There were all sorts of records in stocks and bonds last week with stocks having their sixth best week in history, and bonds having their 10th worst week. Strangely, only once before have stocks moved up and bonds down this much, the week of March 21 2003, when bonds were down 4.5 points and stocks up 54. Because of the small number of observations the expectations next week for the events singly or in combination are not meaningful.

In retrospect, this was a natural result of the increased liquidity provided by the Central Banks. They were able to get the stock market up, but in the process they raised the specter of inflation again and commodities went through the roof and interest rates had a climactic increase. Thus, the bond vigilantes came to the fore again and forced the Fed to trot out their higher ups to say they are very concerned now about inflation, this coming of course after the 3% rally in stocks so as not to hurt the market too much.

The key event in the climactic moves had to be the big brokerage house bail out. It always seems that the destruction of a big institution is the key to renewed success in the market. It was that way with the big commodities firm, the big Nobel Prize fixed-income fund, and also the big banks and brokerages of the past including Barings in two events separated by 100 years.

The epyphytes like the orchids find it much easier to get to the light after the leaves of a tree have fallen, and they can grow quickly since they don't have to waste their energy in growing support structures of their own . Think of the countless businesses and opportunities for making money that will come now that all the weak assets have been, or are in the process of being, withdrawn from the asset pool.

The same thing happens when Walmart enters a town. A few slow-moving competitors like Kmart might find their business depressed, and the local hardware store might find that many of its customers prefer the lower prices Walmart offers. But these lower prices lead to increased spending and new businesses arise that quickly fill the vacuum.

Such can be expected in the next several years in the stock market, until the weight of the epiphytes is so large that the limb breaks.

Bill Craft adds:

Spanish Moss, a southern epiphyte enjoys a shaded environment whilst dangling from trees within the shaded canopy. Tillandsia usneoides are bromeliads, related to Pineapple.

Contemplating the dangling plumes of graybeard(s) on a recent trip, I could see the colony living off structure created by tall, towering trees intersecting the mists that provide life giving nutrients.

The support and sustenance offered here rhymes.

Steve Ellison expands:

A corollary might be that, when interest rates rise and credit is restricted, and a big institution has not yet failed, markets will behave in very unexpected ways in order to locate the vulnerable institutions and force them to liquidate at distress prices. As Damon Runyon said, "One of these days in your travels, a guy is going to come up to you and show you a nice brand-new deck of cards on which the seal is not yet broken, and this guy is going to offer to bet you that he can make the Jack of Spades jump out of the deck and squirt cider in your ear. But, son, do not bet this man, for as sure as you are standing there, you are going to end up with an earful of cider."

As an example, Goldman Sachs said that the results of pairs trades in August 2007 were 25 standard deviations away from historical averages.  The market was doing its best to find someone vulnerable.

Stefan Jovanovich objects:

The line quoted is not from Damon Runyan's Idyll of Miss Sarah Brown but from the screenplay for the movie of Guys and Dolls. The credit should go to Jo Swerling and Abe Burrows who wrote the book for the musical and Joseph L. Mankiewicz and Ben Hecht who reworked the musical into a movie.

Kim Zussman drifts off subject:

Here are some fortune cookies appropriate to these difficult times:

You can't know what you were trying to find until seeing it in hindsight

The thing you are looking for won't occur until you are so discouraged that you stop looking

The obvious thing is only right if you decide it is too obvious to be right

The cynical interpretation is only true when you don't act on it

Wealth and philanderosophy are the secular cousins of immortality



LemurBurton Fabricand wrote two interesting books: The Science of Winning and Non-Brownian Movement in the Stock Market. One of the major principles of the books, highly recommended as a supplement to Bacon, is that when a horse goes off at odds that are unusually unappealing, it's good to bet on it. He applies the method to a small sample of horse races, and finds that for specific applications of the principle, a slightly winning system can be developed.

I was reminded of this principle by the very unusual action of the stock market the last two overnights. Thursday evening and Friday morning, New York time, the market moved up about 1% overnight after yet another 40 day low on Monday. The optimism was broken by the Merrill announcement and the disappointing Fed testimony, as well as the credit downgrades. One of the worst declines in history occurred, 47 points from the open to close, exceeded only by the 66 point decline on 4/17/2000.

