One of the recent Book Club selections we went through was O'Reilly's Killing Lincoln. It was a fast read with many interesting facts and quite a few questionable assumptions. Overall, Lincoln is depicted as a wonderful, caring man– as most of the reviews (almost all raves) attest. However, as a companion piece, I would recommend Lincoln Uncensored by Jospeh Fallon. The book is neither history nor commentary, but a compilation of Lincoln's views, taken from his speeches and written documents. They reveal a man of conflicting positions on important issues. Whether these "changes of heart" were a result of maturity, events, or circumstances is left to the reader. Whether the issue is slavery, religion, the constitution, states rights, or many of the other issues of the day, you can almost be sure to find that Lincoln, at one time or another, came down firmly on both sides.

P.S. I have been told that several organizations that typically carry all books on Lincoln have taken a pass on O'Reilly's effort (due to "many" inaccuracies). I have not checked up on this but the woman who informed me of it has rarely been incorrect (she is a retired history teacher, so this is more than a passing interest to her).



 An astronomer was profiled in the media, ca ~2000. Not for his science, but for the fact that he held onto a position in MSFT stock for ~10X (100X, etc).

He didn't sell after 20% gain. Or 50%. Or 100%. He just irrationally (per nascent behavioral finance) held. Intuition, like in Carl Sagan's "Contact", rather than explicit knowledge of the company's business prospects, valuation, or moving average. Dumb stubborn luck.

MSFT hasn't done much since then, so whether he's still holding or sold out, no matter (because it wasn't AMD).

The astronomer is a standard-bearer for those in the empirical vacuum tempted to sell after a double, or down on their luck and doubling down.



Here's something for the guaranteed to happen file. When asking a futures brokers for rates on treasury bills for margin collateral, I am informed the 9 basis points of interest will no longer cover the new monthly carrying charges and execution fee for their trouble. So I can look forward to excess cash getting a negative nominal return along with negative real return. I decided on an alternative plan.



 Uncle Tom's Cabin really did help start the Civil War; but it was not by arousing the North to embark on some moral crusade. The book's most important effect was to promote wildly exaggerated notions in the minds of plantation owners in the deep South (Mississippi, Alabama, Georgia, South Carolina and the delta parts of Tennessee) about how many slaves were were escaping to the North. The estimate of how many slaves escaped in the 40 years from 1820 to 1860 that I trust is James McPherson's — somewhere between 4,000 and 8,000 — only "several hundred per year". The politically correct numbers being offered by the National Park Service ("one thousand a year" and the National Underground Railroad Freedom Center in Cincinnati (2,500 a year) are as exaggerated as Ms. Stowe's narrative. What everyone agrees on is that almost all the escaped slaves — like Frederick Douglas –came from the border states - Maryland, Kentucky and Virginia.

I find myself wondering how long it will be before the current plantation owners — the School Teacher Unions — become hysterical about runaway children. 3 decades ago a majority of states in the Union made home schooling a crime (30, to be precise). According to Joseph Murphy, who teaches at Vanderbilt, in 1975 there were only 10,000-15,000 children being taught at home in the entire United States. There are now, according to Professor Murphy, two million. "Home Schooling in America” may be as exaggerated as Harriet Beecher Stowe's book was in terms of its numbers; I doubt it will have anything close to the same popularity. But, it may be "the smoking gun" (appropriately awful metaphor for our current politics) for the official education lobby. One can only hope.



 One of the more encouraging statistics I have heard recently is that the rate of movement within the US by county is now back above 2007 levels of 4%. For a variety of reasons roughly 11m people per year are moving again for opportunities. The constraints to moving, be it housing, jobs or some other factor, are less. Tyler Cowen has sited lack of movement as one of the frictions slowing economic growth.

Movement is essential to health on a macro-economic level, and in other areas. On a river, I cannot fly-fish without movement in the water. It provides oxygen for fish to breath and transports food for them to eat. Without wave movement, Sogi and Watson cannot surf. Einstein is quoted, "Life is like riding a bicycle. To keep your balance you must keep moving." In his realm everything is always moving, though we may not be aware of it. In trading, there must be movement to find more favorable prices. Studies show physical movement beneficial in avoiding chronic disease (D. Agus, End of Illness). Sitting too much during the day is harmful. The frontier men of the West were at their best when on the move. When at rest in the saloon, brothel or poker table trouble always ensued. Gretsky said and demonstrated: "I skate to where the puck will be, not where it is now". Fred McDowell sums it up well in the second verse of his song You Gotta Move, covered by the Rolling Stones

"You may be high
You may be low
You may be rich, child
You may be poor
But when the lord gets ready
You gotta move"



Out here in Berkeley, they have a little quirky perk when it comes to parking lots. It's the antithesis of parking for the handicapped; it's parking for the gifted.



 Surprising candor from a former flexionic bank CEO. Why???

"Blame Fannie and Freddie for Mortgage Crisis: Kovacevich"

Fannie Mae and Freddie Mac exacerbated the 2008 mortgage crisis, and that's why the U.S. government should get out of the home loan business, former Wells Fargo CEO Richard Kovacevich told CNBC on Monday. "If it wasn't for Fannie and Freddie, [the mortgage crisis] would have been a small problem. Fannie and Freddie and other government agencies guaranteed 70 percent of those [bad] mortgages," Kovacevich said in a "Squawk Box" interview. He argued that without government-sponsored guarantees, there would not have been any private money willing to buy the toxic loans that have been blamed for the crisis. "There needs to be a decision that the government will not be in the mortgage business in the sense of a hybrid [like Fannie and Freddie]," Kovacevich said. He did say that if the government wants to be in the home loan business, it should do so through the Federal Housing Administration, which has worked well for a long time.

"Everything else has to be privatized," he said, adding that that can be achieved "by reducing by $100,000 a year the Fannie and Freddie guarantee."



 Maybe the most appropriate phrase to mention when talking about markets (over the last 15 years at a minimum) is "Time heals all wounds".

From the Asian crisis to long term capital to Y2k to Sept 11th to 08…it seemed every one was going to be the last…and the end of the world. (I remember sitting at the desk in London, as some one came through the headset in the midst of the '08 panic shouting, no cash in any ATM in the square mile). Rumours or truth, who knows, but panic it was.

How many fortunes were put on hold, as economists and managers argued the toss, how this would be it, and it was difficult not to get involved while struggling to believe that all would be well. How many talking heads said they were was absolutely right, (but took 3 years and 20% rally in the meantime that they let slip before they got thier reward). How many smart men have also under performed due to this (Hussman is in the back of my thoughts, obviously many more).

It now appears the Euro currency is looking sweet as a nut, and all is in order.

I don't know if the cheese can continue to be plugged, but it looks like it certainly has paid to bet that way (while those holding a few short end rate futures in the top pocket from the outset seem to have done well to boot).

Maybe those that have seen this from the 60s and 70s caught on early, and saw every problem for what it was… opportunity… the Cane's hobbling down to Wall Street as the chair mentions.

As many of you have pointed out, with so many now with a vested interest to keep this robot, underpinned, possibly it will continue to surprise as dips kick in into the future.



 On the corporate morality thread, I can offer some experience of the company I first worked for, a large manufacturing business. The number one priority ahead of profits, customer service, quality or value was safety for the employees. We will not injure our employees, and there was zero tolerance on this issue. The quickest way for a manager to lose his job was lax safety practices. And in fact some of the work around machinery was dangerous. Every meeting started and ended with reports and progress on safety. It is the morally right thing and does not conflict with good business. Safety at work or anywhere else is fundamental. Secondly, this focus attracted a culture of employees who cared not just about safety but about the other things that make a business successful, productivity, investment in new ideas, costumers and creating value. I would predict that companies with good safety records internally have equally good performance externally for customers and shareholders, and the opposite.

Jeff Watson writes:

My grandfather had another indicator of the condition of a company. Drive by the place and look at the parking lot. If it's full of older cars, junky cars, it's probably not a good place to work for and probably is a poor credit risk. On the other hand, if a parking lot is full of shiny new cars, it's probably a better place to work and probably has better financials and business.

David Lilienfeld writes:

I don't doubt the morality in corporate behavior. In the pharmaceutical industry there is lots of concern about patient safety. There are two schools of thought about why: The first is that the companies are enlightened and accept George Merck's "Do well by the patient, and you will do well by the society." The second is "A dead patient doesn't buy drugs."

