David Stirzaker's Probability and Random Variables, a Beginner's Guide discusses Poisson distributions which can be used to determine the probability of some rare independent event in a specific period of time. At higher n it approximates the normal distribution. Applied to the market the issue can be stated, during the time that I am long, what is the probability of a crash in the magnitude of 10-10-08 or over 100 points high to low or greater than 7 standard deviation moves. Of 13 such occurrences since 94, 9 were this last October and November. The prior occurrence was in 2000. The clustering reflects that the events are not truly independent negating one of the assumptions of the Poisson model. The clustering seems to be the more important survival factor rather than the probability distribution model. Thus once these outliers appear, the probability of another occurring might be better modeled by a cluster model rather than a distribution curve. It was shown by Rama Cont of the Ecole Polytechnique in 2005 that volatility clusters. We've argued about the effect of these outliers on the distribution curves, but the two regime analysis might be safer. There are other solutions obviously.
Looking at a search for cluster probability models;
2. A cluster-based probability model has been found to perform extremely well at capturing the complex structures in natural textures (e.g., better than Markov random field models).
Having said this, the vacation trade is markedly dampened, and I wonder if the volatility is wearing off as time passes. Some argue for another volatility event in early or mid 2009 but that would not really fit a cluster model of volatility. There seems to be a nice wall of worry to climb and some nice symmetrical drops and gaps in September trade for the elephants to mirror.
Anecdotally, at the store the other day, I heard a lady loudly commenting on how many private jets were lined up on the runway. I'm heading down to the beach after close and will do the jet count for this year. The indicator didn't work too well last year. I'll include my friend's private jet that comes in on the third. Which brings to mind Monty Python… "I'm not dead yet!"
Bruno Ombreux adds:
There is one thing with the Poisson distribution. It converges to Gaussian but not uniformly. Tails converge more slowly than the body. One needs quite a few observations in the tails to reach normality, but there are not a lot, else this wouldn't be tails.
This implies we can't even be sure that these events are outliers. Fat tails may not be fat. They may look so only because we don't have enough observations.
Add to this regime changes, volatility clustering etc… The only solution I can think of is not to use too much leverage.
Adam Kretschmann adds:
Sharp Sports Betting by Stanford Wong has a good chapter on Poisson distributions for those less mathematically inclined.
I believe that Treasuries should not be even considered at these prices. I see a better opportunity with corporate bonds as investors will switch from low-yielding Treasury bonds to high-grade corporate debt. It’s early to say that credit is finally back, but the LIBOR (London Interbank Offered Rate) went considerably down from recent highs. In September, investment grade bonds plunged after the collapse of Lehman Brothers. Now they have recovered a lot from their lows but the yield spread with Treasuries is still very big. As credit markets normalize, the economy starts to recover and risk taking is resumed this spread will be reduced. Partially because of the huge amount of government bonds that will be issued to finance debt that will finally bring interest rates higher. But also because investment grade bonds will represent a good investment opportunity as general conditions improve at the expense of low yielding Treasury bonds.
Jeff Rollert responds:
We were +95% in treasuries for much of the year.
A more important question is are the events of Q4 are likely to continue in the near future? That is something money can be made from.
My wife an I went to see the movie Australia recently. In it, a boy stands in front of a stampede and looks the lead bull in the eye in an attempt to keep the heard from going off the cliff. Right now, there are many alpha males charging towards multiple cliffs. I sure hope there is a brave one, and they see the boy in real life.
The idea of triangular congruency possessing basic reductionist strength is apparent in nature, social interaction and by extension, market behaviour and transactions.
One market relationship which exhibits this property is the classic triangular currency arbitrage, which allows for the determination of the equilibrium cross-rates of three currencies. This necessarily invokes that most central tenet in arbitrage theories, the Law of One Price. And interestingly, some definitions have the Law of One Price as: "the resting place for an asset's price and arbitrage is the action that draws prices to that spot. The absence of arbitrage opportunities is consistent with equilibrium prices, wherein supply and demand is equal". Again this invariably leads back to the idea of a triangulated relationship between the two sides of demand and supply engaging to arbitrage/converge a plumb-line to the base of the equilibrium state/price.
The essential question in the financial markets of course, is in determining just how individual agents/traders’ market views (normally differing on many levels) transform or align into a herding market sentiment. Some interesting studies have used the percolation model (from the physical sciences) in accounting for how market views spread through a financial network topology; the crux lying in how network feedback builds and eventually escalates past the percolation threshold i.e. reaches criticality. A simple treatment utilizes a two-dimensional lattice of individual agent/trader interacting and inter-influencing neighbouring sites - reducing it to a pure geometrical percolation problem. And here the common triangular lattice is used as the basic building block for the network topology.
December 31, 2008 | 1 Comment
As a marathoner, inflammation from overuse of muscles is a part of the territory. While this generally is a short term inflammation process, I thought a couple of evaluations common to runners of this process could have analogies to the markets. Exercise and strengthening is generally a form of creative destruction. You cause minor tears in the muscles to promote growth. And blood flow and cash flow to risk or non risk taking would appear on the surface to have similar effects to overall health.
First a few general rules I use as to when to not run or stop your exercise routine:
1. When there is a fever present, sore inflamed muscles with a fever, produce counter productive exercise, increase the muscular weakness due to flu. An in some cases can cause permanent damage to the heart. A systemic failure can reverse the creative destruction process.
2. When overuse such as during a marathon, where you hit the wall, causes massive damage. However, much healing and increased blood volume can be achieved by mild running before the pain recedes and while you are still weakened.
3. When the pain causes your form to deteriorate, to the point of causing other injuries. Minor tendon swelling can often be run through, with the exception of the Achilles. But tendon pain generally is a sign to look for the cause. The usual first cause is a worn pair of shoes. Many committed runners have a difficult time accepting the advice to stop running, simply because it alleviates the symptoms, without finding the underlying cause of the inflammation.
4. When inflammation is caused by something foreign to running, say a car accident, cancer etc.
Second, when it is good to use ice versus heat to improve the healing.
Ice is good for inflammation caused by pooling or coagulation of the blood. Because it decreases the blood flow to the inflamed spot. This would include inflamed tendons, sprained ankles, or an achilles injury. Whereas heat is good for muscles that are "knotted" because it increases the blood flow. This would include torn muscles or tense shoulder blades or neck muscles.
Dean Davis responds to point 3:
This is seen often in baseball pitchers, where general fatigue, a twisted ankle or some other distant physical insult, causes a change in the pitcher's form such that it leads to a devastating injury in the throwing shoulder, wrist or elbow. Compensation that destroys good form is a constant worry for the pitcher.
It's my contention that except for the move from 9/19 or 9/26 to 10/10 when the S&P moved down from 1248 to 1216 to 890 (with 843 low that day — thanks for the macadamia nuts that day to my friend who visited), it was a normal year with everything behaving in a very orderly fashion. Nothing regular happened those two weeks and no one who follow the ecological nature of multiple time series fomented around here could have predicted this. Yet, according to some, they got it (especially for their own account but not their big public funds). What models from other fields, what insights might they have to offer? There is one field I'm thinking of particularly that I don't like to mention as it's like religion, and not fit for discussion until you die from it.
Victor Niederhoffer adds:
I believe that chronic inflammation is a major cause of reduced longevity. Such inflammations occur in markets, and produce responses that can lead to the replication of the wound in a market and spreading by the blood and lymph systems to other markets. When the inflammation is not cured quickly, and the natural defenses against it don't work, a situation such as the 25% decline in 2 weeks in early October can occur. Quantification of the inflammation process can lead to a longer life on this earth and the markets.
James Lackey writes in:
What did we miss this year? We ignored the internal combustion engine or rotating assembly of the Bond markets. It was easy with your experience in buyouts to see Chambers's paying a million per engineer on buyouts as silly. It was a good investigation of yours that showed how the secret silo society always managed to beat by a penny on earnings to unleash their insider sell or buybacks to cover the non expense option incentive expenses.
But what happened in debt land… frankly I had no clue. Some of the tactics used in Structured Finance were no better, but over all worse than giant size penny stock scams. It was a simple pump and dump debt scheme that became a huge meme supported by Washington on Wall Street, so large that even the originators were caught with inventory… It was so bad that even the day trader's tipoff "Goldman was a seller!" was taken down in the vortex.
Seemingly no one believed the mark to market rule for all would ever become the law of the land and stand. After all, the bankers knew that if everything had to be marked the entire system was insolvent. Texas hold em meets the NY and DC rule makers. It was a good bluff, but they went bust. So they get new backers and are right back at the tables. The tournaments are simply moved to new casinos.
Don Chu observes:
“If a man should happen to reach perfection in this world, he would have to die immediately to enjoy himself.”
A study of the psychology of mirages might be a profitable line of investigation for speculators. The phenomena can be real, but the issue of interpretation can be a question of what we want to see.
A mirage is a naturally-occurring optical phenomenon, in which light rays are bent to produce a displaced image of distant objects or the sky. The word comes to English via the French mirage, from the Latin mirare, meaning 'to look at, to wonder at'. This is the same root as for mirror and to admire. Like a mirror, a mirage shows images of things which are elsewhere. The principal physical cause of a mirage, however, is refraction rather than reflection. A mirage is a real optical phenomenon that can be captured on camera, since light rays actually are refracted to form the false image at the observer's location. The interpretation of the image, however, is up to the fantasy of the human mind, and is easily mistaken for a small body of water.
Peter Grieve comments:
Long distance precision rifle shooters "read" the mirage ("heat waves" in other words) to get an idea of wind speed and direction. "Reading the mirage" sounds like a great name for a trading protocol– unfortunately I can't think of what it would actually be.
We are in the midst of "silly season", when price moves have to be taken with a grain of salt. A speculator, who has strategic framework of what he wants to do through the holidays — and more important beginning Monday, January 5 — can try to filter out some of the price noise via combination of Open Interest (O.I.) and Commitments of Traders (C.O.T.) data, overlaid upon the price moves.
1. My intermediate view of the S&P is squeezed between two usual suspect forces: reconcile downtrend vs. degree of oversold. I ask myself: what may be the catalyst for reversal? The environment is awful: it's not enough that there is usual dark economic background –there is also a possibility that civilization may revert to the stone age: substantial stock values are simply impossible, if the financial infrastructure collapses — and it is teetering on the brink! The 2008 lows conveniently fell into 2002-2003 low territory — which ordinarily would satisfy FLAT CORRECTION pattern. Tragically, a collapsed individual Ponzi scheme is now shaking confidence about the remaining capitalist foundation — it dawns on the masses that Wall Street, shamelessly taking in taxpayers money, is in fact the ultimate pyramid itself; and so is the government! So I hypothesize that any conventional oversold to-date is temporary; it will lead to consolidation/bounce to relieve it, before the final down-wave. Today's C.O.T. had Commercials net-shorting again, during price down-tick no less! Funds were going Net-Long — my suspicion is that they'll reverse to selling into any nice bounce from here…
2. Treasuries of all durations hit what Chair termed "unconscionable" levels. I agree, but there is a little hitch: Commercials have bought into recent record highs, putting pressure on Spec shorts! I'm anticipating the last little squeeze right here, coinciding with another silly Bullish headline and only then would Commercials begin reversing into the ultimate value! I'm not sure it will be as high as 147 on the 30y future, to rhyme with Oil's record tick; but I think at least the impression will be given — that's the target!
3. EU and SF are certainly on their way to eventual new records against the Dollar. It may be because they're currencies more diligently guarded against inflation; or it may be because the Dollar traditionally depreciated over time (except during brief historical German and Japanese tragedies). There is slight problem right now. C.O.T. showed funds jumping onto this idea a little too fast last couple of weeks. So I expect them to consolidate their profits for a little while… Spec sentiment against BP is nearing very oversold: it appears that Specs are pushing toward EUR/GBP parity; I will be very interested in picking up some pounds around there before Specs eventually go the other way… Yen is fundamentally very flawed currency; Japan demographics are irreversibly weak. It's only a matter of time before Yen strength reverses for good but so far we're not getting any strong indications. Clearly: it is because Yen has been trading not on its own fundamentals but rather as the default beneficiary on crosses…
4. Metals have been captives to currency moves; also industrial metals have suffered disproportionately sharp physical demand void and investor cross-margin liquidation. But Platinum's price has consolidated in Q4, while O.I. has much improved. Copper is even more intriguing: Q4 dip from 3.25 to 1.25 came on increased O.I. and uncharacteristic record Fund Shorting(!) I have to conclude that metals are very near cyclical bottom but timing of any major rally would still be tied to currencies. Gold may still have to spend another Quarter or so in roughly 750-950 range, before breaking out to records with currencies; so range is what I will trade, siding with Commercials…
5. Energies are very interesting, as they are nearing very important bottom. Sentiment swings are most prolific here - as they are true strategic commodities. In the world that appears to come apart at the seams - there will eventually occur government hoarding "Mad Max" style! Both Crude and NatGas hit nice natural bottoms last week. WTI managed symmetric equality drop, you can't make this stuff up: $57 slide to $90 by Fall Equinox; then another $57 below $90 by Winter Solstice! NatGas completed 100.0% Lobagola $5.20 to 13.70 back to $5.21 - price, which equals precisely 38% of $13.70! So all of this is nice; except Crude is currently sporting C.O.T. Bearish divergence, and NatGas is sporting O.I. Bearish divergence. My conclusion is that both will struggle a little in Bearish wave2 - before Bullish wave3 rockets them in January… We are in the midst of "silly season", when price moves have to be taken with a grain of salt. A speculator, who has strategic framework of what he wants to do through the holidays - and more important beginning Monday, January 5 - can try to filter out some of the price noise via combination of Open Interest (O.I.) and Commitments of Traders (C.O.T.) data, overlaid upon the price moves.
December 30, 2008 | 2 Comments
Over a decade of pro checkers training followed by two decades of value-hunting in markets taught me but one lesson: Trojans should ring alarm-bells.
One should be cautioned against too obvious a bargain, just like when your checker opponent offers a sacrifice. I view the thoroughly obvious Bond Shorting bargain as one of the ominous signs that will keep me away from Times Square for the Ball-Drop. See, a friend of mine cancelled his well-planned Mumbai biz-trip — just because of what happened there the month before. People's tendency is to be reactive; not pro-active…
With what Israel is currently doing, Hamas is effectively paralyzed. What people are not thinking about: when you corner someone, things may become a little more complex than meet the eye.
Inflammations occur in the markets– bubbles if you will. If they become too large like aneurysms if not treated they burst. Like an infection or a disease, if left untreated they can be very dangerous to the system and can even cause death. Think about the application with speculation. Keep the hyperbaric chamber in mind in the event you ever need one. Long used as a method to treat "the Bends," an affliction when a scuba diver rises to the surface too quickly. It has been clinically proven that treatment of a wound along with treatment with a pressurized chamber dramatically improves the healing process. Along with the hyperbaric chamber the patient breathes 100% oxygen.
I have an associate who was bitten by a recluse spider on her arm on a Friday. By Monday, the poison had necrotised a patch on her arm many inches in diameter and the destruction was spreading. She was at risk of losing her entire arm. The physician placed her on massive antibiotics and hyperbaric therapy. It was through these very aggressive measures that they were able to save her arm and her life. Diabetes patients are also using hyperbaric chambers to treat their advanced stages associated with this disease. Some use it as a holistic method for anti-aging and some years back, Michael Jackson was rumored to sleep in a hyperbaric chamber perhaps as a treatment for his massive plastic surgery abuse on his face.
hyperbaric home models can be found on ebay for $8000.
