1. When you got out for lunch, the market will take a big move in your favor that you were too slow on the trigger to capture. Your wicked friends will stay glued to the screen during that time, knowing the big move in what would have been in your favor is about to happen.

2. When you switch your position size down after series of big losses, you will hit 5 winners in a row, which will not compensate you for just one of the big losses you took.

3. The bonds will rally big on a economic number like GNP, but stocks will go down sharply and the explanation will be concerns about interest rate increases.

4. The big basketball game will feature a comeback the previous evening that is exactly like what happens in your market, and your team won't make it to black nor will you.

5. Whenever you have a big loss, and it turns around and goes to break even and you get out with a hootenany of relief, the market will go at least as far in your favor if you held as your were under water before.

6. Whenever there is serious morbidity in your family, you will lose many days in a row.

7. After a tremendous decline, the market will percolate around near unchanged for a day or two until you give up hoping for a rise, and then it will have a huge rise in your favor.

8. After a series of lucky trades in your favor, you will increase your size and the market will give you a tremendous beating. The same thing happens with basketball teams when they hit a lucky % of threes in the first half. When they try the same thing in the second half, they will make only 10% of them, and will go on to an ignominious defeat.

9. The worst trader on your team will be the one that defends you after a big loss and says that everyone should rally behind the boss, he's been trading the longest. Imagine the ignominy of having Smith the worst player in the league, and the cause of all the Knicks woes, defending Woodson and saying all the team should rally behind him because he works so hard.

10. Your wife will come in and look at the roller coaster chart of your swings on the day, and suggest "why don't you get out of half". You won't listen to her and you'll double up, and you'll be so ashamed you'll quietly sleep in the dogs kennel that evening.

11. The more time that passes from your early days as a speculator, the better you were (in your own eyes).

12. When you're long the grains in the summer, and you spend a weekend in the Hamptons, the sun will shine brightly all day, and a light rain will fall at the end of the day.

13. When you go out for dinner, the person next to you will be talking about his youngest daughter bought Netflix and Tesla and made millions on them.

14. After getting out of positions successfully on a swing during the day, you will try it the next day, and by the close if you had held your position you would be a rich man.

15. When you're long the market over the weekend, war will break out, or John Kerry will be reported to be visiting the Mideast or Russia to put out a fire.

Please add to the list.

David Lillienfeld writes: 

Vic, if it makes you feel any better about it, I often wind up having to sleep in the kennel, and that's without a trading loss. And we don't even have a kennel.

Gary Rogan writes: 

David's tale of woe reminded me of the old definition of Metaphysics: it's like being in a dark room and looking for a black cat that isn't there. Either that or the waterbed joke: you know it's going to be a bad day when your waterbed has sprung a leak and then you realize you don't even have a waterbed.

But for me what's guaranteed to happen is this: if I buy a little of some stock, I will have a nice gain, if I buy a lot, I will have a big loss.

Ed Stewart writes:

 The malevolent invisible hand guides ones trades when the in-laws visit. Suddenly your position size is 3X the norm, getting bigger, and at just the wrong time.

George Parkanyi writes: 

16. When you sell or short a stock - a takeover announcement will happen the next day (that happened to me twice - sold Robert Simpson; shorted General Instrument).

17. When you go from theory to practice, your well-researched and tested system will immediately bleed money, and will only start making money (without you) when you stop using it.

18. The positioning of your stop-loss order is irrelevant - you WILL be stopped out within a few cents of the low/high, and the market WILL go roaring the other way. (This is the only sure thing in trading.)

19. You will apply logic, reason and critical thinking to the market. You might as well have thrown a dart.

20. In exasperation you will eventually just throw a dart. Your position will go against you.

21. You will continue trading anyway, because your DNA has failed, permanently locked in the "I can do this" switch position.

Craig Mee writes: 

As soon as you mention a position to
anyone (some more so than others–for example, Vic's Hoodoos) the
heavens will open and you can kiss it goodbye.

Ed Stewart adds: 

Another guaranteed to happen item. Far more often than should occur by chance an invisible hand keeps you in the loss by a few ticks. At this point if you get out with a planned time based exit, most often prices move quickly in what would have been your favor. If you stay in, it does the opposite. And a related item, if you get out with a day-trade profit, it keeps going in your favor for days. If you swing trade it, the reversal was just a blip in the previous trend and you are soon dunked underwater again. My thought, and I could be wrong, is that much of this is real, not imagined, and is a more distant effect of the adverse selection problem with limit orders.



 I'm currently reading actor Michael Caine's autobiography What's It All About?.

He, of course, was in the movie Zulu, but the book overall is, I think, a very good rags to riches story with experiences cross-secting WWII, the class system in England, the Korean War, apartheid, and the movie business.

There are some interesting life lessons on persistence and dealing with desperation.

If you like biographies, I definitely recommend this one.



 I'm absolutely thrilled. My sister-in-law MaryAnne Vacho Angliongto is the rocket scientist (astrophysics) of the family and I was a wannabe astronomer (childhood dream). I had that chance finally when we booked a night in the (public) Advanced Observing Program at Kitt Peak Observatory in Arizona while on a vacation and family gathering in Tucson, Arizona. The night of April 19, 2002 MaryAnne photographed spiral galaxy NGC5850 in the constellation Virgo, while I opted for a galactic cluster (cluster of galaxies - not stars) in Coma Berenices including galaxy NGC4889, on a professional telescope in a dome with all the software and photographic gear. We were trying for colour, but there were technical problems and we didn't have time to do all the runs with colour filtration (the images then get reassembled by the software to produce a colour image), but we still got very impressive black and white images.

I thought I had lost the images over the years changing from computer to computer, but I just found, buried away in old files, the original CD the observatory had given to us!

Finally, what is super cool, is that unbeknownst to me until I just googled NGC4889, is that apparently it contains one of the two largest known black holes in the universe! In 2002 I was photographing not only a galactic cluster, but a massive black hole (you won't see that in the photo - but it was there). In its photo, NGC4889 is the brightest object near the bottom right.

I highly recommend this is a very different experience you may wish to try with a spouse, friend or on older child (especially a child — to fire their imagination. My father and my son Ben went up the night before). The format is that you book the telescope and a volunteer for a night from 10PM to 6AM. You have dinner on the mountain at midnight with the astronomers, set up and observe till dawn, and then you have the dormitory during the morning to get some sleep - all in a spectacular mountain/desert setting in southern Arizona. If/when you do book make sure it's the night of a new moon or a negligible one if you want to get the best out of observing deep-sky objects. You can visually observe, or you can do photography (my choice). To save time, you should probably plan what you wish to see ahead of time. I was just photographing one small piece of space (a fascinating one mind you), while my dad made a list of about 50 things he wanted to visually observe.

Here are the program and pricing details.



Here's a study on the effect of solar cycles on grain production that caught my attention. There are nteresting implications if indeed we are now going into a quiet (cooling) solar period, and it's useful for energy commodities as well. The science cited in the article suggests the cooling trend has begun.



 This is a very interesting documentary about gold: "The Secret World of Gold". It just aired on CBC. The premise is that central banks have leased out gold, bullion banks have sold it multiple times over, and there is a big gap in physical gold that is supposed to be in vaults vs the claims that counterparties/customers have on it. But before that there is some really interesting historical stuff about gold at the front end. This was a really good watch.

So if the bullion banks and western central banks have this big shortfall of gold and it is starting to come to light, my theory is that what is going on right now in the gold market is a bear raid to get the prices of gold and silver down as far as possible so the mega-short bullion guys can buy in as much physical that they can (at lower prices) to avoid getting caught in the short-squeeze that has to be the outcome of this.

A couple of points that seem to be adding up.

1. Germany asked for its gold back and was told - 7 years. They were not allowed to see the gold that was supposedly there, supposedly for security reasons.

2. Texas wants its gold back from New York! They don't trust fed government sanctioned counter-parties in their own country!

3. J.P. Morgan was successfully sued (settled) for storage charges on physical gold that was supposed to be in their vaults, but was not.

4. ABN-Amro recently settled gold claims in cash at prevailing market prices. Investors came to get their gold - turns out there was none.

5. China and Russia probably smell what's coming and have been buying large quantities of gold, and encouraging their citizens to do so - setting up the short squeeze?

6. Forcing Cyprus to sell its gold? So who's buying it?

7. What's behind Utah, Arizona and other states legislating gold as legal tender?

If this is what is happening, best way to play it is in physical bullion, certificates in bullion trusts that actually hold the physical gold like Sprott, and gold/silver miners I would think (even if its in the ground, they still have gold). Not sure about futures and options, ETFs that use futures as underlying, nor precious metal ETFs that don't publish the serial numbers of their inventory.

Even if banks settle in cash, it will validate/underscore the shortage of the physical product. And if a manipulation comes to light, people will realize there was nothing wrong with gold as such, and will scramble to buy it back themselves for the reason they had it in the first place - insurance. There may also have to be more government assistance if the squeeze turns out really badly for the bullion banks, exacerbating the money-printing.

Anyway its an interesting scenario. Could be a good trading opportunity, I think the move could be explosive depending on how the news comes out - days of limit-up stuff in the futures markets (unless the banks and government call "uncle"). For disclosure purposes - I'm in a battered long precious metals trade right now, holding what I still have (I took partial stops) and starting to slowly rebuild the position.

Anatoly Veltman writes:

Outside Canada, the documentary can be watched here.

I think it's been known for a while that:

1. There is no upside limit for the price of gold in fiat currencies

2. That government confiscation is unavoidable, to limit item 1

Thus, the balance of the two is likely to be found within the historical $255-$1921 range…

Remember the logic for $250-500 oil calls, as $147 was being approached? All scenarios are always based on unrealistic "all else staying the same". Well, it never does. So it was on approach of $150/barrel, that Vitol got the news that it was "not a hedger" and thus is deemed in violation of NYMEX position limits, i.e. must liquidate…So what news will be new on gold's new wave up? That private ownership of it, outside jewelery and numesmatics is prohibited. First to liquidate will be funds, then individuals desiring to stay out of jail. In George's words, the move could be explosive depending on how the news comes out – days of limit-down stuff in the futures markets…

Stefan Jovanovich writes:

When gold was "confiscated" in 1932 holders were paid for their specie in F.R. bank notes at the Constitutional "price" - $20.67. People had to turn in bullion, coin and the outstanding gold certificates - the U. S. Treasury notes that had remained outstanding after 1912. When 2 years later the value for international exchanges was raised to $35 an ounce, the "profits" went to the U.S. Treasury which also took title to all gold and gold certificates held by the Fed. It is hard to see what the Fed/Treasury would gain from a repeat performance. They are no longer obligated to settle foreign exchanges in anything but the currency of their own digital creation.

Let me try to understand what is being suggested about the current state of the world regarding gold, prices and credit: (1) the amount of physical bullion actually available in the world is far, far less than advertised, (2) to preserve their legal tender oligopolies the central banks are not only lying about how much gold they have on hand but actively short-selling against their reserves, and (3) when interest rates rise in the U.S., social chaos will result and the government will impose Martial Law.

The premise seems to be that the U.S. and Europe have unsustainable government debts, and an inflation is inevitable. To avoid this, the Fed/Treasury/IMF/ECB and other institutional villains are doing everything they can to destroy speculators betting that the currency prices of gold will go up.

I don't get it. All of the past examples of government default that the Roganistas point to occurred during periods when foreign exchange markets cleared in gold. No country, not Britain, not the United States even in their days of greatest authority, could settle its foreign debts in its own fiat currency. When Roosevelt issued his Executive Order making the ownership of gold (and govenment promises to pay gold) treasonous, the worry was that the U.S. would literally run out of gold because our European trading partners' currencies were no longer fixed by a specie weight and measure. When, 2 years later, the U.S. devalued by 40%, it was to create a "stabilization reserve" that would keep the country from running out of gold. Even after WW II, with the rest of the world in ruins, the U.S. still had an explicit obligation to redeem its foreign exchange deficits in specie valued at $35 an ounce.

Our present world only began when President Nixon and Treasury Secretary Connolly adopted the Henry Ford approach to currencies - the U.S. trade partners would have their accounts settled in any colors they wanted as long as they were green and black ink on rag paper. Since that time, prices for the same scarce objects - fine art and Bel Air real estate, for example - have literally soared. But what has driven them is not an explosion of legal tender - what was quaintly described by Friedman as "the money supply" - but an explosion of private and public borrowing. When credit has become "tight", prices have fallen; once banks and other lenders, including the government itself, have been able to write checks once again, prices have resumed their increases. It is hardly surprising that gold - itself a scarce object - that has shared that increase in price. What is surprising is that we are somehow supposed to learn the "lessons" of those times in history when foreign exchange was measured in gold ounces and apply them to a period when current annual borrowings, including rollovers of existing debt exceed the sum of all borrowing by the species from its origin until gold's full legalization in the U.S. in 1975.



 Okay, the 142 bank pres and public relations people have the minutes already to be released to public in 10 minutes. Bonds are up and stocks are down. Germany is getting killed. Which way will the release to the non-flexions affect bonds stocks and gold. I've been buying gold whenever it drops as I believe that the bank deposit confiscation has to be bullish for gold as are the trend followers short.

Anatoly Veltman writes: 

Rocky is patient at $1390, getting ready to pull trigger on test of $1320.

Victor Niederhoffer writes: 

Rocky a lot more astute than me perhaps because he has a bit of the idea that has the world in its grip in him from his days at the 'Bank' and his love of trend following. One passed their headquarters near the scene of the crime yesterday evening and it was replete with canine k9 4 footed operatives.

anonymous writes: 

One can imagine the scene:

Fed: Honey, I would love to be with you but we have to lay low a few days after the press got pictures of us together.

Banker responds: If that is the case, you and the D. C. boys have fun by yourselves. Give me the checkbook and I will go home to L.A. to shop. Call me when you decide you need the markets to go up again.

Rocky Humbert writes: 

For the record: I am flat gold. If Cyprus (or any other country) could cure their ills simply by selling gold, there would be no ills. My recollection is that the Korean housewives were selling their gold wedding bands to support the Won … during the 1997 financial crisis over there. Korean bonds were yielding 15% at the time. And I bought a few as an investment. That worked out ok. I am not buying the bonds of Cyprus, Greece or those other places. The wealth of a nation is in its land, its laws, and its work ethic. Everything else is a speculation.

Gary Rogan writes: 

"The wealth of a nation is in its land, its laws, and its work ethic."

Brilliant! I would add "respect for its just laws" to the list. May those who want to reward millions of those who broke the laws of this country by giving them the very object of their law-breaking and by making them a part of this nation give this some thought.

George Parkanyi writes: 

This is not scientific, but my feeling on gold is that given government interventions (manipulation is such a strong word) in markets these days, they can't exactly let that turn into a complete rout either. Fear is fear. Gold was supposed to be the haven of last resort. If people see that collapsing then there is the sense that there's nowhere to hide. The panic could transfer to other markets. It's not behaving as it "should" under the circumstances, which further calls into question in people's minds what the hell IS going on? And what is this action discounting - massive deflation? Governments sure want that idea to spread. This is one of the reasons I'm still holding fast to the core position - though I've taken stop-outs on portions. Not large enough portions to avoid a big hit. But it is what it is. The gold stocks are really getting creamed as well. Solid producers trading like penny stocks. Unless deflation IS ultimately our lot, I'm smelling blood in the streets (some of which is mine) and screaming bargains.

I think the odds are good for a sharp reversal rally. If things go really bad in other markets, that's where they'll be looking to cash out rather really pounded down precious metals. And gold is an international commodity - still highly valued in many cultures. This crowded-trade unwinding behaviour I think could reverse very quickly, very soon.

A commenter adds: 

Was the fall in Gold the result of some bigger thing that I am unaware of, and did someone smell a canary that has been dead for a few months and was the first to find out triggering the selling?

David Lilienfeld writes: 

Let's take a look at what's known:

1. Europe was weak going into 2013, but the dimensions of that weakness are becoming evident. The collapse of auto sales in the EU, the episode with the Cypriot banks (which I still don't understand why the Cypriot government didn't say, "Fine, Germany, we're leaving the euro, we have all these euros in our banks, our new exchange rate is X, and now you have a big mess on your hands, much as we do on ours; don't like that? Fund us!), the coming episode with Slovenia, followed by Spain, Italy (if it can figure out who is the government) and France. Then there's the farce previously known as DC. There's the leader of North Korea trying to demonstrate that there is testosterone flowing throughout his veins. The dimensions of many of these has become evident recently. The degree to which China is slowing down and the degree to which the US housing "recovery" might slow down have also started to clarify recently. I won't get into the potential for a repeat of a SARS-like outbreak in East Asia.

I don't think the canary's been dead for a few months as much as it had a massive stroke, followed by resuscitation from cardiac arrest a few times (OK, OK, it was many times), and it's now brain dead and being maintained by artificial life support, ie, it's dead but it doesn't know it. Or the canary's been dead for much longer than a few months.

There's a lot of bad stuff that's gone on the last few months, and the extent to which the market in the US is near its all-time highs is a wonderful gauge of nothing so much as the power of denial. How there could be as much complacency as there's been (a topic of recent interest on this list) is something I don't understand.

Craig Mee writes:

If you haven't noticed, the first stop for gold was the width of the consolidation. I bring you information on laying of track to take into account expansion and contraction. We must work out what size volatility or influences allows for temperature rises and falls.


1611. In laying track, provision must be made for expansion and contraction of the rails, due to changes of temperature. As the temperature rises the rail lengthens, and unless sufficient space is left between the ends of the rails to allow for the expansion, the ends of the rails abut one against another with such force as to cause the rails to kink or buckle, marring the appearance of the track and rendering it unsafe for trains, especially those running at high speeds. If, on the other hand, too much space is left between the rails, the contraction or shortening of the rails due to severe cold may do equally great harm by shearing off the bolts from the splice bars, leaving the joints loose and unprotected. The coefficient of expansion, i.e., the amount of the change in the length of an iron bar due to an increase or decrease of 1 degree F. is taken at .00000686 per degree per unit of length. 



 When gold was money, its price was measured not in currency but in what it could buy. From the adoption of the Constitution to WWI, except during the Civil War and Reconstruction, the price of gold as currency remained the same — 1 ounce was $20; measured by what it could buy during crashes and depressions, gold's "price" went up. That was equally true during the periods when the dollar was not redeemable in gold at the Constitutional standard — 1873, after 1932; in all these panics what gold could buy in the world's markets has increased. That is to be expected; it is a tautology that, during panics, the prices of things other than money go down and the price of money goes up, and gold has been the world near-money even when it has not been legal tender in the U.S.

George Parkanyi writes: 

I think that gold is difficult to read. It's not a slam-dunk by any stretch. In a rapid deflationary scenario where credit markets seize up and no-one trusts counterparties it could get hammered with everything else - people having to liquidate to cover margin calls, just needing cash to meet other obligations and so-on. Also you wouldn't be able to finance it. There would be a complex interplay between flight to "quality" and scrambling to raise cash. And inflation seems to be mixed bag; specific pockets of it - there seems to be plenty in food and energy, but little wage inflation in a globalized economy with a lot of cheap labour still around. Consumer electronics still seem to be trending down.

On the other hand you do have seemingly unstoppable currency debasement underway (the main gold bug meme), and interest rates practically at zero. And bank runs could be good for gold since the issue will be about parking cash somewhere other than in a bank - gold would sop up some of that. Equities at the moment I believe are benefiting from a shift in the perception away from the "safety" of fixed income. Sovereign debt everywhere really does look like crap because of the unsustainable amount of it - why would you tie up your wealth in it? You see it with companies starting and/or increasing dividends because of investor demand for income they're not getting from debt. Debt markets dwarf equity markets, so if this is a real trend, equities, and commodities in the mix somewhere, could go a lot higher. But at some point all this selling of debt will increase interest rates, which will then work against the economy, equities, and commodities - including gold.

Then there are other dynamics. They say central banks are buying gold right now. Bullish or bearish? That's taking production off the market (bullish), but then they have all that more to turn around and dump on the market if the agenda changes again (bearish).

Gold itself hasn't been hit that hard recently - 16 or 17% perhaps from its high - but the miners have been massively hammered, mainly - and I find this ironic - because of high operating cost inflation. I'm thinking its overdone and a fairly old story, setting the stage for at least a bear market rally (the rationale for my current trade), but the market's not agreeing with me so far.

Larry Williams writes: 

You make some nice points. I see a strong 4 year cycle operating in gold that called the top real well 2 years ago and suggests a low yet to come.



 One of the mantras of those who would convince us individual investors to buy and hold is "you can't time the market". The slogan seems to mean that you can't precisely time the exact bottom and exact top of any given market cycle. But that's a strawman: you don't need to buy on the very day that the market bottoms and sell on the very day that the market tops. Instead you only need to avoid buying when the market is overbought, overbullish, and overvalued, when cyclically adjusted P/E ratios are high, when the Q ratio is high, etc.; and similarly for selling.

Other than broker marketing materials, does anyone here have a good citation for the source of this old bit of market "wisdom"?

George Parkanyi writes: 

It's the mantra of the mutual fund industry (a) they want you to stay put so they can keep the fee stream going (they make money whether you win or lose), and (b) don't like you moving the money around from fund to fund because then they have the hassle of redemptions/re-balancing and/or parking your money in lower MER funds such as money-market for extended periods of time.

Ralph Vince writes: 

I've met people who can time the market.

And I would also say that it isn't necessary to do so.

There are many ways to be successful at this. It's a matter of finding what works for the individual, to find his groove. And it is precisely THAT which is the hard part.



 I was watching an interview of Jim Rogers the other day and he was discussing why he ultimately settled on Singapore as his new home. He's clearly very into Asia for its growth potential (and issues he has with how the US is being run), and moved there with his family so his daughters would learn Mandarin more easily. When asked why Singapore and not, say, Shanghai or Hong Kong, he said he really liked those places, but they were just too polluted. So a man moves hundreds of millions, if not billions of dollars to one country but not another partly because of the relative cleanliness of the air. Now China has announced tighter air pollution regulations (ostensibly not necessarily to accommodate Jim Rogers). Of course there's a lot of new chatter around platinum and palladium (used in catalytic converters), but is there some kind of a bigger trend emerging? - "Do business here - we're cleaning up our mess."



 "Whatever Lol–a wants, Lol–a gets" from Damn Yankees should be lyricized relative to the central banks, flexions, around the world sitting on the razor's edge watching every earnings report, every dip in the stock market ready to provide massive unlimited balance sheet buying whenever it looks like their unseen boss will not get what it wants.

George Parkanyi obliges: 

Victor, the song is already tailor-made … just needed a few minor
tweaks.  Now if you can get someone to sing it I'll be impressed. 


Whatever banker wants
Banker gets
And little printer, banker wants you
Make up your mind to have no regrets
Recline yourself, resign yourself – cause you don’t have to be through  ;)
I always get what I aim for
And your … skills … is what I came for

Whatever banker wants
Banker gets
So let the presses roll
Don’t you know you can’t lose?
You’re an exception to the rules
I'm irresistible, you fool, give in!…give in!…give in!

Hello, Ben
It’s me
We bet so high
All thanks to you
Poo poo pa doop

I always get what I aim for
And you heart'n soul is what I came for
… banker wants
… banker gets
… We’ll always win
I'm irresistible, you fool,
Give in…Give in…Give in.



 Whatever you think of Agassi, there are several market lessons here, and Agassi must have either read the Chair's books or have been taking lessons.

"Quit going for the knockout, he says. Stop swinging for the fences. All you have to be is solid. Singles, doubles, move the chains forward. Stop thinking about yourself, and your own game, and remember that the guy on the other side of the net has weaknesses. Attack his weaknesses. You don't have to be the best in the world every time you go out there. You just have to be better than one guy. Instead of you succeeding, make him fail. Better yet, let him fail. It's all about odds and percentages. You're from Vegas, you should have an appreciation of odds and percentages. The house always wins, right? Why? Because the odds are stacked in the house's favor. So? Be the house! Get the odds in your favor."

-Agassi, from Open: An Autobiography

Victor Niederhoffer writes:

As usual Agassi has it all wrong–something that can be predicted from an ingrate from a family like his. The only one that can go for singles, that can grind is the house. The player should never grind.

Jim Sogi writes: 

Lions and hyenas use a similar strategy when they kill a buffalo or wildebeast. They group up and wound it. They don't go in for the kill. They let it bleed a while, weaken, then tear it up and eat it. Why risk injury when waiting works.

George Parkanyi writes:

What kind of a market lesson is that? "We'll let you stew on your margin call for a while– THEN we'll come and throw you out of your house." ; )



 Dear Mr Niederhoffer,

I really like your website dailyspeculations. There are a lot of fascinating and interesting articles that lead to new ideas and inspiration.

I read in the "About V.N & L.K" section that you trained some very successful traders and hedge fund managers. I am a student of business administration in Germany and want to work as a trader in the future.

It would be interesting to know how the training of your traders was structured and what were the most important things you focused on during the training? If you were now in my age (25 to 30 years), how would you start and where would you try to get the sufficient education for this business?

I hope that you can help me with your insights.

I wish you all the best and hope you will continue to share your insights on the markets.

Kindest regards,

Lars Gutt

Victor Niederhoffer writes: 

This is a good question. Does anyone have a good answer besides reading a good statistics book like [the old] Snedecor, Horse Trading by Ben Green, Bacon's Professional Turf Betting, and starting a hypothetical trading account, and doing some hypotheses testing from a field they know something about?

Jeff Watson writes: 

A big question is why you would want to trade. Trading is a pretty thankless job, very tough, and maybe you only see the media presentation, or you want to tell people at a cocktail party, "I'm a trader," but I'd like to see a why.

Having a good mentor, someone that you can apprentice to, is the most important thing in learning how to trade. A good instructor is much more important than Ivy League Degrees, how to manuals, internet chat rooms, books, systems, gurus, the financial media, and all the other mind numbing stuff out there.

My mentor when I first started was an 85 year old guy who was first trained by Art Cutten. He learned well from old man Cutten, and taught me how to keep out of trouble. The main lesson to learn in trading, more than anything else, is how to keep out of trouble. Manage to keep out of trouble, keep your own counsel, and the mistress might give you a second or third date.

George Coyle writes:

Series 3 study guide is a great (relatively brief) overview of the commodity futures industry. It touches on styles of trading as well as goes through lots of the unexciting but important details (order types, etc.). (Outline of material covered in exam [pdf]). (Online version of Study Guide by Investopedia).

From there the Market Wizard books are good to look at the different styles to see which sounds the best to you.

If quant focused I would say read something on how casino games work (odds and such–Richard Epstein's Theory of Gambling and Statistical Logic book is good) and think of how that might be applied to markets with the trader acting as the casino. Focus on keeping it simple, think of what is practical and possible when working with data.

Read your books of course. Read interviews with William Eckhardt. Larry Williams' recent book (LT Secrets for ST Trading) does a good job of outlining how quant works specifically, as does Charles Wright's Trading as a Business. Livermore's How to Trade in Stocks is a good one too (less popular than Reminiscences but more of a "how to" manual).

Deitel and Deitel C++ How to Program is the best C++ manual out there in my opinion. I dodged it for years but it is crucial and so useful. www.thenewboston.com is a great website to watch youtube vids on various languages to get your feet wet (but Deitel is necessary if you really want to learn the specifics).

And just start trading. The best teacher is experience. Even if equipped with all the great logic from above it seems real experience is necessary to actually follow the rules.

Craig Mee writes:

Understand valuation. Get a handle on all things that move a market price. Maybe have an 8 week internship of your own making with 8 different dealers. Corn farmer, art dealer, financial dealer, car dealer, importer, etc, and understand that whatever you're trading, you potentially should be able to move in theory from one to the other seamlessly. You are a valuer first and foremost, and if you value it wrong, you will also see how most of these choose to cut their positions. This might help to keep in the forefront of your mind what your mission actually is.

George Parkanyi writes:

Well if you can get past the fact that he finally went bust and blew his brains out, I found Reminiscences of a Stock Operator, about Jesse Livermore, to be quite useful. The most notable things I remember are (1) "making the most money when he was sitting, not trading" – meaning a position needs time to make really big money, and (2) to Jeff's point about staying out of trouble – averaging UP a position once its already showing a profit, and never averaging down a losing position. (The latter is especially important when trading with leverage.)

Ultimately, it still comes down to a style you are comfortable with – keeping the staying out of trouble part in mind; however you do that. And this may or may not involve the things mentioned above.

David Lilienfeld writes: 

Go through some psychology texts–learn to understand human behavior and get to know one's own temperament. Understanding on an intellectual level doesn't help much if one's temperament is suited to trading. I have an old friend from high school who was on the Solomon trading in the mid-to-late 1980s. He hated it, often spent the weekends sweating his positions, etc. He moved on to be a buy side analyst, became the portfolio manager for a number of funds that succeeded pretty well under his direction and prospered. He had no trouble sleeping as a portfolio manager, and as I said, his funds did very well. A college roommate became a sell side analyst and was bored as could be doing his job. He did OK with it, but not great. He changed employers (at one point he thought about leaving the industry if he wasn't hired by someone to do something other be an analyst), started in its training program and found himself on the trading floor. He enjoyed it immensely and retired last year (I'm still not sure if he "retired" or was retired by his employer; looking at his homes, it's not as though he's wanting for much, so maybe he really did retire–but it's also not been a topic open to discussion, at least not with me). My guess is that just about everyone on this list has friends with similar stories. The bottom line: You have to know your temperament. You can learn the math, but if you don't have the fortitude, the math doesn't much matter.

The psychology part is understanding what people are about. Understanding gambling is about the mathematics of risk. Important stuff to be sure. But people matter too, and understanding what they are all about is also important.

Those are my recommendations. Lucking into a good mentor helps, but observing for a while is also one of the best teachers.



 I'm reading Trading as a Business by Charlie Wright. Pretty good book profiling the evolution from discretionary trader to systematic trader. One of those books where I found myself laughing at having been down the paths. More trend following oriented but I think it is a pretty good synopsis of the systematic world and he covers some bases that added value in terms of elements to consider in one's trading (or at least mine). Decent set of checklists.

Do systematically inclined speculators recommend similar books (besides Victor Niederhoffer's and Larry Williams books).

Also, Tradestation seems to do most anything a trader would want in terms of trend following testing. I have never used it though.


George Parkanyi writes:

The only flaw I find with systems is that they immediately stop working as soon as you try to use them. I think people need to do more research on fading systems.

Christopher Tucker writes: 

Where's the "like" button on the Speclist?

Steve Ellison adds: 

Yes, even systems I developed myself stop working when I try to use them because of data mining bias. Even if there legitimately is an edge, some component of the good backtesting performance is better-than-average luck. 

Leo Jia writes: 

The word "enlightened discretionary" is very appealing. The reason for it, I guess, is because of the word "enlightened" more than the word "discretionary". Everyone hopes to be enlightened in someway. Being enlightened seems to be a spiritual consummation. But I guess that is not the first and real reason why people are after being enlightened. The real reason is that it is mystic and mostly unattainable. This coincides with a human nature of always craving for what they don't have, which is among the reasons why most people are persistently unhappy.

