Hi Victor,

I'm wondering if you have studied bitcoin at all? Or do you only consider a market once its very liquid?

Victor Niederhoffer writes: 

Seems ready to implode.

Barry Gitarts writes: 

Based on what?

Victor Niederhoffer writes: 

Crooks are using it.

Barry Gitarts writes: 

Isn't that the case with all money?

Victor Niederhoffer writes: 

It will be shut down because it competes with things the government like to monopolize.

Barry Gitarts replies:

That was a fear earlier, however the senators, agency heads and Bernanke all seem to think it serves a purpose and are afraid to stifle the innovation:

Ultimately isn't the government just run by short sighted politicians who just want to be reelected? Any politician who stands up against bitcoin or any internet application stands the risk of being "Ubered" (see this article).

Bitcoin does seem to be a disruptor for traditional banking, but so was the internet for the post office, newspapers, tv and retail, that only grew the internet not kill it.

This reminds me of a half joking quote by Russian entrepreneur: "If you create a business that disrupts big business in Russia they will kill you, in America they buy your business."

Victor Niederhoffer writes:

I remember Peter Theil the founder of PayPal
saying that if they knew what he was doing, they would have shut him
down. As it is, only the Lousiana Attorney General was fast enough out
of the box to try to shut Paypal down. 

Richard Owen writes: 

Like all good bubbles, there is a legitimate story at hand. Even with Tulips there was a valid story of rarity that then seemed as psychologically permanent as does now the rarity and desirability of a Van Gogh.

Bitcoin is a bit like the currency of an island entrepot whose domestic economy is tiny and whose export base is mainly composed of criminality and laundering and for which the currency of the island is disproportionately held as wealth of a group of island oligarchs [I suspect he has sold some and someone might correct, but it appeared superficially that the founder's bitcoin may have a billion plus market value?]. Many accidental paper fortunes are held by bitcoin miners: will they stand passive in the face of volatility?

Of the three social gatherings I attended Weds to Sat of last week, all featured discussion of bitcoin and at one - of the type featuring participants who, to listen to their narrative over time, would appear as genius and never to have taken a loss - the non-documented boastage of coups won and utmost sagacity shown in the BTC market. Mr Thiel is smart: he is financing the pick and shovel providers, not running a large position in coin.

So yes, why not $10k BTC, but also, why?

Henrik Andersson writes: 

 Richard, this is clearly the mainstream/consensus view - bubble. The contrarian trade is not always right (far from it), but was is clear is that many commentators don't understand the many faces of bitcoin. What is also clear is that a good investment decision (long term, not trading) can be done on the premise that the highest probability is that the ultimate value is zero. The question is what probability do you put to the USD 10k scenario. "Nothing is more powerful than an idea whose time has come" Victor Hugo.

Richard Owen writes: 

 You make very good points, and I am sure you know all sides of the argument well. If you are long bitcoins I hope very much it is for a large and successful profit. Please manage your risk well. I am not smart enough to assign a probability to $10k. The thoughts are offered without prejudice and are an honest sampling of my experiences as have occurred. I have no position either way and should be distrusted or discredited on that basis. There may be commentary that it is a bubble and my thoughts or analogies may be derivative and unoriginal. The price is possibly also a form of consensus and that is that each BTC is worth a bunch of money, and increasing. As many have gone bankrupt shorting bubbles as being long. 

anonymous writes:

I recall the great Jim Rogers saying that Hysteria is the first thing to look for, but one still needs to pinpoint a reason to go against it. The kind of examples he gives are buying stocks in country's whose stock markets have been closed, buying tea plantations when the price of tea has plummeted etc. Bitcoin? Might just have to let it play its course. I think its a bad joke, but even I must admit it did survive the 50% drop recently before this latest headline grabbing advance. Anyway, this is just my two cents and I have no interest in even attempting to try and speculate with or against it. 

Jan Peter-Jannsen writes: 

Bitcoin as a technology is superb. Bitcoin as a currency is questionable. Bitcoin as an investment is a bad bet.

A great strength of Bitcoin is that it is open source. Any experts can validate the code, and so far there seems to be no flaws. The crypto-curency works!

But cannot open source also be a great weakness? Anyone can copy the code, improve it, and make an even better alternative to Bitcoin. Is there any reason to stick to Bitcoin if and when that happens? Bitcoin is volatile, no prices are quoted in Bitcoins and very few have both their income and expenses in it. Those who use Bitcoin need to exchange to and from other currencies, so why not switch to another digital currency?

In terms of investment I believe it is a bubble. The supply is very low; many coins have been lost and the majority of coins are probably in the hands of the founders. I guess they are selling at the moment, but at a low enough speed to keep the bubble growing. In terms of demand; everyone talks about it these days.

In the coming years I predict new payment systems to arise based on technology pioneered by Bitcoin. But Bitcoin itself will soon be forgotten.



 The half hour documentary "Magnus Carlsen's Last Big Title" gives a glimpse into Carlsen's world. It's remarkable how he has developed his talent. He has memorized thousands of games and he thinks about chess constantly. Of course he has studied every single of Anand's games.

Enough chess; time to study historic price data!



 I moved to Latvia, a former Soviet republic now in the EU, almost two years ago. Here's why I chose Latvia over Singapore, the US and my home country Norway.

