I’ve been reading up about Charles E. Sorenson as someone who I missed on his contribution to Ford.  There’s a lot of lessons in/on his life.  One is, the #2 defines the #1 man much more than is commonly assumed.

As you would expect, I discovered him through his boat.

Bud Conrad writes:

Fantastic photography, especially obviously surreptitiously boarding the Helene and the waterways around.

I have often been captured by the faded grandeur of some of Detroit, and this is magnificent. I am also shocked by the abject destruction of many areas and buildings that show an ugly turn for humanity.

I wonder how this happens in America, as I live in ever-changing Silicon Valley; where for example Robert Noyce's house (Inventor of integrated circuits and founder of Intel) with 4 acres, two lakes and vineyard sold for $11.4 million last month. My worry is that Detroit may be the model of future USA. San Fran ain't what it was to the flower children of the 60's. 

Silicon Valley pioneer’s former home expected to sell for $14 million. Take a look



Hernan Avella writes: 

A Fearful Asymmetry: Covid-19 and America’s Information Deficit with China

David Moser

July 11, 2020

Volume 18 | Issue 14 | Number 5

Article ID 5422

Abstract: There is a longstanding and fundamental asymmetry in level of mutual understanding between the US and China. Chinese citizens are avid consumers of American media and cultural products, whereas most Americans are woefully unfamiliar with even the basics of Chinese history and culture. This asymmetry has resulted in a situation where the US is in danger of misinterpreting or misunderstanding Chinese motivations in bilateral relations, particularly in times of crisis. This paper recounts how the Covid-19 epidemic of 2020 exacerbated existing tensions between the US and China, and how these escalations in state-to-state conflict were ilarge part due to America’s information deficit with the PRC.



Jeffery Rollert writes: 

The article reminded me of old Cold War articles. Clear local perspective, and cold lanuguage discussing hot topics.  I found the premise to be thoughtful and well explained, but it seemed clouded by reaching to far from it.

K. K. Law writes: 

The author completely missed a very major point and that is likely the result of him also only having very superficial understanding of China and CCP. The author fails to account for the key role of CCP's propaganda machine which controls what the Chinese can read and see and also controls what kind of information and mid-information is allowed to be sent to the West.  The CCP has perfected its machine to control the minds and behaviors of Chinese inside the country since 1945.

Stefan Jovanovich replies: 

1948 would be a better date.  Until the KMT outlawed ownership of gold and imposed price controls - which ruined all remaining exchange value for the currency, the Maoist insurgency had no guarantee of winning.  As usual, the "conservatives" in American politics picked the wrong villain.  The communists in the State Department had little effect on the outcome; the sensible bipartisan financial experts are the people who "lost" China.



Russia was the erstwhile leverage cyclotrone, selling its primary produce the commodities below cost of production. Went bust.

China the next cyclotrone is even more aggressive. Not only the highest operating leverage anywhere in the world as an economy but the Chinese Gummint facilitated layers and layers of cross holdings and paddings within all balance sheets.

Today it's a house of cards. It can collapse. Everyone knows this can bit.

Question is how probable that is and what sort of time for the dragon to roll crumbling on the floor?

Peter St. Andre writes: 

What are the measures for "going bust"? Unless we have criteria, we'll be stuck in the domain of subjective opinions.

(I leave aside for now the question of whether the CCP provides accurate measures of economic activity.)

Jeff Rollert writes:


1) Abandoning their managed currency;

2) Significant nationalization of lending institutions;

3) Direct monetization.

Sushil Kedia writes: 

Going burst has a simple definition: unwillingness and /or inability to fulfill contractual obligations.

1st Failure has happened: They dug roads out of Wuhan and left their own people to die. Its the worst form of bankruptcy any state can ever undergo. Tell-tale signs that if they can kill their own with impunity, they will have no shame in reneging on any contract that they are compelled to.

A list of further signs would be, not necessarily in any order of gravity:

a) Letters of Credits issued by Chinese Importers lapsing & banks denying their fruition. (Is there some place on the net where it can be tracked?) b) Abandoning the currency peg would be of course a public confession of admitted weakening of their financial juggernaut & not a true case of going bust but a strong warning sign that the bust is coming round sooner. c) Failure to meet with any contracts for imports or exports by a Government agency or a Government backed enterprise.

Its simple. Mr. Tweeter should let the FED front-run the Chinese hoard of US Treasuries & send the US Yield Curve hurtling, now. As the Chinese are left with nothing else to pay with except their US Treasury holdings extricate a Trade Deal of the Millennium, offering support to the Chinese via a "friendly" QE.

And by the time its voting time he can tweet "Make America Great Yet Again" and push the S&P500 from 2200 back to new all time highs in a rocket like move. 

anonymous writes: 

I'm told that Chinese contracts with "force makeup" clauses are worthless, here and in China.

Tracking those is impossible, as far as I know, as they are usually very private. 

J.T writes: 

Can you even imagine the nuclear winter if they liquidated their holdings in U.S. debt? Not going to happen but it would make a great script.

Art Cooper adds: 

Cf. the 1981 thriller, "Rollover".



 Romance before athletic contests lowers performance. I also believe that one reason the Knicks are so terrible is that they succumb often e.g. Smith and Carmelo.

Gary Phillips writes: 

A friend of mine from the Bond pit befriended Michael Jordan when he first arrived to Chicago while M.J. was looking for a golf partner at Evanston. C.C. Fitz used to accompany M.J. and Charles Barkley to the NBA All-Star game every year. Fitz would always return with some hilarious tales of their antics and quotes from the outspoken Sir Charles. I can remember one distinctly that I believe is emblematic of their attitude, at least at that point in their lives. "Fitz, if you aren't thinking about pussy all the time, you're not concentrating hard enough."

Mr. Isomorphisms writes: 

Do they succumb more often than the other side? ESPN had an article about the erosion of home/away advantage in the instragram era. Apparently instagram is where NBA players receive sexts and set up dates.

Jeff Rollert writes: 

There's a number of Greek and Roman stories supporting the no romance before a battle concept.



 Crew costs of $3,299 a day account for about 44 percent of total operating expenses for a large container ship, according to Moore Stephens LLP, an industry accountant and consultant.

Rolls-Royce's Blue Ocean development team has set up a virtual-reality prototype at its office in Alesund, Norway, that simulates 360-degree views from a vessel's bridge. Eventually, the London-based manufacturer of engines and turbines says, captains on dry land will use similar control centers to command hundreds of crewless ships.

Jeff Rollert writes: 

As a sailor, I highly doubt that in my lifetime at least for the 0.02% of the time a ship is in a storm.

There's enormous sensory information that come from standing on a ship and feeling how it takes a wave. You'd have to create something akin to a flight simulator which would be really expensive.

Plus, if your comment link goes down, you have an unguided missile. 

Peter Grieve writes: 

Plus, there will be less damage control ability and motivation on the crewless ship.

Maybe it's just an old man talking, but these newfangled AI contraptions seem crazy. The deployment predictions seem wildly optimistic. As you imply, things can get pretty routine when the sun is shining and traffic is light, but I can't believe that the AI will be as flexible as the human mind in dealing with emergencies. Not for 20 years, anyway.

I just attended a colloquium on neural shrubs, a modification of neural nets. The main point was that we won't know how neural nets make their decisions. It will practically take psychiatry rather than software engineering to understand the machine.

I'm worried that there will be disasters which will be covered up, to retain the cost savings. And who takes responsibility for machine decisions? Someone with no skin in the game, because they're not in the car or on the ship. Do failed captains have to drown themselves in a special room in the control center?

Peter St. Andre writes:

In his book The Glass Cage: Automation and Us, Nicholas Carr argues that if you don't stay engaged with the routine aspects of a task then you won't be able to handle an emergency.

For instance, perhaps you just sit back and watch your AI-powered car as it drives you around in clear weather on paved roads in a well-ordered city, but what happens if you end up on a narrow dirt road in a snow squall?

I suspect that, more and more, reality and the humans within it will need to conform to the expectations of the machines.

Zubin al Genubi writes: 

I’ve just experienced several VR experiences in LA. It is truly amazing. Very realistic.



 A corollary to understanding the spaces and times between events is the art of doing nothing.

In survival situations, when uncertain or becoming lost, its is good to do nothing. Get reoriented. Resting in the wilderness is a good skill. In Deep Survival by Gonzales, he describes many deaths by running around in circles until injury, hypothermia or exhaustion kills the hapless adventurer.

In markets one of the hardest lessons I've learned is how to and when to do nothing. When waiting for a good situation, don't throw on a couple trades to pass the time, make a few bucks, wait. Don't do stupid little day trades. Do nothing. When finally in a good position in size, don't start selling to early. Wait, do nothing. Clews called it "resting on your oars". Wait for your expectation period, or the end of the day, or your target, or your overplus. Don't trade because you think its work, from boredom or from fear. Sometimes don't even watch, because that might cause inappropriate action. I remember years ago in Australia, Larry Williams telling me that he didn't even watch during the day. I was astounded at the time. Its taken me about 20 years to figure it out.

Jeff Rollert writes: 

I. Could. Not. Agree. With. This. More.

It is a sign of maturity in a trader. 

anonymous writes:

In the markets, and in life itself in a broader sense.

In the Johnson era (Lyndon), at the largest Catholic school in the city ("The Zoo") we would be forced to march, single file, at lunch each Friday, to the adjoining church 100 yards or so from the school.

Antagonizingly, but appropriately, whistling the tune to "The Bride Over the River Kwai."

Entering the church, in it's large vestibule, often still taken aback by the heavy smell of incense from a morning funeral, a janitors closet off to our right. We would fall out of line, half a dozen of us, one-by-one, into the closet in a blink as we marched by it, down a little metal ladder to a tunnel that ran under the street and came up in a student union lounge at a Jesuit University across the street where we would emerge, liberated from mass and the ennui of Friday afternoon class.

One of our half-dozen or so escapes was it kid named Oswald, which was a bad name to have in the sixties. He lived with his seemingly hapless mother, and, well, rumor had it that…well, you know.
"Was that really his father?"

Anyhow, Oswald was a kid with a big, curly, head of hair that had a giant grey streak in it at 10 years old. He was an astonishingly good chess player, always studying the game. No one could last half a dozen moves against him. As odd as he was, I found him to be very insightful and enjoyed his company.

A revelation to me one day in hat student union lounge, a moment that would last with me for the rest of my life, was conveying to Oswald that: "the problem with just sitting in this student union lounge over here was that I feel like I'm not getting anything done today."

Oswald shot back: "are you crazy? Nothing bad can happen when you're here. Most days, the best thing to do is nothing."

It was a moment I have never forgotten, and most regrets anyone has in life are from pro-active episodes, not from sitting still. It pertains further to the markets, and, in a very pure way to money management especially with regard to maximizing certain performance measures. But that is another discussion for another day.



 One thing to remember about buying art is that the vig is very high. It costs 15% buyers fee and 10% sellers fee. Plus the markets are generally wholesale markets so that what you pay for retail is likely twice the wholesale price. So you start out about with a 50% to 70% loss, it's greater for items that are 8 or less. You should think of waiting at least 10 years to get even.

Jeff Rollert writes: 

I find art (along with vintage cars) is best acquired from someone's near bankruptcy, as time pressures reduce shopping/selling opportunities. BK goes through the courts which permit other games. Of course, documentation must be present.

Also, if they are still alive, buy directly from the artist. 



 My daughter is starting her first professional job as TV producer. What advice would you give some one just starting?

Dan Grossman writes: 

Work very hard and long hours the first six months. Then she can dial back to a normal level, but she will have established in everyone's mind that she is a hard worker.

Vince Fulco writes: 

I would say, study your superiors ruthlessly and choose one as a mentor who is successful, well mannered, and genuinely cares for others. Working with a good one is a career accelerator. Working with a bad one especially your boss is an anchor which will affect you for years.

Also, get into a Toastmasters asap. I believe they have the most well structured program for both "Competent Communication" and "Competent Leadership", two of their formal tracks. It is an effective, cheap and low time way to boost your skills and resume. One of their meeting activities is impromptu speech giving of 1-3 minutes called Table Topics. It is a great exercise in thinking on your feet.

Stefan Jovanovich writes: 

Learn the mike heads and technicians' jobs well enough to understand what bad producers do that drives them crazy and what good producers do that makes their lives if she learns to do the actual job well Enough that the crews and reporters want her, the career will take care of itself.

Jeff Rollert writes: 

Having been in radio, "microphone sense" lacks in many. Learn how to use the different ones like lavaliere, unidirectional, correct cough guards etc. if your sound guy hates you, you are dead. Bad sound is worse than bad video to audience.

Toastmasters is also great. I'm a mentor in one here. Also, if she's serious take sone acting lessons so she learns how to direct and take direction.

Oh, and be very very lucky. Move markets, up the ladder asap. If she's good, she'll make a marine's travels seem modest.

Lastly, never ever date talent.

anonymous writes: 

Hit 'em hard,
Hit 'em low,
And if they get up hit 'em again

anonymous writes: 

I always liked this slogan: "Who must do the hard things? Those who can."

Business/career version: "How much are we going to have to pay the person who does the hard things? Whatever they charge."

anonymous writes: 

1. Avoid any and all social interactions with coworkers - don't even be willing to go to lunch with them. Completely separate work and social life, and leave NO intersection. If it was your son rather than your daughter, I would extend this to include not even making eye contact with females at the workplace, and, inasmuch as is possible, avoid interactions with them. Remember what country and century you are in. It may all sound a little extreme but there is nothing to be gained by violating these rules.

2. The moment she has the slightest hint of any marketable skill, find a third-party agency to begin shopping her around to the next job. Most upward progress comes from the outside, and she should always have aces to play, ever be without an offer sitting on the table. Jobs in the 21st century are wasting assets, vanish and disappear to those not nimble.

anonymous writes:

While it's not always easy to do, if you can listen to the people who don't like you, it can be very valuable because they won't sugarcoat it and they will give you feedback nobody else will.



Like many of us on the spec list I was fortunate to develop a very good relationship with Mr. E, a.k.a. Ed Dunne which taught me many things.

My first impressions were pretty much a mixed bag; seemed like Ed did a lot of talking about grandiose things… Like being actively involved with Andrew Breitbart, getting Drudge Report up and going and a few other things that seemed a little out of place. However at one point I was fortunate enough to have dinner with Andrew, mentioned Ed and he lit up like a Christmas tree telling me about many of the things they had done together and what great admiration he had for Ed.

I had a market idea that Ed thought had legs to it and promised he would have a couple of fellows get in touch with me… I thought was a very nice offer but really never expected people of that caliber, or far up, ever give me a call. To his word however I got the call discussed the idea… there wasn't much interest in it but certainly Ed could get people to do things and was more than willing to do that. He always seemed very willing to reach out and help.

My big take away, the really big thing I learned from Ed, was right at the bear market low in 2009. Ed, always Mr. politics, and a bit on the conservative side, was railing about Obama when Vic was mentioning that the long-term trend was still up. It's one of those memories I will always carry with me a group of spec listers were at John Bollinger's in California Vic was on a conference call or something we were listening to him talk at the same time Mr. E had been extremely negative on the marketplace.

In retrospect Vic nailed the low… Mr. E stayed short way too long. That happens— none of us are always correct in the markets— but my take away point was don't let your political beliefs getting way of market beliefs or trading strategies.

That's a lesson I have learned –and relearned –over the years but finally learned it for certain, absolute certain, in 2009. Ed also had some brilliant calls like at the first of this year I mentioned to him I had some very bullish stuff on cocoa he said his indicators were equally bullish based on supply demand etc. and the rest is kind of history…we had some great rallies there.

Ed and I shared a love for good steak dinners (Gallagher's) as well as trading the bond market. It was very interesting to watch his prognostications which were based more on relationships of the different instruments, time, spreads etc. and mine which is based more on technical stuff cycles and accumulation… how these two things could come together to set up some very good trading opportunities.

The rumor is that Vic and Mr. E had their differences, yet both shared a love of helping other people begin their careers. Some world-class traders began with both of these guys and is probably the hallmark of their career. After all making money is one thing but giving inspiration and beginning careers for other people is much more of an accomplishment.

The final take away point I got from Ed was his incredible interest in learning anything about the markets… Whether it was weather, intermarket relationships, conjunction of Saturn with Venus… It didn't matter… his mind was wide open to learn even from people like (a loop I was fortunate to be in)… and the truth is I was the one that did the learning.

Jeff Rollert writes: 

My memories of Ed were similar. We would talk intermarket relationships and weather. He understood weather as well or better than many of the professional sail boat racers I knew. Only one who goes many miles offshore and thus unable to outrun a storm into a harbor, carries this knowledge.

What I found interesting about Ed, was you had to separate his anger from his frustration. From my perspective, his 2009 views were frustration…a path taken when you see a suboptimal path being taken, like your teenager, and being unable to understand why.

He too helped me, and I don't forget that.

Allow me to also add Vic has shared an enormous amount with me (whether he agrees or not). I've always loved that in private discussions both Ed and Vic allowed you to give your $0.02 and not dismiss you as an idiot. They disagreed without making it personal, which appears now to be a lost skill. Great mentors, which both are, excel at that. Note, Ed did love to poke at you, if he thought you were being grandiose.