You would think that after such a decline, especially after an up opening, with fear in the air as never before, there would be a terrible fear about opening the market up again overnight. But no, it's up 2/3% overnight and Japan during the last two days, when the US market has been down 4%, is up some 1% from 13505 at Wednesday's close to 13650 as I write at 11:00 pm EST.

The insight of Fabricand is relevant, that this seeming underlay, this amazing courage in the light of the pessimism is not quite as amateurish , "boy, don't try too hard in the stretch unless you really are going to take it because I want the odds to be up next time" as it might seem.


I have been studying the intake of clay by lemurs and parrots so as to neutralize the alkaloids and other poisons in seeds that they eat and disperse. What are the comparable foods that the market must eat to neutralize bad events? What does the speculator have to do to neutralize the many uses of specialized information and unlimited capital that the trading houses can apply when they are not acting over and above the various Chinese Walls that they can climb whenever there is a merger or downgrade?

I found 38,000 articles on "underestimation of change" on Google and have not read them all yet. Victor Zarnowitz found that underestimation of change was a persistent aspect of his data on GNP forecasts although the rarity of predictions of declines made his data consistent with algebraic underestimates as well. I thought a realistic way to test this was to look at all the moves from close to 2:00 am EST to see if the big ones are underestimates. I found there were 18 big ups of more than 10 points as of 2:00 am, and 18 big declines of more than 10 points. Of these 36 big moves, 18 had reversed by 10:00 am and 18 had continued. Thus, there was no evidence in a real data set without revisions or biases or contrivances, that there was an underestimate of change. 

Martin Lindkvist adds:

Fabricand also wrote the books "Horse Sense" and "Beating the Street".
In both he explains the principle behind his systems: The principle of
maximum confusion. Writes Fabricand in "Horse Sense":

"The betting public is most likely to err in determining the winning
probability of the favorite in those races where the past performance
record of the favorite is very similar to that of one or more horses
in the race."

in "Beating the Street" he continues on the topic:

"For the races, the intuitive idea behind the principle is that
although the favorite appears very much like the other horses in
ability, there must be some reason or reasons not immediately obvious
for the betting public to make that horse favored. Yet, because the
two horses seem alike on the surface, the public may be confused
enough to bet too heavily on the other horse, making the favorite

In "Beating the Street" Fabricand also lays out a stock trading system
based on the principle. 

Yishen Kuik reports:

A new word for today, Geophagy.  Wikipedia says:

Geophagy is the human practice of eating earthy or soil-like substances such as clay, and chalk, in order to obtain essential nutrients such as sulfur and phosphorus from the soil. It is closely related to pica, a classified eating disorder in the DSM-IV characterized by abnormal cravings for nonfood items.

Geophagy is most often seen in rural or preindustrial societies among pregnant women and children. However, it is practiced by members of all races, social classes, ages, and sexes. In other parts of the world the practice is less stigmatized, and geophagy is not studied as a pathology but rather as an "adaptive behavior" that supplements the diet with essential nutrients or treats a disorder such as diarrhea.

In some parts of the world, geophagia is a culturally sanctioned practice. In many parts of the developing world, earth intended for consumption is available for purchase.

Bill Craft relates:

In the rural Southeastern US there exist deposits of Kaolin along the Oconee Group (formerly called the Tuscaloosa Formation). The locals and miners call it 'chalk' because of the white look and ability to stick when wet and permeate when dry any supposedly closed space.

Some of the residents have consumed the 'chalk' for centuries as it was a cure-all. Even the Creek Indians used it with Yaupon Holly (Ilex Vomitoria) for ritual 'cleansing.'

Mix some Washington State Apples with it and you get:


Ahh! Ritual Cleansing! Just what the mistress ordered!

