Pinnacle and many others are now posting state by state betting lines that may offer interesting overlays to those with detailed knowledge.
Some of the battleground states:
Arizona: +118 Trump Biden -143
Florida: -128 Trump Biden +106
Georgia: -177 Trump Biden +131
Mich:  +239 Trump Biden -304
Minn:  +251 Trump Biden -322
N Car:  +100 Trump Biden -121
Ohio:   -250 Trump Biden +200
Penn:   +184 Trump Biden -228
Texas:  -375 Trump Biden +287
Wisc:  +225 Trump Biden -285

They have the overall election at   +190 Trump Biden -217



 Fans of confidence games will thoroughly enjoy the ESPN 30 for 30 podcast called "A Queen of Sorts" detailing the elaborate con pulled off by "Kelly" Sun and her whale, poker star Phil Ivey, to fleece multiple casinos worldwide out of tens of millions of dollars. The play is revealed in elaborate detail by a panel of experts who have reviewed the surveillance tapes to peel back the layers behind their method– edge sorting.

All elements of the classic con are represented. First they must grease the wheels. Taking advantage of casino's bias that Asian women are "stupid and superstitious", they banter with purpose, seasoning each new dealer. Next come the small requests that they need granted in order and to a T. Little by little, they sort the deck without ever touching the cards. By the time the play is set, they have a 6% edge on each hand of baccarat - at $150,000 per hand. Huge winnings ensue.

But they encounter a new problem - how do you get out the door with $10 million of a casino's money? I made the wife and kids listen during dinner one night and while they protested like a pack of wild wolves in the beginning, by the end of the meal they had every deck of cards in the house out searching for irregularities. Tremendous. Enjoy.

Jeff Watson writes:

I followed this closely. Ivey did not cheat and was brilliant, that's all. It wasn't a con, just good gambling and he beat the house fair and square. Casinos always welcome you to come try out your "system." This is an example of what will happen when your system works well. The casino will cry foul and welsh.



 Living in the Sonora desert, and having been through three major Mouse Wars, suffered from Mouse Dust, observing thousands, befriending dozens, raised one as if a child in my pendleton pocket, and staying on even footing with them on whole for 20 years, here are my postulates re: desert rodent locomotion.

Loco is a proper prefix. There are about 7 species that I observe day in and out around my camp, and during long hikes. When they run from me, or predators, the start-up off the blocks is seemingly programmed en utero and childhood, and so is similar across individuals of the same species for the first few yards. This, of course, is the result of evolution, for the poorly locomoting ones would have been hunted and eaten long ago, and not reproduced. Then, in the second stage of flight, the animals' instincts give way to sheer terror, and the gait becomes more random. It's in this range that the animals may be more easily mouthed by the snapping jaws, because careful evolution has chosen the best flight plan for the initial stage. The upshot is, in my theory, that the rodents that are able to sustain longest their instinctual gait before caving in to horror will survive to reproduce, yielding the most most disciplined rodents.

Animals are far ahead of humans on evolutionary scales because we aren't hunted as much except at borders, and then the jail sentence still allows bail or release and copulation. We have become a very undisciplined species except in outlaw towns like Slab City. If you observe a person running from a mugger, even me on my long legs, I follow a prescribed stage one flight that, if closed in on, gives way only after a long distance to an all out adrenaline burst at angles and speeds the brain cannot plan before execution.

Andrew Moe writes: 

One of the best skills you can teach young basketball players is to use multiple speeds when on offense. Stop and go moves, fast to slow to fast, quick changes of direction and hop cuts are all carefully choreographed skills that can be combined into a seemingly random pattern. When you watch Steph Curry juke left, right, forward, back and into a hop step pullup 3, he's not making those moves up on the spot. He's linking sequences of carefully planned, well practiced maneuvers designed to leave his defender completely befuddled. I would guess that additional study on the jerboa, especially on play patterns of the young, would reveal similar sequences of moves to avoid predators. In the markets, the sequences are meant to draw volume. Today we saw a cut downward off the open, a crossover back the other way, another crossover to the downside, a slowing of pace and then a hard drive to the downward basket. I'd call today a Westbrook move more than a Curry so far.



Many insights into our field with the value of unpredictability and its measurement.


Andrew Moe adds:

One of the best skills you can teach young basketball players is to use multiple speeds when on offense. Stop and go moves, fast to slow to fast, quick changes of direction and hop cuts are all carefully choreographed skills that can be combined into a seemingly random pattern. When you watch Steph Curry juke left, right, forward, back and into a hop step pullup 3, he's not making those moves up on the spot. He's linking sequences of carefully planned, well practiced maneuvers designed to leave his defender completely befuddled. I would guess that additional study on the jerboa, especially on play patterns of the young, would reveal similar sequences of moves to avoid predators. In the markets, the sequences are meant to draw volume. Today we saw a cut downward off the open, a crossover back the other way, another crossover to the downside, a slowing of pace and then a hard drive to the downward basket. I'd call today a Westbrook move more than a Curry so far.

Bo Keely chimes in:

Living in the sonora desert, and having been through three major Mouse Wars, suffered from Mouse Dust, observing thousands, befriending dozens, raised one as if a child in my pendleton pocket, and staying on even footing with them on whole for 20 years, here are my postulates re: desert rodent locomotion. loco is a proper prefix. there are about 7 species that i observe day in and out around my camp, and during long hikes. when they run from me, or predators, the start-up off the blocks is seemingly programmed en utero and childhood, and so is similar across individuals of the same species for the first few yards. this, of course, is the result of evolution, for the poorly locomoting ones would have been hunted and eaten long ago, and not reproduced. then, in the second stage of flight, the animals' instincts give way to sheer terror, and the gait becomes more random. it's in this range that the animals may be more easily mouthed by the snapping jaws, because careful evolution has chosen the best flight plan for the initial stage. the upshot is, in my theory, that the rodents that are able to sustain longest their instinctual gait before caving in to horror will survive to reproduce, yielding the most most disciplined rodents. animals are far ahead of humans on evolutionary scales because we aren't hunted as much except at borders, and then the jail sentence still allows bail or release and copulation. we have become a very undisciplined species except in outlaw towns like Slab City. if you observe a person running from a mugger, even me on my long legs, i follow a prescribed stage one flight that, if closed in on, gives way only after a long distance to an all out adrenaline burst at angles and speeds the brain cannot plan before execution.



 The book Illumination in the Flatwoods by Joe Hutto, the best book on nature I have read, is a 1 1/2 year chronicle about the connection of a naturalist and artist who lived as a turkey, the most human of birds. It teaches you about the life of humans, the relation between romance and affection, the beauty and artistry of nature, the connections between all things including animals and humans, and how to be part of and leader of a group. One comes away from it with a reverence for the turkeys and Joe Hutto, and many ideas for how to trade the markets better, and live a better life.

Hutto imprinted himself on two dozen wild turkey eggs when they hatched, a thing he has done with foxes, deer, monkeys, waterfowls and many others. He lived and foraged, dreamed about, and protected the turkeys each day, until they grew into independent adults. There's mutual love between them memorialized in such passages as "I have never kept better company or known more fulfilling companionship. Our communications although somewhat abstract is completely satisfying and out interests are identical: plants, insects, reptiles, birds, mammals. We are driven by the same engine, and in spite of our divergent morphology, and intellectual approach, I find that our similarities are greater than our differences." Hutto mixes scientific knowledge and studies about animal behavior with the documentary so that one gets an education about ethology, ecology, psychology, and geology seamlessly and painlessly from a reading.

The Turkeys, spend most of their time on the ground walking on two feet, communicating and sensing like humans, and grow to be close in size to our size. They contain within them the instincts developed from 20 million years of evolution, and all it takes is a trigger from their daily life for them to know exactly the right thing to do. They are totally exuberant and enthusiastic and teach us to enjoy the present moments with gusto. As Hutto says: "They are more alert, sensitive and aware, they are vastly more conscious than I. In many ways, they are more intelligent… Every day I see that the most important activity of the turkey is the acquisition and assimilation of knowledge. They are curious to a fault, they want a working knowledge of every aspect of their surroundings, and their memory is impeccable."