I feel preferring discretion to system is quite illogical. Aren't whatever rules one uses as a discretion by nature a system? It perhaps is not explicitly sketched out, but it by all means is a system of rules that resides in one's head. Couldn't that be phrased and then programmed? I agree some are not very easy. But are they really impossible?

Gary Phillips writes: 

I've been doing this long enough to instinctively know what works and what doesn't. I only need to look at my P&L for empirical confirmation. If in doubt I just try to see the market for what it is and not what it appears to be. One needs to understand market structure, liquidity, and price action and develop a framework for analyzing the market, somewhere between bottom-up & top-down lies the sweet spot. This allows you to see the market in the proper context and provides you with a compass, which will keep you from feeling lost and will show you the way.

Craig Mee writes: 

Aren't ?

Hi Leo, you probably could say "whatever rules one uses as a discretion by nature is a system", but a system may not have the ability to load up once the move kicks (obviously it can be programmed) but at times the opportunity may appear intuitive, and  a trader can do that on relatively short notice, whilst keeping initial risk limited.

Interesting, Gary, the issue with systems seems to be at times data mining against price action and structure which gives strength of understanding. The HFT may work on massive turnover, low commissions and effectively front running, and unless you have those edges then it appears difficult to succeed from a data mining basis (and relatively scary trading something that you don't effectively understand from a logical point of view). However classifying a markets structure, and working off 3-4 premises no more, (as I believe more would allow any edge to be diluted across a range of options), and the ability to leverage once on a move, appears to be something you can work with. This is purely from a hands on execution basis, no doubt the pure programmers can weigh in.

I remember speaking to a guy who professionally programs for others… (admittedly a lot of retail), and we were talking about what are the laws in place for him to not front run me after developing a system I gave him…and he was like "mate, to be honest (probably insinuating "dont flatter yourself") 97% don't make a dime." That was certainly probably expected I suppose, but to hear it in technicolour was confronting and I was surprised he said as much.

Gary Phillips writes: 

I really don't believe that discretionary trading today, is any harder than it used to be. The emotional aspects, and risk management, have essentially remained the same. Methodology is different, because algorithmic driven HFTrading has forced intra-day traders to change from momentum chasers to mean reversion traders. And as you stated, there are countless global/macro concerns as a result of the financial crisis and continued global easing. So, it does demand a broader universe of knowledge, and revamped techniques and benchmarks, but it still boils down to identifying what is truly driving price and how it is being driven. 

I guess this is what gives you the elusive *edge*. But, as we used to say the *edge* can sometimes be the *ledge.* That being said, trading doesn't have to be about being right or wrong the market, or predicting where the market is headed in the next moment, hour, day or week. Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results.


Kim Zussman writes: 

"Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results."

One would suggest that trading is a waste of time if your historical or expected mean are random.



 What's in a name?

A lot more than I expected.

I've led a charmed life. I was born in Budapest, Hungary into a revolution in 1956. My parents, at great risk, took me away to safety from an oppressive system, and had to start their lives again from scratch in a strange land in a new language, and I've never been in any real danger since, or have had anything at all to complain about it. Even before then, my father risked his career as an officer in the Hungarian army, by having me baptized in (what he thought was) secret on the outskirts of Budapest. This was mainly in deference to my maternal grandmother - who, bless her and may she rest in peace, as an avid Catholic was utterly determined to protect my soul. This was a big no-no with the communists, and they called him on it - every last detail. (My father had been followed.) Complicit in this little venture, and taking the same risks on my completely unaware infant behalf, was a man named Gyorgy Dirner, who my father had befriended in the army. Gyorgy (George) - or Gyurka, the more affectionate form - acted as and became my godfather at the baptism. I was born Zoltan Parkanyi, but the custom in Hungary at the time was for a boy to take the name of the godfather as his middle name, so I became Zoltan George Parkanyi. In Australia, to where we emigrated, my parents changed that to George Zoltan Parkanyi, thinking George would go easier on me as a child growing up in that country. And so George Parkanyi it is.

So today may father, at the cottage, reminiscing about those times, tells me the rest of the story, the part that I'd never heard before. Back to Hungary 1956. Fast forward from my baptism to November, in the depths of the short-lived, but brutal, revolution. One day Gyurka shows up at my parents' apartment to check on my father and make sure he's OK. He mentions to my father that he is somehow involved, but doesn't go into the details. They part. Events unfold quickly and my father is forced by circumstance to make the decision to leave Hungary, and my parents escape with me a few weeks later across the border into Austria.

My father loses touch with Gyurka, but every trip to Hungary thereafter once he started visiting again in the late 60's, he looks for Gyurka's phone number in Budapest directory. There is never any listing for Dirner, although my father painstakingly checks every time. Then about 5 years ago, while visiting a cemetery in Budapest to pay respects to the deceased parents of one of his other friends, something makes him divert from the normal pathway and cut across a different section. As he's walking to where he's intending to go he stumbles upon a headstone that stops him in his tracks and shakes him to his core. It says Dirner Gyurka …. 1930 - (November) 1956. Gyurka - my godfather - was killed within days, at most weeks, of when my father last saw him.

I'm named for a man, who, at no more than 3 years older than my eldest son now, either lost or gave his life to an unwinnable fight for freedom. What do I feel? Love. Gratitude. How do I feel? Unfinished.



 This is a really fascinating article about thefts, sales, and exchanges of the Tide detergent, but it seems like it's evolving into some sort of primitive street money.

Here's a related parallel: A thriving black market appeared, with Kent cigarettes becoming Romania's second currency (it was illegal and punished with up to ten years imprisonment to own or trade any foreign currency), used to purchase everything, from food to clothes or medicine.

George Parkanyi writes: 

Well … I have a fair amount of gold right now. Should I diversify into detergent then? Are you guys long the regular, or the new-and-improved?

And how do you pitch it to clients? "Has a low beta, AND fights stains!"

Or report the closing markets … "May concentrated cold-water was down 3 cents today in active trade … Elliot-Wave theorists say this is the second leg of a major rinse cycle."



 I find it pretty hard to argue with the Sage on this one. Here is what he actually said, in a Fortune magazine article (February 27, 2012 issue) based on his shareholder letter:

Today, the world's gold stock is about 170,000 metric tons. … At $1,750 per ounce … its value would be about $9.6 trillion.

…Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops–and will continue to produce that bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything.

Stefan Jovanovich writes: 

No one suggests that gold is somehow a magically superior investment; as Money it is not an investment at all, simply the means by which people can save wealth with the assurance that it will not be easily confiscated or corrupted by the government. Mr. Puffy has lived an indulged and indulgent life; since early childhood he has had the security of knowing that nobody would ever mess with him. Throughout human history many, many people have known that they would be the opposite of a Congressman's son. (Cue "Fortunate Son"). They have even been paranoid enough to think it wise to hold some of their wealth in a portable form. Calling the insurance company in order to collect on your policy might not be possible. As even the Oregano knows, there is always the regulatory risk that you may be on someone's shit list. At current prices I can fit the gold coinage equivalent of the average American's lifetime savings ($95K) in a tiny case; it will weigh less than an ultralite laptop. It is just such similarly-sized hoards of the stuff "incapable of producing anything" that allowed the Hugeunots, Moravians, Jews, Anabaptists, free thinkers and so many, many others to flee and save themselves and their families.

Comparing the world's Coin with the valuations of some of the things it could buy is a sensible exercise. Sometimes Money is overpriced, and sometimes it is not. That is for the market to decide. But using crude sums is a rhetorical trick that the Oregano really has to give up. It contradicts everything he has done in his own business practice. As he well knows, anyone who acquired even 10% of "all U.S. cropland" - let alone all of it and 16 Exxon Mobils - would find himself subject to envy regulation by the FDA and the entire Congress; the farmland would still be there a century from now - asteroid strikes being excluded as acts of God - but the returns on investment would not be. That is as certain as the fact that the people who regularly visit the White House will always want to assure the rest of us that the government's word is all we need.

The notion that the government should not "regulate" individuals' money savings is as radical these days as the idea that people have innate rights of liberty not subject to the will of the King was 250 years ago. I don't expect to win this argument in my lifetime; but things do change - sometimes even for the better.

George Parkanyi writes: 

Stefan, I fully understand why people still invest in gold. They/we believe that in the future is can be exchanged first for whatever currency prevails, and then with that currency buy goods, hopefully with roughly equivalent, or perhaps greater purchasing power. My point is that when you think about it - gold itself has limited intrinsic economic value. It does not contribute all that much to actual wealth-creating productivity. It's mainly just used as a proxy for wealth - only because enough people still agree that it is. It's not a commodity that people use day-to-day except for decorative purposes (jewelry and art) and in electronics. It's not something we need with which to sustain ourselves. That to me is its vulnerability. Yes it's tangible, but it doesn't really do anything.

I find it fascinating that in some African rural areas people use transferable cell-phone minutes as currency. That's the kind of digital-age utility I'm talking about. I think that abuses and corruption aside (you find that everywhere anyway) - electronic money is just so much more convenient, and modern economies are now totally structured around that. Modern economies use their productivity as the "collateral" behind their currencies. That actually makes sense as long as you put enough governance around it so that people are willing to trust the currency, and computer and network technology facilitates trade like never before, hugely boosting productivity. Apart from straight barter with things like refrigerators, I can't think of anything more cumbersome to use as a medium of exchange than gold. It's heavy, not easily divisible. I can't even sell my gold coin (received as a gift) to a bank without the original purchase paperwork - otherwise there's an assay charge that goes along with it. What a pain in the ass(ay). And it may not help you all that much in a Mad-Max world either - if food, water, clothing, tools, and guns are at a premium, who wants to be lugging around a heavy gold bar?

I do agree that its not going away any time soon. The emperor may have no clothes, but everyone has universally agreed to pretend that he does.

Stefan Jovanovich replies: 

The Founders and their British forebears like Isaac Newton were committed to milled coinage because, once one accepted the assay of the issuer - i.e. the Royal or U.S. Mint - the coins themselves could be valued simply by weight. Even sweating the coins (shaking them in a bag and then collecting the dust generated by the friction) and minor clipping would not affect their value because that was determined by the weight of the coins themselves, not the "face value". That is the point of the gold standard clause in the Constitution - Congress sets the weight and measure for a coin - i.e. so many ounces at the standard assay. That allowed a $20 gold piece that was worn to be discounted accordingly; the "gold clause" in a contract was a commitment to pay be weight and measure, not by face value alone. (And, yes, every store had a scale; one of the first demands of merchants for commercial regulation was to have scales themselves certified by state and county inspectors.) One of the many reasons Grant's Resumption and Legal Tender Bills (making greenbacks redeemable; setting gold as the only monetary standard for the first time in U.S. history) were so successful is that U.S. Notes - the promises of the Treasury to pay gold of a specified weight and measure - became more reliable than coin itself. The paper money did not itself have to be weighed and the printing and engraving and paper were sufficiently subtle that counterfeiting was too expensive to be profitable!




 I take the view that most market predictions don't produce statistically sound results.

I believe market condition is a result of human behavior. Although many fundamental human behaviors are predictable with the advancement of behavioral sciences, the market involves more than the fundamental human behaviors. The key to it lies in the varying derivative perceptions of market participants.

Let's say the view "since condition A, then the market will rise" is the fundamental perception. A first derivative view, for instance, can be "since all believe the market rises due to condition A, it will fall". A second derivative can then be "since all believe the market falls due to (…), it will rise". And so on.

If the market participants all adhered to one of the principles above, then it would be very easy to predict the market. The thing is that is never the case. The big hands shift views along the derivatives all the time. That is what makes most predictions today unsound.

If we have a way (the big winners should have this talent) to predict which derivative view the big hands take, then the prediction would be more accurate. But then, if many could do that, the game changes again.

Before that happens, let me raise the question here on how one can develop that talent.

Steve Ellison writes: 

This is the principle of ever-changing cycles, as described by Bacon in Secrets of Professional Turf Betting and elaborated on in the Chair's books.

One of Bacon's approaches was to look for good horses that had lost in their most recent races. The memories of the recent losses caused the public to have negative opinions about those horses.

George Parkanyi writes: 

Market movements (which way, how far, and when) cannot be predicted by DEFINITION. The financial markets are a non-linear system. More than three non-correlated variables, and you cannot predict a specific price at a specific future point in time — a mathematical certainty.

However, like many natural cycles, markets exhibit a powerful tendency to revert to the mean. Now that mean moves around and will have its own wobble, but around it there is definitely a clear sinusoidal pattern — actually short and longer term patterns within patterns. Look at any index or commodity chart over an extended period of time. Individual securities will have the same tendency, but the longer term impact of low-probability outliers is more pronounced — your Microsofts or your Lehman Brothers'. The more narrow the influences — the greater the risk (one-trick pony, or bad management risk for example.) If you apply portfolio theory (diversification basically), the risk (and reward) of outliers is significantly diminished, and I believe you can develop successful strategies simply based on price and on the concept of reversion to the mean using indices, sectors, and commodities (anything always economically necessary to greater or lesser degree, that has an extremely low probability of going to zero. Even there it's not quite blow-up risk-free (asbestos didn't really work out.)

You can then more safely use leverage and modulate the range of returns with same. Reversion to the mean requires a large sample size, so you need many sources acting on the main influences on price (large underlying product markets, liquid financial markets), and time. The larger the sample size and the longer the time frame, the more reliable a reversion strategy should be.

The psychology of what Steve alluded above to is reflected in the aggregate behavior (influences on price) mentioned above. If you're going to go for the "bad horses" though, buy several in case one keels over and dies. Now if they all contract a contagious disease from each other…

George Coyle writes:

The 86th episode of Seinfeld was called "The Opposite" and involved George Costanza's experience in cycles.

The plot goes as follows (from wikipedia):

George returns from the beach and decides that every decision that he has ever made has been wrong, and that his life is the exact opposite of what it should be. George tells this to Jerry in Monk's Cafe, who convinces him that "if every instinct you have is wrong, then the opposite would have to be right". George then resolves to start doing the complete opposite of what he would do normally."Of course everything goes right for him from then on (until the end of the episode). While funny it brings up the interesting idea of the Costanza trade. Out sample seldom replicate in sample (probably due to ever changing cycles). How can one figure when to follow the trend of profitability and when to apply the Costanza trade to a perceived winner. 



 I believe in nature. I believe in earth, sun, fire and water. I believe in the circle of life. When a tree loses its leaves, you think it's dead. But the tree is only resting. It's born again, in the spring. I believe in energy. Positive energy.

Paolo Di Canio

How could we monitor energy in markets? What are the leading indicators, what is in control positive or negative energy? (This may not mean it is connected with a bullish or bearish overtone). What happens when a market loses its soul? Does this affect the length of time until the leaves return, if they return at all?

Anatoly Veltman writes: 

Yes, there are plenty of reasons to believe that the free market has been totaled. It will take some sort of cathartic process to ever regain it.

1. It began with the machines taking over. Big picture has gradually been rendered irrelevant, as black boxes battle to take advantage of regulatory shortcomings– and manage to skim the zero-sum markets of billions inside of every reporting quarter!

2. Then came the cyclical peak in asset prices. By the end of 2007, helped by ridiculously easy credit, the bubble formed and popped.

3. The short-term pain proved so unbearable, that both sides of the isle caved in to the kneeling emissary - giving birth to centralized market and killing off free market spirit.

4. The centralized machinery gained speed, as flexionic power houses began to perfect leveraged self-dealing, smashing through all past records in the process. Billions became chump change. The machinery is hungry for trillions, and the far-from-independent Fed is happy to print them.

5. All those newly minted trillions get channeled to a few, resulting in unprecedented wealth disparity. Trillions get laundered on the periphery of the real economy, avoiding regular capitalist process and diminishing the multiplier effect. The entire demand curve shifts, further distancing the financial assets from real economy and the Main Street.

6. Every so often, the financial infrastructure figures blow up and expose total void of the system's integrity. Former exchange chairman is exposed as a Ponzi, and former governor is about to be exposed as expropriator of customer segregated accounts. That's all we needed at this point of the cycle…

George Parkanyi writes:

Even if these things are true, what benchmark are you comparing current markets to? At what point in time did they ever have true "integrity"? Over the ages markets have been manipulated by different parties who benefited disproportionately in different ways and to different degree. If no-one is willing to step up and define what wonderful era represented the true/ideal baseline market environment that worked for everyone, then I'm not interested in listening to the complaining. We are speculators - I posit that we need to deal with reality, not some kind of utopian fantasy. If markets are being manipulated, then understand the manipulation/environment without the hand-wringing and moralizing, and make the necessary trading/investing adjustments. No-one said speculation was supposed to be easy.

Anatoly Veltman responds: 

I'm curious, George. Can you cite modern market history precedent for any of these?

Rocky Humbert joins the conversation: 

There are countless examples of similar govt interventions. Everything from exchange controls to wage and price freezes to rationing to anti-trust exemptions to banning private ownership of gold to tariffs that undermine whole industries to regulatory edicts that accomplish the same to union regulations etc. Etc. Etc. Even Operation Twist is a rehashing of old policies; the practice of monetary policy , if anything, has become only more transparent in the past 20 years — but not necessarily wiser.

And of course, there's the occasional war with its wholesale expropriation of wealth, death and destruction.

History rhymes. Always has. Always will.

I look forward to the day when Anatoly writes constructively of something that actually works…instead of commenting endlessly about what doesn't, lamenting the good ole days…

Anatoly Veltman responds: 

I'm looking forward to that, too, Rocky, and thanks for straightening me out. However, has there been a precedent for robbing customer segregated accounts to such an extent that recovery is seen as unlikely, and yet prosecution is seen as unlikely as well?



After what I heard on NPR this morning I would say the Cards are doomed. It appears to me that they are looking for a great excuse in case they lose.

NPR was gleefully reporting a good excuse. It turns out the bull pen did not warm-up the pitcher for the guy that hit the double, like the coach called for because, get this, they did not hear what Coach La Russa said on the phone. Great excuse! That was painful to hear.

Here is the story

newsfeed: world-series how-the-st-louis-cardinals-got -all-mixed-up

Why does this matter?

In the heat of a grueling marathon I've learned that once you are searching for an excuse in case you lose, you sure will.

George Parkanyi writes:

 To your point, one of the biggest chokes ever was the Ottawa Senators going down to the Toronto Maple Leafs a few years back. They were leading the series 3-2, and the 6th, clinching, game 1-0 late in the third period. Toronto had been completely shut down to that point. Toronto got one penalty, and right after, another. What a glorious opportunity for Ottawa -a 5 on 3 power play! What did they do?

They didn't even go into the Toronto zone, they passed it around and just generally wasted time to eat up the clock. But there was still about 8 minutes left to go in the game. I still remember jumping off the sofa and literally screaming at the television "What the ^*&&*% are you doing, you idiots!!!!" Sure enough, playing not to lose, they gave up a late goal to an energized Toronto, who then won the game in overtime and also won the 7th game after that.

That game is etched in my mind as the poster-child example of why you don't play not to lose when you're in a competitive situation. I remember this when I play soccer, and never play more conservatively when we have only a 1-2 goal lead no matter what stage of the game. My philosophy is keep doing what got you there. That's also why I absolutely HATE late-game prevent defenses in football.

 Peter Saint-Andre comments:

 The Wikipedia page about baseball points out the following:

clock-limited sports, games often end with a team that holds the lead
killing the clock rather than competing aggressively against the
opposing team. In contrast, baseball has no clock; a team cannot win
without getting the last batter out and rallies are not constrained by
time. At almost any turn in any baseball game, the most advantageous
strategy is some form of aggressive strategy."

Some form of aggressive strategy is always advisable in investing, too. You can never simply run out the clock.

 Stefan Jovanovich writes:

And, for racquet sports, even more so; they are the only hand to hand combat sport where you cannot be saved by the bell or blame the loss on the manager or the rookie who tried to steal second. Speaking of extraordinary sporting events, did anyone see what City did to Manchester United? Remarkable. Lazio's loss is Manchester's gain.


Scott Brooks comments:

This is not completely true of baseball. In little league, most (all) games have a time limit. So there is a strategy to playing to the clock. The home team always got the last at bat (unless they were ahead) after the cut off point.

So if we were the home team and were ahead and the cut off time is approaching, we would make the inning last as long as we could. We'd have our batters run the count up. We'd have them step out of the batters box between pitches. We'd call time out several times, etc.

All to ensure that the opposing team didn't get another at bat. Sure we'd have gotten another at bat after them if they tied the score or got ahead of us….but why take the chance.

Peter Saint-Andre responds:

So is the lesson that little-league investors think they can run out the clock, but big-league investors know they don't have that option? :)

 Scott Brooks writes:

Whatever league you're in……..

……Know the rules and use them to your advantage so you can win. I don't
care what the rules are, just make'em clear and let me play/coach/invest.

As Vince Lombardi said, "The object is to win, to beat the other guy"





 One has always wondered why the banks according to their regulators are being prohibited from investing in this and that thing, derivatives, mortgages, stocks et al, but never have I seen a mandate that they don't invest in sovereign debt of the solid as a rock countries such as those they invested in as did Rome after the Trojan war. Could it be that instead of being prohibited from such investments, the opposite is true, and that is why whenever a country is about to go bust, the banks are in danger of falling. Could it be that they are that foolish as to always hold the short straw?

Gary Rogan writes:

Based on multiple occurrences of coming close to the short end of the stick but somehow being saved by the US or the IMF it has not been a bad strategy. How many times has it happened in Latin America? The IMF resolved the early 80's crisis and Brady bonds were used in '89. So it wasn't just crazy people who would loan to Latin America that is guaranteed to blow up sooner or later. There was clearly an implicit understanding that French and German banks would be bailed out from their losses to the various PI**GS, and the way everyone behaved towards Iceland and Ireland, this was clearly expected that they would be the slaves to the big brothers, and the banks would be helped to be made whole by the taxpayers of the less-important countries, and when the bigger countries are involved the big brother taxpayers would have to chip in.

To the banks this was the frog in the boiled pot situation, except in stages: you warm the pot up a little bit, and then some savior helps you jump out, so you learn that the pot is safe. Then the frog jumps back in, and the pot is warmed up a little more, and the savior helps again, and so on. But now he can't help, but who cares? The old bank CEO's are enjoying margaritas some place where they used to lend to or even nicer and safer, or are dead, so on the average this was worth is to the banking flexion leaders. 

Bill Rafter writes:

Several of the 15th and 16th Century Florentine banks including that of the Medicis had problems with their sovereign loans. Despite problems the banks continued to lend for political/military reasons.

George Parkanyi writes:

Banks are large institutions and, like large institutions at the senior levels, don't pay attention to detail beyond a certain point. (I see that in government a lot for example.) Behind every major transaction is some mid-to-senior manager trying to close a deal, land a big client, or in the aggregate hit some number to make a bonus or whatever. I would think that to win a sovereign account would be a big deal, so of course you would trade or perhaps make a market in a client's debt in that situation. Smart sovereign clients, because of their size, can easily play one bank off against another depending on how hungry and competitive the players are at each. Sure institutions have systems, but ultimately deals are made by people, and the culture in investment banking is typically to do whatever it takes to make the deal, even if it means being "creative" and circumventing part or all of your controls, not digging too deeply in case you find something that might compromise the deal, and/or simply treating widely-accepted assumptions as fact (AAA credit, too big to fail etc…). There are many paths to these untenable outcomes, and they are all rooted in human nature. Nicholas Leeson never set out to bankrupt Barings, he started out by just trying to keep a big client happy.

Gary Rogan adds:

Still, moral hazard is what makes all of this possible (having some implicit savior). You don't see Procter and Gamble negotiating a deal with Walmart or some little dictatorship where they will sell them detergent at what winds up being a big loss, and least not very often. The suppliers who are foolish enough to do that disappear without anyone hearing about them, other than in some CNBC special about Walmart. Socialism in any form will ultimately destroy itself: when people have a right (or the idea that they have a right) to other people's resources, eventually they will consume/destroy enough of them to sink everyone involved.

Stefan Jovanovich writes:

The Bardi and the Peruzzi had two enormous technical advantages. Their staffs had fully mastered the science of double-entry book keeping and taken Pacioli 's discovery (probably lifted from the Byzantines) and improved it to the point that they could easily do present value discounting. This was a very big deal at a time when Italian banks were under the same prohibitions that banks in the Muslim world still operate under - charging interest was a sin. Their skill in double-entry was complimented by their shrewdness in dealing with the intricacies of canon law. The Bardi and Peruzzi were the first to figure out that they could get round the problem of usury by issuing loans at a discount and balancing their books by showing the difference between the cash paid out and the loan amount as a gift from the borrower. In a Christian world gifts were perfectly acceptable and (I love this part) the ability to receive them a proof of worthiness. Most of the discounting was not on loans but on relatively short-term bills of exchange. Many of them were remittances to the Papacy. You can see this in the list of the Bardi branches in 1300 - Barcelona, Seville, Majorca, Paris, Avignon, Nice, Marseilles, London, Bruges, Constantinople, Rhodes, Cyprus and Jerusalem. What is supposed to have killed both banks was, as Bill notes, their difficulty with sovereign debt. But it was only one sovereign - Edward III of England. According to the Peruzzis, Edward borrowed 600,000 gold florins from them and another 900,000 from the Bardi and then, in 1345, told them he would not be able to pay on the agreed upon schedule. The Italians had no choice but to agree to a workout, and they ended up taking much of their eventual repayment in wool rather than specie. The problem for them was that the combination of the Black Death and the exhaustion of the German silver mines had produced a monetary deflation that made the repayments worth far less than the nominal loan amounts. But, it is risky to take even this story at face value. The author of the Wikipedia article on the Hundred Years War (where Edward pissed away all the money) has his doubts. He writes that "the Peruzzis' records show that they never had that much capital to lend Edward III….. Further, at the same time Florence was going through a period of internal disputes and the third largest financial company, the Acciaiuoli , also went bankrupt, and they did not lend any money to Edward. What loans Edward III did default on are likely only to have contributed to the financial problems in Florence, not caused them."

What is not in dispute is that it took another half century for banking in Florence to revive on even a regional scale, and in scale and international reach, the Pazzi and Medici were secondary players compared to their 13th and early 14th century predecessors. The Medici are famous because of their adventures in Italian politics, their family stories and their art patronage; but, in terms of finance, it would be like comparing the current House of Baring with the one active during the Napoleonic Wars.



Where are people going to put their money if they get more jittery about debt? You’ve gotta have serious balls to be putting your money into a tiny slug of metal at $2000-$3000 a pop. You can’t eat the stuff or put it in your gas tank. Whereas good corporations have loads of human, financial, and infrastructure capital with which to create wealth and adjust to prevailing conditions.



You guys are into counting and numbers - so here are a few in this excerpt from my blog post today. It partly speaks to the recent discussion here about stops.

The market coughed up another 32 points today, putting it about only 35 points above where it was in the lowest closing low in August (S&P 1119). Whereas the CAD-adjusted S&P500 is currently 3.6% higher than that low close, the portfolio is now 11.7% higher. That's an 8.1% gain on the benchmark in one month. That's an impressive demonstration of the internal dynamics of the reversal trading.

Now mind you the volatility over that month has been inordinately high, but even 2-3% a month (as it was tracking before the downslide) is very impressive outperformance. So far so good.The portfolio again lost ground in the past two days, but is still slightly positive in September at +.21%. It's way ahead of the benchmark at +3.87% in the first 7 trading days of September, and is 3.04% ahead of the benchmark as of the beginning of this year. A comeback is definitely under way -though not yet obvious in that the portfolio (which was not using the reversal trading prior to late May) is still down on the year by 5.35% from prior losses.
So this is the setup for BUYS for any of the vehicles being used:

DAY 1 The closing price is less than previous day's intra-day low, AND the position has so far built to less than four tranches (2% of the portfolio $ value); 4 tranches is the maximum position. DAY 2 Set a limit order to buy one tranche (2% of the portfolio $ value) one cent below DAY 1's intra-day low.

And the setup for SELLS is the inverse:

DAY 1 The closing price is greater than previous day's intra-day high, AND you have at least a one tranche position (can't sell something you don't have). DAY 2 Set a limit order to sell one tranche one cent above DAY 1's intra-day high.

This extension beyond the previous day's extreme serves to widen the average "spread" between buy and sell orders; sometimes you catch nice gaps. You keep buying and selling tranches of fixed markets in this fashion based on this simple setup. And you don't use stops - you're trusting that the world or financial system won't end overnight.

Where there are ETF long/short pairs, I buy and sell both sides of the market, but only use the short ETFs when the price is above the 50-day moving average. Short ETFs erode much more quickly than long leveraged ETFs (has to do with how they are re-balanced to match and multiply (double or triple) the move of the underlying market or index). I don't go short while I still have an open long position (I prefer to "run out" of long inventory), but I do start going long again if I still have an open short position. The strategy is biased to primarily trade the long side and only use shorts at higher extremes to mitigate the cost of short ETF erosion and losses during smooth, sweeping bull trends and/or sharp rallies.

Leveraged ETFs of course increase the "spread" by the leverage multiple (2 or 3 depending on which you are using), and therefore project greater profitability. The only downside to leveraged ETFs is that they erode over time if held, especially over periods of high volatility. They work well as long as you don't hang on to them for months. If you are relatively quickly in and out, the higher volatility will easily overcome the erosion factor.

The overall results are still preliminary, as I've only been using this for a little over two months, but so far it seems to be following back-test projections. Worst case scenario is a steep one-way drop; not so bad but likely an underperform is a long unbroken rise. This risk is mitigated with a portfolio approach. Not all markets are in sweeping trends, or maintain the same correlations at any given point in time. These offsets mitigate having everything going against the same way at once. Highest correlation is in panics. You can't avoid drawdowns (my deepest was 13.9% in August at the worst of the panic), but you can substantially mitigate them, as the first paragraph in the post above shows.

In my blog I document all trades and portfolio results/status, and discuss the reversal trading dynamic in relation to market activity on a day-to-day basis - kind of like a lab experiment. If interested send me a note and I'll pass on the URL. I'm finding the results interesting - some of you might too.





Why does the S&P, when in a certain stage, go down when there is good economic news because the interest rates go up when there is good news, and stocks are valued as an infinite stream of discounted earnings so the interest rate is more important because it is compounded recurringly while the effect of output is ephemeral as everyone knows. I believe that the reason that stocks go down on the rating announcements is it impacts the desire of everyone to hold risky things during uncertain times, but the more that the ratings are cut back, the greater the chances that a deal to cut spending will be made and this is good for interest rates.

