# A Question to be Investigated, from Victor Niederhoffer

June 30, 2013 | 1 Comment

Are there any tendencies for S&P levels classified by 10 point intervals like

1590 - 1599 = 9

1600 - 1610 = 0

1610 - 1620 = 1

1680 - 1690 = 8

to be springing or compressing in the subsequent day, i.e. is it bullish or bearish when the S&P index closes at 1607 the way it did on Friday, perhaps classified by the path preceding day?

# Scalper Algorithms, from Richard Owen

The Mrs and I are at Twickenham to see Rihanna with two no show tickets to sell.

What is the correct algorithm for touts (a.k.a scalpers in the US)?

First ask to buy then use that as a reference for an offer?

What is market standard discount an hour before start?

And what average vig does a tout make?

Here is my fast hand analysis of the market made by ticket touts.

Touts are generally criticised as parasitical, like many financial market participants. However, they provide a valuable service. Since concertgoers know there will be a market made, they are willing to show up for events without tickets. Last minute spare tickets that would otherwise be worthless to punters are therefore saleable.

For a £60 Rihanna ticket at Twickenham as the base of calculation we can note the following:

- Initial instinct in selling a ticket before the event to a tout might be to accept a discount to face value.

- The touts take advantage of this by using anchoring. Different touts rapidly quote heavily reduced prices of £5 or £10. This is accompanied by pained faces and "there's no punters around love" despite a stream of people walking by.

- Conversely, reverse anchoring is recommended: ask the tout "how much to buy a ticket?", then when they quote their price say, "ah, that's good, I have one to sell". And vice versa.

- In fact, the touts carry inventory, some of which they must have purchased before the event. This indicates that they expect to trade out their inventory for par or above, in order to avoid capital losses.

- Since the market is disorderly (although there may be unspoken 'exchange rules'), a punter could in theory join them and front run the next bid.

- All this suggests that tickets should never need to be sold for less than face value, despite this being the typical deal struck by punters looking to sell. This is especially true for ticket pairs.

- The tout's inventory drops to zero value at the time of the event. However, with Twickenham as our example, there are plenty of pubs and clubs nearby, one assumes that the last minute backup plan is to prowl the pubs offering the tickets to couples at knockdown prices. If offered a £60 ticket for £10, the price of a few drinks, one assumes it is easy to trade out of the inventory to locals at the last minute.

- As a finger in the air, one feels a buyer looking for a ticket before the event would pay ~£150 (and this is without factoring in any 'hotness' of the tickets in the weeks before the event thanks to EBay, etc.).

- Thus, for sake of calculation, if you assume (wrongly) for each tout a 50% chance of having to sell each ticket held in a forced sale just before the event at £10 and a 50% chance of getting it bid at £150, it suggests an average liquidation value of £80.

- If tickets are on average bought at ~£20 and sold/liquidated on average for £80, for a £60 ticket that's £60 or 100% roundtrip vig. For pre-purchased inventory, that's £20 roundtrip profit or 33% vig.

- So if 80% of inventory is pre-purchased and 20% bought in the market, that's an average vig of £28 or ~50%.

- For a ~50k seater concert, £3m of ticket inventory exists. So for every basis point traded (5 tickets) that's £300 face value.

- So for each basis point traded (5 tickets) that's £140 profit to the touts.

- It's hard to guess the actual number of basis points traded without empirical data. If you guessed 25bps, that would be £3500 profit to the touts.

- Since taxi drivers double up as the stereotypical tout, and they typically make ~£12/hr, for three hours work (£36), that would suggest an equivalent hourly income for ~100 taxis drivers (ignoring a fee for "return on risk capital").

- The above suggests either (i) very thin trading <<25bps of face value, (ii) my vig estimate is way off, or (iii) this is a way to make supernormal profits by taxi drivers. I eyeballed about 5 touts in total at our gate, so generously say 25 total.

## Jeff Watson writes:

My dad used to scalp tickets when he was a kid. He financed me to scalp the Rolling Stones 1971 concerts, and I had to pay kids to sit in line to get the tics. Typical of my dad, I did all the work and he got his 60%. Still, it was a good learning experience, I made a couple grand (which was a lot of money in 1971), and that money was the seed money for my first excursion into soybeans and commodities in general. Had I never scalped the Stones concert, I would probably be a drone in a lab somewhere with a much different career path. Funny how the most minor things in life can affect the biggest changes. Heck, the most minor things in the market can do the same thing.

## Richard Owen responds:

That reminds me of a story told to me by a friend acquainted with one of London's most successful touts. He is known at "Gary One-Point-Eight". Why? Because he bought a house in Chigwell worth £1.8m with the proceeds.

# Movie Review: Unraveled, from Victor Niederhoffer

June 29, 2013 | 2 Comments

"Unraveled" is a reprehensible showing of the last month of Dreier's house arrest before he was sentenced for 18 years for pleading guilty to a 750 million fraud. He built a firm of 200 lawyers up in 6 years with him as the only equity holder. One of his major clients was Solow whose balance sheet he captured and used to sell debt to unsuspecting hedge funds. At the end with the funds he borrowed from demanding repayment, he took 40 million from an escrow account, and then went to Canada where he impersonated a member of the lender's firm to try to show that the firm truly was borrowing the money.

The movie was supposed to build up sympathy for Dreier. He did it according to him because he was angry with Solow for not caring about him, and he just wanted to be big. He will be unable to see his dog again. He had no friends. He was going through a nasty divorce. And he is sad because he won't be able to see his two kids except in jail for 15 years. We are supposed to feel sympathy for him because when he was in Dubai, he still had 100 million in the bank account and could have stayed there with no extradition treaty, and similarly he could have stayed in Canada had he not been jailed there when they caught on. Left out was the incredible harm he inflicted on the 28 hedge funds he stole from, the cascading problems that a loss of 750 million causes to all those that lost. Yes, hedge funds have investors and they are hurt when they lose money.

In addition to being victimized by Stockholm Syndrome, the director should be censored for being conned by Dreier himself. Dreier got him to pay 50,000 for his house expenses for a month. And carefully staged every interview to make himself look like a sympathetic personage. On the contrary, I've never heard a thief come up with such weak and feeble explanations for his wrongdoing. He had a 15 million yacht, and 3 homes, and gave lavishly to charities he says to maintain his image and get funds. But the money he dissipated had to have much benefit to him.

I disputed that a fraud of this magnitude could be implemented by one person alone but the director answered that the prosecutors didn't feel it worthwhile to prosecute any of the others that might or should have known. One is amazed that the accounting firms of the hedge funds involved or his own fund would not have somehow uncovered the fraud as they usually audit all items on a funds balance sheet. The family supposedly didn't receive any benefits from the fraud, but the power, perks, and spillovers of having your dad or son be able to dissipate that much money would be enormous.

In addition to being victimized by Stockholm Syndrome, the director should be chastised for not showing one iota of the damage that the victims of the crime suffered. Everything in the movie was shown from the standpoint of sympathy for the perp– he will never see his dog again, he will have to say goodbye to his son, who seemed oblivious to the crime, he will not be able to watch the Mets games unless he goes to a minimum security prison, and he may have to sleep in a bunk bed with snoring.

The director seems to have no idea that the punishment is 1000 times less than the crime. There is also no compunction from the director for any money that the attorneys at the firm may have received from money that may have been stolen from the funds that he stole from.

To book, it seems that the director was conned into paying 50,000 for a month of expenses to pay for his house arrest. Somehow he had enough money to pay his very estimable attorneys, but did not have enough money to pay for 1 month more of house arrest. A total reprehensible movie about a reprehensible crook.

p.s. This is merely a review, and I have not checked all my facts nor am I familiar with the full extent of who knew or should have known, or who was or was not involved and who did or did not benefit.

## Documentary maker Marc Simon replies:

As I attempted to convey last night [after the showing], I am not in disagreement with your view of Dreier and I am not seeking to convince the audience that he is deserving of empathy (nor am I drinking the Dreier kool-aid –thus the Stockholm reference). I am trying to present an unreliable narrator, in a setting that we almost never see in a documentary, and give the audience an intelligent, complicated and manipulative man to wrestle with and judge for itself — I feel that the film did strike a chord with you and that's my hope as a filmmaker.

For more insight on my views see my director's statement [1 page pdf].

# My Life at Life Magazine, from Art Shay

June 28, 2013 | 3 Comments

I was a hotshot kid from the Bronx and I had successfully completed two tours– 52 missions in all– as a combat navigator routing out Nazis. I had, all 52 times, beaten the highest combat rate of attrition in WW2–71%. That is, each time I went out I had a 30 or so % chance of coming back. My squadron commander was Col. Jimmy Stewart, who flew a spate of missions but not with me. Twice our plane, Sweet Sue, had led the entire 8th Air Force, once against Berlin, once against Hamburg, 1100 and 800 planes. I was 22 and volunteered for a third tour, taking the wounded home from islands in the Pacific between Australia and Japan.

I was determined to become a great writer from the time I became addicted to reading at James Monroe High School in the Bronx. My immigrant father, Herman Shay, had entertained the same hope for himself, but at 25 in Russia, he was befriended by Leon Trotsky and had a falling out with him. He came to America and ended up in the family trade, a semi-employed tailor during the Depression who taught me chess and gave me a lifetime reverence for Chekhov, Tolstoy and Hemingway. He taught me to be a mensch and how to forgive. And as a Bar Mitzvah present in 1935, he gave me his folding Kodak.

In Paris, hours after the war ended in 1945, I duplicated with my Leica the picture my father made of himself with the Kodak, with the Eiffel Tower behind him in 1905. I see photography as an extension of literature. I sold features to The Washington Post while stationed at the Pentagon. I had turned down jobs at Look and the Post and took the Life job as a reporter when Joe Thorndike, then editor of Life, pointed out Life had recently hired some 20 refugee photographers –guys like Eisenstaedt. He liked the story I had written about my plane crash and said he'd like to hire me to work with Life Photographers to help them do stories and to schlep their gear. Surviving a flying-blind plane crash in Newfoundland had put me in contact with Life and Look.

I went to work for Life and became their youngest Bureau Chief ever. Went to San Francisco when I was 26, and lasted three years on the staff before I went out on my own in 1951 in Chicago. I had learned and practiced my craft of photo journalism in NY, Washington, SF, and then Chicago, where Florence and I settled with our two, then five, kids.

I had worked with two score of the best photographers in the world on some 70 stories. A reporter on Life in those days was an idea man too. I did some 70 stories before I picked up my own Leica for real. First year out I made \$30,000, second I did 60. By my third year I had more work than I could handle. My client list included Time, Life, Fortune, The Saturday Evening Post, Forbes, Business Week, CBS, Ford, NBC, Baxter Labs, Amana, National Can and the Blue Cross. In 1954 came Sports Illustrated.

I refused to specialize– the long lenses I got for my SI work I used in staking out the Mafia– some 60 times, often using my late, beautiful wife, Florence as a decoy or fotog with a camera in her purse. She became a successful international rare book dealer and some of her clients became my friends too, and collectors of my pictures: David Mamet, Joseph Heller, various governors, rock star Billy Corgan– who sang at her funeral last year.

My favorite mentor on Life was Francis Reeves Miller, who looked like W.C. Fields and gave me the nickname of "DeMille" for "directing" certain difficult Life pictures. Like getting together the 17 congressmen and senators who had vainly introduced legislation that would fight the Dairy Lobby's greatest achievement– keeping the American housewife from buying factory colored margarine. It was to their advantage to keep Mrs. America buying white marge then coloring it at home with dye from a little bottle. Picture ran a full page and helped end the Lobby's hegemony.

My photo philosophy has always been if there's a way to tell the truth, show it in pictures. The only no-no was bad taste or corn, like showing a mouse succumbing to an ingenious new trap. It wasn't the kind of thing Life readers wanted to stomach with their breakfast.

Francis Miller always said my greatest achievement was "Life Crashes a Party". The party I picked? The Hungarian Ministry's celebration of the 100th Anniversary of the Hungarian Ides of March. Best picture? I maneuvered the Ministry's buxom charge de affaires (our crasher's "date") in her low-cut blouse into leaning over the table of Hungarian goodies flown in from Budapest that very morning. Under her bosom, describing the tidbits, was a sign that said, "Hungarian Delicacies." If a picture was on the racey side and had a double meaning, Life would sometimes use it. Working for Life, in which I had 900 pictures ultimately as a photographer, was like channeling Mel Brooks playing for the Yankees.

# The Remarkable Journey of a Tennis Ball, from Pitt T. Maner III

At around a \$1.20/ball or less, a tennis ball is a pretty good deal.

"Tennis balls used at Wimbledon are made with New Zealand wool which travels 40,000 km around the world before being served up at SW19, new research has found."

and

'Dr Mark Johnson, Associate Professor at Warwick Business School, was stunned to unearth the surprisingly long and complex journey to one of the world's biggest sporting events.

"It is one of the longest journeys I have seen for a product," he said.

"On the face of it, travelling more than 50,000 miles (80,000kms) to make a tennis ball does seem fairly ludicrous, but it just shows the global nature of production these days, and in the end, this will be the most cost-effective way of making tennis balls."'

(link found via economist Justin Wolfers tweet)

## Victor Niederhoffer writes:

In Following the Equator, Mark twain describes the genesis of the Rhodes fortune showing how the shark is the most efficient way to deliver mail (one delivered news of the outbreak of war with the Germans to Rhodes), and Rhodes made a fortune not in wool for tennis balls but wool for coats and shirts.

# Mike Tyson, from Richard Owen

I watched this short documentary Mike Tyson presents The Heavyweights last night: pretty captivating. Mike Tyson has a reputation for being a bit of a mad man, but on his specialized topic, you can see a real depth of knowledge and intelligence.

