Aug

31

SwanIn my limited experience, risks such as the "Black Swan" type are unusual. Most of the risk we newbie traders assume are not real risks — only mismanagement of risk. One of the most common is "impulse trading" (i.e., trading without an edge or overtrading).

Well, last week I had a lesson on Impulse Trading. I was driving with my family (wife, kid and the nanny) to the border of our state and country — Jaguarão, a city on the border of Uruguay — to do some shopping at the free market shops.  The travel couldn't be by plane (there's no airport there), so we went on a 5+ hour driving trip.

You know, my boy is almost 3 months now — and he is my first son. So I was driving in a long (for me) journey with my boy in the car. There were moments where one, two or three trucks were  blocking  the road, and of course, I wanted to pass them. Another time, I would risk every chance to pass them. But now I had my kid in the car so I only took the completely free-risk shots. There was nothing in  the world that would made me risk my boy's life in brave and daring driving. No way!

Immediately I felt ashamed of the times I took trades that were not "high Sharpe situations". How could I be so risk-idiot? For a person not money-centered (which I believe I am not) trading is the most difficult challenge. Because it's so easy to mismanage risk. "Oh, it's just another losing trade - no big deal". It is a big deal!

If I approach trading with the notion that my wife and kid are in the car, I will become the most aggressive risk manager. And they are: the money that is lost is the money they will not enjoy — and, G_d forbid, money that they will lack.

So, from now on, my wife and kid are in the car on every trade!

Scott Brook reacts:

Black Swans may be rare, but they are game-enders.

That's why you should never go "all in" when playing poker. I get derided all the time for saying this, but I made a lot of money playing poker back in the 80s using this strategy. Of course, that was in the days when you could play stud poker and not this "Texas Hold'em" crock that they play today. In today's MTV fast paced, leverage to the hilt world, you have to go all in to compete. Otherwise, people aren't interested in doing business. They want the big returns and they want them now, "D%mn the torpedo's, full speed ahead!"

You could call me a grinder. I always found a way to grind out a winning night playing poker. Sure I was boring, and yes, I was still subjected to the occasional black swan, but even after the swan wreaked havoc on me, I might have been wounded, but I was still standing and able to play the game.

P.S.: I've also traveled cross country with small children. I found it to be a less than pleasant experience. That's a black swan I would like to avoid for the rest of my days!

J. P. Highland adds:

1. Poker is a great trading boot camp. Folding is the hardest part to master, learning that second rate hands usually finish second.

2. In trading you have two opponents, one is Mr. Market and the other one yourself. The second is a tougher SOB to manage.

Steve Leslie writes:

Tournament poker and cash poker are two distinct animals. They are entirely unrelated and require different skills. WSOP main event is no-limit hold-em which for years was a very small event. Look at the event fields up to 2002 — they were quite small. When Johnny Chan won his first title I think fewer than 50 people were involved. All that changed when Chris Moneymaker won. Also the big game players like Greenstein, Reese, didn't even play tournament poker. TV and the Internet changed all that. Now last year's winner was under 24 and beat Phil Hellmuth's record set back in 1987. Their techniques comsist mainly of bluffing and hyper aggression. Most crash and burn early but there are so many of them like ants that it is impossible to kill them early so some make it to the latter stages. Mr. Brooks and I are anachronisms. Try to find a seven card stud game or draw poker. They don't exist anymore. Nobody knows how to play them. Even Omaha is difficult to find. In the Cincinatti Kid they played five card stud. When I played poker in the 1990s they were closing up card rooms. All that is left today is no-limit hold-em cash and no-limit hold-em tournament. Finally, the skills you can learn from poker are transferrable to trading on many levels. Others have written exhaustively on this. I strongly suggest two books: Zen and the Art of Poker by Phillips, and Zen in the Martial Arts by Hyams. Start there.

Aug

30

1. A strange anomaly: during the last six days, closes of S&P: 1025, 1025, 1026, 1027, 1029, 1029. Never since 1996 has the market been in such a tight range on six consecutive days. Something's got to give, and as M. F. M. Osborne would say, "someone's going to eat crow, raw squawking and fully feathered."

2. C to above 5 and AIG to above 50 are symbolic of the ability of out of favor stocks to regain mojo. Apparently the government is very shrewd in its investments and/or the provision of debt and guarantees of 20 times the market value of these companies when provided was a valuable resource. Let us hope that the expectations, risk aversions, reallocations, incentives, and entrepreneurial drives of others will not be in any way negatively impacted by these great success stories.

3. Many markets are setting news highs these days including equity markets all over the world, fixed income markets, and oil. This is a very halcyon condition.

4. An article about the receiver collecting assets in a fraud case says that a plaintiff advocate is complaining that the receiver has billed the court at a rate greater than the measly $84 million he has collected in 24 weeks. He has 80 accountants and 100 lawyers working on the case. The lawyer has pointed out that he has already discounted the bills by a generous 20%. One neutral observer from the grandstand would say this is a case of sour grapes, and why should this case be any different from any other where the only thing left after two dogs fight for a bone are the fees?

Aug

30

If "everyone" is fearful of September and the end of this six month move, one must question this assumption and realize that most players have already deployed protective and aggressive strategies for the down move, pulled the CNBC reporter aside and told her that September is going to be wicked.

But the uptrend in the S&P is losing quality of advancement — volume shrinkage, dog stocks barking (FNM, FRE, AIG) and tight range closings in successive days — as Victor brought up and was noticed by Paolo for June before the correction — the calm signal before the storm? We have gone up 50% plus. Will it continue to push through quarter end, forcing fund managers to show all-in hands?

So what market behavior may we expect from this widely anticipated trend change? Sharp down and then sharp up into month end? Or will the uptrend hiker keep pacing higher, or just meander along? A long volatility trade seems more probable than a carefree canoe ride with hand dipped lazily in the river.

Aug

30

"Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing." — Irving Fisher, "The Debt-Deflation Theory of Great Depressions", Econometrica, Vol. 1, pp. 337-357 (1933).

Aug

27

EnvelopeTwo Australian physicists claim to have made progress on the Two Envelope Paradox, according to an article on PhysOrg.Com.  In reading the article I came across… turning  losing games into winning games… brownian ratchets… volatility pumping…  winning an exponentially increasing amount of money.  It all sounds too good to be true.

Alex Castaldo replies:

The problem with volatility pumping is that in the real world the gains would usually be wiped out by the transactions costs of constantly selling the more expensive and buying the cheaper of the two stocks. As long as the two stocks keep switching places you would make an infinite amount of money … for your broker.

Thomas M. Cover is a highly respected name in Information Theory , but I must say when I read his Finance papers/books I find them a bit strange, either because I don't understand them or because they seem unrealistic. But we have other contributors here who are more familiar with his work.

As for Parrondo's Paradox it is another strange model of a situation that as far as I know never occurs in Finance, where sometimes in order to be more successful you need less capital; so you need to invest badly at times in order to do very well at other times. No practical use that I can see.  I am pretty sure that in the real world you need to invest well at all times and that playing to purposely lose is never optimal.

Aug

27

I've owned OLN since almost the beginning of the year. I saw it as a good defensive move with a solid dividend that we could profit from due to potentially short term inflationary issues in metals/chemicals and the fear of the new administration's negative leanings towards guns and ammo.

This stock has been a volatile disappointment except for the fact that it was paying a solid dividend. Then today it finally explodes upward while the market and my other positions are flat to down. It's interesting to watch a portfolio be up for the day when it should be down if it weren't for this one stock. It's also unfamiliar since just the opposite seems to happen to me more often than not. In this volatile market I notice that most of my value holdings are close to the index returns on any given day, while one or two big mover stocks seem to move the portfolio's either up or down.

The nice thing about this type of value investing (note that I said "investing" and not "trading" or "speculation") is that it seems to be profitable in that a well constructed value portfolio (however you define that…. i.e. your methodology for picking out potential winners) seems to float around the return of the indexes. So you end up with capital appreciation around the return of the indexes, but if one seeks out superior dividends — well, that's just icing on the cake and gives the opportunity for excess return. I wonder if the more adept value investors on this site have some comments or can shed some light that might add some clarity.

Aug

26

N LinchenInvited by my sister, I took today my first tennis class. Some market lessons came right away from the court.

Keep your eye in the ball - I know, I know, this is an oldie. But goodie: I never had to really keep my eye on a ball before. Now I understand those times when the market made a move against my position while I was at lunch, or with my eyes on something else.

Don't try to impress anyone - You know, I'm older than my sister and she is very competitive. It just doesn't work trying to impress someone when you are performing. (Don't mention the lack of preparation!) - It reminds me trying to manage money for friends, or, worse yet, for my mother-in-law.

Beware the impossible ball - Do you have to go for that impossible ball? Here I took my first landing on the sand (yes, I felt it) and my first bruise for trying to reach something I wasn't prepared to at the moment. (How many times we just shouldn't trade considering wild market conditions?)

Tennis is fun. - The 1 hour class took 10 minutes in my mind. Yes, tennis is fun. And so is trading. Beware: In tennis one has fun, and loses weight, fat, and the exercise is good for the heart, etc. In trading, when one is having fun, he loses money, money, more money - and that's NOT good for the heart.

If you keep up the practice (they told me) you can attain good results. - In trading, only practice, study, research, more practice, more study, more research can deliver good results with time.

Everyone can play tennis, but not everyone can master tennis and make a living from it. - In the markets, everyone can call his/her broker and shout "Buy! Sell!", or at least type the correct numbers and codes into the home broker on the internet to buy and sell. -But not everyone can make a living from it.

You need proper equipment. - One of the causes of my "accident" (kissing the court's sand) was because my shoes weren't "tennis shoes". So they performed badly under an important circumstance - I was running for that impossible ball. - In trading, proper equipment may be considered an edge as it gives you information first and allows you to trade quickly.

I think the next classes will bring more insights. But, if I only had tonight's class before I made any trade or investment in my life, my own results would be a lot different!

Aug

25

Within any family there is almost always a complex group dynamic at work.

These dynamics increase exponentially the larger the family. With say, 11 siblings, the consequential in-laws, and the inevitable army of nieces and nephews pursuant to the Irish-Catholic paradigm, these dynamics could get so complex as to be fully understandable in theory only.

So much so that if there were a quantitative analogue to something like this, Einstein himself couldn't wrap his arms around it. It's an elusive phenomenon.

But sometimes it can be all so amusing. Sort of.

Though I would be loathe of course to single anybody out, but say hypothetically for instance that the oldest of the 11 may have a somewhat out-sized sense of self, including some sort of primogeniture entitlement to usurp control of even the most pedestrian of undertakings, like painting the kitchen of Grandma's house.

How something like this could necessitate a painstakingly detailed, two-page e-mail memo that somehow contained a quote from Leon Trotsky (I guess it was a stab at collectivism) sent to a veritable mob of relatives on exactly how to go about this task pushes one's imagination to the limit, no less their patience.

Naturally, consistent with full-blown CEO syndrome (no known cure), the architect of this grand directive can't do any of the actual hands-on work, because, fresh from the Hamptons, this week he's unfortunately up on Martha's Vineyard,"…one driveway removed from where the President is staying…", as he saw fit to inform his fellow gene poolers.

I found this all so typically tedious until I saw here in my in-box that one of my sisters who deals with diagnostic codes for a living just decided to ruffle the peacock's feathers a bit, conferring on him the rare honor of a number. Kind of like James Bond being 007.

In her otherwise business-like response to his communique, it begins: Dear 301.81

I Googled the figure. It is a DSM code. Five digits and a decimal point have never spoken so eloquently. Here is the definition .

Isn't humility grand. However involuntary it may be.

What a fine afternoon.

Aug

25

I don't have big data bases like I assume most of you quants do — maybe someone can check this. Have there ever been some big UP Septembers?

Reason being — channel surfing yesterday and I watched 30 seconds of CNBC (all I can stomach anymore at one time) — the finance girl said that everyone was scared of September.

Which gets me to a contrary indicator that I use — when the old market saws are being trumpeted expect neutral or opposite action.

In May we heard the din of "suckers rally", "rally old in the tooth", "rally too far too fast", "rally like 1932". The fear was there and what happened — we still are going up here in late August. If we had been hearing about a Summer rally in May it would have been all she wrote.

So now everyone is terrified of September — hmmm.

Phil Mcdonnell says:

Many people are unnecessarily afflicted with big data base envy. Since roughly the development of V!agra even the little guy can now have a big data base for free. So there is no longer a need to envy the big Wall Street firms, at least on that score.

For example complete Dow Industrial data may be downloaded from Yahoo from 1926 to the present. It is available on a daily, weekly or monthly basis and can be directly downloaded into a spreadsheet. This query will download DJIA daily 1928 to present.

Historical data is also available from www.google.com\finance for periods up to 1 year. Google also has current real time data. MSN Money also offers free historical data but with download limitations.

