# More on Wolves in Yellowstone, from Rich Bubb

The post on the site about introducing wolves into Yellowstone and seeing changes in river flow a while back got me thinking. It's like adding one or more random but significant variables to a relatively stable process and not expecting any change. It's almost the negative definition of insanity, doing same thing and expecting different results… I see it in manufacturing all the time. It seems to affect hubristic management the most. And seems like politicians do both all the time too.

Example: Stable system + some random change(s) = *total surprise it blows up*

vs.

Stable system + system left alone = *total surprise it doesn't blow up*

The safest method I've found is introducing small variables for a short time, recording results, then removing variables, and recording the results. Repeat two more times. If ALL results are similar, then the variable + system can be characterized. Just cranking a knob or dial and hoping is roulette with nearly loaded gun.

A nice method is Evolutionary Operation or EVOP. I bought this software, but couldn't get it to work any better than manual method. I just think it might have a viable use in trading schema.

# The 5 Whys Method, from Rich Bubb

I have been thinking about trying to use the 5 Whys Method to analyze trading errors on my account (and then check the "images" tab for actual users' examples).

But the exogenous events (Black Swans, terrorist actions, bad actors with undesirable or stupid agendas, etc) that are beyond a small investor's control, for example: Das Fed; China changing its economic or monetary policies seemingly at whim; whale trading errors; etc., leads me to think that without either (1) an ultra conservative approach that isn't going to yield much investment return, and/or (2) insurance like put-call strategies that I admittedly know little about, a simplistic equation might look like this:

P = G + D *a * b,        or    [1]
P = G + D * e

where:
P = investment profit
G = growth of investment
D = dividends (if applicable)
(a) likely risks I know about that are possibly going to occur, and
(b) unknown risks I don't know about that might or might not occur
(a) and (b) collectively = e … an acceptable amount of uncertainty ("Implementing Six Sigma" by Breyfogle III, 2nd ed, Wiley, page 1029)

roughly translates to:

Investment Profit = growth of investment share price + dividends if applicable * risks I know about that are possibly going to occur (beta-likely things) * unknown risks I don't know about that are possibly going to occur (exogenous things)

I view these 'e' uncertainties of the market/s as gravitational-like-affecting forces, similar to a planet (the Market) and its multiple 'e' moons affecting the planet tides. Then, if one doesn't know the orbits of the moons (see 'a' above) and/or their respective orbits are random / erratic (see 'b' above), the 'e' effects exert influences that push and pull the market.  Sometimes the direction is good, sometimes not.

Which all reminds me of the Chair's recent Lotak Volterra equations information, and a lecture during a university optimization class where Dr. Pugh (Indiana-Purdue Fort Wayne chair of Engineering Technology Dept) went through a very similar discussion about "Why Things that are Normally Stable Suddenly Change".  He was diagramming essentially identical graphs using Hare and Fox populations.

## Leo Jia writes:

Why 5 whys?

Welcome to the list, Rich.

# Thanks For Adding Me to the Spec List, from Rich Bubb

January 23, 2014 | 1 Comment

Although I do not post regularly on the Spec-List, I do regularly read many of the postings and conversation threads on this site. I have purposefully placed myself on radio-silence/posting-probation due to just plain financial ignorance, and more importantly, that I have found that I learn much more from people who are more knowledgeable/intelligent than I if I am in learn mode vs. expositional mode.

Part of this problem is my area/s of expertise is manufacturing engineering, quality engineering, six sigma methods (I am a SS Black Belt in my day job, designer of 20 successful experiments, self-taught in Evolutionary Operations, Sequential Simplex Optimization, and Theory of Constraints, blah-blah-blah), and Toyota Production System (TPS) and lean production systems, all of which have almost nothing to do with investing/finance. In the former, I am near the top of the heap as far as successful project implementation goes compared to former co-workers. But I continually pursue auto-didactic improvement.

A few examples would serve to speak to this. At a recent job, I was instrumental in lowering PPM (parts per million defects) from 7.4 to 3.8 in slightly more than one year (that translates to the facilities' production of 21 million assemblies and only making 80 defects, or 0.00000381% defect rate). I didn't do all of it myself, but worked on greater than 70% of it. At another position, I implemented a Kanban system that saved greater than \$50k in first month it was used and reduced WIP (Work In Process) by 16.2% in \$\$\$ saved terms and reduced % of WIP by 67%, 55% and 11% respectively in the three areas it was used; then followed that up by fixing their clearly non-functional 5S program in less than three weeks.

