Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.



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November 2004 Posts

11/30/04 Do X-Games Lead to X-Rays? James Lackey on the Leaps and Crashes of Motocross

END0--End over End flip, yet forward over the bars, on bike. In motocross this is, besides being landed on by another rider that is jumping over you, the worst accident. I had it happen to me 10 days ago on a BMX bicycle. Usually, on a motorcycle it is from compressing the suspension too much prior to take off. The happens by approaching too slow and gun the gas too low on the jump, or hitting the brakes in a panic. The suspension compresses and like an Olympic ski jumper that takes off waaaaay too early on the ramp, you actually lift off from the bottom of the jump too early hence lose total distance. The landing is usually the 2nd jumps backside of a double jump. Ironically the biggest decision makers, a triple jump, are usually over cleared and that causes a loop out backwards, but it is rare. The landing on a double needs to be front wheel first, so in the air on a motorcycle, you actually tap rear brakes after down shifting 2 gears, this kills the engine for a split second, you could also pull in clutch to let engine run, but I don't think I have ever done that, least effort you know.

That brief moment in the air is when you rest on the track. You can literally stand up on pegs, sit on seat if you choose, take hands of bars, usually grab a tear off lens from goggles, to get a new clear view. With the rear wheel stopped from rotating, the nose of the bike will dip down 10 or 20 degrees. That is the perfect match for the grade or the decline of the landing ramp. The second the rear wheel hits the dirt, the engine pops back to life, at the perfect rpm from prior down shift. Usually, you immediately up shift for a 50-feet-full-throttle charge and shoot the next berm, (corner) or jump. Man, that is it a beautiful site and sound. If your take off is premature and your rear wheel bucks the first jump, you can do opposite in the air, gun the throttle and the velocity of the spinning rear wheel will gyro scope you back to level. Same with getting side ways or any time you are off balance. Ironically at any point on a motorcycle, full throttle will save you, it will gyro or momentum will send you strait forward. Crashes happen from running at 80% throttle, bad timing or braking to aggressively. That goes for street cars too. All braking should be practiced and is a very technical and important thing. You can steer a car with brakes, some times, better than with the steering wheel.

The worst crash, is a perfect high speed jump where you been running all day, tired and careless you take the jump as low and as fast as possible for racing. If you barley clip the landing ramp with front wheel that sends your weight transfer forward. The bike doesn't fire up on the correct time then the suspension from lack of power re-entering kinda double bottoms, bounces, bucks and it sends the rider over the bars at very high speed. This is almost a certain shoulder separation, broken fore-arm wrist or clavicle. What looks worse is the pure amateur bumbling up to the double jump too slow. He hits the brakes in a panic, front wheel hitting the 2nd jump the bike flipping over and the rider sliding face first down the double. This looks awful, yet I think or guess, that injuries must be 1/20th of the time on that wreck vs my racing high speed ENDO. They are going half the speed and land on a decline. As long as another rider doesn't run them over usually they are fine with a sprained writs and a broken heart.

In mountain bike racing, or BMX with no engine, all of this jumping is actually much harder. A BMX bike has no suspension, you bend arms and legs to recover shocks. People ask me what is harder BMX, mountain bikes or motocross, BMX is the most difficult by a long shot. The gist is in BMX racing the landing must be perfect down the back slope of the jump to keep momentum. In BMX if you physically pull the front wheel up over the first jump, a wheelie, let the rear wheel throw you in the air, then come down the backside of the double with front wheel you physically maintain your speed. It appears visually that you actually gain speed as most riders lose 2-5 mph when hitting a big jump that throws them skyward, usually 15 feet in air on BMX bike. The energy you expend by pulling the bike up compensates for energy lost by riding up the front of 1st jump, then energy is gained by riding or falling from air down backside. I passed many riders much stronger than me last year using the pro move. It is called a "pull manual." It is very technical and must be done perfect or disaster will strike. Sounds a lot like short selling. I think I'll quit both.

On bikes now a days you are also clipped in to pedals to help you pull up as well as push down on a pedal cycle. So if you are in the air, there is no taking you feet off the pedals and bailing out. This being clipped in is such a speed advantage it is impossible to compete with out them at a pro level. I will retire from clipping in, but still ride. So effectively, my Vet pro career is over. Yet I can still have a ton of fun riding with my son Austin, age 9. We sprint from dead start to 40 feet, a very short distance 8 men wide, to the first jump at about 24-28 miles per hour. The top pros can do 31-32 with 1 speed BMX bike from a dead stop. It is like the 50 yard dash to the first big jump. So I was on my 2nd hour of training, full speed down 2nd strait I "pull manualed" a double jump I hit 100 times before. I barley clipped with my front wheel the 2nd double. It sent me endo, upside down in slow motion into a concrete berm. I heard my helmet crack and my clavicle snap. Break in 4 places, 6-8 weeks, Broken wrist 3 weeks, That is the life of a racer.

Maybe I can trade better next year and drive a race car again. You can drive in the beater-junker stock car track, for cheap bang fenders have a blast and have very little risk on injury or financial loss. Steel roll cage, much safer form of fun. My dad sure would be happy. My son's motocross bike is on hold, poor kid. He still racing bmx, but motocross? You see these X games jumps today? My gosh. My son returned home from practice last night.. I said you will be a BMX-expert class soon, you know what that means right.... He said yeah motocross! I said hey kid, look here you ever see this, go carts, shifter cart racing as fast as a JR Indy car......Wow Dad...I never thought you'd let me race those, they are so dangerous.. ha ha ha I tried, I did my best. I played baseball with that kid every day from when he was 4 years old til he was 7..the thrill of speed must be genetic, inherited.

11/30/04 Ask The Senator, a continuing series

What is the difference between your "Darlings of the Dow" and the typical "Dogs of the Dow"? -- Orson Terrill [terrill_o@***.com]

The Dogs just look at yield. I have done extensive testing to find the best ratios of stocks that outperform the Dow... yield is not all that good. As a point of interest my "Darlings of the Dow" selections for 2004-5 are as follows; HPQ, AA, HON, HD, MO. -- Larry Williams [larry@***.com]

11/30/04 Mistakes in Huntin' and Tradin', by J.T.

I was in the woods the other day deer huntin'. Lots of times when I get impatient I like to remind myself of why I am there. Mainly, I like to hunt, respect what you are hunting, and you ain't always got to shoot something.

My PaPa taught me that when something is in your sites you have two shots you can take. (1) the first shot (2) the most accurate shot. This is something that for me a (learnin' to be discretionary trader) is highly relevant to trading. I was sitting for hours it seemed in the cold rainy field, lookin' at nothing but wet ground, fog, and trees. When someone like me is out huntin' mostly thoughts of S&P, dollar index, hog bellies, TZOO and such are rampant through my brain. Then outta no where comes a six pointer just outside my range. Right there in my sights and what do i do but take the shot. Big mistake, I walk to the deer to track him down and come up blank! nothing in sight, not a single foot print or anything to help me track. i think to myself, "I know it was a good shot (execution)" i know that i got 'em (long for the haul) but where is he? I walk for 45 mins. and nothin' comes up, not even a drop of blood. the whole time i keep hearin' my PaPa like he was right next to me, "wait til you are certain, be patient, let 'em come closer, the 2nd shot is the more accurate". fellas it ain't a pretty picture, I know i got the deer. I know its dead somewhere now laying, and i feel bad knowing that in some way i have disrespected its life, and the sport of hunting.

Plenty it seems of my tradin' losses have ended in the same manner. My awe struck, slack jawed lookin' around at why I have a loss!! I simply have debts and burdens now because I wasn't patient or educated, executed order at first signal and got a bad fill! Oh the disrespect to the mistress, oh the pain. For the record I am currently passing my third kidney stone in a single yr. and feel that I have had enough w/ those. No man should have to pass as many stones as I have in the last 365 days. I should have known better to have gone huntin' in my condition as well.

11/30/04 Idiot Savant vs. Bessel, by Victor Niederhoffer

Occasionally one reads of a person like Bessel that taught himself mathematics so he could calculate the distance of the solar system and invented Bessel functions as a result. or Newton similarly in physics. There are a google of such greats with no training that one comes across who pioneered in mathematics in an attempt to gain incite into their own field. and one should not leave Galton unmentioned here or even Pearson. On the other end of things are the people like Bill James, Wilder, Arthur Merril, and David Sklansky. They have a mathematical bent, but they are untrained and relatively careless and lack humility. When one reads the latter group, Sklansky in particular, one wants to throw up his hands a million times and say "that's not true, you're missing the point". The Romantic Professor Miller, I believe, has made a similar point; and the poker players in my office agree. This is not to say by any means that one has to be a mathematician to make a contribution of a quantitative nature. Indeed, I found many of the topics treated in Sklansky quite applicable to our own field, and with a bit of simulation, and working out of examples, they would be most useful.

