Apophenia has come to represent the human bias and tendency to seek patterns in random information. Our brains crave patterns and to make sense out of things. It’s looking at a random cloud and remarking how it resembles a duck with a bill. It’s the man in the moon, the Jesus toast, etc.

Luke’s “randomania”, on the other hand, is the flip side of the coin. It is the tendency to attribute chance probability or randomness to what is actually patterned data. It is the bias of thinking there is nothing to be seen or discovered, when there really is. It’s rather rare to catch ourselves doing this, because once we think that something is just “noise” we tend to ignore it and walk on by, never to return.

anonymous writes: 

An interesting thing about markets is at one level of focus one has noise, but in the same time period, in a higher level of granularity, there are regularities.

In an apparent anomaly, the physical laws may be different at sub atomic levels, than at larger levels. 



This IBD article proves how easy it is to manipulate the press with hyperbole and misdirection.

"Theranos Founder Known as Next Steve Jobs' Pays $500,000 to Settle 'Massive Fraud Charges'"

"The next Steve Jobs"

Uh huh.

One should be less biblical in their retorts when another person questions the next tech craze or the sanity of capital pouring into an idea that is too good to be true on the surface, and transparency issues around data make it impossible to reach a solid conclusion.

I find this one especially close to another big name in the tech space whose promises continue to under deliver… yet his moonshot ideas allow him to burn through other peoples money…

Thanks, CNBC.

Henry Gifford writes: 

I don't think Theranos is a scam.

As soon as I heard about the company's plans to sell blood tests that are much less expensive, and easier to do, and maybe better in other ways, I thought about all the companies that would be hurt by them, and how heavily regulated those companies are, and how hard those companies will fight back, presumably using regulations as part of their defense.

Then I looked and saw the founder has three strikes against her: she's female, she's good looking, she's young. This shouldn't make any difference, but when combined with being an industry outsider, the jealousy factor can be expected to go up, and the ease with which entrenched companies can create doubt and negative publicity is I think greatly increased.

An early battle the company lost was when the regulators declared that the small container they collect blood samples in is a "medical device," and therefore subject to all sorts of regulations, thus they are not allowed to use it. Sure smells to me like regulators looking for something to start a fight about – how many years could the regulators cut off the company's cash flow while they consider the regulatory merits of a small plastic container which will not contact the body? I didn't hear anything about blood collection containers having previously been regulated, so this is extra perfect – it will take a few years to write the regulations….

When the gloves came off and the regulators cut the company down to being allowed to sell one test only – for herpes – I thought that was perfect – the company from Stanford and Palo Alto with the young founder is now associated with a sexually transmitted disease, but barred from testing for glucose, etc.

Looking at the recent press gives me many reasons to be skeptical that the recent reports of fraud are accurate, or have any merit at all.

One article entitled something like "Patients get different test results with Theranos vs. hospital labs" quoted one patient as claiming a potassium test was about 11.3 with Theranos and 9.6 (or so, as far as I remember) with a hospital lab (implied as being the gold standard). Nothing about what they normal variation is, which I understand is significant, or what period of time elapsed between tests, or what the results might have been with 10 or 100 tests done with each technology. The other patient quoted said she got a glucose reading of 103 in a hospital, and 96 (or 99?) from Theranos. Glucose levels in blood can be expected to change by at least that much after a patent walks across a parking lot, even if every test was going to give the same result every time. No article I saw had any other "bad" numbers quoted, but they still made this sound horrible.

The actions of the regulators were described in one article as "State and federal authorities started investigations into the accuracy of the company's blood testing work. In 2016 the Centers for Medicare and Medicaid Services, which oversees blood testing labs in the U.S., banned Holmes from operating a lab and revoked Theranos' blood testing licence." The first sentence describes the beginning of the process, and the second sentence described the end of the process. There was no mention of anything in the middle – did they find anything? If so, what did they find? Was the suspension of the blood testing license related to anything they found other than non-compliance with the declaration that the sample container was a medical device that should be regulated? If they found anything wrong, why was this not mentioned in this article or any other I've seen?

The company, in their defense, claimed to have offered to demonstrate the machine in the offices of The Wall Street Journal, and provided or offered to provide thousands of test results and etc. evidence that their technology worked, but reportedly got no response.

