Jan

31

I thought it would be useful to look at the long term drift and variability of holding futures contracts in various markets from the beginning of this century to current spanning a nine year period with 2250 observations each.

market     mean/dy    % up   s.d.     base                                        

S&P            -04            52     154      10000                                      

Nasdaq       -01            52      51       1000                                     

dax           -02             51      79       5000                                     

eurost       -01              59      51       2500                                     

russel         00              53      76       4500                                    

crude oil      -04            51      95       3572                                    

nat  gas       -05           49     242       6000                                    

gold            02             53      76       7500                                    

eurodllr        02            51       75      14000                                    

dllr/yen        -01           50       72       10000                                    

bond           03             53      65       12000                                    

bund           02             53      35       12000        

Some regularities appear. The stand deviation of nas and nat gas are much higher relative to their mean level at 5% than the others. The least volatile market is bunds which varies just 0.3% a day relative to its mean. Crude varies 2.5% a day. The S&P varies 154 points a day. That's 15.4 big points , i.e. a move from 1000 to 1015.4, a variability of about 1.5% a day which is average for all markets. There is no tendency for upward drift in stock markets from the beginning of 2000 or from other starting points back to year end 1995. There has been adrift of bonds and bunds up, oil and natural gas down.

Jan

31

 As a builder I use various size plastic tarps to cover and protect materials, roofs that are torn off in event a sudden downpour appears out of nowhere, covering framing lumber, etc. The Feds version of a TARP is used to cover (up) some things as well. Now I see where part of the government 'stimulus plan' calls for the expenditure of 600M for the purchase of all types of 'fuel efficient' cars for government workers to use in an even bigger 'car pool' . Knowing the government they will now reduce the existing fleet of cars, but will in fact add more drivers to the already bulging government to drive that new fleet of cars! Throwing good money after bad will solve nothing.

The Dow almost got below 8000 Friday. Gold was up $27 Friday. Will Gold reach $1000 before the Dow reaches 7500? I also note that to get a Cabinet position one must exhibit some type of prior tax issue to be considered! I did not vote for Obama, but support him 110% in what he is attempting to do to save our economy. I had a renter move out today as he lost his job at a local car lot here in Belpre, OH due to no sales on the lot.

Jan

31

A pipeline contractorI ran into a pipeline contractor I have known for years and we were chatting and I asked about his jobs. He said things are slow and jobs he bid he got beaten badly by others at bid openings. All the jobs he bids are union/prevailing wage that with all benefits included comes out per hour per worker at a staggering 52.00 !! The stimulus is geared towards roads and bridges etc that mandates that wage per hour. The little average contractor will never see a penny of the stimulus money. If I built homes and paid that high wage you could never sell it as the total price you would final out including land and all materials.

Jan

31

 I trade mostly spot forex, so my comments are limited to that market. Also, my trading is moderately high-frequency.

From my perspective, there has been a pretty big change since mid-2008. Liquidity has dried up, and spreads have increased. That makes it more difficult to be profitable. For example, one year ago a typical spread in a currency pair might have been 2 pips, and now it is 3 or 4 pips. Furthermore, it is hard to get filled at a decent price for larger orders…it seems like market reactions to your order are a little more sensitive.

Not surprisingly in a time of such turbulence in all financial markets, volatility has increased. I'm seeing more breakouts, which I attribute to greater uncertainty and thus sensitivity to market-impacting news. Or, perhaps it is just that the news recently has been of greater "amplitude".

I think there has been a gradual trend to return to what I would, with my limited experience, consider "normal". That process will likely require many more months. As you may know, liquidity in the forex markets is primarily supplied by banks, and to the extent that they become more risk-averse, the market will continue to suffer.

Jim Sogi's question was:

Have you noticed a change in the markets due to the changes in the large investment banks such as GS, Leh, Bear Stearns or other large funds? I can't really quantify it or pinpoint it in a meaningful way yet, but it just seems different, more rhythmical, less jerky, and easier in some ways. It seems more large crowd oriented, fewer huge orders in the pipe or ts.

Stefan Jovanovich adds:

In the days when boxing was THE American sport and New York City was its Mecca (when, according to the promoters for the old, old Madison Square Garden at least one of the fighters had to be or pretend to be Jewish if you wanted to draw a decent crowd), fighters would work a whole round to set up one punch. George just won the prize for champion of the List for January with a knockout right cross at the bell.

George Zachar writes:

The few pools of liquid discretionary capital remaining face the prospect of Barney Frank acting as a Caligulan Nero overseer.

Transient calms of nostalgic transactional ease only remind us of the wreckage on the seabed, and capriciousness of our new masters.

The fixed income market, once the most comely of mistresses, is now a Frankenstein's bride; a halting, disfigured, spastic wreck.

Jan

30

 There have been 30 days in the last 10 years when both bonds and stocks decline 1% on the same day in conjunction. There were three in 2008, three in 2007 and none between May 7 2004 and June 7 2007. It happened today with bond futures down two full points and stocks down 28. It's what I used to call a very healthy day when I worked for The Palindrome, as the juice was taken out of all markets and both the stock and bond vigilantes were doing their job. It occurs two days after a very unhealthy day on Tuesday, January 28 when bonds were up two and stocks up 10. The move in bonds down from 141 at beginning of year to 126 1/2 at the close day is one of the greatest in history and should give one pause.

.

Jan

30

In case you did not hear about this already, in his research, Phil Maymin concludes the following:

"There appears to be a negative relation between music and market volatility. In tumultuous financial times, people prefer steadier music, and in stable financial times, people prefer tumultuous music. Furthermore, it appears as if musical tastes has some ability to predict future market volatility.

The link between music and trading has not been studied in much depth, partially due to a difficulty in obtaining quantitative data. This paper shows not only that there is a link between song and stock volatility, but that the causality appears to go in the least expected direction; namely, this year's popular music seems to predict next year's market volatility."

The full article can be found here.

Perhaps I should consider switching from my plain piano preference to Lady GaGa and Beyonce.

via legacy daily

Kevin Depew comments:

This is less "scientific," but it is an interesting visual of what you are talking about nonetheless.

Marion Dreyfus adds:

From observation over decades, films too are predictive–chaotic times are concomitant with pacific and edenic films, whereas periods of economic calm are positively correlated with martial arts and violence-prone lensers, in much the way the heavily researched topic of skirt-lengths are a secure indicator of economic roller coastering. Long and modest just anterior to boomtimes, short and shocking, with downturns in fiscal friskiness.

Jan

30

 There is headline after headline about the commodity houses, like Koch Trading et al. getting long the underlying (talk at the time was low 50s) and having the deep pockets to carry six months or longer.

It strikes me as a bit strange since how often is the media ahead of the big trading wins? Maybe it is as simple as that this time around.

Kim Zussman writes:

Lots of moves obvious in hindsight are just too painful/risky to hold. One recalls certain home-builder shorts ca 2004-2005, which rose substantially before ultimately doing what was expected (of course after the positions were closed).

One definition of successful active investing is funding your conviction, and holding on through destructive price action until you are either rich or ruined. Survivor bias of war heroes, etc.

Jan

30

 Surprising that this is the first time they will meet in the Australian Open (the final) as they are the game's two most dominant players of the last 4 years, and not surprising as Nadal often has difficulty matching his claycourt prowess on hardcourts on which this tournament is played, we all get a marvelous treat late Saturday Night (or early Sunday am) to see these two battle it out for the title of the year's first Grand Slam.

The questions surrounding this match are many, but the keys:

1. Can Federer master his own surprising mental inadequacies often revealed during past battles with Nadal?

2. Will he revenge his Wimbledon loss and 4 successive French Open defeats?

3. Can Nadal win a Grand Slam on a hardcourt?

4. Will Nadal's fitness hold up after a 5 hour semifinal?

Impossible to know what will happen, just as it is impossible to know if this market has reached a bottom. Past Grand Slam Nadal/Federer encounters and SPX reaction over the next week or two:

French Open 2005 - Nadal def. Federer semifinal - SPX flat

French Open 2006 - Nadal def. Federer final - SPX lower

Wimbledon 2006 - Federer def. Nadal final - SPX higher

French Open 2007 - Nadal def. Federer final - SPX lower

Wimbledon 2007 - Federer def. Nadal final - SPX higher

French Open 2008 - Nadal def. Federer final - SPX lower

Wimbledon 2008 - Nadal def. Federer final - SPX lower

Australian Open - Nadal vs. Federer final - SPX ?

Should be a great match………

Jan

29

 New York today was cold, wet, and raw, but I found this to be a warming tale, one including an unlikely cast of supporting characters: Muammar Qadaffi, Marc Rich, and the commodities trade.

By way of background, one of my older brothers is on the board of a wonderful little middle-school on the Upper West Side of Manhattan. An academic jewel couched in modest confines, some might suggest that the place looks like a factory.

But that it is.

They take inner-city kids that are even more academically talented than they might be economically disadvantaged, systematically educating and nurturing them to the point where the prep schools of New England and Manhattan always come eagerly knocking, quick to admit their graduates under very workable financial terms. That's how much those schools love the product. Ultimately it is a pipeline to the Ivy League for those whose considerable spirit and talents might otherwise fall through the ordinary system's cracks. And those kids never forget, as soon will be made clear.

I've never seen anything quite like this place. It is the noble brainchild of the headmaster, Brian Carty, a most remarkable, resourceful, and redoubtable soul. A guy as kind as he is brilliant as he is dogged. So much so that he and his vision remain the subject of a Harvard Business School case study:

"…To think about corporate responsibility, replication of an organizational concept, and succession planning. To challenge students to consider why this organization has been so successful. Also to consider whether the concept can be duplicated elsewhere and, if so, how. To consider the degree to which Brother Brian is central to the community, and what action, if any, is needed to plan for his successor…"

How cool is that? Luminous minds brainstorming how somebody of note might be duplicated.

So what does any of this have to do with Qadaffi and Rich? I recently caught up with a  story from last month's NYTimes, a sad story with a happy ending, and smiled one of those experienced smiles, having realized long ago that the emotions of sad and glad are by no means mutually exclusive states of mind. It's an amalgam that only a life less lived is without.

It seems that one of Brian's former students, Andre Nikolai Guevorguian, was working for Rich as a commodity trader, and found himself on that ill-fated flight over Lockerbie back in '88. That's the sad part.  Years ago over dinner I had heard from Brian the long and circuitous path the litigious fallout from that tragedy had taken, and how it turned out to have a silver lining for the school.

But to see the story in print brought the tale into high relief. It reads like the script of a sad film that somehow salvages a happy ending. Very Capraesque. And an admirable antidote to the slushy, sloppy weather in NY this afternoon, Andre's mom seeing that De La Salle's good works ending up with $2.47m of her late son's legacy, the rest going to Choate and Harvard.

Oh yeah, the Times columnist that wrote the piece, Jim Dwyer, turns out that he's a former student of Brian Carty's as well. Hadn't known that before, but wasn't surprised to learn it now.

Like I wrote earlier, kids taught well tend to never forget.

What a fine day.

Jan

29

A while back I pondered how some of the Beatles songs might have worked out differently had the lads been bitten by the trading bug. Would they have written:

All You Need is Cash

Don't Mark Me Down

When I Saw Her Shorting There

Day Trader

Hey Crude

Bet it, Lee

Dear Prudent (Man)

Penny Stock

Sgt Peppers Lonely Shorts Club Band

She's Leaving Home (Depot)

You've Got to Hide Your Dogs Away

I Am the Wall Street

Norwegian Wood (a good day on the Scandinavian bond desk)

Hello, Good Buy!

Maxwell's Silver Outlook

Backing the USSR

With a Little Help From My Friends (more recently the Galleon company song)

The Long Unwinding Debt

Get Black (popular with compliance departments)

Here Comes the Stun

RICO Raccoon

Can't Buy Me Bonds

Help! (works either way)

Broker You're a Rich Man

I've a Got a Feeling / Hurl (medley)

If It Fell

Sum Together (also known as The Settlement Song)

Act Naturally (also known as The Audit Song)

Things We Shed Today

Everybody's Got Something to Trade Except for Me and My Monkey

Helter (Tax) Shelter

When It's at Sixty-Four

We Can Work It Out (margin call set to music)

You Never Give Me Your Money (second, more urgent margin call set to music)

and finally …

Fool on the Till

Jan

28

Nothing worked today. All statistical relations failed.

We had multiple down days and down opens, then a huge decline occurred.

The bonds and S&P had coupled together on the down side two days in a row, and then the bonds decoupled up sharply while stocks kept pulling down like an archetypical electric circuit.

CIT finance got its 5 billion loan conveniently announced at 1 pm, and it was good for only a 10 minute ½% rally.

The Fed came in with 5 billion of agency POMOs to liquandize their clients but the market still managed to drop a nice ½% in the afternoon, repeating for the third day in a row a strong morning and a terrible reappraisal in the afternoon.

Companies continued to beat their earnings forecast with 80% beating the star estimate, the highest in history, but instead of going up when they beat them like they did last quarter, this quarter, almost all of them went down.

The techs decoupled from Intel, dropping 6% in the last two days.

The announcement of bullish forecasts for the stock market by the favored analysts did not stem the tide when released at the propitious moment.

The early moves set the fixed number boys the wrong way the rest of the day.

The moves after Oct 27 typically extraordinarily strong for the techs were among the worst on record.

After shaping up on Oct 27 the way it has so many times in the past with devastating verisimilitude, instead of turning around the way it's supposed to, it had the worst decline in a month.

The S&P went down yet again after setting big minima upon big minima in the previous days, but did not deign to give a monthly minimum.

The most similar days to today performed exactly the opposite of what happened today, thereby proving once again that statistical significance has nothing to do with predictivity.

Yes. That's it. The only thing that worked was the principle of everchanging cycles. whenever complacency sets in. Whenever it 's guaranteed that the market will rise — why then the trainers tell the boys not to whip them too hard in the closing stretch.

Jan

28

 One of my favorite lines in a philosophical novel (Sophie's World) is "Why is Lego one of the most ingenious toy in the world?" My thoughts are that it is timeless, creative beyond imagination, durable, ageless (adults can play too), and global. Stocks are I feel parallel in that they too have to be one of the most "ingenious speculative toys in the world". What are some of the reasons for you? Many are the same for me as for Legos. 

V. Katsenelson adds:

This is what I wrote awhile back about why I love investing: I love everything about it:

The uncertainty of every decision. The intellectual exercise of putting different pieces of the puzzle together while never having enough information at your disposal. The constant battle with one's emotions, the hardest and the most important battle of all. The never-ending pursuit of perfection despite its unattainability, how just when you think you have figured it out, the market has a new lesson in store for you. The humbling aspect of the market, arguably the most humbling mechanism ever invented by humans. The people, the debate, the search for the truth. The fact that for every trade there are two opposing sides (buyer and seller), and time is the variable that separates them from discovering who was right and who was wrong. And finally, the hidden, rarely recognized, but fascinating impact that randomness plays in many outcomes.

Jan

28

 One of the strongest traits that Vic speaks of often is humility. I was reading yesterday on the Battle of Waterloo. Napoleon smugly commented that morning over breakfast "I tell you that Wellington is a bad General, the English are bad soldiers; we will settle this matter by lunchtime." And we know what happened next. It's amazing how I get whacked by subtle arrogant moves in my life/markets and am knocked to my knees. GE is currently that example of arrogance as well as friendship, marriage, fatherhood, and DailySpeculations. I have lately been in a spiraling downward depression for about two years in which nothing seemed to go right no matter what the effort was. That has humbled me to the point to where great things are starting to happen due to being brought to my knees in pain and accepting my arrogance and owning it.

Jan

28

I found an article in the Times of London fascinating:

PARTS of the United Kingdom have become so heavily dependent on government spending that the private sector is generating less than a third of the regional economy, a new analysis has found.

The study of “Soviet Britain” has found the government’s share of output and expenditure has now surged to more than 60% in some areas of England and over 70% elsewhere.

The state now looms far larger in many parts of Britain than it did in former Soviet satellite states such as Hungary and Slovakia as they emerged from communism in the 1990s, when state spending accounted for about 60% of their economies.

Jan

27

 I was driving down US 41 and passed by the local McDonalds when I noticed the sign that the McRib is back. That was enough to get me to turn around and pull in. While there are many BBQ snobs out there, myself one of them, I still find the McRib to be delightful. The McRib is a tasty piece of mystery pork, BBQ sauce, onion, served on a hoagie roll. The sandwich is quite delicious served with a correct sauce/meat/bun ratio. The McRib is messy, but not messy enough that you would have to worry about your clothes. Their BBQ sauce is quite tasty, especially for a fast food place, which is proof that McDonalds testing kitchen is doing its job. The main thing about the McRib is that you can be anywhere in the country whether it's in Maine or Alaska, and you can get an instant BBQ fix. The McRib is not very filling, and it takes two to get my fix.The McRib, served with an order of fries (McDonalds fries are the best fast food fries in the universe) is a meal worth stopping by and savoring. While I love my stand alone BBQ places and frequent them often, there will always be a special place in my heart and stomach for a McRib.