11/30/04 Donald Boudreaux on the Deficit

To the Editor of USA Today:

Your analysis of the dollar slide is internally inconsistent ( Dollar slides, alarms ring, Nov. 30th). You recognize that Americans benefit when foreigners invest here. So you re right to worry about the harm we ll suffer if foreigners trim these investments. Understanding these relationships, why do you then fret about the size of the current-account deficit? The larger this deficit, the greater the amount of foreign investment in the U.S. and the more capital we Americans have to further increase our standard of living. 11/29/04 Don't Pass on the Buck, by James Tar

Acknowledging that there is unprecedented bearish stories and scenarios upon the US Dollar, and that the entire global macro community is short the dollar in highly leveraged "carry trades", and that US Tax receipts are on a strong rebound, and that our US economy is much stronger than statistics may currently suggest, and that further strength is ahead, I speculate that the dollar is an unbelievable buying opportunity, and foreign interest in the health of the greenback will return to historic proportion, and the world will wake up to the insightfulness and policies of the Administration. 11/29/04 Trend Following, by Jason Schroeder

Trend following is a reasoning experience. It is hard to combat this experience with statistics. I torment my cat by teasing it into believing a trend is occurring when I drag some yarn around. When it gets bored with the excitement, it either attacks the hand that torments or learns to walk away. The deep problem with trend following is not that it may (or may not) be useful at predicting the future in asserted cases but that the reasoning process I expect by assuming the existence of trends before I predict the future is suspect. The reluctance towards trend following is that previous experience teaches us that we might be simply dangling yarn in front of ourselves when we think that way. The best skepticism is to believe the market is random and prove that there is indeed something to discover. The reasoning process of trend following is natural. It is why we like integration as an mathematical tool. The suspicion of a trending nature lends nicely to accepting Newton's method. It is only a rule of thumb.

11/29/04 Sideways, A Brief Movie Review by Dan Grossman

It is a mystery to my why the movie Sideways has received such unanimously favorable reviews. I found it okay as a nothing-much, rather slow-moving, minor film. But certainly nothing to justify all the raves. Am I alone in this? Victor would probably say the reviewers identify with the failed writer who winds up with the beautiful waitress/would-be horticulturalist. Of course there is no chance in reality of Virginia Madsen falling for such a nerd.

11/29/04 Mathematics of Juggling, by Victor Niederhoffer

There is an excellent article in Discovery Magazine, Dec. 2004, on the mathematics of juggling. Jugglers must throw balls in order so they don't hit each other; there occurs a "mathematical freezing point" between randomness and predictability like a phase transition that separates a liquid from a solid. And, there is much counting of intersecting lines in multidimensional space and use of a relatively simple language called Siteswap based on the height a ball is thrown, and whether the ball is caught with the same hand or opposite. Much application to juggling different markets and sizes of positions one would think.

11/29/04 Saurabh Singal on Ecology

Inspired by Vic's articles, I have started to read books on Ecology. One interesting subject was how senescence or aging differs vastly across different organisms. Certain species of turtles show no evidence of aging. Reproductive output and survival does not decrease with age. The female albatross starts laying eggs at 10 years of age and continues to do so for the next 40 years. Certain snakes lay more eggs as they grow older. This suggested to me to check if the same pattern is impacted differently by aging in different market species namely SP and Euro.

In trees, the aging patterns are extremely different from the animal world. The oldest tree, a bristlecone pine tree in California, is almost 4800 years old and still shows growth. Stimulated by the article by Vic and Prof Pennington, on high priced stocks (trees) I read up on a discussion of how high trees can grow. The limiting constraints are chiefly two - one is purely mechanical. Given a cylindrical column of a certain radius, the density of the material and its Young's modulus of elasticity determine a critical length beyond which the column is going to buckle under its own weight. In relation to its density, wood is stronger in both bending and twisting than concrete and steel. It has been calculated that based on their average girth and the physical properties (density and elasticity) the tallest redwoods could grow to be about 540 feet. The tallest known redwood is 366 feet tall. So nature has a large margin of safety. One wonders if there are certain coefficients that put bounds on the heights of the trees that grow in the jungle of the stock market. The other constraint on tree height is how high the sap can be pulled to reach the highest point of the tree. The process of transpiration allows sap to rise against gravity to heights greater than capillarity alone would make possible. A large oak tree can give off 400 litres of water in a day by transpiration.

Transpiration and other hydrological processes are very nicely described in "Water, Rivers and Creeks" by Leopold B. Luna. I learnt that no river runs straight through for more than 10 times its width. Much like the path of prices in the markets. And the radius of the bend is usually lies between 2 to 3 times its width at that point. Despite dramatic variation in the terrain, size and topography of beds, all rivers tend to meander. Irregularities like boulders and fallen trees are not necessary for meandering, since even ocean currents like the Gulf stream and water channels on glaciers meander. Meandering occurs so as to minimize the energy lost in form of friction along the length of the stream. Gentle slopes and fine grained and easily erodible material provide the most suitable conditions for meandering. Hard to find meander trades (reversals) when SP slopes sharply up.

11/27/2004 Book Review by Victor Niederhoffer

“The Romance of Commerce,” by Gordon Selfridge, has glorious descriptions of the contributions, nobility and history of commerce. Printed in 1918 but written before the war, it’s the kind of book that might have inspired “Atlas Shrugged,” and should be required reading for every high school senior. It’s the kind of book that might have inspired “Atlas Shrugged.” Chapter topics include ancient commerce, China, Greece, Venice, Lorenzo de Medici, the Fuggers, the Hanseatic League, fairs, guilds, early British commerce, trade and the Tudors, the East India Company, north England’s merchants, the growth of trade, trade and the aristocracy, Hudson’s Bay Company, Japan, and representative businesses of the 20th century. One thing that's clear from this book and others is that business morality has been constantly improving. In the old days, wrecking, pirating, robbery and dishonesty was considered standard for a businessman. Thus, the Hanseatic League, a trade group, regulated all European commerce from 1300-1600 with the goal of preventing dishonesty. The strongmen of those centuries were rightly called robber barons, for their incomes were largely derived from lording it over hard-working peasants. And just as the great man went out with his retainers from his castle to rob and kill, so the robber of the sea, the pirate, looked on everyone as his enemy and everyone’s cargo of goods as his, if he could take it. Wrecking was as legitimate a calling as slave trading, in England, and a wrecker was considered as respectable then as the legal trickster of our own day who wins a case by technicalities. One would never wish to recommend that anyone today write a business book unless it were for self promotion or business promotion or vanity, as 99% of them are today, but this book of the great English merchant gone for almost a century, who founded the retail stores that I found being auctioned off at the bottom in 2002, deserves to be republished again.

11/26/04 You Can't Keep a Good Capitalist Down, by James Lackey

"Everything that can be invented has been invented" Charles H. Duell, Commissioner, U.S. Office of Patents, 1899

Ken, my dear old friend, wealth will continue to be created by Americans and anyone that has the freedom to produce for profit. Americans love money; we love to fight; we love to win. I cannot comprehend exactly how many new songs of beauty, much fantastic music that will be created, out of the same old notes known for centuries, in new combinations, sung by a god given instrument the human voice, perfected by years of effort, arranged by brilliant musicians over the next 50 years. Let alone, how can I imagine all the scientific progress, discovery, and invention from nanotech to macro to better the lives of my children and the next generations. The system works, progress, due to the mutually beneficial trade of profits and products. Of course I will add, facilitated by the profit incentives and risks taken by speculators.

All the governments, corruption and evil men of this world can stifle progress for only a short time. It is human nature to create, invent, trade and profit. At what speed, level or velocity some men that promote news to encourage other men to pay fees will philosophize, promote memes and propaganda for a quick score...Yet make no mistake about it, men will always find a way to trade for profit. Good business, long lasting profits only come from mutually beneficial long term relationships. Only those with the brains, a set of balls and the heart to win will succeed at trading for a living. If you choose not to risk your ego for loss, please excuse your self from the game. However, please out of respect for me, and the thousands of honorable men that make their living via speculation, please do not imply that only the crooked, the connected or the well to do by birth, are the only men that have a chance at a profitable life, dedicated to the honorable pursuit of trading for a living.

11/23/04 In the Spirit of Thanksgiving: Ross Miller Acknowledges "The Avengers"

Some people see the world only in terms of black and white, Nigel sees it in terms of black and white chess pieces.

In the spirit of Thanksgiving, I would like to thank Nigel's country for "The Avengers," whose prime episodes (the Diana Rigg ones) are currently being rerun Friday nights on BBC America. Truly stylish and campy. Who can fault a formula that includes form-fitting attire and miniskirts for Ms. Rigg and the obligatory bondage scene? For the traditionalist specs, there is even the omnipresent cane. And the fantasy elements are cool, too. Like British cars that never have electrical problems. Jolly good show.

11/26/04 Finding the Weak Spot, by Nigel Davies

In the heat of the tournament hall and away from the drawing board it's usually possible to see your weaknesses much more clearly. This is why keeping a diary is such a useful thing.

It's clear to me, for example, that the loss of bite from my formerly devastating Catalan opening is one of the main issues I should be addressing. And this is easy to see when anyone looks at my recent games with this opening.

11/26/04 Perils of Last Minute Preparation, by Nigel Davies

Many people like to be seen to be preparing as they think it makes them look serious. But here are some perils of last minute preparation:

1) Creation of anxiety. 2) Cluttering the mind when it should be clear. 3) Reaching superficial, anxiety ridden conclusions. 4) It can talk you out of your normal game. 5) The tendency for it to be seen as a replacement more thorough, long term development of ideas. 6) It can produce a disengagement of a creative thinking process and a replacement by a half-baked imitation of others' ideas. 7) The fostering of a 'single move' approach rather than broad understanding of positional types. 8) Development of a poor work ethic. 9) The tendency for it to foster an over-reliance on computers and their assessments, distancing your from the pieces.

11/23/04 The Next Recession, by James Sogi

Alex Castaldo reported: "At a meeting in Boston recently Mr. R, chief economist of a blue blood investment bank, is said to have made dire predictions about the economy. The Twin Deficits will lead, first to a sharp fall in the dollar, and then because of the resulting rise in interest rates, to severe problems for U.S. borrowers, both public and private. A ``spectacular wave of bankruptcies'' is possible."