# There’s Something About the 3 Stooges, from Victor Niederhoffer

There's something about the movie The Three Stooges that reminds one of the variegated Governors of the Fed as they are called out to give speeches and interviews when the market goes south. They once caused much mischief as the three stooges did when left alone and able to give their views on the operation of the orphanage or the Fed. But then the "orfedage" runs into trouble and the three stooges are called to raise money to get the things on an even track again. You would think that these "governors" would have more dignity than to beckon at the call of the Monseigneurs and spout humorous things about the weakness of the economy as an antidote to the decline.

# Like Magic, from Victor Niederhoffer

June 27, 2013 | 1 Comment

Like magic, and the opposite of last Thursday, everything is up. You have to hand it to the powers that be that they were able to turn everything around in a week, after cataclysmic declines in stocks and bond, soon to be followed by gold and the grains.

And to add icing to the cake as I write, stocks above the round of 1600… as Barron Coleman liked to say, "everything's up except my w….".

# Lacker, from Duncan Coker

Today as the market looks to get even for the month, Lacker is part of the rescue. He is one of the most hawkish on the Fed, but is also a realist commenting on how there is no meaningful reduction in bond purchases anywhere on the horizon. Tapering, he points out, is a derivative, changes in the rate of purchases, but still purchases.

As an aside, in swimming, tapering is the last phase of a rigorous training schedule in preparation for a race. Tapering implies some sort of disciplined or difficult action preceding it. It will be nice when the word retires from the financial lexion as "the cliff" did.

At present, Lacker is a non-voting member so has nothing to lose by telling the truth. With B retirement talk, Lacker would be the best candidate, but the odds can't get long enough and better to wager a summer claiming race at Saratoga.

# Uncertainty, from Pitt T. Maner III

Online publication Nautilus Magazine has an edition devoted to uncertainty.

Here are a couple of quotes from different essays:

Nautilus' second issue is all about the uncertainty that is baked into our modern world. We explore how everything from quantum particles to humans themselves turns out to be undetermined in ways that upset expectations. Even mathematics itself—the language of logic—includes statements that can be proven to be neither true nor false. In this issue's first chapter, "Uncertainty in Nature," we tell you stories about the boundaries of the knowable.

from "Uncertainty" by Michael Segal

Put another way, our cognition, so limitless in the development of the natural sciences, seems the most fallible when, in walking down the street, we meet a stranger coming from the other direction, and, symmetrically polite, both move left and right in a frustrated attempt to make way.

from "The Coin Toss and the Love Triangle" by Simon Dedeo

# But Isn’t it Likely, from Victor Niederhoffer

June 24, 2013 | 2 Comments

Isn't it likely that anything like the current level of prices will cause a slowdown in the economy and soon we will be hearing that the tapering is not imminent?

## Anatoly Veltman writes:

I assume energy prices are meant. Maybe food, too? Any other, "input" prices?

And my second question: ok, suppose "we will be hearing that the tapering is not imminent". Will it necessarily sustain record equity prices? What about cyclical fluctuations? What about economic realities? Will stocks always necessarily go up (from ANY level) due to Fed "hopes" alone? What about fiscal issues around the world? What about geo-political strains? What about currency wars? What about old fashion profit-taking, correction…

Again, the chart looks eerily like 1987 - when a drop of historic proportions proved to be a mere correction

I think the most dangerous for the market situation will arise precisely as described by the Chair: that participants will be given more Fed "hopium"; and we'll get a lot more of them in for the wrong reason and at the wrong levels.

## Ralph Vince writes:

Vic,

Don't you think that depends on the pace of events though here, doesn't it?

Conceivably, things can fall off very, very rapidly given the political backdrop right now and the history of anemic real GDP growth leading as a reliable prelude to recession (and the fact that YoY real GDP has seen successively lower troughs since 1980, the stage is certainly set for a rapid descent). And if the jawboning (which is likely priced in already) doesn't provide the support it is thought to?

A Fed official has already bandied this idea in the media. On Friday Bullard said that the pace and duration of QE will respond to market conditions.

## Gary Rogan writes:

The costs of the rising rates are already hitting the mortgage refinancing market severely and may soon derail the housing recovery. The cost to the Treasury of higher interest payments and the lack of the profit rebates from the Fed would be enormous, while simultaneously increasing outlays for unemployment and food stamps if the Fed causes a recession. The recovery is tepid and not self-sustaining. Also getting to 6.5% unemployment is a long way off.

It seems likely that the Fed saw a stock bubble building and decided to puncture it. When the first downtrend after the initial attempt started to reverse itself, Ben jawboned some more. He probably has a target level in mind, but he can't afford to to let the rates rise too much so it's a balancing act. What may be best from his perspective is a stock market crash followed by a quick rhetoric reversal from him and perhaps even more QE to lower the rates. He needs to have stocks and bonds to move in the opposite direction by any means necessary.

## Scott Brooks writes:

IMHO, there is no amount of stimulus that ward off the coming demographic shift that is occurring in America as well as most of the rest of the developed world.

In America, the final wave (the 3rd wave) of the baby boomers have exceeded their peak spending years and are refocusing their money. Generation X is not yet ready (nor do they have the numbers) to replace the spending of the baby boomers.

Spending is one of the biggest (if not the biggest) driver of our economy. Spending peaks at about age 47/48.

If one were to look at an immigration adjusted birth index, one would clearly see that the baby boom peaked in 1961 then leveled out (with an ever so slight increase increase) thru early 1964 and then off precipitously after that. Add 48 to 1964 and you get 2012.

Spending will decrease for the boomers. The big index companies that sell to the boomers will see their profits further erode. The secular bear that started in 2000 will continue on for several more years.

It will be a traders market with several bear market rallies and opportunities to make money on the short side. I predict higher than normal volatility.

Old "buy and hold" dinosaurs like myself will have to adjust our portfolios and be more nimble. It will be a great opportunity for the day traders and option/future traders of this list to make profits (that is if you profit off volatility). Smaller more diversified positions, low leverage (you don't want to get burned by big moves in volatility), and hedging will be the hallmarks of the day. The long only crowd may experience more pain they are accustomed too, unless the volatility increases the premiums enough on OTM puts that it makes them worthwhile to sell without getting burned on the downside.

Although the potential exists, I don't see big moves down (like 1987)….I see more of a slow bleed like we saw in 00/01/02.

The combination of statist entitlements based on unrealistic assumptions are going to put excessive pressure on governments to deliver on their promises. The same pressure is going to be put on private pensions, many of which are currently underfunded.

This won't last forever, though. Things will get better. Watch demographic tables for those countries which see their demographic start to move positively and buy there when demographics make their positive move. Don't look at typical "index stock" type companies though. When demographic changes take place and the younger generation starts to move into power, they will innovate. Look at smaller companies for profits.

Of course, I've been wrong many times before so it may be best disregard everything I've said.

Scott, where do productivity increases fit into this type pf analysis? After all, isn't this what boosts living standards over the long run? Rather than think in money terms, what about the creation of real goods and services that improve lives.

If it is just "spending" that is needed, they could just poof cash into everyone's bank account in the same way that today they "poof" cash into the QE programs.

## Scott Brooks replies:

Ed, it's more than just spending that drives any economy. Innovations that improve productivity do play a role.

As to real goods and services and improving lives…..I am very excited about that. Difficult times are often the fertilizer needed to cause innovation. As one generation (the baby boomers) moves off into the sunset of their lives, the next generation (GenX) moves into power and gets to apply their new ideas and innovations.

Each generation builds on the work of the last….and even comes up with brand new ideas along the way.

We saw it happen from 1968 - 82, 1929 - 48 (with a hiccup due to the war), and I could go back even further. Generation shifts occur and we are in one now.

## Carder Dimitroff writes:

Your argument makes sense. Unfortunately, this is not how the system has been working. Worse, those advocating for the good 'ol days do not realize they are asking for more government guarantees, a la Solyndra.

Utilities love these guarantees. Given the choice of free markets or government controls, utilities pick government controls every time.

Look at the southeastern states. They had several opportunities to create a free market, called "Grid South." They rejected that idea, preferring instead to remain centrally planned by comrades in state utility commissions.

Almost two decades ago, liberal states began implementing free-market systems for New England to Virginia and all points in between. Soon after, California jumped in. Late to the game was the Midwest. Even later was Texas. Of course, utilities operating in these states were not pleased when their generating assets exit the state's rate base.

It gets better. For decades, gas and electric utilities operated a "cost-plus" enterprise. From time to time, utilities would visit their regulators, present their [prudently acquired] costs, seek an adjusted rate to recover those costs and then asked for a modest margin.

It's like milking your neighbor's cow.

# It is Interesting to Note, from Victor Niederhoffer

It is interesting to note that there have been 92 days over the last 15 years, that's six a year, that bonds and stocks have both been down 1/2 on a daily basis. But three of them have occurred in the last month. The red colors on our DailySpec graph illustrate this in part. Looking at the concurrent of down 1% and 2% days, we've had 3 years without such events but 3 of them in last month. We are entering a different world where the old regularities much be reconsidered.

## Anatoly Veltman writes:

Of course you remember that going into October 1987, it was the pervasive downdrift in bonds which eventually got the better of stocks. The other element was the currency wars, which Jim Baker didn't handle appropriately.

I speculate that should the bond market of today continue its route, then stocks will follow in much more blistering fashion than Mr. Rogan predicts.

## Gary Rogan writes:

I don't think I predicted that stocks will not go down substantially. In fact, my point was that Ben really wants them to. My other point was that he wants bonds to go up. However if neither he nor any of his colleagues at the Fed say anything of substance, I see absolutely no reason for both of them not to go down together, perhaps in a spectacular fashion. I'm not capable of making any kind of time-based predictions, but they are both overvalued on any kind of substantive basis and what has been keeping them both up is liquidity from the Fed. Now if Ben and company keep making disparate noises, some about tapering and some about doing the opposite, while keeping QE to infinity that would be such a mess that I wouldn't even attempt to predict how that will turn out. Ben clearly wants the redirect all the liquidity into bonds, but whether the bond vigilantes will let him do that is anybody's guess.

# A Query or Two, from Victor Niederhoffer

Isn't one of the main reasons that the economy has not been as vibrant as hoped because of the QE? The Fed has an opportunity cost for the assets it has bought. That opportunity cost around the world must be 400 billion. It was taken from the common man, either through direct payments not given or futures increases in service rates and interest costs, and given to the banks. The Fed itself must have a loss of 200 billion on those assets purchased. How has this provided an artificial and frictional stimulus which in the reasonable future will leave us worse off? Regardless, they can't let stocks go down too much, or else everyone will complain and it will be bad for the flexion in November, 2014.

## Gary Rogan writes:

QE is mostly an response. The cause is the federal spending that would be unsustainable were it not for QE. You can't stop QE while the government is running enormous deficits and while everybody and their brother is actively encouraged to go on food stamps and disability. Until the federal government totally changes its tone and approach, QE is inevitable and in fact the only thing that prevents quick collapse. It's not stimulus, as you can't push a rope but a destruction of new government debt via wealth transfer. Inflation plus the interest not paid to those who have cash is what's subsidizing the government largesse.

# Quote of the Day, from Craig Mee

Dutch Boyd reminisces over what might have been at the epic 2003 World Series of Poker:

It still hurts, thinking about how close I came. When you're deep in the Main Event, it's almost like you're living a dream. It feels like fate. It's predetermined, and you're going to win it, and nothing's going to stand in your way. The universe wants you to win. It wasn't until I was out the door that I realised the universe doesn't care.

# Beware the Muni ETFs, from Mr. Kris Rock

MUB has dropped from 4% return in 2013 (as of may 1) to Negative 4% as of yesterday. This is creating a liquidity issue as ETF can't return cash as quickly as ETFs are being redeemed, and so in kind redemptions are occurring. We had been warned that mispriced debt was going to reverse quickly once the FED gave indications they weren't about to keep up their manipulations, and of course, China, which also needs cash might be selling a few treasuries to deal with the need for cash. When the rich man in Brazil has to sell equity for pennies on the dollar in private transactions, it's time to pay attention.

# Letter from San Diego, from David Lillienfeld

June 24, 2013 | 1 Comment

I moved to San Diego with my family for a new job about 3 years ago. While San Diego is nice (the weather can't be beat–even in comparison with Hawaii's), it's not San Francisco. Having renovated our house on the peninsula south of SF (we're in the northern part of Silicon Valley) to suit our needs and tastes only accentuates what we miss about the being by the Bay. I guess we're NorCal, not SoCal people.

The one thing no one in my family misses in the Northeast winters (I keep telling them that they had it good compared to the hearty souls in Minneapolis, where I took my residency training.) There are lots of things upended in moving 500 miles, things that one may not consider particularly significant. Examples include finding a new physician, finding a new racquetball partner, figuring out if there's any place to find a good bagel (Izzy's in Palo Alto wasn't quite at the old H&H level, but it was close)–we're still working on this one, and so on.

Something that one might dismiss as one of those myriad things one needs to feel "settled" in an area is a barber. In San Diego, barbers run from \$5 (I can't recommend at least two–I thought the shears likely had some Hep B and/or C) all the way up to V's which charges \$25 for basically the same haircut, albeit in a place with wood paneling (I guess the wood paneling adds somehow to one's appearance, but I remain unsure as to how).

I found a barber who charges \$8 for a pretty good cut. The shop is down near the navy base, and her husband is, not surprisingly, a sailor, now deployed someplace in the Pacific/Indian Oceans. My guess is that she's in her mid-20s, no children. She and her husband have decided against starting a family as yet. Between his deployments and her constantly working at the barber shop, they didn't think having children made sense for themselves just yet.