Again, these examples are not trivia in standard manufacturing environs, but not relevant sometimes for Spec-List postings and conversations. I have asked a few folks (read: local friends) to apply for ~LIST Membership, to no avail. Personally I recognize the benefit of the SPEC-LIST, and OPEN-LIST for my erudition. I think the friends read portions of the daily speculations website and got scared off. It is such a wealth of knowledge, even though many NFW items never get there. Try as I might, these non-LIST friends do not get the joke, and they're worse off because of those insular mental restraints, and I've told a few of them just that.

~LIST membership places one in a group of extraordinary and obviously gifted individuals. Yet some people wouldn't know a gold mine if they were led there by the nose.

Just a personal comment: The TV shows, "How It's Made", and "Ultimate Factories" are the best entertainment available.

Best regards,

Richard Bubb

# The News From China, by Stefan Jovanovich

October 11, 2011 | 1 Comment

Wang Jingbo: “The world revolves around money, and it makes its own rules.”, quoted in  Patrick Chovanec's article on Chinese Trusts

## Richard Bubb is shocked:

After reading the article linked, I think I smell a bubble regarding this seemingly unregulated financial house of cards. From the article:"The big concern the chain-reaction that could unfold if those developers run out of ready financing and go bust: There are signs the real estate market is already cooling . . . Hungry for cash, some developers are borrowing at 12 percent to 25 percent . . .""  “Medium-sized property developers appear to have borrowed heavily for short-term and bridge loans,” said Il Houng Lee, the IMF’s senior representative in China. “Property developers’ strains could hit trusts.” and,"Any sign of weakness in China’s real estate market could have a chilling effect on trusts and their investors, said Jason Bedford, a manager at KPMG LLP in Beijing. “Imagine that you have a real estate product and suddenly the real estate markets start to plummet,” Bedford said. “What was a liquid product suddenly becomes very illiquid as investors pull out and can’t be replaced." and,“It will cause a significant amount of wealth destruction,” [Michael Werner at Sanford C. Bernstein & Co. in Hong Kong] said. “The party goes on until someone turns on the lights and you can’t roll over these assets. There will be wealth destruction. The question is how much.” Just my 2 cents.

# Tracks of Bizarre Robot Trading, from Rich Bubb

I thought this should be on the dailyspec, though I don't really believe that robots are doing the trading. From a slashdot post:

Jamie spotted a fascinating story at The Atlantic about "mysterious and possibly nefarious trading algorithms [that] are operating every minute of every day in" the stock market:

"Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants."

Spotting the behavior of these bots was possible by looking at much finer time slices than casual traders ever see — cool detective work, but as the story points out, discovering it is just the beginning: "[W]e're witnessing a market phenomenon that is not easily explained. And it's really bizarre."

# Algos Better Than Mere Humans, from David Aronson

June 13, 2010 | 1 Comment

There is a vast literature supporting the use of mechanistic decision in repetitive situations, [instead of] over relying on human expertise. Forgetting about accuracy for a moment, which is key, humans are quite inconsistent in the way they use information. Show an expert the same fact set on repeated occasions and the conclusions only correlate at about 0.50. In other words, the facts only account for about 25% of the variation in the expert’s final conclusion. This suggest that the way information is being weighted from instance to instance is inconsistent or the expert is considering information outside of the fact set. When it comes to accuracy the decision algos do better, overall.

Here is an interesting example. Soon all of you will be replaced by machines [LOL]:

[An automated investing] system was developed by Robert P. Schumaker of Iona College in New Rochelle and and Hsinchun Chen of the University of Arizona, and was first described in a paper published early this year.

It's called the Arizona Financial Text system, or AZFinText, and it works by ingesting large quantities of financial news stories (in initial tests, from Yahoo Finance) along with minute-by-minute stock price data, and then using the former to figure out how to predict the latter. Then it buys, or shorts, every stock it believes will move more than 1% of its current price in the next 20 minutes" and it never holds a stock for longer."

Source: MIT Technology Review Blog

## Nigel Davies writes:

That's a pretty sad comment on fund management standards. Humans have put up one hell of a fight against computers on the chess board using raw (unaided) brain power and still beat the best machines if they're armed with an ordinary PC and have a longer time limit. And that's to say nothing of the drubbing that Go players have given computers, even giving so far as to give them odds.