Aug

25

One of the most ridiculous things is to see market move on projections made by various forecasters, almost invariably with an axe of their own. But regardless, several queries about such projections should be made:

1. Are they accurate.
2. Do they provide any new information
3. If true, would they have any impact on the market.
4. Are they self referential to help a position or status along.
5. Are they counterbalanced by anyone else projections.

Almost more ridiculous than this are the moves on consumer confidence. The confidence is 99% correlated with past stock market moves, and is backward looking and indirect and one of many such confidence surveys which are random in aggregate over and above the stock market because they are all adjusted seasonally different ways or not.

Tom Marks adds:

I had a recent brush with market absurdity myself. The other day I received an e-mail from some sort of ex post facto gypsy inviting the unwashed masses to his seminar in a midtown hotel where for a couple of grand admission he would impart the finer points of recognizing a false breakout.

Prior to this gentleman's generous offer to defog my confusion, I had thought that conclusive proof of a false breakout was when me and everybody else dumped the stuff we had all just rushed in to buy because some generally acknowledged "key resistance level" had been breached. This may unduly untechnical, but generally speaking whenever something loses money, it didn't work. That's a terse truism that I'm not sure I'd be able to discuss for an entire day, no less charge two thousand dollars apiece to get people to listen to it.

Then again, if I were a regional sales representative for a leading snake oil manufacturer, hopefully they would have ample warehouse space because they would be stuck with a large inventory.

Aug

24

I remember vividly the moment I decided that I wanted to funny. I was sitting in the basement of the church I grew up in during a Youth Group meeting. There was a guy named Bruce in our Youth Group who was a few years older than I. Bruce was an incredibly funny guy. He made us laugh all the time. I was sitting in a chair facing the kitchen in the basement of the church, laughing my head off listening to Bruce, when I thought to myself, "I want to be funny like Bruce."

So in emulating him, I began to develop my already decent sense of humor.

But I made an error in judgment.

I used humor that hurt other people. I made others laugh by making fun of one or more people in the room. And it wasn't good fun, it was mean. Sure, I made the majority of the people laugh, but at what cost?

Well, it cost me friendships with the people I was making fun of, and it cost me the potentially closer friendships of those that I was npy making fun. Why? Because they feared me. They feared what my mind, my wit and my tongue could unleash on them. Even though they have acted like they liked me, it was not a real friendship. They would merely suck up to me out of fear and otherwise avoid me whenever possible. The reality was that I was making fun of those that were easy targets. They were almost certainly the ones that were most looking for friendship — outcasts, the "less attractive," the overweight, etc. All this to appease the "crowd" that was never my friend to begin with anyway.

It wasn't until later, in young adulthood, that I figured out it was better to direct the humor at myself, and, if I must go after others, do it in a Horacian manner and always give the other person an out. Additionally, it was best to go after close friends with my sense of humor who knew me, knew that I was not being mean to them, who could return jabs at me and who knew that I would actually play "straight man" for them so they could poke fun at me, which means that they were the one's who got to deliver the punchline and garner all the credit for the laughter that was filling the room.

This example of the proper use of humor was further cemented in my mind when I read Atlas Shrugged and came to understand the difference between Statism and Capitalism. Now, I don't think any of us think "humor" when we think of Ayn Rand, so let me explain.

Statist want to force their way on the "few'' to gain the respect of the "many." But in reality, they are destroying those that could be their biggest allies (the few) to gain the support of the "crowd" who really doesn't like them to much anyway. The "crowd" sees the "statist/mean funny guy" as merely a means to an end to get what they want from the "few" who aren't able to stand up against the crowd (or at least don''t think they are able to stand up against the crowd). But more so, in reality, the "crowd" fears the "statist/mean funny guy" because they know that eventually they will be the next target.

In the end, kindness, not coveting what your neighbor has, and admiring success and ability, is the rising tide that raises all ships.

And when it comes to humor, direct it at yourself, take a humble attitude. If you must go after others, use Horacian methods, pointing to foibles in your own life when possible, and always give the object of your humor an "out" — then accept that out of if they take it.

And don't forget to play the straight man once in a while and let others be the center of attention. I find that the sign of a great "humorous mind" is that of a person who can sit at a table with some others, have an enjoyable evening and play the straight man to complete strangers by throwing out "set ups" that allow others to garner the laughs. Most of the time they won't even realize that they you are giving them "setups" as the straightman, but they will be drawn/attracted to you because you make them feel good about themselves, and laughter does make people feel good — and laughter that you are the impetus of feels even better.

Which takes me back to my thoughts on Statist vs. Capitalist. Today, the Capitalist are silent out of fear of being attacked. There may be nothing worse for a society's financial well being than Capitalists who live in fear and don't feel good about themselves. But that is the reality in today's political environment.

It's time we found laughter in our economic and political world again and brought the true Capitalist out of hiding. That is cure for what ails our economy!

Aug

24

At six months Ma and Pa whisked me in a laundry basket on the back seat of a ´40 Mercury from New York to California. Before preschool they whistled me to supper from under the porch or out a cardboard table draped by blanket walls where I spent long hours thinking about what to be if I grew up. Dad banged together a fort one summer to fend off Indians next to a hole that Mom provisioned for China. A dog house instead led to Michigan State veterinary school where I dwelled in a day glow splashed basement to lure girls, and a follow-up attic that burned to the ground and left me in standing in clinic whites, a bowtie and smile. A turn West after graduation led to a tin hut, closet, and laundry room all to squirrel cash for travel. I hoboed a hundred boxcars caked in sweat or with a beard of frozen spaghetti before landing in ´85 in a simple pine coffin lined with electric blankets against the blasting mid-west winds. I won multiple national championships in racquet sports inside a 20´x20´x40´room, and self-published two books from a tiny porch. Later, three-day seminars in ´crossbar hotels´ for challenging police errors inspired garage Nirvana on a Michigan lakeshore where I knocked together a 6´ wood cell and sat for 24 hours supposing. I broke out and wheeled the Interstates in a '74 Chevy van with a 7' stuffed rabbit named Fillmore Hare riding shotgun searching for intellects to improve my own, and Fillmore waved them down coast-to-coast with an invisible fishline on one arm. The search extended into a 18-month world tour like a hermit crab under a backpack only to land penniless on the stone manor doorstep of a New York speculator who rented me a basement stairwell for one year to write in mirror image a 1000-page autobiography. I needed more material and walked to Canada, the lengths of Florida, Colorado, Baja and on to Sand Valley, California.to dig and carpet a 10´-cube hole 2.5 miles from the center target of the second largest bombing range in the world. Lizards, snakes, rodents and tarantulas tunnel to the rug where I´ve learned we are part of each other´s subconscious. I began to think like them, liked it, and three months ago traveled to the world´s most fecund toenail, the Peruvian Amazon. Yesterday i tapped the final nail into a retirement shipping crate in Iquitos Peru. It was cheaper to hire a carpenter for $10 per day than to rent tools, and he lumbered me to the Belen wood yard where hired hands sweat sawdust for $5 per day and notch samples for the bouquet. ´Rich!, ..Hard!´ until I smelt a sweet 2´x12´´white Aboantilo plank floated five days to here that runs $3 per 4-meter board, and bought 10 for a platform and 10 for the box. The gross 400 pounds was piled on a trike-cart and pushed by a dwarf and me 6 km to a theme park that I call Ayahuasca Central. I fired the first carpenter the first day for stealing, the second carpenter the second day for not returning from lunch, and on the third day rented tools from a third with a tip to scram. It rained the fourth day and the wood swelled 20% in my blistered hands before the sun shone again.. On the forth evening an electrician strung 40 meters of 12-gauge wire ($.25/meter) through trees to three plugs for a light, laptop and razor, but he cut the wire short in order to return the next day for more work where he found the job done and himself fired. I´m looking at a giant 4´x8´x6´ shoebox with an invisibly hinged door, sans windows, a thin mattress, and loft that is both home and storage on a 10-square platform raised on two-foot legs next to a fish, turtle and frog pond under a spreading tree . It cost triple Thoreau´s $28 for Walden cabin except his didn´t unbolt to disassemble and transport down the road for a land deal. The Peru Government understands a mobile home is not for everyone and offers a special retirement visa for foreigners on social security or with other proof of retirement that paves the way to a coveted resident visa. I´m not retired but own a resident visa under a work contract as a naturalist guide. The first night the light switched on conjures an entomologist’s dream as neighbor bugs cover the door net, frogs romance, crickets sing 70F, mosquitoes find knotholes, and 99 turkey buzzards alight in a plotting rookery over the platform. The grounds is Ayahuasca Central with a 12´ red brick wall that one enters through an electromagnetic door into a hectare of Graceland Amazonia within Iquitos There are two large houses, swimming pool, fruit orchards, two boats on blocks, a fleet of 90cc motor scooters, jacuzzi, collection of 2000 pressed medicinal plants, massage table, pregnant German shepherd, groundsman, secretary, accountant and live-in maid. Elvis is Al Shoemaker who doesn´t stand out in the ring of ten hard-driving American ex-pats. He´s come a long way from Mr. Harlan (Kentucky) High as the most likely to succeed in the ´71 class of a handful, from Kentucky U with a degree in criminology, Cambridge, England in theater, and with a design to be the next Clarence Darrow. Instead, he tried out behind Johnny Bench for the Yankees, headed west and invented a rock climbing chalk that leaves no mark. One night in ´91 over a campfire bottle of rum he vowed to go the Amazon, and the next day began a lifelong study of the use of medicinal plants in psychotherapy while carrying a legless Dutch lover like a backpack to ceremonies. He specialized for two years on an Iquitos dirt floor in ayahuasca, the most potent psychotropic, learning to brew, administer and shake the chacapa leaf rattle with the best of the native shamans. It propelled an eighteen month seeding tour of North America and Europe in the mid-90´s, and an export business. Ayahuasca tourism, the national leader, was born! I´m a made guy by association with Al in the ahyahuasca community, among premier shamans, the German shepherd, and ex-pats. In return I´ve suggested an alternative newspaper, started a catering service, offer exercise tips to tourists, and diagnosed pannus in a pet squirrel monkey that claps hands on moths.. The Graceland workers in oversized shoes shout strings of nouns and stumble as if poisoned, except it’s the same outside the thick manor wall. . Murphy’s law cut teeth in Peru, and now I understand the tradeoffs of early world colonization. Two days ago, some ex-pats, tourists and I (watching) sipped rum and chatted spirits when suddenly Al raised his glass and yelled, ´Someone´s poisoning me!´ and put a match to the meniscus that leapt blue flame. ´Paint thinner!´ sniffed an ex-pat. The maid testified she saw the electrician pour something into the bottle, he was collared and ordered to buy more rum because you can´t fire a thinking man in Peru. My problem is staying sane in a place where all evangelize the spirits, elves, clowns and other dimensional doctors that walk the grounds to heal and are invisible only to me. The tourists I’ve met include a Croatian snail farmer on a paranormal bent, Irish transsexual with a jaw tumor, Navajo anthropologist, Indian filmmaker, Hollywood soundman recording chants, Canadian artist with medicinal muses, computer programmers, psychologists, academists, wannabe ayahuasqueros, vacationers escaping stress , and gypsy thrill seekers. A revolving door of ten tourists spend evenings with outlying jungle shamans and afternoons splashing around the pool they admit may be illusion sharing paradigm shifts to determine where to drink next. As the in-house naturalist guide I led a group an hour from Iquitos to strike a rooted shaman´s trail and bumped into ten lost gaily clad gypsies from eight countries searching for the Peru Rainbow Gathering, They had been banned by the Iquitos mayor for looking odd and smelling bad during street performances of juggling fruit, making balloon animals and swallowing fire. I led them straight to the temporary camp of 60 who hugged and kissed us like ants in line sharing feelers and shouting, ´Welcome Home!´ Beautiful girls wore nothing but mosquito bites and anxious smiles for there were proportionally few males in utopia. I dropped off the gypsies and then the tourists at a shaman´s, and returned to Ayahuasca Central. The tourists arrive in small daily batches from a dozen countries, but predominantly USA, Canada, Australia, Spain, England, Germany and Holland. Many are hangers-on from last month´s 5th International Amazonian Shaman Conference on these grounds with 20 hand-picked shamans from the Upper Amazon.. Shamans are tribal persons who navigate between the seen and unseen worlds to help others, and are sometimes called witchdoctors. Ayahuasqueros are healers who employ ayahuasca. Cuaranderos heal with ayahuasca and other medicine like Sapo, mushrooms, tobacco smoke and San Pedro, All purportedly cure, all are positive in their work. For simplicity I call them all shamans, and eschewed the conference glitter, pretty translators, five-course meals, and dancing Bora to trail the shamans to evening ceremonies. Ayahuasca is not a spectator sport. There is projectile vomiting and demon wrestling by candlelight until the wee hours. I have omitted these ceremonial descriptions until Halloween. Ayahuasca Tourism Is the tour people take to the Peruvian, Ecuadorian or Brazilian Amazon where they drink the legendary visionary medicine ayahuasca. It’s the only reason most people go to the Amazon, particularly Iquitos where about 50 ayahuasqueros await you within an hour rickshaw taxi and short jungle hike from the city center. The ceremonies used to be free, and a slap in the face of the river shaman who accepted money to heal. Now some old timers still take donations while the newbies charge $20-$95 per night. Indeed, curanderos- the river pueblo doctors- are being lured from their communities for opportunities to ply tourists for big bucks. In balance, the cuaranderos on the cush note that 15 years ago interest in the medicine was waning on the rivers and few had apprentices. Now there are hundreds of legitimate apprentices and ayahuasca tourism has preserved an ancient heritage. The U.N. 1971 Psychotropic Convention Treaty rules ayahuasca illegal except in Peru where it is Patria de la Nation– the nation´s history. The constituent vines and leaves are legal to import into the USA, but once they´re made into brew containing the active DMT it becomes a felony drug. I believe in 20 years the main Peruvian import will be your sons and daughters for ayahuasca tourism and the leading export the medicine itself. We catch a glimpse of this future as I see it daily in Well´s Time Machine where the time traveler journeys to A.D. 802,701 and meets the Eloi, a society of teeny, androgynous people who live in small communities within large slowly deteriorating buildings. Iquitos is the most distant city from civilization on earth, and the most lassies-fare. There is no set price and everything is for sale. There are few rules. Nearly everyone sells something from a doorstep, corner, street stall or pushcart and happily works 70 hour weeks for $5-10 a day to forget the steaming jungle. The ten American ex-pats (who prefer to be called patriots overseas- P.O´s) forge ideas into action. One exports discarded tree trunks to USA, another tows a floating hotel to fishing holes, a snake farmer, butterfly exporter, real estate agent, hotel owner, three ayahuasqueros, and my project aside the crate that compresses species of sawdust into briquettes to replace charcoal and save the rainforest. In addition, a handful of retired gringos annually take young Peruvian wives where the street ration is 2:1 female to male. Custom has a bride´s second act to ask her girlfriend to sleep with her husband every other night so she may continue to socialize with her. Back at the hacienda, the tiny room smells like a sugar factory and I fling open the door to the first Amazon sunrise. Three red-necked buzzards with 6' winds outstretched model to greet the day, and I snatch clothes from the velcro-like bottoms of 3´ leaves of a LoPuna tree , dress, and climb a hundred-step green tunnel to the swimming pool, sit on an inner tube, and the maid orders a catered liter of squeezed orange juice and five tomato-and-avocado sandwiches for $2.50. Seven in-resident old lady Shipbio shamans tipsy by on hobbit feet beneath colorful dresses with a pitcher of beer and coca-cola pausing to greet, ´Buenas Dias, Senor. Bo.´ At mid-day the tourists have slept off last night´s ceremonies and trickle through the gate to share intelligence on shamans. Most are dutifully employed or students on two-week vacations and miss hardly one night plumbing to find their inner selves before returning home. Their daily reports offer fascinating insights into consciousness, metaphysics, parapsychology and psychology thrown in with comparisons of brown badges of courage from last night´s vomiting and long excretions . I could make a fortune selling toothbrushes. Forgetting the fifth-dimensional helpers, the tourists´ contention is the medicine purges the body and then places the consciousness in space where the first question pops, Who am I? If the eyes are opened at this juncture the person ´becomes´ his body again with a total amnesia that is shocking. One soul among the hundreds I´ve interviewed resisted the spirit world with open eyes and fought back to physical consciousness, and this ex-pat is built like Bluto the Terrible with a mystery background and a 1625 chess rating sitting next to me as I type playing six simultaneous games of online speed chess while studying handgun schematics between moves . Iquitos is the world springboard for ayahuasca, Central the pivot, I have the gate key and am a determined seeker to enlarge on two hypotheses of the mechanism. The first hypothesis is the creation of recovered peers- the only practical psychologists- by the medicine within the user´s mind whether you call them elves, clowns, spirits or hallucinations, and these helpers understand the owner´s malady backward and forward to teach cures. A second hypothesis is that the medicine inhibits an over-active First World higher brain while activating the relative virgin brain stem to provide the user instant relief and a choice of a mental or physical reality… until the medicine wears off. Liquid psychiatrist bubbles on the hacienda kitchen stove. The jungle vine has been macerated and boiled with leaves from other plants with a resulting brew that contains the powerful hallucinogenic alkaloid dimethyltryptamine (DMT). The secret house recipe is pH control throughout the process. I run cold water on an index finger, stick it in the pot, and taste the bitterness. I am the sole teetotaler in the gringo waves who profess that one ceremony of three ounces of ayahuasca is worth six months of good psychotherapy, First, who needs a psychologist? Second, there are two paths up the mountain: the slow and ayahausca, and I´m not backing down.. Third, the medicine is the greatest experiment in world consciousness since the rise of that consciousness in the breakdown of the bicameral mind. Flatly, any good experiment requires an experimental and a control group, and I am one of the controls. The analysis from this old carton is the medicine solves personal problems better, faster, and cheaper than first world psychologists and psychiatrists. Liquid psychiatrist is on schedule as a global transformer. Peter Gorman was ground zero on ayahuasca tourism in1988 with a High Times cover story and the banner ‘Ayahuasca- Mindbending Drug of the Amazon’ that swamped the Amazon tour companies with requests to add the medicine to their itineraries. Five years later, Shoemaker seeded ceremonies around the world. Then, in ´98 on an initial visit to Iquitos, I observed the lack of side effects and predicted the medicine would steamroll minds, and today it´s fashionable among the well-heeled. I know of ayahuasca cells, clubs and churches in a dozen USA cities where it would be elegant to chart psychologist and psychiatrist bankruptcy- professions as a psych tech I disdain - against the rise of the ayahuasca jar. It´s hand carried by hundreds of new annual tourists, and shipped with bogus labels throughout the world. One day a visionary will freeze dry or crystallize the active ingredient DMT to make it as efficient to move by the ton as aspirin or cocaine to later reconstitute into liquid form. It will dominate the USA and European illicit drug market that holds youth´s minds, and become the most potent hallucinogen as a culmination of four First World decades of psychedelic mysticism. Then, for better or worse, the brew will be tainted by additives to make it a business drug to form dependence. The great tide of users will reverse to the Amazon to get pure stuff, and I hope they´ll stop by the crate. The Peru retirement cradle, like earlier models, enables me to read, think and sleep in a quiet place to live a more productive day as a part-time ex-pat in one of the most fascinating spots on earth.

