap,' which is the tendency for people with high IQs to show off how quickly they can see something. This manifests itself as bad thinking habits, for example a failure to consider alternatives. So in chess someone with a high IQ will often calculate a single variation very quickly, but fail to consider alternatives along the way.

There can of course be advantages to high IQ, but I suspect that other talents also need to be in place to make it work for someone. And the problem may be that these may actually be inhibited during their development.

## Sushil Kedia extends:

I believe a number of Daily Spec readers are members of Mensa.

There is a serious problem with Mensa India. Some who have catapulted themselves to be the managers of Mensa India have not been letting it grow at all. The last several years there have been no examinations done to let in new members. Forget about elections to the management bodies, new people can't get in now.

If you check the Mensa India website and call the phone numbers listed there they tell you for the last two years that the number of Mensa has changed and Ms. Sudha Tendulkar (she is a secretary to an Indian industrialist who has manipulated Mensa) will always tell you that in a few days the new numbers of Mensa India will be put on the website.

Requesting all readers who are also members of Mensa if they will kindly escalate it through their local chapters to the Mensa worldwide management that Mensa India needs their attention.

keep looking »