# Toyota’s New Thought Vehicle, from Rich Bubb

June 30, 2009 | 1 Comment

I've been interested in this type of technology as my uncle was employed in the 1960s on a top secret program to have military fighter pilots control their planes using the same thought controlling concept.

Other possible applications include a mind-reading robot, or a lie detector test.

# The Good Old Days, from Rich Bubb

May 4, 2009 | 4 Comments

When I was a kid, adults used to bore me to tears with their tedious diatribes about how hard things were. When they were growing up; what with walking 25 miles to school every morning. Uphill… Barefoot… both ways

And I remember promising myself that when I grew up, there was no way in hell I was going to lay a bunch of garbage like that on kids about how hard I had it and how easy they've got it!

But now that I'm over the ripe old age of 40, I can't help but look around and notice the youth of today.

You've got it so easy! I mean, compared to my childhood, you live in a damn Utopia!

And I hate to say it but you kids today you don't know how good you've got it!

I mean, when I was a kid we didn't have the Internet. If we wanted to know something, We had to go to the damn library and look it up ourselves, in the card catalog!

There was no email! We had to actually write somebody a letter, with a pen! Then you had to walk all the way across the street and put it in the mailbox and it would take like a week to get there! Stamps were 10 cents!

Child Protective Services didn't care if our parents beat us. As a matter of fact, the parents of all my friends also had permission to kick our ass! Nowhere was safe!

There were no MP3s or Napsters! You wanted to steal music, you had to hitchhike to the damn record store and shoplift it yourself! Or you had to wait around all day to tape it off the radio and the DJ'd usually talk over the beginning and messed it all up!

There were no CD players! We had tape decks in our car. We'd play our favorite tape and eject it when finished and the tape would come undone, cause that's how we rolled, dig?

We didn't have fancy garbage like Call Waiting! If you were on the phone and somebody else called they got a busy signal, that's it!

And we didn't have fancy Caller ID either! When the phone rang, you had no idea who it was! It could be your school, your mom, your boss, your Bookie, your drug dealer, a collections agent, you just didn't know! You had to pick it up and take your chances, Mister!

We didn't have any fancy Sony Playstation video games with high-resolution 3D graphics! We had the Atari 2600, with games like Space Invaders and Asteroids. Your guy was a little square! You actually had to use your imagination!! And there were no multiple levels or screens, it was just one screen forever!

And you could never win. The game just kept getting harder and harder and faster and faster until you died! Just like life!

You had to use a little book called a TV Guide to find out what was on! You were screwed when it came to channel surfing! You had to get off your butt and walk over to the TV to change the channel! There was no Cartoon Network either! You could only get cartoons on Saturday Morning. Do you hear what I'm saying!?! We had to wait ALL WEEK for cartoons, you spoiled little rats!

And we didn't have microwaves, if we wanted to heat something up we had to use the stove… Imagine that!

That's exactly what I'm talking about! You kids today have got it too easy.

You're spoiled. You guys wouldn't have lasted five minutes back in 1980 or before!

Regards,

The Over 40 Crowd

## John Lamberg writes:

At least you had an Atari. When I was a kid, all I had to play with were model rockets (and I could go to the hobby store and buy Jetx fuse, not that silly battery powered electronic igniter), chemistry set, erector set, slot cars, CB radio, build your own shortwave radio from Heathkit, and I actually had to ride my bike to go fishing… Hey, that sounds like more fun than an Atari.

# Buying a Home, from Corbin Bates

Given the current mortgage rates and the fall of the housing market, I want to purchase my first home. Since I am stationed at Fort Hood in Texas, I have been doing heavy research in the Killeen / Harker Heights area. I thought I would ask for some advice. I spoke with Tim Melvin about this earlier, and he mentioned that I should never pay more than 10 times the annual rental rate of comparable houses. Does anyone else have any other good valuation metrics like this or have any knowledge / advice that would help me out as a first time homebuyer?

## Legacy Daily replies:

I have found 10x to be used in two cases:

1. High house prices relative to rent — get one to cool off and think more clearly about an investment and do additional homework 2. Low house prices relative to rent - get one to jump in without thinking clearly on a "bargain" investment without doing any additional homework

Some initial questions worth clarifying:

1. Is this a home or a leveraged investment? a. home — ignore rules like this and find the best place to live, raise a family, pursue happiness… b. leveraged investment — do enough homework to be confident enough about the decision to ignore all general rules.