First, ever since my teens - that's ten years ago - I realized that the world is full of new opportunities. With the internet, one can make a business and the income will be the same whether one lives in Nairobi or NYC.

Second, online trading has been my main occupation ever since. However in the last years I've been more into computer science and real estate as well.

I spent several months in Singapore. I liked it so much that I seriously considered moving there. It's a an ultra modern city with a mix of Chinese, Malay, Indian and Western cultures. The fact that capital gains and income from abroad are exempt from taxation does not hurt either. Reasons I did not choose Singapore are expensive rent, it's far away from my family, and its climate.

The US is a wonderful country in that anyone who moves there can feel like a real American within months. Unfortunately its tax rates and regulations make it a relatively unfriendly country for entrepreneurs.

Norway's credit bubble did not crash in 2008/2009, but has instead been fueled by oil money ever since. It will crash.

Latvia, or more generally the Baltic region, grew rapidly before the financial crisis, but excessive credit and foolish risk taking made for a terrible crash. It's a real human tragedy (without fiat currency and artificially low interest rates it would not have happened, or at least been much milder, in my opinion). The population is still very demoralized, and I sympathize with them, but from a rational perspective I believe the Baltic Tigers will bounce back - just as the Asians have since their crisis in the late nineties.

For individuals, capital gains are taxed at 15% and dividends at 10%. Small businesses can register a so-called micro company which pays 9% tax on turnover and normally no other taxes for the employer or employee. This seems like a low rate perhaps, but in reality it's not a "micro tax" but a smart way to collect taxes. I have my own micro company and each quarter I summarize all my revenues, collect all my receipts, hand them over to the accountant who sends a one page report to the authorities, and then I transfer the tax. Simple! However, my actual tax bill is much higher. All expenses are subject to 21% VAT. I can only pay myself 715 EUR without additional dividend tax. I also pay annual real estate tax and a 2% stamp duty on each real estate transaction.

The reason I chose Latvia was not because of low taxes. I estimate the various taxes add up to about 40 percent. The main economic reason is lower operating expenses, especially on housing. Other than that I like the culture. It's more old fashioned. One can buy organic food directly from the farmer. The level of pollution is low. Crime is low. Littering is rare. Achievements are encouraged, and it displays in the population. Most speak Latvian, Russian and English. Many have degrees is sciences. Obesity is rare and women put effort into looking their best.

The Baltic region is still quite poor. Employees generally make low salaries, and entrepreneurs can make a good living only through wise decisions and hard work. It will remain poor until it finds a good export - a niche in the world market. During Soviet times Latvia had the best factories in the union, or so they tell me. When communism collapsed, so did their factories.

Now they are in kind of a vacuum. Maybe they will use their proximity to Scandinavia, Germany, and Russia to attract multinationals, which in turn will grow it into a prosperous Singapore? Maybe Riga's port will become the bottleneck for a growing Moscow? Maybe it will become a new Silicon Valley? It can attract talents from both ex-USSR and EU/US. It even has one the world's best Internet infrastructures. Maybe they will stop exporting wood and instead ship out world class furniture?

The reason I chose Latvia was not because of low taxes. I estimate the various taxes add up to about 40 percent. The main economic reason is lower operating expenses, especially on housing. Other than that I like the culture. It's more old fashioned. One can buy organic food directly from the farmer. The level of pollution is low. Crime is low. Littering is rare. Achievements are encouraged, and it displays in the population. Most speak Latvian, Russian and English. Many have degrees is sciences. 

The Baltic region is still quite poor. Employees generally make low salaries, and entrepreneurs can make a good living only through wise decisions and hard work. It will remain poor until it finds a good export - a niche in the world market. During Soviet times Latvia had the best factories in the union, or so they tell me. When communism collapsed, so did their factories.

Now they are in kind of a vacuum. Maybe they will use their proximity to Scandinavia, Germany, and Russia to attract multinationals, which in turn will grow it into a prosperous Singapore? Maybe Riga's port will become the bottleneck for a growing Moscow? Maybe it will become a new Silicon Valley? It can attract talents from both ex-USSR and EU/US. It even has one the world's best Internet infrastructures. Maybe they will stop exporting wood and instead ship out world class furniture?



 If folks would be so kind: could they name their favorite examples of intelligent and rapid economic development of poor countries (but with reasonable educated workforces, so you're not starting with e.g., Afghanistan)?

Famous examples are: Singapore, HK (although these have a unique entrepot status, and therefore wider learnings are not so great?). And then South Korea was impressive.

And of course China, but this was so big and diverse that its hard to reapply. I am looking for more "turnkey" type stories.

Those few examples went totally against the "Washington consensus" for many of their policies, much to their benefit.

Any further case studies people would recommend?

Many thanks.

Gary Rogan writes: 

Chile and the Chicago Boys come to mind.

Jan-Peter Janssen writes: 

I recommend looking at Estonia. It's a tiny Baltic state which is remarkably advanced in IT . Skype was invented in Estonia. Programming is taught at school from age seven. The government aims to reduce bureaucracy through a so-called eGovernment. It is linguistically and culturally close to Finland (where Nokia is from) and together these two nations should have the critical mass of talents needed to create a high tech industry.

Estonia is ranked the world's 13th freest by Heritage Foundation.

Richard Owen writes: 

Ok, here is a consolidated list of suggestions. Thanks to all.

