Much ink was spilled over the recent "downgrade" of US government debt by S&P. A second-order effect — which has obvious and important business consequences — occurred with much less fanfare.

S&P's downgrade of the US Sovereign was accompanied by a similar downgrade of the five most highly rated US insurance groups: USAA, NY Life, Northwestern Mutual, TIAA-CREF and Knights of Columbus Fraternal Benefit Society. All of these insurers were previously AAA, but along with Uncle Sam, they were downgraded to "negative outlook."

"The ratings of these five US insurance groups are constrained by the sovereign rating on the US because the insurer's businesses are concentrated in the US, and domestic assets account for a large proportion of their portfolios," S&P wrote in a news release (which didn't make the front page of the Wall Street Journal.) "We factor direct and indirect sovereign risks — such as the impact of macroeconomic volatility, currency devaluation, asset impairment, and investment portfolio deterioration — into our financial strength ratings. The rating and outlook on the US constrain the ratings and outlooks on these five insurers. If we were to lower our ratings on the US, then we would also likely lower our ratings on the insurer[s]."

As S&P's singles out these five insurers (which survived the recent financial crisis with hardly a scratch), it demonstrates the capricious nature of S&P ratings (i.e. why is Northwestern Mutual more vulnerable to macroeconomic volatility than GE, Berkshire Hathaway, and Chubb?), and it also underscores some longer-term consequences should the US Sovereign lose its AAA. Put simply, an insurance company's ability to compete and write new policies is directly related to its credit rating. If/when S&P further downgrades the US Sovereign, these insurance companies will be among the most obvious innocent, first victims.

Sam Marx comments:


Would you say that there's politics involved with the people at S&P who do the ratings?

Imagine the effect on the presidential election that could be had if in late October 2012, they actually downgraded U.S. Government debt.

Russ Sears writes:

If the first law is survival, you have to wonder if the threat of the "nuclear" option was a response to the rumors of Congress taking away the rating agency immunity from investor lawsuits.



This article "The Next Epidemic: bubbles and the growth and decay of securities regulation" has a nice historical survey of bubbles and stock prices and fraud with an interesting simplistic model of when fraud pays. It could be expanded to predicting individual stock prices or markets I think with some benefit. The conclusions about regulation of course one finds completely out of blue.

Russ Sears comments: 

I must tie this to the one to the Chair's "10 things I learned about the market" post. I have found that higher math is NOT useless in the markets, in fact I have built my career on it time and time again. Studying them has been quite fruitful for the firms I have advised. However, it is not by actually applying them; rather it is understanding how regulators use them and thereby create blind spots for the bubbles to develop. Why people build faith in their sophistication and regulators love their absolute answers, but miss the glaring obvious that is outside the model/numbers, but still numerable.

There is a simple rule that the risks you are most blind to is the risks that naturally builds up and is totally over-allocated in your portfolio.Now that we have GPS watches that accurately measure a course, it is clear that my favorite courses were all about 1/4 mile short of my estimate and the courses I avoided were estimated as short than reality. Bubbles build because the general public and the regulators are blind to the risk in their models.

I have heard that the regulators have pinned the crisis on everybody being driven to invest in the same thing at the same time, hence they all crashed together. To solve this problem, they have come up with the wonderful (not) idea of measuring the correlation of a bank with the correlation to the others to determine the capital required of any one bank. This might actually work if we had hundreds of banks all about the same size and none of them big enough that they could dominate anyone market. So now instead of nearest neighbor/ copula coefficients misunderstanding the correlations rather than cause and effect over/under-allocations. We soon will have a system built on distancing from the nearest neighbor driving them to exotic allocations. So soon instead of having all banks investing in a deep market like the housing market until it is overwhelmed by the cash pouring in due to cheap capital requirements on AAA rated bonds. We will have each of the big banks overwhelming the smaller asset classes, due to it non-correlation to the markets.

While I have used this successfully, I purposely left out some of the details on how its executed, I will leave it to the Chair to determine if this is too valuable information to the general public/ website.



 If someone could relate the 10 most important ways to be a successful beggar and somehow rate the big CEO's on how they fare on this, perhaps it would be a good way to pick investments these days. Certainly the basketball player, and the [deleted pending resolution of offer and counteroffer] would be high up there, and the heads of the certain institution from areas that are renowned for their ability to compromise would have many lessons to teach, and juicy stocks ripe for investment. The head of a metals company renowned for its low cost elevators in my day was a butler and this would seem to be very ideal training in the absence of a school for beggars in this country. How to generalize?

Gary Rogan writes:

They can't really beg and retain any illusion of authority. They have to prostitute themselves to the regime while plausibly (somewhat) appearing highly enthusiastic and supportive.

Some of the skills:

-Be able to speak with passion and conviction about complete nonsense, generally in the collectivist/green future and similar areas.
-Be able to deny obvious truth with passion and conviction in public, such as the real motivation for any help from the government.
-Regularly show up in Davos.
-Express a great deal of concern for various oppressed constituencies, at home and abroad and describe at length how the company/CEO are helping them.
-Be excited about creating jobs, especially "good" jobs, "skilled" jobs, "green" jobs. Talk at length about how the US needs to be a country that "builds things".
-Be able to motivate a large number of employees by any means necessary to contribute the government political candidate.
-Invest heavily in a number of "relationships" in DC to create wide-spread support for bailing out the company.
-If the company is a conglomerate that owns any media properties turn those properties into the echo chamber for the regime.
-Infrequently offer mild criticism of the regime while emphasizing the silver lining.
-Get involved as advisers to the various regime commissions.
-Hire former regime members.

Steve Ellison writes: 

Maiming: In one country I visited, there were many beggars, who served an important role in their religion by giving the faithful opportunities to do good deeds. Many of the beggars had been purposely maimed by their handlers in order to attract more alms.

Spinning a yarn: When I first worked in the big city as a young man, I was stunned by how many panhandlers there were. Locals informed me that the Republican president was to blame. I saw the same panhandlers day after day, but every once in a while somebody would approach me with a sad story. One woman rode the subway telling everyone she needed to get to a hospital for a medical procedure but needed money to get there. I occasionally would be approached by someone claiming to be a stranded traveler who needed money to get home.

Performing unwanted services to create a sense of obligation: The last time I went to the Los Angeles airport, I was approached as I walked out of the terminal by a woman who asked if I needed help finding anything. I said I just needed to find the shuttle bus for rental cars. She pointed out where it was (it was right in front of me, and I would have found it myself within five seconds) and then asked for money. Squeegie men and charities that send preprinted address labels are in this category, too.

Feigning virtue: I know people who have offered jobs to people holding signs saying, "Will work for food". None of the sign holders have ever shown up to work.

John Tierney writes:

10 attributes which get the alms seeker off to a good start:

1. stresses that the company is concentrating on "giving back to the community"

2. actively involved in and/or seeking out green initiatives.

3. putting increased emphasis on organic growth, but always has an eye-out for M&A opportunities

4. working hand-in-hand with government agencies/NGOs to address hunger/AIDS/climate change

5. supports and serves on advisory boards of outfits like Breast Cancer Awareness, Habitat for Humanity, Thurgood Marshall Scholarship program, anti-vivisection league, and Sierra Club

6. never misses annual meetings at Davos & Jackson Hole; always has time for interview with CNBC and others; dresses casually, but not ostentatiously for same, addresses interviewer by first name…refers to this year's meeting as "one of the most exciting" ever

7. rarely indulges in short-term predictions, instead devotes most of his time to long term initiatives (which he'd like to discuss, but, at this time, is premature); sees things improving slowly but surely

8. believes the Fed did the right thing - might have made a few small errors but, generally, moved decisively at a critical time. Country will bounce back, always has.

9. bailouts, QE1 & QE2, though regrettable, were necessary for the preservation of the financial system.

10. insists the public will realize a "healthy return" on bailout funds

Vince Fulco writes:

Not to be forgotten, the institutions that pound their chests with pride in their ad campaigns using misinformation as JPM has been doing recently re: the X number of mortgages (400M as I recall) the company has modified in 2010. "In order to do our part and assist ordinary consumers get back on their feet…" is the approximate spirit of the ad. Needless to say, for better or worse, in early consultation with these companies, the administration & Treasury planned for a 4-5X number of alterations.

Gary Rogan adds: 

Basically, the main requirement for being a CEO today is excelling at credible hypocrisy.

Russ Sears contributes:

Here are a half dozen more.

1. Beg for federal money for your customers. This should allow your prices to double what they put in. Plus the room for undetected fraud goes up. (See higher education and Medicare, medicaid and first time buyers tax credits). This way you get the best of both worlds, customers thanking you for making it affordable and tax payers footing the bills.

2. Give away your product to third world countries with tax breaks so that the Feds will extend the favor by lengthening your patent protection in US. Again gratitude for sticking it too us.

3. Have the government make it illegal not to be insured, and then make sure your product must be paid for by insurance. (car, health, PMI etc) Again with the government involved raising the easy of defrauding insurance companies.

4. If you are captured by the unions, make the government give only union shops a chance.

5. Use your size to get tax breaks as incentives, use your popularity to have the citizens build your stadiums.

6. Make sure that court system understands that with all the lawyers you hire, you are the ones keeping the judges in a job. Bringing regulatory capture to a new level, too big to prosecute.

World traveler B.K. writes: 

I've seen countless mutilated beggars in India, enough to make you want to cry coins to them. However, the practical advice is not to give: "In India thousands of children are being mutilated annually. The joints of their bones get injected with bleach. Infection is the result and amputation follows. Eyes are stuck out as well. …"

However, the greatest beggar I ever saw was an armless man in the NYC subway with a sign around his neck, 'Please give to buy drum set.'

George Parkanyi writes:

That may well be, but I look at it this way– who am I to judge? I once gave a leg-less homeless man a ten-dollar bill. Well he just absolutely lit up into a beautiful smile, looked me straight in the eye and said "God bless you!". That blessing hit me like a sonic boom. I felt it physically, and walked away feeling like I received much more out of that exchange than he did. Make of that what you will, but it had a huge impact on my outlook on life, and how we relate to each other. 

Marion Dreyfus writes: 

I saw the same mutilations and deliberate crippling in Nepal. Hundreds of kids tottered after Westerners, begging and making mewling sounds. If once you gave you were encircled and could not advance another step until each and every child had gotten coins from one. 

Art Cooper writes:

One of my favorite Sherlock Holmes stories is "The Man With the Twisted Lip," an exceptionally successful London street beggar, who gave his benefactors psychic value for their alms.

Pitt T. Maner III writes:

Here is an article on organized phony beggars. Those who donate must be able to differentiate the individuals worthy of a helping hand:

"Certain persons posing as social leaders have been running the racket of beggary. We are busy in gathering necessary evidence to initiate criminal action against them," Ramalingappa said.

He claimed that at few places the "beggary business" was going on a "commission basis"

and whenever the officials conducted raids, the beggars escaped from the clutches of law and also alerted others over mobile phones.

"Whenever the beggars in disguise are arrested, lawyers rush to get them released," Ramalingappa said. Most of these rackets thrive in and around well known pilgrim centres and religious places where people generously offer to beggars. He said an awareness programme will be launched to impress upon people that beggary should not be encouraged.

Stating that no proper rehabilitation of "genuine beggars" has taken place anywhere in the State, Ramalingappa said a comprehensive survey on the conditions of beggars will be taken up soon. There are 914 beggars including 168 women in rehabilitation centres all over the State. Steps were being taken to set these centres in order.



 We need a systematic ranking of companies by the flexionism of their CEO's and then we can quantify and look at future performance which of course in the past is highly correlated positively, but with our baedecker maybe the situation will change.

Gary Rogan writes:

Flexionism is a two-edged sword. As much as it helps companies, it also hurts some in a similar way that "low-income" welfare eventually ruins its recipients. I've never researched this statistically, but I concluded for myself early into the current flexionic golden age that sheer size matters more than before. A company has to have critical size to be able to protect itself against the government by fighting back, bribing, or pure flexionic behavior, and in a less significant way amortize the cost of compliance with regulations over a larger productive base. In the good old days size helped too by making the company stronger in many ways, but also hurt by making it a target and also reducing it's ability to react to change. All these things remain, but the necessity to deal with the aggressive, totalitarian-lite government is shifting the balance, in my opinion, towards very large companies. 

Russ Sears writes:

When your worth is built on your political contribution, you can quickly be thrown under the bus when the winds change directions. Size brings more internal enemies and jealous and greater chance of collapse from within.

Gary Rogan replies: 

True. My point really was that size is less fleeting than flexionism when the winds suddenly change. From this perspective I prefer Pepsi to GE: both are large and quite flexionic, but Pepsi will not collapse when the government turns away from wind turbines and financial bailouts.

I strongly agree that a large multinational has a lot of advantages these days, being able to escape the reach of the US government and not as exposed to its collectivist policies are more important than ever. Those who use flexionism as a defense strategy are preferable to those who are actually living the flexionic life at the core of their business. He who lives by flexionism will eventually die by it, but simply saying the right things in the right places is likely to be less traumatic long term, when things change, they'll start saying something else. 



Here is an interesting article on using improv for business:

"Improvisational comedy offers valuable lessons to business, says Lakshmi Balachandra MBA ’04. An improv comic before working in venture capital and finance, Balachandra brought her spontaneous theater skills into the classroom …"

"Improv teaches you how to think on your feet, she says, to accept the facts, and then build on them. All these are excellent business and negotiation skills. In a CNN article, she offers her five rules of improv:

1. 'Yes, and.' Accept a situation and then deal with it.
2. Avoid asking questions. Continually asking questions makes other
people do all the work.
3. Listening. Focused listening is a crucial skill.
4. Add information. Contribute if you want to guide the conversation.
5. Eye contact. In the workplace it’s important to pay attention to
body language."

Russ Sears writes: 

While not improv, here is a humorous Toastmaster speech I gave last year. It won at the club level.

This might have some lessons on risks and reward; parenting and other humorous topics when we think we have it all mastered.

And for those that have not meet me; you get to see my pretty face.



 "It is common to think of individuals to use genes to make more individual, but from the gene's eye view of evolution, its the other way around. Genes use individuals to make more genes. The chicken is the egg's way of making more eggs". p. 114 The Seventy Great Mysteries of the Natural World edited by Michael Benton.

Yes, and its the digits of the prices way of replicating itself to make individual market players create more of those digits. (I wrote about this before here).

The digit 0 plays a big part in the replication game, and it makes individuals sacrifice themselves to create more 0's.

One notes for example that the double digit 00 in 1300 on the sp has been broaches from below on a closing basis from Feb 03 on three times and gone from above to below on three times.

Similarly for the triple digit 000 in 12000 on the DJI. The DAX crossed the triple digit 7000 on Jan 3rd from below, went above below then above then below on Jan 07, then crossed to 7097 on Jan 13 but stayed above 7000 until March 14, then fell to 6436 on March 16, a decline of 10% for the year, and now for the first time on March 25 hit a high of 7006 but failed to close above 6981, a fact which must cause great disennu to the triple 0's in 7000 and they must be inducing much political change in Germany as we speak to achieve that level.

Similar analysis relates to the Nikkei at 10000 which crossed below 10000 on March 11 briefly, but closed at 100075 and then on the following two days declined 20% captures by the triple 000 at 8000 as its low was 7790, a decline of 25% from its mid December levels of 10300.

A similar analysis could be made with the grains especially corn which has shown a similar affinity to 700 as the Dow to 12000 and the SP to 1300.

Instead of taking closing prices for granted we should ask how the digits themselves influence our actions so that we can make them reappear over and over again.

Kim Zussman writes:

A simpler version of this is the opposite of the usual "the market did Y today because of X": We say X because it did Y and we need why.

The evidence is that for many similar X there are many dissimilar Y.

Price is selfish because its impact demands explanation.

Gay Rogan comments: 

I'm having trouble understanding any of this. Genes are selfish in the following sense: if genes don't propagate, they disappear, so the only genes that are here today are proven propagators. How can prices or digits permanently disappear? And why would 0's propagate more than other digits? How do these explanations provide more clarity than simply saying people's brains are attracted to numerical markers, and in the absence of other alternatives they chose round numbers? 

Steve Ellison comments:

One possible line of reasoning is that people are more likely to put limit orders at round numbers. People often put stops near round numbers, too, but the research I have seen suggests stops are more likely to cluster on the opposite side of a round number from the current price. Here, then, is a hypothesis: if the last two digits of the S&P 500 closing price are above 90 or below 10 (i.e., near a 00 round), the change the next day is likely to be in the opposite direction as today; if the last two digits are above 10 and below 90 (i.e., away from the 00 round), the change the next day is likely to be in the same direction as today.

Checking the last 1584 trading days of the futures,

Near 00 round:
N: 366
reversal next day: 194
unchanged next day: 3
continuation next day: 169
% continuations excl unch: 46.6%

Away from 00 round:
N: 1200
reversal next day: 592
unchanged next day: 15
continuation next day: 593
% continuations excl unch: 50.0%

The percentage of reversals was higher near rounds, but the difference was not significant.

What was significant was the number of closes near the rounds. One would expect a close within 10 points of a round about 20% of the time, but 23% of actual closes were within 10 points of a round, p=0.0006.

Victor Niederhoffer writes:

Here is an interesting paper on round numbers for individual stocks. It doesn't look at expectations, but does look at bid

Russ Sears writes:

I believe that this paper could be expanded measure this effect on high volume versus low volume stocks. Therefore its stated cost may not be as large as expected on all stocks. My guess, needing testing is the small stocks have this more frequently than the large stocks, that are often computer traded.



 A few years ago, Gladwell wrote an interesting story on how the underdog can beat the favorite. When the underdog plays the favorite's game they lose around 65% of the time. When the underdog refuses to play the favorite's game and plays another game entirely, the win/loss reverses and they win over 60% of the time. This magnificent article has many, many lessons in trading and life in general.

Russ Sears comments:

I loved this article also, and have recommended it to many non scientific minded friends.

However, like many of Gladwell's writing that are entertaining summaries of other experts ideas, I believe he misses some of the more relevant points. Perhaps it is literary license, to make it more entertaining to the masses, or perhaps, it is just poor science to focus on what he believes can tie these ideas all together in a nice neat package without the lose ends that reality always messes up tight arguments.

While I can not disagree with his lawyer like presentation style of writing quasi scientific pieces for marketing purposes, most of his works leave me wishing to talk to the real expert's and scientist's whose life work he is putting into these boxes… to get the real story. The end result I believe is that his work often over-reaches to make a scientific case for his pet ideas. In my opinion, the masses buy them as "science" but they tend to fall apart when the rigor of science is really applied.

One thing that bothered me about this piece was his glossing over hard training to achieve the fitness level of the players for the underdog basketball teams. Knowing a few things about how to get peak running performance out of somebody. It would seem that while those coaches that get their players to consistently peak during the March Madness Tournament would have to loss a few games that they could have won because the players trained too hard and did not sufficiently recover. During the regular season the players would have to train so hard they leave their game on the practice field and loss some to teams that have less talent but are fresher. Then near the tourney, the coach would lighten up the practices to let them peak at the right time. Cardiovascular wise you can only really peak for a little over a month. It would appear to me that those teams that are coached to win every game during the regular season would be ranked higher than they should because they cannot "peak" any more. While those that worked harder, lost more games due to fatigue, are ranked lower than they should be. In other words are they "underdogs" because they train so hard during the regular season that they can peak higher than the other teams or are they Cinderella teams like David because they are prepared and fit enough to attack Goliath.

Also the pacing of the game must be such that the underdog's players are able to still match the jump and burst of speeds of the other team at the end. Some of this can be achieved by burning out the other team's fast twitch muscles early on…but some of this also has to be taught to strategically hold back a little at first, so your team does not suffer the same fate.

I have not watched any game this year, I have been too busy, however, this may explain why all the underdogs are left. And Gladwell may very well have made this style of coaching popular in basketball today. Whatever it is teams like Butler certainly have made the tourney exciting this year.

And while I think the numbers may be overstated, it would appear that there is some substance to the 3 ideas he states that underdogs should try:

1. Take an unconventional approach,
2. Try harder than the top dogs
3. Aggressive attack with determination and no thoughts of losing.

The first one helps you believe in yourself, that it is possible. The second gives you moral basis for why you should win. And the third can stun the others into thinking you will win.



 You think you don't have an edge in the market, well, if you don't have this you may just have one…… Toxoplasmosis:

Around 15 to 20 per cent of Americans are infected with the parasite, according to a study by the U.S. Centres for Disease Control and Infection (CDC).

The study suggests that male carriers have shorter attention spans, a greater likelihood of breaking rules and taking risks, and are more independent, anti-social, suspicious, jealous and morose. The behaviors observed, if caused by the parasite, are likely due to infection and low-grade encephalitis, which is marked by the presence of cysts in the human brain, which may produce or induce production of a neurotransmitter, possibly dopamine, therefore acting similarly to dopamine re-uptake inhibitor type antidepressants and stimulants.

Femi Adebajo:

There we go again so many conditional verbs and clauses… suggests….likelihood….if….likely due to….may produce..or induce the production of…possibly dopamine… a flimsy theory built on a speculative (not in a trading sense) foundation.

Victor Niederhoffer explains:

Okay. The mice make themselves sexy so they be eaten by cats. Then the cats spread the mice around through the sewerage system. The breakout occurs and the trend followers jump in (one can now say this with much greater impunity than the last year), and then the trend followers and pivot boys and breakout boys spread their genes, I mean money, around to the locals and the homeostasis boys when they get out. In former days the locals played a role in the detritovore works. 

Anon writes:

[I hate ladies with too many cats.] The scented candle, mystical music, flavored coffee crowd always that has the de rigeur loofah brush hanging somewhere in the shower. It's all part of the Bed, Bath, and Beyond archetype.

Russ Sears replies:

Considering the alternative Bed, Bath and Beyond is to be praised. Besides John Adam's compassionate pining over his alcoholic son, another major difference between David McCullough's book [John Adams ] versus the mini series movie version was his relationship with Ben Franklin. It was not the moral filth of Franklin's mistress that Adams wrote his wife about that he could not stand, it was the literal smell and filth of the pets of this mistress. This filth was hard for Adam's to get past.

Comparing the movie version to the books is a good lesson in the necessary pandering to the liberal stereotyping needed in a movie this days. Let the historical facts be damned.




 While his recent blunder in purchase and recent sell of Bank of America for a 2/3 loss according to Bloomberg has been widely reported, it puzzles me. If the press is not playing favorites, why is more is not written about how the stock he sold throughout his history has performed, such as the article Markman once wrote on picking delisting of S&P 500 stocks? Yes, care must be taken to recognize there will be those hopeless going to zero.

But would an equal weight average under of over perform? Is there such a study? For a person about whom it is widely reported that his holding period is forever, those stocks he sold should be of interest to the public.

No matter the answer, that it is not widely published speaks volumes. It seems to be either a case of complete bias, or being too lazy to do the numbers themselves, and only relying on Buffett's media campaign giving them the study to publish.

The media does not care. Either way it does not fit their agenda. If it over performs, it is simply a matter of saving the sage's reputation for future articles with a preferred slant. If it under performs, what good would such a press reel do for Buffet's current portfolio. Hence it was not spoon fed to the media by his propaganda machine. Likewise if it is fairly neutral, it would at least imply that person was expecting to outperform the market. This was a proabaly a good move. But such a further drop in the stock price after it is unloaded, does nothing for Buffett's future returns.



 I leave tomorrow for a yearly checker tourney that is 500 miles each way. Regular at 3.55 today.

The oil companies must track my upcoming trips.



Russ Sears writes:

My training friend in the 90's had a similar lament about his marathons and training vacations…

He was on a tight budget to squeeze in a many trips as possible. I think he made 2 mistakes. One, I always thought he over-weighted the times he lost due to gas prices and did not complain the prices went down, and 2 because he planned more trips when the prices were low.

Paying the entry fee and the preparation time of training made it hard for him to back down. In other words, he always bought high because he sold low like many 401k investors do.

I believe his trip to England to race one year was nearly half price his original budget due to favorable currency rates. But then he did look at it as a trade and "hedged". He bought pounds early over-hedged because he thought they were under valued, when he came back sold at a nice profit.

If you do "hedge" your trips, you might remember to including vig and taxable gains, makes it hard to break even in a hedge that is not recieving IRS hedge treatment.



 As a man in a dream who fails to lay hands upon another whom he is pursuing- the one cannot escape nor the other overtake even- so neither could Achilles come up with Hector, nor Hector break away from Achilles; nevertheless he might even yet have escaped death had not the time come when Apollo, who thus far had sustained his strength and nerved his running, was now no longer to stay by him. Achilles made signs to the Achaean host, and shook his head to show that no man was to aim a dart at Hector, lest another might win the glory of having hit him and he might himself come in second.

Then, at last, as they were nearing the fountains for the fourth time, the father of all balanced his golden scales and placed a doom in each of them, one for Achilles and the other for Hector. As he held the scales by the middle, the doom of Hector fell down deep into the house of Hades- and then Phoebus Apollo left him.

–From Book 22 of Homer's Iliad, translation Samuel Butler

The scales have tipped against the seasonatarians thereby allaying the massacre they administered in the month of January.

Russ Sears writes:

One is reminded of March of 03 when fate was sealed and the hunt was on for a different dictator. 

Victor Niederhoffer writes: 

One is reminded of Secretary Baker's battle while talking about his meeting with Tariq Aziz, in January 09, 1991.

The dooms were placed on the scale and the terrible word was uttered "Regrettably…. " A 5% decline, big for those days ensued in the next minute. 

Alston Mabry writes:

In college we read the Lattimore's Illiad and the Fitzgerald's Odyssey. It was a great combination.

Russ Sears adds: 

Given that it looks like the US military will stay out of this, and the Secretary appears to have only a small part on the world stage, I am hard pressed to identify what the trigger may be. The timing and scale is always a mystery. However, not knowing the actors in this drama, it will certainly take people like me by surprise. 



 With all the attention the Federal Reserve has gotten lately, Rothbard's "Origins of the Federal Reserve" has been published in pdf form. Very interesting read.

Stefan Jovanovich writes:

Veronica Wedgwood said somewhere (sorry– I can't find the reference) that the test of a historian is whether he or she lets the facts change opinions. Wedgwood herself passed that test in her own work. That is why her history of the Thirty Years War is still the definitive work– 75 years after it was published.Wedgwood also said that a book was only worth reading if you could take its facts and find that they were true.

I wish I could share Jeff's enthusiasm for Rothbard; but, when I took one of the first paragraphs in Rothbard's book and put it to the Wedgwood test, it failed badly.

"The alliance of big business and big government with the Republican Party drove through an income tax, heavy excise taxes on such sinful products as tobacco and alcohol, high protective tariffs, and huge land grants and other subsidies to transcontinental railroads. The overbuilding of railroads led directly to Morgan's failed attempts at railroad pools, and finally to the creation, promoted by Morgan and Morgan-controlled railroads, of the Interstate Commerce Commission in 1887."

The Revenue Act of 1861 was extended in 1862 to apply the excise to gunpowder, playing cards, feathers, iron, leather, piano, billiard tables, yachts, drugs, patent medicines and whiskey. At the end of the war, the taxes were repealed on everything; only the traditional excise - on liquor and tobacco - remained. The same Revenue Act of 1861 enacted the income tax. It was a flat tax - 3% on all income above $800 (what would be $20-25K now) - and 5% on the income of all Americans living abroad. The 1862 amendments changed the income tax to a progressive tax system; they also included an explicit date for its repeal - 1866.

Rothbard is correct in noting that the Morrill Act introduced "high" protective tariffs; but even that statement is out of context. The overall tax rate under the Morrill Tariff was 26%; for dutiable items the average rate was 36%. That was higher than the Walker Tariff rates (17% overall, 21% dutiable). The rates in the 1820s had been much, much higher (roughly 50%).

At heart Rothbard is making the standard Mises.org/diLorenzo/never-mind-the-facts doctrinaire Libertarian argument that the sons of the South were only seeking liberty and small government (never mind the first attempt at the legislative reach of Obamacare - the Fugitive Slave Law). But, try as they might, those who try to make the Morrill Tariff and not slavery the central cause of the Civil War/War Between the States run up against two very inconvenient facts: (1) President Buchanan, a Democrat, signed the Act into law and (2) Morrill's bill would never have passed the Senate, let alone gotten through Conference if the Secessionist Democrats had not already left the Senate.

I will spare everyone any further lectures for now, but I promise to return to those thrilling days of yesteryear and explain why Rothbard's history of the Interstate Commerce Commission and the Indianapolis Monetary Convention is just as specious.


I promised to return to Rothbard's history of the Indianapolis Monetary Convention.

First factoid: "the Rockefeller forces, dominant in their home state of Ohio and nationally in the Republican Party, had decided to quietly ditch prohibition as a political embarrassment and as a grave deterrent to obtaining votes from the increasingly powerful bloc of German-American voters".

Since all political parties are coalitions, there is a hint of truth here; but only that. The Republicans, in general, favored the "dries" - Methodists, Northern Baptists, Southern Baptists, Presbyterians, Disciples of Christ, Congregationalists, Quakers and Scandinavian Lutherans. The only concession made on the issue of prohibition was that McKinley decided to serve wine in the White House, symbolically reversing Hayes' no-alcohol policy. That was hardly "ditching" prohibition; neither political party dared publicly come out for "rum" or even "beer".

Worst factoid: "As soon as McKinley was safely elected, the Morgan-Rockefeller forces began to organize a "reform" movement to cure the "inelasticity" of money in the existing gold standard and to move slowly toward the establishment of a central bank."

Rothbard reads into the Report an elaborate Rockefeller-Morgan conspiracy to defeat popular opinion when the issue was anything but hidden from the public. The country was openly divided on the question of bimetallism with the Democrats supporting it as a means of issuing "cheap" dollars and the Republicans opposing. Even the Prohibitionists were split among themselves. The "gold" Prohibitionists - i.e. those who sided with the Republicans on the monetary question– won control of the Prohibition party itself .

For James Lawrence Laughlin and others, the purpose of the report to the Indianapolis Monetary Convention was to escape, once and for all, the snare of bi-metallism. The Report is unambiguous about that purpose. Here is the preamble:

We submit, for the reasons hereinafter stated, a plan of currency reform, in the hope that it will, if enacted into law, accomplish, so far as possible, these results :

1. To remove, at once and forever, all doubt as to what the standard of value in the United States is, and is to be.

2. To establish the credit of the United States at the highest point among the nations of the world.

3. To eliminate from our currency system those features which reason and experience show to be elements of weakness and danger.

4. To provide a paper currency convertible into gold and equal to it in value at all times and places, in which, with a volume adequate to the general and usual needs of business, there shall be combined a quality of growth and elasticity, through which it will adjust itself automatically and promptly to all variations of demand, whether sudden or gradual ; and which shall distribute itself throughout the country as the wants of different sections may require.

5. To so utilize the existing silver dollars as to maintain their parity with gold without imposing undue burdens on the Treasury.

6. To avoid any injurious contraction of the currency.

7. To avoid the issue of interest-bearing bonds, except in case of unlooked-for emergency; but to confer the power to issue bonds when necessary for the preservation of the credit of the government.

One more thing:

John Taylor finds himself once again defending his Rule.

The questions that James Laughlin would have wanted to ask Professor Taylor and Chairman Bernanke are these:

(1) how can you have "reserves" in a banking system with a sovereign monopoly on legal tender and no specie exchange requirement?

(2) if a rule is to be the only constraint on unlimited "supply" of money in a world where money and sovereign credit are synonymous, how can the rule avoid circularity when sovereign spending is one of the major components of "growth"?

Rocky Humbert writes:

And for reasons related to Professor Taylor, one finds oneself again poking fun at Anatoly's continuous calls for a top in gold.

On February 9th (18:45), Anatoly wrote:

"We used to be mesmerized by round numbers. But ever since Crude topped at that $147.27 print, I've gone on red alert well on approach of 150-ish. Lo'n'behold, next came an all-time high in 30-y bond futures at 143. And Gold print of $1431, in my opinion, will stand for years…Nothing beats an audited track record (and an internet paper trail) to debunk nonsense and test veracity…for both traders and central bankers."

Anatoly wrote: "…the gold print of 1431 … will stand for years…"

It didn't even stand for 8 weeks!!!!

Even before this latest crude spike, real interest rates were re-testing their record negative yields. Now, the feedback effects of negative real rates are percolating even faster ….

P.S. The gold price continues to rise at a 27% annual rate. While gold options have a sub-15% volatiltiy. Get the "drift" ???? With a nod to the options quants who wince at this bastardization of black-scholes, this risk-averse speculator gets the drift.

Russ Sears writes:

 When hundreds if not thousand of people are dying in the streets from their own government firing at them, millions more hungry because of rising food cost creating the helplessness needed for uprising, and the emerging markets have billions people with new found wealth to protect and a long tradition of hoarding gold for the hard times… the demand is not all about trader/speculators.