 Rogue waves can be defined in many ways, yet the one I prefer is "a wave of extreme severity that appears unexpected even to an expert". Given that definition, rogue waves do exist, yet there is no evidence that they would be globally more frequent than conventional (non-linear) waves theories predict, they just don't happen where and when — i.e. in the most extreme sea states — one would expect them. There is no evidence either that the "modulational instability" theory that my colleague Prof. Akhmediev puts forward to explain them would not apply: the theory was validated in wave tanks, optical fibers and plasmas. It is just impossible to know whether the necessary boundary conditions are satisfied in nature. Several points may be noteworthy to the Specs:

1. A recent article shows that rogue events can be empirically predictable, but that for ocean waves the delay would be of the order of the time needed to shout "Buddies, grab something and hold on to it!"

2. "Normal" extremes are at least as frequent as "special" ones, and all indicators based on breather theories such as Akhmediev's have false alarm rates of at least 90%, perhaps 99%, and still fail to warn of about 10% of actual rogue waves.

3. Experienced sailors deny having met "rogue waves". They say that they encountered waves that were rogue, they capsized or broke some ribs (Roger Taylor, Isabelle Autissier), but when you discuss it directly with them, nothing that they were not expecting and had not prepared their ship for.

4. Only a very small percentage of fatalities occur well off the coast (Nikolkina & Didenkulova), most of them happen at the coast or in shallow waters where victims feel wrongly on safe ground or in safe waters.

William Weaver comments: 

Your fourth point is similar to many car accidents happening within a small area from home. People make more mistakes when they feel comfortable. I'm not sure how this changes when accounting for activity though. For example, you could normalize accidents per mile driven and then compare close to home versus far from home, or do a similar normalization for the study mentioned with at sea fatalities, which I have not read. It might be helpful to measure after splitting into bins for types of vessel (cargo ships might have more miles, farther from home travel and less fatalities), and by type of mariner, which might be self defeating as it is more likely less experienced seamen would stay close to shore ( which is not the case for drivers staying close to home).

It seems like a data set prone to torture someone. But do we make more mistakes when we feel safe? The opposite might be true too. My observation is the difference between good and great traders is often the number of mistakes they make. Bring back the checklist posts?

Jeff Rollert writes: 

I see some sample issues. Most sailors (N) do not venture more than 20 miles from the coast. The ones that do are orders of magnitude better prepared (boat) with experienced crew. So I suggest the distribution is bimodal.

Also, there is more than one kind of "rogue" wave. One is an overtaking wave, which is when two waves combine; the second, and more deadly, is when the wave comes from a direction that is unexpected. In my experience, these are the most deadly, as they roll (or broach) the boat. They are also the hardest on the structure of the boat and hit the weakest points harder (deck access from the stern, control or bridge room windows and electrical systems). For fisherman, they dread losing engine power, as the boat becomes exposed in the same way, as fishing boats have the windage at the bow, which turns the boat and presents a breaking wave to the stern.

Lastly, looking at single vs combined storm fronts also messes with their structure.

IMHO, they oversimplified their model.

Jim Sogi writes: 

Surfers expect at least 1 wave each day that will be 3-5x the smallest wave. It's called the wave of the day. In a random sequence this would be one of the far tails. They tend to come with the incoming tide as there is an extra push from the moon.

I think the rogue waves in the ocean might be 20x or more if there were a number of storms with crossing wave trains which could combine. It's the cross chop that creates these large events through random combinations. Rogue is often and mistakenly used as unexpected. Sailing through large parallel swells on a calm surface is quite easy. Sailing through a cross chop is very tiring and rough. Refraction and reflection from shores often make coastal sailing rougher than in the mid ocean.

What always surprises me is how calm the ocean tends to be. You would think it would be rougher given how big it is. 



 Will someone explain to me why news of Greece no deal is bullish for bonds, i.e what it has to do with the long term rate of inflation? And why news of a deal is bearish for bonds? Also while at it, why no deal is bearish for stocks and deal is bullish?

John Floyd writes: 

A market pundit might say (not a personal explanation): "if there is no deal in Greece that is bad for Europe and the ECB will have to do more QE and buy European bonds to get confidence up, growth up, and inflation up, that would be bearish for the Euro, the uncertainty around no deal is bad for stocks in the short term." On the next contradictory headline you can expect the mirror image response.

Alston Mabry writes: 

From the cheap seats: no deal for Greece, or even Grexit, means a mini-catastrophe, where lots of players will be looking to get out of certain positions and move to safety until the smoke clears and we find out if a Greek exit actually raises the possibility of Portugal or Spain leaving, too. So in this case, Treasuries = safety.

John Floyd writes: 

As I sit and watch the headlines on Greece I can't help but recall similar headlines and market reactions prior to the Russian default on August 17, 1998. Hopefully I have learned at least one thing since then. While not financially ruinous, and actually profitable in many ways, it was amongst other things a tiresome and loathsome experience getting up at 1 a.m. NY time to watch the latest headlines and developments.

The first lesson would be to attempt to recognize an untenable position from a macro economic and geopolitical standpoint in the medium to long term. A corollary is to not position investments with the thesis that an untenable position will be resolved in the short term and provide profits.

The wolf of the markets will at some point overpower such a short term view. The PIGS in the periphery perhaps might have their houses and building materials tested further. The wolf will have to be careful though as the cauldron waits in a house and may try and stymy speculative avenues.

Jeff Rollert writes: 

In a "normal" world, a large debtor defaulting forces participants via systematic transmission to add Treasuries/AAA bonds to portfolios to return to the prior risk/reward or VAR state for a window of time until asset recovery levels become apparent.



I found this business model interesting. It involves storing wine in the ocean. Hype or real?

Stefan Martinek writes: 

Anything having to do with wine must be a good business model. In case of some redemptions, managers can drink the inventory.



Perhaps it would not be remiss to express some thoughts I had over night.

1. Friday was perhaps the greatest loss in wealth ever.

2. Extraordinarily rare since the 90s for both stocks and bonds down 200. Actually only once since 1999. That in 2009.

3. Useful idiots attribute it to revision in expectations of fed increases.

4. But actually the rise had nothing to do with that but had to do with discounted value of returns on capital and lowering of inflation targets.

5. Amazing that good news can cause so much havoc.

6. But the market is the market. It will do what it wants.

7. But of course the stock market vigilantes, and now the bond market vigilantes will make it do the rite thing, especially before election.

8. Ephemeral things can cause great consternation.

9. The threat is worse than the execution.

10. They got me big yesterday. I actually make a nice little profit in SPU by getting out at 10 am.

11. However, I lost big in bonds, very big.

12. One will have to be more careful as the markets rise to new highs again. 

Jeff Rollert writes: 

It felt more like a systematic deleveraging. A balance sheet shrinkage, on both sides.

Anatoly Veltman writes: 

I think there is an important element missing from all these statistics. A drop such as Friday's is felt big by an SP futures long, because the SP futures long is very leveraged, while his currency exposure (hedge) is straight cash, unleveraged.

On the other hand, the real one day depreciation is miniscule for a holder of US stocks - as USD gained so much on the day. Compare a holder of US stocks Friday with an EU or UK person who held no stocks but their cash in the bank - and that person lost plenty, without being Long of US stocks.

Hernan Avella comments:

Anatoly, the reason why it was indeed very big is because you did not have the buffer of buying bonds, golds or oil. Furthermore, the 50-50 theoretical portfolio lost big on Friday on top of a bad streak of 5 down days out of the last 7, and now it's slightly down on the year.Now, when one accounts for stock market appreciation over the five year period as strictly "fundamental", "value of returns on capital", etc etc - one yet skips over a harder to quantify element of market truth: that Central Banks, with their long-standing zero interest policy, have left little alternatives for world wide investors but to pour cash into stocks the past five years. Some of that cash hasn't gone all in based on fundamental projections, it's just gone in. Like in "market will do what it wants". Enter one of the current day hot factors: EU is in dis-array. There is a lot of European capital that isn't investing based on long term returns on equity these days…They are paralyzed in fear of what next shoe will drop. So corrections such as Friday's are inevitable



 From the Facebook page K9s4Cops, by Lt.  Daniel Furseth:

Today, I stopped caring about my fellow man. I stopped caring about my community, my neighbors, and those I serve. I stopped caring today because a once noble profession has become despised, hated, distrusted, and mostly unwanted.

I stopped caring today because parents refuse to teach their kids right from wrong and blame us when they are caught breaking the law. I stopped caring today because parents tell their little kids to be good or "the police will take you away" embedding a fear from year one. Moms hate us in their schools because we frighten them and remind them of the evil that lurks in the world.

They would rather we stay unseen, but close by if needed, but readily available to "fix their kid." I stopped caring today because we work to keep our streets safe from mayhem in the form of reckless, drunk, high, or speeding drivers, only to be hated for it, yet hated even more because we didn't catch the drunk before he killed someone they may know.

Nevertheless, we are just another tool used by government to generate "revenue." I stopped caring today because Liberals hate the police as we carry guns, scare kids, and take away their drugs. We always kill innocent people with unjust violence. We are called bullies for using a Taser during a fight, but are condemned further for not first tasing the guy who pulls a gun on us.

And if we do have to shoot, we are asked "why didn't you just shoot the gun out of their hand?" And when one of us is killed by the countless attacks that do happen (but are rarely reported in the mainstream media) the haters say, "Its just part of the job." I stopped caring today because Conservatives hate us as we are "the Government." We try to take away their guns, freedoms, and liberty at every turn. (continued)

Stefan Jovanovich comments: 

What Lt. Furseth is really complaining about is the 1st Amendment. No one in his actual life has ever asked him to shoot a weapon out of the criminal's hand. That is a question that he has only read or seen asked in the public soup we call social media and the press. For cops this the golden age in terms of pay, weaponry, body armor, mortality and public pensions so, of course, the logical consequence is that their public posture should be to complain about the lack of respect from people in general.



 Within 2 blocks from where my sometimes office is, where the spec party was held, there are the retail outlets, Bed Bath and Beyond, Best Buy, Staples, Whole Foods and Coach. (all within 1 block from Time-Warner building.) One finds that they rank 496, 497, 499, 499, and 500th worst of the 500 companies in the S&P 500 with declines for the year of -25% for Bed Bath, to -38% for Coach.

There are only about 2 establishments that are listed in S&P 500 not in that category I would guess within that 2 block radius. I believe this is not chance. Does it mean I am a hoodoo? Or is it related to the dynamism of the vigorous that are not located in the Time Warner. Or is it related to the poor performance of big box retailers. Or the excellent performance of these companies in the previous 5 years. The average S&P stock is up 6.2 % for the year. One believes there is some deep truth in this geographic excursion.

anoymous writes: 

One recalls that there were at least a few Woolworth's retail stores in that area in the mid 90s. (A big one near 86th and 3rd, I think). I'm unable to draw a parallel to the fact that they have a skyscraper named after them on lower Broadway, but as far as retail disasters were concerned, they left a lot of open space in Manhattan when the last stores finally closed.

Jeff Rollert writes: 

There are buildings with poor traffic characteristics. I keep a list of them in LA. When a retailer moves into one, I sell their stocks. Period. I have found they have either passed the point of scalability for their market or for their real estate staff/advisors.

It 's a variation of "never push a bad position."

A commenter writes: 

This sounds like the skyscraper rule gone retail.



 There are a number of texts on single handed sailing, which speak to the effects on being becalmed on a sailors nerves. It may surprise some to know that long periods of being becalmed are more dreaded than fierce storms by experienced offshore sailors.

Since many traders work for themselves, I wonder how many are able to handle a lack of action without unintentionally selling volatility.

Many a lake sailor has learned this lesson and got caught with too much sail up when the weather changed abruptly.

I'd observe the Chair's courts provide such an outlet.

Chris Tucker writes: 

 When I sailed from Honolulu to Berkley in the late eighties we suffered from exactly this problem. There is a semi-permanent high pressure system that usually sits between Hawaii and California  and in order to sail back to the mainland you have to go around it. This means sailing northward from Hawaii for some time and then turning east towards the mainland once you've gotten around the northern edge of the high. The temptation is always there to make the turn. You are, after all, not sailing in your intended direction and there is a tremendous amount of psychological pressure to make the turn. After a while we found ourselves behaving like a bunch of kids in the backseat: "Can we turn yet? Can we turn yet? Can we turn yet?" And of course, we turned too soon and were becalmed for 17 days of our 27 day voyage. I saw the Pacific Ocean flatter than any pond. You had to put your face right down against the water and look along its surface to see the 1/2 inch tall swell.

We also dealt with some fierce weather and parted several sheets and lines — all of which had to be replaced to prevent the sails from being ripped to shreds. The top of the pilot house was fourteen feet above the water line and we were taking green breakers right over it. I had to replace the outhaul on the main, riding the boom like a rodeo cowboy in the middle of this. Exciting to say the least. I have to admit that shinnying up the forestay to gasket the jib, with the stay rotating in huge arcs and trying to fling me bodily into the sea while the bottom dropped away from below us and then screaming down the face of the wave to bury the bow in the trough - this - this was exhilarating and I've rarely felt more alive. The doldrums on the other hand, they were their own kind of hell. But I did find some of the most solidifying inner peace I've ever known during that time. So completely different sides of a coin. Looking back it seems that a tremendous number of miracles chained together have kept me here still breathing on the face of this rock. It is a wonder, an absolute wonder that I'm still here.

We were in a 56' ferrocement (yes - a concrete boat) 86 ton ketch. She was a very slow beast of a tub but quite roomy and comfy with a stable helm. There is nothing like the sea (except perhaps a bare rock face several hundred feet up) for pure clarity. 

Craig Mee writes: 

Work out your plan and the surrounding environment early, then plan to reassess in x hours or if the wind conditions change. Shut out any thoughts by fixing the radio or doing onboard work. Just like with trading, shut the monitors down, set call levels and work on some project management. Don't give the gremlins and hoodoos freedom to run wild.

Calm markets are worst after you take a hit and have lost ground and the agitation is there to move p and l to previous highs. The fact that markets delivered opportunity previously is directly correlated to the loss of opportunity currently. So vigilance and attention to detail should be at their highest. I wouldn't argue at this point to downsize positions until you play back into form.



I find there are two type of buy/sell climaxes, and find it interesting that many models I see only handle one.

You can call one the "Oh Shit!" and the other the "I'm bored and am watching youtube, not bloomberg."



It would be wise to review prior periods of Fed Chair transitions, for their equity and bond moves and overlay that on election years.

But I am not sure I'm wise.

anonymous writes: 

Date              Chairman                        DJIA     CAGR         t    t+1    t+5    t+10    t+20    t+62
13-Aug-14    Charles S. Hamlin               Market Closed till end of year ??           
10-Aug-16    William P. G. Harding           90.05    1.17    -0.23    0.3    2.07    4.2    2.49    16.77
01-May-23    Daniel R. Crissinger             97.4     17.49    -1    0.67    -2.04    -2.05    -1.41    -8.21
04-Oct-27    Roy A. Young                     198.88    6.15    -0.45    0.17    -4.95    -6.07    -8.65    1.03
16-Sep-30    Eugene Meyer                   237.22    -32.86    0.25    0.22    -6.09    -10.41    -19.06    -21.81
19-May-33    Eugene R. Black                 81.75    14.23    -0.99    -1.88    2.42    8.99    15.95    15.11
15-Nov-34    Marriner S. Eccles               99.72    4.51    0.3    -0.33    -0.25    2.67    3.05    1.28
15-Apr-48    Thomas B. McCabe             180.27    11.15    0.64    0.2    0.61    0.39    1.24    5.7
02-Apr-51    William McChesney Martin, Jr. 246.63    6.05    -0.53    -0.25    1.48    3.29    3.29    2.91
02-Feb-70    Arthur F. Burns                  746.44    0.07    0.32    1.48    1.24    0.97    5.49    -1.72
08-Mar-78    G. William Miller                750.87    9.04    0.55    -0.12    1.03    0.89    1.74    15.4
06-Aug-79    Paul A. Volcker                  848.55    15.42    0.28    1.33    3.15    4.47    2.84    -3.35
11-Aug-87    Alan Greenspan               2680.48    7.91    1.69    -0.42    -0.96    1.56    -4.9    -26.91
01-Feb-06    Ben Bernanke                10953.95    4.72    0.82    -0.93    -0.87    0.96    0.65    4.22
03-Feb-14    Janet Yellen                  ~15848.61                       

avg        0.13    0.03    -0.24    0.76    0.21    0.03
stdev        0.73    0.85    2.66    4.67    7.78    12.68
t-test        0.63    0.14    -0.33    0.59    0.10    0.01



 We have gone almost a year with the two percent additional payroll tax reinstated. The results are worse than expected.

What would have been expected is an increase in employment, but not enough to offset the effective tax increase. The reason you would expect an employment increase is because Americans are a resilient lot and get bored with sitting around. Sooner or later they find a way to get back to work. That is not what we have: The growth in payroll taxes is now negative, indicating a net loss in payrolls. The data is effectively "cap-weighted" so it might mean a loss in the number of jobs or switching to lower pay, as when a nuclear engineer becomes a sanitation engineer.