Rocky Humbert responds:

I'm probably being dense, but I still don't follow your logic. You first sentence doesn't address my point about what's happening in the PIIGS right now — sovereigns are being shut out of the bond market, but blue chip borrowers are conducting business (pretty much) as usual. The rising sovereign interest rate seemingly is becoming less and less relevant to the conduct of business to business lending. In pointing out this 7-sigma phenomenon in a private correspondence with a very knowledgeable spec this morning — that this is a a very different world than we've seen for the past 40 years — the spec replied, "[This is closer to ]the world that JP Morgan inhabited, where sovereign credits were more risky than sound companies and the banks bailed out the Treasuries. I grasp what you mean in the context of not-owning-risky assets when things seem uncertain. However, this is a mindbending paradox. The risk is arising from the riskless asset. So if the riskless asset is becoming more risky, does it follow that the risky assets are proportionally more risky? Because if you sell the risky asset because you're scared of the riskless asset, do you buy the riskless asset even though it's becoming risky even though it's what made you sell the risky asset to begin with??? Off to the gym… 

George Parkanyi adds: 

Corporations (at least the true going concerns that serve a broad economic need) seem to have the resiliency of cockroaches (e.g. the Japanese and German companies that survived the massive bombing in WWII being case in point). Companies have more flexibility than governments (in general) to adapt to changing economic environments. They can more quickly re-deploy capital and can cut costs more quickly and aggressively.

It has occurred to me that if sovereign debt, massive amounts of which are out there, eventually are widely perceived as crap, there could be a veritable stampede out of it - especially in conjunction with declining currency and/or inflation. So where is that money to go? The first look would probably be commodities - especially precious metals, and the initial panicky inflows will likely drive up prices dramatically. We've seen some of this already, facilitated by the advent and growth of commodity ETFs. By the same token, there are legions of equity ETFs, funds and well-run companies which will be perceived as a safer than sovereign debt because of the survivability advantages of corporations. As commodities soar, equities will start to look like screaming bargains in comparison. Dividend-paying big-caps may very well become the new bonds from an institutional investor's perspective. This transfer of capital from debt to equity could drive stocks much higher as well in a boom similar to what commodities are experiencing. Interest rates may not matter. At high stock prices, companies will be able to raise capital through equity offerings, and dividends may come into vogue as another way to attract that outflow from bonds. As bonds are being sold, they may get to the point where they are so low that governments (that still wish to avoid default) may start buying them back on the cheap to retire them. If you had a trillion in debt that just got marked down to $500B, and you had that money and/or could print some to fund the buy-back, wouldn't you take that opportunity to wipe the $500B off your balance sheet and improve your credit rating?

Now that I think about it, jacking up interest rates to short your own debt (to buy back later) could be one bizarre option the Fed could try at some point. Although you'd likely strengthen your currency doing that and it could backfire … unless … you short the other guy's currency first … and use those profits to buy back your debt. You could probably do this once. 

Interesting times indeed. Rocky's PIIGS observations are very well worth thinking about.

Paolo Pezzutti adds:

As a country defaults I do not expect to see all companies go bankrupt. The financial health of a government does not imply that companies cannot make a profit. In a sell off type of environment where asset managers weigh down their portfolio in a troubled country, I agree you can find good bargains. One problem may be the timing. When in 2008 prices plunged I started to buy stocks of very solid companies in Italy. Unfortunately prices continued to the downside some tens of percent. It took more than a year to see prices go back to my level. during a panic also good quality stuff can sink. In Italy there are some of these companies. I look at the utilities sector,luxury, oil. I look also at banks. Most of them are well managed and are mispriced right now. But we'll probably could buy at much lower prices. Imagine what could happen in these troubled countries in case of a slow down of the global economy.



While reading PoliticalCalculations I ran into a good pie chart of just who exactly holds the national debt as of Sep 30, 2010.

(for details click above linked article)






George Parkanyi writes:

A nice way to fund all the pensions (including military) and social security is boatloads of low interest bearing, depreciating IOU’s that are on an ass-wipe trajectory…

You know, it was just about the time that the senate in Rome thanked the veterans who managed to cut their way out of the Cannae slaughter by exiling them to Sicily, that the Roman army started looking to its generals to take care of them. The republic became, well, inconvenient, when these generals started becoming emperors. Just sayin’ …

Stefan Jovanovich corrects:

There were no "veterans" at Cannae; the Roman armies were still largely citizen-militias modeled on the Greek (not the later Macedonian) phalanx. The analogy with current U.S. military pensions is a complete anachronism; the Roman Army did not start paying pensions until the latter part of the 2nd century C.E. I know Hans Delbruck makes the argument that the military reforms after Cannae (appointing a commander-in-chief rather than continuing to alternate command between the pro-consuls) somehow led to the decline of the republican form of government; but that is not supported by the facts. After all, Scipio Africanus declined to accept appointment as perpetual consul; he and his professional army, unlike later "popular" ones, did not march on Rome. The idea that the Roman army started "looking to its generals to take care of them" after Cannae is also a considerable stretch. Citizen soldiers had expected to be paid money from the spoils of conquest since the first days of the Republic. Citizenship was valuable because it allowed you to join the militia and get part of the loot; that was the reason that you find no discussions of conscription in the history of the Republic or even the later Empire, when enlistment allowed you to become a citizen and receive your part of the spoils (as it still does today in the American military.) Soldiers had always expected to be rewarded by Senate and its pro-consols; war was business for Roman citizens just as it was for the French who flocked to join the Revolutionary army and the sailors of Nelson's Navy. The decline of the Republic came from the Senate's persistent refusal to extend the franchise of citizenship to those outside Italy; having gained an Empire, the Roman elites wanted to deny the vote to anyone not from a founding family. That left an opportunity for Cinna, Sulla and Caesar to claim "citizen's justice" for the disenfranchised. One of the nastier aspects of the sentimentality of Adams and Jefferson for the Roman Republic is that they both feared the example of the Empire in extending the rewards of citizenship to the great unwashed.

George Parkanyi writes:

That’ll teach me to mention anything historical with Stefan around. That’s it, I’m cancelling my subscription to Discovery Channel …

It was a crude analogy, more about pissing off your own military through neglect/disrespect and the eventual consequences than the details of how they were/are compensated. 

Stefan Jovanovich writes:

 Please take comparison to the professional Roman army to heart, George. We are at the point where the Romans were after Cannae, not in the declining days of the late Empire. The American military is not going to be cheated out its pensions precisely because the franchise has been extended and "entitlements" for soldiers, sailors, marines and air folk are now more politically sacred than they have been at any time in the country's history, except for the Union Army pensions after the Civil War. There is also very little real discontent among the current serving military; reenlistment rates are now so high that the Navy is having to pay bonuses to get people to leave the service early!!!!

P.S. One of the legacies of the earlier time when military pensions were sacrosanct is this:

The National Building Museum

IMNSHO it has the most beautiful workmanship of any building in Washington D.C. It was designed by Montgomery Cunningham Meigs , the engineer for the Capitol Dome, and the Quartermaster of the Union armies and the Southern Unionist who despised Lee so much that he single-handedly turned the Lee-Custis home into Arlington National Cemetery.

Here is an interesting article about the reach of the Roman professional army

I've been donig some more thinking on this subject. 

 For the United States, Korea and Viet-Nam were Cannae; they may have been necessary wars against unavoidable enemies, but they were fought as the Romans initially fought against Carthage - with the extravagant waste that always accompanies the structure of a "citizen" army. The lesson the Romans learned and I would think Americans have learned is "never again". When cannon fodder is cheap, both democracies and dictatorships will allow their generals to use attrition as a strategy. Whatever its faults, that has hardly been the U.S. military strategy over the past 2 decades; the investment in battlefield medicine alone dwarfs everything done in the previous dozen wars. Wars are never worth the cost, but some are less wholly stupid than others.

The wars of the last 2 decades have left the country with no conscription, a capable professional military, and a sense of caution about further military adventures but no fear of conflict. Our known and likely enemies - Russia, China, Iran, the believers in permanent Jihad - have severely limited capabilities; yet the necessary continuing expenses of the military, including R&D and veterans pension and health care costs, are likely to be 5-6% of GDP, at most - half what they were in the 50s and 60s when everything was so wonderful.

By comparison, the Israelis have spent and will have to continue to spend 8% or more of GDP merely to preserve a strategic situation that is a hundred times more perilous than our own. If we are to look for the spending of "deep-bench assets", the search will have to begin with Johnson and Nixon and their domestic wars against poverty and the Federal subsidies to health and education spending. Those have consumed the bulk of the country's assets, not the spending on munitions and professional soldiers.

Check this out:

Fiscal     U.S. Military
Year       spending as
               percent of GDP

1940       1.7
1941       5.6
1942       17.8
1943       37.0
1944       37.8
1945       37.5
1946       19.2
1947       5.5
1948       3.5
1949       4.8
1950       5.0
1951       7.4
1952       13.2
1953       14.2
1954       13.1
1955       10.8
1956       10.0
1957       10.1
1958       10.2
1959       10.0
1960       9.3
1961       9.4
1962       9.2
1963       8.9
1964       8.5
1965       7.4
1966       7.7
1967       8.8
1968       9.4
1969       8.7
1970       8.1
1971       7.3
1972       6.7
1973       5.8
1974       5.5
1975       5.5
1976       5.2
1977       4.9
1978       4.7
1979       4.6
1980       4.9
1981       5.1
1982       5.7
1983       6.1
1984       5.9
1985       6.1
1986       6.2
1987       6.1
1988       5.8
1989       5.6
1990       5.2
1991       4.6
1992       4.8
1993       4.4
1994       4.0
1995       3.7
1996       3.5
1997       3.3
1998       3.1
1999       3.0
2000       3.0
2001       3.0
2002       3.4
2003       3.7
2004       3.9
2005       4.0
2006       4.0
2007       4.0
2008       4.3
2009       4.7



 A while back, someone asked about the value of doing nothing. I had two positions on going into this morning - short S&P, and short natural gas. Had I not turned on a computer today, I would have made enough money to forgive many a sin of the first quarter. As it is, I ended the day breaking even when I had started out being significantly short two markets that gapped in my favour and then later basically went over a cliff. I won't go into the gory details of what and why I traded - nor share my feelings - but I'm pretty convinced that I'm going to have to hire a guy with a gun who, after I've set up the trade and the risk management, under contractual obligation is required to say to me "Sir, step away from the keyboard, or I'm going to have to shoot you in the head."

I would say there is value in doing nothing.

Speaking of doing nothing, the hockey game is on and the couch beckons.

Alston Mabry comments:

 One sympathizes. It brings to mind this proverb.

Kim Zussman writes:

 Randomly speaking, the market might have just as easily shot up and you could have avoided regret.

Gordon Haave writes:

Whenever I am in a business meeting and someone has come to it with some pressing need we have to react to right away, I always ask "what if we do nothing?". Everyone is always stunned.. they haven't even considered not doing anything. After asking that usually the consensus become to, in fact, do nothing.

Alston Mabry writes: 

 I would say that the over-arching issue is that the Market Mistress can torment her lovers in many, many ways. And experience would lead one to believe that tormenting her lovers is, in fact, her main obsession.

George Parkanyi replies:

Oh sure, Kim, you're right about that. But I had my risk management in place. Stops. But the point is, I had my idea right, and the method of executing basically set up to exploit the anticipated scenario. That would have played out very well, since there was nothing more that I needed to do at that point. Then I started changing stuff …

I don't mind being wrong, because that always happens in the markets, and you plan for it. What really gets me angry at myself is when I'm right and then I get in my own way. What other people do, I can't control, but what I do I SHOULD be able to control. Not being able to maintain self-discipline is a character flaw that has to be actively managed, and today it got the best of me. Doesn't always, but today it did. (Tomorrow may not be so good either, because before the close I went long a little silver.)

Jim Sogi writes:

Well, the next best thing to doing nothing is doing just a little to see what happens. If you're wrong, not such a big deal, but a small sample gives a good sign. Like Commodore when the guy gives him a hot tip in Reminiscences of a Speculator. See how it gets swallowed up.

Jeff Watson writes:

Jim mentioned probably the best thing I ever learned in my speculation game which is still going since 1973. "See how it gets swallowed up." Second best lesson I ever learned, but it only works with big orders and can tell so much about the markets, where they are, where they're going, who want's what, etc. Many things can be said with words, but until the order is put to the market, one can't say anything. The order getting digested is where the rubber hits the road and contains so much information(even in these electronic days), almost 10,000 pages per order if one is willing to keep an open mind and analyze it. The Commodore's system still works well in the grains, more than any other market I've seen and has been responsible for much of my limited success.

Vince Fulco writes:

The multi-day swing boys and the deep pockets are the big winners in GC1 so far tonight. Late afternoon, the contract came in like a ton of bricks as ES tumbled, with modest movement in equities after hours, zoom goes Gold as if the latter part of the day didn't even matter. The solid long moves all seem to be held "in reserve" till the day traders are flat.

Jim Sogi responds: 

I know its so minuscule, but the market knows when I put in my and my order makes it harder for Globex to move to the price and for a fill. I try to stealth even my limit orders keeping them mental until the price is where I want, ambush like. It puts me near the end of the queue, but at least its the right queue at the right price tick. Less chance of the hunter becoming the hunted, less exposure.



 I would like to give a book to the young officers of my ship when I leave my command in a few months. The idea would be to transmit the idea that one should look at opportunities today having a vision, a road map for tomorrow's journey.

As Randy Pausch said: "It is not about how to achieve your dreams. It's about how to lead your life."

Basically it is all about the curiosity to experiment and explore your dreams. Mistakes made are not about being good or bad. Don't be afraid to pursue your dreams. Opportunities occur randomly. If the environment is favorable there is a great chance that these opportunities will be favorable. Work to create this environment. If you are not happy, change. Do something. Don't whine. Do things with passion. Exploit and realize your potential and talent to the maximum extent.

Could you please give me some advice? What is the best book?



George Parkanyi writes:

Hello Paolo,

Yes Man
by Danny Wallace is a lot of fun. It's very funny (not sure if its translated into Italian though), but the central idea is that Danny wasn't happy with his life as it was and decided to see what would happen if he simply said "yes" to every opportunity and request that came along, without filtering. The book documents what happened. This addresses the curiosity/exploration part of the message you wish to convey, done in a fun way.

Think and Grow Rich by Napoleon Hill is an excellent book. It has many very good, uplifting life messages and very practical prescriptions for success.



Scott Brooks writes:

I agree with George that Think and Grow Rich is a must! It had a huge impact on my life.

Since part of vision is proper communication, I also recommend Dale Carnegie's, How to Win Friends and Influence People. I know the officers of a ship aren't there to "win friends", but communicating properly and in a manner that is receptive to the listener is a vital characteristic of all great leaders.



 I've been thinking a lot about randomness lately. Trying to define randomness, I presume that it can only be defined negatively, as in the absence of any discernible or systematic patterns. I believe that complete randomness can only be disproved and not proven; but a test will only detect a single pattern or a group of related patterns. I would appreciate any thoughts on randomness in a philosophical vein as there might be a few meals lying right under our noses.

Gary Rogan writes:

Just some random thoughts on the subject. Randomness signifies the lack of an informational connection between the process that generates one even and any other event. There are two kinds of connections: the specific knowledge of one process knowing what the other one is doing, and the inherent construction similarity between the processes. Imagine that you need to pick 100 random events. You could pick 100 individuals, put them in separate rooms and let them pick a number each. They will satisfy the lack of the first type of connection, but not the second. Their picks will not be truly random because human beings of any kind have enough similarities to not satisfy the second, yet their picks will be more random than if they were together as a group. So the trick is to find processes that have not connection to each other and no preferences to generate any particular number within the rules of what's acceptable. 

George Parkanyi adds: 

Randomness seems to be overlaid on some kind of order – a basic framework within which seemingly unconnected events then play out to set up our environment and our experiences. Kind of like a board game - a basic set of rules with additional random elements, say dice, shuffled cards and individual decisions that ensure that no two games will ever be played exactly the same way. The game overall works toward a predictable outcome (someone winning), but the means of getting there will never be the same for any two plays. 

Mark Schuetz writes: 

Apologies if Rumsfeld's quote has become hackneyed, but I think it describes one facet of randomness well.

"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know."

Some always think of randomness as "known unknowns": everything was determined by some underlying process or fits some probability distribution. Depending on one's definition of randomness, perhaps there are more "unknown unknowns" than meets the eye: a truly random event or series of events might not determined by some underlying logical process and a descriptive probability distribution might not exist or might be impossible to know.

Russ Sears adds:

Randomness is a major topic in Abstract Algebra, and studying it almost became my career after grad school. Not sure if I can do it justice now, as I have been away from the subject for so long. However, in sequence of numbers (most events/things can be numbered), if there is no way to discern step t+delta from t even by narrowing its probability down then by most definitions it is random. For practical matters to "create" something that is random it is really a matter of hiding the pattern so that these probability distributions can not be discovered. You do this by the size of the numbers involved. In other words it is deterministic (it really can be discerned by cause and events ) but the numbers involved make it impossible to do so either because the measurement of the determining factors are impossible to categorized with enough accuracy to determine (think lottery ball drawings or weather/chaos) or because the "code" is varied and on such a large scale that only those with the "key" can decipher it.



 If someone could relate the 10 most important ways to be a successful beggar and somehow rate the big CEO's on how they fare on this, perhaps it would be a good way to pick investments these days. Certainly the basketball player, and the [deleted pending resolution of offer and counteroffer] would be high up there, and the heads of the certain institution from areas that are renowned for their ability to compromise would have many lessons to teach, and juicy stocks ripe for investment. The head of a metals company renowned for its low cost elevators in my day was a butler and this would seem to be very ideal training in the absence of a school for beggars in this country. How to generalize?

Gary Rogan writes:

They can't really beg and retain any illusion of authority. They have to prostitute themselves to the regime while plausibly (somewhat) appearing highly enthusiastic and supportive.

Some of the skills:

-Be able to speak with passion and conviction about complete nonsense, generally in the collectivist/green future and similar areas.
-Be able to deny obvious truth with passion and conviction in public, such as the real motivation for any help from the government.
-Regularly show up in Davos.
-Express a great deal of concern for various oppressed constituencies, at home and abroad and describe at length how the company/CEO are helping them.
-Be excited about creating jobs, especially "good" jobs, "skilled" jobs, "green" jobs. Talk at length about how the US needs to be a country that "builds things".
-Be able to motivate a large number of employees by any means necessary to contribute the government political candidate.
-Invest heavily in a number of "relationships" in DC to create wide-spread support for bailing out the company.
-If the company is a conglomerate that owns any media properties turn those properties into the echo chamber for the regime.
-Infrequently offer mild criticism of the regime while emphasizing the silver lining.
-Get involved as advisers to the various regime commissions.
-Hire former regime members.

Steve Ellison writes: 

Maiming: In one country I visited, there were many beggars, who served an important role in their religion by giving the faithful opportunities to do good deeds. Many of the beggars had been purposely maimed by their handlers in order to attract more alms.

Spinning a yarn: When I first worked in the big city as a young man, I was stunned by how many panhandlers there were. Locals informed me that the Republican president was to blame. I saw the same panhandlers day after day, but every once in a while somebody would approach me with a sad story. One woman rode the subway telling everyone she needed to get to a hospital for a medical procedure but needed money to get there. I occasionally would be approached by someone claiming to be a stranded traveler who needed money to get home.

Performing unwanted services to create a sense of obligation: The last time I went to the Los Angeles airport, I was approached as I walked out of the terminal by a woman who asked if I needed help finding anything. I said I just needed to find the shuttle bus for rental cars. She pointed out where it was (it was right in front of me, and I would have found it myself within five seconds) and then asked for money. Squeegie men and charities that send preprinted address labels are in this category, too.

Feigning virtue: I know people who have offered jobs to people holding signs saying, "Will work for food". None of the sign holders have ever shown up to work.

John Tierney writes:

10 attributes which get the alms seeker off to a good start:

1. stresses that the company is concentrating on "giving back to the community"

2. actively involved in and/or seeking out green initiatives.

3. putting increased emphasis on organic growth, but always has an eye-out for M&A opportunities

4. working hand-in-hand with government agencies/NGOs to address hunger/AIDS/climate change

5. supports and serves on advisory boards of outfits like Breast Cancer Awareness, Habitat for Humanity, Thurgood Marshall Scholarship program, anti-vivisection league, and Sierra Club

6. never misses annual meetings at Davos & Jackson Hole; always has time for interview with CNBC and others; dresses casually, but not ostentatiously for same, addresses interviewer by first name…refers to this year's meeting as "one of the most exciting" ever

7. rarely indulges in short-term predictions, instead devotes most of his time to long term initiatives (which he'd like to discuss, but, at this time, is premature); sees things improving slowly but surely

8. believes the Fed did the right thing - might have made a few small errors but, generally, moved decisively at a critical time. Country will bounce back, always has.

9. bailouts, QE1 & QE2, though regrettable, were necessary for the preservation of the financial system.

10. insists the public will realize a "healthy return" on bailout funds

Vince Fulco writes:

Not to be forgotten, the institutions that pound their chests with pride in their ad campaigns using misinformation as JPM has been doing recently re: the X number of mortgages (400M as I recall) the company has modified in 2010. "In order to do our part and assist ordinary consumers get back on their feet…" is the approximate spirit of the ad. Needless to say, for better or worse, in early consultation with these companies, the administration & Treasury planned for a 4-5X number of alterations.

Gary Rogan adds: 

Basically, the main requirement for being a CEO today is excelling at credible hypocrisy.

Russ Sears contributes:

Here are a half dozen more.

1. Beg for federal money for your customers. This should allow your prices to double what they put in. Plus the room for undetected fraud goes up. (See higher education and Medicare, medicaid and first time buyers tax credits). This way you get the best of both worlds, customers thanking you for making it affordable and tax payers footing the bills.

2. Give away your product to third world countries with tax breaks so that the Feds will extend the favor by lengthening your patent protection in US. Again gratitude for sticking it too us.

3. Have the government make it illegal not to be insured, and then make sure your product must be paid for by insurance. (car, health, PMI etc) Again with the government involved raising the easy of defrauding insurance companies.

4. If you are captured by the unions, make the government give only union shops a chance.

5. Use your size to get tax breaks as incentives, use your popularity to have the citizens build your stadiums.

6. Make sure that court system understands that with all the lawyers you hire, you are the ones keeping the judges in a job. Bringing regulatory capture to a new level, too big to prosecute.

World traveler B.K. writes: 

I've seen countless mutilated beggars in India, enough to make you want to cry coins to them. However, the practical advice is not to give: "In India thousands of children are being mutilated annually. The joints of their bones get injected with bleach. Infection is the result and amputation follows. Eyes are stuck out as well. …"

However, the greatest beggar I ever saw was an armless man in the NYC subway with a sign around his neck, 'Please give to buy drum set.'

George Parkanyi writes:

That may well be, but I look at it this way– who am I to judge? I once gave a leg-less homeless man a ten-dollar bill. Well he just absolutely lit up into a beautiful smile, looked me straight in the eye and said "God bless you!". That blessing hit me like a sonic boom. I felt it physically, and walked away feeling like I received much more out of that exchange than he did. Make of that what you will, but it had a huge impact on my outlook on life, and how we relate to each other. 

Marion Dreyfus writes: 

I saw the same mutilations and deliberate crippling in Nepal. Hundreds of kids tottered after Westerners, begging and making mewling sounds. If once you gave you were encircled and could not advance another step until each and every child had gotten coins from one. 

Art Cooper writes:

One of my favorite Sherlock Holmes stories is "The Man With the Twisted Lip," an exceptionally successful London street beggar, who gave his benefactors psychic value for their alms.

Pitt T. Maner III writes:

Here is an article on organized phony beggars. Those who donate must be able to differentiate the individuals worthy of a helping hand:

"Certain persons posing as social leaders have been running the racket of beggary. We are busy in gathering necessary evidence to initiate criminal action against them," Ramalingappa said.

He claimed that at few places the "beggary business" was going on a "commission basis"

and whenever the officials conducted raids, the beggars escaped from the clutches of law and also alerted others over mobile phones.

"Whenever the beggars in disguise are arrested, lawyers rush to get them released," Ramalingappa said. Most of these rackets thrive in and around well known pilgrim centres and religious places where people generously offer to beggars. He said an awareness programme will be launched to impress upon people that beggary should not be encouraged.

Stating that no proper rehabilitation of "genuine beggars" has taken place anywhere in the State, Ramalingappa said a comprehensive survey on the conditions of beggars will be taken up soon. There are 914 beggars including 168 women in rehabilitation centres all over the State. Steps were being taken to set these centres in order.



 The more one studies the markets, the more one is convinced that the hallmarks of a con are very useful in unraveling the possibility of making a profit. In this regard, I found the article "Con Ed" which features the insights of Todd Robbins, where he talks about spotters, the 3 h's of cons: hide, hype, and hate, and the direct relation between misery and the extent of cons to be helpful. I find that prices often have the hallmarks of con when they break through a barrier, showing you that it has overcome a difficult hurdle, and thereby gaining trust and confidence. Also, the spotter, the person that makes you confident by showing you his trust in the deal. So many CEO's, analysts, and newspeople play that role.

The article features the common adage that you can't cheat an honest man, or the related it's always the greed of the mark to get into something with an unfair advantage as a important precondition. How much evilness lied in most of the victims of the Catskill, Palm beach, Riviera, Long Island con who all must have thought that they could front run the market making operation downstairs. The importance of giving the mark excessive praise, which in most cases would be a short term profit, and is related to the principle of ever changing cycles would be another one.

The whole subject of flexionicism as a variant of the big con needs to be studied and quantified.

Sam Marx writes: 

The missing data for such a study are the successful con games that are never discovered.

There are probably a load of Ponzi schemes still operating.

In fact a Ponzi scheme, with luck and some skill, could turn out to be a big winner for both the manager and "investors", especially in a bear market.

In a successful classic con game, at the backend, there is what is known as the "blowoff" where the victim has lost a bundle, doesn't realize he's been conned, and actually is convinced he has to keep quiet about it or he'll wind up in jail.

Henry Gifford writes:

My favorite book on cons is The Gentle Grafter, a collection of O'Henry's short stories on the topic.

Many entertaining scenes of con artists arguing over whose specialty is more moral and noble, and the entertaining justifications they come up with, meanwhile constantly conning each other.

George Parkanyi finally asks: 

What is a flexion anyway? I see the term used here liberally, and it seems to have nothing to do with the dictionary definition (which has to do with bending limbs). And is "flexionic" even a word?

Gary Rogan elucidates:

This is Victor's explanation:

From the book The Shadow Elite by Wedel, Ganini. Former fed officials. Former high treasury officials with private access to the sqaush courts and executive dining room. Presidents of colleges, former and current, who worked at high positions in the treasury and fed staffers privy to the daily conference calls at which all upcoming releases are discussed high executives on Wall Street, who are consulted about the economy for their feedback by the treasury and the fed. Big owners of newpapers from Nebraska who dine on coke and dairy cream. Counterparts and their operaitve from other central banks that our treasury and fed discuss the upcoming policies and release with on a need to know basis so they will not be surprised and will know how to act and put things in perspective for their flexionic pursuits a home. Operatives within the agencies that prepare the numbers and especially those who make final adjustments on them.

Rocky Humbert writes:

I agree that unquestionably, and right under everyone's noses here, absent the savoir vivre of Madoff, that there are many Ponzi schemes still operating. One good whoosh will shake them out here (I am aware of one which I am certain of, massive in size, and I can only laugh that this one is still out there prowling in the deep).

Unlike Madoff, these other funds are not primarily comprised of Jewish investors (in truth, Madoff did have some Arab soverign wealth fund money too, but the majority of it was from the Jewish community) so when these monsters explode I would look for an entirely different reaction this time.

We were speaking of cons on a previous thread in a related list. I predict after this next manager explodes, the investing world (not necc "the public," we're not talking about hoi polloi here) will wake up and realize that if the manager has access to the money– it might be a con. Managers do NOT need access to the funds.

Sam Marx adds: 

I believe that it was in Barton Biggs' book Hedgehogging that Biggs described a club of money managers, large investors, etc. that he belonged to that would share financial information unknown to the public. But if anyone related information that was to the divulger's advantage and detriment to the divulgee (new word?) the divulger was blackballed.

Would this be considered part of the "Shadow Elite"?



First, why are so many people unemployed? The answer is very simple.
Because there is no profitable work for them to do as present labor
rates. Thanks to previous meddles, the US economy focused itself on
building houses and importing geegaws from overseas for people who
couldn't afford to pay for them. This was a dead-end economic model. And
the end came in 2007. Now, the latest figures show an uptick in
manufacturing…which is clearly the direction to go. But it will take
years before the US economy has made the adjustment to a new, healthier
model…making and selling things at a profit.

In the meantime, unemployment levels will remain high.

But wait…there's more. For which the adjustment is taking place, US
authorities are trying to block it. How? By taking resources from the
new, unborn industries and using it to prop up the old, dying ones. Like
Wall Street, for example. The financial industry grew like Topsy in the
bubble years. It began to shrink in the crisis of '07-'09, but the feds
came in and pumped more than a trillion dollars into the financial
sector, producing record profits for the big banks, but depriving the
rest of the economy of much needed capital.

Not only that, the feds also take the pressure off labor to make
adjustments. Food stamps, minimum wages, unemployment compensation,
make-work, shovel-ready boondoggles - all these things cause workers to
think they can continue as before…that a "recovery" of the good ol'
days is just around the corner…and that they'll soon be earning as
much as they were in 2007. Maybe more!

Want to really fix the unemployment problem? Listen up. Eliminate all
bailouts, subsidies, giveaways and support systems - both to business
and to labor. Abolish all employment restrictions and employment
paperwork. All free labor - undocumented non-citizens - to compete
equally with native-born workers. Cut taxes to a flat 10% rate for
everyone. Abolish every government agency that begins with a letter of
the alphabet. Then abolish the rest of them.

We confidently guarantee that the nation would be back at full employment within 30 days.

Tyler McClellan comments:

 This whole argument is bullshit.

The productive industries are by their own choice and for their own
reasons net suppliers of capital to the rest of the economy. It's a
myth, complete myth that capital flows to where it is most profitable.
It flows from where it is most profitable to where it will be accepted.

Stefan Jovanovich writes:

I wish I could agree with Craig, but he omits a significant handicap.
Because of the catastrophic decline in the productivity of American
elementary and secondary and college education, the skill sets of
workers under 30 are far, far lower than they were in 1945 - 1955. The
transcripts are immeasurably more impressive that they were for people
coming out of the military service and leaving college after the GI
bill. That Army confirms this sad fact in its recruiting statistics. The
handicaps for inductees in WW II were that some had had very little
formal education and were underweight from having struggled through the
Depression. The Army found that these could be remedied with "basic
training" in the 3 Rs (Reading, writing and arithmetic) - usually a 3-4
month course - and some decent chow.

The handicaps for recruits now are obesity and the creeping dumbs -
almost all the kids from the inner cities and slum suburbs are fat,
illiterate and without any learning skills. No entrepreneur in his or
her right mind is going to hire these kids, even if Craig's hallelujah
miracle of sane political economy suddenly appears. Full employment is a
long, long way off - as far away for this generation as it was for
people like my father-in-law in 1930. He had degrees in geology and
petroleum engineering from the Universities of Texas and Oklahoma, and
it took him half a decade to find steady work - initially as a
roughneck. These poor (in all senses of that word) kids don't stand a

Gary Rogan responds:

While I agree with all the recommendations, guaranteeing full
employment within 30 day while possible contradicts some fairly recent
Nobel prize work (of course the very fact that Krugman has one
invalidates it stature, but still it's something to consider).