My observation is that while the industry has a sincere interest in patient safety, it can also deceivingly discounts that safety in preference to efficacy, which is perceived to be the reason drugs gets approved. I don't think this is a conscious effort at deceit. That doesn't make it any less real. Many of the leading pharma houses have come to accept that and have tried to design in fail safe safety mechanisms into the approval process. It will take another 4-5 years to see if they are having their intended effects.



 The miserable performance of the text book company in all areas including the nook, and sales of books, and stock price, would seem to raise the question of whether a company that has declining sales might be worse situated to provide customer satisfaction than the companies with increasing sales and profits. Thus a positive feedback loop of sales, profits, and customer satisfaction develops. It would be interesting to look at customer satisfaction as an indicator of future stock performance.

Jeff Watson writes: 

In Florida, there are two main grocers, Publix and Wal-Mart. (Winn Dixie, Whole Foods, and Sweetbay are minor players). Publix charges higher prices, but offers better quality, good variety, better service, quick checkout, better trained employees, an enforced dress code, employees that smile, and bright, cleaner stores. Wal-Mart offers rock bottom pricing, surly employees, poor quality, and long waits at the register.

Here is a chart of Publix's 5 year performance (private yet employee owned).

Here is Wal-Mart's 5 year performance.

Maybe customer satisfaction in the grocery industry isn't reflected in the stock prices, but these are just two samples and Wal-Mart does a lot more than groceries.. My friends at Publix tell me it is an excellent place to work and they regularly receive bonuses every quarter while at Wal-Mart, the full timers are lucky because they might get 32 hours a week. 



 One recently waited 15 minutes after making a big purchase at Barnes and Nobles while they held me up because the computer went down and they couldn't take cash, exact payment, credit card. At the end, they sardonically told me that if I had a complaint about the wasted time, effort and treatment, I should talk to their manager. On the other side, I read in John Mackey's new book Conscious Capitalism about how when a hurricane hit a Whole Foods in Conn, the computer broke and a lower level operative without any feedback from headquarters gave everyone in the store free goods for the 1 1/2 hour that the computer was down. They got millions of good will and publicity as an unintended consequence. A study in the book shows that companies that cater to the customer, and employees and suppliers as well as the stockholders have better performance than the average. Panera and The Container Store are examples. I wonder whether this is a real effect and whether these companies will perform better or worse—- and the former will never get my business again and the latter will. What's your experience and view.

Vince Fulco writes:

My wife works in the textile area of Target, I have tried to look at its operations with a jaundiced eye as a financial analyst would. I've always felt welcomed and well treated there without their knowing we were an employee family.

anonymous writes: 

 I bumped into a colleague at Costco today who quizzed me about the recent tax changes. Not sure why he thought I would know, but after 5 minutes of listing the various relevant increases I asked, "Do you have time for more of these?" "Not really", he said, adding "You've already depressed me enough". "What are we going to do, raise fees?" he asked.

In the wake of recession we have not raised fees, and in many cases lowered them. It is better to stay busy and build good-will when people need it, and raise later when discretionary demand increases.

Increased taxes ordinarily reduce demand. But for businesses with existing demand, they are inflationary.

Maybe the FED gets what it wants (inflation preferable to deflation), and the agrarian organizers do too.

Rocky Humbert adds:

The chair asks a very important question; and the implications transcend business. With the caveat that I'm rather better at asking difficult questions (than answering them), I'd pose the question this way:

1. To what extent do people and organizations act in their self-interest?

2. If (1) is 100%, then any act of altruism MUST BE motivated by either reciprocal altruism or goodwill. If (1) is less than 100%, then any attempt to answer (1) is hopelessly complicated using a rational/analytical framework. And I won't go there since it's a moral argument.

3. A paradox arises because except for reciprocal altruism (i.e. keeping your counterparty in business so he can buy your goods and continue to service your needs), there is a irrationality that occurs for any action which isn't in one's self interest (for both the seller and the buyer) For example, if the customer is rational and self-interested, then ANY warm and fuzzy feelings towards a vendor are not rational if those warm and fuzzy feelings arise because of a historical and non repeating gesture (giving away goods during a power failure assuming that the goods wouldn't otherwise spoil.) However, in contrast, convenience IS rational and is part of the value proposition. That is, a vendor who doesn't make you wait in line when the cash register breaks has a superior product at the same price for SOME (not all) customers. And ceteris paribus, that should garner more business (for some, not all) customers *IF* he doesn't have to raise prices for a massive fault-tolerant computer system. If he has to raise prices for a massive fault tolerant computer system, then the customer who doesn't care about waiting in line won't shop there anymore. But the lone vendor who tries to gain a lasting competitive advantage by giving away milk and bread during a blackout will fail — since the goodwill generated by this will quickly fade and there's no lasting benefit to the customer.

Every economics question can be solved by recognizing that: 1) Incentives Matter. 2) Resources are limited. And … then it's simply a question of utility curves. BUT BUT BUT if there is a moral aspect to the question, then all of the rational analysis goes out the window. And that is, I think, what Whole Foods was trying to do.

Jeff Watson writes: 

 Right before Hurricane Andrew hit South Dade County and went across the state to hit Naples and Collier County, Home Depot was giving away 4×8 sheets of plywood……just had truckload after truckload, bringing it in to offload it to anyone who wanted it for free to board up windows etc.

Their main competitor, Scotty's was gouging, and charging $40 per 4×8 sheets. In the aftermath of the storm, Home Depot kept their prices down while Scotty's jacked them up. Scotty's did the same thing after Hurricane Charley. Much editorial space was spent discussing this in the Miami Herald, El Nuevo Herald, Sun Sentinel etc. Scotty's reputation suffered greatly and eventually went out of business at the end of 2005.

There was lots of bad karma and my builder friends avoided Scotty's like the plague. Scotty's said they closed all their stores because of the hyper-competitive building supplies market…..this was when Florida had the biggest construction upswing in history. Again, real bad karma. Home Depot is still a viable corporation. Because of Scotty's actions(and that of others), Florida passed a non-gouging law in 1993 which Scotty's still ignored in 2004.

Steve Ellison writes:

 In Predictably Irrational, Dan Ariely devotes a chapter to "social norms" (the friendly requests people make of one another) vs. "market norms" (you do x, I'll pay you y). People generally see social norms and personal relationships as being on a higher plane than mere market transactions. In one study cited by Professor Ariely, implementing fines for picking up children late at day care centers actually increased the frequency of late pickups. Before the fines, the parents felt bound by social norms and felt guilty for inconveniencing the day care providers if they were late. After the fines were implemented, a late pickup was reduced to a mere market transaction: I want to be late, and I am paying for extra service.

My guess is that companies such as Whole Foods that serve customers beyond the bounds of how customers expect a profit-seeking corporation to behave elevate themselves on the social vs. market scale and thereby gain much customer loyalty.

Russ Sears writes: 

People are cooperative beings, they want to feel they are in a partnership where one looks out for the other. While the individual is the driver of innovation and change, progress is made by the most connected in ideas. Arts, science and technology thrive is these highly cooperative environments such as the big cities. Ideas are one thing that the sum of the parts can become exponentially more.

If the business really is adding value, then they display it by highlighting cooperation with their customers. Because long term the good will makes them more resilient and able to grow.

Whereas if every transaction is a zero sum game, then the signal to the customer and investor is short term thinking. There is a tinge of buyer beware for the customer and an touch of desperation to next quarters results to the investor.

The entrepreneurs I know who are successful only do it because they love the business otherwise the risk the stress and the heartache are not worth the money or the effort.

I believe Jobs showed the world that at some point it is no longer is about the money, it is about making a difference, giving others what they want and of course "beating" your competitors. If you can do these 3 things well it is like having a blank check written by the world.

Gary Rogan adds:

 Yes, that's another way of looking at the situation. But Jobs is Jobs, and regardless: when confronted with a situation where a person (or an entire business enterprise) who doesn't know you from Adam is particularly accommodating and friendly to you, you have to decide whether (a) that's just how they are (b) they are doing this to get repeat business as a calculated move (c) they are conning you (d) they saw you and really fell in love with you. The thing is, it could be any combination of these or something else. All I'm saying is that a "they are giving stuff away" or some equivalent to "therefore I will make them by business/partner of choice for a long time" isn't always the most rational thing to do. One really should only feel gratitude to people who are doing it for un-selfish reasons while recognizing that a good businessman will often behave "nicely" as opposed to being a jerk.