Philosophically, tax rate increases for individuals generate increases in tax revenue for governments. This is exactly what is expected by government, but the problem is that government does not know where to stop. They expect further rate increases to result in commensurate increases in revenue. But government neglects that individuals have a say in this: the latter can vote with their feet by leaving the workforce. America is now on the wrong side of the Laffer Curve.

Additional amounts taxed (N.B. the PPACA has been ruled by the Supremes as a tax) will have a continued negative effect.

A fellow Spec-Lister suggested I look for structural/secular changes in the employment data. My initial thought was that humans are skilled at obtaining freebies, and the disability payments coming from Social Security seemed a perfect target. Consider, faced with a lay-off, why not see a doctor, claim clinical depression and get yourself on disability? The long-term advantage of doing so may mean that you never have to work again, which would not be the case with unemployment benefits. But is my conspiratorial claim borne out by the data?
The short answer is "No". However there is more, should you feel inclined.

Firstly, which data does one use? Social Security Administration issues a report showing claimants for disability and the average claim. Multiply the two and you get the total value of disability benefits paid. Alternatively, you can go to the Treasury website and see their ledger of what actually was paid. Although the two sources (Soc.Sec. and Treasury) mimic one another, they are decidedly not identical. Of specific concern is that they differ by an odd order of magnitude, and one which is not relatively constant. So then one might posit which source does one trust.

Chart of Disability Benefits Paid

Chart of the 12-month rates of change of benefits paid

My experience suggests that the Social Security data looks as though it has been manipulated or "cleaned up". The Treasury data looks as though it contains a degree of static, which is more realistic. My guess would be that the Treasury data is "raw", while the Social Security data is "adjusted". In general my personal preference is for raw data if I cannot reverse engineer the adjustments. Both data sources indicate a relative decline in the yearly rate of change, decidedly counter to my pre-supposed conspiracy claim.

If you look a little deeper into the Treasury data you find a profound cyclic influence:

Cyclic disability benefits

This was a surprise. I did not assume the claimant had much control over the process, but the data indicates that summer is a key time to receive benefits. Oh, the joy of it all. [Skeptics should note that the cyclicality is not related to the number of days in the various months.] The cyclicality also suggests that disabled persons do return to the workplace. (I would have lost that bet.)

What is the current trend?

trend slope in disability benefits paid

For whatever reason, the drift of disability benefits is not increasing. One might optimistically believe that because conditions are not worsening, they must get better. Such logic could cost an investor a lot of his wealth.

Rocky Humbert replies: 

There was a Washington Post story yesterday that adds some color to this discussion. It notes a fact: 1.3 Million workers will have their "emergency" unemployment benefits end on December 28, unless Congress renews this aid program. This is a big number. And I was unaware of this fact. And as I consider myself somewhat informed about stuff, I'd guess relatively few market participants are aware of this fact either.

The writer then looks at the probability that a lot of these folks will file for disability claims. The author cites a study (which I have not read) which suggests that they won't. I have no opinion except that people respond to incentives. And some number of these 1.3 Million will surely find their way back into the reported labor force. This will likely distort the tax revenue, payroll, and other data to some degree in the first months of 2014.

I am raising this point not because I have any view about the currently big number of people receiving disability or what it means. (That's HR Rogan's job.) Rather, I am raising this, because the employment and tax numbers will, I believe, look really odd in January and February. (HR=hand wringer)

The story can be found here:  "Where Will Workers Go After Their Jobless Benefits Expire? Probably Not on Disability"

Jeff Rollert adds: 

Just to add another vector to the discussion, I would also argue that, since 2000 (the benchmark year in the article), the entry into the global labor pool of hundreds of millions of smart, motivated Chinese workers (not to mention Vietnamese, etc) has had a significant impact.

From the MIT Technology Review: "How Technology Is Destroying Jobs":

Given his calm and reasoned academic demeanor, it is easy to miss just how provocative Erik Brynjolfsson's contention really is. ­Brynjolfsson, a professor at the MIT Sloan School of Management, and his collaborator and coauthor Andrew McAfee have been arguing for the last year and a half that impressive advances in computer technology—from improved industrial robotics to automated translation services—are largely behind the sluggish employment growth of the last 10 to 15 years. Even more ominous for workers, the MIT academics foresee dismal prospects for many types of jobs as these powerful new technologies are increasingly adopted not only in manufacturing, clerical, and retail work but in professions such as law, financial services, education, and medicine.

That robots, automation, and software can replace people might seem obvious to anyone who's worked in automotive manufacturing or as a travel agent. But Brynjolfsson and McAfee's claim is more troubling and controversial. They believe that rapid technological change has been destroying jobs faster than it is creating them, contributing to the stagnation of median income and the growth of inequality in the United States. And, they suspect, something similar is happening in other technologically advanced countries.

Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress. On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the "great decoupling." And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.



 I came across about this rather nice summary of backtesting in the context of investment/trading framing over the weekend.

"Fool's Gold:Why most back-tested performance histories are bunk, and how you can identify the ones that probably aren't" :

Reasonable investors derisive of back-tests acknowledge that in theory back-tests can illuminate something true about the world but believe in practice back-tests can rarely be relied on to do so. The Vanguard study, by finding that past performance does not reliably predict future returns of asset classes, joins a chorus of studies by many independent researchers demonstrating the same. A skeptic might conclude back-tests are to induction what Richard Simmons' hair is to the category of things that can be burned for fuel.

The problem with that argument is too many successful investors are or were back-testers. Benjamin Graham, father of value investing and Warren Buffett's mentor, devised trading rules based on studies of what would have worked in the past–back-tests, in other words. Early in his career, Buffett applied Graham's back-tested rules to identify "cigar butts," statistically cheap stocks that had assets that could be sold for more than they could be bought for. Another successful Graham acolyte, Walter Schloss, achieved 20% gross annualized returns over several decades by "selecting securities by certain simple statistical methods…learned while working for Ben Graham." 

Ray Dalio, founder of Bridgewater Associates and arguably the most successful macro investor alive, uses back-tested strategies to run Pure Alpha, an unusual fund that uses only fundamental quant models. Mathematician James Simon's Medallion Fund, a quantitative, fast-trading strategy, has earned 35% annualized returns after fees since 1989.

Jeff Rollert adds:

The difference between back testing and understanding drift is the difference between knowing history as taught and understanding evolution.

That is my inner Hobbes speaking today.



This poem is entitled "I Missed Hearing it Ring":

Large GM bond deal, sold by investment grade desks hours before moody's upgrades;

Chrysler files for ipo;

I missed the bell to sell autos.



It is interesting to reflect that out of 37 open market meetings since the beginning of 2009, 11 have closed the day before at a 20 day high versus just 3 at a 20 day low. That might seem unusual without the knowledge that since 2009 there have been 292 separate 20 day highs and only 95 20 day lows. Thus 25% of all days have been at 20 day highs since 2009 but 30% of the open market day precedings have had that honor. A most insignificant but interesting difference and framework. 

Jeff Rollert writes: 

I had a long discussion about this with someone internally yesterday.

Writing and "doing" concurrently in a team is a very difficult organizational exercise, as ideas and implementation folks have different time frames frequently. I've seen similar dynamics with pilots and racing skippers with their navigators.

Steve Ellison adds:

I found that even talking about my trades introduced subtle motivations that I did not believe to be performance-enhancing.



There are several things that bonds don't take account of I think. The threat is worse than the execution. If the Fed tapers, it's already in the market and the amount of their reduction will be offset by reduced sales because of increased revenues. The stock of bonds is about 20 trillion As Tyler Cowen said, the stock of bonds, what existing holders will accept, is more important than the flow of 25 billion. The rate of inflation determines the yield. The rate past and expected is close to 1.5% and the premium that bond yields pay to the holders based on the Fed model is at an all time high. The ratio of stock market levels to bond levels is at a 3 year high and this is not bullish for stocks and bullish for bonds. The 10 year yield has pierced the barrier of 3% and frustration has been relieved. The levels of yields at 3% for the 10 and 4% for the 30 year are competitive with stocks and would cause a decline in the economy if they increased. I don't have a position in bonds but trade them fairly actively within the week. 

Rocky Humbert writes: 

FWIW, I agree 100% with everything that the chair wrote here — with a couple of additions:

1. The primary challenge that the market faces here is assessing the equilibrium yield in the absence of fed interventions. There will always be fed interventions at the front end, but the back end interventions are a recent (3 year) phenomenon and many purchasers (and now sellers) were engaged in front-running of the fed type activities. This is a flow-oriented phenomenon, not a value-oriented phenomenon. My general rule (and the Chair would surely agree) is in the short-term, flow trumps fundamentals for longer than the average leveraged speculator can tolerate. So, the primary question, I believe, is whether the front-runners have exited the market. My guess is that on the announcement of the taper, that process will be complete.

2. On a longer-term basis, the question of what real yield is "right" remains in front of us. The other Tyler has written eloquently (but I disagree) that TIPS should command a near zero real yield. I believe that TIPS should command a real yield that approximates the real growth rate of the economy plus some sovereign risk premium plus some liquidity risk premium plus some tax rate premium plus some risk premium associated with gaming the CPI which the government is motivated to do.

I have a speculative long (trading not investment) position in bonds (especially muni's and tips) right now, but that could change quickly and I don't recommend that anyone follows me into this, as we are suffering from a hindsight/anchoring bias where things look inexpensive because they were expensive before NOT things look inexpensive because they are really inexpensive. I think the odds substantially favor a rally versus an immediate further decline , but I base this on unqualifiable drivel which is not worthy of this list. In contrast, my Apple call was based on an extremely rare confluence that was in fact quantifiable and yesterday's decline in Apple (which I didn't participate in) was likewise statistically probable.

Jeff Rollert adds: 

I agree with both Chair and Rocky.

As long as the Fed can use open mouth policy and have traders do the heavy lifting, they will IMHO. Rolloff re-fills their quiver that way over time.

As I've mentioned on the list for a few years, an analytical shift has begun. As we never step into the same river twice, the next cycle begins with the consideration of what is the risk free rate when sovereign bonds are manipulated.

I have some unfinished ideas on this, but the core is a replacement of T-Bills. An alternative path is the question of can there be a risk free rate.

As modern monetary systems appear to share the characteristics of religious belief systems, I believe this is a material change.



 Sometimes it's the thing that makes it good that makes it bad, something I believe is known as the reflection principal.

I got a new Gopro Hero3. Great little cam and it's small and light because it doesn't have an lcd to look at the pics. But the lack of the lcd makes it difficult to see what you are and what you've been shooting. It has a wide angle lens which is good for selfies including background, but not so good for shooting others doing anything. So it goes.

The principal applies more broadly to things like relationships. The responsibility which attracts one person to another in ten years of a relationship can become boring. An exciting and free personality, after ten years of a relationship, becomes an irresponsible personality. So it goes. Life is full of tradeoffs.

Jeff Rollert writes: 

Relationships are like cars…if you don't add energy or maintenance, it becomes just a car. Add gas though and it's a trip and adventure.

Wish I'd met mine 10 years earlier and had the wisdom to know it.

How many of you have a girl who rides motorcycles, fly planes, builds skyscrapers, or make a killer German meal (or French) from scratch? … just bragging…

Seriously, many times I find people forget what they have right in front of them. I've always felt that risk was a derivative of boredom. Really. Really. Really…

Thank God for the fashion/society pages…how else can you so easily find boredom?



We have had numerous discussions on this venue regarding stop losses. Part of the surprise from those discussions is that using a stop loss will double your odds of having a loss in the amount of the stop loss.

However the same is true for a profit target. Using a profit target will double your probability of having a gain equal to the target gain. The reason for both phenomena is that in a random walk half of all such trades will get reversed after hitting the target or the stop. The fancy name for this is the Reflection Principle.

Larry Williams writes: 

In a random walk, half of all stops/targets get hit, so if that is not true in several trading systems, does it suggest the market is not random?

Anatoly Veltman writes: 

Electronic markets are far from random. Your broker's HFT frontruns your orders, and non-broker largest HFTs parallel run your orders. Thus your limit (profit-taking?) order is played against by unabling, and your stop-loss order is played against by triggering. Random? Not to your account.

Ralph Vince asks: 

But can non-random ticks, sampled on a bigger time frame, degenerate into randomness?

Anatoly Veltman replies: 

In the sense that all those orders, magnified by HFT mechanism, will carry markets somewhere - sure. The other question is: OK, so 70% of executed trades resulted in robbing the outsider spec - but the HFTs and the brokers have not fully benefited by your loss, because of their high overhead (the arms race, et al). So ok, the wall street salaries, the IT salaries get financed out of your pocket. Then the only way to keep you in the game is to inflate your remaining funds…So the mechanism will continue on…but to what end, if the economy is not picking up? So the result may well be non-random: all prices will go up.

Gary Rogan writes: 

Clearly the natural drift and/or inflation-driven accelerated drift will result in an upward bias that will make a random walk impossible. In addition, if there is an HFT-induced tendency to hit stops and not hit limit orders (by the way are there any objective statistics that prove that?) the question becomes: would an independent observer looking at the data tick by tick, but who is not himself placing limit/stop orders be able to tell that the statistical nature of the tick distribution has changed?

Jeff Rollert says: 

No, HFT is attacking your behavioral biases. Not the academic ones ones. Your bids show your hands.

These are modeled after high yield bond trading patterns.

How would you trade if the book was open and public? That is the point. Trading systems are rational, and your systems are easy prey…seriously, inject the random. To borrow a sports analogy, you can't bore a machine into an error.



 An expert has great comparative advantage in their area of expertise.

They say it takes 10,000 hours of study and mindful practice to become an expert — not to mention the natural talent, and the practice time it takes to maintain expertise.

Since a work lifespan is ~50 years — along with time needed for play, sleep, food, and social interaction — it would be unusual to become expert at many things. Which suggests that the economic fuel of comparative advantage is not likely to go away.

How is expertise possible in ever-changing markets?

Jeff Rollert writes:

I recommend the book Mindfulness, which contains the research work of Harvard psychologist Ellen Langer on observing and problem solving.

I practice some of her ideas when I walk to work…



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

Vince Fulco writes:

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

anonymous writes: 

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

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

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

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

Rocky Humbert adds:

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

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

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

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

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

Jeff Watson writes: 

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

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

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

Steve Ellison writes:

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

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

Russ Sears writes: 

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

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

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

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

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

Gary Rogan adds:

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

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

Jeff Rollert writes:

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

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

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

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

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

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

You guys often remind me of that lesson too!



 Our band's new lead guitar player is one of the best in town and knows music theory. He recently gave me a quick lesson on the Circle of Fifths. A chord is basically two notes, often three. Chords in a song have progression. Typical overtones are 3, 5, 7, 11, 13. Interesting to note the prime numbers. The 5 easily resolves to the 1. The 7th and higher overtones create tension and the resolution to the one is a release or catharsis. Minors and diminished chords have a unique emotional resonance. Interestingly, the same notes can be different chords depending on the the tonic. There are some similarities to Japanese Candlestick chart theory with record highs of 11 wanting to resolve. I imagine there is some tendency of stock charts to follow an emotional path similar to music and the theory would be similar also. Chair wrote about music and markets in Edspec.

Jeff Rollert writes: 

Jim's next lesson involves power chords and the blues… ; )

Easan Katir writes: 

Much more original thinking in Educ of a Spec, however as one who learned music theory before trading theory, it is useful to see how the 11th resolving to the octave is similar to the attraction of round numbers noted by the Chair.

Also the octave is similar to investors selling when they have doubled their money.

The recent trajectory of FB is not totally unlike the dominant phrase in Thus Spake Zarathustra , which could be the PR theme of its übermensch founder.

Jeff, blues might be similar to options traders, with the endless repetition of the same chord relationships selling vol the way the bluesman makes lamenting his lost loves into an art form and ekes out a living.



 My submission for article of the day: "Why is the Euro so Perky? "

The article presents a medium term bearish view of the Euro. The view that the Euro is relatively strong because of the 200 days moving average seems ridiculous. Moreover, the ECB as a lender of last resort has been brought on only recently, while the Euro crisis is a long process started back in back 2009. The idea of a weaker Euro because of structural issues that cannot be solved by a divided group of leaders and nations can be shared, however, this has been a European problem (actually THE European problem) for centuries.

The Euro resiliency is a temporary phenomenon. Right, there are several outstanding reasons for the Euro to be near parity vs the USD. None of them has been sufficient, however, over the past 3/4 years to weaken significantly the Euro. If you compare prices between Europe and the US prices are at least 20% lower in the US. One example: the Ipod Touch 32 Gb cost 329 Euro vs 299$ in the US.