I believe some of Mr. R's arguments are not sound:

Smart people downtown agree.. (testimonial/bandwagon) You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas. (Plain folk) 30 percent chance of a slump soon and a 60 percent chance that we'll muddle through for a while. (non verifiable prediction) Consumers, who are in debt up to their eyeballs, (glittering generality) America has to import $2.6 billion in cash. Every working day. (card stacking) A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible. (unattributed hearsay)

The real question is When is the next recession expected to arrive?

Yield curve is flattening still, especially short end, but not flat yet.

"A /flat/ yield curve frequently signals an economic slowdown. The curve typically flattens when the Federal Reserve raises interest rates to restrain a rapidly growing economy; short-term yields rise to reflect the rate hikes, while long-term rates fall as expectations of inflation moderate. A flat yield curve is unusual and typically indicates a transition to either an upward or downward slope. The flat U.S. Treasury yield curve in Figure 3 below signaled an economic slowdown prior to the recession of 1990-91.

*What are the different uses of the yield curve?* The yield curve provides a reference tool for comparing bond yields and maturities that can be used for several purposes.

First, the yield curve has an impressive record as a leading indicator of economic conditions, alerting investors to an imminent recession or signaling an economic upturn, as noted above.

Second, the yield curve can be used as a benchmark for pricing many other fixed-income securities. Because U.S. Treasury bonds have no perceived credit risk, most fixed-income securities, which do entail credit risk, are priced to yield more than Treasury bonds. For example, a three-year, high-quality corporate bond could be priced to yield 0.60%, or 60 basis points, more than the three-year Treasury bond. A three-year, high-yield bond could be valued 4% more than the comparable Treasury bond, or 400 basis points "over the curve."

Third, by anticipating movements in the yield curve, fixed-income managers can attempt to earn above-average returns on their bond portfolios. Several /yield curve strategies/ have been developed in an attempt to boost returns in different interest-rate environments."

11/23/04 Ken Smith adds: testimonial/bandwagon

Plain folk non verifiable prediction glittering generality card stacking unattributed hearsay +++++++++++++++++


In this train of thought I will add more of what can be termed "counterfeit arguments."

faulty generalizations post hoc reasoning faulty analogy all-or-nothing mistake false dilemma faulty classification emotive language pomp and circumstance appeal to authority appeal to tradition or faith impressing by large numbers popular passions damning the origin personal attacks self-righteousness wishful thinking having it both ways apriorism personification cultural bias gambler's mistake humor and ridicule demand for special consideration red herring pointing to another wrong call for perfection ambiguous terms double talk

Here is a quote from Schopenhauer:

"It would be a very good thing if every trick could receive some short and obviously appropriate name, so that when a man used this or that particular trick, he could at once be reproved for it."

*Uncertainty is not an edge.

11/23/04 Nigel Davies adds an Angelic Spin:

I remember the first time someone showed me a Rorschach test - I saw the black bat very clearly but not the white angel. Even when they pointed it out I still couldn't see an angel. Angel? What angel?

It has always seemed to me that whether someone sees the angel or the bat will have a profound effect on many of their assessments and decisions in other fields. Will they see the booming company profits or a country's debt in assessing the markets. And when they look at a chess position will they see one side's space and initiative positively or see this as wild overextension?

Is there a Rorschach test on the chessboard? Maybe there is, and that's in the difference between a players results with Black and White. White is a much easier color for optimists, if they try expansive pawn moves with Black they get into trouble. On the other hand players attuned to defense are going to waste the White pieces by not being ambitious enough. Can I put a number on it? Yes. In my main databases White scores 54% and has a rating of around 60 Elo points higher with White than Black. Assuming this is a 'normal' result I suggest that large deviations may show an excess of optimism or pessimism. 'Ceterus paribus' of course.

11/26/04 Yield Curve, by James Sogi

In another NY Fed paper, authors find that the yield curve ( spread between 10yr and 13 wk) is highly predictive of recession 2-4 quarters in advance, and outperforms the leading indicators, Stock and Watson indicators and the NYSE indicator. Knowing where in the cycle we are helps in judging the proper extent of making commitments. The current spread is 4.195-2.13= 2.063. According to the article study this means that there is less than a 5% possibility of a recession in the next 2-4 quarters. Click here to view entire story! 11/23/04 Patience, by Henry Carstens

I feel almost like my futures trading needs to be approached with far more patience.

Patience is the easy answer.

Patience says, "I have all the tools, I just need not to work so hard."

Patience is five perfect trades a year w/ a single unit of risk.

Personally, my problem is the continuing realization about just how little I know and how much work it takes every day not just to learn, but to discover, investigate and apply.

11/22/04 The Anatomy of an Old Time, by Victor Niederhoffer

The following are the key news stories that appeared on Intel during the  rundown and up of its stock similar to the Wyckoffian books (All from Bloomberg). date item price 7/13 "Needs 90 days to reduce invent Bryant says"         26.1 7/14 "Intel drops on fears margins will decrease" 23.3 7/26 "Cuts chip prices by as much as 35% " 23 8/23 "More chip prices cut" 21.9 8/31 "Shares slip as proof estimates cut by MS" 21.3 8/31 "3 RD quarter sales may lag highest estimates anal. say" 21.3 9/02 "Profits may shrink as prices drop, invent. rises"' 21.6 9/03 "Forecasts raise concern of global chip demand" 20.0 9/12 "Intel's struggles to test new chief apparent Ottelini" 20.6 9/15 "We're seeing slower growth than we had initially anticptd."    20.6 9/24 "Cancels wireless option in personal computer chips" 20.1 10/12 "To report slowest sales growth in 5 quarters" 20.3 10/13 "Revenues tops estimates, inventory reduced" 21 10/15 "Cancels version of pent chips, cuts prices" 20.5     10/16    "Barron's says it lags in cell phones" 20.6     10/18     "Lowers chips prices by another 35% " 20.8     10/19 "Analysts cite mumbo jumbo in inv. layers discussion" 20.8     10/20 "Cancels project to develop flat screen tv chip" 21.7     10/25 "Chief begs forgiveness says was too relaxed, says we ate crow, gets down on knees before 6000 tech." 22.7     11/05 "Int and Wachovia have lowest profits gains since 2003" 23.4     11/10 "Doubles dividend , to buy back 50 million shares, inches out slight increase in net income in q3" 23.2 11/12 "Barrets says timing sucks about departure" 23.7 11/18 "We are on target for improved perf. in qrts. 1&2 in 05" 23.8 11/23 "AMD takes market share from Intel. CSFB cuts INTC to under perform. 23.8

 All I can add to this is a " damn my broker " on 10/12 . "sell  regardless of price".  Like a Scriabin prelude no. 111? Beautiful. Both. Note* while not relevant to the anatomy, I own Intel shares as of this writing. 11/22/04 Allan adds:

I completely agree with the chair that the concept of a Wyckoffian casts and "corners" is valuable these days (has been for a few years). To see this, read Bernard Baruch's description of the Northern Pacific Corner and look at a chart of the A/D line side by side with the large growth stocks and mutual funds from 1998 through today.

More recently, notice that the market cap of each of the stocks owned by one reclusive, but now more public hedge fund manager. The market caps are less than the size of his fund. He truly could take the companies private, but he doesn't because private companies sell at discounts to public companies because of liquidity. He has figured out how to create a stock supply shortage, and hence a lack of liquidity premium. He tempts the shorts by buying troubled companies and makes them howl the whole way up.

"Collusion" need not be as overt as a group of bankers sitting in a room after the demise of a large hedge fund. It can result from a number of activities like large funds sponsoring/corning certain small stocks or money flowing heavily into a particular "style box" area where the managers all use similar strategies, and hence chase and punt the same stocks at the same time. Even the best pools failed when the fundamentals did not support their activities.

 12/04/04 Plato and Aristotle Talk Turkey, by Art Cooper The Spec Duo's Thanksgiving Day column (in particular, William Bradford's reference therein to "that conceit of Plato's and other ancients" that all property was to be owned and worked in common) brought to mind the disagreement between Plato and Aristotle regarding the advisability of common vs private property. It will be recalled that, in his "Republic," Plato has Socrates argue that all possessions should be held and used in common. "Republic," 461d5 - 465e3. Rejecting this view, Aristotle argues in his "Politics" that "this matter of possessions [in common] would be a source of much discontent. For if the citizens are not equal but unequal in the enjoyments they take and the work they do, accusations against those who enjoy or take a lot but toil little will necessarily arise from those who toil more but take less." "Politics," 1263a8. "[I]n nobly managed cities...each has his private property but makes some of it useful to friends.... [I]t is better for possessions to be private and to be made common in use." Id. at 1263a30. "[I]t is beyond telling what a difference is made in respect of pleasure by regarding something as one's own....Moreover, helping and doing favors for friends, strangers and companions is a thing most pleasant, and it requires private property." 1263a40 - 1263b5. (translator Peter Simpson) Plato, who derived his beliefs regarding possessions from utopian ideals, was refuted by Aristotle, who relied on observations from everyday experience. Thus the Plymouth Bay colonists, who after bitter experience gave up communal ownership and use of land in favor of private ownership, were not so much rejecting "Plato and other ancients" as switching from a Platonist to an Aristotelian viewpoint.

11/22/04 Turkey Dishes: BBQ or Imu, by James Sogi

An excellent way to roast a turkey is in a Weber grill. Use the indirect method. Add a few hickory chips. Use a thermometer for the bird. Butter the outside of the bird before putting in the Weber. You get a beautiful golden brown bird with the juice seared in with tender meat in about 70% of the normal oven time. The meat has a delicate smoke flavor that also makes the gravy delicious as well. Add purple yams, (Chinese yam available in Chinatown for you New Yorkers) mashed in with oranges and served in the half orange. It's a nice contrast with the purple and orange together and the yam is orange flavored. If I can get my wife to disclose her stuffing I'll share that too. My mother pleaded for store bought turkey, though I've been fattening up our flock of wild turkeys that parades around the yard. For some reason they get pretty scarce right around now. She thinks the wild ones are gamey, but the fattened up ones are very tasty. It's just kind of smelly pain dressing them out as you hunters like JT will agree.