Aug

24

 It would serve one well to revisit history and look at the history of the Roman empire, as history does tend to repeat itself. The Romans had established property rights, protected trade routes; they had replaced barter with the use of currency, and had a sound monetary system complete with sophisticated banking services that are no different from the practices today. The Roman citizens enjoyed the use of bills of exchange, letters of credit, long term loans, and savings and checking accounts. Rome, at its height, had the reserve currency of the world, and enjoyed the status of being the world's clearinghouse, especially with the developing trade with Asia and Africa. The Roman government kept their hand on the pulse of the thriving money market and exerted control and influence by setting and regulating interest rates. The pulse of the Roman economy was being taken by all productive citizens, and international trade and free markets were developing rapidly. Cicero was even perceptive enough to note that, " The credit of the Roman money market is intimately bound up with the prosperity of Asia; a disaster cannot occur there without shaking our credit to its foundations " [quoted in F. Teggart: Rome and China, Univ. of Calif. Press, 2d ed., 1969]. Because of the sound property rights, rule of law, and the ever expanding economy, natural evolutionary forces took over and the survival of the fittest was the order of the day, as it should be. In areas like farming, larger farming operations began to replace smaller operations in large part due to the good business practices of the owners (plus slave labor), and the economy of scale. The merchant class prospered, satisfying the demands of the ever increasing empire and finding new products from all over the world. With the economy humming along, many rural people, some displaced, started a trend of moving to the cities, a trend which continues in many places to this day. This group of new immigrants created a permanent underclass, and necessitated the beginnings of welfare programs, higher taxes on the rich and businesses, and increased regulation. In order to keep the underclass in check, they needed more than the "Roman Circus" to keep order. The government went on a building binge of public work projects, building roads, bridges, aqueducts, and places like the Coliseum (sort of like a Roman version of the WPA). Although the initial outlay for those buildings, bridges, and schools was large, the government never realized that there would be an even greater cash outlay for maintaining those institutions, after all buildings and roads need maintenance, and schools need teachers. So, more public money was needed, in ever growing amounts, and this became an ever increasing spiral of higher taxation, debt, and monetary debasement, all of which ultimately led to the demise of the empire. Contributing to this demise was the expense of maintaining an army, various wars they were bogged down, combined with uncessful military campaigns. Although the Romans were able to hold things together remarkably well for a few hundred years after the peak, things started to unravel around 300 AD, and took another 100 years to really crumble.

The entire Roman Empire could be described as an economic stimulus package run amok. It conquered and grew with each conquest bringing in more booty of land, silver, gold and free labor (Slaves). And each conquest led to more conquests, and on and on ad infinitum . But the net effect of this plunder, for which no productive work was done, was only the need for more stimulus. It did not stimulate real prosperity, but instead undermined prosperity, much like the Spanish were to realize 1500 years later. First, slaves bought by rich farmers undermined the free labor market and ruined many small farmers who weren't able to compete. And then, imported wheat from the new provinces and conquered areas, caused the wheat market to collapse and affected the larger scale farmers.. Rome was by then dependent on foreign sources for its food, being a net importer for the first time by the first century AD.. In the first century AD, Roman conquests reached the tipping point of diminishing returns and the first physical effects of the downward spiral were felt. However, borders and trade routes still had to be protected, armies fed and clothed, the bureaucracy paid, pet projects built, the increasing graft of public officials, and the ever increasing demand by the public for bread and the circus. Therefore, the money had to come from somewhere, and that somewhere was out of the pockets of the productive, and also an increase of the money supply. Caesar Augustus tried to increase the money supply by having the slaves work around the clock in the silver mines to produce more silver. More silver was produced and much more coinage was seen on the street and in the vaults, but the net effect of this was inflation. Still, the leading economists and leaders of that era still were bent on fiddling with the economy and this led to Nero reducing the silver content of the coinage and a recall of money with higher silver content so it could be melted down and alloyed, causing more inflation and currency debasement. The Roman Treasury even tried a direct cash stimulus to the citizens, releasing over three million pieces of silver on to the street to kick start a depressed economy, but the result was inflation.

The Edict of Diocletian in 301AD was one of the bigger blunders in the Roman Empire. In order to control the spiraling inflation, in no small part caused by his tax and spend policies, Diocletian, along with his co-emperor and fellow autocrat, Maximian, issued an edict that mandated against selling at prices above a certain level, for an entire list of staple items, with the mandatory penalty of death for violation of the edict. The law of unintended consequences caused merchants to hold back product rather than sell at a loss, and another edict against hoarding was issued, again violations of this law carrying the death penalty. Facing many business failures and a major recession, Diocletian took the ultimate step. He arbitrarily issued another edict that made it punishable by death for one to go out of business (something that would have been the end result in Atlas Shrugged had the looters prevailed), and that each son had to work at his father's occupation. Although many university scholars like to present Diocletian as a reformer, visionary, vessel of change, and good leader who was able to hold everything together, he tripled the number of laws and regulations and greatly expanded government's rule over the daily lives of the population. Diocletian was a personally greedy petty despot, making Boss Tweed look like Mother Theresa, because he had absolute authority over an entire empire. His complex holdings necessitated the need for two finance ministers, one for the empire, and one to manage his personal portfolio. He went on a hiring binge of government workers, increasing the number of lifetime civil servants in Rome from 15,000 to 60,000, although that exact number is in dispute. Along with the lifetime civil servants was a corresponding increase in clerks, scribes, accountants, and especially tax collectors. He increased the bureaucracy by dividing up states, thereby duplicating local bureaucracies on a large scale. The early Christian activist and author Lactantius claimed that there were now more men in Rome using tax money than were paying it, a condition which is starting to reappear in today's increasingly socialistic societies. The whole scene during Diocletian was reminiscent of Terry Gillam's excellent movie, Brazil. Ultimately for reasons that are in dispute among scholars, Diocletian ended up abdicating shortly after his 20th year run in power.

Modern academics tend to treat the fall of Rome as an inevitable consequence of a civilization run amok and discretely blame free market forces for the demise. They fail to recognise the impact that rules, regulations, debt, high taxes, and welfare had on the empire, and that the fall of Rome was more of an economic event than a geopolitical event. Had the rulers of Rome done a better job of management, not treated the treasury as their personal bank, and adopted a laissez faire free market approach to the economy, the world might be a totally different place. For one thing, that 900 year depression known as "The Dark Ages" might have been much shorter, or averted totally. The tentacles of the Roman Church might not have been able to reach in and siphon off tax free wealth, productivity, freedom, and ideas in that span of time. Perhaps the ideas of Adam Smith would have been adopted 800 years earlier for the betterment of society as a whole. While all of this is all speculation on my part, one can only imagine how the world would be if the producers and independent thinkers were always allowed to be free of the yoke of excessive government regulation.