Clearly almost all expressions of "good will" and cooperative behavior by businesses are self-serving. The rare exceptions are of the nature of some owner or executive clearly touched by the misery of his customers and/or employees and doing something good for them just because. Cooperative, reliable, and resourceful businesses do add value by not wasting their customer's time and money and not aggravating them, so often everybody wins. Sill in many of these situations have to be analyzed carefully because you are typically not dealing with friends or relatives. Otherwise one can become a "victim" of deception, as someone who buys a company's product because its advertising agency made a particularly effective commercial that is often in no way related to the quality of the product. 

Jeff Rollert writes:

I'd like to share a story that happened this weekend.

A number of you know my hobby is racing sailboats. Well, I'm on a number of forums and they have members that range from the grouchy to super nice and helpful.

About six months ago, a fellow I'd never met or spoken to offered to lend me a sail to test an idea I had been struggling with. There was not a request on when to give it back; in fact it was open ended. After dealing day in and day out with the squids of our occupation, the offer seemed too nice. Something worth $200-$500? Just drive over to my house and you can have it. Really? This is Los Angeles!

Well, in a race this weekend we all got to talking about boats we had owned and one of the guys had the same as mine. We started to compare notes, forums, parts suppliers etc.

It turns out he was the guy who made the offer. I was ashamed at how genuine and nice a guy he was, and what I had suspected.

I only bring this up as a probability point…no matter how pissed you can get at humanity, the percentage of genuinely nice folks is always above zero. I'd forgotten that lesson.

You guys often remind me of that lesson too!



One of the interesting fallacies that one comes across in markets is the part whole fallacy. If you correlate the whole with a part of the whole + a random number, you come up with amazingly high numbers. For example, the first quarter change in a year or an earnings is correlated about 45% with the whole year change by randomness assuming each quarter has the same variation and there is no correlation between the first quarter and the last 3 quarters. An exact formula is given in Biometry (page 573 on google) by Robert Sokal (no relation to the man framed by his boss). In any case, the relation between Jan and the whole year is mainly a part whole correlation, although it has ceased working in the last 10 years and is in the graveyard except for the oldest seasonarians. However, if the correlation between the first month and the last 11 months is positive, then by a modification of the formula the correlation between the first week and the next 3 weeks must be negative.

Ralph Vince writes: 


Doesn't this get to the heart of the matter, that being that good minds get sidetracked into boobey-traps all over the place in our endeavor here?

On a planet where camouflage is the dress code du jour, where predation and it's avoidance often depend on deception, we end up — as cognitive beings, reflexively and relentlessly seeking patterns and relationships — looking for things in prices that ultimately deceive us (or at best, work until they do not, a cruel form of deception, longer-term).

Markets, as man-made constructions, are particularly adept it this. I am again reminded of Nabokov's Lolita, one of the greatest pieces of English literature in this opinion of this amateur critic (second only to his Speak, Memory), as one that most will not consider because it alludes to sex with an adolescent — the common disdain for that, a perverse ruse in itself keeping many from ever enjoying the novel.

In similar fashion, I think one must must must must MUST assume randomness, however unpalatable the idea of trading randomly-generated data may be. In fact, as a strategy, rather, as concern or description of the underlying character of what we are working with, one must craft their strategy under the assumption that randomness belies the data flow, yet, should it go into periods where the data becomes non-random-like, to have that accrue further to our benefit.

It's more difficult to do than it seems at first glance, but, from a personal standpoint, it has been the most beneficial realization in my trading life.



 I was reading about entrepreneur Bill Liao to keep myself entertained on New Years. He is very impressive and went from high school dropout to wealthy magnate.

It doesn't take long, when researching him, to come across a handful of Irish articles trying to brand him a cultist for his participation in the Landmark seminars. Landmark is quirky, but just a self-motivational system. And clearly quite an effective one for Bill.

I find it interesting that such approaches to life are easily branded as "cults" or otherwise disparaged. Similar labels are found for Transcendental Meditation and Tony Robbins' work. Robbins' fire-walk seminar recently had a few participants out of thousands receive a burn (and even this may have been exaggerated) - much schadenfreude ensued.

However, if you study impressive men, you will so often find they had some toolset like this to help them during inevitable tough times: Bill Clinton and Paul Tudor Jones both are big Tony Robbins fans; Ray Dalio a Transcendental fan; Bill Liao a Landmark graduate; Warren Buffett a convert of Dale Carnegie.

The classic instance is Clinton calling Marianne Williamson, Tony Robbins and Stephen Covey to Camp David for a supercharge. Say what you like about Clinton, but you can't much question the resilience or achievement.

This is a common response to anyone who follows a belief set outside of the mainstream. I wonder why instinct is to be disparaging? Perhaps the strong leveling instinct in humans? Or the risk that wide adoption might crowd out the more stationary outlook of mainstream belief systems?

Tangentially, witness Mark Zuckerberg, pre-IPO, being subject to leaks of IMs he made as a youngster, quipping about the safety of subscribers data. Or any well known investor going through a tough time; suddenly all their prior victories are forgotten.

Are jealousy and self-motivation two sides of the same coin. Thus the evolutionary benefit of the latter necessitates the former?



 When I grew up, I dreamed of emigrating to the US. As the world has changed more rapidly than one could imagine, I altered my plans. Some 16 months ago I relocated to the ex-Soviet Baltic state of Latvia. Now I am happy to see NY Times write about its economic recovery.

"Used to Hardship, Latvia accepts Austerity and its Pain Eases"

"Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union's worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia's economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union"

"Britain, Portugal, Italy and also Latvia's neighbor Lithuania, meanwhile, have bubbled with discontent over austerity. But in Latvia, where the government laid off a third of its civil servants, slashed wages for the rest and sharply reduced support for hospitals, people mostly accepted the bitter medicine. Prime Minister Valdis Dombrovskis, who presided over the austerity, was re-elected, not thrown out of office, as many of his counterparts elsewhere have been."

"Also largely absent are the leftist political forces that have opposed austerity elsewhere in Europe, or the rigid labor laws that protect job security and wage levels. In the second half of 2010, after less than 18 months of painful austerity, Latvia's economy began to grow again."

Also worth mentioning is that in one year builders' salaries have increased by 17%, though from a low initial level.

The state runs with a healthy surplus.

The government is cutting the tax rates.



 When will the drought vibe hit the grains if things continue weatherwise? Drought is a slow creep type of price impetus that suddenly pounces.

Ever since Jeff Watson asked about wheat and what to do with it a few months ago I have been poking around the river scraping bottom articles. With everything else up yesterday, I have to turn a head towards the left behinds and consider them as worthy orphans.

"Mississippi River Nears Historic Lows, Shipping at Risk"

Scott Brooks writes: 

One thing to watch for in a drought is the amount of snow that falls. Snow is very important in agricultural land. A good snow cover will slowly melt and drip into the soil, thus giving the soil water but in a way that allows it to soak deep into the ground without too much run off or evaporation (i.e. the snow cover keeps the water from evaporating thus allowing it to soak deeply into the soil.

Soaking the soil deeply followed by consistent and gentle spring rains helps end a drought.

The problem that these drought stricken area's have is that they are not only dry on the surface and in the rivers, but also deep within in the soil. And since water goes down (or evaporates up), we have to fill up the watershed from the bottom up, thus the need for snow. Otherwise, even gentle consistent spring rain won't help as much as you'd think…..as most of the water is going to go deep into the soil and not be of use to the plants.

Think about it this way. You have a cup that is 12 inches deep, but you only have a straw that is 8 inches long. You gotta fill the cup up 4 inches just to get a taste of the water. And to drink from it on a long term and consistently (i.e. throughout the whole growing season) you need the base amount of water to be closer to 5 inches and then have consistent rains to keep the water at a level where the roots can reach it.

a commenter replies: 

10 inches of snow is equal to 1" of rain. This article speaks to what you say: "Drought in 2013? Major Pains Ahead".




 The opening of a Berlin airport has been delayed a 4th time, till at least 2014.

This captures an interesting phenomenon: How can one make large greenfield projects attractive to commercial capital? It seems to go one of two ways: Cost Plus / guaranteed minimum return: a free bonanza. Or equity discount rates that turn out to be totally wrong followed by massive overruns and investors taking a huge bath.

If you go back and look at Eurotunnel, Eurodisney, etc. all ran their costs over by a multiple. One can ask if Buffett is being chintzy about the Wright Brothers, but what is the right (Wright?) alternative?