Tysons Corner, VA
Reston, VA
Japan WWII
Poland (Mazowiecki)
Latvia in 90s
Drexel Burnham under Mike Milken
Jaimaica vs. Singapore



 When I grew up, I dreamed of emigrating to the US. As the world has changed more rapidly than one could imagine, I altered my plans. Some 16 months ago I relocated to the ex-Soviet Baltic state of Latvia. Now I am happy to see NY Times write about its economic recovery.

"Used to Hardship, Latvia accepts Austerity and its Pain Eases"

"Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union's worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia's economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union"

"Britain, Portugal, Italy and also Latvia's neighbor Lithuania, meanwhile, have bubbled with discontent over austerity. But in Latvia, where the government laid off a third of its civil servants, slashed wages for the rest and sharply reduced support for hospitals, people mostly accepted the bitter medicine. Prime Minister Valdis Dombrovskis, who presided over the austerity, was re-elected, not thrown out of office, as many of his counterparts elsewhere have been."

"Also largely absent are the leftist political forces that have opposed austerity elsewhere in Europe, or the rigid labor laws that protect job security and wage levels. In the second half of 2010, after less than 18 months of painful austerity, Latvia's economy began to grow again."

Also worth mentioning is that in one year builders' salaries have increased by 17%, though from a low initial level.

The state runs with a healthy surplus.

The government is cutting the tax rates.



 "After the Keynesian financial and monetary stimulus in the 1970s and '80s, which led to inflation, repeated devaluations and low growth, Swedes believe in fiscal discipline. They are scared of huge national debt and budget deficits — especially at the levels they are in the U.S."

Do the Swedes on site have further remarks? The author, Anders Åslund, has an impressive bio. Would you recommend his books?

By Anders Aslund June 7 (Bloomberg) 

Not so long ago, Sweden could claim world leadership in unmitigated Keynesian economics, with a 90 percent marginal tax rate and a welfare state second to none. Now Swedes look at the conflict between the U.S. and German examples over whether more spending or more austerity is the key to financial salvation, and for them the choice is easy: Germany was right. Northern Europe harbors no sympathy for the spendthrifts of Southern Europe. Americans still think of Sweden as a tightly regulated social-welfare state, but in the last two decades the country has been reformed. Public spending has fallen by no less than one-fifth of gross domestic product, taxes have dropped and markets have opened up.

The situation is similar in the other Scandinavian countries, the Baltic nations and Poland. But no turnabout has been as dramatic as Sweden's.

Read the full article here: "Booming Sweden's Free Market Solution". 



 Here is a great video introduction to Mart Laar, Estonia's first post-USSR prime minister– (the only book he'd ever read on economics was Milton Friedman's Free to Choose).

Here is another video titled "The Baltic Tiger: How Estonia Did It".

And some more information on Estonia.



 Why Oslo? … you ask

Actually, Norway and all of Scandinavia serve as an excellent barometer for the "progress" of Islam in the West.

The best blog I've found to monitor developments has been The Gates of Vienna. There is yet to be an update for the 22nd, but keep an eye on it. (All their articles are translated.)

Also keep track of one of their regular contributors: Fjordman. He used to keep his own blog, but now contributes to others -one of which, The Brussels Journal, also gives the current developments in the EU.

Jan-Petter Janssen writes:

*Muhammed cartoons re-published last month
*Troops in Afghanistan
*Supports coalition in Iraq
*F16s actively bombing Libya these days
*Very bad integration
*Large muslim population
*100s of muslims went to the streets protests last year: Peaceful, but
one speaker warned against a 9/11 on Norwegian soil
*Nobel peace price
*Mullah Krekar

… and so the list goes on…




 I would like to ask the fellow readers of the dailyspec if anyone has some thoughts on the subject of physics vs markets.

If you bring a GPS along on a bicycle trip, you will see that the altitude-time graph shares the same qualitative properties as a stock price. A bicyclist declines hills faster than ha climbs them. I'm no physicist, but if I remember my high school physics correctly, gravity pulls one down with a constant force = M*G = bicyclist's weight * 9.81 m/s^2. On a horizontal ride one will never notice this force because the road pushes up with an equally large force. On a climb, however, one does not have this luxury. One's muscles must generate M*G*cos(angel of climb) just to fight gravity. Indeed, for anyone except Superman, climbs will be much slower than descents.

(Please note that the physics description may have some mistakes. This is not my area.)

If one instead plots altitude against distance, not time, on the horizontal axis, the declines-steeper-than-climbs bias disappears. Would the same be true for stock prices if one plots these another way, e.g. against volume instead of time?

If so, can any lessons be drawn from physics? Has anyone tested this?



 Norwegian biologist Thor Heyerdahl suspected that the South Sea Islands had been settled by an ancient race. [He] knew that the trade winds and ocean currents off the South-American coastline bear in the direction of Polynesia. Ridiculed by the scientific establishment, […], he decided to prove the possibility of his theory by duplicating the legendary voyage.

Watch the full one hour documentary here.

Lessons from Kon-Tiki:

1. Ridiculed ideas pay the best when proven wrong.

2. Follow the drift.

3. When ancient methods and modern expertise contradict, chose the former.

4. "Don't resist nature, but yield to her commands and accommodate" (Golden rule among native tribes)

5. Technology complements #3 and #4. (Without a radio Kon-Tiki would've been a one way journey)

6. There will always be sharks following in one's wake.

7. Preparation puts the odds in one's favor.

8. No matter how well prepared, be prepared to improvise.

9. Befriend the locals.

10. Always bring a BBQ kit.



One of the more useful skills one can have, at least if one is a researcher, is knowing how to program a computer to extract online data, e.g. stock market prices.