I went for a haircut yesterday. She wasn't as jovial as she usually has been. For the past 3 months, as the sequester has taken hold, she's observed a fall-off in business. It's been noticeable. She said that she and her husband had already begun cutting back on expenditures, expecting there to be some impact of the sequester on her (and their) income. They've already eliminated any vacations and some clothing purchases for the foreseeable future. She volunteered that some of her friends (with at least one spouse in the military) are using food stamps. She also mentioned that her brother-in-law is an aviator out of Miramar and his flying times are being reduced, supposedly by the sequester. Regina commented that her immediate worry is with their apartment. Their lease is up at the end of August (I think that's what she said), and the landlord told her yesterday that their rent will be going up to cover additional interest costs since borrowing costs are going up.

In northern San Diego County, away from the navy base (south of downtown), one might have expected less of an impact of the sequester. However, there has been something felt by some of the businesses–probably because of Camp Pendleton, which occupies a spit of land between San Diego and Orange County. Asking some of the merchants at the outlet mall in Carlsbad about business, there's some suggestion of softness, but there's been layoffs in the mall, at least not yet. What happens next though, is a (to use Yul Brenner's phrase) a "puzzlement."

The local biotech industry is slowing making its way back from the premature death sustained when Biogen Idec closed its local campus. Health in general, though, seems to be in growth mode. So is mobile engineering. And there's some suggestions of an improvement in the local tourism trade, with the opening of non-stop service to Tokyo. (The inaugural flight was greeted by about 200 cheering individuals positioned just off the edge of the runway. They clapped when they saw the plane overhead as it was landing.)

Most are aware of the weakness of the economy–the employment growth numbers remove the little doubt about that condition. Though we are used to looking at number, there are people behind those numbers. As an epidemiologist during the early and mid-1980s, it was possible to become numb to the statistics behind the AIDS epidemic. The numbers were unlike anything seen in the US for many years. Each of the persons represented by those numbers was someone's son or daughter; someone's husband, boyfriend, girlfriend, wife; someone's brother or sister; and so on.

It's easy to forget about the people when looking at the data. Data don't have faces. They don't have arms and legs. And most of the time, they don't have voices. That shouldn't remove the reality that there are people behind those numbers. At the same time, one must remember that there are still real ills present in our economy, that dealing with them will require dealing with real pain and that, since we are a globalized economy, the effects of what ever actions we take are likely to have impact far from our shores (I'm thinking of something more than the butterfly effect). How we go about doing it, with what level of rancor and disdain (which seem omnipresent in DC these days, which isn't surprising I guess given the absence of political leadership by just about anyone), will say provide its own Rorschach Test result about what the US is all about, how we want to be perceived, and what values do we hold dear and which are just "so much fluff.

As Regina was telling me about her family's situation, I wondered when do we, as a nation, begin to have an economy growing sufficiently that Regina and her husband feel they can start a family, that they can take a vacation (even if only to Palm Springs overnight), that we unite rather split apart, and that not merely allows civil discourse about our society and what we want it to look like and function but rather encourages it. At its core, it's about how we interact with one another as people, how much we value someone else as an individual and not a statistic in a table or a model. Perhaps it's a matter of giving the country more time to address its ills. I'm not so sure that time will make that much difference by itself.

I think with all of the activities in our daily lives, we are quick to stereotype–almost like zombies–someone based on an utterance or two. It's faster that way. It's also the lazy approach. It takes effort to get to know someone, to see them as more than a statistic on a page or in a table. Let's hope that we, as a country, get past zombie mode and move the country forward. For all of our ills (and there are many of them), the US remains as the sole superpower on the face of the Earth. Let's not squander the opportunities to fashion our world and realize all of its potential. Until then, however, I think I'm going to think about letting my hair grow longer.

# Didier Sornette on How We Can Predict the Next Financial Crisis, from a Southern Gentleman

June 24, 2013 | 2 Comments

If you have read the book Why Stock Markets Crash, the author has a very good section on the growth stock paradox in negative interest rate environments, as originally highlighted by Von Neumann in 1938 when t-bill yields went negative as money fled Europe to get away from Hitler.

Mathematically, anything with a positive yield takes on an infinite value, however, the math allows for two solutions U and - U both balance. When the charge on a magnet changes, there are large effects. The Fed papers call these regimes "Jump Dynamics." QE has created the same environment for carry trades. I believe the Fed has increased the probably of Jump Dynamics. LTCM went about 4 years up Feb 1994- Feb 1998 and was out of business by the end of August. QE turned 4 this past March and since May markets have begun reversing all convergence trades which benefited from QE. Recall gold in Rubles, suddenly revalued in August.

Stocks may stablize yet, as they did the summer of 1987, but yields are moving like they did that year after trading in a low range. the prior year. There were two legs up in rates then.

The long term issue is this — stocks offer a compelling risk premium over cash at 0 as one might estimate them to now offer 6.25%, however, there are many environments in which stocks, in a free market, may offer compelling absolute values of 10-12% which would require a move back toward the lows.

In 1914 the markets made such a move back to the panic lows of 1907 with a six month halt.

Interestingly, book value of the S&P 500 in Barron's this week is 666.97. The Fed lent to AIG on the basis of its book value of \$90 Billion at the time, did it also lend to the market based on a 4-5 year projection of book value at that low? I think so, as the bank assets have about a 4-5 life, and in 2009 cash buyers were bidding 30 looking for 20-25% in 4-5 years cash on cash because there was no leverage available, the banks said to the Fed, allow us to earn the equity Return and Bring book values up to our current marks at 70 (for the good banks).

This out of court bankruptcy restructuring of current rates to 0, making no net new loans, and riding equity value up to marks, has taken time, but now looks to be complete.

Where the markets really broken in 2009 or did the leveraged institutions just not like the prices. Market participants are expecting \$110 in S&P earnings. This would require a 16% return on equity. A high hurdle for the market as a whole. If one actually checks the data one would see company's currently are earning about 13% in line with historical averages implying about \$91 of normalized earnings power.

# The Lone Soldier, from Craig Mee

A consideration to buy in the aussie equities on the next pullback in price (they had a strong week) as a hedge on rising U.S 10 yields… More learned stock pickers may be able to offer a more detailed analysis. This is just to showcase its potential exposure and potential for upside on this changing market condition.

Based on its current short-duration investment portfolio of almost \$32 billion, the reduction in global interest rates compared with four years ago has crimped QBE's annual pre-tax profit by more than \$1 billion. But with the Fed flagging to the market and the prospect of interest rates reversing and bonds falling, QBE's earnings are set to benefit significantly. To put this in context, the company delivered a 57 percent jump in investment income in 2012 to \$1.2 billion (\$809 million from policyholders' money and rest from shareholders' money), dwarfing the \$453 million insurance underwriting profit for the year. This was generated from a near \$32 billion investment portfolio, comprising mostly cash and short-duration money market instruments (i.e US Bonds).

# One Notes, from Victor Niederhoffer

June 20, 2013 | 1 Comment

One notes that bonds and stocks have to an inordinate extent gone in opposite directions for 7 years. For example, since 2008 on days when stocks were down 20 or more, bonds were up 120 times and down just 12 for a 10 to 1 odds ratio. With bonds down 200 or more, stocks were up concurrently 25 and down 6, a 4 to 1 odds ratio. There was just 1 occasion in the last 5 1/2 years when both bonds and stocks down 200 on the day, 1/30/2009. It's great to be living in historic times.

# One Would, from Victor Niederhoffer

June 20, 2013 | 2 Comments

One would speculate as one often does when seeming short term liquidity is tightened but long term inflationary expectations are dampened, that another day or two like this, and the flexions can forget about ever having to give up on qe2 because the wealth effect will contribute to an increase in unemployment.

# Gambling Systems, from Jeff Watson

June 20, 2013 | 5 Comments

On the website for Mega-Millions Lottery, to encourage action, they are giving "statistics" for their players, much like the statistics one sees in a keno room or at a roulette table. Very interesting. After all, balls with numbers on them have memories…..just like coin tosses, ha.

# Popovich, from Victor Niederhoffer

June 19, 2013 | 2 Comments

Popovich likes to yell at his players, possibly manhandling them the way he possibly did at the Air Force Academy. He reminds one of McNamara and the whiz kid when they toured the Ford factory in 1944 to install modern management methods there. In order to show the whiz kids how tough they were, Bennet, Ford's assistant in charge of security, manhandled all the operatives on the factory floor pushing them around and berating them for this and that infraction. Of course the whiz kids were astonished as they used cuddly management in the armed forces to embrace their soldiers to provide good morale. One wonders whether Popovich's yelling at his players caused them to slack off in the last 28 seconds and that's why they lost the game. Also, whether rough management in companies, firing willy nilly, and providing no benefits, a la Welch (assuming you couldn't talk sexy to him on Saturday mornings before golf), leads to inferior performance.

## Richard Owen writes:

Branson's maxim is a company should be for employees first, then customers, then shareholders. That will create the best spirit, thus the best product, thus the best return. There seems to be a bifurcation of high performers: at one extreme are the psychopathic cultures that rule by fear, at the other, those that resemble religious/positive thinking inculcation.

# I Like What Ginobi Said, from Victor Niederhoffer

June 19, 2013 | 1 Comment

I like what Ginobi said about the loss to the Heat when ahead by 5 points with 28 seconds to go. "Bad, very bad". How many times has one felt that way about the market and one's posture within it at the buzzer.

# What Would Nock Do, from Victor Niederhoffer

June 19, 2013 | 1 Comment

How would Nock or the subsequent public choice economics analyze what the Fed is likely to do with the Qe2. I would think he would say that they would not wish to give up their power too quickly. They like it that every utterance and every decision cam move the market by trillions. And that it can insure that an incumbent or agrarian can stay in power. That's what I think anyway.

# A Bayesian Understanding of Information Uncertainty and the Cost of Capital, from Stefan Jovanovich

I found this paper interesting:

Uncertainty is not always resolved by new or better information. Also contrary to intuition, the cost of capital implied by a conventional capital asset pricing model can increase as investors become more certain about future events.

## Gary Rogan writes:

I only got as far as this premise in the abstract:

"The role of financial reporting should be understood not in terms of its effect on the cost of capital per se, but as aiding investors to assess the probability distributions of future cash flows more accurately, thereby leading on average to higher expected utility portfolios."

Can widely distributing financial information to investors increase the AVERAGE expected utility? If everyone is better informed, won't the positive effects average out to zero or close?

## Rocky Humbert writes:

I have not read this paper yet, however, the answer to Mr. Rogan's question is: No, this is not a zero sum game. Better information can generate net positive value when measured at a societal level. The core economic principle which explains the net positive is that better analysis/better information will result in better capital allocation. Better capital allocation should result in higher societal productivity and hence a higher potential growth rate. This is one of the economic underpinnings behind the SEC principle of full disclosure of all relevant and material facts.

Simple example: If I "invent" a perpetual motion machine and raise \$10 Billion in capital to build a factory to produce my perpetual motion machines, then this capital will be re-directed from some other potentially more productive use. In this silly example, investors rely on my prospectus to invest and have bad information. If they read the prospectus carefully however, they will see a disclaimer that the physics behind my invention are nonsense and they are better off investing in a factory that creates widgets or drugs or whatever which actually work.

# The Heston Recipe: A Picture, from Fabrice Rouah

This is an update to my first article about the Heston Recipe on the site.

The Heston model is a mathematical formula for the call price. Similar to the Black-Scholes formula, it requires a set of observable inputs such as the spot price and strike price, the risk free rate, and the time to expiry. In place of the single parameter 'sigma' in  Black-Scholes, however, the Heston model requires a number of parameters that must be estimated from market data. These parameters drive the shape of the implied volatility surface extracted from call prices generated with the model. This surface is simply a three-dimensional plot of  implied volatility as it varies according to strike and to maturity.

In FX markets the implied volatility is usually symmetric in the strike direction and the pattern is often referred to as a "smile". In equities markets, however, the implied volatility is usually asymmetric and is referred to as a "smirk" or "sneer." A number of explanations have been proposed for the asymmetrical smirk, but one of the most plausible is "crash-o-phobia." According to this explanation, following the October 1987 crash, investors in equity options have been willing to pay relatively more for downside protection than for upside speculation. Consequently, out-of-the-money (OTM) puts are relatively more expensive than OTM calls. Since there is a one-to-one, monotonic, relationship between the option price and its implied volatility, the smirk is simply a reflection of this price mismatching. The Heston model is a convenient way to capture the smirk and other features of implied volatility, along a continuum of strikes and maturities.

The most common way to estimate the parameters of the model is to construct a function that calculates the distance between implied volatilities observed in the market, and implied volatilities generated by the model and matched by strike and maturity. The distance is often chosen as the squared difference between the model and market implied volatilities, and the function is the sum of all the squared differences. The parameter set is chosen as that which leads to the smallest sum, and consequently, which provides the closest fit of market implied volatilities to their model counterparts. The figure illustrates the implied volatility surface for a subset of SPY options on April 13, 2012. The market implied volatilities are represented by black dots, and the implied volatility surface generated by the Heston model, by the colored mesh. The Heston model is able to fit the smirk, and to account for the mitigation of the smirk at long maturities.

# Public? What Public? from J. Pitch

Who is this ubiquitous "public" of which we all speak?

You must know who I mean. The one that Bacon thinks the form always shifts against at the race track. The one that allegedly always loses in physical stock markets. The famed 'Mrs. Watanabe' in the JPY Carry Trade. The 'Belgian Dentist' (what the ???) in Fixed income Securities. Well, I think, in the modern world, the concept of a "Public", as commonly classified, is absolutely redundant.