Assuming investment:

2. What is the holding horizon? What future plans could interfere with that holding horizon? 3. What is the appreciation potential for the country, state, county, city, town, neighborhood, subdivision, this property…? I have not yet been able to come up with sufficient justification to buy for income alone when it comes to residential real estate. 4. What segment of rental market would the property (subdivision, neighborhood, town, etc.) attract? Is that the segment one wants to serve? Real estate agent needed to rent? 5. How predictable is the income stream? How would economic booms/busts affect it?
6. What are the worst case scenarios? What could go wrong?
7. Financial analysis — P&L, tax impact, financing options, downpayment flexibility (very illiquid), initial estimated repairs, etc. 8. Legal analysis — zoning issues, easements, property title issues, locality department issues, neighbor issues, etc. etc.

1. Decent real estate attorney representing one's interests can save from numerous headaches (especially true in foreclosure/short sale cases). 2. Avoiding a buyer's broker saves one money, gives additional negotiating room, makes the seller's broker more willing to work extra hard for the deal. 3. Inspections are money well spent, even if one does not end up buying the property. 4. The market is generally very efficient (yes even during this recession). Why has the property one's considering not sold yet? etc.

I hope you find this useful.

## Jim Rogers writes:

The rule of thumb I've heard used is 1% of sales price should be equal to or less than comparable monthly rent (that's a little more aggressive than Tim Melvin's measure, especially when you factor in the mortgage tax shield). I'd say, use either and stick to your guns.

## Sam Marx replies:

Don't trust what the real estate broker says about a house's value or price. Do your own research.

Try to find prices of recent sales of similar houses in same neighborhood.

Check with the local banks to see what houses they now own and what are their asking prices.

If you can go to foreclosure sales, do it, not to buy a house but to get an idea of what the market in houses is and remember those prices when negotiating with a broker.

I don't recommend buying at a foreclosure unless you're experienced at it.

Don't be shy about making offers 25-30% below asking price when dealing with a broker.

Watch for estate sales, the heirs are motivated sellers.

I don't know your area, maybe it's reached a bottom, but in FL, housing prices are still too high. The stock of St. Joe Land (JOE), FL's largest landowner, was 69 a few years ago — now it's 15.

Buying a first home can be a frightening prospect. It should start with a realistic look at your needs. How many bedrooms and baths do you need now and in the future? If your life involves one or more women strongly consider the extra bath. If you have the skills a fixer upper my be of interest.

I frequently advise my Realtor wife on the statistical aspects of our local real estate market. Pricing in this market is especially tricky. It is a declining market but that also means buyers have much more negotiating leverage. To measure your local market ask a local Realtor for the latest stats on number of homes on the market and number of sales in the last few months in your area of interest. For a normal market this is about a four month supply of homes at the current monthly sales rate. In this market it is running about 10 months of inventory per home sold. Hence the declining prices as sellers compete. One should consider staying out of the market until the inventory show signs of declining. However do not be fooled by a one month decline in local inventory. Buyers in the Seattle area are negotiating prices an average of 4% below asking. Get the similar number in your area.

As a buyer in this market it is best to view the prices as a price distribution. Suppose we have ten houses in your area. But only 1 will sell in the area in the next month. Clearly it is most likely to be the one that offers the best value on a relative basis. The other nine are over priced for these market conditions. By staying on the market for another month they will probably lose something like 1% in value per month.

There is an old saying in real estate. One should buy the least expensive house in the neighborhood. Generally this is true. After numerous regressions on homes it can be said that among comparables the most important single factor is square foot of the house. For the best resale find out which area has the best schools. Even if you do not have kids the people who ultimately buy your home may have them and it will help resale in the long run.

Check out all the government mortgage deals and tax subsidies. They are offering a tax credit of up to \$8,000 for first time buyers. 30 year fixed rates are below 5%. The military may offer even better deals. Remember the \$8,000 credit is only paid the following year via a refund so you do not have it to use as a down payment. It is more beneficial the smaller the house you buy. I saw a recent home sold for something like \$80,000 in Killeen. The \$8k represents 10% on that home, but only 5% on a \$160k home.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Home prices, in general, are still falling in the US, therefore waiting will probably bring lower prices.