Most recent articles quoted several people as not having been able to find out anything about how their new machine works. Neither journalists at The Wall Street Journal nor anyplace else could find out anything, or find anyone who knew anything. This is consistent with the box the company came up with being a hollow cardboard box, or some other fraud. But, I know how to find out what is inside the box, and what is inside the company's labs. With a quick search I found about 190 patents assigned to Theranos, all for technologies related to what they claim they are doing. I know a thing or two about patents, and a couple of years ago I read some of the patents assigned to Theranos, including some whose inventor was the company founder (there are many of those). The patents are complex but I think mostly well written – this I think says a lot in a field where I think most patents are so poorly written they are worthless. Theranos hired an expensive law firm that specializes in bio patents – a good sign. The US Patent and Trademark Office makes about as many mistakes as any other large organization, but probably not more, and is not quick to grant patents that do not meet the standards, including not being anticipated by prior art – someone else's idea that came first. Getting patents means they probably came up with something. The patents are mostly different enough from each other to not be minor variations on the same theme. Getting about 190 patents, a huge number, means they are apparently working hard and really coming up with things. Many things, probably very valuable. But, most importantly, anyone who works in bio or writes regularly about bio and claims they have no idea what Theranos is doing, and has no way of finding out what Theranos is doing, is not making any mistake – they are lying. They are surely lying because bio is a field that is very dependent on patents. All the articles I've read are consistent with 100% of the people quoted knowing the company has many patents in their core area, but playing dumb and lying by claiming to have no idea what is going on. The existence of the patents means that if they are good patents, which I expect they are, Theranos really has a lock on much better blood tests for years to come. I think it is quite possible that Theranos came up with much, much better blood tests, so much better that they could dominate the field for decades to come (as old patents expire then-current and evolving technologies are covered by newer patents). All evidence I have seen points to this being possible, and not unlikely. If this is the case, then the real story is as follows:

Young dropout comes up with much better blood testing methods, gets strong patents, raises money and actually brings the technology to market fairly quickly – patents, company, and sales, the unusual dream come true, actually done at lightning speed in an industry where patents are almost expired when products come to market (drugs, frequently). Founder stacks the board with powerful people that are not industry insiders, to help defend against the inevitable attacks from the entrenched competitors. Regulators and competitors in one of the most regulated industries can't find any real problem, so they invent a technicality related to exactly what makes the company special – the small collection container. Then they allow the company to test only for a sexually transmitted disease. Fill in the details after this.

Then they find the founder guilty of fraud – but no news reports explain the nature of the fraud, or mention any law or regulation that was broken. Perhaps the fraud was using the small sample container without approval before the approval was required?

I don't know the real story, but none of the stores I've read ring true.

I suspect the real fraud is what the regulators have done, and what the competitors continue to sell while better technologies exist.

anonymous writes: 

I always love a good contrarian position, so thanks for posting yours. Here is what I don't get:

She wasn't doing this on a shoestring budget. She has hundreds of millions.

If the thing works, couldn't she just show the world?

If the thing works, wouldn't Walgreens be out there saying "no wait, this thing works everybody, we of course tested it before we entered into an agreement with Theranos"?

David Lillienfeld writes: 

I'll go beyond that: Not everyone in the valley was pushing to get into the company. There were many who weren't. That's in contrast to, say, 23andme a decade ago or Gilead a couple of decades ago.

The first BoD was stocked with major names in American politics–with absolutely little if any healthcare expertise. Maybe that makes sense to some, it doesn't to me. George Schultz may have been a great SecState, but I fail to see the value add for healthcare. Maybe because it's simply not there. It's not always a matter of hearing the right answer as even knowing what are the right questions to ask.

As for shoestring budget, the office bldg. (I pass it every day) sits on a commanding bluff on Page Mill and Porter. It's hardly low-cost. The company may not have spent like drunken sailors, but low budget doesn't seem to have been its thing either. Not Brooks Brothers, not Jos A Banks, maybe Paul Stuart. I guess the finance people could be grateful it wasn't Savile Row.

Now, let's look at the founder. She has little knowledge of the deeply regulated environment that is healthcare in the US. Rage against those regulations all you want, they define much of the marketplace. Her age means she hasn't lived through the inevitable crises in the healthcare world, for which knowledge of FDA, EMA, ECs, IRBs, etc is invaluable. Think it's an accident that there are very few young CEOs in the biotech world–start-ups or otherwise?

Think surgeons. Do you want the surgeon who just finished her training to do your Whipple procedure, or the chief of surgery? I'll take the latter, just as I'd prefer the former for my appendectomy. Theranos was a Whipple–high risk, big potential reward. Age wasn't in her favor. Enough said.

I'll leave aside the scientific basis for Theranos's products–it simply wasn't there.

As I put it to someone else on the list who asked me for an evaluation of Theranos a few years back when this person had been approached about making an investment in the company, if something looks too good to be true, it probably is.



 I have been back country skiing in British Columbia and Japan recently. Skiing in trees is a good strategy because there is less wind and the snow is soft. The trick is to find well spaced trees. A young friend commented that you don't ski "trees" you ski the spaces between the trees.

On the long hike up the hills I have lots of time to think about things like this. Applied to trading, the spaces would be the time between volatility events. Survivorship analysis gives some good info especially when we press into historical record territory as we did a bit ago. Another idea of spaces is the gaps that appear in overnight trading, or even things like the "Cohn" gap. I think trading abhors a vacuum and low volume areas like to be revisited.