The work of the winners,
Professor Diamond of the Massachusetts Institute of Technology, Dale
T. Mortensen of Northwestern University and Christopher A. Pissarides of
the London School of Economics, is best known for its applications to
the job market.

The researchers spent decades trying to understand why it takes so long
for people to find jobs, even in good economic times, and why so many
people can be unemployed even when many jobs are available.

Traditional economics, after all, would predict that wages should simply
drop, helping the labor supply to meet labor demand automatically and
sweeping jobless workers into whatever positions were immediately open.

These researchers’ explanation addresses the complications that come
from searching for jobs and job candidates: it takes time for unemployed
workers to be matched with the proper opening, since people are not
identical, cookie-cutter units, and neither are jobs.

While all this may seem intuitive, in the 1970s it was considered quite
radical. The resulting insights about how search costs can affect
markets also helped revolutionize not only labor economics, but fields
like public finance and housing economics as well. The work is
especially relevant today, as policy makers try to understand and combat
the causes of stubbornly high unemployment in countries like the United

Stefan Jovanovich responds:

The equilibrium assumption behind the Diamond, Mortensen, Pissarides
study is fascinating. Why should there be any necessary match between
ALL the skills being offered and ALL the skills being demanded? Prices
can adjust supply and demand where markets exists; they cannot produce
demand for skills that offer no profit to the buyer at any price. The
neo-Keynesian fallacy is that money dropped from helicopters will cause
private employers to find profits in having holes dug and then filled up
again; the original Keynesian fallacy was that the government can take
money from the incomes of people whose skills are marketable and give
the money to the hole diggers without reducing the amount of savings
available for investment.

Scott Brooks writes:

Capital doesn't flow where it will be accepted, it flows to where the government allows it to flow.

America is like a sick body riddled with metastasizing cancer. Nothing
works properly in a body that is fighting for it's life. Nothing "flows"
properly. The "Body America" is riddled with the cancer of statism. As a
result, the entire "financial organ" of the "Body America" isn't
working properly.

Mr. Albert comments:

The 'Greatest Generation' had an enormous advantage. After the war,
the US faced essentially no mercantile or manufacturing competition, and
thus dominated foreign markets at a time of enormous replacement need.

It was easy for the unskilled and unlearned to find work in that
environment. This advantage lasted essentially for the career length of
that generation. Fortunate circumstances coupled with the wealth
transfer of government borrowing and spending fuels the illusion that
somehow they had it right and the next three generations don't.

Craig Mee writes:

Thanks Stefan and co. It
seems he brings up many areas, but at the heart of it, is protection,
and political correctness and slowly slowly, and looking after the
flexions. When in fact a case of strong medicine is often needed, and a
swift kick up the butt. 

Stefan Jovanovich comments:

Tyler makes the conventional mistake of assuming capital and savings are
equivalents. People, by and large, have been remarkably canny about what
they do with their savings as long as their money is immunized from the
manipulations of the government and the better class of people
(academic joke). "Capital" - that Marxist construct now used by central
banks presiding over fiat monetary systems - will always want to snuggle
up to the Emperor and the Praetorian Guard and stay as far, far away
from the unruly uncertainties produced by the getting and spending of
the plebs in the marketplace and their insistence of being paid in
actual coin.

Gary Rogan comments:

While there is something to the paradox of thrift as a game-theory
type concept, the idea that the government can solve it through directed
spending is one of the more evil ideas that ever occurred in terms of
practical impact.

Tyler McClellan comments:

I feel very confident in saying you simply
don't understand the paradox. you have likely never read it, have no
idea (unlike stefan) that it arises from the identity of private sector
account that savings must be equal to investment but that our motivation
towards the one is the opposite and equal of the other. That they are
intermediated by the financial system under any circumstance just at a
level that is previously not computable because it would require knowing
what everyone's planned savings and investment were prior to some of
their income being destroyed by or added to based on others similar
calculations. In aggregate society cannot save by dissaving.

Oh yes it can via the production of indeterminant claims by the
government which is a result of excess private sector savings demand
over and above each individuals in aggregate investment demand (real
investment as a flow).

Now Stefan is learned enough to admit that he at least simply doesn't
believe in the identity, which I must admit is too difficult of a
concept for me to think about after years of trying to have kept at it.

Stefan Jovanovich responds:

Tyler and I have a quarrel over the nature of money, and his is most definitely the majority opinion. Mine is the quaint antiquarian notion that (almost) predates utility curves. You find the odd vestige of it (like a kind of monetary appendix) in the valuation of gold at the price set by President Roosevelt's order under the Trading with the Enemies Act (the loophole that allowed the provisions of the Federal Reserve Act to be superceded). This pricing of gold at a U.S. dollar figure other than the current market serves no evolutionary purpose in a world where Tyler's tautology is not only the economic rule but also the legal tender law.

But these odd remnants of a past economic world should serve as a reminder that the idea that a bank's reserve should be specie - a monetary thing tangibly powerful enough to stop even the most severe breaches of trust - was once common wisdom. It is no accident that the term "reserve" came from military doctrine; a reserve was supposed to be the troops strong and brave enough to held back from the front lines with the understanding that they would be sent forward when the frontline troops had been routed. We have nothing like that now. The Reserves of the Federal Reserve and every other central bank are to be found behind the curtains of the neo-Mussolini architecture (both inside and out) of their buildings where there lie printing presses (excuse me - computer keyboards - with linkages so vastly powerful that no skepticism about the ultimate exchangability of the bank's units of "capital' dare be whispered, even by the girl in the ruby slippers. Until now, that is.

Those odd people who insisted that the Federal Reserve Act itself affirm the exchangeability of U.S. Notes (what were to become our Federal Reserve Notes) into gold under the Constitutional standard thought Tyler's aggregations were dangerous because they established a full substitution between money and credit in the name of "capital". Most of the time this aggregation did no harm; but when people were tempted to borrow and spend (as they had in the American Civil War/War Between the States) without any regard to whether the borrowings could, in fact, be repaid in money as good as gold, the ability of the government to create savings by simply increasing paper bank reserves was a fatal temptation. As we have seen, that temptation has been impossible for modern governments to resist whether the war is one "to end all wars" or "against poverty".

Gary Rogan writes:

Whatever the nature of money is, sooner or later there is a war that interrupts even the most stable tax/spend regimes, and there is never enough political will/desire/ability to tax enough to support it. Or there is a "crisis" and the voters in the next election are always more important than the ones in the following one. So sooner or later the government will find a way to corrupt the monetary standard. It just gets irritating when someone like Bernanke is p***ing on everybody's shoes an telling them this is the rain that will finally end the drought.

 George Parkanyi writes:

And what government/country/civilization in the past hasn't done this? It's the nature of the beast. Different regimes will do it a different pace, but the long-term historical result will be the same. Read Machiavelli's "The Prince". This is an excellent treatise on how politics relates to human nature. You could always try working your way into office and try to change the government, or become some kind of guru and try to change human nature -good luck with either.

Stefan Jovanovich responds:

 No, George. Machiavelli wrote The Prince as a satire. That is why the book was banned by the Pope aka the Medici's ally Julius II. Machiavelli was a republican - i.e. someone who thought tyrannies were bad because they were so ultimately stupid. Under the Florentine Republic Machiavelli was in charge of the militia and he insisted that only citizen-soldiers serve, breaking with the tradition of hiring foreign mercenaries. If you want to know what the man actually thought about "how politics relates to human nature", read Discourses on Livy. Machiavelli had no doubt that people can and do change the government and the world of political-economy they live in; it is the Princes who want us to think that history is a Hobbesian monotony.




Amare is currently ranked #12 and Carmelo #25. At PER 20.68 Carmelo is currently a "borderline" all star. Melo looks to be rebounding quite well and that helps a team win. He did help lead Syracuse to a National Championship as a freshman— which might be a indication of future ability to raise the level of team play when in a supporting environment.

I can only conceptualize that for a trader it would be how efficient he performs within the boundaries of time, risk, trade size, contribution to portfolio winning percentage, etc. and all those advanced measures you experts use.

The basics of shot selection
, defensive play and positioning, "hustle", and judicious leveraging of innate abilities are pretty important in basketball.

The Player Efficiency Rating is ESPN Insider writer John Hollinger's all-in-one basketball rating, which attempts to boil down all of a player's contributions into one number. Using a detailed formula, Hollinger developed a system that rates every player's statistical performance

All calculations begin with what is called unadjusted PER (uPER).

Once uPER is calculated, it must be adjusted for team pace and normalized to the league to become PER: This final step takes away the advantage held by players whose teams play a fast break style (and therefore have more possessions and more opportunities to do things on offense), and then sets the league average to 15.00. Also note that it is impossible to calculate PER (at least in the conventional manner described above) for NBA seasons prior to 1978, as the league did not keep track of turnovers before that year.

George Parkanyi responds:

 It depends on how many people are directly or perhaps indirectly contributing to the final decision of a trade. For example, how many people have a touch in your organization Victor before you make the final decision to trade or implement a trading program? - research/set-up, analysis, programming, execution, and so on … Any one of the these factors could impact the success (profit) or failure (loss) of the trade.

Steve Ellison comments: 

"What is missing from formulas like Berri's is an account of what Anthony does to the rest of the Nuggets."

There is a hockey statistic called plus/minus to help assess exactly that. Every player on the ice when his team scores gets a plus one. Every player on the ice when the opponents score gets a minus one. The results are cumulative. A player who does not score much but has a high positive plus/minus total is presumed to be doing something right.

Victor Niederhoffer inquires: 

How could this immediately be applied to markets ? There are players on a team also. But rather than simply adding, would a regression work better?

Steve Ellison responds: 

 One might consider various market "players" and what happens when they are visibly "on the ice". For example, when the President is speaking, does the market go up or down? When the Mayor's news feed features the Sage, does the market go up or down?

Victor Niederhoffer writes: 

I would conceptualize that the other players on the team are the other markets. how often does the stock market , create wins for the oil market et al, and for the grains, and are there leads and lags?

T.K.marks comments:

Anecdotal evidence has long had it that the oft-retired Michael Jordan was the ultimate basketball player in terms of making teammates better players. Apropos of the discussion here, it's been suggested that his talent in that regard was not limited to the court, but instead, cross-market in its scope.

From Wikipedia:

"…Jordan's yearly income from the endorsements is estimated to be over forty million dollars… An academic study found that Jordan’s first NBA comeback resulted in an increase in the market capitalization of his client firms of more than $1 billion…"

The journal in which the study is found is a subscription so I'll take Wiki's word for it. Though it would be nice to know by comparison what the overall market cap did during that same time frame.



 The first big swell of the season hit yesterday. The waves were 15 feet or so with a few 20 footers rolling through, and had power in them. I had one of those flawless sessions with no wipeouts, and the sets focused right where I was sitting allowing me to catch the wave with ease when those right near could not. I felt strong. At the end of one wave I saw a boy with no board floating in the impact zone with wide eyes. Though he wasn't drowning, he was on the edge and out of breath, so I asked him if he needed help and let him rest on my board to catch his breath. I paddled him out of the waves and helped him find his boogie board with had drifted off 1/3 mile in the rip current. No one else helped him and he would have drowned. I remember when a person did the same for me on the biggest day of the century when I was near drowning myself. Later, after paddling half a mile across the bay back to the beach, I noticed two heads floating in the rip current. As I got closer I saw they were two tourists with sunglasses and they were struggling against the current and being sucked out out to sea and big breakers and were going backwards. The husband could barely keep up himself, and the wife could not. I saw their predicament and paddled over to help. I towed the lady against a strong current and it took me quite a while. One of them would have drowned. They can't see the rip current that flows rapidly along the shore, and once in it, they can't get back to the beach. I felt good that day saving three people. It was a good karma day.

George Parkanyi writes:

Congratulations Jim. That's an amazing and commendable success. Some people don't have the opportunity to save a life through a whole lifetime, and you saved 3 in one day. I was involved in a water rescue situation many years ago under different circumstances, and though I was successful as well, I was struck by the fact that out of maybe 30 bystanders, no-one else thought to act– they just watched. I've often wondered about the psychology of that. Perhaps when there are too many people, everyone assumes that someone else has or will take action, and the individual imperative is suppressed. If each of those people were alone with no-one else around in the same situation, how many more would act? I think a larger proportion (because of the heightened sense of urgency when it's one on one, and there's no-one else to take charge).



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)

wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.

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 www.rockyhumbert.com 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 www.rockyhumbert.com 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 www.fyretv.com 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



Disregarding the penumbra of small moves, 5 big 10 reversals in a row… what does it portend?

Anatoly Veltman writes:

In the good old times, when charting still worked– increased choppiness of this magnitude tipped pending "previous trend" reversal. Currently, "previous trend" would have to be the up-move from 1000 to 122.

George Parkanyi writes:

I would agree with Anatoly in this situation. Quiet day today, yet treasuries and VIX up a lot on a relatively mild 8 point S&P drop. Major skittishness here I think precursing a downdraft. (Asian markets looking scared in particular with China's anti-inflation sabre-rattling.) But all the bailouts and easings won't just vanish either, so I'm thinking we're at/near the top of some kind of range, to be pushed around for a while by the news-du-jour. Don't have any great conviction for where we go next, but if you put a gun to my head, short-term I would sell equities and commodities and buy treasuries or just go to cash. (And two weeks from now I'll be writing about why that was a bad idea.)



 What has being liberal, libertarian, vegetarian or whatever got to do with being a good speculator? In my mind a speculator needs to explore and understand how the world is, rather than how he wishes it to be. If the world if full of bleeding-heart blood-sucking socialists, then figure out how to speculate successfully under those conditions. Or if it's full of profit-at-all costs exploitive blood-sucking capitalists, figure out how to speculate through that. Who cares (as a speculator) if paper currency is going to become an environmental problem. Should one be buying gold? And/or timberlands? Speculation is little more than a game really. You're dealt a hand– figure out how to put it to best use. Influence the game if you can. If someone else isn't playing by the rules– adapt. Be creative, resourceful.

Everyone should of course nurture and grow a life philosophy and be able to freely pursue it (although I personally don't agree with anyone trying to impose theirs on others, including parents). This of course can influence why and how you speculate, but I think its the individual's application of intellect and effort rather than the philosophy itself that determines the success.

Just my two cents. No– four cents. Is it four yet? (Where the hell is gold trading now? … Haha. )

Kim Zussman writes: 

It is the rare person who can bet and profit from the opposite of their own belief system. Imagine going against your own G-d, your people, your family, your children– because intellectually you believe they will lose and you will pay any price to be on the profitable side of the bet.

Faustian abitrage



 Jeff Watson just put up a great story about rogue trader Darryl Zimmerman on his blog.

Reminds me of my own little rogue trading episode when for a brief time I was a stockbroker in the early 80s. It had to do with options, and a margin calculation error in the firms computer system that I had stumbled on. But I didn't purposely set out to exploit it. It's just that when my position went under water (undetected), I used it to try to buy time and trade out of the hole. But of course it only made things worse. I would bet you that is how 90% of rogue traders start out– innocently and just unlucky. They get under water, mistakenly try to dig out by taking on more risk, but never make it and instead get sucked into a vortex that spirals totally out of control. (I would also bet there are a lot of rogue traders that do managed to dig out and no-one is the wiser.) I was down about $50K or so at the worst point. Pretty scary for a young guy on a $5000 monthly draw barely making his commission nut (it was the bear market of 82).

I managed to battle back and cut the loss in half, but at that point the firm detected the error. I had already given my notice, having decided to leave the business, so I didn't even actually get fired. (I didn't get invited to stay either.) The firm pointed out to me the error in the margin-calculations, but never asked me directly if I knew about it, and didn't even grill me in the way that I had expected (I was scared shitless going into that meeting I'll tell you). They also settled immediately for only about a quarter of the value I owed them (their offer). I dawned on me that it was much cleaner for them that this little software problem just be quietly fixed than get into messy investigations, fines, and the loss of credibility. In that sense I probably actually them a favour in a way. My strategy was certainly not mainstream (I think it was something stupid like selling deep in the money stock options and using the premiums to buy bonds at 12-14% interest rates), but it inadvertently uncovered the bug. Some option trader with real money could have blind-sided them pretty hard at some point.

So what does it feels like to think you have lost everything (and more). Some time shortly after, I was driving up to nearby Edelweiss Valley to go night-skiing, and on the way the dam just burst. I bawled my eyes out for about 20 minutes. And then suddenly this tremendous feeling of peace and calm overwhelmed me. It was an indescribably liberating experience - of having hit bottom, of having nothing left to lose, and having nowhere to go but up. To know that whatever you did next, by definition would better than what you were doing now. I had a great ski that night, and not long after was on a whole new career path– in satellite communications.

It's a strong reminder to me today, that if you're utterly miserable and struggling to hang on to something or to keep some situation together, if you just cut yourself loose and let it all go– all of it– there is some kind of beautiful, magical, power in that. There is nothing like a truly fresh start– pure, unadulterated, unblemished possibility.

BTW none of my clients money was involved. This was all in my personal options account. (As a broker, I was always much more interested in trading than selling anyway- I was not a great broker from the firm's perspective, even before the flame-out.)



 Let's not forget the existence of many other distinct possibilities when dealing with microcap, possibly shell stock issues; the two currently being discussed here– simply 'going to zero'' vs. 'shooting up to $100/share'– are not, by any means, the only two possibilities, and in my experience traipsing about the world of Bulletin Board, Pink Sheet and letter/Restricted stock trading, I'd actually deem those the least likely outcomes. Adding to those:

Possibility #3: "The Yawn of Death". Company trades sideways for years - literally years - within a one or two cent range from the current price. (#3A: This, but periodically mgmt issues a few million/hundred million shares, expanding the float and ensuring little or no movement in the price other than possibly slipping agonizingly down towards 'bid wanted'.)

Possibility #4: "The Roach Motel". Company rises from, say, 4 cent per share present price to trading @ 10, even 15 cents per share (or drops to, say, 2 cents per share) - then volume drops to nothing and the bid/offered spread explodes; in former scenario, to 3 bid/20 offered or in latter 1 bid/5 offered, with only a scant bit trading daily.

Possibility #5: "The Long Goodbye". Company rises to, say, 15 cents per share (or $4 per share, for that matter), is suddenly and unexpectedly halted by a regulatory body, and either (#5A) never reopens for trading, leaving you with your sole 'return' reading regulatory proceedings concerning your dead money, or (#5B) reopens to trade 0.0001 bid, offered at 0.0003 for years.

Possibility #6: "The Shapeshifter". Company, with nary a hint of warning, issues a Press Release one day saying it is changing its business from stem cell research to researching and eventually opening the world's first chain of cold-fusion powered laundromats.

The world of corporate finance fairly bristles with avenues and options for locating and funding good ideas and talented entrepreneurs. Scant few - none, that I can recall - have ever come through the drillbit equity markets.

Jeff Watson writes:

Speaking of penny stocks…..are there any good studies out there comparing the vig in penny stocks vs regular exchange listed and NASDAQ stocks? Although beyond the scope of my limited intelligence, I would suspect the vig in penny stocks to be the highest of them all, as high or higher than a game of keno.

Kim Zussman adds:

It is hard enough to find something to buy which will one day go up. But after you buy at 0.05, what will you do when:

1. It doubles? (On the way to 10X or 0?)

2. Stays at 0.04-0.06 for 5 years– giving you plenty of time to get discouraged and sell– only you check back at year 7 and it is now trading over $1?3. You have enough guts to hold until 10X, and realizing this was a miracle, sell. Only to find it was the next MSFT

All hugely successful long-term investments will, along the way, ask what you are made of. For most of us this information is carefully concealed and thus the path is non-navigable.

Vince Fulco comments:

Moreover I would argue the energy required to follow the situation will exhaust the h-ll out of you and absorb the precious time you can use to find vastly more profitable situations. In the mid-2000s, way past the Net burst, a colleague who should know better bot converts and common in a new age company (prefer not to mention the industry to protect the innocent), participating with a top tier Greenwich HF in financing rounds. For the HF, the position was de minimis but whose participation was a great selling point to other investors. The technology underlying the company was patented but time was wasting on it and it faced much bigger competitors. It took only a few days of fact checking and looking through the SEC filings by me to realize something wasn't right. While the company surrounded itself with all the buzzwords of the day and had a great marketing effort, its cash burn was always way too high relative to its size and it was obvious existing shareholders would be diluted ad nauseum if the company were ever to gather sufficient resources to really grow. Deals booked were always tiny relative to the market potential and industry installed base. Bottom line: the red flags were all over the place but you had to be willing to listen and not drink the kool-aid. The majority of penny stocks are simply fool's gold surrounded by a sub-culture whose sole purpose is to tout by any means necessary. Suffice it to say, my Pal is still nursing this POS (piece of %^&*) as we call it in the industry. 

George Parkanyi writes:

Back in 1980-82 I was a stockbroker. One of the guys in the office, Paul C, connected with some guys out in Vancouver who were promoting/pumping a junior coal company. Paul had his clients buying the stock, and some of the guys in the office, including myself bought a little as well. I had about 5 or 6 people in it– some friends and relatives, and for a few weeks it rose nicely and I averaged up the positions.From what I heard of Paul's end of the conversations, you could tell these Vancouver guys had a certain amount of money they were using to work the stock, and the rise was carefully choreographed with orders placed just so and press release this and press release that timed just so. I wasn't paying a lot of attention, but Paul was constantly on the line with the promoters and with his clients. At some point, I forget the reason, my mother wanted to sell her position, so thinking nothing of it, I sold her out at the market at a good profit somewhere in the $5 or $6 range. Not 30 seconds later, some guy is on the phone chewing out Paul about "market orders coming in from his office". Paul looked really uncomfortable and came over to talk to me about it. I remember saying to him, "Are you *^&%$# serious? My mother's rinky-dink order is "messing up their market"? I'm outta here, and you should be too." So as quickly as I could call everyone in the stock, I blew out all the positions– at the market. Within days the whole thing collapsed. I personally got out already on the way down, only because I had to get all my clients out first. Paul and his clients never got out. I can still picture him sitting leaning back in his chair, staring out the window with that blown-up look, absentmindedly swinging his telephone around in circles beside his chair. He took it like a man though, and never held any of it against me.

As a general rule, unless you REALLY know something, never get into these things on the buy side. You need to assume that they are all pump-and-dump operations, no matter what the story. In fact, I remember doing a study at the time and concluded that a great strategy would be take a pool of money and short every Vancouver stock that popped its head over $5. When these things go, they collapse like a house of cards. Sure, a couple would have burned you, but if you did them all you would have made a killing.



 One must compliment the checker player who jumps backwards and forwards for his insightful comments about the currencies and the market which in Russian fashion happened faster than a Troika from Minsk to St. Petersburg.

George Parkanyi writes:

It gave me a breather at least today. Unlike all you prescient folk racking up the gold and silver bars, I'm staring down the business end of this juggernaut wondering "OK, why is nobody else over here?". Wait– a voice. Anatoly?

It's quite remarkable how little there is to hang on to on the nose cone of a rocket. So while today's jolt raises the hope of "Ah, finally, a malfunction; we're going home.", the sad Darwinian reality may be that this was only the first booster jettisoning to make way for the next.



 If you think you've lost the American dream and are searching to find it again, look no further than reality TV. Yup, you heard me right– reality TV. There is a show that plays on the home and garden channels called Extreme Home Makeover, where the show picks families where the parents are wonderful, giving to people in some fashion, but are under extreme duress because of health and/or financial issues. It sends them to Disney World for a week, and in that one week tears down their barely functional, problematic and sometimes dangerous existing home, and builds them a beautiful, brand new home.

They engage the local community– volunteer contractors, ordinary people, local businesses etc.– who all band together to complete these magnificent projects. Often, the sponsors help in other ways like paying off medical debts.

For example on this evening's show, they picked a couple from Toledo, a fireman and his social worker wife, who had three kids of their own, and then adopted 8 more, 5 from Haiti and 3 from inner-city Toledo. They were all living in this tiny house in pretty serious disrepair for lack of funds, and the woman was recovering from a medical condition that had already almost killed her and they were all trying to get by on his one salary and also coping with medical bills.

The wonderful thing about this show is how it changes people's lives, especially those of people that are unquestionably deserving of a leg-up. It gives a fresh start and new hope to the receiving family, and wonderfully energizes the community. Literally hundreds of people participate. That's what I think the true American dream really is abou– unbridled can-do optimism and hope. At least from the perspective of this Canadian.

Watch the show some time. I'd wager that you'll find it quite uplifting.

Kim Zussman plays the Devil's Advocate:

This may seem heartless, but this clips down to current political-hollywood rhetoric:

Lost American dream (what is it anyway?)

Searching to find it (whatever)

Families –where the parents are wonderful (and need help, but not with birth control) giving people (who wind up taking) under extreme duress (get in line) health and/or financial issues (get in line), sends them to Disney World (where else. What about going to work?) barely functional, problematic and sometimes dangerous existing home (you should see the ones in China where kids study linear algebra) and builds them a beautiful, brand new home (take a mortgage and go back to disney). They engage the local community (you knew that was coming), volunteer contractors, ordinary people, local businesses etc. – who all band together (but evidently don't need to feed their own families) to complete these magnificent projects (the ones they charge for are capitalist, evil, and taxable) paying off medical debts (because medical care is a right that hollywood will pay for to sell soap). Why not instead inspire the nascent dependency with Horatio Alger ?



 One of my daughters just got asked by a man to help her carry and buy groceries at a supermarket, and he had a young girl with him in tow or some such. The attempted crime didn't get carried out according to the daughter because "she didn't have enough money or she wanted to go into the grocery store" or some such. I recounted the story of Ted Bundy to her whose Volkswagen that he had lured a hundred college girls he killed into was on display. She asked me what the moral of the story was, and I said, "never trust a man who wants you to go with him to a private place no matter how needy or how much in authority he is." She said "you mean, never trust a policeman or fireman?" (one of the lures that Bundy and many others use and I said something like "yes". I don't think I gave her a good moral for the story. Could you help me say it better?

George Parkanyi writes:

Things aren't always what they seem, and it only takes once to make a fatal mistake. The most successful lurers/killers are the ones that are charming, or blend in with regular jobs/lives, so you can't make assumptions about how a person looks and talks.

Any valid person in authority knows they will run afoul of the law if they insist on being alone with a woman or child (or man)– especially on the strength of that authority. There are usually strict protocols in place (we have them in Scouts– never an adult alone with a child other then their own at any) to prevent potential abuse and also because of the potential liability issues. Call them on it. If someone asks your daughter to go alone with them for any reason– she should by default (politely but firmly) refuse unless someone else can go along as well, preferably another person in authority (a second officer, etc.), or someone she already knows and trusts (say a friend). Though even two or more going off somewhere with a strange person can still be very risky (they could have a weapon or accomplices)– best to avoid any such situation.

Also important to avoid situations/places where there is the risk that if accosted, no one else is around to help.

She should also never volunteer information as to where she lives (especially not take anyone there like the grocery guy), or give out any phone or email numbers. A second wallet with some cash and expired credit cards (with different numbers than the current ones) could also be a useful decoy for getting rid of someone accosting for money (say a drug addict).

Russ Sears writes:

One danger in the solitude of distance running is that you often appear an easy mark for those trolling for trouble. A few rules I follow and tell the kids I've coached are:

1. Run against the traffic. Never approach a car that stops try to stay 10 feet from any door. As others suggest, go the other way running. Pick up the pace. Beware of drivers turning right. Trust your instincts if anything is strange.

2. Do not answer questions. Asking for directions or help find something (kid, dog etc.) do not answer. Generally, there are much better people, people of authority or position to help them. You should not even been approached. Someone approaching a teen for help of any kind should send off alarms. You are much more vulnerable than they are.

3. If they persist–If somebody is near, say a passing car or someone in their yard doing work pretend to know them. Run into places of business. Most kids now always have a cell phone, take it out and dial someone. There is a YouTube video that shows how a cell phone would have ruined the drama of many famous stories: from Romeo and Juliet to Blair Witch Project. Even before it is answered, you can say something like: "some creep is trying to a talk to me." Do not be afraid to escalate into yelling and screaming. 

Jeff Rollert writes:

I can vouch for this, when two guys started hitting each other with tire irons, in the cars directly in front of me in stopped traffic this weekend in LA.

There was no where to go, and being in East LA it was not prudent to get out and run off-freeway.

Very scary. Especially when one went back to car to enter the back seat for something.

Though it scared me quite a bit, the ending was funny, as they got back into their cars and proceeded to try and cut each other off…however, after hitting each others cars with the irons, they were clearly afraid of hitting the cars in the process and damaging them. So it looked more like ballet.

Finally, to explain how LA is the NYC of the 1970's…the guy behind me was honking and screaming at me to move the car towards them. (Note, the convertibles top was down).

Nigel Davies writes:

A fascinating read is Meditations on Violence by Rory Miller, a prison guard used to dealing with violent criminals on a daily basis. He reveals that most ofthe preconceptions people have about violent confrontation are just plain wrong.

For example very few people figure on the 'hormone dump' which takes out both reason and any fine motor skills and can cause the victim to freeze. The attacker meanwhile can have everything planned, giving him a huge psychological advantage.

Miller's top recommendations are as follows, in order of preference:

1) Avoid such situations altogether by being careful.
2) At the first sign of trouble RUN.
3) Hide if possible and running is not an option.
4) Only fight as a very last resort and if no reasonable alternative is available.



 A friend sends me a biblical commentary, "Farewell to Hope", that tells stories from Revelation that show that what Madoff did was wrong. "People had become rich off his returns, and charities had been helped by the goodness of his heart," his attorneys argued. But the rebuttal was that he "merely gave his clients (and charities) money that belonged to someone else".

Kindly tell me what the difference is between what the idea that has the world in its grip is, as embodied in the taking from the currently rich to give to the currently poor, and this idea of Madoff's. Sometimes kids respond to the idea that if a robber comes up to three people and takes one's money that's bad. Now suppose instead of the robber there's a vote of the three people as to who should give the money to the others, and the two vote for the third to give his money away. Isn't that bad also?

George Parkanyi comments:

It reminds of the Monty Python sketch of highway robber Dennis Moore, who robs from the rich to give to the poor, until the poor become rich and lazy and the rich poor– then he becomes conflicted and finally ends up simply re-distributing the loot amongst the passengers and then riding away.



Because I buy and hold, I am a sage I’m told
But no one showed me how to sell, now I am old
Try as I might, I just can’t get it right
I can’t sell, can’t you tell?  It’s my hell.

On Berkshire Hathaway, I did the math that day
Looked pretty good, bought, as I should, I had a play.
But where’s the thrill?  In a crumbling textile mill?
I can’t sell, can’t you tell?  It’s my hell.

And then the thing just grew, T-shirts and tanks - who knew?
Parlayed into Coke and news – insurance too!
Got out of hand; this I had never planned.
I can’t sell, can’t you tell?  It’s my hell.