I personally use VB.NET, but I'm sure most programming languages have built-in functions that make the process quite easy.

I wrote "quite" easy, as in everyone can do it, assuming they know basic programming. An introductory book, or a little tutoring from an experienced programmer, should be sufficient.

Two line are all it takes to download a web page:

Dim wc As New System.Net.WebClient wc.DownloadFile("", "savedFile.txt")

The above lines tell the computer to save the webpage's source as a text file named "savedFile.txt" in the same directory as the VB.NET program.

Naturally, one wouldn't make a program just to download a single page. It's when one needs to download dozens or more pages that the programming approach pays off. If these pages are numbered (they often are), then all one needs to do is to loop through them, e.g:

For i = 0 to 1000 Dim wc As New System.Net.WebClient wc.DownloadFile("" & cstr(i), "savedFile-" & cstr(i) & ".txt") Next

With stock market data, one often needs to specify the tickers. Thankfully, this is easily overcome:

Dim tickerList() as String = {"ABC", "XYZ", "JPJ"} For i = 0 to tickerList.getUpperBound(0) Dim wc As New System.Net.WebClient wc.DownloadFile("" & tickerList(i), "savedFile-" & tickerList(i) & ".txt") Next

If neither of these approaches work, then the process is slightly more challenging. One needs to search for links within the downloaded source files. It's doable, but too complicated to include in this text.

Although it's very fast to write the code for downloading webpages, the actual execution is very slow. This varies a lot with the internet line and proximity to the remote server, but a rule of thumb is that one page takes one second to download (one should also consider waiting a a short while between each download). One hour, as you know, exists of 3,600 seconds. One day is 86,400, and one month is 2.6 million seconds.

Because of these time concerns, I almost always download all the raw source files to a hard drive, and I do not manipulate them. You never want to find out that there's a bug in the data extraction algorithm, and then having to do all the downloading again. Once the files are on the hard drive, one can easily read them and then save the relevant information into new files again. Reading a file takes something like a hundredth of second or less. The downside with this approach, is that raw data takes up tremendous amounts of space. But with affordable 1TB external usb-connected drives, this is not a problem.

Although reading files from the HD is many, many times faster than downloading them in the first place, working with data loaded to the memory (RAM, as variables in the program) is many, many times faster than reading and writing files. I therefore prefer to make one, only one, text file (CSV) with all the relevant data from the raw data, and every time the program starts up, this file is loaded. When the program finishes, the manipulated variables are then saved to a text file.

I know I only scratched the surface here, but I hope this short text will inspire other researchers to learn the skill of automated data downloading. Once fluent in instructing computers to do your dirty work, you have an extremely valuable slave at your disposal.

P.S. Some useful codes can be found here.

Work in progress!



 #1 Trading creates no greater good
- like when you buy grain futures, the price skyrockets, and you make a killing! A poor farmer plants more seeds as a consequence, third world children get affordable bread, hmm, did I say you make a living?

#2 Trading makes you selfish
- and that's why filthy rich old speculators turn to philanthropy.

#3 Staring at screens all day is not healthy
- which is true, and why slow lunch hours are perfect for physical exercise.

#4 Staring at screens all day is not good for your social skills
- which is why traders are out having fun when the market is closed. (Don't "normal" people spend evenings in front of the TV?)

#5 The market is a casino
- where scrupulous gamblers make it easier (and more important) for sane traders to make a living.

#6 Changing cycles make it hard to make consistent money
- and that's why I take months off traveling the world.

#7 Watching the market is sometimes like watching paint dry
- which is true, and why you should use slow hours to study arts and sciences (while some make #5 come true).

#8 Most traders lose money
- which makes it even more rewarding for successful ones.

#9 You won't make it without talent
- just like a talent is needed to become a piano, chess, or basketball professional. A zillion different market niches should make it possible to succeed for a variety of personality types though.

#10 Traders do not deserve all that money
- if spent on booze and babes. Do good and create exponentially more "greater good"! (ref #1)

Jim Sogi counters:

Good Reasons to Trade

1. Trading provide capital and liquidity for production of good.

2. Trading is an honorable profession.
3. Trading give time to exercise, ski, surf when markets close and you always get weekends off.
4. The gains have favorable tax treatment.
5. The competitive environment is tremendously rewarding.
6. The analysis is deep, wide ranging, complex and also very rewarding. It covers history, math, statistics, current events, politics, economics. No other field is as broad or deep for study.
7. Trading has economies of scale built in to the structure.
8. Immediate and easy credit is available.
9. The Spec List.
10. You can trade from home, be it Hawaii, Alaska, CA, NY, Bahamas, Singapore.
11. There are world wide markets, and many niches to fit many styles and temperments.



"so 200 or 300 dollar oil is in the cards"

$300 / barrel * 84,000,000 barrels/day * 365 days/year

= $9,198,000,000,000 / year
(USD 9.2 trillion every year!!!)