December 29, 2008 | 4 Comments
Russia's economy is deteriorating at a very fast pace. The Stabilization fund — a giant $450 billion savings account — has been depleted by a quarter since September as Russia tried to defend its currency. Despite that attempt, the ruble still declined.
Russian companies are facing $170 billion of debt rollover next year. Since the rest of the world is not willing to finance companies in stable political regime, getting financing for Russian companies will be a problem. Mr. Medvedev and his boss (Mr. Putin) will have to spend another quarter of the reserve fund Russian corporations. According to the FT, as the Russian economy is starring into a deep abyss and Russians suddenly start waking up to realization that almighty Mrs. Oil and Mr. Natural Gas were responsible for (temporary) resurrection of Mother Russia, not Mr. Putin, people are already whispering for Mr. Putin's resignation.
These whispers will magnify as things get worse. But what concerns me is the likely response. I visited Russia in September for the first time since I left in 1991, and even though at the time Russia was still prospering (and economic crisis was weeks away) I still felt this broad anti-American attitude.
Now that things are getting worse every minute, Mr. Putin will likely redirect the attention and shift the blame to — you guessed it — the United of States, the mother of all evil. The United States will be responsible for the global crisis, for manipulating oil markets, and anything bad that happens in Russia, the US will be the culprit. I don't think this brings the US to war with Russia, but the relationship with Russia will likely get a lot worse.
I've just started reading Richard McCall's The Way of the Warrior Trader. The author maintains that the cultivation of the spirit of the trader is more important than 'the system' or 'method'.
I think this idea is a very important one; paradoxically it may be far more important in the achievement of profits than trying to get them directly. Perhaps this is also the true meaning of this unique site we are contributors to. Via training we cultivate our spirits and that this in turn can lead to greater proficiency in the battlefield of financial markets.
GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005
Our computers were stricken by one of the most vicious and ingenious strain of virus/malware/Trojan system I have ever seen. It was a multi stage and multi component system composed of a timer based installer, a downloader that contains another downloader that in turn installs viruses that install other viruses. In addition this system operates in worm mode and installs itself on any other computer in the network exploiting the latest zero day security holes. In addition it uninstalls the antivirus on the computer and disables the firewall and the automatic updates, and preventing the installation of antiviruses. Because of the way it works the antivirus software took close to four days to discovers all the hidden features, slipping back between safe mode, offline updates and other methods of removing the virus. I am still unsure that it is behind me.
One of the most logical question would be: What do these operators and programmers stand to gain from designing a system on such a huge scale? The surprising answer is hundreds of millions of dollars, perhaps even billions! Over the last few years I have been working alongside with some of the major Internet marketing experts, which gave me insight to the problem. One of the key components in any successful internet marketing strategy is affiliate programs. These programs allow the vendor to expand the services to customers and add value to the site.
As an example, suppose we have a website that helps people find movers in their area. suppose you visit the above site and click on boxes. The boxes are supplied by a third party. Most affiliate programs have a vendor ID that is assigned to the link and a cookie to help track that the user indeed was referred by the vendor. This allows the user to leave the site. If on a subsequent visit the user decides to buy a product or service, the vendor would be granted a percentage of the sale. It use to be common practice to install a frame called a "invisible popup" in the page to mark the client and pay money to perpetrators, but newer browsers block these attempts.
I think you now all understand why these malware/viruses are such a lucrative business. By opening up as many sites as possible before being removed you are actually tagging these sites so if you purchase from any of these sites within three months you are paying the pirates a large percentage of the sale. For example if a Trojan popped up Amazon, then every purchase will pocket at least 4% of the profits (see this for example)
A couple of years ago I turned down a very high paying job offer to develop such malware for a company that makes well over 100M in profits every year from this scam. This is only one in a list of hundreds of companies worldwide that exist to exploit these security problems.
Unlike battling pirates in a million square mile area, government can battle the virus operators by the racketeering laws to follow the money trail and shut these operations down. They can investigate and expose the operators by infecting computers with the viruses and see what affiliate programs are tagged. Then they can hold payments by the affiliate programs. I think that these measures would be far more effective that trying to nail a specific individual. By drying up the pond, you get rid of the mosquitoes.
It would appear that I am in the business of making viruses - that is not the case - I went to a job interview and when I did a background check of what the company does that is what I discovered. I decided that morally I cant be associated with such a company.
That there are almost uncountable thieves and charlatans out there at any given moment is very old news.
What always amazed me is the societies unwillingness to catch, convict, and force restitution from same.
The system itself seems to thrive, except for very short bouts (such as now) on this behavior, thus it is loath to end it or punish it too harshly.
So many are running their own scam or two, that they rejoice in the cover of others doing the same.
This story [Los Angeles restaurant owner Nancy Silverton of La Brea Bakery fame put her savings in a fund entrusted to Bernard Madoff, LA TIMES ] offers the best explanation for why some of us out here on the Left Coast find the whole business is terribly sad and yet very much like a car crash on the 405 — horrible but part of the unluck of a bad draw.
What neither affects nor surprises this former busboy is knowing of people in show business who are paying upwards of $1 million for tickets to have special seats at the Inauguration while others are losing their houses. The dance goes on.
I'll suggest that empathy does exist, but that sympathy does not. I'll concede that $50 billion is a substantial sum and that Madoff is a bad, bad man. However, I am personally aware of individuals who will argue that they collectively lost substantially more with the dot.com bust up; and, further, that some of the sleazes involved in the never-ending promotion of those equities were as culpable as BM yet suffered either no or minor consequences.
Those burned earlier certainly can empathize with the more recent victims, but find sympathy difficult to muster when the common reply to their plight was "We're sorry, but it should have been obvious that the market was in a bubble."
Additionally, Ponzi schemes and other swindles far more frequently target the farmers, pharmacists, and farriers of my region than the doctors, lawyers, and Indian chiefs of New England. When it occurs here, it's generally revealed on the 10 o'clock news with some thirty-something Yankee-import filing a 3-minute report concluding with the inevitable finger-wagging "if it sounds too good to be true, it probably is." While never stated, the implication is clear: "these rednecks will never learn."
However, when we have a Madoff event, we no longer have a "Ponzi scheme." We have a "Very Sophisticated Ponzi Scheme." Again, it is never stated, but the clear implication is "no one but the very, very clever and very, very bad can gull the Masters of the Universe." And news coverage goes well beyond 3 minutes with "specials" running 30-60 minutes; calls for congressional hearings are de rigueur; and presidents (past, present, and future) chime in with words of concern and promises of action. You will not hear a single "if it sounds too good…etc."
Apparently it is bad form to give the finger-wagging lecture to the victims of a "very sophisticated" Ponzi scheme. Likewise, it must be bad form to voice general sympathy or call for congressional hearings when the great unwashed take their first financial bath at the "stay-the-course" urgings of those always optimistic brokerage houses (RIP).
In general, then, it seems to me that the apparent lack of sympathy stems from an unavoidable perception that there is greater concern being shown the wealthy in this, their most perilous moment. And while suicide is a most terrible thing, I would wager there are millions of poor schlepps who were similarly wiped out, yet still go to work every day facing the new reality that they'll never retire…and, indeed, might live the rest of their lives in poverty.
Millions of others, myself included, wonder if the whole story has been told. We don't worry that $50 billion sounds too high. We're concerned it may be too low, that there are other Madoffs out there - that our pension funds may be the next to be listed as insolvent. If we have learned anything in the last decade it is that there are a substantial number of dishonest, unsavory characters populating the financial industry. Worse, rather than being the brightest, some of these individuals are almost criminally stupid - however, many are aware of this short-coming and to cover for it, invest our funds with someone really smart - like Bernie Madoff.
Very sophisticated, indeed.
One of the most valuable lessons a parent can teach a child is to be financially competent. A child that knows how to use money intelligently and responsibly will excel well beyond his peers. A young adult that naturally values the autonomy of self-sufficiency, the powerful exponential growth of delayed gratification, and the potent influence of incentives will be capable of success.
The signs of rampant monetary illiteracy in young adults are all around us. It is often found even amongst the intelligent and the affluent. Over half of college graduates will move back in with their parents. It is common for college age adult to have destroyed their credit rating with unbridled credit card spending. Marriage is often postponed, or even not feasible due to high debt. Many marriages are severely strained and end due to monetary issues. Possibly the most tragic, most of us personally know a well meaning parent whose unfettered generosity has enabled their child to fall into a costly nightmarish life of substance abuse. In contrast, monetarily literate young adults will increase their potential success in career, marriage, influence and ambitions.
Toddlers through teens can be taught how to respond to money. Much of the fundamental lessons can be grasped in toddler years. Money can be earned, spent, saved or shared. By their late teens these ideas can be mastered as a way of life.
Earning Money: Instilling in children the lesson that work has its rewards is important. A child should expect some chores to be done out of respect for others. But incentives can motivate and encourage areas needing attention. An immediate gold star might help the youngest learn to consistently make their bed. Giving them money and a reward after reaching a goal will have many lessons. Encouraging them with money can help them work on everything from earning good grades to staying fit. Kids are happiest if they are contributing and progressing. When a child earns money, it helps them realize a parent values their contribution, and gives them an immediate measurable mark of their progress.
Don't forget to teach the ability to bargain. Help them sell unwanted items on eBay or online. With some jobs a parent may want to negotiate the price. Mowing the lawn, for example, may depend on how hot it is or who is available. Teaching a child to take advantage of supply and demand may cost the parent more, but learning the lesson to value their effort is priceless.
Spending Money: There are many ways to teach how to spend money wisely. To eliminate the give-me's on entering a grocery store, give them a dollar or two. A kid will learn with practice, that once its spent it's gone, and weigh their choices. Allow them to make mistakes. It will not take too many times before they learn the frivolity in advertising. Perhaps the most important lesson is that money has limits and parents are not a magical ATM. Rather than simply splurging on kids, let them be involved, even if its a trivial amount. A souvenir bought on vacation will have added significance if they chose it. Buying the collar for the puppy will increase their appreciation and responsibility towards the dog. Contributing to a family adventure lets them feel more valued.
As they get older, they can get more involved with fiscal planning. Have them research their spending. Take advantage of their tech savvy. Have them present which cell phone plan is best. Let them research internet plans. Get involved with vacation planning on the internet. If they have been involved researching such things as auto insurance, health clubs versus YMCA memberships; they are much better prepared to research college choices, cost and financing. Having the kids involved in planning a budget for events that a parent is paying for will help them understand a budgets importance. Learning to make a simple listing of major cost will give a young adult a huge advantage over most of his peers.
Young adults often are unconscious of the budget planning of Moms and Dads. They assume they can maintain their parents lifestyle. They often are oblivious that their fixed spending has them headed over a cliff. The reality check of budget skills can help them make informed choices. Finally, a few years before they leave home, get them a credit card with a limit. They soon will get one anyways. Credit card companies have made it very easy and tempting for college age adult to be enslaved to credit card debt. A supervised introduction to responsible credit use may prevent a lifetime of high interest and poor credit.
Saving Money: For the young, a simple and fun piggy bank can teach the important habit of savings. When they are about seven and can do simple math help them open a bank account. Going over the statements will teach about interest and simple accounting besides the practical lessons in math. When they are young setting shorter achievable goals can help encourage saving. As they get older longer goals are more appropriate. Matching parental contributions can help encourage saving, and show the value of an employer sponsored 401k account. As they get older the investment lessons should progress. Teaching them about investing mutual funds and stocks can prevent paralysis due to fear. The young should take more short term investment risk to maximize their long term gains. But many do not, because they fear the unknown. They have never been taught. Designating a part of their personal saving fund as an emergency fund has several invaluable lessons for children. The most important may be that Mom and Dad cannot always bail them out.
Yet equally important is planning for rough times. It should be decided well before the ticket or car accident, how much they will have to pay and what restrictions will be attached. These talks should be held for any new responsibility prior to losing or breaking a costly item such as glasses, retainer, or the band instrument. These times will be emotional enough without the added fear of testing the limits or feeling abandoned. Having a plan and having an emergency fund available for these times are emotionally freeing, but still teaches responsibility. Likewise openly discussing the planning and savings for other major life events can teach as well as eliminate resentment. It should be clear how much a parent will contribute to college, a wedding, or even under what conditions they can move back home. Gifts and contributions to college saving, and IRA plans should often be discussed with the child. Again lessons can be learned with discussing the statements when they are young. It is assuring to know what a parent expects especially on long term goals that involve more independence.
Sharing: Giving can be a valuable lesson to anyone, but especially to children that have so much given to them. A few big lessons are that nothing is free, that confidence and independence, comes through nurturing others and the joy of being part of something bigger than themselves. Encourage kids to be involved emotionally to their chosen charity. Helping them see the benefits of their gift. Show a child how they meet a need after a gift. Tracing the money to meeting the objective and then show how the blessing can multiply. Teach them to look for ways to expand this growth effect. Among the many great charities are some frauds. Help them research how responsible a charity is with its money. Help them to consider if a charity is nurturing others to behave responsibly towards money, hence reproducing its effectiveness. A good charity will mirror a good parent/child relationship with money. Both will use it to foster independence rather than a dependency to inflate its own worth. Teaching a child to give generously and responsibly will bring the lesson full circle, enabling him as an adult, to effectively teach money intelligence to children. Finally, a good example may be the best teacher of monetary intelligence. A parent should be a good example of monetary responsibility.
1. What is the exact physical principle that makes triangles laid on their sides so strong relative to other shapes and how does this relate to market movements?
2. What is the correlation between the two year change in the S&P and the subsequent one year move, and how has this changed since the 1970s?
3. How can the sharp upward continuous move in the 1950s and 1990s in S&P be reconciled with the well known two year reversal tendency?
4. Is there any support for the idea that the best strategy in one year is exactly the opposite of what worked in the last year?
5. When will the asset allocator boys change their mix of stocks / bonds back to its "permanent level" now that stocks are down 30% and bonds up 30% from the previous year? Of what relevance are the moves in the market in 1908 and 1909 vis a vis the 40% decline in DJI in 1907 as a comparable to present? Will the reaction to the employment numbers month by month this coming year be opposite to the movements last year, starting with the January 2007 number which was the beginning of the end? How will all the liquidations related to the purported 50 billion fraud work themselves out in the market and have they all been discounted? When will the Nebraska conglomerate sink to a price to book value ratio that befits its status as a firm or man whose mission is not in accord with the future?
Anatoly Veltman responds:
The biggest problem I see for 09 Bull is reconciling investing into paper assets with fear of:
2. …government itself
I was previously looking for correction to previous trough as thoroughly sufficient — for Vic and Laurel's bullish quantitative (historical) considerations to kick in. But given both the government and human heart-breaking experiences of 2008 — I tend to think 2009 will not be the easy "intermittent" rebound.
Perry Metzger answers Question 1:
Triangles don’t deform easily because all triangles with a given side length are congruent — there is no way to deform the angles without deforming the length of the sides. This is not true of, for example, quadrilaterals, where you can deform the angles without deforming the length of the sides. I have no idea why any of this would be at all relevant to market movements.