Stefan Jovanovich says:

The Romans had specie and credit; they did not have currency in the sense of Demand Notes. It is an historicism to suggest that there was anything approaching a reserve currency for the world. Merchants did extend each other credit, but there was no central bank, only a Treasury; and there were no exchanges of sovereign currencies between, for example, the Parthians and the Romans. I would appreciate Jeff's providing citations for his assertion that contemporary classical scholars blame capitalism for the decline of the Roman Empire; the ones whom I admire the most - Peter Green , for example - see the matter as being a failure of Rome to accept enterprise as a substitute for war. In their view the "economy" of Rome was based on conquest, not trade; it followed the Napoleonic model. The legions were expected to be able to turn a profit from their wars; when they didn't, things became difficult. No one in the Roman world considered enterprise to be the appropriate occupation for a gentleman. "Trade" was looked down upon as something literally beneath contempt; it was the province of freed slaves, Gentiles and Jews, not "noble" (sic) Romans. Gibbon, who lived in a society that had similar snobberies, found it easy to blame the Christians for the fall of Rome because, in his day, the evangelical Protestants - the Quakers, for example - were a large part of the contemptible merchant class. He could hardly blame the Society of Friends for the fall of Rome, but he could blame their historical antecedents. It also helps to remember that Gibbon was writing for the applause of a public who saw the House of Hanover as a bulwark against the threats of Popish Spain and France and, closer to home, the Catholic parts of Scotland and Ireland.

Bruno Ombreux comments:

You wrote "For one thing, that 900 year depression known as "The Dark Ages" might have been much shorter". The so-called Dark Ages were not a 900 year depression.

Firstly, the Dark Ages never really existed. No one in that period described himself as living in the dark ages. The idea of a dark age is an artificial construct of later so-called historians that wanted to glorify their era at the expense of the previous one.

Secondly, over those 900 to 1000 years, a lot of things happened. This is not an homogenous period. There were phases of recession, but there were also phases of strong economic technological and cultural growth, notably the 12th and 13th centuries

Scott Brooks comments:

Isn't it fair to say that the 12th and 13th century's were really the dawn of the Enlightenment?

Can you really have the light without the dark? Didn't the "rate of progress" of the world slow during the Dark Ages? Couldn't we argue that there were extended periods of time in which man made little or no progress, and in some cases went backwards for extended periods of time?

When one looks at modern depressions, what are we really looking at? During the 1930's the world suffered immensely, but there were a lot of great fortunes made during the depression.

I'd bet that Peter Lynch of Magellan fame didn't see the 1970's as a bad time. He cut his teeth and made his fortune guiding Magellan during a time frame when the major indexes were in toilet.

Some would consider a forest fire an ecological depression. But a fire can actually strengthen the forest and clear the way for new growth……just like we saw in the 1950/60 time frame or the 1980/90 time frame.

One man's depression is another's opportunity. I guess it's all in how you choose to view it.

Stefan Jovanovich has a more nuanced view:

Jeff's overall point - that Rome and its Mediterranean civilization collapsed and that, with that collapse, came an extraordinary increase in human misery - is unassailable. The Dark Ages may no longer be the politically correct term, but it is still the appropriate one. In measures of public sanitation, life expectancy, and practical individual liberty (the freedom to travel without threat of robbery, the freedom to buy and sell without threat of extortion), it took European cities 1800 years to get back to the place where Rome, Athens, Antioch, and Alexandria were at the time of Augustus [reigned 27 BCE to 14 CE]. The loss of classical literature alone is incalculable.

Scott continues to have a much more optimistic view of modern history than I do. If you include the totalitarian oppressions in Japan, the USSR, German-speaking Europe, Marxist/Fascist Spain, Italy and the consequent devastation of Part II of The World War, the 1930s are a period that has no equal in human history in terms of awfulness. The idea that this was somehow a cleansing devastation that "strengthened the forest" is astounding.

Aug

24

V NAt the traditional Rose Garden meeting of the Specs, held in alternate venue this year because of recent storm damage, I very properly pointed out that my wisdom was very much limited and that the participants could enlighten each other at least as well as I could. We had a very interesting discussion of stops sparked by Anatoly.  Topics discussed included the skewness caused by stops, the sickness indicated by using them, and the expectations after based on the reflection principle as well as the resonance behind the rule " never meet a margin call with new money". A very nice dissussion of oil led by J.P. Highand, with related discussions concerning the movements opposite to the current quantity demanded at the current price, and the evening out of positions overnight as well as the volatility related to price, and the related disconsilience between natural gas and oil. What has to give? A grain trader remarked that he liked to fade the 30 second movements in wheat but not the 30 minute ones, and how it related to fills.

Inspired by the qualitative talk, I added a few things that I would add, change or emphasize if I wrote Ed Spec now. The first one was "always assume that a friend will take care of the interests of his romantic partner ahead of yours." This led to a nice discussion of cronies and related market movements.

The second was "always read and know the rules of the game you're playing with particular reference to how ties are handled and the exact starting and ending procedures." This led to a discussion of whether the robots are better equipped to beat you at tied bids and offers and the speed of light and what can be done when the opponent has better equipment than you.

The third was "always assume that the web, feeding chain, and leading relations between markets, the 'California' that sets the trends for the rest of the world, will change. Particular attention was focused on how the California of the yen goes through Baconian cycles in this regard.

Aug

21

1. One often talks about the difficulty of proving the gravitational attraction, and of course the much more important question of expectation around rounds. However, one light at end of tunnel, is that there have been at least eight excursions back and forth around Mr. Big Round in S&P: 1000. No other round has anything like this.

2. The Israeli market predicted or preordained every move n the S&P for last x weeks.

3. The POMO is a license for the banks to feather their nests at the expense of the poor unlucky souls whose debt is not guaranteed, and whose losing assets must be sold at distress.

4. There is always a web between currencies and other markets, a feeding chain if you will. But the web is always changing just when the public gets on to it, as Bacon would say.

5. The market abhors stability like the man a —-

Michael Bonderer reports:

John Mackey, the objectivist and entrepreneur, penned an op-ed on his suggestions for healthcare in the WSJ on August, 11, 2009. This has led to a 'progressive' furor and calls to boycott the company he co-founded, Whole Foods Market Inc. The least that any Daily Speculator can do is go out of his way to spend money in his stores. I have linked his piece and the WSJ's editorial follow-up.

David Higgs remarks:

Walter Isaacson's book Einstein tells of the difficulties Albert dealt with on his generalizing gravity in his Entwurf theory. It wasn't until he applied mathematics to it that he started to get the problem correct. Not sure if mathematics the answer here with the human element such a dominating element, be it a Madoff, a GS, an Obama or anyone else out to swindle the little guy, yet the wall of worry sure seems to hold true…

Steve Leslie surveys:

Don't look now but Dow 9500, S%P 1022, NAZ 2014, GS 163. In the words of Roseann Cash: "My baby thinks he's a train." Stock market up 50% since March.

Cash for Clunkers ends Monday — 450,000 cars sold as a result. One program that the Government got right. Now the dealers need to get their money from government — only 2% paid out so far. Is it true that the next thing is cash for appliances?

Aug

19

BarnfireIn an agricultural society this was akin to a financial heart attack, or at least a very large setback. Today it is still an event that causes great loss and trauma to livestock, goods, as well as property.

I bring this up in connection with speculation because I heard an interesting behavioral aphorism: "The horses escaped from the burning barn and then turned and ran back into the barn and perished". This was in reference to a dollar entry/exit and subsequent re-entry where a trading group was totally burned, but the point is why would smart animals (specs/traders) run back into a burning barn?

Lightning strikes, hay bale combustion, electrical and other reasons are the general causes for a barn fire. What happens to horses in barn fires is quite unpredictable. Some horses, once the doors are opened, just run out, some must be led out, but some willfully refuse to leave and are totally scared by the flames and smoke. These horses will need to have their eyes shielded so that they can be led out. Still this method does not work for some.

Also, the number of horses in the barn may influence the group behavior. If one begins to panic, they all might panic. If they can get free they may be able to get out, but others, even though able to get out, may just shut down and not run–this in turn influences others to stay. It's been said that entire packs have been rescued by the owners, unhurt and let out of the barn; the horses run to some other familiar area of the farm — and then re-panic and all run back to their known place of safety — right back into the fiery barn.

When a trader finds himself or herself in a burning barn, a trade that is totally blown up: a market crash experience, an exchange delay or closure, maybe an event after hours which is going to light things up like a gasoline fire the next day — how will that person react? The horse relies on the owner to help provide rescue; the trader must rely on gut, action plans or some other learned procedures in the event of a "trading fire". Do you know yourself? Are you the type of personality that needs your eyes covered (turn off all TV's) and then quietly follow a preset plan, trusting this to survive?

Seemingly the caregivers of the horses know their traits and behaviors and play to these during emergencies. The shy horse can be coaxed, the excitable one must be eye-shielded. Even then there is panic in the smoke. When panic hits, will the trader naturally cover all positions, buy treasuries and sit-and then upon some internal or external signal, reset with 50% positions, 200% long (but for only x amount of time), or some other volatility trade? Do traders know enough about their learned habits that they can determine not to run back to their trade of safety-can they tell if the barn is still aflame and its too soon to go there?

Regardless of what happens-horses that are in a burning atmosphere suffer a lot of internal damage and can develop disease later on and succumb to wasting effects from being in smoke. Likewise, after a trading fire its best to get yourself fully checked out, re-set your emergency strategy and go over the reasons why you were caught in a burning barn.

Note: Most livestock-killing barn fires occur at night.

Victor Niederhoffer remarks:

This beautiful post reminds me of one of the five things I learned from the Palindrome in our 16 years of very intimate connection: "don't try to make it back." Three of the other four were "always use two cans of tennis balls," "never marry a woman you wouldn't want to divorce," and "never trust anyone." He has a magnificent instinct for survival.

Aug

19

My father was a commodities trader and small business owner. When I was 12 years old I would call out prices to him from the WSJ as he worked. He did everything in his head and could come up with deep calculations without writing them on paper. I followed a lot of stocks and stock options for him. At night he would sit and read Barron's, Fortune, Business Week, numerous farm journals, Popular Science, and many others. Usually if I walked into Dad's reading room, I saw an open newspaper first, and then Dad would let half the paper droop and peak out to see me. When cable TV came out, Dad had it installed at the business — it was locked on the finance TV channel. He would make me watch and try to get the occasional quote for him. Once I called out a bogus quote on purpose — to get him excited. I never pulled that one again.

My father sparked an interest in me that I would not realize till many years later — unfortunately he died young, before I graduated from college and before I realized that trading would be a part of my life. He passed before the 87 crash, after a long illness and got out of everything related to stocks and put everything into US treasuries. He told me something bad was going to happen, and didn't trust the "portfolio insurance" concept that was bandied about as the key to everything.

He did teach me all I would need to know in life — principles, honesty, gut instinct, gladness, going above and beyond for people and love. The building blocks for my life were laid piece by piece as I worked with my father at his business.

I always worked as a kid — paper routes, Dad's place, shoveling snow, retail. In college I had the highest paying job on campus (Advertising Manager of the school newspaper) — I held the job for three years straight including summers and paid my way through college. Graduated with a BA, English, poetry minor. I was the president of the college Chess Club. Never really made it out of the 1700s USCF, but I played a lot of games.

Got a real business education in the Insurance industry. Worked in underwriting management for a Fortune 500 company right out of college. I was hired during the recession of 1990 not because I was a college grad, but because I had practical business management experience from my college job. I would read the WSJ and Barron's cover to cover every day — at first I didn't know exactly what everything meant, but gradually I learned.

My "I gotta learn this market stuff moment" came when I watched the Desert Storm attack — watching oil move higher and higher as the days counted down to the attack deadline was fascinating to me. I was programmed. I really believed that oil would explode up on the day of attack — when oil swooned I was stymied. Down was up and up was down. I started to read market books by the dozen. Mom gave me Dad's books from the 60s and 70s for starters. I also had money to invest and I didn't want to lose it. What to do, what to do?

I got hooked up with a broker who did Elliott Wave, Prechter stuff, and fractals. I made up my own systems and on my first trade I used the new long term LEAPs product. I figured why not get the leverage but not get hacked by time decay. My first trade was a great success (oh no!) as I rode CEO Stempel 's GM and some nice LEAP puts from the forties under thirty — and I just let this trade run over many months. My broker was ticked because he wanted to churn me, but I didn't know it at the time. My big mistake was not going long GM calls. My other big mistake was listening to this broker and not just doing the trades I liked. I quit this broker after realizing that he was polluting my mind.