We just dug an Imu, a Hawaiian underground oven pit for my daughter's 21st birthday next month. The neighbor has been fattening up one of the pigs I trapped in my front yard a while back, so it should be a great shindig. (It was rooting up our lawn pretty bad) I will bag a few turkeys for the Imu. The imu is a pit in which a huge fire is built overnight, and lined with rocks. The pig and turkeys and fish, breadfruits, are wrapped in banana and ti leaves and buried underground on the hot rocks and covered with dirt. The next day during the party the leaves and foods are uncovered and unwrapped. All the meat is steamed to tenderness and falls off the bone. Any specs in Hawaii on January 9, 2005 are invited. Its a good life. I can't complain. Someone has got to do it.

11/22/04 Las Vigorish, by Thomas Miller

Just went to Las Vegas for my birthday and stopped in at the Traders Expo held at same time. (The vig in Vegas worse than ever. They should just change the name to Las Vigorish and be done with it).

Some observations:

1) The place was packed. Many people turned away from freebie seminars. No room. They told me xx and yy paid seminars had to be moved to larger rooms even at $400 and $800 a pop respectively. People in from Australia, Hawaii, Japan, etc. In seminars I was at many people just learning how to trade. Lots of new money ready and eager to pay the market mistress.

2) Many vendors like vultures waiting to attack you if you gave them the slightest eye contact. (Thought I mistakenly wandered into used car salesman convention). All promising to make you rich with no work on your part. "Its easy" they promise. "The software does all the work". Large groups of people attentively listening to sales pitches. Many nodding their heads up and down. Traders are like golfers and fisherman. Always willing to buy the latest gadget or gizmo guaranteed to catch more fish or hit a golf ball farther and straighter or make more money in the market with little or no work. Human nature doesn't change.

3) Food and drink prices in exhibiters hall outrageous. (Can of pop $3.50). Like gold rushes of old, big money made from selling picks and axes (software, books, seminars, etc.) not actually prospecting (trading). Also similar to real estate "Make millions with no money down" seminars and books. Seminar hosts made fortunes from seminars and books, not real estate.

4) I learned stocks will be wildly bullish in 2005 because of 10 year cycle and year after prez election cycle. I also learned stocks will be terribly bearish in 2005 because dollar is crashing and gold going way up. Takes all kinds to make a market.

11/22/04 Grist for the King of Darkness, by Mitchell Jones

Hi Kevin. Regarding your bearish case re the stock market, I would caution you that if the scenario you envision unfolds. it could easily turn into a panic, as foreign investors dump their U.S. holdings and flee in droves. Note that if the present market parallels the 1990 market, as you suggest, it would reach the downward sloping line on your chart (which I have attached) in 2 1/2 months, reaching about 1020 by the end of January, 2005. From the peak of 1190 to 1020 is a decline of (170/1190)100 = 14.3%. In addition, the DXY has dropped from about 89 to 83 in the last 2 1/2 months, which is about 6.7%. Clearly, if the recent downtrend in the dollar is ongoing while your hypothesized stock market decline is taking place, the rate of erosion of value in foreign portfolios (about 20%, or a 96% annual rate) is going to be unacceptable to large numbers of owners of those portfolios, who are holding positions acquired late in the 1990's at substantially higher prices. It is from them that the panic selling is likely to ensue, and since no similar population sitting on losing positions from much higher levels was present in 1990, I would suggest that your analogy breaks down: a decline in the present market is likely to be much, much more powerful than the parallel decline in 1990.

So what are the possible scenarios, given current conditions?

There is, of course, the (very real) possibility of outright hyperinflation, in which a Federal Reserve note becomes as worthless as a French assignat, a German reichmark, or a Confederate dollar. Leaving that aside and assuming a continuation of the dollar's rapid decline, the following scenarios remain:

(1) Stock prices spike to unimaginable levels as the authorities attempt to compensate foreign investors for their dollar losses by directly intervening to force up the market averages. Eventually, prices rise above the levels of the last private bids, leaving no one but the authorities on the buy side. Since they are buying with counterfeit (fiat) money, the money supply soars, giving rise to fears of hyperinflation. Result: the authorities eventually accede to the inevitable, and a vertical downdraft ensues.

(2) Prices move sideways as the authorities merely attempt to prevent the market from crashing. Result: foreigners exiting the market turn the dollar decline into a torrent, and the authorities find themselves forced to absorb the bulk of the foreign holdings. Result: threatened hyperinflation of monetary aggregates eventually causes the authorities to give up, and the market crashes.

(3) Stock prices move down and the authorities offer no support. Result: the market crashes immediately.

I have been watching Greenspan for almost 20 years, and it is my observation that he invariably plays for time. Thus scenario (3) is out: given a rapidly declining dollar and no Fed support, this market would crash immediately. And scenario (2) is also out: vastly larger quantities of monetary aggregates will have to be created to support a sideways market, because foreign holders will be receiving no compensation for the dollar's decline; hence they will bail out in much larger numbers than under scenario (1)

Bottom line: I expect scenario (1), a hyperbolic spike in the stock market averages followed by a vertical crash, if the dollar decline continues.

How much will I be betting on my expectation? The answer: not one red cent. At this juncture I wouldn't touch the stock market with a ten-foot pole. The crash will come on a bureaucrat's whim, and the timing of that whim is unknowable. What I am sure of is this: America will be a financial and economic ruin when this is over, regardless of how Greenspan handles his endgame or when he turns down his king. Result: civil disorders are going to render many of the urban areas virtually uninhabitable. The best investments are therefore those things that will facilitate getting one's ass as far from urban areas as possible, and will minimize one's dependence on the easy life to which most of us have become accustomed.

11/22/04 Peter Gardiner on "Stocks with Negative Working Capital"

I find all this talk about the dour future guaranteed by a "large" trade deficit perplexing. In the analysis of corporate financial structures we find three classes of companies with negative working capital accounts: those with large cyclicality or seasonality to their businesses; those who are edging closer to the demise guaranteed by a return on invested capital lower than the risk free rate, and whose erosion of market share, competitive position and marginal profitability require the incurrence of long term debt to finance short term operations (or those 'turning around' from same); and those whose businesses are so strong, profitable, and persistent that their suppliers are either only to happy to finance their operations, or are so dominated by the company's control of costs that they are effectively required (as a condition of doing business) to supply financing by acquiescing in a longer collection period of their own receivables, thereby supplying the longer payables maturity to their corporate dominatrix, even as the latter's average days sales outstanding (receivables) is short, because their customers are only to happy to pay earlier. These dominant companies are often the most profitable in their industries, if not the country. There is only one country with such a "working capital" account, and to think that its future is bleak is to suggest that somehow the interest of others in its assets, productive power, profitability and buying power for goods and services is in decline: not a bet I would make in the long run.

PS. WalMart, for example, with $8 billion of negative working capital at July '04 quarter end, is an example of this latter category.

11/22/04 Kinsey, A Movie Review by Victor Niederhoffer

11/22/04 The Cartoon Guide to Statistics, a Review by Steve Wisdom

11/22/04 The Body Snatchers, by Victor Niederhoffer So many of our institutions, our common pastimes have been taken over by imposters and makes the putative goal of the activity completely at odds with the output. Yes, of course, all the propaganda we receive about the stock market is part of it. And the government regulators are snatched by the companies being regulated, as public choice theory teaches us. And we know that in most cases, the legal fees are greater than any possible benefits of a legal trial. And similarly, the medical system is in the main part of the imperial triangle of co-pay, preclude competition from new companies, and maintenance of the pari passu of the medical interests, and education has in the main become a system of spreading the idea that has the world in its grip by unionized forces, and the newspapers and TV and other second-hand disseminators of culture..... the list can go on.

And, yes, one feels superfluous about it all. But even I was surprised at the recent Harvard weekend honoring Jack Barnaby the greatest tennis and squash coach in history, a warm and noble man, the consummate teacher of the 20th century, and a person who was better at his profession than any I know. What surprised me was that I could have been so naive to fail to realize that now memorials at institutions are mainly fund raisers rather than efforts to honor the deceased. The memorial came almost 3 years after he died and had to wait until it could be fitted around a fund raiser for the tennis team and a program to honor past givers of tennis and squash buildings at Harvard. While these programs are very good, and the donors very honorable and charitable and good men, I felt a palpable uneasiness as I went up to the podium to praise Jack, and remember him. How could I have been so naive to fail to realize that the snatchers had taken over the dead as well as the living.

11/19/04 My Beloved Brokers, by James Tar Today is one of those days where all those gun-shy Bears come out of the woods to show there scruffy faces, howling, "Grrrrrrrr......I told you so." Of course, they had their asses so decimated and worn bare from this latest surge that all they could do was hide and protect and rebalance what remained in their coffers. Surely, they were not even in bearish squadron formation at the 1185+ level, as their confidence and willingness to lay 'em out was too in retreat.

Naturally, they start making phone calls and showing their ugly faces. "I knew it, blah blah blah". "Please stay away from me", I say. "I am still in recovery, I do not need to hear your gibberish."

My beloved GS, MWD, LEH, and BSC are certainly having a tough go of it today, as they are giving back much of their performance of the last several weeks. Big Deal. Could be ideal to get long.