As property prices fluctuate, one sign of high prices is easy loans. Times when prices are better tend to be times when loans are hard to get, with of course reasons for this relationship. But, as an affiliate of the military, there are sometimes special deals available to you that are not available to other people, which means you can be one of the few buyers out there at a good time to buy. Some of these loan deals only exist on paper now, as the price limits and interest rates make them impractical, therefore nobody talks about them, but because they are government programs which get updated slowly, and usually out of sync with the market, they can be really good deals at times. Therefore there may come a time when you can get both a good price and a good loan.

Buying near a military base involves risk of base closure (I owned a whole bunch of houses near a base that closed) or downsizing, and since you're in Texas where there is lots of land, upsizing the base won't put much pressure on prices - people will simply build more houses. Perhaps you can ask around inside the gates to get a feel for this.

Buying and selling property involves large costs for brokers, taxes, title insurance, etc., which penalize short term ownership, meanwhile you can get transferred to another base at a moment's notice, which puts you in the position of being in a hurry to sell. If, instead, you buy a commercial property, you can own it as long as you live, with far less management headache, which makes owning it while living elsewhere more realistic than renting a house to someone.

## Phil McDonnell responds:

I think the truth in this statement is based on a defect in the way people perceive value. Suppose the average home in a neighborhood sells for \$500k but yours is worth \$400k. Then if the average goes up to \$600k the innumerate masses will think that all homes have gone up \$100k not the 20% they really should have. When they do this the \$400k home appreciates by 25% not 20%. In other words people add when they should multiply by a percent increase factor.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

## David Hillman writes:

Another part of that defect is focusing on the value of the improvements v. the value of the land.

Some years back, a close friend bought a lousy house on a great piece of property in the best neighborhood. Even though it was a prestigious address in a 'branded' area, he got a deal on the property because the house was so undesirable. The plan all along was to demo the house and built a new one to suit, which is exactly what he did. He had realized the land was worth perhaps 90% of the true total value of the property before the new construction.

Many county auditors, etc. have searchable tax records online with the assessed values of land/ improvements parsed out. One might use that to figure a reasonable estimate of market value of land v. improvements. Don't forget the old saws apply….'land, they're not making any more of it'….and….'location, location, location.'

## Bill Egan writes:

In the last 10 years, I have bought three homes and sold two. Did not plan to, but that's the way it worked out due to job changes. Sold both houses in < 1 week for a profit despite forced timing. We were not in subprimeville, either, and the last sale was 2001 before the real estate madness.

My wife and I kept resale value in mind because you never know what can happen to you. We made sure we bought homes that were average to excellent on the following criteria:

1. School quality
2. Exterior appearance and interior layout — good and normal
3. Quiet, safe neighborhood that looks good
4. Reasonable size (3/2 or larger)
5. Likely demand due to commuting routes/distance to jobs

For example, I was working at a biotech in NJ from 1999-2001. We bought a 3/2.5 in a newer development, nice neighborhood in Burlington County, right next to an average-quality elementary school. However, the area was less horridly expensive than the homes closer to Princeton, where I commuted to. There was strong demand from people priced out of the homes closer to NYC/Princeton.

## Rich Bubb replies:

1.  look at the neighbors. C-L-O-S-E-L-Y… look at the state of their domiciles (even getting "invited-in" for a look see if at all possible), and the state of the upkeeping… especially the immediate next door folk. You might end up living next door to your own personal nightmare. Believe me, it is Not Enjoyable. Even after almost 20 years. Thankfully everyone else on the entire block is somewhat more sane and respectful of their neighbors than my nextdoor nightmare. Or to put it another way: you might get the best deal that no one else could stand…

2. if you really know somebody in the real estate biz (my sister is an agent), have them look around for you. she got her daughter's family a fabulous deal in a great neighborhood. Or to put it another way: sometimes real professionals Do Know what they're doing.

3. look long at the deal, bid low for the deal (Game Theory might help a little here, here is a cool intro), then be prepared to walk away… even if not doing the deal means you'll have to go back and start the whole search-etc process all over again, and don't put pressure on yourself or let anyone pressure you into buying. My wife was not prepared to walk away from her last car purchase. She still got a good vehicle, but she could've strengthened her bargaining position by uttering the words, "Let me think about it." And then purposefully heading for the door. We went outside and argued between ourselves about leaving. She *wanted the vehicle*. It cost her almost \$5k more than I wanted her to pay.