They told me make it split, but when I thought of it,
That might only reproduce this piece of _____
So the price just swelled – somehow as though compelled.
I can’t sell, can’t you tell?  It’s my hell.

Then Munger and I clicked, thought that might do the trick
I’d bounce ideas off him and he’d say I’m a dick.
On his advice, the share price tripled – twice.
I can’t sell, can’t you tell?  It’s my hell.

OK now this is nuts, who out there has the guts?
To kill this psycho thing from Massachussetts.
Need a plan unfurled, before it eats the world.
I can’t sell, can’t you tell?  It’s my hell.
I can’t sell, can’t you tell?  It’s my hell.  (Help meeeee)
I can’t sell, can’t you tell?  It’s my hell.



a campfireWhat's the worst that could happen? Potlatch! Everyone who owes goes bankrupt and the government just issues new currency. It's happened many times before in many countries. People, roads, buildings and all that will still be there– only the medium of exchange, and the mix of who owns what, will change. People will still produce and consume, so there will still be an economy. Granted, it may get messy for a while– the lawyers will need something to do. If you have something in hand that gives you title to real property of some kind, you'll be able to keep most of your chips unless they are forcibly taken. If it's all paper and electronic blips, well …

If we pollute our planet beyond repair, that's a little more problematic. I guess we'll just cross that bridge when we get to it.

Scott Brooks says:

I have given this further thought and have determined that a potlatch and camp out at my farm is in order. Gary, Rocky and Stefan please make arrangements to fly to Missouri and we'll make smore's, roast wieners and marshmallows, drink some ice cold beverages, and debate until all of this is settled….or until the haunting silence of a beautiful full moon night is broken by the howls of coyotes. Or, if there's a new moon, we can get out the optics and gaze up at the heavens and see constellations with the naked eye (or a good pair of binoculars) that you could never see in the city.

You will be entranced with the simple beauty and simplicity of life, and all these debate issues will slowly melt as we all discover our commonality of purpose under the stars that one can only see in the middle of nowhere.

We can debate or just share life stories as our friendship grows thru the night. And then, when the skies begin to turn from black to blue, to purple to red, and the world comes alive around us with song birds, and whippoorwill's cry fades off into the distance, then is when we'll all realize that all of these debates are mere exercise.

When the turkeys fly down from their roost and the first deer of the morning move from their feeding area's to the edges of the forest and creeks to bed down for the morning, then we'll realize how tired we really are and how pleasant our camp out has been.

We'll head back to the farm house, crash for 5 or 6 hours, get up, eat a hardy breakfast around noon and then I'll take you on a tour, around the place. Maybe we'll ride in a tractor. Or if the family that farms my land is harvesting, I'm sure we can go get a ride in a combine and watch the miracle of the harvest.

Early in the evening, we'll grab a fishing pole and see if we can't catch a bass, bluegill, crappie or catfish. Maybe we'll shoot some clay birds. Then we'll go to town and sit in the local bar and grill and watch the locals wander in. I'll even introduce you to a few. You'll meet small town businessman and farmers and ranchers. You'll meet laborers, and school teachers and those just passing thru. And you'll find many of them to have unique stories of success. Their scripts will be different, but you'll see that they are really just like you and me….only with a different calling in a different geography.

We'll eat small town food and feel our arteries clog in the process. I'll have a water with lemon and you guys can then start a different kind of debate….a debate about trying to remember who owes who a drink. And then you'll decide to just not worry about it.

And that, my friends, is the effect that the BrooksFarms has on one and all that take the time to travel there.

So smile guys and enjoy the debate and remember, it's all amongst friends…..friends who are only a plane flight away from a campfire, some smore's and the haunting howl of a pack of coyotes under a blanket of stars.



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

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

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

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

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

Any thoughts out there on this and other scenarios?

Jeff Rollert writes: 

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

Problem is it assumes stable GDP here and abroad.

Ralph Vince writes:

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

Not a one of them has been called to account. 



 Movie rental rules of thumb especially for one whose girlfriend has a more humanitarian, international sensibility:

1. Avoid movies about poor people in f**cked up countries.

2. Avoid movies relating to "the troubles" in Northern Ireland. (This is by and large a subcategory of 1 above, since Ireland much of that time was a f**ked up country.)

3. Most movies would be improved by the addition of scenes involving the machine-gunning of Nazis. (This includes movies like Julie and Julia, Sideways, and A River Runs Through It.)

Can specs offer other rules of thumb?

Disclosure as to where I'm coming from: The movies I'd rate highest over the last couple of years (at least the ones I can remember):

The Queen

History of Violence

No Country For Old Men

Lives of Others

Taking Chance

Victor Niederhoffer comments: 

 Explain to girlfriend that if they take from the rich and give to the poor, it's a taking based on singling out one group based on attributes that the majority does not  like, and it is very dangerous when extended. Explain that it has to come at some one else's expense. Explain that when a game is played, it's unfair to take the chips from the winners after the game. Explain that if two people vote to take the third 's chips away, it's like a robber coming and taking it away. Explain that once you take it away from one group, after another, there won't be any one else to take it from, ( the Jews thing from the bishop again). Explain that people stop trying after they keep having to have it taken away. Explain that it's not theirs to give. That it's wrong to steal from others, even if there's a vote. Explain that when people approach each other from each according to their ability to each according to needs, they begin to hate each other always being afraid of what the other guy is wanting from you or you can get from him. Explain that there's no difference between taking from the rich and giving to the poor to buy votes and all this, and that this is the idee fixe of the party in power. Explain that buying votes by taking a small amount per capita from one group and giving to another, earmarks and logrolling is the same thing.

George Parkanyi writes:

Generally I agree with the points you make, but you need to define "rich", and how they got that way. If you are rich because of looting, subjugating/brutalizing, running people off their land, government subsidies, inside information/cheating, exploiting misery (in a way that perpetuates/worsens, not improves it), generally racketeering and so on (in business or politics) - no sympathy whatsoever. And if you are rich by benefiting from the commons - the environment, shared infrastructures such as roads/highways etc. then a fair contribution should be put toward the custodianship of that (fair being the same formula for rich or poor). But where someone acquires wealth by imagination, creativity, and effort within on a fairly accessible, level, playing field, then I agree wholeheartedly that forced re-distribution of wealth is wrong. As for inherited wealth, although that may appear to be a free ride, if someone bestows upon you the fruits of their work, ultimately it is their right to spend their wealth that way, so that also should fall under protection from external plunder.

T.K Marks writes:

At the early onset of a relationship, there's always a little dance that takes place. I call it the pas de deux period, the part of the performance wherein the two principals gingerly feel their respective ways around one another.

In one's youthful exuberance this situation invariably takes place against a backdrop of lots of saloons and even more beer.

However as one gets older and lest their elevated liver enzymes leaving them forever dancing with two left feet, they must summon up their inner-Balanchine and modify the mating choreography a bit.

As such, and with respect to film rentals, there is a cinematic litmus test of sorts that affords one a little window into exactly what they're about to get into.

Think of it as a diagnostic dating tool. Kind of like an MRI of the soul.

Simply explain to the lady that you're in the mood for a classic film and since the ultimate choice of the rental should should only fairly be a bilateral decision, how about if you choose the director, and she, the exact film.

She may very well be taken aback by your quick sense of interest in her input and tastes in art.

Then you tell her that the two directors you had in mind were Frank Capra and Ingmar Bergman, a blithe/bleak dichotomy if there ever were one.

If she bites on Bergman, you might as well just have snuck a peak into her medicine cabinet. That thing is probably going to choking with Paxil, Zoloft, or whatever the latest SSRI big pharma is pushing at the moment.

However, if she's reflexively goes for Capra, there's a better than even chance that the serotonin issue is off the table and you may have just walked into a Norman Rockwell painting.



David FerrerAn article in the WSJ reports that there are certain players, Ferrer, for example, who do very well in minor tournament events but never get to the quarter finals in a major. The opposite is Serena Williams who never wins a minor but always wins the majors. One wonders how the bulls and bears of the markets are at winning on the big ones. What are the big ones and little ones? The big change days and small change days? The beginnings and ends of weeks? The days of the big announcements like yesterday. Are there hot hands that get used up after winning the majors. Once again the field of sports gives one a thousand useful hypotheses to test.

George Parkanyi writes: 

 This particular example may have to do with the ability to handle pressure. Some traders might perform quite well and consistently trading a relatively smaller amount of capital, whereas a few may be able to trade successfully in much greater size because they can stay calm and still function at a high level under the pressure of drawdowns and reversals. So position size would definitely be a big/little differentiator.

In sports, increased media scrutiny probably influences player performance. Another big/little differentiator could be the amount of external influences/distraction that might affect your decision-making. For example in a position trade, while, you're holding, you could be subjected to all sorts of external influences - economic news, personal life, someone's opinion. Let's call it noise. Will a big noise shake you out of your position? Will a series of little noises aggravate you out? Or can you hold/trade through it? Can you effectively differentiate between noise and something materially important?

Steve Ellison writes:

I once read a suggestion that golfers practice coming through under pressure by not allowing themselves to finish practice until they make 25 consecutive three-foot putts. The 24th and 25th putts simulate high-pressure situations as the golfer has to start all over if he misses.

In football, Joe Montana had an incredible knack for winning the big one. This trait was in evidence as early as his sophomore year at Notre Dame, when he came off the bench a few times and led comebacks from multi-touchdown deficits. Montana was probably an average athlete by NFL quarterback standards, certainly not as gifted as Dan Marino or John Elway. Yet, when he met these men in Super Bowls, Montana came away the winner.

As a counterexample, the San Francisco Giants had a pitcher who was notorious for coming apart under pressure. He was good enough to appear in the All-Star game, but gave up a grand slam in the game. I groaned when this pitcher was named as the starter for game 7 of the league championship series, knowing what would happen; sure enough, it did.



dodgin bulletsChess players play speed chess to exercise their minds under pressure and hone their instincts and reflexes. A question– do or have any of you put yourself in a position of making rapid-fire decisions about a market direction as a way of warming up or practicing reaction time and decision making under pressure? I understand that some of you probably do this in your actual trading, but does anyone do it for practice, either on paper or with small amounts of money with actual trades?

Example of a possible scenario. After the market has opened, someone calls out to you rapid-fire a number of futures markets or stocks, and you have to instantly answer– without hesitation– buy or sell. And you measure the results over a given holding period. I wonder if the results would be random? Would the results be different on paper vs. actually trading the answers?



 Back in 2006-2007, for amusement I participated in the Motley Fool's CAPS stock-picking game. After playing for a while I pointed out some mathematical flaws in their scoring system, and exactly how it could be gamed (which I did for a while because it was easy). They chose not to fix the flaw. Well, I racked up a pretty high percentile score and was one of their top stock-pickers for a time. Then as I started my own blog, I got tired of it and finally just forgot about it. Now again, after 3 years of doing nothing to the position I had abandoned– not even logging into the site, I was informed by email today that I once again have near-genius status as some kind of ace stock-picker at the 97.44th percentile.

Maybe my friend and once stock market mentor in the early days Omar Sheriffe Vernon el-Halawani was onto something when in his last years he would keep telling me– "George, why bother to sell?" (He was a high-school teacher and one who consistently made money in the stock market over the decades. He had a great nose for value, not in the Graham and Dodd sense, but rather in understanding which were the economically important up-and-coming industries, and once he bought something he liked, he would hang on to it like a dog to a bone. He traded a little around the edges, but only for amusement. He also loved selling puts for income.)

Or maybe as a broken clock is right twice a day, so is a fool right once every three years …



Summiting mount kenyaI have been learning about ski mountaineering and climbing. One aspect of safety is setting anchors and belay points called protection. When starting up a steep pitch where falling and injury or death is possible in case of a mistake, the climber creates an anchor by tying a loop around a rock or putting pitons or nuts in a crack which will hold the rope tied to the climber to limit how far he can fall. As the climber climbs higher, the rope is shortened, and new protection is placed limiting the fall length. In case of a fall, there is some give in the system to avoid too hard a shock.

In climbing there are other "stops". One is the summit…goal reached, or back home. The other stop is time. If the climber has not reached the summit by enough time to return home by dark or before bad weather hits, its time to stop and turn around.

The trading applications are obvious, and in both cases it appears to be an art. Phil has stated that stops do not improve performance, but merely lower deviation of return. Senator has always advocated using stops. What is unclear to me is some scientific way to determine the optimum stop. Time stops seem common. Profit stops are too common. The difficult question is the use to trailing stops and the distance or adjustment and size. I've never seen a satisfactory analysis. Adjustment for volatility seems a must. Chair has advocated adjusting or limiting leverage, rather than stops as "protection".

Advice sought.

George Parkanyi writes:

This is very timely, because I just set three rows of stops in August trying to catch the down-leg (short) while keeping my risk low, and I got taken out of the meat of my position all three times– FOMC fake-out, sheared right before the 20-point drop, and sheared again this morning before the market settled down again. Arggh. Luckily still made a little something on the scraps, but basically managed to completely miss the move. (Please feel free to point and laugh.)

Sometimes taking a larger position (and risk) and commensurately narrowing your stops can pay off big, but there's something to be said for taking smaller positions and more forgiving stops (and a longer holding period to adjust reward to risk). While I was frantically trying to catch the equities just so, my relatively smaller short oil position (whose stop I had not touched) was plodding along building up nicely, looking over now and then going "What's YOUR problem?" Maybe you do a hybrid. I don't know.

So, what looks good on the long side then? Bargain-hunting in the long bonds perhaps?

Phil McDonnell comments:

There are many interesting themes in this discussion so I will address a few.

First a few basics assuming a random walk - if you use stops:

1. Your expectation will not change. You will neither make or lose more money assuming a random walk.

2. Your variance will be reduced (a good thing)

3. Your probability of having a loss as least as great as the stop will DOUBLE! Suppose the odds are about 16% that a stop loss set at 1 std deviation will be exceeded to the downside. If you use a stop loss at that price point, the probability it will be hit is 32%. The reason is the Reflection Principle of Statistics which essentially says that every path that reaches that point has an equal and opposite path that reflected back from that point. There are some graphs in my book Optimal Portfolio Modeling (Chapter 4) which illustrate this point.

4. If you use profit targets the preceding points are reversed.

5. On Friday I posted a 9 minute video with charts to theStreet.com which discusses my use of stop profits with respect to options. It is in the Options Profits section but people can get a free trial at the site.

In my opinion it is possible to optimize a stop loss or profit target provided you first specify an objective function that you want to optimize. My preference would be something that includes both risk and reward like a Sharpe Ratio. In one sense a stop loss and a stop profit are much alike. They both double the odds of winding up there. But a loss is more important in the sense of compounding your money. A 25% loss needs a 33% gain to break even. But this information is captured by taking the log as your weighting function. The trick is to take the log at the portfolio level and not the trade level.

Optimizing stops can easily be done in Excel using the solver. But I am not saying that such optimization will always be productive. Essentially it is a search for an anomaly just like a trading system. Just like a trading system it requires a significance test and sufficient data. Adding the stop parameters brings one that much closer to the slippery slope of data mining and curve fitting.

Nick White's interesting point about information is spot on. If you compare the formulas in my book to the formulas developed by Claude Shannon the father of Information Theory they are essentially identical. Yet mine were derived from first principles and compound interest math. As an aside the formulas in list member Ralph Vince's book are essentially the same math even though when you look at them Ralph does not use logs (mostly) so on the surface they appear different from the formulas Shannon and I wrote, but they are not.

To me this says that the market pays for information. That explains the beautiful symmetry between the formulas of Information Theory and portfolio optimization.



 One of the most common and one of the most intense irrational fears is the fear of public speaking. Even the best speaker can lose his cool giving a spontaneous speech in a high stress situation, say at job interview or meeting the in-laws for the first time (I believe they make movies about this one). On the other side however, one of the most common forms of self-destructive behavior is saying too much. I believe everybody has had an experience where they have said something in anger, spite, arrogance or some other irrational momentary emotion, destroying or badly damaging a valued relationship. Many of the most miserable people I have known are constantly spitting out acidic words, chipping away at others, often at those beaten down souls closest to them.

I've have been going to a Toastmasters club most weeks now for over a year to help me overcome my fear of public speaking. And while I believe that the Toastmasters meetings were helping me, perhaps I made my biggest breakthrough once I realized that for me, and perhaps for most people, the problem boiled down to one word. This word, which Aretha Franklin spells for us, is r-e-s-p-e-c-t. We all crave this in our relationships.

The reason that respect or acceptance and esteem can cause such irrationality is that we develop many of our conditioned responses when we are toddlers and kids. Our ideas of respect get greatly distorted as a kid. It is almost impossible for a kid to understand that their parents reactions may have nothing to do with them. Further given that parental/adult acceptance is seen by a kid as such a necessity for their survival, many distorted and warped views can develop.

Finally, much of what makes a child be held in high esteem is not the same things that make people admire an adult. Sometime they are even the opposite. Take for example our grading system and testing. We hold the kid that makes the fewest errors as the best and brightest. This training can cause several distortions in a kids view of acceptance. For example, kids may come to believe:

1. Mistakes are always bad. Overcoming errors is not possible. But as adults we find the most successful are those that failed and got back up. We admire those that overcame though odds and many failure

2. that they should only worry about what is tested. Curiosity beyond the known is not encouraged. But as adults we admire the discoverer, the explorer, those that do not accept the standard answer and therefore come up with a better one.

3. Excelling at the subjective is a waste of time. But as adults we admire the artist, the actors, the great orators.

4. Kids are to be seen but not heard or not to speak unless spoken to. But many of the highest paid jobs are for the salesman.

5. Respect adults and discount a child's understanding.

Many people are like me, they are fine talking if they are sitting down. But make them stand up and suddenly the primitive brain kicks in… and many of these distorted views from childhood on acceptance impulsively take over. 

It seems to me that much of the Toastmaster's system is designed to get you to rethink and recondition much of that training you received as a child. Everything is critiqued, however, all suggestions for improvement are supposed to be sandwiched between praise. At each meeting everybody's grammar, filler words (such as "um", "ah" "and" or "so") are counted and everybody is timed. Roles are assigned to each element of the evaluation (timer, grammarian, wordsmith, etc.), and before each evaluation, they are to explain the goal in their critique.

 The speeches for the day each have a specific purpose to help the speaker improve. Usually this purpose is rather subjective, such as "vocal variety and quality" or "getting to the point". Every meeting has chances for impromptu speaking, standing up and giving a 1-2 minutes speech on the spur of the moment. Even the meetings themselves are critiqued.

The overwhelming implication to all this is that improvement is the most important thing, that any problems can be overcome, and to build on what you did well. I was seeing some improvement in my fear factor as I went to these meetings. However, I think for me the big breakthrough was realizing not just that these fears were irrational, but that they came from my distorted views of respect, acceptance and esteem developed as a child. Not that my parents meant to teach me this, but this is what often develops, within the simple mind of a child, trying to interpret the motivation and meaning of an adult's training.

Only once I started going through my fears one by one and seeing them as an adult did these fears dissipate. I think I stopped believing in these fears. Instead I saw them as "a" childhood interpretation of what I was taught, when there were really many, often much more valid possibilities than just that simple one sided interpretation. Often what I considered my parents "response", was simply AN interpretation, one of many, that I developed as a child.

Another interesting thing I learned at toastmasters concerns body language. For instance, for the impromptu speech, I have learned to listen closely and intently to those asking the question. I consciously direct my body language to suggest that I am hanging on their words. Then when I respond, I relax. I listened closely to them so I have "earned" their attention. I repeat their question, often putting it into my own words to show that I got the emotional part of the question they were conveying, not simply verbatim rote repetition. It shows I cared. Hence as equals they should listen to me. Why should I fear them being bored or inattentive?

It would appear that ramblings and shouting are also an effort to gain respect. General McChrystal spouted off to the journalist apparently because he felt slighted by Obama's "indifference". Understanding these triggers and detonating them before they explode can help control the tongue. For example, if you are in a heated argument standing up, try sitting down. Bring them in closer. If they are a loved one try holding their hand. In contrast, if you are confiding too much, stand up. Distance yourself from them. Of course seeing these situations for what they are in the moment rather than after the fact can be difficult. Yet, if these kinds of situations seem to occur too often, perhaps reconsider whether your motivation and view of respect and acceptance might be a simple child's interpretation and consider how it might affect the situation.

Likewise one speculates that such recurring problems in trading and investing could also be improved by reviewing your childhood understanding of how to gain respect and acceptance. One also speculates if standing to make a trade encourages one to be more aggressive, while sitting more passive, and whether other body postures could help. Say when you are closing a trade, try standing to be more aggressive.

George Parkanyi writes:

An aha moment for me about being self-conscious came in my early twenties at some point, when I realized that people are far more worried about what others think of them than what they happen to be thinking about you. Their pre-occupation with themselves is deep and permanent. Their pre-occupation with you highly transitory– especially in an arms-length engagement such as a public speech. Also, people will tend to be empathetic. If you slip up, most will not be thinking "what an idiot!" but rather "I'm glad it's not me up there".

Once in a while I'll see a guest on a business show that looks really nervous and is clearly struggling. I start to feel uncomfortable for that person, mentally cheering them on, thinking to myself "come on, get it out, get it out…"After that, for me public speaking was more about being prepared, and finding ways to keep the audience interested and engaged. If you do have to wing it, stories and anecdotes are a good way to come up with something on the spot. Usually you can relate something from your past to the current situation. People generally love to hear stories. 

Craig Mee adds:

Also someone mentioned to me years ago, "just think you're talking to your best mate" But preparedness seems to help…Tim Ferriss is never far off the mark. His article Public Speaking: How I prepare Every Time is great. 

Russ Sears responds:

 Yes, understanding the truth that people are not that focused on you because they are thinking about themselves helps. However, often when the fear is impulsive, simply knowing what is right is not enough. Think of some common phobias: fear of heights, germs, etc… most often the phobic knows the fear is irrational. People are great at holding two incompatible ideas in place and impulsively choosing the irrational one to act on.

What I am suggesting is that you kill the root of the impulse– your distorted belief that is causing the fear. I am suggesting you do this by re-interpreting your childish beliefs caused by a childish interpretation of the threat. To do this you have to dig deep and figure out what your fear is. Is it making a mistake, looking stupid, indifference or several other common fears?

Then you re-interpret that childish belief, for example, that adult esteem = survival, from the adults perspective. Once this is thoroughly done, what I found was what was once held as a "truth" is shown as an immature interpretation of the situation. Hence using both, killing the old belief and giving a new one in its place can end the impulsive fear.

Further, I am suggesting that using this dual method, can improve many areas of our life. Perhaps most if not all of the hubris in trading may stem from similar simplistic childhood misinterpretations of the situation.

Ken Drees writes:

Ellen Degeneres doing standupTaking a theater course or a stand-up comedy training seminar may help by pushing one's self into deeper water and then one could recede back and take a public speaking course to put structure around the process of public speaking. I am lucky to be gifted in public speaking, but scared of stand up comedy–which I think I could do but I am frightened of people not laughing, and thereby having no defenses against ridicule, or of an unloving crowd staring back at me and not laughing.

If I was to pursue it, I would do a lot of structure: rehearse, tape myself, fine tune, do small test groups, ask for feedback–seems like a job now.

I have a tendency to become red-faced when embarrassed or in some terrible stressful moment. If this happened during a routine –oh no. I would have to come up with some sort of routine if it happened–draw the audiences attention to the red face and use it somehow as a joke routine–turn the disaster into something funny. 

I remember playing in a poker game for the first time in multi years (3-4 years ago). There was retired cop at the table (9 or 10 people) and I was bluffing in a showdown hand–I could feel the heat coming into my face and knew that I may get called because of it. The guy folded to me and the cop from the other side of the table said "you gotta do something about that red face of yours" then everybody stared at me and then everyone busted up laughing.

The cop said that in interrogation rooms he learned a lot about lying. Needless to say as time went on and practice makes one better, the red face doesn't appear at the table anymore. 

Russ Sears replies:

Surprisingly, people say I am funny. I seem to have little problem coming up with a spontaneous humor during a speech. I have found that if the audience understands that you yourself are the biggest target for your jokes, that you do not take yourself too seriously, they are much more willing to give you liberties on almost anything and find it funny. As Ken implies making fun of yourself, almost always gets some attention, if not laughs.

As far as bombing goes, the best comics sometime threw in bad jokes on purpose, just so they could make fun of the hole they had dug themselves into. However, Toastmaster's club is doing a humorous speech contest and we will find out how funny I really am.

Brett Steebarger comments:

It's a very interesting topic. Where I might differ from Russ is that many of those irrational impulses are less the result of distorted beliefs and more related to emotional imprinting that bypasses critical, rational awareness. Edna Foa from U. Penn has done very interesting work in this area that is relevant for those engaging financial markets. 

Russ Sears responds:


One is impressed after reading about Edna Foa's work, in which significant change can be measured in Vets suffering from PTSD, in only 12 sessions, by getting them to focus on the emotional events and the trauma. How does this relate to much smaller "trauma" but perhaps, much more frequent conditioning. Say taking tests weekly at school, and the learned emotional implusive response about exactly how to please the teacher and parents.

Does focusing on the emotional take less time to "correct" the irrational impluse, because the "trauma" is not intense at all? Or does it take more effort because the conditioning was wide spread and reinforced often?

Further, what does such ingraining in children teach a parent to do? Make sure that the child knows that your esteem for them is based on a well rounded education with plenty of real life experiences?

What would you recommend for my girl who upon entering high school last year is showing clear signs of test anxiety, especially in Math?



 One was recently asked, how do you spot a hoodoo when you are in or dangerously close to their presence? I would say that their past record of failures is a good starting point. As is their ability to talk a much better game than they play. Also, their attempt to impress you with the trappings of success, ( a conference call with their five principals is a usual gambit). Not to be disregarded is their locus of operations, often from a ephemerally built recreational area where permanent lodgings and such things as pianos are not availalbe. The inclination to befriend you and flatter you is also a clue. But how can this be quantified, and how can we learn to avoid them? What should you do when you've met a hoodoo? I've always taken to burning my shirts, especially if they've hugged me as they ofen do. Dare I ask the question of whether there are such things as hoodoos or is it a figment of random numbers? No, that would be too mind boggling. But please help with your insights.

Alan Millhone writes:

Some years ago my late father and me were enlisted by Banque Worms to take over a failing condo project in our area.

The developer met us and after I shook his hand I could smell his pungent cologne on my hand for the rest of the day. He had a lady friend assistant who wore a see through dress with precious little underneath if the sunlight caught her profile just right. When I first met him I could see " carpetbagger " across his forehead.

He was a genuine "slicky boy" right out of South of the 38th Parallel.

People like him wear a lot of bling and cheap after shave. Usually have a woman at their side as a distraction.

They are long gone. Our crew finished the job.

Stay vigilant and wide eyed. 

Pitt T. Maner II adds: 

hoodoos at Bryce CanyonFortunately, I associate the word "hoodoos" with the past leader of my university (UF) geology field camp, Professor of Geomorphology, Dr. Robert Lindquist, who was an expert on the formation of hoodoos in the magnificent Bryce Canyon in Utah and knew of the locations of many wonders in the West–original survey markers left by Powell, dinosaur bone and gastrolith graveyards, amazonite on Crystal Peak and ancient lahars in South Park, Co. A geologist's geologist who looked like he had stepped out of the 1800s.

As for the other definition, there was a person who once recommended Enron, Freddie and Fannie, and several other long ago bankrupt companies and who was so consistently wrong for awhile that it was almost uncanny. If one had just done the opposite. It was a good education to lose money at an early age though on hoodoo picks. Better to lose and learn using your own thought processes–at least there is a sliver of hope for improvement. 

Russ Herrold writes:

I might add that to view a person's bookshelves (even ones only in public areas) or even books in the process of being read on a table, or to note the absence of such, in each case provide a window into the mind of that personis to me a 'tell'.

Alston Mabry writes:

To see something clearly, it can be helpful to study its opposite. Recent list discussion included one of my favorite anti-hoodoos, Richard Feynman– intelligence, curiosity, enthusiasm, creativity, generosity, joie de vivre.

Russ Herrold adds: 

This certainly may work for when to exit or what to avoid. My brother also seemed to have a uncanny ability to leave the party, when things were getting hot… too hot… right before the cops came and arrested everyone. His friends started following him. However, the same may not be true with when to start a party. As a kid I remember people would fight for a seat next to me during a math test. If I did not like them I would pull a Goldman synthetic and write down some wrong answers, to be corrected latter in secret. It has been my experience in investing that the surest sign of a Hoodoo is willingness to copy someone elses system or trade and yet have no idea why they should expect it to work. There seems to be floating around hundreds of billions par value of formerly AAA paper that now only worth hundreds of millions that seems to prove that these Hoodoos are extremely common, if not the most common Hoodoo around.

Nick White writes:

Perhaps the most difficult aspect of detecting hoodoo-ery is to discern the difference between the genuine actions of the bona-fide dealer versus the pretense of the hoodoo (who - come to think of it– may well be bonda fide, too, but just cursed. Let's call these poor souls benign hoodoos versus their more malignant bretheren).

I think the sure tell of a malignant hoodoo is that their most effective lies will be those very closest to the truth…yet there lies their very advantage over us, and requires some street smarts to know the difference. Perhaps the foil is to know and experience for ourselves the difference between ambition and aspiration. The Stoics made this sort of distinction to help them in their quest against self-hoodooery: Ambition was vulgar, akin to avarice, full of scheming and accompanied by a very lowbrow, keeping-up-with-the-jones mentality. These sorts of feelings were to be put to death in oneself moment-by-moment through Stoic practice. Aspiration, on the other hand, was considered more noble, civic and had the connotation of dilligence, discipline and a bent toward giving a world-class performance simply for the sake of excellence as a way of life. Therefore, perhaps we might say this kind of vulgar ambition is the giveaway quality of malignant hoodoo-ery? Applying this little rule-of-thumb might constitute the foundation of an early warning system.

However, before any of us jump on the moral high horse and consider themselves "aspriational", the Stoics further stipulated that it required very great self-knowledge to even know the difference between these two values, let alone to declare oneself in one camp or the other. Even then, the Pyrrhic victory was assured– if you felt yourself to be truly humble and aspirational, you were most likely hopelessly ambitious and required greater training to cure the very need to make such statements about oneself.

Jeff Watson adds:

Nick, you made the most erudite explanation of hoodooism I've come across in a long time. One might wish to consider the partial hoodoo which affects 95% of the population. With the exception of a few good trades and the ability to be a good father, I'm a world class hoodoo, among the best. I won.t deny this because that would be a folly, and total lie as I can make money but my personal life is a train-wreck. I won't get into the Faustian aspects of all of this, but it is there. Hoodooism comes in many ways, shapes, and forms and I've seen and done them all. Hoodooism is like the old adage that history doesn't repeat itself but it always rhymes. The hoodoo that the chair describes isn't enough, the one you have to watch out for is the one that makes money on a regular basis, he's the danger.. He might steer you onto something good, but there is always a price to be paid, and the price is not always what you expect and not the currency you wish to pay..

George Parkanyi writes:

This whole notion of hoodoos frankly I find rather uncharitable, and burning one's shirt after a tainted hug smacks far more of superstition than science.