Sadly, the McRib is one of those sandwiches that McDonalds brings out only every so often. If the McRib were on the menu all of the time, I'd probably eat at McDonalds a lot more than the couple of times a month I normally go there.

Jan

27

Chutes, from Jim Sogi

January 27, 2009 | 3 Comments

 Recent day market charts are forming a tectonic pattern seen in mountain formations created by the tectonic forces pushing up plates creating chutes down which skiers ski in Alaska. There are tectonic forces at work in the market and there are plates of players getting squeezed around creating these patterns. As in the mountains, the chutes are steep, vertical, cover large vertical footage, are very dangerous. There are rocks on either side and avalanches make negotiating them quite dangerous. All like current markets despite the curious fact the but for the movements, we are close to unchanged for two weeks. Kind of like heli skiing in some ways, straight up and down. The Japanese candlestick guys have a name for something like this, called mountain tops, or river bottoms. The distinctive feature of the chutes is the chutes. Appropriate since in Alaska the mountains drop straight into rivers.

(I skied down some of the chutes pictured )

Valdez, AK

Oz

Sphynx

Jan

27

 The fact that our lives belong only to each of us individually is completely lost in this political environment. The most patriotic thing any of us can do to benefit our country is go out and get a job on our own, do great work at that job and improve our lot in life.

Then if we choose to, we can give back in whatever way we chose.

For instance, you become successfully self-sufficient and raise a family that grows up to do the same.

You could volunteer and teach people how to fish (as opposed to the government that gives them fish or, in the case of this misguided idea of "national service", forces them to fish).

You could further your education.

But at no point, ever should you be a burden on society or expect society to anything other than what the Founders intended (society being the government). If you're a child, you get a pass… except that you must work constantly to educate yourself and develop a good work ethic.

If you are physically or mentally unable, you get a pass and charities or family will care for you (believe me, it doesn't take the government to do it… you'll be surprised at just how generous people will be when they don't live under the oppressive rule of the government that encroaches further and further into their lives and finances.

It's time we do something in this country that has never been tried: laissez faire politics. Busybody politicians do not know what's best for me and my family.

Kim Zussman looks at the investment implications:

SocialismOK but 'splain me this: If free markets reward hard work, independence, and innovation, why should one work hard when the markets become unfree? Many folks paying usury taxes on their marathon efforts might resent decreed redistribution of the fruits of their labor "putting America to work" (whether they can or not, qualified or not, want to or not). If the hard workers pull back, and the soft workers get softer, fiat monetas vaporis.

Increasing socialism is very bearish.

Pitt Maner III adds:

A couple of forthcoming books — no doubt timed for the New New Deal — make the opposite argument:  irrational and animal-spirited humans need government intervention.

Free Market Madness by Peter A. Ubel

"What’s wrong with free market theory? It doesn’t take into account our human nature. We humans aren’t entirely rational creatures.[…] All too often our subconscious causes us to act against our own self-interest. Yet our free-market economy is based largely on the assumption that we do act in our own self-interest. In this book, I argue that the combination of human nature and free markets can be downright dangerous for our health and well-being. That government must step in and further regulate the markets[…]".

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof and Robert J. Shiller

"Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government–simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life–such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes–and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them."

Stefan Jovanovich concludes:

 As with most "debates", this one has the fix put in with the premise. (No wonder the citizens of Athens got so tired of the Socratic method that they asked its creator to take a walk.) Neither Ronald Reagan nor Margaret Thatcher thought that liberty = perfect rationality. No one who spent most of a lifetime working in Hollywood or being the only woman in the meeting could think that even imperfect rationality had much to do with human conduct. (No wonder they liked and respected each other.) Mr. Ubel creates the same egregiously phony straw-man by his thesis that the "free-market economy" is based on the "assumptions that we do act in our own self-interest." Markets are never "free"; there is always a house and usually someone has an assured position at the rail. Yet, even with their corruptions, the uncompelled exchanges between private parties still work far better than any prescriptive allocations determined by the people with the best transcripts. Even a little bit of liberty works far better than the pure hierarchies of authoritarian structures. What really screws things up is when the people who benefit most directly from government interventions completely rig the game and call it a collective good. Mr. Ubel's use of the universal academical "us" - "human nature and free markets can be downright dangerous to our health and well-being" - is the classic aggregation fallacy that makes so much of economics remind me of Tennessee Williams's best line ("File this under C for crap").

You had it wrong, Mr. L. The first thing to do is kill all the preachers of the economic doctrine who never have to worry about the actual cash market for their wisdoms. Or, even better, don't kill them and make them get by on their royalties from writings other than the required text books. Without the state-sponsorship of their compulsory indoctrination of the collective "us", the lawyers would hardly be much of a threat.

Sorry for the rant, Pitt; I will now retreat to my private, unmortgaged cave and consider why my nature remains so persistently unable to see the obvious benefits of Fannie, Freddy and the future Maes now working together to build a "more robust, behaviorally informed Keynesianism".

Jan

27

Magic, from Jim Sogi

January 27, 2009 | 1 Comment

 There are typically three stages of a magic trick. First, the pledge is something that appears ordinary but is not. The magician uses distraction, misdirection, deceit and illusion. The turn is where the ordinary becomes extraordinary. Then the prestige is the effect of the illusion producing a surprise and amazement.

The market, (and our government perhaps) is involved in an intricate magic trick involving the markets at the present time. What started as an ordinary dip turned into an extraordinary global crisis. Misdirection, deceit and illusion abound as evidenced by bailout funds going to fund massive bonuses and lavish office redecoration, buyouts and private airplanes. Apparent failures blamed on the markets but rigged to hide huge inefficiencies. Showing huge misdirections such as Madoff distracts attention like the pretty magician's assistant. The market itself makes horrifying drops or glorious rallies like this Monday morning only to fall back to break even territory.

The trick here as part of the audience is to figure out the illusion that is going on. Things are not as bad as the pledge and turn are showing them to be. Many interests will profit from painting a bleak picture to the public audience. The government needs financial panic to increase its scope. Before people feared terrorists. Now the government is painting fear of economics to increase government power. Big inefficient, bloated, top heavy companies need to create the illusion of imminent collapse to receive billions. Big investors need to create fear to shake out the last holder to be able to buy the lowest prices in decades before and hence. More than entertainment is at stake. We are coming near the end of the turn. Out of the hat will come a wonderful and breathtaking recovery leaving all amazed.

Rod Fitzsimmons Frey adds:

An interesting aspect of a successful magic trick is that it requires the complicity of the audience. Viewers, for their own reasons, want to be deceived and assist the magician in accomplishing that goal.

The boy in the front who yells "I know how you did that!" is not appreciated by the other audience members.

Jan

27

 In The Last Lecture, which has already been presented and discussed in an inspiring post by the Chair,  Randy Pausch writes: "It is not about how to achieve your dreams. It's about how to lead your life." As this is profoundly true, I would add: "with the curiosity to experiment and explore the dreams of a child". Only a child can have the wonderful and amazing ingenuity to blend real life, dreams, games. Their visions are the most fantastic worlds where everything is possible, where tens of pterodactyls are defeated in combat by a brave warrior who defends his beloved princess with her pink dress. It's a world where dreams are for real and the real life is a dream. The problem is how not to be afraid of pursuing these dreams. And this is possible only if you remain a child. Often life makes you see more obstacles and difficulties than there are actually. Next week I will go with my daughters to Disney World to let them dream. Who knows. May be they will grow up different from what I am.

Jan

25

 Like the beat beat beat of the tomtom
While the market resumes its fall
Like the tick tick tock of the 800 clock
And the certainty of the margin call

Like night and day, the market has been inevitably drawn to the round number of 800. It started the year well in the 900's

            hi    lo    cl

1/05     934 916 927

descended with certainty to break below for a second on

1/20     866 798 806

and then descended to the abyss again

1/23     836 799.5 824

One might ask what and who forces the price down to this level, and what it does to people who use stops, and get in over the head. The move occurs in conjunction with the largest drop in bonds history 12/31 141 3/4 138 138

1/23   130 1/2 128 1/2 1295/8   a drop of 12 points in 15 trading days, the previous maximum being 10 points from 7 10 to 7 31 03. Such a bond move above 8 or so has been bullish in the past for bonds and bearish for stocks on the 2 meager occasions its occurred. What does it mean besides kismet?

At the most microscopic level, it confirms the chair's adage that a round number never holds. It also proves the evility of the market in running stops and breaking the backs of all those who wish to ward off total one shot ruin by letting their losses run without stops, thereby bleeding them to death rather than killing them off with a painless one time death. And let us not forget the gravitational pull of the round number as an ethereal force of immutable timeliness.

Remarkably the markets seem to be coming to their senses. Eventually the bond market had to realize that all the new money or debt being created to pay for the trillions of bailouts and guarantees had to come from somewhere or someone. If more money, then certainly it had to lead to inflation. And the liquidity preference theory that because the Fed was buying bonds the price had to go up without limit is shown to fail a critical test, with the expectations hypotheses that interest rates are an average of the discounted rate of inflationary expectations over many years won out. The stock market seems repulsed by the idea that a handful of people are that much more able to decide the fate of who shall be saved and who shall be encouraged to expand than the decisions of the customers. Perhaps it also shows that the basic ethos of the market does not like a few well meaning people deciding how a trillion should be taken by everybody and given to a selected few worthy institutions and supposed linchpins. And that is why I believe the steady beat has been to that abominable 800 level.

Anatoly Veltman writes:

A VIt's true that 800 held by the skin of its teeth last week. I have another important puzzle to solve: Open interest in both bigSP and E-mini experienced record quarterly redemptions when Dec contract expired. While cash-settled futures' expiry is inconsequential — I see only one explanation to record phenomenon: to passively let your position expire and settle (as opposed to place an offsetting order before expiry, or roll-over via spread, or immediately open Mar position), customers had to have lost (en masse) their ability to place orders (even offsetting orders!). And that's another indication of decision power being taken away from customers…

Jan

25

I like GM Miguel Najdorf's definition of intelligence; the speed with which someone is able to change his mind about something. But it strikes me that this may be mainly a trait that can be acquired via education.

There seem to be two major parts to this process:

1. Having enough curiosity to look for alternatives.

2. Being able to admit you were wrong about the previously held view.

This leads on to a possible definition of an 'educational environment', i.e. a place which is able to foster these two.

Jan

25

SlumdogAfter ten academy awards nominations, Slumdog Millionaire has suddenly caught the fancy of every Indian, including other film-makers, artists and the likes. I got to view this movie today.

What struck me was a rather ingenious business mind that is securely and fairly quickly taking over the Bollywood masala-movie-making adventurorium. Think about what such a movie would have done during "good times" unlike the "gloomy times" surrounding the globe today.

It's about a dream-run wherein the least expected of any — a slumdog gets to win the ultimate game of acceptable avarice, who wants to be a millionaire, igniting the passions, the morale & the imagination of a world grappling with a meltdown. Throw in high-strung contrasts of skyscrapers jutting out of vast slums spinning a yarn of a rare positive black swan wherein the entire life-sequence of a guy growing with the flow (sounds familiar with the traders' going with the flow) comes to be captured in a set of twenty or so questions. Any probabiliticist would be inspired to see how a rarest of rare flukes gets enacted out, wherein each travesty of a man carried in its womb the answer to each critical question to his final glory.

Luck, chance, bravado, the persistent human spirit and most importantly the all important element of hope in these times spin around. Each of the three child/adolescent actors who portrayed the growing ages of the central character has done some brilliant acting bringing out the made-of-steel character in equal measure. So, perhaps this movie instead of getting a best actors award (since perhaps it cannot be given to three individuals for playing the same character together) could be deserving of the best director's award for bringing such performance out of new actors.

SlumA catch line in the movie where the malleable brother of the slumdog who has already sold his soul to a gang lord surmises that India is today at the center of the world and he is at the center of the center is the ring fence around the commerce of this movie. The Chindia fears of the West stand diluted in the backdrop of the pain of the slums and yet on the other hand this same moment ignites the global morale back again. A beautiful deploy of the transferred epithet. The other line that comes into justifying my assertion happens when Slumdog yelps to his tourist clients at the Taj Mahal, "You wanted to see the real India, here it is" on being bashed by the tourists' chauffeur when they all return to find that the car tyres and everything else that could have been dismantled have been and taken away by the cronies of the slumdog kid. In sympathy the American Tourists pass on a hundred dollar bill. Yes, this movie tells the Americans that howsoever much goodness you would dole out the real world "Out there" is just what has been shown — a deceitful, emotionless slum!

Even with my critical eyes, I switched off the screen and the player with an elevated morale, that one could just do it, even after landing in a slum.

A savvy commercial play on the mass emotions of the times, produced with one of the lowest budgets with which a film has been made in Bollywood. It perhaps is on its way to jingle the cash boxes in an unprecedented way.

But then, in a free market economy wouldn't the consumer get what it needs most? Here it gets, the "Slumdog Millionaire."

Jan

23

Big Surf, from Jim Sogi

January 23, 2009 | 1 Comment

SurfWe've been having some big surf here lately up to 25 feet. The timing of the swell hitting our local breaks is a big issue. Typically the primary wave model is used, but I've found that in fact the swell period is a better predictor than the wave height model for timing the arrival of the swell. The wave size model is distorted by the interaction of the islands in the swell direction and is usually grossly wrong. Since everyone reads these erroneous reports, we often get perfect waves to ourselves.

-wave height model

-period model

Entering the water over the rough rocky shores requires waiting for the end of a large set waves. We always sit a watch the water for a while before going out and count and time the wave sets to see how big and how long the period between the sets and how many waves are in each set. Wait for the water to run up the shore on the last wave of the set. Jump in and let the outgoing retraction of the swell take you out to sea, and paddle out in between sets. If the timing is wrong, you fight the surge, get pushed back on the rocks, and can get pummeled by the next or the remainder of the large set.

The market has also been having some big waves and it seems anecdotally that a periodic model might be a good predictor for the arrival of the market swells. Of course market wave size is very important and the average volatility is up, but combining timing the entries along with noting the wave size is helpful, just like in the ocean, and can avoid drowning or getting washing machined by the market. Also since the public often follows an erroneous model, it is possible to get good market action to yourself.

Phil McDonnell adds:

Several key points about ocean waves:

1. Unlike sound waves or light waves that occur in a medium, ocean waves occur on the boundary between two media (air and water).

2. Because of 1., wind can have an effect on waves. Waves can add turbulence to wind.

3. Larger amplitude waves go deeper than small ones.

4. Waves sets are formed by the interference and cancellation of multiple waves with similar periods. Effectively the complex of these waves creates a wave envelope which itself is somewhat sinusoidal.

5. When a tsunami strikes the curvature of the Earth acts to refocus the wave fronts about 12,000 km away where they can do additional damage.

Some good discussion can be found at seafriends.org. Especially interesting was the factoid about the Chilean tsunami that traveled at about 500 mph to New Zealand.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Jeff Watson comments:

Swell height and period have another correlation, which Sogi-San doesn't have to worry about with the monster waves he gets every winter. The longer the period, the more powerful the swell. With the same wave heights, I would look forward to a six foot swell with a period of 15 seconds, whereas I might not get too excited about the same six foot swell with a period of nine seconds. I went surfing yesterday and wrote about it:

While I was out waiting for waves to come, I was thinking of how a surfer positions himself to catch a wave. You see waves on the horizon, and knowledge and experience tells you approximately where to paddle to get into position to catch the wave. A successful speculator needs to do exactly the same thing with the market. Practice, experience and knowledge will tell you when and where to position yourself with entry points to try to ride the market wave. After you catch the wave, experience tells you how to ride it….whether you bail out, wipe out, tear it up, rip, pump for speed, ride it lazily, or take it all the way into shore. There are lots of market lessons in surfing.

Russ Sears writes:

The wave not in the old model:

I recently locked in a refi-rate at the rate of 4 3/8 % (simple interest) for 15 year. And also could have locked in 4 3/4 % on 30 years on that date I moved in 2005, so I had a 5.5% mortgage on 30 year.

A few comments about this mortgage some I learned myself while "shopping" some was told by the mortgage officer.