11/19/04 Wildfires Revisited, by Andrew Moe Almost a year ago today, San Diego suffered through the worst wildfires to hit the state in over 30 years. The Cedar fire alone charred over 100,000 acres and burned out hundreds of homes. Armed with my trusty digital camera, I took a ride out to one of the hardest hit areas to see what could be seen.

The canyons of Southern California are typically filled with thick, dense, low growing brush. As we have an extremely dry climate, these are hardy plants that can survive many months without water. They have also evolved the ability to recoup after wildfires. Here are some of the survival strategies I observed.

1. Deep roots allow most types of plants to grow again in the same spot. I was amazed at the number of new plants growing directly at the base of the charred remains of the old plant. Clearly, they are new growth from the same root system. 2. The native trees seem as though they have allowed an outer layer of bark to burn, but have preserved the inner fibers necessary for survival. New growth is robust, especially around the base of the trunk, perhaps to shield the new bark from vines, pests, etc. 3. Seeds that were either well underground or spread from other areas have almost no competition. In areas that were laid completely bare by the fire, small clover type ground cover and grasses have moved in quickly.

Wildfires are currently blazing throughout the pharmaceutical industry. Those who survive will emerge in fertile conditions with lessened competition for natural resources. Who have roots deep enough to survive? Who will move in to take advantage of the burned out spaces? 11/18/04 Kim Zussman adds: I Have witnessed similar aftermath of many So. Cal. brushfires, one which came very close to home in '92 (Greenmeadow fire, Thousand Oaks). Although I did not quantify the change, one could see in the years following the burn that the mix of revitalized flora was different than before. This pattern is still noticeable 12 years later. Perhaps long periods of easy growth relaxes selection for hardiness, and the landscape becomes choked with weak and inadaptable plants. These fires, which have (even without modern arsonists) occurred naturally for thousands of years, in effect cull the fragile and reward the strong and their seeds with passage to the future. 11/18/04 Jeff Sasmor on Wildfires I used to live in San Diego until about 8 years ago. Every year we'd get one of two brushfire prognoses:

1. There wasn't much rain so the brush was very dry. Very high danger for fires. 2. There was a lot of rain, therefore a lot of brush growth. Very high danger for fires.

Had large fires come near to my house on 2 or 3 occasions. Unnerving. Helpless. Exciting?

11/18/04 Vestiges of Jesse? by Victor Niederhoffer

Lately, the movement of many stocks reminds me of the kind of pool syndicates that the operators of Old Drew and Livermore liked to run. First a big down, and bad news as the weak hands liquidate and strong hands take over. And then a run up as the news filtering out is not that bad. Two stocks I own that I don't know if they are good or not are Pfizer and Chiron; and I don't know anything about what they do, but it makes me want to go to my library of old books and read the "Magazine of Wall Street" circa 1910 or "50 years on Wall Street" et al. 11/18/04 A Sage replies: First, I'll agree with the chair that things do have a Wyckoffian cast these days.

David asks: "What is the modern day form of a "pool syndicate"? Can one exist today? ...it would not surprise me if they do exist as I see what appears to be manipulation at times. Do market makers work together at times?"

Now there is an interesting question. I'll guess that E would say that the herd instinct amongst hedge funds was creating virtual pool operations and he was anxiously awaiting an opportunity on the other side. Well, at lest that's what I would say. (Wyckoff spoke of the "composite operator" in this context.)

11/18/04 James Sogi continues: The modern day version could be the internet chat room. Let's say there is a group of operators who are all on line together and one says, " I'm buying xyz". If 500 others jump in together with 100 lots each, XYZ moves. The 'public' sees this 'break out' and jumps in and the stock takes off on a run. In the meantime, the operators quietly distribute their shares, on high volume resulting in a flat congestion pattern. There was a case of a high school kid that was indicted for pump and dump online using small illiquid issues on online forums and chat rooms. Livermore and other trust operators back in the day made the other operators put their stock into a trust to avoid front running each other. JD Rockefeller had large trusts with irrevocable power voting the shares of many companies, hence the 'Anti Trust ' law. But there lies the difference. In the modern day version there is no prior understanding or scheme. It is just communication or education which is not illegal. It is the preformed understanding, or scheme that would be suspect. (usual disclaimers of course blah blah etc etc) Other areas of interest to Spitzerian types might be the sell side operations that were discussed earlier. If a sell side operator had large blocks from more than one operator and used that block to manipulate the market, even presumably for a few ticks, that might constitute a problem, but I am not familiar with the details of those types of operations. As always, there are many ways to skin a cat.

11/22/04 Ken Wasserman offers:

I have seen pools in the penny stocks and they can generate enormous gains if the ingredients are there. First, you need a real business. Second, you need a tight float. Third, you need the stock to have been beaten down and forgotten. Fourth, the stock is accumulated by those who can then bring others into the play through the message boards, particularly on Raging Bull. Fifth, the company has a big story with seemingly unlimited potential and press release after press release is issued to bring the message home that the business plan is being carried out. It is key that the company not be tethered to earnings or assets, just carrying out the packaging of the business plan.

The game can end badly if either one of two things happen. First, the business plan stalls. Most do, so the game tends to be short lived. Second, even if the business has a big sky quality, if the managements' interests are not aligned with the shareholders.

This takes two forms. First, management is in cahoots with death spiral convertible debenture holders, thus creating the motive to crashing the pps to allow the debenture holders to convert at the lowest pps possible. The second trap is the company dilutes the stock to death with S8's and the like. The gains can be astronomical, very much like a cheap option right before expiration can balloon with the right news. The losses can be catastrophic also. It is of key importance that the float be controlled. If that is done, then only the market makers need to be dealt with in terms of curtailing or making them pay for naked shorting. Another chapter for another day.

11/18/04 Russell Sears adds: Even the press has caught onto the "pump and dump". "The greater fool theory", had analyst assurance that you wouldn't be a "bag holder".

All this reminds me of an old Shirley Temple movie, believe it was "Twinkle Toes". My girls and I was watching couple weeks ago where her guardian fell for the staged con. Shirley's Guardian and a well dressed chap overhear a deal being made for "Napoleon's antique watch". The second man offers to double the selling price, as he must have that watch. The buyer makes clear it is no longer for sale. Shirley's guardian is promised a fat profit if he can just get him that watch. Upon purchase and offering, the buyer feigns insanity through grandiose delusion.

However, the new game is "slander and slump". The scam seems to works by preying on our cultural cynicism, the evils of corporations, lawsuits at the drop of a hat and by the 2nd level deception presumption of unbiasedness, by the individual journalist uttering statement "does not trade in stocks..". After all isn't it a given that the media is the sole champion for the little guy in our society. Here's one mans battle against this.

While I offer no evidence beyond circumstance, such orchestrated predictable volatility from yellow journalism seems hard to imagine it is all solely for the best interest of the reader.

11/17/04 A Mr. S. asks why we predict a convergence of Sharpe ratio to minus infinity on delta neutral funds ---- here is one answer from a fellow traveler:

 I am surely no Mr. S., but it strikes me there are two things in life; where you are going and how you are getting there. Discussion of so-called "market neutral" strategies has often suffered from a confusion between means and ends: 1.) there is the" low correlation" end with respect to some targeted benchmark (' we make money regardless of the S&P's movement, etc'); or 2) there is market neutral means (we make what the S&P or some other index does, but we do by means of a hedge or spread or offset technique), targeting a Sharpe or information ratio, etc. The first type tends to be a sleight of hand or bald-faced deception based on a three card Monte set-up; the second is a pure illusion which by its very structure is generally doomed. In case one, for example, a famous refugee from LTCM, currently sends out a monthly letters for his new partnership in which the correlations with all the listed classes of alternative and standard benchmarks are shown to be next to zero, complete with a "risk budget" expressed as a volatility function of the notional value of the ten year treasury. He is known to be a fixed income convergence specialist as well as an options guru. But nowhere in his letter is a correlation depicting performance with ANY spread whatsoever - corporates to treasuries, TED, Mortgage backs to treasuries, High Yields, etc - even noted. Reading his letter one could be led to believe that his fund expresses the unitary, uncorrelated particle in the universe. And yet, it was only 3 months after AAA mortgages went from 40 bp over the curve to 250 over (in the summer of '98), that LTCM blew up. There is no such thing as "uncorrelated." There is always a correlation, and if you do not know what it is, then when you find out you will be dead.

But it is the second sense of "market neutral" about which the great Mr. S. inquires. And in this sense the question is even more curious.

Twice the transaction costs and dealer spreads for each position would be tough enough to beat, but the idea that one can correctly and continually forecast the simultaneous pathways of two sides in the same position - over many positions through time - and still give up the asymmetrical return possibility defies imagination. Being long a spread is not to decrease volatility: it is to transform it and express it in a different direction. For example, when marking to market convertible arb positions, the bond prices are, like loans from your bank, good when you don't need them. As soon as you do, the relative illiquidity of one side of the "hedge" reveals itself with a vengeance, and the famous widening out of the conversion premium - say upon announcement of a credit problem - promptly disappears; the rate of decline of the bond price suddenly accelerates rather than slows. In this respect, while the convert specialist knows he is short a call through the farther out conversion strike of a bond and attendant call protection, he is also short a put to those senior in the capital structure to him. This hidden cost is quietly amortized by the yield spread on the bond/stock 'hedge'. But it ain't free money. There is some insurance being written. There is simply no free lunch, and the appearance of such a freebie at month end markings of over the counter securities does not prove the fact. Even in program trading, the "cleanest" spread trade, there is always a legged-in entry - a first side taken with the other laid off. This risk is paid for over time in little pieces and occasionally rebalances viciously.