Now not hanging around negative people I understand. Some just wear you down with their negativity, and you do have to cut your losses at some point. But to classify those who have tried and failed into their own undesirable caste is unfair and a vast oversimplification. People run into difficulty for many reasons– failed relationships, health problems, sometimes just honest mistakes. My experience has been that people have far more to offer than what appears on the surface– regardless of their circumstances.

I wander past homeless people– ostensibly life's greatest "losers"– sometimes as I go to work, and when I really think about, I'm awestruck at how they have managed to survive all this long– with absolutely nothing, through harsh winter conditions. How do they do it? Clearly, they have skills that I don't. One time I gave a not only homeless but also legless man $10. He didn't ask for it. I just walked over and gave it to him. Here he was on the front lines at the very edge of humanity, representing on my behalf one of the worst possible circumstances that I could even imagine for myself and somehow I was drawn to him. When I gave him the money, he beamed at me with this smile of pure joy, looked me straight in the eye, and cried "God bless you!" To this day I will never forget that blessing, because at that moment there was a seismic shift– I actually physically felt it– in my understanding.

In the lands of the dispossessed, I don't see hoo-doos at all. I see potential teachers.

As for people who befriend you only because they want something from you, the best I think you can do is make your own decisions on to what extent and level you wish to engage. If you enjoy their company or there is something about them that you like, go with it, but don't take risks that would seriously jeapordize your business, family, and other relationships. Not everyone is genuine, yet not everyone's on the make either– and some people are absolute gems. To be completely distrustful will cut off a lot of wonderful experiences. To expect too much of people or to be overly trusting will set you up for disappointment, or worse.

It's like trading really. If you diversify your relationships you have less risk and less volatility. If you concentrate your relationships, you have more risk and more volatility, but perhaps a bigger payoff in the intensity of love and friendship. You have to figure out the right mix for you. The interesting thing about relationships is that that while you're investing in others, they're also investing in you. The more relationship value you create, the more relationship value you (and others) will also accrue. I can't quantify it, but I think there is a real multiplier at work there.

Last point. If you're not confident enough to engage or deal with a "hoo-doo" without fearing harm to yourself, then perhaps you should worry less about the "hoo-doo" and examine your own fears. What difference should it make to you if have a conversation, dinner, or even a business deal with such a person (however defined)? In what sense would that make you a lesser person or cause you harm? It may or may not, but I think its a good question to ask.


Jeff Watson comments:

George, it would behoove you to read up exactly a hoodoo is before writing such an elegant, misguided essay. The essay was great, almost fantastic, but missed the point. I can say this because I'm a hoodoo and proud to admit it. Not all hoodoos lose money in the market and in life and divorce. Some lose through gambling drugs, going for long odds, begin too easy with short odds. I lose my money by staking unreasonable ventures, loose women, and bad ventures. Not a lot of misadventures but enough to affect 11% of my bottom line. Add that to my losing trades, my 30 dependents, and I have a big nut to make every month. Nothing like the Chair, but still significant. There should be a place in the hall of fame foe us grinders who knock it out every month for years…That's gotta count for something.

Duncan Coker writes:

On the topic of hoodoos, when I am performing a task others can either help me perform better, have no impact, or lead me to perform worse. A hoodoo would would reside in that last category. I am not so concerned about their motivation or intent, just their impact. With my favorite fishing comrade, we actual raise the level of our game so to speak, so an inverse hoodoo. We share information on the flies that are working, fish caught, good spots on the rivers, ( after a small bit of subterfuge of course for good measure). We have a good rhythm of leap frogging each other up the river, alternating the good stretches, not spoiling the water ahead for the other. Plus the general level of conversation or lack of it fits well with the day allowing us to focus on the river and landscape around us. In a pinch we can count on one another. I recall one day I slipped and snapped my fishing rod while at the same time managed to lose my fly box and all flies and watched it float away into the fast current. My friend saw it all and after a few jibes, offered to share his set up, and we took turns the rest of the day. We landed my rainbows that day.

But I have fished with hoodoos as well. One guy we nicked named Trigger. He was so nervous and jerky casting and moving around the river we thought he had an itchy trigger finger and thus the name. He could destroy a beautiful fish laden stretch of river faster than anyone I have seen, with sloppy casts, poor retrieves and a general disharmony with the environment. And he liked to talk, talked way too much. So just being around the guy brought my fishing down and took away my rhythm. Plus, he had the very real affect of spooking any fish near us. They must have known he was a hoodoo as well. One day was enough with Trigger.

Nick White comments:

Actually, I wonder if the null hypothesis is that we're all natively hoodoos…with only will, practice and a life record to help us refute it?


George Parkanyi responds:

Humanity in the aggregate, and individuals all, are - maybe flawed isn't the best term - let's say limited, at any given point, by the sum total of our experiences and our genetically born underlying capabilities and pre-dispositions. Most of us I would think have far more potential than we ever actualize. As infants and children, we start out gang-busters, absorbing everything - especially information and ability most pertinent to our survival. It is primarily a world of exploration for us at that time, underwritten by the support of those that take care of us in the early years. We're all about curiosity and imagination. As our thirst for knowledge and experience leads us to new experiences, we also begin to develop routines and habits, which enhance efficiency and conserve energy, but also help us re-experience that which we have enjoyed or that have worked in our favour before. The filtering begins, and the type and nature of recurring experiences that we seek increases. Habits take form, even at a young age. The continuously developing habits, I believe, progressively and increasingly compete with our desire and ability to pursue new experiences. At certain points in life, we even choose massively pre-packaged experiential templates (e.g. marriage, career) as well, which hugely filter and channel our future experiences. Ultimately, we (not all of us, but a large portion) reach a point where there is no further desire to seek new experiences that are outside our past experiences. Our habits completely define us. As we age, we also begin to lose the resources, particularly health and energy, with which to pursue and expand our overall life experience.

Perhaps a hoo-doo is simply a person that can or will not go to the next level, and finally settles for habit being the determinant of his/her future experiences. Perhaps they give up on the pursuit, or are ultimately distracted away from seeing or imaging that next level of experience beyond the point that they have already reached (which point would be different for each person), and never even think to look toward the horizon of their life again. All I know is that habit is a very powerful force, and ultimately I think it overwhelms us.

John Holley comments:

"Amen, JT. Sorry I made you burn a shirt that time I hugged you at the Mets game, Vic!" KD

Just to show I put my actions where my mouth is, I will share with the list that I recently have read two very important books that have shaped my life thus far. Both are shared favorites, highly insightful, and forever giving and common amongst the Spec Listers:

1) Memoires of a Superfluous Man - A.J.N. (via Vic)

2) Five Lessons: The Modern Fundamentals of Golf - Ben Hogan (via my Dad, also Kevin Depew's fav golfing book)

These books are on my top ten list. If you haven't read them then do it. In fact read them over and over again.

Other than G-man's speech in Atlas, the 1 thing I hang onto that Lack shared recently in a post regarding his Father that would get you out of being a Hoodoo is appropriately going to be number twenty six.

26) “If you saw Atlas, the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down on his shoulders—what would you tell him to do?” " To Shrug." Shrug, bare more. Your mind can handle it.



 An analyst on CNBC yesterday was saying BP is cheap, and the dividend is secure. His interviewers (are they supposed to have an agenda of their own? Or is this just asking the tough questions?) kept hammering on their idea that it will be politically unacceptable for BP to pay dividends to its shareholders, a line of questioning that drew uncomprehending stares from the analyst.

George Parkanyi comments:

Yeah that makes sense… take a whopping out-sized risk on BP with its huge potential future liabilities, in a world economy and market possibly on the brink, where P&G can lose 35% of its value in 10 minutes, for a dividend. Where do I sign up?

Rocky Humbert comments:

 Here are some questions that one might consider before investing in BP. (No such analysis is required for a skilled trader who claims to be able to systematically buy low and sell high without regard to "fundamentals.")

1. Remediation costs and liability are related to a spill size both by physics, practice and statute. The Exxon Valdez had a defined amount of crude. How much crude will spill from the Deepwater Horizon?

2. What is the law regarding punitive damage penalties if gross negligence can be proven? Is it like a RICO case (4x)? Is it capped by statute? Or can it be unlimited (like an old Joe Jamail lawsuit)?

3. What is the law regarding punitive penalties if there is criminal liability? What is the worst case penalty? If the Goverment files an criminal indictment, what effect(s) will have on their business?

4. What effect will the overhang of litigation have on the cost of BP's financing of their regular business? If there is a risk of a $50+ Billion punitive penalty, what will the credit rating agencies do? And if BP's cost of financing increases by 100-300 basis points, what effect does that have on their exploration budget?

5. If they capped the well today, can one assess the risks of #2, #3, and #4 with certainty?

6. What is the risk/cost of a boycott of their service stations? Did Exxon experience a boycott? And if so, what impact did it have on their downstream operations?

7. What is the tail (in years) of the litigation? Will they be required to post a performance bond? And if so, what assets will they sell to meet the performance bond? More generally, is there a risk that they will have to sell assets to meet other liabilities? Or, can they almost certainty meet the expenses out of current cash flow?

8. How is BP's stock faring versus other companies with exposure (Anadarko, Cameron, etc.)? Will these companies present a unified defense? Or will they be pointing fingers at each other — further concentrating the litigation risk?

9. How has BP's stock performed versus other major oil companies? For example, if BP is down 35%, but Chevron,Exxon,Conoco are also down 15%, which of these companies represents the best relative value, given the facts and probabilities?

10. If I am leaving for a five-year vacation, would I be comfortable purchasing BP at the current price, and not looking at it until I return? Is there any price where I would buy a non-trivial amount of BP and not look at it for five years?

Vince Fulco writes:

 While I am no apologist for BP's seemingly high risk and perhaps incompetent procedures in the Gulf, I am also wondering about the proportionality of the public reaction (to the stock that is, not the beach pollution) vs. the total cost of the disaster. The company's mkt cap is down $70B since the explosion and is currently $115B for a company with $230B-ish in historical assets ($90B estimated in the US) and relatively low non-current debt levels. Moreover the company has a stand alone re-insurance company with $3.5B in assets. They may also have some additional cover which I am disregarding for now. As Ken has stated, halting the dividend brings $7-10B more to pay claims which I assume will have a somewhat long tail, say 3-5 years. And just because Chuck Schumer believes the payout should be halted, doesn't mean he knows anything about corporate finance strategies or management's responsibilities to its owners. More evidence of the worrying 'they came for…' behavior.

Given the rarity of the event, arguably the next comparable disaster naturally might be the Exxon Valdez (other smaller events could be chosen too). The best numbers I could find were a cost of roughly $5-7B stretched out over 20+ years. For argument sake, let's say the cost to BP is 10x as much or $50B; that would be roughly 1.6-1.8x mean operating income of the last 4 years.

I am not considering BPT in the conversation because it is a different animal and Rocky has addressed it well. Lastly, since our current admin seems to be in the business of picking winners and losers, are they ready to and can they kill a formerly $1/4T asset company 40% held by pensioners and retirement funds of our closest ally? It is also notable that LA's governor is already publicly complaining about the effect on jobs if a drilling ban is instituted for any length of time. Double edged sword indeed.

Disclaimer: This is absolutely not a recommendation for anyone but I am long right at these levels and would appreciate reasoned arguments against.

Rocky Humbert adds:

 One more thought on BP as I work through their financials: The company generated free cash flow of about $7 Billion last year and paid $10.5 Billion dividends.

Their next dividend will be announced on about July 27th with an ex-date of 8/4/10. Looking at the pricing of at-the-money options, it appears that the market has priced in a cut of their dividend by 50% (from .84/share to about .44/share).

Any spec-lister who has a variant perception on their dividend policy (either holding it at its current level, or reducing it more than 50%), can execute an direction-neutral options "conversion" to express this view.

In my humble opinion, a 50% cut in the dividend seems entirely reasonable to satisfy all of the different constituencies. And, in assessing the future behavior of the stock, one needs to consider that Mr. Market has already discounted this news.

Before you invest in BPT, I suggest you get an objective estimate of the reserve tail in the Prudoe Bay field. I studied this several years ago and there is a NAV based on the dwindling reserves and foward curve in the crude market at various discount rates.

The field should start tailing off in 2011 or 2012 and the stock will be worthless certainly by 2020 so you need to value not only the current and future crude price but also the decline rate. I'd also suggest that you look at their financing and change of control provisions as well as cross default issues. Lastly, I owned BPT when it was at a substantial discount to its NAV at a large discount rate (versus crude futures), but could not short it when it went to a large premium because the shares could not be borrowed.



The Europeans ponied up $1 trillion of funny money to essentially guarantee the debts of Greece and the other members of the EU family nobody really likes to talk about at family gatherings. Ostensibly, the bailout war-chest was as much to protect major European money-centre banks as Greek and Portuguese civil service pensioners. Stock markets are acting like these countries have already defaulted. If that were actually happening, banks presumably would be doing the same thing they did in the great Credit Crisis of 2008 – not lending to each other for fear of stinky balance sheets on the other side. When this happened in 2008, LIBOR spreads spiked almost 150 basis points. Today LIBOR ranges from .25% to 1%, depending on maturities, (1 mo to 12 months) at all-time lows. It seems that banks continue to be quite happy lending to each other, and therefore there should still be plenty of liquidity in the system. Sure there is in itty-bitty up-tick in May-– not entirely unreasonable since the VIX just doubled - but no indication that it's anything other than business as usual behind the scenes.

Yes, governments are printing money and debt levels are ultimately unsustainable, but just like consumers can keep rolling over and transferring their credit card debts virtually indefinitely, so too can governments that matter, and major banks essentially underwritten by these governments, keep staving off default for a very long time. Look at how long way-over-leveraged Japan has been able to muddle along for over two decades after it blew up in 1989. I don't see banks panicking in this situation, and with all the liquidity and promise of liquidity, that's just more fuel for the fire. Someone is going to wake up soon and realize we may be going down, but we're not going down any time soon, and all those companies reporting big earnings increases are likely to snap back in a hurry. If we are to have a double-dip recession and a bear market, it would be for other reasons, which will be more slowly developing. Shorts beware.

Mick St. Amour writes:


I wish more folks agreed with you as I do. From a technical perspective one thing that I'm not hearing in the media is that Dow Transports don't seem to be confirming retest of Feb Lows by the Dow. If I'm correct on this as well Thursday's action seemed like a washout to me, I can't remember seeing 75:1 downside to upside volume days in some time. I'd love to find research that shows turning points in the market when one looks at the vix collapsing (like it did on Friday) with volume that is at least 10:1 positive to negative. I suspect that would show good turning points.

Craig Mee writes:

It appears that since the bull market run up of the tech wreck, it has been all boom and bust, and until we have renewed respect in the banking sector, and politicians pulling there belts in, and making some tough calls, and with that and a credible plan moving forward…then this charade looks set to continue. Not until we see some consolidation of prices at lower levels over an extended period of time, in essence saying that yes , we have learnt our lessons, and we are ready to come out of the naughty corner…will it seem that the market can move forward without any risk of the volatile behavior of late no matter what numbers companies are posting. 

Alex Forshaw comments:

I'm confused.

LIBOR is at 3-month highs across most maturities. The treasury/libor spread is at 10-month highs.

The series is extremely autocorrelated, which means that a reversal of trend should be taken extremely seriously, as the series doesn't change trend easily.

If anything LIBOR is flashing a big warning sign as $1T of QE has caused nary a blink in the spread's rise over the last month.



After a long day of deleveraging your Euro trade, at supper time make sure you cook your suckling pigs well in hot grease so as not to risk contagion that could make you fall ill while later trying to spell Nouriel Roubini correctly - and make sure you rescue the package for re-cycling.



Beware of the parade of technical analysts soon to make their rounds on
television.  When this happens a panic low is usually near.

Sushi Kedia asks:

Do you say this because either Fundamental analysts are always in panic/euphoria extreme psychologies or the quantitatively evolved price students (they too are technicians, which the Chairman has acknowledged several years ago and he has indeed suggested that this passe thought process of beating Technical Analysts be avoided) are never experiencing panic or euphoria?

George Parkanyi adds:

And beware the contrarians who call panic lows based on what goes on on television…



a quizOne may inquire in answer to Rocky's quiz to what pockets do the big v shaped moves big down and big up in a half hour accrue. One would not think that it would accrue to those who are leveraged more than 2 to 1 or 3 to 1, as not only must they meet initial margin but must meet maintenance margin before they are liquidated at the lows would not the ability to borrow from a big lender at low rates help the top feeders and flexions in such a regime? Just a theoretical query.

George Parkanyi asks:

Why not? You could target multiple stocks, some of which are just decoys to mask the main attack, work it from multiple accounts, have your "one cent" bids at the ready, and then bring the hammer down with a concentrated attack at exactly the place where most traders would place stop-losses. Enough kindling to spark a sudden flash fire. You slam the market down to the low bids placed that have been placed according to some pre-calculated algorithms that make it look random (which you've probably modeled already on a Cray). You cover with a huge profit. Others step in, it's all over, and you slink away. You would need to have detailed knowledge of how off-exchange platforms work (e.g. no stock-specific circuit-breakers). Some smart traders and top-notch trading platform programmers, with the appropriate financial backing, could pull this off. Come to think of it, it could have been a heist.

The main flaw I see with this though is that someone this smart would also have anticipated the attention that the anomalous trades would attract. In the end, some were actually busted. Could the manoeuvre then have been a decoy/catalyst for something else? Perhaps a huge, leveraged currency position, or one in some other correlated market like oil? If I were an sleuthing man, I would look there. Because of globalization and the interconnectedness of global markets, a foreign power could even set up something like this. Who might want to unload a pile of US Treasury paper, oh for example?

This would make a good movie.

Vince Fulco writes:

Last Thursday was eye-opening on so many fronts…

1) Technology has superceded our humanity– The exchanges and regulators proved themselves completely unprepared and uncoordinated for a growing cascade of one sided activity. What is so infuriating is that there has been a public warning by infrastructure experts and traders about the growing potential for systematic dislocations for a few years and as usual specs have been told, "all is well". Moreover there is evidence of a wholesale and I would say engineered withdrawal of bid side activity. Planes don't just fall out of the sky en masse.

2) Assume at all times that your systems will fail with questionable potential to regain access. I believe IB did the best that it could but I never saw the software behave in this manner after years of observing mkt stress pts. My DOM halted for 1-2 minutes twice with re-newed (displays of) activity 10 pts down each time and then a complete shutdown when SPUs were in the mid 60s-80s. The software came back up after a quick re-login however. Would be interested in behavior of others systems.

3) What we knew on de jure basis; that the exchanges will always do what is best for them, became de facto. Formal decisions as to what to cancel and what level to cancel (60%) were arbitrary, not subject to any outside scrutiny and not challenge-able. I was particularly bemused by the CME's almost immediate claim that their systems worked properly & there would be no trade cancellations even though the activity in cash instruments underlying them still needed to be examined more carefully and in limited circumstances were ultimately canceled. The House wins always in the end.

4) Amazed at the resiliency of human nature– while I am not surprised to see to this week's pop subsequent to ECB/EU/IMF activities, until trading activity fragmentation can be addressed more comprehensively, why are folks so confident that it won't happen again? And soon?

5) Trading is war– Any complacency can have fatal effects. One must always cast a wide net as there were suggestions and pre-cursors in other mkts, as much as 30-60 minutes prior, that would have kept one's exposure down if not non-existent. Always more to keep tabs on, more to learn and more to think about. And that's when fighting the last war.

Rocky Humbert responds:

As students of mathematical logic know, it is impossible to DISPROVE a conspiracy theory — because the absence of evidence is not a proof of anything. Hence I submit that the primary usefulness of speculative post-mortems should be introspection and self-improvement … (i.e. And what does this plunge foretell about the future? And what can be learned from the experience?)

On the first question, I recall a post by the Chair (some years ago), where he noted that when there's a horrible adverse price move in an open position — and the price then recovers, he anecdotally observes that one should exit — as the recovery was a golf "mulligan." We'll shortly find out whether the rally of the past few days is a mulligan.
Also on the first question, I was surprised to observe that yesterday's retail investor sentiment showed only a modest increase in bearish sentiment. Prior to the plunge the bull/bear/neutral ratios were 39/28/32 and yesterday (after the plunge and recovery) the bull/bear ratio was 36/36/26. So retail was evidently not spooked too badly … (I use this statistic as a qualitative contrary indicator.)

For me, the experience of last Thursday reinforces the value of always having dry powder to exploit panic (even if the prices are revisited), as the risk/reward of fading a market that declines 10% in ten days is vastly differently from the risk/reward of fading a market that declines 10% in ten minutes.

I would be most interested in hearing from others what lessons they learned…

Sushil Kedia comments:

If it is hugely profitable to build such a conspiracy, then with all the technology and all the geeks why do such events happen only so rarely?

Has the frequency of such conspiracy explained moves been rising?

The learning that I obtain from such an event, drawing on the Chair's older post of such being the golf mulligan and a recent one wherein he said that such moves clear out the short term longs and the spike back clears out the short term shorts too. So, the markets when turning from day to day battle shift gears for month to month and quarter to quarter battle move sizes, actually then such moves are like a "benign devil". The same way angina pains do trouble but are nature's blessing calling for a more thorough heart check up and recuperative measures to be brought in, moves as these reduce the number of people who would have suffered much deeper damage over a longer course of time in the particular markets.

Can't agree more with anything than Rocky's thought on having some dry power, always.This specific situation of electronic markets (that appear to be so high-tech and hence an illusion of having progressed) disintegrating for moments brings to mind the signature line of Mr. Bollinger: When you progress far enough, you arrive at the beginning!Man must work, to even have a hope to be paid. Any modifications to any degrees in the tools of work will not lead any man (computers too!) to a point where without work and just by stealing anyone can hope to be paid, consistently. Change the system to whatever, men will work even though sometimes thieves will be able to steal. Men may still not get paid upon work and it may not mean that it was someone's steal, since spills happen and will happen.

Victor Niederhoffer comments:

Well said. As Zachar points out and this was originally brought to my attention by someone deeply in my debt, who actually beat me the last time we played tennis, it's a millstein. If the shoe fits, wear it.



a rogue waveThe futures markets have limits on how far a market can move in one day (both up and down). Why not the same for stocks? You could make it % based from the previous day's close (say 10%-20%). You could hold the limit for the day, or perhaps a set period of time intra-day. Enough for participants to review outstanding orders, margin situations, and so on. It might mess with day-trading and automated trading algorithms somewhat, but it would certainly prevent the type of liquidity-related rogue moves we saw last Thursday. Showing the stacked up bids or offers at the limit price would also provide useful information for traders on how to offset the impending damage in other stocks/markets. Options would have to be subject to the same controls. These policies would have to be implemented on all interconnected markets so order flows are not unknowingly routed to the most illiquid by trading platforms.




 I recall reading somewhere that 18% of the US oil comes through a terminal in the Mississippi delta down river from New Orleans. If shipping can't get through because of the oil slick, would oil and gasoline prices not go through the roof?

Disastrous earthquakes around the world, aircraft-stumping volcanoes, man-made environmental disasters… makes you wonder how long we can keep taking these torpedoes in these economic conditions…

The short side in equities suddenly looks attractive (but not attractive enough to forego really tight stops). The long side in grains and sugar perhaps also. The times they are a changin'.

Jeff Watson adds:

They're expecting that if this thing doesn't get capped, that the clockwise currents in the Gulf will ultimately be putting an oil slick on my front yard. Still, the gulf is a pretty big place and 200,000 gallons a day is not a lot of oil, especially since only a percentage of it actually makes the slick. I'm not worried about any environmental damage, and will accept whatever happens. The bright side is that the tourists stop coming.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MOTU.



the two blades of the scissors come togetherOne of the hallmarks of a terrible decline in the fortunes of a company besides skyscrapers and hubris is an acquisition binge. A certain non-bank company with extensive financial interests and a tall chief headquartered near me that has made thousands of acquisitions and does not talk to analysts except when they are in trouble comes to mind as well. Much too often the acquirer sells out when it sees the handwriting on the wall. Many of the big banks bought with abandon before their own fight with the death spiral.

The other side:

One has seen this happen often times when I was in the finder business with buyers trying to cover up their own lapses by buying to boost lapses in their own business. Often the two blades of the scissors come together with the buyer trying to pull the wool over the seller and the seller over the buyer. The net result to me has always been that companies that make it a principal part of the business to buy companies seem to me to have inordinately poor performance. I have seen innumerable conglomerates in my day go from great to dismal. The companies that say they are in the business of acquiring and use the word "tuck in " acquisitions or some such are all prime candidates for a fall in my experience. Of course every one of these acquirers says that their mantra is "we leave the acquired company alone to run its own business. Look at how small our headquarters is."

All these thoughts come together when I saw a quote from a sagacious business man in the Midwest saying "I am ready to spend 11 figures on Monday if I get a call from the right acquirer." How has he held back the Canutian tides? All these thoughts must be quantified.

George Parkanyi writes:

I'm not sure how counting as such would work here. Perhaps you could do an analysis of company performance as a function of accounting goodwill. Beyond that, I think it ultimately comes down to human nature. People don't easily identify with being part of a big monolithic entity. They understand that their individual impact is heavily diluted. My experience has been that the best teams are small, tight, and focused, and conglomerates by definition are not tight or focused. The so-called "synergy" that acquisitions are supposed to create is usually just a euphemism for "layoffs", particularly to the working ranks. Muy anxiety. And/or sometimes the entire heads of acquired companies are cut off and new ones screwed on, muddying the career paths of those just experienced managers just below. Large organizations in general also feature a wider communication gap and disconnect between senior management and front lines. To me this is a solid prescription for poor morale, and subsequent mediocre to poor productivity.

Another type of company to watch for are the ones that are constantly re-organizing. Re-organizations more often than not, in my experience anyway, tell me that a company is not tackling its problems head-on, but rather just papering over previous poor decisions by shuffling people around.



 One is astonished at how far the subject of position sizing has come since Robert Bacon in 1940 when he suggested 2% of your money on each bet, then a buck on the races so you could lose 50 in a row before going under.

How about an approach where position size was a variable that you put in your statistical return and reward space to start with, then examine the distribution of returns with various positions sizes and determine how your utility fits in with the distribution.

For example, today a 20 day high of 230, indeed a 1½ year high. What is the distribution of the six such?  Max 4.8, min -5, moves to relevant endpoint 2, 5, 2, 2, 1, 5, -2, 3. No trade from Bacon. Wait for overlay. Pittsburgh Phil in the background.

Phil McDonnell writes:

The hard truth, to me, is that it is all position sizing. –Ralph Vince

I agree with this only up to a point. In order to have a winning strategy one must have an edge in a statistical sense. You cannot win with a losing system. One needs both a winning system with an edge and a solid money management system. Neither one alone is sufficient.

After one finds a winning system then you must also have a money management system that does not expose you to ruinous losses. If you graph the expected amount of money you make at various position sizes for any winning system you will find that it looks like a mountain. The peak of the mountain occurs at precisely the positions size Ralph calls optimal f. But if you also look at a chart of risk (stdev) you find it is a monotoncally rising function of position size. Thus as you continue past the optimal f point you are giving back return but still increasing risk. It is the worst of both worlds. If you go far enough past it you can actually wind up losing money even with an overall winning system. That is why I prefer to call the optimal f point the point of maximal investment return.

kahneman receiving nobel prizeWith respect to Vic's comment about utility, there is much merit to this approach. None of us truly knows our utility function and if you believe Kahneman and Tversky it is probably irrational anyway. So then the next best thing is to construct a rational function mathematically from some logical first principles. The three most obvious choices are Sharpe ratio, log, and my favorite is log log Sharpe ratio. Except for the simple log function, one invariably finds that using these utility functions one chooses a point on the mountain graph somewhat to the left of the optimal f peak. So in that sense optimal f is really only 'optimal' for the case of maximizing compounded portfolio return but is sub-optimal and dangerously past the optimal point for maximizing any utility which explicitly takes risk into account.

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

Ralph Vince adds:

I agree with most of what you say here. Like the old Frenchman used to say, "Most people don't know what makes them tick; they only know that they tick."

Most people do not really know what they are in the markets for — and I think there are very many different and good reasons for being in the markets aside from mere growth maximization. But most don't know what they are here for.

I think until someone can answer that they're probably better off not being in this arena. But I no longer think one needs a winning strategy, and I beg to differ with the notion that you must have a positive expectation (and, this too further indicates that timing and selection are subordinate to sizing). Ultimately, you are in this for a finite number of holding periods or trades (call this T) , and given that you have control over your quantity, you seek to come out at T (or before, if you have achieved the objective of your criteria) with the objective of your criteria.

Again, and I will use this for illustration of the idea — if I could do a full martingale on my capital, and I had unlimited capital, and my goal was to accumulate, say, X……

I could then do a full martingale on a losing system, and when X was achieved (or at necessarily time T) leave the game.

I know for years I too bought into the idea that you have to have a winning system. But I am seeing guys who have specified their criteria well, and are getting astounding results, and are trading approaches that are, at best, feeble. 

Ralph Vince is the author of The Leverage Space Trading Model, Wiley, 2009

Phil McDonnell replies:

I would love to see an example of a system that had a negative expectation but could somehow be turned into a positive expectation through money management. The martingale example is a system that exchanges a high probability of winning a small amount for the small probability of losing a large amount.

Examples of such 'systems' with skewed distributions would include:

  1. Selling out of the money options.
  2. Setting a profit target of $1 with a stop of a $10 loss.

Until I see one I shall remain skeptical that one can reliably expect to profit from a losing system simply through money management.

Rocky Humbert:

As a philosophical matter, I question whether a system can truly have a negative expectation. Because if you take a system that supposedly has a negative expectation and simply do the exact opposite, you should have a system with a positive expectation. I am skeptical that any market participant believes that his approach has a negative expectation.

If you have ever tried to play checkers to lose (instead of win), you'll see just how difficult this can be.

(Note that I am excluding transaction costs from this discussion. But there should be no a priori (efficient market) reason to believe that always buying out of the money options should have a better result than always selling out of the money options– unless there is a systematic mispricing.)

Steve Ellison comments:

crapsAny casino game is a system with a negative expectation for the player (except a blackjack card counter). In craps, one can bet against the shooter, but the expectation is still negative. The only way to take the other side is to be the house. 

George Parkanyi writes:

In my REAP system (Relational Equity Allocation Program), I made the position size a function of the relative separation ( % move of X minus the %move of Y determined the % of position X to sell to fund the purchase of position Y) between two securities made over time. You can re-allocate based on a specific net separation (e.g. 30%) or re-allocate at specific time periods come what may. This has a positive expectation over long periods, because there is dollar-cost averaging dynamic involved - a more aggressive version because fewer shares are sold of the relatively higher security, and more shares bought of the relatively lower security, and the wider the separation the larger the re-allocation size. The compounding over time depends on the volatility (and therefore degree of divergence and funds transfer) between the matched securities.