1. In 2005 the rates where very close from one bank to the next. Like the gasoline station several had same rates. If they didn't, you could often simple tell them about the rate their competitor gave and get it lowered. I went with the local bank last time only because I wanted to close faster. This time the money seems to be at the local banks. Bank of Oklahoma, and MidFirst are both regional banks and a strong balance sheet. Many of the smaller banks didn't get into the trouble the big guys did. Not sure if this was because they didn't have the size to get into a specialty space like sub-prime or if they simply didn't

2. While I didn't buy points, they were cheaper than in 05 to get the same rate reduction of 1/4 it was about 1/2 price.

3. Like the banks, you need a good balance sheet to get these cheap rates FICO scores of 740 or better got the best rates.

4. Jumbos loans are not nearly as low of rates.

5. Rates have since gone up. about 3/8 %. It was getting too hectic at 4 3/8 % or 4 3/4 %. But they are still very busy. I got the impression that they let up on the gas, simply because they were so busy, without the big boys to compete against.

Still at these rates it is obviously the trigger point: A few 1/8th higher and the spigot will close, a points lower and they will get a big big wave.

While clearly much more restrictive underwriting than in 2003, we may see more than 1/2 that kind of turn-over.

You should ask a true Wall Street quant, but in my opinion what causing the log jam in credits, in balance sheets and therefore the mortgage originators and the housing market, is nobody knows where the trash is hidden in the MBS markets. This wave of fresh air could very well separate the wheat from the chaff.

Jan

23

This research related to non-verbal communications and signaling that occurs in crowd behavior, may have market applications: "A Crowded World: Researchers use computer scenarios
to study crowd behavior in time and space
" by Diane Banegas, NSF. It is interesting to note how a single individual under the right conditions of the model can influence the actions of many. Tipping points and leverage at work…

Jan

23

 1. A complete worldwide economic collapse has become unavoidable. There is no way out, there are no realistic scenarios that avoid this outcome. The sooner there is a consensus that playing with shifting debt around is not going to solve the problem, the less dramatic this collapse will be. There may not always be an England:

The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.

The political impact will be seismic; anger will rage. The haunted looks on the faces of those in supporting roles, such as the Chancellor, suggest they have worked out that a tragedy is unfolding here. Gordon Brown is engaged no longer in a standard battle for re-election; instead he is fighting to avoid going down in history disgraced completely.

This catastrophe happened on his watch, no matter how much he now opportunistically beats up on bankers. He turned on the fountain of cheap money and encouraged the country to swim in it. House prices rose, debt went through the roof and the illusion won elections. Throughout, Brown boasted of the beauty of his regulatory structure, when those in charge of it were failing to ask the most basic questions of financial institutions. The same bankers Brown now claims to be angry with, he once wooed, traveling to the City to give speeches praising their "financial innovation".

Palindrome is mostly right, but mostly too optimistic, or at least allows for a solution — but it's kinda like saying "if everyone had at least a million dollars we wouldn't have poverty": nice but deficient in real world applicability.

2. The problem with destroying scoring systems, or at least something that invariably happens along with such episodes, is that that the societal order crashes and burns. It pretty much has to, both as a cause and a consequence of something so serious. Usually there is a lot of shooting, fires, homelessness, and hunger that results. It becomes pretty much impossible for a large percentage of people to retain control of physical assets. The oligarchs or Russia simply outsmarted everyone else, and in many cases out-shot them too. They were not always yesterday's communists and to the extent that they are, which is more common now than in the early years, that was because as the ruling party communists were associated with armed elements, some of whom have managed to survive, and in one case even rise to the very top.

We are facing a worldwide calamity unprecedented in peace time. Just as financial manias happen in good time, what I call "bad meme bubbles" happen to prosperous societies during long periods of relative calm: wrong ideas become accepted because applying them doesn't hurt enough to figure out they're bad. During the rising tide even the overloaded boats stop scraping the bottom. Today really, really bad, long discredited and some brand new ideas are all the rage. Costly and massive cures to difficult problems are accepted simply because some guy says that's the way to do it. The "bad meme panic" will start when the destructive power of bad solutions as well the true extent of the problems become apparent. Through globalization the world has become a much tighter coupled, as well as a more complex, system than it used to. Local positive feedback loops are starting to shake the system, and the resonances in more distant parts from the points of origin are starting to appear. Like the doctors from the Middle Ages, the current shamans will apply more bleeding to the patient shaking uncontrollably after a little bleeding only makes him weaker, which they will explain as the consequence of the underlying disease. They will not stop until the patient dies either from the disease or their "cures".

Jan

23

 Many people misunderstand capital. Even if all our dollars are rendered worthless, that does not change the fact that land, buildings, roads, the tools of our trades and above all, human ingenuity is still all there. (True capital) Dollars have no tangible value. (Zimbabwe dollars have even less). The Emperor never HAD any clothes — we just all mutually agree to see clothes where there actually are none. Money is just a scoring system to determine how much of my efforts and the fruits of my efforts I will trade for your efforts and the fruits of your efforts. People who think they have value in cash, CDs or bonds, or to a large extent stocks, and park all their lifetime accumulated efforts there would be big losers if that particular scoring system fails. (Unfortunately, as traders in electronic blips, it would also probably suck to be us in this scenario.) People who retain control of physical assets through simple possession or specialized knowledge would end up the winners. (Look at who’s rich today in the pieces of the old Soviet Union and its satellites. Typically, yesterday’s communists are today’s big capitalists.)

If our currencies became worthless we would simply have to invent other media of exchange and new ways for re-mobilizing all the physical and intellectual capital that would still be there and at our disposal.

The concept of the potlatch is actually quite interesting. Purposeful wealth destruction had the social preventative/regenerative effect similar to say, fires deliberately set to prevent larger fires and/or regenerate land. The end of money, or the current form of it, is not necessarily the end of us.

Jan

22

AristotleMuch ado has been made in the media about the market decline, the bailouts, TARP, and the excesses on Wall Street. The average guy on the street has had his fill of listening to the constant scandals, price declines, loss of jobs, and real fear of a big depression. For many, opening their 401-K statement puts a knot in the pit of their stomach and the resolve to have to delay their retirement a few more years. Many people stoically accept their victimhood with a sense of camaraderie, comparing their brokerage statements with their peers during their morning coffee breaks. Despite this outward bravado, a sense of hatred is developing with many passive investors regarding the markets, traders, speculators, and the whole system. This isn't the hatred described by Descartes, but is a more insidious hatred, a type of hatred described by Aristotle. This is the hate that results in the destruction of the entire capitalist system. Right now, speculators and traders aren't very popular on Main Street, being blamed for everything from the crash, the low values of 401-K's, to all the crooked scandals. We're denigrated, admonished, bashed, and set to be the fall guy for all the ills that have beset the country. The media and government seems to ignore the political social engineering decisions that started the downward spiral. Never mind the fact that many speculators have been hit hard by recent market action, the public sees us as parasites, contributing nothing to society while taking everything. Portraying speculators as looters is a brilliant method the genuine looters are using to camouflage their agenda of control. Whipping up public hatred of risk takers will enable the real looters to justify the nationalization of the economy and solidify their control over the means of production and our lives. It is already starting, and this crisis is playing right into the hands of those citizens who loathe and fear the productive. The public is ripe to willingly go along, being duped by a partisan government and complicit media, and being offered the empty promise of forty acres and a mule or whatever the modern equivalent is. Meanwhile, the speculators might have to lay low for awhile and let this whole mess play out. Whether business is nationalized, the country is socialized, or we end up in a series of five year plans, there will still be room for risk takers and individuals in the future. Ideally, it would be nice if we all were able to go on strike, but that won't happen. However, in my humble opinion, as long as there is a difference in the opinion of two or more people, there will be a market somewhere. And this fact, and this fact only, makes me cheerfully optimistic for the future. No matter how bad things might get in the USA, it will always be worse in Pakistan.

Jim Sogi writes:

J SogiThings were way worse in the 60s and 70s, then again in the 80s. Remember the stench of the bums lining Grand Central station, the bums everywhere on the streets, the crime, garbage in the streets, New York City under Lindsey almost bankrupt, riots, anti war demonstrations, race riots, lynchings. Remember the 50,000 dead in Viet Nam. Remember the savings and loan. Remember 24% interest rates? Remember the 50% drop in 74? The S&L thing was really bad. Real estate tanked for a decade after that. Remember the junk bond crisis? This "crisis" for all its blown up to be, is not as bad. Sure real estate is down 20%-30% , but it ran up 600% before. Sure there are some foreclosures, but in Hawaii there used to be 4 on every block. Mexico went down. Asia went down. Japan went down. Its not as bad now. Sure the market is down 38% or whatever, but wait a few years. All these people complaining at cocktail parties now will be daytrading again in the next decade at the new highs and bragging how they bought during the end of 08 during the crisis. But really, its time for some new blood. A new generation is coming up. The baby boomers are done. Bankers were always chumps no wonder they are going down the tubes. Those egomaniac overpaid CEO's deserve to go down. Let the fires clean out the filth and waste, finally. Remember, the public is usually wrong. Its a new dawn. I can almost smell it coming. Its been in cycles like this for all of history. An its happening again. Heck, the bottoms are only 50 or so points away, so what if there are new lows. Good, we got over it really fast and we should be happy about it for crying out loud. When it takes off, its going to make your head spin.

Nigel Davies comments:

The greatest irony of this situation is that it hasn't been the traders and speculators who are to blame, at least not those with this title who assume risk. It's the politicos who operate within the financial world, the guys who have looked for a risk free return from finance by manipulating the system. It's not hard to identify them, just look for signs like the creation of frankenstienian instruments, paying themselves huge amounts for having done and only ever risking the wealth of the shareholders who own the company they're leeching.

These same guys will perform this role in whichever system they find themselves in. As a case in point look at how the KGB 'elite' went from milking the socialist system to owning companies and getting elected as presidents etc. They never took a real trade in their lives.

I think this is what confuses the public, the villains change their costumes. And what better way to stay one step ahead than by yelling 'THEY'RE THE ONES', whilst pointing to those wearing the clothes that they had on last.

Jan

22

 It is interesting to compare the open, high, low, and close of Nikkei and the S&P. Though separated by many miles, hours, differences in culture, economy, and currencies, they move remarkably in harmony.

Market   Date            Open   Hi      Low      Close                                       

Nikkei    1/15           8040  8155    7990    8025                                        

S&P       1/20             839   840     797      806  

The respective closing prices were the lowest in some 30 trading days for both, with the 10 year low in S&P occurring on 11/20 at 746 and the Nikkei setting a lo of 7700 on 11/20. During the month of December and January, Nikkei hit a closing high of 8760 never going above the 9000 level while the S&P had 4 days in December and 5 days in January (the first 5) above 900. The correlation between the daily changes in the S&P and the change in the dollar versus yen, over the last year has been about 70%, with hardly a contemporaneous day with the dollar down big and the S&P up, or the dollar up big with the S&P down, so one who is averse to being beleaguered or stopped out or political announcemented out in one market having the luxury of trading the other. It is interesting to see the frustration aggression hypothesis, or the dissonance consonance theory, or the round number never holds theory, or the play of running stops worked out, or what have you, manifest itself in the climactic but ephemeral breaks of the big 8 rounds.

Jan

22

 In the 90s, there was a company called Wizards of the Coast who put out the playable fantasy trading card game Magic the Gathering. The designer of the game was a mathematician by the name of Richard Garfield.

The basic premise was that you were a wizard and your deck of cards was a book of spells and artifacts. An enemy player would challenge you to a duel and you would both shuffle your respective decks and draw cards off the top for your hand. You could cast spells from your hand to damage your opponent, or summon creatures to attack opponent or enhance your creatures or do a myriad of things. You could take 20 points of damage and whoever reached zero first would be the loser.

The remarkable thing about the game, other than its incredible popularity, was its flexibility. All kinds of odd strategies evolved as players used cards in combination to achieve results the original designers of the cards probably did not forsee. Deck construction became a fine art of selecting cards. Because the cards are shuffled, you have to take into account the probability of the certain cards turning up. If you try and cover too many contingencies, you would have a very thick deck of cards, and the wait time for a particular card could be long. If you have a very focused and thin deck, your expected wait time would be short, but so would your list of options.

For example, if you have a deck geared towards summoning trolls, giants and other creatures to pummel your opponent to death, but your opponent has a deck full of spells to paralyze or disable creatures in addition to a few bolts of lightning to directly zap you, you are going to be slowly zapped to death. Your hand will likely be filled with creatures to summon and his hand will likely be filled with paralysis spells. As you summon creatures he paralyzes them and waits for a lightning bolt spell to be drawn to zap you. If you slipped in 2 healing cards in a 80 card deck otherwise devoted to monsters, and your opponent had 8 lightning bolts and fireballs in a 60 card deck otherwise devoted to paralyzing monsters, you would likely be the eventual loser in this war of attrition.

An entire tournament structure blossomed regionally and nationally around MTG.

The cards were sold in sealed random packs like other collectible cards and had different print frequencies (ie rarity) for each card. The rare and particularly useful cards become extremely valuable, both for winning at tournaments.

It has been 15 or more years since I've played MTG, but I see on ebay that the most valuable cards have held their value of a few hundreds of dollars. The fantasy playing card market is far less lucrative than the collectible sports card market.  

Jan

21

 Beyond the natural reading of the final-stressed-syllable rhyme, there is a wider range of rhyme types which, together with rhythm and meter, offers interesting prospects for reading market insights. Internal rhyme, where rhyme occurs within a single line or even as multiple rhyming patterns within and across lines and stanzas, seems to mirror the dynamic market state rather well. And one linguistic device which encapsulates internal rhythm and rhyme is the palindrome, especially the multiple-order palindromes of non-alphabet languages (one such palindrome, with 841 characters arranged in a 29 by 29 square, apparently contains 7958 poems – staggered/inversed/folded/turning/diagonal/etc.).

In the context of the markets, the simpler linear palindrome may offer a reductionist analogy to a common market structure like the range. Looking at the DAX H9 futures for the preceding three days (1/15, 1/16, 1/19), one sees an almost perfect harmonic waveform with regular amplitudes and periods – prices moving coherently in a range, much like a palindromic function. Of course, prices lost their palindromic stationarity today, breaking down through the range boundary in a loud tattarrattat-a.

One distinction that rhythm and rhyme confers upon poetic verse is a mnemonic-like structure which acts as a memory aid and allows for easier recall. And as commented, good assimilation and anticipation of recurring patterns, whether they occur in poetry, markets or video games, allows one that crucial edge necessary for success. Of course, some market days feel a lot more like Finnegans Wake or "Jabberwocky" than Mother Goose.

Jan

20

 One of the imagineering tenets is to bring yourself back to your childhood to create spectacular entertainment. They like to use erector sets and play dough and sand and paints to get their ideas. I tried to go back to my childhood to get some ideas while I was driving and allow the non-logical brain to brainstorm as they recommend. I figure that kids like to rhyme and sing music and swim and do independent things and do jobs and find out about the world.

I started with rhymes. The question is whether the market rhymes. I started with the last x minutes before 10 and looked to see whether there was a one-three rhyme or a one-two rhyme. I found no evidence of a one-two rhyme but much evidence of a one-three rhyme as in "Yankee Doodle." For example, the rhymes at 10 repeat at 12 but not at 11, defined with reasonable precision, with a chance likelihood of 1/20. The subject of how rhyming and childhood play in the market deserves exploration.

Jeff Watson writes:

A common element of video games is that a series of different recurring patterns are interspersed throughout the game. The best players are the ones who practice endlessly and learn to identify and predict the patterns. It would be an interesting study to design a trading platform that mimicked a video game, and allow a group of young video game wizards to try their hand at it. With the right software, would the best video game players be the best traders?

Jim Sogi writes:

Etymology of rhyme from Wikipedia:

The word comes from the Old French rime, derived from Old Frankish language *rim, a Germanic term meaning "series, sequence" attested in Old English (Old English rim - "enumeration, series, numeral") and Old High German rim, ultimately cognate to Old Irish rím, Greek ????µ?? arithmos "number".

An essential part of rhyme is meter, as in the essential and compelling use by Shakespeare of  iambic pentameter. There is something in this structure that captures the human function and rhythm. Di dah di dah di dah, di dah, di dah.

The meter of the market might even be broken down from days, di dah, to the actual timing of the spoken and thought phrases, rather than from hour to hour.

As with jokes, ballads, most nursery rhymes come in sets of threes. It's a natural rhythm seen in natural phenomenon as well. Rhymes have application in markets and quantification.

Phil McDonnell adds:

Some years back my son was an accomplished video game player. He was rated number one on the Microsoft Zone in Warcraft. At the time they had about a million players. Our family often played as a team. I, my son, and daughter played against three other opponents. Our motto was 'The family that slays together, stays together.' That won out against 'The family that preys together, stays together.' My guess would be that became the Madoff family motto at some point.

One time my son left my PC logged on as his screen name. So I sat down to play. At the time my son was number one in the world. Immediately I was messaged by a 16 year old kid with the screen name of psycho. He lived in nearby Redmond and was rated about number three or four in the world at the time. At the time I was rated about number 10 in the world.