 Hutto himself is an admirable person. He is a can do person who loves nothing more than building things, eating a grasshopper along with the turkeys, painting a scene about nature, and picking up a dozen rattle snakes with a garden hoe and transporting them to a new home. I particularly admire his ability to withstand the thousands of insect bites from gnats and Florida black bugs, the constant wetness from perspiration that cause him all sorts of pain and soreness that arise in the day and fray with the turkeys. Yes, this life was difficult, but he notes it was easy compared to his previous imprinting study of water fowl where he lived with them for 6 months, submerged half way in tide pools, with alligators stalking him and his charges 8 hours a day. Without further ado, but recommending the book and accompanying PBS documentary wholeheartedly, I turn to the 15 or 20 things I took away from it that should help us with our trading.

1. Seriousness

The turkeys are the favorite prey of many animals, and parasites, and have to be very careful from birth that they don't die. As a consequence, they are very serious about learning at all times, and never allow anything out of the ordinary to escape them. While they are exuberant and enthusiastic, they don't have time for frivolity. Like the turkeys, the market person is always prey to disaster, and must not be distracted during the fray.

 2. Sense of Place

The turkeys like certain places and will speed up to get to them, and once they get there just relax and admire the beauty and majesty of it. They especially enjoy ponds and edges. The market person has certain landscapes that they should look forward to, and should expedite their passage to them, and take full advantage of their beauty and profits potential.

3. Interconnections

The turkeys often join flocks of other species, including jays, chickadees, woodpeckers, cardinals, wrens, gnat-catchers. The birds are attracted to the movements of other birds. On occasion, the market person must know that all markets move together. The normal negative correlations don't work. The bid moves in one market carry over to the others. Try to find the mechanism that creates this, but also be alert that one big move can presage another.

4. Curiosity

Nothing escapes the turkey's attention. Nothing new can happen without them investigating it and assimilating it into their daily life. They won't move on until they understand it. They never forget once they have uncovered it. The market person must be alert to all new things, all unusual moves, all crazy events that cause big moves. For example, on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was a preamble to one of the biggest drops the next day in market history.

 5. Edge areas

The turkeys loves to forage in areas that are between forests and farmlands, wetlands and drylands, pastures and creeks, pines and oaks. The edge lands are more interesting, provide a better variety of food, and provide more areas of escape. The edge of markets are great opportunities for us. The time between one market open and another open, the moves that occur during and after the fixings, and reopenings, the times that pit markets close and electronic markets open, the times between work and lunch, are all grist for an opportune study and alacritous attempt to profit.

6. Acquisition of Knowledge

The turkey's main business during the day is gaining knowledge. Any object that they haven't met must be assimilated. All new things must be examined by each turkey. The market person should have a wide canvass. He should study science, economic, psychology, politics, and turkeys. Whenever a new relation occurs, whenever a new crazy reason for a market move is on the cusp, the market person must pause to understand it.

7. Fossil Ancestry

The turkeys have 20 million years of evolution to teach them about all things that have ever been life threatening to them. They instinctively know which reptiles are dangerous, which insects are edible, which places they are safe. They rely on instincts leavened by knowledge of the current environment. The humans have fossil ancestries and instincts also. When you feel your color changing, your hair raising, your sense of fear arising, know that your tens of thousands of ancestors are sending you a warning, and pay attention to your instincts.

 8. Color

The turkeys will try to remove any clothing on Hutto that they don't like. Blues are their favorite color, and reds their most hated. Market persons should wear colors that are not distracting to their colleagues, and don't interfere with their quiet contemplation.

9. Skirmish Lines

The turkeys move in a line so that when one turkey harasses an insect but doesn't catch it, and the insect flies away, the turkeys behind it are able to catch it. They maintain that order all the time so that they are optimally formed for the flock to capture the maximum of prey. The humans who trade markets maintain a line of trades so that if the first one doesn't lead to the desired move, the trades right behind it perhaps on a scale down or scale up will do the trick. Similarly, the big market operators can't move the markets by themselves. They form a skirmish line with their colleagues by having meetings where they agree that the market should be down or up, and then go to the old stream media now the new social media to broadcast their views, and make sure that the personages in the line next to them can move the food in the desired direction.

 10. Sensory abilities. The birds can detect movement and smells and color to a discrimination level that is almost supernatural. They can spot a hawk at 2,000 feet above. They are always alert and never rest without the protection of cover and their leader. They can smell all their predators and prey and investigate all new things with their beaks. The market person must always keep his eyes and ears open and should never wear headphones or any other distraction.

11. Herding versus Following

The turkeys like to be together at all times. They have numerous calls to assemble. And when they can't see their brothers and sisters they are unhappy and nervous. They never wish to be alone. And yet, they know that Hutto is their mother and leader. They wish and know they should follow him, but he must never do anything that disperses or confuses them. Hutto's relation with the turkeys is similar to many trading mangers, and leaders on a trading floor that I have seen. He stands at the front and reports various ideas and opportunities, and trades that he is doing, and the herd of traders and salesmen follow him in a flock of related activity. Never forget that humans have the herd like tendency of birds in a flock, and as Galton points out the mentality of oxen who will never lead but follow a leader with blind ambition. Okay, that's a start.

Steve Ellison comments: 

In point 4 you write: "For example on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was preamble to one of the biggest drops the next day in market history."

This is a very interesting example. I suspect the 10-point decline in the S&P 500 after the unemployment report on July 8, 2011 was in the same category. The S&P 500 fell another 130 points in the next month and did not regain its pre-July 8 level until late October. I generally think most news is discounted before it happens, so any market reaction to news is likely to be reversed. However, there may also be cases in which a reaction to news exposes an underlying supply/demand imbalance. Finnegan moves, such as the 2010 "flash crash" and quick recovery (only to have the S&P 500 drop back to the flash crash low 3 weeks later and continue down), may be in the same category.

Jim Sogi writes: 

Viciousness. I've heard turkeys can be vicious. I believe trading takes a bit of viciousness. The reality is you are taking money from someone. You may be ruining someone. It takes a certain attitude to do this. It's abstract as you are screened from the other side in anonymity behind the screen. But I've seen the reality of it. A trader needn't have a vicious or a terrifying mien. Take the Chair, for example: he seems mild mannered in person, but underneath there is a drive that makes him a good trader. Please don't take this wrong, I don't mean he's vicious. He's the most magnanimous man I've ever met.

Andrew Moe writes: 

I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff

The only reason they are able to do this is that they provide a necessary function for the market at the lowest possible cost. Perhaps one should take heed of the original brilliant post in this thread and examine the why and the where of how HFT fits into the market ecology. What do they eat? How do they hunt? What do their tracks look like (nanex will show you some pretty pictures)? Do they herd? What are their defenses? When are they weak? The turkeys undoubtedly know all this and more about anything that might be stalking them. Once you understand the predator, it is much easier to avoid being the prey.

Anatoly Veltman writes: 

"You are taking money from someone" And do you say the same about someone who is perpetually long stocks?

It's interesting to hear your opinions on the subject. I'll tell you one thing for sure: I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff.

anonymous writes: 

My 2 cents

The investor's wealth ultimately comes from flows that derive from the real economy such as eventual dividends, buybacks, etc. I would include the return of leveraging equity which is financed by "real" economic activity. This is particularly true when the finance rate is in some way subsidized by state intervention, which is frequently the case.

Trading and speculating -if successful- takes advantage of the money flows of other traders and market participants. Many of these strategies (at least what I am familiar with) are based on the concept of "urgency." My finding is that ideas with persistence are in effect "giving the market what it wants" even if what it wants is mistaken if viewed from an X period(s) of time later perspective, which is where the profit is made.

In the real world there is much overlap, however I see these as two distinct sources of potential return.

If one believes (as I do) that the primary purpose of financial markets to price things (equity, debt, commodities, currencies), it makes sense that there is a competition to set prices and achieve equilibrium (which is never reached). If one does not want to participate in this contest they can hold for very long periods and seek to get the investor's return that derives from the "real" economy and leveraging equity.

My way of seeing HFT is that it occupies the space the floor used to have. They are consistent (the good ones) because they get massive scale and turnover beyond what an individual could achieve trading manually. This is why (once again, the good ones) are so consistent, it is a law of large numbers type effect.

I had the opportunity to invest in such a firm when it was just getting started and the principles were looking for backing. Upon reviewing their business model I felt I could not get a handle on the extreme blow-up risk do to potential operational error. It was outside of my competence level to assess accurately or prudently. I passed and still feel I made a good decision, even though with hindsight the guys were very successful and I would have made a large return. My point in mentioning it is that the great HFT return stream can hide things that are not obvious - particularly operational risk that often appears to be huge (…or at least I tell myself that rather than kick myself for passing). 