Trade sizing can also be used for money management in trend following. The simple principle of scaling into a position as it rises keeps your risk relatively low on initial entry, and there is a cushion of profit to fund the risk of subsequent higher-up scaling purchases. Here again, you can optimize by how high you go before adding, and what tranche sizes you add at each level. The trade-off is that you limit your profit potential by scaling, but your stop-outs are cheaper, and waiting to add provides confirmation of the trend.

I currently am using a 40-30-30 scaling sequence, using a specific setup pattern rather than a fixed % rise (e.g. 0%, 10%, 20%). You could use a relatively wide stop on the first tranche, or really keep your costs down and use a very tight stop that allows several inexpensive stop-outs before you "latch". The latter is a better way to go I think if you are trading breakouts and strength patterns. A good break-out doesn't look back, so your tight stop doesn't factor in. If you have to stop out 3 to 4 times before you catch it, you can still keep your misfire costs low.

Rocky Humbert:

Fair point. I was referring to the financial markets (and not casinos,) but you can indeed buy and hold the shares of publicly traded casino companies and you are taking the other (positive expected) side.

Turning a system upside down highlights an additional phenomenon: path dependency can determine whether one is a trading "genius" or "moron."

Nigel Davies comments:

Fascinating discussion.

If I might offer my two cents I've found that in my field there are an immense number of practical difficulties in bringing a nice piece of theory to the board. From my amateur perspective I see many issues with regards to the subject under discussion:

a) A maximum loss size implies that you have a clearly defined exit point, i.e you are trading with stops of some kind and these can nonetheless leave you a winning system.

b) Assuming you have your exit point, how realistic is it that this will be achieved (slippage etc).

c) Does assigning all trades the same position size represent maximum efficiency? I suggest that some are much better than others and should therefore be weighted more heavily.

I'm sure that readers of this site can think of many more issues such as these. This in turn makes me wonder about the utility of trying to apply very precise mathematics to practical and very messy issues. Surely it should come with a good sized dollop of common sense and flexibility in which good lab experiments are regarded as mission statements rather than straight jacket rules.

Of course doing this is an art in itself which will extends into all sorts of psychological nuances. If anyone is unable to do this they should be looking to work on themselves rather than 'the system'. Discovering the reasons why people can't operate effectively under pressure is very valuable, both in the markets and in life.

Craig Mee responds:

Fair call, Nigel, though the one thing I would have to agree about on the surface but disagree on is "I suggest that some are much better than others and should therefore be weighted more heavily."

It had been my humble experience that the trades I thought were crackers ended up as duds, and those I thought were tradable, but just above the criteria, turned out to be 4-10 baggers. Setting the same cash risk, at the start was imperative across the board.

Nigel Davies writes:

 Well, yes, that can be a tricky one. But if one's assessment of bullitude/bearitude is unreliable vis a vis degree, what makes you so sure that they're not completely the wrong way round!? It could be that 'sure thing' trades lower one's vigilance in which case we're back to the human factor. Anyhow, now I'm more awake I can think of some other flies in the ointment in this position sizing debate. What about:

a) The good part time trader with a day job who wants to build up capital. Perhaps he should he push the boat out more at first so as to get a big enough account to go professional.

b) The improving trader; shouldn't he trade small size whilst learning?

c) The successful professional trader who wants to protect capital. Shouldn't he gradually reduce size rather than have his entire wealth and livelihood on the line.

Don't get me wrong, I think that an understanding of position size risks is essential. But there's a lot more to this than just numbers.



Dan BoyleGreat sports teams have a way of constantly reinventing themselves. Case in point perennial playoff choke-team San Jose Sharks, who last night found a whole new way to lose an important playoff game — fire the puck into your own net 51 seconds into overtime after you've utterly dominated the other team.

Intending ostensibly to clear the puck from the corner to his defense partner behind the net, Dan Boyle of the Sharks instead wired a very nice back-hand shot between goaltender Nabokov's leg and the goalpost to break the 0-0 deadlock and win the game — for the Colorado Avalanche. And it really was a nice shot, which made the whole thing so much more tragic-comic. In one sweeping back-hand, Dan Boyle generated more offence than the miserable 16 shots the Avalanche attack was able to muster for the whole night.

As the dejected Boyle skated past the goal, you could see Nabokov's head tracking him. I can just imagine what he might have said…

"Nice shot, Dan. I was thinking more like the win and a shut-out, but let's not go there. The world needed to see your back-hand just now– and it really was a nice one.

Or … "OK that was a really good shot, Dan. And for sure we should do this again, but how about just you and me - at practice let's say?"Or … "Dan, do you see the irony?"

Or …"So Dan, like what would your plus/minus be in this situation?"

Reminds me of my gas trading of late actually. If there's anything trading-related that would feel like a game-losing own goal in front of 20,000 people, I'd say for sure that would be it…



 Our daughter Eddy who is in medical school thinks the predictions of ever increasing medical costs — like David Dodge's – fail to take into account two likely changes:

(1) the breaking down of the medical cartel's current structure of required licenses and

(2) further advances in medical micro technology, both in drugs and in physical surgeries.

A nurse-practitioner with access to computer tools can now do as good a job of diagnosing patients as any Internist; and, just as many patients who once would have been candidates for open-heart surgery are now treated by angioplasty, so will other now expensive surgeries give way to cheaper, less invasive procedures. The medical future may not be as expensive as is feared.

If Christie's catalogs are any indicator, the really good stuff among collectibles seems destined to continue its century-long ascent to the financial heavens. Assuming that the non-profitistas and the life insurers keep the envy-the-dead tax in place, that trend seems destined to continue. However, other, less genuinely precious objects may find themselves becoming less pricy even as currencies become rivals to replace the Yugo (fiat joke!).

That seems to be happening now in our the niche of the economic environment with equipment rentals. In this part of the pond even the biggest fish are finding it hard to eat. Volvo Rents, which is at the top of the food chain, is now offering a $15,000 fee to "the referrers of franchise candidates who become Volvo Rents franchisees and open a store". Coke and ore contract prices out of Australia have certainly proven George right about the worth of tangible vs. paper assets, but there are few, if any, new takers for backhoes and the other stuff actually made out of iron and steel.

George Parkanyi writes:

I don't know what the answers are either– it doesn't look very promising given the social, political, and economic status quo– none of which can be easily changed from the inside, if at all. If you want to play the decline both here and elsewhere, I think you have to look at the eventual effect of these unsolvable problems. Governments are not only bankrupt financially, but also for ideas and simply just in the ability to execute. The knee-jerk response to each crisis du-jour is and will be to borrow and spend out of it. When they can no longer borrow, they'll just print. This can only mean continuous and accelerating currency debasement around the world, so I think tangible (vs paper) assets will remain a very persistent investment theme. Governments are going to default, and currencies are going to fail with new ones issued in their place. It's just a question of which ones and when. In that environment tangible assets (the more liquid the better) would have to do well I would think– precious metals, commodities, real estate, perhaps some collectibles, and equities that represent these things. It's not going to happen overnight, and no given trade will be a slam-dunk, but that's where I think the heart of the drift will remain. 

Ken Drees comments:

5 years ago the highways were choked with landscaper trucks and their stuffed trailers with ubiquitous mowers, weed whippers and gas cans. Getting gasoline in the morning on the way to work, one would always see a few landscapers fueling up the tanks and the cans for the day.

I am lucky to see one landscaper a day now. There are many pieces of equipment for sale now–if things don't pick up this summer, you should see these items go for 20 cents on the dollar (used of course) in the fall.

Justa Guy respectfully disagrees:

Many of you do not know me, but I am a physician who has practiced in both Canada as well as in the US. In my opinion there are two issues that are a threat to health care in both the US, as well as in Canada, as follows:

(i) Increasing technology. Over the two decades that I have been practicing medicine there have been innumerable new gadgets which have allowed physicians to more precisely define where problems exist ( we used to diagnose stroke with CT scans, then it was MRI, then it was supersensitive 3 Tessla MRI, now there are some unbelievably sensitive 15 Tessla MRI machines being produced). These incremental advances in technology of course come with increasing costs. Unfortunately these advances rarely improve either clinical outcome, or survival. For reasons of medicolegal protectionism, and customer expectation, we are in a culture in which the biggest, best and latest technology is the norm in our healthcare, however the use of these technologies does nothing to affect the outcome of patients.

(ii) Unreasonable expectations. There are two facts in healthcare which are undenyable: Every one of us will die, and we spend >60% of total healthcare expenditure on people within the last month of their lives. In order to curb healthcare expenditure, we must begin to recognise futile situations, and limit the resources spent in these situations. Do not beleive that is the same as Palins "death panels", rather it is a first step in healthcare fiscal responsibility.

(iii) There is a need to transition to more mid level providers as a means of primary health care delivery. Those midlevel providers will be equipped with algorithms for how to treat certain conditions in a medically proven and fiscally responsible manner. Only if those initial steps are unsuccessful will patients be seen by internists and then specialists.

(iv) About 30% of health care spending occurs under catastrophic circumstances. These include bone marrow or solid organ transplants, trauma and accidents. In many of these circumstances, the chances of survival are minimal at best. In the US ( and to a lesser extent) in the Canadian systems, there is no good mechanism by which to limit care in such catastrophic circumstances. A poignant personal example: Several years ago, my aunt (age 70) who lived in the UK was diagnosed with an incurable ultimately fatal lung disease; her physicians told her ( with out presenting options) that her care would be designed to minimize symptoms and discomfort. She died about 2 years later. Around the same time, I was involved in the care of a wealthy businessman age 75 with the same diagnosis in the US. He was offered and ultimately received a lung transplant (even though outcomes are poor for lung transplants in patients with that condition). He died within the year. We need to learn that no matter what insurance company is paying for such cases, it is financially irresponsible to offer such extraordinary care in hopeless situations

(v) The way physicians are compensated needs to change. In most health care settings, Physicians are paid in the same way that lawyers are: the more they do, the more money they make. Example, a cardiac surgeon who does five bypass surgeries in a week makes more that the cardiac surgeon who does three bypasses, and puts two patients on aspirin rather than operating. That system of having a disincentive for choosing cheaper care is dangerous and expensive. Example: many obstetricians believe that the optimum C section rate is between 5-10% of births. In the 60's in the US it approached that number. By 2007 the rate was >30% of live births, although it remains unclear why the rates have grown so remarkably. If physicians were paid by salary, any potential for conflict of interest is removed.

In my humble opinion, without addressing these issues health care costs will continue to rise, and as David Dodge succinctly puts it, heath care will bankrupt which ever countries fail to tackle the issues.

Kim Zussman responds to Dr. Guy:

Dr Guy:

As markets amply demonstrate, there are many discontinuities and irresolvable problems inherent to the human condition. eg, be kind to animals while eating them, love thy neighbor while profiting at other's expense, woman should be faithful but with men its optional, government for the people and for the government, ration health care to others but not your loved ones.

I would likely pay for a lung transplant for one of my daughters, if there was some hope the operation could save her. And if the insurance company making billions will pay some of this, I'll take it.

Outcome, "evidence based treatment", should always be the driver but ultimately humans are driving. Doctors may earn more (earn) by doing more, Kaiser and other HMO's get to keep more by doing less. Both systems have moral hazard problems, as do all the in-between solutions brokered by governments. 

Stefan Jovanovich replies:

Eddy has the fortune/misfortune to have Dr. Zussman's head for statistics. It is a blessing to have that knowledge, but it can be a curse once people in research labs discover that they have someone can actually make sense of the data Pearl Diver spits up AND, if she can't do it herself, she knows some really bright people from Cal who work at JPL who can make sense of the outputs. As a result, in her fledgling career, she has already done a full year and more of full-time lab work collating price and outcomes data for both an ophthalmology and an orthopedics lab. From that limited and completely skewed base of knowledge, she has come to these tentative conclusions about medical costs:

(1) price competition works - in those areas of care that are open to active price competition (Lasik, elective plastic surgeries), where the patients pay for at least half the ultimate bill, prices have gone DOWN each year, not UP,

(2) universal insurance is absolutely the worst possible financial model to use for financing general health care- "imagine an energy/transportation system where people were issued monthly, fixed-price gasoline insurance cards; even the most responsible, self-reliant people would find themselves thinking why not take a Sunday drive, it's free and the energy producers do everything they could to abandon market pricing and go to a cost-plus, government contracting model just as the hospitals have",

(3) the Big Lie in medicine is that there is no scarcity of skills, that, if we can only get the costs down, there are enough skilled people like Dr. Guy available to treat all the patients who need care. The rationing that the medical education system imposes does not help; but, even if the libertarian dream of open, unlicensed competition arrived tomorrow, there would still be a shortage of first-rate care. That is a truth that no one can profit from telling. On the issue of lung transplants, Eddy and her Dad are hopelessly biased; her uncle, my brother, had both lungs switched out 6 years ago so our family interest would outweigh our principles even if we believed in rationing by medico-political authority rather than price.



The Ring of FireEarthquakes are an interesting analogy for how markets sometimes move. Correlations may be stable for a time, as they have been for the past couple of months, but then a sudden tectonic shift can either break a given correlation or maintain it but cause a sudden shift in differential between the correlated items. Case in point, Monday the first of March. I have ¾ of my trading assets in USD (alas), and have to suffer the constant currency hit when oil and to a lesser extent, other commodities and equity markets go up. It’s been like clockwork for quite some time. On Monday, oil and other commodities were down significantly, the USD up. The Canadian dollar should have been down as well (mitigating the other declines, to my advantage) but instead went roaring the other way by over a full cent — the reason being an upbeat GDP report from Canada. Needless to say I took a relatively outsized hit in CAD terms that day. The next day the correlation returned to “normal”, but the Canadian dollar had shifted to a higher relative position against the US dollar – a sudden tectonic shift in differential as it were. (A similar analogy from physics is how particles jump from one quantum energy level to another without any smooth transition in between).

The markets then have their own “ring of fire”. Earnings announcements, takeovers, devaluations, surprise government rate and policy decisions, crop reports. These are the risks of living in sunny market climes. They can be more or less managed if you build your portfolios to “code”, but once in a while such an event (e.g., the subprime crisis) can spawn a killer tsunami (the 2007-2009 bear market/“Great Recession”) and severely damage even a well-constructed portfolio. And the portfolios built by crooked contractors that cut corners (Madoff); well those are completely shattered and washed out to sea.

What’s your portfolio building code? And where’s your high ground?

Henry Gifford comments:

Building codes follow Bacon's law, both mandatory codes and voluntary standards.

The changes are partly in response to lobbying by manufacturers of products, partly in response to new technologies becoming available, partly due to changing politics/wealth levels/societal interests such as handicapped access and the spread of mandatory fire sprinklers to more and more residential buildings in the US.

So, while parts of the codes stay fixed for many years, others change rapidly, just as portfolio rules would.



people run from an approaching tsunami in Hilo ,HawaiiOne wonders about the impact of this earthquake on copper and basic materials prices. Is the infrastructure (rail, ports, etc.) in Chile damaged to the extent that copper shipments will be impaired for several weeks/months? And what of the demand for basic materials to repair all the other infrastructure? More ominously, is there a trend in increasingly destructive earthquakes (and collateral effects such as the 2004 tsunami disaster?)

Anton Johnson comments:

I found the paper "Measuring the Impact of Natural Disasters on Capital Markets" by Worthington and Valadkhani of Queensland University of Technology to be interesting.

George Parkanyi adds:

On vacation in Hilo last summer, we went to the tidal wave museum. There have been many major earthquakes around the Pacific rim in the past 100 years, yet only two generated killer tsunamis in Hilo Bay. The profile of an earthquake is very important to how much and how the energy propagates. The ones that tend to spawn dangerous tsunamis are the ones that cause a shearing and shift up or down of one side of the ocean floor, like the 2004 one in Indonesia. It is always correct to take the precaution of evacuating low-lying areas, because you can never know if any given earthquake will be one to generate a killer, but I don't think it is something to be overly feared, because of the relative infrequency, and the fact that there is usually plenty of time to evacuate. When you don't have a lot of time, and need to move really fast, is when you feel the earthquake, because that means it happened nearby, and is its own warning.

The risk of anyone's being hurt, in Hilo at least, is also lessened by the fact that Hilo was smart and didn't allow any re-building of residential buildings in the low-lying mapped out flooding zone. There are commercial buildings, but the chances of anyone being surprised at night in their beds is near 0. I'm pretty sure that Japan has similar measures in place along its coasts.

Kim Zussman writes:

Thanks to Big Al for the link, which produced the following academic study:

Looking just at earthquakes >7 magnitude, since 1900 has the death/year increased over time?

Running two regressions, one (death count) vs year, and the other (death count) vs year only for deaths>10, the slope coefficient was not statistically significant. Here for the second regression:

The regression equation is
deaths10+ = - 121592 + 66.3 Year

Predictor     Coef   SE Coef      T      P
Constant   -121592   131916  -0.92  0.358
Year             66.27    67.36   0.98  0.326

S = 30633.2   R-Sq = 0.4%   R-Sq(adj) = 0.0%

Note however the "Year" coefficient of 66 is positive (ie, rate increasing by 66 per year), so perhaps it will become significant sometime before Nasdaq 5000.

Jim Sogi comments:

There are interesting google results on earthquake and full moons. The theory is that gravity and tides contribute to geological pressures. We've discussed the full moon effect before on markets. Similar result for geological phenomena, but anecdotally very compelling.



soybeansCommercials are at an 18 month net-long extreme in soybeans. Interestingly however, large specs are also net-long. Small traders are heavily net-short against both. Who's going to win that one?






The partnership between Ostrich and ZebraThe reaction to recent events where something devoutly to be wished actually happened and sadness and disappointment and revulsion occurs is part of a general syndrome related to the dissipation of the sex cells. Time and time again, a company reports good earnings above expectations and a terrible decline ensues. Time and time, an important link in the totality is confirmed a la Bernanke today, and the market drops an immediate 1%. Time and time, a bill that everbody wants, like the stimulus bill, or the Massachusetts election results, occurs, and the market drops an immediate 1% the way it did last Tuesday. What is the reason for this? Is it a variant of 'buy the rumor, sell the news', or is it insiders selling on the news? Or is it related to the general apathy that results when the discharge has occurred? Can it be predicted, and acted upon?

A friend writes in that the ensenble of comovements between bonds and stocks posted on our web site always reminds him of Leo Goodman's classic article "Movements and Comovements between M Dependent Time Series" that Doc Castaldo has kindly sent hundreds of copies out to far sighted researchers in previous glory days. It is good to honor and create a visual model and real life exampe of such important dependcies. And perhaps this will be a prelude to providing statistics on this site that will be at least as informative by half as the average sports statistics contained in such fine publications as The Post or Sporting News under "Stat City". The desire to provide a league standings tabulation is keen.

I am reading several books on animal partnerships and the partnership between the ostrich, which has good eyes, and the zebra, which has good hearing, reminds me of the partnership between many markets. One or the other, whether it's silver or the omniscient one, are there to alert to possible danger. One feels the pain of the CEOs who were at a dinner at the Oval last Wednesday, and learned about the Volcker plan only at 9 pm that night an hour after the dinner and just 12 hours before the 6% decline started. "That's not squash," as my friend from New Zealand used to say when I mixed in a volley or two. Heard at the Olympic Club at 10 pm: "You might want to play an all court game tomorrow, mate."

Of course there is a higher purpose to the recent decline of 6%. First the move must shake out all the weak longs who were buying it based on their hopes for the January baromoter. Next, it has to set all the public behind the form so that they will sell out in disgust at the three-month lows. Finally, it must engender a Dow below 10000 to create the kind of newspaper headlines and fear that will shake out the remaining weak longs before a rally occurs.

Paolo Pezzutti comments:

After you have finished your succulent second plate of spaghetti "all'amatriciana" and you are offered one more, can you eat it? After a long uptrend when earnings have beaten repeatedly expectations for a year, can you really expect more surprises? Some take profits, others go short. It seems that the news release is the trigger to execute actions that were long planned.

I found on CXOAG this post that addresses the issues raised: Earnings Surprises and Future Stock Market Returns. The post reports about the study Aggregate Market Reaction to Earnings Announcements.

The authors investigate the relationship between earnings announcement surprises and market returns on the days surrounding earnings news. The analysis identifies a negative relation between earnings news and market return that persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news. There may be a considerable degree of inefficiency in the market’s processing of aggregate earnings information. Consistent with this interpretation they find that Treasury bond rates and implied future inflation expectations respond directly to earnings news.

George Parkanyi writes:

Definitely, the same type of news after a few months loses its power to move the market (true for both the down side and the up). At a certain point you stop listening, you’re on auto-pilot. Markets respond to surprises –- the something new, the something different, or the something possible. This is very much a human characteristic.

A related example was the Internet bubble. Everyone was buying the companies that had no earnings – because while they had no earnings the potential for earnings was unlimited. As soon as companies started to report any kind of a profit, they were crushed. For now someone had put a limitation on all that “potential”. I was highly amused at the time how earnings for an Internet company was the kiss of death.

Kim Zussman writes:

If it were as simple as "up on good news", Galleon and others trading on inside information would immediately overtake the solar system –like a hadron-collider black hole. This evidences supernatural laws which prevent even cheating determinists from commandeering supreme mating rights.

Years ago at a Stephen Hawking lecture on time travel, he "discussed" (the lecture spun from his laptop) various paradoxes produced if one could go back in time. For example, if you killed your parents in the past how could you have been born in the future to go back to kill them? One theory was that when you pulled the trigger, the bullet would "diffract"; somehow splitting before hitting it's target — in compliance with rules keeping the universe in logical order. (whose logic?)

Another theory was parallel universes — one in which your parents died, another they lived and you were allowed to develop.

The questioners were kind to Stephen, because of his illness, but after the show he sat helpless in his wheel-chair in a van outside with the dome light shining on his contorted face like an involuntary spot light. A crowd hovered outside to see the great man, like at the zoo.

On a different note, Pfizer's run-up to the Massachusetts Miracle is typical. Removal of near-certain health care reform and promised payoff by pharma met with big decline. Would you have sold knowing the election results before hand? The upside is that if you can be at peace with the way market treats your logic, you will understand how to be a ladies man.

Duncan Coker writes:

 I would like to pick up on Messr Parkanyi's comment regarding "the markets respond to surprises, something new, somthing different or the something possible…this is a human characteristic." I agree. Related to this, I attended a showing of the film Poliwood last night where the director Barry Levinson was there for a Q and A session. It is a documentary about the triangle of media, celebrity and politics and how the lines between reality and theater, entertainment and substance, are becoming more and more blurred. Politicians become celebrities and celebrities become politicians. Media fosters celebrity and celebrity feeds the media. Politicians need the media for promotion and the media needs them for content. One of the ways to get high ratings in news television is to present conflict in a dialogue. That is why guests are always at the extremes of a position. It allows for more yelling, arguing and better entertainment for the viewers. Polarization is more interesting television. Informed and moderate discussions is just boring to watch.

I wonder if this carries over into the market. Stagnant markets are boring, wild swings make for better entertainment. Also, who benefits from wilder markets, financial media has something to write about, brokers and exchanges have more commissions and fees, money managers can justify their services. It allows politicians something to regulate, gives floor trades movement to scalp, hedge funds can fire up the algorithms. The causality works in both directions as well. Last week the politicians spiced up the boring upward move of the past 2 weeks. When a fund is rumored to be weak or going under another spike. The media does all it can to create excitement and volatility around the market. When traders over-trade and the line between entertainment and substance can get blurred. Also, like the television example, conflict is more interesting. In the case of the bulls and bears it is most interesting at the extremes, so the market follow this type of cycle.

Ken Drees adds:

This fits here with financial television as of late. The big question or overall theme being is this just another dip for the market or something more? Hopefully capturing viewers by keeping this nail biting question front and center–having two view points and the ensuing debates roll on out.

Off the bottom it was "is this a sucker's rally or a setup for another drop?"; now its "is this just a little dip and the start of a sideways consolidation, or the start of a substantial 5 -10 % correction?"

It seems like these times of opposing question of market direction after extreme linear moves should be watched closely for reversal. I find it interesting that the choice not talked about much off the march low was this: Or is this the start of a nice 50% multi month rally from oversold conditions not witnessed since 2001?

Today the choice missing would be this: Or is this the start of a 50 to 70% drop, retracing most of the gains of 2009?

TV — usually it's what they don't say or its the opposite of what they scream into your face — making great TV but bad advice.



the banker from monopoly[Editor's Note: TBTF = Too Big To Fail]. My friend Rocky Humbert posed the question: ‘If 1000 mini-AIG's and mini-Fannies are all imploding, why is that less of a catastrophic event than a single mega-AIG? Arguably, it's a more serious systemic risk…as the possible chain-reaction will be like the whack-a-mole game at the video arcade.’

His statement presupposes that 1000 separate actuarial teams would ignore or miscalculate risks inherent to derivatives. The assortment of risk management methods and individual company’s investigations initiated because of pricing disparities among competitors will illuminate many risk pricing issues that went unnoticed in the past. Notwithstanding past widespread risk pricing blunders, it is likely that risk management performed by 1000 separate competitive entities will lower overall systemic risk.

Rocky Humbert begs to differ:

I respectfully disagree with your premise for these reasons:

Thousands of supposedly independent and uncorrelated investors BOUGHT the housing related derivatives over the past several years; and all their models presupposed the same generalized assumption - that housing prices wouldn't decline nationally. This demonstrates beyond any doubt that a systemic event is systemic exactly because of a widely held belief. Any time large groups of people share the same belief, it becomes a systemic risk. How can you ignore the exception that proves the rule?

The wave of bank failures in the early 1930's was spread across the country in small and medium sized banks too. Similarly, the RTC which spent billions cleaning up the S&L failures of the late 1980's. Who was the TBTF institution in the 1930's ?

The equity quant debacle in the summer of 2007 demonstrated that most of these independent minds were using similar models. This was not a systemic risk event — but it demonstrates the illusion of independence among participants…both hedge funds and broker-dealers.

There are many many illustrations of similar phenomenon in the natural world — feedback loops, harmonic amplifiers, etc etc.

George Parkanyi adds:

Banks should be allowed to grow as big as they want, but not allowed to be counter-parties to each other where their own capital is involved. And certainly no borrowing from each other or insuring each other. (They are supposed to be competitors after all). That way, they would be transacting with each other only on clients` behalf (e.g. letters of credit, wire transfers, cheque clearing etc.). They should be able to take deposits, borrow from the Treasury with the transparency associated with that, and they should be allowed to trade their own capital on 3rd-party exchanges (again, not directly with each other). And of course they could form syndicates to spread risk when financing 3rd parties. This way their business, and sphere of exposure would be limited to the business they do with their clients and their proprietary trading through exchanges that have well-established margin rules and centralized, neutral clearing mechanisms. There would be relatively little linkage to allow a chain reaction to occur. (There would be some through lending to the same clients. One guy calling in a loan at a bad time could cause problems for the others. But this would just have to be risk-managed - you can`t take the risk out of everything).

Something like this would compartmentalize risk without having to treat institutions differently simply because of their size. Thoughts?



 Algorithmic trading developed impressively during the past years. Up to 60% of trading in equity markets is computer-driven. Some say that the increasing dominance of algorithmic trading could cause "tiny price changes to snowball, rolling down the hill at exponentially increasing speed". There is the possibility for a crash to happen also because too many funds are trading in the same style. What is the human control on these machines? How long will it take before a mistake is recognized as such? Is there a way to prevent "algos gone wild"? Can regulation help or would it make it worse? In practice, there is a risk of systemic imbalance. On the other side there are those who believe that high frequency traders deliver a service: liquidity and their systems are the most efficient way to match buyers and sellers.

In the paper "Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market", Alain Chaboud Benjamin Chiquoine Erik Hjalmarsson Clara Vega find that:

- algorithmic trades tend to be correlated, suggesting that the algorithmic strategies used in the market are not as diverse as those used by non-algorithmic traders

- there is no evident causal relationship between algorithmic trading and increased exchange rate volatility

- even though some algorithmic traders appear to restrict their activity in the minute following macroeconomic data releases, algorithmic traders increase their provision of liquidity over the hour following each release

- non-algorithmic order flow accounts for a larger share of the variance in exchange rate returns than does
algorithmic order flow

- there is evidence that supports the recent literature that proposes to depart from the prevalent assumption that liquidity providers in limit order books are passive.

Among the most recent developments in algorithmic trading, some algorithms now automatically read and interpret economic data releases, generating trading orders before economists have begun to read the first line. They allow trading to take place automatically in response to market data and news, deciding when and how much to trade. There are services that allow to react more quickly to breaking news events, providing a quantifiable measure of qualitative information present in news articles. The result is that computers can place orders more strategically than humans.

In the paper, it emerges that there is no positive correlation between algorithmic trading and the level of volatility. The evidence points towards a negative relationship, suggesting that the presence of algorithmic trading reduces volatility. Computer trading provides liquidity in period of stress (after the release of news). From the data analysed, the growth of algorithmic trading has not caused lower market quality.

George Parkanyi writes:

I don't see them being a problem unless everyone is automatically increasing trade size and leverage with the trend. The associated risk-management is fairly sophisticated. That they would do this in a highly-correlated, invisible way is highly unlikely. And high-frequency trading is by definition short-term, so there is constant buying and selling in the market. A lot of these strategies may not hold a position overnight. Markets that are up a lot or down a lot as one-way sure-bet trades are pretty highly publicized. You'll eventually get a sudden reversal, and a lot of haircuts, but these overextensions most savvy players can see coming (though you don't know where or when the turn is going to happen). Wouldn't worry about it - enjoy the liquidity.



 One is always amazed at how useful and insightful the customs of the British Navy are. It was equivalent to mutiny there when a captain proferred a dinner at his table to a junior officer and the junior officer declined (except when a matter of gallantry was involved). How often I've invited a junior officer to dinner and it was declined and a month later I found the junior officer had performed or was about to perform an activity punishable by death by the articles of war. What other nautical or martial customs can you think of that would truly be useful to incorporte in everyday life?

I am writing a review of Nigel Davies' new book. It's so good, it's unbelievable. He's distilled the wisdom of markets, martial arts, psychology and chess into a lesson for all of life and boards.

Pete Earle writes:

What better place to start than the naval tradition of keeping a (Captain's) log book, of course. Recording the events of the day, successes, failures, incidents and accidents in such a way that one — or their successor — can peruse them at will, and in so doing be better prepared for the future. I don't know a single serious, professional trader who doesn't do this, and the practice extends far beyond financial markets.

Tom Marks jokes:

Who amongst us hasn't at some point over the years sailed past a woman or two on whom they they'd love to apply a cajoling variant of this old British nautical custom.

George Parkanyi lends a hand:

Here's a useful summary of such Royal Navy customs and traditions.

Apparently one of the traditions for a warship entering a foreign port was to fire all their guns, shoot their wad as it were, to show that they were coming in unarmed. (I wonder if this analogy ports to dating?) Also, when two foreign warships met the custom was to sail at each other and fire off a broadside volley before coming abreast, basically for the same reason "Hi, how are you, I'm unarmed". But I'm wondering about those warships that had three rows of cannon. OK, you fire your first row "Hi, how are you? I'm good too", and then once broadside you empty the other two rows into the passing ship. Surely some sorry captain has the dubious distinction of having been the first to learn that lesson the hard way. "Oh, you didn't get the memo? We're at war."