We played a 2 vs 2 game against some world ranked players. We kicked their butts. However the reality is that psycho won the game. I was merely a major contributor. After the game was over he asked me why I was off my game. It was clear that there was a huge difference between number one in the World and number 10. I had no choice but to fess up to psycho. The fact is that there is a huge difference between number one and number 10 in terms of performance.

To date, my daughter has been to Singapore for the local software company and is now back in Redmond at headquarters working in Treasury. My son went on to work for a Redmond based group of ex-Microsoft video game people. Then he joined the big Redmond behemoth. Subsequently he was stolen by the big G in Mountain View. His purview was as tech lead on the last software to look at your search results. Presently he is off to Zurich to improve the efficiency of the many big G programmers Euro programmers.

It is fair to say that some traders are destined to be great and others not to. It is also fair to say that many people with video game backgrounds are unrecognized for many reasons.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

From the President of the Old Speculators Club:

I suggest that searching for a rhyme is obvious and that if the market is anything, it is not obvious. A more fruitful idea may be to look for rhyme's forgotten brother: assonance.

"Assonance, (or medial rime) is the agreement in the vowel sounds of two or more words, when the consonant sounds preceding and following these vowels do not agree. Thus, strike and grind, hat and man, 'rime' with each other according to the laws of assonance." (J.W. Bright and R.D. Miller, The Elements of English Versification, Ginn and Company, 1910)

These are harder to identify and when they appear it's difficult to determine whether their existence is by happenstance or design. However, if a sufficient number occur it might be worth examining. But be careful of an overabundance of them:

"Beware of excessive assonance. Any assonance that draws attention to itself is excessive." (John Earle, A Simple Grammar of English Now in Use, Smith, Elder, & Company, 1898)

Since the vowel sound is key, and must be bracketed by non-agreeing consonants, one might look for similar volatility between simultaneously divergent averages (e.g., the S&P and the NAZ).

Russ Sears adds:

This quotation is from an interesting article entitled the "16 Habits of Highly Creative people."

While perhaps the author's ideas need some testing, the quotations alone are worth the read.

"There is no use trying," said Alice. "One can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast." - Lewis Carroll

And my favorite, considering 2008: “If you are not confused, you are not thinking clearly" — Tom Peters, quoted by Shalu Wasu

Scott Brooks comments:

Of course the market rhymes…until the poem changes. And the Mistress loves to change the poem when most are least expecting it.

During a secular bull market, the Mistress says: Up, up and away with very little volatility on any given day.

I'll make you money and you'll think it's great

you'll leverage to the hilt until it's too late

For when I change from bull to bear

you will pull out all your hair

If you confuse brains for a bull

it will be ugly when the mistress starts to cull

Culling the quants, the fundamentalist, the techs

You will feel the noose around your neck

When times are great, we all think bulls will always last

Those who do, ignore the past

During a secular bear market the Mistress says: Up today, gone tomorrow

I hope you didn't make your bull returns with money you had to borrow

The market changes from bull to bear so fast

So that if you were leveraged you lost your a$$

For a bull is very different than a bear

I know this for I've lot most of my hair

When times are bad we all think bears will always last

Those who do, ignore the past

So a trader must remember:
All the gains do not matter when you're leverage just gets fatter and fatter

So don't swing for the fences it's okay to settle for just a hit

then you'll win more than you lose and won't find yourself in deep $#!^

And finally, remember to stay out of the poo

losses hurt more than gains help you

Jan

19

 The Imagineering Way: Ideas to Ignite Your Creativity by the imagineers of the Walt Disney imagineering team is a behind the dreams look at making the magic real and are inspiring tableaux for how to be creative. The imagineering way is always to believe in the impossible. To laugh. To make many models of a problem, some too big, some too small, and then usually to take a middle course. To start at the end of a problem and then to work back to the beginning. To dream big and establish a culture that fosters it. In the only sensible thing that the former boss there said, he quotes Disney: "Curiosity keeps leading us down new paths, exploring and experimenting are the beginning of creative imagination and technical know how." He then adds, " Not only are the imagineers curious, but they are courageous, outrageous, and their creativity is contagious."

The market during the days that I was out was totally outrageous moving down to below Dow 8000 at 7995 at 12:30 on Thursday 1/15. But it was Thursday, and after seven days down, there was no way that the problem of where it was going could be solved by the usual means. An imagineering solution as to where it was going to end without regard to the obstacles along the path would seem to have been the best way to solve the problem, aside from the fact that it was Thursday, and that's always a nice day for violence to reach it's climax and be dissipated before the end of the ride. It would be good to apply the imagineering culture and methods to market moves.

Jan

19

 The financial crisis has a number of causes including weaknesses and gaps in regulation and supervision. However, the idea of a growing government as a solution to problems created by greedy capitalists and bankers around the world looks too simplistic and has a bit of populism in it. There may be results in the short term, but in the longer term the issues will likely be more than the benefits with an expensive bill for the next generation of taxpayers and citizens. I am not referring specifically to the US, but also to Europe to some extent.

Real change would be first to understand weaknesses and challenges of our industrial, financial and social systems. The world is changing. There are new players in the game. And the relative importance and power of countries is changing with time, and accelerating. We should recognize this fact. This has consequences on our present and future ability to be innovative and competitive, on the possibility to maintain the same lifestyle in the future, the same welfare. This crisis has shown that the US is still vital and fundamental for the good of the world's economy, but it has also dramatically shown the increasing difficulties of the US in maintaining this leadership, which is not only economic, but also intellectual and political. After this crisis we cannot go back to business as usual and our countries will end up with more debt on their shoulders. We cannot solve the crisis just pumping government money in a model that is not working without doing anything to change it. We will only have crisis after crisis if we do not eliminate the roots of the problem. And the problem is that new players in the global economy produce goods cheaper than we do, that they are learning fast how to make high tech products and services, that they sell more than they buy. This is causing a fundamental imbalance in the global system that market forces should solve within a proper framework and set of rules provided by governments. Also we should probably all realize that may be we are living a standard that we cannot afford any more.

From a WSJ article:

One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today: Galt: "You want me to be Economic Dictator?" Mr. Thompson: "Yes!" "And you'll obey any order I give?" "Implicitly!" "Then start by abolishing all income taxes." "Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?" "Fire your government employees." "Oh, no!" Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.

Riz Din writes:

Not so long ago, I heard a pundit commenting on recent economic policy responses saying something along the lines of when the fires are raging, the first priority is to put them out, and to deal with the longer term implications later. Personally, I think it is better to sometimes let things burn and let nature take its course.

I agree that we are living a standard we cannot afford any more, but only in the sense that we may have 'brought forward' living standards by a few years and that we may have to contend with tougher times before the wheels of progress start spinning again. Indeed, while a part of me worries that all this policy meddling risks damaging the natural checks and balances of a free system, I am reminded of the old adage 'necessity is the mother of invention', and look forward to new discoveries being born from a period of relative hardship.

Duncan Coker adds:

Looking to history, in the 1930s all the programs rolled out by FDR did little to solve the Depression. There was even a mini Roosevelt depression within a Depression in 1937-38, four years after all the government action. What did get people back to work was arming for potential conflict, which added three million jobs in 1939-40 and continued through the horrible conflict to follow. All the FDR structural reforms played a bigger role a decade later, after the war, when security and arguably a more transparent system allowed for exponential growth for middle class incomes, housing and standards of living. I believe it will be the small businessman and entrepreneur that paves the way this time, really the only ones that can "create" jobs.

Jan

19

 Here is an article about a fashion indicator for contrarians. Hair shirts for banker penitents would seem appropriate also:

A key player in the riches to rags department is Christopher Bailey for Burberry, who Saturday evening sent tousle-haired youths wearing Oliver Twist caps down the runway in crumpled shirts, slim trousers, heavy knit sweaters and desert boots with an exaggeratedly pointed toe. All-purpose tweed overcoats and a trademark Burberry plaid ring scarf complete the tough-times look.

Jan

19

 The market has had a daily rhythm known in the blues as a shuffle; di dah, di dah, di dah. You might also hear this in William Tell's overture.

Marlowe Cassetti replies:

An interesting thought. Has anyone transcribed market movements to a musical score and does the playing this "music" have any predictive significance?

Dr. Janice Dorn comments:

Tom Hamilton has done some interesting work in this area. I have his CD, London Fix–Music Changing With The Price Of Gold.

I do not believe there is predictive significance, but I have not tested this.

Marlowe Cassetti writes:

I listened to the excerpt of "London Fix" and it is beautiful. Certainly not random tones.

Last year I built a mole chaser that comprised of a micro-chip that generated random tones. While testing it on my workbench I literally got nauseated listening to it. My wife forbid me from running it in the house. The moles weren't too fond of it either.

Jan

19

 I spent 10 days in South Central Alaska floating a river last summer. I was with three other friends in two rafts floating down a 50 mile stretch of river, fishing (trout and salmon), hunting (mainly for grouse) and taking it all in. The bears were a big part of the experience. On the river banks where we would pull over there were always tracks, some the size of dinners plates. Each day, more or less, we would see a few or them, large brown bears, Grizzly. It was usually from a distance and they look like large moving boulders across the tundra. On one occasion we came up on a single male along a river bend. We were both startled, but he quickly turned and disappeared into the woods. I was rowing and my friend up front got the closest look, maybe 20 feet away.  

The nights we took precautions, but knew that anything we did would matter little if an aggressive bear wanted to get into a tent. But as the days went on we became less concerned and grew more comfortable with the surroundings and the dangers always present. I think during long periods of time outside in nature, the mind and spirit slow down to become part of the natural order. And as the days passed, I felt less like the enemy or prey of a bear and more like a fellow creature in the wild. I think the more a bear senses you belong here, the less likely he is to view you as a threat. In any case for those 10 days we lived in a harmony with the bears, rivers, mountains and trees. I felt I had found balance with the wilds, which maybe can be applied in many places.

Jan

17

There is a long SP500 monthly series on Shiller's website, which I used to compute the 10Y rolling returns (for the 10 years ending at the present) from 1880-12/2008. I did not attempt to factor in dividends (which were significant once upon a time…), and keep in mind it was hard to "hold the index" until Jack Bogle came along. Nevertheless…

The enclosed chart shows that rolling 10 year returns are negative now as they were for (approximately) 1974-82, 1932-47, 1914-24, 1890-98, and 1884-5. If you advance these dates by ten years and look again at the chart, you would be tempted to conclude that the subsequent 10 year returns were strong.

Also interesting to note an apparent pattern in the wait time between peaks in 10Y return:

1887-1906 (19Y)
1906-1929 (23Y)
1929-1959 (30Y)
1959-2000 (41Y)

The second wait is 4y longer than the first, 3rd 7y longer than 2nd, and 4th 11 yrs longer than 3rd. It is tempting (again) to compare the elongating waits between 10Y peaks with concurrent increasing life-expectancy:

This table compares waits with (midpoint) life expectancy (for white males, of course):


.                  inc wait   LE    inc LE

1887-1906 (19Y)              48

1906-1929 (23Y)  4y          50      2

1929-1959 (30Y)  7y          63     13

1959-2000 (41Y) 11y          71      8

This whole investigation was pursuant to an academic paper suggesting increased risk-aversion for people who lived through bad markets: Do Macroeconomic Experiences Affect Risk Taking? by Malmendier and Nagel. Eventually the risk aversion decreases again through (ahem) natural population replacement.

Phil McDonnell comments:

Although there are only five complete cycles, I note that each speculative cycle is increasing in amplitude as well as increasing in period.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Jan

16

An interesting quotation:

“Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.” — John Mills (1821-1896)

Prof. Gordon Haave applies the lesson:

This is a critical point for those in charge of public policy. Everyone is worried that house price declines, etc. are going to harm the economy. The economy has already been harmed. Billions were spent building houses that were not needed. The damage is done. The debate now is ultimately whether or not those who did the damage will bear the costs, or if the costs will be pushed onto the taxpayers.

Ola Dunk replies:

Disagree, although I still like the quote.

I mean, panics can reveal a lot and in a Darwinian way remove those that are unfit, but unfortunately panics often also destroy those that under normal or even slightly adverse situations would make it.

Jan

14

 The surf line up is a competitive arena requiring strength, endurance, and agility. Almost none of my contemporaries survived. I see them hanging out on the beach, drinking, overweight. I am one of the last survivor of my generation out there. Makalawaena Bob, at 73, is still surfing.

Disease at this stage of life is one of the main factors. A negative mental and moral attitude seems to correlate with disease among my acquaintances who have been struck down. There have been a large number of business failures on a large and small scale this past year. Survival is the name of the game. Survival requires fitness which is a combination of strength, endurance and agility. An imbalance reduces fitness. With age comes a reduction of physical and mental agility. With effort, strength can be maintained. The mental aspect requires avoiding bad attitude. It requires daily diligence to every detail: eating, sleeping, exercise, drinking. These are such simple things, but it's so hard to execute them. It is extremely difficult to maintain fitness, both physically and in the business world.

In trading this year, survival also was the name of the game. It required fitness of the mental sort. Strength and endurance to handle the awesome swings. Endurance to stay up the late nights. Agility to move quickly in 100 point ranges. The main thing was to survive. With so many of the big names going down, with those all around going down, and suffering massive losses, survival. How does one survive? Physically, be fit. In business, always be careful, always protect oneself. Many lost all due to failure to do so. Attend to detail. Avoid mental error and bad attitude and the dangers of hubris. Avoid the string of errors spiraling out of control ending in death. Competition and survival seem diametrically opposed, but in fact they are not. Sometimes, merely surviving wins. This was Croesus's dilemma.

Jeff Watson writes:

SurfOur surf line up is composed mainly of teenagers and 20 somethings who are pretty aggressive and competitive like surfers of that age group tend to be. The three surfers who are over 40 at my break rely on knowledge of the waves, experience, and physical conditioning to be able to compete in the young man's arena of our little circus. The parking lot is full of guys my age, sitting on the beds of their pick up's, drinking beer, smoking cigarettes, and talking story to whoever will listen. It is evident from the old wax jobs that their boards haven't been ridden in a long time. They claim that they will only go out when the waves are good, but somehow conditions are never good enough for them to go out and get wet. They sit there like deteriorating relics, gaining weight, polluting their lungs, ruining their livers, and reminiscing on how much better it was thirty years ago. Like middle aged armchair quarterbacks everywhere, they always have an opinion and never fail to critique of our waves. Sitting in that parking lot will never get them ready for the rare big swell that passes through. Meanwhile, our small geezer patrol is hitting every swell that's over knee high, having fun and staying healthy in our advanced age.

Russ Sears writes:

Runner2008 was finally the year that even at my best times an average collegiate runner could beat me. At the shorter races (5k-10k), a good high school kid would also. I've fought the good fight, I've kept the faith. I'm definitely not out of shape, nor sitting on my couch talking about the old days, drinking cheap swill, bragging like I could still do it if I could only find the time to train or if the perfect right wave came.

Many distance runners, run and train hard for life. But few of my contemporaries kept at it. You'll still see a few of the late 70s early 80s USA distance stars, make a speaking engagement tour to show-up at road race expos and some will even run. I believe Bill Rodgers may still have a few age records but the stars in the Masters divisions usually can beat them. Age and a few too many battles has finally taken that extra zip away.

I've had the privilege to train with several great runners over 40. I've had insights to their training, racing and personal life. They have in turn made me aware of how many of the great master runners have trained. Here are few insights that might apply to working with a tough market.

Often those that bloom to be the Masters champs are those that either took time off in their youth or never started serious training to begin until their 30s or late 20s (this is especially true with women).

I've also known runners that were clean up till their 40s start to lose their competitive edge and turn to banned drugs to get it back. The rules don't seem to matter once they see their youth and promise start to slip to age. But the thing was everybody knew what was happening. It was clear to those that watched they were using something. Their times would place them in the middle pack. Suddenly they would have a phenomenal race or races. One was not to be believed and they'd get caught in a drug test a few months later.

However, I know many runners that were great in their youth and suddenly, often on turning 40, would start to run again. They'll find and contact me, since they know I've kept trying, and expect in a few months to be setting new age records. I've yet to see one of these succeed.

With this insight you might think I would have done better after 40 than I did. On approaching and turning 40 I first tried running same amount and did not back down on workouts. I didn't heed the coaches warnings to those thinking they were invincible: "just because you could, doesn't mean you should". This placed me on the injured and sick list too much. So I've cut back to less miles.

A for the marathon and beyond however, where the race is often about survival on the edge of what the athlete is capable, the battle still goes to the experienced and mentally tough. Not that a good young marathoner couldn't still beat me, it's that few will. Even at the local no named races I expect to be beaten by some young well trained younger runner, but he must be well trained and give enough to last the whole race. Are they willing to grind it out, when things get really tough.