Andrew Moe writes: 

I'm glad the thread lives, and it will hopefully develop in a few directions. But one point I raised was very pointed: I was not implying HFT as a sector. I was questioning the moral aspect of a handful, who managed to place themselves into a no-risk pocket within the ecology. Their only risk is CAPEX committed and personal freedom, should lawmaker flip on them one day. But their conscious choice is to operate daily as nothing more than a tax on all participants.

When Mr. Sogi said "taking money from other human", he merely implied competing (and prevailing) within the risk-taking endeavor–not within 1:1000 day risk of loss.



 Here are some recommendations gleaned from hustling tickets to sporting events and concerts over the last 20+ years.

1. Know the general layout and sections of the stadium. Indoor stadiums often have 100, 200 and 300 levels. Baseball fields have their own nomenclature and concerts can have strange setups. Take a look at a seating chart before you go to get the lay of the land.

2. Know the approximate market value. A quick look at stubhub or the like will give you and idea of what to expect for each section.

3. Know where the scalpers are. Every stadium has it main points of entry and the scalpers try to go where the greatest foot traffic is without getting pinched. Street corners near off site parking lots are good. Areas with lots of t-shirt vendors also tend to have more scalpers.

4. Singles and pairs are the easiest to buy. 4 is another nice number but be prepared to split up larger groups.

5. For games with tailgates, that larger tailgates are a nice source of extra corporate tickets — these tend to be better seats and the sellers are often pricing for beer money instead of market value. If you fall into these, verify them but don't even bother to negotiate. Move straight to #11.

6. Inspect the tickets with a look of dismay "these are the best you have?" — but this is when its very important to verify game, section and seat numbers for EVERY ticket.

7. Question the price "you want how much?" … "ooohhhh" — often they will come down a bit right on the spot — this is also a good time to look around for other scalpers as if thinking about shopping elsewhere.

8. Offer the round number just below their price. If they quoted you per ticket, offer for the whole batch (ie, if quoted $55/ticket for two, offer $100for the pair). If they quoted the batch, offer per ticket.

9. If met with consternation (likely if you lowball), offer to work together to fatten that bankroll of his. "Help me out a little bit and I'll help you out a little bit."

10. Know that scalpers are hustlers. Go in with 3 eyes and 11 fingers. Look at the tickets again just after the exchange.

11. Treat it as a gentleman's game. Be polite, do your business, shake hands and enjoy for the game/event!



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

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

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

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

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

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

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

Victor Niederhoffer adds:

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

Easan Katir comments:

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

Rocky Humbert replies:

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

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

Details on the Chancellor's Briefcase.

Ken Drees comments:

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

Jim Sogi writes:

Nik 9k

Kim Zussman shares:

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


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

Andrew Moe comments:

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

Russ Sears contributes:

How to Listen to Jackson Hole

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

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

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

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

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

Ken Drees adds:

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

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



 Channeling current events like only the Mistress could, she dropped a "Strasburg Curve" on the markets today, the lowest volatility of the last 'n' days in many markets where volume had ruled the day and she did it on a witch infested options expiration. Everyone was looking for heat. How many were left mightily swiping at air as the ball softly settled into the catcher's mitt?

The kid goes live at 7:05 est. WSox vs Nats.



After I looked at the data from 1900 to 2008, it is safe to conclude that September historically was the worst month for investors, period. — A Reader of Dailyspeculations.

A MAnalysis of seasonality effects often falls victim to one of the most common oversights in probability. It is illustrated by the birthday problem in which a group of 23 or more randomly chosen individuals will be found to have (with probability greater than 50%) at least one pair sharing a birthday. With two individuals and 365 days in a year matches are rare, and 23 individuals still do not seem many compared to 365 days, but this apparent paradox is resolved by considering the number of possible pairings between those 23 individuals instead [Ed.: 23*22/2 = 253 pairings, which is close to 365].

In much the same way as a naive application of probability will massively underestimate the odds of two individuals in the group of 23 sharing a birthday, seasonality studies suffer from a similar effect. When grouping by week, month, or season, combinatorial considerations come into play. While 63 out 108 Septembers having a loss might appear statistically significant as a series of Bernoulli random trials (assuming an underlying 50/50 split between up and down months, p = .03), such effects are washed away when we instead consider the underlying empirical distribution of days or weeks, randomly permuted to form months. When comparing the months composing September to a random basket of days the results are random. Attempts to find seasons of non-randomness are frequently subject to data mining bias, as the same permutation test debunking the September drift is easily used to identify (falsely) statistically significant periods.

The study: Running a bootstrap permutation study on Dow data from 1960 to 2008 we estimate the empirical distribution of differences in monthly return between September and other months. We test the hypothesis that a random September is no more bearish than a composition of random days sampled with replacement. We find that the mean difference between populations is 0.0695%, yielding a p-value of 0.3612 – random.

Bob Humbert writes:

The same September underperformance anomaly exists in the municipal and corporate bond markets. Doesn't this seem "unusual" or is it simply a byproduct of relative value transmitting itself through the various asset classes?

I am not as numerate as you; but keep in mind this: if a coin comes up tails 20 times in a row a Trader would examine the coin… while a Quant would merely assume he was witness to an extremely remote event…

Alston Mabry reports on another study of the issue:

Stats for all Dow months from Oct 1928 thru Aug 2009:

All Dow months:
mean: +0.37%
sd: 5.44%

Take all days in this period, randomly pull 20 to create a month like September, and do this 1000 times (with replacement) to create 1000 randomly-selected "months" with the following stats:

1000 randomly-created months:
mean: +0.26%
sd: 5.03%

Close enough, given the vagaries of the actual monthly data, the use of replacement, etc. Randomly pulling out days creates a distribution of "months" very much like the actual distribution, so one cannot find a solid critique of the use of the actual monthly data, given the similar stats of the randomly-created months.

Then pull the actual Septembers out and compare them to the actual months:

All actual Septembers:
mean: -1.66%
sd: 6.37%
z vs all Dow months: -3.34

That z is spot on with the result from the random resorts of months posted earlier. So, one must conclude again that, in the time period under study, September has been unusually cruel.

The thing about the previously-posted analysis with the random resorts is that one is really asking the generalized question: If one treats the monthly % change series as a set that can be redistributed among the months-as-containers, what is the likelihood that any month will have an extreme mean like -1.66%? I think this eliminates the multiple-comparison problem, since it doesn't have to be September.

But another issue is: Can you treat a series like Dow monthly % changes as a set that can be re-sorted? One concern is the issue of volatility regime changes. For example: in a volatile year, September is the worst month at -4%, and December the best at +4%; then in a calmer year, September is the best month at +2%, and December the worst at -2%; now you have September's mean return as -1% and December's as +1%. But is September really "worse"? Or does it just appear so because of the problems inherent in mixing volatility regimes?

One way I've tried to address this issue is to normalize each month as a z score compared to the mean and sd of the previous 12 months. So that in the example with September and December, the values for September might be -2.5 and +2.5, and the same for December, making the months equivalent.

Normalizing the Dow months (again, Oct 1928 though Aug 2009) in this way and then analyzing September again, one gets:

All Dow months normalized:
mean: -0.05
sd: 1.19

mean: -0.37
sd: 1.23
z vs all months: -2.42

So this adjustment pulls the z score in (as it does in all cases I've used it), but here the z for September still leaves it in the "unusually cruel" category.

Mr. K wrote: "Shorting September every year for 80 years could be fine, but on any given year, it is a crapshoot."

Alas, yes — a crapshoot with a bias. But the analysis is fun.



 One evening an old Cherokee told his grandson about a battle that goes on inside all people.

He said, "My son, the battle is between two wolves inside us all.

One is Evil. It is anger, envy, jealousy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, and ego.

The other is Good. It is joy, peace, love, hope, serenity, humility, kindness, benevolence, empathy, generosity, truth, generosity, compassion and faith."

The grandson thought about it for a minute and then asked his grandfather, "Which wolf wins?"

The old Cherokee simply replied, "The one you feed."

Michele Pezzutti responds:

 This reminds me of The Strange Case of Dr Jekyll and Mr Hyde: I would like to share my experience on how this thinking can make me a better trader.

If I should apply this to my (very, very poor and limited) personal trading experience, I can find Evil everywhere:

 -arrogance, when I trade based on pure instinct and with little/no evidence of trends or data supporting a decision.