The Fed's "quantitative easing" program has provided underpinning for the Euro. The push of the Fed in the direction of a weak dollar is very strong and has so far outweighed the structural Euro weakness. In relative terms, it has to seen how quickly the 2 trends evolve respectively in Europe and in the US. If the US "system" is more resilient and the crisis in Europe accelerates because from the sovereign financial level it spreads heavily at the social and political level then we'll see the parity of the EURUSD. In this context, the unemployment rate in the Eurozone and especially in the southern nations is an important indicator. It is steadily increasing and it emphasizes the risk of a deterioration of the social structure should this trend continue longer.

David Lilienfeld writes:

Based on what I saw and heard in Barcelona in August, I think the matter has now gone out the ECB's domain. Granted it's a very small sample, but as I've noted before, many Barcelonians have become disillusioned with the EU and with their country in particular. That will, at some point, manifest in spending patterns and capital flight–and I doubt that that thinking will change soon. The European leaders "successfully" kicked the can down the road, but with the result of raising both the cost and the pain of the inevitable crisis resolution. Hence, the issue is no longer whether the Fed's efforts with regard to the dollar are stronger than the impact of the EU's structural problems. Those structural problems, in part because they've been unattended to for so long, will ultimately lead to the euro depreciating relative to the dollar. What the Fed is doing is at best temporary, ie, tactical. The problems with the euro, however, are strategic.

Bottom line: I agree with your concern, and at this point, I'm not sure I see how even the exit of Spain and Greece would help matters much. France is now stagnating. That doesn't bode well for crisis resolution anytime soon.

Paolo Pezzutti replies: 

David, actually this is not temporary…

John Floyd writes in: 

The key, I believe, is to recognize the Euro is a political animal. The politics are now unraveling from both the top (core countries) and bottom (peripheral countries). Bad economics have led to bad politics and the circle is becoming self-reinforcing. The U.S. dollar, rightly or wrongly, remains the world's reserve currency at the moment. There are approximately $200 trillion in derivative contracts denominated in Euros. The size of the decline in European growth, the politics, and the market product entanglement is making the Euro's ultimate price more difficult than ever to forecast as it may be 1.0 or .80, or lower. The expected returns of the thesis that the Euro goes lower in value however are increasing rapidly as the vortex of the deciding forces gather momentum and power. 

Anatoly Veltman writes: 

That was interesting reading, until you got to "forecast, may be". How to interpret what follows?

John Floyd responds:

My point was not to be interesting but to outline what I think are the key drivers of the Euro and the potential feedback mechanisms through trade and financial channels globally.

As to how to interpret what follows that is up to you. As a guide I would think outside the box and remember some combination of the following: the Tequila Crisis, the ERM crisis, why "hedged GKO's" were not really hedged, the Malaysian Ringgit fixing, how a butterfly flapping its wings in Iceland had a major global impact, etc.

Jeff Rollert writes:

I like to think of it as the behavior of the passengers in a plane, which just lost altitude suddenly.

They suddenly realize the only ones in control are in the cockpit, yet are unable to see where they're going (just where they are and a little of where they've been).

John's point is very good. History is not a (literal) guide but how investors react to the unexpected is useful.

I'm finding many pieces of evidence of avoidance behavior, including an overweight of whatever was last read.

The model may be a reversal from highly regulated markets to highly unregulated ones.

I've been going to ethnic markets for insight recently, as the calmest investors I observe are immigrants, for insight on their interaction.



If one presumes that a ZIRP is a form of command economy, without complicating the question with other similar restraints, haven't the current structure of global markets just become state sponsored speculation? That would certainly explain the increase in correlations.

I've been thinking about the line that divides investment from speculation. Prior to this administration, I considered the difference to be based on time window and interest/dividend cash flow differences.

Anyone's thoughts?

Stefan Jovanovich writes: 

To avoid real work I have been reading Sumner's History of American Currency; it is a delightful reassurance that "state sponsored speculation" began as soon as Washington left office. The present may be dreadful, but it is hardly unusual. I would argue that the present "command economy" is, in fact, far less under the thumb of the government than it was before ZIRP. Is there anyone on the List who thinks that, freed from the shackles of the Federal Reserve and the Treasury and the alphabet agencies now guaranteeing home loans, the U.S. single-family housing industry would boom and passbook savings rates would go back to 5%? Roosevelt's legalized theft of American's specie savings had terrible consequences for the American economy because it represented the complete triumph of state sponsored mercantilism. World trade literally evaporated. That is hardly the situation now. The Federal Reserve, ECB, and Banks of England, Japan and China can tinker with the maturities of their IOUs all they want and the national Treasurers can hint broadly at the need for a strong (weak) national currency; but the markets call the tune.

Gary Rogan writes:

Let's say you discover that on a particular day the stock market is likely to sell of based on historical patterns, so you short the market. In a different situation you find a promising young company that you believe will create a product that will sell in the billions several years from now so you buy the stock of that company. Wouldn't the first example be more of a speculation and the second one more of an investment? To generalize, could speculation be betting on the market participants' behavior, generally in the short term, and investment betting on the underlying fundamentals, generally longer term? 



 Even granting the the Elliott stuff is garbage, the opposing linear forces of buyers against sellers subject to a vig forms wave like patterns. All other waves can be modeled. Why not market waves?

Leo Jia writes: 

I'd love to hear others' comments on this. My take is as follows.

The market waves are actually constantly measured and modeled by market participants. These people then use their models to conduct trades on the market. This very action, as performed by many, then causes the underlying market wave to change its attributes, which then fades the models in use and causes the people using the models to lose money. This gives many the impression that market waves can not be modeled.

Perhaps akin to Heisenberg's uncertainty principle, which was initially mistaken as the observer effect, the above view of the market might be misconstrued. The uncertainty principle was later understood to actually state the matter-wave dual nature of quantum objects, regardless of the observation.

Aren't market participants very similar to quantum objects in this sense? What is the dual nature of people? Can't we say greed-fear?

Jeff Rollert writes: 

I would argue the periodicity, or perhaps wavelengths, vary as do ocean wave patterns reflect long distance, off shore storms.

Long ago, I read somewhere that polynesian males hung over the side of boats naked, so their "sack" could sense current vs waves for navigation.

Perhaps the model should include waves and divergent currents.



 About five years ago, I lost my business partner and friend to a heart attack. I know it was caused by the stress of the markets. My Dad spoke to him hours before he passed away.

This weekend, I lost a friend to suicide. He was well versed in the markets and extremely bright…easily a match for my former partner. Again, I know the stress of trading and investing is big, but you have to make sure you can burn it off in a positive way. In his case, he couldn't handle the stress of investing and a failing marriage.

I have too many friends on Dailyspec, and frankly I do worry about you folks. Both these guys knew what was going on… they were neither stupid nor weak people.

Make sure to recall this is a game, and those you come home to at night are your real treasure. If you don't think of it as a game, you should leave the business immediately for the sake of those you love and who depend on you.


Jeff Rollert

Victor Niederhoffer writes:

I knew and admired the first person. He was larger than life, enjoying all aspects of it to the full, and appreciative of all his friends and family. He had a myriad of interests, and loved life in all its aspects. A man like Falstaff but good in all his facets. I miss him greatly and will always remember with gratitude the fine and large points he enriched in my life and others.



 Here's a shocker:

Take the Confidence Board Consumer Confidence raw number from May, 2010, through November 2011, and calculate monthly % changes; then regress against that series the previous month's % change (close-close) in the S&P…and you get the previous month's change in S&P being an excellent predictor of the CC change!

multiple R: +0.69

R squared: +0.48

…and just to be humorously over-precise:

CC%chng(month[1]) = -0.00498 + 1.8*S&P%chng(month[0])

Jeff Rollert writes: 

I cannot recall when that strong a relationship didn't hold, so much so I stopped doing the calculations.

One of my current stat problems is finding data sets that do not have some strong feedback dynamics, where a strong data point is reflected in market prices and becomes non-predictive. The expansion of SAP, ORCL and other large data set manipulation/analytic engines seems to be one of the culprits.



It is interesting to look at what companies have an October Fiscal Year end, and how today may impact their accounting.

Recall that balance sheets are converted as of the close today, and income statements use a different method.



My take (unimportant ramble) on the following article:

This is very important for all traders but as an algorithmic trader (Dailyspec being comprised of many counters as well), I have done well in executing the statistical set-ups generated by my systems (not to say I have been overly profitable, just to say I can follow the triggers). However, I will often look for confirmation (see confirmation bias) of a discretionary contradicting opinion in less useful statistics that may take my system(s) out of the market. Truth be told I could spend 30 minutes a night making sure my data is clean, setting up orders for the following session and go to sleep. As it stands I rarely sleep more than 5 hours, I spend upwards of 12 hours a day researching, another 4.5 coaching rowing, and the rest making sure my girlfriend doesn't get jealous of my time with the market. So basically this tells me I should just relax… And let this not come across as "I have my systems, I don't ever have to research again", but rather as "okay, I have my orders for tomorrow, lets not spend another all-nighter testing the hundreds ways I can throw rocks at my system." And I will still probably not sleep tonight, but at least I'll have more confidence in my positions, right?

Here is the article: How decision makers complicate choice.

Jeff Rollert comments:

This is a very important trend. It helps establish dominant economic players.



 What higher purpose is involved in all the news about Greece? How does it help the flexions? And how does it make man small? The answer must lie somewhere related to these last two.

Vince Fulco writes:

1) "Only Govt has the answers…"
2) The powers that be must deliver bad medicine (aka taxes) regardless of one's individual responsibility/frugality/discretion/smarts.
3) Overcomplication hides the truth as long as possible.
4) Suffering should be shared by the masses, prosperity obtained/retained by the sharpies

Jeff Rollert comments:

Actually, I see the flexions losing control. The public has tasted information freedom. They won't give it up easily. If Greece says "No" then their world changes rapidly. In my circle, the banks are "reaching out in the community" with ever greater frequency. Yet, consumers interest in their products is waning, except at the mid/mega cap level and gov't.

Dylan Distasio replies:

Jeff, can you elaborate on what you mean by information freedom, specifically in reference to the Greek situation?

I think some of the flexions have already profited in the first round of the Greek bailout by offloading bad debt to the ECB from the private sector when the ECB agreed to take it. I'm sure the other ones tied up with the IMF have a strong incentive to make the Greeks take their medicine.

I don't see how the Euro will survive this situation long term. It is very unlikely that Greece's economy is going to improve enough to meet these payments especially with a Draconian austerity plan. All this new bailout is doing is delaying what appears to be the inevitable. It might take another year or two for the pain to become insurmountable for the ECB and Germany/France, but they will eventually be forced to stop throwing good money after bad. The Euro is a flawed currency and there was no exit plan built into it. Greece, Spain, Portugal, and Ireland all need to devalue their currencies to one degree or another and are unable to. This situation is untenable.

  Things fall apart; the centre cannot hold;
   Mere anarchy is loosed upon the world,
   The blood-dimmed tide is loosed, and everywhere
   The ceremony of innocence is drowned;
   The best lack all conviction, while the worst
   Are full of passionate intensity.

Ralph Vince writes:

I agree with all except it "it could get real ugly part." Not that I don;t think the possibility exists, but my analysis leads me to believe we are on the brink of gigantic, unprecendented economic growth in America, that we are rounding the turn, given a trough of some sort around 2014-2015, things REALLY take off after that.

And as we saw with China post-Tiananmen, nothing quells the masses like economic growth.

This is an extremely sophisticated society that, in the main, on the level of the individual, produces, despite their governement. In the main, Americans are quite peaceful, self-organizing, self-reliant people when need be. The seeds of pare-to-the-bone efficiency are in place here like nowhere else, the technological advantages now in place and as-yet unfelt — a catalyst need only emerge. The amount of available capital, so desperate now for a return, will be the second great biblical flood.

Talk to the younger crowd, and you see they isotropically have little faith in the future, little appetite for risk. They aren;t going to all be right. We re in the prime years to push all of our chips as individuals out onto the table.

Stefan Jovanovich writes:

I share Ralph's optimism about future returns in what the old men with canes would have called "sound securities". If I had the energy for it and did not still live in California (aka PIGS West), I would be buying and managing as many small businesses as I did 20 and 30 years ago. I don't find the absence of "faith in the future" among young people to be as alarming as Ralph does; I don't remember even thinking about the future when I was 15 and 20 and 25, and the young people I now meet who "have a plan" are basing their projections on what they have learned in school, not their dreams. The others - who are properly cynical about school - understand that their fate is largely at the hands of the marketplace. But they are not scared. Quite the contrary. They seem to be far more comfortable with risk and uncertainty than my generation ever was and still is (we seemed to think we had the divine right to complain and receive whatever medications were available to escape from the pains of actual life.) I think intelligent young people now understand the difference between risk (doing potentially dangerous things that require skill and practice to avoid harm) and the arrogance that comes from ignorance. Extreme sports have never been more popular; but Lack's kids and others are sensible enough to wear helmets voluntarily. The kids are all right.



Regrettably for the many traders out there that watch such things the 100sma is intersecting directly with the 1308.50 gap.

Victor Niederhoffer writes: 

As those of us who strive in the futile effort scratch out a living by taking advantage of microscopic moves know, the market had a terrible excursion down overnight to the dreaded 1300 level stopping at 1302.5, and then gracefully as grandpa martin would say, climbing back to 1313, —– what does it all mean is a excursion down just above the round number, a danger sign, or a sign of strength.

Hard to test this without refining the data so far that it becomes statistically meaningless. But it's an interesting question that could be generalized in many different directions. 

Jay Pasch writes:

It is beneficial to have learned here the undesirable nature of stops and to sleep in the buff.

Jeff Rollert replies: 

That was not the visual I needed before my second cup of coffee…

Jim Sogi writes:

A couple of sidenotes…

Just around the close, certain brokerages changed the margin requirements certainly wiping out a number of players and causing some of the airdrops in the night as certain large positions liquidated. Secondly, it would be necessary to examine not only 24 hour data, but look to see which countries were manipulating the markets while NYers slept. The idea here is that the overnight markets or foreign interventions are becoming more and more important. Note the existing unfilled gaps that the day markets have not been able to fill for a while now. The same condition existing a few weeks ago in reverse as well. The night session is not a thin as it used to be. Still if you could, why not move things around at the margin for your own gain. 



 I keep wondering if AAPL will be the first $1T-market-cap company. It's hard to accept that number if you're an old fart with a set of mental reference points that do not encompass market caps that begin with "T".

Right now AAPL has ttm net income of about $20B, and sells for 16x that number. So at the same multiple, $1T in market cap would require roughly $65B in net income. Is it possible they could get there in the next 3-4 years? They may break $100B in revs in calendar 2012. They also have $65B in cash on the balance sheet right now. By 2015 that will be…$150B? $200B?

The first $100B market cap was a big deal, too, though I don't remember which company it was.

Tyler McClellan writes: 

The reason apple will never get close to a 1 trillion market cap is very intuitive.

At that level they would be the largest net lender to the U.S. economy other than Japan or China. What are the prospects of a company that lends all its profits to the U.S. at zero percent interest rates. 

In fact, I will go further and say that the cash on the balance sheet at Apple is exactly equal to the amount of savings that society wants to do and apple refuses to accommodate.

For all of you who think you understand economic theory very well. What company supplies net capital to the economy at ever increasing rates even as its own prospects continue to improve vis-a-vis the economy?

Apple is a great lender to you and me, who have no need and no want for these lent funds, in exactly the opposite proportion to the amount you and I want to save in apple given its huge scope of opportunities.

Apple positively refuses to allow people to save. They force people to dis-save.

And for those of you who think the impetus to competition makes up for this (i.e., inducement effect of high market cap). Microsoft makes more net cash flow than all of the venture capital in the united states.

Apple itself makes nearly as much in free cash flow as the entirety of venture spending (that's in all categories at all stages).

Jeff Rollert writes:

Aren't market caps just measures of human preferences? If so, then they are good measures for where you are, not where you will be, as much of this behavior mapping is coincident.

A trillion seems to trite these days. 

Alston Mabry writes:

I think size matters.  Here are some more stats for AAPL:

last two quarters' YOY rev growth: 70%, 82%
last two quarters' YOY earnings growth: 74%, 91%
annualized growth rate of net income since 2005: ~60%

PE based on most recent 4 quarters: 16.3
PE after backing out $65B in balance sheet cash from mkt cap: 13.2

Now, imagine you saw those growth rates for revs and earnings, and that PE ratio, in a company with a $1B market cap, a company that had relatively limited market penetration for most of its products. "Is that something you might be interested in?"

So why aren't we more interested? Because people think AAPL is too big already. But maybe we have entered a new era of an expanding global economy in which there will be many companies with trillion-dollar market caps. As a popular and much-quoted writer and self-styled philosopher called it: the "JK Rowling Effect".

At one point in January 2000, the top ten (or twenty…I can't remember) stocks in the Nasdaq 100 had a total market cap of $1.6T and aggregate net income of about $19B, for a PE of 83. AAPL's current ttm net income is $19.5B, it's market cap $320B.

Frame of reference…point of view…big round numbas….

Alston Mabry asks: 

So you're assuming that rates will still be zero in, say, 2016? Could be. But what if the whole curve is pushed up two or three hundred basis points by then?

Tyler McClellan writes: 

Their actions as representative will force the rates to be low.