In comparison:
$58 trillion = World GDP
$14 trillion = US GDP

I wonder what the sheiks will do with all that money? Even more empty Dubai skyscrapers? A second man made world (the 1st is sinking)? Fuel yet another commodity / stock / real estate bubble?

Such a price, and the following wasteful relocation of resources, is not sustainable if you ask me.

Even $125 gives me the shivers…



 There appear to be deeper messages in this music "Friday" by Rebecca Black– ostensibly market related:

One notes that in 2011 Fridays have not been particularly strong, but Mondays gave Fridays reason to celebrate (attached compares mean of weekday returns of SPY, cls-cls).

Jan Petter-Janssen writes: 

Talking about music… Korean pop is extremely inspired by American culture.

The kids over there apparently cherish individualism and internationalism. It's a very good sign for Korea's future, isn't it?

Hyori Lee 

Girls' Generation 

Wonder Girls 

How do I know about all these? It's impossible not to hear these in Singaporean malls. Much better than Justin Bieber though.

PS: Make a YouTube search on "Indian pop". It's a totally different story.

PS2: Also Chinese pop features some English. And materialism to the extreme…




 Several of you began with relatively small sums of capital and made fortunes, got published, became your own boss, etc. (or so it seems based on posts here and material on the internet). This doesn't seem to happen as much anymore. Most Horatio Alger style stories these days begin with well established offshoots of big firms and too often end in handcuffs. I can't think of any instances of people started with a $5k credit card advance or loan and a dream in the past twenty years (except non-market stories like Facebook which is probably why compu sci is becoming so popular again).

Even those with multi-year consistently profitable track records with good alphas are having difficulties raising any reasonable sums of AUM. And turning $50k into $1mm let alone $20mm seems to require incredible risk or a time machine. Most biographies of successful people that I have read (whatever the field) tell stories of men and women who lay everything on the line and suffer any obstacle (lost spouses, prolonged poverty, living in a taxi while subsisting on ramen, etc.) to achieve their dream. Perhaps this is still the formula. But it seems the odds are stacked up against the would-be market entrepreneur more now than in the past with the current environment and many of the great success stories came in a period of unprecedented market rise. So, to those on the list who have achieved the improbable what would you recommend to your children or other interested parties regarding how to become a success in the markets these days while remaining personally solvent and without taking undo risk when in an era where raising external money is difficult with a good track record and impossible without one?

Charles Pennington comments:

Gladwell writes a lot of wrongs, but I think he has a point in this article . He says that often entrepreneurs have images as swashbuckling risk-takers, but in reality, at the time when they made their crucial decision(s), the circumstances were such that the decision was not all that risky.

Vince Fulco writes:

The authors (really Andrew) of the book I mentioned a few weeks back; "Panic" by Andrew Redleaf and Richard Vigilante, go in depth to the point Prof. Pennington is making. They point to the backgrounds of real entrepreneurs who seemed like risk takers but in point of fact often had years of experience before venturing out on their own.

Location 837-838 on kindle:

"…In the real economy we see all the time people being paid for hard work, for perseverance, for insight, and for experience. But it is all but impossible to observe anyone being paid for risk. It is easiest to see this starting with some extreme cases. There are many heros among the great entrepreneurs. It is almost impossible to think of one who got paid for taking risk. The more brilliant the entrepreneur and grand his achievements, the less true it seems. Was Alexander Graham Bell paid for the risk he might not invent the telephone? Nonsense, he was paid for inventing it. Was Edison paid for the risk that he might not invent a light bulb, or for actually inventing it? Henry Ford was not paid for taking the risk that he might not be able to build a car affordable to "any man of good salary"; he was paid for actually doing it. In the extreme case, even insurance companies, as the great Frank Knight pointed out almost a century ago, are paid not for accepting risks but for transforming genuine uncertainty–will I be in an accident?–into statistical predictability–some percentage of drivers will be. Even the flying Wallendas were paid not for their risks but for their skill. Dead acrobats don't get a piece of the gate. Acrobats who risk and fail are less popular than those who succeed despite undertaking greater and greater challenges…"

"…the deeper we look into these men's lives, the more difficult it is to justify the notion that 'risk taking' explains their achievements and rewards. The very notion of risk disappears into incoherence. What are the risks of not inventing a telephone (or a light bulb or an automobile)? Do we mean the odds against doing so? The odds against whom doing so? Anyone or the men who actually succeeded? If the odds against success are the measure of risk and hence reward, why were these men, who were good candidates to achieve these things and thus took less risk, so well rewarded?…"

"…Or by risk do we mean what the entrepreneur had to lose? But the more dramatic the story, the more we see that in their most productive years these men had very little to lose and enjoyed what they were doing far more than most men enjoy their own work. It is at least as true to say that they were 'at play' as to say they were 'at risk'…"

Jan-Petter Janssen writes: 

I won't call myself successful yet, but I do know a recipe for success in today's world.

1) Work and save money in a high income country.

2) Relocate to a low cost, tax free country.

1->2) Exponential growth for the savvy speculator.

The mining sector in Western Australia pays extremely well (you should be able to make $100-$200k). Since there are not many temptations in the Aussie outback (except playing the didgeridoo), you will see your bank account grow in tandem with your salary. After a few years you can take your money and move to one of the low cost, low tax countries in South East Asia.

Join me, Coyle!