- false pride and superiority, for being able 'to beat the market', when I make some profit.

- anger, when I lose too much not being able to put a stop loss.

- lies, when I do not want to admit to yourself that I have acted irrationally.

- regret, when I think 'why did I do that?' And I could go on and on…

Much more difficult is to find examples of the Good wolf. That is, long way to go to become a 'Good' trader.

Paolo Pezzutti writes:

I want to propose a slightly different perspective of the two wolves, the "bad" and the "good" one.

Trading wolves move in packs. They are territorial and wait for their preys to graze standing ready to attack when they are distracted. Wolves can also establish some type of coordination during the hunt. They conceal themselves as they approach the prey, targeting the easiest options available, the weakest animals of the herd. Sick or young animals, even pregnant females. They look for preys they have seen already. They do not take much risk, do not even engage in long chases, and rather wait for their prey to die because of the wounds. Sometimes wolves have to yield to their prey and their killing success rate may be low. But they know that their prey will be there in the same place at the same time the next day. It is only a matter of time, sooner or later the wolves will get it. These traders are deadly, but the current downturn might have killed many of them. They have taken too much risk, too much confidence in their strength. These wolves have become preys themselves in this phase of the market. Those who will survive, however, may become even stronger and be able to adapt their techniques to the new environment.

Single trading wolves can also be found, but less frequently. Lone traders can be old specimens expelled from the pack or young animals in search of new territory. Solitary wolves target smaller animals and many deaths are due to other wolves' attacks. Being alone in the wild can be very dangerous. These traders have to find niches, small inefficiencies left over and disregarded by the wolves packs. They have to be adaptive. They have to learn how to survive. I feel one of the lone wolves. Hopefully I will survive and learn how to be a "good" wolf.

Who knows if any of the wolves will survive this market? After all, species can also disappear.



 1. Walking east across 56th Street from 9th to 6th Avenues the other day, at 5:15 pm, I noted 50 cars parked there, with drivers in the drivers seat waiting, slumbering… It wasn't an invasion of the body snatchers. Just people waiting for the 'no parking till 6 pm' to pass. They save 15 bucks for the night at the cost of an hour or so, valuing their time at less than $15 an hour. I wonder what the implicit price of time is in various cities now as a function of the recent diminution in wealth and loss of jobs.

Along the same lines, I recently received an offer from Icon which has a few hundred parking lots in NYC to park one's car on a monthly basis for $220 a month with "further discounts available" if you call. This might be a good way for the city and others to save money through obvious substitutions.

Fifteen dollars after tax translates to $22 or more pre-tax depending on the bracket. Moreover snoozing or reading have their own value, so the $15 could also be interpreted as the marginal difference in comfort between reading/napping in one's car versus doing the same in another environment. Nonetheless, the point remains: whether these people have anywhere better to be. Such Millhonian observations are enlightening and a reminder of the complexity of the economic system in which even the smallest actors are constantly performing economic calculations, the results of which feed into larger calculations.

I hope these people are reading some mentally enriching material, or at least taking power-naps or meditating, or somehow increasing their human capital, and that this is not complete deadweight loss.

2. At x pm every day, an announcement is made. The market moves to a level. The move is attributed to the announcement. The question is whether the move would have occurred regardless of the announcement. Also, whether the announcement was planned to make the move. For example, at 3:02 on 11/21, an announcement that the new Treasury Secretary was appointed occurred and the market moved up 6% in 59 minutes. Similarly at 3:10 last Friday, the announcement from the current Secretary that he believed everything was under control. The market set a new high and then dropped 6% in 50 minutes. We know that the news follows the price. Also, that the news is often now as "new" as we believe. The proverb comes to mind "the ____ will do what he can do." Also, the ephemeral nature of the news and those who know about it in advance. Is it fate or chance when such moves occur? And does the market do what it's going to do regardless? How would one approach this question and its tests and what insights can be drawn from such a traverse?

3. "The Game" between Harvard and Yale was won 10-0 with Yale limited to 90 yards. Yale previously had allowed just 95 points through 9 games. If the market can't be predicted, let us at least use the market to predict other things. Scores in baseball are always lower during bear markets. That's well known. Can we expect the same in basketball and such others as "What time is it, Mr. Fox?" and does the well documented predictive relation between low scores in baseball still continue to predict the market as previously enumerated in Practical Speculation?

4. Sometimes the kind of language used is a signal of vast underlying unearthed issues and problems. Times of crisis provide many nice examples of these and here a few which should be quantified and tested. In talking about his meeting with the former head of the investment bank who seamlessly moved to the chair of Treasury, the head of the now bankrupt investment bank said, "Our brand with the Treasury is very good." A Canadian central banker said about his meetings with senior bank executives, "If you were having a meeting with a central banker such as I and the conversation drifted to opera or the ski slopes at Davos or some such social setting, I think that's an issue." In discussing his tenure as consultant the former Treasury Secretary who seamlessly moved to consultant of the troubled bank, said  "When you have a risk book…, you can't earn more unless you risk more," and he according to others asked to "bulk up" the book. Others involved said that, "as long as you grow revenues you can grow bonuses," and apparently the risk manager and the risk taker in CDOs were once stranded together on a "boat on a lake that ran out of gas" on a fly fishing trip. (That's not exactly language but it recalls the similar incident of the server CEO who was stranded on a boat with his assistant during a survival exercise before the comparable plummet in his stock after they bought an interest in a company he owned for 1000 times revenues or so). In talking about the risk controls, a former president of the troubled bank said "our reputation with the public and the regulators must be an asset." These are paraphrases just to set the ball rolling, and I would be interested in other telltale uses of language that reveal deep truths below the surface.

Gregory van Kipnis replies:

You can not read too much into the fact that 60 cars are waiting for the "No Parking" period to expire so they could park overnight for free. I live in that neighborhood and such a sight has been seen every night for seven years. Perhaps if you knew if there was an increase in the number of cars that didn't get one of those spots you might have a hardship barometer.

Much more revealing, however, is that two weeks ago everyone who parked on the street got a flyer on his windshield, saying he could park for $211 per month, guaranteed for one year, at an undisclosed garage, just call (212) xxx-xxxx. That's a $150-200 per month saving over the prevailing monthly rate in the neighborhood, and was being offered by one of the leading garage chains. I took the deal and wound up in a better garage than the one I left.

It appears that in anticipation of reduced demand for parking and an increase in space capacity, one of the garage chains is trying to cannibalize as much business as possible from the other chain operators, and lock them in for a year with the low teaser rates. After a year they start jacking up the monthly rate by $25 a clip every few months. The assumption must be that the frictional costs of searching for a cheaper deal and adapting to a new location will be high enough to retain most of the new customers while they transition them up to full market rates.

I haven't see parking rate warfare since 9/11/01.

Kim Zussman ponders point 2:

One thing news-related market moves can do is reveal a hidden question or tension. The big jump on Geithner (along with the post-election slump) suggests there was worry about if/how BHO would address the crisis.

I wonder what would have happened had he tapped Volcker? Maybe the same.

Recall the big up open when they caught the other Hussein; then an all-day decline.

It seldom makes sense, which is one reason it's so frustrating to ask logic to predict. If the market were logical, the logical would be rich. If the market were a puzzle, the clever would be rich. If the market were a symphony, Mozart would not have died poor.

There are enough stars to make a thousand constellations, and by design enough movement in the market to keep people believing in a rhyme or reason.

Andrew Moe replies:

A MoeUnderneath the belly of the beast, we had options expiration on Friday, and it seemed that the 750 strike was running the table for much of the day, creating extreme gains for those on one side of the trade and extreme losses for their counter-parties. Just days before, these levels seemed unthinkable, so emotions were running high on both sides. At 3pm, the market seized upon the Geithner news to speed directly to the 800 strike, delivering comeuppance and salvation in one swift blow. I believe this move was in the can all afternoon as the mistress alternately teased and taunted before finally making a decision as to what news would carry the banner for the advance.



 We have learned that Ken Smith, a frequent contributor to this web site, passed away on June 2, 2008 at age 78 (of an apparent heart attack).

Ken travelled to many places over his life, was involved in all kinds of interesting situations and shared many of them with us through his writing. Several of us had a chance to meet him in person as well.

Our condolences to his wife Ina.

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Andrew Moe remembers: 

Here is my favorite post from a good friend who often gleaned remarkable insight from the wonderful life he led and was generous enough to share it with us. A true Spec.