The other huge problem with Private Finance Initiatives is the major agency issue of negotiating contracts to a deadline: public vs. private players. This one is never mentioned, however. Maybe because it is insoluble.



How many market lessons can you find in this article? Fantastic article.

"A Pickpocket's Tale: The Spectacular Thefts of Apollo Robbins " by Adam Green

Michael Ott adds: 

Here's a link to the video that accompanies the piece.  You can see him in action and it's fantastic.



A yield of 3.1 % on the 30 year gov bonds corresponds to what kind of mortgage rate? And what kind of impact on housing?

Michael Cohn writes: 

I am not near terminals, but I would guess that the 30 year rate is set by the marketing department over the appropriate tsy, but every mortgage analysis I see that includes the TBA product uses 2-10 year swaps and treasuries to hedge the production. The option adjusted simulations give mtg durations way far below the stated maturity. Of course this duration extends as rates generally rise–the dreaded Negative convexity….

Victor Niederhoffer adds:

If the 10 year rate is 2% and the 30 year rate is 3.1%, then the average 10 year rate starting in 10 years must be (93 - 20) /20 = 3.6%. Looks like a bust in housing somewhere the far side of the world of 10 years.

Anatoly Veltman comments:

I'm wondering whether this can even be arbitraged away. It's always surprising to me how commodity deliveries are NOT, despite very obvious math, only a month or two, or a year forward.

I'm floored by the chair's ability (or eagerness) to predict any economic development 10 years hence. We've been on unprecedented path ever since ZIRP ensued. Both the political and economic moves should be viewed as completely unpredictable, if not random, that far out.

Richard Owen comments:

Is the perpetual commodities gap down to commercials being a 600lb gorilla? Particularly sovereign-backed commercials? They will smash open a small arb by being price insensitive, thus making the basis too painful to hold as it widens? Or rather, the basis is too uninteresting to hold if you do it in a size that will leave you safe upon arrival of gorillas?

Is the Chair's maths based on a risk-neutral expectation? ie., the current superlong end of the curve is a good estimate of the future long end of the curve? Which often does not work out that way? [I was trying to figure the formula you are using at the end - which one is it?]

Some of the back and forth over past days has had me thinking about science vs. mumbo. Science matters. But if at least one has a grounding in science, does that justify occasional "mumbo"? ie., We can allow the Chair his gut?

Kasparov knew his science cold: his brilliance was knowing when that grounding told him something in his gut, out of his range of proof, and to act upon it: Quoth Gary:

"Oh it [intuiton] does exist! It's the most valuable quality of a human being in my view. […] You have to learn how to trust your intuition. My view is we severely undermine the importance of intuition, because intuition involves taking too much risk. Whether we like it or not we live in a risk averse culture and intuitive decisions very often cannot be explained in the terms that should be required by corporate culture or by other family members. By adding this core of intuition to the decision making process, we can dramatically improve the results."

Or does Taleb apply, and we should all get back into bed, beneath the covers, as anything more impressive achieved during the day is luck?




You know what I love? A huge American breakfast!

No one around 'ere knows Steak and Shake does breakfast. I dunno about Belpre, but around these parts any Saturday morning the breakfast joints are lined out the door. Not that IHOP is great, but they always have a wait. Saturday AM, I take my young girls to breakfast. 1/3rd of the time Daddy's choice is Steak and Shake…I can get in and out of there quick. I am sure many here think of breakfast in terms of quickness on work days. Yet on Saturday AM's–Sunday noon just when Church lets out are for lunch and church picnics–Saturday AM is for breakfast!

P.S then go exercise for 10 miles to burn off the 1,000 cals.



 I was looking at the book The Physics of Wall Street on Amazon.

It couldn't have a better recommendation:

"Beautifully written, with clarity, understanding, and a broad view that is rare in these domains. Even those of us who are unconvinced physics has played an important role in finance will be carried along and learn from this engaging book."

—Stephen M. Stigler, Ernest DeWitt Burton Distinguished Service Professor of Statistics, University of Chicago

Here's another book on unusual physics applications: The Physics of Superheroes

Seemed somehow related. An enjoyable read, though it might have been better if Taleb, Sornette, Mandelbrot, Gross and Greenspan had been included.



Wow. here is every NFL play for the past 10 years in CSV format.



Junto is tonight at 7 pm at The Mechanics Institute (20 West 44th Street, New York, NY 10036).

Don Boudreaux will be talking today about common fads and fallacies in popular media about economics.

All are welcome.



 1. All stock timing systems suffer from their inability to get back long after selling.

2. It is impossible to overcome the positive drift of 10% a year with timing systems.

3. Investing in an index fund enables one to capture the drift without being forced out by emotional reasons and news.

4. The moves in just two days, e.g from 1384 to 1458 in two days can be very violent and account for the major portion of profits in a year.

5. The big 27 point decline on 12 24 provided a cathartic unleashing of all weak longs from the market.

6. Any flexions or strong longs who were able to take the opposite side of that trade, i.e. by buying at 1384 would have been well situated especially if their customers were forced to liquidate due to margin or they knew of margin liquidations.

7. There were thousands of articles talking about the big market decline that was inevitable if we fell off the fiscal cliff but hardly a one that talked about the market rise that would occur if we didn't fall off it.

8. The stock market vigilantes forced the politicians to agree on a deal, and at the highest levels that was given as a reason for the necessity of agreeing on a deal.

9. The fixed income market moved to near a 1 year low as the stock market moved to a 1 year high

10. The Mississippi bubble wherein the French Government bought in all its outstanding debt before those of bent posture used their back to allow buying of stocks at the peak seems more analogous to the present situation then the scholarly Chair's studies of what happened during the Depression. What other biggies did I miss.

11. The time to buy stocks is when fear is at the greatest. 

12. The best thing for the investor to read is Dimson, Marsh and Staunton's The Triumph of the Optimists and Fisher and Lorie on returns from buying stocks with different holding periods. But don't be put off by the relatively pessimistic conclusions of the former paper as that is de rigeur for the zeitgeist of Europe.

13. The big up moves both absolute and relative in all other stock markets like Japan and Germany well before the US carried ours along by gravitational force and were predictive. 

Anatoly Veltman writes: 

The Chair's summary is correct indeed and is greatly appreciated. I rush to add that it was the preceding decline of an even greater magnitude than 70 points, that caused the 70 points to be regained in the last two sessions. After all said and done, the stock values will remain roughly the same - as if there was no event on the Hill. And that may qualify as a pointer number 12.

One contention I have is that all of this is not really related to drift. I happen to be edgy not to over-hype the drift as stocks approach record levels. I will not say that any record will stand an eternity; however, I was thinking more positively about the drift, when market was carving out its 2008 and 2009 lows, and C was briefly a penny stock.



 This was written at the start of a memorable bull market, by the savviest commentator, to an insider: John Steinbeck to Adlai Stephenson. Found on the great blog Letters of Note:


Mainly, Adlai, I am troubled by the cynical immorality of my country. I do not think it can survive on this basis and unless some kind of catastrophe strikes us, we are lost. But by our very attitudes we are drawing catastrophe to ourselves. What we have beaten in nature, we cannot conquer in ourselves.

Someone has to reinspect our system and that soon. We can't expect to raise our children to be good and honorable men when the city, the state, the government, the corporations all offer higher rewards for chicanery and deceit than probity and truth. On all levels it is rigged, Adlai. Maybe nothing can be done about it, but I am stupid enough and naively hopeful enough to want to try. How about you?


New York 1959 Guy Fawkes Day

Dear Adlai,

 Back from Camelot, and, reading the papers, not at all sure it was wise. Two first impressions. First, a creeping, all pervading nerve-gas of immorality which starts in the nursery and does not stop before it reaches the highest offices both corporate and governmental. Two, a nervous restlessness, a hunger, a thirst, a yearning for something unknown—perhaps morality. Then there's the violence, cruelty and hypocrisy symptomatic of a people which has too much, and last, the surly ill-temper which only shows up in human when they are frightened.

Adlai, do you remember two kinds of Christmases? There is one kind in a house where there is little and a present represents not only love but sacrifice. The one single package is opened with a kind of slow wonder, almost reverence. Once I gave my youngest boy, who loves all living things, a dwarf, peach-faced parrot for Christmas. He removed the paper and then retreated a little shyly and looked at the little bird for a long time. And finally he said in a whisper, "Now who would have ever thought that I would have a peach-faced parrot?"