I have told the story to the list more than once, how my grandmother's family came to the US with only the gold they had around their house in lamp-stands, candle sticks and silverware made of gold, when their factory, land and home were taken by the WWI revolutionaries, leaving them to flee for their lives. She was seven at the time but she told the tale every time "gold" or "silver" was mentioned in her presence. Tell her gold is useless. The demand does not have to be a bubble soon to bust. Without the shock and awe of the US or Britain and especially not the Israeli military intervening, I would say we are in for a longer haul of uncertainty to the unrest than has been the case to most recent Middle East wars.

Rocky Humbert writes:

Howard Marks (Oaktree Investments) wrote a nice essay on this subject. Because he's a respected stock & bond guy, his articulate thoughts are worth a read.

One of the more pithy things he writes:

My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists, or that God doesn't exist. The believer can't convince the atheist, and the atheist can't convince the believer. It's incredibly simple: either you believe in God or you don't. Well, that's exactly the way I think it is with gold. Either you're a believer or you're not.

I'll add that a speculator has a slightly different spin on this. A successful speculator needs to assess the conversion rate from gold atheist to gold believer to gold atheist.

One remembers that when Moses returned from Mt. Sinai, he saw the Israelites worshipping the Golden Calf (Exodus 32:4). This posed a "problem" because it was both wrong for the Israelites to be engaged in idol worship, and it was wrong for them to ascribe a physical representation of God. (Both acts are forbidden.) Nonetheless, 5000+ years ago, Anatoly would have bonded with Moses — because both saw the Golden Calf as an "outrage." Yet the successful speculator would have been long gold — while the calf was under construction — but it's unclear whether the speculator would have subsequently shorted gold due to the nuances of the Biblical story.

Gold prices will rise and fall — based on supply and demand. However, the belief that stocks are (in the long run) are the best performing asset class has elements of religion too — as this too requires "faith." Just faith in different things.

Anatoly Veltman defends himself:

My trading biases come from chart structure - but I would never bet money on something I don't understand. To that end, before putting up $10,000 deposit to Comex - I'd make sure that charts mostly reflect the supply and demand, both near- and long- term.

My family also fled Europe, albeit not in WWI - but in the course of more civilized era of a mere Soviet excursion into Afghanistan and subsequent US-led Olympic boycott. We were able to make necessary transatlantic connections over the phone to arrange currency swap of Russian Rubles here for US Dollars there (at four times premium to official non-competitive exchange rate). Thus, we didn't have to risk trafficking gold through customs. I guess, my bias in that sense is slightly different. I'm not a believer in impending world currency backwardation, and I see even less sense in Silver playing any role in this. So as an investor, I was always very interested and Long Silver in $4-$5 historical areas - when it would languish for a long time devoid of any speculative interest. I remember a stretch of over 5 straight years (and possibly even 8, depending on stats reliability), in which silver usage outstripped silver mining - yet world price hasn't perked by a penny!

Going into Labor Day 2010, I commented that Silver is obviously breaking out of an unprecedented protracted base in $17 handle - and that Shorts will be 100% squeezed. Rocky, who has apparently kept up an e-mail folder of "Anatoly's predictions", should be able to dig it out. Now, since price doubling has been fulfilled - I try to use events like Lybia to invest in Shorts.



 I recently was asked a good question: does high altitude resistance training actually work?:

Certainly using oxygen filtering masks works to simulate high altitude training. You may get the same benefits with an oriental exhaust mask (that cuts air intake by about 30%, and I currently use) over the mouth. Moreover, you may put training stress on your lungs by willfully controlling respiration– learn to breathe less oxygen per breath by many means such as through the nose, heating air by holding in the pharynx, diaphragm breathing, filling just the lower lung lobes, & so on.

Yet, the $89 training mask is ingenious. Thanks for the site, however, the company's argument of equality of passive vs. active training holds no water, and this is a lesson for all sports, dance, bedroom, or walk in the park. Having ambled on most of the world's major ranges, active training out-performs passive in myriad physiological gross & microscopic ways, despite studies to the contrary by lazy bone scientists. Isotonic overpowers isometric. Physical doing beats mental rehearsal almost always.

Physical training made easy is grasping there are three techniques to fitness gain: increased weight, repetition or frequency. This is a distillation of every exercise physiology class I ever took, and Joe Wielder's technique to stop getting sand kicked in my face. The best gain for most sports is by increasing weight (resistance), e.g. the ankle weights I'm wearing & 10lb. of books, bills & camera stuffed in my hiking shorts.

The face mask can be said to increase the resistance of respiration. Future elite athletes, I think, will train in underwater gyms like track horses to increase resistance on every square-inch of skin, and later Olympic champs will train on Jupiter (or a simulator) requiring more effort for every muscle fiber to contract. Until then, you may sink your gym set in the shallow end of a swimming pool, and dog paddle with a weight belt between sets.

The resistance trainer will win nearly every time against one who doesn't, whatever the activity. I used to tell competitors that the wire on my tournament racquetball racquet was a coach's antenna.

Russ Sears weighs in:

Altitude training is a lot like life: it is not how you are torn down that matters but how you re-build. What runners have found is that it is the recovery especially sleeping at high altitudes is what build endurance by forcing the body to adapt in the recovery. Hard training in high altitudes is not as much nor as quick and it is close enough to race pace or conditions. The newer mantra is to train low and live high. They achieve this either by stimulated altitude chambers or sleeping tents or by driving down a steep road to train, at least to do the faster harder stuff.

The newest mantra is to use "anti-gravity" treadmills (they hold you up at the waist so the pounding is not as hard). This enables you to train more distance and to increase the turnover and pace beyond a normal race. So the idea is to train "gently" so as to train as much as possible and to also stress neurologically system occasionally beside the muscles.

While Bo certainly could tell us more about the bodies adaptation than I could, the main effect as I understand it is to increase the red blood cells and therefore the bodies ability to carry oxygen and repair damage. This is similar to the effects of EPO, except EPO tends to let your blood turn to sludge and cause heart attacks if you dehydrate too much. The tale tale sign of a drug cheat is to see if they pull out of a meet/race when the weather is hotter than expected. But I can attest that even a trained runner can pass-out from dehydration, as I did last June.



 Yesterday's across the board collapse of ag futures is a very serious move. Lock limit in most grains etc.

It looks like wheat and soybeans started to roll over a few days ahead of cotton. The nearby is down almost twice the daily limit, and the rest are all locked. It certainly is unusual and may be a solid confirmation.

Steve Ellison writes: 

Has the "realizing market" begun? Roy Longstreet in Viewpoints of a Commodity Trader said that some of the best profit opportunities are in realizing markets, when price is driven by the market's realization of some fact. For example, stock investors realized in 2000 that most of the Internet companies that had been valued on clicks or eyeballs would run out of cash long before they could become profitable.

Russ Sears writes:

The agri oil boom bust is a spiraling cycle. Oil goes up lowers economy growth, commods like grains go down but then grains substitute, grains go up oil countries populace go hunger/revolt oil goes up, less economy growth but …the cycle is becoming clearer.

Gary Rogan replies: 

Russ, I appreciate the explanation, this is very helpful. On the other hand, the original contention was that this is now a "realizing market". Has the market suddenly figured out this spiral, in the sense that oil going up will definitely (in the economic, not speculative sense) cause agri price to go down because the middle east is on fire? A case can be made that fertilizer prices or agri fuel costs are more important than some destitute people becoming even more destitute b/c of high oil prices and what, not eating any more? Or that raging inflation can manifest itself unpredictably in various commodities, or that transportation costs will raise import agri prices. I'm not sure this is equivalent to everybody figuring out in March 2000 that the Internet emperor was a bit on the under dressed side. 



Extreme monthly declines in SP500 are preceded by rising or falling markets?

(don't look until you guess)


The mean of the 20 worst monthly declines in SP500 (1950-present) is -10.7%; the mean of the prior 6 month period was -4.6%:

One-Sample T: mo ret, pr 6mo

Test of mu = 0 vs not = 0

Variable   N       Mean     StDev   SE Mean          95% CI               T
mo ret     20  -0.10739  0.03419  0.00764  (-0.12339, -0.09139)  -14.05
pr 6mo    20  -0.04606  0.14976  0.03348  (-0.11617,  0.02403)   -1.38

Extra credit:

After a many month stock rally to 3 year highs, when the middle east
catches fire:

a. buy the dip
b. sell the dip
c. skip the dip and take a trip (thanks to professor Leary)

Russ Sears writes: 

The S&P has not quite hit its 3 year high and may not soon.

But looking at the previous points where S&P hit a 3 year high on the close and had not hit a previous 3 year high for at least 6 month prior from 6/53 to present there were only 17 such instances. It appears pretty bullish on the surface, see the comma delimited data below. I got 1038 new 3 yearly highs, that the 6 mnth prior cut-off boils down to only 17 seems to also imply bullishness, but how sure how to do such a significance test. This extra credit for the stats majors.

For the following 21 trading day periods (mnth) after a new 3 year high with no prior new 3 year highs in the previous 126 days (6 months).

stdev,2.39%,4.37%,3.50%,3.29%, 2.83%,3.82%,5.1%,5.1%,7.9%


positives, 14 , 8 , 14 , 12 , 12 , 10 ,14,13,13

1st mnth,2nd mnth,3rd mnth,4th mnth,5th mnth,6th mnth,sum mnth 1-3,sum mnth 4-6,sum mnth 1-6



I humbly admit, all day I've been beating myself up, mean to wife, because I was so wrong today.

I think, "honey if I lost all my money would you still love me?" "Yes, dear, I'd love you, but I wouldn't be with you any more"…

When your wife asks you how it went, I like Irving Redel's answer… "Honey, how did the market treat you today?" "Fair."

Tom Printon writes:

When I was beginning my career on floor Irving was winding his down.
Occasionally Irving appeared for an opening which meant something was
going to go down. The Blue Jay signaling other members of the forest?
Perhaps something on the predatory side?

Jeff Watson opines: 

 A man may be a fool and not know it, but not if he is married. [H.L. Mencken]

A man's women folk, whatever their outward show of respect for his merit and authority, always regard him secretly as an ass, and with something akin to pity. His most gaudy sayings and doings seldom deceive them; they see the actual man within, and know him for a shallow and pathetic fellow. In this fact, perhaps, lies one of the best proofs of feminine intelligence, or, as the common phrase makes it, feminine intuition. The mark of that so-called intuition is simply a sharp and accurate perception of reality, an habitual immunity to emotional enchantment, a relentless capacity for distinguishing clearly between the appearance and the substance. The appearance, in the normal family circle, is a hero, magnifico, a demigod. The substance is a poor mountebank.

[H.L. Mencken, "In Defense of Women"]

Stefan Jovanovich writes:

I can't find the reference so this may be apocryphal, but Einstein is rumored to have said that he and his wife had a perfect understanding. He would decide the important questions (such as whether or not his adopted country should raise its income tax rates) while his wife would deal with the trivialities (such as where they would live and what kind of car they would drive).

Russ Sears writes:

My wife of 23 years is very tolerant of these things, besides letting me say "yes dear, right away. You're right." I can add "I was wrong."



Did people just jump in and buy the dip, or was that the result of legions of traders going flat overnight? Wasn't a huge move, but I kind of expected more of a panic.

Victor Niederhoffer comments:

One who was short and waiting could cover his shorts short of the big house.

Paolo Pezzutti writes:

…interesting to know if there is a ten minute effect…

Victor Niederhoffer responds:

Believe it much dissipated and changed in 2010.

Russell Sears writes:

What shocked me was the out performance of the Dow compared to the S&P, especially given the relatively low inter-day vol.

To check this out I did the following, took the ln close to close Dow - ln close to close S&P then ranked them. Today was rank 37th of the 2700 days I look at. Then I took this out performance divided by the max (interdayvol Dow, inter-day vol S&P) where inter-day vol is LN(high/low) for the day. This ratio placed was number one !

I do not know what this out performance means, but looking at the dates that "beat" today or came close did not bring pleasant memories back. They were 2000 to 2001 vintage then big time gap and appeared again in Sept 2008-Jan 2009 and another small time gap. This would indicate that when things get volatile and down it often best to be in the big Dow.

What this means with a relatively weak volatile period I do not know.

I will leave it to the reader to come up with a test to see if this is a indicator of Large over small cap shift that is reverse the small outperforming large gap the last couple of years.



 Is the quality of the announcing teams for sports broadcasts unusually high because aside from those who are readers of westerns, the sports listener is the most demanding of accuracy in the world? I like the Yankees baseball announcers, and the Knicks television announcers very much. They seem to be very sagacious, infinitely more so than the average market analyst or CNN reporter.

Dan Grossman writes: 

The quality mentioned by Vic also applies to commentary.

Over breakfast I usually switch back and forth between CNBC and Mike & Mike in the morning. The quality, no-nonsense content and science of the latter far exceed any financial commentary that may be offered on the former.

Russ Sears writes:

 I had always thought it was because of the large number of former elite athletes that they have to compete with to get a spot. They love the sport either they are doing this in sports retirement or were great in college but not the right size for the big leagues. These elites raise the bar for all candidates.

The elite athlete, transforming himself into an elite second life, is proof that the elite often can transform themselves to what is valued. Rather than just the "luck" of being born in a system that values "X" as the non-hunting gather Sage would have you believe.

I believe you see this somewhat better at the college level where local announcers are often great local college player. But have not thought up a test of this hypothesis on "quality".



The Bubble NebulaWhat is a bubble?

I generally think of a bubble as when the majority of agents in a particular market are buying something simply because they think someone else will buy it from them at a higher price shortly after, instead of buying something because they think it has fundamental value as an investment, consumption value, or because of a macroeconomic change.

To be sure, every market has speculators, one can debate all day about the difference between "speculators" and "investors," and this definition surely is not robust. But I believe when the majority of actors in one market are buying for the same reason (that they believe someone else will pay more) instead of just a fraction buying for that reason, it is indicative of a bubble.

Jeff Waston adds:

Isn't a bubble knowable only in retrospect ?

Russ Sears writes:

No, If Greenspan can spot one in his irrational exuberance speech, then investors should be able to. But this example shows that, while spottable, it can be hard to make them profitable..the easy kill is only in hindsight. Paulson's and like on MBS show the sophistication required and perhaps the size an inside track needed to make such a killing.



UPDATE 1/31/2011:

Contestants Summary:

- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.

- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.

- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.

- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.

- The most creatively expressed entry of course has come from Rocky Humbert.

- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.

- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):

- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.

- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)

- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.

- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.

Contracts Summary:

- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.

- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.

- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.

- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.

- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.

- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.

Victor Niederhoffer wrote:

One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.

May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.

My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.

I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.

I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.

What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.

David Hillman writes: 

"I do know that a sagging Market keeps my units from being full."

One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference. 

Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:

 1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).

4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.

5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.

The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.

Market direction picks are wanted:

Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.

The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.

Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.

Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".

All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".

Bill Rafter adds: 

Suggestion for contest:

"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.

"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.

Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.

Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.

I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.

Ralph Vince writes:

A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.

If I were a Roman General I would take that as a sign to sit for next few months and do nothing.

I'm going to sit and do nothing.

Sounds like an interim top in an otherwise bullish, long-term backdrop.

Gordon Haave writes: 

 My three predictions:

Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.

The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.

Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.

The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.

The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.

In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of

Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.

Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.

Factor                  Prediction      t       N    R sq
US Treasury yield curve      1.162    2.17      30   0.143
30-year change               1.052   -2.28      52   0.094
Trailing 5-year E/P          1.104    0.92      18   0.050
US unemployment rate         1.153    0.90      30   0.028

Weighted total               1.118
SPY 12/30/10               125.72
Predicted SPY 12/30/11     140.52

Jan-Petter Janssen writes: 

PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.

PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.

PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.

Vince Fulco predicts:

 This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.

Additional points/guesstimates are:

1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.

2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.

3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.

4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.

5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.

6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.

Potential negatives:

1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.

2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.

3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.

4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.

A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).

Mr. Albert enters: 

 Single pick stock ticker is REFR

The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.

Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).

Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.

Dan Grossman writes:

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,


Gary Rogan writes:

 1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.

Wildcard: Short Netflix.

Jack Tierney, President of the Old Speculator's Club, writes: 

Equal Amounts in:

TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)

(Wild Card)
BONXF.PK or BTR.V (Long junior gold)

12/30 closing prices (in order):


Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today

I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.



Ken Drees writes:

Yes, they have been going up, but I am going contrary contrary here and going with the trends.

1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.

2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.

3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)

wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.

Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

My forecast for the S&P 500 for the year ending Dec 31, 2011;

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011

VXX Short moc 1-21-2011, buy to cover moc 12/30/2011

UBT Short moo 1-3-2011, buy to cover moc 12/30/2011

Scott Brooks picks: 


Evenly between the 4 (25% each)

Sushil Kedia predicts:


1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky

Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin www.rockyhumbert.com kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):

My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.

2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read www.rockyhumbert.com which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.

Tim Melvin writes:

Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"

Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.

 Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.

Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.

Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.

I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.

I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.

I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.

I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.

PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.

I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.

Other than that I am clueless.

Kim Zussman comments: 

Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).

Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)

short GLD (looks like a bubble and who needs gold anyway)

short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)

Alan Millhone writes:

 Hello everyone,

I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.

For myself I will stick with what I know a little something. No, not Checkers —

Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.

I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.

Happy New Year and good health,



Jay Pasch predicts: 

2010 will close below SP futures 1255.

Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.

99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.

SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.

SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.

The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.

Chris Tucker enters: 

Buy and Hold


Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

Mr. Ed Seykota once outlined for me the four essential rules of trading:

1) The trend is your friend (till it bends when it ends.)

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.



John Floyd writes:

In no particular order with target prices to be reached at some point in 2011:

1) Short the Australian Dollar:current 1.0220, target price .8000

2) Short the Euro: current 1.3375, target price 1.00

3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70

A Mr. Krisrock predicts: 

 1…housing will continue to lag…no matter what can be done…and with it unemployment will remain

2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3

3…with every economist in the world bullish, stocks will underperform…

4…commodities are peaking ….

Laurel Kenner predicts: 

After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.

Short the 30-year bond futures and cover at 80.

Pete Earle writes:

All picks are for 'all year' (open first trading day/close last trading day).

1. Long EUR/USD
2. Short gold (GLD)

MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)

PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8

J.T Holley contributes: 


The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.

Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.

Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.


Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.

Long lithium related or raw if such. Technology demands such going forward.


Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.

Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.

Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.


Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.

Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.

Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.

Sex and Speculation:

Look to see www.fyretv.com go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.


This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.


Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.

Long - Counting, you need it now more than ever. It's as important as capitalism.

Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.

Long - Common Sense.

Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.

Short - Politics. It isn't a spectator sport and it has been made to be such.

Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.

Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.

I had to end on a Long note.

Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.

Russ Sears writes:

 For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.

Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.

The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.

Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.

The stability or even elevated food prices will have some big effects on the heartland.

1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.

2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?

3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.

4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year. 

5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…

Yanki Onen writes:

 I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.

Now the ideas;

-This year's lagger next year's winner CSCO

Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.

You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)

-Sell contango Buy backwardation

You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.

Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.

- Leveraged ETFs suckers play!

Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!

If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!

Vic, thanks again for providing a platform to listen and to be heard.


Yanki Onen

Phil McDonnell writes: 

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.

George Parkanyi entered:

For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open

BUY SILVER at open

BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open

SELL and then SHORT SILVER at open

SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open

COVER and then BUY SILVER at open

COVER and then BUY CORN at open
Hold all positions to the end of the year

3 JAN BUY PLATINUM and hold to end of year.


. Markets to unexpectedly carry through in New Year despite correction fears.

. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2

- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)

. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas

. Also assuming seasonals will perform more or less according to stats

If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.

Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency. 

Marlowe Cassetti enters:

FXE - Currency Shares Euro Trust

XLE - Energy Select

BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:


VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than



HR Block, from Tim Melvin

December 28, 2010 | 1 Comment

HR Block has almost as much cash as they do debt so they should survive. The question is how much business do they lose if they do not find a way to offer RAL's this tax season? Given the value of the franchise, I would be less than surprised to see this end up in a private equity portfolio by this time next year. Management has consistently made serious mistakes over the past few years. Tangible book value has fallen by half over the past five years. They still have a bank charter and the tax brand is viable. The dividend will provide some support, but I don't think i would be an excited buyer until about $7 a share. With reduced revenues form the lack of RALs and even a slight tick up in mortgage putback for old securitizations and the stock will get there. At that level somebody is going to make an offer for the company. Insiders own less than 5% so they would be powerless to stop an offer.

Scott Brooks writes:

HRB is middle/lower middle America's tax service. HRB got themselves in trouble a few years ago when they decided that they could get into the securities business and offer investments to their clients. They learned the hard way that's it's really really difficult to make a living on $2,000 IRA deposits.

The refund loans were a high priced, but desired service that their clients wanted and now the government, in it's usual nanny state method, has "protected these consenting adults" from making a decision that they deemed to be in their best interest to gain quicker access to money that they stupidly loaned to the government interest free in the first place.

As a side note to all this…..

This is a great example of how you get fleas when you lay down with dogs.

HRB needs the corrupt government system to enforce their idiotic nearly incomprehensible tax laws so that organizations like HRB can exist, and then when HRB get's big and powerful, the corrupt government that they have to support finds way to control them, via regulation, and ulitmately push them towards much lower profitability (how long can they be pushed?).

So the organization (the corrupt US Government Tax System) that is working towards their (HRB) demise is the exact same organization that they HRB) need to support to justify their existence.

The ultimate Catch-22.

Russ Sears writes:

It has been a few years, but personally they have lost the self help
software battle to TurboTax. I found the H&R software was full of
glitches and bugs with poor technical support model.

This despite the difficulties switching brands from one year to the
next. Like bank's checking account customers, they should have a lock on
repeat business. Besides having to re-enter data, they also should have
capitalized on familiarity with the software and superior customer
service by maintaining personal data in electronic format and all the
great benefits electronic version has over paper. Turbo Tax has built
this costumer loyalty into a nice little annual annuity with prices
rising with the tax savings potential and complexity.



 What is often not said is that walking and exercising is not what generally causes weight loss in and of itself. In fact, it is the extra muscle built into the process of getting in shape that causes the weight loss. Muscle increases your metabolic rate, fat slows it.

Further exercise reduces your stress level and makes good use of your cortisol levels. What causes fat gain is stress that the body thinks is sign of starvation and kicks in cortisol. All this signals more hunger and tells your body to store calorie as fat, for the coming starvation your stress is telling your body is coming . This system worked well when it was true that is you did not work (physically) you did not eat. But does not work so well when stress only means you do not upgrade to sports car for a few years, or when it means you are living on govt provided safety net rather than having to work for a hand-out. While the media would have you to believe that it matters not how intense you exercise, this is not true, some need to workout more intensely to combat the stress. Plus everybody's level of intensity is different.

Most people that start to exercise actually gain weight for about 3 weeks, and then start losing thereafter. Muscle weighs more per cubic inch than fat however, so the thing to watch is the tape measure NOT the scales. Many people bodies are not meant to be thin or even low weight. Many are built for heavy lifting not distance. These people should strive for muscles not fat. The extra weight even as muscle however does mean these people need to maintain a more consistent and regimented healthy lifestyle.

In short the exercise is to combat the stress levels that cause people to gain or roll-a-coaster in weight. Exercise is a way to make it stay-off. Calorie restriction is simple for dropping the pounds. For the very over weight sometimes the weight must come off before they can actually exercise enough to fight the stress levels appropriately for them. Calorie restriction also has it own health problems as a long term plan.




1. Showboating is a form of exaggeration. It is often done because there is a missing need in your life. Often in sports it tries to cover the weakness in your game. Say spectacular slam dunking to hide the lack of outside shot, or perhaps more directly playing up the 3 pointer because they know it does not happen enough. It shows known vulnerability and suggest it is soon time to attack. Often the "weakness" is simply being worn out. Very much like a toddler going on a rampage, right before bedtime and then crashing. At the race line most everyone knew where everyone else's best times stood. Bragging about them before the race meant you were not in your best shape and you were feeling vulnerable. Leave the bragging to us over the hill folks whose game is well past being able to improve upon. And our one time best will only get proportionally better as we look back at it with the distance of time.

2. To answer Mr. Tucker on why some people consistently have to start over, even to the point of suicide, going to the other side of life. I had a friend that self sabotaged many races, seasons and his potential by constantly getting in and out of shape. He would stop running, start eating and gain 20, 30 even 40 pounds. Then suddenly he was a man on a mission. Running 100 + mile weeks soon after 0 mile weeks. He would take trips to far extreme places like mountains or the desert or even different countries. No regular tourist, he would only camp and run. He would regularly call me excitedly tell me of his weight loss, his times dropping and his renewed racing conquest. He loved clawing back, from a nobody, an also ran, to a winner. First of local races and then regional races. But as the competition got tougher and the progress got slower and more gradual you could see the commitment wane and doubt creep back in to his training. Some people love the chase more than the success. My whole Senior year in college I dated a man eater. She simply wanted the thrill of finding someone new to feed the ego. She loved the chase, but hated the day to day doldrums and tasks of a real a relationship. She was a drama Queen.

This is also called the missionary syndrome, where a missionary is "called" to some exotic place. They learn a new vernacular and the inspiring complexity of any culture. It is all new, full of excitement, starting a church, getting it going, meeting new people, changing their lives… Then suddenly they stall, money gets tight and the newness wears off. Then they start realizing the filth, the poverty, the disease, the lack of opportunity for all their converts. They learn the vulgarity of the language and culture. Once the enormity of the task sets in and the hard work begins suddenly they get a new "calling" or start losing the faith. Or they may start drinking carousing with women or a myriad of other sins that disqualifies a spiritual leader. Often time they would simply miss handle the church's money for amounts that State side would hardly tempt anyone, let alone a professed contentious spiritual leader.

Often they would simply mishandle the church's money for amounts that State side would hardly tempt anyone, let alone a professed contentious spiritual leader. But it would seem clear in hindsight all along that you should have watched the church's offering plate and purse strings a little closers with those charismatic leaders that were overpromising and under delivering. Perhaps this is the string that binds them all charismatic, great promise but demons keep them from delivering on those promises.It sometimes hard to distinguish those that are apparently fearless from those that are truly courageous. Except the supposed fearlessness comes from not being afraid to start over, but still always carry the bigger fear of not having a new exciting all consuming goal. The courageous, focus on the goal and are not disturbed by boredom, but thrive on it.

3. For those of you who want just the facts on QE. One must look back to the early 90s to see a period where interest rates on the 10 year took such a 6 month spikes up and down and the 80s to see a down up down spike of such large BPS moves. A interest rate changes. Are we in for another spike up next 6 months? Why does it feel like the 80s are in vogue? Perhaps it is the nostalgia of a simpler time when everything hits the fan; at least the Fed understood what needed to be done to win, "Whip Inflation Now". One wonders why the Sage must write the NYT. It could not be that the Flexion victory see the need to help rewrite history as the rest of the US and world currently views it. Nor could it be and the President medallion given during a lame duck period is some last minute editing of the history books before the political winds shifts power, could it? It makes sense in the information age to make sure you spend the last hours of your reign to make sure your message is etched in the hardest stone or metal known, a medalian.

Speaking of 80s and campaign slogans and QE it all reminds me of the "Save Ferris" campaign except QE chant should be "Save Flexions". Perhaps just the slogan, Ben, Buffet and President are looking for to make the rest of us thankful this Thanksgiving for the benevolence of our leaders in maintaining the status quo. Of course there must be some more creative acronym with a constant "D"in Deflation, instead of the easy vowel like "I".

4. Of course Rocky has a point why should the Fed change tactics and give the Flexions such a blatant quantifiable gift. Consider GM IPO it apparently makes the public whole, because even the best accountant can not add up the lost opportunity cost or the missed creative destruction cost to kicking the can down the road of such a dinosaur. No ones saying Lackey that GM does not make great cars the Corvette comes to mind, or the high minded hybrids that people will rush to buy when everybodies coffers are full. But one cannot expect an economy to always support the high legacy cost, by only offering the high margin high dollar option every time. One cannot help but wonder where the hides must have come from that are being used to make the leather seats in those cars, if they were not simply stole by this opportunity cost versus accounting cost switch from other automakers and ultimately taxed into everybodies car buying bill and lost jobs an prosperity used to spend on real innovative start ups and things beside broken windows.. Piece by piece these hides come out of everybodies wallets. Likewise and similarly where are the hides coming from that are being used to reupholster the Flexion's balance sheets. Is it not it understandable for the public to notice how much lighter their wallets are lately and conclude that somehow those bankers took it from them. And The Question:

I am familiar with the break-down of the Black Scholes equation when a stock drops near zero as it means death to the company. The distribution matters rather than normal volatility. Does a low 10 year rate and with a limit of zero interest rate have such similar effect on how we normally would measure volatility?

Given that there is some upper limit to bond prices when rates hit zero, is there is a similar barrier to the distribution of the bonds prices?

However unlike stock prices interest at zero does not mean death to the underlying. And if so, how does one assume at least the non-Japanese scenario where interest rates do eventually revive. Does it mean the ab-normal distribution varies disproportionally by time? What does this say about the current volatile state of bonds… does it mean that this volatility effect is even more pronounced as the rates goes lower?

These are real questions,not just theory, does this should this and is this effecting hedging cost? How about modeling of interest rate scenarios? Perhaps the bonds prices and BPS recent volatility should be considered even more adnormal is such a low interest rate environment due to this static effect of a possilbe zero rate. 



 I recently played with Aubrey at the new Stuyvesant park on West Street. It illustrates many things that made America great and are appropriate to think about relative to the well known abundance that giving each settler his own plot gave to the pilgrims enabling them to have a Thanksgiving. Everything is better now. Think back to the catalogs you used to order from 10 years ago, and see if there's anything you would buy. Not only in electronics, but in toys , gifts, cosmetics. The park has products from Kompani and Berliner– that are infinitely safer and more playful than the old parks. The ropes of the jungle gym protect the kids from falling and doubtless save hundreds of lives a year. The artificial soft turn prevents thousands of deaths a year from concrete and asphalt accidents. All the equipment turns and jumps with unbreakable springs. The plastic that Kompani uses is infinitely safer and more playful than the splintering and depreciating wood that our kids grew up on. How many things are infinitely better now than they were 20 years ago.

What causes this? Incentives, competition, specialization and trade. I must improve on this thought for my annual thanksgiving message based on the incentives that Governor Bradford provided.

Russ Sears writes: 

While one would hope that there is truth in this post, I believe the closer you look the more you see this is the incentive of government in charge of most parks and hover parents, not a free market. Parks often are most concerned with preventing lawsuits, rather than the entertainment or the education or even the holistic physical well being of the kids. Gone are the Basketball goals, the volleyball nets, and the score of competitive sports played on baseball field that encourage kids to casually compete, testing who is best. Even a kid Aubrey's age understands when helmets are good and when they are for show and support of over protective parents.

It is outside the parks system. To find the free market and true innovation you must go to the mountain climber, the bicyclist, the hikers, the campers, and even running specialty stores. There kids are thought to take educated risks and how to swing the odds greatly in your favor, to have a great time and live life fully in true freedom. These store are amazing places with gear that would stun a Rip Van Winkle awakened from a 20 year nap. 

Rocky Humbert writes:

 Each year, emergency departments treat more than 200,000 children for playground-related injuries.

And from 1990 to 2000, 147 children aged 14 and under died from playground-related injuries. 56% died from strangulation and 20% died from falls. This may not seem like a troubling statistic, unless it's your kid that hit the ground at terminal velocity.

I submit that the Plaintiff's Bar is the "unsung hero" in playground safety evolution.

Russ Sears adds:

How many of increasingly obese, depressed, apathetic and unambitious youth and young adults are there through lost opportunity cost? Like the FDA, let us never forget "safety" has a hidden cost. In fact it could be argued that the bubble in safe AAA bonds was the fuel that allowed the housing bubble to start, grow and explode.

Jeff Watson writes:

 You're right that most things have improved in science kits and electronics. However, chemistry sets have gotten worse, although they are much safer. My old Gilbert set from when I was a kid had a much wider range of experiments and greater variety of chemicals than any set today due to the legalities and regulations. Although I love the new electronics kits, the old Allied Electronic "Knight Kit 200" was the best electronic kit I ever played with because it was a breadboard and even had a solar cell. I tried my hand at designing simple circuits with this kit and always had a propensity to blow out .01uF ceramic discs due to my adventure.

Victor Niederhoffer replies: 

 I disagree with you. The Kosmos Chem 3000 is infinitely better as are the snap tech kits much better than allied or radio shack. You must come and see the new science curricula that Kosmos provides.

Jeff Watson elaborates: 

The nice thing about the old Allied 200 in one kit was that it was a breadboard kit and used 110VAC with a multi tapped transformer. The breadboard came with plenty of extra connectors and I could add all the extra resistors, capacitors, transistors, coils, chokes, diodes, tubes, etc, that I could scrounge from old TV sets etc. The new kits just don't allow that flexibility, at least from what I've seen online etc. I still have that old kit and taught John the rudiments of basic circuitry when he was a kid. That kit is so old, I had to change out all the electrolytics and put in a new transformer as components change values with age. In my case, all the science and electronic kits I had ended up getting heavily customized by me, and they never resembled the original after a few days.