It had been me learning as I go from this point on. I quit my Fortune 500 job after seven years to trade on my own. Six months out and things got rough for me and I had to start a small web business to make ends meet — still do this on weekends and nights — very flexible enjoyable work.

I read Education of a Speculator and loved it. Yes that broker I had was a "hoo" in many ways. So now I trade actively, but not day trade — short (weeks), medium trades — long pulls on trends. I like learning. My father's best advice: "Do the opposite of the central banks." Favorite line from Jim Rogers: "When an asset is not loved and is just lying in the corner with dust on it, go ahead pick it up and put it in your pocket." Best learning from Trader Vic: "Make sure you know who is going to pay you when you win your trade."

Aug

19

Statistically speaking the month of September has the worst returns of any month — A Reader of Dailyspeculations.

The data I have easily available is only monthly Dow from Oct 1928, but doing a quick random-resort Monte Carlo provides interesting results. After calculating the % change for each month and then determining the average change for each month, one gets:

high month: December, +1.34%
low month: September, -1.66%

Then resort the actual % moves amongst the actual months, compute again the average move for each month, and then pull out the high month and low month for this random resort. Do this 1000 times and get a mean "high month % change" and a mean "low month % change" and sd's for each. And here they are:

mean high month % change for 1000 random resorts: +1.33%

sd of high month % change for 1000 random resorts: 0.28%

mean low month % change for 1000 random resorts: -0.62%

sd of low month % change for 1000 random resorts: 0.31%

So if we look at the actual -1.66% for September, it has a z of -3.38 compared to the random resorts. But also interesting is the fact that the actual high month of December is right on the nose with the random resorts.

Just more of that voodoo that up moves tend to be consistent with randomness, but down moves aren't.

Martin Lindkvist adds:

Old man Bacon almost always says it best: "But by the time Labor Day has passed the general form change is well under way." In "Secrets of Professional Turf Betting" - from the "Picking September's Wake Up Longshots" chapter.

Aug

19

A MillhoneEnd of the nightly news tonight had a segment about a fellow who used to own a NYC nightclub and realized there was more to his life. He now raises money to drill water wells in remote areas of the globe. It is estimated that 4,500 children die each day due to lack of safe drinking water.

Made me think back to my overseas duty in Korea in the Army. Every barracks on base had 'houseboys' and one day I visited Mr. Yee's hut in the village. Sanitation was about nil and the outside privy had next to it their water spigot protruding out of the ground right beside of the outhouse! The Land of the Morning Calm was a filthy third world country while I was stationed there. I am sure Seoul has progressed but oft wonder about other countries and the small villages that make up most of Asia.

Americans have much to be thankful for and clean drinking water is one of those things we are blessed with.

Legacy Daily writes:

Every morning when I drive against traffic on Route 128 in Massachusetts, I cannot help but notice the thousands of cars lined with thousands of people rushing to go to work and improve this country in their own meaningful ways. When I hear 10% unemployment, I remind myself that 90% of the workers get up every day and go to work hard, to do something useful, to create something, to maintain something, to help someone. In one or two weeks a major section of Rt. 2 was repaved for a very smooth ride with nice straight white lines and reflectors, at night. This gives me great hope about the future of this country. Thank you for the reminder to not take it all for granted.

Aug

18

Hurt Locker'Hurt Locker' is a slang phrase often used in the military for 'a metaphorical place you go when you are painfully unsuccessful in a competitive event.' It is also the title of a new movie by director Kathryn Bigelow. For those who see similarities between intelligent, fast-paced decision making in leveraged trading and those made in the fog of war, this film will entertain. It depicts the day-to-day lives of specialists in an elite bomb disposal unit of the US Army tasked to Iraq in the mid 2000s. Particularly enjoyable is the interplay among members of the unit who carry themselves in a rational, cautionary, procedural way and a new leader who comes across as totally 'unhinged' but is actually one of the most talented in the field. It is also easy to empathize with the head of the unit as he's found the only thing he wants to do in life no matter what the risks or cost. I won't spoil the plot by drawing analogies to trading but you'll be surprised to find 2+ hours have passed when the lights come up. I highly recommend it and mention it due to its limited rollout.

The Hurt Locker, reviewed by Christopher Goodwin

Aug

16

AmazonAt the core of the peoples of the world are diet, language and genes. The jungle people here are one step out the trees. This isn't Ecuador, Columbia or Chile where the blood has mixed and religion invaded. It's historic forest green. The monkeys and people and Bo eat well, and sometimes each other. Everything is natural. Everyone including the poor eat better than I did as a kid and all USA vegetarians. The additives include a string of jungle medicines like ayahuasca so potent that their minds are gone to spirituality whether they know it or not. They stand around like prairie dogs chirping at each other during lapses to concentration. The leading industry in Iquitos, Peru is ayahuasca tourism and I'm living in the backyard in a shipping crate of Ayahuasca Central awaiting my house closing. There are four towns high in the Andes I encountered a month ago that fall outside the norm of the happy faces just described, but why think outside the box. The theory supported by the Internet that you'll discover aluminum toxicity from the volcanic soil is absorbed by the national staple yucca causing what I see see each battling second of Alzheimer-like symptoms of zero concentration, ADHD, and poor memory. 99.9% of Peruvian teachers failed the United Nations international exam placing the country lowest in the world and giving a canned sub like me a chance to start a new life. Plus at least in Iquitos, it's the gods must be crazy place for nonviolence.

Aug

16

Sir Steve Redgrave was one of the best rowers in history. Apart from the amazing fact that he won five Olympic gold medals for Britain in five consecutive Olympics as a endurance athlete, he also won nine world championship gold medals, two silver world medals and two bronze, one at the Worlds and one at the 1988 Seoul Olympics where he doubled up in the coxless and coxed pairs! What a lot of people do not know about Steve is that he was a product of being in the right place at the right time.

Redgrave's first stroke of luck was attending a comprehensive school in Marlow where he was fortunate enough to have an English teacher, Francis Smith, who was a member of the Marlow Rowing Club. Smith invited Redgrave and his three friends to come down to the boat house to try their hand at rowing. Steve, who is dyslexic and, by his own admission, not a good student, excelled at rowing. From the very beginning, his four dominated their competition. At the time, Redgrave, in a single, was so good that he would get bored racing other juniors. To make it more interesting for him, Steve would not actually row full pressure for three quarters of a race, but just paddle down the course, before turning on the burners and blowing away his competition!

The second stroke of luck for Steve was that Marlow was also where rowing coach Mike Spraklen lived. Spraklen is notorious in the rowing world for training his athletes too hard. Redgrave just ate it up! At seventeen, Steve left school and began rowing full time. He was so good he joined the Senior National Sculling Squad who were training out of Spraklen's back garden, which was beside the Thames. Redgrave would have been selected for the 1980 Moscow Olympics had it not been for the Junior rowing selectors insisting that he race at the Junior World Championships held in Hazewinkel, Belgium. They desperately wanted a junior crew from Great Britain to win a medal and Redgrave and his partner, Adam Clift, were odds on favourites to win gold. However, the crew were beaten into second place by an East German boat. Redgrave was so disgusted at his performance he threw his silver medal into the lake!

Over his career, Redgrave continually challenged himself by trying the impossible. For example, he would double up in the coxless and coxed pairs events at the Worlds! Not only would he have to qualify for the event by being the British national champion in both boats, he would also have to race the events back to back at the world championships. On a number of occasions, this meant that as soon as he had raced in one boat, he would have to immediately switch into the other boat, row down to the start and race again, against his rested competition!

It was not all plain sailing for Redgrave during his career, however. Apart from the niggling injuries he had to contend with through out his time as a rower, Steve was diagnosed with ulcerative collitis in 1992 and with diabetes in 1997. Just as he did with his competition, Redgrave was determined to dominate his illnesses and not let them affect his rowing performances. They became part of his "training" that had to be dealt with in order to win.

In retirement, Redgrave has transitioned very well into a motivational speaker and head of various charities. He is an inspiration to those who had the privilege of sharing the river with him and to those who look back at his legacy as an exceptional rower and living legend.

William Weaver responds:

 Good rowers can be considered great only if they have mastered the single. I don't remember if Redgrave won the single at Henley, but I'm more inclined to attribute greatness to oarsmen like Lange, Muller, Kolbe and Karppinen who showed they were not only strong enough, but technically brilliant enough and mentally tough enough, to win the single. The pair is possibly the only shell as technically challenging (if not more so) than the single, but the meat lays with the toughness of being a single sculler.

If you're ever in Philly I'd be happy to host you at Fairmount or Vesper for a row and a beer; both clubs have bars — one great part of rowing in Philadelphia! Just don't visit during the winter — I've done my fair share of rowing in December and January and have suffered from frostbite twice, so I'm done with that!

Chris Cooper says:

 I'm also a rower, though not active at the moment. Did 6:21.6 on the erg at CRASH-B in 2008, which was only 0.7 seconds off the world record for my age group (55-59 HWT), set in the same race. But I'm not very good in my single, having taken up the sport only recently. There's a long learning curve! Last year I convinced my mother to try the erg, and this year she turns 80 and is hoping to set a world record in her new age group, or at least take first place.

I haven't rowed in Philly, but I paddled there for several years on their world-championship dragon boat team, which is composed primarily of ex-rowers. The river is a beautiful place to row or paddle, but only when it isn't freezing.

Sam Humbert observes:

Chris Cooper rocks! His ~6:20 time (in his late 50s!) is equivalent to ~1:35 500m splits. Wow! My 38-yo trainer, who's a longtime weightlifter and quite fit, can do 1:35 for a single 500m — then he's toast. Me, at age 48, and moderately fit, 1:45…

Aug

15

ClunkersOne of many interesting things about the 'Kash for Klunkers' program is that a quick estimation of the average MPG for the replacement vehicles shows that they barely meet the current government mileage standards and fail to meet those that go into effect for the 2011 model year, which is just one year away.

According to the WSJ [preview only, subscription required for full article], nine of the top ten vehicles are considered passenger cars and they average 29.67 MPG, and that number is biased upward by the Toyota Prius, which is number four on the list at 46 MPG. By comparison, the new standard is 30.2 MPG. The only non-car on the top ten is the Ford Escape, which gets a pitiful 23 MPG, which is less than the 24.1 MPG. While this is an imperfect estimate of either the Top 10 sales or those of the entire K for K program, there are no statistics available on actual sales and unless the sales for the top four vehicles are approximately equal, there is little likelihood that the average mileage of the Top 10 meets next year's standards.

Allan Millhone sees an investment angle:

Companies in the parts business: NAPA, AutoZone, et. al., may benefit in increased sales over time if the "Cash for Clunkers" program continues. Salvage yards are required to keep the clunkers in another area and cannot sell the motors and other parts as they customarily do with the rest of their yard. In time this will create a shortage for many parts that one may now purchase from salvage yards. Aftermarket parts will become scarce and the part stores will benefit while the consumer regrettably will have to pay higher prices.

Aug

14

TurtlesSo far I sadly have neglected discussing my late grandmother, the one married to my 104 year old grandfather, who died in her 90s. She had an independent streak and made sure that we grandchildren were sufficiently exposed to concerts and music of all types. She was quite a character and had an uncanny resemblance to Rosalind Russell in Auntie Mame. She took all of us to the ballet, operas, and symphonies, and rock concerts on a near weekly basis. By the time I was in 5th grade, I had seen the Dave Clark Five, The Stones, Beatles twice, Monkees, Jimi Hendrix, The Turtles, Chad and Jeremy, The Animals, The Beach Boys, Jan and Dean, and a host of other bands. To make her happy, we went to see Dorsey, Sinatra, Tony Martin, Count Basie, and all the greats of an earlier generation. She was always 50 years older than anyone at the rock concerts, and had just as much fun as the kids. She also had an uncanny ability to score tickets in the first three rows for everything… she claimed her poor eyesight necessitated  front-row seating. Feeling that being around all of the kids made her young again, she was criticized by the rest of the family for her apparent craziness. She was crazy like a fox, as our generation of cousins has an appreciation of every form of music and we owe it all to her. Those concerts she took us to are among the best memories of my life and can never be taken away. I think that this fall I will invite Vic and Aubrey to a Phish concert when they come to NY. I know Aubrey will like it and it will open some news doors for Vic.

Marion Dreyfus notes the benefits of taking children to concerts and other grown-up activities:

You pick up a great deal of incidental ambient intelligence at those concerts. Different venues rouse new parts of the dormant brain, making more synaptic connections and neuron networks grow. The new intel becomes part of our personal carapace of knowledge and sentience. You can function on more data, have a greater range of facts and input upon which to think and act.

Tom Marks is skeptical:

The 'synaptic connection' angle sounds like what an embarassed neurologist in a Woody Allen film might say to his unamused wife after she had found strip-club charges on his Am_rican Express card statement.