Larry Williams writes:

And trees can be dangerous. My friend and excellent skier did not miss one.

His memory lives on with this trail. Also former Miami Dolphin great Doug Betters did the same thing and today lives in a wheelchair.

Never confuse boldness with recklessness.



 "We've survived 200,000 years as humans," "Don't you think there's a reason why we survived? We're good at risk management. And what's our risk management? Paranoia. Optimism is not a good thing."

-Nassim Nicholas Taleb

Kora Reddy writes: 

Looking at Taleb's twitter timeline and his recent musings, am not a doctor btw, but am certain he suffers from advanced paranoid personality mental disorder!

Russ Sears writes:

As individuals we all die. Yes we try to maximize our own lives and that entails confronting the harsh realities of life and death. And this means some optimizing our own survival through some pessimism. But this should be tempered with the amazement of life. Why would a pessimist optimize what he dislikes. However, as individuals we also realize that we are strong and will survive through others. While we will lose some battles, hope and mutual cooperation cannot be killed. Hope wins.

anonymous writes: 

Show me one single great human advancement, one invention, one cure of a disease, a great work of art or literature that was done by a pessimist. You will be hard pressed to find one. Usually the pessimists are too busy wringing their hands while waiting for an imaginary boogeyman to strike. Pessimists falsely consider themselves to be realists, but their picture is as blurred as a fogged lens.



 Interesting article on the cost of a loaf of bread in 19th century inspired by reading of David Copperfield where he bought a loaf of bread at 9 years old for a pence to stave off hunger.

Bill Rafter writes: 

Let me assume that the costs of making bread by hand in 2018 is somewhat equivalent to making bread commercially 200 years ago. Since the bread of Victorian times was "wheaten", I will compare it with today's whole wheat.

I know these things because I make virtually all the bread we eat because it tastes better, looks better and is undoubtedly healthier.

When you make bread by hand (no electric mixers) you always make two loaves because it is more efficient. If the second loaf is more than you need, you will have no trouble giving it away and make a friend by doing so.

You start with 1000 grams (2.2 lbs.) of flour. If that is the supermarket brand it might cost you $1.25. To that you will add say 750 grams of water (free), 22 grams of salt (nominal) and ¾ teaspoons of yeast (~10 cents). You don't need to buy yeast, as you can make your own (that's what they call sourdough), but the latter is only efficient if you make bread daily. So all-in, your raw material cost for two loaves is less than $1.40, or 70 cents per loaf. To that add the cost of the oven, 475 degrees for an hour and you are probably looking at a dollar per loaf.

The result will be great-tasting with a nice crust, a fantastic peasant-type bread that is highly nutritious. The two loaves will weigh about 1040 grams, or 570 grams per loaf. You would think more, but all that water steams off. So for comparison to Victorian times, the two loaves will weigh about ¾ of the mentioned quartern loaf meaning that the quartern loaf today would cost you $3. BTW, The largest loaf I have made myself was 3 kilos (6.5 pounds) and a real pain (pardon the pun) to handle.

I have not included the cost of labor. although making bread requires skill, it is easily mastered. After all, everyone in the third world knows how to make great bread, and there's a company here that uses prisoners to make great bread. In Dickensian times the baker's assistant was probably not paid, but given bread as wages, which is contrary to the article. Note that a lot of the time involved in creating bread is in waiting, during which the breadmaker can be doing other things. For example, I can easily bake bread while trading the markets. Thus the cost of labor is somewhat hard to quantify.

Aside 1:

The above is the basic plan for great homemade bread. But limits can be pushed. For example, my personal favorite is adding 450 grams of Kalamata olives to the kilo of flour and substituting beer for water. My family's favorite adds 400 grams of chocolate bits, 200 grams of walnuts and uses pear cider instead of water. It's not too hard to imagine a loaf of homemade bread costing in the vicinity of $10. But of course, the taste is incomparable.

Aside 2:

The article mentioned "wheaten". In Victorian times the bread in England most likely included a fair amount of barley flour, which was more common and cheaper. Today, barley flour is not as common and more expensive. I like the addition of barley as it gives a sweeter flavor.



 Re: Xi life-long chairman

I think this is a significant event.

The rule of law within China is in question more than before.

Because of this development, I expect the money-flows out of mainland china to continue or to accelerate.

People will publicly laud Xi, but will privately move money out.

The prime final receiver will be US assets (equities, bonds & real estate). Intermediate receivers are Australia, New Zealand, Mexico, some Europe and maybe Africa (re-branded as investment).

Since major private outflows are banned by the Chinese Gov.– creativity is applied.

I assume, some on this list have better knowledge about the tools applied. Maybe crypto currencies are used as an intermediate tool.