####### Original Post by Ken Smith #######

At 6 am I looked out to the front lawn and observed a lone American Robin listening for worms and insects in the dew-moist grassy ground. The bird shuffled from point to point in a random-appearing change of direction. This is breeding season; the birds are now carnivores. After breeding they will switch to a vegetarian diet. The Robin was patient at each stop, giving his senses time to pick up the signals nature has programmed him to use in his search for food, food which furnishes him with reproductive energy. He has arisen early and discovered this niche for himself, my front lawn, recently watered.

A signal from the ground is perceived and Sir Robin quickly has his prey, no hesitation. This guy is an active hunter, as in active trader. His little computer brain and sense organs are crawling the field in search of prey, a morsel to fatten his resources. Sir Robin will switch to another lawn or playground or marsh when his present search produces less energy than the energy required to do the search.

He will fly away, perhaps randomly choosing the next site for exploration. When breeding season is over, the eggs hatched and nurtured, Sir Robin will change his diet preference. And the turning of the earth, the sun, and the moon will influence him to change his territory, his environment, his location in relation to these planetary orbits. A trader seeks a niche, as the good Doctor Niederhoffer has suggested. Sir Robin, as an epitome of nature's example, has a bird brain yet survives, breeds, and flourishes. How complicated do we need to be to survive as traders?

"Once breeding season is over, the sweet-singing and familiar robin of our backyards becomes more furtive and shy. Large nomadic flocks form and range over the countryside in search of berries such as mulberry, sumac, grape, viburnum, and cedar, as they shift from their breeding season diet of insects and earthworms to become wholly vegetarian. By September, many are moving south from the northern parts of the eastern half of the country to winter with southern residents in the Middle Atlantic and Gulf states. In the West, Robins wander broadly in search of food and move generally to areas of lower altitude. But some linger as far north as Canada when food supplies are adequate, so the first robin you see in spring may not have come from too far away." (Cornell U. ).



VN.pngIn considering the phases of the moon I found the following two passages partially illuminating:

"Considering the moon as a circular disk, the ratio of the area illuminated by direct sunlight to its total area is the fraction of the moon's surface illuminated; multipled by 100 it is the percentage illuminated. At New Moon the percent illuminated is 0; at First and Last Quarters it is 50%; and at Full Moon it is 100%." Source

"When a sphere is illuminated on one hemisphere and viewed from a different angle, the portion of the illuminated area that is visible will have a two dimensional shape defined by the intersection of an ellipse and circle where the major axis of the ellipse coincides with a diameter of the circle; if the half ellipse is convex with respect to the half circle then the shape will be gibbous, bulging outwards, whereas if the half ellipse is concave with respect to the half circle then the shape will be a crescent." Source

The explanations made me start thinking of the angle of incidence and the angle of reflection, and the % of the time that a market is above zero and below zero, and other concepts engendered by the phases of the moon.

I wonder what other ideas about markets are generated by considerations such as the above. Also, a layman's proof of the ellipse/circle statement might be helpful to speculation.

Jim Sogi writes:

Speaking of moon effects, there is one of Vic and Laurel's classic penumbras forming off the 1400 round in S&P off this recent high.

Also, the other image I got is the kids playing jump rope with a kid at each end spinning the line around. There is a definite drift to the spin in one direction, but one can play the spin until tapping out or whatever they call it. Its definitely tradeable though may or may not show on radar of a fixed wavelength. The game is different at the bottoms than at the tops for sure. Do kids play this game anymore?

Andrew Moe adds:

Reminds me of earnings season. First Alcoa, then a handful of others. The first sliver of the waxing moon. As the days pass, the number of companies reporting earnings steadily increases until a full globe of information illuminates the markets. Hunting/gathering levels peak just as the flow of earnings begins to dissipate. Next comes the struggle for survival on diminishing resources as the moon wanes into oblivion. Only the strong will survive the dark days until the cycle begins anew.

Phil McDonnell enlightens:

Phil.pngThe side of the Moon facing the Sun always looks like a circle from the perspective of an observer on the Sun. The simplest way to understand how the shape of the visible lighted portion of the Moon changes is to view the circle of light as a rotating circle. It is well known in mathematics that a circle rotating on a North South axis will appear as an ellipse in general. It will only be a true circle when viewed full on.

From the perspective of a viewer on Earth the circle of light on the Moon is rotating once every 29.5 days. So from the Earth perspective the line between day and night on the Moon will generally be visible as an ellipse because it represents the edge of our rotating circle of light. However the lighted edge of the Moon is still circular at all times so the edge of the lighted portion will always be described by a circle. Thus the combination of one edge bounded by a true circle and the day-night line of demarcation by an ellipse will always be true.

To understand the convex concave claim we need only consider the ellipse formed by our North South rotating circle. When the Moon is exactly half full corresponds to when the circle is rotated by 90 degrees and faces us edge on. At this time the ellipse appears to collapse to a straight line because the circle is edge on. This is what happens at first quarter and last quarter Moons. During the Gibbous phase the ellipse will appear convex from Earth because what we are seeing is the convex portion of the lighted ellipse. Similarly during the crescent phase (either waxing or waining) the visible ellipse will be the concave portion of the lighted circle.



BreadCan the global macro boys explain to me how wheat is up 60% for the year but i can get a loaf of bread or a box of Wheaties at the same price as 2006? Would seem the producers of food hedge their costs so as to control both the cost to consumer and their profits from the best recurring biz in the world — food.

But if they hedge then of course the must hedge at certain levels and if it keeps going they must keep hedging until the reflexive traders are satisfied and in the end it seems only the consumer gets the bill, so there must be inflation upon us as a result not only of the quants but also of the global macro reflexive crowd.

Jason Thompson replies:

First, I'd very much question the observation that you are paying the same price YoY. This is certainly not the case here in Chicago as Wheaties, along with Raisin Bran, Cheerios and Cornflakes are measured as part of a basket in a private inflation survey. They are up roughly 9% 3rd Quarter to 3rd Quarter and will experience price increases (already announced by manufacturers) of 10-12% to be seen within the next six months. It's very likely what you are missing is the reduction of discounts. By this I mean there are fewer promotions, coupons to the consumer, or rebates being offered to the grocery store. The price quoted on the rack may not have changed, but the average price paid by the consumer has increased.

I'm much more perplexed by your observations on bread, as that has seen the one of the largest increases in our basket of food, outside of milk and cheese, and some fruits and vegetables. Bread here in Chicago is up 18% YoY.

David Lamb extends:

WifeI've got to be luckiest husband on Daily Spec. My wife makes our bread and she orders hard wheat for $6-$7 per 25 lb. bag.  It takes 12-13 cups to produce five pounds of wheat flour, which is needed to make five loaves. We go through five loaves every week (she gives away half of it). Therefore, she spends $6-$7 per month on our breadstuffs (rolls, loaves of bread, etc).

Compared to store bought bread — well, there is no comparison, at least in taste. However, if we bought the same number of loaves at a store it would cost us, for the cheapest bread at WalMart, almost $2 a loaf. That would be $40 a month. Yes, I have seen an increase in wheat prices but the greatest wife in the world can handle it!

Riz Din replies:

The cheapest bread in the UK is less than 50p a loaf. Currently, £1 (or two UK cheap loaves) buys two dollars (or 1 US cheap loaf). Perhaps the international cheap bread arbitargeurs have helped to lower the USD/£.

Eli Zabethan explains:

Most food producers hedge out several years, but now there is little carryout as supplies are being used for alternative energy projects.

Kurt Specht replies: 

It's true that most food producers (and processors) hedge out several years, but the levels of hedging and the duration can vary widely by company and by item.  Several companies have cited various raw materials increases in their quarterly earnings reports this year as a cause of diminished earnings per share, but as the prices of commodities rise and more time passes, more and more of these companies will have to raise prices to keep up.



MastermindThe greatest projects in civil engineering are undertaken by young children digging. Whether at the beach or deep within a closet, you haven't built a bridge until you've built one of sand and you haven't tunneled until you've hit the back corner of the family game closet. My kids excel at both and a recent expedition to the dark hinterlands of our home unearthed Mastermind, a code breaking game for two.

Play is simple. The first player has a choice of six colors to make a four-peg secret code. The second player must then solve the code in 12 or fewer turns by making guesses with the pegs. After each guess, the first player provides feedback as to:

  1. How many pegs are the right color but wrong place (white response peg)
  2. How many pegs are the right color and right place (red response peg). Information is transferred both by the response pegs and the absence of same. Player two has 12 turns to deduce the pattern.