Then there is the other kind of Christmas with present piled high, the gifts of guilty parents as bribes because they have nothing else to give. The wrappings are ripped off and the presents thrown down and at the end the child says—"Is that all?" Well, it seems to me that America now is like that second kind of Christmas. Having too many THINGS they spend their hours and money on the couch searching for a soul. A strange species we are. We can stand anything God and nature can throw at us save only plenty. If I wanted to destroy a nation, I would give it too much and would have it on its knees, miserable, greedy and sick. And then I think of our "Daily" in Somerset, who served your lunch. She made a teddy bear with her own hands for our grandchild. Made it out of an old bath towel dyed brown and it is beautiful. She said, "Sometimes when I have a bit of rabbit fur, they come out lovelier." Now there is a present. And that obviously male teddy bear is going to be called for all time MIZ Hicks.

When I left Bruton, I checked out with Officer 'Arris, the lone policeman who kept the peace in five villages, unarmed and on a bicycle. He had been very kind to us and I took him a bottle of Bourbon whiskey. But I felt it necessary to say—"It's a touch of Christmas cheer, officer, and you can't consider it a bribe because I don't want anything and I am going away…" He blushed and said, "Thank you, sir, but there was no need." To which I replied—"If there had been, I would not have brought it."

Mainly, Adlai, I am troubled by the cynical immorality of my country. I do not think it can survive on this basis and unless some kind of catastrophe strikes us, we are lost. But by our very attitudes we are drawing catastrophe to ourselves. What we have beaten in nature, we cannot conquer in ourselves.

Someone has to reinspect our system and that soon. We can't expect to raise our children to be good and honorable men when the city, the state, the government, the corporations all offer higher rewards for chicanery and deceit than probity and truth. On all levels it is rigged, Adlai. Maybe nothing can be done about it, but I am stupid enough and naively hopeful enough to want to try. How about you?



Art Cooper adds:

It was Steinbeck's sentiments expressed above which led him to write his last major novel, The Winter of Our Discontent.



 It's 41 days until pitchers and catchers report to the Orioles spring training camp, so in the spirit of preparations for the onset of spring such an event promises, I'm passing along an interesting piece from today's NYTimes.

There have been many cultural contributions to the lore of American baseball. Perhaps none is better known than Abbott and Costello's "Who's on first?" routine. (I Don't Know is on third. Really, he is. Who's on third? No, Who's on first. and so on) One of the lesser known contributions is a poem referenced in the NYTimes article linked above. It includes the immortal line "Tinkers to Evers to Chance", detailing what is among the more well-known double play combinations in baseball. It was not however, the most potent, just the most celebrated. Even so, the Cubs, upon whose team these three played, managed to post the highest W-L record in modern baseball history, perhaps scant comfort for those Cubs fans who had to endure a seemingly endless series of seasons in which the Cubs contributed little to baseball other than wins for other teams, Ferguson Jenkins, and a few other others like Ernie Banks and Ryne Sandburg. (As a long-time Orioles' fan, I can sympathize with the Cubs' fans: the Os wandered in the "lost games" desert for almost twenty years before showing some life last season. Hopefully, Mr. Angelos continues to stay away from the front office this year like he did last year.) Whether the Cubs will ever again field a combination in the middle that rivals Tinker, Evers, and Chance remains to be seen. It seems unlikely that such a combination will be able to displace that of Tinker to Evers to Chance in the lore of baseball, and in the cultural history of the United States.

42 days until "Play Ball!" is again heard and all becomes right with the world again. (We'll give the boys of summer a day to get the protective gear fitted.)



 Recent conversations with a close friend have had me thinking about "The Basics". How, and to what extent, does an understanding and focus on the basics of a particular subject contribute to the building of a strong foundation from which to expand outward in a stable and progressive manner? While they may never be mastered, an understanding of what the basics are seems to apply to a myriad areas of life. The foundation in the basics in various areas of life's pursuits would seem to provide the base from which to advance. Conversely, lacking such a core likely limits movement forward relative to one might be able to go.

In sport we might learn the basics on the very first day of study. In traditional Japanese karate the student often begins with the making of a fist and the punch. The simple mechanics are improved upon and practiced in every training session from white belt to 10th dan black belt. In fencing experts say that basic footwork is 65% of the game. In mountaineering one is told of the importance of keeping one foot moving after the other and not stopping too often to rest.

In nature the basics of survival and expansion can be seen in both plants and animals. Sequoia Giganteum, the giant sequoia, manages to live several thousand year through thick bark that protects against fires and pests amongst other factors.

In relationships the basics of simple greetings and compliments by name and eye contact seem to go far.

In games like chess the building of a solid foundation and harmony amongst pieces goes a lot further than memorizing openings.

In civilizations there are often core values that act as a bulwark against more nefarious forces. The founding fathers of the United States had some ideas on this topic. What might be learned about current events and political forces globally and those of say Rome and the British Empire?

In the daily routine the art of breathing properly, stretching, posture, exercise, hygiene, and diet.

In trading the basics might include first the art of survival. Important on the list would also be the daily routine, the size and number of winners versus losers, the ability to evolve with markets yet maintain core principles without style drift amongst many others.

In Japan there is a saying " Ichi Nichi Issho" or "One Day One Lifetime". At the core one might view this as a starting point in the basic building blocks and unfolding of one's life.

Many books could be written about all this topic and this is meant to be only a short list and some thoughts. What other areas and basics might be considered in various endeavors? Who can we look to as examples of success built upon the mastery of the basics? What books or learning tools might be applied and studied?

Anatoly Veltman writes:

There will be a lot covered in this topic, but I'll touch on Technical Analysis. Specifically, on what's commonly referred to as "a basing pattern". In 2012, this pattern played out to its best in USD/JPY. The cross has languished in 76-78 yen area just long enough to lull everyone. The technical foundation for a blistering rally thus had been built. Technical Analysts refer to this set-up as "things that stay horizontal the longest — go vertical the fastest"

Jim Sogi comments:

The myth is the "basics" are easy. The 10th Dan karate master still studies the basic punch because there is so much depth to it, the timing, the placement, the purpose. Musashi Miyamoto after a lifetime of study of the sword still pondered the basic sword cut and the purpose of it. Basic diet sounds simple, but eating and cooking properly with nice taste and presentation everyday is very very hard. Breathing sounds easy and everyone does it, but to breath with the right mindset can be the key to nirvana. Talking sounds easy and everyone does it, but to say the right things…well you get my point. Real mastery of the basics, especially at the highest levels, is difficult.



A quick check of the last 61 annual changes in the S&P 500 index shows no significant difference in net changes between years immediately following changes of 20% or more and other years. The average net change one year after a gain of 20% or more was 11%, slightly higher than the average net change of 8%, but with t=0.79, so consistent with randomness.

Sorted by previous year change:

Date        Close   Change  Previous year change
12/30/1955   45.48     26%     45%
12/31/1959   59.89      8%     38%
12/31/1996  740.74     20%     34%
12/31/1976  107.46     19%     32%
12/31/1998 1229.23     27%     31%
12/31/1990  330.22     -7%     27%
12/31/1999 1469.25     20%     27%
12/31/1956   46.67      3%     26%
12/31/2004 1211.92      9%     26%
12/31/1986  242.17     15%     26%
12/31/1992  435.71      4%     26%
12/31/1981  122.55    -10%     26%
12/31/2010 1257.64     13%     23%
12/31/1962   63.10    -12%     23%
12/31/1997  970.43     31%     20%
12/31/1968  103.86      8%     20%