Phil McDonnell explains:

Ketchup/MustardMost toxins are alkaloids, which in turn are bases. These toxins can usually be neutralized by ingesting acids. This is a practice which is not unique to backward civilizations. Check common condiment ingredient lists for vinegar. It is in ketchup, mustard and many other items. Chemically it is an acid. Oil and vinegar salad dressing is another example. When an acid and a base combine they neutralize each other and form a salt. Many salts are water soluble and can be readily flushed from the body.Even in modern society we have many minerals that are important to nutrition and are routinely used as remedies. Antacids such as Tums and Rolaids are simply calcium carbonate — chalk. Products such as Milk of Magnesia and Pepto Bismol are long-time mineral based remedies as well. Most so-called vitamin pills also contain a long list of minerals that are essential to our daily well being.

In the markets the toxins are the bad stocks at any given time. Recently the toxic stocks have been the big banks, most are down something like 50% over the last year. They continue to feel the worst effects of the current financial meltdown. Money usually goes somewhere. So when the banks are sold the good stocks are the beneficiaries. Google is a prime example. The high growth of earnings continue on track. So for a while GOOG continued to surge ahead. But toward the end of a panic the market acts more like the police when they raid a house of ill repute. They take the good girls with the bad. So even the formerly strong GOOG has seen a come down from well above 700 to a touch below 600. But there is nothing wrong with Google as a company. It is only that the big G has to act as an acid to neutralize the toxic base which is the subprime dependent stocks. So that salty taste in your mouth may not be just blood. It may be the act of a market neutralizing its toxins in order to return to good health.

George Parkanyi writes: 

To answer Victor's question about ingesting antidotes to poisonous markets, I eat 2x leveraged short ETFs, and I'll tell you why.

I live in Canada. Our family assets are tied up in tax-deferred registered retirement savings plans and registered education plans denominated in Canadian dollars. Although we can buy U.S. equities (and have to convert currency back and forth every trade), we can't buy options (we can write covered calls), we can't use margin, and we can't use futures. So there was a time when you had two choices in these conditions, sell or hold.

One morning last year I'm making my kids' school lunches, watching the Business News Network, when a commercial comes on proudly trumpeting three new pairs of long/short 2x leveraged ETFs. I remember thinking "Finally, something useful!". Later that day I researched those same Canadian ones, and found the U.S. ones. There was a wide range of available pairings, not only by indices, but by industry sectors as well. Some even paid dividends.

I use a specific strategy that requires full investment. By embedding (OK, eating) just a few of these ETFs on Jan 2, I was able to maintain my holdings, and keep my drawdown to only 3% as of today's close (despite all those NASDAQ stocks — ahem). It didn't take many; at most, 1/6 of the portfolio was in short ETFs, and I even scaled these back as the down-leg progressed.

Bottom line — your garage mechanic or plumber now has the ability to turn his retirement savings into a hedge fund.

If you can now so easily buy what is essentially market-catastrophe or profit-protection insurance, could this be changing the fearscape when markets fall? It makes being a contrarian more complicated. Reminds me of the Monty Python sketch where the people's bandit Dennis Moore is so successful stealing from the rich and giving to the poor that the poor become rich and lazy, leaving him confused and conflicted. Eventually he ends up holding up stage coaches and just re-distributing the wealth amongst the passengers.



 I fully agree that trees are not thinking things in the strict sense, and they cannot imagine the future. However, trees may 'think' (I use that term very loosely) about the future as much in as it is to their benefit. That is, while certain aspects of trees are purely reactionary to circumstance (e.g., growing toward light), if we consider seed dispersal strategies then perhaps it could be said that trees are exhibiting a form of forward looking intelligence. They are making their best guess about what time to release their seeds. While it probably a very simple model, based on tens of thousands of years experience of the seasons, it could be called a form of anticipation and planning.

Alan Millhone writes: 

Earlier today I had a conversation with one of my long time renters. Next to his building is a very tall and full oak tree and it has begun to release its acorns. The renter was complaining about the mess the tree was making. I told him that the tree in its fullness was shading his side of the building, filtering the air we breathe and cooling that air by about 20 degrees when the hot air (95 degrees here in Belpre today) passes through the branches and leaves to reach his windows. I told him the tree needs to be trimmed sometime, but care must be taken not to injure such a wonderful living thing.