December 27, 2008 | 4 Comments
As a psychiatrist and medical doctor it would be improper to diagnose Bernard Madoff without interviewing him directly and having him take various psychological tests.
However what is not off limits and just as relevant is not what his behavior says about him, but what it says about us. What is there about human nature that makes some of the smartest and supposedly shrewdest financial minds ignore red flags and abandon judgment?
"How" Madoff was able to do it is can be explained by social psychology and "why" he was able to do it can be explained by neuropsychology.
Social psychology is the study of how people and groups interact. Robert B. Cialdini is a social psychologist, Professor of Psychology at Arizona State University and author of Influence: Science and Practice. He is one of the leading researchers in the field of influence and persuasion. His work is compelling, convincing and so powerful that he vigorously decries its use in any exchange that lacks integrity and ethics. Unfortunately too often, people with impure motives have learned to apply this effective approach to their impure ends. I don't know if Madoff was a student of this approach, but his behavior indicates that he followed all of Cialdini's principles.
Cialdini's six "weapons of influence":
Reciprocation - People tend to return a favor. Thus, Madoff's offer to clients to be part of an exclusive list of wealthy clients and institutions, caused clients to be grateful for this special invitation and return the favor by investing more money than common sense would dictate.
Commitment and Consistency– Also referred to as "confirmation bias," if people commit, orally or in writing, to an idea or goal, they are more likely to honor that commitment and be inclined to keep saying, "Yes" to reinforce their believing they have made the best judgment call to begin. With Madoff, the more that people originally invested, the more they continued to invest and the more they invited their friend to invest. This all served to reinforce their believing they had made the best decision to begin with. Finally, this also caused people to overlook or negate any facts to the contrary and made them all too willing to take a "don't ask (Madoff), (Madoff) don't tell" position.
Social Proof- People will do things that they see other people are doing. So when people discovered that others who they thought were smart and wise were investing, that increased their confidence that it was safe for them to do so.
Authority- People will tend to obey authority figures, even if they are asked to perform suspicions or even objectionable acts. Madoff was a former Chairman of the NASDAQ and philanthropist. So it was assumed that if anyone could understand the potential opportunities and risks of younger growth companies, it would be he.
Liking -People are easily persuaded by and buy from other people that they like. It was easy to confuse Madoff's sly smile as a shrewd one. Also we tend to like people who demonstrate swagger and exude confidence. They trigger swagger and confidence envy in others who would also like to possess those qualities.
Scarcity- Perceived scarcity will generate demand. Madoff's reserving his offering for elite investors and by invitation only, made more people want to be part of his exclusive club.
Neuropsychology is the applied scientific discipline that studies the structure and function of the brain related to specific psychological processes and overt behaviors and may explain why Madoff was able to trick us. One area of neuroscience that has generated a great deal of interest and study in the past two decades is the discovery of an area in the premotor and parietal cortices referred to as the mirror neuron system.
In the late 1980s this region of neurons was discovered in Macaque monkeys. These neurons which were first referred to as "monkey see, monkey do" neurons were activated when a monkey watched another monkey perform a behavior and when the first monkey performed the behavior that it saw. When the discovery was also applied to humans, the region also fired when a person imagined doing that activity in his mind's eye. So when a golfer imagines the flight of a ball before he hits it, this part of the brain actually thinks it's hitting the ball.
Further research including fMRI scans (which show what is happening to the brain as it is thinking or doing an activity) have indicated this site might be the prime location for where imitation, learning and empathy develop and when dysfunctional, a possible site that might lead to autism.
The significance of this discovery is that people not only have a reaction when they respond/react to the people around them; they also have a very positive and satisfying reaction when people are mirroring them or "getting where they're coming from." That is why many people cry and feel disarmed when someone is kind to and understands them without it being solicited.
This neurological region may be the underpinning for why Cialdini's "weapons of influence" are so powerful, i.e. applying them causes the other person to feel empathized with and understood. When people feel that way, they lower their guard and lean into the relationship and trust it more. In essence when people really feel that you get where they're coming from, they're much more likely to trust you to take them where you'd like them to go.
Just as guns do not kill people, people kill people empathically mediated persuasion techniques do not manipulate people for evil, people do that. Hitler and Osama bin Laden were both extremely empathic in that they both knew all too well how terrorizing people can almost paralyze them with fear or at least completely disrupt their ability to function.
What it comes down to is a person's values. It's their values that determine whether they will use persuasion and empathy in the best interest of their clients (as medical doctors who are sworn to "first do no harm" do with their patients) to do good or to greedily exploit their fears, insecurities and yes, their clients' own greed to violate ethics and morality.
How can all of us use these findings from social psychology and neuropsychology to be more fortified against the charming manipulators and psychopaths in life? First, go into any meeting with any person who is pitching you, knowing explicitly what you want and need from them. When you don't know these, the charm of these people can cause you to be vulnerable to their persuading you to need and want what they are offering. Second, make certain that whatever they are offering makes sense, feels right and seems actually doable. Third, realize that whatever they're offering is a good deal for them, so push them to tell you why it's a good deal for them.
Finally, be prepared to walk away, no matter what they say. If they say, "Take it or leave it," leave it. If it feels too good to be true, it is.
Bernie Madoff is all over the news and other than the recent suicide of an investor who lost it all for himself and family and a few named high profile celebrities most of us don't have a face or name of the many victims as yet. As a Christian, I have been praying for Madoff and for all those he swindled. Last week my Sunday school teacher of several years left our church. The class voted to have me take over for her. Tomorrow as part of our class discussion I am going to poise the question of how the class as Christians feels towards Mr. Madoff and how they feel towards his victims? Mr. Madoff will have to live with what he has done. I fail every day, and not really my place to judge him. My heart goes out to all those who invested with him out of total trust and that he was getting them fantastic returns. Perhaps in that situation one turns a blind eye towards asking too many questions that perhaps the SEC should have been asking long ago about his firm?
James Lackey writes:
Probably because very few know the very rich or the closed society that lost all. I am ignorant of that clique but inquired around its six degrees of separation.
Its not schadenfreude, but relief to traders. Men that risk for a living know it's impossible to profit without risk and max drawdowns some 100% above advertised, which is the get the joke of the year as the entire Sharpe ratio risk management diversification was a scam and we all knew it. There was never any oh how can they do it, they must be so smart. Why can't we figure out how to profit on 90% of days, never lose much and have stable returns?
That is the silence of the lambs. Most are guilty, except the Specs, who talk only about losses and are always very upfront. We take very high risk, and that was a bad word for years. We were made fun of… "you're going to blow up"…
Well, you'll never profit without taking risk. You'll never know its a panic until you're in it, and if you stop yourself out at every whiff of a panic you're guaranteed to never make a dime over a decade. Now they know all the low risk returns were a scam.
Now back to speculating for a living.
So many possibilities. Maybe the $50B is itself a lie, a scam. To maintain the focus of attention.
How much truth-bending will there be in order to maximize reported losses for tax purposes?
How many will get on camera to say they "knew something was wrong all along" and so didn't invest?
How many bad positions or failed ventures will be rationalized by the "Madoff excuse"? "Our main backer had his money with Madoff."
December 26, 2008 | 1 Comment
Reviving an ancient DailySpec discussion, I believe I can now answer the question of why someone would use a more vivid type of data presentation. Bar charts and especially candlesticks provide a more vivid experience; bars have the advantage that more data can be represented, candlesticks very clearly show the open, close, high and low. For a counter there are other options, like counting by hand or writing prices down. I'm sure this approach will reach parts of the brain left cold by more 'modern' methods, and I suspect that looking alternating visual and numerical data is better than favoring just one kind.
The candlestick experience is like using a nice wooden chess set as opposed to a computer screen for chess analysis. You can't turn Fritz on but the experience is much richer in sensory input. When computers first started to be used for playing through chess games and online competition, the board and pieces were thought to be redundant. But a number of players have been drifting back, and many at least using 3D representations of the board rather than the flat 2D.
GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005
Many of the things here give insights into stock market research. In particular, I am led to consider the importance of studying actual definable phonemes and numbers for predictions and insights rather than general statements and news announcements about the past, present, and future economy.
After wading through 372 pages of Marcel Link's High Probability Trading, I found the following nugget: "A trader needs to learn when to let go of a position. He is not marrying a trade; it's more like a typical date. Find the trade, get in, get what you can out of it and then get out without looking back. Sure, you'll promise to call the next day, but by then a different stock has caught your fancy." Many different questions come to mind. For example is instrument monogamy reflected in a trader/investor's personal life? Does getting used to trading multiple instruments mean that one never finds true happiness in the markets? Can one hope to apply the same pick-up method on different instruments, or is this just left to luck? Presumably a large number of stocks correlate closely to the averages, but many will not.
GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005
Scott Brooks writes:
I'm not sure if this author beat me to the punch on that saying, but I've been saying it for years. You marry your wife, but you only date stocks. You date them until you are no longer getting what you want from them, then you dump them. And unlike a women, if you ever choose to go out on a date with them again, they'll take you back in a heartbeat.
December 25, 2008 | 1 Comment
Worried about your job being sent to China? If so, then you'll never see the bigger threats lurking on the other side of the cubicle wall. Advances in technology and budget cuts by management are much more of a menace to your future employment than some two-bucks-an-hour worker in a southern China boomtown. At least that's the message of Columbia Business School professor Bruce Greenwald and historian Judd Kahn in "Globalization," their bracing response to the "irrational fear" of outsourcing and other bogeymen of the antiglobalization brigades.
Messrs. Greenwald and Kahn argue that the key forces shaping our lives are local; it's not that international trade is unimportant, it's just that other factors are more important. Consider the significance of technology in the workplace, something often overlooked by globalization worrywarts. Examining data on changes in the U.S. work force, the authors show that job losses due to higher productivity — often the result of improving technology — greatly outnumber those lost to globalization. The authors cite Commerce Department figures estimating that 65% of job losses in manufacturing between 2000 and 2006 were due to productivity increases; just 35% of job losses owed to overseas outsourcing. "The data actually reveal that fears about the havoc from globalization on workers in high-wage economies have been wildly overblown," Messrs. Greenwald and Kahn report. Think of the legions of secretaries and office workers eliminated by the desktop computer or the increasing use of technology in the auto industry.
So if globalization hasn't sent your job to another country, it must at least be the reason for the economic rise of China and India, right? Wrong. If globalization were the cause rather than a condition, Latin America and Africa would have arrived at the party a long time ago. Instead, globalization and trade help countries that have made the tough local decisions to liberalize markets, tamp down corruption and unleash the powerful incentives of capitalism. Hence the influential role of local decision-making in everyone's future.
If this sounds counterintuitive, given the conventional wisdom about world economics, it helps to remember that "globalization" is just another word for a phenomenon that we've seen before. Messrs. Greenwald and Kahn find similarities between our era of expanding global trade and international markets a century ago. Trade as a share of global output rose until 1920, thanks to improvements in shipping, which helped build foreign markets for commodities such as grain and coal. But this trade expansion proved limited and cyclical. Commodities became cheaper and thus commanded a smaller share of household budgets. Consumers were able to spend more money on manufactured goods, such as washing machines and automobiles, that were harder to globalize because they depended on local sales networks and consumer preferences. That caused global trade's importance to shrink — until midcentury, when overseas markets heated up again.
Globalization: The Irrational Fear That Someone in China Will Take Your Job By Bruce C. Greenwald and Judd Kahn (Wiley, 186 pages, $29.95) Fast-forward to today. Will trade continue its post-World War II boom? The authors argue that global trade has peaked again — independent of the world-wide recession that has so constricted consumption. The demand for computers, cars and appliances fueled the increase in global trade because companies learned how to produce cheaply manufactured products that could be tailored to meet local market demands. In other words, manufacturers finally figured out how to commoditize the modern equivalents of yesterday's washing machines. Computers, iPhones and automobiles are now all global goods, easily tailored and distributed to meet local market needs.
But Messrs. Greenwald and Kahn believe that we will again shift more of our spending to things that are hard to globalize. "Services are likely to be the greatest area of growth, and the majority of these items will be locally produced and locally consumed: housing, medical care, education, legal and social services, recreation, utilities, telecommunications, and others."
The authors' contrarian view of globalization leads to several provocative arguments. Among the more startling is the contention that liberalizing global financial markets isn't necessarily a positive development. Local investors will always have better information than investors who are widely dispersed geographically, Messrs. Greenwald and Kahn argue. The authors offer a vivid example of how information gets lost as the distance grows between investors and the assets they're buying: the repackaging and sale of toxic subprime mortgages across the world.
While local knowledge is certainly important, Messrs. Greenwald and Kahn might have at least spared a word of praise for the way that deploying capital globally can produce worthwhile investments. Disciplined foreign investors made out very well in the aftermath of the Asian financial meltdown of 1997 and in crises where fund managers were able to move money quickly from capital-rich investors in one part of the world to capital-starved countries elsewhere.
Messrs. Greenwald and Kahn also might have spent a little more time on the subject of wages around the world. They dismiss concerns about the income stagnation caused by global trade, noting that wages have done slightly better as global trade has expanded. But a more rigorous analysis of the forces influencing anemic income growth in the U.S. would have been welcome; they may well include migration, the quality of new service jobs or other matters related to globalization. Still, in its crisp, stimulating way, "Globalization" presents a rational element in a debate too often characterized by hysteria.
Mr. Carew covers Asian mergers and acquisitions for The Wall Street Journal in Hong Kong.
Start with 10 companies, each with 100 shares worth $1 each. Each player starts with $100. Player 1 rolls dice, and can choose to buy as many shares as they can afford of company # (# = numerical roll of dice) from the IB.
The price of shares in each company starts at $1, but once a player owns some of it, the price to new players increases: to $2 once 20% of shares owned by players, to $3 once 30% of shares owned by players, to $4 once 40% of shares owned by players… to $10 once 100% of shares owned by players.
If player X wants to buy shares of company Y, and some or all of Y shares are owned by other players, the owning players can choose to sell their shares.
After a few rounds, shares in the different companies are worth different amounts depending on buying by players. A player's "Net worth" is sum of a current share values + cash. Rolling "mammaries" (double 1's) is a divorce: give half your net to the nearest female player, and pay her 50% of your cash after each time you roll. The winner is the player with the highest net worth on "retirement". Retirement occurs 2 hours after the game started, or when all the Wassail is gone –which ever comes first.
December 24, 2008 | 3 Comments
Every year at this time we like to repost Jack Schaefer's short story about a young cowboy's adventures on Christmas, and send our best wishes for the holidays to all our readers.
Of late I notice a lot more people walking carrying bags or wearing some sort of backpack. These are not joggers or people simply out walking. These are displaced/distressed individuals. What I noticed is that all have no coverings for their hands. I approached my local lumber yard who sells lined jersey work gloves for $1.59 a pair. After some discussion and telling of my intent I purchased 50 pairs at $1.00 a pair. I keep some in my truck and some in my car and when I see a barehanded traveler I give him a pair. All are appreciative and give me a smile — which makes it all worthwhile.