1. Holdings of Physical Stocks by the 'Public' is now circa. ~ 20% (Excluding Mutual Fund Holdings)

2. Therefore, the public to which we refer (in stock markets) is actually an MBA from a Big Ten business school in the United States or Oxbridge/Insead in UK/Europe. These guys are the ones buying and selling.

Now I am not saying that these are better or worse investors than the "public" we all allegedly copper. It's just that their behaviour is different — more institutional.

The ecology of the market has changed substantially, even in the past 25 years since I have been involved. I read somewhere recently that BlackRock owned or controlled ~ 20% or 1 in 5 stocks… Now figuring out how they move volume and why might be better than focusing on the public.

I find it hard to even dignify the 'Mrs. Watanabe' classification. The allegation that investors and speculators in Japan are in some way more trend following in nature or more likely to "buy the high" than any other classification of investors/speculators is laughable.

In all fairness, there are one off anecdotes about large purchases at the highs of trophy items by Japanese investors but that has more to do with who has the money and when. The last five years have seen the G.C.C. countries & China buy everything way through the highs for trophy assets…They too shall sell the low in times to come…

## Ed Stewart writes:

I disagree.

You are only considering it from the viewpoint of time-weighted returns. The problem is that time weighted returns are make-believe from a actual IRR perspective. Money weighted returns are where the public's poor outcomes become most apparent. Investors underperform their own mutual funds by something like 2% a year or more, if I recall correctly. Significant under-performance even occurs in index funds. People also time their 401k contributions, etc. I would love to see data on how much contributions dipped or were canceled in late 2008 early 2009, only to be turned on 2 or 3 years later after the tremendous rally re-instilled confidence. There were undoubtedly a tremendous, outrageous losses during this period relative to the time weighted returns, which seem to suggest that "everyone has been made whole" which is far from accurate.

# Was First Hunch Correct? The Case of the Problematic Tooth, from Ed Stewart

June 16, 2013 | 3 Comments

I have recently had a lot of pain related to a problematic tooth. It is a tooth that has been giving me trouble on and off for years and I have no idea why. Dentists have suggested it suffered some type of trauma when I was younger, but if that was It I don't remember the event.

Went to the emergency room last January (weekend, regular doctor closed) because I was in massive pain over the holiday weekend.

It turns out that it had become infected and was putting pressure on the nerve in the Jaw. Since that time I have had a root canal on the tooth, but that did not solve the problem. I have had two other procedures, the last one this morning because the prior one did not heal properly and got infected again. Really aggravating experience, no need to go in to details. Today I am holed up recovering, jaw aching on a beautiful day.

The thing is, back in January, I had a gut reaction that the best thing to do would be to just forget all the treatments and have the problematic tooth yanked out. Based on the trouble it had caused me to that point, it just seemed to be the solution that made sense — likely to be final and just "end" the problem.

Yet, I was told that was too extreme and "the tooth could be saved" etc. No professional I spoke with thought it was a good idea, in fact they seemed astonished that I suggested it. And today, after treatments and quite a bit of discomfort, things not going right, etc, I am inclined to think my initial hunch was correct. Forget treatment. Just get rid of the problem.

I wonder how often this happens.

A clear cut solution to a problem exists, but a bunch of complex alternatives are presented and the resolve to do what is likely required to the end the problem with certainty is dampened. Not to push the analogy to far, but does this not also happen in trades, businesses, and relationships that are going wrong. Rather than end a problem trade, it is easy to tinker with it, look for hedges, "scalp" around the position, etc. but instead of a resolution only more pain is created. Or a relationship that has stopped working — "keep fixing it" but only more delays for the inevitable split which is more painful than a clean break.

It is hard to tell what is hindsight quarterbacking, and what is a life lesson. In this case I am still not sure which it is. I wonder if there are any general rules or ideas that can be applied to these situations to give better outcomes.

## anonymous writes:

Absolutely, the best case is to always treat (your tooth or a losing trade), like it was bad meat and spit it out. Deal with it immediately, no messing around, just take the hit and get over it. Bad trades, like bad relationships, have a way of metastasizing into something worse, and the old cliche comes to mind, "Your first loss is the least."

Personally I remember once having a relationship with a nice gal that went south (but as a guy I was totally oblivious to the whole thing and didn't see the obvious signs). I was out with the lady in question in public at a restaurant and she gave me "the blow-off speech." I was so confused that I didn't even see it coming (One could make a case that infatuation is insanity). In retrospect, I should have gotten up, picked up the check, paid her carfare, bid her adieu, and walked out, never to see or communicate with her again…..like one exits a bad trade. Instead I lingered for months in an emotional limbo, like a sick puppy, suffering great humiliation and many bad feelings. In retrospect, like a bad trade, that relationship wasn't worth it and there was no bargaining, hedging, covering it with options that was going to save it. It had to be pitched immediately, and I broke my cardinal rule by not pitching it (emotions again).

Bad trades, like bad relationships can teach one many lessons in life and trading if one listens to what the situation (market) is telling you. If only, when dealing with that person, I had used my trading persona instead of my emotional side, I would have not lingered in emotional limbo for months.

This supports a great case for dispassion, and a big part of the Masonic obligation is to "learn to subdue your passions." But like the ying and yang, good things happened out of that debacle and I ended up seeing a very cultured, erudite, successful, powerful, and beautiful woman that I married a few months ago. I'm happy for the first time in five years, and that's what's important. Bad teeth, bad trades, bad relationships…..get rid of them, they are just nuisances that get in the way of life.

But that thinking of could have, would have, should have is very deadly in the markets. Although hindsight is always 20/20, my eyesight of 20/100 does not allow such indulgences and my defensive game does not allow for such risk. I'm trying to make money, not keep my finger in the dike like the little Dutch boy. The Dutch boy was wasting his time.

## Gary Rogan writes:

Bad women and bad teeth rarely get better by themselves, although some teeth that seem to need a root canal sometimes do. Equities do it a lot more frequently, so to this day I don't know how to reliably tell when a bad equity trade needs to be spit out. "Your first loss is the least" obviously applies to some situations, but for instance I still own a stock that lost me 20% two days after I bought it, 50% three months after I bought it, but now two years later it's up 70%, having been up 120%. Rocky talked a lot about his thoughtful decision to exit HPQ back when it was relentlessly moving south, but it's back. What used to be RIMM is still in the dump, but someone who bought it in September doubled their money. If you could always make a wise decision by just getting out of a (currently) losing trade, everyone would be a lot richer than they are.

## Rocky Humbert responds:

Mr. Rogan,

Indeed HPQ has been inexorably working its way back and may keep climbing. Who knows? What we do know is what  the S&P index has done subsequent to my exiting HPQ. And we also know what  other alternative investments (gold, real estate, etc) have done over the same period of time. Taking the hit and putting the (remaining) capital into the alternatives would have been better than suffering. Hence in these matters, one must consider not only the ongoing pain, but also the opportunity cost. To the extent that one is monogamous, the analogy holds for personal relationships.

Is there an opportunity cost for teeth? Not sure.

## Gary Rogan replies:

Sure, there is always the opportunity cost. The question is, how well do we know it in advance? My point was that if say you bet all your money leveraged 10 to 1 on wheat, and your position is down 10% you may want to exit, but if you own 100 stocks and one is down 10% or 50% or even 90% what to do at that point outside of any tax considerations and without any additional information isn't exactly clear. Given my preference for 52 week lows in the absence of any other information it may make sense to buy more or do nothing. If the sudden move lower really attracted your attention, and upon further study you conclude that this is only the beginning, of course you may want to sell. But then a sudden move up or a long period of flatlining or something you happen to read or hear may attract your attention as well.

## A commenter writes:

The key phrase that piqued my interest was when you said, "you bet all your money leveraged 10 to 1 on wheat." Why would you "bet" all your money? Wouldn't you want to just "bet" a small part of it, and keep the rest of your powder dry? Anyways, betting signifies gambling, and gambling is wrong.

## Gibbons Burke writes:

Anonymous, I am like you—I don't see any value in pissing my money away in a known negative expectation game, so I sympathize with your view. I have never found enjoyment in gambling, personally. But I can't extrapolate from my subjective view and experience onto the world because everyone's utility and entertainment functions are different.

Gambling in the United States has several positive social functions… State lotteries support education of children… Gambling on Native American reservations is a voluntary form of reparations to that people… and, it gets money out of mattresses and back into economic circulation, transferring capital from those who are not prudent in their stewardship of that capital (otherwise they wouldn't be gambling, would they) and putting it into hands where it will be more efficiently employed.

Part of the freedoms cherished in this Constitutional Democratic Republic is the freedom to act the fool, on occasion, as long as you don't infringe upon the rights of others, or forsake the duties to yourself or those in your charge.

You would not have regretted your decision to accept professional opinion / treatment had everything gone well.

The mistake is assuming you could have made a better decision - to extract the tooth - simply because in hindsight the treatments have not worked.

For any decision there is a range of outcomes. Perhaps your treatment had 80% chance of success (defined as rapid pain reduction, elimination of infection, and saving the tooth). But so far you are in the 20%, and for you the failure feels like 100%. "If only I'd extracted"

Do you expect portfolio managers or sound strategies to never lose, or abandon them only when they do? (Buy high / sell low)

Dentist and physician success rates are mostly unknowable but patients use cues to evaluate them. Cues such as trusted referral, reputation, diplomas, demeanor, looks, office decor, exhibited technology, etc.

Your treating dentists are simultaneously incentivized to obtain good results (reputation, future referrals) as well as make money (perform treatment). Those with consistently poor results have trouble competing with those with good results, and you are less likely to wind up there.

# Review of Man of Steel, from Marion Dreyfus

MAN OF STEEL

Actually Stalin meant steely man, too. Would his mild-mannered alter ego wreak more impressive havoc today than the muscled one-man wonder?

Directed by Zach Snyder

Superman was created in 1938 by Jerome Siegel and Joe Shuster, designed as an adolescent anodyne and savior, in large part, from the hitlerian juggernaut that had sent so many surviving graphic artists and novelists over the oceans for succor.

For fact-chasers, this year marks the 62nd anniversary of the first Superman movie, Superman and the Mole Men—but not many will recall that first go-round of the man of steel franchise. The first Superman most of us recall or can see on late-night TV was the impressive Christopher Reeve, whose looming physique and chiseled good looks combined with his Juilliard-trained acting technique to generate the most paradigmatic Superman to grace the screen for the 5-issue franchise beginning in 1978.

The Brit Henry Cavill, who plays American Man of Steel without a lapse back into English (joke intended), is certainly handsome enough, but lacks the smooth, seamless facial planes and hauteur of his predecessor. Certainly, Cavill's physique is peerless, but he seems querulous and even hesitant onscreen as often as he seems commanding. It does not fill one with confidence. He seems a bit weather-worn, in a way that Reeve did not. Also lacking from this man of steel is much of a personality, or that naughty glimpse of sly humor that delighted audiences as it trickled out when Supe dealt with Margot Kidder's Lois—especially in those close-ups with chemistry evident between the two leads. Amy Adams, always competent, talented and pert-nosed cute, does not resonate any of the heat that you hope to see, especially as so few of these moments are visible onscreen altogether in MoS. She is a spunky, responsible reporter, refusing to reveal Superman's whereabouts to Zod or his people. But no frissons.

The Krypton mega-villain, the re-enlivened comeback Zod, played by a face familiar from innumerable mob pics, Michael Shannon, does not measure up to MoS villains of the past–Terence Stamp, Jack O'Halloran, Kevin Spacey, or the slightly buffoonish but clever Gene Hackman as Lex Luthor (whose solid chops as a tough guy, G-man and outlaw before this character stood him in good stead when the part as written could have defenestrated a lesser actor–and his diction slips into thugdom's unwonted dese, dem and dose from time to time. Krypton did not have a canton of Brooklyn to school such a pronunciation.

Jor-El, chief Kryptonite scientist [and father of Kal-El] played by sturdy Russell Crowe, sports a beard; one person, at least, who doesn't have a dimpled chin, as almost every major character seems to. It seems almost a cast member on its own, these dimples everywhere. (Is there something about dimpled kids that hurtles them into acting? It would seem so.)

This absence of chemistry between Lois and Supe may have been a choice of the writers, who figured people would go for the effects (yes) and the escapism (ditto), not necessarily for the romance (wrong).

Harking back to the innate value of the story (if that is what you unconsciously expect at base), the plot points are artificial, as nothing is at stake—the bad guys are just bad. There's no "On the other hand…" The earth is imperiled, OK, but that's SOP. We don't really worry about Metropolis and the violated and punctured mountain tops or glacial vistas. We watch the screen, zonked by the amazing effects that seem impossible. Thirty five years in advancing SFX have made a discernible difference. But viewers don't feel invested in either the characters or the outcome.

As a counterpoint to the pure evil, we can say, of the Reich and its übercommandos, Superman was conceived as a polar opposite. You know the drill: Dedicated to truth, justice and the American way. (Had the comic geniuses that poured into the US to escape nazism fled to the steppes, we would have had a different and less fortunate motto: Truth, justice and the Really Red Cape Way.)

For lovers of complexity, Clark/Kal El is hard to get, one would think. An übermensch too loaded with powers and too innately good to be a source of much dramatic tension. Except in our day, when goodness and power are not often a matched set, a character exemplifying these traits may seem obvious for the child primed by a constant stream of fiction fodder. For the sager adult knowing the shades of complexity and gradual moral elasticity/atavism of the world we inhabit now, the dramatic tension shifts not to this avatar of goodness and ethicism, but to our shifting relationship and accommodation to compromise.

One could argue that we adjust to evil and a full-spectrum response in hellholes, say, Sudan, Iraq under Saddam, North Korea, Uganda under Amin, Chechnya, Romania under CeauÈ™escu, under their absolute tyrannical heirarchs, more easily than we do to the obverse scenarios. We idealize Shangri-La, but would soon grow irritated and restless under its unfailing puffy white cumulus and imperturbable smiling sun. Nothing but free golf and chicken croquettes.