If the worlds most rapidly growing large enterprise refuses to borrow funds at 70% internal growth rates and is more than happy to lend them at 0% interest rates, then what possible companies demand to invest more than their willingness to supply savings?

It's a big fake that no one is supposed to talk about, our best companies don't want any money no matter how fast they grow, and in fact the faster they grow the less money they want. But wait, that's great, you say, because it means they create value out of nothing, and that what economics is. And isn't it true that companies can have value only if the sum of their discounted cash flows are positive, so doesn't that mean were wealthier if all of our companies have really high net cash flows.

And of course the answer to the above is categorically no, but I don't suspect what I've written to make a bit of difference, so back to my little day solving equations. 

Rocky Humbert writes: 

Tyler: I'm not sure it's appropriate to generalize from AAPL to the entire economy. AAPL is sitting at the top of the technology food chain, and they are benefiting from the investments being made underneath them. It's surprising, but Apple is NOT investing in R&D in a meaningful way… and this demonstrates that they are much more of a marketing company (like Proctor&Gamble) than a technology company. Hence they will eventually need to either buy back stock or pay a dividend….

R&D as a Percent of Revenues:
AAPL: 2.7%
P&G: 2.5%

INTC: 15%
MSFT: 13.9%
GOOG: 13.0%
IBM: 6%
(Source: Bloomberg, FA IS page, trailing 12 months)



 1. "There is no such thing as easy money"

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

[An example supplied on April 18 by Mr. Rogan: "The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday" (zerohedge )]

3. It's bad to try to make money the same way several days in a row

4. Markets that have little liquidity are almost impossible to profit from.

5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

6. The market puts infinitely more emphasis on ephemeral announcements that it should.

7. It is good to go against the trend followers after they have become committed.

8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you'll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

10. A meme about the relation between today's events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

11. All higher forms of math and statistics are useless in uncovering regularities.

Mark Schuetz comments: 

A point about # 2: This one might be fun to try to rigorously measure and test, looking at price movements in the time leading up to and including certain announcements (knowing this type of thing has been shown by list members before, but usually it's more descriptive instead of measured). Is it possible to show which types of announcements are more often known by participants beforehand as opposed to other types? Also, if certain participants are informed ahead of time, how far ahead of time do they know and in which way will they "front-run" the announcement (there can sometimes be many different ways to make a position on one economic statistic) ?

Victor Niederhoffer replies:

Certain participants know it and they react to it, and you can figure out which announcements are go with and go against——-but but but. The pre and the post regularities are always changing vis a vis the flexions and cronies and their nephews.

Ralph Vince writes:

What a great post. Thanks Vic. I certainly must second points 1 and 11, the bookends….and they have me thinking…

1. There is no such thing as easy money

This is so true, in the markets, in everything. Those who happen upon money where it DID come to them easily, it seems, as a witness, have had it very fleetingly. In my own case, although I am supremely confident in the profitabliity of what I am doing, in practically any market, in virtually any "regime," doesn't mean it's easy. It works like clockwork and is incredibly painful and distressing. It would be so much easier to simply sell buckets of blood."

11. All higher forms of math and statistics are useless in uncovering regularities.

Certainly in a post-'08 world, quants are out of favor, and for good reason. Most anyone I know who DOES make money in the markets, does so with very simple, robust techniques. Having considered going to quant school, and studied a good deal of it, I finally came to the conclusion that they are simply working with "models." Models of how the world behaves. unlike hard sciences like Physics and such where you can perform a test, come back a year from now, perform it again and get the same results, you don't have this in financial modeling. And I think this is where the quants have fallen short. Models are NOT reality, and they never got down to the bedrock, the reality of what his game is about. Of course it had to fail, and in a large way, at some point. A good rule of thumb is that if I need a computer, if it isn't simple enough to do in my head on the fly in the foxhole after I have been awake for over 100 hours, I can't use it. 

Jim Lackey writes: 

About point # 10: It takes no time at all for the information to spread. Yet how many times have we acted, lost a bit, recovered, then seemingly too much market time expires, and we close out a position. We say "awe everyone knows that it's priced in." The meme is then repeated for the 57th time and on a low pressure day, month, or year and then, kaboom!

Of course, I can think of the few times where we missed a huge score, being short YHOO in 2000 or selling some short in 2008. Yet there are hundreds of low magnitude fantastic long only ideas that we forget about. I look back 6 months later and say wow look at that beautiful rise, what happened? It went up very small, day after day, and only buy and hold would have worked.

Alston Mabry adds:

 12. One should not make one's analysis more precise than one's actual trading could ever possibly be.

If the rational mind has not determined the parameters of a trade, then upon execution, the lizard brain will decide.

14. Never go on vacation with open trading positions.

Or, zooming in:
<click> home

<click><click> to lunch

<click><click><click> to the bathroom 

Paolo Pezzutti writes:

One could test how the stock market reacts to good (very good, wonderful) or bad (very bad, terrible)(a sort of matrix) news when the news is released and after some time. It might help build a strength indicator. Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Alston Mabry comments:

Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Chris Tucker adds: 

Stick to your guns, but realize when you are wrong. Easier said than done. Good ideas can lead to conviction, but only experience can strengthen ones resolve. Forget the last trade, look to the next. Try, try, try to learn from your mistakes, but also from your wins.

Anton Johnson writes:

15. When correlations among many typically disparate markets become high, one should reassess leverage and seek novel opportunity.

Jeff Rollert writes:

17. Sell side liquidity is an inverse function of cell signal strength and micros0ft patch frequency, especially at lunch time.

Rocky Humbert writes:

The First Law of Rocky – In every "macro market" (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. This Law is true 99.999999999% of the time.

The Second Law of Rocky – Rocky always keeps his calculator precision set to two decimal places. Any trade that requires more precision than the hundreth decimal place, is a trade that Rocky leaves for smarter participants

Jeff Sasmor writes:

About Jeff R's # 16:

16a. Never go to the doctor when you have a profitable position as it will reach its maximum profit and reverse exactly at the time that you enter the doctor's office.

Happened to me yesterday…

Ralph Vince comments:

With regards to the First Law of Rocky…."Unless it is a new high, that price has already been seen before."

Victor Niederhoffer adds:

Beware of using hard stops as it's bad enough that the floor can always know your physical hard stops.

Jay Pasch comments:

No wonder over-leveraged daytraders always lose as they are required to deposit a hard stop with their leverage, along with their hard earned money…

Ralph Vince adds: 

Despite numerous posts on this thread, it has not been opened up beyond Vic's original 11…

T.K Marks writes:

Aristotle felt the same way about drama, posited that it could be comprehensively reduced to 6 elements. And any additional analysis would by definition be but variations on those original half-dozen themes:

"…tragedy consists of six component parts, which are listed here in order from most important to least important: plot, character, thought, diction, melody, and spectacle…"

Jim Sogi writes:

Always be aware of and consider current market conditions and how they might affect or even negate your prior analysis.

Even the the weather forecast says sunny, if the clouds look dark and the wind is blowing, stay home or dress warm.

James Goldcamp writes:

One good anecdotal rule I've found that works for investing is that the market that causes you the most psychological pain, revulsion, and visceral response from prior bad investments, or overall perception, is probably currently the best opportunity since others may also have a similar overly pessimistic view (or over assign risk premium). This seems to be especially true for post calamity emerging markets, high yield bonds, and fallen growth stocks (tech). If for no other reason, this is why I think stocks like Citi and the West Virginian's company are good buys now (and perhaps government motors and Russian stocks).

Ralph Vince comments: 

 Thinking on this a great deal the past 24 hours, I think I would add one more, which is to me the most important of them all perhaps, or at least tied with #1 and #11. And that is that most people have no business being here. They don't know why they are here, and, if pressed, can only give a sloppy, struggling answer. "I'm here to make money." "I'm here to improve my risk-adjust return," or some other nonsense.

They are here for action– whether they know it or not, whether they acknowledge it or not. The market is a magnet for gamblers, a magnet for those who compulsively seek out the very action she puts out. People are here because they want to feel they have one-up on the masses, the system, or that they are not as inadequate as they suspect. The very proof of that is their utter inability to instantly articulate their criteria in specific terms. Absent that– they're in a bad place.

They're looking for girls in the wrong dark alley.

It makes no difference how well-capitalized the individual is. The world is full of guys with $10,000 accounts who will lose it all and then some, and full of guys with very fat checkbooks who will lose all of it equally as quickly, in similar fashion.

They still think it is about what you buy, when you buy it and when you get out, facets that have nothing to do with what is going on here (which is specifically why mathematics, simple or higher-order, fails in this endeavor; people are applying to aspects they mistakenly think this thing is about.)

If you examine institutions, they may be equally as clueless as to what this thing is about, but they have one big up on the individuals– they have a specific, well-defined criteria in most cases about what they are in this for, what they are willing to do to achieve something very specific.

Most individuals– of all gradations of wealth– can't, and that's the red flag that they here for all the wrong reasons.

Jeff Rollert adds: 

Amen. If it doesn't hurt a little, you're wrong.



 IMHO, the oil price spike is about inelastic delivery. So they release from the SPR [Strategic Petroleum Reserve] … what happens if hoarding develops as I expect?

My work indicates that consumers are oblivious to the current implications. The cognitive dissonance is off the charts. They may talk, but they've done little about it. As an example, look at Prius sales. Not hard to find them on lots here in CA.

That SPR flow gets absorbed quickly. On the other hand, I'm looking at this as a possible new car cycle.



 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.



 If you look at it from the perspective of the Chinese this headline has got to be maddening. They are desperately driving millions of indigent citizens to work for next to nothing under extremely hazardous conditions to send real good to the US and elsewhere. The citizens are always ready to rebel due to this treatment, and the main goal of the Party in reality is to keep the citizens from rebelling. In return they are getting a heavier and heavier anchor that prevents them from their second goal, taking over Taiwan (the potential of repudiation of the US debt is pretty much the only thing that's keeping them from attacking) and military domination of everybody else around them. They can't stop this charade immediately, because then the citizens would rebel due to joblessness and thus it's being perpetuated. So they are shifting their debt into the Japanese government obligations and getting involved with the Japanese trade policy for a totally spurious reason. I'm sure if they knew how to make every citizen instantly rich and totally shift to domestic consumption with just some exports to nearby Asian countries they would. If all that wealth the government is sitting on could be distributed in a one-time deal, I bet they would go for it, but the logistics must be truly daunting.

Jeff Rollert writes:

I suggest you frame the point in a 100 year time frame, as China is doing now.

China has to look inwards for 20 years, or at least until this generation has trained enough world class managerial talent to run multiple multinationals, without foreigners.

By buying Jap debt, their are securing a flank. By buying our debt and acquiring the manufacturing through pollution/tax/labor cost arbitrage, they are industrializing quickly.

I look at their debt maturity in the same way a general looks at an opponents perceived strength and structure. Short term average suggests the need to protect is growing smaller. The size of the maturity buckets bought gives you an estimate of their timing for a reduction/increase in the perceived threat.

Debt weaponization…thrust (buy others debt) and parry (issue debt, then imply decline paying).

It's MAD all over again…we won't default to handle a Taiwan situation because it would remove our reserve currency yield advantage. China is not ready to assume anything near a reserve currency role….and they won't push us that way until they're ready to do so.

Stefan Jovanovich writes:

After the ruins of the Great War aka WW I, the negotiators at the Versailles Peace Conference spent days and weeks discussing the details of how the maps of Europe, the Middle East, Africa and the Western Pacific would be redrawn. No one did an accounting of the liabilities that had been incurred; they only discussed the real estate assets to be acquired. When– and if– the Chinese decide that they want the rewards of seignorage, I pray that the U.S. will follow the model of the Danish Department of Defense during the Cold War and have a recording that says "We surrender" in Chinese, Spanish and Arabic.

Also, take a look at this on the Gini Coefficient:

"The Gini coefficient of different sets of people cannot be averaged to obtain the Gini coefficient of all the people in the sets: if a Gini coefficient were to be calculated for each person it would always be zero. For a large, economically diverse country, a much higher coefficient will be calculated for the country as a whole than will be calculated for each of its regions. (The coefficient is usually applied to measurable nominal income rather than local purchasing power, tending to increase the calculated coefficient across larger areas.)

Gini coefficients do include investment income; however, the Gini coefficient based on net income does not accurately reflect differences in wealth-a possible source of misinterpretation. For example, Sweden has a low Gini coefficient for income distribution but a significantly higher Gini coefficient for wealth (for instance 77% of the share value owned by households is held by just 5% of Swedish shareholding households ).[10] In other words, the Gini income coefficient should not be interpreted as measuring effective egalitarianism.

Comparing income distributions among countries may be difficult because benefits systems may differ. For example, some countries give benefits in the form of money while others give food stamps, which might not be counted by some economists and researchers as income in the Lorenz curve and therefore not taken into account in the Gini coefficient. Income in the United States is counted before benefits, while in France it is counted after benefits, which may lead the United States to appear somewhat more unequal vis-a-vis France."

Rocky Humbert writes:

It would be interesting to see a Gini Coefficient for the major industrial companies of the world. (That is, income distribution within corporate enterprises … [i.e. the income dispersion between CEO's, staff and mail room clerks].It would be then be most interesting to see if there is a correlation between long term ROE/ROC/stock price performance and the Gini Coefficient…

Does anyone know of thorough study that has done this? I know of studies of CEO pay versus performance, but that's a different question. The study would have to analyze after-tax income of course…

Lars Van Dort comments:

Here is a paper from Belgium that addresses this question. Maybe not the major industrial companies of the world, but anyway.

PDF available for free download.

This paper examines the relationship between intra-firm wage dispersion and firm performance in large Belgian firms using a unique matched employer-employee data set. On the basis of the Winter-Ebmer and Zweimuller's (1999) methodology, we find a positive and significant relationship between intra-firm wage dispersion and profits per capita, even when controlling for individual and firm characteristics and addressing potential simultaneity problems. Results also suggest that the intensity of this relationship is stronger for blue-collar workers and within firms with a high degree of monitoring. These findings are more in line with the 'tournament' models than with the 'fairness, morale and cohesiveness' models.



my birthdayThe more I think about it, I don't believe credit and debt are likely to be our biggest issues in the next couple of decades. The credit crisis was really all about the valuation of illiquid assets, and the death-spiral of marking to market assets that stopped trading outright, because no-one knew what to mark them to, and therefore couldn't assess counter-party risk. It struck me early on in the crisis that trying to mark these "assets" to market was stupid. The most obvious solution was to take troubled debt, garbage or otherwise, and refinance it over longer maturities to gain some breathing room. And that's kind of what happened, and here we are today with LIBOR nicely back to normal. If things get really bad again, central banks will just lead re-financings like the Europeans did earlier this year - and keep interest rates low, because sizeable tranches of new money will likely have to be created from time to time.

Interest rates have to stay low now because governments are running large deficits and adding to their already big piles of debt, and can't really afford to pay much higher interest. The cost of credit appears to have shifted toward a subsidy regime much like agriculture, and could very well become as politicized. Credit needs to be cheap and affordable, and kept there as everyone - governments, business, and consumers - get used to paying so little for money. Because the U.S., Europe and Japan are all in the same boat (Japan saved us seats) and represent the currencies where most reserves are parked, I think we're going to see low interest rates for a long time - even if economic growth comes back, which it should as everyone continues to refinance longer-term debts to lower rates. They'll be able to keep rates low because there really won't be any other game in town currency-wise.

This is my assessment, and who knows if it really will play out that way, but if it does, I think the current financial system and major economies can remain intact for a long, long, time, deferring the day when debt really comes home to roost. I foresee a more robust form of what Japan has gone through in the last couple of decades. Not as much growth as before, a lot of bad debt in the attic that no-one wants to write down in a big hurry, but generally better economic performance than Japan in the aggregate. The analogy I would make is the stretched family that just keeps paying off one credit card with another indefinitely. I think this will be our macro fiscal situation for a while.

Most things in the world will still function, so commodity and equity markets should return to business as usual– they pretty-much have already. With such low interest rates, not sure what's going to go on in the bond markets. When confidence increases, a lot of that money may actually shift to equities and commodities for higher returns, and with that appetite, it might soon again be a good environment for IPO's to absorb some of that capital, and the innovation that goes with that. Industries that depend on, or prosper from low interest rates should do well. Real estate and utilities might boom. Deflationary pressures may still hover near, especially if consumers remain strapped for an extended period of time in the major economies.

Inflation? Don't see it here unless low rates set off another major boom. Future crises? Probably currency, in places like Russia and Brazil. Because other economies/currencies don't have the same low-interest luxury and will be more sensitive to inflation (interest rates in Brazil look to be about 11% these days), we may get some currency devaluations. War and geo-politics are always wild cards. Dollar, Euro and Yen could stay relatively strong from the influence of carry trades (borrowing cheaply in these currencies to get higher returns elsewhere).

Any thoughts out there on this and other scenarios?

Jeff Rollert writes: 

I differ… the crisis began as a liquidity crisis, and has morphed into a problem of insufficient systematic equity. Low rates are a prayer that hopefully buys enough time for debt amortization to effect a re-equitization.