What gives the edge to the youth is their resilience. As HBR said: “More than education, more than experience, more than training, a person’s level of resilience will determine who succeeds and who fails. That’s true in the cancer ward, it’s true in the Olympics and it’s true in the boardroom.” – Harvard Business Review, May 2002. Many aspects of resilience are internal and hard to detect. However, one outward clue to self resilience is sense of humor. Comedy is aimed at youth, many men simply become grumpy old lions. Do companies have a sense of humor, in these markets?

Jan

14

 I've heard it remarked that modern multi-billion funds are involved in systematic "chart-painting" (i.e. pushing through stop-levels), then covering and possibly even reversing a profitable trade. I certainly have seen plenty of that happening in open-outcry era where locals sometimes managed to simply "yell the market" through a level of known stops, without ever doing a single trade! And yes, it can be accomplished even in the most liquid markets if you know the right spots and have enough capital to satisfy the limit orders resting there. A stark example can be found in EUR/USD trade 12/18/08 and again 1/13/09.

Following the 2008 collapse 1.6040->1.2329, followed by six-week rectangle consolidation, EUR rocketed at record-pace toward the 61.8% retracement mark of 1.4622. But on 12/18/08 it managed to slice through the level, peaked a full-figure over at 1.4717 — and swiftly reversed! Now today, it punctures 1.3241 level = 61.8% retracement of 1.2329->1.4717 run only to swiftly reverse precisely full-figure under at 1.3141. I wasn't much surprised: my charts were marked corresponding to this idea well in advance.

I'll be on look-out for developing situations in this regard.

Jan

14

 I recently read a great essay, "The Importance of Stupidity in Scientific Research" by University of Virginia biologist Martin A. Schwartz in Journal of Cell Science. Excerpts:

"… how hard it is to do research. And how very, very hard it is to do important research… What makes it difficult is that research is immersion in the unknown. We just don't know what we're doing. We can't be sure whether we're asking the right question or doing the right experiment until we get the answer or the result."

"… we don't do a good enough job of teaching our students how to be productively stupid -– that is, if we don't feel stupid it means we're not really trying."

Adam Robinson responds:

That is a wonderfully illuminating essay, at once humble and bold.

When it comes to the scientific method, it is taught that central is the notion of the falsifiable hypothesis. Easier said than done for some personality types, as their need for positive reinforcement nudges them towards being debilitatingly conservative on how far they'll venture forth. Nary a bold stroke attempted for fear of ultimately appearing "wrong." Then again, being right is overrated. Too often it's enervating.

Jan

14

In general people have a much higher self image and a higher opinion of their level of skill than is warranted by the true facts. I happily suffered from this grand self delusion but sadly have gotten over some of its helpful effects. It is much easier to see this in others to the point where it is amazing where people get such delusions in almost an inverse proportion to the actuality. Practically it must be a requirement of survival to maintain a modicum of self respect and to alter the self image. Otherwise reality can be depressing. The Churchillian idea of running from one failure to the next with no loss of enthusiasm is a daunting prospect. Everyone has their strong points and it is easy to inflate the wins in the mind. The problem is recognizing the weak points. It is nearly impossible to do.

One of the great things about trading is it highlights your weaknesses right in the face. Self delusion is one of the greatest dangers in trading where only the facts matter. There is the type 1 delusion: to think one is smarter than the markets, and the type II delusion where you think you are dumber than the market and get washed out of a winning position. Delusion is deadly in the markets. The numbers don't lie. You are as good as your results, at least in the market. This is why it is good to have other interests, at which you might excel as markets are not always kind and the competition is always tough and relentless. In Mistakes Were Made (But Not By Me), Carol Tavris and Elliot Aronson explain how people actually change their recollections of the past to fit their present delusion. Rationalization and justification and excuses are big lies.

Jan

13

 To say that viruses are masters of deception is an understatement. They can't reproduce themselves so they have to trick the cell into reproducing them. And in doing this they have to deceive the cell's control mechanism to prevent getting killed. Since they have evolved over many billions of generations, they have become masters at deception. I was drawn to this subject as one of my grandchildren was watching a clip of Max and Ruby  on youtube. I stayed with him for the first few minutes, but all the sudden I heard a stream of curse words coming out. Apparently this is very common on youtube. The beauty of the deception was how they waited a few minutes to start the imprecations, knowing that the parents would be off guard. It is loathsome to think that some people would devote their time to hurting kids like this and putting them in the way of disgusting ideas and thoughts. It is also loathsome to think that humans can learn from viruses, and apply all their techniques to hurt honest people like players in the market. A good review of deception in biology is contained in University of Washington biologist Carl Bergstrom's recent paper "Dealing With Deception in Biology". I thought I'd test a few of these basic techniques to see how they work out in the evil market firmament.

Here's one. The virus S&P rests unchanged around noon but as of 1 pm is down a reasonable amount. It's happened 41 times and the market drops on average another two point by the end of the day with a standard deviation of nine points. The virus stays latent until midday within a range, with the midday price no more than 1/2% away from both the maximum and minimum of the day up to that time. Then it tries to reproduce at 1 pm, by going up more than 1/2%. The natural killer cells of the market come in and move it back 1/5 of a % or so by the close. Similar to my killing the Max and Ruby show after it was latent for five minutes, but then I heard it, and turned it off with a slam, and no more watching that tubular video for the youngster.

Jan

12

 Grandmaster Davies raises a good point in his post "The secret of the hand count."  Indeed, much of the major eastern consciousness lies towards cultivating such a state; but he may be surprised at quite a few western sources which may parallel. In the spirit of the theme raised, rather than superfluous explication, a more cogent understanding may be reached by placing hand over mouth and to just point and let ancient words speak for themselves.

“The pivot of Tao passes through the center where all affirmations and denials converge. He who grasps the pivot is at the stillpoint from which all movements and oppositions can be seen in their right relationship… Abandoning all thought of imposing a limit or taking sides, he rests in direct intuition.” [Chuang Tzu on wu-wei/non-being]

“Prince Wen Hui’s cook was cutting up an ox. . . . The ox fell apart with a whisper. The bright cleaver murmured like a gentle wind. Rhythm! Timing! Like a sacred dance. . . . Prince Wen Hui: Good work! Your method is faultless! The cook: Method? What I follow is Tao beyond all methods! When I first began to cut up oxen I would see before me the whole ox all in one mass. After three years I no longer saw this mass. I saw the distinctions. But now I see nothing with the eye. My whole being apprehends. My senses are idle. The spirit free to work without plan follows its own instinct guided by natural line, by the secret opening, the hidden space, my cleaver finds its own way… Then I withdraw the blade, I stand still and let the joy of the work sink in. I clean the blade and put it away. Prince Wen Hui: This is it! My cook has shown me how I ought to live my own life!” [to apprehend with your whole being - this version is Thomas Merton’s paraphrase]

“The purpose of fish traps is to catch fish. When the fish are caught, the traps are forgotten. The purpose of rabbit snares is to catch rabbits. When the rabbits are caught, the snares are forgotten. The purpose of words is to convey ideas. When the ideas are grasped, the words are forgotten.

Where is the man who has forgotten all words? He is the one I would like to speak with.” [on letting go of technique/words/language]

“A good traveler has no fixed plans and is not intent upon arriving. A good artist lets his intuition lead him wherever it wants. A wise man has freed himself of concepts and keeps his mind open to what is.” [Lao Tzu]

“The body is a Bodhi tree, the mind a standing mirror bright. At all times polish it diligently, and let no dust alight.” [Shen Hsiu - Head disciple of the 5th Patriarch of Chán Buddhism]

“Bodhi is no tree, nor the mind a standing mirror bright. Since all is originally empty, where does the dust alight?” [Hui Neng - temple laborer and later 6th Patriarch of Chán Buddhism, in reply to Shen Hsiu’s stanza above]

Cultivating samadhi (non dualistic discernment) towards allowing prajna (wisdom) to surface; to penetrate the veil of maya (illusion), achieve moksa (liberation) and reach atman (true self) - as in the Indian Vedanta.

Grandmaster Davies rightly speaks of the difficulty in finding Western sources which describes the same, but there have been western thought which shows some faint parallels, and which may be useful for further examination:

-Kant’s theory of imagination through which objective experience and subjective interpretation interacts dynamically in a limit process to arrive at perception.
-Schopenhauer’s sufficient reason.
-William James’s mysticism.
-Husserl performing phenomenological reduction in order to apprehend pure cognition.
-Heidegger’s existential Dasein - “being-in-the-world”.
-Jungian archetypes and potential actualizations.
-Emerson’s and Thoreau’s transcendentalism.
-Thomas Merton’s interior contemplation.

And perhaps, more recently and surprisingly applicable to varied fields, including trading –Timothy Gallwey’s Self 1 and Self 2 in his cult classic, The Inner Game of Tennis.

Jan

12

 There are mathematical constants such as the ratio of a circle to its radius we all know as pi, the relationship of a line u and a segment such that u/u+v=u/v or the golden mean, and lim x -> 0+, (1+x)^ 1/x Seattle Phil's favorite constant, "e" a valuable computational tool allowing additive solutions. "e" allows doing complex calculations with relative ease, by replacing multiplications with additions. Pi is used in statistical computations involving the Gaussian distribution. They don't really know who discovered e. Archimedes discovered pi. Such ideas had commercial application in practical things as determining whether the coins were fake, or the volume of the King's golden crown. The curious thing about each is that no computer can state the number since some are irrational or transcendental. Each is critical to whole fields of prediction. Identification of market constants might uncover some regularities otherwise hidden and allow calculations and solutions. Some say market moves often follow the golden mean. I have been pondering what other important but unused constants might exist in the markets. Time, of course, is a constant. The vig is another. The use of the normal distribution might be viewed as a constant for computational ease and allow use of constant ratios such as standard deviation, mean, median. In the past, gold or the dollar might have been a constant but globalization and floating currencies stopped that one. The ratios are important still. What other constants might be in the markets?

Sushil Kedia writes:

I am visualizing two broad categories of market constants. The first category that is a list of constants for all participants and the later one which contains transitory constants for individual participants and varying values of the same constant for different types of participants at a given point in time.

The first variety of constants are relating to the sense/measure of time, of the variety:

1) Minimum Tick Size for each contract / market
2) The weekend
3) Market opening & closing time
4) National & other regular Holidays
6) Occurrence of earnings announcement seasons
7) Presidential Elections (every four years)
8) Options & Futures expiration cycles
… so on and so forth

The second classification of constants comes from a less easy to describe and more amenable to visualize variety that most of us are more often interested in are the price related constants. I would surmise that given any particular state of a trader the amount a particular trader is willing to risk on the next trade is a constant in the near vicinity of his recent wealth / income / consumption matrix. Thus, it may be useful to visualize a +/-2 Standard deviation price move in a day/week/month measured over the same units of time say at 20, 50 and 100 day/week/month span could be that constant threshold which evokes sense of pain/gain for say traders, speculators and investors. Variable constant for different types of participants varying for each over their journeys inside markets and varying across different participants at any given point in time is what makes the market a self sustaining, self perpetuating contest.

If one assumes that a disciplined trader is making repetitive constant sized bets (the search for that "optimal F") and Value at Risk is changing due to changes in volatility at a chosen time horizon then eventually this class of individual state dependent constants are again connecting back to the individual sense of time.

The search for thoughts on market constants is thus taking one back in a loop of figuring out if there is an inner market time.

Jan

11

Sometimes one sees almost every conceivable variations of prices during the year. It's like an evil genius had a bag of tricks and never had to repeat one exactly the same way. I wonder if it's possible to turn this around and assume that there is a finite number of tricks, possible variations that will occur and then predict that the ones not used yet will eventually be used. This becomes particularly relevant for people who look for repetitions of past patterns and in days like this find that there is nothing similar to it in history. Regrettably, that is true almost every day. There should be some creative ways of testing this.

Bruno Ombreux comments:

We could look at market entropy, in an information theoretical sense:

Code every possible pattern in bit form, eg 1110011000111

Measure entropy.

See if the market is maximizing it, this would be the "Second Principle of Market Dynamics".

We could also have a Prigogine's Theorem analog i.e the market is forming patterns that will minimize its entropy production.

Sam Marx adds:

As an analogous situation, I believe that slot machines, keno games, etc. have their results or numbers selected by random number generator formulas. I always thought that if one is an expert on the existing formulas or was able to generate a random number generator formula based on a series of outcomes then he could beat the game.

I realize that the casino could easily thwart this in keno but it would take additional work on their part for the slots.

In the stock & futures market, I understand there is some pattern recognition software now available. I have no experience with it.

James Sogi writes:

Maybe sampling something simple like variance over the last couple days might give one a clue. Volatility clusters, and lack of volatility clusters, and variance of volatility within those clusters or length of the clusters, or the survival rates. Again the replacement issue and the assumption of independence clash. The replacement assumes independence, but a cluster model assumes some correlation.

 Vincent Andres comments:

A related (and very important) topic is the number of stable patterns achievable by a set of interconnected nodes. On this topic, a worthwhile read is Stuart Kauffman. Kauffman's work is rather well presented in a chapter of Deep Simplicity: Bringing Order to Chaos and Complexity , John Gribbin, Random House. 2005. ISBN 1-4000-6256-X. 

Jan

10

 I've been thinking about the nature of counting and the intent involved. For most people who examine markets the aim of looking at data is, I believe, to consciously find some pattern which will lead to a winning market system. But what if one were to count without any particular intent in mind, purely as a means of familiarizing oneself with the nature of the beast we are called to dance with?

Vic and Laurel have mentioned many times the virtue of counting by hand, and I've listened because this somehow chimed with my chess experience without my being able to fully identify what the analogy is. Now I think I know; when I prepare for an opponent I've found it to be far more effective just to look at his games in a holistic way, familiarizing myself with how he plays rather than look for a particular move to play against him in a position he has reached before. And this works better still if you play through the games with a real board and pieces rather than do it on the computer.

I think there's a very subtle but important distinction in these two methods, the 'hand count' in both chess and markets being a method of familiarizing the mind at a subconscious level without the burden of conscious effort. I can't find any Western sources that adequately describe what's happening, but there seems to be a wealth of knowledge from the East.

"The mind of a perfect man is like a mirror. It grasps nothing. It expects nothing. It reflects but does not hold. Therefore the perfect man can act without effort." — Chuang-Tzu

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Jeff Watson adds:

J WAlthough not a member of the technical analysis cult, I do update my daily charts by hand at the close. It’s an exercise that keeps me connected to the markets and affects my trading on the subconscious level. Abandoning hand-drawn charts in the late 80s in favor of having a chart spit out on a computer had negative impact on my trading. After quantifying my below average personal performance for a 19 month period, I reviewed what behavior had changed, and all indications led towards the charting issue. Resuming the task of putting up charts by hand had an immediate positive effect on my trading, right out of the gate. Perhaps it was a confidence changer, a talisman, or something else; That’s worthy of another study entirely.

Jan

10

I would like to toss an idea regarding the post Sampling Without Replacement, from Victor Niederhoffer.

I'm thinking of signals and receptors. There seem to be no receptors for these alleged signals. One thought, assuming an agent, is signals are being polluted by governments or just an abnormal amount of uncertainty. Have the opposing Quants finally gained enough complexity and control to nullify what once were signals, leaving nothing in their place? Then this is a rational enterprise on their part, generating randomness (as Sam Marx posited). Assuming this purpose driven agentic randomness would presume something of a very large player, concerted or homogeneous group. Purposeful randomness should fail, unless the catcher knows where that "random number" is being thrown. But now I think otherwise in that a random system could help the vig. Also possible is non purposeful randomness arising from a high level of uncertainty.

The world markets recently seemed to be largely acting in one direction across asset classes, thereby ruining ideas of diversification. This was the means of those without means to hedge. This would mean that countervailing elements (values) gold, oil, stocks, dollars etc. do not support the traditional means of valuation in a growing world economy, as I derive from your posts. In other words, I’ve understood you to mean that value is derived from the value of other things (circular, yet valid). Opposing forces have been reduced for now. However, you say that bonds have offset some of the stock losses.

I would simply suggest that the lack of good valuations in bonds has created a temporary random environment. A virus? Arguing against myself, isn't this always the case for oil?

But to test:

1) macro test — deductive: When in the past were there no discernible predictive sequences? I’m respectfully submitting that there may have been periods when history stands alone and unrelated to history. How long did this last, what were the world markets like, was there a large market of something without a good valuation, or very fragile, possibly random, and when and how did sequences reemerge?

2) micro tests — inductive: Another idea is to search for intervening events that altered usual sequences, as in the weather.