Though Superhero Kal-El (in Hebrew, where the preponderance of comic book ethos originated: Vessel of G-d) is supposed to be uncomplicated, in reality, this generation of consumers of the myth sees a character fighting against his better instincts, as instructed by his earthly parents (Kevin Costner, Diane Lane). The battle is maintaining the goodness in the face of vast cynicism and normalized unwholesome. Young Clark wants to vent his anger when taunted, pestered by school colleagues—but holds back. We are taught now not to suppress our wishes or desires or instincts (other than murderous rage, perhaps, or the male lusts to have every passing female on the average American street). Superman must squelch his natural desire to pay back bullies so as not to raise fear among his little schoolmates and community. Thus there is a reverse dramatic tension: We would not hold back. We'd smash their faces into the electric fence, knock the bejezzus out of the drunken jerk in the bar. But Clark doesn't, even when his own father (Kevin Costner) is at risk.

Risen out of adolescent escapism, Supe had, critics had it, nothing much to say about the human condition other than to indicate by his existence and responses to threat or calamity that salvation was possible, and that goodness could be sustained in the world of constant unpleasant surprises. Today that optimistic template reads as revolutionary. We've largely forgotten optimism.

After devouring Superman and his Action Comics supercolleagues as a child—I often ascribe my relatively commodious vocabulary to the thousands of comic panels I consumed after buying them with my tiny allowance—during my teen years I came to apotheosize him as the ideal boyfriend. Not someone I could hope to locate, but someone to aim for—he was a goody two -boots in the primary colors with all the Jewish values: Decency, charity, openness to others, helpfulness, sobriety and zero dark mishugas. Unlike American friends, I was brought up British-strict, and he represented my salvation from a personal raging tyrant. As it turned out, the boyfriend I had was probably better than Superman, because he was smarter, funnier, and clued me into many of the clandestine realities my family never imparted.

Superman makes broad-brush discriminations: These are good people. These, bad. We have many more dubious opponents, however, than were dreamt of in that Shuster and Siegel cosmogony. Most baddies today would not fall easily into either definitive camp. Superman and his cohort followers Batman, Wonder Woman, Flash, Aquaman et al., never dealt with the latter-day scourges of Communism or, more immediately, terrorism and radical islam. The seeping result of infiltration that imperils the free world with its encroaching ooze into all segments of society is not amenable to flying thrusts and grunting, lifting pounds per square foot. A man as rigorously physical as Superman has less impact on such foes than would, in fact, the meeker, milder spectacled version, Clark Kent. Kent's métier, as a reporter/journalist, unmasker of evil schemes and unholy plots, would today be effective in subtler ways, by informing the public and helping to dismantle terror networks. Clark is a crusader without a cape, a pen-in-hand counterweight to the forces tripping us up.

The film disappointed in its conscientious product placement of restaurant chains, camera brands, electronics and a variety of stuff we don't want to see any more in prominent Look-At-Me locations in our films. The flurry of product placement roused a counter-reaction that made such deliberate "subliminal sales" efforts embarrassingly gauche. Bad enough to have to cope with banner ads and customized computer–generated product sells on our laptops. No doubt the producers lowered the staggering costs of the film by selling rights to these commercial interests. (They have reputedly already netted \$150 million before the film officially opens.) The authors of the hero, by the way, got the princely sum of \$130 when they sold their strip in 1938, and until their dying days (1992, 1996) fought court battles to a fairer remuneration for the titan that is the Man of Steel. Using a dedicated lawyer and comic maven, Marc Toberoff, their heirs recovered some millions after epic battles in succeeding decades. \$130!

For the alert, the film features a number of homages to films before it: Field of Dreams (Costner's 1989 baseball fable), Orson Welles' immaculate Citizen Kane, and a host of other swift visual refs. Most unsettling are the subtle but iterated Christ-like iconic shots of the Man of Steel as he stands still in the sky above citizens, erect and crucifix-like. Created by Jewish artists, about a largely idealized reverse-Dybbuk-figure of idolatrous [Jewish] beneficence, Christ imagery comes as a bit of a startle. There is no end of pertinent applications of Christian imagery in myriads of books and tales; this is not one.

It does damage to the well-worn legend of the destruction of the planet Krypton, a planet peopled by extra-uterine birth (but for our man Kal, who is the only normally birthed child, on screen, according to Jor-El, "in centuries"). The fellow next to me whispered: "First time I knew Jor-El was an Ob-Gyn!"

That pointed to another problem in the movie. There were too many scenes where if the audience was not so rapt on the special effects and blam-blam, they would have laughed at the silliness and unsubtle goings-on. Amy Adams scoots around the North Pole in her kicky parka and cute booties, no face mask, no earmuffs, all solo, crawling on rock faces jagged with ancient glacial formations. Really? I mean, really? The guy playing Zod, Shannon, is this side of over-exposed, a bad guy we have seen in one too many gangster flicks. His elocution is hardly Richard Burtonesque, when it needs to be, frankly, better. The guy next to me: "Burton wasn't available." Other reviewers, mind you, loved Shannon's performance.

Superman himself was slightly weathered in a way Chris Reeve was not, the planes of his face being more indented and chiseled than we are used to. He is immensely well-built, of course, so perhaps most people won't mind his indented look. The exuberance of diving up and clomping down on mountaintops, however, wears thin: Why just showcase wanton destruction of ice-faces, berms, earth forms?—We know what he can do. We miss the scene of the complicated Krypton baby-pod (hat-tip to Alien) landing in a Kansan field. But the liberties this sequel/prequel/he-quel takes with the cherished Superman tale (the film runs 143 minutes) get under the skin, even if viewers don't notice the feebler elements of the script, or the occasional silliness overall. Did anyone notice that all major characters except Diane Lane and bearded Russell Crowe had chin dimples? Even the bad-guy generals. What were the producers trying to say?

The time-honored red cape and red, blue and yellow body-leotard and tights worn by the toothsome but not quite right Superguy has been darkened here to deep navy, ruby wine red, and ochre yellow. It is a magnificent textured suit, a more mature palette, with a marvelous cape that you can tell at a glance has a lovely "hand," drapes beautifully as he walks or flies. Superman appears, from a distance, slightly colorized pewter.

But you'll go to see it no matter what the criticisms listed.

Best advice: Go with a witty companion. And note that the reporter actually has more impact against true evil today than the mighty Superman ever could. One serious op-ed, a stomping journalistic call-out, and Boom go the bad guys entrenched and doing their utmost damage in our upper echelons.

# An Alarm, from Ralph Vince

Is there ANY reason on earth why bank free reserves would be up over 25 percent since the beginning of the year?

The last time we saw such acceleration was to stem meltdown.

What in the world is this about now?

# David Bohm, Shared by Richard Owen

Faced with explaining gyroscopic motion, most physics students learn the various formulae, involving conservation of angular momentum, and produce an explanation in a relatively mechanical and formulaic fashion; but Bohm needed a direct perception of the inner nature of this motion. Once he was walking in the country, he imagined himself as a gyroscope, and through some form of muscular interiorization, he was able to understand the nature of its motion. In this way he worked out, within his own body, the behaviour of gyroscopes. The formulae and the mathematics would come later, as a formal way of explaining his insight.

From very early on in his scientific career, Bohm trusted this interior, intuitive display as a more reliable way of arriving at solutions. Later, when he met Einstein, he learned that he too experienced subtle, internal muscular sensations that appeared to lie much deeper than ordinary rational and discursive thought.

Without explictly knowing it at the time, Bohm had returned to that ancient maxim "as above, so below", the medieval teaching that each individual is the microcosm of the macrocosm. Bohm himself strongly believed himself part of the universe and that, by giving attention to his own feelings and sensations, he should be able to arrive at a deeper understanding of the nature of the universe

This particular skill remained with Bohm throughout his professional life. His colleague at Birckbeck College, Basil Hiley, once remarked, "Dave always arrives at the right conclusions, but his mathematics is terrible. I take it home and find all sorts of errors and then have to spend the night trying to develop the correct proof. But in the end, the result is always exactly the same as the one Dave saw directly".

## Pitt T. Maner III adds:

I found this excellent interview with the gentleman in which he presents his views on perception and the necessity of incorporating many viewpoints in order to gain greater understanding.

# Mumbo Jumbo Department, from Victor Niederhoffer

The Nikkei entered a bear market sliding 20% from its peak.

"Stock gains accelerated after the S&P 500 recovered from a brief dip below its average price in the past 50 days. A measure that's watched by some analysts to gauge the markets trend, the S&P 500 has closed above the threshold on all trading days so far this year except for April 18". Bianco said that market volatility will continue "until the taper tantrum stops".

A WSJ news report said that the Fed may "push back on market expectations of higher interest rates. The market fell earlier on a world bank report that growth will be 2.2 % this year, less than its Jan forecast of 2.4 %".

A round number was broken for the second time in the S&P 500 at 1600 intra day and rejected. That was a weight on scale also.

Okay. Those are the weight on the balance scale that tilted the market and caused its quantum jumps today, the pitches in the pinch of Christy Mathewson.

Let us all join Willie Sutton and turn oursevles into headquarters for being such fools to succomb to churning over such things.

# A Father’s Day Tribute, from David Lillienfeld

My home office adjoins my daughter's room. Her last day of high school (and therefore public school) was today, and now that she's finished it, she's home finally clearing out her room of the school year's detritus. It's amazing how much "stuff" she managed to keep in her bedroom. Walking by that room's door brings to mind the scene in A Night at the Opera of the ship's storage locker holding something like 10-15 people. Tomorrow, she will join her class at graduation; at some time, she and some of her peers will be saluted for academic achievement. I'm told that that's the top 5% of the class. Given the nature of the high school, that's a better result than my wife and I had expected. Her high school is rigorous–almost to a fault. During spring break, some of her friends now freshmen at MIT and Cal Tech came by for some pizza. The frosh from both schools kept commenting on how much they were enjoying college. It was easier, for some courses much easier, than high school. Both my wife and I were shocked, but perhaps these kids aren't aberrant in their assessments.

That my daughter, our youngest child, will be graduating within 24 hours brought to mind my graduation. For my daughter, the biggest graduation in her life thus far will be the one tomorrow; for me, it was 29 years ago when I graduated from medical school. It's not that it was the last graduation I would share with my father, though it was–or even the last time I would see him, though it was that as well. It's not that I thrived in medical school. Hardly, having bombed in biochemistry (I think it's psychological moreso than the material, but that's for another thread) and having a simply awful experience with one medical resident (I nearly dropped out of school in my third year–almost unheard of; on hearing of my interest, the Dean inquired as to what was my reason, and when I explained, she promptly called in that year's class of 2nd year residents in medicine and read them the riot act about abusing the 3rd year medical students. My classmates were aware of the situation, and when the abuses stopped-at least for my rotation–many thanked me, though I told them it wasn't altruistic on my part, it was survival), I saw my graduation from medical school as a triumph. It's not the degree of which I am most proud–that would be my MSEngineering, and it's not the one I worked hardest for–that would be my MBA in marketing, nor even the degree which most of my peers associate me with–that would my MPH in epidemiology. It is, however, the degree with which I most identify, the one most enmeshed in my identity.

In medical school, during the first year intro to clinical diagnosis, there's much effort expended on trying to get med students to empathize with patients, though not sympathizing with them. I began to understand the idea much better after talking with my attending what was meant by the empathic physician that we strive to be, that our patients need if we are to be effective in helping them maintain or improve their health.

Those experiences contrast with some of the other ones, perhaps less emotionally challenging, perhaps not, such as my first appendectomy (not holding the retractors but doing the surgery; what should have been 30 minutes under anesthesia for the patient became 60 minutes for me–not unusual, I'm told), trying not to cut too deeply, hoping to pick up the peritoneum, all of 4 cells in thickness, sweat pouring out of my brow (and being attended to by a fortunately doting circulating nurse) even as the temperature in the OR stayed a steady 63 degrees. The patient came through the procedure OK. For many medical students, their surgery rotation, while grueling, is also the most fun one. One gets to see the pathology present, instead of surmising it the way an internist would. At the same time, one comes to appreciate that being a surgeon takes a certain personality–not just bravado or ego but also perspective on the role of a physician in the treatment of a patient. A surgeon is cutting on a patient to help the patient therapeutically. She cuts on living flesh seemingly on a daily basis. Granted, it's with anesthesia, but even so, it is a concept which in the abstract may not seem challenging, or even when one's encounters with the surgeon are infrequent. Seeing surgery daily, though, is different, whether it's the surgeon, the surgical nurses, or the anesthesiologist. I think the former two have the most challenge. It's one thing to nick someone's skin for a biopsy, it's another to open a chest to transplant a lung. There's the old joke about the surgical resident at the poker game tossing \$20 into the pot with an ace-high hand, while the medical resident hems and haws about whether to raise a nickel with a full house. It fits better than most might appreciate.

Graduating from medical school meant a change not merely in life but in me as a person, in my identity. I don't know that that was true for all of my classmates, at least not that they were willing to say come reunion time. It was for me.

As my daughter graduates, so will my wife and I. Empty-nester syndrome may hit, hopefully not. My daughter will move on to the next phase of her life, to begin adulthood. Both my wife and I wish that she comes through her college experience as enriched as she has her high school one.

In 24 hours, her world will change in ways she won't appreciate for years to come. Perhaps her mother's and father's will do so too?