This is a wonderful game of feedback systems, deduction, intuition and chance. It's one of those games that can be created and played from scratch with sticks, stones, leaves or whatever is at hand and enjoyed for hours. Also, you start with a completely random guess and use incoming information to deduce complete signal. What a lesson to teach kids! It's like cross training for the spec mind.

I've yet to be prouder of my five year old then when she cracked her first code with no hints. "Daaaaaad, I know…just let me do it".



 In 1940, with Hitler running amok in Europe and the US gearing up for war, John Steinbeck and marine biologist Ed Ricketts chartered a six-week expedition into the Gulf of California (Sea of Cortez) to make a study of the marine life in the region. The Log is the brilliant narrative of their voyage, from detailed accounts of preparations, collections, methods and observations to the sometimes bawdry, sometimes comic observations of their hired crew.

Market applications jump out of every page as they detail survival strategies used for various conditions. They marvel at the complexity of life while observing its brutal simplicity. Always, the individual is considered in relation to the whole.

Written between the Grapes of Wrath and East of Eden, Steinbeck is at his best in observing not just the marine life, but the people of the region and the effect of their group upon the people. You get an unfiltered run through his (and Ricketts’s) mind at the time.

This is the type of book that once you finish it, you go right back to the beginning to reread and relive favorite parts. Already, I miss my time aboard the Western Flyer.



About two years ago, Vic and Laurel discussed control charts. I use a similar concept by tracking the drawdowns of various trading strategies. If a strategy is working well, there will be drawdowns, but the drawdown amount will repeatedly return to zero as profits exceed losses. Conversely, if a strategy is losing, the drawdowns will get further and further away from zero. Thus, a drawdown that exceeds a preset threshold or fails to return to zero for an extended number of trades might indicate that the cycle has changed.

Andrew Moe adds:

Improvements to control charts can be made by upgrading the fixed window look-backs to exponential or DSP style windows (see Ehlers, Jurik, et al). Information theorists will find additional gain via the use of fast-responding windows on the entropy. These methods are used to turn various strategies, traders, and funds on and off. I particularly like Mr. Ellison's idea of return to even from the max vis-à-vis survival statistics as traders tend to get paid on making all-time highs, and the distance and journey between tell much about the method.

Vincent Andres writes:

Cycle changes are not directly viewable. Hence we're often trapped.

I believe cycle changes are only viewable in some slightly more indirect universe of parameters. Don't look at prices or first differences of prices.

Cycle changes are of course written in them, but a bit too deeply to be seen just on the surface (price). We must go one (or more) levels downstairs. We have to search/compute indirect/deep parameters from the prices.

Plotting those deeper parameters will of course show deeper things. Just as using a microscope or X-Rays. Some parameters we may consider:

1. Correlations (in many ways)
2. Regression coefficients
3. Lags
4. Price distribution parameters

Scatter-plots may also be of interest. Points clusters may correspond to regimes.

Vic and Laurel recently had an interesting post about ordering/ranking. In a general sense, rank measures can be used in many ways — what's the cluster of the leading horses, and is it changing?

A great part of physics is simply building measurement tools. Then using them. Is market physics so different from other physics?

Adam Robinson explains:

Vincent's insights answer his own query, for the difference is fundamental and ineradicable.

In the physical world, phenomena consist of relations among unvarying "observables", and even at the quantum level, observing those phenomena offer us at worst a position vs. momentum tradeoff. Light quanta might shift a subatomic particle we have in our sights, but they don't usually change the particle.

With markets, once one or more traders observes a phenomenon (e.g., equity markets are rising as the yen falls, whatever — even spurious correlations) they begin to trade/arbitrage away the phenomenon so that it diminishes or even disappears entirely.

Hence ever-changing cycles that vex and humble us.



 The quantitative among us spend incredible time, money, and effort to search out predictive patterns in the markets. We use state of the art equipment to aggregate, analyze, and optimize vast streams of data in an attempt to squeeze out a small edge every day. Compounded over time this edge becomes significant but only if followed as designed. Stops, fear, and greed combine to degrade performance in real time, leaving many vexed by their relative underperformance to the pure patterns.

The Detroit Tigers have "Nine Full Innings" inscribed on their League Championship rings from 2006. Certainly, some would object here, as in blowout games where you have very little chance of winning. Maybe you should rest your stars to avoid injury. But manager Jim Leyland would never let the Tigers quit.

Leyland repeatedly preached the concept of playing hard for nine full innings, and the players took up that mantra, as evidenced not just by their words but also by the team's propensity for late-inning clutch hits, rallies, and comebacks.

We've established what one extra hit a week brings. If you have an edge in the markets, play the full nine. 



 The odds of one person's filling out a perfect bracket for the NCAA basketball tournament, i.e., the odds of picking every single game winner correctly is nine quintillion to one.

Another way to view this is that if every person on the planet were to randomly fill out one million sheets the chances would be one in 1000 that a perfect sheet would be found.

The odds of picking the five numbers in the Powerball lottery are one in 3,563,609 but to pick all five numbers and the powerball are one in 146,107,962.

Alston Mabry writes:

If the tournament were a coin-tossing exercises, there would indeed be 2^63 = nine quadrillion outcomes. But can we improve those odds?

Looking at the NCAA Tournament results for 2005 and 2006, 86 of 126 games were won by the higher-seeded team, a 68.3% win rate for the NCAA seeding committee. If the seeding were random, one would expect a win rate of 50% with a 4-5% standard deviation, so the committee's results are inconsistent with randomness.

If you go further and rank the games by the difference in seeding (low seed minus high seed, so that a one seed playing a 16 seed would be a 15-spread game), and then look at the quartiles, you see that the committee is even more successful. The first column is the average difference in seeding between the teams in the quartile, and the second column is the rate at which higher-seeded teams won in that quartile:

seed diff / win rate
12.29 87%
7.79 75%
4.25 69%
1.27 42%

Andy Moe remarks:

 I would suggest that spreads and seedings should be examined closely in the tournament, as there are statistically significant edges that can be of use both at the sportsbook and in an office pool. For the most part, I believe the edges are present because the tournament selection committee is better at seeding the teams than the general public is. Add plenty of "amateur" money chasing favorite schools and you have the perfect recipe for mispricings.

The memes surrounding the tournament are surprisingly similar to those found in the markets. The length of time since a #16 seed beat a #1, the danger of the #5 vs #12 matchups, past greatness of teams, coaching vs players, upset specials, giant-killers, hot hands, the list goes on and on. Thankfully, almost all of this centers on how to pick winners, not how to beat the spread.

So while the rest of America concentrates on filling in brackets, I'll be packing my bags for Vegas. As in the markets, it pays to know when to break out the cane and hobble down to the sportsbook.

From John De Palma:

From the New York Times

"When it comes time to pick a champion in an N.C.A.A. bracket, people tend to cluster around a few of the favorites…. At first glance, this focus on the favorites seems to make perfect sense. History suggests that the top-ranked teams really are more likely than other teams to win the tournament. If you cared only about picking the correct national champion, it would be smart to choose a team like Ohio State or Kansas this year. The problem is that you would have a lot of company. To finish at the top of your pool, which is what matters to most people, you would have to do extraordinarily well in the rest of your bracket … The lesson is basic: As long as everyone else is clustering around a couple of favorites, you hurt your chances by joining them … But pools do make a broader point about human behavior. Frequently, people make decisions without fully taking into account the actions of others. Investors, for instance, may buy stock because they believe a company will do well in coming years, but they fail to consider the possibility that the stock price already reflects that information…"



There are 1001 ways to lose money in the markets. Starting with the deceptions, but continuing with methods of snatching defeat from the jaws of victory. Chair mentioned a number of them in Ed. Spec. and Prac. Spec. including his Uncle Howie’s methods, his Grandfather’s methods, sexulation, hubris, hoodoos, fixed systems, trend following, technical analysis, the propagandists methods, Abelprectorish bearishness, body snatcheritis, everchanging cycles, and trading during times of personal or family events.

There is also Livermore’s most expensive last 1/8th of a point, and the other Livermorean folly of asking the market to buy a coat or a car, making the danger of trading the P&L and not the markets. We should never forget the Expert Professor’s good warning not to confuse luck and skill which was echoed by Professor Diebold’s discussion of alpha and beta. The greatest way to lose money of course, is the weak hand syndrome, whose symptoms strike both on the bailout and on the failure to capitalize on the rise after the fall, which is more of the loss of opportunity variety of losing money. A good number of ways to lose money involve the use of, failure to use, or the over use of leverage or capital. All in all there are 1001 ways to lose money, and I invite you to add to the list.