Problem is it assumes stable GDP here and abroad.

Ralph Vince writes:

The villains in the story are the quants– those whose maladroit ir math  mispriced the CDOs and CMOs grotesquely– then ducked back into their dusky shadows.

Not a one of them has been called to account. 



Are declarations of victory against the global crisis premature? This column argues that "graduation" –- the emergence from recurrent crisis bouts-– is a long and painful process which neither developed nor developing countries look close to completing. Two centuries of evidence suggests that most countries need 50 years before the chances of further crises subside.



The report from ICI that bond funds in the US attracted more money than their equity counterparts in 30 straight months through June, the longest such stretch in 23 years…

23 years ago was 1987…when yields (at the high) were at 10% for ten year treasuries.



I am so sorry to hear that Bill has passed on August 15th, 2010. He has been a highly valued friend and mentor since 1992, when I was aerospace reporter for the Daily Breeze in Torrance. I left Southern California for New York in 1994, but we stayed in touch over the years.

I had hoped to introduce my four-year-old son to him. Aubrey is obsessed with space exploration, and I had wanted him to know Bill, who will be remembered as one of aerospace’s brightest stars.

My deepest sympathies to Bill’s family.

An obituary ("William “Bill” Everett Haynes, 86, decorated Vietnam fighter pilot, of Rancho Palos Verdes, CA") appears on his web site timeleft.org

Alex Castaldo adds:

Here is a passage Bill wrote many years ago reflecting his appreciation of Daily Spec:

[DailySpec] is often a window on the souls of its members.

And a window on our own souls is often opened when we read what

Others write here.

It is lessons on life.

Chess strategies.

Investment in markets, life, family, nation and the future.

It can be and often is profound and superficial; deep and shallow and always enlightening, even when a writer may not be.

It sends out tendrils seeking answers and finds them, coiled about ideas we would never have found alone.

The [site] lives and throbs with the insights, prejudices, wants and experiences of the members.

There is a selection process at work here, as some find an intellectual home … others move in for a while and then move on.

Those who remain don't always agree and contention boils up, simmers and fades, sometimes leaving a residue of hostility but never, never boredom.[…]

Surely we, the weavers [of this tapestry] are much the better for it, and must acknowledge the debt each of us owes to each other, and to the two who first spread the warp and the woof.
Thank you Victor; thank you Laurel. Bill

Also interesting was his post on the national debt from March 31, 2008. (Though the figures today are completely different).

Notice to readers: to honor Bill we will stop updating Dailyspec for the next 24 hours.

Laurel Kenner adds:

Bill Haynes embodied the ideals of courage, persistence, mastery and friendship. Young at heart to his death this month at 86, he stayed clear of the cynicism, apathy and fear that often silence those who can offer innovation and guidance to realizing daring visions.

I met Bill when he was in his seventies and nearing the end of a remarkable career in the space industry. I was an aerospace reporter at a Los Angeles daily newspaper. Bill was then working for SAIC, a top space consulting firm. He took on the daunting job of educating me about the industry, inviting me to aerospace conferences where he would be found exchanging choice anecdotes about the beginnings of the aerospace industry or holding serious talks with groups of brilliant young engineers who looked to him as a mentor. He passed along to me his outrage about waste in the industry, but he also inspired me with dreams of unbelievable adventure that might just lie right the corner: voyages to Mars, commercial space exploration, cheap space launches. He introduced me to the ideas of geniuses like Gerald K. O'Neill http://en.wikipedia.org/wiki/Gerard_K._O'Neill and scientists exploring the barriers of longevity.

Bill was doing 100 pushups a day well into his 80s. The Friday before his fatal car crash, he flew the ultralight plane he had just finished building this year. 

Outspoken to the last, the essay he posted on his poignantly titled "Time Left" blog in April of this year succinctly summarized his vision:

*Human Space Exploration <http://timeleft.org/?p=215>*

*The primary current barrier to space exploration is cost; the exorbitant cost of getting into low earth orbit, currently in the high thousands of dollars per pound.  (Space News Apr 21-27, ’97, pg 3: $22,222/lb on the Sp Shuttle; ref NASA) But I see that as a transient problem.  Without going into what we will do specifically to lower the cost of getting in to orbit (although there are a number of efforts under way), we can cite historic precedents for saying that the cost will come down.  Every means of transportation known to humankind has gone through a cycle of high initial costs succeeded by steadily reduced costs until the transport means is available at low cost to everyone.  The earliest example is walking; Luke tells us in the parable of the prodigal son that the father welcomed his son’s return by telling the servants to bring him a robe and sandals. The sandals were generally reserved for persons of stature and were a symbol of authority two thousand years ago. A later example is the horse, which in medieval times was generally reserved for the nobility, so much so that it is called the age of chivalry, from the French “cheval”, for the horses ridden by chivalrous knights.  A modern example is the jet airplane which began as the high cost, limited domain of the military and has now become the transport of choice for millions of people.  That space transportation will be the first exception to this rule seems unlikely,  but the effects of cheap space transportation on our civilization will be much more far-reaching than these older examples.  Cheap access to space will lead to mankind populating the solar system, yes.  But far more important, it will give us access to unlimited raw materials and energy.  Combined with the access to information created by the computer revolution, this will give mankind all three elements necessary for unlimited wealth: unlimited energy, raw materials and knowledge.  The unspoken assumption is that we will exhibit the wisdom necessary to exploit those elements.* 

Among those attending Bill's memorial was his long-time friend, Apollo astronaut Buzz Aldrin, who said meeting Bill had been the best thing about the Apollo program.  Another friend, Rand Simberg, wrote on his "Transterrestrial Musings" blog:

*Remembering Bill Haynes

*He flew for the military from the post-WW-II era to Vietnam, was a jet test pilot, was an F-100 squadron commander, risked his life many times for many years, and continued to enjoy commanding high-performance machines all of his life, when ironically, it suddenly and unexpectedly ended with him losing a battle of momentum between his Mazda sports car and a Toyota Highlander, on his way to church, a devout Lutheran who spent his life dreaming of the stars, now at final peace with his God. In that regard, he reminds me, sadly, of Pete Conrad, who after commanding a mission to the moon and back, and becoming a leading light of entrepreneurial space, died riding the motorcycle that he loved on a tight curve just outside of Ojai.* 

*Bill Haynes used to tell the story of when he joined the US Army Air Corps in the 1940s, and told them that he wanted to go into space. “Better put down ‘extreme high-altitude flight,’ son,” the recruiter told him, after thinking for a bit. “The army doesn’t have a space program. Yet.” It still doesn’t, of course, because not long after, it spun off the Air Corps into the Air Force.*

*I first met him in 1981, when we were both working for the Aerospace Corporation in El Segundo. He was working the Military Man-In-Space program, which was looking into military applications for humans in space, which would be tested with military astronauts on the Space Shutte, which was just going into service. After his military career ended in the late sixties, he had worked on both Skylab and Spacelab, and probably knew as much about space station design issues as anyone at the time. He was highly critical of the space station studies occurring at Marshall and JSC at the time, and predicted many of the problems that the program would encounter over the next decade and a half before it finally started actually launching parts into space.* 

Victor and I have a four-year-old son, Aubrey, who is mesmerized by space launches and knows every stage of the Apollo mission. Hardly a day goes by when Aubrey doesn't "go to the moon." One of my fondest wishes had been to introduce him to Bill, so that he could learn from the best and kindest of masters. Goodbye, old friend. Thanks for being a star.

Timeleft.org Obituary:

William “Bill” Everett Haynes, 86, decorated Vietnam fighter pilot, of Rancho Palos Verdes, died Sunday, August 15, 2010, while driving his little red sports car to church. His loss is deeply felt.

Bill was born in Paris, France, on January 18, 1924, to Everett Campbell Haynes, a noted jockey in Europe between the World Wars, and Edna Heise Haynes. The Haynes family, including his younger brother, John Barrett Haynes, returned to Oklahoma in 1933, and moved to Los Angeles in 1942.

Bill relentlessly pursued his goal to be a fighter pilot and his dream of space travel. In 1943, he volunteered for the US Army Air Corps, where he served until the end of World War II. He obtained his undergraduate engineering degree at UCLA in 1949, and immediately joined the US Air Force.

His Air Force career took him and his family to Arizona, Germany, Ohio, Oklahoma, Southern California, Florida, and Virginia.

Prior to his service in the Vietnam War, Bill continually educated himself on the principles of flight and aircraft design and maintenance. He graduated from the Air Force Institute of Technology at Wright-Patterson AFB, Ohio, in 1954, and from the USAF Experimental Test Pilot School at Edwards AFB, California, in 1956. In 1965, he earned his Master of Arts from USC in research and development systems management.

Bill worked in the Minuteman missile program in Cocoa Beach, Florida, starting in 1965.

From 1967 to 1968, Bill bravely served as the commander of the 90th Tactical Fighter Squadron (nicknamed the “Dice”) at Bien Hoa AFB, Republic of South Vietnam. Bill flew 187 combat missions over the Ho Chi Minh trail. He was decorated with the Distinguished Flying Cross, the Bronze Star, the Air Medal and the Vietnam Cross of Gallantry. For the rest of his life, Bill enjoyed keeping up with his fighter pilot buddies via email and reunions.

He capped his Air Force career with a year in the Pentagon. He retired as a Lt. Colonel.

Following his retirement, Bill worked from 1969 to 1991 with various defense contractors, including Martin Marrietta, Nord Micro, Dornier System, Goldsworthy Engineering, Aerospace Corporation, and SAIC, in Colorado, Germany and Southern California.

Bill moved to Rancho Palos Verdes in 1977, where he lived with his beloved wife, Christine Apelles Haynes, until his death.

Bill is survived by his wife, Christine, his daughters Susan Ellen Roberts, of Dallas, Texas, and Kirsten Michele Howland, of Palos Verdes Estates, his sons John Barrett Haynes, of Los Angeles, and Richard Craig Haynes, of Pilot Point, Texas, and his grandchildren, Emma Kent Roberts and Caden Everett Robertson Howland. His parents and his brother, a Korean War veteran, predeceased him.

In retirement, Bill enjoyed anything involving flight. From 1998 to 2004, he worked with a team building a replica of the original airplane flown by the Wright Brothers. After that, he flew his own hand-built Ultralight airplane. His most recent flight was last Friday.

Bill continued to be actively engaged intellectually until the end. He held US Patent no. 4,828,207, for “fluid lock” technology. He wrote and published articles on various scientific issues, including the presense of “Square Craters on the Moon.”

He deeply loved his grandchildren, his pet parakeets and holding forth on the great issues of the day.

Bill was a loyal member of St. Paul’s Lutheran Church, Rancho Palos Verdes, for over 30 years.

Prior comment by Laurel Kenner (5/25/10):

Department of Happiness and Heroes:

Specs who know Bill Haynes will be glad to hear that last week he successfully flew the plane he built. [To see picture of actual plane, see our prior post from April 23]

The flight took place in the turbulent conditions over the mountains near Chino, California. Bill noticed shortly after takeoff that his throttle automatically went to idle, so he spent the next 45 minutes holding the throttle in his right hand and working the controls with his left hand. "If you're flying a plane for the first time, you don't want to land it right away," he told me.

Ha. I would have wanted to land it right away. You may remember that Bill is 86 years old.

In addition to being a tough ex-fighter pilot Bill is a rocket scientist. He's also a helpful and optimistic person, which puts him right in tune with DailySpeculations.Com .

Jeff Rollert comments:

Bill was wonderful, in giving me and my kids a tour of the aircraft he was building at the Compton Airport. Yup, that Compton.

He was a classic gentleman and a refreshing person. Not a single shred of ego (though he was really proud of still being certified to fly the Wright Flyer).

We'll miss him.



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.

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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.



 The following is not a rhetorical question; I genuinely don't know the answer. The 12 hours of school, music lessons…sports programs–is that really what's going to be best for these kids?

There seem to be fewer and fewer pre-scripted routes to success these days. Alan Corwin wrote about highly skilled database programmers who found themselves obsolete. Medicine has gone from being very cushy to modestly cushy. (A few pathways that might still exist: 1] do well academically/go to law school/ become partner at law firm, 2] get a government job, or 3] be nice to your very wealthy parents) Increasingly you have to invent yourself.

So what happens to regimented and highly educated kids when they grow up? They can hit a passable forehand, play some of Beethoven's piano sonatas, and do integrals (on Matlab), but they grow up and find that what they really need out there is something that's unique, which they don't have. Most of the successful people that I know personally had unstructured lives as children, and they had to figure out for themselves what to do with all that time. Most unsuccessful people though had the same situation! That's why my question is a real one, not a rhetorical one, one in fact that I'm facing with my own children.

Scott Brooks writes:

Having an unstructured life as a child equating into success as an adult depends on your upbringing, parental guidance, and environment. I saw a lot of my friends growing up living unstructured lives because of single family households (mother couldn't do much more than work to support family), alcoholism of one or more parent, or other factors.

I think a lot of these kids would be much better off if they were in a structured environment that allowed them freedoms most of their day (12 hours or more), at least 6 days a week.

The problem is that the kids who need this environment are stuck in some kind of a governmental system whereby the teachers unions control the environment. I believe that is what has lead us to being a country of non-thinking sheeple and is destroying our children today.

Jeff Rollert writes:

Improv is the best training I've had, and I use the trapped time in the car to make the kids do it. Doesn't matter if it is story telling, music, jokes, etc.The only consistent skill I've seen in life that doesn't get obsolete is on-the-fly storytelling.

Jack Tierney comments:

 This is an important question and one that has great significance for the future. Recently I've come across more and more articles regarding this cohort and their predicaments.

The recent spike in student loan defaults has highlighted the fact that many of our "highly educated kids" have gone deeply into debt. Unfortunately, many have been highly educated in specialties that offer little opportunity to secure a wage sufficient to pay off the debt and live in a manner to which they've become accustomed.

In many of these households, the parental unit(s) have also taken on substantial debt to provide the education; unfortunately, their 401Ks and pension plans have been whacked by the market, and chances that junior will be offered a comfortable, all-meals-provided, rent-free existence dwindle daily.

I recently re-read "The Grapes of Wrath" for a discussion group. There was some conversation on whether current events could lead to a re-run of those days; it was suggested that our many undocumented immigrants would supplant the equally powerless and under-educated Okies. I suggested, however, that while both groups presented problems for their times, our well educated but un- or under-employed youth could present a significantly greater one.

During my lifetime it's been rare that major anti-establishment protests have been led and peopled by the under-classes…the poor rarely had enough time or resources to be regular participants or prisoners. Those movements were conducted by an educated but unhappy coterie that was rarely underfed or unqualified for well paying positions. Tomorrow's protest leaders could well be both.

Another disturbing element in this education scam is the adult re- education programs being offered and underwritten by the Feds and the States. There's heavy emphasis on computer skills, auto repair, finance, education, business admin, accounting, and nursing - fields in which there already exist many unemployed but experienced professionals, and others which have little future.

I can appreciate Dr. Pennington's concern. Of my three sons, only one appears to be moderately secure. All are now in their forties, so options are limited and not very promising. For my grand-daughter and grand-son (I have one of those now), I have major concerns as I feel they, too, are being offered yesterday's curricula for yesterday's jobs. Will they be tomorrow's Joads?

Stefan Jovanovich writes:

We already have Steinbeck's world here in California; but the traffic is heading east away from the state. The only people driving to our state are the people behind the wheels of the empty rental vans. (I urge List members to check out the differential rental rates to and from California.) People here are literally packing up and heading out because there is no work; and they know there will not be any.

Not to argue with John but the "anti-establishment protests" in American history have never been led and peopled by the underclasses. The Homestead strike was by the best-paid steel workers who were protesting the hiring of cheaper immigrants who spoke languages other than English. The Reuthers, the founders of the UAW, were skilled machinists; so were the auto workers who staged the sit-down strikes in the 1930s. The poorest workers - the blacks, the hillbillies - had already been laid off. The Wobblies my grandfather knew were skilled miners who had learned their crafts in the European mines before coming to America; the "scabs" (sic) were the Mexicans and poor white Southerners. Now, riots - like the Rodney King uproar - are another thing; then, the underclass comes out to smash windows.



A tailwindMy work indicates that most of the drop in commodity inputs, including PET and other plastics, has run its course on improving company margins. Now revenue gains have to increase greater than cost inputs, and I am finding little discussion on this. I would appreciate thoughts from readers of the site.

Vince Fulco comments:

A few of my fundamentally driven long-short buddies concur. As I recall during the 1989-1993 and 2001-2003 periods, the pauses in the move to Dow 36K came from the periodic realization that while margin recovery was the easy/quick part (slash and burn everything in sight), it was the top line growth that remained halting & lumpy and required the real heavy lifting. 



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.



Greek Temple at AgrigentoGreek and Portuguese bonds are in a nasty spiral. Very little seems to be working in terms of convincing the markets to mop up some paper. Greece 3.7 2015 is now trading 86-86.5, yielding approx 6.6 pct and some long term Portugal bonds are down a point or so since yesterday. I don't think Europe is in any way capable of rescuing Greece, or anybody else for the matter; the virus will soon spread to Italy, as it suffers from the samle chronic high debt to gdp ratios as the afore mentioned countries. Thus the trade of the day could be long Bunds short Btps.