# The Heston Recipe, from Fabrice Rouah

June 13, 2013 | 1 Comment

Most traders are intimately familiar the implied volatilities of equity options. These implied volatilities are often smoothed to avoid the temporary spikes in the strike/maturity surface that can lead to butterfly and calendar arbitrage. Many trading desks and market makers use the Heston stochastic volatility model for smoothing.

To understand the genesis behind Heston model, and why it is so important, we must revisit an event that shook financial markets around the world: the stock market crash of October 1987. The consequence on the options market was an exacerbation of smiles and skews in the implied volatility surface which has persisted to this day. This brought into question the restrictive assumptions behind the Black-Scholes option pricing model, the most tenuous of which is that continuously compounded stock returns be normally distributed with constant volatility. A number of researchers since then have sought to eliminate the constant volatility assumption in their models, by allowing volatility to be time-varying.

One popular time-varying approach is to allow volatility to be stochastic. The Heston model, developed in 1993, was not the first stochastic volatility model for pricing equity options, but for mathematical and practical reasons it is by far the most popular and the most successful. It is used throughout the world by option trading desks and market makers, banks, hedge funds, and academics. It forms a crucial part of the options curriculum of financial engineering programs offered by universities across the world. The model has been refined and extended in many ways, to overcome some of the shortcomings of its original formulation. The top option valuation software companies, such as Numerix, SuperDerivatives, and Fincad, all incorporate the model into their pricing routines. My forthcoming book is devoted entirely to the model.

In short, the Heston model is one of the great success stories of mathematical finance, yet most financial professionals have never heard of it. The next time someone mentions the Heston model, you won't be wondering whether it refers to Charlton Heston, the late American actor, or Heston Blumenthal, the quirky British chef, but to Steve Heston, one of the most influential financial engineers of the modern era.

Fabrice Rouah is the author of the forthcoming book "The Heston Model in Matlab
and C#" from John Wiley & Sons.and a consultant on option pricing models.

# The Dissapearing Edge, from Jeff Watson

June 12, 2013 | 5 Comments

An edge can last a long time, but when a paper is published outlining a system with an edge, sagacious people note the edge and start trading that system and natural market forces move that edge to zero. We all know people who have shared their systems and their edge. Regrettably, I've given away a few myself. Once they're shared, in my personal experience, they tend to disappear quickly and may not reappear for a very long time. That's why I would no more give details of my methods than I would give perfect strangers a glimpse into the most private areas of my life. The only consistent edge is to pay the price to have exchange privileges, able to buy at the bid and sell at offers on the inside market. You won't get rich but probably won't get killed either. But then again, I should be talking…….Ceres decided to give me an auto da fe today, with musical accompaniment, and she used a cat of nine tails in 7/8 time.

## Jordan Neuman writes:

Hi Jeff,

Interesting note. I have found that edges go away even when I don't give them away — if I am paranoid, I would think I am in a Truman show. Others start talking about what I discovered eventually, and I also wonder if I discovered it because of what others have talked about previously. Thus, I am not sure if edges go away faster if you discuss them versus the null of not doing anything. I think it also depends on what the edge is…some like the January effect will last a long time because of tax arbitrage while others might fade to equity-like risk/reward and then lack the "natural market forces" to fade further.

Regards,

Jordan

# Review of Endgame, from Victor Niederhoffer

June 11, 2013 | 4 Comments

Endgame by Frank Brady, the excellent biography of the rise and fall of Bobby Fisher, perhaps the greatest chess player of all time, and a man not unlike Beethoven who thought the whole world owed him deference, shows Bobby at 9 playing chess in a bathtub like Alan Greenspan at 80, for five hours at a time, the only way his mother Regina could get him to take a bath. His mother spoke 9 languages and was a stenographer for Hermann Muller who won a Nobel Prize in genetics. She was a devoted though impoverished mother and professional protester throughout Bobby's life. Bobby's biological father was reputed to be an eminent physicist, Paul Nemenyi, who sent modest support payments throughout Bobby's childhood. Bobby's normal day from the time he was introduced to chess at the age of 8, until he won the world championships 20 year later consisted of 15 hours of study of chess, reading every chess book in all the book stores and libraries in all the original languages. He was given a scholarship to to the progressive Community Woodward school at the age of 10 with the idea that he'd teach the kids chess, and his IQ of 180 would take care of the rest of his education. He dropped out of Erasmus at the age of 14 so he could play in chess tournaments as he was the youngest Grandmaster in history, and already the US junior and Amateur Champion. Thus, as in almost every other case a combination of immersion in his field, environment and genetics led to his genius.

At the age of 9 he developed his central ideas of chess–rapid development of the officers, occupying or controlling the central squares at the equator, and mobility-giving maximum scope to the pieces. The ideas might be likened to following the opening range breakout, building a solid foundation whenever a movement against the breakout occurred, and insuring that there was enough liquidity in the position at all times to add and subtract without undue friction. I liked the numerous little touches that Bobby used to improve his changes like wearing a visor during his matches so that his opponent wouldn't see what pieces on the board was looking at, and his invention of a clock with an overhead push button that would not make noise like the spring pushed versions, and his insistence on the spectators sitting 65 feet away from him.

He had numerous mentors throughout his career starting with Camine Nigro, a music teacher who introduced him to the Brooklyn Chess club at 9, and Jack Collins who became a second father to him and took him to the chess clubs of New York, especially the Manhattan and Marshall clubs. Bobby renounced all contact with these and all other mentors for infractions such as taking a photograph of him, or asking for him to write an introduction to their books of experiences.

The book opens with one of the three times Bobby was imprisoned, this time in Japan for 15 months, a very good prison to avoid, and then transports the reader back in time to the beginning and end of his tragic life. As is well known, Bobby was snatched by a religious group that believed in impending apocalypse in the world, and recommended against medical treatment for its million + believers. He added to this total belief in the conspiracy of the elders of Zion to take over the world. As part of this he refused to sit at a chess table, or eat any foods that came from Israel, and loudly broadcast his views on this subject and the deserving retribution of 9-11 on radio. An arrest warrant from the US was issued and this was the reason he was arrested in Japan. Eventually he was granted citizenship in Iceland, and the book movingly describes the last 4 years of his life in Iceland as he wasted away, almost friendless, and without family as he refused hospital treatment for the kidney ailments that eventually killed him.

There are many great set pieces in the book that show the development of a paranoid genius. Almost all his friends were excommunicated by him for the slightest bit of self interest on their part. A typical incident came with Walter Brown, a Berkeley friend, who showed him hospitality and room and board for four months but dared to note that Bobby was eating him out of house and home with his 4 hour long distance phone calls. As soon as he mentioned it, Bobby walked out of the home and never spoke to Walter again. He repeated the same excommunication with every friend that had mentored him throughout his life.

He spent 25 years after winning the world championships in Iceland without playing a competitive match. His belief was that if there were any chips that were on the table from his play, that 100% or more had to devolve to Fisher. Frequently whatever the offer was, and it could be 10 million to play in Zaire or Manila or Yugoslavia, he would have to have double, and if anyone else were to make a profit on it, then the deal was off. Thus, he believed in the socialist idea that life was a zero sum game and that whatever chips someone else made from a mutually beneficial exchange came out of his pocket. This view, doubtless devolved from his mother's pro Russian views, was the source of his ruin as well as his lack of education and common sense.

In one of his humorous remarks, Bobby noted that after he won the championships from Spassky, the US newspapers had chess on the front page and the Russians had it on their back page for the first time in history. He believed that the Russians were always conspiring to cheat him out of the world championships and that they contrived in all their matches to do him in. He also believed that they were so hurt by his winning the championships that they were apt to try to kill him. Apparently, as documented in the book, there is truth to both of these fears.

The author is a great historian with empathy for Bobby. He describes how while Bobby went through what he does to prepare for a match over dinner they were having, he started crying because he could see he was in the presence of genius. Out of the Head of Zeus came Bobby Fisher. Of course romance is always a factor. And Brady gives a very even handed and complete recounting of Bobby's courtship and marriage proposals to a chess playing fan 30 years his junior and his attempts to father a child with a worthy receptacle of his genes and genius in the Philippines.

It is sad to think about the 37 years of Bobby's life after his championships that went without any published or competitive games except for his anticlimatic re-match with Spaasky in 1992. That match did make Fisher a milionaire, and the book contains a nice epitaph describing the legal battle over the \$3 million estate he left. There is much for all speculators and parents to learn from this great book about the tragic life of Bobby Fisher and it is highly recommended.

P.S. I became aware of this book when I enrolled Ob. as the youngest member of the Marshall chess club. The book sat atop a table where Fisher player the game of the century at the club where Fisher sacrificed a queen at the age of 13 against Robert Byrne, a grandmaster and won. Strangely, I knew many of the persons described in the book including Art Bisguier who was his second in many tournaments and broke up a fight with another grandmaster, and Jackie Beers who is described as having a great temper which he showed frequently at Brighton Beach Baths where I knew him well, and Walter Browne who I had the pleasure of playing poker against.

I was born in the same year in Brooklyn as Bobby and achieved many of the realms of excellence that he did in another sport, squash. We took the same tests in high school at the same time, but he was in Erasmus where Artie went to school and I in Lincoln. 8 miles to the South. It was interesting for me to note that Bobby was an avid tennis player and swimmer and baseball player, like myself. (It is an interesting irony to me that like Bobby , I took a five year sabbatical from my sports career when I was at my peak at the age of 20. but for opposite reasons to Bobby's. The irony is that I stopped playing because they wouldn't allow any Jews in all the clubs in Chicago where squash was played ( except for one reputed to be a bagman). I didn't wish to demean myself by playing where I couldn't bring a guest, have a locker or order a coke. ( I was able to play for free). Bobby quit the game because he feared that there was a conspiracy among the Jews to grab all power and do him in). Instead of becoming a tennis bum, my parents were able to edge me into Harvard–albeit to my discredit or possibly credit, eventually I became a micro speculator. Bobby who had no contact with his legal or biological father undoubtedly could have achieved untold extra greatness had he been reared by a strong and loving father and mother the way I was. One hopes that Ob. and I and others will learn from the highways and byways of the life of Bobby and will be able to avoid the pitfalls while ascending the summits.

# How to Identify a Drowning Person, from Pitt T. Maner III

June 11, 2013 | 2 Comments

A quote from an interesting article follows below that refutes the conventional images of drowning. Closest I have come to drowning as a kid was at the Y when a smaller child, playing around, jumped on my back and put me in a choke hold while I was swimming underwater. It was quite a tussle to get him off and make it back to the surface–the nearby lifeguard didn't see it.

The Instinctive Drowning Response – so named by Francesco A. Pia, Ph.D., is what people do to avoid actual or perceived suffocation in the water. And it does not look like most people expect. There is very little splashing, no waving, and no yelling or calls for help of any kind. To get an idea of just how quiet and undramatic from the surface drowning can be, consider this: It is the number two cause of accidental death in children, age 15 and under (just behind vehicle accidents) – of the approximately 750 children who will drown next year, about 375 of them will do so within 25 yards of a parent or other adult. In ten percent of those drownings, the adult will actually watch them do it, having no idea it is happening (source: CDC). Drowning does not look like drowning…

As a surfer, I have saved more than a few people from drowning. Every instance was with them getting caught in the rip and trying to get out by swimming against the current and becoming exhausted. I would paddle over to them and insist that I tow them in to shore. Often, people would refuse my assistance, not realizing their danger. I sat on my board nearby, waiting for them until they changed their mind, or started to swallow water or go under. My Senior Lifesaving teacher once told me that one needs to get control of the victim before you can make the rescue. My own technique is jabbing my thumb as hard as I can into the side of their rib cage (between the ribs) which makes them submit. And you're right, drowning does not look like drowning. Fellow dailyspec-er, George Parkanyi should recount his heroic life saving experience.

# Quote of the Day, from Bo Keely

"The great fighting men who graduated from the ranks of the army that fought the Moors will disappear. The politicians and the courtiers will take over – the gentle ones, the conniving ones! They will rook the fighters out of all they have won. Men like Cortez, Pizarro, Alvarado, and DeSoto will disappear, and in their place the weak ones, the ones grown fat on easy wealth, will come to power."

-Louis L'amour

# A Rainbow Has Appeared, from Alex Castaldo

June 7, 2013 | 1 Comment

In the last 4 days we have seen every colour on our calendar (see above).

Tueday June 4 Red - Stocks and Bonds down

June 5 Blue - Stocks down and Bonds up

June 6 Green day - Both Stocks and Bonds up

June 7 (today) Yellow - Stocks up and Bonds down

Interesting, but what does it portend?

# The Fear of Fixing Things, from Chris Tucker

June 7, 2013 | 1 Comment

I was washing the dishes today and thinking about the plumbing in my house. When we bought this place seven or eight years ago, it was a dump. Cracks in the foundation, termites, even rats (yes — hard to believe, but true). There were small trees growing in the gutters. The previous owners left crap everywhere. The light fixture in my daughters room consisted of a single bulb in a socket with the wires simply hooked over and dangling from the wires in the ceiling box. Every single drain in the house leaked — when I removed the p-trap under the kitchen sink it crumbled in my hand. The sheet rock on the soffit over the kitchen sink had been removed, exposing the horizontal cast iron drain pipes that had visible and botched patching attempts that leaked onto the kitchen counter. Christ.

The main soil stack had a ten foot long crack that you could slide your hand into — there were signs of raw sewage on the basement floor. The yard…well, let's just not go there.

Before I could get a contractor in to do the renovation, I had to make the place safe to live in — because we were going to have to be there during the process. I was discussing the litany of problems with a coworker who did construction on the side, telling him I needed a plumber immediately. He smiled and said "No, no, no. No you don't. Drain plumbing is easy. Go rent a chain pipe cutter and remove the cast iron yourself - -it's simple, just make the pieces small because its heavy stuff. Then buy a how-to book on PVC plumbing. Again, it's simple and MUCH cheaper than a plumber. Map out what you need, buy extra elbows and fittings and when you screw up, cut it out with a hack saw and do it again. Simple. I promise."