 Checklists have been shown to reduce errors, improve accuracy, and increase profits in many fields. Most recently, a study in the New England Journal by Atul Gawande shows that use of a 19 point check by surgeons could reduce deaths by 30% and save billions. Such simple things as knowing all the names of your colleagues and being sure that an adequate supply of blood and respiratory equipment is available are useful.

When it was suggested to me that a checklist for my own trading might be useful, I originally had the same reaction as the doctors. "I've flown with the eagles, climbed the highest mountain, captured the mountain lion, been a member of all the exchanges, played 12,000 refereed matches, went to Harvard." But then I read the reaction of the Drs. "I'm from Harvard. I don't need such a list. But if I was operated on, I'd like such a list."

Here's a list I came up with for the forgotten man, the hundreds of thousands of traders in stocks, futures and options.

Before the Trade

1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?

2. When does your market close, especially on holidays?

3. Do you have all the equipment you'll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?

4. Did you write down your trade and check it to see for example that you didn't enter 400 contracts instead of the four that you meant to trade?

5. Why did you get into the trade?

6. Did you do a workout?

7. Was it statistically significant taking into account multiple comparisons and lookbacks?

8. Is there a prospective relation between statistical significance and predictivity?

9. Did you consider everchanging cycles?

10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker?

11. If a trade is based on information, was the information known to others before you?

12. Was there enough time for the market to adjust to that information?

13. What's your entry and exit point?

14. Are you going to use market, limit or stop orders?

15. If you don't get a fill how far will you go? And what is your quantity if you get filled on all your limits?

16. How much vig will you be paying if you use market or limit orders and how does that affect the workouts you did knowing that if you use stops you are likely to get the worst price of the day and all your workouts will be worthless because they didn't take into account the changing price action when you use stops, to say nothing of everchanging cycles?

17. Are you sure your equipment is as good and as fast as the big firms that take out 100 million a day with equipment that takes into account the difference between being 100 yards away from an exchange and the time it takes the speed of light to reach you?

18. Are you going to exit at a time or based on a goal? And did you take into account what Jack Aubrey always did which is to have an escape route in case all else fails?

19. What important announcements are scheduled? and how does this affect when and what kind of order to use? For example, a limit before employment is likely to be down a percent or two in a second. Or else you won't get filled and you'll be chasing it all day.

20. Did you test how to change your size and types of orders based on announcements?

21. What's the money management on this trade?

22. Are you in over your head?

23. Did you consider the changing margin requirements when the market gets testy or the rules committee with a position against you increases the margins against you?

24. How will a decline in price affect your margin and did you take into account what will happen when you get stopped out because of margin?

25. What will happen if you need some money for living expense or family matters during the trade? Or if you have to buy a house or lend money to a friend?

During and After the Trade

1. What's your game plan if it goes against you and threatens your survival?

2. Will you be able to get out? Did you take that into account in your workout?

3. More typically, what will you do if it goes way against you and then meanders back to give you a breakeven? Or if it immediately goes for you or aginst you?

4. Would you be willing to take a ½% profit if you get it in the first 10 minutes?

5. Did you test whether taking small opportunistic profits turns a winning system into a bad one?

6. How will unexpected cardinal events affect you like the "regrettably," or the pre-annnouncement of something you expected for the next open? And what happens if you're trading an individual stock and the market goes up or down a few percent during the day, or what's the impact of a related move in oil or interest rates?

7. Are you sure that you have to monitor the trade during the day? If you're using stops, then you probably don't have to but then your position size would have to be reduced so much that your chances of a reasonable profit taking account of vig are close to zero. If you're using 10% of your capital on a trade, they you'll have to monitor it for survival. But, but, but. Are you sure you won't be called away by phone calls, or the others?

8. Are you at equilibrium in your personal life? You're not as talented as Tiger Woods, and you probably won't be able to handle distressed calls for money or leaks on the home front. Are you sure that if you're losing you won't get hit on the head with a 7-iron, or berated until you have to give up at the worst possible time?

9. After the trade did you learn anything from the trade?

10. Are you organized sufficiently to have a record of all your trades for your accounting and learning?

11. Should you modify your existing systems based on it?

12. How does recency and frequency and value affect your future?

13. Did you fit your after activities to your mojo?

14. If you made a good profit, did you take some capital out of the fray for a rainy day?

15. Have you learned to say "fair" whenevever anyone asks you how you're doing and are you sure that you don't spend a fortune after a good trade, and dissipate your profits with non-economic activities?

16. Is there a better use for your time than monitoring the ticks or the market every minute of the day if you do, and if you don't, do those who do so and have much faster and better equipment than you have an insurmountable advantage against you?

Well, specs, that's what I come up with off the top. How would you improve or augment it?

Nick White comments:

If a position begins moving against beyond what was anticipated in the workout can one, through either contacts or acquired counting skills, figure out as fast as possible why the move against is occurring? With that information, can one then discern whether or not such a move needs to be heeded, faded, or left alone?

What legitimate information sources can one leverage to better understand a particular trade? A buddy who is a floor trader, a mentor, a high ranking friend of a friend in a central bank?

Are one's current skills commensurate with one's trading goals and ideas? Perhaps, more importantly, are one's trading skills of the same league and caliber as those one is competing gainst in a particular market? If not, surely best to wait and keep capital safe until one is sure of one's edge. This strongly accords with Chair's admonition to never get in over one's head, and to not spend inordinate amounts of time watching each tick when that time could be more profitably invested in training and developing new and existing skills — counting, programming, etc.

Make the strongest effort possible to find out whether the tail wags the dog in a particular instrument that you're trading. If it turns out that it does, does it happen with significance at a particular time, such as expiry? Or after a particular event? Can it be exploited after costs or is it better to fade it after the fact?

If one asks these questions and takes note of them in the essential lab notebook that ought to be at one's fingertips during all trading and researching activities, have those questions subsequently been answered by oneself? I have found this to be the most fertile soil for developing new insights and ideas. If you observe it, note it and question it — hypothesize about it and answer it.

Alston Mabry comments:

Here's one: Don't fool/confuse/tire yourself by making your execution more precise than your analysis. If your target is 2% within the next five trading days, then chasing two bps on the entry isn't going to make or break the trade.

Easan Katir adds:

  1. If you trade odd hours, get enough sleep and appropriate caffeine dosage.
  2. One well-known S&P pit trader advised two bowel movements in the morning before setting foot on the floor.
  3. Start the day with a centering routine — affirmations and goals. Remind oneself of one's larger purpose.
  4. List important times and dates on an online calendar with appropriate alerts: government numbers, earnings, ex-dividend dates.
  5. Rehearse successful behaviors and outcomes. And disaster recovery.
  6. Minimize other life stressors: long commutes, family arguments, risky vices, debt.
  7. Test backup equipment and systems regularly. I test my diesel backup power generator weekly.

Victor Niederhoffer responds:

I would add a small point. Trading foreign markets always seems much more difficult than domestic ones. For one, you never know what the important announcements are. For two, you get killed on the spread on your foreign exchange prices. For three, it seems to be 100 times more time-consuming to get into the queue than even the 1/100 of a second that's enough to give the domestic high frequency traders an insurmountable edge on you. For four, you have to go without sleep for at least one night, and then on the second night when you can't stay up the required 48 hours without sleep the move you expected and closed out is sure to happen.

Alan Millhone writes:

Checker master Tom Wiswell said to always keep the draw (escape) in sight.

Scott Brooks adds:

I have to disagree with Easan on the caffeine. I know there are many people that have to have their morning cup(s) of coffee to get their day going, and without it, don't feel/function right.

I do not want to go through life being so dependent on something that I have to have it to make myself feel right, let alone function right. I know this will be anathema to most (everyone?) that reads this, but I have to say it.

When I removed the caffeine addiction from my life (and don't fool yourself, it is an addiction…..if you have to have it everyday and then quit it, you will go through withdrawals……it is an addiction), my life changed so much for the better. I can think clearly. I can process information more quickly, and I can see solutions with greater clarity.

And your sleep will improve immensely. I suffered from severe insomnia for years. Kicking caffeine out of my life has lead to my being able to fall asleep, usually within minutes and being able to get up earlier and feel more refreshed!

You will find a level of "mental processing" that you never thought possible when you replace coffee and caffeine with purified water (I drink around a gallon a day) and a glass or two day of the organic juice of your choice.

But be prepared, you will likely have around two weeks of headaches when you go through caffeine withdrawals (you know, from the caffeine that you're not addicted too).

Nick White agrees:

Ditching caffeine is a good move. Best to save it for when may really need it on an overnight (or two) session. As mentioned in the past, Dr. Shinya is fervently anti-caffeine. Like many others, I found Dr. Shinya's principles promoted many positive health benefits for my wife and me.

On that note, i find that the Shinya nutritional principles — when moderated by the ideas behind the paleo diet — are a real winner; the increased "good" protein from the Paleo program does much to mitigate weight gain from increased carbohydrate consumption when kicking off on the Shinya program. There is a Paleo program for those involved in elite endurance sports.

George Parkanyi writes:

On any project or major activity, the first question I ask is how much time I have. That frames everything that is to come.

The very next thing is to build a contact list with names, phone numbers (backup phone numbers) and email addresses (and account numbers and passwords). This is also true in Scouts, where we need to have that information at our fingertips for safety reasons — in fact for every camp we have to draft an emergency plan — police, hospitals, parents, primary first aid responsibilities, etc. In a trading operation this is critical. If you have key support resources who have to act on your behalf at a moment's notice, then they need to be available, you need to able to access them, and if not, there must be a ready backup contact and plan B, even C. Chair's point about having a pen available can even be a critical detail — what if, in the heat of battle, you have to write down, say, a wire transfer number? In my case, reading glasses would be another.

Kim Zussman comments:

As a periodontal surgeon, I have found it much easier to stay composed and rational during difficult surgery than unruly trades. Chair's excellent list hints at why, in the form of the question "how do you know?".

Surgical complications follow rules of biology, and mistakes usually come when overlooking something or miscalculating the compounded risk of several factors. One can and should practice with a large margin of safety, which in almost every case is easy to determine. Biology is almost immutable, but markets morph wildly in real-time. It is very difficult to stick with a position if you are honest about your cluelessness and unwilling to go down with the ship. When the trade goes bad:

1. What was your hypothesis? How many others had your idea too? Or the opposite one? Are they right? What do they know that you don't? What is the source of your confidence that you can out-smart (or out-run) the million-mind-march?

2. Did you test properly beforehand? Did you miss something; a signal from another market, a subtle backdrop to your traded market? What is the chance this time is different, and should this doubt change your mental stop?

3. How heavily is your market being manipulated? By government? Big banks? Goldman's trading desk? Does persistent manipulation / insider trading change your hypothesis or render hypothesis formation useless?

4. How do you know whether the move is merely noise of your correct hypothesis, or part of a regime change you have not noticed?

5. Deep and abiding doubt is essential to science, but how do you incorporate doubt into market prediction when most of the movement is random?

6. Does the non-linear, mostly random reward system of trading corrupt your judgment (sleep, personal life, etc)? Do some people lead a happy, well-rested life with long periods of gut-wrenching loss alternating with gain, and are you one of them?

7. What unalterable beliefs are necessary to trade successfully? If you hold them, are you sure they are the right ones? Should some beliefs be discarded as a result of a changing world? Are there new ones you should know, and are you confident you will see them when they develop?

Steve Ellison adds:

Margin of safety is a key concept in many fields. While skiing, I put on the brakes a bit earlier than I absolutely must so that if I miss my footing or hit a patch of ice, I have another chance to avoid the hazard (e.g., other skier, tree, out of control speed). Graham and Dodd wrote about margin of safety in investing. Rather than buy a stock that is below book value, a value investor might wait for an opportunity to buy a stock below 80% of book value.

If I ski 10 times a year, even on the same mountain I am likely to encounter 10 different sets of conditions — temperature, wind, length of time since last snowfall, etc. One day last year, the fog was so thick I could not see the trees on either side of the trail. Some conditions dictate caution; others are more forgiving and allow me to be more aggressive. A warmup run is an excellent way to get a feel for conditions.

Nigel Davies proposes:

Checklists are very good whilst learning, but I believe that one should ultimately aspire to be able to do without them because everything has been internalised. In my own field I tend to believe that conscious thought of any kind can be a distraction, which is why I don't like the old Blumenfeld Rule (a checklist used before playing a move).

Ken Drees writes:

I just did an experiment with my son with one of his Christmas presents, an electronic learning kit. We have learned so far the basics of how electricity works. Resistors (series and parallel), Capacitors, etc. Each lesson has a page explaining the experiment, a schematic, a drawing of the circuit in relationship to how water moves through pipes — the water analogy for electrical flow resonates with my son. And each experiment has an electronic "wiring checklist'.

The checklist comes in handy since its easy to forget a connection, misrun a wire, or leave an extra connection from a previous experiment in the lab circuit.

I associate checklists with "must have"–high accuracy functions. Like programming, wiring, piloting, fixing a car, cooking –its all routine, but items can be omitted, done wrong and can be forgotten due to human error. The checklist is a tool, an aide that removes ego from the scenario. Used in trading it helps set the trade up, helps initiate or close the trade, and removes emotion from what needs to be done automatically. A checklist in the grey area of a trade like the middle game in chess, or an operation where the patient is being worked on really doesn't help much–you need to make gut-inferred decisions, unless your trade is so automated that you remove yourself from the trade entirely and rely upon a program.

Using trading checklists help bring focus and energy towards the trading exercise. Using checklists of some sort during the "live–life of its own phase of the trade" must be explored further. Maybe there are ways to check off your decisions, check your options, use your skills with the pressure of time taken into consideration–during this live phase.

But when your hand is on a hot stove, trade going wrong, does one need to look at a post-it-note do determine if one should remove hand from stovetop?

FYI: a 9 year old boy is understanding electricity –public school may teach a child these ideas in 7th grade. I am amazed at what can be taught to children that most think is way over their heads.

Alan Millhone adds his two cents:

I will add my two cents. Some years ago I bought an International dump truck and it has air brakes. My late father and myself drove it for use in our construction projects. Because it has air brakes you need your class B driver's license to be legal. We drove it several years without the proper license. Finally my father got the book and studied and took the written part for class B. After he took that part he gave me the book and I studied and took the test and passed. Quite a book to study.

Now the second part was an over the road test with the instructor in the truck with each of us. He said he had never given a back to back test to a father and son. Dad and myself had to back the truck then drive to the right close as we could to an orange cone– without touching the cone. Then each of us had to do a 50 point check list of our truck that we earned (I still remember the list ) and still check my truck before taking it onto the road. So checklists are valuable in many applications ranging from dump trucks to the Market.

On a side note, dad and I rode to the test center in our dump truck without the proper license. The instructor said he was not going to ask how we got there.

David Brooks comments:

All very good ideas. I wish there were some good way to test Atul's theory historically. Why? Because I am convinced that poorer outcomes in the last decade come from fragmentation of the system - shift work, decreased work-hours by house staff, the high volume being forced through the system and de-professionalation of nurses.

Alas, we can't measure the past, but I am convinced that the hospital I started in (The Peter Bent Brigham of the early to mid 70's) was a safer, more humane place with better (allowing for technological changes) outcomes.

All the same, the reason we have embraced checklists a la airlines has to do more with the aeronautical outcomes than medical outcomes. The amount of information that a pilot has to process is order of magnitudes more than what a surgeon has to process. Furthermore, when a pilot fails completely 300 lives are lost, and when a surgeon completely fails, 1 life is lost. The former is far more dramatic, of course.

It's nice to know the anesthesiologist's and scrub tech's name, but it's hard to believe that that is going to affect the outcome of a significant number of operations.

That said, I have the greatest admiration for Atul. He sits a short distance from me, and I am proud to have had even a small role in training him. He is a remarkable young man and we will being hearing from him for many years to come.

Newton Linchen comments:

Once I took an airplane pilot course, and I was amazed how everything was done with checklists. Actually, the first time I heard the word 'checklist' was there. (Even here in Brazil they keep all the terminology in English, for standard procedure). I realized how checklists can keep you out of trouble and save your life. In markets, perhaps a great deal of losses could be avoided if I followed my own trading checklists.

Russ Sears writes:

Checklists can be very useful in an emergency. I have found that a simple checklist was valuable in a race. When the going gets tough it is easy to panic. The list It went something like this 1. relax 2. pump the arms smoothly 3. breath in normal rhythm (One hard puff out, relax in). It is easy to panic on the edge of your limits. These 3 things are the first signs that you are starting to panicking, subconsciously without knowing it.

Runner, use checklist often as part of their diary. Each day you check your weight, evaluate your nights sleep and your overall mental state. You check your diet and fluid intake .

Before a race you follow your pre-race checklist from what to pack, to when and what to eat, and when and how you should be warming-up and stretching.

Then after the race you check how well you followed the plan, where the plan worked and where if failed.

Finally at the end of the year you check the philosophical underpinnings of your training. Your goals, why you are doing it all, what are the cost that you are willing pay and what is the best path to get there.

So checklist have there place, but you need to 1. put them in the right point of time in the process, 2. not let them lose their relevance and meaning . 3. keep them simple at critical points, simple enough that they are potent.

Easan Katir adds:

Thinking about checklists, and watching the Haiti disaster coverage, made me think about a checklist for emergencies. Then thought about a list of the various types of emergencies one might encounter, big and small. What came to mind:






home invasion


mistaken id

false accusation






missing person


currency replacement/devaluation

market crash

partner deceit


power outage




i suppose each needs its own checklist, though some may overlap. What did I miss?

Scott Brooks adds:

The best checklist you can have is to either be a great leader or be around a great leader.

It's been my experience that average and ordinary people need checklists (which they rarely if ever have or use…which is one of the reasons why they are average and ordinary), but smart people with leadership skills don't need a checklist when it comes time for a disaster.

Most disasters/problems rarely follow a fixed pattern. It takes a leader who is capable of thinking on his/her feet who can stand up, take charge and direct people as to what they need to do.

And this doesn't have to be right all the time, he just needs to make decisions and get people moving and be willing to take responsibility and shrug of criticism of the naysayers…..while listening to them to extract the wisdom that might be contained in their "naying" (I think I have just made up a word).

A leader has to have insight and the ability to see several moves ahead. A leader has to be able to see correlations and connections between seemingly disparate pieces of information.

A leader has to then take this data and formulate a solution and then direct people to execute the solution….and if possible, get people to see the vision of the completed project so that they can begin to work towards that goal with minimal supervision.

But most importantly, a leader has to be willing to make a decision when it comes time to make a decision even when the solution is not apparent. A course of action that fails is better than inaction that is guaranteed to fail.



David LeeHere is an interesting story showing once again that in sports, the use of statistics is better than our own, albeit no analysis of variability, or subsequent paths.

Scott Brooks writes:

Lee is from a little town in MO, called Poplar Bluff. So being from MO, I have followed his career with a slightly more interest than usual.

I've always admired rebounding specialists. Without rebounding specialists, you don't have as many "Sport Center Top 10 Plays" spots for the likes of Kobe or LeBron.

But Lee lacks scoring ability in his aresenal. It is my opinion that the one thing he should work is the most devastating and nearly impossible to stop shot in the game of basketball:

The Fade Away Jumper.

I can not begin to describe how much a game changes when you have someone on the floor that can hit the fade away jumper…..and for clarity, I'm talking about having your back to the basket, driving said butt into the defender and then stepping away from the defender (while still away from the basket), planting your outside foot (the foot towards the top of the key) pivoting towards the baseline (less defenders down there) and shotting a high arching shot.

The only way to stop it is double team the man……….and that certainly opens up possibilities all over the court….especially when you consider the guy performing this shot should be a "working man" (a grinder…and non-razzle dazzle/non-star player).

Karl Malone built his career around that shot (yes, I know of the "Stockton to Malone pick and roll).

Michael Jordan extended his career by several years by developing one.

Kevin McHale, Larry Bird, and many others mastered that shot.

A "working man" (which is what Lee is…..which is what most any rebounding specialist is), can punch his own ticket to the "Hall of Fame" by simply developing that shot.

It ain't pretty. It won't make the highlight reel or the nightly Sport Center Top 10 Plays, but it is devastating simply because it is unstoppable.

George Parkanyi adds:

Michael Lewis's book "Moneyball" being case in point. Oakland A's manager did very well by finding (good) new players based on their college stats vs the anecdotal information baseball scouts were typically using observing college and even high school athletes. A number of the New York Yankee's current big stars are names that came through the A's this way. (I remember them from the book.)

Baseball I would think has more predictability than trading because there is not a great likelihood that a pitcher can substantially improve his "best-game" ability from one game to the next - there are limits on physical and mental ability, and more likely the variability will be to the downside (having a bad game). So a hitter that historically hits x% against this pitcher is statistically likely to have similar success in any given game. The pitcher's recent consistency might be the main variable the opposing manager would look for. Markets have many more macro and micro influences that could suddenly dramatically change the odds of any given current expectation that is based on historical data.

In trading, it's probably as important however to record all your trades and the outcomes, as are at-bats in baseball. If you have a current situation that is similar to something you did in the past, what did you do then, and what was the outcome? For example, did you bail on your system because you didn't "like" the looks of a particular signal - and then ended up outsmarting yourself by leaving a pile of money on the table? That could be a useful reminder to stick to your plan now.

Jim Sogi comments:

During football season there was a bit of work on whether it is more profitable to kick a field goal or run for the extra point. It's always a question when to take profits. I know there are expectations, but is there a way to improve on them? Is the higher percentage play with smaller return going to pan out better over time? How does the psychological affect the above?



Dan BuettnerI enjoyed this TED talk on longevity from Dan Buettner.

Jeff Watson writes:

I also enjoyed Buettner's talk very much. Although I find it difficult to accept the premise that doing X can add 4.7 or whatever years to your life, he does present many good ideas for living a full life. I am blessed with ancestors who have the longevity gene. My grandfather on my dad's side lived to 104 and my dad's mother was a spry 96 when she died. My mother's parents died at 98 and 97. All lived full, complete lives until the last months of their lives.

My 104 year old grandfather summed up his longevity by telling me that the reason he lived so long was because he spent at least five hours a day outside doing yard work. He never worried about diet, and drank 3- 4 highballs a night and smoked Pall Mall non filters from the age nine onwards. His diet consisted mainly of meat and potatoes, and he made sure that he went to the office everyday for a few hours until he was 102.5 years old. He was a reader, and he constantly wrote letters to the editor until he was well over a hundred. A chronic list-maker, he wrote me a blueprint for living a full life that I have done my best to follow. His wife, my grandmother, was healthy until the day she died of a choking accident while raiding the refrigerator after a Thanksgiving fest. She made holiday dinners for over 20 people every year until that fateful Thanksgiving. My mom's parents both smoked and drank, but ate a Mediterranean diet, which might have helped. They were also very active, well into their mid 90s. They were into intellectual development, and didn't exercise much except for yard work and cleaning. My father is 81 years old and is a 10 year lung cancer survivor. He also has a case of MS, but doesn't let that get in his way. He still golfs 18 holes at least five days a week, preferring not to use a cart but to walk. He fishes, maintains the outside of the house, and keeps it looking like a showplace. He still keeps his hand in several businesses, despite being retired. He has had many serious medical problems, but like the Energizer Bunny, "Keeps On Ticking." I suspect that he will give his dad a run for the money as far as longevity.

I'm 53 and still surf and skateboard and play many other sports. Despite my medical issues, I have no plans on giving up, and I certainly don't plan on ever retiring, despite the fact that I could quit tomorrow and live my life in comfort. All of this leads me to the conclusion that the best way to live to be 100 is to win the genetic lottery, stay active, and forget about getting old. Another common thread with my relatives is that they don't associate with other old people, preferring to be with younger people. Living in Florida, it is easy to get sucked into the Senior Citizen treadmill, and that is certain death.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MasterOfTheUniverse.

George Parkanyi comments:

One thing that drives me nuts is people who do nothing but talk about the medications they are on. I hope I never become that unbearably boring. I empathize with people that are ill, and I get it, pretty much right away, but unless you’re suffering and in distress and need medical attention or comfort at that moment, obsessing over the things that are keeping you alive doesn’t leave much for the actual living, and nobody is really interested.

George Parkanyi, Canadian telecom entrepreneur and ETF trader, blogs at StockAdventures.



 In discussions of humor, Tim Slagle in Liberty Magazine has what I believe is an important insight. He says that everyone knows that it's important for the comedian to be liked by the audience. Since he says all comedians must have one of seven deadly sins, this requires work. However, even more important is for it to be clear that "the comedian likes the audience." "When I found that out, that changed everything," he says. He goes on to say "it is important to remember in marketing that even though you might be a niche product, you still want that niche to be as large as possible." A similar idea is made in the Ursut le May introduction to Rabelais. Something like: "you must roll around with your audience, make them feel that you are one of them, that you share their likes and weaknesses, and can together look at the human predicament as wonderful in its folly and greatness." I believe that this might be a partial key to successful companies and stocks. What do you think?

Steve Ellison replies:

All businesses try hard to be liked, even those that seemingly do not need to be liked, such as the regulated monopoly utility company I once worked for that advertises incessantly on television.

Alvin and Heidi Toffler in Revolutionary Wealth compared the pace of change in business to a car speeding at 100 miles per hour. They found change occurring almost as fast in "civil society… a burgeoning hothouse sector made up of thousands of churning and changing nongovernmental grassroots organizations". By contrast, the Tofflers found government so slow to change (they rated it three miles per hour) that they predict a Constitutional crisis at some point in the U.S. as events outrun government's ability to respond.

Nongovernmental organizations exert much influence over businesses because the nongovernmental organizations can persuade some consumers that particular companies are good or bad. For example, there were boycotts of Nike products in the 1990s when it was found that some of Nike's subcontractors in China had sweatshop-type conditions at their factories. To prevent a similar public relations catastrophe, the technology industry formed a set of certification standards for suppliers, complete with audits to ensure compliance.

Similarly, many companies are trying to improve their impact on the environment because environmentalism is an important value for many consumers, who would rather spend their money at a company that shares their values. To be effective, businesses' environmental initiatives must be real because sophisticated nongovernmental organizations request audits of, for example, reduced energy usage or carbon emissions.

Jim Sogi adds:

Another example of a company reacting to public pressure is described in The Botany of Desire where McDonald's stopped using GMO potatoes for their fries after large public outcry over their nondisclosure of the use of GMO products. Government regulation did not require disclosure of the percentage they used.

Alston Mabry writes:

I enjoy the humor that Patrick O'Brian injects into his narrative. The sly humor of Maturin, the buffoonish and navy humor of Aubrey.

Just listening again this afternoon to the sequence in HMS Surprise where they approach Bombay and then Maturin immerses himself in the city. If I were to pick a passage to demonstrate what a good writer O'Brian is at his best - his use of description, pacing, character, historical interest — I would likely pick the Bombay passage. (And Tull reads it so well.)

Thomas Miller writes:

The Postal Service is an exception. They don't care what the public thinks, hence the long lines in many offices. If the government is driving three mph, the PO is doing at least 50 mph — in reverse. The death spiral for the PO is moving forward and picking up speed. Survival of the fittest will prevail as always.

George Parkanyi adds:

Laughter is a surprise response, and we all like to be (non-threateningly) surprised — case in point being the hundreds of billions of dollars poured into the Christmas holidays just now. In humour, the surprise comes from the connection of two or more unrelated ideas and/or the linking of two or more unrelated contexts. Timing is used to enhance the surprise element. For the humour to work however, it is very important for the audience to recognize and understand the ideas and the contexts, which is why good comedy with broad appeal comes from day-to-day experiences such as being in the check-out-line at the grocery store. I've seen comedians do very funny routines just around that alone.

Since we like to be surprised, and to laugh, a comedian that can do that early on will be instantly liked. He is giving us an enjoyable experience. Comedians that are too abrasive (e.g. relying too heavily on swearing or making fun of an audience member for example) can quickly lose an audience by making them uncomfortable. I've seen examples of all of this in our past two evenings at Comix on 14th Ave in New York the past two nights. (What can I say, I like comedy - and so do the kids.)

The biggest take-aways from comedy that I can think of for trading are definitely the connection of unrelated ideas (and markets), but also the agility and quick-thinking required to deal with adversity. A comedian that has been interrupted and/or loses his train of thought must factor that in as part of the game, and deal with as quickly when it comes up. Timing is useful too.

Another take-away perhaps is not to take the ups and downs of trading too seriously. If you did nothing but throw darts at a quote screen, your odds would be 50-50 less transactions costs (and the cost of replacement monitors), so the markets are not necessarily an evil conspiracy or epic fight to the death. You think more clearly when not overly stressed.



 Dim Sum – it sounds so stern, and fiduciary. (Canada’s Auditor-General to the Royal Canadian Mint, who this year lost track of $10M worth of gold: “I take a very dim sum of this.”)

Yet, one finds oneself desiring an exceptional dim sum experience on one’s upcoming Christmas vacation to New York City, and was wondering if anyone here has had such exceptional experience recently, and would be forthcoming with some useful intelligence on the matter. (Translation: does anyone know where to get good dim sum in New York?).

Yishen Kuik comments:

There isn't any good dim sum in New York City. The nearest place to get good dim sum would be in Vancouver or London.*

However, Chinatown Brasserie by Great Jones Way & Lafayette is a decent choice. While it is apparently Westernized on the outside, the chef inside, Joe Ng, is quite competent.

* Why is this, you might ask. Dim sum is found all over China but reaches its apogee with the Cantonese in Hong Kong. Like all other art, the best examples flourish with proximity to wealthy patronage. Prior to 1997, many wealthy Cantonese secured second passports and homes in Canada and Great Britain as insurance. Thus they brought the discerning patronage necessary to sustain top flight dim sum to Vancouver and Toronto.



 I was very impressed the week before last at how Barrick Gold picked the top of the recent gold rally. With great fanfare on Dec 1 they announced they had completely eliminated their hedge book ahead of schedule and were now fully exposed to the upside potential of gold — and, took a $6B charge to do so. That's some stop-loss! Three days later gold tanked spectacularly and has been going down ever since. Awkward.

It reminds me of the time back in 1996 when oil was $10 and the Economist did a huge spread on how the oil market was now permanently confined to structurally low prices for all sorts of wonderful fundamental reasons. That was the very week oil started its huge bull market that ended 12 years later in a price 15 times higher. When I heard the Barrick story on the news, this immediately leapt to mind, and I remember thinking "You know, I bet this is where gold coughs up a lung."

But maybe Barrick was its own worst enemy. After all, they were admitting that they had eliminated all commitments for future delivery, and were now in a position to dump their full production on the open market at any time. Well thought out. My question is, how'd they ever get so big?

Steve Ellison writes:

The Commitment of Traders report has recently been showing commercial short positions at multi-year highs. Apparently while Barrick was trumpeting the end of its hedging program, other producers were quietly increasing their hedges. Maybe it was Barrick's short covering that drove gold above 1200.

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