The most remarkable thing about his question is that the vehicle through which one expresses a long bet in equities is always moving: the index itself has the huge survivor bias; the companies themselves grow or die; prodigious creative, competitive forces drive new monopoly rents to the marginal cost of production - thus infusing the economy with "saved" cash flows and high standards of living as long as there are no restrictions on exchange, etc - and are relentless, geometric, and evolutionary in scale and scope. The statistics on the table bear this out in terms of drift for all time periods, subject to volatility, etc. Taking the other side of that trade in the long term seems, on its face, to be akin to defying gravity.

The world view of one who would seek to eliminate risk is one of a flat-earther; there is no elimination. There is risk identification, estimation, and pricing , and variation in all. The rest is just big vig and the leaf of a fig. 11/16/04 Russell Sears Adds: I would add that models fail to adequately adjust for their own effect on the market. One aspect of this has been said before, that good hunting grounds will bring in crowds of hunters. I would add that besides the models failing to adjust for diminishing returns, tougher competition, they fail to realize how their growing presence brings its own inefficiencies to the market. Where their assumptions fail, be it infinite liquidity, especially on the short side, or correlations being cause and effect, they bring in opportunities for other hunters. They forget, that they to are being hunted. Just because they are sheltered and their shelters are well camouflaged does not mean they are invisible, especially once their scent is all over the forest.

Further while the long side has many advantages, the short side has one. It takes years to develop a talent, but a moment for it to vanish. It always is wise to look for that player whose sport has lost the twinkle in his eye, and he is about to hang it up and cut him from your team. It's usually wise to replace those old sprinters with fresher hungry leg before his hamstrings give out. It is always the coaches job to destroy so he can rebuild. But as Tim implies lets not lose sight that the first and most important job is to develop and nurture the talent.

11/16/04 George Zachar offers: Speaking personally, as a fixed income futures/options guy, nearly everything I do can be modeled as either an insurance providing function, or a liquidity providing function. I find it downright funny that I spent much of the past few years at my desk, solo, in my jeans, providing what amounted to reinsurance for those who wrote portfolio coverage to Fannie and Freddie.

Nonetheless, the knowledge of my role in the great market ecosystem allowed me to both fix my risk parameters and sleep at night. My business concern going forward is that Fannie and Freddie [and by extension the mortgage market] no longer "need my services". The big GSEs are contracting their books, and mortgage borrowers are increasingly taking out loans with less optionality for their creditors. Much of the collapse in debt vol. is neatly explained by this. That cycle has changed, and it's time to move on.

11/16/04 War Strategies of John Boyd, Can They Help Your Trading? by Will Huggins I saw an interesting parallel to the Norbert Wiener quote from Sept. It's a reference to late USAF Col. John Boyd's work on the Korean Air War, courtesy of Fred Thompson, Willamette University:

A link to the whole paper follows...Boyd's work is excellent for students strategy as it intersects and develops work by Sun Tzu and Musashi...

Is the rapidity of trade execution critical to the success of day traders?

"The significance of the Observation-Orientation-Decision-Action cycle was first noted during the mid 1970s by John Boyd, a young captain in the United States Air Force assigned to study air-to-air combat during the Korean conflict [4]. American aviators were especially successful in Korea, achieving a ten-to-one kill ratio against their opponents. Why?

The first possibility John Boyd considered is that the Americans simply had better planes. But, as it turned out, by most measures of aircraft quality, the American F-86 was inferior to its Korean War opponent, the MiG-15. The MiG-15 could climb and accelerate faster and turn quicker than the F-86. Nevertheless, the the F-86 had two advantages over the MiG-15. First, its pilot could see out better. Second, it had quick, high-powered hydraulic controls, and the MiG did not. This meant that, although the MiG could perform many individual maneuver activities-turning, climbing, accelerating-better than the F-86, the F-86 could switch from one activity to another much more quickly than the MiG.

Using these two advantages, American pilots developed tactics that forced the MiG into a series of maneuvers. Because the pilot of the F-86 could see how the situation had changed and could switch faster to another activity, at each maneuver the F-86 gained a beat on its opponent. With each switch, therefore, the MiG's responses were less appropriate to the situation, until they were so inappropriate that the MiG was exposed to destruction. Often it appeared that the MiG pilot realized what was happening to him and panicked, which made the American pilot's job all the easier.

John Boyd then turned to ground combat to see if circumstances paralleled those of the air war over Korea. He found a similar pattern. One side presented the other with a sudden, unexpected challenge or series of challenges to which the other side could not adjust in a timely manner. As a result, the side with the slower response was defeated, and it was often defeated at a small cost to the victor. Moreover, the losing side was frequently materially stronger than the winner and, in many cases, the same sort of panic and paralysis the MiG pilots had shown in Korea seemed to occur.

What do the winners in these cases have in common? John Boyd's answer is that they consistently went through the OODA loop, sometimes called the Boyd cycle, faster than their opponent and thereby gained a tremendous advantage. By the time their opponent acted, they were doing something different. With each cycle, the slower side's actions were less apt and it fell farther and farther behind. This is what happened in many of history's most decisive battles. Hannibal went through the OODA loop faster than the Romans at Cannae and won one of history's greatest tactical victories. The Germans beat the French in 1940 and the Japanese beat the British in Malaya in 1942 because they went through the OODA loop faster than their opponents. In some of these cases, a single, sudden action was enough. In others, a series of Boyd cycles was required. But in every case, the critical competition was in time and the faster side won." 11/16/04 Joyce Shulman Adds: BOYD: The Fighter Pilot Who Changed the Art of War is helpful to the trader. When Boyd describes the OODA cycle, he does emphasize speed, but also the understanding (the Observation and Orientation phases) of what is going on, and using all of that in deciding the next action. (Diagram on Page 344)

He also studied the differences of flying in a simulator and flying in an airplane. There are differences. Do we react differently when we study trading patterns of our own and others, than when we actually trade? Many more lessons in this book appropriate to the fighter and the trader.

11/15/04 "Patting Yourself on the Back" by Victor Niederhoffer Harry Browne has an excellent chapter in "Why the Best Laid Investment Plans  Usually go Wrong" on self-administered evaluations by forecasters et al. My favorite passage is suitably documented in Ed Spec. (p. 69)... "He usually cites one or two forecasts that seem now to have been especially shrewd. But, of course, you expect him to do that. It's when he cites some that turned out to  be wrong that you're won over. You can see that he's being more than open and honest. By treating a near-miss as "wrong," he demonstrates that his talent and  even his standards tower for above yours and mine. He said: 'Among the losers I was a bit too optimistic about the high in gold (said 450 but it was only 406). Ditto silver: I said 11.50 high but it was only a 10.85 high.' ...Any man who's wrong only 13% of the time and who's that close when he's wrong, must be a genius. [But] I've never found him to be even 40% right.... And he almost never repeats last years forecasts accurately. For example... 'when he made the forecasts of 450-500' gold it was already at 406 it's high for the year". Turning to the present day, I counted the following uses on Google phrase number "as predicted " 735000 "as I predicted" 38300 "as predicted" NYSE 6200 " as I predicted" NYSE 181 Thus, only 1% of the uses of the hubristic self-evaluation appeared on NYSE and another 1% appeared vis-a-vis Nasdaq. Here are a few example: "The results are as predicted. Consolidated figures before audit first quarter 2001" "If as predicted copper prices", Now as I predicted, monetary aggregates are slowing down.." "They are rising as I predicted". "The Asia crisis has as I predicted dragged down the value of big name stocks. "As I predicted, two weeks ago, it looks likely that Nokia will fail in its bid to acquire control over Symbian" "This week the fed cut rates by 0.25% as I predicted" "As I predicted several times last year, long term rates can go" oh and yes, "as I predicted those lovable misfits from cyberfast systems...." It would be interesting to prepare a typology of uses of "as predicted" and its variants with the subtle points that aggrandize and feign humility attached but one gets the point. Too often, very fallible forecasters and investors like to pat themselves on the back with far too many "as I predicted" and its variants. It's unseemly, bad sportsmanship, bad science, and hubristic. For your good and ours, please let it cease. Let us instead follow the example of our spiritual leader, B. Franklin who to make himself more humble used such phrases as "I conceive" or "I apprehend" rather than "as predicted" to weed out this vice.

 11/15/04 Philip McDonnell Responds: In the vain hope that I might find one of my failed predictions I Googled the phrase: "contrary to prediction" nyse, and received only 10 hits. Compared to the Chair's searches the number is strikingly low. It would seem that almost no one wants to memorialize their own failed prediction. Reviewing the actual hits themselves, most dealt with corporate governance issues and in fact didn't refer to failed market predictions at all. Only one reference was an academic paper revealing that in aggregate security analyst's predictions were "unrelated or negatively related to recommendations". Who knew? In any event even this one lonely relevant hit clearly isn't a case of the analyst's self admission of performance failure.