UPDATE 1/31/2011:

Contestants Summary:

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

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

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

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

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

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

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

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

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

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

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

Contracts Summary:

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

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

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

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

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

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

Victor Niederhoffer wrote:

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

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

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

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

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

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

David Hillman writes: 

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

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

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

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

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

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

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

Market direction picks are wanted:

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

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

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

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

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

Bill Rafter adds: 

Suggestion for contest:

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

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

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

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

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

Ralph Vince writes:

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

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

I'm going to sit and do nothing.

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

Gordon Haave writes: 

 My three predictions:

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

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

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

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

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

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

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

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

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

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

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

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

Jan-Petter Janssen writes: 

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

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

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

Vince Fulco predicts:

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

Additional points/guesstimates are:

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

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

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

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

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

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

Potential negatives:

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

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

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

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

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

Mr. Albert enters: 

 Single pick stock ticker is REFR

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

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

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

Dan Grossman writes:

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

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

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

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

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

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

Best to all for the New Year,


Gary Rogan writes:

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

Wildcard: Short Netflix.

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

Equal Amounts in:

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

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

12/30 closing prices (in order):


Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

 For Returns: Long XIV January 21st through year end

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

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



Ken Drees writes:

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

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

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

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


Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

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

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

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

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

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

Scott Brooks picks: 


Evenly between the 4 (25% each)

Sushil Kedia predicts:


1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

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

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

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

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

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

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

Tim Melvin writes:

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

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

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

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

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

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

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

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

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

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

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

Other than that I am clueless.

Kim Zussman comments: 

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

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

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

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

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

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

Alan Millhone writes:

 Hello everyone,

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

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

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

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

Happy New Year and good health,



Jay Pasch predicts: 

2010 will close below SP futures 1255.

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

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

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

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

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

Chris Tucker enters: 

Buy and Hold


Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

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

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

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.



John Floyd writes:

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

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

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

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

A Mr. Krisrock predicts: 

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

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

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

4…commodities are peaking ….

Laurel Kenner predicts: 

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

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

Pete Earle writes:

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

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

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

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

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

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

J.T Holley contributes: 


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

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

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


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

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


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

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

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


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

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

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

Sex and Speculation:

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


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


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

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

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

Long - Common Sense.

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

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

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

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

I had to end on a Long note.

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

Russ Sears writes:

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

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

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

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

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

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

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

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

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

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

Yanki Onen writes:

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

Now the ideas;

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

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

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

-Sell contango Buy backwardation

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

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

- Leveraged ETFs suckers play!

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

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

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


Yanki Onen

Phil McDonnell writes: 

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

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

SLV closed at 30.18 on Friday.

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

Net debit is .50.

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

George Parkanyi entered:

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

BUY SILVER at open

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

SELL and then SHORT SILVER at open

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

COVER and then BUY SILVER at open

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

3 JAN BUY PLATINUM and hold to end of year.


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

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

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

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

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

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

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

Marlowe Cassetti enters:

FXE - Currency Shares Euro Trust

XLE - Energy Select

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

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:


VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

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



Notes from Jakarta:

#1. Fresh is better. Alive is the best. Asians know. Buy newly caught fish directly from a fisherman . Super markets are no no. Poultry shall be bought alive. Meat shall come from a wild animal. Learn to hunt or get to know a hunter.

#2. Let chefs do the cooking. Unless you're willing to slaughter chickens yourself, that is.

#3. Don't BBQ with charcoal. Indonesians use pieces of dried coconuts. Tastes much better. If you don't have ample supplies of coconuts, experiment with various kinds of wood.

#4. Do as the locals. Indonesians don't sit at the table. They sit ON it . Local traditions add flavor to the BBQ experience.



 Mr. Sogi points out that prices seem to chart out along a line and that they would not have done this if they followed a random walk. My question is: If prices are DERIVED from a random walk, are trends then possible? My rationale for asking this comes from:

1. A random walk is very easy to model. Finance students use binomial trees to get an intuition of option pricing. Even the Nobel Prize winning Black-Scholes model uses a special case of this (infinitesimal time steps.)

2. Although the stock price distribution in these models obviously is wrong, the insight it offers into derivative pricing is worthwhile. But what if we for instance use the state of the world as the underlying and then derive a stock price thereof?

I am experimenting on this through a game theoretical framework. First, a price settles where everyone agrees through their beliefs and pockets. With belief I mean that everyone has his own private opinion on how the stock might perform. Instead of the standard set up of probability distributions and risk adjusted returns etc, I simply set up the market in two camps; for instance bulls vs. bears, contrarians vs. trend followers, and so on. With pocket I refer to the budget constraint one faces. Second, any participant will be willing to push the price somewhat in their own disfavor. So, through the market’s bargaining process the beliefs will indirectly be adjusted as a new price settles. This could perhaps be used to explain bubbles and crashes — and any linear paths between such highs and lows? I have posted a preliminary model, with a simulation.



 Regarding the Swedish tax situation, it is encouraging that we now have a government that aims to lower taxes. At over 50% of GDP we are highest in the world. I am sure that it will be very beneficial long-term as huge amounts of money currently are held outside the country to avoid taxes, and this outflow will be lessened and money and companies will instead grow here. It will be a triumph for the optimists.

While companies and high net individuals try to lower taxes by either going abroad or at least keeping their capital abroad, ordinary citizens gravitate towards using the underground economy and paying Polish guest workers outside the tax system for help with cleaning, house renovation and such. Even a few ministers in the government did that, and had to leave their posts once discovered. But this excerpt from the earlier mentioned pdf, is too funny by far, showing that even the tax authority tries to avoid the sky high taxes here.