Jan

10

 The "Bookshelf" column on p. A11 of today's Wall Street Journal reviews Barry Werth's Banquet at Delmonico's: Great Minds, the Gilded Age, and the Triumph of Evolution in America, which centers on Herbert Spencer's 1882 tour of America, culminating in a feast at Delmonico's.

Werth weaves profiles of leading figures of the Gilded Age as they relate to Spencer's application of Darwinian insights about evolution to political, economic and social life.

Jan

10

 In my local paper the last two mornings is bad local economic news. The other day in my area R&J Trucking out of Boardman, Ohio laid off 36 drivers up the road from Belpre at their local hub. Then International Converter in Belpre shuts down and 45 jobs are lost and in this morning's paper Eramet near Marietta, Ohio lays off 110 workers out of 330. I note oil at $40 today and gas prices dropped a dime today in Belpre.

The news attributes oil decline to less usage. This makes sense with all the lost jobs to truck drivers and individuals who drove their autos to work. I wonder if a formula could be developed to correlate lost jobs nationwide to the decline in oil price?

Phil McDonnell replies:

A trucking company should be more profitable because of lower gas prices, not less. They should be able to lower prices, if necessary because of their own reduced cost and this should stimulate demand and allow them to hire more people.

The fundamental point is that any model of the economy that took into account oil prices would only work for a certain part of the business cycle. At some times the higher price of oil is a tax on the economy which slows it down, so oil prices and the economy move inversely. At other times a drop in oil price serves as a reflection of the fact that the demand is reduced because of reduced economic activity, so oil and the economy move down together. This latter reality is what we are facing today.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Jan

10

 This has been the first full trading week of 2009. In years previous: the trends marked in Year-Opener would provide direction for a number of months(!) Of course, 2009 is getting the most uneasy start across most markets in recent memory - as credit has been severely constrained, fund net inflows are non-existent and the entire financial service industry undergoes austerity. In this extremely emotional environment, we are doubly reminded of just how important objective measures of market commitments can be.

1. SP flows continued somewhat Bearish within their make-up. I was pointing in recent weeks, that Commercials have flipped back into Net-Shorting mode - erasing their Net-Longs accumulated near decade's lows. Also, that sentiment surveys went Bullish 1/6/09 - for the first time since 8/20/08! Current report showed Large Specs shedding their recent Longs into 100-point pop; while Small Specs assuming new Longs, under the drum of "rally over 900". Another interesting tidbit was substantial migration of Open Positions from bigSP to E-mini (except, remarkably, in Small Specs!!) I venture guess: Small Specs, convinced that "bottom may be in", took some Longs earmarked for "longer-term hold". Larger Traders, in contrast, preferred greater flexibility of E-mini to scale in-and-out of price spurts and "play the range". Other than this little distinction: I must note that 2009-opener week was decisively DOWN!

2. C.O.T. showed Commercials rolling significantly out of 30y and 10y Longs and into 5y, 2y and Eurodollar Longs! (again, a tiny indication that big boys are reaching for flexibility - as opposed to committing to obvious yield differentials.) Two very important notes: a) the week was decisively UP for shorter-term paper; b) O.I. pattern in 30y favors one more Bullish attempt - before they commence "long-term Bear Market". Why? The 142->132 pullback was all due to aggressive Commercial Long-liquidation in light trade: hallmark of wave1 DOWN. Wave2 UP to follow is usually emotional and scary. Only then wave3 DOWN should emerge with aggressive NEW SHORTING and voluminous price action DOWN.

3. EUR and SF marked strong DOWN-week; BP, CD, JY UP-week! My opinion remains that EUR and SF will eventually go to new records in 2009; however, as pointed out last week - Specs had to first abort their ill-timed Longs. For those two currencies: this is a classic false start, liable to confuse many a trend-follower.  BP has enjoyed solid Commercial support in recent weeks; it should develop into star currency of 2009! Yen is interesting: where its early-week's dump attracted no Commercial support to speak of! I stay of the opinion that Yen lacks its own fundamental bright future - and that it will stay strong in spots on default basis; ready to embark onto multi-year Bear market before most Specs realize it.

4. Gold keeps piling up COT problems: this time Commercials even Shorted it on slight decline. Funds now hold 8 Longs for every 1 Short! Platinum strung basically 11 straight UP-days since I pointed "O.I.-accumulation signal" going into Xmas. Copper's O.I. behavior remains constructive; but it also has already jumped 25% of off Xmas lows. All-in-all, metals are likely to still shadow the currency trade right here.

5. Energies remain extremely interesting: most contracts appear in wave2 pull-back; thus potential of explosive wave3 run remains attractive - despite obviously weak 2009 opening week. CL went up on rising O.I., then down on declining one. Gasoline sports 13:1 Fund long:short ratio. This ordinarily could be viewed a Bear trap - but energy contracts are not undergoing any particular margin stress, plus there is a lot of spread trading among contracts. NG's drop here is very intriguing - as Jan seasonals are, in fact, Bullish. Daily chart is near bottom of yet another price accumulation: five preceding ones resolved down in continuation pattern. This should attract speculative Shorting into the lows - and potential for big Bullish surprise to follow! This has been the first full trading week of 2009. In years previous: the trends marked in Year-Opener would provide direction for a number of months(!) Of course, 2009 is getting the most uneasy start across most markets in recent memory - as credit has been severely constrained, fund net inflows are non-existent and the entire financial service industry undergoes austerity. In this extremely emotional environment, we are doubly reminded of just how important objective measures of market commitments can be.

Jan

10

 One of the most highly-regarded components of the proposed stimulus package is the computerizing of medical records. Pres-elect Obama says this will save the government $80 billion dollars a year and will in effect pay for covering the uninsured.

Let's analyze this a little, especially since we have many readers owning (or working at) financial firms who know something about computerizing and securing sensitive records, and paying for developing, maintaining and continually updating the IT departments, hardware and software that will be necessary for every doctor's office, clinic, hospital and pharmacy. Computerized medical records may be a good idea, but anyone who thinks this elaborate nationwide IT set-up will cost less than the extremely cheap file folders currently found in most doctors' offices has never had much to do with IT.

Does anyone remember the computer systems development of certain other entities which took years of — and still could not work?

Now let's make the heroic assumption this time it will be different and the Gov will get a national computerized record system to operate within a reasonable number of years, within budget, and properly protecting from unauthorized disclosure everyone's very sensitive personal medical information. Let's think in a slightly sophisticated way about the effect on costs.

Doctors get paid these day (by Medicare, Medicaid and insurance companies) by listing all the diagnostic and therapeutic procedures they carry out for which reimbursement is permissible. When each doctor is computerized and can have his computer instantaneously search through thousands of possibly-applicable reimbursement codes, does anyone think there will not be more codes checked and listed by the computer? Would an average medical bill 20% higher be a reasonable projection?

And how about all the vaunted enhancements provided by a computerized record system such as alerting the doctor to alert each patient when to return for a further test or procedure or for adjustment of the patient's medication? Assuming doctors' offices will be competent enough to comply with such computer alerts, how many more doctor visits and additional charges will this generate, to be paid for by the Gov or private insurance?

And these are just two of the more obvious cost consequences, with more subtle cost consequences sure to emerge as health practitioners learn to game the system. Computerized medical records may be a great idea but anyone who thinks they will cost less, $80 billion less, is smoking dope.

Let's consider the analogy of your financial records — income records, expenses, receipts, stock purchase and sale records, purchase dates and cost-basis records extending over many years — that you keep for calculation of your income tax each year. Some handwritten, some computerized, but from various different, incompatible, software systems.

How inefficient! Why doesn't the Gov develop a uniform computerized financial record system, securely protected from unauthorized access or disclosure, which your tax preparer, or the Gov itself, could use to calculate your yearly income tax? According to the, uh, Brookings Institute, such a national computerized system could save the country $80 billion a year.

Or should we rely on people to keep their own financial records? But wait, the average person is not medically — I mean financially — trained. These records are too important to each person's medical — I mean financial — health to leave to chance. And some people don't even have computers. Or filing cabinets. Nah, let's not rely on relatives or volunteers to help those few; we need a computerized financial record system to take care of everyone.

Okay, okay, enough. It's clear from this reasonably close analogy what the solution is — people should keep their own computerized medical records. And, amazingly, the way to do this already exists on the Internet, for free, without waiting years for an elaborate, confidential, Gov system to be developed.

Take a look at myhealthfolders.com (and I'm sure there are others). For free, you can in a few minutes set up for each family member an online medical record file, protected by a password (which you can change after you have given anyone temporary access). Or an employer, again for free, can set up a medical record file for each employee. And each time you go to a doctor, or to the hospital, or to the emergency room, you (or, if you are unconscious, your medical emergency bracelet or emergency card in your wallet) can reveal the website and password so your medical records can be immediately accessed.

And each time you visit a doctor or hospital, you can ask them to update your online medical file. Or if they are too obstinate or inefficient to do so, you can ask for a copy of your new medical record (which you have the right to by law) and update your online file yourself.

Would some politician please suggest this instead of appropriating billions on it in the stimulus package? And then be forced to wait to see how many years, at what cost overrun, and at what compromise in protected confidentiality, the Gov computerized record system takes?

This is not just a theoretical discussion. Collect your last blood test results, the prescription and otc drugs you take, and go here to begin setting up your computerized medical record file.

Alan Millhone comments:

There will always be millions who remain uninsured in the US unless you are on welfare and get a free medical card that comes along with your welfare payment each month. Also if you are on some kind of disability thru SSI, etc. you get a free medical card with your monthly payment.

On another post I see mention of computerizing medical records. Some years back the government came out with a 'paper reduction act', another farce.

Also any kind of public works project related to schools, bridges, roads, etc. will fall under Davis-Bacon, prevailing wage, Union wages and the money in the project will be eaten alive due to the exorbitant labor costs associated and just the 'big boys' will be able to bid who can secure enormous bonds for the various projects. All this TARP and stimulus money is like pounding sand into a big rat hole. I am just a realist and not a dreamer. 

Jan

10

 What Is?

Life is …
Love is …
Happiness is…
Success is …
Marriage is …
Parenting is …
Family is …
Friendship is …
Teaching is …
Knowledge is …
Wisdom is …
Art is …
Living is …
Hope is …
Compassion is …
God is …
Truth is … Religion is …

There will be myriad of answers to all of life big “is-es”. They are all, what you make them. And living will make you answer them like it or not. Make sure the answers you give deeply suit your nature. Watch those around you. Study those giants of before. Examine how great men, men you admire, answered these questions. Wonder how they lived their lives, and how it suited their nature. Learn how they looked deep within themselves and persisted for the long term. Also watch those that faltered. Ponder why they failed. View the shallow, short sighted answers they gave. Decide if they were true to themselves. If you do this, you will know yourself. If you done this … people, those that matter to you, will want to learn from you how you answered these questions.

Jan

9

 The biggest love delusion is illusion. When you feel the irresistible attraction of the first dates, you think she has something special, unique that you cannot miss even for a minute. But with time inevitably daydreams vanish. And you discover a different person. That you don't understand. That you don't know. That you don't like anymore. You remain with the bitter feeling of failure. Once again.

It is similar when you apply a market model that works for some time. All parameters perfectly synchronized with the price action, you are mesmerized by such perfection and beauty. Price swings follow the rhythm that you have perceived and coded. Invariably cycles change and the same parameters and logic applied appear so inadequate and awkward you feel almost ashamed to have considered them in the first place. You remain with the bitter feeling of failure. But for some time, the illusion to have found your meal for a life time remains. The illusion to have found the woman of your life.

Jan

9

Of info I am a font –
More than you probably want –
          I'll give you advice
          It will be quite precise
And some of it quaintly quant…

I also discuss finance theory
until your eyes grow bleary
          from CAPM to Black Scholes
          I stress risk controls -
but I always try to be cheery.

Our goal is to beat a bench -
but according to Fama and French
          we'll probably lag -
          (a bit of a drag
when our clients decide to retrench).

We cannot believe this is true -
we're stock pickers through and through
          though we think we have found
          that returns will compound
more, if we keep risk in view.

We aim to be more than lukewarm,
while taking less risk than the norm.
          You can't tell in advance
          if it's skill or it's chance
if we do or do not outperform.

What else can I say to you?
to help our assets accrue
          I simply observe
          the Gaussian Curve
in everything that we do.

Kim Zussman writes back:

That last ad made me Mad
The premise - it was Off
A dance around the mean?
That makes this rabbi cough!

I promise not an average
Convergence to the mean
Just modest up returns
In good times and in lean

You're lucky to invest here
At my firm no arms wave
Because we make the markets
We know how they behave

You'll have to think a while
Before I'll take your money
It will stay in the family
Just you and me and sonny.

Jan

9

 A bridge collapses in Minnesota a couple of years ago and it becomes virtually unanimously agreed that our country's roads and bridges are seriously outdated and the main component of any "stimulus package" should be the rebuilding of our "infrastructure". (That the Minnesota collapse was due to a design flaw rather than age seems to have gotten lost in the shuffle.)

Of course no one really knows how much infrastructure would be appropriate since there is no market in it and building new roads and bridges seems to get decided upon based on such factors as political influence and earmarks.

Let's guess there are a few hundred thousand bridges in the country (depending on exact definition of bridge). If most of them were seriously deteriorating, wouldn't more than one bridge fall down every couple of years? And doesn't the fact that bridges practically never fall mean that they are actually in pretty good shape? Maybe even in much better shape than the minimum needed?

I don't mean to make light of the personal tragedy of the three people who died when the Minnesota bridge fell. But what is going on here? Media crying wolf? Politicians drumming up public fear so they can justify their pork? Statistical and economic ignorance by the media and politicians? All of the above?

Thank goodness there was that bridge to nowhere or we'd have no check at all on infrastructure spending and the stimulus package would be two or three times as large.

Pitt T. Maner III comments:

With respect to infrastructure I wonder if the fiber optic business will at some point make a revival. Thesis being there is a need to maintain and upgrade the Information Highway /Internet. Companies like Corning were once selling at 10X from where they are today. Is there another technology that will replace those older fiber optic lines?

Stefan Jovanovich adds:

As the noted philosopher Homer Simpson once said, "Public transit is for losers." Roads offer individuals choice; "mass transit" is the planners dream. As James concedes, it is also a guaranteed money loser. Roads and bridges actually pay for themselves; the tolls here in the Bay Area have been subsidizing BART for more than 3 decades. The presumption that the dreaded foreigners in the auto and oil industry will benefit disproportionately from road construction is mercantilism at its finest. I thought we all shared the odd notion that the consumers should decide matters, not the producers. (Oh, wait, that would mean a "rescue plan" that focused on the depositors — my bad.)

Jan

8

 NASDAQ is using Amazon's Cloud Computing technology to store massive amounts of tick and quote data for rapid retrieval by pros and non-pros alike. The Market Replay product is described here.

The following article is a write-up on the fast-growing concept of Cloud Computing:

NASDAQ Using Amazon for Cloud Storage January 7th, 2009 : Rich Miller

The NASDAQ Stock Exchange is storing "many terabytes" of stock market data on Amazon's S3 cloud storage system. NASDAQ's use of Amazon Web Services is detailed in a story by Penny Crosman at Wall Street & Technology and will be the subject of a presentation at O'Reilly's Money:Tech conference on Feb. 4-6 in New York.

NASDAQ is using AWS for Market Replay, a product that provides data on historic trades and lets investors analyze pricing in relation to news events and earnings calls to gauge the market response. Claude Courbois, associate VP of product development for NASDAQ OMX, said the use of S3 has helped it control costs for the service. Rather than using a database, the exchange is storing text files at Amazon and using an Adobe AIR client application to analyze the trading data and create trend graphics.

Courbois told WS&T that it stores many terabytes of NASDAQ, NYSE and Amex data in Amazon's storage cloud, and adds 30 gigabytes to 80 gigabytes of data every day to the cloud. The data retrieval time is less than one second, and the system scales instantly.

"If we built this ourselves or used a standard ASP (application service provider), we'd have to ask for more space than we initially need and pay for all these empty terabytes until we fill them up," Courbois said.

See Wall Street & Technology for the full story.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Jan

8

 We have almost every Shakespeare play and Greek tragedy on Wall Street rolled into one tale with a little Tom Wolfe for good measure. Some days King Lear, some days Rosencrantz and Guildenstern.

Tom Marks writes: 

In a perfect theatrical world the whole thing would be a colossal performance art piece with Bernie having not only had the original 50 billion safely secured in an escrow account, but having turned it into 100 billion by having been short crude all the way down. So Bernie, accompanied by a gaggle of his doctors, comes out one fine morning to face the pack of media wolves camped outside his princely co-op and announces that the whole confession thing was just a misunderstanding, citing an adverse reaction to medication for Lyme disease by way of plausible deniability. He walks away scott free, the Carnegie Deli names a sandwich after him (bologna on wry), his investors flusher than ever, and the audience (meaning us) left with their jaws agape in classic WTF fashion. It would be theatre of the absurd's finest hour, while at the same time being the only rationale explanation how 50 billion dollars could somehow evaporate. 