Some data, that supports above: The "outflows" of millionaires out of mainland China into the rest of the world.



I missed out on a couple good trades this week during a power outage/internet outage.

Now I am thinking redundancy at an affordable level. The way I trade does not demand intense computer power and latency. Just general connectivity works fine. Losing power/internet is not devastating to me either. It's just painful when I miss opportunities that proved successful.

Curious if anyone has any input or recommendations. Thanks.

Current set up with zero redundancy:

Primary Computer (Laptop) - Connected to Broadband Internet Access and general commercial power

No Secondary Computer

Remote Access to Computer - TeamViewer

Potential future set up:

Primary Computer (Laptop) - Connected to Broadband and commercial power with Battery Backup/Surge Protector

Secondary Computer (Laptop) - Connected to Broadband with Battery Backup/Surge Protector
- 4G Connection

Remote Access to Computer(s) - TeamViewer


Larry Williams writes: 

Cloud computer you can access via phone works here in Hurricane land.



Check out this chart with the odds offered by various UK and Irish books for the 2020 US presidential election. None of these prices near the top surprise me. Any overlays?



 Dear Specs,

I am very late in writing about the Consumer Electronics Show in Las Vegas. It was held in January and I attended to staff the booth for a few hours and go to two conferences: digital health and smart retail.

Will recount my experience bullet style; please contact me privately if you'd like more info.

- Nothing new in hardware
- Buzzwords were AI, Blockchain, and to a lesser extent robotics
- The "smart home" exhibit was HUGE. Many different players, still too fragmented and not yet plug and play.
- IoT is here but the margins are non existent for consumer
- The start-up area was wholly uninspiring
- Digital health will be dominated by big players: medical device companies, telecommunication companies, and insurance companies. They will buy out or simply push out anyone smaller.
- Smart retail is creepy; many cameras, geo-location indoors, brick and mortar is transforming into more of a display (and possibly Virtual Reality (VR)) play.

Places where there is good money to be made in the short term, for industrial, health, and consumer: augmented reality (part of VR).



Robots were going to strike terror into the hearts of all workers and devastate incomes and the economy. They were cited as a reason to sell stocks back in 2009-11 by our resident robot pundit, actually one of the best times ever to buy stocks.
Where they at, though?!

Did they go the way of "peak oil?"

Stefanie Harvey writes: 

One of the issues with robotics and automation is that designers frequently anthropomorphize their construction and use cases.

This is silly (with the exception of "companion" robots.)

Effective robotics enhance or extend human competency. Lift more, survive harsh environments, no need for down time.

The technology needs a bit of improvement but one driving factor is that human life is cheap. As we near 8 billion people we are the ultimate commodity; there is no cost driver for widespread adoption. Yet. 

Stefan Jovanovich writes: 

Stefanie is letting the mad Rover down easy. No one whose enterprise must do things better, faster and lower price has paid any attention to the Department of Labor statistics since public employees became unionized. No one who cares at all about people having better lives thinks "robots" (sic) threaten anything. If applying the labor theory of value really worked to produce wealth, ditches would be dug with teaspoons instead of mini-backhoes.

anonymous writes: 

Based on capital investment, it appears businesses are not even bothering to build the robots. Check out this tweet with chart from Adam Tooze:

"Historically, tighter labour markets in US drive wages and capital substitution —> higher investment. Since 2014 that pattern has uncoupled. @CapEconUS @SoberLook"



I was just reminded that the states of Illinois and Iowa each individually grow more soybeans than China does. Illinois and Iowa produce about 15 weeks of China’s demand while China only produces 6-7 weeks of their needs. That’s why looking at the export figures, tenders, etc. in the bean market is so important.



If you look at the Daily Spec site you first see a calendar. Most people probably just breeze on by. But of interest this month is the correlation between stocks and bonds. In February those markets, which usually oppose one another, have been moving together. That is evidenced on the calendar by either Green days (both moving up) or Red days (both down). This month only 2 days have not been either red or green. Of the many market statistics we watch, the moving correlation of stocks and bonds is our oldest (i.e. time-tested) and a very important input to our basic market algorithm. It is valuable information.



"The notes I handle no better than many pianists. But the pauses between the notes– ah, that is where the art resides!"

-Artur Schnabe



Fake doc Alan Greenspan's tenure at Fed began August 11th, 1987, with S&P at 330. On December 30th, 1987, market was 240. Paul Vollker's tenure began August 6th, 1979, with S&P at 1014. It closed the year at 1010. Janet Yellen saw a rise in S&P when her tenure began in Feb 2014. It seems that there is a tendency to test the new Fed chair as he begins his tenure.

Chair Bernanke's term which began on February 1st, 2006, the market only dropped 3% during the next few months. The point being that the market likes to test the new Fed chair to see if he will be bullish.


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