"Even the Swedish tax authority tries to avoid Swedish taxes. As noted by the Wall Street Journal, 'When it comes to paying taxes itself, the Swedish Tax Authority, responsible for collecting some of the highest in the world, would just as soon keep them as low as possible. It's saving a bundle on the production of slick TV spots that encourage Swedes to file online by producing them in the neighboring free-market, low-tax haven of Estonia'. _Spokesman Björn Tharnstrom told us, "We decided to do it in Tallinn because the costs are lower. One of those costs is taxes, of course." 

Victor Niederhoffer asks: 

Do you see any opportunities for Swedish equities with new tax rates?

Henrik Andersson comments:

It might come as a surprise that despite the highest tax rates in the world, the Swedish stock market is one of the global winners during the past 100 years or so. Of course it has to do with the state of the country 100 years ago not high taxes.

The earnings yield differential for the Swedish equity market is currently 2.0%.

Kim Zussman adds:

Point at figure analysis suggests high correlation between national tax rates and risk-return profiles of the indigenous female. Like Sweden, Russia has exorbitant nominal tax rates commensurate with 100% non-compliance.

Any comments about reduction in US tax rates relating to immigration patterns or legislated anti-social Darwinism are bifurcative.

From Jan-Petter Janssen:

My macroeconomics teacher told an anecdote about the Norwegian tax system (Norway's tax system is very similar to neighboring Sweden's.) An American professor came visiting him while he was building a sauna. The American just couldn't understand why he was making it himself. Did the Norwegian professors really get paid so badly he couldn't afford a carpenter? Well, the answer was both yes and no. No, the wages were quite good. Yes, even quite high wages could not buy much labor. The Norwegian came up with a calculation that stated this problem. After income taxes, VAT and the employer's tax, a gross $4 has to be made in order to leave the carpenter with $1.

However, while the economic policy makes labor-intensive services ridiculously expensive, the stock market is flying high. The economy is excellent in supplying our natural resources to a demanding world. In February 2003 the benchmark was playing with sub 100 levels. This Friday it passed the 500 mark for the first time. 

Thomas Bjurlof writes:

I left Sweden some 25 years ago a never returned (except for visits) partly for reasons related to the tax regime and the monolithic political culture. There were other reasons more related to opportunity.

When my father died in 1992 I spent a couple of months in Sweden and I then invested in a number of smaller tech companies. You can imagine the results having timed the bottom of the 1992 crisis and the beginning of the Internet boom (by luck, since in those days I had no idea what a banking crisis was).

The event that tipped my decision to invest was that someone offered gold as payment for some items I sold! I don't know whether this event was representative, but it certainly hinted at a shortage of liquidity in the markets.

I have recently noticed that GaveKal is very upbeat about the Swedish market, so Martin's positive statements about taxation intrigue me. What if tax rates decline say an average of 10%? Is there any research that quantifies the effect of taxation on the market? I understand the direction a change will cause, but what about the quantity?

My question is what reason is there to believe that there will be significant sustainable change to the system this time? Should we start believing in a Thatcherite change emerging in Western Europe? Is there a new "Swedish Model"?

Since there has been a cultural connection between France and Sweden for a long time, might the election of Sarkozy be a first hint of a tipping point? 

Martin Lindkvist responds:

Indeed, Thomas hits the nail on the head as we had a "new start" also in 1991 when a right wing government started to lower taxes only to be voted out of power three years later and taxes once again ware raised. And I don't know how good our chances are for a lower tax environment for the long term, although my gut tells me that it's less than a 50% chance (if that sounds pessimistic, it should be said that I still think we have a better chance now then ever, not least because of international development).

The problem you see is that to lower the tax rates, the costs must of course be lowered, and the obvious and most important cost savings can be made in the redistribution area. And then there are always groups that gets their benefits lowered and are an easy target for the socialists in the next election.

In a sense it is a miracle that the right wing won the election at all. Ha ha, they had to rebrand themselves as "the new labor party." This was true because one of the most important changes has been to start to lower taxes on work and at the same time lower unemployment benefits. Thus it should pay to work. They did get that logic across, but it has been harder for them to get across why it is important to take away taxes like the wealth tax and realty tax. And that might be why they would fall way short of winning the election were it be held again today.

It is amazing but the average Swede has no clue how much he or she pay in taxes. If you ask, you might get an answer like 31%, which is the typical tax for a worker up to about SEK25k a month. If you ask one that is paid more, you might get an answer of 55%, which is the highest marginal tax rate. They are both wrong of course since you have to add a lot to get the full picture. Social costs are paid by the employer but they lower the room for paying the worker.

Then you have value added tax on most things bought, and special taxes on things like liquor, gas, cigarettes, etc. Realty tax of course also raises the rent for those that don't actually own their own house. And more. The Swedish taxpayers association estimates the real tax for a low paid worker to be 65% for a person earning SEK 132k (that is less than USD 20k for crying out loud!), and 69% if you are at a "lofty" SEK 397k (and it does not stop there of course but goes much higher the more you earn).

The real irony is that since the person earning more sees more tax being withheld on the paycheck, percentage wise, he is more likely to vote for the right wing than the poor guy not earning much. But the taxation is almost as high on the latter.