12/29/2000 1320.28    -10%   19.5%
12/30/1977   95.10    -12%     19%
12/31/1964   84.75     13%     19%
12/31/1984  167.24      1%     17%
12/31/1952   26.57     12%     16%
12/31/1973   97.55    -17%     16%
12/30/1983  164.93     17%     15%
12/31/1987  247.09      2%     15%
12/31/2007 1468.36      4%     14%
12/31/1965   92.43      9%     13%
12/30/2011 1257.60      0%     13%
12/29/1989   353.4     27%     12%
12/31/1980  135.76     26%     12%
12/31/1953   24.81     -7%     12%
12/29/1972  118.05     16%     11%
12/30/1966   80.33    -13%      9%
12/30/2005 1248.29      3%      9%
12/30/1960   58.11     -3%      8%
12/31/1969   92.06    -11%      8%
12/30/1994  459.27     -2%      7%
12/31/1993  466.45      7%      4%
12/31/2008  903.25    -38%      4%
12/29/2006 1418.30     14%      3%
12/31/1957   39.99    -14%      3%
12/30/1988  277.72     12%      2%
12/31/1985  211.28     26%      1%
12/31/1979  107.94     12%      1%
12/31/1971  102.09     11%      0%
12/31/2012 1426.19     13%      0%
12/29/1995  615.93     34%     -2%
12/29/1961   71.55     23%     -3%
12/31/1991  417.09     26%     -7%
12/31/1954   35.98     45%     -7%
12/31/1982  140.64     15%    -10%
12/31/2001 1148.08    -13%    -10%
12/31/1970   92.15      0%    -11%
12/29/1978   96.11      1%    -12%
12/31/1963   75.02     19%    -12%
12/31/2002  879.82    -23%    -13%
12/29/1967   96.47     20%    -13%
12/31/1958   55.21     38%    -14%
12/31/1974   68.56    -30%    -17%
12/31/2003 1111.92     26%    -23%
12/31/1975   90.19     32%    -30%
12/31/2009 1115.10     23%    -38%
Of the 58 years from 1951 to 2008, 49 were followed by at least one down year within the next four. The only exceptions were 1981-1985, 1994-1995, and 2002-2003 (and each of these periods included at least one year with a 20% or greater gain).



Looking at SPY reversal patterns (2007-present): If two consecutive trading days were each up >1%, and they were preceded by a drop of at least 1%, the next 2-day return was negative (NS):

One-Sample T: DUUXX

Test of mu = 0 vs not = 0

Variable   N   Mean     StDev   SE Mean  95% CI             T
DUUXX   18  -0.0097    0.025  0.0058  (-0.022, 0.002)  -1.64

Variable      P
DUUXX   0.119



The difficulty of getting back in once you have sold in stocks is underlined vis a vis the buy and hold strategy, as well as the fate of short selling, as well as timing— by the fast 50 point move in stocks today.

Gary Rogan writes: 

It seems like generally speaking one should either trade, as in being in and out "often" or buy and hold. Buying and holding except for periodically being out or short seems to be what Victor is addressing, and I have always been suspicious of "market timing". All it takes is getting it wrong once, and you are in a hole that's expanding for a long time.

I'm still curious how Victor was so sure there would be a deal.

Anonymous writes: 

What was the effective date of the STOCK Act to ban congressional insider trading, I wonder. As a staffer, one could have slapped the emini around harder the Khan brothers squash ball.

Victor Niederhoffer replies: 

Let us hope that the profits from such activity were sufficient to assuage any such desires for a few days.

Russ Herrold writes:

The dance is a re-run and in prior seasons, the cliff is avoided. Sitcom writers can re-cycle plots endlessly.

Kim Zussman writes: 

It's the binary conundrum of markets:

Buy the rumor / sell the news (or buy the news)
Buy and hold (or sell and sit)
You can't time the market (but some can)
Stocks beat bonds (except for the last decade)
Printing presses lead to disaster (which may not come in our lifetime)

The President of the Old Speculator's Club writes in:

I heard a Congressman speak recently and have to admit it was an enlightening experience. Traditionally, members display a certain amount of restraint when speaking of colleagues with whom they find grievous fault. In a refreshing departure from good manners, this gentleman took the gloves off and bluntly stated that a goodly number of his fellow representatives are less than bright. The word "clown" came up several times and "stupid" might have been slipped in.

Although he artfully avoided specifying individuals or party, I couldn't help but believe that he, like many in the "beltway", had come to the same conclusion: the arrival of the Tea Party contingent has been nothing short of a national disaster.

Unsurprisingly, the congressman's public and scathing view is shared by the current establishment elite. (It's dangerous to out there and speak your mind if what you say is out of step with the conventional wisdom.) His case is provided with added cover by a host of recently published and similarly themed books ("It's Even Worse Than It Looks", Mann, "Do Not Ask What Good We Do", Draper, "Beyond Outrage", Reich, and "The Party is Over", Lofgren).

However, the "fiscal cliff" isn't a maiden making her debut. We've had two relatively recent encounters with her; so her charms, though formidable, are familiar. Her appearances in '91 and '95 were just as awesome and, as expected, so compelling that one of the parties bit into the proffered apple. Unfortunately, the fruit, which is bitter and often fatal, is the produce of the tree of Folly. On this most recent visit, though, she is confronted by a group so naive and simple that her blandishments have gone unrequited.

In any event, it's apparent that the respect (whether real or faked) House members used to show each other, at least in public, has been thrown over for a newer, more aggressive, in-your-face approach. Long gone are the clever and informed debates which provided a rich mix of facts, history, and truth. It seems important to figure out why this has developed and if, in fact, a functioning government is still possible.

If one studies what the House has been in the past and what it has evolved into, it's impossible to overlook that this body has lost, or given up, much of it's power and authority. The growth of the executive branch (the Imperial Presidency) is one factor. Back in '96 the congress and the president worked long and hard to create the first welfare reform package. Contrary to forecast of terrible consequences, the new programs worked well.

Yet, in one day, an Executive Order by the current president re-established the old, failed programs. Another assumed power has been the declaration of war, and the most recent threat: unilaterally raising the ceiling on the debt.

While the Executive Order has been increasingly utilized to usurp powers constitutionally granted to the House (and Senate), the greatest loss of power has been though Congress' voluntary abandonment of authority to "regulatory agencies."

Figuring that some issues were just to tough, complex, or time consuming, the country has had foisted upon itself the EPA, FDA, TSA, USDA (with 20 sub-agencies within it), the Dept.of Commerce (with 17 sub-agencies), Dept. of Defense (with 32 sub-agencies) and the list goes on and on. Each agency is staffed by unelected individuals, many with their own agendas, who dictate new regulations that possess the force of law. It's understandable that so much work has to be delegated, but to give it to agencies that are unanswerable to the body that created them is inexcusable.

Then, of course, there is "party discipline." Sam Rayburn of Texas, Speaker of the House for many, many years, gave each incoming freshman representative of his party one piece of advice: "If you want to get along, go along." And they did. Those that didn't faced many difficulties: in committee assignments, in getting their legislation to the floor, in receiving party re-election funds, and they'd be high on the list of targets should redistricting become an issue.

Unfortunately, this approach worked, and worked well. As a result, many constituents found that the views they wished their representatives to promote in D.C., took a back seat to the views favored by the party leaders - many of them from different parts of the country with substantially different interests and goals. The "house of the people" became a house held hostage. Matters reached a new low in representative government when the other party adopted the same process.

Then 2080 rolled around and enough citizens, aggravated at the apparent unresponsiveness of their representatives, threw them out and ushered in the Tea Party. A delicate balance has been disturbed and the Dysfunctional Couple, used to newcomers adjusting to them, failed to realize that these clowns - these yahoos, actually believed in what they'd declared. Whether they win or lose, prevail or fail, their chances for another re-election are small. But for a brief period they have served as reminders that doing the people's business is serious business and that a promise made is a debt unpaid.

For a brief period this collection of vagabonds has added a dose of virility to a confederacy of eunuchs.

As to the President's actions in the recent negotiations, he did nothing, offered nothing…he arrogantly summoned everyone back to D.C. Most came back assuming he had a proposition - he didn't - even CNBC's John Harwood was a little taken aback at the presumptuous gesture. Some time back I suggested I was all for giving this guy everything he asked for - and then letting him perform as he has suggested he would. He has received almost everything; now it's time to lead. This from a guy who, in his short term in the Illinois senate, voted "present" on over half the bills that went through. He is structurally averse to taking a position - preferring, instead, to demonize his opponents.

So, first time at bat, he (and his faithful followers), are hand-wringing over what roadblocks the GOP will/might place before a debt ceiling deadline is reached. It's time he quit talking and started doing.



 The mid to late 1990s saw the development of the Icelandic housing bond market. Some very good early investment opportunities in these bonds and the currency. Brokerage firms then became more heavily involved and wrote numerous research reports touting the benefits of the bonds. The Icelandic Kroner became one of the darlings of the emerging market carry currencies. Icelandic banks become more heavily involved, balance sheets exploded, the local population benefited, etc. Macro-economic imbalances continued to grow through the millennium and the end result was becoming all too familiar. Like many trades, though, the imbalances persisted for much longer than expected. In all too familiar fashion markets also unraveled much faster than anticipated.