4. Consider the cost of long term ownership. I mean, Really figure it out… what's the cost of x, and y, and z, and can you afford it if those costs all hit at once.

5. Tangentially to #1 above, if there'll be kids living next door… would you:

(a) invite them in?, or

(b) chase them away?, or

(c) start scouting for really out-of-the-way burial sites?, or

Just mentioning this as my siblings and I were the 'b-c-d' and almost always the Never-more-than-once 'a'. And the neighborhood's less-than-model parents would often let their barbarians-in-training train at our place… Or to put it another way: your neighbors' kids might have fiends, er friends, worse than they already are…

Hmmm, karma might really exist…

A anonymous blogger, 'Benjamin.Publicus' on Thomas Paine's blog  had this this observation:

… The author lives in a community that is (or was) at the epicenter of the mortgage crisis. The developer aggressively marketed the homes to young, first time home buyers, many of whom renters. No money down, own instead of rent, mortgage payments the same as the rent, etc, etc. The development was started in 2001, so the first wave of 5 year ARM's hit in 2006.

…and it goes on from there.

I have spoken to that author (and a couple others) about contributing to DailySpec, but he has been busy.

Dr. Herrold is Principal of Owl River Company, a high-end Unix consultancy

As mentioned previously, my sister is a real estate agent. following are her comments on home shopping & buying.

Get a Real Estate Agent to represent YOU as a BUYER. Sign a contract as such. Tell them what YOU want.

There are surely things important to you that you would like to have in one of the biggest investment decisions you will make.

TAKE NOTES of likes/dis-likes of each home you view. re: Basement, Garage, Four Bedroom, Square Footage, LOCATION. I stress location because it can make or break the satifaction of your purchase.

Drive through the neighborhoods you are considering at different times of the day to see what the atmosphere is.Pay attention to the neighbors up keeping of their property. Schools?, established neighborhood?, new additions? child / adult ratio?
Comparison shop, don't just jump at the first home you look at just because you can afford it. Ask your agent to provide you with a CMA (a market analisis of a surrounding area - 5 mile radius ).

Get pre-approval from your lender, look at homes a bit higher than your range and offer LESS - the worst that can happen is, they will say NO or counter-offer and you may wind up with a nicer quality home.

BE Strong in making the decisions of your offers. Be prepared to give and take.

Then BE PATIENT thru the purchase process which seems like it takes forever because we are a see it, buy it, want it now, kind of people. It is a process that is in place to protect you. re: CLEAR TITLE

Again, don't just settle for a home, get as close to what you want as possible.

# The Stats, from Kim Zussman

Everyone knows last week's 18% drop was the worst in DJIA history (10/28-present). Here are the stats excluding that week (but including Great Depression weeks):

Descriptive Statistics: week ret

Variable     Mean    SE Mean   StDev     Minimum  Median Maximum
week ret   0.0012  0.00038  0.02442  -0.1554    0.0025  0.1821

So last week's return (return?) of -0.18 was about 7.4 STDEV below the mean.

Not only not normal, but where to look for example periods to model quant strategies? We now see it was a mistake to exclude 00-02. Even 29-40. What about the KT boundary?

In honor of this occasion, one will ditch the clever-as-if-it-was-known tone of this web site, and offer an opinion:

There are periods when markets behave well and are amenable to characterization (quantitative or otherwise). And there are periods when they are not. If you could know this with any precision, you would be extremely wealthy; which by design makes it about impossible to know.

Markets wouldn't trade actively if there weren't opportunities, or if it were easy to tell genius from luck.

There are periods when markets behave well and are amenable to characterization (quantitative or otherwise). And there are periods when they are not. If you could know this with any precision, you would be extremely wealthy; which by design makes it about impossible to know.

Markets wouldn't trade actively if there weren't opportunities, or if it were easy to tell genius from luck.