1. Interest rates. Just as oil eventually went down, after breaking the back of the shorts, because the incentive to explore and produce went up, and people substituted other sources for oil, and reduced demand at the price, interest rates will eventually move back to 4%. It's been 6% in 1999 and averaged that throughout the last century. Why should not things in 10 years look like the average of the past 30 years? We couldn't have eliminated inflation. Certainly after raising this money from borrowings or service contributions, there will be revulsion, and people will be given the incentives to be expansive again with the money that exists. As production goes down, the inflation will go up even more than money with velocity constant, and velocity will increase eventually the same way it always has, as the incentive to spend money increases. Thus the 30 year bonds at 142 will in 10 years be where it was on average in the last 10 years.
2. Holidays. There is a curious tendency for stocks to show inertia in the days surrounding holidays.
3. Runs. On the six days in the last 10 years, that are closest to the long run of declines we just witnessed, a negative run of five, the standard deviation the next two days was a mere 7%.
4. Romance. When I go to shows, I like to think about what they teach about markets. From diamonds are a girl's best friend: "He's your guy when stocks are high but beware when they start to descend. It's then that those louses go back to their spouses. Diamonds are a girl's best friend." So many shows prove that romance based on business is better than business based on romance. Pal Joey and Guys and Dolls and Sweeney Todd (Mrs. Lovett) come to mind as prime examples. Rogers and Hammerstein seem to have been great businessmen, with Hammerstein and Ira Gershwin never writing a word that wasn't on tune, and seemingly Hammerstein a magnificent business person, who knew how to spend to get movie revenues, especially if he owned the movie company. I've always said that equal to those two in lyrics are Laurel and my brother Roy. I'd like some other great examples of very prescient lyrics.
5. Cambridge. Three months ago, I received a great fund raiser from the college I went to, suggesting I donate to get the great returns that their great managers can get in an annuity. You see they were making 15% easy and I could give to them, and I'd end up better financially than I was before. I queried as to whether there was a regulatory agency for such academic fund raisers, as I used the last straw when they wouldn't hold a memorial for the greatest squash coach in history for 3 years, until they could make it a fund raiser. Now they're reporting a 25% decline in the endowment in the last several months, but DailySpec has at its middle name "deflate ballyhoo," and one wonders if they have marked down their illiquid investments in such great real assets as oil and venture capitals. I hope their fund raising was not sparked by the same motivations as the last minute whirlwinds that apparently the market maker 50 billion fraud made. And I hope there was no attempt to justify bonuses with this mere 25% decline, and the reports that their managers received increased bonuses this year, will not come from the same pages as the reports of their previous eight-figure bonuses that appeared in EdSpec.
December 24, 2008 | 2 Comments
Florida has had several real estate busts over the past 100 years. My friends in the business are really feeling the pain. In fact, one of my good friends successfully speculated by flipping houses for several years. When the market was good, he was laughing at me for not taking advantage of the easy money. He got caught at the top, long 30+ houses and is now paying a lot of mortgages and isn't laughing very much. However, hope seems to be his best friend these days. Other, more pragmatic, real estate owners are talking the bull by the horns… literally. The most desirable land for development, east of I-75 and closer to the beach, was commonly used by people who would run few head of cattle on the scrub acreage. In my area, it was not unusual to see 20 acres in the middle of suburbia surrounded by barbed wire, and carrying a small herd of cattle. When the real estate boom started, the "For Sale" signs went up, and the cattle were gone overnight. The real estate crash changed all of that in short time. As of late, some of the land has the cattle back, grazing next to the decaying signs of new developments that will never happen. I noticed this a few weeks ago, and realized that ultimately, things will seek their maximum value, whatever that value is.
Along with the resurgence of the cattle, I've also noticed that three small orange groves in the area, allowed to fall into disrepair, have recently been spiffed up. The trees have been trimmed, sprayed, and the underbrush cleared and the groves are back in business. Obviously, the owners feel that they won't get value out of their land by selling to developers in the present business climate, and are putting the land back to work. I wonder what similar corollaries can be made regarding the markets.
When you are in love with someone, you refuse to see certain aspects of his/her personality and behavior. You find always a way and a reason to justify them. Although you are humiliated and hurt, you do not manage to free yourself from the situation. You are willing to accept any condition provided that the link with the loved one remains established. At any price and any cost. It is impossible to think of a different relationship or even life without that person. When you finally manage to leave this blurred perception of the reality, you may have damaged yourself seriously. Similarly, there are investors who are in love with a specific stock they have been following for years. They look at the ups and downs of prices with the idea that eventually their loved one will reward their patience and trust. When prices go down, they continue to find justifications about the good fundamentals, the strong cash flow, the new products the company is about to launch, the improved market share and so forth. Or even the charisma of the leadership. They average down their positions as prices plunge, but they do not even think of buying something else which could perform better.
Falling in love implies a "fall" into a new state of mind, a dramatic, uncontrollable and sudden emotional change. A state of vulnerability for the investor, but also of irrational excitement to start a new life. During the dotcom bubble these situations were quite common. This is typical of some companies such as Google or Apple. For their fans, it is difficult today to justify why the stocks have lost more than 50% in one year. Actually, I would refer to infatuation more than love at this point. Love is a mutual condition and in this case there is no reciprocity. But we'll see what happens to these emotional relationships and their investors' portfolios in the next months.
Nigel Davies adds:
This is one of the great truths of very many activities. I sometimes think that it's especially dangerous for counters because we can find new numbers on the fly and convince ourselves we're being scientific. I've become convinced that the proper approach is to adopt the same rigor as some of our TA cousins and have trades worked out beforehand and have them written down trading plan. This should of course include escape routes.
By the way, I understand that some hard-nosed American women conduct early dates like a kind of interview, which would be the, er, 'romantic' equivalent. Once their potential beau meets the appropriate criteria (shoes, manners, absence of hair in ears etc) they allow themselves to 'fall in love.' In many respects this actually seems very sensible though I wonder how well it has been tested. If any successful trades had actually been made, presumably they wouldn't still be looking. So the criteria must therefore be arbitrary.
Listening to Dan Ariely's podcast, "Arming the Donkeys", pointed me to this paper, Fear and Loathing in Las Vegas: Evidence from Blackjack Tables Bruce I. Carlin, UCLA David Robinson, Duke, in which Robinson and Carlin study data on blackjack players and find that mistakes of a conservative, risk-averse nature are four times more likely than overly-aggressive mistakes, even among people who have specifically chosen to risk money at the gaming tables.
Psychologists study regret primarily by measuring subjects' attitudes in laboratory experiments. This does not shed light on how expected regret affects economic actions in market settings. To address this, we use proprietary data from a blackjack table in Las Vegas to analyze how expected regret affects peoples' decisions during gambles. Even among a group of people who choose to participate in a risk-taking activity, we find strong evidence of an economically significant omission bias: players incur substantial losses by playing too conservatively. This behavior is prevalent even among large stakes gamblers, and becomes more severe following previous aggressive play, suggesting a rebound effect after aggressive play.
Dan Ariely's podcast: (The link at Dan Ariely's site will open up iTunes for the podcast. This specific interview is the 11/10/2008 podcast.)
Not all bailouts are the same; the government's efficiency in bailing out the fatcats at A!G is in sharp contrast to its lackadaisical approach to the Katrina victims. A reader.
As a Katrina victim, the FEMA-backed Red Cross paid my family's hotel bill in toto for the first couple of weeks of our evacuation. We registered with FEMA online and within three weeks of the storm received an initial check for two grand, then a couple of weeks later a second check for two grand, and then a couple of weeks after than a third check for 10.5 grand. That combined with the couple of grand fronted to me by my insurance company (State Farm was awesome) meant we were pretty flush.
We never got one of the Red Cross debit cards, which folks were seen using buying flat screen TVs and such. Nor did we take advantage of the food stamp program as so many of my friends and neighbors did even though they didn't need to.
When they came and finally inspected our house, and determined that our damage was minimal, and they knew what we'd gotten from our insurance, they, much later asked for the 10.5 grand back! We took our time paying them back, enjoying the carry trade - they were charging 1% and I was earning much more than that on it with Madoff. (just kidding). Finally paid them all back, and I'd say that the gummint probably did a good job stewarding the money they paid out because it pretty well covered our disaster related expenses and that's it.
Don't believe the mainstream media spin. The Federal Government did a great job. The reaction was delayed when they heard they had to deal with a population of storm victims who were shooting back at rescuers and looting the federal armory at Jackson Barracks, etc. The full story hasn't been told.
December 20, 2008 | 12 Comments
The original idea, based on John Dollard's 1939 behaviorist reformulation of psychoanalytic theory was that when you're striving for a goal, and you don't achieve it, you're frustrated, and aggressive behavior is likely. It seems to fit with many real life situations, the anthropological literature, and case studies of the aggressive persona. Where there is aggression, you should look for frustration, and where there is frustration you should look for aggression. The theory was modified to point out that some frustrations don't lead to aggressions. Cues like guns and knives of an aggressive nature seem to stimulate aggression more than non-aggressive ones. And aggression seems to occur when it is justified more than when it isn't regardless of the degree of frustration. The experiments that support the theory are of the usual variety. College students given money when they shock fellow students. Kids told stories about hateful things by adults, and psychologists cutting into lines. The most interesting finding of a refutable nature seems to be that the closer you are to the goal, the more likely you are to be aggressive. For example, when you cut into a line in front of the second person, she gets much angrier than if you cut into it near the end. The whole subject calls for testing in the real world.
I have already reported studies of what happens when a goal is reached in the S&P. One needs to immediately study what happens when the goal is not reached, i.e. when the DJI stops right before the round number. The break of the Dow from 10325 to 9955 on 10/06, an unrequited 4 year failure from September 2004, when the DJI quickly rose from 10000 to 14000 in the next two years is relevant. It seems relevant that after achieving this goal of 10000 on the down side, the DJI slid 1500 points in the next 2 weeks, and 2500 in the next month, goals which on the upside had taken 10 years or more to achieve when traveling up the hill. As Lobagola said, you never know when they're going to migrate back, but they always take the same path. One must study this on a more microscopic basis to give some hard evidence to the reformulated Dollard theories so that it will not rely only on kids and students.
Just watching the nightly news and one area near Boston has one town 30% without electric power and those with power are stuck at home. One lady was interviewed and commented on how lucky she was to have her 13" TV and had no idea what else to do if no power for it!
People have forgotten how to read, play Chess and Checkers, Dominoes, card games, engage in conversation.
Looking back at the year, a down year, what type of strategies worked best? A different question is also, what type of strategies that worked before would have worked this year. All this should be tested of course a la Seattle Phil's methods, but generally, from a qualitative view, it seems that timing worked better than stock picking this year. Secondly, lower leverage seems to have produced better returns. This at first blush seems obvious in a downmarket, but could produce higher profits on profitable methods. A risk return matrix could quantify the sweet point, at least in retrospect, and might be used going forward when a regime is recognized by the pilot fishes' first appearance. The February 2nd outlier turned out to be that pilot fish and the introduction of the new high volatility regime. This last Friday was a low volatility day and volatility levels seem to be dropping. With 8% daily moves in equities, 2% moves in currencies and bonds, who needs leverage?
With the Madoff imbroglio in full bloom, due diligence, apparently sorely lacking, will make a big comeback. I've commented before on the beauty of the markets ability to make large deals in standardized forms without reams of paperwork and lawyers, but the wilt is on that bloom. Now you have to keep a daily eye on the values and balance sheets of the bank, broker, contractors, car repairman, so they don't go bust while holding your stuff. Witness Refco, Lehman, Madoff, Citigroup, WaMu et. al. No wonder there is no confidence. Perhaps some of these funds and banks should have had the lawyers and accountants take a look at these multi-billion dollar investments as they would will any other deal of this size. It shows that the Emperor had no clothes, and no one noticed.
Looking forward, the entire industry seems to be changing. The volumes are down leading to big fast moves. Many of the big Wall Street dinosaurs are dead, or dying. I think there will be opportunity from all this, like after the forest fires. Life leaps back. The ultimate slow mover, the government, will provide loads of opportunity. I started my career with the IRS. Fresh out of school I was handling huge deals, cutting my teeth. Typically a government worker is fresh out of school and will be assigned to run GM, or the entire banking system. The boss, the name, will be lunching on the private jet, but the person making the decisions will be a 23 year old kid, smart, no doubt, but still 23 years old. I, when 23, dealt with these old crafty 60 year old guys who made me feel just great, but no doubt made a great deal for their clients at the expense of the government interest.
Next year should be a good year. Just got to survive to see it!
Vinh Tu writes:
It has been an interesting year. That fact timing worked better than stock picking is consistent with the factor analysis that says that beta is by far the most important factor. That lower leverage was better than higher leverage is also very interesting. In part this was due to optimal bet sizes going down as volatility went up. On the other hand, it was also related to the highly-leveraged ecosystem being over-crowded, and the deleveraging becoming a stampede.
Enjoyed a couple of good Q joints in OK and TX on a recent drive through. Pix here.
Rick's in Ardmore, OK: On I-35 between OKC and Dallas, you take exit 31A and head east through town, literally crossing the railroad tracks to East Main, and Rick's will be on your left. Outstanding ribs and sauce. He has much more, which I plan to taste when next make the drive, and the ribs were so good, that's justification in itself. Besides the fact that there's lots of pretty country around there.
Dairyland in Jacksboro, TX: Heading west from Dallas, I didn't feel like taking the normal route up 287 to Wichita Falls and then Amarillo and I-40, so I just headed straight west on 114 from Denton. Which put me in Jacksboro round about lunchtime, and there was Dairyland just waiting for me. Again, I had ribs. And again, they were good. Though I would have to give the edge to Rick in the rib department. However, I plan to return to Dairyland and try the chicken, as well as the milk shakes (made with soft-serve ice cream) and other delicacies.
It was good. I wanted more. One day, I will get more.
Pitt T. Maner III observes:
Good Q is hard to beat.
I have been working in the Baton Rouge Area for the past 6 months and this one off I-10 near Gulfport, Miss. has a neat combination of good BBQ and the Blues and is a good stop on the way to/from South Florida.
Now in Baton Rouge they say that Voodoo BBQ is amongst the best and its pretty good:
But the folks at Roadside BBQ near Jackson, La. on Hwy 61 on the way from Baton Rouge to Natchez are real nice and have fine BBQ. The owner actually served BBQ in New York City after 911 to the relief workers. Have not had the chance to visit the Oakley Plantation-Audobon House but it is just up the road in St. Francisville, La.
I am reading Freedom from Fear, by David Kennedy, an excellent recount of the '29 Crash and Depression years of the 30s up to 1945. It is long, 900 plus pages, and I am only up to the year 1934. For me it was striking to compare the context of events between then and now. For example, one of the big issues of the 30s was the gold standard and strict adherence. Hoover shaped much of his policy around this. So he was restrictive on monetary policy, and fiscally wanted a balance budget. He proposed raising taxes in addition to cutting spending to add confidence to the system. FDR was different and informally went off the gold standard trying to inflate assets prices, a major policy shift. Another big issue was the roll of agriculture at that time. It made up around thirty percent of GPD, and FDR shaped many programs to support the farmers. He thought the farmers and their purchasing power were the key to getting the economy inflated again. FDR was also very concerned with over-production, so came up with a myriad of alphabet soup programs to centrally plan various industries. The world was much less open to free trade at that time. Most nations opted to go it alone. The ideas of Keynes were just being disseminated into the public forum. Labor unions were in their infancy.