Aug

14

Everything you need to know about markets you can learn at rock concerts. From a combination of circumstances, I had the good fortune to attend five rock concerts in the last few weeks with my young son Aubrey, and I have learned so much about markets from each of them that I could write a book about the lessons. If only I had learned these lessons before! When you go to the concerts, the rules are the key. I've found scalpers outside of each, and the prices are always considerably less and the time saved considerably more valuable than the tickets themselves. At first I made the mistake of going to these concerts at the stated time, but I found that the main act always goes on at midnight, and all the preliminary acts, like the undercards on a boxing match or the picadors at a bull fight, are meant only to whet the appetite. Similarly, the market activities before the open are all a facade to get you in, and the main events happen well into the show, usually at the encore, when the audience thinks the game is over, but then the stars play their main song.

YahuI knew that I was going to learn much from them when I attended a Matisyahu concert with Aubrey which I thought was going to be an Asian show. I couldn't understand the language but was surprised to see half the audience in yarmulkes. I asked one of the tens of thousands in attendance, and he told me the language was Yiddish and Yahu was very sagacious and his Yiddish rap contained much sentience. He then opened his arms like King Canute by the sea and asked the audience if it was time to jump in. A frenzy occurred and 25 security guards rushed to the middle and he jumped in, much to Aubrey's delight. "He just jumped right into everybody and they're carrying him on their shoulders." The frenzy is exactly like the POMO that is so current these days with the preannounced $1 trillion that they're going to buy coming every few days, with $7 billion here and $10 billion there, with the cash that's coming in being available for 20 to 1 leverage buy equities. The effect is the same, with much good music coming afterwards with a z of 1.5 or so, but many people getting hurt as they try to stampede in to pass the star down the line. Of course the scholarly Yahu is a stand-in, art imitating markets, of the scholarly Israeli market that exactly foretells the opening on Monday with its Sunday moves and is generally accurate as to what is going to happen in New York from 11 a.m. to the close with its early Israeli close, as presumably they read our mail and don't want to be caught in a state of detallises.

We went next to a TV On the Radio concert which was almost as frenzied as the Yahu one and Aubrey was the only one who liked the music because it was exactly like the amplified electronic beeps that his switch-on electronics for 2-year-olds plays, with no harmony or timbre to it, but strictly rhythm and tones. It's apparently just as much the rage as the Yiddish rapper and of course its the analogue of the electronic algorithms' robotic activity that currently dominates futures and individual stock trading. The best sounds came during the 1 1/2 hours it took each group to set up all their equipment, and I guess the group with the best amplifiers and lighting is the most favored the same way the robots near the exchange and the "banks" that have their debt guaranteed by the Fed so they have all the capital in the world to shake out the mere public who don't have the electronics or funds to compete with them.

I next attended a Don McLean concert and heard his song American Pie, which reminded me so much of all the trendfollowing books that I've read which did so much good 50 years ago and have been voluminous though completely out of date since. Apparently McLean was once a great, and had a hit song, the same way the large man once made a fortune by buying beans on the way up and shorting them on the way down.

Regrettably I did not get to see the pre-concerts of Michael Jackson although my daughter Katie once attended his father's 50th birthday party and got a private showing of the zoo when I was a star. Jackson was once a great, then lost everything and had as his best friend a chimpanzee, and liked to dress up funny and play with youngsters. He was in eclipse a non-entity, but then when he died, he became the most loved and revered of them all. My goodness, I heard this exact story before. Morse is back. He first was famous for bulling up Trolley and Canal in the 1870s but then lost everything in the panic of '77 when Livingston got his start. But then he was a ghost. Still he was spotted while a ghost walking down Wall Street and Radio immediately went up 15% thinking that Morse was back. Well, you get the picture.

I also went to Frankie Valli but he only performed after midnight the same way you have to wait for the close these days to have all the big boys try to switch you out. I'll report on the other rock things I went to, and quantify a few of these things after I get readers' insights.

Steve Ellison adds:

CornI saw REO Speedwagon and Styx last month. REO played first, and apparently many of the holders of the most expensive reserved seats right in front of the stage were Niederhoffering. The section was nearly empty. After a few songs, Kevin Cronin said that he hated singing to empty seats and encouraged others to move forward. However, he had not consulted security. Within minutes, hundreds of people were moving forward, but ushers blocked the aisles, only allowing those who had tickets for the front rows to enter. An analogous event occurred two weeks ago when corn broke above its 10-day high at 340 and moved up to 376 within two days. Alas, the hopes inspired by the breakout were dashed as the price collapsed to below 330 by the end of last week.

Allston Mabry asks:

Ever consider taking young Aubrey to one of Levon Helm's Midnight Ramble shows up in Woodstock? You'd both get a kick out of the rustic intimacy of the barn ambiance, and the music is sublime. At turns, hues of rock, jazz, country, and classical, all in one evening. It's a unique venue and vibe, and the lineup of artists that regularly perform there is a joy to behold. Great spot, cool town.

GM Nigel Davies reflects on performers' reputation after death:

The taboo about not speaking ill of the dead works very well for controversial characters, except of course that they're no longer around to enjoy it. And when there are direct beneficiaries from the sales of the controversial one's products some new dynamics come into play, the thought that the death of the controversial one would considerably enhance sales (I bet many in the Jacko camp considered the possibility these last few years) resulting in extreme guilt (and ever greater praise) should that actually happen.

It surprises me that there hasn't been at least one known (to me) example of an over-the-hill celebrity faking their deaths and then channeling their funds to a new incarnation as this is such a genius career move.

GM Davies is the author of Play the Catalan, Everyman, 2009

Andrew Moe reports on his concert-going experience:

On their current US tour, Coldplay moves from the main stage to several smaller stages positioned well out in the cheaper seats of the venue. In San Diego, they went so far as to set up shop for a few songs at the base of the lawn area that lies behind the assigned seats.

During a particularly engaging number, one observed security quietly clearing a path from the main stage. As the lights went out, the band quickly and easily moved through the packed venue. Once their new positions were established, on went the lights and the crowd went wild. Reminds me of the clearing of the way for certain banks to take positions they later flip to the government for immense profits.

Traffic patterns in and out of a concert offer the opportunity to study drivers under pressure in an unfamiliar environment. This is quite different from the regular commute where a fair percentage of the drivers know both the route and the daily tendencies. The best opportunites in markets come when you have a group (or groups) in unfamiliar territory reacting to intense pressure.

Aug

14

The Fed has the most control over the Monetary Base, less control over MZM and even less over M2.  Interestingly the Base has doubled with the Fed’s activities, but those activities have had a much reduced effect on MZM and almost negligible effect on M2.  This means that the extra money is being held on deposit by the banks (helping their bottom lines).  With no bank-lending-created expansion of money, any inflationary or bubble argument is diminished.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Steve Ellison recalls:

I feel like I have seen this movie before. In the early 1990s the banking system was in trouble, and the Fed's actions were considered ineffective — "pushing on a string". The next phase was the jobless recovery, in which Bill Clinton was elected on the platform of "it's the economy, stupid" 18 months after GDP growth turned positive. As late as the fall of 1993, Barron's ran a cover story on efforts to rescue homeowners with negative equity. This entire period was a great time to own stocks. It wasn't until the economy was unmistakably strong that the stock market ran into trouble in 1994.

Bill Rafter adds a picture to his comment:

I refer you to this graphic that will illustrate the point.

As you will see, M2 is below its target rate of growth. That’s contraction from a monetary policy standpoint. That means no inflation.

What would happen if there was an increase in bank-lending-created money? Well, what do you get when you increase a fiat money stock without an increase in goods and services? Increases in prices; loss of confidence in the currency.
 

Aug

14

 [The race between Atalanta (l) and Ippomene (r) by Guido Reni, 1618, Museo del Prado de Madrid. She loses the race and wins the boyfriend by picking up the gold "pomo" tossed to her by the Fed.]

After a sagacious relative's Email about POMO, I have been reading as much as I can about it. I found a recent article (August 10, 2009) by CXO Advisory Group particularly interesting.

Aug

13

We received a report today from the So Cal member of the family. On her way to work this morning she saw a van that advertised "mobile dog washing." That is not, by itself, remarkable if your commute takes you through West LA. What was notable was the come-on: "We use only organic shampoos and conditioners."

Aug

13

Risk Aversion is the central assumption for expected behaviour of market participants. Loss Aversion is considered an anomalous behaviour. However the pursuit of any enterprise including trading and investing is profit seeking and not loss avoiding. So, like all ideas in Economics, there is a Buddhist middle path where logical conflicts are minimized. As long as there is a reasonable tolerance for losses, risk aversion works.

Within expected, expectable, tolerable, reasonable ranges of losses or risks, they are inversely correlated to each other. However, at the extremes, i.e. beyond the tolerable ranges of either losses or risks, they are not negatively correlated. “Not a negative relationship”, is not necessarily a positive relationship at or beyond the extremes. It could be that beyond the extremes, there is no relationship, undefinable relationship or a positive relationship.

The whole problem is made “intellectually” consistent by seeking refuge in quantifantasizing (quantifying & fantasizing) that an investment utility curve is unique to each unique individual in the markets and that helps define and quantify what is a numerate idea of reasonable, tolerable, expectable losses or risk.

Reality is we are using some undefined or undefinable quantities. I would like to add to the Behavioural Finance Terminology, thus the term Quantillusion since Perversions don’t exist in markets is the assumption.

Beyond the tolerance point, for some there is a stop loss wherein risk-aversion starts going close to infinity. For some, risk aversion instantly reaches infinity (read undefinable) and they live with the loss making trade until the margin calls cannot be met. There are a rare few for whom Loss Aversion and Risk Aversion are positively related in the zone of fat tails. Such rare men and women have gone to a point of no return to win yet unknown lands, discover yet not known molecules, find yet not imagined axioms.

The rarest of the rare among men and women thus are playing on that very infinitesimal probability where readiness to take a larger loss (losing it all, including oneself) while engaging in increasing risk still leads to a productive outcome. My question, is as traders and investors, does any one of us in the markets have that mandate?

So, loss aversion is not really an anomalous behaviour but only symptomatic of the anomaly of most people not wanting to know their own limits of excursions.

The sagacious Steve Ellison adds:

There are probably as many answers to this question [how loss aversion works] as there are market participants, but behavioral finance researchers have found that people value things they own more highly than non-owners would value the same things. In addition, Kahnemann and Tversky found that the pain of a loss is twice as intense as the pleasure of a gain of equal magnitude. These biases result in asymmetrical responses to risky investment situations. An investor who buys a stock that goes down is likely to stubbornly believe that the stock must be worth what he paid for it and hold on. Conversely, an investor who buys a stock that goes up becomes fearful that he will lose what he has gained and is likely to sell for a small profit.

By trading, I have gained a much deeper understanding of risk than I had before. I think most investors who are not professionals have a very shallow understanding of risk. They look at the long-term upward drift of the stock market and think about the potential profits. They smile and nod their heads when told about the periodic declines, but do not think carefully about how they will feel when the inevitable decline occurs. It is easy to understand the logic of dollar cost averaging, but hard to understand what it will feel like to continue putting money into the market when one's previous investments have shrunk dramatically in value.

I have become a believer in stops, not because they are intrinsically profitable, but because they allow me to keep losses small enough that I stay rational. They prevent trading mistakes from metastasizing into psychological mistakes.

Aug

12

P o HOn a recent vacation to Hawaii, we explored some of the history and culture, and ended up at Pu'uhonua o Honaunau, now a small and beautiful National Historical Park on the Big Island that recreates a once-special refuge in the Hawaiian culture. The purpose of these refuges was twofold: sanctuary, and absolution. There weren't many of them in the islands, but as long as you could find a way to make it to the refuge without being captured or killed, you would then be safe, a shaman would spiritually absolve you of your "sin(s)," and you could return freely to society.

I find it fascinating how cultures build in these special exceptions — places where the usual rules don't apply, and formal mechanisms for getting away with breaking serious taboos that otherwise would be punished, or being relieved of obligations. Roman Catholics have the confessional and the sanctuary of the Church, ancient Greek actors could ridicule kings with impunity, the Japanese don't hold against you anything you say while drunk, the neutrality of certain nations, e.g. Switzerland, is globally respected, west coast Indians had potlatches to cancel debts, and even US presidents issue arbitrary amnesties at the end of their terms.

It seems societies need a symbol to remind them that sometimes it's best to just forget it and move on.

I guess the contemporary Wall Street equivalent would be the $33 million SEC settlement…

Aug

12

Day OneA new book, Day One Trader, is one of the finest accounts of life on a futures trading floor and is the best trading floor book since Charlie D. was published over a decade ago. The author, John Sussex, recounts his experiences of being a young pit broker from the first day the LIFFE trading pits opened in 1982 and continues to the transition of electronic futures trading, including his role as an exchange director when the LIFFE Connect system was developed which eventually closed the pits.