Victor Niederhoffer writes:

Yes. But that's infinitely more difficult and harder to learn and attach the springs than the snap-ons, which come with all those components and educational sets keyed to actual curricula.

Jeff Watson counters:

I know that the springs are harder, but they worked for me. When I was a kid, I never followed a curriculum, but by 5th grade, I was looking at schematics in Popular Electronics and building workable models on my Knight Kit breadboard. I made many improvements to their schematics and sent them to the magazine and I was published and rewarded with a free subscription. My tweaks weren't much, but for a 11 year old kid, they were pretty cool and left me with a sense of accomplishment. I never did much digital as it wasn't around then, but when I was a freshman in college, I remember studying "Digital Electronics for Scientists" by Malmstadt. Good book that is dated but still useful today.



 Here is a story about a marathon cheater who was my contemporary.

Eddy stole money from my training partner and coach, Steve Wilson. I finished second to Eddy at Twin Cities in 2001. Then in 2002, Eddy effectively ended my career at Twin Cities as I choose it for my Master's (over 40) debut. Eddy ran 2:12. He took us out so fast the first 10k (30 min and change) I died and I ran a 2:42. With a time like that I never got invited to another big marathon, and could not string together the confidence and strength to train consistently thereafter to tag a much better one. My friend had trained with Eddy some in Florida, and I had meet Eddy at some races. He was a fun guy to hang around after the race. But even before the doping, his quirks hinted he had some demons.



How would the speed up stuff (see below) work in trading?

Trading while standing up?

Trading with a gun rather than a mouse?

Taking a fast 4 ticks?  (guaranteed to lose money unless you have the infrastructure of a flexion)

Trading 3 markets in succession??? 

Larry Williams adds:

Going from yesteryear's 200 day moving average to a shorter one? Trading instant spreads? 

Jim Sogi writes:

It's a whole new skill set, both different motor and mental with a learning curve. Years of practice with certain tools cannot be discounted. Like switching from squash to tennis to ping pong. Or longboard to shortboard. 

Ralph Vince writes:

Great questions. Based on my own, limited, life experience, I would add that there is an element of a certain mental "groove," to all of this, necessary to success, not altogether very different than that of an athlete on the top of his game (we have discussed this at length in this forum– some great discussions on it I think) or when you are thinking a problem through– a very difficult, elusive one, threatening to drip off the edge of your consciousness…….and I'm not so sure that is even timeframe-specific, so long as you find your groove.

When I put on a trade, I KNOW I'm going to make money on it, I'm not worried about it one jot. You get into certain habits, which are a function of your cadence, and "settling in' to that, whereas I think it IS timeframe-specific, seems to be timeframe specific to the individual and how he trades.

I very much believe that the kind of "hurry up" trading you are describing here may fit certain individuals and may sabotage others. Even if on a purely mechanical basis. What comes to mind for me on this is trying to play simple, basic strategy blackjack at a table with a fast cadence– I can't handle it, and am certain to fumble it.

Ken Dreees writes:

It would be interesting to create a dynamic trading skills test in which you had mutliple positions open in multiple markets and were then given simulated info in a real time sense that caused market disruptions. You would be graded under criteria such as:

1. exiting safety

2. capital protection
3. Finding and exploiting panic etc.

Like a trading version of star fleet's test.

Jeff Watson adds:

Here's an interesting site with info on CBOT full seat prices from 1898-2004. There's a handy little excel download in the site with the high/low of CBOT seat prices on a yearly basis. 1942 was the year to go long the CBOT. 

Russ Sears comments:

My opinion is that building up the endurance to concentrate for long periods of time is not like riding a bike. If you've been away from it a while train yourself back into it.

Taking scheduled stress relief breaks should be required to be on your best defensively, especially in volatile markets. 




UO football

Oregon football: Ducks' success on offense is just a matter of time

Oregon's fast offensive tempo has baffled opponents this season, and USC will try to solve it Saturday

By Rob Moseley

The Register-Guard

Appeared in print: Wednesday, Oct 27, 2010

In college football, it's best to take things one week at a time - unless Oregon looms on the schedule.

Because of the Ducks' withering offensive pace, USC has increased its tempo in recent practices. And not just this week or during the preceding bye week, Trojans coach Lane Kiffin said, but even earlier than that.

"Over the last couple of weeks, even going into the Cal game, we've picked up our tempo in practice whenever we were going against the defense," Kiffin said Tuesday. "I just think that if you try to all of a sudden do it in the week you're playing Oregon, it's not going to help a whole lot. …

"We've been doing this for a few weeks and took a different approach to the bye week than if we were probably playing someone else, by the speed we practiced at and the way we approached it."

The list of top-ranked Oregon's scoring drives this season, entering Saturday's 5 p.m. game at No. 24 USC, includes 16 shorter than a minute, and only three longer than four minutes. To some extent that reflects the big-play ability of such stars as LaMichael James, Jeff Maehl and Josh Huff, and also some favorable field position owing to the 25 turnovers forced by the UO defense and special teams.

But it also illustrates the tempo at which Oregon's offense plays, and the minimal time the Ducks take between snaps. Mostly, that's determined by how long it takes officials to spot the ball after the previous play.

"We're playing at a pretty good clip right now," UO coach Chip Kelly said. "I think it's because our players have a really good understanding of what we're trying to do. We just try to eliminate that time between plays, and then just go play."

Snapping the ball just a handful of seconds after the previous play minimizes the time available for the defense to call plays, substitute or react to Oregon's offensive formation. It's a common occurrence to see defenders spend those moments with their hands on their hips, a sure sign of fatigue.

Oregon doesn't have such trouble signalling plays to the offense. The Ducks streamlined their terminology in order to play faster on offense when Kelly was promoted to head coach in 2009, he said, and they employ a complicated system of signboards and hand signals to indicate plays during offensive possessions.

The signs each include four images - faces of ESPN personalities are among the most recognizable.

Kelly said the signs indicate a package of plays, and hinted that they can sometimes be used as a decoy. Sometimes, he said, players aren't asked to "go to the board" to get the call.

"It's just another way to play fast," Kelly said. "The analogy I can give you is, iif you go to McDonald's and order a No. 2, that's all you have to say and you get a Quarter Pounder and a drink and fries, and you just say, 'No. 2.' If we send them to the board, one picture can mean the formation and the play and the snap-count. That's all it is. It's just another way to play faster."

The Ducks' tempo seems particularly suited to their spread-option offense, which doesn't feature excessive pre-snap shifting and motion to fool the defense, as in the scheme employed by Boise State, to use just one example. But Kelly said he'd look to push the tempo even if Oregon's personnel was best suited to packages requiring three tight ends and a fullback.

"You could play up-tempo no matter what you do," Kelly said. "You watch (Indianapolis Colts quarterback) Peyton Manning, they're not running any option but they play as fast in the NFL, in terms of him being able to get their plays in and the speed they want to play at. So it's not married to the system."

Kelly also quipped that, "The byproduct is, as the play-caller, you can call a lot of really bad plays, and people forget about them quickly because we're on to the next one." But clearly Kelly, whose offense leads the nation in points and yardage, hasn't had many missteps in that regard.

The potential drawback to playing so fast on offense is that Oregon's defense is on the field so long. The Ducks are 114th out of 120 teams nationally in time of possession, at 26:40 per game; the 516 plays defended by Oregon are more than anybody else in the Pac-10 but Washington State.

The Ducks try to mitigate that with a regular rotation of about 25 players at the 11 positions on defense.

But Oregon also uses about 20 players regularly on offense, another challenge for opponents.

"The different ways they mix and match that personnel in terms of personnel groupings and formations, you're trying to identify what their top runs are and their top passes are, and when there's more of them it's hard to really pinpoint what their favorite ones to do are and defend them," Stanford coach Jim Harbaugh said.

Kiffin and his staff at USC are trying to tackle that challenge this week.

"You don't know who's going to be in when," Kiffin said. "They do rotate guys in. I'm sure it's because they know they're going to play a lot of plays because their offense scores so fast and doesn't use very much time.

"The 14 touchdown drives under (54) seconds, that's unheard of for four years of games, let alone half a season. I'm sure that's why they do that. I don't think until this week I realized how deep they were. For them to play so many people on offense and defense, they've got great depth."

All of it speedy, as Oregon tries to keep pushing the pace of this historic season.

"We just try to eliminate that time between plays, and then just go play."

- Chip Kelly, Oregon Football Coach

Pitt T. Maner III shares:

On speed in practice:

Bill Walton on Wooden and UCLA basketball practice, from (With Steve Jamison) Wooden: A Lifetime of Observations On and Off Court, Contemporary Books (Lincolnwood, IL), 1997.

For us, it all started with our practices at UCLA, which were nonstop action and absolutely electric, super-charged, on edge, crisp, and incredibly demanding, with Coach Wooden pacing up and down the sidelines like a caged tiger, barking out instructions, positive reinforcement, and appropriate maxims: "Be quick, but don't hurry." "Failing to prepare is preparing to fail." "Never mistake activity for achievement." "Discipline yourself and others won't need to.

"At the same time he constantly moved us into and out of minutely detailed drills, scrimmages, and patterns while exorting us to "Move…quickly…hurry up!" It was wonderfully exhilarating and absolutely intense.

In fact, games actually seemed like they happened in a slower gear because of the pace at which we practiced. We'd run a play prefectly in scrimmage and Coach would say, "OK, fine. Now re-set. Do it again, faster." We'd do it again. Faster. And again. Faster. And again.

I'd often think during UCLA games, "Why is this taking so long?" because we had done everything that happened during a game thousands of times at a faster pace in practice.

Ralph Vince writes:

It's a game of evolution, the hurry up, with a mobile quarterback, an absence of putting a man in motion (and hence, plays that aren't contingent on defensive reads) and spread out receivers.

The counter to it is the part I am trying to study, and seems to be confusing blitzes (which are difficult to coordinate when faced with a no-huddle), middle zones and man for man on the outside (and, surprisingly, it appears the outside coverage man should take the INNER of to wideouts on the same side when that occurs). 

Russ Sears writes:

Football is a sport requiring quick short burst of speeds. Speeding up the normal pace of the game cause the recovery time to shorten drastically. An offense that knows before the position of attack can rotate the burst of speeds, where as the defense must all be ready and attacking. The stamina to endure these burst of speeds with short recovery takes a good month of training. This is, I believe, the Indy Colts advantage also.

In basketball, it takes even longer because of the aerobic base needed. Wooden and several other great basketball coaches practiced running stairs and full court press. As full court press is the basketball equivalent to no huddle offense.

In distance running the equivalent is cycles surging the letting up the pace. If you practiced this you could beat better runners who are not prepared for this.



 While natural gas has been the butt of jokes after 50 out of 50 winners…The one loser on my screen was the bank index bkx & BAC. It may be too early to call a trend, but I have noticed that 6 days so far in Oct the bank index has been down while the S&P has been up. Most of these have been since Oct 13th when the markets started hammering the banks over servicing mbs and foreclosures.

Looking at each quarter, the S&P was highly correlated with the bank index from 2003 late 2008. In hindsight it seems so clear that the banks index switching from low or average beta to a high beta correlation to the S&P index was a sign of the impending explosion before Lehman hit the beta for the 3rd quarter 2008 was 2.70 according to my regression. This is after a fairly stable Beta hovering around 1.0 .

Looking back during the 90s when tech not banks were driving the market, the beta of the bank index on any given quarter would bounce around and the correlation would also, but in general was much lower (the bank index data I had only went back to March 1993).

Of course with banks were issuing those IPO's back in the 90s where as by aughts they were switching to securitization and financial engineering to manfacture their edge.

But do banks still matter? With the government effectively backstopping their balance sheet, do they really have a reason to exist? (aside from the political gains do they havea wealth creation reason?) If not, does "too big to fail" still apply if they do not fit the political agenda?

What are the new numerical disconnect saying?

S&P r        BKX r        correl      Beta        Alpha  quarter          Year
0.0381     -0.0150     0.58344     1.16939     -0.0035    oct     2010
0.1018     0.00173     0.93421     1.64995     -0.0026     3     2010
-0.126     -0.1199     0.92693     1.42600      0.001      2     2010
0.0475     0.19681     0.69486     1.18386      0.0023     1     2010
0.0534     -0.0999     0.84697     1.64582     -0.0029     4     2009
0.1396     0.25845     0.78197     1.62397      0.0005     3     2009
0.1416     0.25874     0.84468     2.78847     -0.0022     2     2009
-0.124     -0.4542     0.84269     2.43938     -0.0025     1     2009
-0.255     -0.4237     0.81996     1.23216     -0.0017     4     2008
-0.092     0.15255     0.91565     2.57134      0.0061     3     2008
-0.032     -0.3060     0.75759     1.54808     -0.004      2     2008
-0.104     -0.1154     0.85674     1.68488      0.001      1     2008
-0.038     -0.1793     0.86751     1.50680     -0.0019     4     2007
0.0154     -0.0629     0.85999     1.23968     -0.0013     3     2007
0.0564     -0.0085     0.83763     1.00614      -0.001     2     2007
0.0018     -0.0316     0.91944     1.09838     -0.0006     1     2007
0.0576     0.03269     0.75834     0.83588     -0.0002     4     2006
0.0482     0.04607     0.83727     0.98334      0          3     2006
-0.021     0.01923     0.77312     0.89102      0.0006     2     2006
0.0407     0.02143     0.79510     0.95712     -0.0003     1     2006
0.0166     0.07061     0.78553     0.91498      0.0009     4     2005
0.0229     -0.0276     0.84186     0.99538     -0.0008     3     2005
0.0161     0.02979     0.84171     0.89760      0.0002     2     2005
-0.026     -0.0753     0.85131     0.98382     -0.0008     1     2005
0.0837     0.06477     0.90318     1.02108     -0.0003     4     2004
-0.023     0.00936     0.85927     0.85178      0.0005     3     2004
0.0162     -0.0401     0.82188     1.02596     -0.0009     2     2004
0.0114     0.03282     0.91278     0.92618      0.0004     1     2004
0.0974     0.09482     0.87883     0.89619      0.0001     4     2003
0.0323     0.03224     0.88914     1.07428      0          3     2003
0.1388     0.19254     0.93348     1.10238      0.0006     2     2003
-0.036     -0.0558     0.96863     1.01468     -0.0003     1     2003
0.0761     0.07047     0.92250     1.30637     -0.0005     4     2002
-0.193     -0.1740     0.93277     1.12174      0.0007     3     2002
-0.146     -0.0743     0.87331     1.00450      0.0011     2     2002
-0.001     0.03820     0.89408     1.26995      0.0008     1     2002
0.0979     0.08147     0.78028     1.05444     -0.0004     4     2001
-0.163     -0.1527     0.89156     0.97725      0.0001     3     2001
0.0723     0.13445     0.80468     0.89475      0.0011     2     2001
-0.136     -0.1037     0.79788     1.19917      0.001      1     2001
-0.103     0.03487     0.71966     1.05525      0.0023     4     2000
-0.002     0.12468     0.54630     1.03989      0.0022     3     2000
-0.032     -0.0248     0.58095     0.88924     -0.0001     2     2000
0.0285     0.01104     0.70553     1.24602     -0.0001     1     2000
0.1301     0.04747     0.73276     1.53207     -0.0025     4     1999
-0.027     -0.1303     0.74732     1.10596     -0.0018     3     1999
0.0197     -0.0155     0.77527     1.11365     -0.0003     2     1999
0.0506     0.05411     0.81441     1.17468     -0.0001     1     1999
0.1621     0.16835     0.82698     1.52850     -0.0013     4     1998
-0.077     -0.2254     0.90935     1.33349     -0.0019     3     1998
0.0255     0.00949     0.71068     1.12551     -0.0003     2     1998
0.1616     0.15019     0.81421     1.14996     -0.0006     1     1998
-0.001     0.03142     0.91399     1.11496      0.0005     4     1997
0.0535     0.08639     0.88248     1.10622      0.0004     3     1997
0.1174     0.08028     0.81751     1.23158     -0.001      2     1997
0.0435     0.07625     0.83011     1.37483      0.0003     1     1997
0.0984     0.15136     0.77470     1.36041      0.0003     4     1996
0.0318     0.10855     0.86728     1.10377      0.0011     3     1996
0.0173     -0.0125     0.83779     1.40889     -0.0006     2     1996
0.0613     0.09627     0.78498     1.11939      0.0005     1     1996
0.0553     0.04865     0.62770     1.22768     -0.0003     4     1995
0.0645     0.12961     0.49631     0.92225      0.0011     3     1995
0.0794     0.14789     0.67762     1.12278      0.0009     2     1995
0.0911     0.10919     0.76762     1.71786     -0.0008     1     1995
-0.006     -0.0715     0.72703     1.11738     -0.001      4     1994
0.0406     -0.0271     0.80706     1.00491     -0.0011     3     1994
-0.002     0.07169     0.75132     1.07790      0.0012     2     1994
-0.043     -0.0368     0.77869     1.18102      0.0002     1     1994
0.0089     -0.0698     0.47082     1.12801     -0.0013     4     1993
0.0269     0.05376     0.48552     0.84299      0.0005     3     1993

Gary Rogan writes:

The upcoming change in the political reality and some dangers to the biggest protectors of TBTF, the servicing/foreclosure controversy coupled with the possibility of a Countrywide mortgage putback made the group a lot more risky. Who is to say whether another balance sheet shock will be met by bailing out the bondholders again? TBTF may become redefined as just full protection of deposits vs. every stakeholder. There will certainly be less appetite for the latter after Nov. 2. Plus if on Nov. 3 QE2 is really modest and limited to Treasuries as opposed to the recent speculations of everything under the sun due the "shortage" of new issue treasuries, coupled with possible Fanny/Freddy uncertainty again due to the change in the political reality the naked truth staring in the face of MBS and plain old mortgage holders, and even CRE doesn't look too good. 

Phil McDonnell comments:

Thanks to Russ for a counting tour de force. I have a few questions which I shall pose as assumptions.

I assume:

1. S&P r is the daily serial correlation of S&P changes at lag 1.

2. BKX r is the daily serial correlation of daily serial BKX changes at lag 1

3. correl is the daily coincident correlation between S&P and BKX

4. Beta is the beta of a regression of BKX changes on S&P changes on a daily basis5. Alpha is the alpha for the same regression

Correct me where I am wrong.

Russ Sears writes:

S&P r is S&P return for the quarter on lognormal basis. likewise for BKX



 A recent study shows that Asians need about 50 points higher on the SAT to get into college than White students and 100 more than Black students. It is well known that Asians have a higher IQ by 5 points than Westerners. This is tested in numerous academic papers. Also, well known is that the more intelligent the CEO, the better the performance of his company or hedge fund. One hypothesizes therefore that the companies whose CEO's are Asian will show superior performance to those headed by your average non-Asian Harvard Business School Graduate, (although if they haven't taken the mandatory ethics course there, they are more likely to be caught in flexionic pursuits that the elite schools are so good at whitewashing). What is the support for all these statements? and: How could they be tested?

One knows that this is the most rancorous subject under the sun, and I have lost many friends when I was foolish enough to discuss this in the past, and point them to the incontrovertible evidence about individual differences from a Galtonesque perspective, but let us please try to keep it civil, and stick to the scientific literature (none of this armchair stuff about this or that study being culturally biased as the more culture free the tests, the greater the differences) and no anecdotes, but predictions and tests and references.

Alex Castaldo adds:

Since the Chair does not give footnotes, it is not easy to find the sources for his information.

I believe the "50 point study" may be the one mentioned by Steve Sailer's blog.

An IQ figure of "6 points higher" is given in the Rushton Jensen review paper.

Russ Sears comments:

I have doubts to the usefulness of CEO's IQ test as over-performance of a companies stock. It is not that CEO's do not need to be smart, it is simply that there are enough smart people around and business is tough enough that those that made it have been culled out and vetted pretty completely. Show me the numbers, I am a skeptic.

Further, while creativity to overcoming obstacles in ones life may suggest carry-over into a CEO's performance. I doubt that overcoming one political rigid standard of race by offsetting another no doubt equally rigid political standard for entry into elite colleges would translate into the creativity needed for a successful business. Rather it signals the willingness to conform for acceptance. You mention Asian, but how many of the Asian's admitted for instance are women, versus men? Any stock study of CEO IQ education and minority must consider that education by minority race in the USA is widely distorted by the politically preferred sex of a student. May I suggest that one takes the list of Jewish Noble winners find how many come from the ivy league schools and compare this percentage to the non-Jews. Yes, the ivy league alumnus have a smaller world than most. But may I suggest those with the creativity to overcome this lack of sheepskin, are those that would out perform.

Here are some reasons why I believe IQ can be a handicap to a CEO…

1. Those great at answering questions that others already have the answers, a test situation, often find it uncomfortable and difficult to switch to asking questions that the answers are not known. The ability to ask questions that others did not is a key to make a difference.
2. Necessity is the mother of invention and desperation is the mother of risks taking. A well paying job, is often the road-block to starting a business. Probable failure is hard to choose when you have almost certain path to mild success. Yet it is the probable failures that succeed that skyrockets company. And vise-a-visa its the probable successful businesses that are blind-sided by innovation.
3. Like Reagan, often the most brilliant performers as a team are those that want to work with the smartest minds, they do not have to be the smartest guy in the room. The successful CEO does not have to ask the right question, he simply has to ask the right person to ask the right question.
4. High IQ people perform best with less stress, they can choke more in stress, does the Peter Principle apply to them under stress?

There are a couple thoughts that come to mind that could be tested.

1. New Research has shown that the brain does develop new cells, These baby brain cells are produced by cardiovascular exercise. Further, test after test suggest that cardio improves your creativity. Do CEO's that exercises out perform? There was a study of CEO gulf handicaps, is there a similar study of say 5k times? Are there other test of creativity, say CEO's that are talented pianist, CEO's that are writers do they out perform? Do CEO rising from the operational side ( engineers, IT etc) outperform those that come from the marketing side?

2. A few years ago it was suggested that many CEO's are dyslexic, Could a twice exceptional CEO (high IQ but learning disability) out or under perform?

There are a couple thoughts that come to mind that could be tested.

Victor Niederhoffer adds:

For those interested in a factual, scientific discussion of environment versus innate influences, rather than armchair speculations so grievously present in our environment, and so dysfunctional to proper thinking about markets if similarly believed or proposed, I would recommend this article and the references cited thereto.

Also note the same kind of commentary there relating to making all individual differences consistent with the idea that has the world in its grip, and the purpose of life being self sacrifice.



 One of my daughters just got asked by a man to help her carry and buy groceries at a supermarket, and he had a young girl with him in tow or some such. The attempted crime didn't get carried out according to the daughter because "she didn't have enough money or she wanted to go into the grocery store" or some such. I recounted the story of Ted Bundy to her whose Volkswagen that he had lured a hundred college girls he killed into was on display. She asked me what the moral of the story was, and I said, "never trust a man who wants you to go with him to a private place no matter how needy or how much in authority he is." She said "you mean, never trust a policeman or fireman?" (one of the lures that Bundy and many others use and I said something like "yes". I don't think I gave her a good moral for the story. Could you help me say it better?

George Parkanyi writes:

Things aren't always what they seem, and it only takes once to make a fatal mistake. The most successful lurers/killers are the ones that are charming, or blend in with regular jobs/lives, so you can't make assumptions about how a person looks and talks.

Any valid person in authority knows they will run afoul of the law if they insist on being alone with a woman or child (or man)– especially on the strength of that authority. There are usually strict protocols in place (we have them in Scouts– never an adult alone with a child other then their own at any) to prevent potential abuse and also because of the potential liability issues. Call them on it. If someone asks your daughter to go alone with them for any reason– she should by default (politely but firmly) refuse unless someone else can go along as well, preferably another person in authority (a second officer, etc.), or someone she already knows and trusts (say a friend). Though even two or more going off somewhere with a strange person can still be very risky (they could have a weapon or accomplices)– best to avoid any such situation.

Also important to avoid situations/places where there is the risk that if accosted, no one else is around to help.

She should also never volunteer information as to where she lives (especially not take anyone there like the grocery guy), or give out any phone or email numbers. A second wallet with some cash and expired credit cards (with different numbers than the current ones) could also be a useful decoy for getting rid of someone accosting for money (say a drug addict).

Russ Sears writes:

One danger in the solitude of distance running is that you often appear an easy mark for those trolling for trouble. A few rules I follow and tell the kids I've coached are:

1. Run against the traffic. Never approach a car that stops try to stay 10 feet from any door. As others suggest, go the other way running. Pick up the pace. Beware of drivers turning right. Trust your instincts if anything is strange.

2. Do not answer questions. Asking for directions or help find something (kid, dog etc.) do not answer. Generally, there are much better people, people of authority or position to help them. You should not even been approached. Someone approaching a teen for help of any kind should send off alarms. You are much more vulnerable than they are.

3. If they persist–If somebody is near, say a passing car or someone in their yard doing work pretend to know them. Run into places of business. Most kids now always have a cell phone, take it out and dial someone. There is a YouTube video that shows how a cell phone would have ruined the drama of many famous stories: from Romeo and Juliet to Blair Witch Project. Even before it is answered, you can say something like: "some creep is trying to a talk to me." Do not be afraid to escalate into yelling and screaming. 

Jeff Rollert writes:

I can vouch for this, when two guys started hitting each other with tire irons, in the cars directly in front of me in stopped traffic this weekend in LA.

There was no where to go, and being in East LA it was not prudent to get out and run off-freeway.

Very scary. Especially when one went back to car to enter the back seat for something.

Though it scared me quite a bit, the ending was funny, as they got back into their cars and proceeded to try and cut each other off…however, after hitting each others cars with the irons, they were clearly afraid of hitting the cars in the process and damaging them. So it looked more like ballet.

Finally, to explain how LA is the NYC of the 1970's…the guy behind me was honking and screaming at me to move the car towards them. (Note, the convertibles top was down).

Nigel Davies writes:

A fascinating read is Meditations on Violence by Rory Miller, a prison guard used to dealing with violent criminals on a daily basis. He reveals that most ofthe preconceptions people have about violent confrontation are just plain wrong.

For example very few people figure on the 'hormone dump' which takes out both reason and any fine motor skills and can cause the victim to freeze. The attacker meanwhile can have everything planned, giving him a huge psychological advantage.

Miller's top recommendations are as follows, in order of preference:

1) Avoid such situations altogether by being careful.
2) At the first sign of trouble RUN.
3) Hide if possible and running is not an option.
4) Only fight as a very last resort and if no reasonable alternative is available.



What a sordid story this would make for defendants in a case. Chicago purchasing managers announced at 9:45am, with moves 5 minutes after and 5 minutes before in conjunction telescoping the 2 point decline…

Russ Sears writes:

What most mid-westerners know that can be lost in the hub of the city is in the US– we truly love our rich friends…because most of them give us the best service, work the hardest and are the most talented people we know.

Yesterday, at lunch I gladly gave $10 for just a hamburger and fries to my friend Nic at Penn and 16th. It is the best hamburger you will ever eat. He always has a line out the door. And if anybody ever goes hungry for anything, it is more conversation or not getting enough time to talk to Nic or his interesting help JoVon because they have to head back to the office. Likewise at the OK Runner, I try to go during the week so there may be the chance to talk about the local runners before I pay $20-$30 extra for a pair of shoes. Because they are too busy helping customers during the weekend. We may have complained about our lawyers bill for our 1st will, but it definitely was worth every cent with the advice not to settle with the insurance company too quickly when my wife was in an accident and her concussion 6 months later turned into complications.

And there was no complaint about the bills from the gynecologist when she twice miraculously saved my first born's life by perfect timing, gutsy diagnosis and a prenatal surgery. I even like my insurance agent, and gladly would spend a day fishing with him. And do not get me started on buying used cars from my gear head friend that probably does get a couple hundred extra out of me every time I buy a car. But I have never had a problem with his cars so the security is more than worth it.

What does make us mad is the cheats and scoundrels that become rich. If any politician really wanted to use his position to become popular with the masses, it would be to convict those that believe to big to fail also means to big to prosecute…and run their businesses as ethical parallel opposite of Eliot's "The Untouchables". This is where Main Street hates Wall Street. It is an ethical line that is crossed, not some $ of income line in the sand. 



 Disney parks must be judged through the eyes of a young dreamer. The success of the Princess line of dreams for the toddler set of girls is in sharp contrast to the heroes offered up to the young boys. Perhaps the poor boys last hope is become a pandering President from Hall of Presidents.

Perhaps the pendulum has swung from the days of my youth and before. Before my time when Disney's Davy Crocket was the rage, coonskin caps enabled trappers to continue to make a living many years after their trade would have otherwise dwindled. Swiss Family Robinson inspired several failed attempts by my older brother and me to build a canoe. And I remember fondly The World Greatest … series and Herbie series that seemed to appear in theaters every summer. While I Dream of Jeanie and I Love Lucy occasionally crossed the line to demeaning, it certainly made clear that women can be silly. While now Tim Allen and Tom Hanks supply the laughs, juxtaposed with the women's punch-lines. The women's lines all are through sarcasm, more complete common sense and superiority in minds and romantic motives. It has been a few years for me, since we have been to Disney and I have only daughters, but it is clear to me then that dreams are hard to come by for today's sons.

This of course can now be seen as more women graduate from college than men. The link is a few years old, but I believe a more up to date analysis of the statistics would prove the problem is worse. If you add to this additional stress factor such as poor, black or Hispanic discrepancy between women and men graduates becomes a crisis to some communities. Disney is of course just selling the ideas that has the world in its grip as Vic says. Yet study after study shows that the parents involvement in the kids academics makes the difference. Dads must learn to become more active in their son's dreams to help the dream survive.

Disney's success largely comes from kids natural ability to dream. As a kid everything imaginable is obtainable. A parents job, in my estimation, largely is to keep that dreaming spirit alive but also to mature it so the teen learns to adapt evolve and develop the dreams to turn them into reality.

Kids rather quickly now a days out grow Disney. Yet there again, if you look closely at the "princesses" and the merchandise for sale at the park, it is clear that girls are allowed to fantasize longer than the boys. I would suggest that Dad's indulge their sons dreams well past their peers especially not just in sports. The evolution of the dream, in my estimation the second stage, however, seems not to nearly be as natural for parents of today's youth. Next year both my daughters will be teens. The world is full of narcissistic teens where participation trophies and parents routinely go through social upheaval to get the kids at every practice. Then both must watch them sit over half the game on the bench. This is the new norm. My mother was dead set against her scrawny teen participating in distance running. But she did countless times tell me I was "brilliant" and talented in many aspects. But she also made it clear that being poor, being a fundamentalist preacher's kid and being a runt meant I had to try harder than anybody else to get past their first impression. Consequently I only ran a few Junior high races. I did not train at all until I was at college. Started running as a freshmen at Liberty U on my own. Walked on the team as a sophomore and barely made it. But by the time I graduated with a year of eligibility left I was good enough that my coach at Liberty would not let me use it, if I transferred. I did come back the next year at Virginia Tech and smoked everyone on the Liberty team, with times that would have been a LU record back then. I say this to show that: 1. To get kids to put forth effort, you have to let them know they can fail. True success only comes from negotiating a brutal survival of the fittest world. 2. That as a parent you believe in them, you see their potential and want them to succeed. But you can not want it for them. 3. That as parent, you do not get to choose what the kids are passionate about. It maybe hard to accept, but they know themselves better than you do. And if you taught them faith in themselves tempered with the necessity but not sufficiency of total effort than whatever they are passionate about will make them succeed. These steps would seem somewhat self evident to me. But as a parent, there seems to be little direction in how to achieve these goals in daughters let alone sons. Though I did not qualify for the USA Marathon Olympic Trials until 1996, physically, at 30, I was most capable during the 1992 Olympic,. Around the 92 Olympics I set almost all my personal best time in every other distance but the marathon. The 92 Marathon Trials had a much weaker field than any since then. Based on my 20 mile split (1:42 and change) in the LA marathon, trying to qualify, it would appears that I had a realistic possibility to have made the 92 Olympic team. If I had only learned how to run through "The Wall" that hits racers near 20 miles. But I crashed and burned. With a few more years of experience, to go with the physical development, and who knows what could have been.

Not to say my parents did not do a great job overall in helping me keep my dreams alive and to go all out for them. But to show potential and fine line of nurturing a dream. And a little more understanding of the process of dreaming who knows what the next generation is capable.

With a bright 16 year old daughter trying many shoes to see how they fit, I now find myself on the other end of the nurturing a kid's dream. She has my spunk and determination to make it in something, but she is not sure what yet. She has a beautiful voice and loves music, but is totally put off by the HS music scene. She loves biology, (she likes science yet hates the math), she reads and devours US history. But perhaps her passion and much free time is spent in writing. How could I help her get a coach/ mentor for writing? Expertise appreciated.