The taller part of the tree has extended its branches over to the gutters of the building, knowing that water flows there when it rains. The tree has deep roots and is solidly anchored. It has learned to withstand gusty winds, hot weather and the cold winters of Ohio. Man can learn much by careful observation of trees and the ways they adapt to many situations. 

Bill Craft writes: 

Working with forest ecology on a daily basis I have seen and studied the adaptive response of trees to stimuli, growth and regeneration. Whether it be seed dispersal, wind, sun or gravity, as earlier stated these responses evolved over many millennia and are fun to observe, admire and use. Something stalwart, romantic and functional about trees. Trees’ persistence to survive always inspires me to take out the cane and invest.



Vic Queries:

There are only a few people I know who know more about trees than Bill Craft does. He's a forester and things like the laws of uniform stress are second nature to him. I feel like sitting on a log with him and asking such questions as

1. Why do the canopies of trees tend to grow to the same height in a stand?
1a. Is there such a thing as hubris in trees and is it dangerous the way it is in markets?

2. Why do trees decide to have a single trunk rather than several?

3. What are the strategies that determine the horizontal versus the vertical growth of trees?

4. What predictions can be made from the distribution of different species of trees at a time as to the ultimate succession and climax community?

5. When does the growth of a tree decelerate relative to its mortality, i.e. the risk return of a tree?

6. Is there a systematic difference in subsequent expectations of growth between the tree strategists that spend their time developing a trunk resistant to disease and attack from flora and fauna and those that just shoot way up with attention to getting to the sun as fast as possible without regard to the buffets of time?

7. Are the relative occupancy levels of various size trees in a forest predictive of movements between them, eg. if there is a relative clustering of numbers of trees of 100 feet and 25 feet tall, does that imply that there will be a growth in the numbers of trees with a height of 50 feet?

8. What is the relative success of trees at each size range in a stand?

9. How does the shape of leaves determine the success of a tree?

I could go on with many child-like questions and I might be able to answer similar questions if they were directed to the defunct game of hard ball squash, but I believe that thinking in such areas might lead to good insights into markets, over and above the natural drift.

Bill Craft replies:

Generally trees/plants, whether woody or herbaceous, grow as a response to light stimulation and the subsequent internal chemistry/clock/aspect/elevation/latitude etc. Thank the sun for all our biomass, hydrocarbons and friends.

1. Why do the canopies of trees tend to grow to the same height in a stand?
1a. Is there such a thing as hubris in trees and is it dangerous the way it is in markets?

Canopies of stands (similar soil/site/age/population) tend toward the same height as a response to this demand for energy. Genetics and position in a stand determine what individual will be dominant or codominant in the group. Being in a dominant position, a stem forms a large Wolfy crown able to utilize energy and transfer it to diameter growth at a faster rate.

But this exposes the dominant stem to more risk, breakage, lightning, ice storms and such. Therefore, the majority of thriving individuals in a stand are co-dominant, in a less risky position, swapping, by chance, growth for support from neighbors/cohorts.

2.Why do trees decide to have a single trunk rather than several?

Tree species have varying responses to gravity and utilization of sunlight. Generally, the softwoods grow straight and tall (excludes understory Hemlock et al) and the ones that are more shade (uses less light if need be) tolerant, such as oak/hickory/beech, have larger spreading crowns. They are programmed to respond within certain bounds of energy and competition. Multiple limbs form the crown, which is in a lower position, chemically, from the dominant top bud/buds, and is called apical dominance.

When the controlling bud is lost, dominance is transferred resulting in more crown or several stems. Pines that have poor apical dominance will have multiple stems or ramicorn branches. An example is the white pines' response to bud damage. In hardwood forests, a Coppice method can used to regenerate a stand. Harvest the stem, and multiple fast growth (already have a root system) leaders appear.

3. What are the strategies that determine the horizontal versus the vertical growth of trees?

It depends on the need for light, how crowded the stand is, and the level of competition (they all do better with some stress/competition). This results in better form, better wood, better yield and so on.

4. What predictions can be made from the distribution of different species of trees at a time as to the ultimate succession and climax community?