Vic responds:

One way not to lose as much money as usual is to eschew forums where the agenda is controlled by someone who you are not convinced has the ability to make a profit in real life. Also, do not assume that each day of the week and hour of the day has the same regularities.

Try not to take flyers on other people’s trades as you will become weak, not knowing how convinced they are of their prospects, and will tend to bail out at the worst time.

Do not read books by people with get rich schemes, as if they had one (other than selling books) they would not share it with you. Nor for that matter should you read books talking about how great a personage was in the past. The question is always what is the going forward reason that this method of thinking/methodology should have an edge, not already discounted, in the future.

Do not put on trades where there’s only one way for you to get out at a profit. For example buying at 3:50 p.m. with the idea that you have to close it at 4:00 p.m. because the close looks strong. The same for moves in the first ten minutes.

Be careful about going against near the ends of the day, and the ends of periods, because the strength of the other side increases in proportion to their profits on a trade.

Never be overconfident. You can sink in a moment on a boat, and lose everything with one bad trade in the market. Try not to be overly pessimistic either though, as the market is very resilient, and the infrastructure is designed so that the system can continue and capital can be raised and entrepreneurs will reap returns for their creativity.

Do not ever brag about your trades, or have too big a position relative to the total money flows in and out of your niche, as you will tempt others to run over you. And after a long period of abstinence, when all the moving averages look the worst, that is when you should test whether the expectations and risk reward are in your favor.

Always be flexible and strong in your thinking and money management. Do not have positions where you might expect on average to fluctuate by more than 4% a day on your capital. Stay away from news stories that put you in the same frame of mind as the average public, that lose so much more than they have any right to do. And when you have a big unrealized loss, and the position comes back to break even, test the odds of a continuation as opposed to a reversal.

Do not ever play another persons game. If you are set up to speculate, speculate. if you are set up to grind, grind. Do not make markets or engage in arbitrage where banks and dealers have about a million times the capital availability that you do.

Make sure that your costs suit your occupation. If you are day trading, be sure that your commissions and borrowing costs are in line with your competitors’. If they are much more low cost or quicker than you, how do you really expect to compete with them.

Many of these rules seem like those that Poloinius gave to Laertes … Above all others, remember that the only one that can really grind is the house.

Steve Leslie offers:

I will mention one sure fire way to expose yourself to loss and one to potentially expose yourself to complete financial ruin.

Firstly, the best way to lose money is to focus on your winners and forget about your losers. Mentally we like to watch our winning trades more than our losing ones. The reasons for this have been described in great detail on this list by many.

For example, if you buy a stock and it goes down — not uncommon thinng to have happen. So you have a mental stop of selling half the position when it gets to a 7 percent level. Unfortunately though you do not fulfill your obligation and hold onto the position. Then you notice it is now down 10% and still no action on your part. It continues to grind lower and suck your capital with it. Still no action on your part. and it goes lower. Now you stop looking at it because it has become too painful to watch, so you shift gears to another stock that is going up. This is your excuse. You have now fallen into the trap of avoiding pain and seeking pleasure. So now what do you do? You sell the stock that is going up or has already gone up 20% to offset your unrealized loss. Had you kept to your strategy, you would be out of the loser, booked your loss and now you let your winners run. You have also freed up available capital that can be used for other purposes rather than sit as dead money.

Another way is to own too much of one thing. I always tell clients, friends and anyone else who will or will not listen, not to over expose yourself financially to any one stock, no matter how appealing it is. I don’t care if they claim to have the cure for cancer, don’t own too much of it. I personally believe 10% of an individuals portfolio should be the maximum. I cannot think of any scenario where you want to own more, unless you know more than the general public. Now this is where you get the Bill Gates, Larry Ellison, Paul Allen, Andy Grove Arthur Blank, Sam Walton and others argument that this is how they became fabulously wealthy. My reply is that you ain’t them! The interesting thing about these overnight wonders is that it took years for them to become overnight wonders. 25 years from where Sam Walton opened his first store to his second. Some of them also had more than one bankruptcy in between their successes, so beware the headlines. Paul Allen incidentally used to have a terrible record in investing in companies. I have lost track of what he is doing now.

For every Microsoft and Intel, I will point out Enron, World Com, Calpine, Tyco, Imclone and many many more. The best regulators, analysts and money managers in the world never saw Enron coming. What makes you immune from such an event showing up in your portfolio?

The sand can shift very quickly, especially in stocks that have technical expertise. Two and a half years ago, Biogen Idec was flying high and their stock was at 65. Then they found that several patients with MS who were taking their drug developed a rare form of a brain disease called PML, and the stock dropped from 60 to 35 in two weeks. After an exhaustive study, the drug returned to the market and the stock is now 50. It has yet to recover its price fully.

Peter Lynch said that if you want to find one good stock you need to research 10. If you want to find 10 you need to research 100. Now be realistic. Who is going to research 100 stocks. Who has the time, energy, resources, knowledge. etc to play on this field. Most of us are involved in other things such as running a business, earning a living, running kids to soccer, helping with homework, holding together a fragile marriage, watching the next American Idol …

To take poetic license, I paraphrase Ratzo Rizzo in Midnight Cowboy “You know what you need Joe Buck? You need management. Money management that is.”

Andrew Moe contributes:

As corollary, take care when playing in other people’s markets. Strong runs in energy, then metals has made it look easy to profit from commodities. And with incessant reminders on increasing global demand from all the experts, folks are lining up to add oil, gold and wheat to their portfolios. I can just see old Ben on the floor of the exchange, reluctantly agreeing to sell some of his contracts, “When it’s beans in the teens, I’ll sure look foolish for having sold so low…”



It seems the black swan is amorously engaged at present and thus unavailble for a repeat of the may meltdown. A fine desktop wallpaper for the day to serve as a reminder of the fickle nature of chance — and love:

A black swan swims in front of a paddle boat on the Aasee lake in north-western city of Muenster November 2, 2006. When the black swan arrived at the lake in spring, it became a local attraction, after ‘falling in love’ with the plastic swan paddle boat available for hiring on the German lake. REUTERS/Ina Fassbender(GERMANY)



With a wry smile, Benjamin Franklin proposed the basic idea for daylight savings time to the Journal of Paris in 1784 but it remained dormant until 1916 when the Germans adopted the idea during WWI. The UK fell next, with Newfoundland and the US close behind in 1919. Despite small pockets of resistance in half a dozen states, it remains an accelerator to natural perception of the seasonal shift that kicks us into accumulation mode as daylight wanes.

The effects are felt across all age groups, all nationalities, all types of people. In the morning, 6 am looks like 7 am so the early risers feel behind right out of the gate. Lazy teens are no better as 11 am looks like noon and the days are short enough already what with school taking up most of the time anyway. Darkness arrives an hour early with predictable results on traffic. Monday’s commute will be one of the worst of the year as freeways crawl with light dependent drivers thrown into the black.

But instincts developed over millions of years quickly kick in. A sense of urgency prevades our existence as schedules shift to capture the dwindling daylight. With holiday shopping bearing down, we dig in and accumulate wealth as fast as possible. Everyone’s out for a quick strike. Festivals and rituals resonate the theme. It’s time to bring in the crop.

The markets show a confoundedly significant jolt around the rolling back of the clocks, though I leave the particulars as an exercise to the counters.



 Why is it that when oil rises from $60 to $75 per barrel, interest rates from 4.5% to 5.5%, and gold from $500 to $700, 99% of the commentary is how bearish and 'Steve Roach like', this is for the stock market and real estate? Also, how come the Fed has 'no choice but to tighten', even though when the reverse happens, (because of the effects pointed out in our review of the bestselling travel book, and most recently regarding the first stop being the best), there is supreme quiet about things being bullish.

Andrew Moe comments:

The authors of these bearish articles have absolutely no idea what the forward direction of the market will be. Instead, they are most interested in getting eyeballs to their pages and this is done via sensationalized stories of imminent demise.

As quants, we are already trying to drive our car by looking in the rear view mirror. Introducing news is like putting a blindfold on and trying to drive by listening to a backseat full of drivers who are each looking in a mirror of their own — many of which do not even point to the road behind.