Jeff Watson comments:

Still, when I hear "It's a Small World After All" it evokes the emotions that I felt when I was a six year old and first saw it the first time. Same thing with the display, "This is the ways the birdies sing, tweet, tweet, tweet….." Those still get to me 48 years later. Although I denigrate Disney due to the damage they have done to Florida, those timeless pieces still get to me…but then again I'm a sentimental fool.

Mr. Krisrock comments:

You are talking about themes the original Walt Disney enshrined. Right now, DIS is about PC…and super liberal causes that will never survive the test of time…just like Obama's ideas won't.



 Warren Buffett (who sometimes gets harshly criticized in DailySpec land for his politics and and pronouncements) was opining on the economy yesterday. He remains consistently upbeat on the economy, says that he sees no signs of a double-dip, and he has shortened the duration of the BRK bond portfolio substantially. Sadly, even Buffett fans must see that the effects of age are starting to show in his elocution.

I generally try to ignore his pronouncements and other self-interested comments, and focus on his portfolio and performance. His performance is once again startling: (All numbers are total return)

One year: BRK=+19.9% ; SPX=+4.93%
Three year: BRK=+1.3% ; SPX= -23.8%
Five year: BRK=+41.9%; SPX= -4.5%
Ten year: BRK=+105.9; SPX= -30.9%
20 Year: BRK = 1754% ; SPX= 393%

The one year return is the most surprising to the "what have you done for me lately?" crowd. Darn amazing!

Russ Sears comments:

Let us at least compare GrannySmith Sour apples to Red Delicous apples. The Ishare Russell 2000 index give the following as of 9/13/10:

1 yr: 10.40%
3 yr: -15.42%
5 yr: -3.01%
10 yr: 92.81%
20 yr: no data

While still over performing in all periods, the numbers suggest that the over performance has been during the financial crisis. And before that there was a 5 year period of large underperformance… almost as large as the over performance. Which given his reputation leads one to ponder, if his over/under performance of the Russell 2000 value is a good pessimist/optimist index or perhaps government fiscal policy intervention index vs. laissez-faire i.e. Govt can tax and spend our way to prosperity because they are so much wiser than the individual, especially the rich. 



 This article on income mobility will put in perspective the malaise affecting our economy. It's the 40 % from each of the lower 2 quintiles who moves to the top 2 quintile that has made us beautiful and created the jobs and responded to the past incentives, and dolorously "prefers not to" create jobs and value now.

Australian Nick White comments: 

This is a great country. Being back here the last few weeks just reinforces to me how lucky America is– even if you're in a perceived funk right now. This is the country where anything can get done…that's not the case in any other western nation. You have freedoms that you take for granted every day (even post legislative amendments that may have eroded them more than trivially). You have every type of geography and lifestyle. You have 36 different choices of one brand of orange juice fer crissakes! (which you can drink while watching one of thousands of tv channels).

I don't know much, but I know that if America continues to focus on the the things that got them to here– without trying to reinvent the wheel– you will all be just fine. The only danger I see is increasing reliance on form rather than substance– but this is a malaise of the world in general, not just the US. 

Rudolf Hauser writes:

This data on income mobility does not give us a complete picture. Large gains or losses from realized capital gains/losses, special bonuses payments, decisions to take long breaks from work, etc. can all influence results for any one year. One would also expect income from most careers to advance with experience and age. What would be interesting to see but probably very difficult data to obtain would be an average of five years of data say at age 50 with those relative income positions of those households income compared with that in the same period in the lives of their parents. I suspect that there would be a good deal of upward income mobility demonstrated by such an analysis, but it would nonetheless be most interesting to have that evidence.

Russ Sears writes:

Isn't this the premise of the sitcom "The Big Bang Theory"?

A group of nerdy physicists meet their neighbor, a beautiful blond girl waiting tables at the cheesecake shop… but even she is hoping to become an actress.

But you miss the point– from the Will Smiths to the nerds in physics to the marathon runners to the Saints QB, they are all incredibly talented, even the WS geeks, not just the WS geeks.

And as someone seen how letting a small business owners put the money back into a sport can revitalize: it can change how everybody developed talent. In 1992 The US marathon trials were a joke, but these guys changed it.

The world will never know the talents that were not developed for lack of a few dollars, but I have seen first hand how thin the pie can be sliced at the top, and how a few centimeters thicker can change everything. 

Jordan Neuman comments:

It is interesting that you mention the varieties of orange juice. I just read The Paradox of Choice which argues that our lives would be better if we did not have so many choices. The varieties of grocery items was the author's starting point.

It would not matter unless such ideas had support in this Administration. The references to health insurance in the book are illustrative. And I found the interview with the author in the afterword absolutely chilling. This professor was sure he and his "expert" friends knew better.

Larry Williams writes:

Living in the US Virgin Islands means giving up many choices in foods, clothes, cars, etc. I have found that a wonderful thing; it causes one to focus on what is really desired (that can be ordered from off island). It makes for a simpler life style and turns ones attention from man made consumables to the ocean, the trade winds, local markets and such.

Sam Marx comments:

I remember one of the escaped English spies then living in Moscow, when asked what he missed most about England, he replied Lea & Perrins Steak Sauce.



Verona and Stan DruckenmillerHere is an article about the lessons from Stan Druckenmiller's career. The author identifies four lessons: "Size matters," "Outperformance is possible," "Excellence takes hard work," "The money doesn't matter."

I note that these platitudes are not unique to money management– and could be straight out of a Tom Peter's Motivational Speech. The sad truth is that no matter how much I love, study and practice basketball and purchase AirJordan shoes, I still won't play like Michael Jordan. But it's a nice dream to think otherwise.

Pitt T. Maner III writes:

With practice there are many (even Rocky) who could give MJ a challenge at the free throw line or from the 3-pt line or playing "HORSE". Specialists in narrow aspects of the game. Trick shot artists. The niche players. So by practicing the unpracticed skills one might eke out a small advantage against the pros in the arcane areas where there is not actual physical contact.

It seems though there is a certain lack of diversity these days in basketball compared to era of Earl the Pearl, "Lucas layups", Pete Maravich, underhand freethrows by Rick Barry, Dr. J, Bird, Magic, et al.—more athleticism and muscle now (aka Shaq-types) with more plain vanilla in most cases and less skill/finesse. More of a business and more money on the line and more risk adverse to unusual styles. Defense and team play emphasized where every knows his "role". Even Lebron will have to adjust to team play at Miami and pass more and do other things.

On another note, interesting also that Mr. G is rolling out new mutual funds and a sequel to his "magic formula" book that apparently has many followers and "still beats the market" for now.

Victor Niederhoffer adds:

Knowing of the humility and inabilities of some of the people mentioned here, including myself, and there is certainly no absence of down years and sub par performance in the ones that I know about very well, including the 50% down year, in the year before I met him of one of them, and 7 years of 0 performance after that, I am still amazed that the records can be so good. I attribute most of it to the remaining winner of the coin toss problem. But something else is going on. The one thing that seemed right in the four lessons. They all go to the same schools. They lived next door to each other in the summer and often had dinners together or talked to each other every day. They all were agrarian reformers. And they all hated free markets. Thus with the idea that had the world in its grips. But mainly, they were always on same page with their positions, especially until the end of the year. Not an artifice I believe.

Vince Fulco adds: 

And I think it was mentioned (maybe here, too much reading material this week) that Biggs is his father-in-law? Guessing the Pequot-MS cabal loomed large in the mix.

Russ Sears writes:

After 08-09 it should be clear that much of the MBS and other structured securities markets were a Lemon Market. With the manufactures putting all the faulty parts into the same car, One side knew exactly which cars were clunkers.

Further, while perhaps they were totally naive to get so close to the edge, once near, there was plenty of muscle willing to give company after company the final shove over the edge by marked to market in a lemon market. So much so that even those securities with seasoned cash flows and stockpiled protective subordinates tranches became suspect.

Of course if size is a disadvantage and does not matter, why would you buy so much insurance on these securities that you knew the counterparty would never have enough collateral to pay you. Unless of course that was the whole idea.



 I currently am in the midst of writing a paper that suggests the regulators are the magicians of the markets. They direct your attention to the left, implies that your really should focus on the right. Time after time the central planners will steer the market to focus on this risk only to let the herd be blind-sided by the risk they are ignoring. There will of course be a rabbit pulled out of the hat at Jackson Hole and nobody would want to miss that. However, everybody is watching what is happening with the Feds and postulating how or even what they will do to make that rabbit pop out of that hat. Of course the assistants are in the know already. The lovely assistances will of course be able to buy all that jewelry and build castle in Vegas that such assistance need, from the crowd's tickets. But do not fool yourself that you can profit from these assistance they will only slowly get fat and growing old.

When the local college big football game is on, it is of course the time for the studious students to go to the library or simply go for a run around the other side of campus; But also it is the worst time to leave your car unlocked by the library or the other side of town. When the focus is on the imaginary, the divertive competitions of a game and fiscal policies of the Feds appear omnipotent. This is of course time to pay attention to what is real, the long term and risk all are currently ignoring.

I could specify hunting grounds and give data to validate this but will not because of the following reasons.

These extra-ordinary trades, without my bad ones, would seem like I was bragging.
2. I do not want to alert the competition to their mistakes
3. People do not remember what you told them yesterday, if it proves correct; it was their idea all along. History even becomes much more fuzzy, if you were right, and much clearer if you are proved wrong.

Yes, Virginia there are inefficiencies in the market, suffice to say look at the well spring of the Government's heart to find them.



horse whispererThe cathartic moves of Wednesday came just in time to create a sense of life at Jackson Hole in conjunction with the horse whispering and hiking so necessary to the research activities that occur there.

Desperate attempts to right imbalances come later in the week during the Summer than the other months because of vacation schedules at the Riviera and time with the others in the Hamptons.

To counterbalance the natural tendency to lethargy during the Summer, the market has moves approx 2% high to low in 19 of the last 20 days so that the public will not refrain any further from contributing to the overhead so necessary to keep the whole thing going in the absence of further subsidies from the centers at Brussels and the Beltway.

The top feeders must of necessity get on the same wavelength during the Summer so that they can get on the same page and possibly counterbalance the natural tendency of markets to homeostasis and this is why the trends in the summer are more pronounced than in other months.

East of Eden by Steinbeck has more insights into behavioral finance than all the studies of the so called men of promiscuous hypotheses, i.e. the behavioral finance gurus at the Universities combined.

The new Lloyd Webber show, Love Never Dies has more good work, more hummable tunes in it, a better plot than Beauty and the Beast of its predecessor than any other of his hits.

All the above assertions must be tested as to their validity to serve as a meal for a life time.

Victor Niederhoffer adds:

One wonders what the best use of horse whispering sessions there might be. Would it be to give instructions to the horses and engines that move the economy? Or would it be to receive unspoken in the native language signals as to the coming releases from the body language of the flexiopurveyors et al? What do you think? I'll award a prize for the best suggestion for the use of these whispers to any parties. Also one notes an amazingly large number of round numbers broken with SP 1050, Dow 10000, yen 85, crude 82, dax 5900 ish, nas 1800 as ever, beans 1000, and many others emerging vividly. What am I missing here? 

Easan Katir comments:

Another fascinating idea from the Chair. One recalls past analysis of Mr. Greenspan's briefcase as he walked to the Fed meetings. One thinks the main stumbling block to current and future analysis is lack of data: The viewer only gets brief video clips of the flexiopurveyors. A whisperer needs to observe the body language on his own terms to catch those small unconscious messages. Horse whisperers can't just watch rodeo clips. Maybe there is a way, but this is first reaction. 

Rocky Humbert replies:

The chancellors briefcaseIt's a cinch to note that the the horse whisperer's goal is to install a "western saddle" with its extra padding for the "fleecing," and its phallic horn. The English have no need for such contrivances for either foxhunts or dressage.

Similarly, the Greenspan briefcase indicator was developed by a group of American Anglophillys who lusted after the most famous briefcase in the world: The Chancellor's "Box"– which dates to the original leather briefcase made for William Gladstone around 1860– and which is carried by the Chancellor of the Exchequer to Parliament for the annual Budget Speech. Unfortunately, the "bulging briefcase indicator's" meaning was lost in translation from English to American– as the proper briefcase is rectangular and sold– and cannot be influenced by the battle of the bulge.

Details on the Chancellor's Briefcase.

Ken Drees comments:

The briefcase indicator was a made up cnbc gag/come-on; also Wayne Angell turned out to be not a talking font of knowledge but in court defended hinself as simply an "entertainer". Now we watch and listen to Bullard this morning–is he an entertainer, a wise font, a broken bell or a front? As Jimmy Rodger's said–get a tip from the company president and lose half your money–get that tip from the chairman of the board and lose it all. 

Jim Sogi writes:

Nik 9k

Kim Zussman shares:

Pierre-Olivier Gourinchas*, Hélène Rey**, and Nicolas Govillot***


We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an "exorbitant privilege" that significantly weakens its external constraint. In exchange for this "exorbitant privilege" we document that the US provides insurance to the rest of the world, especially in times of global stress. This "exorbitant duty" is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.

Andrew Moe comments:

As the cloistered flexions whisper, a steady stream of rumors and leaks drive speculation wildly through the thinned ranks, causing the type of ranges that the former colleagues utilize to generate 100% profitable days for the greater good. 

Russ Sears contributes:

How to Listen to Jackson Hole

I currently am in the midst of writing a paper that suggests the regulators are the magicians of the markets. They direct your attention to the left, implies that your really should focus on the right. Time after time the central planners will steer the market to focus on this risk only to let the herd be blind-sided by the risk they are ignoring. There will of course be a rabbit pulled out of the hat at Jackson Hole and nobody would want to miss that. However, everybody is watching what is happening with the Feds and postulating how or even what they will do to make that rabbit pop out of that hat. Of course the assistants are in the know already. The lovely assistances will of course be able to buy all that jewelry and build castle in Vegas that such assistance need, from the crowd's tickets. But do not fool yourself that you can profit from these assistance they will only slowly get fat and growing old.

When the local college big football game is on, it is of course the time for the studious students to go to the library or simply go for a run around the other side of campus; But also it is the worst time to leave your car unlocked by the library or the other side of town. When the focus is on the imaginary, the divertive competitions of a game and fiscal policies of the Feds appear omnipotent. This is of course time to pay attention to what is real, the long term and risk all are currently ignoring.

I could specify hunting grounds and give data to validate this but will not because of the following reasons.

1. These extra-ordinary trades, without my bad ones, would seem like I was bragging.
2. I do not want to alert the competition to their mistakes
3. People do not remember what you told them yesterday, if it proves correct; it was their idea all along. History even becomes much more fuzzy, if you were right, and much clearer if you are proved wrong.

Yes, Virginia there are inefficiencies in the market, suffice to say look at the well spring of the Government's heart to find them.

Ken Drees adds:

I was thinking in a similar vein. All this attention directed to monetary policy as a myopic focus on fixing the economy (and of course the markets) when policy and the structural problems that are slow to change remain intact. The market focus is thus back on the magician and not on the real risk which i would characterize as "outside shock of any kind". When the momentum is slowing and minus a policy change –for example if Obama said that he would keep the tax cuts permanent until 5 quarters of positive sequental gdp would emerge then that would be a market booster since it would allay fears and unknowns, call it the Obama targeted tax extension business relief act". But minus a real policy change, we are back in the soup on Monday morning. We are now at the mercy of outside shocks which could very well tip us into the damned double dip—but shock could be used by pols for blame-so maybe they like that route.

If it wasn't for "x" we would have climbed out of the recession already. The economy is weak and getting worse by all measures–what rabbit will they pull–a good pro business bunny or just another QE painted hare? At election time, it's the economy stupid, will be the song on the voter–time is running out for. Maybe its just too late this time for another trick?



jail for Clemens"Joe Maloof, who owns a casino said this about athletes: "they always think they can win. The great ones are the worst. It's as if they really think that odds don't apply to them." (relating to Clemens going to jail).

Russ Sears comments: 

From what I have seen of steroid use in athletes, the surest sign displayed for all to see, is the change of cockiness at the start of there use. It goes from stubborn determination needed to succeed at those levels, to self assured immortality/indestructibleness. This I believe is why steroid use only gives a athlete a temporary boost if he/she has already reached their peak without them.

This omnipotence includes superior intellect, especially over drug experts and authorities, that borders on the teenager's omniscience over authoritative parents. They have experienced something clearly beyond science or the laws possible grasp.

If libertarian views on drugs use is to gain anything but derision from the masses, it must address these self delusions drugs inflict, Both on an educational campaign on these self delusions. And make clear that while we may have some similar end goals towards freedom. The means to get this freedom would still place a heavy personal burden on these poor delusional souls. But perhaps a more enlightened view of their self assured self destruction, and a more productive repayment program for the heavy social and economic burden their deluded actions places on all of us. I hate to see Clemens go to jail, but he certainly owes us all a big debt for robbing the integrity of the game.

Nick White writes:

I would advise anyone interested in this topic to look at the before and after interviews of almost any professional cyclist convicted of doping offenses…take your pick of nation or language…there are hundreds….all from the sharp-end of the knife, not "also-rans".

I would also present - as exhibit A - the cocksure attitude of one particular, multi TdF winning "hero". I would advocate the reading of affidavits from staff, team-mates and others in forming your judgments.

Right now, I'll pull out this card, and wait for the ensuing vitriol.

My own two cents? The popular attitudes required of professional athletes is akin to being short gamma in a fast market. I would say for any individual involved in an activity where the best outcome that can happen is the keeping of the sold premium, there is going to be an element of delusion just to keep "sane" while the position is on….sports, business, life, politics, personal goals or philosophies. 

Russ Sears adds:

If innocence or guilt was really the question, then drug use in sports would accept evidence like any other crime. But it is assumed not just innocent until proven guilty, but that anybody that witnesses the crime or has knowledge of the crime has turned to the other teams, is jealous or simply got bought off…at least this is what the sports leagues/teams would have you to believe. See Nick's post. Now you have a crime that can not be reported, because you are assumed the guilty party more than the drug cheat.

Now if they really wanted to clear drug use out of baseball, they could enact a system like college's uses to keep their players from accepting a dime. If a team's player is caught breaking the rules, now or from the past, the whole team lose major league status for a year, and their players contracts must be honored but the players can choose to be free agent. Likewise for Olympic sports. In track it was well known that the Chinese women had the best runners by times, in the late 90's, but they were cheating and therefore did not get invited to real track meets. But if the track team would have been banned for a Olympics you can beat, the Chinese would have taken care of this before they were banned.

But as it is drug testing is the only way to "prove" guilt, despite its clear drawbacks.

If this type of system, giving punitive punishment to the whole team where the team really wanted to eliminate the users were in place, then your testing would be invaluable.



 I read an article "How Venice Rigged The First, and Worst, Global Financial Collapse" by Paul Gallagher. Whaddya think?

Bill Rafter summarizes:

Skimming the article one gets the opinion that the author blames most of the 14 Century economic failures on Venetian bankers rather than on the Black Death. 

Victor Niederhoffer writes:

We must hear from Stefan on this subject to get the truth, the whole truth and nothing but. 

Stefan Jovanovich commentates:

I am feeling damn near invincible this morning having had Susan's corn meal and flour drop bisquits for breakfast (also the 10-year old boy cat's favorites) so I am going to pretend that this opinion offers what Vic requested– "the truth, the whole truth and nothing but the truth". I have read Charles Lane's book , and I do know something about the period because my own faith comes closer to what is now called the Eastern Church than any other Christian sect; and I have always been curious about its fate. As Bill tactfully suggests, perhaps Black Death had something to do with the decline in European population that the essayist blames on those awful Italian bankers. The later Crusades and the mere Hundred Years war (which, together, had relative costs greater than WW II and the Cold War combined) may also have played a part. Blaming the bankers for the decline in food production that began around 1300 also seems more than a bit of a stretch. The farmers themselves thought that the end of the Medieval Warm Period was a more likely cause.

The author is right: there was a credit bubble. But like our most recent ones the bubble rose out of a dramatic reduction in the real prices for the things people lived by (computing for the tech bubble, household and home improvement goods from Asia for the consumer/real estate bubble). The rise of the Italian city-state bankers came from the dramatic declines in the costs of transportation and protein. (Archaeologists are finding that around 1100 Europe relatively suddenly went from eating freshwater fish to cod and other salt-water species.) These changes came from developments in naval technology and an outbreak of relative peace. The Italian bankers couldn't have been able to cheat poor King Edward if they hadn't had the means of getting themselves and their gold to London and back quickly without risk of having the Vikings waylay them.

The bubble continued and then broke because events moved against people and then as now, the bankers kept their mansions but most of them lost the better part of their fortunes.The essay assumes that there was ONE GIANT FINANCIAL VILLAIN without which the rise of benevolent national governments would have continued and everyone would have lived in peace and prosperity. This essayist blames the Venetians; others have blamed (who else?) the Jews. What is indisputable is that the bankers kept better books and minted more honest coin than the governments they lent to. How that allowed them to "control the Mongol Empire" and switch legal tender from gold to silver and back again remains unexplained. But, then, so does the modern notion that the Great Depression and the rise of the Nazis were mostly a function of the New York Fed's misadventures with the money supply.

The costs in blood and treasure of WW I, the influenza epidemic and the Tokyo fire and earthquake and the Mississippi Flood of 1927 were entirely incidental. What made people stretch so far for yield that they were willing to invest in match monopolies in the 1920s is the same cause that brought people to do serial refinances with the Bardi, Peruzzi and Venetian banks. Events had left most of them without the incomes they had come to expect so they borrowed and risked more and hoped to make it back when the weather changed and they won the next war.

Phil McDonnell adds:

I have to side with Bill Rafter on this. Arguably the Bubonic Plague may have begun in Europe when the Mongol Golden Horde laid siege to the nearby Genoan city of Kaffa in 1345. The siege was only broken when the Mongols were too badly stricken with the plague and forced to go home. Within a couple of years one third of Europe had died.

I think Plague and Mongols invaders would have a strong chilling effect on trade. Conversely, a banking panic cannot cause the Plague.

Steve Ellison comments: 

One of my pet peeves is the overuse of impenetrable equations in
peer-reviewed finance publications (and I think I'm pretty good at math;
I can still occasionally help my son with his calculus homework). To
cite a recent example, it would not seem to require calculus to explain
that spending on durable goods falls faster in a recession than other

Russ Sears replies:

Mr. Falkenstein's argument should be applied to all modeling, not just economic modeling. Even in a field with time tested product pricing models as actuarial science, I have found time after time that to truly add value, you must ask "where is the model blind spots?" People drove a convey of trucks through the MBS model's blind spot in pricing and ratings. And if left to their own devices FASB mark to market models would have driven all of us to a great depression. As I said at the time, (see A modest Proposal to the SEC)

They were blind to a liquid assets that can quickly turn illiquid and have huge liquidity premium on a mark to market model.Exploit the loopholes, and if nobody ask if this is simply a blind spot that you are exploiting, you will look great on paper like AIGFP… for awhile…until it become apparent that your resource allocation has a divide by zero error in it.

Modeling and regulatory modeling in particular, have replaced the central planner of the failed communist system.



Picture book ad for HPBack in about 1994, my wife and I started investing in individual stocks. We did not have much to invest but if we had a couple hundred from say a race won or a tax refund we would research what to buy. We would go to the local library and look up the latest issue of Value Line, to come up with our top ten prospects. Then we would look at their recent statements compared to its competitors to screen out the candidates. HWP was one of our initial purchases,(before the COMPAQ merger ticker switch to HPQ).

While we made several mistakes on other stocks, HWP initially was a great buy., as were most any tech stock back then. Still HWP bet the QQQ.and IBM for first few years. While we had a good initial screening plan, we made several beginners mistake. We had no exit strategy, except to rely on our broker. Further, once we had about 10 stocks we simply started adding to the over performers buying highs.

Then in July of 1999 thing quickly changed with the announcement of Platt's retirement and Carly Fiorina as the replacing CEO. The market voted their disappointment with their feet. Quickly the over performance turn to underperformance compared to QQQ. Meanwhile IBM had started addressing it problems and was out performing by about 96. And of course in hindsight I would have been much better to sale and switch to IBM in 1996.

But HWP was my second best stock, so I kept buying. Then of course the QQQ dropped in 2000 and 2001. But in 2001, to add injury to insult Fiorina got into a proxy fight with the founders son, a board member over the Compaq merger. I kept voting against the merger, but kept getting packets asking me to change my vote. Once they got enough votes by the big mutual funds they finally merged. This of course did not improve things. Finally, I got the message and sold in 2001.

Carly was out by 2005, by shareholder accounts a failure, compared to the QQQ their peers and by price the stock had lost half its value.

Hurd brought HPQ back to over performing. But with his ouster, the stock still has made up for Carly underperformance, but has given up the long term over performanc (to QQQ) of his and Carlly combined tenure.

The moral of the story, is perhaps Platt, Carly, and Hurd or any other CEO is not worth, the billions that is lost by the market. But the Board is telling the market something. Are these isolated events? These stumbles would seem to be predictive of future mistakes or perhaps predictive of simply poor oversight and contempt for the shareholders?

Further, while mergers, may not subtract value, such as Intel, in and of themselves, but do they signal poor future decisions and similar contempt for the shareholders?

Has there been a study to see if these CEO drops are actually predictive of the incumbent CEO tenure? And has there been a study to see if these bad merger announcements, ones that the sums of the parts are clearly negative, signal future underperformance.

Victor Niederhoffer says:

Russ's post about his "layman's" experiences with HPQ should be on television. It's a perfect and useful story for our times. Everything the fast runner does is pitch perfect in my opinion.

Rocky Humbert replies:

There is abundant academic research which shows that most mergers don't create value, particularly in technology. However, the results are skewed by a handful of large deals — and don't give consideration to whether a company is buying a technology which can be exploited — or whether it's some sort of obtuse synergistic strategy proposed by investment bankers and ratified by megalomaniac CEO's. It doesn't take a genius to realize that if a buyer pays a 30% to 50% premium to the market for an acquisition, it's a difficult hurdle to overcome [unless the target was too cheap before the bid.] Importantly, these studies can't answer the question "what if"– since there are an infinite number of alternate scenarios which might have been even worse than overpaying for another company– especially depending on the timeframe. There's also a Wall Street meme at work here. Back in the days of Cendant, every deal "created" value– even though it was just smoke-and-mirrors.

You ask whether an academic has studied "whether the market's initial reaction is predictive of the long term success of a merger," and I'm sure there are papers on this– and I'm also sure that the papers are useless for investors since the forest gets confused with the trees. Case in point: The market "loved" the AOL/Time-Warner deal. Enough said.

There are a lot of papers about CEO departures. Here's one. It's EXTREMELY rare for a CEO to depart after good stock performance (except for retirement, health, etc.) I generally don't pay attention to CEO's unless I consider them to be lazy, unethical, inconsistent or undeserving of their job.

Lastly, I should disclose that since 1997, I did not invest (as distinct from speculate) in technology stocks. Putting the business/innovation/franchise aspects aside, it's only in the past year that certain technology stocks have finally reached valuations which can generate double-digit returns for investors with a static p/e assumption and 3-5 year time horizon…

James Goldcamp comments:

I took Rocky's post to imply something I also believe to be true. Much of a CEO's (perceived) performance is the result of random factors and timing and in many ways are like the ephemeral economic reports, to which chair often refers, that get revised (just like Neutron Jack, Chainsaw Al, and the ousted CEO's predecessor get revised down years later after being previously uniformly lauded). Also, CEO stories probably cause to much focus on the narrative, rather than the underlying business fundamentals, causing mis-pricing of securities when there is excessive negative or positive headlines regarding the executive (to which Rocky has alluded with a prior post about the departure of HP's CEO and questions of how many B's the CEO is really worth).

I didn't take from Rocky's post that CEO's are overpaid, though I will go as far to say that in my opinion directors of public companies have not (in general) been sufficiently diligent with compensation and insuring an appropriate alignment of interests between shareholder and management, especially with respect to cases where said executives do not have "skin in the game".

Disclosure: I was a buyer of shares in HPQ and INTC this week. (among other things)



 The solemn and ominous sounding bear cultists are bringing out the flaming hydrogen ballons. Several mentions today of the Hindenberg Omen– not talked about on this site since an April 18, 2006 mention (at a time when the market found helium and moved up roughly 20% over the next year). Nattering nabobs of negativism…

The traditional definition of a Hindenburg Omen requires that:

The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 79. (Source) The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day. The NYSE 10 Week moving average is rising. The McClellan Oscillator is negative on that same day. New 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

Paolo Pezzutti comments:

More about it on this chronically bearish site. To me it looks like a nostradamus prediction more than a pattern. Bears are trying to find new ammunitions…and last week was encouraging.

Victor Niederhoffer comments:

I can't tell if everyone is kidding or not about Hindenberg. But in edspec, I show how a run of 25 in one direction is not inconsistent with randomness, and Birinyi turning points and come up with an infinitely better indicator than Hinden.

Marlowe Cassetti replies:

But The Chair should admit that Hindenberg Omen has such a funereal appeal, an air of foreboding. Rather like the Mayan 2012 Prophesies. 

Russ Sears comments:

But could you come up with a better marketing name? It has great name recognition and implies that they know something that others do not, but will soon after the fact think it should have been obvious. It would seem the splashier the name of this or that indicator in the media, the more desperate their position and need to bring in the masses to offload their positions. May be profitable if one could quantify such an inverse correlation. 



 One of the most common and one of the most intense irrational fears is the fear of public speaking. Even the best speaker can lose his cool giving a spontaneous speech in a high stress situation, say at job interview or meeting the in-laws for the first time (I believe they make movies about this one). On the other side however, one of the most common forms of self-destructive behavior is saying too much. I believe everybody has had an experience where they have said something in anger, spite, arrogance or some other irrational momentary emotion, destroying or badly damaging a valued relationship. Many of the most miserable people I have known are constantly spitting out acidic words, chipping away at others, often at those beaten down souls closest to them.

I've have been going to a Toastmasters club most weeks now for over a year to help me overcome my fear of public speaking. And while I believe that the Toastmasters meetings were helping me, perhaps I made my biggest breakthrough once I realized that for me, and perhaps for most people, the problem boiled down to one word. This word, which Aretha Franklin spells for us, is r-e-s-p-e-c-t. We all crave this in our relationships.

The reason that respect or acceptance and esteem can cause such irrationality is that we develop many of our conditioned responses when we are toddlers and kids. Our ideas of respect get greatly distorted as a kid. It is almost impossible for a kid to understand that their parents reactions may have nothing to do with them. Further given that parental/adult acceptance is seen by a kid as such a necessity for their survival, many distorted and warped views can develop.

Finally, much of what makes a child be held in high esteem is not the same things that make people admire an adult. Sometime they are even the opposite. Take for example our grading system and testing. We hold the kid that makes the fewest errors as the best and brightest. This training can cause several distortions in a kids view of acceptance. For example, kids may come to believe:

1. Mistakes are always bad. Overcoming errors is not possible. But as adults we find the most successful are those that failed and got back up. We admire those that overcame though odds and many failure

2. that they should only worry about what is tested. Curiosity beyond the known is not encouraged. But as adults we admire the discoverer, the explorer, those that do not accept the standard answer and therefore come up with a better one.

3. Excelling at the subjective is a waste of time. But as adults we admire the artist, the actors, the great orators.

4. Kids are to be seen but not heard or not to speak unless spoken to. But many of the highest paid jobs are for the salesman.

5. Respect adults and discount a child's understanding.

Many people are like me, they are fine talking if they are sitting down. But make them stand up and suddenly the primitive brain kicks in… and many of these distorted views from childhood on acceptance impulsively take over. 

It seems to me that much of the Toastmaster's system is designed to get you to rethink and recondition much of that training you received as a child. Everything is critiqued, however, all suggestions for improvement are supposed to be sandwiched between praise. At each meeting everybody's grammar, filler words (such as "um", "ah" "and" or "so") are counted and everybody is timed. Roles are assigned to each element of the evaluation (timer, grammarian, wordsmith, etc.), and before each evaluation, they are to explain the goal in their critique.

 The speeches for the day each have a specific purpose to help the speaker improve. Usually this purpose is rather subjective, such as "vocal variety and quality" or "getting to the point". Every meeting has chances for impromptu speaking, standing up and giving a 1-2 minutes speech on the spur of the moment. Even the meetings themselves are critiqued.

The overwhelming implication to all this is that improvement is the most important thing, that any problems can be overcome, and to build on what you did well. I was seeing some improvement in my fear factor as I went to these meetings. However, I think for me the big breakthrough was realizing not just that these fears were irrational, but that they came from my distorted views of respect, acceptance and esteem developed as a child. Not that my parents meant to teach me this, but this is what often develops, within the simple mind of a child, trying to interpret the motivation and meaning of an adult's training.