Many books regarding the trading floor are sensationalized but Sussex wrote a straightforward memoir regarding the camaraderie, risks and culture that transcended every trading pit. Besides exciting tales of the characters which seemed to be drawn to the exchange floor, Sussex offers a broad perspective since he was much than his primary role of a pit broker, particularly his creation of a dominant floor brokerage. Eventually Sussex Futures transitioned to electronic trading and one of the most insightful parts of the books was his experience dealing with a rogue trader during the early days of electronic trading which nearly bankrupted his firm.

It's quite rare to get a tasteful but frank impression of how the trading pits operate but the author succeeded in doing so better than any other attempts I've seen. I really admire his energy and observations because after decades spent in the pit, most guys are down to two brain cells and one of which is waving goodbye to the other.

The book will be released in the US next month but is already available in the UK. At 172 pages it's a quick read and has broad appeal for anyone with an interest in financial history, particularly the development and evolution of futures trading.

Aug

12

DGCMy bride and I recently returned from a visit to a musical Caribbean location, the name of which rhymes with a large brass musical instrument.  It was quite an eye opener. Among other things it reaffirmed the importance of so many of the ideals spoken about on this site, like personal freedoms, private property rights, freedom of movement and employment.  How dramatically life changes if even one is taken away! Simple tasks like booking travel in country are simply impossible or involve many black-market channels and considerable risk.  An unauthorized drive in a car can result in jail time for a local. Blue and green clad officials adorn nearly every street corner in the capital city. There is no ownership or credit.  Cars and houses are grandfathered from 50 years ago. There are shortages for everything.

But in front of all this and in the streets is the constant sound of music, and a tapestry of movement and life. Rhythm and art are woven into this culture and they do thrive. Creative methods to circumvent the system are adopted by all as well. The small businessman is emerging.  Private dinner clubs, hotels and other services are allowed in limited numbers and are the best-paying enterprises.  There are plenty of unlicensed businesses as well who take on even more risk in order to be entrepreneurs. The health and education are very good for those who have practical access. But afterward there are no opportunities to apply those skills. So you have PhD Botanists giving rainforest walking tours, microbiologists explaining historic sights, doctors and scientists arranging travel plans.  The government jobs surprisingly are the worst place to work, with very low pay. So no one wants to work there.  One does not sense government corruption but rather paranoia and massive inefficiency.  A 50th anniversary passes with barely a notice.  Signs of a famous Argentine are ubiquitous. But movement and desires of the populous is admirable. There is no island mentality here and things do get done despite the handicaps. There is desire for change on all fronts.

Aug

12

It has been my experience with the wiser gender that mother and wife have a superior sense about when mocking fear turns into the overconfidence of mocking risks.  Which may explain why the motherly bank analyst has had superior analysis of late.  Further, it may give insight into why a certain trader's ex wished she knew all his trades… not that he was wrong so often as she bitterly proclaimed, but because she had the good sense to know when he had erred.  Finally, it may be a better explanation of why Iceland failed and why sufficient women on a board signal better returns, if the reporting is accurate.

Gordon Haave replies:

G HThe mother and the wife are like Wall Street.  They privatize the rewards (wife — i need a new house, mother — my son is so great) and socialize the risks (mother — you should have listened to me and been a lawyer, wife — see ya later).

They are both a necessity at some point, but don't let them influence your self-esteem.  Men are defined by their actions, what they accomplish, and what they impart to their children (which includes how they treat their wife and mother).  However, never put your self-esteem in the vise of your wife or mother.

Aug

12

I looked at the average daily range (ln(high/low) ) on the S&P index for each calendar month since Jan 1969 — 487 months — and found a few interesting things.

1. The most volatile month was October with 1.79% after last year. This is true even with last 20 years i.e. no Oct 87. This was followed by Jan with 1.59%, then Sept 1.51% and Nov. with 1.50% with the least June at 1.33%

2. The following month is highly correlated to the prior month at 80%. The auto-correlation is to be expected, but I was surprised at how high it was.

3. But the change in volatility is negatively correlated at -15.45%,

4. I also looked at whether the volatility was accelerating,( getting bigger), or decelerating (getting smaller) and thought the following was interesting.

a. There were 233 accelerating months. Of these, 85 had back to back accelerations and 28 three time in a row 8 and 8 4 times 5

b. and 254 decelerating months with 106 back to backs, 38 triples and 14 quadruples, 4 five time in a row, 2 and 1 six and seven times in a row.

I would infer that there may be exponentially more energy into accelerating and breaking the longer it is sustained and therefore negatively correlated.

March was the only month since Oct. that vol has increased. Right now we have 4 months in a row decelerating, and currently August looks to continue with 1.39 average versus July 1.60

Aug

10

ElephantsThe S&P went down from 1200 to 850 without a reversal of consequence, and we will see if now that it has Lobaed back from 850 to 1000 without a reversal of consequence, whether it will complete the migration, trampling the same ground and path at a separate time. The "scholarly" faker Lobagola must have read about these migrations at the British Museum, perhaps sitting next to Karl Marx and the King who rode the tortoise in a similar fashion to my father playing Willie Sutton a match at Borough Hall.

Aug

10

The period from the decline and failure of the Second Bank of the United States [1833 to 1841] to the discovery of gold in California [1848] is usually written about as a magnificent process of Westward expansion.  The reality was homesteading beyond the Ohio country slowed to a trickle.  Only the most desperate people, like Lincoln's parents, kept moving West; and only the most desperate people from abroad – the Irish from their famine, the German and other political refugees from continental Europe after the failures of the revolts in 1832 — came to the United States during that period.  Unlike the Great Depression that began in 1930 the slump of the 1840s was largely limited to the United States.  Its cause was the collapse of the states and cities' international credit-worthiness after the Panic of 1837 and the shriveling up of domestic credit. The inability to borrow or get actual money explains the extraordinary fever that surrounded every "discovery" of gold during the period and the sense of almost divine intervention that greeted the realization that the California discovery was the greatest in history and – thanks to the Mexican War and the Bear Flag Revolt — it was all ours. The discovery at Sutter's Mill literally allowed the U.S. to get out of hock.

G_d may look after fools, drunks and the United States of America, but He may be busy with other things these days.  In 1929 in the U.S. the ratio of debt to GDP was 190%; in 2000 it was 275%; in Japan in 1989 it was 270%. The pattern has been for the ratio to increase when the credit/speculative bubble bursts and economic growth declines. In the nine years after the height of their bubble, the Japanese saw the debt-to-GDP ratio increase to 350%. In the U.S., since 2000, the ratio has increased to 375%. The question isnot whether the U.S. will now share the Japanese experience of weak income growth.  That seems certain.  What one has to ask is whether the next decade of bust will have the productive result of lowering the overall level of debt to national income.  The current debt to GDP ratio in Japan is 110%. The Japanese have been persistently criticized for not resolving their problems by allowing failures to be liquidated: but I wonder how likely it will be ten years from now that we supposedly hard-nosed Americans have done more to write down assets to their market values than the Japanese have done in the last decade.  Where will we Americans find the pot of gold at the end of the debt rainbow this time?

Gregory Rehmke explains:

It depends what debt is used for. High-yield bonds funding an array of innovative companies in the U.S. might reasonably be purchased by folks overseas looking outside their stagnant economies. Garage start-ups funded with family loans and credit cards increase debt, but shouldn't be mixed up with consumption-debt used for boat-loans, car-loans and loans for vacations. And given that Congress has made it nearly impossible to fund new companies with IPOs, financial markets search for ways to fund start-ups with debt instruments. Of course the easiest place to throw debt was at home and commercial mortgages. As that disaster continues to unfold, will debt now fund new firms that boost productivity by inventing better technologies and products?

George Parkanyi responds:

If it were up to the west-coast Indians, one ripping potlatch would sort it all out. "OK everybody — fresh start tomorrow at sunrise. One loincloth each!"

Aug

10

Traveling to work in the summer, I drive down a freeway 77 which goes from 3 lanes into 2 lanes, right before it overpasses interstate 44.

There are several short entrances and exit ramps right before and during the narrowing.  In morning traffic, it always bottlenecks.

Like a construction site where one lane is closed down, the doomed lane is well marked in advance as ending. Most of the morning commuters know the lane will end. This seems to be a classic case of the “prisoners dilemma.” Should you take the closing lane, slowing everybody down, but minimizing your travel time by cutting into the remaining lanes in the last second?Or should you move to the other lanes and orderly get into the lanes that are slowing down?

Game theory would predict that commuters would take advantage of the group and stay in the ending lane, as it would be more advantageous to them.  However, this is not the case.  This week I only saw 2 cars take the quick route.  So the traffic slowed but did not come to a stop.

During the school year, when traffic is heavier it makes travel time through the bottle neck much longer and variable.  There is a considerably higher percentage of people that cut in as the lane ends. But still there is a clear advantage staying in the ending lane and cutting. Theoretically, this should not occur. Also interesting on these busy days, sometime someone will block the speedster, by purposely staying in the ending lane but going the speed of the slower lane.

It could be that in reality, as opposed to theory, the chance of getting whacked for being a jerk increases too much to risk it. Yet, I believe most do not take this route, because they do not want to be seen as the jerk, hurting the whole.

Even in the prisoners dilemma, the cops and judge know you cut a deal. It would seem that the underwaterness of mortgages and the foreclosure rates are following this pattern… Nobody wants to be the first to turn in the keys… but a neighborhood could quickly turn int a ghost town as the frustration builds.

Aug

10

CornHybrid vigor is one of those evolutionary concepts that creates instant emotional reaction among the vast majority threatened by individual differences. Thus, it is very little studied although it has been shown to be of enormous economic importance in improving corn, wheat, cattle and egg production. Not surprisingly, it has not been studied much in the area of human and market activity. It is a subject very close to my heart, and I understand that one of the very fine non-eastern athletes on this site attributes much of his lustrous family's success to a dose of it.

I thought it apt to study the subject in markets. To do this, I had to start somewhere and did so with the hybrid vigor that comes when a S&P and Nasdaq move in opposite directions during the day. I found that such instances of hybridization are somewhat rare, occuring just 15% of the time. Surprisingly, the results showed that when a positive S&P was crossed with a negative Nasdaq on the same day, the next generation one day later showed almost exactly 50% rises for the S&P and 50& rises for the Nasdaq.

The results for a cross of a negative S&P and positive Nasdaq on the day were equally nondescript and random with almost exactly 50% rises for each of them the next day. Turning to a cross of a S&P with bonds on the day with opposite directions, I find that such outbreeding occurs about 50% of the time. Almost equally divided between the positive S&P negative bond and negative bond positive S&P combo. The results the next day were somewhat interesting.

Results for S&P     today generation      next day generation     total

.                                  +                             -

S&P+ bond-                345                        335                        680

S&P - bond +              390                        305                        695

The results for bonds next day: 

S&P+ bond-               361                        375                      736

S&P- bond+               390                        350                      740

Thus, we have provided for the markets what one hasn't seen for humans and I hope we will see studies in both areas that build upon this pungent subject. I would encourage similar studies in various classes of commodities such as grains, oats versus corn et. al., or metals, gold versus copper. Also, a hybrid day with strength here and weakness there et. al.

Aug

10

TrackA good coach will always have a way to teach his athletes to mock fear, and spit in its eye. He will teach the runner to say, "I may not have anything left, but they will have to peel me off the track as I melt down the last yards."

Lately when I read an article on Bloomberg I get this over-the-top movie trailer voice going in my head: "Be afraid, be very afraid…" from the over-the-top 1986 horror film "The Fly".

We know the bear magazine cover story is a sign of sensationalist journalism at precisely the wrong moment… What are some of the other indicators of being over the top fear mongering? Here are a few that may be worth considering:

Mocking fear, is however, something completely different than mocking risks. Mocking risks is something the good coach never wants to see his team do. Taking lazy shortcuts, without considering risks, is overconfidence.

Aug

9

ChessmenIt is interesting to speculate on which people in one's life have characteristics of chess pieces. We have only a limited number of people who are the significant players on our own "team." The design of chess (unlike Go or checkers) incorporates pieces which may symbolize psychological types, and as it works so well in the game, in life do we notice someone who:

The king can also represent spirit or essence which grows through the layers of personality which have long protected it. In this vein gestalt analysis can also be applied to a single personality. We have a part of all these types within us. As chess has evolved to a design that defies all attempts to improve it, its structures may have wider application.

GM Nigel Davies adds:

An interesting idea that is close to others I've considered. The most obvious extension is that the pieces all represent aspects of the personality (psyche, soul) and that our struggle to coordinate the pieces symbolises our attempts to be 'complete personalities'. The forces of the 'other side' are there to provide the necessary resistance that inspires us to grow.