"Watch out for that grain silo"
"Don't hit the canyon"
"A herd of cows is in the way"
"Wow, I look good today"

GM Nigel Davies adds:

One has to ask: what is the motivation of the bears? In most cases they have no positions in the market, instead deriving their income from their views.

What will they choose to write about? Well, nothing attracts attention quite like disaster (car crash, plane crash, market crash), probably because it is an affirmation for those who never take risk. The market may go up a million percent without them, but they get to delight in a 5% drop, or at least salivate over the thought of it.

J. T. Holley offers:

Those who disregard paths of least resistance, Gresham's Law, the Law of Ever Changing Cycles, etc, and cling to "black and white" fixed trading systems seem to always have a sense of permanency to the direction of markets. The exception to this is when everything is running its natural course and they "think" they will try being a contrarian, just at the wrong time. DailySpeculations, more importantly than anything else, has a spirit of teaching and espousing "seeing things as they are" and utilizing tools to do so. Other authors do not do such, as it is easier for them to attach their feelings and decisions to those things that are in the direction of loss or some voodoo formula.

When oil goes from $20 to $40 to $60 to $80 it is easy to not do any math on supply and demand and project it to $400 a barrel, and then have fiction fill in the lines. With the markets it is so easy to be a bearish contrarian and cherry pick evidence from days of yore, and to do this at the wrong time when the odds just do not have it in the stack of cards, and the game has changed. I have always wanted to ask someone what he would do if he timed a 60-90% downside move and shorted everything "under the sun" (no explosion) and also bought every single available put option while it was happening? "So you won, everyone is broke, the banks cannot pay you because of their own runs at the doors, pestilence, vermin, and gloom is the theme and you are going to tell me you have a smile on your face?"

It is the sense of permanency that they attack, and their disregard for change.

Scott Brooks mentions:

Three things sell best to the masses; envy, greed and fear. Therefore, if you want to sell your writings to publishers, you must employ one of these methods.

As I sit around at holidays listening to my relatives (who have a very blue collar mentality) talking, I have to bite my tongue to keep silent (risk being murdered by my wife if I start another debate with the mentally unarmed) listening to the sky is falling mentality. These people love fear.

I also listen to them talking about greed. Their new get rich quick schemes or poorly thought out business opportunities. Or complaining about all the money that is being made by someone who does not deserve that much money ("no one is worth that much money" … as I sit there and smile and hold my tongue).

So the masses will greedily chase returns from the investments that they wish they had purchased last year (as is probably true of the highly intelligent "accredited investor"). They will over-react to anyone telling them the sky is falling and run away from what they should be embracing, or embrace what the should be running away from. And they will elect politicians that will stick it to those that "have more than they deserve".

That's what the writers like Abelprechursaskyisfallingallthetime are selling too; fear, greed, envy. And it works (well, for them to earn a paycheck, at least!)

Thomas Miller contributes:

When the commentators get particularly bearish, it seems no one mentions the incredible growth and upward trend in corporate earnings, which are still growing nicely. To test this I suppose one would have to count and track the number of bearish articles in numerous publications and "experts" on CNBC and compare that to market actions over time. It would really be another sentiment indicator. Probably time consuming, but my guess is that it would be of value.

Jeff Sasmor adds:

I would submit that stocks are products sold to various types of customers. Like autos, so your stockbroker is actually a new/used car salesman. I am not being flippant.

My attitude is based on being someone having gone through the IPO and road-show process as a company officer and becoming quite friendly with one of the underwriters.

Sushil Kedia comments:

Behavioural Finance is a website with a long list of plausible explanations for the Permabears maintaining their stoic silence now, but mounting the rooftops the moment their original framework appears on the markets' horizons. Some of the ones that caught my attention immediately were:

  1. Cognitive Dissonance
  2. Communal Reinforcement
  3. Illusion of Knowledge
  4. Curse of Knowledge
  5. Selective Thinking
  6. Self Deception
  7. Framing

Ronald Weber adds:

Following Mr Sushil Kedia's comments on behavioral finance, may I mention the Investment Office website which contains (among others) information on behavioral finance on the left side of the navigation, under "market characteristics" (not yet optimized for Apple!).



Conversation over a rollicking summer BBQ tends to magnify one's perceived abilities, especially when challenges of a physical nature are issued by the opposite gender. Somehow, the fact that I run a few miles every morning was transmogrified by my wife into my ability to swim a mile for charity, which does not sound too bad until they tell you it is out and back into the Pacific. As in swim 1/2 a mile out where all the big fish are, then high tail it back in. But no worries as it is a big event and there will be lots of swimmers in the water so the likelihood of sharks is very low. Safety seemingly assured, I plunged.

To prepare for the event, my runs were exchanged for a few days each week in the local pool, eventually building up to a mile. I learned the importance of rhythm and breathing and built a nice system tailored to my style. Stroke, stroke, stroke, breathe. Despite or perhaps because of no prior swimming experience, I made quick strides in getting up to the full distance. Paper trading like a champ, I began to envision a fast start and low time.

Heat 2 of the 77th annual Oceanside Pier Swim lined up on the cool sand at 8:45 AM. The surf was flat, but lifeguards watching Heat 1 advised of a strong drift south so the main pack started about 300 yards north of the pier with instructions to swim straight out and let the drift bring us back around. "But you're all experienced enough to know that," chuckled the lifeguard. I didn't get the joke until much later.

The horn sounded and around 150 open water vets sprinted into the water. Years of surfing provided an edge in getting out past the breakers ahead of the pack, but the early dash caught me out of breath as an unexpectedly large set rolled in just after our initial clearing. After fighting through the choppy monsters, I found myself sitting near the front but gassed from the effort.

Flipping over to do a little light backstroke and catch my breath, I was nearly mowed down by a churning mass of determined swimmers who had also just passed through the surf and were steaming out to sea like they just left port. Stroke, stroke, stroke, breathe went out the window as panicked reality was more like stroke, breathe, stroke, breathe, breathe, stroke, gasp, choke, swallow, stroke, breathe. Regularity turned Brownian in a hurry but what really scared the Hades out of me was the way the ocean looks through swim goggles.

In the pool, the crystal blue water provides a superb lens through which one can navigate lanes, lengths and laps. In the ocean, limited visibility magnifies the unknown. Terrifyingly long tentacles of kelp strain to wrap themselves around you and mysterious dark shadows cruise the murky bottom. It's like swimming across the top of a teeming rain forest. Gripped by fear, I chucked my goggles less than 200 yards into the race. CNBC had to go.

In the pool, I thought the water choppy when another swimmer was in at the same time. In the ocean, 3 foot swells quickly redefined my notion of a flat surface. At this most opportune time of embattled revelation, I became acquainted with the drift. Because I was moving slower than the field, the drift affected me more. That was good for a while, as it got me out of the grinding pack, but when I got too close to the pier, my perspective on drift changed.

Suddenly, it was like shorting a runaway bull and I had to fight my way back going 1/2 speed at triple effort to get around the outside buoy. I rounded the turn dead last, which is particularly bothersome considering everyone in my heat was wearing a neon green swim cap. We looked like bait. Discovery Channel aficionados know what happens to those who stray outside the safety of the herd.

But the turn for home was a rally point. It was like being down big all morning, only to have the market reverse and move back to breakeven. What a relief it was to be heading back. I found stroke, stroke, stroke, breathe rhythm across the swells. The drift became my friend as I plowed for shore.

Laying it all on the line as I approached the beach, I was suddenly lifted up by a breaking wave and slammed deep into the slop. Normally, I am good for about a minute under the surface. By the end of the race, I was down to about 5 seconds. Thoroughly mopped after a good thrashing on the way in, I staggered to the beach with about 1/2 oxygen, 1/2 seawater in my lungs.

Just when I thought I was out of the trade and done with the whole thing, I realized the finish line was another 100 yards up the beach through the soft sand. My kids were going nuts and the crowd was roaring so I pulled out all the stops and dashed for the line. It reminded me of chasing the ask as I try to unload a position into a dropping market. Every time I enter a limit order at the ask, the spread drops another tick and I have got to drop my limit, then it drops again. Like running in soft sand as it gives way before you.

But I finally crossed the finish line. Despite my poor performance relative to the competition, I did something I have never done before. I know I can do it again. All in all, I would say it was very much like my early days of trading futures. Reality is far different from theory. In the pool, you can always grab an edge. In the ocean, it is sink or swim.


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