Only once I started going through my fears one by one and seeing them as an adult did these fears dissipate. I think I stopped believing in these fears. Instead I saw them as "a" childhood interpretation of what I was taught, when there were really many, often much more valid possibilities than just that simple one sided interpretation. Often what I considered my parents "response", was simply AN interpretation, one of many, that I developed as a child.

Another interesting thing I learned at toastmasters concerns body language. For instance, for the impromptu speech, I have learned to listen closely and intently to those asking the question. I consciously direct my body language to suggest that I am hanging on their words. Then when I respond, I relax. I listened closely to them so I have "earned" their attention. I repeat their question, often putting it into my own words to show that I got the emotional part of the question they were conveying, not simply verbatim rote repetition. It shows I cared. Hence as equals they should listen to me. Why should I fear them being bored or inattentive?

It would appear that ramblings and shouting are also an effort to gain respect. General McChrystal spouted off to the journalist apparently because he felt slighted by Obama's "indifference". Understanding these triggers and detonating them before they explode can help control the tongue. For example, if you are in a heated argument standing up, try sitting down. Bring them in closer. If they are a loved one try holding their hand. In contrast, if you are confiding too much, stand up. Distance yourself from them. Of course seeing these situations for what they are in the moment rather than after the fact can be difficult. Yet, if these kinds of situations seem to occur too often, perhaps reconsider whether your motivation and view of respect and acceptance might be a simple child's interpretation and consider how it might affect the situation.

Likewise one speculates that such recurring problems in trading and investing could also be improved by reviewing your childhood understanding of how to gain respect and acceptance. One also speculates if standing to make a trade encourages one to be more aggressive, while sitting more passive, and whether other body postures could help. Say when you are closing a trade, try standing to be more aggressive.

George Parkanyi writes:

An aha moment for me about being self-conscious came in my early twenties at some point, when I realized that people are far more worried about what others think of them than what they happen to be thinking about you. Their pre-occupation with themselves is deep and permanent. Their pre-occupation with you highly transitory– especially in an arms-length engagement such as a public speech. Also, people will tend to be empathetic. If you slip up, most will not be thinking "what an idiot!" but rather "I'm glad it's not me up there".

Once in a while I'll see a guest on a business show that looks really nervous and is clearly struggling. I start to feel uncomfortable for that person, mentally cheering them on, thinking to myself "come on, get it out, get it out…"After that, for me public speaking was more about being prepared, and finding ways to keep the audience interested and engaged. If you do have to wing it, stories and anecdotes are a good way to come up with something on the spot. Usually you can relate something from your past to the current situation. People generally love to hear stories. 

Craig Mee adds:

Also someone mentioned to me years ago, "just think you're talking to your best mate" But preparedness seems to help…Tim Ferriss is never far off the mark. His article Public Speaking: How I prepare Every Time is great. 

Russ Sears responds:

 Yes, understanding the truth that people are not that focused on you because they are thinking about themselves helps. However, often when the fear is impulsive, simply knowing what is right is not enough. Think of some common phobias: fear of heights, germs, etc… most often the phobic knows the fear is irrational. People are great at holding two incompatible ideas in place and impulsively choosing the irrational one to act on.

What I am suggesting is that you kill the root of the impulse– your distorted belief that is causing the fear. I am suggesting you do this by re-interpreting your childish beliefs caused by a childish interpretation of the threat. To do this you have to dig deep and figure out what your fear is. Is it making a mistake, looking stupid, indifference or several other common fears?

Then you re-interpret that childish belief, for example, that adult esteem = survival, from the adults perspective. Once this is thoroughly done, what I found was what was once held as a "truth" is shown as an immature interpretation of the situation. Hence using both, killing the old belief and giving a new one in its place can end the impulsive fear.

Further, I am suggesting that using this dual method, can improve many areas of our life. Perhaps most if not all of the hubris in trading may stem from similar simplistic childhood misinterpretations of the situation.

Ken Drees writes:

Ellen Degeneres doing standupTaking a theater course or a stand-up comedy training seminar may help by pushing one's self into deeper water and then one could recede back and take a public speaking course to put structure around the process of public speaking. I am lucky to be gifted in public speaking, but scared of stand up comedy–which I think I could do but I am frightened of people not laughing, and thereby having no defenses against ridicule, or of an unloving crowd staring back at me and not laughing.

If I was to pursue it, I would do a lot of structure: rehearse, tape myself, fine tune, do small test groups, ask for feedback–seems like a job now.

I have a tendency to become red-faced when embarrassed or in some terrible stressful moment. If this happened during a routine –oh no. I would have to come up with some sort of routine if it happened–draw the audiences attention to the red face and use it somehow as a joke routine–turn the disaster into something funny. 

I remember playing in a poker game for the first time in multi years (3-4 years ago). There was retired cop at the table (9 or 10 people) and I was bluffing in a showdown hand–I could feel the heat coming into my face and knew that I may get called because of it. The guy folded to me and the cop from the other side of the table said "you gotta do something about that red face of yours" then everybody stared at me and then everyone busted up laughing.

The cop said that in interrogation rooms he learned a lot about lying. Needless to say as time went on and practice makes one better, the red face doesn't appear at the table anymore. 

Russ Sears replies:

Surprisingly, people say I am funny. I seem to have little problem coming up with a spontaneous humor during a speech. I have found that if the audience understands that you yourself are the biggest target for your jokes, that you do not take yourself too seriously, they are much more willing to give you liberties on almost anything and find it funny. As Ken implies making fun of yourself, almost always gets some attention, if not laughs.

As far as bombing goes, the best comics sometime threw in bad jokes on purpose, just so they could make fun of the hole they had dug themselves into. However, Toastmaster's club is doing a humorous speech contest and we will find out how funny I really am.

Brett Steebarger comments:

It's a very interesting topic. Where I might differ from Russ is that many of those irrational impulses are less the result of distorted beliefs and more related to emotional imprinting that bypasses critical, rational awareness. Edna Foa from U. Penn has done very interesting work in this area that is relevant for those engaging financial markets. 

Russ Sears responds:


One is impressed after reading about Edna Foa's work, in which significant change can be measured in Vets suffering from PTSD, in only 12 sessions, by getting them to focus on the emotional events and the trauma. How does this relate to much smaller "trauma" but perhaps, much more frequent conditioning. Say taking tests weekly at school, and the learned emotional implusive response about exactly how to please the teacher and parents.

Does focusing on the emotional take less time to "correct" the irrational impluse, because the "trauma" is not intense at all? Or does it take more effort because the conditioning was wide spread and reinforced often?

Further, what does such ingraining in children teach a parent to do? Make sure that the child knows that your esteem for them is based on a well rounded education with plenty of real life experiences?

What would you recommend for my girl who upon entering high school last year is showing clear signs of test anxiety, especially in Math?



Clever HansThere is the famous story about the horse that could do basic math, but was really picking up on the subtle clues of the professor that "thought" him when to stop stomping the hoof. I suspect this was what Paul [The Octopus] was doing also.

However, intuition comes with experience. Intuition can be counted, to help figure out how you "knew" or if it pure personal biases and random.

Marlowe Cassetti comments:

Isn't that what they refer to as self confirmation bias? I know someone who showed me how using Stochastic Oscillator (a BS misnomer) of several time spans one can make great profits trading options. When I point out some glaring exceptions that he conveniently overlooked, he counters that no indicator is perfect. Believing is seeing, but don't quit your day job.



 At work I have been helping coach a friend who has turned his future around since he started exercising regularly.

At over 300 pounds he hit his breaking point with stress of work, and the stress of his only child turning into a normal teen had turned his life into a vicious loop of no sleep, despair and poor health. He had a blunt talk with his doctor. He started lifting weights and doing cardio. He has lost over 50 pounds over 2 years and has about 20 to go. Recently he had an injury to his back not related to exercising but had to stop lifting. But now he has taken lessons to learn to swim and is swimming every day and back on track.

He got most of his specific advice from his weight coach, but I was helping him with his cardio work and just keeping him motivated in general. He went from never being on a competitive team to an athlete over these two years. Before his back injury he was doing amazing weight workouts. Now that he sees the benefits from exercising he is hooked on it and has been thanking me for helping him through those hard first days, when the road seems impossibly long. A few things he has repeatedly told me he learned from me are:

1. We are most vulnerable to self sabotage when we are feeling most stressed. Recognizing this is half the battle of overcoming your self defeating excuses of why you can't. But the reverse is also true, stress leads to feelings of hopelessness and excuses of why we can not possibly exercise and do anything which bring more stress. He now spots those sub-conscious sabotages. I think what he likes most about lifting is how you can surprise even yourself when you think you can't and positively encourage yourself.

2. Do it when you can. Always look for that window of opportunity and the opportunity that is there, not the one you ideally wish for. He was really down when he had to stop lifting, but was grateful that he did it while he still could. Now he sees how taking advantage of those small opportunities that you do have leads to bigger and better things. Dropping his weight and staying in shape now has his doctor hopeful that he can return to a modified lifting program again. People think that if they try and fail they will have a lifetime of regrets, but most people end up having bigger regrets thinking back on missed opportunities. If you try and fail, you can always be grateful that you tried when you could.

Scott Brooks lectures: 

Too many people in our great country are unwilling to accept responsibility, and there are way too many people that are willing to let others do most, if not all, of the work. There are certainly far too many people that are unwilling to lead, let alone exercise the qualities of a true honorable, virtuous leader. But far too many people lack any discernible talent beyond being absolute experts at finding the "Perfectly Legitimate Excuse."

Al Corwin agrees:

The larger the bureaucracy, the more you can survive as an excuse maker. Small organizations can't tolerate excuse makers because one excuse equals one failure, and that can bring down the organization. Only large organizations can tolerate excuses, and the excuses often even [destroy] them.

However, I am not alarmed by the pursuit of the legitimate excuse. Excuse makers are my competitors. I just don't want to slide into their camp myself. I've been there and probably will occasionally go there again, The perfectly legitimate excuse is just for oneself. When you try to pass it to others, they will almost always see it for the counterfeit that it is.



Starling flockHere is an interesting study I read in Wired. I wonder if anything useful can be applied to markets that suddenly move en masse with funds buying or selling in unison as a result of an outside stimulus?

Amazing Starling Flocks Are Flying Avalanches

To watch the uncanny synchronization of a starling flock in flight is to wonder if the birds aren't actually a single entity, governed by something beyond the usual rules of biology. New research suggests that's true.

Mathematical analysis of flock dynamics show how each starling's movement is influenced by every other starling, and vice versa. It doesn't matter how large a flock is, or if two birds are on opposite sides. It's as if every individual is connected to the same network.

That phenomenon is known as scale-free correlation, and transcends biology. The closest fit to equations describing starling flock patterns come from the literature of "criticality," of crystal formation and avalanches — systems poised on the brink, capable of near-instantaneous transformation.

In starlings, "being critical is a way for the system to be always ready to optimally respond to an external perturbation, such as predator attack," wrote researchers led by University of Rome theoretical physicist Giorgio Parisi in a June 14 Proceedings of the National Academy of Sciences paper.

Parisi's team recorded starling flocks on the outskirts of Rome. Some had just over 100 birds, and others more than 4,000. Regardless of size, the correlations of a bird's orientation and velocity with the other birds' orientation and velocity didn't vary. If any one bird turned and changed speed, so would all the others.

In particle physics, synchronized orientation is found in systems with "low noise," in which signals are transmitted without degrading. But low noise isn't enough to produce synchronized speeds, which are found in critical systems. The researchers give the example of ferromagnetism, where particles in a magnet exhibit perfect interconnection at a precise, "critical" temperature.

"More analysis is necessary to prove this definitively, but our results suggest" that starling flocks are a critical system, said study co-author Irene Giardina, also a University of Rome physicist.

According to the researchers, the "most surprising and exotic feature" of the flocks was their near-instantaneous signal-processing speed. "How starlings achieve such a strong correlation remains a mystery to us," they wrote.

Read More

Russ Sears comments:

 It would seem to me that "scale free" correlation and one bird following another bird is a fairly parallel description of what happened with mortgages and the banks.

When regulators encourage investing in subprime, quasi regulators like the rating agencies turn a blind eye escalating risks outside their models and encourage economy of scale… no matter the scale and early entries appear to print money and apparently know where all the regulator stuffed bird feeder are….But unlike the flock size the markets all have their limits on supply and demand no matter how "synthetic" you make them it still comes down to this reality.

I will leave it to the reader to decide what this has to do with trading systems, risks managment and Mark to Model apprasials during booms and bust in home ownership.

Pitt T. Maner shares:

StarlingI found this unusual story from the UK, a "flight to safety" disaster:

A flock of starlings which died after they crashed on to a driveway could have confused the drive's shingle with reeds they could land in or might have been trying to escape a predator, experts suggested today.The flock of 76 birds crashed into the ground because of a "fatal error" in their flight, according to an inquiry led by the Veterinary Laboratories Agency (VLA) wildlife group.

They could have crashed as they tried to escape a predator such as a sparrowhawk or become confused by traffic, light reflections or noise, experts at the VLA said.

The VLA also said the shingle on the drive was a similar colour to reed beds and the birds could have thought they were descending fast into tall reeds when they hit the ground.

The agency, along with Natural England and the RSPCA, carried out an investigation into the massdeath of the starlings after dead and dying birds were found littered across a garden in Somerset earlier this month.

Onlookers heard a whooshing sound before the birds were spotted falling from the sky and on to the driveway of a house in Coxley in good weather conditions on Sunday March 7.

Investigation of 60 birds found they were in good condition with no broken wings, legs or skulls but a number had damaged beaks and blood in their mouths.

Read more 

Jeff Rollert comments:

I suspect that the lead birds are self selecting, such that their responses are a nano second faster than the others. I've seen some of these models, and the real life "lead" birds never fly in a straight line.



 Sunday morning I woke up at 6:00 to run a 10k race that ended up with me taking a short ride in the ambulance to the trauma center after passing out from dehydration.

There was a 5k race and a 10k race part of OKC Corporate Challenge. The 5k runners just run 1 loop and the 10k runners are to do 2 loops of the course.

It is always hot and humid for this race. This year it was even more so than usual. For some unknown reason they did not have water on the course. I went out what I thought was a reasonable pace and kept up with a former college runner 3 or 4 years out of college, but he was doing the 5k. The first loop was only about 18:30.

 I made it to about 6 miles where things started to go terribly wrong. First I apparently turned off Lincoln onto 13th street and was suppose to turn on 10th for the final block. I don't really remember why I missed this turn but deliriousness and wishful thinking do not mix well. Soon after I remember falling down scraping my knees. I got up thinking I only had 1 block to go, tried to continue. I don't think I made it more than 10 meters before I was down again. By now I my stubbornness has kicked in and I am determined to finish. But remember wobbling a few more steps and went down a 3rd time. And got back up. The fourth time I do not even know if I took any step, but I remember thinking I better try walking in the grass, because this falling down was killing my knees. I do not really remember going down the 4th time. From the lump on my head I must have hit my head on the curb. But I do remember calling for help, and could not understand why nobody was coming. I thought I must have been less than 100 meters to the finish. Luckily for me on the corner of 13th and the Lincoln is a hospital and a nurse saw me laying in the curb. Next thing I know I a cursing the medics for not letting me finish and strapping me down.

In retro-spec there were many things I could have done that would have got me through the extra 2/10 of a mile. First I woke up with a little intestinal problem and should have called in a sub. But I wanted to run a 800 meter leg of a 1600 m relay at noon and dropping out meant being ineligible for the relay. Second I drank Gatorade that morning, deviating from my normal routine of drinking only water that close to a race. The nurse said my blood sugar was over 300. Third was the day before. I rested up on my running, but mistakenly thought this meant I could do other activities. I spent most of the morning working outside in the heat. Then I went swimming with my daughter for 30 mins that evening. Also I had Pizza for supper. Each of these dehydrated me. Finally and perhaps most important was I went out too hard. From the turn around, me and the 5k winner had over a minute and a half on the other 5k runners, and who knows how far ahead I was from the next 10k runner.



Here is a check on the evolution of "Sell in May". SP500 Nov1-Apr30 mean returns were tested against zero, by decade ("00" = 2000's, "90"'s, etc):

Test of mu = 0 vs not = 0

Variable   N   Mean   StDev   SE Mean     95% CI            T      P
N-A 00    10  0.0105  0.0912  0.0288  (-0.0547, 0.0757)  0.36  0.724
N-A 90    10  0.1154  0.0871  0.0275  ( 0.0531, 0.1777)  4.19  0.002
N-A 80    10  0.0830  0.1055  0.0333  ( 0.0075, 0.1585)  2.49  0.034
N-A 70    10  0.0648  0.1233  0.0390  (-0.0234, 0.1531)  1.66  0.131
N-A 60    10  0.0576  0.1246  0.0394  (-0.0314, 0.1468)  1.46  0.177
N-A 50    10  0.0790  0.0841  0.0266  ( 0.0188, 0.1392)  2.97  0.016

All positive, 3/6 decades significantly greater than zero.  Here is the same test for May1-Oct31:

Test of mu = 0 vs not = 0

Variable   N     Mean   StDev   SE Mean     95% CI             T      P
M-O 00    10  -0.0152  0.1514  0.0478  (-0.1235, 0.0930)  -0.32  0.758
M-O 90    10   0.0442  0.0657  0.0207  (-0.0027, 0.0912)   2.13  0.062
M-O 80    10   0.0429  0.0979  0.0309  (-0.0271, 0.1130)   1.39  0.199
M-O 70    10  -0.0272  0.0683  0.0216  (-0.0761, 0.0216)  -1.26  0.240
M-O 60    10  -0.0064  0.0760  0.0240  (-0.0608, 0.0479)  -0.27  0.794
M-O 50    10   0.0414  0.0871  0.0275  (-0.0208, 0.1038)   1.51  0.166

3/6 decades were negative (however not significantly different than zero), 3/6 were positive (only the roaring 90's significant).

Russ Sears writes:

Having heard "sell in May" for eleven years, it is time to put paper to pencil. For the S&P index,

First day, whole mnth, month, year

1.30%,        ?        5      2,010  

0.54%,      5.17%  5      2,009 
 1.70%,      1.06%  5      2,008 
 0.26%,      3.20%  5      2,007 
-0.41%,     -3.14%  5      2,006 
 0.46%,      2.95%  5      2,005 
 0.92%,      1.20%  5      2,004 
-0.07%,      4.96%   5     2,003 
 0.88%,      -0.91%  5     2,002 
 1.35%,       0.51%  5     2,001 
 1.08%,      -2.22%  5     2,000

First day 9 positives, average 0.73%, worst -0.41% 2006, best 1.70% 2008,  Cumm. Binomial Dist 99.4%

Whole month 7 Positives, average +1.28%,  best 5.17% 2009, worst -3.14% 2006, Cumm. Binomial Dist 94.5%

No wonder this dogma seemed annoying.



Coach WoodenEvery sport has those figures that are great performers but use the prestige and honor that comes with that distinction to degrade the sport and bring it down and trash it in a feeble attempt to prove that they are better than the sport. Some simply never learn how, as Coach Wooden teaches, "Team is greater than self."

Some are just cocky jerks that are great talents but troubled souls nobody can live near. Often these guys are publicly praised, but those who know the sport despise their cockiness. Their cockiness is an open secret. They are the OJs of their sport. Others are cheats, like Marion Jones, living a lie. While there is no doubt she was better than her competition, she took illegal short cuts to get that edge. They knowing how to remain one step ahead of the testing.

In many sports judges can be either outright bought or simple out spent or wined and dined. One of my fondest treats to my second tier national status in marathoning was being on the inside to learn what some of the stars of the sport were like. While most were wonderful people you would love your daughter to marry, the few who were jerks dominated the inside conversation and also often the press. To some this may appear to be idle gossip and petty jealousy, but to those of us that loved the sport like I did this was deeply troubling talk. These people were destroying something we loved… it was not idle chatter. To get ahead in the sport they no doubt paid a great sacrifice, but they ruin it for the rest of us. Many also paid a great price to try to get ahead but were not labeled "a winner." No doubt in my mind that the same applies to the sport of investing… however, it has many more ramifications than a simple game, and this needs to be vetted and discussed beyond the win/loss scores.



The Saratoga Tree NurseryI spent the weekend planting 150 baby trees on our property.

The trees of Westchester and Fairfield County suffered mightily during the spring storms, and many of our wealthy neighbors purchased large shrubs and full-grown trees to mitigate the aesthetic damage. One neighbor's estate now looks like a Christmas Tree farm.

In contrast, I planted dozens of random six-to-nine inch tall native species seedlings — and for the price of two Home Depot shrubs, I left a bequest to future generations. Even if there is only a 10% survival rate, it will provide an awesome return-on-investment.

The NY State Department of Environmental Conservation runs the Saratoga Tree Nursery, and since 1902 has produced and sold more than 1.6 billion seedlings at a low purchase price.

Surprisingly, NY State says that the major cause of seedling mortality isn't wildlife or competing plant species. It's lawn mowers.

For more information about this excellent resource, go here.

Other states probably have similar programs.

Scott Brooks comments:

 Although I'm not expert, here are a few tips from a guy who's planted more than a few trees in my day.

I don't know what it's called, but it looks like an inverted cereal bowl that you put over your tree and slide it to the ground (bowl side down). This keeps sunlight from hitting the ground under the "bowl" and thus keeps weeds and grass from growing right around the base of the tree and competing with the tree for water, nutrients and sunlight.

Use a "tree tube" (that's what I call the) and put them around the tree to protect them from wildlife eating them. It also makes it easy for the person on the lawnmower to see them. It also doesn't hurt to tie a piece of surveyors tape to the top of the tree to make them easier to see.

Fertilize the hole you are going to put the tree in, then fertilize around the drip line, but don't over fertilize (NB: small seedlings won't have a "drip line" yet, but when they do, fertilize around the drip once or twice a year). Then dump a bucket of water on it. If it's been particularly dry, feel free to water the seedlings.

Don't be shy about weed whacking around them to knock down any weeds or grass.

Rocky Humbert adds:

If you have a bad back, they sell a device that allows arborists and forest rangers to plant seedlings while fully erect. And if you are planting thousands, you can rent a mechanical planter.

Nigel Davies comments:

Yuk. 450 minutes on one's knees is precisely 30 minutes worse than being a pawn down for seven hours…

Russ Sears writes:

Indiana has a similar program. When each daughter was young I planted several hundred trees– 700 trees in all on our 2 acres. Walnut and oak mostly. Pine trees were planted between rows of hardwood to make them grow. By the time we sold the house the hardwoods were just beginning to over take the smaller pines. The kids loved marking time by the size of the trees as both the trees and they grew the 12 years we lived there. It also turned out to be profitable as the buyer said they wanted the house for the trees. Plus, on visiting an old neighbor, each neighbor bought several large trees from them. A super Walmart moved behind them bringing with it multiple fast food joints, etc. This ruined the lovely view, rustic trails and the low traffic runners love, which were the things that made me buy the place to begin with. It left an island of nature that hides the modern development. 



Inigo v. WestleyThe Princess Bride Swordfight Scene shows a gentlemen's prelude, and how concealed ambidexterity can be a secret weapon, but can also backfire.

You will see Inigo Montoya very chivalrously allowing the Dread Pirate Roberts, aka Westley, to catch his breath after scaling a sheer cliff wall before beginning their swordfight.

Then as concealed ambidexterity is applied and revealed by both fencers one after another, the tables turn and turn yet again. But really the chivalrous Spaniard's eventual loss was sealed the moment he allowed Westley to clamber up over the cliff edge.

Chivalry, malevolence or (unjustified) pride in one's abilities?

Chris Tucker adds:

"The Princess Bride" is a movie that Aubrey simply must see. I love this movie; so do my kids. We find ourselves quoting Inigo at work frequently. "I do notta suppose you coulda speed things up?" or "I'm going to do him left-handed" or "You know what a hurry we're in!" or "It's the only way I can be satisfied" or "Inconceivable!" or "You keep on using that word. I do notta think it means what you think it means." Mandy Patinkin is priceless!

Bill Rafter adds:

"Never try to outwit a Sicilian," and "Do I have to get a new giant?"

Russ Sears writes:

My high school aged daughter tells me it is quoted all the time around her clique. Quoting it is the inside joke/ litmus test for those with verbal IQ versus those clueless.



Freedom of Speech by Norman RockwellMy brother Stan and I went to many different schools. I was the 'new kid' at 12 different schools, my brother a few more. Plus as preacher’s kids, whose father was always trying to help new or struggling rural churches, we went to countless different churches. Both of us were scrawny and lanky, dressed as only devoted fundamentalist Baptist parents dressed their kids in the 70’s; all the bullies came out to be our welcoming committee. But they had to go through my big brother first.

In the tradition of big brothers, he was the only one that could beat me up. What none of these bullies knew until it was too late: Stan had seen this all before. Stan may have been tall and skinny but he was a brawler. Those that were not as spontaneously ingenious in the heat of the battle, may say he did not fight fair. But Stan after surprising his attackers by his swiftness, skill, cunning and fierceness, always gave them a second chance and let them up.

One of his memorable fights, Stan let the Head Deacon’s kid go after breaking his fingers in response to being attacked behind the Church. The next service the Deacon's kid brought his fat friend twice Stan’s size and cornered him in a Sunday School room. Stan broke the Deacon’s kid’s nose with a chair, then cracked a few ribs and kneed him in the groin. The fat kid seeing the results quickly left. Stan would always go after the leader and before the followers could pile on, he would in seconds show there was hell to pay.

Perhaps it was part chivalry, or perhaps he felt sorry for them falling for the baited ambush. After all these were not the truly dangerous hardened criminal inner-city street thugs. These were small town rural farmer kids, bullies that only thought they were tough (this was before small towns become havens for poverty, drug infested and hide outs for small time gangs).

But he told me a couple times afterwards that the second fight is when the real battle began. He knew the bullies could not walk away even for their own good. They would not admit defeat to a skinny outsider, until real damage was done. It was only the second battle that would win their respect. It was only then would they accept him. Stan would often make friends with those bullies early on, or sometimes they simply accepted a stand-off. Hurting them, once, no matter how bad, would escalate the battles. It was only if you could increase the cost by several order in magnitude in the second battle would there be lasting peace.

My big brother was respected by these kids and I never really had to deal with the harassment. No peer pressure to smoke or do drugs, because Stan let them know I was off limits.

This toughness may have helped him survive when we did finally move to the big city, Kansas City, MO. But it may have also given him too much access to  real trouble. But this is a different story.



 Last summer I had to take down a large Birch tree that had died from infestation of Bronze Birch Borers. The tree overhung the site where I was preparing to build a shed and I decided to remove it first to prevent damaging my new creation.

Upon climbing the tree in preparation for its removal I found myself reflecting on trading metaphors. There are tremendous risks in being high in a tree with a powerful chainsaw.

When one gets very high in the branches of a tree one finds it is critical to take the effects of the prevailing wind into account before doing anything. The wind can determine which part of the tree to remove first and where to drop the debris.

I think about safety first and at all times during the operation. I wear a climbing harness and attach myself to the trunk of the tree in two places with two separate lines. I pay close attention to where I place my feet and hands.

Familiarize yourself with the tree. Is it recently dead or has it been for some time? Can it be climbed safely or should it be taken down from below or from a cherry picker? A recently green tree will support large weights on a one inch diameter branch, a dry or rotten tree will do no such thing. Can you drop branches safely or are you too close to the house? Sometimes each piece has to be secured prior to cutting and lowered carefully with a line.

Use a ladder to get into the tree. Tie the ladder off to the tree in a way that prevents it from wobbling or rotating. In markets, sometimes one must stand on others shoulders to get oneself in place.

Have the necessary tools with you before you climb. It is time and energy consuming to have to go back for them. And not having the proper tool can induce you to use the wrong one rather than go all the way down and back to do it right.

Be familiar with your tools and know how to use them and care for them. Powerful tools, like leverage, allow you to do big jobs quickly but they bring powerful risks. It is amazing the number of ways a chainsaw can ruin your day. Chainsaws can bounce back out of the cut right at you so it is important to keep your face and body off to one side when cutting. Chains can break and fly back as well and fly or wrap in entirely unexpected directions. Be aware of the damage that your tools can do to you, not just the tree. Pay attention to them and treat them with the respect they deserve. Try to make allowances for the unpredicted. I've seen a chain fly off the saw and become entangled around the large branch it just removed and very nearly pull the user out of the tree.

Secure heavy tools to you or to the tree with a line strong enough to hoist them but light enough to part if the tool becomes ensnared in falling debris.

Never start using a heavy power tool until you have secure footing. I usually rest my weight into the harness and let my lifelines support me, using my feet to keep me stable.

Take your time. Being rushed will get you hurt.

Never bite off more than you can chew. When removing large portions of the tree with a single cut, they can behave in unpredictable ways, such as twisting or bouncing the tree or grabbing your lifeline and pulling it down with them. Once a very heavy piece begins to fall, there is absolutely nothing you can do to stop it.

Never extend your reach beyond what is comfortable. Using a tool at more than arms length puts you in a position that prevents you from reacting quickly if something goes wrong. It puts undue stress on you and the tool. It removes whatever leverage you have on the tool. It also prevents you from "feeling" properly through the tool. When using a power tool you receive signals about the material you are cutting and the nature of the stresses on that material. You can always tell when a branch is about to go if you are listening carefully to the tool. That feedback is denegrated by reaching too far or by using only one hand.

Several years ago a friend was cutting off a tremendous horizontal limb from a large oak. He was on a ladder extended to its maximum height and leaned up against the limb. The ladder was resting on the limb between the trunk and the cut and as the limb came off, this stub end jumped up and the ladder fell away beneath it. My friend tossed the saw and grabbed the three foot thick trunk and tried to hold on but slid down and finally fell off, shattering his femur and tearing up his chest and the insides of his arms. Had he and the ladder been secured to the tree he probably would not have fallen.

What have I missed?

Scott Brooks adds:

Hunting is considered by many to be a dangerous activity, what with a bunch of guys running around with shotguns or rifles. However, there are very few actual injuries from shooting accidents. The main cause of accidents are not the inanimate objects that send forth projectiles, but another inanimate object…tree stands.

Every year, people who feel that they are immune from the laws of gravity climb into stands and sit or stand waiting for their prey to wander by. And every year there are people who are stunned to find out that the laws of gravity are much more brutal and punishing than they thought.

There are only two types of tree stand hunters: Those that have fallen and those that haven't fallen yet. No matter how much you think you'll be able to hang on, or how adept your dexterity, you simply can't react fast enough to ward off an accident or mechanical failure.

I can personally attest to the feeling of bile rising in my throat from the fear of lost balance while perched 15 up in the air…and that was when I was wearing a safety strap.

I have a standing rule on my land. If you climb up into a tree stand, you must not only wear a safety strap, but it must be the first thing you put on when you get into the stand, and the last thing you take off when you climb down. I have asked (told) people to leave my farm because I caught them up in a tree without a safety strap.

So why even climb a tree stand if it has that much risk? It's about risk vs. return. I love the return I get from arrowing a nice buck. Same is true with trading. I love it when I get a great return for my clients. But the reality is that it's important to wear a safety strap when trading. Just as I profited in my poker playing days by taking a slow grind it out approach (never going all in), I do the same with trading. I'm satisfied with the inferior returns of a non-leveraged portfolio. My theory is that the more you leverage, the higher you're climbing and the thinner your safety strap gets.

All of my bad losses and sleepless nights have come from leveraging or taking too much risk.

That's why I'm a pretty boring guy these days.

Jim Sogi comments:

Professional tree trimmers all use a belay.  Mountain climbers also belay themselves for protection or to 'hedge' their position in case of a fall.

Ken Drees writes:

Never lend your chainsaw to someone who doesn't use them much. As in don't give stock advice to people or just give them advice that is general in nature–this saves on friends. Always remember torque and twist. If you don't read and predict how the cut will behave, rethink it. I have seen trees twist and pull the wrong direction, seen limbs bind back on the saw and have trees fall off course because of hidden dead spots. Be ready for the twist of the market as it takes your trade and bends it slightly the wrong way. Once I saw a dead tree being taken down by a friend. This large straight tree as it was falling broke apart into 3 huge sections. The trunk part closest to the ground went the right way and the other two in tangents like a V. Market wise–don't mess around with a junk-trade–its just not worth it and you can get hurt. And lastly don't drink beer before operating a chainsaw, nor chop wood with only shorts on, or put your hot saw down in a pile of dead leaves.

Pitt T. Maner III adds:

 Ok, this is a little bit like what I have been doing the past 2 years–namely Health and Safety oversight for pipeline and tank construction workers… guess who the least favorite person on the jobsite is?