11/15/04 Yishen Kuik Found:

Some google results inspired by Dr McDonnell,

"as we predicted" 20,500 hits vs "contrary to our prediction" 793 hits "contrary to our predictions" 610 hits

control ratio : 15 (rounded to nearest integer)

"as we predicted" & "nyse" 393 hits vs "contrary to our prediction" & "nyse" 22 hits "contrary to our predictions" & "nyse" 4 hits

nyse ratio : 15

"as we predicted" & "futures" 397 hits vs "contrary to our prediction" & "futures" 17 hits "contrary to our predictions" & "futures" 9 hits

futures ratio : 15

"as we predicted" & "OTC" 151 hits vs "contrary to our prediction" & "OTC" 4 hits "contrary to our predictions" & "OTC" 4 hits

OTC ratio : 19

"as we predicted" & "nasdaq" 579 hits vs "contrary to our prediction" & "nasdaq" 14 hits "contrary to our predictions" & "nasdaq" 4 hits

nasdaq ratio : 32

11/15/04 Galton's House, 42 Rutland Gate, London The ground floor was dominated by a dining room where Galton would do most of his writing sitting at a desk in the front window. All his notes and manuscripts were kept in a store room at the back of the house, but there were precious few scientific books on display. Those books he had were usually complimentary copies given to him by friends and colleagues. In fact it is one of the more peculiar aspects of Galton's character that he rarely read the work of other scientists. When he approached a scientific problem for the first time he hardly ever bothered to research the published literature. Unburdened by history and the work of others, he tackled his subjects head on, from his own first principles. This unusual mode of working undoubtedly gave his research an original and fresh perspective that contributed to many of his successes. -- from "Extreme Measures", Martin Brookes, Bloomsbury Publishing 2004 11/15/04 Striving for Arete, by Easan West from Rutland Gate, a block past Kensington Palace, I holed up in a flat for a year to study and count the S&P index. I watched its meandering moods every day from open til close, looking for an edge. I remember the day the palace lawn was solid with flowers of mourning for Lady Di, remember the day the Israeli embassy, a few blocks away, was bombed, remember the day neighbor Sultan of Brunei threw a party, and his driveway looked like a Benz showroom. On Vic's 'Mistakes can Kill U' theme, agree about the big one: hubris, difficult to see until the market sharply pointed it out there in that Kensington flat. Back then I didn't know I didn't know what I was doing -- compared to now when I am dimly aware I don't know what I'm doing -- I had the bad luck to make a lot of money on some initial trades, attributing it, of course, to my obvious genius. Eventually I got my big head handed to me, but like Hydra, new heads kept growing, about as fast as the Herculean Market cut them off. In the Greek story, Hercules had an ally, his nephew Iolaus, who helped him overcome Hydra by cauterizing the wounds before the heads could grow back, until Hercules was finally able to lop off the one immortal head and overcome the beast. I thank esteemed List member Professor Brett for introducing me to Ed's work years ago. The raison d'etre for his Tribe is to directly face exactly these emotions which we don't like to admit, so that they won't run our trading decisions. I can only guess from the scant detail James provided about his anonymous friends, that perhaps they thought it was going to be a tea party or something, rather than facing the many-headed Hydra of oneself. Parts of our psyche is Hercules and part Hydra, and it doesn't hurt to have a few allies along the way. How does hubris affect trading? For example, since James' friends are wildly successful now, a possible scenario is that at some time they will feel greatly insulted and upset at the Herculean Market for not doing what such successful traders as themselves know it should, and will fall into what the Greeks say comes with hubris, that is "hamartia", literally 'missing the mark'. Hamartia specifically means some weakness or blindness arising from one's talents, strengths and overconfidence. In other words, those unreconciled feelings may still control their actions and judgment. For the Greek philosophers, the opposite of hubris and resultant hamartia is arete, a constant striving for perfection while at the same time acknowledging perfection is unreachable, a state of mind embodied, in my opinion, by our Chair. As long as one humbly strives to be one's best, he/she has arete. Paradoxically, as soon as one believes one has arete, he/she has lost it. A razor's edge koan sort of deal. <[> Also near Rutland Gate, as one walks west past Gloucester Road, is an old pub with warm ale that tastes like goat piss, great for the homeopathic self-medication of matching one's remedy to the disease, in the aftermath of a Hydran "cashtration".

11/15/04 Nuggets from the Notebook of Da Vinci, by Hany Saad "A painter needs such mathematics as belong to painting. And the absence of all companions who are alienated from his studies; his brain must be easily impressed by the variety of objects, which successively come before him, and also free from other cares.." as much as the speculator needs counting to master his art... his brains must be easily impressed if evidence against his reasoning is revealed and always have his eye on more than one escape route ... To the end that well-being of the body may not injure that of the mind, the painter or draughtsman must remain solitary, and particularly when intent on those studies and reflections which will constantly rise up before his eye, giving materials to be well stored in the memory. While you are alone you are entirely your own [master] and if you have one companion you are but half your own, and the less so in proportion to the indiscretion of his behavior. And if you have many companions you will fall deeper into the same trouble. If you should say: "I will go my own way and withdraw apart, the better to study the forms of natural objects", I tell you, you will not be able to help often listening to their chatter. And so, since one cannot serve two masters, you will badly fill the part of a companion, and carry out your studies of art even worse. And if you say: "I will withdraw so far that their words cannot reach me and they cannot disturb me", I can tell you that you will be thought mad. But, you see, you will at any rate be alone. And if you must have companions ship find it in your studio. This may assist you to have the advantages which arise from various speculations. All other company may be highly mischievous. Then Da Vinci goes on with a very provocative and at first glance contradictory statement to the above paragraph.... I say and insist that drawing in company is much better than alone, for many reasons. The first is that you would be ashamed to be seen behindhand among the students, and such shame will lead you to careful study. Secondly, a wholesome emulation will stimulate you to be among those who are more praised than yourself, and this praise of others will spur you on. Another is that you can learn from the drawings of others who do better than yourself; and if you are better than they, you can profit by your contempt for their defects, while the praise of others will incite you to farther merits. Couldn't describe the spec list more eloquently... 11/15/04 Adventures in Retailing Part 1: Grocers by Ross Miller. *Includes response by J.T. 11/15/04 A Pro Player's Strategy, by Ari Siegel In poker, if the other players have gotten very good and it's hard to make $, it is often best to drop down to a lower limit (i.e. smaller betting structure). Dropping down in limit can be used effectively in other circumstances: e.g. if you're bankroll is hurting, if you are consistently losing for no apparent reason, if you are mentally fatigued by the grind of the game. In my opinion, it serves 2 main purposes: protecting bankroll and increasing confidence. Confidence is crucial to poker success, and good players know to quit a session when confidence is waning. Another trick I'll use if bankroll or confidence is waning, or if the current games just don't seem juicy, is to switch from real-game poker to tournament poker, the latter usually offers lower volatility and a better risk/reward scenario for a hurting bankroll or psyche. Also, I normally only play Texas Hold em, but sometimes find that learning another type of poker can reenergize me to succeed at Hold em or figure out new Hold em strategies I had previously ignored. 11/15/04 Jim Sogi: Pilot Fish Mauna Loa has had swarms of earthquakes and erupts usually every 25 years. It has been 30 years since the last one. Last time the lava flow stopped just 2 miles short of running over Hilo. Bill Gates just bought a big piece of land here near a failed development deal. Paul Allen owns in downtown Kailua.  Charles Schwab and Mike Dell have BIG places here as does the Medtronic guy, Dr. Bocken, Lorretta Lynn, Neil Young, Jesse Colin Young, Roberts of KKR group. The real estate market has peaked here. Last few years have been all buys, new deals, new construction.  Now just starting to see  escrow failures, and contractor failure as the boom peaks. Later in the bust cycle come the  foreclosures, construction disputes. This cycle was 13 years around. We usually lag the mainland, but seem connected closer now. 11/15/04 Saurabh Singal: Coincidences The paper "Methods of Studying Coincidences" by the mathematicians Persi Diaconis and Frederick Mosteller (Journal of the American Statistical Association, vol 84, No 408) describes how the recall of "notable" events and the non-recall of "humdrum" events produce a situation where coincidences are noted with much higher frequency that their expected frequency. The authors also describe the "Law of Truly Large Numbers." Let me quote from their paper: "The Law of Truly Large Numbers. Succinctly put, the law of truly large numbers states: With a large enough sample, any outrageous thing is likely to happen. The point is that truly rare events, say events that occur only once in a million are bound to be plentiful in a population of 250 million people. If a particular coincidence occurs to one person in a million each day, then we expect 250 occurrences a day and close to 100,000 such occurrences a year. Going from a year to life time and from the population of the world (5 billion at the time of that writing) we can be absolutely sure that we will see incredibly remarkable events. When such events occur, they are often noted and recorded. If they happen to us or someone we know it is hard to escape that spooky feeling. "A Double Lottery Winner. To illustrate the point, we review a front page story in the New York Times on a "1 in 17 trillion" long shot speaking of a woman who won the New Jersey lottery twice. The 1 in 17 trillion number is the correct answer to a not very relevant question. If you buy one ticket for exactly two New Jersey state lotteries, this is the chance both would be winners. (The woman actually purchased multiple tickets.) ... The important question is,What is the chance that some person, out of all the millions and millions of people who buy lottery tickets in the United States, hits a lottery twice in a lifetime? We must remember that many people buy multiple tickets on each of many lotteries. "Stephen Samuels of George McCabe of the Department of Statistics at Purdue University arrived at some relevant calculations. They called the event "practically a sure thing," calculating that it is better than even odds to have a double winner in seven years someplace in the United States. It is better than 1 in 30 that there is a double winner in a four month period - the time between the winnings of the New Jersey woman."