My take away is that though they did have a banking crisis, and a credit crisis, and massive deflation of assets, the context was far different. Today there is no gold standard, much smaller agricultural affects, little concern with overproduction, open trade, more sophisticated economics and labor unions in decline. Regarding government and business responses, they did what they could given the tools they had, but their policies seem unrelated to today and somewhat misguided looking back in retrospect. I believe the next five year will not resemble five years during the mid 30's and see little of predictive value. I do enjoy reading about the period though. Beside an interest in history for its own sake, it makes me realize how much better off we are all today than 70 years ago. And whatever we are going through now, it is nothing compared to the hardships of those times. We have have advanced as a nation even after years like this one and that is a reason for optimism.
December 20, 2008 | Leave a Comment
Sometimes direct is best.
Today, because of the current transit strike in Ottawa, and because it was not like 40 degrees below zero outside, I walked to work, and for once remembered to bring my iPod. Trudging across the Minto bridges that span the Rideau river just above Rideau Falls, I was suddenly enveloped in soft early-morning sunlight streaming through the trees and stretching their shadows across the frozen snow-covered river. A pretty half-moon was bolted onto the clear blue sky at about 1 o’clock (degrees), and Boney M’s catchy “By the Rivers of Babylon” was boogying through my head. It looked as if everything was settling into one of those rapturous slow-motion magical moments, but then “The Tennessee Birdwalk” (a novelty song) came on. Well that’s like listening to Vivaldi followed by the chicken dance — and that was that.
But it was a nice morning, and I was making good progress. It got me thinking about my dreadful attempted commute of just the day before. The plan had been to “drop off” the boys at their schools downtown (since there were no buses because of the strike), and then drive in to work, leave early, and do the rounds in reverse. Well it had been snowing pretty heavily, and as standard operating procedure, two snow-flakes and everyone in Ottawa forgets how to drive — but with the transit strike it was much worse.
I went for my favorite short-cut, but when I got to my re-entry point, traffic was seriously backed up and going nowhere, so I went the other way and tried another short-cut, and another, and everywhere, in the direction I wanted to go, there was nothing but a sea of red tail-lights stretching out ahead. Then the kids started. “Why are we going to Toronto?” “Shut-up, Tom.” “I don’t recognize this part of the city.” “Shut-up, Nick.”
I finally gave up, worked my way into the crush of cars clogging the artery that I had ended up at, and just followed the car in front of me — for an hour. I dropped off the kids — way late, and then got to my work a full two hours after I had started out. No parking, anywhere. 3 lots later I capitulated in disgust and drove home (took 5 minutes), and just worked from there.
I can walk to work (as I did today) in 40 minutes (a guaranteed, known return). Instead, I tried to take one short-cut, then another, and another, just digging myself in deeper — getting more and more late. Had I taken the route Cindy does when she drives the kids, it would have been slow, but much more direct and I probably would have gotten to work in half the time — and found a parking spot. As I walked on this morning, I thought about how my little commuting disaster sounded a lot like some trading I’ve done in the past.
Thought I’d share.
December 19, 2008 | 6 Comments
It's important to note that deflation has happened many, many times in the history of this country. It was a regular feature of the business cycle. Demand goes down, prices go down. Simple stuff. Markets equilibrate, and things get going again. There are three examples of prolonged deflation that I will mention here.
First, the great deflation of 1875-1896. For thirty years, prices decreased an average of 1.7%. Also there was a prolonged deflation for three years, 1930-1933. Finally there was a prolonged deflation in Japan, from the 1990s until recently, although Japan may slip back into deflation.
What are the points to be learned? Those unfamiliar with the great deflation of 1875-1896 might automatically assume that those must have been tough times in the economy, as the great depression saw output plummet, and Japan has seen its economy stagnate. That could not be further from the truth. The great deflation was a time of great economic growth for the US.
What is the difference then, between the Great Deflation, and the Great Depression/Japan Slump?
The difference is that Macroeconomics had not yet been invented by 1875, and therefore the government didn't try to do anything about it. The government, and economists, never imagined that they could possibly model the endless millions of individual actors in the economy on a few simple graphs, and then conduct sweeping policy changes to "fix" the problem of falling prices.
By the 1930s all that had changed. Modern macroeconomics was forming, and in all its hubris thought it could accurately model the economy in simplistic terms. Those of a more conspiratorial bent will note that the Federal Reserve was now in existence, and controlled by those who most hated falling asset prices, the bankers.
So, the US government/Fed did everything that they could to prevent falling prices. FDR's government even allowed industries to fix prices to keep them from falling further. Hence, the economy was unable to equillibrate, and millions of people could not even afford food.
Japan also decided to try to prevent falling prices, when falling prices are exactly what an aging country needs. It is assumed that the generational problem in Japan is solely a matter of culture. Then again, who is going to have kids when one can hardly afford a one bedroom apartment? Falling prices are exactly what Japan needs, but the economists think they know better.
I thumb my nose at all the economists, politicians, and journalists who fear a "deflationary spiral." Ye of so little faith in the common man, and his ability to interact with his fellow man in mutually beneficial transactions. Get out of the way! Asset prices falling is not a bad thing. Their having gone up too far was the bad thing. Their coming down is what will fix the problem of them having gone up too far.
Assuming, however, that the politicians and bankers do not take my advice, what to do?
First, the record of the Great Depression and Japan's Slump is that the government can't in fact prevent deflation very well. Second, the UK did not do as well during the Great Deflation, owing to its heavy industrial asset base during a time of asset deflation.
The United States is a mixture of heavy and low asset base industries. My advice: buy the latter, sock 'em away for a few years.
It's quiet before the storm. Almost like the market can't do any damage either way because it is disgusted with the big rise, so it can't go up too much from that. And interest rates are also down, so it can't go down too much. It had a narrower range of 24 S&P points that doesn't give much chance for public to do much wrong. It will come up with something. The Madoff episode has to take the animal spirits out of everyone. The interest rate decline makes total wealth much greater than before. If equities were worth 40 trillion at the beginning and fixed income worth 20 trillion, there was a decline of 12 trillion in equities, and a gain of 6 trillion in fixed income. Total wealth not that much impacted relative to what appears on surface.
After collecting Euromoney magazine's "Best Bank in the World," Santander described itself as such in full-page newspaper ads. The same bank now accounts for almost a quarter of the $13 billion potential losses European investors have said they may incur after Madoff's arrest. Santander said it won't compensate clients because Madoff's investments were a fraud.
When markets sell off sharply and severely and the prevailing trend changes it appears that a basing period is needed before prices move higher again. This period maybe in someway proportional to the sell-off. Note the 2000 equity sell off took roughly 1 year march 2002-march 2003 before the market than rose again solidly.
It doesn't appear there needs to be any quick decisions made (however seeing where prices are now to where they were 4 months ago almost drives you to act) to get long equity or crude at these levels or a lot of other markets for that matter as work needs to be done in price and this will effectively take place as excesses are unwound.
A Paradigm Shift, Part II: Quantitative Relativity for a Quant-Algo Rustled Program Converged Industry, from Douglas Dimick
December 19, 2008 | 5 Comments
On a best efforts basis, remove morality and legality from the analysis, then correlate the architecture, conducting, and harmony of the work in terms of its enduring production, and we may arrive at a single word following the viewing of Pitt’s cited video performance of Madoff –- Maestro.
Three years ago, some four months before coming to China, I was “brought in” by a former high-frequency trader ($350m per annum) – he was like a brother, whom I have known now some 15 years. He was angling to “get in” with this guy in New York who was providing consistent, annual high returns. Perhaps he would set up a clearing operation with the big guy’s firm, whereupon then he could schmooze a book of business?
My friend’s father had the guy managing his money. Home in Westchester… Winter residence at Palm Beach Polo Club… A golf family… Great people…
I look back on my conversations with father and son about Madoff – his name was never mentioned to me. I think the Peak-End Rule was then flashing like a stoplight at a poorly lit, inner-city intersection of New Haven on a rainy, black of black nights, when only the after-hours joints are still trading; it was flashing as starkly as the red flags were streaming, fender mounted among industry vocals, including those notifying clients, the press, and the SEC that “Something’s Afoot” and the butler didn’t do it – yes, it almost has that Broadway pizzazz, don’t cha think(?)…
But enough, though, of the harmonic convergences… for then there is the missing 6:10 minute encapsulation in the video…
A ground shattering divergence at a level nearing the missing 18:5 minutes?
Mark the time from 19:15 to 25:25 of Pitt T. Maner’s cited video… Josh explains the architectural alignment of greed and fear as correlated in the “fundamental quant models” so driving electronic market exchange systems.
Herd mentality: in seven years of research and development, I could swear that it was the cause and effect, but its recording appeared erased. Alas, Josh so testifies.
To those who dismiss the psychotic patterning of “the markets,” listen to the 6.10 minutes. Note the repetition of words “herd” and “animals” to describe funds buying “cheap” stocks and selling “expensive” stocks as “bets.”
Question: what is the relative basis for those quant generated characterizations of valuation?
As Josh notes, in the August event, what appeared uncorrelated either actually was or became so assimilated, whereby correlation was a de facto quantification in of itself from a program trading perspective.
Was that market occurrence a 25 Standard Deviation event?
How do we quantify these variables of correlation, deviation, particularly given the multi-tiered concentration(s)?
Is the video’s audience participant’s (low-high pressure system) weather analogy indicative?
Victor’s opening (December 10) post on Peak-End reports twice the variability of lowest compared to highest peaks. Consider Josh’s discussion of the periods of “time” corresponding to the building up of positions a la greed contrasted by the fear-struck collapsing of positions – note his use of “pain.”
I am the 1974 4-H Dairy Champion of Cumberland County, Maine. The cow’s name was Beth.
That said, be it large animals (the fund type) or dairy cows, when herding out to pasture or into the barn for milking, relativity of speed and variability of direction is as determinative (if not more so) than size of the herd.
Thus, we may now see how “quantitative relativity” is what the program trading and portfolio management industry has been missing since quant-algo fashion became sexy.
When, may we ask? Oh, right around the time Madoff was ramping up. Henceforth, the need for firms big and small to retool their fundamental programs accordingly is unto itself the primary rationale for a rules-based paradigm shift.
We did not need Mr. Madoff’s confessional to tell us so. Still, those at the SEC may come to recognize his crime(s) in the hopes to prevent a repetition…
He was a maestro because he understood relativity of positioning. He knew where to place his firm, being a gatekeeper as a marketmaker first, a hedge fund second, whereby the former “enabled” – see prior article’s AA clinical reference of – the latter to lie, cheat, and steal at intoxicated levels of leveraging.
Then again, position is relative and not just among the herd. Two often volume is confused for mass.
The email response from my former trader (forever friend) in Florida… yes we lost everything my father is taking it real bad worried about him.
Granted, a single cell organism within a corpus of complex organs, but the nature of markets – and why there is that “hand” thing going on – is because where there was one, there can become two… and three… then four… and so on until a market is made, perhaps then only to be lost (or conceded upon confession) by a correlating inversion of that very same process.
Herding much of anything is a process, one may note…therefore, laws of relativity become front and center (for managing a herd), determinative of any calculation, formulation, even estimation, thereby necessitating rules-based quantification…
Like the once young farmboy, sitting atop the posted end of a funneling fenceline, counting heads in preparation to close the gate upon all passing through, not to forget the rustlers themselves… Here, in the case to be before the court, swinging it shut, were two market-making sons – whereby we can only mitigate that moment of cognition, as he enables them to turn him in…
If I may paraphrase something Doc Castaldo once wrote, "Whether or not you have a position, you have a position."
One of the simplest forms of this occurs in relation to markets: Assuming one has $ome discretionary capital (or can borrow it), it can be spent or invested many ways. Or kept under the mattress (assuming one has a mattress). If you choose to keep it in a money-market account, that is the same as choosing not to invest it other ways, and miss the next move in (say) stocks.
Of course the same holds for whether to keep various positions, vs close or add to them.
This can be extended to life in general; where (for example) each day you can choose to be loyal to your spouse (or not), stay at your job, exercise, further your education, etc. Each is a kind of binary yes/no decision, with large ramifications compounded into the future, which are make on a daily basis.
December 18, 2008 | 5 Comments
As an exercise in falsification I suggest looking for all the cases of the wrong lessons that were learned from 'history' which led to disasterous actions. The only problems here are that they won't be too well documented, firstly because people try to hide their mistakes and secondly because a lot of them will have been made by the currently extinct. A good place to start is with fallen empires, all of which will have thought they were acting very reasonably at the time. Similarly great books tend to be viewed as great until they were discovered to be just baloney — for this we need the best seller list of 1600.
The Fed could be classified as the ultimate carrier shell. Although owned by the member banks, it carries along thousands on its back. Like a nursing mother, it nurtures 99% of its sick children to health and gives the healthy children good exercise. The children who won’t make it generally get grafted on to stronger, bigger siblings. She feeds them well, and accommodates all of their needs. Now, as of today, the member banks are going to get free food in order to grow strong again. The Fed is the quintessential Jewish mother, scolding and laying guilt trips on her children, yet feeding, loving and defending them against harm. She’s also laying her balance sheet on the line for her charges, and will ultimately fall on the sword if necessary. Of course, she has a very rich sugar daddy, the Treasury and the full faith and credit of the US government behind her so I suspect she’ll do OK. Although the Fed, Treasury, and Congress might have squabbles worthy of the House of the Borgias, the Fed is capable of morphing from the Jewish mother into the mistress, Lucrezia, at the slightest hint of trouble. She is quite capable of taking care of herself while defending her charges, however she has been known to eat her sickest young. Ever misunderstood, the Fed is somewhat also like the Masons in the fact that they never publicly respond to criticisms, allegations, innuendo, or accusations. Like Masons, and the Borgias for that matter, they are well ensconced in their marble palace, well above the fray.
Matt Humbert writes:
The Fed is behaving like a desperate trader who keeps averaging down his position, pleading with the market gods to let him out of his position.
"…The lies most likely to be successful must not only be believable, they must also take advantage of the prejudices, weaknesses, and fears of those lied to. Any lie custom-tailored to psychological makeup and biases, any lie that feeds vanity, jealousy, fear of rejection, or any of the ten thousand other goblins making merry in the twisted hallways of our brains, will be compelling in a way in which few other are…"
The Concise Book of Lying, Evelin Sullivan.
There are many companies whose existence provides a foundation in the main for other companies to survive like the carrier shells in the Xenophora branch.
I would consider the car companies carrier shells as they provided for so many part suppliers to make billions, including all the GPS companies recently that sold out at values greater than the carrier. Whole Foods down some 80% is proud of all it did to make billions for so many companies that sold it products and then were bought out or went public. The same would be true for the electronic retail stores, that sell so many good electronic devices so efficiently that have made so many fortunes. What other carrier shell type companies do readers find relevant?
Steve Ellison adds:
There have been many companies that used IBM as a carrier shell, for example, Amdahl, EDS, and BMC Software [not to mention Compaq and the whole PC-compatible industry of the 1980s]. The big software companies, including Microsoft, Oracle and SAP, are all carrier shells for numerous independent software vendors and systems integrators that provide installation services, auxiliary programs, or consulting to help users navigate the complexities of the big companies' products.