Jan

8

 If one were to deliver a last lecture like Randy Pausch, what would it be like? I'd start with trying to prolong life. It's terrible to die at an early age like he did, and there are many things that a person can do now to prevent it. Let's start with the Mediterranean and Okinawa diets and statins, Tagamet, and nsaids like Vioxx and Celebrex. In addition to the added time to enjoy and liquify the wealth, this gives one the power of compound interest.  

The second thing I'd say is always be aware of deception. The market is at least as smart as the caterpillar which has a hundred ways of deceiving its predators. A good understanding of deception in nature, and models that go into first, second and third level deception in various games is a good start.

The third thing is similar to Randolph's head fake thing and is contained in Liddell Hart best. The power of indirection. A frontal attack is often met by the adversaries best defenses. It wastes too many resources. Absolutely essential is to divide and conquer.  

The fourth thing is to develop a good character. All your faults will come out in the market. and if you are a chronic complainer, or liar, or compulsive gambler, or procrastinator, the market will ferret them out and do you in.  

The fifth thing is to always be humble. The market is so smart, so changing that to think you ever have the answers for too long, is certain to lead you to be behind the eight ball when things change.  

The sixth thing is to develop good fundamentals. Randolph says that he likes to use football analogies and to get a good three point stance and to play well without the ball. I'd go back to coach Wooden and start with washing the hands, and putting on the socks, and keeping your execution costs low, and making sure that you don't pay too high a cost in promotion or that you're carrying too many people on your shoulders who aren't paying an appropriate part of the passage.  

The seventh thing is to learn how to count. Too many people are prey to wishful thinking and an inability to distinguish regularities from randomness too many are subject to real psychological biases, (not the ones talked about by the Nobelites) to think that you can overcome them without some hand studies and calculations of variability.  

The eight thing is to learn how to handle failure. It's bound to happen, and you have to learn from it.  

The ninth is to read good books. We have many that we recommend on this site.  

The tenth thing is like Shakespeare to suit your apparel to your position, and to suit your positions to your size so that you don't get in over your head.  

The eleventh thing is to have some escape hatches and contingency plans i.e. the mouse with one hole is quickly cornered or as Randolph says, what happens if the wolves are after you. I could go on and on, and perhaps I will but I"d like to get your insights on this.

Valery Kotlarov comments:

I’d take the best of the best writers and begin with something like what Kurt Vonnegut said here. I love every book he wrote, and the most important thing that I took from them is the fun– that every situation in life can be so comical and funny, so we should never take anything too seriously. As humans, we are driven by language, and sometimes it’s funny what one can understand from the same sentence or even word– something totally different from what another would understand. Also, I’d speak about the charismatic and optimistic personalities, like Ayn Rand. I’d mention the legendary people. I’d also speak about the bank robber, whatever his name, just to show that success is something that we can create and follow, but we should never be slaves of it, or friends of it.

When I was in Turkey, I heard that many families build homes for themselves. Each year, they build it higher and higher, step by step, so in a few years they get a warm house. And I’d speak about some of the greatest inventors like DaVinci, Edison, Tesla, Archimedes, and what they did to show the achievements and that dreams can come true. I’d take some of the Gregory Bateson’s ideas, and emphasize that the ideas and dreams are things we are made of. And from here again to Vonnegut: “We are what we pretend to be, so we must be careful about what we pretend to be.” And, well, I’d also emphasize reading and learning– the importance of it, and to try make fun of it all–life, whatever it is. Also I’d never think or call it my last lecture, just too optimistic for that, even if 99% of facts would point that it is (gimme events not the descriptions) Last, I’d buy some S&P or other stocks of  healthier, economologically speaking, countries, and give it to someone I love (so he or she could only use it after some 15-20 years.) 

Nigel Davies writes:

There's only one major addition that I can think of, and that's the importance of having a higher purpose or mission in life. This is something that all the great people in history have in common, whether it's 'queen and country' (e.g. Nelson), 'the truth' (e.g. Galileo) or helping others (e.g. Mother Theresa). This could even be the biggy, the one that holds other principles in place.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Victor Niederhoffer adds:

Find a good mentor. You can ride on their shoulders and they will achieve immortality and pay back for the mentoring they received through you. But by the same token, never take a tip from anyone, a trade for the day, because you won't know if it fits in with your persona as it did with theirs, and you'll never know how strong their convictions are, and when they change them, and you'll be weak.

Be optimistic. Nothing good has ever come to those who hope for the destruction of civilization or the market or who fight the upward drift which must continue up to follow the strands of human progress, which is still grand, even today especially if you consider all the individualism unleashed on the world in India and China.  

One of my mentors, Dr. Raymond Chang, says that the best meal for a lifetime he knows is to take a vitamin D3 Supplement each day, and I would add it to the list. Exercise is always helpful as it prolongs the life, and eases the tensions, and improves the digestive process, and makes you look better, thereby attracting better mates, and mentors, and is in keeping with the fundamental nature of humans, which involves play and sympathy.  

Family. The people that you can always count on are your extended family, and the more you use this to support you, the better you'll be. Conversely, be aware that most of your non-extended family, except for your very good friends, can never be trusted to support you when you need it the most and indeed are likely to disappoint you over the long run.

Friends. Friendship based on business is always better than business based on friendship. I would augment my little thing about deception above by saying that one should always beware of the negative lie as a tool of deception. The thing where the deceiver tries to say something bad about himself so as to get you off your guard so he can go in for the big kill. I was interested in this regard to see that the French firm that killed itself out of honor on the Madoff matter was taken in by the very self deprecating manner in which B. M. told them that he once lost too big while his kids were tugging at his coat, and telling him not to help others, when he tried to intervene with big bucks against his kids advice. It is interesting how the kids "apparently" did not tug at his coat vis a vis any of his other less noble activities.

Stephen Stigler comments:

That is a good list, although I'm tempted to repeat a comment of my father's, "There are not ten good reasons for anything." Which would suggest focus and priorities.

James Sogi adds:

Do what you love. Love what you do. Don't do what you hate. Many people will tell you what to do. There are social and family pressures, some hidden. Follow your own agenda. Trade your own style. You can't follow someone else's style. It won't fit, and you will lose money. Trade and make money the way you know how, they way that is comfortable to you.

Spend time with your family. As Vic says, no one but they will really be there when your really need them. There is not much time, and it will soon be gone. Spend time with them. 

Kim Zussman writes:

Regarding Vic's "fourth thing," use the market-mirror for self-diagnosis, but never rule out the possibility that your condition (you + the market you're in) could be pre-malignant and require complete excision.

Laszlo Birinyi comments:

There are two things I would add. One, read different books and develop breadth. Drucker amazed me in school because he could illustrate ideas from history, literature, life and whatever. I encourage my kids to take courses in Arab culture or Norwiegen or whatever, not just literature and art which are their major interests.

Second, learn to listen. I find at bonus time everyone has inflated opinion of their contribution. I did well in my career because I never argued with my bosses. If they paid me x, my contending that I was worth 2x wasnt going to fly. If it was .5x (fortunately it never was) that was a signal to shape up.

David Brooks writes:

All of Victor's ideas about ways to prolong our mortality are right on. I particularly like the comments about deception, because I have always believed that one of the things that differentiates excellent surgeons from merely good surgeons is the ability to see things that others don't, such as tissue planes, obscure vessels, the deceptive picture that disease often presents.

Jan

7

 I love trading because I love the game. So far that doesn’t seem to have harmed me, quite the opposite. I don’t love action, study for its own sake, or particular positions. I strive for perfection in trading, and thus my sole concern is to have on the best positions possible at any given time, and I find that I get closer to this by trying to trade well rather than churn, spout analysis or commentary without placing positions, or sit on horrific losers as account equity goes up in smoke.

In relationships, I don’t feel I make up an idealized version of someone. Maybe this is why I’ve never married nor have plans to. In my opinion, only those inexperienced in romance fall for this basic error. As a prevention I recommend dating at least two dozen members of the opposite sex before committing to any kind of serious relationship such as marriage or cohabitation. By this point you will know “love delusions” for what they are — an evolutionary trick designed to tempt you into producing children before it is in your own interest to do so. You’re then more likely to commit for genuine reasons of mutual compatibility and respect, rather than passing hormonal imbalances. In trading and love, as in life, experience is the antidote to delusion and falsehood.

Jan

7

 I started out writing a review of American Pop, a 1981 movie, but was at a loss for words. This animated tale of four generations of a Jewish American family set to the popular music of the day just defies description. A heart rendering story line set to the best popular music America has to offer is just about all I can say to describe this wonderful movie. The creator, Ralph Bakshi, managed to seamlessly weave the popular music of the day into a storyline that tells a story about every family that emigrated to this great country. It combines triumph, tragedy, hope and despair all set to an amazing musical sound track.

Starting out with a traditional Aneinu in Russia, progressing through ragtime music, to the music of the 1930s and the big bands of the 40s, it continues through the music of Brubeck in the 50s, the 60s music of Hendrix, The Doors, and Big Brother and the Holding Company. The movie artfully segues into the late 1970s with the music of Lou Reed and the first elements of the punk scene. Since the movie is about a family and it's complex relationship with music, this is a must see for everyone. Very few movies in my life have affected me as deeply as American Pop. Although the premise of the movie is very straightforward, it is a very complex piece with numerous twists and turns, and layers upon layers just waiting to be peeled back. Much of the movie is sad, depicting the struggle of a Jewish American family trying to survive in America. Without giving out a spoiler, the movie has a triumphant ending. Here's a link to the trailer.

Jan

6

 Here's one for the guaranteed to happen file:

Last January we had three down days in S&P futures leading up to the end of the year and followed by another five down days more or less (one slight up of 0.3 in there). This year we had five up days leading into the year end followed by two more up days so far. Of the eight most recent examples of up two day moves at year start, the results are mixed for rest of month.

Jan

6

In considering the ecology of markets it is always helpful to see what's moving in conjunction with other things. Here's a interesting 2 by 2 table (a template of which Galton and all his followers should always keep in their wallet for updating with pin pricks).

It is a shocking table that shows that increases and decreases in wealth, what I used to call healthy and unhealthy days respectively, in both big markets in conjunction are half as likely as counter moves in the two, when US wealth is relatively little changed.

Steve Ellison writes in:

Not surprisingly, it seems the net result was a decrease in wealth. In a talk in Singapore yesterday, Brad DeLong estimated that global financial assets have shrunk from $80 trillion to $60 trillion in the past 18 months.

Jan

6

 Many things that have been said about love apply to the markets.

From The Merchant of Venice:For I am much ashamed of my exchange:/ But love is blind and lovers cannot see/ The pretty follies that themselves commit;

Erich Fromm: Love is the only sane and satisfactory answer to the problem of human existence.

Kahlil Gibran: Love has no desire but to fulfill itself. To melt and be like a running brook that sings its melody to the night. To wake at dawn with a winged heart and give thanks for another day of loving.

Proverb: Love is a sweet tyranny, because the lover endureth his torments willingly.

Albert Ellis: The art of love… is largely the art of persistence.

Boethius, The Consolation of Philosophy, A.D. 524: Who would give a law to lovers? Love is unto itself a higher law.

Mignon McLaughlin, The Neurotic’s Notebook, 1960: The hardest-learned lesson: that people have only their kind of love to give, not our kind.

Bill Balance: When a man is in love or in debt, someone else has the advantage.

Rose Franken: Anyone can be passionate, but it takes real lovers to be silly.

Ben Hecht: Love is the magician that pulls man out of his own hat.

Phillip Pulfrey: Love is no respecter of age or practicality/ Neither morality: unabashed/ She enters where she will/ Unheeding that her immortal fires Burn up human hearts…

Lord Dewar: Love is an ocean of emotions entirely surrounded by expenses. Rabindranath Tagore: Only in love are unity and duality not in conflict.

Ursula K. LeGuin: Love doesn’t sit there like a stone, it has to be made, like bread; remade all of the time, made new.

Robert Browning: Take away love and our earth is a tomb.

Tom Masson: The love game is never called off on account of darkness.

Percy Bysshe Shelley: Love withers under constraints: its very essence is liberty: it is compatible neither with obedience, jealousy, nor fear: it is there most pure, perfect, and unlimited where its votaries live in confidence, equality and unreserve.

Fyodor Dostoevski: Love in action is a harsh and dreadful thing compared with love in dreams.

Charles du Bois: Love does not care to define and is never in a hurry to do so.

William Carlos Williams: What “love” is I don’t know if it’s not the response of our deepest natures to one another.

Jareb Teague: Love floods us with hope.

Jan

6

 Ships generally tend to be mission-oriented (e.g. finding and engaging an enemy, delivering a cargo etc.) as opposed to process oriented. If you want men to follow you, there needs to be a strong sense of purpose attached to the activity. People need to identify with and be part of something, and to feel that there is meaning in what they are doing. They will take on even menial tasks much more willingly if they know it is for something special.

The most fun and satisfying job I ever had was on an actual space mission. Our team was stationed for 3 months in Perth, Australia at the Aussat tracking station, and our job was to acquire the signal from the satellite Anik C1 after launch after it crossed into the Eastern Hemisphere on its shuttle orbit. We had a tight team, each member with distinct responsibilities– mine the operation of the computers and the software. Failure was not an option. At risk was a $300 million dollar satellite and multiple millions of transponder revenues to the company. We worked hard, testing and practicing, but we also partied and played hard. And we of course succeeded. It was a great experience. Create a purpose — and they will follow.

On a side note, that job spawned an awful lot of stories. They would be true, and would have titles such as:

“The Cherry Blossoms of the Hakone Hills (Japan)

”“The Vending Machine … or … Drawing A Crowd at Mt. Fuji”

“The Star Ferry, Kowloon, and Victoria Peak”

“Lobster at 30,000 ft on Singapore Airlines”

“Being Sprayed at 3AM by Men in Space Suits.”

“Being Propositioned at the Koolabah … or … Thank God She Fell Down Before She Got to the Table … and … Why My Colleagues Thought That Was Beyond Funny”

“Cigars at Night on Sorrento Beach, and the Great Green Meteorite”

“Leo T’s Retirement Plan”

“The Hughes Guy Did the Car-Mounted Camera for Steve McQueen’s Famous San Francisco Car Chase! Go Figure”

“Man on Beach Discovers Yin-Yang Sign is Actually the Moon Observed From the Southern Hemisphere”

“Sleeping in the Car Outside Bendigo”

“Abandoned Railcars on the Trestle at Bonegila (NSW) … or My First Australian Home Was a Refugee Camp”

“Visiting My Childhood Neighborhood in Eden Hills, SA … or … Why Does Everything Look So Small?”

“Driving on the Wrong Side of the Road - and All That Entails”

“It’s 43 Degrees C Outside - I Know, Let’s Install the Feedhorn in the Bird-Bath*”
* slang for antenna in stow position

“My Day at the Nude Beach”

“The Unofficial Coded Messages Slipped Into The Daily Mission Control Report … or … Had They Known”

“A.G.’s Unofficial Topless Beach ‘Photo Shoots’”

“Casually Chatting With Micheal B. As He Walks Out of Fremantle Bar Carrying a Newly-Found Girl Slung Over His Shoulder.”

“Rob P. Found Asleep Pants-Down in Toilet Stall After Brief Search by Fellow Drunks.”

“Crashing the Oilmen’s Association Cocktail Party, and Stealing Off With Their Women”

“Welcoming the QE2?

“Welcoming the Concord”

“My 3 Days on the Indian Pacific*”
* Sydney to Perth transcontinental train

“Shooting Pool With Gold Miners in Kalgoorlie”

“Buying a Water Polo Team Raffle Ticket in Kalgoorlie … or … My Shot at Winning a Side of Beef”

“Also During Kalgoorlie Lay-Over - Strange Kiwi Travel Companion Finds Reasonably Priced Horizontal Refreshment in Tin-Hut Alley”

“There’s No Such Thing as Too Much Pizza, Cricket, and Monty Python; oh yes, and Souvlaki”

“The Girl in the White Bikini”

“Officially Verified, Playing Cricket in a Parking Lot is a Bad Idea”

“The Kodak Girl … or … The Most Amazing Red Sweater in the World”

“Finding Circuit Board Cleaning Spray with 15 Minutes to go Before an Australian Long Week-End”

“Bringing to Life the Expression ‘Not Being Able to Get Laid In a Whorehouse’ … or … the One-Armed Madam”

“The Swan River Wine Tour … or … No Man Left Standing … or … Group Vomiting on the Swan River”

“Catamaraning on the Swan River”

“Swimming After Catamaran on the Swan River”

“Foster’s, Toohey’s, Swan Lager … We Drank It All. No Really, We Drank it ALL”

I think I’d better stop … 

Jan

6

 On Mentors: seek others help in your talents. A good coach is a necessity to keep your balance, even if you are an expert in the field. You don’t have to reinvent the wheel of course, but the coach will see your errors of over eagerness while still encouraging your dreams.