GM Davies is the author of Play the Catalan, Everyman, 2009

Legacy Daily asks:

The people/personality spectrum is perhaps far richer than the chess glasses allow but the situations in which we find ourselves are indeed as diverse as the possible combinations of pieces on a board. But how do the three outcomes (win, lose, draw) mirror life? Also, in life the “queen” or some other piece decides to sacrifice another piece or move in a direction. While in chess the player rules and dictates all of the moves. Who’s the “player” in life?

Aug

7

CottageI'm currently in the process of trying to buy a place to live humble abode in the English countryside and I thought that today's events might be of interest. I went to the Abbey National (alias Santander) for a mortgage and a smartly dressed lady called Jan went through the paperwork with me. Throughout the process I got the impression that she was really on my side, looking for ways to make my case fit in with the tight regulation.

Far from being either bureaucratic or exploitative I felt that this particular banker wanted to create a deal that would work for both the bank and me, providing me with capital that I need to escape renting whilst making a decent profit for the company she works for. I had to come in a second time, this time with my son, and the banker helped keep him entertained whilst trying out different lending options. Towards the end of the second visit I noticed a number of cards on her desk. They were 'thank you' cards from clients who appreciated Jan's efforts in getting them a mortgage. And it was clear that she was proud of them.

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

Aug

5

Circuit boardDuring controversies about outsourcing, an executive I knew liked to hold up a 10-year-old circuit board next to a current circuit board. Typically the newer board was much smaller and had only about one tenth the number of components.

"What happened to the manufacturing of all these parts?" the executive would ask.

Slowly, the realization would dawn on the audience. "It is gone!" 90% of the manufacturing was not gone to China, it was just gone.

Stefan Jovanovich writes:

W TOur staff is 10% of what it was, but we still have the capacity to handle 75% of the unit volume we ramped up to during the dot.com boom. What used to be done by people with clipboards is now done by custom-designed software running on computers with wireless bar code scanners. What used to require hundreds of square feet of linear space can now be handled in 15% of the area using vertical storage and retrieval. The enterprise is now a joint venture (like the Pequod) with no "payroll" employees; the tax savings alone are greater than our net profit was during the last year (FY 2008) under the old structure. As Steve might have put it, the "jobs" (sic) are gone; and they are not coming back.

And we are not the only light industrial business in Califormia going virtual:

"The U.S. industrial [real estate] market has recorded negative absorption in four out of the last five quarters, third quarter 2008’s 38 million of positive absorption being the sole exception. Second-quarter 2009 saw 49 million square feet in negative absorption, a new high for the decade following the first-quarter's minus-48 million square feet." CoStar Group.

Aug

4

White shoe firmIt is reassuring that the secret high frequency algorithms have been secured and are back in safekeeping. As the government prosecutor said, in the wrong hands these algorithms could be used for evil purposes like "market manipulation." I will feel much better when they are back in the hands of the trading desk investment bankers who designed them so they can be utilized in their altruistic way.

Vin Humbert writes:

It is good to know that at all times one is playing against a robot that pays 1/100 of the commissions and gets paid for its orders, and gets to see your orders before putting on its trades, and is always two computers and a geographic distance of light ahead of you. As Willie Sutton said when the Dodgers lost, it makes you feel so bad you want to turn yourself in to headquarters.

Aug

3

Recently I did a search of Daily Speculations for "Ever changing cycles" and waded through the gold mine of thoughts that it yielded. I was caught up by the Chair's "Knowing Your Limits" from May of 2007.

Intrument PanelWhen flying airplanes there are a plethora of limits that must be obeyed. Especially speed limits. Many, many speed limits. During the take off roll of a commercial airliner, the pilot not flying is responsible for watching certain things but most importantly the airspeed indicator. He will make audible calls to the pilot flying. If the aircraft has an engine failure or some other failure that requires an aborted take off, this must occur prior to reaching a speed called "V1". At speeds prior to V1 the aircraft is still capable of stopping safely without going off the end of the runway. V1 is calculated for each runway and can change due to temperature and humidity. If V1 is exceeded, the aircraft will continue accelerating to V2 (minimum safe take off speed) and to Vr (rotate, or lift the nose) even if an engine is lost prior to V2 (in a multi-engine aircraft of course). Once an aircraft is airborne, pilots will want to maintain either Vx (best angle of climb, used for obstacle clearance) or Vy (best rate of climb) for the climb out, then at certain speeds flaps and slats can be retracted. The list goes on. One of the first speeds that all pilots learn is the stall speed for the aircraft they are flying, or Vs. At speeds below Vs the airflow over the wings will separate from the wing causing a loss of lift or stall. Most airlines prohibit operation of an aircraft at speeds below 15% above the stall speed. Pilots are not permitted to exceed 250 KIAS (knots indicated airspeed) below an altitude of 10,000 feet.

Controllers routinely assign speeds to aircraft to maintain safe spacing. It is common to assign jets speeds ranging from 250 to 320 knots. Once aircraft reach altitudes of about 26,000 feet they will typically stop using indicated airspeeds to control their speeds but switch to Mach number, a ratio of true airspeed to the speed of sound . Aircraft must use a Mach meter at higher altitudes because they must be sure not to exceed M mo or maximum operating mach number or the critical Mach number for the aircraft, this is a speed at which, although the aircraft has not exceeded the speed of sound, the airflow over certain parts of the wing may do so locally causing a shock wave to form and a dramatic increase in drag and possible disturbances to control surfaces (ailerons, rudders etc.) ability to perform.

As an aircraft approaches its service ceiling it is no longer able to climb at a rate that will produce gains in operating efficiency.

Aircraft limits are hard and fast based on the laws of physics. Limits in speculation are much more subjective and one has to develop a feel for ones own limitations and expand beyond them incrementally so as not to do too much damage in the process.

Speculators are subjected to a degradation in performance if certain of their limits are exceeded. I can clearly recall making a trade in which I exceeded my personal size limit and the feeling of utter incapacitation when it went against me. Other limits can be number of trades on at one time or number of markets watched. What limits have you discovered that hamper your performance?

Vin Humbert elaborates:

A limit that comes to mind where you feel that sense of hopelessness that apparently pilots feel when the plane is not under their control anymore comes when you exceed your margin carrying capability. Or worse yet, when the marks on your positions have no relation to underlying related moves but are manipulated against you to force you out of a position. This is guaranteed to happen when there is inadequate liquidity in your market of choice relative to your position size. Wisdom comes too late in many cases.

Chris Tucker continues:

Obstacle clearance speeds are dynamic, that is to say that they vary with windspeed and direction and with density altitude so must be calculated based on these things for the runway in question. Take a peak at V speeds and Airspeed indicator  for interesting reading.

Chris Cooper writes:

I have recently started learning to fly helicopters, and there are more critical speeds not listed in the references given. For example, every helicopter pilot wants to know the best autorotation speed, which is the speed you shoot for when your engine fails. With the right speed you can keep the main rotor turning [and the helicopter slowly descending], but if you mess that one up [so the rotor speed falls below a critical value], you fall out of the sky.

Aug

2

Species and stocks move around. They go up and down during the day, frequently starting high and ending low or starting low and ending high. They can move slowly, quickly, step by step, jump or fly. Species can swim or be dispersed by wind and stocks can be carried along by movements in the general market itself or related markets such as interest rates, oil, or Asian markets. Many species like to go back to their nests or dens and many stocks like to move back to some quieter place at the end of their day. Birds and fish often migrate back to the equator or northern regions during the winter and summer and stocks often move in opposite directions in the colder months and warmer months.

 Occasionally a species moves into a new area. It invades a new territory. And if it proliferates in space and numbers, we say it's a pest. Famous invasive species in the literature include the sea otter in California, the muskrat in Europe, the European starling in North America, deer in the Northeast suburbs, and innumerable plant and insect species. As Charles Elton said "a hundred years of faster and bigger transport has kept up and intensified the bombardment of every country by foreign species."

Two excellent books on biological invasions are Biological Invasions: Theory and Practice by Shigesada and Lawasaki, and Biological Invasions by Mark Williamson. The former is a primer on mathematical modeling of invasions and the latter is an impressionistic summary of the state of the field with numerous biological examples by a leading field researcher.

The main principles that the books teach is that most invasions fail, when they don't most become pests, and when they do become pests — about 1/10 x 1/10 of the time – they diffuse in space and numbers according to the square root of time and the growth rate adjusted by a standard logistic factor based on how close they are to carrying capacity of the area they invade.

Invasions are close to the heart of every market person. The qualitative invasions that constitute the bailouts for the cronies is a new factor in the United States that should be analyzed with the same care that ecologists traditionally place on the badger.

Other invasions that market people might well study are the recent invasion of the Nikkei to 10000. The move last year to gold above $1000, and oil above $150 and below $40, and the always threatening long 10 year bond yield of 10%. Such questions as: Why did some of these fail, and what other markets did they carry along with them, and when will they come again, lead to many other interesting lines of inquiry.

SLETo put some numbers on the table I decided to study the invasion of big stocks to the rarified areas of the turbulent landscape around the number 10. I looked at the S&P 100 as of the beginning of the year and found one stock below 10, Sara Lee at 9.80.

From December to January, Sara Lee moved to 10.03, making one invasion from below to up. Dell, Alcoa, and B of A moved down, making an invasion of three down. In February, GE and Dell and Dow all fell sharply from above 10 to below 10. This invasion failed, as all three rose sharply from the below 10 territory to above in March. In subsequent months, the invasion below 10 has petered out to extinction with B of A moving above in May and Sara Lee in June.

It is interesting to speculate on the invasions of small stocks like those in the S&P Midcap to these levels during these and other time periods. And to plot the diffusion and expectation of these invasive species when then tread on these highly fugacious territories.

I would be interested in other applications and examples of invasion theory in markets.

P.S. I will post the month end prices and names and dates at an appropriate time.

Steve Ellison adds:

CheatgrassInvasions that might fail under normal circumstances can be successful when additional disruptions occur. When settlers brought cattle to the steppes of southern Idaho, the cattle ate the dominant crested wheatgrass and provided an opening for cheatgrass, an invader from Russia. Cheatgrass altered the fire dynamics by being highly combustible and having fire-resistant seeds. After a fire, cheatgrass quickly became dominant.

Interestingly, one of the best places to find samples of the original native plant species is the cemetery in Virginia City, Nevada, (web site1, web site 2) which has been kept from grazing and defended from fires for 150 years.

Russell Sears writes:

Alien species are the second leading contributing factor in extinction. For about half of the species listed as endangered, alien species are contributor to their demise.

But even more pronounced is the 85% contribution of habitat destruction or change of living environment.

Clearly the regulatory environment is changing for financial companies. The securitization process will forever change. Which I would classify as habitat destruction.

AOLHowever, back to the alien species, it would seem to me, more akin to the game changing technologies invading established territories and market share. The late 1990s early 2000s we saw the game changing technologies in telecoms. There are of course companies that are experts in introducing these game changers, Apple and Google come to mind. But many tech companies have hit the scrap heap, because they couldn't maintain a constant acceleration of products. (Remember when AOL was going to rule the world?) Even retail tech companies have a difficult time staying on the cutting edge, as Radio Shack and Circuit City seem to display.

The drug companies, and bio-tech have similar potential if the regulatory environment can be deciphered… although I certainly don't have the expertise to predict what can make it through this maze. But have known traders with enough organic chemistry knowledge to make fortunes, and vice-versa; organic chemists that have made some nice trades.

Perhaps, invading products contribute to the death of more companies, and birth and growth of new industries. Environmental changes contribute to the destructive effects, but with much more sterilization of productive potential.

Aug

1

 An item posted on his blog Marginal Revolution by FoC Tyler Cowen reminded me of Robert Bacon's notion of "ever changing cycles" as people jockey for advantage, acting independently on common perishable information:

"The collective optimization of individual driving routes by drivers using realtime traffic maps slows everyone down. That is, everyone picking the "fastest" route on the map results in overall slowdowns (…)".

Scott Brooks sees a religious angle:

That's one of the reasons why the saying, "everything works until it doesn't" is true. People find something good and then they tell everyone about it – and then it's ruined. We all tend to want to brag about our "find", when in reality, that is the worst thing we can do.

I use this all the time when the Jehovah's Witnesses knock on my door. I ask them, "How many people do you believe are getting into Heaven?" Of course they respond that they believe only 144,000 are going to make it into heaven (or whatever the number is). I then tell them that if I found out that only 144,000 people were going to make it, I'd stop knocking on doors and telling everyone about it.

Aug

1

1. Jon Stewart on Tim Geithner's (the Treasury Secretary) inability to sell his own house — includes funny interview with Sh_ller (video) [4:52 minutes]

2. More stories are coming out about outrageous real estate projects in China; Video of empty skyscrapers in China, reminds me of empty condo buildings in Miami [4:55 minutes]

3. Lenny Dykstra (Mets baseball player) video about his business career: my favorite line "he took a year off to master the stock market"  so he could manage his own money (but he also said "I don't read books, they give me a headache"). At the end, in his foreclosed mansion devoid of furniture he denies being broke. [11 minutes]

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