There are probably better business analogies than below but here it goes (this is the short list! and not complete by any means, OSHA website would be a good resource):

1. I would have a health and safety plan in place with contact numbers and how to get to the hospital. Is there a written plan of action for each step of the process with the risks involved and the ways to mitigate the risk. (Investment plan)

2. Use a "buddy system". Have a friend nearby that can help you in case of an emergency. Have a 1st Aid Kit and someone Red Cross trained in 1st Aid and CPR. (Mentors and advice of others)

3. Survey the tree to make sure there are no hazards you have missed. Electrical lines. Red ants. Poisonous plants. etc. Ask yourself what is the worse thing that could happen (What could go wrong with your investment? What could come back to bite you?)

4. Inspect your equipment. Is your climbing harness worn anywhere? Are the lanyards of the proper length? (Guys have died or hurt themselves badly by not having the proper length on the lanyard, yeah they had their fall protection on it just didn't stop them in time from hitting the ground). Is the ladder rated for your weight? Do you have a GFCI if you are using an electric chan saw? Do you have cut resistant gloves? Do you have on hearing and eye protection? Level D OSHA clothes?

5. If it is hot or cold you need to take a break. Drink water. If you get tired you are more likely to make a mistake. (Take regular breaks from the computer screen)

6. Do you have enough light? Night time operations are doubly dangerous for workers. You need visibility. (Transparency in your investments)

7. Have you set up for disposing of the branches and such. You don't want the city to fine you unnecessarily for yard trash. (Tax consequences)

8. Wouldn't it be cheaper given the risks to have a professional service do it? (ETFs/mutual funds vs. individual management)

9. Are you sure the tree won't fall on someone else's property or their fence? (What are the liability issues?)

10. If I do get hurt what will the effects be to my family and others? Do I have the skills, knowledge, and physical abilities necessary to do the job right and do I understand the risks? Am I in a good state of mind and able to stay calm and not get angry if something doesn't work out right? Do I have a fear of heights?

We always carry a card around in the wallet for safety reference and it sort of boils down to 3 steps: 1) Assess; 2) Analyze; and then 3) Act.

It sounds like overkill but an effective safety "culture" within companies has been shown to dramatically reduce injuries, deaths and all sorts of economic and emotional costs. And it is a good idea to teach everyone at home how to stay safe too. If you do not have a sense of vulnerability then you are susceptible to hurting yourself or others around you.

Russ Sears comments:

In the last four years I took down three cedar trees that were dying. Here are a few things I did that were missing from the lists above.

1. Limit the access to the area. Shut down the drive-way, no extra people or kids allowed etc. Tree cutting is not a spectator sport. The trading room is sacred. No extra people or kids. Never show off.

2. Notify the neighbors when near their property. Likewise no kids. They let me know if they would be outside etc. I worked around their schedule. When working with others money, its all about them, not you.

3. Call the buried cable hot-line to have it marked before. Know the hidden risks and try to avoid them.

4. Have lots of rope. Extra rope tied to the tree and other trees can help prevent the tree from going the wrong way onto the house. Controlled slack on a large trade is a must.

5. Keep the area clean, limbs dragged away as they are cut. You never know when you may need that exit.

6. Rent what you do not have, but get the right size saw above all. It may cost more, but do it right.

7. Have patience. Take it in small pieces. It is only impressive in the vast woods when it all comes down at once. In your yard it will only be damage. Know your size. And do not try to meet a schedule. Pay that extra day's rent, Leave the stump up till next weekend. Do not try to swing for the fences to meet some arbitrary goal. 

Vincent Andres writes:

All valuable advice in this tree thread! Not to say it's missing, but I often add an iron chain as a line (with mountain climbing equipment).

Among dangerous things a falling tree is able to do, having the foliage act like a spring is a rather vicious one. The tree falls nicely with its big round green foliage, everything seems OK, but the green foliage is slowly compressed/crushed (for 2 or 3 seconds) and then the compressed unbroken foliage uncompresses and moves the 3 ton trunk in whichever direction. If you're in the way you're killed without even noticing it. (Certainly a market analogy here!)Folded branches are also a very classic cause of injures.

Many things can happen when cutting trees– unexpected things, so as a general rule, better be largely too cautious then slightly too incautious. Even if other people do not understand, you are in the tree with the chainsaw, not them.



woman burning stacks of worthless currency in her stove for heat in WeimarThe echoes from the days of Weimar begin to be heard. Respectable "Western" opinion (NYT, WaPo, NBC News, all cosmopolitan Canadian and European media) now blames all the world's intolerance on (1) the Israelis and (2) the one group in America — fundamentalist Christians — who think the Israelis are wise to mistrust their Islamic neighbors. There were two questions on which the varieties of Socialists in Germany in the 1920s — whether Marxist or Nationalist — always agreed: (1) the Christian churches, whether Catholic or Lutheran, needed to be severely restricted in their liberties and opinions and (2) the nation's defeat in the Great War and the financial collapse that followed were entirely the fault of the Jewish bankers in Germany and America.

Russ Sears comments:

Complexity, as in computers to cars, or jet planes can make the world safer, but often in return for that safety comes loss of control. This is why there was a spike in auto deaths after 9/11, people did not want to give up control to air regulators. http://thestatsblog.wordpress.com/2008/01/16/fear-of-flying-after-911-led-to-increase-in-auto-deaths/ This is why third party inspections are so valuable, that even the Government often can add value by running them. However, complexity can make the world more un-safe by adding risks of a chain reactions. Sometimes loss of control, by the individual, make make you safer in some situations, but in total it means there is more risks of a death spiral within the system. This is the argument for the "right to bear arms".

As I have said before to understand what happened you must look first to Model Risks, IMO. Yes, GS and most of the other investment bankers were selling complexity, however, it was not a pure buyers beware situation. As CDO's were only able to be "test driven" by the quasi regulators the rating agencies. It is much more akin to "food" inspection than automobile driving. The buyer only knew he has had food poisoning 24-48 hours after, and even then the true cause is unknown. It appears that GS handed the regulators a good sample stored properly in the freezer, and attested to the purity of the rest of the meat. They knew full well that some had been left out in the heat exposed, and they put that pile together. The rating agencies look stupid for trusting them. The cardinal rule of dealing with regulators, is never to make them look stupid.

Where the over-allocation was, however, was in model risks itself. If the buyers are too blame, it is not because they did not understand the complexity of the deal; but because they did not see that the conquest of model risks had allowed a bubble to develop. A bubble not just in housing but also any engineered financial products and vehicles tied to them including the originator investment banks. The world was blind to model risks, so that is where everybody found the best reward to risks, overwhelming the system.

It is my contention that just as "Standard Oil's" monopoly was not seen as dangerous and in opposition to capitalism itself until 20 years after it was broken up. So too will the "too big to fail" banks find themselves in 20 years.

I do not believe the the big 13 banks see this yet. But in destroying the confidence in "models"; they have destroyed themselves. They themselves are so complex, that they are run by "models" not good management . When the modelers are revealed that they are not as pure as the fallen snow. be it through French rogue trader, AIG's CDS writers or GS CDO cherry picking, it becomes clear that rather than minimally adding efficiency to the system, by being too big to fail, they exponentially add risks to the system by bring nuclear potential to it without a way to "trust but verify". I simply would perfer to see this break-up through market pressure, rather than regulatory. However there is no pity on the guy that makes the king look like a fool.



 It is common sense that the stock market anticipates what will happen in the economy after some time. The invisible hand of the market driven by millions of investors who make decisions according to different quantity and quality of information eventually represent the best way to encapsulate and synthesize the current status and prospects of the world's economy. But is this always true? Or for some reasons markets are resilient to change and slow in timely reading the information available?

If this is the case, what are these reasons and when does this happen? Can markets be manipulated by strong hands or there are simply forces that render decision making viscous and create a breakout friction before markets actually change the course they are following? Like a ship takes some time before reacting after the wheel is turned.

These questions are relevant today as they were before the beginning of the crisis two years ago. As loan underwritings standards deteriorated, the securitized mortgage market developed a bubble in housing prices that continued for quite some time until it finally popped. Even if we now read on several reports that it was clear to many what was about to happen, until the very last moment almost everybody continued to play the same sheet of music. Investors, regulators, government. The markets went on with huge inertia along the tracked lines of unrealistic risk assessments, walking on quants' clouds and careless of gravity. The longer they continue the more violent is the reaction eventually.

It seems to me that currently markets are in a similar situation. After the impressive injection of liquidity in the system (like an adrenalin shot to the heart) aimed to restore confidence and normal functioning of shaken markets, prices of assets have reflated for over a year now. In order to do this, sovereign debt in Europe and the US is increasing to levels that everybody knows are unsustainable. Still, for political reasons nobody wants to take the bitter medicine that would be needed. The show goes on with cheap money poured into assets that go up with a regularity and pace that is almost unprecedented. Regardless of unemployment, housing prices that in some states are going down again, the contracting credit to consumers, some states and cities are very close to bankrupcy, banks continue to be seized by the FDIC, industrial production levels are still 10% lower now than at the pre-recession peak, durable goods orders are almost 20% lower now than they were before the recession began. Finally, equities are up 75% from the lows, but earnings are still almost 40% below their pre-recession levels.

Is this manipulation? When and how is this going to finish? Or actually this time markets are reading correctly what is going on and are simply anticipating a global recovery and the consequent future increase in corporate profits?

Laurel Kenner writes:

The wonder is that the market didn't go up much more, given the trillions of stimulus. Since '07, the market has made short-termers of all of us– at least, of everyone fortunate enough to still possess enough liquidity to trade. We're all dancing in the dark until the tune ends. Meanwhile, the music has changed in the bond market.

Russ Sears writes:

It is my contention that the markets are good at forecasting what is predictable. However, much is not forecastable, like the weather.

I will be presenting a paper Tuesday that Dr. Dorn and I have authored in Chicago Tuesday.

In it we content that faulty risks evaluations can cause neurotic outcomes, in individuals, companies, sectors and even whole economies.

The markets can become, and apparently did become, a mechanism to trade short term gains while coming at the expense of increasing long term risks from over-allocation of resources. The risks of over allocation is often a chaotic system, meaning it is impossible to predict specifically when and how hard it will crash. Statistically, this could be thought of as trying to predict when the correlations will become a self reinforcing mechanism approaching 1 . Or is more practical examples when would over- building of housing in California, Arizona, Nevada etc. lead to deflationary spiral and foreclosures and inability to refinance all across the country and world. Another example would be the over allocation of delta hedging and portfolio insurance in Oct 87.

I am hesitant to make predictions, especially after Bear Stearn then Lehman and AIG and a government run mortgage market in Fannie and Fredie. But I am not as pessimistic as many that this is only a short term bounce. This stems from my belief that while the mortgage markets securities economic value are difficult to predict… the markets are giving at least giving them a more realistic view of their worth given this uncertainty. If this discount for uncertainty is as healthy a discount as I believe; there is still considerable liquidity and value that can return to the markets once these values are realized and known. The markets, at least in my modeling, seems to still give a considerable chance to the deflationary spiral returning.

Mick St. Amour writes:

Paolo, thank you for sharing your thoughts. I like your comments on inertia because that is at work. I see this all the time with retail investors and as of right now that dynamic is at work in that those folks still haven t taken a bullish slant and have been slow to change their minds. most investors are slow to embrace a change in thought when conditions change and they tend to ignore what market prices tell them. They tend to get locked into some ideology and usually only change their belief until after bulk of gains are made. Best trades are made when you can find inertia still at work and market prices begin to shift in different direction opposed to prevailing view. I have found those to be the best low risk trades.



a mcmansion

What the Stocks and Bonds have that the Government does not is a mechanism to maintain the cash flows to the company to a positive present value. Meaning that through the financial markets management is held accountable for their actions. While clearly there can be some robbing the bondholders to enrich the stockholders and vice versa with leverage or without… management decisions still have to make the most long term sense to the business as a whole for Modigliani-Miller theorem to work as Rocky pointed out.

Monetary policy could never exist in a tax free world; what gives money its store of value is the ability to use money to pay  taxes on real taxable assets, be it gold or personal income. Government issued money would be only paper without the government's power to tax. 

Further, a liberal monetary policy debases the purchasing power of money, and therefore is a figurative tax on the past producers of wealth that have stored their value in fiscal assets. This of course drives up demand to store value by holding real assets, like McMansions or Dot.com start-ups, or commodities.

Whereas a tight monetary policy increases purchasing power, and therefore is a real tax on the future producers of wealth. Which erodes demand for real assets to store value and drives a demand for fiscal assets.

Perhaps soon they will see that the swings can be wild rides if they switch between the two quickly.

Finally, emerging markets are full of wealth to develop; like the boomers example competition increases wealth for all and there must be a hundred ways that the increase in wealth from the past 60 years is speeding up rather than declining.



Please correct me if I'm wrong, but am I right in thinking that the particular suitability of Markov models to interest rate derivs derives from the term structure of interest rates vis a vis the section of the wiki entry that states:

"Since the system changes randomly, it is generally impossible to predict the exact state of the system in the future. However, the statistical properties of the system at a great many steps in the future can often be described"

Here is an abstract of a paper that might be of interest.

We introduce a general class of interest rate models in which the value of pure discount bonds can be expressed as a functional of some (low-dimensional) Markov process. At the abstract level this class includes all current models of practical importance. By specifying these models in Markov-functional form, we obtain a specification which is efficient to implement. An additional advantage of Markov-functional models is the fact that the specification of the model can be such that the forward rate distribution implied by market option prices can be fitted exactly, which makes these models particularly suited for derivatives pricing. We give examples of Markov-functional models that are fitted to market prices of caps/floors and swaptions.

Bruno Ombreux writes:

I just checked "Analysis of Financial Times Series", by Tsay. It is a relatively recent book so should be almost state of the art. It looks like Markov chains are used in two areas:

- better time series modeling, with regime switching.

- MCMC as a tool for Bayesian inference, whose main financialapplication at this point seems to be stochastic volatility models.

Practically, that would mean applications in "ever changing cycle" detection and option pricing/hedging.

On the first point, I personally toyed with Hidden Markov models. They work well in hindsight and are able to detect transitions between (high volatily / bear) and (low volatility / bull). But:

- this is all in hindsight. "Past performance is no guarantee…"
- this is low frequency data and I am not sure that the fact they could
detect the handful of past secular changes is that much useful. - a simple volatility threshold might do the job just as well without complication. - what you end up with is a probability transition matrix, which is not very helpful given that you are looking at only a few cycles.

… Maybe they could be more interesting in high frequency. I don't know.

On the second point, my opinion about option pricing is that the price of an OTC option is "as high as the buyer is prepared to pay". Models are an excuse. So I am not sure bayesian stochastic volatility models beat "seat of the pants" marketing.

Phil McDonnell adds:

If we look at the Niederhoffer-Osborne data on p. 899 we can see the number of times the market went from a don tick of various sizes to an uptick state. The reverse is also enumerated. I will take just the -1/8 state and +1/8 to illustrate the following. This matrix is the transition matrix by number of times each prior state led to the subsequent state.

            -1/8       +1/8     total
-1/8      231        777      1008
+1/8      709        236       945

From this we can compute the probabilities of being in each state given the prior state in the previous time period (trade).


           -1/8       +1/8      total
-1/8      .23        .77       1.00
+1/8      .75        .25       1.00

For Markov analysis we can make a prediction by multiplying the probability matrix by the vector which describes the current state. The result is a new vector of probabilities of being in the two states given the initial state. To predict two states ahead we multiply that by the probability matrix yet again. Let us take S as our starting state and P as our probability matrix. Then a prediction k steps ahead is given by:

S(k) = S(0) * P ^ k

Note that * is the matrix multiplication operator and ^k means to multiply P by itself k times.

What often happens is these matrices arrive at some steady state equilibrium after k iterations and we get the happy result that the probabilities are unchanged from iteration to iteration.

Russ Sears writes:

the Society of Actuaries has many research articles using the Markov Chain process. To see them all type in "Markov chain" into their home web search. I believe one of the best papers to give and intuitive understanding of its use and power and limits, is Ms. Christiansen's paper in which she gives a brief intro to many different interest rate generators.



the asset side of the economy
I think we have a problem that stems from a confusion between the asset side of the economy and the liability side of the economy. The assets are land, plants, people. They produce something. They create wealth. Sometimes this is called "the real economy."

The liabilities are financing the asset side, but they don't create wealth by themselves, or only at the margin (via tax arbitrage mainly). They are: stocks, bonds, etc… They are the oil in the engine, not the engine itself. The Fed is part of the liabilities.

What macroecomics is sorely lacking is a Modigliani-Miller theorem. As you know, the Modigiani-Miller theorem is a corporate finance finding that what matters is the asset side of the balance sheet, not the liabilities. The way it is financed doesn't change the value of a firm. It needs to be extended from corporate finance to macroeconomics, and I am happily providing it here as a conjecture, because at this stage it is not a theorem yet: "In a tax-free world, finance is irrelevant to the real economy." That means monetary policy is irrelevant, the Fed is irrelevant. What matters for wealth creation and growth are people, plants, and land.

Things were going well until the late 1990s because of the asset side:

1. reconstruction after WWII
2. baby boom
3. cheap oil
4. wave of innovation
5. no competition from emerging countries– they were communist, and, in hindsight, communism was great for Western Europe and the USA, because it meant less international competition

All these positive factors meant the asset side of the economy created huge value. It would have done so with or without monetary policy, with or without central banks, with or without banks actually. Now the positive factors are gone. The real economy is doing poorly and it will do so no matter what is done in terms of monetary policy, which is I repeat, irrelevant.

That's why we can have huge unemployment, that's the assets world, and a booming stock market, that's the liabilities world. They really operate independently.

Alston Mabry writes:

I'll bite.

The last few years appear to have been a story of how much finance does matter, unless one argues that the global downturn was a purely secular matter coincident with a financial collapse. Now, I have felt that the importance of the cyclical downturn in real demand got less credit than it should have, but it would be tough to argue that finance doesn't matter.

At any given point, there is some interplay between the finance side and the real asset side. The nature of that interplay changes over different regimes. There are times when lax monetary policy is just "pushing on a string" because there is no demand waiting to be unleashed by loose money. There are other times when changes in policy can have a much larger effect. And monetary policy is just one vector of finance. Finance can matter a lot, in different ways, at different times.

The asset world and the liabilities world certainly can operate independently, but we may also be seeing the markets work as predictors of what is going to happen in the "real" world.

Rocky Humbert disagrees:

I disagree that what macroeconomics is sorely lacking is a Modigliani-Miller theorem.

The practical interpretation of Modigliani-Miller is that leverage doesn't matter (to an enterprise) and while it has limited merit in structuring an enterprise during normal times, any sensible executive (or hedge fund manager) who has lived through a severe business contraction or credit squeeze will laugh at the notion that leverage doesn't matter. M-M correctly observes that a lousy business with 2% ROE is still a lousy business with 20% ROE (after 10:1 leverage). However, M-M doesn't say that a decent business with 7% ROE can be turned into a lousy business with 70% ROE (after 10:1 leverage). That is, leverage can't turn a lousy business into a great business, but it can turn a great business into a lousy business. After after that cyclical downturn, the company with less leverage will have less competition, more market share and greater unleveraged ROE. Lastly, if debt doesn't matter, why does anyone care about a rising national debt? Given the choice, I'd prefer a restoration of the Papal Vix Pervenit to a M-M in macroeconomics.



Reviewing some stats I noticed that the top four first quarter sectors of the S&P 500 index were in order: industrial, financials, consumer discretionary and consumer staples. Likewise manufacturing, financial, and retail all had large percentage decreases in workers over the last 12 months according to FRED. While definition of sectors on the S&P and government statistics are not aligned., it would appear that the lower number of workers are highly correlated. But I suspect that this has more to do with where we are in the creative destructive cycle.



aberdeen bullThe bull move by many measures is the greatest in history. Birinyi looks for big 10% turning points in markets and found that by some measures this one is the greatest in history going up 1/5 of a % a day versus 1/6 % a day in the 10 others of comparable rise to this. And we're right in the midst of another such surge with exactly 20 days of consecutive 4% or more moves, an event that's only occured 6 times in last 15 years, with previous dates 5/28/1997, 4/06/1998, 11/24/1998, 4/12/2000, 5/15/2001, and 1/27/2004.

One notes also that we haven't had a a month minimum since Feb 8th, 2010. Since Feb 8, 2010, the median S&P 500 stocks is up 13%, and the top 10 are each up more than 40%. An opposite scenario is working itself out in the world of fixed income. How can we make sense of what is happening?

To what should we turn in conjunction with the bearish feedbak that counting gives. I have been considering the fields of economics, martial arts or romance. What fields would you suggest?

Vince Fulco comments:

The thought of a pendulum with too much transitory force being applied to one side comes to mind. 

Russ Sears writes:

In my opinion to understand the crisis and the resulting recovery, you must understand that most of the crash stemmed from "model risks". People had bought these wonderfully complex AAA structured products that suddenly you had to be able to model the expected losses. In the past this was considered only a remote possibility with no need to model. Once it became clear that much of this "structure" was mush, it was equally clear that these things really could not be modeled well. A slight change of the breeze from the butterfly caused wild swings in the heavens.

Models with even a slight downward trend in the housing markets quickly turned into a death spiral in housing. AAA suddenly were worth pennies. And those that bought them were those least able to absorb the losses or downgrades, further cascading the price due to illiquidity.

One must wonder if this recent reversal similarly has the "all clear" signal being given, and people are coming out of their bunkers to see some rays of sun. In other words which came first for the pendulum, the crash or the recovery?

Ken Drees writes:

Some recent puffy white contrary clouds that have passed my eyes:

advertising aimed at gold straddles

advertising oil calls and bull spreads

themes of money market money needing to go to stock market to earn advertising mailers about apple type clone micro caps–a ground floor opportunity advertising for homeowners to lock in natural gas now–don't wait for summer since rates NG rates can't go lower best 12 months in recent stock market history and the recovery isn't even rolling yet at full steam.

Bond bears are simply frothy–they can't wait to feed! The fed is in a box and its locked and its under water.

Lots of interesting hooks in the water in many markets. I am not surprised since trends have been running themselves quite far without pause, and thats the action that creates the hooks–the unarguable facts of self reinforcing trend. Voila!

Kim Zussman suggests we look at the big picture:

The attached plots log [base 10] (SP500 close) every March from 1871-2010, using data from Prof. Shiller's website.

In the context of history, the recent decline and bounce don't really stand out. However stock returns of the recent decade are noticeably different than the prior two, and rather resemble the pre-WWII period.

Next, Kim Zussman looks through a magnifying glass:

Using Shiller's SP500 monthly data, here is comparison of mean monthly returns by decade 1900-2000


Note that the 2000 decade was one of only 3 (1910, 1930) with negative mean monthly returns. The two prior decades, 1980's and 1990's, both had the largest mean monthly return since the 1950's, and the 50's, 80's, and 90's - the top 3 - all occurred in the last half of the century.

I also plotted log(sp500) within each decade. Drift is noticeable in some of the decades, and noticeably absent in others.



 By the time the NCAA Men's Division I basketball tournament gets down to four teams, is it a toss-up as to which team wins? In other words, does each team have a 1 in 4 chance of winning?

Steve Ellison responds:

This is an excellent situation to apply the binomial theorem. In E****, you can write a formula: =BINOMDIST(s,t,p,c), where s is the number of successes, t is the number of trials, p is the probability of success, and c indicates whether to calculate the cumulative result (1=yes, 0=no)

Our null hypothesis is that the probability of success (winning the Final Four) is 0.25.

For example, for the teams that have made only one trip to the Final Four, the formula is =BINOMDIST(1,20,0.25,1), resulting in a p value of 0.024. This result appears to be statistically significant, but the significance is questionable given that we are doing multiple comparisons.

Teams that have made at least four trips to the Final Four have won more than a quarter of the time, so we can check the probability of winning 21 times or less and subtract it from 1, using the formula =1-BINOMDIST(21,65,0.25,1), which results in a p value of 0.070.

Russ Sears comments:

This is retrospective, and has "survivorship bias" or winner's bias.

This would be true if the championship wins and returning to the Final Four where independent. But they are not. If you win one year, the record most likely show you have a better chance of repeating in the final four.

You need stats that show winner only in their first appearance or second appearance, etc.

Here are the Final Four champs by appearance order:

appearance  count champs  binomdist

1st                  97     13          0.4%
2nd                 55     15         71.3%
3rd                 32      8          59.4%
4th                 24      9          94.5%
5th or more      80     25         92.0%
4th or more     104    34         97.0%

Alston Mabry adds:

Looks like an opportunity to run a quick sim. The sim sets up the Final Four participants for each year 1979-2009, randomly assigns the National Championship to one of the schools, and then records whether that school was one of the schools that actually went to the Final Four just once, twice, three times, or four or more times. Results of 1000 runs:

schools that went to the Final Four just once
count: 20
actual championships: 1
mean # of championships in 1000 sim runs: 5.00
sd of this distribution: 1.68
z score of actual # of championships compared to sim distribution: -2.38

schools that went to the Final Four exactly twice
count: 9
actual championships: 2
mean # of championships in 1000 sim runs: 4.49
sd of this distribution: 1.73
z score of actual # of championships compared to sim distribution: -1.44

schools that went to the Final Four exactly three times
count: 7
actual championships: 6
mean # of championships in 1000 sim runs: 5.33
sd of this distribution: 1.92
z score of actual # of championships compared to sim distribution: +0.35

schools that went to the Final Four four times or more
count: 11
actual championships: 22
mean # of championships in 1000 sim runs: 16.19
sd of this distribution: 2.53
z score of actual # of championships compared to sim distribution: +2.30



 Robert McTeer had an interesting post on StreetTalk. He responded to a TV commentator who claimed the recent BLS employment numbers showed: "Not a single new job has been created." McTeer called the claim misleading because it implied "a stagnant economy dead in the water." McTeer notes that though jobs have been lost on net over the last two years, "The gross jobs numbers behind the negative tell a far different story." Though 8 million jobs were lost in the second quarter of 2009, McTeer notes that "6.4 million were created (674,000 more than in the first quarter)."

A gain of 6.4 million new jobs in a quarter shows a dynamic economy. But I sent an email to Mr. McTeer suggesting there is more to the story. The 8 million jobs lost, I argued, are in some ways as good for the economy as the 6.4 million new jobs.

Eight million people losing jobs means eight million in the market for "better for the economy" jobs, if not at first higher-paying jobs. If these workers were destroying wealth at their old jobs (though no fault of their own), just stopping is good for the economy.

The huge number of union jobs lost in the auto industry is good news for U.S. economy as well as car buyers. Overpaid and badly organized auto industry workers are disruptive for a free society, apart from the problems of high labor costs and uneven auto quality. All these jobs were privilege jobs gained by connections and legal protections. Auto companies could have hired and trained workers at 1/2 or 1/3rd the pay, but were prevented by various labor law interventions from doing so.

The economy has to continue the adjustment out of industries like housing construction and related goods and services, and those resources and workers have to be redeployed into more productive industries and professions. Figuring out and coordinating redeployment to wealth-producing occupations has to be a complex and time-consuming process.

Though a great many job losses could be blamed on taxes and regulations of various kinds, and on uncertainty created by state and federal policies, the lion's share of unemployment was caused by adjusting to new realities after the real estate and financial bubble. What the new realities and opportunities are isn't immediately clear. That is what has to be figured out by millions of entrepreneurial employers and job searchers.

Losing a job creates trade-offs and potential benefits. People for a time lose productivity from established skills and business networks. But as they look for new jobs, the searching process, though labeled unemployment, is actually work collecting information and developing search and self-knowledge skills.

Think how many millions were likely underemployed or by accident in the wrong industries for their personal preferences and skill sets. Most wouldn't leave a secure job, even if they strongly suspected it was somehow not right for them. Though most would prefer underemployment to unemployment, most have probably also been surrounded by employment or entrepreneurship opportunities they lacked adequate incentives to investigate.

If an unemployed worker hired someone else to spend 30-40 hours a week searching for new employment, and to evaluate job-retraining opportunities, that would cost money and likely generate value. Those who lose jobs become self-employed in this informal home-based employment search industry.

Some of the unemployed are not working at job searching (or at "off-the-books" work), so they are taking advantage of opportunities for leisure that a wealthy society like ours affords. This can also have long-term benefits.

Losing my job at the Foundation for Economic Education in 2003 was one part difficult and disorienting, but nine parts a great opportunity to innovate and launch new economic education projects and programs.

Paolo Pezzuti comments:

I agree on the assumption that the economy has to continuously adjust to redeploy workers into more productive industries and professions. Old, low productivity and low added value industries have to be abandoned to move into more remunerative sectors. I do not dispute this because this is the tenet of growing economies and capitalism. This process may be painful for many workers laid off that have to retrain to find better or equal pays in their new jobs, but it brings progress and growth for the individual and the society.

However, I am starting to have doubts that this can be applied to the present situation of western economies, where jobs are simply cancelled to be created somewhere else in the world. This process is negative and is developing in parallel to the healthy process of adjustment I was referring. Jobs are transferred very quickly to areas of the world where labor is less expensive. Our economies cannot adjust adjust timely and fast enough to create enough jobs in the new sectors because the speed at which this transfer of wealth and jobs is occurring is unprecedented. This requires an impressive education system to adapt the professionality and retrain millions of workers very fast. This requires huge investments in high tech and higher value added areas. This takes time, capital, new infrastructures, a government that favors entrepreneurship.

How to manage this transition is the main issues and all elements of the society should be involved in this debate. I am convinced that the governement in the economy is inefficient and should be limited as much as possible. At the same time, without government support, the situation could be disruptive for millions of families while the process of adaptation develops.

Finally our competitors are not looking at us wihout doing anything. They are also moving quickly to acquire the technologies and move their production up the scale toward higher returns industries. They are working to put us out of the market and not be competitive.

Flexible and adaptable economies will be advantaged, but the process is going to be very painful. The transitory will be very long in any case because of unprecedented scale of what is happening. The challenges are huge and success is not ensured even for the most dynamic countries. The outcome, if we are not able to adapt, could be to see our economies and standard of living decline sharply in favor of others. We could simply see unemployment and poverty increase structurally.

Paolo Pezzutti is the author of Trading The U.S. Markets, Harriman House, 2008

Pitt T Maner III adds:

Touring around in Europe in the early 80s you couldn't help noticing the number of young Australians and New Zealanders. Many of them apparently just decided to do a "walkabout" and wait out the bad unemployment situations back home. If you are willing to rough it there are many cheap places to live outside the US. Hanging out for a couple of years in the right "socialist" country with good food, beer, healthcare, law-abiding citizens, low cost education, history and culture would seem to be an option–at least you would get an opportunity to see the pluses and minuses of other systems. No its not the American way. Are citizens of other countries more flexible with respect to moving around the globe to where there are opportunities?

Do today's youthful short-term free riders outside their native country that avoid permanent bumdom become tomorrow's long-term tourists and multilingual global investors?

Russ Sears writes:

While simply based on anecdotal evidence from those I know, I think you will find that "funemployment" is almost exclusively the domain of the youth, still riding on Mom and Dad's pocketbook. It seems to me to be the result of being taught: "you can be any thing you want","you are the star at everything" and most important parents never letting their kids fail– meeting the reality of this job market.




The help laughs behind their backs,
As the Mercedes, Lincoln and Catties.
First fill the handicap spots..
Until the whole lot is full
Of Gray and Bald headed Early-Birds.

They stroll, walk and hobble,
To the supper special for the day:

Desserts puffed with air
And weak artificial flavor
Vegetables steamed to oblivion;
With variety of syrupy fruits;
All with slabs of meat
Served with pomp and detached jazz

The waiters know them by name
And the story behind each one
A doctor, a lawyer, a professor or two

Little did they know,
The devil's trade they daily made
Those toiling years ago.

To miss the daily diligence of running, hiking or seeking:
The wild beauty of the bobcat,
Attacking the spotted doe.

They would be left with black velvet deer
And serene glowing trails on canvas.
As their arteries clogged 
As their blood turned to medicated sludge.

But then the conversation turns sadder
As they talk of greater minds, lovers or brothers;
Gone or in the home,
From dementia, strokes or fatty cancers.

The devil smiles as they say grace,
And thankfully say they are the lucky ones.

Rocky Humbert comments:

The studies which I've seen suggest that running 30 minutes a day will add 3.5 to 3.7 years to one's life. However, if one is awake only 16 hours/day, then that 30 minutes of running consumes 3% of one's life for an increase of life expectancy of approximately 4.7%. While this gives no value to the increase in general well-being from regular exercise, it's hardly grounds for the help to be laughing.

In contrast, a talented attorney can spend those 30 minutes billing at $1,200 per hour, and use the income to ensure access to a private room at the Cleveland Clinic for a quadruple bypass, valve replacement and experimental treatment for Type II Diabetes.

One wonders whether Jim Fixx has any regrets?

Kim Zussman adds:

 Which begs for a present-value calculation for doctors who run 30 minutes a day from $1200/hr lawyers.

Nigel Davies writes:

The time could be used to listen to talking books and the like. Plus it would be interesting to see if cycling on an exercise bike would produce similar results in which case one's options are much more varied (eg trading and cycling).