On Losses: when the changes or losses happen, view them as a time to change the dysfunctions in your life. Always strive to improve your response. Be it a new school year, a new school, leaving home, college, various new jobs, marriage status and having children. These are all times to consider what you did well and continue the good work. But also want to change, what bad habits did you indulge, and then set about improving response to life.

Value consistency. A child thrives on a consistent environment, rules and routine. Adults do also. Loyalty, marriage, daily effort thrive on consistency. The brilliance in Sharpe’s ratio, is that it sets the bar high. The question isn’t did you make money but did your actions and acceptance of volatility actually improve your lot or where you better off, passively consistently buying and holding. It's the reckless investor i.e. gambler, who does not hold himself to this standard. They end up trading to trade. Life will force some losses on you, without that escape hatch. Yet, there will of course be times when you must cut your loses, but those that don’t weight against the standard of consistency, will end up changing things just for the change. Like the Sharpe ratio, there are many ways to game the system and trick you into self-deception. Those that don’t learn this end up like the gambler; they die broke morally as well as literally, without a nickel and without a true friend or disciple.

Jan

6

 If you've ever gone on a twilight run out in the wild, with a well trained free roaming dog you know there is something primal involved. At least for me, it's something I was designed to do.

Here is an excerpt from a Running Times article:

When Charles Darwin termed similar competitions a "survival of the fittest," he wasn't referring to vo2 max, lactate threshold, and running economy, the usual measures of a runner's ability. But in terms of human evolution, that's more or less what it amounts to, according to university professors Dennis Bramble and Daniel Lieberman. They believe that Running Made Us Human–that is, that early man's talent for endurance running led directly to our present, large-brained selves. That's the argument they made three years ago in a Nature magazine cover story, and it's a case they're still building.

Jan

6

 A fascinating replica of an instrument called Storm Glass appeared in a recent holiday catalog. It is based on an instrument developed for forecasting weather and used by Vice Admiral Robert Fitzroy, the captain of the H.M.S. Beagle while Charles Darwin was on board. Fitzroy was one of the first weather forecasters and became the first head of what would later become England's Meteorological office. The French apparently made similar instruments before Fitzroy in the late 1700s. You can see from the pictures and text that it would take a bit of interpretative skill to know what the storm glass state represented. The science behind the storm glass is a bit odd since what causes the crystals to form/precipitate in the glass evidently is still a bit of a scientific mystery–electricity, temperature, atmospheric pressure, quantum tunneling? Quantum tunneling reminds one of the many charged particles and even gamma rays that can be emitted by powerful thunderstorms…

If you would like to make your own storm glass, check out this link.

Here is some continuing recent research on storm glass:

"Pattern formation of crystals in storm glass," Journal of Crystal Growth, Volume 310, Issue 10, 1 May 2008, Pages 2668-2672 Yasuko Tanaka, Koichi Hagano, Tomoyasu Kuno, Kazushige Nagashima

Abstract

“Storm glass” is a sealed glass tube containing a camphor–ethanol solution with aqueous NH4Cl and KNO3 solution. In 19th century England, the pattern and quantity of the crystals formed were observed and interpreted as a weather forecasting tool. In the present study, the pattern formation of the crystals in the storm glass solution was investigated by focusing on one parameter, such as the applied temperature. The growth patterns of the crystals in the storm glass solution were controlled using a directional growth apparatus and observed in situ as a function of the growth rate. Crystals grown in camphor ethanol solution were also observed for comparison. In addition, a replica of the storm glass attached to a temperature control system was constructed in order to examine the effect of the history of temperature variations on the crystals. X-ray diffraction patterns of the crystals were obtained to clarify the species of the crystals in the storm glass.

This story reminds me of the difficulties of making scientific predictions when there are tons of variables…

John and Mary Gribbins' book, FitzRoy: The Remarkable Story of Darwin's Captain and the Invention of the Weather Forecasting plays up that Admiral Fitzroy and Francis Galton did not get along very well. There is a sense of tension between proponents of qualitative and quantitative data that is quite interesting.

Discussing Galton's view of the early British Meteorological Office they say:

As for the compilation of statistics from ships at sea that had been the raison de e'tre of the Office, Galton felt that FitzRoy had stopped collecting data much too soon, with at least three times as many observations required before the database would be of much use.

And this from Katherine Anderson's book, Predicting the Weather: Victorians and the Science of Meteorology :

Reviewing his 1866 report on meteorology for the Treasury inquiry in 1877, Galton thrice underscored the section that noted, "A clear understanding of the degree of Precision to be aimed at, lies at the root of all estimates of past and future work."A summary of Anderson's book notes:Victorian Britain, with its maritime economy and strong links between government and scientific enterprises, founded an office to collect meteorological statistics in 1854 in an effort to foster a modern science of the weather. But as the office turned to prediction rather than data collection, the fragile science became a public spectacle, with its forecasts open to daily scrutiny in the newspapers. And meteorology came to assume a pivotal role in debates about the responsibility of scientists and the authority of science.

Admiral FitzRoy's book, The Weather Book: A Manual of Practical Meteorology can be found in its entirety here.

As noted in his biography, FitzRoy committed suicide by slitting his throat at age 60. 

Jan

6

A VMonday's delayed CFTC Report covered the festive 12/23-12/30 markets. It did confirm:

1. Commercial propensity toward Shorting indexes.
2. Commercial propensity to start rolling out of Treasury Longs.
3. Commercial Shorting of currencies.
4. Commercial offer into Gold rally and bid for Copper.
5. Commercial buying in liquid energies, while lightening up record Commercial Longs into NG rally.
 
Transition and reversal in short-term price moves should be completed by Wednesday Jan. 6 in the following important contracts:
 
1. EUR/USD will likely sharply reverse from 1.32 area, just like it did from 1.47 area on 12/18 (both 62% retracement targets).
2. Corresponding move in DXC up to 84.50 (62%) area.
3. EUR/GBP has dropped quickly from 0.98 toward 0.90 buy (38%) area.
4. 30y USH aggressive profit-taking from near-142 record (Open Interest fell during each of the three big down-days!) has max. target near 130 (38%) area.
5. In SP: offers are lining up in 950 area; once penetrated, scale-up sellers on the way to 1000.

Jan

5

After seven up opens in a row, we get a down 1%. After five years when a big rise in dollar versus yen, i.e. the yen weaker, never occurred in conjunction with a big decline in S&P, we get an instance with the yen down 2% and S&P down 1% as of 9 am. Of 26 markets open on my screen, all 26 are down. A very appropriate second trading day of the year from a very appropriate mistress.

Jan

4

 The most powerful kind of love is the love that is not self centered, but goes outward. This kind of love can take many forms such as the love of knowledge, compassion and empathy towards others, the love of nature, love of one's profession and work, or the love of art. In some respects one can love the market as a love of knowledge.

I disagree with the oft used characterization of the market as 'mistress'. That definition embodies and emphasizes more tawdry, baser instincts in the relationship. It is an erroneous anthropomorphication and an unhealthy relationship. Empathy is one of the elements of love. Empathy can be used to understand the herd's motivation to profit in the market. Love enables late nights, long hours and tedious computations. Love is power. Love creates power and that is why it is the greatest of all.

Jeff Watson adds:

I'm so glad that the holiday season has passed, as all of the commercialized sentimentality tends to give me a case of a sour stomach and the need for a strong bromide. Holiday cheer is supposed to allow one to demonstrate love for his fellow man, and a person is supposed to show this love by purchasing as much swag as possible to keep the holiday numbers strong. To all of this, I have to agree with Dickens and say, "Bah Humbug." Not to say that I have anything against love, but love has some psychological components that should be examined. Love has been shown to be a mammalian trait, much like hunger or thirst. Psychologists state that there are different stages of love in an interpersonal basis that include lust, attraction, and attachment. These stages can be overlapping and all involve the chemistry of neurotransmitters in the brain and other endocrine glands. Some theories about this misunderstood phenomenon also state that love is composed of three components that are intimacy, commitment, and passion.

While it is all good that psychologists have done exhaustive studies of love, it is my contention that self delusion is a major component of what we call love. When there is that initial attraction between two people, only the good sides are shown, and one only sees an incomplete picture of what the other person is all about. The mind makes up an idealized model of the other person, ignoring all of the other characteristics that could cause one to change one's mind.

Love happens to be a very irrational concept, although it's  worked since time began. Love has been the subject of writers from Shakespeare and Ovid, to Danielle Steele and a hundred other cheap romance writers. Love happens to be big business, in fact it's a multibillion dollar business. It would be a tough calculation to determine the amount of our GDP, that is a derivative of love.

Love happens to be a very bad thing for speculators or any traders for that matter. When one falls in love with a position, irrationality takes over, and one only sees the idealized position, not the real one. When one loves one side of the market, whether it be bullish or bearish, all other rational arguments fall upon deaf ears. When one loves a particular method of trading… a style, one might not see that the method has become unprofitable before it's too late. Love will keep one going back to the same mistakes, all irrational of course, but that's what happens sometimes. One might fall in love with the Mistress of the Markets, and feel a strong desire to be at her side 24/7, and always have a position on. Spending all of one's time in the market courting the Mistress, carrying a position, can spell financial doom. I'm sure that a hundred different analogies about the detrimental effects of love regarding trading could be listed, and this short list is by no means complete. I will admit that I feel a lot of love in my heart for friends, family, and my country. I will also admit that I've felt love in the markets before and paid very dearly for that love. Since I've gotten older, the best trading lesson I've finally gotten after all these years is the lesson of a dispassionate attitude, not love.

Kim Zussman writes:

 A man walks into the market, and asks, "What kinda Gin ya got?"

She replies, "Oxygen, Nitrogen, and Estrogen"

It seems no accident to refer to the market's alluring, seductive, narcotizing, hypnotic, deceptive, convoluted, torturous, capricious, punitive, empty, destructive path as "mistress". Not just any mistress; but that just ripe girl with a perfect body, blemish-less skin, and crystal eyes that smile with love just for you. Until you grow to need it.

How do you dally with her without falling in love? As Jeff says, love is the point beyond which ruin no longer matters. If you can be intent enough to see it coming, can you be strong enough to resist the temptation of heroic sacrifice?

Maybe it takes a good lady's man. Presumably the guy who can take it right to the edge, make her believe, but hold back enough of himself to walk away unscathed at any moment. See Casanova.

Dr. Janice Dorn observes:

J DornIn my experience, one approaches the study of the markets, the long hours, the tedious computations with a sense of passion. People truly fall in love with the study of the markets and the attempt to make sense of them. Perhaps it is the challenge of attempting to understand or explain that which can possibly be understood or explained after the fact — not before.

First Corinthians 13: 1-13 says that — of faith, hope and love — the greatest of these is love.

In the actual trading of the markets, there is no place for faith, hope or love. Markets are not entirely rational and not entirely random. They hold out hope and dash it. They hold out faith and dash it. One can fall in love with the idea of trading until your real money in on the line. Then, the mean markets show themselves and love turns to fear and loathing. Certainly, one can use the concept of empathy to understand the motivation of the herd to profit in the markets. The herd needs empathy because, for the most part, the herd loses.

The markets are neither friendly nor loving. This is a game where some 60 million people compete everyday to take your money before you take theirs. If love is truly a battlefield, there is no better place to find the battle than in the markets.

The markets demand humility, they demand gratitude, they demand that one approaches each day as a loser.

I challenge anyone who actively trades these markets every day to tell me that they are not a demanding mistress, that they are not there to take as much money from as many people as possible or that they are loving and kind. 

Paolo Pezzutti adds:

The relationship between love and passion is interesting. A sane passion helps you reach significant results and objectives. You do not have great objectives if you are not a dreamer, and somehow an irrational component in these endeavors is always involved. Markets are not loving and caring, but you can actually love the way they are structured and twork, and how they surprise investors with sudden and unexpected moves which systematically trap the herd on the wrong side.

You can love the long and patient endeavor to discover hidden inefficiencies and short term behaviors due to specific and repetitive moves of certain participants in the markets. However, love must not be confused with obsession. In this regard, the initial phase of a relationship is characterized by an instantaneous attraction. This phase can be replaced by an anxious and obsessive phase, characterised by an unhealthy attachment possibly overwhelming your life. The final destructive phase may involve extreme feelings of self-blame, anger, and desire to seek revenge. Markets are a fascinating expression of social behavior. The emotional behavior and the ever-changing characteristics and number of participants makes them so complex and quite unpredictable. But the feelings that participants in the markets can have are quite similar to those in a relationship. The post Lady in Sorrento I wrote back in November is about this.

Jan

4

In the times of Madoff and Isreali wars, baseball comes to mind…

Hank Greenberg's brilliant quotations and play after his war duty is quite impressive to me. All aspects of his self discovery and play should be studied in depth. I am sure others have said it before but he said it best: "baseball is a game of percentages stacked against you."

I've never heard "against you," but as a hitter or trader nothing could be better stated. His return in 1945 after being worn by war both psychologically and physically, then with out play or training for 4 years, was difficult and inspiring. I loved his first homer in July of '45. All his teamates pulled a joke on him and ignored him when he came back to the bench. He didn't know how to react and when he sat down they all burst out laughing and congratulated him.

Jan

4

 Author's site with free book.

Modeling with Data fully explains how to execute computationally intensive analyses on very large data sets, showing readers how to determine the best methods for solving a variety of different problems, how to create and debug statistical models, and how to run an analysis and evaluate the results.

Ben Klemens introduces a set of open and unlimited tools, and uses them to demonstrate data management, analysis, and simulation techniques essential for dealing with large data sets and computationally intensive procedures. He then demonstrates how to easily apply these tools to the many threads of statistical technique, including classical, Bayesian, maximum likelihood, and Monte Carlo methods. Klemens's accessible survey describes these models in a unified and nontraditional manner, providing alternative ways of looking at statistical concepts that often befuddle students. The book includes nearly one hundred sample programs of all kinds. Links to these programs will be available on this page at a later date.

Modeling with Data will interest anyone looking for a comprehensive guide to these powerful statistical tools, including researchers and graduate students in the social sciences, biology, engineering, economics, and applied mathematics.

Ben Klemens is a senior statistician at the National Institute of Mental Health. He is also a guest scholar at the Center on Social and Economic Dynamics at the Brookings Institution.

Jan

4

 One reason why markets fascinate people is that they offer a means of self-cultivation as our decisions provide a unique insight into and training ground for the self. I learned this about chess after decades of playing and studying; it's not about what someone can achieve, it's about the opportunity such art forms present for developing your mind and spirit.

This facet of markets is probably unappreciated for several reasons, the first being that they also offer a unique means of making money and cultivating one's bank account. The second is that western culture has a heavy bias towards external things, so who needs inner cultivation when you can have fun prior to the inevitable snuff time? But the subconscious disagrees and yearns for such things, leaving us with the problem of how to rationalize.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Adam Robinson replies:

Nigel's thoughts on self-cultivation were echoed in an unlikely philosopher, Juan Belmonte, an illiterate street urchin who, though completely unsuited to the sport physically, rose to become the greatest bullfighter in Spain nearly a century ago. I extracted this quote from his autobiography and reflect on it often; I believe it to be one of the wisest things ever said:

Any life worthy of the name consists of nothing more than a continual series of efforts to build up a character through the medium of whatever struggle one has adopted for a career.

Russ Sears adds:

Dr. Brett's blog had an excellent link on the "Corporate Athlete" from Havard Business Review which describes how to self cultivate.

What I would add to this analysis, is that keeping a healthy physical base is excellent to refresh yourself, "clean the slate." When the best laid plans fall apart, hard excercise puts the loss in perspective and shows you can rebuild the pyramid over and over.

Jan

4

 On the way to the beach this New Year weekend, there was row after row of big private jets, with a total of approximately 60, on the Kona Hawaii tarmac, the poor guys with the little jets parked in the dark at the edges. The overflow has to park on Maui. Helicopters ferried the private jet passengers to their homes at Kukio. I talked to a few high flying friends, and they are buying. The indicator did not work well last year, or maybe my count was bad, but there were fewer jets last year than this, and so I project a good year for 2009 overall. These guys are both smart and lucky to have private jets which are not cheap to own and run. I note a positive change in attitude after Christmas, an increase in traffic with lower gas, and increase in shoppers, travelers. This is born out in the Christmas rally and the New Years rally.

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