Mike Humbert writes:
The following pairs are testing interesting short-term speculative milestones in front of the historic FOMC announcement:
EUR/USD retraced 38.2% of its fall from record 1.6040 -> 1.2335
DXC retraced 38.2% of its H2 2008 advance 71.31 -> 88.46
USD/CHF is breaking trendline drawn through 7/15 and 9/22 extremes EUR/CHF retraced 62% of 1.6828 -> 1.4300 12-month drop EUR/GBP is at 0.9020 record double-top Feb Gold retraced 62% of Q4 2008 938.8 -> 688 drop US Treasury yields are at record lows from 2-y to 30-y
So while there is a myriad of qualitative considerations: to include unprecedented world-wide credit squeeze, government and crook interferences, holiday "silly season" and year-end repatriation - we are about to assess the veracity of certain quantitative speculators.
Thanks to Steve Ellison for this very impressive overlay ! My immediate guess is that in true trending market (which SP has been since summer - down), Commercials do prefer trend-following. Once market "trendiness" changes (to swing-market), Commercials should shift into fading mode! Just a first guess..
December 16, 2008 | 1 Comment
If you parse exactly and carefully what Madoff says you will see he is telling the truth:
A. "It doesn't mean there are no abuses - for sure. In today's regulatory environment it's virtually impossible to violate rules when this is something the public just doesn't understand."
So: There are abuses. But the public does not understand so you end up not [getting caught]. So even if I try to violate rules it's impossible to be labeled that way.
B."If you read something in the newspaper and you see someone violating a rule you say 'well they're always doing this'
"But it's impossible for you…uh, for a violation to go undetected certainly not for a considerable period of time."
This sentence should not have the "not" in it.
Yes, his abuses did go undetected for a considerable length of time. And the sentence should read…"certainly for a considerable length of time." It's "Impossible Not" which means possible.
The main problem is that people do not hear what others are actually saying, but hear what they expect to hear. They listen to his tone of superiority and fill in the rest - even when he tells them straight out. This is called hiding in plain sight.
Youtube video of Mr. Madoff. Is there anything that can be detected from his body language? He makes a point of emphasizing how difficult it would be for anyone to get away with anything in today's regulatory environment. He touches his face a few times.
All in all he has that avuncular, reassuring manner but perhaps there is something a bit too pompous there.
Victor Niederhoffer observes:
As the avuncular old man said in the youtube interview (5:22), "it's virtually impossible to violate a regulation and not be detected for any length of time in today's regulatory environment." This certainly is an indirect form of bringing down the guard of the skeptical. But its more than that. I guess this is grabbing the lion by the beard or the great Willie dressed as a policeman in front of the bank he's planning to rob. Something else I'm missing here, also in the scratching of the face as he smiles. Victoria is an expert on body language lying techniques and I'm going to ask her to consult with Anatoly and report back.
The Man-Made-Global-Warming hoax continues.
ON DRUDGE TODAY;
AP PANIC: 'Obama left with little time to curb global warming'…'cooling trend illustrates how fast the world is warming'…
NEW RECORD LOW TEMP IN DENVER…
Montana's -29 easily breaks record…
December 14, 2008 - (Buleumberg News). This evening at a press conference in Iraq, an unidentified assailant threw two shoes at George Bush in rapid-fire succession, which the president nimbly avoided.
Given the lackadaisical Secret Service response - no agents dived to take a shoe for the president, nor returned fire with their own shoes - the breakdown in security was considered complete, and it is expected heads will roll.
It’s not yet clear what shoes were used in the attack, but according to Jane’s, Florsheims (which several experts have suggested they might be) are more of a long-range shoe, whereas the Gucci is favoured by NATO countries for short-range tactical operations (and mess parties). Nike’s may look scary, but they are mostly just rubber and canvas, and generally better suited for crowd control.
It’s not clear how the assailant acquired the shoes, or who financed them, but there’s been no shortage of shoes on the black market since the collapse of the old Soviet Union.
The anti-shoe lobby, born of the sordid Imelda Marcos years, is of course outraged, sparking worldwide demonstrations outside Italian embassies for better shoe-control.
The president had not yet revealed what he plans to do after he steps down in January, but the White House did acknowledge that dodgeball offers have started pouring in from across the country.
Dec/15/2008 03:52 GMT FR/23B
Nigel Davies remarks:
I was quite impressed with the Prez’s deft shoe avoidance and wonder how many other politicians would have shown similar dexterity. For example out of the last three Democratic Prez nominees I believe that only Obama would have shown a similar level of skill.
Dan Grossman agrees:
I agree with Nigel, Bush was very deft in dodging the shoes, with minimal movement, not flinching or making a big deal of it.
Raises the question, what President was the best athlete? Probably Bush 41, at least at time in office, because good athlete and relatively young. A runner and cyclist, undoubtedly an infinitely better golfer than Clinton (even though latter made such a big deal of it) and Eisenhower. But consider:
Bush 39 was a star baseball player at Yale, while Bush 41 only a cheerleader. Bush 39 a wartime fighter pilot, survivor of crash, parachuted on 70th birthday.
Kennedy a good athlete and golfer, although severe back problems.
Ford a star football player, so could well have been best of all, athletic reputation unfairly ruined by Chevy Chase.
Washington was best horseman in Virginia.
Jefferson rode horse for days to inauguration in Philadelphia or some such.
Don't know enough about 19th century presidents.
Many elements of the fraud charges against M would seem to have applicability to markets. The macher thing, where he was seen as a "macher," a big-hearted big shot. His denying to some people the favor of taking their funds. His friend the tall partner who would mention at clubs that "Bernie earned me 12% this year and he's not open to the public but I can probably get you in." Cialdini apparently calls this a triple threat fraud where someone else mentions how great M is, and then you don't investigate because it would be an affront to the accomplice (who you don't know is getting a fee), and you use all your energy to see if you can get in rather than to investigate the performance. Amazing is that we've all been subject to reports of returns in the security field that seem way out of line with those actually achieved.
Sam Marx comments:
In addition, because M owned and ran a large brokerage firm, the "mark" would feel that his investment was getting some illegal inside advantage that resulted in high returns, such as front running. Most, if not all, confidence games rely on the greed of the mark. You never hear about successful Ponzi Schemes that have been successfully unwound.
James Sogi writes:
That's a good point. Its the reverse of the survivor bias. Let's call it the loser syndrome, where the losses are hidden, as the successful con, the mark doesn't know he's been taken. Further if he does, he doesn't want to blow the whistle because of either romance, his own complicity or blameworthiness. On a more common scale, the denial syndrome often glosses over and forgets failures, losses, defects, losing trades, that extra drink
James Goldcamp writes:
The surprising part of this to me is much less the regulatory overnight or lack thereof, but the third party fiduciary roles. Where was the administrator and the auditors of the funds? How could this have happened? Will it turn out that he invented counterfeit bank and Prime Broker statements and if so did he personally have the technical means to do so? (Unless he was his own PB, but it's hard to believe any reasonably sophisticated investor like Tre~0nt would buy into such a set-up). I have to ask, how did the trial balance, balance?
Victor Niederhoffer requests:
Let us never forget the human tragedies here. I cry when I read the letters of people who had their life savings or wealth or retirement or plans ruined by this. My goodness, what a terrible crime and way to live one's life.
Ronald Weber writes:
Tragic indeed, but I can’t help to quote the good old Livermore, almost one century ago, on the average investor:
“He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”
“There is profit in studying the human factors-the ease with which human beings beleive what it pleases them to believe; and how they allow themselves-indeed, urge themselves- to be influenced by their cupidity or by the dollar-cost of the average man’s carelessness. Fear and hope remain the same.”
“Investments were not wanted. The demand was for easy money; for the sure gambling profit.”
Harmony. There is something beautifully harmonious in the the ranges of the last two Fridays on the 24 hours S&P futures.
date high low close
12/12 887 829 886
12/05 880 817 873
In one day in each case the high and low recapped the entire range of the previous week. Each of the three entries in the first row is 10 points higher than the corresponding entry in the second row. The range of 7% in each day gives the opportunity for untold losses and wealth and hope and glory and failure. Yet, just 10 points up from one week to another. Ugly things. It is well known that the ugliest sounding things on a menu are often the best and most delicious. They wouldn't get on the menu unless they were good. A similar phenomenon we all know from Chorus Line where the song "dance 10, looks 2" shows that the girls who don't look good in certain ways never get the good parts, and the girls who don't look good who do get the parts are superb dancers or singers. I recently came across this phenomenon at a performance of the Nutcracker with the youngster. All the girl dancers looked like Cinderella's step sisters, but goodness, they were fantastic. Most of us have had similar experience with this in romance and many proverbs attest to the fact that the persona of the beautiful blond is often lacking in certain respects, if only to keep the stage door Johnnies in check. This principle would seem to have general applicability and I will have to check with my behavioral psychology friends, especially Katie and Dr. Brett to see if some hypothetical study has limned this phenomenon in one of the multiple promiscuous hypotheses that always prove a point in one sample of another of such studies depending on how much the "students " and "contrived experiments" are set up.
I like to buy stocks at the ugliest times and the comment by Harry Reid that he shudders to think of what's going to happen to the market was such a time, at 830 S&P at 3 am 12/12. The comparable decline on the French Inside trading day which went from down 40 to down 70 as they exited from their positions before the announcement must be distinguished. The phenomenon can be studied systematically, and before October of this year, the results were very interesting. Take a position on the rumor and exit it on the announcement. No better exemplars of this rule have come than a proper and systematic analysis of the news relating to bailouts. Whenever a bailout is consummated, the market drops like a rock. Whenever it is not consummated the market goes up. I guess the market has an inner soul that realizes that industrial policy has to lead to the decline of what America stands for relative to business, thus destroying the system of incentives, and proper allocation of resources that is the hallmark of an enterprise profit and loss system. Symmetric conclusion.
My daughter Katie who taught an intro psych class at UT Austin before taking her present job at the social networking startup Dachis company told me that the "peak-end rule" is much studied in psychology. It inspired me to enumerate some systematics in a real world context showing that ends that are really peaks in the market are much more variable after down peaks than up peaks. To see if the end is truly the be all and end all, one should at least look at peaks that are at the beginning to see if there is a difference. Without in any way violating our mandate here always to be meal for a lifetimish rather than meal for a dayish, I thought the least I could do is report the comparable results for peaks at the beginning of the period. In addition, I thought for the sake of science itself the results should be reported. Here they are:
.Peaks at beginning of period . number mean change . one day variability .max 300 -1 12 .min 250 -0.5 17
The above results are for 120 (10 minute) intervals from 1999 to present. Once more there is nary a difference in the means but the variability after the downs is twice as great as the variability after the rises. One notes also the curious phenomenon that in a period when the market went down by almost 600 points adjusted, there were 20% more highs than lows at the opening. Such is the wisdom of the market mistress in relieving the weak from their chips.
Architecture and conducting. I am working on a piece on the lessons to be learned from conducting and architecture for markets. There are hidden regularities in both fields that make the output harmonious and beautiful. I would be interested in any ideas that you all may have on this.
Which I trust is everyone,
Stats.org website is devoted to using statistics to investigate and resolve social and economic disputes, as well as other areas of modern life.
"We check out the numbers behind the news" is their slogan.
Dr. Robinson is the author of The Rocket Review Revolution, NAL Trade, 2006
A key to today's action was Senator Reid's comment, "I hate to think of what's going to happen to Wall Street tomorrow" (Friday) overnight at S&P 830.
Jim Sogi comments:
Yen and Bonds shot to new highs, concurrent with the drop in equities, temporarily in the night market when everyone's defenses were down. Yen this morning, with no jiggles or pauses, mechanically marched down from 1.11 to 1.10, the proscribed PC number. It had the signs of a heavy hand. All seemed geared in lockstep in the various directions, like a clock. The equities are barely spare change compared to these markets. Imagine the economic effects of the marginal trades on a currency or on the the bond holdings. It made the equity moves almost seem… sedate? As for the comment, what a hubristic and ultimately wrong thing for a politician to say, almost like the mayor of a windy town. And now these are the people controlling the markets?
Thomas Miller writes:
He has a bright future on Wall Street after the political thing is over.
Alex Castaldo goes over the facts and figures:
S&P March futures closed at 885.40 on December 12, up 10.90 on day.
From Bloomberg December 11:
“I dread looking at Wall Street tomorrow,” Majority Leader Harry Reid said before the vote in Washington. “It’s not going to be a pleasant sight.”
Asian stocks and U.S. index futures immediately began falling after Reid’s comments. The MSCI Asia Pacific Index slumped 2.2 percent to 86.13 as of 12:33 p.m. Tokyo time, while March futures on the Standard & Poor’s 500 Index slipped 3.4 percent [i.e 844.75 at 22:33 EST, although they fell further to 830.0 in the next 10 minutes].
Models of Adaptive Behavior by Houston and McNamara models biological systems (such as little birds) using states. At one bound there are barrier states, i.e, death, birth, beyond which, in scientific theory, organisms cannot go beyond. Another concept is that of the life history of the individual and that of the group, which can be very very different as traders know. The organism trades off behavior choices that optimize and balance the state of its health, food, and reproduction.
Looking at markets, there are certain theoretical barriers. In bonds, it is a zero yield. For companies, it is zero value or bankruptcy. In Yen, the G7 inform us it is near $1.10. As an adaptive ecology of the markets we see some markets approaching their barrier levels. The fear of course blaring in the press is death — of companies, of countries and of markets, and in some cases, we are seeing this. But for the group, what does the barrier represent? For the adaptive survivor, isn't it going to provide opportunity? How might the trade balance the various states in an optimal manner? Will a broader range of behaviors improve overall state than perhaps the single behavior which previously sufficed. For example, we see broad move in bonds and currencies where as equities are quiet. Houston speaks of convergence to a stable state. Vic and Laurel have spoken of the tradeoff in bonds and equities seeking stability. Houston uses models with tradeoff charts which seem similar to Friedman's Price Theory charts of marginal values. Bonds are up 15 points, Yen up .03 in a month and SP is basically flat on the month. Where is the food for the little bird? Would a classical asset diversification have helped? Many tough questions in a stressed environment.
Jeff Watson writes:
Biologists like to study the “Edge Effect,” which is the result of the boundary between environments in an ecosystem, a good example is where a forest meets a grassy field. The whole ecosystem is affected for a distance from the edge, and many changes from the norm occur with regularity in this area. At the edge, one might find increased wildlife, changes in flora and fauna, territorial changes, adaptive behavior, irregular patterns of animal behavior, ecological imbalances, and changes in weather. The edge has patterns that might not make natural sense, but is natures way of achieving homeostasis. It would be interesting to study what kind of “Edge effect” is exhibited by different markets juxtaposed upon one another.
The idea behind the peak-end rule is that the only thing that matters to people is how something ends, good or bad, and what the peak is. Like most behavioral psychology things, this one isn't tested in real life situations. I thought I'd make a substantive contribution in the real world. I looked at occasions when there was a peak at the very end. In particular when the close of the S&P was at the highest peak of the previous 10 days, sort of like the close on Monday, December 8. Also, at the converse when the close of the S&P was at the lowest peak of the previous 10 days.