Now I had a mentor years ago — still a good friend, but far away now, who somehow managed to instill in me a willingness to find out how to fix things. I'm a curious cat anyway so maybe easier for me then most. He owned a small business and did all of the maintenance and repairs on his vehicles himself. Big trucks, not semis, but big enough. Replaced the engine on one of them in a parking lot in the middle of a knock down, drag out Oklahoma rain like God is pissed at you personally storm. The guy had work to do and he needed the damned truck. There was something about that that I just loved. No freakin' excuses. If it had to be done, it got done.

So when we moved into this dump, I mean place, we put most of our stuff in storage and I shipped the wife and kids off to her mother's for three days and prepared to get dirty. Removing the old cast iron was, in fact, easier than I could have imagined — and fun too. It was very satisfying to hear it snap with a resounding CRACK! Don't get me wrong, it was disgusting in a way that is hard to imagine, but I'm not afraid of filth. So, good, done in about an hour, and I cut the remaining soil stack straight and pretty as you please five feet above the slab in the basement.

I pulled all the toilets up and began by setting the closet flanges (the first piece of plumbing under the toilet that connects to the drain pipe). From below I then mapped out what pipe and fittings I needed to get to the stack, fiddled and tinkered, cemented, joined and plumbed my way all the way up through the roof and down to the basement and joined the whole thing to the remaining iron stack with a rubber Fernco coupling. I only botched two or three joints and it was not a problem to cut 'em out and do 'em again. It took me three days — most of that time looking up, rubbing my chin and thinking — maybe four or five hours of actual labor. I was so damned happy with myself that I didn't want the real plumber to come replace it when the time came to move the soil stack into the exterior wall (it was in the way of the new kitchen).

I tackled several jobs — dug down to the footing and repaired the crack in the foundation wall with a hammer and chisel and hydraulic cement inside and out and on the exterior set a 4' x 4' sheet of cardboard whose flutes were filled with pelletized bentonite to make a water impermeable barrier. (Think clumping cat litter.) Basement has been dry as a bone ever since. I sistered the rotten floor joists with 3/4" plywood and some heavy bolts, cut out and replaced portions of the mud sill and plate, replaced the water heater and learned how to sweat copper pipe from a book. The list goes on and on.

The point of all of this, is that when I tell most people, they are simply amazed. "How could you do all that?", "How come you know so much about plumbing and electrical stuff?", "Aren't you scared to mess with the wiring? What if something goes wrong?" And I can see their points, what do you do if you get in over your head? And the answer is to do the thing that I was trying to avoid in the first place, pay a professional to come set things right. Yes, sometimes the only alternative is real, hard earned, specialized experience or skill.

The thing is — people are afraid to fiddle with stuff they don't know about or understand. Okay, I get that. But the thing that really bothers me, the thing that Robert Pirsig so eloquently expressed in Zen and the Art of Motorcycle Maintenance is that when you press people a little about that, the awful truth is that most of them don't WANT to know or understand. They really just don't wanna know. Or can't be bothered. That bugs the crap out of me. (This book, by the way, is not about motorcycle maintenance, it's a deep philosophical exploration of values — and it reads like an adventure story.)

Look, if you need brakes on the car and don't want to pay someone an arm and a leg to do them, then you have to acquire some basic knowledge — absolutely — if you screw up badly enough you could kill someone. But brakes are simple. They are SIMPLE to replace. But you have to get dirty, gain a little knowledge, maybe even THINK for a few minutes and then DO THE DAMNED WORK. And most folks just can't abide that. It's too much trouble. What if I screw it up? I don't like using a jack, what if the car falls? It's too dirty. It's tooo much work.

In Zen and the Art, Pirsig tells a tale about his companion's motorcycle. The thing has some valve chatter and, as was common on bike engines back then, the valves needed shimming. Not that hard at all, and look, here's an empty soda can — the aluminum is EXACTLY the right thickness to make shims — I'll take care of it here and now. But his companion would have none of it — he was afraid something would get messed up. Afraid. Just afraid. Pirsig goes into this in a very deep way that I can't hold a candle to and I cannot recommend this book highly enough to anyone involved in any endeavor that requires peeking under the hood, a little rolling up of the sleeves and some elbow grease. Perhaps trading especially.

Now get back to work.

# Market Story Time, from Duncan Coker

Everyone loves a good story and I try to read to my children every night. The current market narrative is that the last 6 month rally is entirely Fed driven and without Fed support equity markets are doomed. I'd argue stocks have gained on an improving economy and corporate profits. Real rates have gone up for the same reason as seen in TIPS ( though still negative). But as long as this narrative is floating around there will disparate opinions which is what makes a market.

I think this will be the summer theme. Then one day, rates and stocks will have gone up enough for this narrative to be dismissed entirely and we will be on to a new story. And, with any luck we will all live happily ever after.

# Very Short and Sweet (or Bitter) is In, from Pitt T. Maner III

Short, short stories are a specialty of Lydia Davis, this year's Man Booker International Prize Winner. Perhaps it is a sign of the times given the stresses of modern life and lessening attention spans. Davis also has translated Proust for more patient readers.

"Lydia Davis Wins " :

Literary critic and scholar Sir Christopher Ricks, chair of the judges, said: "Lydia Davis' writings fling their lithe arms wide to embrace many a kind. Just how to categorise them? Should we simply concur with the official title and dub them stories? Or perhaps miniatures? Anecdotes? Essays? Jokes? Parables? Fables? Texts? Aphorisms, or even apophthegms? Prayers, or perhaps wisdom literature? Or might we settle for observations? "There is vigilance to her stories, and great imaginative attention. Vigilance as how to realize things down to the very word or syllable; vigilance as to everybody's impure motives and illusions of feeling."

Here is a sample from The Collected Stories of Lydia Davis:

The Fish Tank

I stare at four fish in a tank in a supermarket. They are swimming in parallel formation against a small current created by a jet of water, and they are opening and closing their mouths and staring off into the distance with the one eye, each, that I can see. As I watch them through the glass, thinking how fresh they would be to eat, still alive now, and calculating whether I might buy one to cook for dinner, I also see, as though behind or through them, a larger, shadowy form darkening their tank, what there is of me on the glass, their predator.

# Fortune Global Forum 2013 in China, from Leo Jia

The Fortune Global Forum 2013 is being held at the Shangri-La Hotel in Chengdu between June 6th and 8th.

Someone has started a new campaign to name Chengdu (a 2,500 year old name, which literally means "becoming a capital") City of Fortune and Capital of Success.

The participants in the forum are listed here and the agenda is here.

From Xinhuanet: "This is the 12th annual forum held by Fortune magazine. It's also the first one hosted by a western Chinese city, following Shanghai, Hong Kong and Beijing. Chengdu is the capital of Sichuan Province and is a rising economic engine in China's "West Development Strategy". Last year, Sichuan Province ranked in the top 10 in terms of foreign direct investment utilization."

From China Daily's article "Chengdu gains from Fortune Global Forum":

More than 600 state leaders, CEOs of world-class companies and economists from around the world have registered for this year's event under the theme "China's New Future".

The city will enrich the forum, as it is pertinent to its theme and this year's core topics: sustainable development, innovation and technology.

The city's good infrastructure, convenient transport links and logistic systems, comparatively low labor costs and efficient administration system have attracted 238 companies out of the world's top 500 to the city. Chengdu's GDP was 800 billion yuan (\$127 billion) in 2012, accounting for one third of Sichuan province's economy and 8 percent of western China's GDP.

# Gild the Farthing if You Will, from Victor Niederhoffer

Another bit of topsy turvy, a double negative, is the meme. It used to be that when the economy was weak, the stock market would go down and bonds would go up. Or when the economy was strong the stock market would go up and bonds go down. That's been the idea for at least five years. But now, when the economy is weak, the idea is that the Fed will continue buying weak assets of banks longer, so that stocks go up and bonds go down. When the economy is strong according to the latest random economic number, the idea is that the qe2 will not be prolonged, so the stocks do down and bonds go up.

This is a rather loathsome state of affairs that only Gilbert and Sullivan or Voltaire could have seen. It all stems from the abysmal buying of weak assets by the centrals. Okay. They've bought 2 trillion of assets. The bonds are down about 5 or 10%. That's means to me that 100 or 200 billion has been transferred from the portfolios of banks to the Fed, and this 150 billion has an opportunity cost. One opportunity cost is that instead of enhancing the colleagues and clients, it could have gone to the common man—- even in the form of lump sum payments or a reduction in, dare we say it—- no we don't.

What's the appropriate response to this topsy turvy. The old idea was crazy because when the economy is strong, then inflation is less by the quantity theory of money, mv = pt and t is higher. So bonds should go up not down. But this is even worse. The economy is strong, so stocks go down because the Good one will not buy the weak assets for as long as hoped. What's the world coming to. Which is appropriate. The Willie Sutton thing—- he wanted to turn himself in after Thomson hit the home run. The cricket thing, it ain't cricket. Or my squash opponent who would always say, "this isn't squash, mate" when I moved in to volley a few instead of waiting.

# Junto This Thursday, from Victor Niederhoffer and Dailyspec

John Mackey (CEO of Whole Foods) will be the next speaker at the Junto on Thursday, June 6th at the Mechanics Institute at 20 W 44th St in NYC. His talk on the social and profit responsibilities of business will start at 8 pm. Regular Junto Franklinian thing will begin at 7:15. Please come early if you wish a seat.

# Obituary for Ross Miller, from Mary O’Keeffe

June 4, 2013 | 1 Comment

Ross Miller died, unexpectedly but peacefully, in his sleep at his home in Niskayuna on May 20, 2013, leaving behind his wife of almost 34 years, Mary O'Keeffe, two daughters, Alison and Catherine Miller, a sister, Dr. Dinah Miller of Baltimore, and a large extended family, many friends, colleagues, students, and mentors.

A pioneer in the fields of experimental economics, artificial intelligence, and computer-aided financial analysis, he worked in both industry and academia, winning awards for his innovative teaching and financial research inventions from Boston University, General Electric R&D, and the University at Albany. Since 2004, he has been Clinical Professor of Finance at UAlbany, where he taught students in the MBA and Financial Analyst Honors programs. Fascinated by the inner workings of financial markets from an early age, he investigated financial frauds and deceptive practices and analyzed alternative market trading rules to avoid speculative bubbles and financial disasters.

His book What Went Wrong at Enron spent months on the New York Times business paperback best seller list in 2002. Other books, Computer-Aided Financial Analysis and Paving Wall Street: Experimental Economics and the Quest for the Perfect Market received praise from both academics and industry practitioners, and have been translated into Chinese, French, Italian, Japanese, and Korean. His research articles since 2005 have shined a light on excessive hidden fees charged by financial institutions. The Wall Street Journal, Money Magazine, CNBC, and the New York Times have highlighted his work, which has contributed to some industry reforms.

Born January 6, 1954 in Greenville, South Carolina, Ross was the son of the late Rabbi Milton Gerald ("Jerry") and Sara Stein Miller. Following a few years in Greenville and in Memphis, Tennessee, where his father was active in the civil rights movement, the family moved to Elizabeth, New Jersey. After graduating from Elizabeth public schools, he studied math, computer science, and economics at Caltech and Harvard, working with many distinguished scholars, especially Charles Plott and Vernon Smith, his lifelong mentors and collaborators in his seminal undergraduate research project. While at Harvard, he met his future wife, with whom he founded a consulting side business, Miller Risk Advisors, which they ran together.

Throughout his 59 years, he was a lover of learning and a creative and tenacious problem solver with a wonderful sense of humor, filling the family home with joy and laughter. His gift for cheerleading and inspiring others to believe in themselves and not to give up in the face of daunting challenges–whether his students, his wife, or their two homeschooled daughters–has left a remarkable legacy.

Memorial Celebrations will be held in July. Memorial contributions can be made to the Summer Program in Mathematical Problem Solving or to the YWCA of Northeastern NY More information will be shared at RossMillerMemorial.blogspot.com.

What is written above is the obituary that appeared in the print editions of the Albany Times Union and Daily Gazette on June 3. I am trying to preserve and piece together as many memories as possible, by going through photos and documents left behind and reading some of his prolific writings, especially his occasional commentary series, which you can find at this link.

I am writing a series of essays with photos about his life. There is a draft of a first one about his early years in this post. There will be more on later years on this blog. I am grateful for anyone who would like share memories. You can comment on this blog or reach me to share privately at mathcircle@gmail.com.

Ross was the love of my life. We met in September 1975, at the beginning of graduate school, both of us age 21. We married in July 1979. We were not just husband and wife, but partners in virtually everything we did together. I miss him more than words can say.

Rossmillermemorial.blogspot.com

# The Style of Gerry Lopez, from Jeff Watson

June 4, 2013 | 1 Comment

Gerry Lopez, might not be the best surfer ever, but his style approaches sublime. No other surfer, ever, had the natural style of Lopez. I wonder whose style in the world of speculation is similar to his.

It's his flow, the way he glides along the face, always on the best part of the wave, gets tubed, and casually stands up fully erect, shakes some water out of his hair, little smile on his face, then kicks out of the wave and starts over again. He is totally relaxed, zen-like, despite the conditions being really hairy.

What you never see with Lopez is the horrible wipeouts that he took as the cost of doing business. He was brutalized by the reefs under the waves, yet he always kept riding. Lopez's style is something a trader would want to emulate but on a different plane.

## Richard Owen writes:

An equivalent investor would be Crispin Odey.