Of course the other thing they didn't measure is quality of life. Not much fun having a blonde on one's knee whilst struggling for breath and wondering if one will survive the experience.



Can readers help me understand the meaning of backwardation vs contango in the past in the ES? Why is it negative now? Does it mean people think it's going to go down, or are the rates that low? I've studied, but don't really understood the formulas for computing the values of the future contracts or why there is a negative spread now when is was +4 points or higher spread in 2007 as the market topped on the rolls.

Nick White lends a hand:

Garden variety futures valuation is just a simple cost of carry model: the price of the underlying today adjusted for the cashflows you expect to pay/receive until expiry. The whole bundle is then appropriately adjusted via interest rates for time — effectively, the exact same as any other asset.

Intuitively, this is easy to understand if you think of how NPV — or a DCF model — works and then team it up with the laws of arbitrage. What is your asset worth today given what you will spend and receive for it over a given period, adjusted for interest rates? If your asset can be exactly replicated, is the price of that replication worth more or less than the original? If so — ceteris parabus — you can arb it.

The proviso to the above is that not everybody has the same interest rate in their model… your cost of funding may be very different to mine, which will be very different to GS's. I would argue that — care factor on Index Arb notwithstanding — one's ability and inclination to practice any form of index arb depends vitally on this cost of funding rather than some point spread in the rolls… and that in turn "depends" on whether the arb is long stock / short future or vice versa. Risk free rates are just a proxy.

So, if you cannot perform index arb… what is this info useful for? Knowing the fair value spread might give you a few ticks edge when placing an order because the future may already be a bit over/under extended vs the cash market. So, to provide an example, if you're buying, you may be better to place your order — per the Chair's admonition — a couple of ticks behind the BBO if the fut is over-extended vs the cash. Otherwise, you might want to lift the fut if the cash has moved and the future is lagging.

Very simplistic — but backwardation and contango are just natural progressions of these pricing models, adjusted for the vagaries of short-term supply and demand.

Steve Ellison comments:

 Philip L. Carret, in his 1931 book The Art of Speculation, considered it very bullish when stock dividend yields exceeded the margin interest rate. In such circumstances, he said, stocks "carried themselves", i.e., one could buy stocks on margin and pay the interest on the loan using dividends. Backwardation indicates that S&P 500 futures now carry themselves.

The S&P 500 futures began trading in 1982 and almost never traded in backwardation for the next 20 years. They went into backwardation in mid-2002 and stayed in backwardation for most of the next two years, advancing 53% during this time. They have been in backwardation continuously since October 17, 2008, advancing 25% during this time.

Russ Sears interjects:

 I have seen some option quotes on Enron, that had calls, same strike, different maturities (I believe it was Oct and Dec maturities) that apparently had some time arbitrage. Not sure they were actionable though. In 2000 I bought some deep deep out of the money long term custom interest rate options, that later became in the money, for my old company. The selling counterparty called in 2003 and begged us to sell them back, because they were very difficult to hedge. He told me they were so far out of the money that they sold them thinking they would never have to actually hedge them. I suspect in both cases the option seller, simply booked the premiums as 100% profit, so the theory really went out the door.

Quant Chicken writes in:

The personal impression I formed when I reviewed the empirical academic literature 4-5 years ago was that the forward is not an unbiased predictor (contrary to the theories of FX I had learned in school). The "forward premium puzzle" has been confirmed using so many different statistical tests (some quite esoteric) that I came to believe there is something to it.

I was getting interested in investing real money in this anomaly when I was dissuaded by wiser colleagues, who pointed out that this "carry trade" idea (borrow in low yielding currencies, invest in high yielding ones) was getting crowded, everyone was getting into it, DB started an ETF to allow public to participate (this was in 2006), etc. And statistically the evidence was not very strong. In retrospect I am glad my friends advised me to stay out of it.



school teacher by Norman RockwellMy daughter was telling me that her math teacher will not give extra credit for anything because she was sued by a single mom for giving her son a "B" and ruining her son's future. She had to spend her own money for a lawyer, but in the end the son/mom dropped the case when they lost credibility after her son was sent to prison for dealing before he graduated.

If you coached or volunteered for anything to do with many kids, there is always one parent that will be upset with you if their kid is not the "star" or leader of the group. So much for the days where whatever the teacher gave you, you could expect to get doubled at home.



High-frequency finance can revolutionize economics and finance by turning accepted assumptions on their head and offering novel solutions to today’s issues. This comes from an interesting article on the topic:

In high-frequency finance:

The first step involves the collecting and scrubbing of data.

The second step is to analyze the data and identify its statistical properties. Due to the masses of data points available for analysis (for many financial instruments one can collect more than 100,000 data points per day), identification of structures is straightforward– either there is a regularity or there is none.

The third step is to formalise observations of specific patterns and seek tentative explanations/ theories to explain them. Fractal theory suggests that we can search for explanations of the big crisis by moving to another time scale — the short term.

On a short-term time scale, we study how regime shifts occur and how human beings react. The large number of occurrences allows for meaningful analysis. We study all facets of a crisis– how traders behave prior to the crisis, how they react to the first onslaught, how they panic, when the going gets hard and finally, how their frame of reference which previously was a kind of anchor and gave them a degree of security breaks down and how later, when the shock has passed, the excitement dies down, there is the aftershock depression and then eventually how gradual recovery to a new state of normality begins. It is possible to build maps of how market participants build up positions and how asset bubbles develop over time.

High-frequency finance opens the way to develop "economic weather maps".

Just as in meteorology where the large scale models rely on the most detailed information of precipitation, air pressure and wind, the same is true for the economic weather map. The development of such a global economic weather map has barely started. The "scale of market quake" is a free service. It is a very interesting experiment. You can read the paper "The scale of market quakes".

I believe these are really exciting developments. More than 15 years ago it was expensive to find end-of-day data and I would update together with my dad the files of the stocks I was interested in using data from the newspaper. Today we have huge online databases available to the average trader. The computer I had at the time and the SW I could afford would allow me to do some technical analysis building indicators and that's it. Today I use Tradestation.  I can program and automate my indicators, studies and strategies. It is a huge advance for average traders like me. High frequency finance is now the new frontier and if you want to be profitable, there you can still find the sort of inefficiencies you need. However, it cannot be accessible to everybody. Once again, you need the data, the computers and the math/statistical expertise. It is getting more and more complex. Moreover, to trade on such a short time frame you need to have very very very low commissions that the average trader cannot obtain. Would you expect something different?

The question I have is whether there are inefficiencies in longer time frames that the big guys do not even bother to consider: the leftovers of their meal. At the 60 minute level or even the daily time frame. I had the privilege to talk with one of the best traders of Wall Street (he trades mainly the emini) about this issue and he believes that this is the only way to stay on the market for the average guy. There is a way to profitable in these time frames. It worked for him. Inefficiencies at micro structure level must be so important that the few big players in the business that can afford that type of game are making a lot of money. In fact, policymakers have started to look into it, but it is very sensitive and interests are huge. With time, competition will increase also in that area and it will become more difficult even for them. But for now, they make billions. As far as I am concerned, I feel like a little fish that lives under the rocks and comes at night out after the sharks have made their dinner and left something back, which was not worth for them wasting time. The search continues.

Paolo Pezzutti is the author of Trading The U.S. Markets, Harriman House, 2008

Sushi Kedia writes:

In the spirit of Daily Speculations, where observations of small fish swimming up predict coming quakes in Japan, investing ideas that can be hypothesized before testing by observing characteristics of oaks etc. etc, one keeps wondering what would qualify from market data points as the proverbial rats, birds and smaller creatures that behave distinctively before coming changes in weather, terrain, storms and big winds. Even if jokingly, when a friend reminded me few days ago that Finance is the art of moving money from hand to hand until it disappears and while I know that fractals make the same ideas appear at every scale making the big and the small equal in their eventual outcomes, one simplifies the notion of fractal finance to the simplest possible that it is the art of moving money from hand to hand across any size, until it disappears. That brings one to a more easily imaginable notion of visualizing the food chains in the markets at action looking at distinctive behaviours of the smaller creatures.

Is retail behavior a richer source of predicting large moves or is the professionals' action a better gauge? Or is it that both used together produce some finer ideas?Does the behaviour of small caps and micro caps provide some extra insights into the markets? Distinct expansion or contraction of range is one obvious thought stemming from Chair's latest post.

So many have been talking about a potential crash coming by, suddenly in the last week or so, one wonders which minnows and sparrows are they watching to get such "feelings".

Are there any distinctive behaviours in volume and open interest too that forebode a coming change in the winds? Has some master of the universe quietly assembled in some corner of this world the mythical all encompassing indicator that captures time, price, volume, open interest? The equivalent of the General Theory of Everything in the markets? How far are the scientists in the markets from the equivalent of an 11-Dimensional M Theory?

Even if this set of simple(ton) queries generates from the specs a list of ideas they have felt over their long years in the marts as precursors to large moves, it would be highly useful to compile them and explore what testable theses can come up from them, for Einstein did say and believe that an ideas should be simplified as much as possible, but not more.

Russ Sears comments:

It would appear to me, that on the anniversary of the turn-around in the markets, it would be wise to review what the Derivative Expert / leading fractal proponent and his teacher/mentor were saying last year at this time.

As I recall, his predictions were that doom was inevitable and that it was just the beginning. The future was clearly going to be worse than the Great Depression. His only hope was, he prayed, every night, and in the morning when he woke up, "he was wrong"…

His teacher was not as sure as him, but thought it was more likely than not, going to be more terrible than imaginable, also.

Yet, I do believe there is considerable turbulence and potential for chaos theory, to occur whenever people allocate resources…However, the markets are the best mechanism for catching those grossly misallocated resources and shuting down those chaotic loops of turbulence that man has devised. While the derivative expert still could be proven right in the long run. One must consider that there are some strong forces of learning from your mistakes built-into the system also. Non-the-less no matter how certain our demise may be, the rebound shows that care must still be taken thinking one way, up or down, is the only direction.

While I will disagree with the Derivative Expert, that the markets are built on a time fractal, a quick look at the human situation shows that herds, large and small, are no protection from irrational thinking. Dr. Dorn and I have been working on a paper, that I will be presenting on April 13 in Chicago at the Enterprise Risk Management Symposium that will discuss this further. It is not directly related to chaos theory or fractals. But one sentence to ponder concerning fractals to whet your appetite: "Individuals, businesses, industries and even whole economies, all, can become victims of mania and panic".
And I will have more to say on how this does more closely tie into fractals and chaos theory in other works, time and receptive audience permitting.

Jeff Rollert comments:

The last 12 months remind me more of the eye of a hurricane.



Penny BlackFeb 10 was the first "snow day" in New York in three years where kids don't have to go to school and when I was a boy, we greeted the snow days with alacrity as it meant we could hop on the subway and visit the stamp dealers on Nassau Street and spend a quarter on some rarities. Apparently there are few if any stamp collectors left among kids today because other activities crowded them out. I base this on direct testimony from Stanley Gibbons and the fact that there are no stamps offered for sale in the newspapers anymore as well as published reports from stamp magazines themselves. This is a tragedy since stamps provide so many benefits in geography, art, history, economics, categorization, collecting, and patience, foreign exchange, printing, and topical interests.

In honor of the snow day, I thought I should enumerate some trends I have noted from my reading of the literature. Dimson is seminal. There is a seminal paper on investment returns from stamps available that does for stamps what DMS and Fisher, Lorie and Ibbotsen have done for stocks. They report that the returns from stamps over the last 100 years have been about 2% a year worse than stocks and 3- 4% above bonds. Adjusted for systematic risk and standard deviation the returns are comparable to stocks. There are so many important and intriguing points covered in that paper that I must refer you to the original. However, a few that I noted are that stamps hardly have had a down year during the last 100. The cost of getting in and out is about 25%. The returns from high priced stamps are similar to those of low priced stamps. The boom years for stamps were 2008 and the late 1970s and like stocks these days they have a few 20 year periods where the returns have been flat especially during the early first and last 20 years of the 20th century. The market for collectible stamps is 10 billion a year, higher than the fine art market in total. The number of collectors is about 50 times higher in Germany per capita than in the US: 1 in 20 in Germany versus 1 in 1000. There are an estimated 20 to 50 million collectors in China. It was previously illegal to collect stamps in China under Mao so there is a surging demand especially for the old issues that none in China were allowed to buy. The price of many low priced issues in stamps has appreciated more than the high priced issues becuase people didn't take good care of them. A nice example are the first stamps issued in the US and the Columbia Expedition sets. The price to weight ratio of stamps is among the highest in the world and part of their value is their portability. The upside down fixed income "Sponsor" has bought 100 million worth of stamps and believes that their value is correlated with GNP. Dimson has a nice set of regressions showing the systematic beta of stamps about 0.2 when adjusting for various Fisher type effects in lags in pricing. (The Dimson and Spaenjarie article)

Stanley Gibbons has a nice index of the 100 rarest British stamps, which are the most collectible, as is their silver, and this correlates well with the Dimson estimates, even though there is much spurious lookback effect in it. There is general agreement that the current collectors in stamps are those who were introduced to it before the 70s and now have the income to augment their portfolios. Very few new collectors are coming in from the US and England. In view of the 25% transaction cost of buying and selling stamps, one could not recommend them as an investment. A good investor would never see his stamps because the values regrettably depend almost entirely with a range of 500% for the same stamp based on condition. Thus, only long holding periods like the 40 years that Dimson uses would seem appropriate. But in 40 years the demand from the kids of today would seem to be likely to be small because they don't collect now or even know what a letter is in many cases. If one were going to invest, one would probably confine his activities to German speaking lands and Asia, and England which still is the rule of the sea as far as collectibles goes and is likely to maintain that edge. One should not rule out the changing value of stamps as a hedge against increases in the service rate on gains and lifetime earnings. One would be interested readers' thoughts on this alternative asset.

Sam Marx comments:

Don't buy retail. Place classified ads in Linn's, bidding close to wholesale prices and/or join the NY Stamp Dealers Club and buy close to wholesale there. If you know stamps it is hard to lose money but the amount you can make is small compared to stocks. In my opinion, if you still want to get involved in this type of endeavor, coins are a better choice. Spilled coffee can destroy your stamp investment.

Alan Millhone commments:

A MMy stamp collecting began one Christmas when I was seven and my parents gave me a Coronet stamp album. I still have it and over the years have expanded my collection. Guess at heart I am a collector and the upsurge in values has been a side benefit. As in all collectibles condition is important. One never has to apologize when selling quality items. To date I have never sold anything from my collection. None of my grandsons have any interest in stamp collecting. My daughter collected some as a youth but quit. I look at stamps as little pieces of paper with bits of history printed on each stamp. Stamps are an excellent way for youngsters to learn about countries and where they are on the map. Something many youth cannot do today. As a youth I dealt by mail with HE Harris , Zenith and Garcelon stamp firms. Stamps could be used today in grade school as a teaching tool. Queen Elizabeth maintains the Royal Collection. Spink etc. has helped the Royals add to this most valuable collection since the Penny Black was introduced. I don't collect any modern stamps and the early US are beautiful esp. newspaper and periodicals. My best friend is Greek and we collect the early Hermes. I like to get out my stamps in the Winter months. I like early stampless covers of my area. Penny post cards and post cards depicting Checkers ( a cross collectible). Cut squares is another area I like and Trieste A and B and AMG-FTT. Stamps as you said is a yearly multi billion dollar business. Auction firms like Greg Manning is publicly traded and deals with collectors all over the world.

Rocky Humbert responds:

A slightly different way at looking at this is the fact that domestic postage rates have handily beaten inflation since 1958. Last February, I went "all in" and purchased a trove of USPS Forever Stamps. (My local postal clerk was perplexed, to say the least.) See: http://onehonestman.wordpress.com/2009/02/28/warren-buffett-deer-poop-and-postage ,  Yet if one extrapolates the trend of the last fifty years, this "investment" will handily beat CPI inflation going forward. The Chair's cited paper is interesting. Yet before drawing any conclusions, one should study how stamps have performed compared with other ephemera … such as private letters from Abraham Lincoln, Ronald Reagan, and Hank Paulson. Given the rise of email and the demise of private letters, one might speculate that collecting the written letters may have a historical significance and scarcity value in the future that bests the postage stamps? Details on the forever stamp: http://www.usps.com/communications/newsroom/2007/sr07_011.htm

Russell Sears writes:

While I do not know the first thing about stamps collecting, the Chair's story reminded me of my 3rd grade winter in Titusville, PA. It was close enough to Lake Erie to get hammered by lake effect snow. I would take all the money I owned, (under 15 bucks) and go to the bank and ask for rolls of pennies, nickels or dimes. Shift through them for collectible dates.

The wheat backed pennies, were still fairly common in change. While the silver nickels and dimes quickly grew scarce. The rare one I found were treasured, more than the bought silver. I can still grab a handful of coins shake them and tell you if one is silver.

The ladies at the bank were always gracious and used the machines to re-roll them when I returned a pile of pennies to the bank. Most likely because I was the rare customer on those snowy days, and it was always evident that I walked/ran that mile to the bank on entering.

However, my interest in stamps, now is for the art work. Stamps and their press have some of the best miniature work available.

Plus the interest in special commemorative editions always catch my interest after the press have stopped.
I think the interest in the 50 states quarters and bicentennial quarters may signal that these limited edition and artist designs may be the future of trading stamps, In this large volume nearly reproductive limitless world we live, uniqueness can thrive.

Victor Niederhoffer responds: 

I would add to the erudite Floridian's remark that the vigorish of 25% that Dimson notes, which is in line with or ever too small versus the reported P&L of Gibbons, does not take into account the grading differential where if you bring a stamp in to sell it's very fine but if you buy it, the condition is perfect and flawless, adding another 25% at least to the vigorish.

Alan Millhone comments:

On grading, perhaps a discussion of "slabbed" stamps and coins is warranted on grading services in business today.

Alston Mabry comments:

Does not take into account the grading differential where if you bring a stamp in to sell it's very fine but if you buy it, the condition is perfect and flawless, adding another 25% at least to the vigorish. Certainly reminds one of:

Strong Buy




Strong Sell

and the increase in churn thus promoted.



It is ironic that sprinters spend 12 hours per day training and seconds on the actual event, while marathoners spend on average less than two hours a day training for an event that last over two hours.



 I cannot count the number of times my trading was going along really well, then all of the sudden, wham… all my profits were erased in one fell swoop, one bad trade. In retrospect, I got arrogant, and decided, because of my invulnerability, to assume extra risk which became my undoing.

Despite many decades of trading, I still occasionally get a b**ch-slap from the mistress of the market when I get excessively confident. In my own case, this seems to happen when I have many trades on and all are solidly in the black, or I've had a real good run. I get a sense of invulnerability, hubris, and that's my own personal kryptonite. At least I can recognize this flaw, and it hasn't reared its ugly head in a few months. Usually when my normal balance between my offensive and defensive game goes out of whack is when I get killed. Now I have a system in place that identifies when I'm about ready to go on tilt. The system hasn't kicked in yet, so maybe I'm learning something.

When I was coming up, an old grain trader told me that "Hope" is for losers. I used to get stuck in a position, and hope it would come back, and it usually would not. In fact, my friends saw me hoping for an improvement and were fading me all the way down. It took awhile, but I learned that hope won't bring the market to your favor, but hope will make you go bankrupt. Finding people full of hope can be a gold mine for you, provided you play it right. Seeing a person "Hope" for his position to improve enables another person to get additional clarity on what the market is going to do….at least in my case…..but I like fading losers. The converse is that I don't mind or take it personally when people fade me when I'm wrong.

Luck is just wrong. I don't believe in luck, and if it were to exist it would be a zero sum game. Is a person who wins the lottery lucky, or is he just part of the statistical distribution? I like to think of luck as an offspring of statistics and probabilities. There is a probability for every possible occurrence in the universe, and things just happen without any mysticism involved..Some gamblers like to have lucky rabbit's feet, or other talismans. I like to sit in position to those guys in table games. Some guys like to brag about their lucky streaks and I listen carefully. I like to observe their streak, and at some point, start to fade them, a little at first before I really press. Sometimes this works, sometimes I get my butt handed to me on a silver platter, it depends.

My favorite are the superstitious, as they believe that some mystic power controls their destiny. Evidence of any kind of lucky charm raises my curiosity and I try to observe that person for any fade clue. It's tough enough to pull money out of the markets. The emotions of hubris, hope, and luck make it near impossible to make money. These emotions are akin to having a horse player bet the his idea of an overlay, only to lose, and hear the lament, "Boy, I wish there were just one more furlong." In horses, as in the market, and life, there is not one more furlong and do-overs aren't allowed.

Kim Zussman replies:

How about this definition of luck: 

From Merriam-Webster:

1 a : a force that brings good fortune or adversity b : the events or circumstances that operate for or against an individual

2 : favoring chance

3. Favorable or unfavorable outcome which was not caused by skill, effort, or actions taken.

I purposely left out "ability", since some large fraction of ability is genetic, and one can only obtain good parents by luck.

Janice Dorn writes:

Self attribution bias applied to trading posits that traders attribute good results to skill and bad results to bad luck. This is a common bias that underlies the inability of many to admit they made a mistake.

Rudolf Hauser writes:

Kim's definition of luck is a good one but I disagree when he writes "I don't believe in luck, and if it were to exist it would be a zero sum game." There is no question that ability, persistence, preparation and work in general are needed to take advantage of opportunity, but luck also plays a part. So much of what we do involves interaction with other people and some depends on being in the right place at the right time. The geologist or anthropologist who is traveling somewhere and happens to notice some clues that will lead to a significant discovery is the beneficiary of both his or her skill and good the good fortune of being alert (not luck –or is it if you were just doing something else at that time and so missed what you otherwise would have notice so you had bad luck) and the luck of being in the right place at a time they had the experience to take advantage of the opportunity.

Or what about the person who takes a job in a local company that just has a product about to take off and ends up making a super salary and seeing the stock he purchased in the company rise and make him rich whereas if he had done the same in another town with the same skills and hard work doing much less well because the people running the company in and industry with no such product line and whom he had never meet were bad managers and ran the company into the ground? Sure he or she did not have perfect foresight and the ability to evaluate the thousands of people one interact with and predict how will interact with them over a lifetime–but then who does?

There is no question in my mind that a person who does not fully apply themselves is not likely to be able to take advantage of what good fortune of opportunity presents itself but there is also no question that luck plays a major part in life. And it's not just genetic– if you were born in a country in perpetual war and poverty your changes of a good life are much less than if you were born in the U.S.A. Or what about the Jewish children born in the 1930's in Germany or central Europe rather than the U.S.A. or being born in either place in the 1960's? Was that there bad luck or a failure of keen judgment and hard work on their part if they died in Hitler's gas chamber? What about the person who contracts a disease and dies from it when a cure would have been available had he gotten the disease a decade later? Was that something he or she could have prevented or just bad luck?

Kim Zussman adds:

I know a guy who is a retired contractor/developer, who "came from Germany with $20 in his pocket" and is now very wealthy. He developed a number of commercial and residential properties.

Why so successful?

1. He happened to like to work outdoors, was good with building, and good at commanding laborers
2. Was born charming
3. Was lucky to have lived through three decades of atypically high appreciation in real estate

Had any of the above three been missing, especially #3, he would not been as successful — maybe even a failure. I call that luck.

You can say the same about stock bulls in the 90s, oils and railroads in the past — all kinds of bull markets and bubbles, without which the great moguls and flops would not be. Not to mention war heroes who survived to tell the story, as opposed to those who took equal action but were silenced.

Economic society is pretty much zero sum over short periods, if you add all the give and take together.

Russ Sears writes:

Much of what we call luck is really the skill, effort and actions taken by others and given to us by the generosity of those most successful.

This would include living in a free country.

Further, much of this skill, is willingness to take actions and give effort where the difference between success and failure often hinges on the smallest thread. A thread so small, that even the most skilled, those putting the most effort can not be assured that any fruit will be borne. But one where the skill lies only in putting the edge in their favor.

This would include parenting and trading.

Finally, much of what looks like incredible luck is compounding of these skills over time and history.

However, to anecdotal throw a wrench into the "no such thing as luck" I have a relative by marriage, that won 2 lotteries. One a $4.3 million jackpot in MO state lottery, by entering one ticket a week. The other a half million Reader Digest sweep-stake, by answering the junk mailer. But she would like to remain anonymous.

The untold story however, is how the money tore apart her family. Luck or curse, I leave it to the reader.

Jim Sogi writes:

 Chinese proverb

Good Luck Bad Luck!

There is a Chinese story of a farmer who used an old horse to till his fields. One day, the horse escaped into the hills and when the farmer's neighbors sympathized with the old man over his bad luck, the farmer replied, "Bad luck? Good luck? Who knows?" A week later, the horse returned with a herd of horses from the hills and this time the neighbors congratulated the farmer on his good luck. His reply was, "Good luck? Bad luck? Who knows?"

Then, when the farmer's son was attempting to tame one of the wild horses, he fell off its back and broke his leg. Everyone thought this very bad luck. Not the farmer, whose only reaction was, "Bad luck? Good luck? Who knows?"

Some weeks later, the army marched into the village and conscripted every able-bodied youth they found there. When they saw the farmer's son with his broken leg, they let him off. Now was that good luck or bad luck?

Who knows?



Father talking about his daughter (triggered by whether she should charge for shoveling people's walks, or do it for free):

No kid among my daughter’s friends or my wife’s students has ever worked for pay (except maybe at camp), but they have put in vast numbers of entirely pointless community service hours in places like Guatemala and Costa Rica, entirely ignorant of the whacked aid economics of sending 14 year olds to “build” houses in rural communities in the Third World. My daughter and her friends are rapacious — not as capitalists, however, but merely as consumers. Once my wife mentioned to someone at one of the DC private schools that this was not an effective way to help people in the developing world, and that as far as she could tell among her private school students, they understood perfectly well that this was crazy — the response was almost exactly, “Well, it’s really about our kids, isn’t it?” The take-away by the kids was, they understood that the economics of it were whacked — and that the priority was that they have a good “experience” doing good things for poor people. In the end, their community service was just another form of consumerism.

To the extent these kids have been educated in the ethics of production — it is entirely an ethics of therapeutic production, the helping professions, in which they are extending assistance to those not in their privileged positions, for which they merely happen to get a paycheck that appears mysteriously from some third party. It teaches them inequality, to start with — the inequality that goes with the patronizing condescension of the expert who ministers to the masses (there are indeed experts; but what I refer to here is not expertise, but the sensibility of expertise, which is a sensibility acquired long before and independent of whether one has actual expertise; my kid and her friends have the attitudes, even by the teen years). It also teaches them that payment comes from third parties, not the party to whom one provides the “services.” It is not the equality of market exchange among freely consenting equals. It is not any kind of market production at all. This is a very big problem when that is the in-training of the next elites, because what we call capitalism is as much sensibility as sense.

My kid’s problem is not to learn to do good things for people. She knows how to do that and understands too well the sensibility of it. My daughter’s biggest need is to learn how to negotiate in a straightforward way, a business-like basis, in which she will not presume that because she’s a nice kid and this isn’t a ‘real’ market transaction, she doesn’t need to do a good job, or that she is somehow a rapacious little profiteering scamp if she thinks she should get paid. Learn that it is okay to negotiate to a deal. You have no idea how hard that concept is for kids raised in a purely pro-bono environment. They are scared to make an offer or bargain; it seems low-class and grasping.

Jeff Watson writes:

As a kid, I was constantly berated because I realized the value and utility of money at a very early age, yet everyone turned to me as the lender of the last resort. When someone wanted to borrow five dollars (a princely sum in 1967) I was more than glad to lend the money provided the debtor paid $6 at the end of the week. At that time, I had around $200 floating around on the street, with a big Greek kid who collected on commission. Many a time, I ended up in the principal's office, the debtor, his mother, and the principal hammering me and threatening me when he refused to pay. I was careful, not doing business on school property and after school hours, but these people were not only trying to avoid the interest, but to bust the trade altogether. Since I had the high moral ground, I spoke my piece about bad parenting, welshing, and the bad lessons taught by not paying one's bills. Still, I ended up in detention and had to get my father involved, as none of these transactions took placed on school grounds or on school time. My dad had a Svengali way of getting me out of trouble, and it was business as usual. Still, I had many deadbeats, surrounded by their overprotective mothers, who refused to pay. Somehow, my Greek cohort would find their bicycle, ride it to Madison Street, and sell it for substantially more than the $6 owed us. In all honesty, we took our rightful cut, and put the rest in an envelope and sent it to the deadbeat. We kept a list of deadbeats, and sold the list for a song to the neighborhood bookie, who was glad to get such information early. If you think it's tough making money as an adult, making money as a kid is twice as tough… It's not the making money, but the collecting money over the shadow of overbearing parents. I tried to be a different type of parent… I let my kid take his lumps, and when he cried due to getting ripped off, taught him that he just had a learning lesson. Since he got ripped off, he learned to think things thorough. Since then, I have financed several of his businesses, such as DJing, Notary Public, crab trapping, shell diver, buying and selling surfboards. While he hasn't gotten rich, he knows the key to retail is in buying correctly.

Adam Kretschmann remarks:

Too bad one of the kids parents wasn't a lawyer. A juvie record for usury and theft might have helped you recognize the "value and utility" of the law as well as the dollar.

Jeff Watson replies:

In Illinois in the 1960s the usury rate was ~45% thanks to Sears Credit. Anyway, if any adult messed with me in a legal sense, they would have city inspectors crawling over hsi house and business, before their mortgage was called. My dad and grandfather always insisted in a call provision in a loan, just for certain unexpected contingencies with intransigent borrowers. I feel no empathy for people borrowing money, as they walk into it with both eyes open, and their promise to pay it back is more than a promise, it’s a covenant.

Russell Sears adds:

I remember well the few times I spent hours shoveling a sidewalk for a negotiated price of $5, only to be handed a quarter or a buck. It is hard for a kid to argue with a old miser. But it was easy to watch him become snowbound the next big snowfall. Word spread quickly.



Looking at the S&P 500 Index monthly through 2000 to present, I separated the monthly maximums and minimums by “Large Moves Up” and “Large Moves Down”..

Each month I calculated the “Max Move Up”  =  (Max of Inter-day max for month – Open for month)/ Open for Month.


“Min Move Down”  =  (Minimum of Inter-day min for  month- Open for month)/ Open for Month.

And then sorted them by size.

The Highest 12 (90th Percentile) Max Moves Up the following stats:

    Concurrent Month


         All Positive
         Max+ 9.2%   3/00
         Min +0.28
         Avg. +6.9%

         1st biggest Max Move Up = 13.7%
         12th  Max Move Up = 6.6%

    Next Month’s Returns:

        10 of 12 Positive Next Month Return
         Max  +9.0%  3/09
         Min  -5.5%  8/00
         Avg: +2.5%

However, doing a little data mining it looks like this positive “trend” disappears if the Max Move Up is less than 6.5% the 13th highest move up . Under this Up range the next month returns start having some large down months. I will leave it to the reader to determine how much.

The Biggest 12 Min Moves Down has the following stats:

 Concurrent Month

         All Negative
         Max  -18.6%   10/08
         Min   -3.1%    4/00
         Avg.  -9.6%

         1st biggest Min Move Down = -28.0%  10/08
         12th  Min Move Down = -9.4%

(The 13th Min Move Down was -9.3% and overlapped the 2nd biggest move up occurring on 3/09 with a 9.0% next month return)

    Next Month’s Returns

         6 of 12 Positive Next Month Return
         Max  +8.3%  9/02
         Min  -18.6%  9/08
         Avg: -2.5%

So it appears that negative volatility can have positive next months, but they are overwhelmed by the much larger relative size of negative next months. Again doing some data mining it would appear that this negative signal continues until the negative -6.5% Min Move Down.. Again I will leave it to the reader to determine how much.

This suggest the strategy of simply getting out of the market and staying out when a Min Move Down is < - 6.50% and then getting back in when the all clear signal is given by the months Max Move Up > 6.5%.

Even with staying out in 04/09 since 03/09 first was both first < - 6.50 and then > 6.50 for the Move Down and Move up: This strategy would have placed you in the right position for the 4 major trends in 2003 up and in, 11/2007 to 04/2009 out and 5/09 to now in. Again I will leave it to the reader to count the gains of this strategy. But obviously this assumes the trends up or down will be long and steady one direction for it to work.



There are multiple methods of measuring investment risk. Several popular methods utilized by investment managers:

VAR (historic, variance-covariance, and Monte Carlo)

Sharpe Ratio

Modified Sharpe Ratio

Standard Deviation


Ulcer Index

Information Ratio

Intra-Portfolio Correlation


For investment capital attached to future outlays such as pension obligations and retirement account distributions, surely Shortfall should be included in the risk assessment tools mix. For those asset managers who are not tethered to an Index, Information Ratio is of little use and is clearly inferior at measuring absolute risk. Furthermore, for all but the most stoic of investment managers, Standard Deviation and Sharpe Ratio are deficient because they don’t differentiate pro-position and counter-position volatility.