Jeff Rollert writes:

Would it be unreasonable to compare the inability of any country to act as the world's military police, and in a similar sense, one country being the worlds bank?

Seems like the ECB built a wing on their house with wood full of termites.

I've always enjoyed the science fiction writers observation that the world will never unite until there is a non-Earth threat. Perhaps that includes monetary unions.

Alston Mabry writes:

It used to be so simple: The Greeks would have a crisis, the drachma would fall, and the Neuro's would swarm down for sun and fun and economic stimulation. The Greeks then took the extra money and started another story on the house because they knew that keeping the cash was not a good long-term investment. You'd see half-finished buildings everywhere, bristling with rebar — just the local version of a savings account with a currency hedge.

Bruno Ombreux adds:

Have you been to Athens recently? That's exactly what they have. Half-finished houses. They don't even bother covering the concrete. I was told that it was for tax reasons. As long as the house is unfinished, there are no real-estate taxes. So they don't finish their houses. This is very creative.

Jim Sogi replies:

Same thing in Peru.

William Weaver comments:

I didn't attend either event, but I remember in 2003 when Athens hosted the FISA Junior World Rowing Championships and then in 2004 Olympic Games someone made a comment about how clean everything was. It wasn't until about a week into Jr Worlds that someone finally noticed the grass on the sides of the highway between the athlete village and the rowing venue wasn't grass, but a green tarp covering heaps of trash.

The state of the art rowing venue is to my knowledge abandoned today. It was also only finished one week prior to Jr Worlds, and no one thought to anticipate the mid-August winds that sweep the city. The winds created such waves that the Men's eights heats had to jump ship and swim their boats between 500m and 1000m to cross the finish. Finals were reduced from 2000m to 1000m. The Games were lucky and didn't have this problem.

But what about selecting cities in order to build athletic facilities that will help the community in years to come? I wonder if there is been any research regarding future price performance of munis issued to build venues for Olympic Games. Most venues go unused after the event.

Henry Gifford adds:

Another reason for the rebar sticking out the tops of buildings in some places is that they expect to build the building taller later, when money is available, but without a mechanism for collecting on debts there is little money available for lending, thus things tend to be paid for in cash, and built gradually. Here, with loans available, that strategy doesn't pay as well as borrowing the money to build a property to it's "best" economic use, as the cash flow is much worse on a partially built-on property - same land taxes, same land cost, lower return, higher hassle/permit costs for repeated small construction jobs.



 To my friends:

Our industry is in the throes of massive change – and many say it came from dishonesty or avarice. While that may be true for some parties, it is also part of an evolutionary process for the organism we refer to as the financial services industry.

The research areas of most industries create tools, only to later discover their best uses. In some ways, 2010 will be a year where we get new tools – just as a mechanic gets new tools and manuals for each year’s new car models. For us, these changes create many opportunities.

So that is my New Year’s resolution to you: to recognize how many opportunities we are given.

Our family wishes yours all the best – health, happiness, and good fortune.




Another way of saying leverage and the yield curve have driven ROA…

The Shift Index highlights a core performance challenge that has been playing out for decades: return on assets for U.S. companies that has steadily fallen to almost one quarter of 1965 levels, while labor productivity has continued to improve.




I am in awe of how much a group can accomplish, if there is one dedicated member who works hard without protest nor attention need. People flock to help him out. I see it frequently in markets and our Scout troop. It also works in the opposite direction, unfortunately. I wonder how to quantify that individual… Atlas if you will… who drags others along by strength without yelling. It's also in the markets, but I can't get a handle around how to quantify the lack of need for attention. Singleton played this game masterfully at Teledyne. Yes there are generals, but how do you define the majors that actually embarrass them (and others below them) into bravery?

 George Parkanyi responds:

Why would you even want to quantify such an individual? Quantifying andcounting isn't everything. Some people are just a life force, and you knowit because you can't help but recognize it as soon as you meet them or seethem in action. These people are so effective because they point the way to possibility,fire the imagination, and scoff at obstacles as mere details. And othersthen follow because who wouldn't want to be part of something that isunique, infused with energy, and helps define them in some special way?Everyone wants meaning in their lives. Show people how to create it andthey (well at least some) will rise to it. Also, not everyone has a clearsense of where they want to go, or if they do, haven't figured out how toget there. Give them an interesting destination, and/or a plan, and they'lloften be more than happy to throw in time, effort, and resources and goalong for the ride or even better, adventure.



DASThe Chair's tongue in cheek blaming his parents for predestinating him to have a blind spot for con men reminds me of what I call "The Doctrine of Acceptable Sins". If the list will indulge my breech of etiquette to briefly talk of religion to explain this "doctrine". As a Preacher Kid whose Father moved around a lot, I got to visit many churches of all denominations in many small towns. And like sausage making, and legislation writing the personal problems and inter working of a congregation are not stuff for young children to view. However, it would appear that most congregations develop an unwritten code that certain sins would be acceptable and nobody would mention them. For example the Baptist deacons might be all obese, the Church of Christ leaders would light up before reaching their cars and the Lutherans maybe the town gossips and the Catholics maybe the gamblers. Of course those of the other congregations and the heathen could easily spot the others flaws. Malcolm Gladwell, in his book Tipping Point suggest that we, as social creatures are thought to look away, and ignore certain tale-tale signs of humanity.He explains that con men and politicians are experts at understanding what these blind spots or acceptable sins are. See Steve Ellison post one of the anecdotes he uses about Bill Clinton: www.daily speculations.com/word press/?p=3692 While there undoubtedly is some truth to the chair's implications, that upbringing and acceptable way of looking at the world leaves some spots more open than others to becoming blind spots. It would appear that perhaps, it is acceptance amongst the family, the congregation, the community or the era, that allows one to over look The unquestioning acceptance appear to be the reason the congregations, the con men and politicians love these blind spots. They are one of the most binding glues in society, agreed upon dysfunctions. From such serious offenses like slavery, prejudices, spousal or child abuse to light hearted, teen fashion of slovenliness, the agreed upon dysfunction can be difficult or impossible to break as they somehow become how "we" define ourselves. It maybe the world view that leads one to a particular blind spot, but all have them, no matter the world view. But it is those that can see through the fog, and control these weaknesses that are the great and successful. And as for the con man as parents, perhaps they have the most dreadful blind spot leading to certain failure. The blind spot that to get ahead you have to cheat others. The cynicism that all success and relationships are built on angling against others problem, not coordinating with their strengths.

Jeff Rollert reflects:

As having had similar "church" experiences, it makes you very, very cynical, towards humanity in general. The natural conclusion being that there is very very little nobility in leadership. The only answer to this I have personally found is to engage leadership to attempt to limit (but without hope of eliminating) the collateral damage.

Stefan Jovanovich comments:

Fred de Cordova, the producer of the Tonight Show when Johnny Carson was behind the desk, was raised by a pair of con artists. He tells the story of how, when he became successful, he paid his parents to stop grifting. His autobiography Johnny Came Lately is worth reading for that part alone.



RosieOne of my analytical speedbumps has been the subject of forecasting tax policy. Being a child of the incentives form of economic modeling, I cannot get away from the disincentivizing aspects of the probable 2010 and 2011 tax policy changes.

Based on my thinking, it would be natural to see a large exit of women from the workforce, as the after-tax income of working migrates closer and closer to childcare and tax-adjusted healthcare costs. This loss in demand for services would reflexively feed back in decreased demand for other services.

For fun, let's also note the popularity of Mad Men, a show of badly behaving men and their stay-at-home wives. Again, another show, Desperate Housewives, is wildly popular. Clearly this is in the forefront of women's thinking.

RBS also notes similar observations, in that the private sector gets it, while policy makers and the financial sector do not.

Considering the economics again, migration patterns between high-tax and low-tax states are increasing. That would support a change from a "two income" household  to a "one income" household. A lack of a certain activity would also "encourage" more risk taking behavior by men in the workplace.

Domestically speaking, the pie appears to be shrinking. I just can't tell if this is descriptive or predictive.

Art Cooper answers:

Tax incentives matter, but there is a more immediate cause of the shift from double to single income households: job loss. The U-6 unemployment, most recently reported at 17% nationwide, doesn't even include those who have given up looking for work. If a spouse loses his/her job, and can't find another, tax disincentives to working become irrelevant short term. Long term, such disincentives shift work to "off the books" employment, i.e., the underground economy. Because job losses have been worse for men than women (e.g., in the construction industry), the exit of workers from the workforce may result in more husbands than wives leaving formal employment. I wonder how many former construction workers turned "handymen" fully report their income?

J. Rollert replies:

I concur, but was not making the point [incentives] was a current causal factor, but a growing one. So, the ideas can run in parallel.

Point I forgot to add: am noticing conversations occurring where "older" mom commenting "one doesn't have energy for work and kids anymore" a lot. Yes, it may be a rationalization. But it's also accurate, as boomers had them later. I'm 50, and my kids just started middle school/junior high.

Was in San Diego over the weekend, and heard cash bids and mortgage bids are pretty close on residential auctions now.

Ken Drees writes:

John Williams of Shadow Government Statistics has current U-6 unemployment at 21% (including discouraged workers). I think job loss is the driver for these trends.

Construction and jobs surrounding building (residential and commercial) will be dead for years to come. Real estate jobs and banking jobs are tipped towards women. Car dealers have been decimated, which favors men losing jobs. So far this year over 1200 plus bank branches have been shuttered. So as real estate and construction have already liquidated many employees, banks will continue to close next year. Both genders are losing jobs in general. As states seize up, more government workers and education workers will be losing jobs in 2010. Education has more women, whereas government is mixed.

The movement from high tax to low tax states is affects wealthy individuals and business, rather than average families. For example, the exodus of the wealthy from New York, and the exodus of business from California. It is much more difficult to move from state to state now as a single family. If you cannot sell your home, you will not just abandon it and move, unless you are close to losing it already. Probably a lot of people who lost homes are the ones able to pull up stakes and go to lower tax states where the cost of living is more affordable and where jobs may be had. People moving to new states will probably rent first to test the waters, depending on how good the new job is — how confident they are in the job continuing. How about the person who wishes to take a higher paying job in a new state within their same corporation — you can't just sell your home in 45 days any more. The crisp housing market really made job hopping and movement within the country fast and efficient. That's over.

As the squeeze continues, tax avoidance strategies and migration trends will be more indicative of higher earners than 100k and below families. Tax avoidance and EPA/government restrictions will be the big business drivers out of states that hold these policies as important (blue states overwhelmingly).



Lately I have been reading several books about sea travel in the 1600-1800's, one about the whaling community in Nantucket, one about the Dutch early traders and one concerning the Mayflower voyage. An interesting aspect of sea travel at the time was the use of leverage in the context of sail and mast relative to the boat hull size. The trade off was simple, a large mast with much sail was faster, however during storms the large sails could cause a "knockdown". This occurred when strong winds pushed the ship over horizontal to the sea. The wind and sail acted as a lever and lifted the much heavier hull of the boat. It was a trade-off the captains had too make, deciding on a balance between the amount of sail to raise and the chance of a storm. It would often take hours to adjust the square rigged sails, so when a squall came it was already to late. But managing this type of leverage was part of being a ship captain.

Jeff Rollert adds:

When one looks at boats of that time, they had high bows and sterns, but lower mid sections. This was fine unless water/waves came in to the middle area, where they could quickly find a way thru doors/hatches into the boat.

Square rigged boats can't turn into the wind/waves quickly, as the sails were mostly centered on the boat. If you saw a huge wave coming, you had to take it at a relatively broad angle, otherwise you would loose steerage and go backwards/broach. The sails had to be removed as quickly as possible as soon as the wind picked up - hence the old sailors lines "You reef before you need to / If you think you may need to reef, do it immediately."

Lastly, for those who have not gone up a mast, it can get scary quickly. On the boat I race, a one inch change in the deck is a movement at the top of five feet…in wind those old whalers/freighters could have guys in the rigging when their location was moving forty feet, side to side, while they bundled sails up and tied them down.

Also, they were ballast boats, which meant they had stones (literally) in the bottom to offset the weight and leverage of the mast. The bottoms were flat/ to slightly rounded, so in big waves a 90 degree movement from side to side was common. At 120 degrees, the boats rolled over and sank quickly. This is a reason few sailors then learned to swim. It was moot, the boats sank so quickly.

As a sailor complement, those guys had balls, but with a 60% fatality rate.



 The following is only one data point, but it reflects not just our views but also our experience. Once, we were in a building that was great until the new owners "zombied" it. They borrowed the maximum and tried to force tenants out to get higher rents. They eliminated maintenance along with other services and eventually half the building got up and left within 90 days. We didn't sue even though all leases were broken, as there wasn't anything left in the their corporation. The building has been 50% empty for the last three years we have heard. The owners were foreign, with very little equity, and little interest in doing much management.

Our present owners, also foreign, bought the current building 18 months ago. A Berkshire Hathaway division left this month, emptying 10% of the building. During our lease negotiations, the present owners held firm on raising the rent (I assume to make up for a lost tenant). The new lease we just signed today is half what our existing cost is per square foot, in a better building and better location. Prospective "zombies" could be easily identified based on how they handled the negotiation. We were amazed how many wouldn't acknowledge existing market conditions. For our non-West Coast friends, our town of Pasadena is also the headquarters of IndyMac and their newly downsized mortgage servicing operation (total space about 1.5 million sq ft) with a third of that space across the street from us. We'd suggest not renewing your lease, if the building you are in was purchased during the 2003-2007 time frame.

There will be many zombie buildings which will not have excess cash flow for maintenance and services, and will be desperate for new loans over the next 24 months. Given the lack of financing we anticipate for commercial properties, these loans will be forced to extend at the upcoming maturity date — usually at a penalty interest rate. This dynamic may mean the current commercial real estate down-cycle may be longer than the 1990s. Then it was regionally concentrated, now it is global. California residential properties in the $300,000 price points are beginning to get multiple offers, as they can be FHA financed with 3% down. We are also seeing money going into partnerships to buy these in bulk from banks. That is a good sign that the low end appears to be stabilizing.

P.S. - Wyndam (hotels) was just lowered to "junk" rating by Moody's based on profit pressures, according to Dow Jones.



 I believe that Treasuries should not be even considered at these prices. I see a better opportunity with corporate bonds as investors will switch from low-yielding Treasury bonds to high-grade corporate debt. It’s early to say that credit is finally back, but the LIBOR (London Interbank Offered Rate) went considerably down from recent highs. In September, investment grade bonds plunged after the collapse of Lehman Brothers. Now they have recovered a lot from their lows but the yield spread with Treasuries is still very big. As credit markets normalize, the economy starts to recover and risk taking is resumed this spread will be reduced. Partially because of the huge amount of government bonds that will be issued to finance debt that will finally bring interest rates higher. But also because investment grade bonds will represent a good investment opportunity as general conditions improve at the expense of low yielding Treasury bonds.

Jeff Rollert responds:

We were +95% in treasuries for much of the year.

A more important question is are the events of Q4 are likely to continue in the near future? That is something money can be made from.

My wife an I went to see the movie Australia recently. In it, a boy stands in front of a stampede and looks the lead bull in the eye in an attempt to keep the heard from going off the cliff. Right now, there are many alpha males charging towards multiple cliffs. I sure hope there is a brave one, and they see the boy in real life.



 The Math Department at the University of Michigan has held an annual lecture series called the Ziwet Lectures since 1936. Past speakers include von Neuman, Kac, Thurston, and about a half a dozen Fields medalists. This year, the speaker is I. Karatzas . He is giving a series of three lectures. Today he discussed Stochastic Portfolio Optimization (the next lectures will be on Volatility and Arbitrage respectively). He spent a lot of time introducing the subject, which was good for me. One assumes that there are n risky assets available, S_1, . . .,S_n, and they evolve according to the stochastic differential equation

where dW_i(t) is Brownian motion. X(t) is one's wealth at time t and p_i(t) is the percent of one's wealth invested in asset i at time t. Denote by p=(p_1,…,p_n) our portfolio. U(x) is a utility function, i.e., any increasing function that is concave down. Our goal is to maximize the expected value of utility at the time T. In other words, we let V(x)=sup{E[U(X(T)]} where the supremum is taken over all possible portfolios given that our initial wealth was X(0)=x. Apparently we are guaranteed existence of such a thing in general, but finding the optimal strategy is not very tractable, so as always, one starts with special cases.

If we assume that the utility function is U(x)=log(x) or U(x)=x^{a}/a for 0<a<1, then one can find a reasonable solution. However, the solution depends on having reliable values for sigma_{i,j}(t) for all times t as well as for the interest rate.

If one assumes that all coefficients involved are constant, then we can handle the problem of a general utility function. The solution is characterized by a partial differential equation called the Hamilton-Jacobi-Bellman (HJB ) equation. Because we have assumed U is concave down, we can apply the Legendre transform and linearize the partial differential equation. We can then solve the linearized equation.