Moves subsequent to highest peak lowest peak
Number of obs 116 135
Move (and sd) to 1 days later -1 (15) 2 (23)
The variability to the next day after the lowest peak end with a mean square of 529, which is more than twice as great as the variability after the highest peak. Perhaps the behavioral psychologists would like to add this real life difference in variability to their armchair ideas about the be all and end all of peak-end rules.
Diffusion-Limited Aggregation (DLA) is what results when you start with a seed particle and then release another particle from far away that moves according to Brownian motion. When it hits the seed, it attaches. You release another particle moving according to Brownian motion, and wait for it to hit the structure and attach somewhere. You keep doing this. The resulting structure is DLA. As mentioned in the Wikipedia entry, this appears naturally in certain mineral deposits and in dielectric breakdown. Here is a fun java simulation. Apparently, this phenomenon is still not well understood. At the colloquium about this I went to yesterday, the speaker said he had been working on this stuff for 20 years and had made little progress. The hope is that they can exploit the connection between DLA and Schramm-Loewner Evolution (SLE) to better understand the phenomenon, e.g., are such structures self-similar.
Vincent Andres writes:
Here is an interesting book on the topic (by an ex-colleague).
I still remember picking up a copy of the June 1974 issue of Radio & Electronics Magazine and reading about the construction of a 8 bit Intel chip microcomputer with a full 128 bytes of memory. I had to have one and by October of that year I had on my desk a fully functioning home computer.
I suppose this was eventually going to happen, the common PC has now transformed into a supercomputer. And it is made by none other than Dell. Now the dream of scientists, engineers and even amateur rocket scientist may soon come true. I once mused that with a supercomputer one could conquer the stock market… we shall see. Or maybe put into motion another Long Term Capital Management?
Vinh Tu writes:
Nvidia gave a seminar on this at Oxford e-research Center yesterday. CUDA looks very cool, and does indeed make massively parallel computing seem pretty usable to ordinary programmers. Also, the language is very close to OpenCL, so your algorithms and code should be transferable without too much effort. You can get started by using a fairly cheap Nvidia consumer graphics card with a model number that starts with at least an 8.
December 10, 2008 | Leave a Comment
In the event NYC specs are interested in taking a break from the markets (and they still have a few dollars in their pockets), I recommend an evening with Andrea Marcovicci singing movie tunes from old Fred Astaire movies such as "Roberta" to more modern takes such as "Tootsie." In addition to lovely vocals, Andrea also provides interesting storytelling about the history behind the scores. A charming evening offering much needed respite from markets gone wild.
Sort of. . . after telling the audience that at the age of 60 she can do something that most her age can't (move her face muscles), she proceeded to inform us that she had invested her monies in her lovely sparkling gown. "It doesn't go up, it doesn't go down, and I don't have to watch TV all day to learn what it's been doing."
Cute. Andrea will be at the Algonquin through 12/27.
December 9, 2008 | 2 Comments
I received a couple of bottles of Jack Miller's BBQ sauce in the mail this afternoon from a Cajun fishing buddy who still lives in the bayou. Jack Miller's is a very interesting Cajun BBQ sauce, straight from a small family owned business in Ville Platte, La. I have very fond memories of this sauce, as this same friend introduced me to it 25 years ago. The sauce is quite rare outside of a very small part of Louisiana, and is indescribably delicious. Jack Miller's sauce is heavy on the tomatoes and spices, and goes great with everything from beef, pork, and chicken, to BBQ alligator tail. Opening the box with the sauce, I couldn't wait to taste it on a sandwich, and ended up driving over to Sonny's BBQ to buy a couple of pounds of sliced pork. I brought the pork home, put heaps of it on Wonder bread, slathered Jack Miller's sauce over it, and ate the messy combination with gusto. Three sandwiches later, my hunger was sated, my shirt was messy, and I took a well deserved nap.
Diets that are high in protein and cereal grains produce an excess of acid in the body which may increase calcium excretion and weaken bones, according to a new study accepted for publication in The Endocrine Society's Journal of Clinical Endocrinology & Metabolism (JCEM). The study found that increasing the alkali content of the diet, with a pill or through a diet rich in fruits and vegetables has the opposite effect and strengthens skeletal health. "Heredity, diet, and other lifestyle factors contribute to the problem of bone loss and fractures," said Bess Dawson-Hughes, M.D., of Tufts University in Boston, Mass. and lead author of the study. "When it comes to dietary concerns regarding bone health, calcium and vitamin D have received the most attention, but there is increasing evidence that the acid/base balance of the diet is also important." Average older adults consume diets that, when metabolized, add acid to the body, said Dr. Dawson-Hughes. With aging, we become less able to excrete the acid. One way the body may counteract the acid from our diets is through bone resorption, a process by which bones are broken down to release minerals such as calcium, phosphates, and alkaline (basic) salts into the blood. Unfortunately, increased bone resorption leads to declines in bone mass and increases in fracture risk. "When fruits and vegetables are metabolized they add bicarbonate, an alkaline compound, to the body," said Dr. Dawson Hughes. "Our study found that bicarbonate had a favorable effect on bone resorption and calcium excretion. This suggests that increasing the alkali content of the diet may attenuate bone loss in healthy older adults." In this study, 171 men and women aged 50 and older were randomized to receive placebo or doses of either: potassium bicarbonate, sodium bicarbonate, or potassium chloride for three months. Researchers found that subjects taking bicarbonate had significant reductions in calcium excretion, signaling a decrease in bone resorption. "In this study, we demonstrated that adding alkali in pill form reduced bone resorption and reduced the losses of calcium in the urine over a three month period," said Dr. Dawson-Hughes. "This intervention warrants further investigation as a safe and well tolerated supplement to reduce bone loss and fracture risk in older men and women."
Article adapted by Medical News Today from original press release.
Other researchers working on the study include Susan Harris, Nancy Palermo, Helen Rasmussen, and Gerard Dallal of Tufts University in Boston, Mass., and Carmen Castaneda-Sceppa of Northeastern University in Boston, Mass. The article "Treatment with Potassium Bicarbonate Lowers Calcium Excretion and Bone Resorption in Older Men and Women," will appear in the January issue of JCEM. Founded in 1916, The Endocrine Society is the world's oldest, largest, and most active organization devoted to research on hormones, and the clinical practice of endocrinology. Today, The Endocrine Society's membership consists of over 14,000 scientists, physicians, educators, nurses and students in more than 80 countries. Together, these members represent all basic, applied, and clinical interests in endocrinology. The Endocrine Society is based in Chevy Chase, Maryland. To learn more about the Society, and the field of endocrinology, visit our web site.
I like to read several books at a time for half an hour each. Some of the recent books are pretty thick going and half hour is barely a page or two. Also I'm in waay over my head on a few. Its good to read both fun books as well as challenging material.
1. The World Without Us by Alan Weisman is a Fun book about what will happen to man made infrastructure when man disappears. Manhattan streets become rivers, and the bridges and skyscrapers fall down, and animals take over. Most shocking was the information on the amount of plastic waste clogging up the planet and how it never degrades. Made me switch to glass plates, and cloth shopping bags. Its clogging the oceans and rivers. Awful.
2. Shadow of the Silk Road by Colin Thubron is a somewhat mystical, political travel book by a Brit traveler who speaks Chinese and Russian and travels the old Silk road. He has an odd and, I suppose, British style, but once into it, very pleasing. He visits ancient religious sites along the way and describes modern life. I saw a DVD called the Journey of Man which postulates using DNA evidence that cavemen migrated out of Africa up through central Asia, and then to the rest of the world. This made the description of the people and cultures on the Silk road even more fascinating to me as the cross roads of man as he spread out to the world.
3. Mathematical Constants, Stephen R. Finch, Cambridge University Press is really an encyclopedia of fascinating mathematical constants with a plethora of references. It is rather technical, terse and in mathematical terms. It is not at all like Berlinski's Tour of the Calculus which is aimed at casual readers. Of course the most interesting are Pi and e. These show up in the oddest places and in more places than you might imagine. They show up in the sums and products of sequential fractions. PI of course is part of statistics and used to compute the area under the various distribution curves.
A fascinating constant is one of the Feller coin tossing constants used in determining the probability of a run of heads in n sequence of coin tosses. Its not as trivial as it seems and different than some other solutions to this that I've seen. In conjunction, of course I had to revisit my daughter's Calculus text.
4. Patterns Formation, Rebecca Hoyle, Cambridge University Press, is about mathematical methods to define patterns such as leopard spots, fingerprints, oscillatory patterns such as traveling and standing waves. I''ve only skimmed this book except for the introduction which identifies symmetry as the basis for defining patterns. This of course has deep implications for the market analysis. Typically books of this nature have only one or two sections dealing with subjects that might apply directly to markets. The idea that an algorithm can be found that models the market and that can be coded and used for market prediction is always the elusive goal.
The market contest on Friday, December 5th had all the elements of the greatest contests played out in our favorite sport or war. The Lakers versus the Celtics playoff or the Memphis Tennessee NCAA championship, or the New York Giants win over the Boston Patriots or the Tiger Woods - Rocco Mediate or Roger Federer - Rafael Nadal match of this year — or from previous years, the Ali - Foreman boxing fight, the Giants versus Baltimore Colts Super Bowl, or the Dodgers - Giants pennant playoff. The Borg - McEnroe match, as does the battle between Achilles and Hector in the Trojan war, comes to mind. (I would be interested in some nice additions to this list).
It had everything. Magic and disbelief. A beautiful exposition, climax, and resolution. A complete recapitulation of the range of the previous week, a 8% move in the four climactic hours, 880 to 813, in just one day, an earth shattering opening of down 3%, the fourth such 3% or more in five days, a buildup of tension with the worst employment report ever, the lowest oil price in 4 years, the lowest bond yields ever, all following by a day the backdrop of the NBER finally calling it a recession, retail sales falling off a cliff, and news that the automobile bailout was going under and over, the steady drumbeat of negative reports and news, building up to a climax when Hartford forecast better earnings and rose 100%.
The resolution of the climax occurred in the last hour as if following a script from a great story or symphony with the market rising to the week's high, very near the magic 900 level that it started the week at. One should note "that with long term interest rates at 3%, ceteris paribas, the value of mortgage assets held by banks has to have risen by 100% from the levels of a year ago when 6% long term rates were the norm. This has to counterbalance the increase in default rates to a large extent, and increase the return from holding mortgages so that they're much more attractive than most say they are. This has to be counterbalanced by the acceptance by the populace of an industrial policy program by the US, as if the public servants are a better steward for our money than the hedge fund managers, and investment advisers. And the idea that spending on building roads and computerizing hospitals, and making public buildings use solar power, and have grassy knolls and bicycle racks (as Henry Gifford has limned) is a better use for creating jobs than what would have emerged from allowing voluntary exchanges and incentives to take their course. I can only sit back and say, "what a great game it was" after pointing out that the decline in interest rates has to be remarkably bullish, and I predict a Lobagola move back up.
Alan Millhone adds:
On Friday I noted the Market was up even with dismal job reporting. I heard something about a job lost in the US every five seconds! I hope we see many more up tic Fridays as the US economy improves.
You show many comparisons based on battles in sports, the ancients, etc. Makes me think of our national Checker Tournament of 2007 held in Vegas at the Plaza Hotel. The Master's group battled all week back and forth on round points and on the final day of play it boiled down to Dr. John Webster of N.C. and Lubabalo Kondlo of South Africa fighting for the lead. After the last round was played and the smoke cleared we found that both men had the same match points. The referee was Tim Laverty and Tim keeps most meticulous hand written records all week of the player's scores. After careful mathematical calculations it was determined Lubabalo won the Masters and the ACF National Championship by one honor point! Another thin skin of the finger example.
Edward Talisse remarks:
Lower mortgage rates are a boon to the homeowner but a nightmare for the banks. The banks are all short refinancing options as rates move lower and reinvestment options are limited. The banks make money where they underwrite new products. Also, loan assets are on accrual basis rather than mtm so until the securitization markets reopen, its tough to lock in gains. Lower leverage will cap ROE, so if we move back up, it won't be the banks that lead in my view.
Craig Bowles writes:
2008's rallies have come after basic materials and energy have become the weakest sectors and that happened on Thursday when viewing short-term growth rates. Interest rates have shown a lot of relative weakness to stocks, so can move up a bit without being a problem. One fundamental change is inflation indicators have fallen earlier than in the 1973-75 recession. Generally, economists are focusing on economic negatives but none is talking about the positives of low prices. There aren't many economists around who talk up Austrian economic theory anymore which is probably why they all focus on stimulus to support prices rather than the positives of less inflation and declining prices.
Relative to most of you, I do not know much about trading. My work during the past seven years learning how to design and engineer a program trading system has been in stead course not to trade (in a trading sense).
That said, during book research these past two years here in China, I recall one particular, personal tour by the manager of a sixth nationally ranked securities firm’s branch office.
Working our way to central ops, we finally arrive at the trading room.
When introduced to the head trader, I asked him why he was successful. I noticed most screens in China displayed variations of MACD.
1.3 billion people (or maybe .4 or .5 or .6, as no one seems really sure, as I guess there are too many to keep track), represent the “potential” largest world’s financial services and investment market. Still, today, the giant paper wealth generator here appears to ebb and flow along this one, rather dated indicator.
Aha, I notice the firm’s star trader has Bollinger Bands on display. Is this the secret to his success, I press?
With his boss, my friend, peering across, he sort of shuffled in his chair, looked down – Chinese here seem to do that a lot — and mumbled about the government.
When we head back down the hallway to the office, I asked “what the heck” was that guy talking about?
I was told that he said “supply and demand.” OOOKaaay… and so…
Privatization a la Red Chinese Corporate Buffet means that the government sells one third to some trusted party member(s), retains one third, and sells as little as possible of the balance to create enough interest… so they (party and government) can then go and dump stock (reportedly at times against proscribed rules) once prices rise.
Who’s money are they taking? I read news here of a national study that reported 80% of Chinese market investors lose money, so I guess “who” would be all the little people with big dreams (and foreign dopes).
Translated and processed regarding our head trader? Perhaps he has inside info with government minions?
Who knows? Who cares… the system is a parlor game. You know this when you walk in the door.
How? As an American, relatively speaking, I find that Chinese securities firm branch offices present a Feng Shui blend of bus station and race track décor and ambiance. Enough said – though, also note a hint of Italian bordello-ish-ness.
This last impression must be a Chinese subtlety for reminding one that lawyers are of no use here – they don’t seem to be very welcome throughout China, come to think of it.
That’s odd… I am noticing reams of HR listings for lawyers needed in China.
Note to self: what is mortality rate of foreign lawyers here?
The central government must have numbers on this… notice how quickly they get out key economic reports for worldwide consumption… almost like tomorrow’s news today… You don’t think they are…?
Alternatively… back to the foreign lawyers, Bleak House (Revisited)? The China version (or syndrome)?
I SHARE ALL THIS but I cannot say how it might relate to girls and boxing. Love that title though — smart guy…
I only comment that we might keep in mind our star, head trader’s cloaked wisdom (“supply and demand”) with regards to redemptions and recognition (not just realization) of subsidiary insolvent banking channels yet to drop onto one of many Florida-ballot-chad-like balance sheets.