If undisturbed, stands tend toward species' compositions most capable of reproducing under the canopy in lower light. Here, if one sees similar species in the canopy and understory, you possibly reached the late successional stages. Most things are not undisturbed, so some things are guesswork, swags if you will. I always wonder what the vocally enamored mean by old growth? Where would the discussion be if we still have Castanea Dentata? Now there's a big burr under the saddle! Many species react differently to location and types of competition. At Yellowstone, there is the lodge pole pine, armed with its serotinous cones, and the stands reproduce with response to full sun and bare mineral soil. In other areas, lodge poles act differently. (Please read under Associated Forest Cover. Ya gotta know in what ecosystem you stand.)

5. When does the growth of a tree decelerate relative to its mortality, i.e. the risk return of a tree?

This is measured using stand tables, age expectancy (there are economic and biologic rotation ages), projected growth rates (Hello CO2,) and mortality. In an economic setting, when one drops below a growth rate relative to standard density, it is time to thin or regenerate. Try to thin prior to or at the asymptote to prevent slowing. Boot leather says to thin when you have less than 25% live crown ratio. Sophisticated thinning/harvesting Max IRR etc. programs have been developed. Another reason to shorten the rotation is the replacement with better 'genetics,' which is in fact a great plan. These have more genetic diversity than the original local seed sources. What's the next hot stock?

6. Is there a systematic difference in subsequent expectations of growth between the tree strategists that spend their time developing a trunk resistant to disease and attack from flora and fauna and those that just shoot way up with attention to getting to the sun as fast as possible without regard to the buffets of time?

Yes, the genetic 'diversity' of i.e. Loblolly I am planting is great. Genetic material from many sources, prodegeny tests (takes time). Increases of 10 to 15% growth without soil amendments i.e. same site, better form, more compact crowns (use less space, more efficient user of sunlight), less repeating spiral grain (as pines grow away from gravity they twist, see one hit by lightning with the barber pole effect), and disease resistance. Insect resistance from being more thrifty can repeal attacks. Older seeds were from localized sources. Less genetic diversity is due to deforestation for crops. One interesting note is: In my duties, when trying to prepare a harvest with seed tree for regeneration, I have to cut it, and it is hard to find stems with abundant cones that are straight, not as limby, low disease etc. Better to replant now. The cone response is one of/to stress, just like pruning an apple/peach tree to get the max amount of blooms. The geneticists are always working, holding those few/precious sought after seeds that will benefit us all.

7. Are the relative occupancy levels of various size trees in a forest predictive of movements between them, eg. if there is a relative clustering of numbers of trees of 100 feet and 25 feet tall, does that imply that there will be a growth in numbers of trees of height 50 feet tall?

Yes, in similar stands and between species, if not too old and if mixed, the shorter ones are more shade tolerant. If the height differences are different as a 'group' then that group is a stand. We try not to get the stands too small. Edge effect takes over and can reduce expectation, i.e. A planting of Loblolly fails (rarely), do not interplant the surviving with newer seedlings. This means losing on year's growth. This edge effect is remarkable even at very young ages and one will not know this until 12 to 15 years out when this interaction causes lower growth.

If the stand is mixed, Loblolly and some sweetgum (ubiquitous here), then by measuring relative growth rates and the density and prices of the material, there is an argument for growing the hardwood for pull or pallet. Hey money is money. (Density = Basal area, described in square feet or meters, which is the sum of all the cross sectional areas of the stump if the stems were cut off at 4.5 feet (dbh) expressed on an acre or HA basis. It describes stems/acre and 'thickness' or diameter relative to age.)

8. What is the relative success of trees at each size range in a stand?

In a stand, the bigger get bigger, and the small bonzai die out, which equals increased mortality. The larger are more 'successful' per value and survival, and also take up more canopy. Live Oaks can deploy enough taninc acid within the drip line to stop most competition. They have to capture (harvest) that growth or it will be lost to mortality.

9. How does the shape of leaves determine the success of a tree ?

Wider leaves are bigger solar panels, mostly deciduous here, and they are generally more shade tolerant and love better ground. They only last a season, and they need rest.

Long needle Conifers shed the ice and snow and whistle in the wind. They are generally more shade intolerant but they are able to survive in poorer spots.

Surviving in poorer spots is a good strategy.


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