Karatzas ended the talk with several open problems.

I am not sure whether this lends itself directly to practical application, but perhaps it inspires some more practical ideas.

Jeff Rollert asks:

Why would one assume the coefficients are constant?

Chris Hammond responds:

One answer is that over a reasonably short time horizon, they would be approximately constant. I think the same question could be asked of the Black-Scholes model. It is assumed that if S is the price of an asset, dS=S*r*dt+S*sigma*dW(t), where r is the expected return on the asset, sigma is its volatility, and W(t) is Brownian motion. More sophisticated models assume that the volatility is also a random variable that changes with time sigma=sigma(t). But it makes sense to start with the simpler, constant, case.

In some situations in math, it is insightful to assume very simple behavior to get a model case and view reality as some sort of perturbation of that.

I am not sure it is a good answer, but I'm trying to learn more about these things, so if I find a more satisfying answer, I'll let you know.



 The game goes on…but it is never the same game with the same rules.

When the "game" at the game becomes discouraged, it goes upstairs/outside/underground and that type of transition is not usually pretty.

Jeff Watson writes:

Despite the change of rules, the game will still be played, and there will be winners and losers, so not much really changes. One must be able to adapt to the rules changes, just like a pitcher has to adapt to changing strike zones, or the height of the hill. As for the game at the game, that will probably disappear for awhile, only to reemerge in the future, morphed into another form, or even a repetition of the same old game. It's human nature that there will always be a game at a game, in one form or another. Old games never, ever die, and that's why one can go to any city and find Three Card Monte gangs still plying their trade.



Our neighbor's son was lethargic during the scout camping trip this weekend, and since we had two doctors there, he got a quick exam. The whole family is tired, as they have a new daughter.

I got to watch the father, as the E/R doctor found a lump in the abdomen, and the cancer doctor called Children's Hospital and had him admitted stat. He is currently on the operating table to have a grapefruit size tumor removed from his liver. He's 11 years old.

This is a Dad's worst nightmare. He is also our scoutmaster. For the next four hours, please rub the rabbits foot, pray, or do whatever works for you. He's been on the table for an hour, and has about five hours of surgery left.

Many thanks in advance…



We have a two year low for the German Bund contract, the second or perhaps biggest futures contract in the world by volume (notional value). What could have changed to make the prospects so bad relative to the past over the next ten year horizon? I note this from a speculative context and seek qualitative insight.

Eastsider replies:

1) There had been a macromeme along the lines of: Europe is behind the US in this economic cycle, and the ECB will have to cut rates soon… Trichet's hawkish talk a couple of weeks ago triggered a stampede unwind of that trade rationale.

2) Reports of massive derivative/structured note plays on the Bund curve likely getting tripped too.

J. Rollert adds:

Inflation is high with a strong currency, yet if it regresses back to mean modestly the inflationary pressures will increase.

Double whammy… to bunds. Also foretells major political battle.

Edward Talisse writes in:

I traded bunds for many years whilst working for the blue shoes in London. ECB chatter is obviously hurting sentiment there but something more interesting is also afoot. The bund curve is close to inverting between 10y and 30y. This is a highly unusual situation in Germany where the curve generally remains steep though various cycles. The rub is the structured product market in Europe, which is absolutely huge. Most interest rate derivative notes are written on the back of a CMS (constant maturity swap) structure. The holders of the notes basically sell volatility to earn above market coupons. The problem is that as the curve flattens, CMS gets absolutely killed. So there is a big demand in Europe right now to get into long dated flattening trades. That means people buy 30y and sell 10y, thus depressing the bund future price. 



In tonight's race we sailed shorthanded. Normally, there are four good friends sailing together, but one was in an operation for a minor outpatient procedure.

We went through four head sails changes, which normally is not a big deal, but with 20 minutes before the race it can create a lot of work, tiring out the crew. Additionally, with one less person's weight to sit and balance off the energy hitting the sails it was hard to tack well.

We did really well, on the upwind and downwind leg. The reason was we went to our smallest head sail until we felt we could control the boat if the wind rose (which we did not expect). The wind didn't rise.

My takeaway was that by having less sail (leverage) we could attack more aggressively, which we did. We did well around the buoys, rounding tighter (closer) than others who were overpowered (too much sail up). I left before the results, but was pleased for the race.

Perhaps other sailors can apply this to a market discussion better than I.



Assuming one's net speeds are up to snuff, where would the IT pros look next for bottlenecks?  Running IB, R, Excel, with a decent sized data import and IE with about 20 tabs open on an AMD 64 bit 2.4Ghz single core with 3 GB running XP_64 and two monitors on a 500Mhz+ video card feels increasingly sluggish.  Would like to move completely to Linux 100% of the time as my quad core with 4GB never has any processor/memory response hiccups but a few apps are just better on XP (unfortunately); e.g. can not make the jump to Open Office.

Vincent Andres replies:

1/ Any browser with 20 tabs open is something really heavy (this may well be the main bottleneck). And some "tabs" are very heavy.
2/ Depending on what you do with your IB screen(s), it may also be heavy because of the Internet data refresh.
3/ Data import

As for the dual screen, but I would be surprised if it's 100% managed by the video card.

We probably have all more or less similar tasks. My choice has been to split my main tasks onto several computers. So the computer on which I do my main work (where I'm sitting the most): Open Office + R for little studies + Firefox + email + etc. It's separated from other computers used for the other tasks.

Keep in mind that, although the processor speed is always the highlighted number, our jobs go through a long chain (HDD, RAM, etc.), and all pieces are not always accordingly fast. And also that the more opened tasks, the more interrupts to the processor.

Bruno Ombreux adds:

I found that the biggest bottleneck on my machine was the ZoneAlarm firewall and antivirus suite.

I got rid of this horrible piece of bloated junk. It has been replaced by a hardware firewall and an antivirus that is light on ressources yet efficient: Avira.

A DSL router acts as an impregnable firewall, is very cheap and doesn't use any computer ressources since it is sitting outside. If one absolutely wants a software firewall, Comodo is much better than ZoneAlarm. It is free and light.

Another thing to get rid of is Windows auto-update. This can slow the machine.

Jeff Rollert remarks:

I have found putting all communication (e-mail/IM programs, browsing) on a single machine makes crashes far less likely and speeds things quite a bit.  I also use Outlook 2007 (a pig) and Firefox (with so many tabs open I can't count them).

I will also keep Firefox windows open by subject, with tabs like chapters.  Doesn't help speed, but it does help organize thoughts.



1) A good-looking woman realizing she's no longer "hot"
2) An athlete whose doctor tells him his body can't handle the game any more
3) Listening to someone who used to be wealthy



I'm looking for a preferred stock total return index, ideally reasonably broad. Does anyone have one that seems to be reasonably statistically robust, with ten plus years of data? I've searched the normal places…



CubsI was in the LA wildfire this weekend, and I can tell you that having been in hurricanes, this held up in comparison. We had a thirty person Cub Scout camping trip to Leo Carrillo State Park campground, five miles north of Malibu. Friday was quiet, but the wind started picking up about midnight Saturday night. By 1 am, gusts were at 60 mph, and I had to wake about half the sleeping campers at other campsites to put out the fires they had left unattended (140 campsites). One guy had embers blowing about 20 feet. Our campsite was at the end of a box canyon, so with the wind at our back we'd never smell the fire coming if these bozos caused one. I kept a few people alive that night. By 3 am, the gust were up to 80 mph. My son and I were lifted and moved just short of two feet in our pup tent — while we were lying down in it trying to sleep. Surprisingly, only one tent shredded in the wind that night. When the wind lifted us, it blew our ground cloth away — out from under us. I guess we weren't in Kansas. We were told to evacuate at 8:30 am and drive to Oxnard. Up to that point, the skies were azure blue all weekend and the weather was incredible. Right now in Pasadena, you would think it's sunset.

Alan Millhone writes:

To earn my First Class in the Boy Scouts I had to "get a message through" in Morse Code, 20 words in a minute. I still have all my Cub and Boy Scout manuals and all my scouting items! Fond memories of a much simpler time in America. I am proud to have been involved in Scouting.  In today's world Scouting should offer a merit badge in the markets — a real challenge for proficiency!



Oil, from Jeff Rollert

September 18, 2007 | 1 Comment

The difference between the current spot price for crude oil, and the moving average for one-month and three-month contracts is really wide. Crack spread is also out of whack. I would suggest that we may see a snap back post Fed on spot oil, with no change in gasoline prices. Or the next few weeks are going to get back in line with products moving up and/or spot coming down. Gas is already back up to $3 for regular in CA, after being 2.65 a week ago.

Gordon Haave remarks:

Large crack spreads are good for the producers, such as Devon, that also own midstream assets.



What's the likelihood of folks' "painting the tape" on a very illiquid Friday 8/31? This applies less to liquid securities than equities or index futures. As an example, I have seen it done in high yield — or at least it appeared to have been done. Call reports and other mark-to-market/model issues will be interesting to watch, especially TRACE.

Larry Williams replies:

You believe in that? I never did. Suspect it's an old wives’ tail. But I’ve never been that close to the fire. If they paint the tape, buy to drive prices up, they have increased their longer term exposure for a momentary gain.



I wonder if "covering shorts" is a more predominant activity on Fridays than going long. And I wonder what method could test this. We see this today in debt markets for home builders' bonds, covered shorts, but not long buyers.

Bill Rafter adds: 

I don't have any proof, just a feeling that you would find Fridays to be mean-reverting, or reversing the Monday to Thursday action. But most of my feelings are wrong, which is why it's important to do the testing.

Craig Mee writes:

Climatic selling at its best late in the week saw the markets rates and equity finally break into a gallop and suck in some big ones after months in a slow well control trot. With so much energy now exerted, it looks like Phar Lap, will now look to please the crowd and not the punters. 



 Walking through this mining and fishing town after ten days on the desert trail, looking like poncho villa's left hand man in hiking boots, a dusty pack and beard. A Mexican kid runs up and hands me hard rolls and dashes off with, "Say no more." An ancient miner sides me to shout, "You have chicken legs… like my son." The latter materializes next to him with those legs and tattoos from waist to chin. "I have one wood leg myself," says the old man, limping off. A marine veteran of 37 years here for sport fishing gives me a ride to a 20-dollar room on the beach and tells me of an investment opportunity.

Escalada nautica is the scheme of some American lady operator to form, as the Spanish term implies, a 'stair for boats' from the pacific to Cortez, where I just walked. That is, private boats from Los Angeles and San Diego now come to this Cortez town of Bahia de Los Angeles, which has one of the prettiest harbors I've seen. But they must sail around the tip of the Baja Peninsula to arrive.

The concept underway is to build boat lifters in a little town on the Pacific that will place boats on truck flatcars and transport them on an existing road 100 miles overland to the bay. A large resort is planned and this town, which is bustling with construction. The idea is solidifying slowly for need of investors, I was told. There are already a couple dozen newly built asphalt turnouts on the cross-land road for the boat trucks (to allow traffic to pass) that I've seen. And I hitched a ride on a truck the other day with wooden power line poles that will bring electricity south from Ensenada on the Pacific across the land to Bahia de Los Angeles.

So there you are.

Jeff Rollert writes:

One of the newest things is an entire boat, with rigging, a boat that fits into a shipping container so you can have it ocean-freighted to your area of choice, without sailing there.

Of course, you are likely to be a hazard to all upon arriving, without any sense of where the shoals are.



Remember Seinfeld’s episode on shrinkage? Nobody’s laughing now.

US Financial News reports: European equity markets have shrunk for the first time on the back of a boom in mergers and acquisitions, private equity buyouts and share buybacks — despite record issuance.

It is the first time European, UK and US markets have suffered “de-equitisation” - when more equity is retired than issued — in the same year, according to research by Citigroup. The US market contracted in 1988 after the Wall Street reversal of the previous year and the UK market has been shrinking for three years. A record amount of cheap debt is driving the M&A, buyout and buyback binge which has removed shares from stock markets, especially in the UK, faster than companies can issue them.

Some GBP55bn has been returned to UK shareholders through completed cash takeovers worth GBP60bn, with GBP53bn reclaimed via record buybacks and special dividends.



I have been trying to gain insight into the economics and sociology of the number of friends one has. Some concepts that are relevant are the substitution of family ties for friendship, the reduced time that we have for friends when we have children, the opportunity cost of having a friend when you have other high value uses for your time, the amount of investment that you place in a friend and what the rate of return on that investment is (and how to measure it). Mobility is often reduced by the amount of friends one has, but life-span is increased and apparently friendship is a more important determinant of happiness than money. Here is a simple mathematical study on friendship and its rewards, based on having 150 friends.

I believe that many of the same factors that determine the number of friends you have determine the number of markets or stocks that you own, and the loyalty that you place on them. Perhaps the methods of studying friendship and the concepts that help us determine our choices could be of use when determining what to buy or sell, and where.

We all could be better friends in one way or another, and I plan to reach out to a few people and become a better friend today. Perhaps this will make me happier and more profitable in my investments also?

Rod Fitzsimmons Frey adds:

There are those who are skilled at being a friend. The adolescent view of a good friend is that he is a good listener, concerned for you, sympathetic, etc. That also describes a Labrador Retriever. I think Optimism is the defining quality of somebody who is good at friendship.

He pays you a visit because he is optimistic you want to see him. He buys a small gift for you when he spots it because he is optimistic you will like it. He telephones after a year because he is optimistic the news will be good. Conversations are about the present and future and not past faded glories. Making new friends is the ultimate vote of confidence in the future.

Not quantitative, unfortunately, but relevant to market activities.

C. Kin comments:

Friendship is in some ways an early form of credit … the accumulation of "favors" receivable. I seem to recall from Sidney Homer's History of Interest Rates that kings would make overtures of friendship with other neighboring kings. Gestures of goodwill, tributes, etc., would require reciprocity with a slightly higher value in the future. Failure to reciprocate (a default) would be met with derision, anger, distrust, a disruption of commerce, and all of the other unpleasant things that occur when royalty gets slighted.

Vince Fulco mentions:

While I am a strong believer in the more altruistic reasons for developing friendship vs. the commercial ones laid out here, Charles' historical mention scratches at some great work by Robert Cialdini, a psych professor, regarding reciprocity. It is a generally inherent trait, some call it a mental flaw, of all humans. A flaw because as Cialdini's studies point out; upon receiving something of only nominal value from a friend or acquaintance, we have a tendency to respond in kind with a return favor or gift many times the value.

This phenomena and many other excellent examples are found in his book Influence: The Psychology of Persuasion which I highly recommend for the reference library.

Jeff Rollert adds:

I differ with the implied symmetry of value. Last weekend I traded $20 and an old stereo for a very nice mountain bike for my son at a place where we normally donate stuff. They had a lot of bikes which were not selling. The receiving area needed a new stereo. I clearly won in my mind, they in theirs, yet on market value a third conclusion may have been reached.

Steve Leslie says:

One thing that I always admired about Winston Churchill was he would invite friends and associates for long dinners at his estate house. His suppers were legendary as some of the great politicians, diplomats and thinkers of his era were invited to discuss the events of the day. And these suppers would last long into the wee hours of the morning. I can only imagine the discussions and as I recall, Churchill continued these especially through World War II. Now if Churchill could find the time to have over a group for supper while the fate of the free world hung in the balance what does that say for us.

Speaking personally, there is no greater enjoyment for me than to be invited to someone's home for dinner. There is just something wonderful about being liked so much that another would want you in their most cherished and private part of their world. It is as if they are saying to me "We are welcoming you to be a part of our inner circle of trusted friends."

Kashi Vishwanath mentions:

Your book and website indicate that you (and your colleagues) are willing to look at alternate explanations than the conventional party line. Here is one on Winston Churchill for your consideration and debate.

Conventional thinking has put Churchill on a pedestal. Witness the recent comment in your thread on friends. Ditto the innumerable books and hagiographies on him. Etc.

All that for someone that sought to continue colonial exploitation, ridiculed and disparaged MK "Mahatma" Gandhi, abused the native population of the Middle East and Africa in his time there and sought to maintain that going into the future, supported slavery, and so on. To call him a "leader of the free world" raises weaknesses in one's own critical and independent thinking. Free for what and for whom? and at what cost?

Jan Petter-Janssen continues on the topic:

As a student on a foreign continent the first weeks are really exciting. Since most students know no one or very few when they arrive, making friends is really easy. Everyone is in a kind of friendship vacuum. After a while the number of friends declines a bit since one cannot find enough time for everyone. This is like in micro economy where a monopolist sets marginal revenue equal marginal cost.

Adapting economic thinking and finding how to increase the social revenue and reduce the time cost of a friend may be a good idea (with the risk of such an idea being regarded cynical - which would imply your friends reducing their revenue of having you as a friend).

Another aspect with friends is to balance socializing with working. You work in order to buy goods and services, so you could say that the marginal benefit of interaction and transaction should be equal? I can definitely see myself in such a dilemma because trading stocks gives me the benefit of competition, achieving goals, and studying the mystery of the marketplace, but little social benefit. However, the balance is found by cutting out TV and video games, so then I have enough time for socializing too.


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