Secondly, when a butterfly flapped its wings in Iceland reverberations occurred on a global scale given the increasing interrelatedness of markets.

I would encourage a visit to Iceland. It is a short trip from the US east coast and the UK. I spent some time there prior to 2008 and enjoyed the hospitality of a local surf crew.



 The world's greatest sporting gimmick ever is fast approaching as well: The World Baseball Classic.

I found it surprisingly enjoyable last time around, but this year, I'm very curious to see what will happen with Cuba and one of its best players. There is a wealth of talent rising there, evident by the success of Aroldis Chapman and Yeonis Cespedes. As Cuba continues to be closed off, scouts are chirping over a first baseman who could be one of the best power hitters on the planet. He'll be showcasing over in Japan on March 2.

His name is Jose Abreu, and here are his staggering numbers from the 2010-2011 season…

.453 batting average; .597 on-base percentage; .986 slugging percentage. 33 homers and 93 runs batted in 212 at-bats. Granted, playing in Cuba is similar to High-A ball in Carolina, but the numbers are still remarkable and there is a lot of variance in the amount of talent on his team Serie Nacional - a team whose games MLB scouts can't even get close to. Given that he's 25, it appears it's unlikely he'd ever make the MLB jump… but Cespedes jumped at 26.

Last season, Abreu hit .394 with a league record 35 home runs (90 game season). He's appears to have more power than Yeonis Cespedes, who was team Cuba's centerfielder in 2009… but he doesn't seem to run as well (Abreu has Gus Triandos speed). He also leads the league in intentional walks and finds himself hit by pitches very often (both numbers above 20-25 for the season).

I'll be interesting to see if he can outpace Cespedes, who hit .458/.480/1.000 with a double, 3 triples, 2 home runs, five runs and five RBI in six games in the tournament in 2009. Cespedes then defected in 2011, and now plays with the A's with a very impressive rookie campaign this year.

An interview with Oakland scouts I read last year said they were doing everything they could to scout Abreu. So I have to ask why Cuba would even take the chance by putting this level of talent on the roster… The country lost two players in 2009. It's likely that more will defect when Cuba finds itself on US soil for the final rounds.

But then again, it's Cuba, and he could actually be 35 for all we know. Livan Hernandez is supposedly two months younger than Derek Jeter, but he looks old enough to be Jeter's uncle. His half-brother Orlando "El Duque" Hernandez was actually four years older than he said he was. So, there's not a whole lot of confidence in the numbers.

The two other players I look forward to seeing in the WBC are:

Abreu's teammate, Alfredo Despaigne, who is a five-tool star at 26, and frequently finds himself at the top of the Cuban league's home run leaders.

Japan's Masahiro Tanaka. In 2011, Tanaka went 19-5 with a 1.27 ERA, 241 strikeouts, 171 hits and only 27 walks in 226.1 innings pitched. He's in the Dice-K, Yu Darvish mold and could be the next big signing from Japan in the coming years.

It's always exciting to see talent in places where we never really have the chance. Here's hoping we can get a chance to see hidden gems to liven up Bud Selig's international experiment that has a lot of the feel of watching minor league ball until the finals.



One finds it absurd that the lawmakers are "risking a stinging rebuke from financial markets" unless they agree to the increased taxes on the upper class without any spending cuts. Thus, a somewhat unusual feedback circuit is built with the financial markets trying to influence the politics an the politicians anticipating the financial moves —- all without gravamen of testing.

Anatoly Veltman writes:

Doesn't it point to the charade that stocks have become? Are you still a confident investor?

Jim Lackey writes:

One would think the opposite. Commodity ETF's and the ilk are the sham. Individual stocks, low vig, no cost of carry, hold forever. It's the best deal outside of private where one must be on the job 24/7 or have a trusted one.

Vince Fulco adds:

Except for the self dealing of mgmts providing themselves with bonuses regardless of actual corporate perf, making operations appear horrible just before an LBO, padding staff & BOD with friends and family, diluting outside shareholders with every kind of option available.




 In 1985, Jerry Perenchio bought Loews Theaters from the Tisch family for $160m and flipped it in 12 months for ~2x. Given the Tisch brothers 'made' this asset and knew the sector, does anyone know what happened? Was it something to do with the anti-trust of movie companies not owning their theaters being lifted — something JP had seen but the Tisch's not?

Also, here are Perenchio's ten "rules of the road", which are a good read, particularly as there's twenty of them:

1. Stay clear of the press. No interviews, no panels, no speeches, no comments. Stay out of the spotlight — it fades your suit.
2. No nepotism, no hiring of friends.
3. Never rehire anyone.
4. Hire people smarter and better than you. Delegate responsibilities to
them. Doing so will make your job easier.
5. You've got to know your territory. Cold!
6. Do your homework. Be prepared.
7. Teamwork.
8. Take options, never give them.
9. Rely on your instincts and common sense. If you go against them you
generally regret it.
10. No surprises. We don't give them. We don't want to get them.
11. Never lose sight of what business you're in. Stick to your "last."
12. When you suit up each day it's to play in Yankee Stadium or Dodger
Stadium. Think big. 13. If you have a problem, don't delay. Face up to it immediately and solve it.
14. Loose lips sink ships!
15. Supreme self-confidence, never arrogance.
16. A true leader is accessible — no job too big, no job too small.
17. Communication is our business. You can reach any of your associates
anytime, anywhere, anyplace.
18. If you make a mistake, admit it. Just don't make too many.
19. Don't be a "customer's person" (man or woman).
20. Always, always take the high road. Be tough but fair and never lose
your sense of humor.



 So another year has come to a close. It has been a mildly eventful year with the move to a more southerly location. We had the great truck caper of 2012 and all the attendant adventure of having everything you own stolen along with your moving fan. That resolved with the miraculous recovery by the praiseworthy North Carolina State Police and is now just another story to tell. As a side note I love the State of South Carolina. The low country area is one of the prettiest in the country but I hope I never have to drive it end to end three times in one day in a car with no air conditioning in July ever again. We have pretty much settled in here in Windermere with the gators and Mickey Mouse. As I write this it is approaching 70 degrees at mid-morning and I have little to complain about.

Moving here was the latest stage in a transition phase of my life that began at about three years ago. The years between 38 and 48 were a high speed romp through life with fast boats, horse tracks, Rush Street reviling, Manhattan misadventures and just a scotch fueled extravaganza. There are a lot of memories in there that I would not trade for anything and friendships I will have for the rest of my life but after a decade of it I was starting to lose a step. More Saturdays found me on the couch with a ball game and a cocktail than in the dock bars or hanging onto the side rails of Tic Tacs boat as he once again misjudged a wake. Like an aging fighter I could still go when the occasion called for it but it hurt more the day after.

Then I met Erin and the process moved along at a rapid clip. It is hard to justify going out when the person you most want to be with is at home. There is still plenty of adventuring and excitement but it is of a more personal nature. She is my best friend and partner and hanging out with her is my favorite activity of all. The move to Orlando has seen us settle into a pattern of life that is slower but even more rewarding on so many levels.

I do not want anyone to get the idea that I have grown up or anything silly like that. I have not gotten religion or fallen down the twelve steps. I may not have the Grouse distillery working a third shift anymore but there are several vineyards that have no doubt seen an uptick in their bottom line. We have sniffed out some of the cool funky little bars here in Florida including some dock joints and beach bars. Most evenings can find me on my little lanai with a wineglass and a cigarette in hand enjoying my palm trees. This is merely the latest and best chapter of the adventure I call life. If the kids would move to Florida sometime soon I would have everything a man could want out of life. Good wine, lots of laughter, good music, good books and someone to share it all with. Perfection.

Now onto other items of various levels of importance. It has been a strong sports year. The Orioles made the playoffs for the first time in 15 years. Navy had a winning season and took home the CIC trophy once again and Beat Army once again. The Ravens have some serious choices to make as the offseason looms but for the 5th straight year are in the playoffs and should be able to handle Indy and move to the next round. My newly adopted Florida Gators are in the Sugar Bowl and will be in the top 5 if they snuff Louisville on Tuesday. I still don’t give a shit about the NBA and the hockey strike means pretty much nothing to me. All in all a good year.

Baseball has had an interesting off season so far. As if life in the AL East is not bad enough the Blue Jays decided to out Yankee the Yankees and made some monster signings. They now have a savage lineup and strong pitching staff. This is going to be on exciting team to watch and a very tough one to beat. The Yankees look old, Boston got a little better with some key signings. Tampa Bay remains a consistently good team with an ignorant and absent fan base. So far Baltimore remains pretty much the same.