 11/13/04 Dept. of Ever-Changing Cycles Sometimes in a tournament you can be playing very correctly but you just don't get the opportunities. This is often just the luck of the draw but it might be a technical issue. For example if your game is too well known to your opponents they may be able to neutralize you. There are two ways of trying to solve the problem, either to attempt to adapt (new systems and ideas) or wait for the tide to turn. Sometimes a bit of both. -- Nigel Davies, "The Grandmaster" Regrettably, many of the relations between bonds and stocks, and between other variables, change over time. Thus, it is always good to see whether any relations that are posited over, say, a 15-year period, have worked over the last few years. One must be very careful to consider whether the many slight variations of a particular hypothesis, combined with a small profit per trade, are not consistent with Father Random. This is where a knowledge of math or the ability to pick random numbers from a table or computer is very helpful. Also helpful in this regard is humility, an acknowledgment of the utter unfathomability and orneriness and changeabilty of the market when confronted with fixed systems. The work on rational expectations in economics is a good theoretical caution in that regard. A practical restraining link on the use of fixed bond/stock ratios comes during a period like last week when bonds set new low after new low, thereby according to the gestalt of the theory being highly bearish for future stocks, while stocks set new highs. Yet a retrospective review of the relation between bonds and stocks finds that they held the predictive clue, albeit this time it was the sharp up open on one day or another rather than the two-day, which countered the previous prediction of a decline based on a x-day maximum in stocks, if this or that open had been above the previous high. I can hear a wise voice in the background telling me to take it easy before I use all this stuff, there are too many things on the plate. -- Vic

11/12/04 Dept. of Connections: A Thought from Jeff Rollert Can a comparison be made between Boyle's Law, a woman's purse and low stock price volatility? If gas expands to fill the space allotted to it, doesn't low vol do the opposite (adding the function of time) as a form of compression? The low vol is a form of pressure...think of a bunch of Wall Street CFA's with ADD around bonus time. The purse addition came from a notion that once a new (and presumably larger) purse is acquired, other stuff is added also to "fill" it...so the initial purchase flutters the butterflies wings and off things go... Seems like a good time to look for bonus drift.

11/12/04 A Strong Beginning, by Victor Niederhoffer One has always found it a little too pat when the beginning of a period goes straight in one direction. Also, when a pat seasonal like the tendency to rise in the first two months of the year is realized to the full extent of the average in the first 5 or 10 trading days. Also, when more than 15 days has gone by without a serious decline. All such factors seem applicable now, and one has his statistics on the table in a Franklinian spirit to maintain a proper humility and perspective amidst this seeming abundance of riches.

11/11/04 Magic in Drug Research and Stock Research, by Victor Niederhoffer There is much magic that we see in our field where a chartist takes one of a hundred patterns he's tested and then chooses the one that looks best. Similar magic appears in the work of a scientist from Penn regarding a certain drug company whose painkilling product has not been recalled. He takes a number of groups that have used the drug Bextra and then finds that among the heart bypass group, the risk of heart complications and strokes et al is twice as great as for the placebo group. This reminds one of the Cal. seismologist who notes that out of the 100 of the most recent 10,000 days similar to the current the risk of a decline of more than 6% was 1 in 10,000 versus the normal 1 in 20,000. "But professor is there anything on the other side of the equation, i.e. the benefit ratio?" And "what is the expectation of a big rise and the average for today?" And " Is there anything about the selection process that father random mite have caused considering that one selected the 100 days retrospectively out of numerous other sets?" Eventually, people like the scientist and the magicians in our field that pull rabbits out of a hat must face the terrible test of data hitting the facts, unless of course Government Regulation can come. But based on the 5 million or so people using this kind of product who must reduce their suffering from pain, I would imagine that no fiat will enable the bad stats and bad cost benefit to preclude use of the product. Thus, I have accumulated a modest position in the issue under consideration with its 2 pain killers still on the market on the grounds that this too will pass.

11/10/04 A Bee in the Bonnet, by Victor Niederhoffer I've had a bee in the bonnet since the Friday, Nov. 5 release of the employment numbers was so drastically greater than expected, so clearly imperative if previously released to the outcome of the race as it would have totally defused the one of the two points that the repubs. were weakest on. But it wasn't that the numbers would have been particularly so important and had such an impact if released just one month earlier that caused the buzzing to reverberate. It was the power of it all. The total nonchalance and aplomb and celerity that the operatives displayed in the timely release. Yes, it's sort of like the spouse that lets you know of infidelity after it's too late, as the geologist said, and yes, it's like the horse's head if you don't hire Johnny Fontane in the Godfather. But I felt that something was quite rite -- to capture the sheer power of it all. Finally, I think I hit the right note and it was there all along. When Wynand comes back after 2 months on a cruise with Roark to learn the philosophy of self esteem.

"..finally, dear. For the first time I feel I can talk to you as an equal. That I understand that being interested in one's own happiness is not evil. That self esteem and self reliance is the key to all the good. I could stay up all night just talking about these ideas. Please can we just talk. And then perhaps for the first time... " " "But , honey, I already bought tickets for tonite for a play and we'll be having cocktails with your friends from the paper and the club after ". " You already bought them? What play? " " No Skin off your Nose. It's all the rage "

11/08/04 Father Random by Victor Niederhoffer An interesting post came across my desk indicating that consultant Bob Shrum was pleased that Mr. Kerry came within 60,000 votes in Ohio "of winning the presidency." Of course, father random arranges it so that if you take the 10 states with the most electoral votes, and then rank them by how close the race was, you can always find a small number of votes to moves from one party to the other to switch the outcome. Indeed, in analyzing cross classified data such as: Last 2 months up Last 2 months down Last 2 Months Avg. Chg   First 10 months up                       10 2 4%   First 10 months down 6 6 2%

A standard way to tell whether an association or non random preponderance in any elements exists is to count how many of the observations must be moved from one element to another in order for the proportions to equate ( see the Leo Goodman method of teaching for another example of Goodman and Kruskal's ingenuity in Ed Spec for a lead to this). .... But there's something much more than the father going on in the backings and fillings that the market took before the election before finally going up a "Swift " 7% in the days surrounding the election. It's the mistresses way of giving the losers hope. If only those odds of 3 to 1 in favor of Kerry on Nov. 2 at 7 pm had held up and he had won, then the market could have gone down a "Swift" 7% " they can say. Of course, the sapient investor knows that the market would have surmounted the obstacles to end up in the same place regardless, but it is amusing how the Mistress gives the bears and other losers hope. " If only they had bought instead of sold, .... if only the Swifties hadn't found a handle... If only oil hadn't started it's Lobogola move the other way home ".. But of course, the mistress of markets must always give hope, must always take account of her husband's, Father Random's, tendency to "confound and percolate". Or else the friends of the losers could not be drawn in, and the loser's themselves would not be ready to come back to the casino, ( to lose more than they have any rite to do ), in  the most efficient fashion.   In discussing the magisterial efficiency with which the market ploys her trade, making every thing seem like it is hung on a thread, that without such fine distinctions, the reader's of the biggest financial weekly, those with an average tenure with the magazine of 50 years or more, those who love the humor, the wit, the acerbic skepticism of its lead columnist, those who have been induced to either stay out or reduce the % of funds deployed in the market during the 40 years he's been their columnist, mite not be encouraged to continue to withhold funds from stocks, as their leader elicits yet another group of friends (where is Bob Farrel and Mark Faber and Charles Minter and Robert Prechter today) who can point to that knife edge that prevented them from circumventing the 2 percentage point differential in favor of stock returns relative to bonds that has existed this whole year, and can lead their followers and readers to continue their bearish predilections.

11/08/04 Chinese Optimism by Linden Doerr Fully recognizing how gauche it might be to recommend an article from a news source not available in a supermarket check-out line, the page one, column one article in today's Wall Street Journal is inspiring and perhaps one should make an exception if only in this case.

The article profiles an 18-year-old woman who had the courage to move away from home and take three jobs of progressively more responsibility in two years, moving from typical country-side poverty to enough income to save and send home the equivalent of one person's average yearly income each year. This woman is one of 114 million Chinese who have begun to understand labor mobility and the endless vistas available to humans. These 114 million are the spearhead of, perhaps, 10 times as many in Asia and other utterly impoverished parts of the world. This group alone represents a labor force almost as large as that of the United States. Imagine the bounty such as we have enjoyed from Japan's industrialization after WW II, only multiplied by 7 or 8 times, pouring out of a country that isn't so constrained by social strictures. One of the pillars of endless prosperity (indeed growth in prosperity) is the ultimate resource, the human mind. The unleashing happening here and now is probably without parallel in history.

11/08/04 Growth versus Value, by J.T. The other day sitting at the dinner table my son looking at his glass asked "does water come from ice"? I thought and said, yes it does come from ice if it melts. Then I was proud when he asked "but Dad doesn't water turn into ice?". I said yes that's true too. It is hard to explain and keep things simple and easy for him without using words like thermodynamic, entropy and such. But I felt accomplished to have him finish dinner knowing that he understood that there is some kinda cycle involved. Wow, being a dad is hard work.

This got my two brain cells left thinkin' about probably one of the most observed phenomena on earth. Ice to Water and then Water to Ice. I then thought of the ongoing battle of growth vs. value. What is the better investment? Is ice better than water? Is there a cycle or conversion between value becoming growth and then growth turning into value? We know water when cooled just below 0 degrees C becomes ice, is this like a growth stock slowing its earnings down, no longer splitting or buying shares back and starting a dividend (cooling). Then once this process starts the shareholders want more "ice", nucleation starts on the molecules and the company raises its dividend yr after yr becoming colder and colder - ice. This value "ice" becomes so cold that it must break apart or evaporate and then it becomes heated above the 0 C point and becomes water then flows once again. Recently EK and XRX which were free flowing water and through changing technologies and consumer and business choices cooled over the years until the "change" took place and now water is there flowing again. MSFT which was a free flowing water (growth) now is cooling and freezing (3buck div. ex Nov.) slowing growth. MO paying yrs and yrs of ice to its shareholders is thinkin' of breaking apart to thaw out and freely flow as water in separate parts. VZ, T, SBC, BLS seeing the freezing icy effect of landlines and wanting to thaw out and flow freely as water with growth once again. It's there, I just need to see the points of change latch on and profit to and fro. I definitely tend to be bullish in nature and know that Water (growth) is far better to invest in than the stone cold icy (value) companies for the future. Water does cover the majority of the earth fellas, ice only occupies a little piece.