## Rich Bubb responds:

So this "characterization" could be a 3×3 cube plotted representation (albeit this might be a little simplistic for most of the SPEC-Listers), with axes listed, in no particular order:

x aka a bubble exists in sector/commodity, scale might read: "no chance" at far left end; hysteresis happening and/or lobagola should happen or just did happen being in the mid-zone/s; and price/cost up n% in m-time meaning "here there be the bubble monster" and tread lightly or get out as fast as feasible.

y aka the interest rate du jour… scale trending down means economy &/or mkt trending down; scale trending up means economy &/or mkt trending up… but the scale would be visually represented by an upside down bell curve. So, for example, if fed rate is trending down, then the might be converted to a z-scale transformed scale with 0 in the mid of the scale, +3 on high end of scale, and -3 (std devs) at the low end.

z aka axis might be volatility or put-call ratio, or money supply, or OBOS%, or your indicator of choice.

With enough data points one might be able to observe the rate of change in 3D as things (x, y, z) move about.

I think this could be done with the charting tools in Excel…

## Phil McDonnell observes:

The analysis Rich Bubb has described is essentially a 3D scatter plot. There are many examples of 2D scatter plots in Education of a Speculator and Practical Speculation as well as any introductory stat book that covers regression. The 2D plots relate to regression of one variable in an attempt to explain or predict another. The 3D case would relate to the case of using 2 variables to explain a third one. The regression would be of the form:

Z = a * X + b * Y

The usual caution is to avoid variables which are serially correlated. Usually price CHANGE variables are not correlated because an efficient market will remove any such correlation. By the same token price LEVELS are always highly correlated. One notes in passing that interest rates are a kind of reciprocal of the price level of the underlying debt instrument. Thus interest rates would be expected to be highly correlated but CHANGES in interest rates or prices would not be correlated.

Volatility is a more interesting animal. Volatility and therefore Vix levels are highly correlated. Again it is probably better to use changes in Vix than levels.

A final note is that one can perform a two variable regression of the above form even in Exc3l. To do that you need to have the Analysis Tools Add-In loaded. The data columns should be right next to each other (vertically). Then the regression analysis can be performed by clicking 'Tools/DataAnalysis/Regression'.

# Guitar Duel, from Rich Bubb

Steve Vai Battles Karate Kid is the best guitar duel i've ever seen/heard. Long, 8:46. No vocals. Even without knowing aforehand the Devil was in the audience, one can easily see why he tore up the "contract."

# For Star Trek Fans, from Jeff Sasmor

September 14, 2007 | 1 Comment

New Star Trek episode: World Enough and Time, based in the original Star Trek milieu. Starring George Takei ("Sulu") and a few other originals you'll notice (like Yeoman Janice Rand). Really quite well done; consistent with the original in style. Highly recommended for those who enjoyed classic Star Trek! The ending is quite touching. Following the ending, there's a teaser for the next episode. Streaming video, 65 minutes, requires Flash player.

## Rich Bubb agrees:

World Enough and Time rivals any of the original and the subsequent Star Trek spin-offs. Very well done writing, good plot weaving. Special effects and sound effects are very similar to the original Star Trek, but not exact copies. The actors are darn good too. And no commercials!

## Vitaliy N. Katsenelson extends:

TV-Links contains links to every TV show and most newly-released movies. Not all the links work but a good portion do. I tried Stargate Atlantis and Star Trek: The Next Generation — both work. I even watched The Illusionist.

# Interesting Architechture, from Rich Bubb

After last year's Sunday morning Stock Talk in Central Park, my wife and I decided to visit the NYC Guggenheim Museum. We had no idea they were exhibiting Zaha Hadid's brilliant works. After seeing her work for five seconds, I thought she was the 22nd century literal reincarnation of Frank Lloyd Wright.

Today I was cruising through her website and found language and building designs.

# Crop Report, from Rich Bubb

July 18, 2007 | 2 Comments

A few weeks ago my wife and I took a day trip to Shipshewana, an Amish community in northern Indiana specializing in agribusiness and tourism. Along the drive there I noticed many fields with monstrously large portable/movable irrigation spraying systems. Some of them were in operation, spraying water in mass quantities on crops. The fields using this method were nice and green. Those that weren't were stunted.

The corn crops we drove past had their uppermost leaves pointing straight up, which is a sign the corn needs water. We saw "tasseling" but few ears of corn on the stalks. We had heard some farmers are getting ready to plow under their existing crops and wait it out until next year, but didn't see any evidence of this yet. My drive to work takes me through about 20 miles of farmland, so it'll be easy to see this happen.. if it does.

## Scott Brooks explains:

It's when corn is tassling that rain is most critical. When corn tassles is a largely a function of when it was planted. The amount of rain it gets in the pre-tassling stage also plays a role in when it will tassle, but not as much as when it was planted. Tassling occurs most often in July.