It is a shame that Swedish people have been brainwashed to the extent that they don't even understand what monster they have created in the Swedish tax system. And this is where the rubber meets the road. If things are to change for real this time, then people will have to wake up and understand that if they are paying between 65-80% of their real earnings in tax then they are not free. The day they wake up and want to be free we can expect lasting change



Several days ago on this web site there was an article regarding The Melbourne Cup. I had to see it for myself so on Saturday I attended Derby Day. Here are a few thoughts I would like to share:

Happy but Out of Pocket
Before the Carnival, I guessed the services would be overpriced. So I budgeted by placing only one Australian $50 bill in my pocket. I promised myself that I would not place bets on horses as I know nothing about racing. I kept this promise. The price structure of the complementary goods of gambling and alcohol was impressive, or dangerous is probably a better word. Champagne was ridiculously overpriced, while beer was much more affordable. It is my opinion that the beer priced at $6 had two purposes: to get patrons intoxicated so they would gamble more and to squeeze the last coins out of the unlucky pockets of losers. The small plastic bottles of champagne sold for $30 were effective in reclaiming money from any lucky winners.

The Grace Equilibrium
Everyone puts on their most beautiful outfit for the races. For men it’s simple. I only spent a minute donning my olive green Italian suit. Girls on the other hand, have been planning, shopping and using their creativity for weeks to come up with the most gorgeous dresses and graceful hair pieces they can find. I have never seen so many eye-catching combinations of colors, shapes, flowers and feathers. I wonder why hair decorations are so rare in today’s daily society. Since almost no one wears them daily, an individual woman would feel silly sporting one. However, if women wore these decorations daily they would collectively be more graceful. Maybe a small spark (designers, stars, wake up!) is all that’s needed? Tons of money could be made on decorations and designer hats if incorporated into daily fashion.

The Opposite Seasons
We are the first generation that can relatively easily cut down the four seasons in a year to just two. By having one home in each hemisphere, one can have twice as many friends and can experience the magic of spring and comforts of summer twice as often. For business this becomes a problem however. In most industries moving all staff members twice a year would be impractical. But I do see an opportunity here for some firms, especially small firms with young (childless) employees doing online business. Possibly a good way to attract the brightest minds without paying the highest salary? Offering a country swap and endless sun? I think this opportunity exists as long as there is an asymmetry between the number of firms operating this way and the fraction of people who would suit this unique lifestyle.

Craig Mee replies:

Just a quick reminder, Australia’s biggest horse race, “The Melbourne Cup”, is November 7. In 17 of the past 22 (and 11 of the last 11) years the Australian share market has closer high on the day. The average gain has been close to double the average loss. The effect on human emotion and share buying in the midst of one of the happiest days during the year in Australia cannot be under-estimated.



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

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

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

Rod Fitzsimmons Frey adds:

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

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

Not quantitative, unfortunately, but relevant to market activities.

C. Kin comments:

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

Vince Fulco mentions:

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

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

Jeff Rollert adds:

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

Steve Leslie says:

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

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

Kashi Vishwanath mentions:

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

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

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

Jan Petter-Janssen continues on the topic:

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

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

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



I wonder if the resemblance between how molecules are structured and how stocks are traded can be used to explain some "irrational" price moves that occur sometimes. By irrational I mean large jumps or declines in the price despite no new information.

When heat (energy) is added to a substance two things can happen: A higher temperature is observed, caused by higher kinetic energy. Or, if the substance changes phase, the heat will change the bonding of the molecules, increasing the potential energy. The idea is that stocks have phases (or equilibria) that change in much the same way.

Note the two fundamentally different reasons for trading: #1 Buy one, sell another to take advantage of differences in relative prices, #2 Buy or sell based on whether consumption or investing makes one better off.

These equivalents are being used: Temperature (kinetic energy) <=> The expectancy and return at the price where #2 buying and selling balances. Bonding (potential energy) <=> The value the #1-participants add to the market. Heat (kinetic + potential energy) <=> The price from the impact of both #1 and #2

Normally stocks can be thought of as being in the liquid state. Trades trying to benefit from the differences in valuation (#1) are the forces which keep the stocks connected. This will normally imply very little impact on the price from selling or buying (#2) in a particular stock when no new information is released.

When the net price impact from those who go in and out of the market (#2) is higher than the #1-traders can deal with, stocks will change phase.

If the change is a negative one, price will fall until we again find that Price = Money in / Shares out (#2), This new frozen price will be where the expectancy and risk is the same as for liquid stocks; i.e. a stock could fall from P=10 to P=5 despite no new information and be neither more nor less attractive than before. The reason is that the individual participants no longer have the benefits the #1 traders give them. Few will have incentives to trade because relatively small volumes will move the price in an unfavorable direction. A low price also harms the fundamentals, and private placements are less favorable for the existing shareowners; which can be considered costs of buying a frozen stock.

Similarly, when a stock boils it has more buyers than there are available sellers. A bubble will occur, and the participants who are fond of the stock have the power over its price. During the Internet bubble no one could stop it, and those who tried going short were most likely squeezed out anyway.

Whereas the individual stock must be in any of the three states, the entire market exists of a fraction of the stocks in each state. This is comparable to a pool of water which has an ice cube floating in it at zero degrees Celsius.


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