The only man in town with enough style, accrued wealth, and know how to swing a book that actually looks like a hedge fund of old.

Able to turn gracefully on a wave before it engulfs him. Who pulls out the longboard, the quad, etc. dependent upon conditions. And who is likely as fascinating off the water as on.

# Blackjack is Not Easy, from Jeff Watson

Blackjack tables seem to be the major profit centers in Vegas, and I don't see them going away anytime soon. The house has the edge when you're playing a "perfect game." Make one or two mistakes or deviations from the perfect game and the house vig goes to ~18%.

At the Riviera, if they suspect you are counting, that shoe gets reshuffled every other hand. On those non-regulated offshore gambling boats, they either put in a mechanic or a gaffed shoe to bury you. Blackjack, roulette, slots, lotto, keno, etc are way too tough for me.

## Steve Ellison writes:

I had three fraternity brothers on the team referenced in the below article. The most obvious parallel with trading is that casinos won't tolerate any player who consistently wins. Casinos have rules against card counting, but the principle applies in other games, too. My wife knows a guy who has won big at video poker and is banned from several casinos.

"Blackjack is the 'minor leagues,' said John Chang '85, one of three alums from the notorious MIT blackjack team who returned to Caesar's Palace in Las Vegas May 28 for a panel discussion at the 15th International Conference on Gambling and Risk Taking.

The Las Vegas Sun reported on the panel, at which Chang joined Houh '89, SM '91, PhD '98 and Andrew Bloch '91 for a frank discussion of the years-long streak that MIT students enjoyed, putting their math skills to practice.

Chang had to join the panel remotely, answering questions in a prerecorded session, since his ban from Caesar's (among other casinos) is still in effect. …"

# Federer’s Loss is Our Gain, from James Tar

June 4, 2013 | 1 Comment

Always something to learn when Federer is clearly beaten which can be applied to markets, especially in a market like today:

1. He was out of position, or better put, poorly positioned for all of the match.
2. Up early in the opening of the match, he failed to hold and close his early lead when he had clear opportunities.
3. He made errors in pivot points early in the second and third sets - giving away every chance to get back into the match.
4. He was a consummate professional in defeat in the post match - the opponent was better, played better, and deserved to win.

The pundits will like to call this another sign of his decline, etc. I'm not so sure. Particular in that his inability to hoist another championship trophy is now nearly fully priced in.

# Hurricane Drones, from Pitt T. Maner III

I recently came across this interesting article:

I would think that similar devices could be used for tornadoes and many types of remote sensing (with obvious military applications given "swarm intelligence" features).

'Kamran Mohseni envisions a day when the unmanned vehicles in his laboratory at the University of Florida will swarm over, under and through hurricanes to help predict the strength and path of the storms.

The tiny, autonomous craft — some fly, others dart under the waves — can spy on hurricanes at close range without getting blown willy-nilly, while sensors onboard collect and send in real time the data scientists need to predict the intensity and trajectory of storms: pressure, temperature, humidity, location and time.

Mohseni said people always ask him how the miniature flying machines — just 6 inches long and about the weight of an iPod Nano — can take on one of the monster storms.

"Our vehicles don't fight the hurricane; we use the hurricane to take us places," said Mohseni, the W.P. Bushnell Endowed Professor in the department of mechanical and aerospace engineering and the department of electrical and computer engineering.'

# Productivity on the Waves, from Stefan Jovanovich

The ratio of crew to tonnage is changing again. In Nelson's Navy a 3500-ton ship of the line needed a crew of nearly a thousand sailors. ("Needed" but rarely got.) The dreadnoughts that started the industrial arms race in the last quarter of the 19th century (the race that the world is still running) were 4 times as large but had slightly smaller crews. The switch from wood and sail to steel and steam meant that countries could spend more of their wealth accumulating weapons and less paying for meat puppets in uniform. (The popularity of mobilization/conscription was that it allowed armies to keep up with navies; if serving was a duty rather than a job, then the Navy's enviable stuff to payroll ratio could be emulated.)

But, after WW I the switch to steam and steel stopped having any effect on crew ratios. The current U.S. nuclear carriers have 57 sailors per thousand tons of ship, very little change from the dreadnoughts' ratio of 62 sailors/ton. This is a problem. Sailors in the modern Navy cost \$100,000 a year; a carrier crew runs a tab of half a billion dollars a year. And that figure does not include the tail costs of military retirement, including VA medical care. Something will have to change. The present hope is that packaged weaponry can somehow bring the container revolution to the Navy (McLean's magic boxes have reduced crew and longshoreman staffing levels per ton of cargo by more than a hundred-fold since the 1950s). The new LCS type is supposed to require only 25 sailors/ton; the hope is, according to StrategyPage, that "advances in automation, as well as the introduction of the combat UAVs in the next decade" will allow carriers to operate with only 20% of their present crews. That would be a ratio of 10/ton. If that happens, then we will see the same kind of explosion in ship-building that produced naval wars in South America and the Panama Canal.

# Review of King Me, from Bob Newell

King Me, a film from ThinkMedia Studios of Cleveland, mirrors its subject. Like checkers, the film is filled with subtlety and punctuated with explosive moments.

Checkers is no simple game, and King Me is no simple movie. Humorous and serious, compelling and moving, writer/director Geoff Yaw has made a work of significance out of a game that few adults ever think is more than something for kids or old folks.

After watching King Me you'll never think about checkers the same way again. You'll experience a story about hope, courage, triumph and loss. It's Rocky and Cinderella and maybe even a little Chariots of Fire.

On one level, the movie tells the story of Lubabalo Kondlo, a black man from an impoverished South African township. Kondlo plays checkers at the grandmaster level, but due to disputes with white-dominated Mind Sports South Africa (MSSA), the national governing body for games such as checkers, he was blocked from competition on the international level.

Is the leader of MSSA racist? Or did Kondlo flout MSSA's rules? King Me strives to present a balanced picture, and herein lies one of the movie's subtle touches: you'll draw your own inevitable conclusions, but you'll draw them from the facts, not from a skewed or agenda-driven presentation.

Alan Millhone, President of the American Checker Federation, managed to pull international strings, line up sponsors, and break through bureaucratic roadblocks. Kondlo came to America to compete, and ere long he was the challenger for the world championship of what's known as "Go As You Please" (GAYP) checkers. This is the version of checkers that we all grew up with.

Enter Ron "Suki" King, reigning GAYP champion since the 1990s, a superstar in his home, the island nation of Barbados. King's personality looms large on camera; he's flamboyant and more than a little egotistical. But he's also very, very good. Challenger Kondlo was facing an uphill battle.

It's the classical underdog vs. establishment scenario. Kondlo is poor, short on resources, and struggling. King enjoys tremendous support from both government and business in Barbados. He's wealthy and confident.

Director Yaw makes real drama out of the 24 game King vs. Kondlo match. Can checkers keep you on the edge of your seat? You bet it can, and the emotional content in the match sequences is high. You'll find yourself cheering for the challenger, and you'll share his feelings when the match is ended.

Yaw and crew traveled to both South Africa and Barbados to film on location. The poverty of the South African townships and the lingering after-effects of apartheid come through all too clearly. The contrast with the sequences shot in Barbados is another of the film's subtleties. Barbados is hardly a wealthy place but Yaw captures the differences in a way that you can't help but notice.

There's a lot of color content about checkers, of course. Many of the "big names" in American checkers appear in the movie, although unfortunately a number of them aren't identified by name. Yaw portrays them as a largely eccentric lot. While there is certainly truth in this characterization, it seems overemphasized. Checker players, unlike chess players, tend to be of the man-in-the-street variety.

If you're a checker fan, King Me is an obvious must-see. If you know a little about checkers and want to learn what it's all about at the uppermost levels of play, watch this movie. Even if you're not especially interested in the game, but you enjoy real-life drama and are moved by the heights to which the human spirit can soar, there is much here for you.

Geoff Yaw has done extraordinary and unexpected things with King Me. A documentary about checkers? You're going to be amazed.

King Me can be rented or purchased from Amazon, iTunes, and VUDU.

# May Away, from anonymous

June 4, 2013 | 1 Comment

"Sell in May. Go away" -Wall Street lore

"Rough winds do shake the darling buds of May" - Sonnet 18, Shakespeare

Like many of the Wall Street adages, there is always a bit of truth along with some misdirection. Looking recently since 1998 (n) buying at the end of May, the next four months are -10,-6,-12, -9 SP points on average, roughly 50% of these months are down with a few large negative moves. So the summer months are negative on average but not impressive on the downside. Also, if the holding period is a modest 12 months the effect becomes very muted compared to the profits of buying after most of the other months, shown in average SP points. (jan)15, (feb)18, (mar)14,(apr)15,(may)-5, (jun)-2,(jul)1, (aug)11, (sep)14, (oct)8, (nov)-4, (dec)-2

Maybe the advice should be "buy pretty much after any month if you can hold a year or more". But that is hard to rhyme.

# A Shocking Decline, from Victor Niederhoffer

A shocking decline in S&P of 28 points occurred in the last 2 hours of trading on Friday, the largest since 9/21/2011. The present countist inquires whether any of the following have descriptive or predictive significance.

1. It was preceded on Tuesday by a 3 1/4 point decline on Tuesday in bonds, the largest since 11/1/2011. Was it causal?

2. As of 2 pm on Friday, the bonds were down 9 points since the beginning of the month, the worst decline since may/27/2009. Did it cause the decline?

3. The ratio of stocks to bonds at 118 as of 2pm was the highest in at least 10 years. Did it trip the wire?

4. Are the moves in 4 day weeks significantly more volatile than those in 5 days weeks?

5. Ends of months in the past have traditionally been times for those who don't trust business and believe in fairy tales to sell stocks on the grounds that they're bearish. This has vanished for a few years as they licked their wounds. Did they come out of the closet once again?

6. Gold had receded by 30 bucks by 2pm on Friday, hitting 1388 below the round of 1400. Was it a harbinger?

7. Japan dropped 4% on wed overnight, with no apparent impact on Europe and North America. Was it a pilot fish?

8. A tweet by The Upside Down Man that he was no longer bearish on 5 year and 10 years came at exactly the time of the devastating decline and managed to pick bonds up by a point in the subsequent 1/2 hour before the denouement from 3 m to 4 pm in SPU.

9. It was the end of the month and those who sold puts and bought calls had been having a field day for 18 months. Were they complacent and did they get their due.

10. Did margin calls in bonds and gold especially for those who banks were closed in the Mideast and those who can be sold out with 1 second notice from their internet accounts exacerbate the final deluge?

Looking at SP500 index sectors, the lowest return for the past month was utilities -7.85%. The highest financials +5.25%

Seems the expectation is that as bonds decline banks will make out and people will get out of utilities.

# A Market Lesson I Never Forgot, from Jeff Watson

June 3, 2013 | 1 Comment

When I was a 9 year old kid, my parents told me that a diamond was the hardest thing on the planet, virtually indestructible. A friend came over, and we were talking about Superman and indestructibility and I told him that Superman was fiction, but a diamond was impossible to be damaged, since it was the hardest thing in the world. He said, prove it, and I said OK, and even made a huge bet of all my baseball cards on the outcome. I sneaked into my mother's jewelery box and filched a 1.5-2 ct loose diamond she had. Brought it downstairs into the basement where my dad had a small anvil. I put the diamond on the flat surface of the anvil, grabbed a 5 lb hammer, took a swing, and came down really hard on the diamond. I thought it would just bounce off, but imagine my surprise when all I found that the diamond had turned to dust. Later on that afternoon, my sister ratted me out, and I got that "Go up to your room and wait until your father comes home" speech. My dad came home, went upstairs to my room and wanted to know why I would destroy a very expensive diamond. I told him that both he and my mother told me that diamonds were the hardest thing on earth, virtually indestructible, and I was just proving what they told me to a disbeliever. After all, my own parents wouldn't lie to me or give me unscientific facts.

I thought that my explanation would suffice, reason would prevail, and I'd be in the clear, but I was still grounded for a week, had to do all the dishes, polish all the silver, wash floors, plus I lost a my entire baseball card collection when I paid off the bet.

This was the first experience I had as a kid that taught me that adults were just as full of crap as kids and to not take their word as gospel. That lesson alone, when applied to markets and gambling, gave me more than a few million % return over the years. It took me the rest of the summer to win all my cards back as I had mastered the trick of flipping for cards. Learning the mastery of flipping cards was another story in itself and was the result of losing all my cards the year before to a big kid in the neighborhood. It takes hours and hours of practice, practice, practice to learn how to flip cards to give you an edge.

# Huge Sale, from Vince Fulco

I thought the Dailyspec should know that there is 50% off MIT press books till early June.

# Trader Burnout, from Kim Zussman

Inspired by the concept of burnout from the medical world, it might it be useful for traders to review every once in a while as a tool for when to take a break.

Or conversely take out the cane.

# Reference Book Recommendation, from Shane James

June 3, 2013 | 1 Comment

The value of a reference text can be measured by how the reader applies or adapts the knowledge therein. The following work is regularly very helpful and a highly practical assistance to my speculations: Runs and Scans with Applications by N. Balakrishnan and Markos V. Koutras. (First published by Wiley in2002)

I am ashamed to say that I bought the book just from the picture on the front cover (take a look — those interested in counting will understand what I mean) It hooked me immediately. Some of the chapter headings say it all: Chapter 2: Waiting for the first run Occurrence; Chapter 4: Waiting for Multiple Run Occurrences; Chapter 5: Number of Run Occurrences; Chapter 6: Multivariate run related Distributions, and so on.

Some of the things in the book are not relevant to financial time series analysis but much of it is. There are some fascinating real world applications also that can be adapted to transformed price data. Section 12.7 was particularly helpful and fascinating amongst so much else.