Although many are concerned about the lack of moves by the form office it may be the right thing to do. If Nolan Reimold can come back and play like he did before getting hurt we will have an awesome outfield. He hit for average and power and along with Jones and Markakis would form a solid outfield. Machado looks good at third and in addition to being occasionally Brooks like at the bag the kid can it and he is fast. Chris Davis needs to work on his position play but he is a solid bat. If JJ Hardy can get those 30 points back on his batting average we have a solid infield along with Weiters behind the plate. The hole is at second base. Brian Roberts is a mystery at this point and Andino is just adequate and lacks any pop in the bat. If there is any question about B-Rob we need to go get a second baseman with either power or speed to solidify the infield and improve the offense.

The pitching staff looks good to me. If we can bring back the same guys and the younger guys continue to improve the staff will be just fine. Dylan Bundy could break into the bigs full time this year and that would be another welcome young talented arm. I think we can ride this staff into the playoffs again.

We could use one big bat at DH. If we could get a 30+ homerun 100 RBI guy in the middle of the lineup we will be a tough team to face. The problem is that I really do not see anyone in the free agent ranks that looks like a decent fit. We will have to count on Buck to find a way to get some additional pop in the lineup. It’s a tough division and a tough league. On paper it’s the Angels and Blue jays but I like our chances of hanging around until the end of the year and maybe surprising someone.

I suppose I have to tackle politics before moving on and that means it is time for the children and overly sensitive types to leave the room. Dear Government: Please just do your job as defined. Provide a level playing field for commerce, provide for the common defense and leave me the **&* alone. The rest of this stuff is simply not your job. I do not need you to regulate my behavior and provide me with some ridiculous safety net or somehow try to make an unfair world magically fair. Dear ignorant liberal: Please quit trying to have the government solve the words problems. They cannot. Further I do not want your help or advice on living my life, raising my children or handling my financial affairs. I did not sign a social contract and you owe me nothing and I sure as heck do not think I owe you or anyone else one thing as a result of your birth. You take care of you and yours and I will do the same thing. Dear Ignorant intolerant social conservative: really? Shut the **** up. I do not care what you think of my sex life, what I do or do not do with my body or my religious views. Just shut you ignorant backwater mouth and keep your **** to yourself. If you want to sit there and believe all that ignorant stuff about people do so quietly. And quit blaming it on Jesus. If Jesus came back today he would most likely beat the ever loving crap out of your close minded hate filled selves. Above all please quit trying to legislate morality or perhaps best of all just quit voting.

It boils down to this. Quit looking for the government to solve your problems. Take personal responsibility and act as the invisible hand of the market to change society. Practice the golden rule and take care of those you love. Help where you can and don’t hurt if you can help it. Work hard, be thrifty and responsible and quit asking me to bail you out. I don’t care if you are a third generation welfare queen or large bank who made bad investments. You do not have a claim on my money so please just quit buying politicians with money or votes and leave me the heck alone. Please just leave me alone and I promise I will do the same for you. Quit ruining my world and my country in the name of fairness, for the children, to save the financial system or any other bs reason you can come up with.

Now onto markets. First off I have no idea what will happen in the stock market next year. Neither does anyone else. If anyone tells you they know what the stock market is going to do and asks you to invest based on their beliefs, stop, think and then beat the heck out of the charlatan. I know some super smart guys who use higher math and super computers and they can predict the market with a high degree of success. That is for the next few hours or maybe a day or two at most. Beyond that it’s all guessing and mental masturbation. Why so many people waste so much time and energy trying to predict the market direction remains one of the great mysteries of our time.

The truth is that if you look for safe and cheap stocks and buy during down moves you should just fine over time in the stock market. Quit chasing the popular names and focus on businesses that can be purchased at an attractive price. Prices will fluctuate daily but business and asset values more slowly. Read Graham, Whitman and Klarman and then act accordingly.

My list for the end of 2011 has done pretty well this year with an average return above 30%. I’ll take that. That doesn’t include the suggestion to buy small banks which was also a winning strategy for the past year with several takeovers and positive surprises. Lets hope we do as well with the suggestions for 2013.

Going into the year I find I am bullish on energy stocks. I am not oil expert but I see a few things. First to achieve energy independence and get the economy growing the administration is going to have to allow drilling, digging and fracking. They can pay lip service to the premature exploitation of renewables but the truth is we need oil gas and coal. Some doomsday types see oil going to $40. The Saudi oil minister is the most accurate indicator of oil prices I have found and he is pretty comfortable with the current price. I do not see prices going much lower for very long.

There my bullshit macro case for oil, gas and coal. The real reason I like the space is because so many of the stocks are cheap. Arch Coal (ACI) is trading at 60% of tangible book value. Nabors is at 70% of TBV. Swift Energy (SFY) is at 60%. Penn Virginia (PVA) is at 30%. Rowan is at 80%. Tesco (TESO) trades for TBV and has enormous upside in the oil services sector. I like the energy sector because it is cheap.

I like staffing as well. I have done okay with Kelly services so far but its still at 90% of tangible book value. One of my favorite picks in Volt Information Sciences (VISI), a provider of technical staffing to many fortune 500 companies. I do not have time to get into the nuts and bolts of this special situation but it is an uber cheap stock with several catalysts. I don’t like these stocks because I think jobs and the economy will come roaring back. I like them because they are cheap.

I like the banks again this year. I even like some foreign banks again. I have a good profit in Bank of Ireland (IRE) but I still like the stock. Its at 40% of TBV and Wilbur Ross is on the board. The stock goes a lot higher over the next decade. I am looking at Latin American banks, especially Brazil but haven’t pulled any triggers there yet. The closest I have so far are Popular (BPOP) and First Bancorp (FBR) out of Puerto Rico. They are longshots but could easily rise many multiples of the current quote over the next few years.

I am not giving up the little banks I like as I see no need to create competition for myself in these thinly traded gems. If you really want to know make cash offer and I may discuss them with you. Of the larger community and regionals I like KEY, BERK, WFD,AF, CBF,CFNB, ESSA, ASBB, CPF,FFNW, and several others I will mention from time to time during 2013. Watch this space.

A few things to keep in mind. I do not buy up tapes. You improve your odds of success dramatically by buying fear and selling greed. Markets Fluctuate. Make that work for you. I stay small, move slow and scale in and out of stocks most of the time. Insider buying is hugely predictive. I have done a lot of work on this during the past year and found it be a powerful addition to the arsenal. I own stocks for a long time so if you are looking for three month holding you are probably best following someone else.

So 2012 is coming to a close. In 2013 I hope to move ahead with a few projects, increase my money management practice, maybe introduce a newsletter or web based project, and perhaps write a book. On the business side of things my goals are modest as I do not have any wish to be the biggest or the famous but to succeed and prosper enough to have a good life for me and mine.

There are far more important things to focus on in this life. In 2013 I will kiss my wife often and tell her I love her every day. I will try not to give her too many reasons to kill me in my sleep during the year. I will talk to my adult kids often and agitate the living shot out of them until they move to Florida. I will continue to restrict my little ones access to electronic crap and make her do unpleasant stuff like homework and reading books. I will make sure she continues to love art and explores her talents in that area. I will do all the things she hates now so she can have all the things she loves later.

I will read a lot of books. I will drink a lot of wine. I will go to the beach more often. I will laugh a lot. I will make new friends where ever and whenever I can. I will avoid ignorant people. I will look for alligators every day. I will watch a lot of baseball games. I will go to more minor league games (I think there is a team called the Pelicans right down the road and I simply have to become a fan).I will listen to a lot of music. I will spend a lot of time on my lanai. I will find a swamp bar to go with the beach bars we have found. I will take a lot of naps. I will walk the dog a lot. I will do all the things I like with the people I love and together we will ride out any storms that my come our way during the year. I will try to emulate Ben Graham and do something generous, something creative and something foolish every day.

It’s a new year. A new chance to embrace life, to live, to learn, to grow, to love. Let’s make the most of it.



 Premium Rush is a great movie about fixie bicycle delivery riders in NYC delivering a ticket with a bad cop trying to steal it. The greatest part is the "what if" scenarios in choosing his bike route through traffic. Very fun movie, good riding, fast paced, not much violence, exciting, ok plot (mostly a chase).

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