Perhaps markets and traders have insights that “enable” (an AA clinical term, ahem…) all that detail stuff… many certainly seem to have done so swapping back and forth derivatives.
Hmm, let’s see, we bought it today for $52.50… must be worth $54 tomorrow… Just look at the real estate market. Right, that’s the ticket…
Hey, as long as I am getting mine, who cares — heard and saw a lot of that thinking during recent years as well.
Kind of like musical chairs, right up to the point where the leasing company shows up to take the chairs back… and the piano… and the karaoke machine… and the espresso maker… and the Warhol… and, well, just take it…
Not sure if this is any consolation, but I know a guy who has been in the securities markets for 30 years, tour in Nam, went to lot better schools than me… He says the support level is around 7500; if that breaks, 5500.
Can we watch the boxing match now?
December 7, 2008 | 3 Comments
Here are my latest thoughts on JOSB. We don't own the stock, sold it in September. This company is truly incredible; you'll see why:
When I think of the Jos. A. Bank, I think of Yogi Berra's saying "Nobody goes there because it is too crowded."
Only in the case of JOSB, it sounds like this: "Everybody goes there because it is not crowded." As most men who shop there will attest, you are lucky to see and handful of customers shop at there at once at any given time. Nevertheless, it seems that JOSB operates in a very different economy and there is an incredible disconnect between its performance this year and the rest of the economy as well as other retailers.
JOSB reported 3rd quarter numbers couple of days ago and they were stellar even by a healthy economy's standards.
They were truly incredible considering that negative double-digit same-store sales for retailers have become the norm. JOSB reported same store sales of 7% for the quarter (the company doesn't report monthly numbers anymore). Total sales were up 13.7%. Operating profits before taxes were up 20.3%. Cash was up year-over-year, and inventory growth lagged sales. Every single metric was simply beautiful.
A great number of the company's stores were opened over the last three years which puts them in the category of "immature." New stores, almost by definition, generate lower sales than mature stores. As stores mature, same store sales rise and profit margins expand. In addition, the company is able to spread advertising dollars against a large store base, which is another reason why the margins increased.
By the year-end JOSB should have over $100 mln of cash, which is about a quarter of its market cap. The margin expansion may actually continue into next year. JOSB said that it will slow down store openings next year but it will increase offerings of big and tall merchandise. I believe this will help JOSB generate more free cash flow as well as drive (a much higher margin) same store sales. At some point the economy will catch up with this retailer, but a lot of internal positives I just mentioned should mitigate the external negatives.
I presented JOSB at Value Investing Congress in Pasadena this year (see slide 31).
December 7, 2008 | Leave a Comment
Tonight I sit at my computer and hear the wind outside moving my wife's wind chimes. It is a very cold evening with snow on the ground and ice on the roads and walks and a good night to be at home. I have been to downtown Cleveland on nights like this for football games and have seen poor souls sleeping next to heated grates on the sidewalks or under blankets and newspapers on the park benches. People look the other way so not to have to acknowledge them. Many will say they are there by their own volition. I just visited my fridge and find it so full I can barely close the door! I was recently at our local Bob Evan's Restaurant and inside the door they have a tree (through the Salvation Army) that has tags with names of needy children on the branches. Vickie and I always take a couple of tags and buy a gift for a deserving child. This Christmas season many a child will have nothing under the tree (or even a tree) to occupy their time on cold winter nights. I cannot save the world, but can bring some cheer through taking some of my own time to buy a gift or two for those much less fortunate than I. I have a nice warm home and a clean bed and my cupboards are full to the doors with food. One can reason that many are in a bad way due to drugs, drinking, smoking, gambling. But one needs to take the time to reflect on how one is blessed in so many ways. I consider time in my own life a very precious commodity and do my best to manage my time and do some good in any way I can each day. Tomorrow after church we have baskets to deliver to our shut-ins. I will take the time to deliver some baskets to our local nursing homes where many there never see anyone other than the staff on hand during the year. The sands of time stop for no one and one day the silver cord will be loosed for all of us. So take the time and see how you can do some good over the holidays and any time during the year. The time will be well spent, I can assure you.
December 7, 2008 | 3 Comments
I've always been intrigued by circular definitions, which are described as, the meanings of whatever is to be defined are found in the definition itself. Time is one of those constructs that might exist, but one would be hard pressed to find a definition of time that didn't have "time" included in the description. Many other circular definitions exist in the world, and many fundamental units such as the kilogram are best described by circular definitions. Circular definitions, sometimes paradoxical in nature, extend to other areas of nature and humanity with regularity. One would be hard pressed to define exchange without including some aspect, meaning, of exchange in the definition. I can't think of how one could define the meaning of the word trade, without having an element of the meaning of trade in the definition, Trade and exchange could even be used interchangeably Debt could be another term best described with a circular definition, as I'd be hard pressed to find a meaning that didn't include owing something in the definition. Value, as in monetary terms, is another construct that could best be described by a circular definition. Although it's a stretch, the word money, when stripped to it's essence is best described using a circular definition, as "medium of exchange" is still money. It seems that when you drill down to the essential things in science and nature, the building blocks, the things we take for granted, circular definitions pop up with increasing regularity. If fundamental units like time and mass cannot be described without resorting to circular definitions, then our entire bedrock of human knowledge, from the time of Aristotle, is laid on quicksand.
Art Cooper writes:
The bedrock of human knowledge is in fact based on universal human experience in its broadest sense. Your criticism of circular definitions brings to mind Noam Chomsky's universal grammar, which relates to universal human experience. There is a universal human understanding of such fundamental concepts as time and mass, although there are cultural differences in the way such concepts are perceived.
Vinh Tu comments:
For those who are inclined towards things computer-sciencey, the free MIT online book Structure and Interpretation of Computer Programs is great, and in particular I found the chapter and lectures on the "metacircular evaluator" to be mind-expanding.
Vincent Andres writes:
Among the best things I have read about time are :
from I. Prigogine
1. La Nouvelle alliance - avec Isabelle Stengers, 1986,
2. Les lois du chaos (Le leggi del caos) - 1993, ISBN 2-0821-0220-3
I think 1. is : Prigogine, Ilya; Stengers, Isabelle (1984). Order out of Chaos: Man's new dialogue with nature. Flamingo. ISBN 0006541151. Unfortunately, I don't know if 2/ was translated in English.
Both books are clearly written (but not always easy). It appears I. Prigogine did a great work as a contemporaneous scientist. But in those books he also achieves a truly impressive history of science job. It's this sort of book you just regret to not have read earlier.
I'd like to hear about other good books/texts on the topic of time.
Phil McDonnell adds:
How about this for a non-circular definition of time:
Time is a condition of increased entropy in the universe.
The usual meaning of 'circular definition' is when someone uses the word itself in an attempt to define the word. In order to understand such a definition one must already understand the word.
However this discussion has embraced a much wider interpretation of the word circular. If I understand correctly it is that a definition is equal to the thing itself. That is always true for every definition. A thing is equal to itself and by extension to its definition.
Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008
Jim Sogi writes:
In Henri Poincare's time, there was great dispute over time, where the meridian would be and exactly what time was it? Two places could not agree on time without adequate communication and accurate clocks, neither of which were available back then.
Now time in data is still an interesting issue. Time in Europe, NY, Chicago, Tel Aviv, Japan… whose time is it and what time is it really? Whose framework will prevail. I think this is still contested daily and weekly now. If we take a holiday, does time stop? Who is moving the markets? There have been many big gaps when our markets are closed. Whose time is it?
For years I have been an investor, always trying to see the positive and believing that free enterprise and capitalism is the path to prosperity. Work hard, save your money and invest in the stock market. I also believed that owning a beautiful home was a good investment as well. There was a time when America was the envy of the world. Now we are the fool. Our financial system as we know it is gone. Lehman, Bear Stearns, AIG, Fannie and Freddie, Merrill Lynch… gone. Citigroup would fail if not for the bailouts and the great Goldman reduced to a bank. Record layoffs, record foreclosures and trillions of dollars in 401(k) plans and savings wiped out in a year. Millions of lives have been destroyed. Why would anyone want to invest in this country that provides no healthcare, where the states are mostly bankrupt themselves and asking for money and can’t even make their unemployment payments to 10 million unemployed, where a bank will kick a family out in the street because a man lost his job and fell behind on a loan payment? We are the laughingstock of the world. Perhaps the market will rebound but why in G_d’s name anyone would want to invest in this country is a mystery. Substantial damage has been done and it will take years for confidence to return. Why leave your hard-earned dollars in a retirement account that can lose 6% in less than half an hour? Why buy a house that can lose 50% of its value in a year and then risk losing your downpayment and foreclosure when the average shelf life of a job is only three years? An elephant stampede Lobagola into stocks? Makes perfect sense — elephants have poor eyesight and fail to see what is immediately in front of them. In spite of the impressive Friday reversal and clearing of the 20 day moving average and IBD conviction that we are in a confirmed rally, this market isn’t finished until everyone is wiped out. They say the market foresees the future and rises six months in advance of a recovery. Who among us believes that the economy will recover six months from today? We are truly in uncharted waters and a drop of 40% from this level on the S&P would take us to the 50 year long term trendline. Perhaps then the risk reward ratio will favor investing in a country that doesn’t take care of its own people.
December 7, 2008 | Leave a Comment
A snowy and cold night here in Belpre, OH and I've been thinking about what it takes to excel and gain that all-important edge in any endeavor. Recently Alexander Moiseyev of Dublin, OH competed and won the Gold in the first ever Mind Sports played in Beijing. Alex is our current Three-Move Restriction World Champion in 8×8 English-style Checkers. Players came and entered from all over the world and rounds were played all week. Players had to make and submit hand written notations of their games played after each completed round. Players of Alex's caliber use the vast literature on Checkers which goes back to the 1500s to locate obscure lines of play to introduce against unsuspecting opponents. Or the player will find an improvement to published lines and use that when the opportunity arises. This "springing" of improved play in a game is called a "cook" in the parlance of the game. Players today have programs with six or 10 piece databases that will analyze billions of possible combinations of moves. Recently Dr. Richard Beckwith (also on the USA Beijing team) came down from Cleveland for Thanksgiving at our home and spent the night. He pored over my Checker library during his visit. We played four games and we both wrote down our games. He is a top Master player and I know he will review our games when he gets back to his home. Top Master players look over and study all the past games played that they can amass in their own manuscripts.
A carryover to the market exists from Checkers in that the astute Market player keeps detailed notes of current and past performance of stocks in order to have well organized and easily accessible notes for research. Chair recently commented on DailySpec how the late Richard L. Fortman had a massive index file of games that he could easily refer to for game annotations. "Knowledge is Power" and the well-organized person in anything will over time develop and maintain that ever important 'edge'.
December 7, 2008 | 4 Comments
Economic news is the mainstay of media reporting, especially between natural disasters. Unfortunately, economic news seems only worth reporting when it is bad news. The media has had economic news generally backward over the last few years. The housing boom was reported as great news. Middle-income and low-income people were getting loans to buy their first homes, thanks to Congressional pressure on the Fed and banks. Everyday Americans were seeing their home equity increase significantly, so they could borrow money to travel and buy. This was all great news for the retail industry and new retail chains blossomed.
Home building was creating millions of jobs nationwide, and generating fast rising sales for Home Depot, Lowe's, as well as lumber, window, and appliance companies. And times were especially great in the home town of New York Times reporters, as Wall Street was generating vast fees from new mortgage-backed securities (after Congress had over-regulated business IPOs).
We now know that much of this news was misunderstood and misreported. We now know that new federal regulations and Congressional pressure on Fannie and Freddy, combined with weak oversight of mortgage brokers and NGO threats against banks to expand loans to minorities, led to way too many home loans handed out to unqualified and under-qualified home buyers and speculators.
Just as governments has unique powers to create financial crises, markets have unique powers to quickly clean up the mess. The press is again misunderstanding and misreporting the clean-up process. Government interventions throughout the US economy led to complex distortions in health care, energy, education, as well as housing and many other sectors.
In housing, the clean up process starts with redeploying millions of workers from the housing industry to other industries. If financial interventions encouraged companies to build a million too many homes, it is important for home builders to slow down and let real market demand for homes catch up. The government has also been cracking down on immigrants, shipping or scaring hundreds of thousands back to their home countries. That lowers demand for housing and for all the other goods and services they were purchasing while in the U.S.
So PBS is reporting the millions who have lost their jobs as bad news. Would it be better news if all these workers were to continue building homes, pouring concrete, taping drywall, and all the other tasks that surround the homebuilding industry?
The New York Times reports similar news of expanding factory closures and growing unemployment in China. Thousand of the factories that were producing goods for export have apparently closed as export orders from the US have stalled. Is this really bad news? Is there some reason why workers and factories in China can't be reoriented to produce goods and services for 1.3 billion Chinese people, nearly all of whom lack adequate housing and dream of the home appliances we take for granted? Markets work, and when companies lose overseas orders, they look to for other opportunities. If company owners and managers can't find profitable opportunities, they lose their claim on capital and labor. The sell their assets to other managers or return them to creditors. New managers take over, as they should. If the U.S. auto industry cannot figure out how to build cars that people what to purchase, they similarly lose their claim on auto industry capital and labor.
The great advantage the U.S. has compared to over-regulated Europe is that U.S. firms can quickly release assets and workers to new opportunities. John Stossel, in a segment from a ten years ago on outsourcing, reported that the US had lost 391 million jobs since the 1980s but had also created 411 million jobs. While European welfare states were mandating lengthy unemployment payments to laid off workers–creating strong incentives to stay unemployed–across the U.S., shrinking firms let workers go by the millions so they could retrain and staff millions of new firms in growing sectors of the economy. Stossel reported on a Levis factory in Tennessee that shut down, laying off hundreds of workers. But it was remodeled into a college, and most workers found better jobs in other industries (we have a link to this online Stossel segment here.
So job losses, reported as terrible news, and as open invitations for the next administration to massively intervene in the U.S. economy, are in fact good news. Job losses are good news in the sense that a hangover is good news. The discomfort of a hangover is our body adjusting to the abuse visited upon it the night before. It is both a warning against future abuse, and a call by the body to replenish lost liquids, salts, and generally readjust operations. Some heavy drinkers fight hangovers with Bloody Marys and other alcoholic drinks in the morning. They generally die young.
As we learn from the great masters of trading, one has to use all his edges to beat the market. But this example of having an edge over your opponents is the most unusual I have ever heard of. And this comes from soccer. If you think about great soccer players (excepting goalkeepers), you think about how fast they are, how well they can handle the ball, how great their free kicks are. But have you ever heard anybody praising a soccer player for how he can throw in the ball? Nor had I until I read about a certain Mr. Rory Delap from the English Premier League . His team Stoke City scored "eight Premier League goals this season, five have come as a result of a Delap throw-in," according to this BBC report. Also watch this video on youtube. Have readers heard about any similar unusual (but fair) edges in trading?
Matt Johnson offers:
How about staying small, like managing assets under $25 million US? One can stay nimble, pack on size when need be, and be out with minimal skid. One can day trade with this sum, and make a contribution to the P&L, or bet smaller for the long pull. It's kinda like a throw-in.— keep looking »
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