# Fiat Lux, from Henry Gifford

The efficacy of white LEDs is about 12 to 19 lumens/Watt, which is much less than the 36 to 55 claimed by manufacturers. Compact florescents have efficacies 1.5 to 3 times higher than LEDs.It it said that compact florescents last indefinitely, which is far from true. The screw-in types last much longer than incandescent bulbs, but don't last forever, and their life is shortened by the fact that the "ballast," the electronic guts, is located very close to the bulb, thus the heat shortens its life.

It used to be true that compact florescents were expensive, gave off a harsh light, and could not be dimmed. But now the screw-ones cost less than \$2.00 in quantity (not everyone agrees with this, but I'll sell anyone who doesn't believe it as many as he wants for \$2.00 each).

The best deal is a real florescent fixture, as the reflector is shaped optimally for the bulb, and the ballast is remote, thus protected from the heat, and is seperate, so it doesn't need to be replaced when the bulb goes bad. The bulbs are available in five different colors and more and more of them are dimmable, especially those made by Phillips.

florescents are now hard to tell apart from incandescents without taking the fixture apart and looking, so energy geeks are resorting to using fancy light filters to tell them apart without climbing on a ladder.

## Rich Bubb remarks:

Our firm has been using the spiral bulbs for five years. Recently I was in the room where we'd installed the earliest ones, and noticed an odd smell. Then the bulb burned out. Probably the mercury in the bulb vaporizing.

I didn't know they contained mercury at the time of the first burn-out. From now on we'll raise the windows and go outside to let the fumes dissipate. Maybe go get a cup of coffee in the meantime.

# Mathematicians, from Peter Grieve

March 21, 2007 | 1 Comment

The sentence, "Even mathematicians don't have all the answers" is a frightening one. Mathematicians strain hard to have all practical answers. Even engineers go up a zillion blind alleys, and often don't know that the alleys are blind until they've already been announced as the answer.

"It may well turn out, of course, that what they need are more mathematicians." Heaven help IBM, and us.

The classic mid-life arc of the mathematician (esp. the pure one) goes like this:

1. At 42 - Notice that some friends are getting rich.
2. At 44 - Notice that zillions of "idiots" are getting rich.
3. At 47 - Form company based on brilliant idea. Insist on maintaining complete control, to avoid corruption of idea by idiots.
4.  At 50 - Declare bankruptcy.
5. Later - New buyer of company makes a success out of it, sometimes a greatone.

I must admit that the high-tech age has reduced the probability of step 4 to, say, 96%. I am not writing as an outsider.

Here is an article about one of IBM's chief mathematicians, and the real-world problems her department is solving.

## Kim Zussman writes:

Re: "Zillions of 'idiots' are getting rich:"

This is actually the key to everything. You will never get over how many less (intelligent/educated/motivate/ethical) people have more than you can ever hope to, and the explanations about randomness will fall on the deaf ears of all significant others.

What is much harder and more important to appreciate is how many of your betters will always live in incomprehensible hopelessness.

# Desalination, from Rich Bubb

February 19, 2007 | 1 Comment

Some Specs have been discussing water-related investment opportunities. This article describes a working desalination pilot plant in Long Beach, CA.The use of nano-filtration is described, and the method is discussed in an overview manner. Unfortunately, the online article does not include the diagrams and illustrations in the print version of the article that appears in the February 2007 Water Technology magazine.

Following is intro to the article:

The Long Beach Water Department (LBWD) has developed and patented a two-pass nanofiltration (NF) process, called NF/NF, to desalinate seawater to drinking water. Over the past several years, the LBWD has been testing the hybrid desalination process in the 9,000-gallon-per-day (gpd) pilot scale unit at its groundwater treatment plant. The two-pass, multistage nanofiltration membrane process can treat water at a lower operating pressure and energy than a conventional, single-pass seawater reverse osmosis (SWRO) desalination process that uses cellulose acetate or thin-film composite membranes. A key component is the second-pass concentrate recycle loop, which dilutes the feedwater and makes the use of nanofiltration membranes feasible. LBWD has constructed a 300,000-gpd prototype seawater desalination facility to validate the performance results observed during initial pilot testing, and to test the long-term operating characteristics of the hybrid desalination process.