Although each remaining method has strengths and drawbacks, all successfully measure risk. Maybe, a combination of methods throughout the investment decision-making process will permit a more comprehensive analysis of risk. Consider it ‘risk analysis diversification’, if you will.

One potential avenue could be to first figure out which individual strategies to deploy within a multiple strategy portfolio. This can be accomplished by using the relatively simple to compute and compare, and fittingly named, Ulcer Index (at least to those whose gastric ailment is not rooted by a H. pylori infection). Ulcer Index is apposite because its formula contains, instead of standard deviation as is used in Sharpe Ratio, the sum-of-root-mean-square of all periods’ percent-drawdown. Vital to maximizing precision is using long-term historic data. Importantly, data should include periods of extreme price excursion. If there is no long term data, generate a synthetic long term series, or if possible, select

a highly probable highly and positively correlated surrogate asset. Normalize the surrogate to the actual asset’s volatility over a comparable time period (compare periods after regular high volume has been maintained in a new issue). Next, Ulcer Index can be computed for each strategy’s returns over a uniform time period. Then, rank and check for correlation among strategies and choose accordingly.

Lastly, to engineer the desired overall portfolio risk/reward profile, optimize expected Intra-Portfolio Correlation and Modified Sharp Ratio. For accuracy, Modified Sharp Ratio’s (which incorporates VAR) inputs should be projections, partly extended from historic and if necessary synthetic data. Do expect to make regular revisions.

Of course, there are other combinations of methods to achieve risk analysis diversification benefits; this is but one example

Russ Sears writes:

The problem with these measures are they cannot measure the risks of cannibalizing the future for short term gains. The more a model is used, the clearer it is to all those involved how to tip the scales in their favor. Remember the chaos of the gyspy moth, overbreeding until the trees cannot regenerate leaves quick enough for the last generation.

Take VAR, its lack of liquidity measure, and do a cursory scan of the role it played in the overallocation to sub-prime, mortgages, real estate and structured credit or rating agencies, AIGFP, SIV's, banks and insurance companies required capital. Even those titans of business Havard and Yale fell for these gapping holes in measuring risks and performance. Soon everybody is overallocated to the same thing. Then suddenly everybody is surprised when the door is not big enough when the liquidity fire alarm is pulled.

For diversification of risks measures, I have had much more luck understanding the weakness of the model and trying to prevent myself or a company taking my advice from letting the weakness of the model predetermine my allocation or strategy. The genuis of Chaos Theory, in my estimation, is clearly understanding what a model does not and cannot measure. Then you won't expect it to measure all risks and are not alarmed by those that cannot see they stepped off the edge of a cliff. 

Anton Johnson responds:

Mr. Sears makes exceptional observations, and to extend on those, I would add that the endowment funds’ problems were exacerbated by inexcusable errors in basic portfolio management. By simply monitoring the portfolio and maintaining prudent volatility adjusted component size limits and intra-portfolio correlation level, much of the funds’ losses engendered by the managers’ usage of VAR, and their apparent ignorance of its shortcomings, would have been mitigated. Of course, the root cause of their problems was unfortunate asset selection and poor foresight; and that is an entirely different topic.



 Although I love to collect fine art, especially Impressionists, I also am an avid collector of Surf Movie Posters. These posters were made during the 1950s-70s and some were real works of art. Since I like to check out eBay for the offerings, I have noticed a few things.

Normally, in that eBay category, there will be 30 posters offered, mostly $4.99 reprints of terrible movies like "Blue Crush" or "Surf's Up." Lately, I've noticed that there are 100-150 posters being offered and sold for amounts that haven't been seen since Mat Warshaw came out with his excellent coffee table book on surf movie posters titled Surf Movie Tonite! Surf Movie Poster Art. His book caused a pronounced bubble in the market for posters, and I stopped collecting until the bubble popped.

Looking through the current offerings, I see works by John Severson going for as much as $109-$299. Bruce Brown's posters are going for $129, and even the faux surf movie "Ride the Wild Surf" original is going for $1200. 2007-2008 was the year to buy these same posters, as they were 60% less then the current market prices. Some posters like Yuri Farrant's "Hot Lips and Inner Tubes" command prices of $3,000 if you can find a copy. I got mine in 1976 for $6.00 from an ad in Surfer Magazine. Any work of art or original surf poster by the late Rick Griffin costs as much as a painting from a gallery in Soho. Somehow, I suspect that the market in original surf movie posters is going up and might test the 1986 highs. Still, in this market, it is caveat emptor, as there are a lot of fakes out there.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MasterOfTheUniverse.

Yishen Kuik observes:

There is clearly a lifetime cycle effect for the collectible asset class.

People in their 50s who are at a stage in life where the most successful of their cohort have enough money and time to indulge in the things that most captured their fancy in their formative years between 15-20 bid up the best collectibles in that class. It is likely that that is the peak average asset valuation of that collectible — the best items might continue to mark higher and higher prices, but any random assortment of quality pieces would slowly become less and less liquid, and speculative sellers would have to choose between the theta of warehousing & unknown time of execution in order to obtain bid improvement, or pay up for the illiquidity disposal fee.

The kind of comic books I read as a kid (X-men) have enjoyed a resurgence in popularity in the movies that I assume must have translated into higher prices, just as old arcade game boxes have enjoyed a revival re-entry into many bachelor pads. Star Wars figurines by Kenner are another example of items that have enjoyed resurgences in the past 10 years after a 20 year lacuna since their introduction.

What are the things that fascinate the young today, which if stored cheaply and properly, might yield good appreciation 20 years hence?

Russ Sears writes:

Surely any women painted by Renoir and any girls by Degas, deserves a place on the list of art that "makes life worth living forever." 



 Checklists have been shown to reduce errors, improve accuracy, and increase profits in many fields. Most recently, a study in the New England Journal by Atul Gawande shows that use of a 19 point check by surgeons could reduce deaths by 30% and save billions. Such simple things as knowing all the names of your colleagues and being sure that an adequate supply of blood and respiratory equipment is available are useful.

When it was suggested to me that a checklist for my own trading might be useful, I originally had the same reaction as the doctors. "I've flown with the eagles, climbed the highest mountain, captured the mountain lion, been a member of all the exchanges, played 12,000 refereed matches, went to Harvard." But then I read the reaction of the Drs. "I'm from Harvard. I don't need such a list. But if I was operated on, I'd like such a list."

Here's a list I came up with for the forgotten man, the hundreds of thousands of traders in stocks, futures and options.

Before the Trade

1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?

2. When does your market close, especially on holidays?

3. Do you have all the equipment you'll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?

4. Did you write down your trade and check it to see for example that you didn't enter 400 contracts instead of the four that you meant to trade?

5. Why did you get into the trade?

6. Did you do a workout?

7. Was it statistically significant taking into account multiple comparisons and lookbacks?

8. Is there a prospective relation between statistical significance and predictivity?

9. Did you consider everchanging cycles?

10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker?

11. If a trade is based on information, was the information known to others before you?

12. Was there enough time for the market to adjust to that information?

13. What's your entry and exit point?

14. Are you going to use market, limit or stop orders?

15. If you don't get a fill how far will you go? And what is your quantity if you get filled on all your limits?

16. How much vig will you be paying if you use market or limit orders and how does that affect the workouts you did knowing that if you use stops you are likely to get the worst price of the day and all your workouts will be worthless because they didn't take into account the changing price action when you use stops, to say nothing of everchanging cycles?

17. Are you sure your equipment is as good and as fast as the big firms that take out 100 million a day with equipment that takes into account the difference between being 100 yards away from an exchange and the time it takes the speed of light to reach you?

18. Are you going to exit at a time or based on a goal? And did you take into account what Jack Aubrey always did which is to have an escape route in case all else fails?

19. What important announcements are scheduled? and how does this affect when and what kind of order to use? For example, a limit before employment is likely to be down a percent or two in a second. Or else you won't get filled and you'll be chasing it all day.

20. Did you test how to change your size and types of orders based on announcements?

21. What's the money management on this trade?

22. Are you in over your head?

23. Did you consider the changing margin requirements when the market gets testy or the rules committee with a position against you increases the margins against you?

24. How will a decline in price affect your margin and did you take into account what will happen when you get stopped out because of margin?

25. What will happen if you need some money for living expense or family matters during the trade? Or if you have to buy a house or lend money to a friend?

During and After the Trade

1. What's your game plan if it goes against you and threatens your survival?

2. Will you be able to get out? Did you take that into account in your workout?

3. More typically, what will you do if it goes way against you and then meanders back to give you a breakeven? Or if it immediately goes for you or aginst you?

4. Would you be willing to take a ½% profit if you get it in the first 10 minutes?

5. Did you test whether taking small opportunistic profits turns a winning system into a bad one?

6. How will unexpected cardinal events affect you like the "regrettably," or the pre-annnouncement of something you expected for the next open? And what happens if you're trading an individual stock and the market goes up or down a few percent during the day, or what's the impact of a related move in oil or interest rates?

7. Are you sure that you have to monitor the trade during the day? If you're using stops, then you probably don't have to but then your position size would have to be reduced so much that your chances of a reasonable profit taking account of vig are close to zero. If you're using 10% of your capital on a trade, they you'll have to monitor it for survival. But, but, but. Are you sure you won't be called away by phone calls, or the others?

8. Are you at equilibrium in your personal life? You're not as talented as Tiger Woods, and you probably won't be able to handle distressed calls for money or leaks on the home front. Are you sure that if you're losing you won't get hit on the head with a 7-iron, or berated until you have to give up at the worst possible time?

9. After the trade did you learn anything from the trade?

10. Are you organized sufficiently to have a record of all your trades for your accounting and learning?

11. Should you modify your existing systems based on it?

12. How does recency and frequency and value affect your future?

13. Did you fit your after activities to your mojo?

14. If you made a good profit, did you take some capital out of the fray for a rainy day?

15. Have you learned to say "fair" whenevever anyone asks you how you're doing and are you sure that you don't spend a fortune after a good trade, and dissipate your profits with non-economic activities?

16. Is there a better use for your time than monitoring the ticks or the market every minute of the day if you do, and if you don't, do those who do so and have much faster and better equipment than you have an insurmountable advantage against you?

Well, specs, that's what I come up with off the top. How would you improve or augment it?

Nick White comments:

If a position begins moving against beyond what was anticipated in the workout can one, through either contacts or acquired counting skills, figure out as fast as possible why the move against is occurring? With that information, can one then discern whether or not such a move needs to be heeded, faded, or left alone?

What legitimate information sources can one leverage to better understand a particular trade? A buddy who is a floor trader, a mentor, a high ranking friend of a friend in a central bank?

Are one's current skills commensurate with one's trading goals and ideas? Perhaps, more importantly, are one's trading skills of the same league and caliber as those one is competing gainst in a particular market? If not, surely best to wait and keep capital safe until one is sure of one's edge. This strongly accords with Chair's admonition to never get in over one's head, and to not spend inordinate amounts of time watching each tick when that time could be more profitably invested in training and developing new and existing skills — counting, programming, etc.

Make the strongest effort possible to find out whether the tail wags the dog in a particular instrument that you're trading. If it turns out that it does, does it happen with significance at a particular time, such as expiry? Or after a particular event? Can it be exploited after costs or is it better to fade it after the fact?

If one asks these questions and takes note of them in the essential lab notebook that ought to be at one's fingertips during all trading and researching activities, have those questions subsequently been answered by oneself? I have found this to be the most fertile soil for developing new insights and ideas. If you observe it, note it and question it — hypothesize about it and answer it.

Alston Mabry comments:

Here's one: Don't fool/confuse/tire yourself by making your execution more precise than your analysis. If your target is 2% within the next five trading days, then chasing two bps on the entry isn't going to make or break the trade.

Easan Katir adds:

  1. If you trade odd hours, get enough sleep and appropriate caffeine dosage.
  2. One well-known S&P pit trader advised two bowel movements in the morning before setting foot on the floor.
  3. Start the day with a centering routine — affirmations and goals. Remind oneself of one's larger purpose.
  4. List important times and dates on an online calendar with appropriate alerts: government numbers, earnings, ex-dividend dates.
  5. Rehearse successful behaviors and outcomes. And disaster recovery.
  6. Minimize other life stressors: long commutes, family arguments, risky vices, debt.
  7. Test backup equipment and systems regularly. I test my diesel backup power generator weekly.

Victor Niederhoffer responds:

I would add a small point. Trading foreign markets always seems much more difficult than domestic ones. For one, you never know what the important announcements are. For two, you get killed on the spread on your foreign exchange prices. For three, it seems to be 100 times more time-consuming to get into the queue than even the 1/100 of a second that's enough to give the domestic high frequency traders an insurmountable edge on you. For four, you have to go without sleep for at least one night, and then on the second night when you can't stay up the required 48 hours without sleep the move you expected and closed out is sure to happen.

Alan Millhone writes:

Checker master Tom Wiswell said to always keep the draw (escape) in sight.

Scott Brooks adds:

I have to disagree with Easan on the caffeine. I know there are many people that have to have their morning cup(s) of coffee to get their day going, and without it, don't feel/function right.

I do not want to go through life being so dependent on something that I have to have it to make myself feel right, let alone function right. I know this will be anathema to most (everyone?) that reads this, but I have to say it.

When I removed the caffeine addiction from my life (and don't fool yourself, it is an addiction…..if you have to have it everyday and then quit it, you will go through withdrawals……it is an addiction), my life changed so much for the better. I can think clearly. I can process information more quickly, and I can see solutions with greater clarity.

And your sleep will improve immensely. I suffered from severe insomnia for years. Kicking caffeine out of my life has lead to my being able to fall asleep, usually within minutes and being able to get up earlier and feel more refreshed!

You will find a level of "mental processing" that you never thought possible when you replace coffee and caffeine with purified water (I drink around a gallon a day) and a glass or two day of the organic juice of your choice.

But be prepared, you will likely have around two weeks of headaches when you go through caffeine withdrawals (you know, from the caffeine that you're not addicted too).

Nick White agrees:

Ditching caffeine is a good move. Best to save it for when may really need it on an overnight (or two) session. As mentioned in the past, Dr. Shinya is fervently anti-caffeine. Like many others, I found Dr. Shinya's principles promoted many positive health benefits for my wife and me.

On that note, i find that the Shinya nutritional principles — when moderated by the ideas behind the paleo diet — are a real winner; the increased "good" protein from the Paleo program does much to mitigate weight gain from increased carbohydrate consumption when kicking off on the Shinya program. There is a Paleo program for those involved in elite endurance sports.

George Parkanyi writes:

On any project or major activity, the first question I ask is how much time I have. That frames everything that is to come.

The very next thing is to build a contact list with names, phone numbers (backup phone numbers) and email addresses (and account numbers and passwords). This is also true in Scouts, where we need to have that information at our fingertips for safety reasons — in fact for every camp we have to draft an emergency plan — police, hospitals, parents, primary first aid responsibilities, etc. In a trading operation this is critical. If you have key support resources who have to act on your behalf at a moment's notice, then they need to be available, you need to able to access them, and if not, there must be a ready backup contact and plan B, even C. Chair's point about having a pen available can even be a critical detail — what if, in the heat of battle, you have to write down, say, a wire transfer number? In my case, reading glasses would be another.

Kim Zussman comments:

As a periodontal surgeon, I have found it much easier to stay composed and rational during difficult surgery than unruly trades. Chair's excellent list hints at why, in the form of the question "how do you know?".

Surgical complications follow rules of biology, and mistakes usually come when overlooking something or miscalculating the compounded risk of several factors. One can and should practice with a large margin of safety, which in almost every case is easy to determine. Biology is almost immutable, but markets morph wildly in real-time. It is very difficult to stick with a position if you are honest about your cluelessness and unwilling to go down with the ship. When the trade goes bad:

1. What was your hypothesis? How many others had your idea too? Or the opposite one? Are they right? What do they know that you don't? What is the source of your confidence that you can out-smart (or out-run) the million-mind-march?

2. Did you test properly beforehand? Did you miss something; a signal from another market, a subtle backdrop to your traded market? What is the chance this time is different, and should this doubt change your mental stop?

3. How heavily is your market being manipulated? By government? Big banks? Goldman's trading desk? Does persistent manipulation / insider trading change your hypothesis or render hypothesis formation useless?

4. How do you know whether the move is merely noise of your correct hypothesis, or part of a regime change you have not noticed?

5. Deep and abiding doubt is essential to science, but how do you incorporate doubt into market prediction when most of the movement is random?

6. Does the non-linear, mostly random reward system of trading corrupt your judgment (sleep, personal life, etc)? Do some people lead a happy, well-rested life with long periods of gut-wrenching loss alternating with gain, and are you one of them?

7. What unalterable beliefs are necessary to trade successfully? If you hold them, are you sure they are the right ones? Should some beliefs be discarded as a result of a changing world? Are there new ones you should know, and are you confident you will see them when they develop?

Steve Ellison adds:

Margin of safety is a key concept in many fields. While skiing, I put on the brakes a bit earlier than I absolutely must so that if I miss my footing or hit a patch of ice, I have another chance to avoid the hazard (e.g., other skier, tree, out of control speed). Graham and Dodd wrote about margin of safety in investing. Rather than buy a stock that is below book value, a value investor might wait for an opportunity to buy a stock below 80% of book value.

If I ski 10 times a year, even on the same mountain I am likely to encounter 10 different sets of conditions — temperature, wind, length of time since last snowfall, etc. One day last year, the fog was so thick I could not see the trees on either side of the trail. Some conditions dictate caution; others are more forgiving and allow me to be more aggressive. A warmup run is an excellent way to get a feel for conditions.

Nigel Davies proposes:

Checklists are very good whilst learning, but I believe that one should ultimately aspire to be able to do without them because everything has been internalised. In my own field I tend to believe that conscious thought of any kind can be a distraction, which is why I don't like the old Blumenfeld Rule (a checklist used before playing a move).

Ken Drees writes:

I just did an experiment with my son with one of his Christmas presents, an electronic learning kit. We have learned so far the basics of how electricity works. Resistors (series and parallel), Capacitors, etc. Each lesson has a page explaining the experiment, a schematic, a drawing of the circuit in relationship to how water moves through pipes — the water analogy for electrical flow resonates with my son. And each experiment has an electronic "wiring checklist'.

The checklist comes in handy since its easy to forget a connection, misrun a wire, or leave an extra connection from a previous experiment in the lab circuit.

I associate checklists with "must have"–high accuracy functions. Like programming, wiring, piloting, fixing a car, cooking –its all routine, but items can be omitted, done wrong and can be forgotten due to human error. The checklist is a tool, an aide that removes ego from the scenario. Used in trading it helps set the trade up, helps initiate or close the trade, and removes emotion from what needs to be done automatically. A checklist in the grey area of a trade like the middle game in chess, or an operation where the patient is being worked on really doesn't help much–you need to make gut-inferred decisions, unless your trade is so automated that you remove yourself from the trade entirely and rely upon a program.

Using trading checklists help bring focus and energy towards the trading exercise. Using checklists of some sort during the "live–life of its own phase of the trade" must be explored further. Maybe there are ways to check off your decisions, check your options, use your skills with the pressure of time taken into consideration–during this live phase.

But when your hand is on a hot stove, trade going wrong, does one need to look at a post-it-note do determine if one should remove hand from stovetop?

FYI: a 9 year old boy is understanding electricity –public school may teach a child these ideas in 7th grade. I am amazed at what can be taught to children that most think is way over their heads.

Alan Millhone adds his two cents:

I will add my two cents. Some years ago I bought an International dump truck and it has air brakes. My late father and myself drove it for use in our construction projects. Because it has air brakes you need your class B driver's license to be legal. We drove it several years without the proper license. Finally my father got the book and studied and took the written part for class B. After he took that part he gave me the book and I studied and took the test and passed. Quite a book to study.

Now the second part was an over the road test with the instructor in the truck with each of us. He said he had never given a back to back test to a father and son. Dad and myself had to back the truck then drive to the right close as we could to an orange cone– without touching the cone. Then each of us had to do a 50 point check list of our truck that we earned (I still remember the list ) and still check my truck before taking it onto the road. So checklists are valuable in many applications ranging from dump trucks to the Market.

On a side note, dad and I rode to the test center in our dump truck without the proper license. The instructor said he was not going to ask how we got there.

David Brooks comments:

All very good ideas. I wish there were some good way to test Atul's theory historically. Why? Because I am convinced that poorer outcomes in the last decade come from fragmentation of the system - shift work, decreased work-hours by house staff, the high volume being forced through the system and de-professionalation of nurses.

Alas, we can't measure the past, but I am convinced that the hospital I started in (The Peter Bent Brigham of the early to mid 70's) was a safer, more humane place with better (allowing for technological changes) outcomes.

All the same, the reason we have embraced checklists a la airlines has to do more with the aeronautical outcomes than medical outcomes. The amount of information that a pilot has to process is order of magnitudes more than what a surgeon has to process. Furthermore, when a pilot fails completely 300 lives are lost, and when a surgeon completely fails, 1 life is lost. The former is far more dramatic, of course.

It's nice to know the anesthesiologist's and scrub tech's name, but it's hard to believe that that is going to affect the outcome of a significant number of operations.

That said, I have the greatest admiration for Atul. He sits a short distance from me, and I am proud to have had even a small role in training him. He is a remarkable young man and we will being hearing from him for many years to come.

Newton Linchen comments:

Once I took an airplane pilot course, and I was amazed how everything was done with checklists. Actually, the first time I heard the word 'checklist' was there. (Even here in Brazil they keep all the terminology in English, for standard procedure). I realized how checklists can keep you out of trouble and save your life. In markets, perhaps a great deal of losses could be avoided if I followed my own trading checklists.

Russ Sears writes:

Checklists can be very useful in an emergency. I have found that a simple checklist was valuable in a race. When the going gets tough it is easy to panic. The list It went something like this 1. relax 2. pump the arms smoothly 3. breath in normal rhythm (One hard puff out, relax in). It is easy to panic on the edge of your limits. These 3 things are the first signs that you are starting to panicking, subconsciously without knowing it.

Runner, use checklist often as part of their diary. Each day you check your weight, evaluate your nights sleep and your overall mental state. You check your diet and fluid intake .

Before a race you follow your pre-race checklist from what to pack, to when and what to eat, and when and how you should be warming-up and stretching.

Then after the race you check how well you followed the plan, where the plan worked and where if failed.

Finally at the end of the year you check the philosophical underpinnings of your training. Your goals, why you are doing it all, what are the cost that you are willing pay and what is the best path to get there.

So checklist have there place, but you need to 1. put them in the right point of time in the process, 2. not let them lose their relevance and meaning . 3. keep them simple at critical points, simple enough that they are potent.

Easan Katir adds:

Thinking about checklists, and watching the Haiti disaster coverage, made me think about a checklist for emergencies. Then thought about a list of the various types of emergencies one might encounter, big and small. What came to mind:






home invasion


mistaken id

false accusation






missing person


currency replacement/devaluation

market crash

partner deceit


power outage




i suppose each needs its own checklist, though some may overlap. What did I miss?

Scott Brooks adds:

The best checklist you can have is to either be a great leader or be around a great leader.

It's been my experience that average and ordinary people need checklists (which they rarely if ever have or use…which is one of the reasons why they are average and ordinary), but smart people with leadership skills don't need a checklist when it comes time for a disaster.

Most disasters/problems rarely follow a fixed pattern. It takes a leader who is capable of thinking on his/her feet who can stand up, take charge and direct people as to what they need to do.

And this doesn't have to be right all the time, he just needs to make decisions and get people moving and be willing to take responsibility and shrug of criticism of the naysayers…..while listening to them to extract the wisdom that might be contained in their "naying" (I think I have just made up a word).

A leader has to have insight and the ability to see several moves ahead. A leader has to be able to see correlations and connections between seemingly disparate pieces of information.

A leader has to then take this data and formulate a solution and then direct people to execute the solution….and if possible, get people to see the vision of the completed project so that they can begin to work towards that goal with minimal supervision.

But most importantly, a leader has to be willing to make a decision when it comes time to make a decision even when the solution is not apparent. A course of action that fails is better than inaction that is guaranteed to fail.



wheatFrom the 1980s up to 2005 there was a phenomenon in the wheat market that locals referred to as the "Noon Balloon." Four days out of five, the market would rally 2- 3 cents on big volume at the noon hour, then settle back after we sold into it and the buying stopped. It was so regular, that we'd start bidding up the market a few minutes before noon, hoping to get the buyers to pay even more.

Many a fortune was made on this anomaly and it was our personal ATM machine. The Noon Balloon curiously disappeared with the demise of REFCO, and was just one of those quirks that a sagacious person on the floor could exploit. Since so many people jumped on the Noon Balloon, the effects were exaggerated. Whenever I see an uptick in wheat at 1PM (12cst) I fondly think of the Noon Balloon.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MasterOfTheUniverse.

Victor Niederhoffer observes:

A published report relating to an irregularity supposedly found regarding afternoon movements has been disseminated by a very profitable brokerage. The subsequent comments relate to the layers of meaning and deception behind such reports. 

Jeff Watson comments:

Not all players have the same motives in the markets, Case in point, hedgers will sell no matter what the conditions might be. Certain commercials will play with spreads, defending them for no discernible reason. Many games are played in the delivery months, and with deliveries being re-delivered, and on and on. Commercials try to stack the pit committee, and play with the settlement price (which is not necessarily the last trading price), for their own gain. Despite the fact that trading has mostly gone electronic to improve market efficiency, a whole new series of land mines has been laid down, part of the law of unintended consequences.

Tom Marks writes:

The question of a published report with an intra day trading regularity arises from Victor and he suggests that something seemingly useful like that must have an ulterior motive. I demur. But what if they figure that the jaded such as ourselves have figured that out that nobody provides gratis which otherwise provides profits, so they in turn fade the faders. Especially when they have the wherewithal to cross-check against the order flows of whom was provided with that report in the first place. Artful deceptors rarely ply their craft one-layer thick. They like suggest texture and added dimensions. A trompe l'oeil effect that fools the eye. 

Nigel Davies adds:

The fact that the effect has been noticed and publicized seems likely to make it behave differently from the past. At least some traders will want to jump in ever earlier to exploit it, and then there will be those who fade them etc. But the last thing I'd expect to happen is an exact repetition of the past…

There's a good chess analogy to this in that the champions tend to set new opening trends but move on as soon as the crowd has noticed.

GM Davies is the author of The Rules Of Winning Chess, Everyman, 2009

Phil McDonnell writes:

To echo the Chair's observation I once reviewed a quantitative study of some market anomaly. It showed that some 700,000 (!) trades backtested would have been 80% profitable over a 10 year period. The authors were a well known TA writer and his researcher. Although the report had none of the usual tests of statistical significance that we might use here, still the sheer magnitude of the number of observations was compelling.

Nevertheless publication alerted the antenna and caused me to ask why. I redid the study on a smaller sample for the most recent year. In fact it lost money in the recent period. Hence the reason for publication — it no longer worked. But it enabled the authors to keep their names in the press.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Tom Marks responds:

Perhaps the real intent was to get the market so confused over this "anomaly", that no substantive moves would happen around 12:30, and those at GS could get a bite of lunch. Like the strategy we played with my 7th grade social studies teacher, simply mention Vietnam and you could ignore him and safely work on your math homework for the next hour.

Russ Sears writes:

When it comes to deception, there are different strains, some ultimately less problematic than others. Toward that end, the 7th grade social studies subterfuge may be as benign as it is precocious as it is brilliant as it is utilitarian. Everybody wins. The teacher gets to indulge his fixation, maybe even sharpen some pedagogical skills, while the kids learn how to best juggle academic time constraints by effectively calling some sort of curriculum timeout.

Sure, in terms of flawless honor, it's a little chipped, but so is the Venus de Milo. Doesn't make either any less a work of art.



 One of the only times left today in our busy world for families to spend alone in close proximity with each other is in the car. Now that families eat out more and kids are being rushed from one practice to the other, traveling to school, games or activities.

My family also often take a 13 hour trp one way to Grandma's in the car. My kids and I spends more time together than I ever did as a youth with my Father including nightly meals.

But cars are not conducive to heavy discussions. While often my wife and I use this time to get caught back up to, what is happening in each others world; this generally has not been the case for the kids. Rather than bonding its time, it has either been a time to bicker or ignore each other for the girls (girls 11 and 16). Fighting, or stopping a fight,especially in a car while driving is probably one of the most distracting dangerous things you can do. We have a strict, no fighting in the car rule. I often say, "Unless it litterally is worth dying for…I do not want to hear it."Like many our family car is an SUV. It is now equipped with a plethora of mobile electronic devices that would make the early James Bond's car seem boring. Judging from the small screen DVD players, cell phone conversations, game boxes, and I-pod you see on the road, ignoring each other seem to be the alternative many families choose.
So in the past year I invented a game we call "the imagination game". The rules of the game, as we play it is every body has a chance to think of a topic they would like to hear the others imaginary story about. Then everybody listens to the story until it is finished. And then someone else's turn to either tell a story of the same topic or think up a new topic an asks someone else to go.

The girls love it. The oldest girl ups up and shares her feelings…something I think is pretty amazing for a 16 year old. And the youngest loves having the floor and chance to ham it up. It has probably changed my relationship with her the most. Because, like her Dad, she is a severe introvert. This allows her to express herself like an actor, or artist with a layer of protective detachment. But also because she now looks for chances to go to the hardware store or other trips just with me, so we can play.

I try to draw from my childhood daydreams and works of art for my topics. Some typical topics may be:If any book you read came to life what would it be? Which character would you be and which character would the rest of the family be?
If you could invent anything what would it do and how would it change the world?

If you dug a hole in the back yard and found something amazing what would it be and how did it get there?

If you could buy anything what would it be and what would you do with it?

What movie would you like to be real? What character would you like to be?


Jim Sogi adds:

JSI found one of the best times to talk with the kids (when they were kids) was while driving in the car. They had a long commute to school. When the other kids in the car pool were in the car, they chatted away, and I got to hear about everything going on. Its a good non-confrontational situation since you are not looking at them, so they don't feel on the the spot and tend to open up more. It was a good time to raise things away from the rest of the family as well. The gadgets in the car might tend to discourage this nice talk time.

Jeff Watson remarks:

MotuMy son and I always had an agreement that he could decorate his room anyway he wanted from kindergarten on. He had a rather eclectic style of decorating, and his room (in surf-rat style) still reflects who he really is, not the Classics Scholar he wants the world to see. We always had an agreement that I'd come into his room every day, ignore the putrid mess, and we could have any discussion and he would have total immunity for anything he divulged. I heard a lot of things, but as my word is my bond, never punished him for any transgressions he revealed. Ultimately, the real lesson he learned was that he could trust me, that I was on his side, and it's better to be a good citizen than an outlaw. Since we live at the beach, he's run into many eclectic characters, has had to grow up early, and has seen many things that might not be age-appropriate. I've always played the role of "Ward Cleaver," and have provided guidance without hovering, but encouraged him to make his own rational choices. The result of our laissez faire parenting is that my son will tell me anything, won't lie to me, and will make and listen to rational analysis. I'm willing to let him go off on tangents (with a rope in hand to bring him back to earth), and I provide a safety net, so he has security which will give him courage to spread his wings and fly. So far, so good, but he's 21 and as a parent I will still worry about him until he's 80.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MasterOfTheUniverse.

Jim Lackey writes:

LackMr. Jim, we all talk to kids on the way home from school or best, after sports practice when they can think without emotion. Long drives are greater than 3 hours but less than 8 hours or 500 miles. Brutal drives are 8-13 and 14 and over hours is pure torture. My brother and I call it "seeing fireflys".

The imaginary game sounds cool. We have a million BMX/MX miles and the 500 mile 8 hour drives are good for books on tape.That Turkey day Thunder run to Fla to see family, 13 hours, my wife had fun with "Sundays at Tiffany".  I said OMGauche a romance novel Jenn? It was, weird… an imaginary friend comes back to romance her.

One trip the BMX kids groaned one AM when I plugged in a murder mystery. "What is this, a book? No!…Let's listen to music!" The next rest area/stop the kids ran back to the van to listen. One trip a book had 30 minutes to go and everyone wanted to hear the end of the book before race practice. I've also used "cliff notes" books on tape for those Victorian classics that I would never read. We are talking Pride and Prejudice here. Which reminds me, my 8 year old girl is on Dickens. Last night after dinner she mentioned England, living in London. Yet our discussion was cut short with that pesky tech…1$ redbox movie the TV and DVD player and Cloudy With A Chance Of Meatballs. Cute story. The kids read the book. Only thing I got out of it was, "See, she is playing dumb blonde" which is one of my pet peeves and I tell my girls to "please never play dumb blonde." Yet do practice your southern drawl and lay it on thick during negotiations. Which was another spec list meal for a lifetime we learned here. Wish I had the ability.

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