Not to be hostile or anything, but I have never had dealings with Chinese where they haven't cheated me. I am told that there is a Northern Chinese persona and a Southern Chinese persona, and that I believe in the South, everyone is dishonest with Westerners, and the more you have done business with such a one without a wrong being committed the more likely it is that it will happen the next time, a very strange kind of hazard rate by the way. I may be wrong about this, it cost me much of real time wrongness, many years ago which compounded, my goodness—I'd be a wealthy man— but I'd like to know if there's a kernel of truth to it. You, Mr. Jia seem like a very worthy and honest man, and nothing in this is personal, but the memory still stings, especially in these markets.

Yishen Kuik writes:

China today is often compared with America in the 19th century. What I find remarkable is how true this can be.
The Chinese in China will cut corners, bamboozle, harass, deceive and cheat you on par with any 19th century "wily yankee". They are energetic, entrepreneurial and as hungry as any red blooded capitalist can be.

The melanine milk poisoning scandal is often held up as the worst example of Chinese business men run amuck.

And it is an echo of New York City in 1858 where "swill milk" killed thousands.

The horrors of working conditions in Chinese sweatshops is an echo of Upton Sinclair's expose of the Chicago meat packers — which created such an uproar that Roosevelt sent a secret fact checking mission that largely corroborated Sinclair's novel.

If you have ever been on a boat or a plane in China and it is about to land, they will all surge towards the exit, pushing each other out of the way to save a few seconds on exiting. They are a nation that has industrialized late and are pushing and shoving to catch up.

Scott Brooks writes:

I believe Yishen is correct. China as a nation is where the US was back in the 1850's (of course, with modern technology and infrastructure mixed in). They are still transitioning from a 3rd to 2nd to 1st world country. If you stop and think about it, they are really all three mixed into one. To expect a country to act and behave like a mature adult when they are really more like an adolescent, raised by dysfunctional parents is simply not foolhardy.

It will take the Chinese several generations to move into full 1st world status, and several generations to after that to mature into a moral system that is akin to the US.

We all go through our growing pains, the key is recognizing where the other person, or country or trading partner is on the "national maturity continuum" and the relate to them accordingly.

However, it is also a mistake to underestimate or minimize someone or a group of people because you see them as "less sophisticated" than you. That's why there is such a divide in America between the coastal elite snobs and us backward country bumpkins out here in fly over country.

Jay Pasch writes:

One of my best friends had an IT business selling computer mainframes and services into overseas markets. He did fine everywhere he went until he wound up in China; he had the equipment shipped, put boots on the ground, bolted the mainframes together, bus & tag to the disk systems and tape drives, IPL'd the system and turned the project over to the Chinese with a perfectly turned-up MVS system complete with blinking cursor. To his dismay the Chinese all of a sudden wanted application support, which was not in the contract, nor part of the company's forte. The Chinese government detained the engineers for six months, holing them up in their hotel rooms, and withheld contract payment until the company was forced into bankruptcy after the big bank notes came due. That was a long time ago, but even today we can't get through a pitcher of beer without the inevitable cussing about dealing with the Chinese…

Rocky Humbert writes: 

My dealings with the Chinese are largely limited to my contact with the venerable General Tso. I should note that The General has treated me well over the years. However, one serious exception comes to mind: It was in a small, nondescript restaurant inaptly named, the Jasmine Rose, located on a hardly-traveled road in northwestern Massachusetts where my friend, who was seriously allergic to garlic, and I ordered dinner. We advised the waiter of his food sensitivity and were assured that our dishes would be prepared without any garlic. After my friend started to show preliminary signs of anaphylactic shock, we discovered some garlic in the dish and called over the manager. What amazed us was not that the kitchen had made a mistake (which happens), but rather that the manager when faced with irrefutable evidence simply kept repeating (in broken English), "NO GARLIC! NO GARLIC! NO GARLIC!" as if his protestations were proof that we were wrong and that he was right. It was a bizarre, but memorable experience, and left an indelible impression on my mind, and on my friend's medical chart.

More relevant to Specs is some below-the-radar-screen litigation currently underway against certain Chinese companies and their US underwriters. A lawyer friend, working on these cases has explained to me that vast numbers of listed Chinese companies are complete and total frauds — and that in fact, a variety of (private) Chinese firms exist solely for the purpose of providing seemingly-kosher accounting paper trails for the fraudulent Chinese companies– so legitimate US accountants will see their (completely bogus) payables, receivables and assets, and provide a clean bill of health. Every time I am tempted to buy a Chinese stock (or index), I think of this story and I stay away. It's not that US companies are immune to malfeasance (Worldcom, Enron, Adelphia, MF Global?), nor it is true that US companies don't massage their earnings (GE, etc.). But, rather, if you throw a dart at a list of US companies, the odds are good that you won't hit a complete fraud. It's my impression that the same cannot be said about Chinese companies, hence I will not invest there directly, but prefer to invest in world-class US companies that can complete their own on-the-ground due diligence in China. Lastly, the Chair has opined periodically on nature vs. nurture. At the risk of putting words into his mouth, he has usually come down on the side of nature. Without taking a position, I would suggest that corporate and personal behavior MIGHT BE more influenced by genetics than by culture. If this is so, certain countries and people will be inhospitable to passive investors for a very very very long time, while other countries and people will demonstrate very different characteristics. Again, I am NOT taking this position. I'm just putting it out there…



 Let's play a little game — it's called “Baron Rothschild” — who once said “I made my fortune by selling too early” (a comment also made by Bernard Baruch)… Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out “Baron Rothschild” and go to a defensive position, or you can gamble and get the entire market return the dealer shows next. The gain cards read, say, 15%, 20%, 25% and 30%. If you're defensive, you lag the market by 10% when the market return is a gain, but you get, say, 5% if the market return is a loss. There is one -20% loss card. Once it appears, the game ends and everyone counts their dough, compounded. It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out “Baron Rothschild” even before the first card is shown. For example,

20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%
15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%
20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%
5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%

You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out “Baron Rothschild” after year two. It just doesn't pay to risk the big loss. The point of this isn't that investors should always take a defensive stance — some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting even long periods of defensiveness. Because of the mathematics of compounding, large losses have a disproportionate effect on cumulative returns. Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses, which is why the recent bull market has not even put the market ahead of Treasury bills since 2000 or even 1998. So again, the point is that the avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon." With regard to present stock market conditions, it would take a correction of only about 10% in the S&P 500 to put the market behind Treasury bills for the most recent 3-year period. That's not an empty statistic given rich valuations, unusual bullishness, overbought conditions, rising yield trends, and a market long overdue for such a correction. Given the average return/risk profile those conditions have historically produced, it makes sense to call out "Baron Rothschild" even if we allow for the possibility of a further advance, in this particular instance, before the market inevitably corrects.

1) Let's assume that one's goal is to beat some passive index (it doesn't have to be stocks; it could be the Yen or Natgas) over an X month period. And let's further assume that one is willing to engage in "selling early." And lastly, let's assume that "selling early" is sometimes the "right" thing to do due to the essay above. As a statistical matter, what is the likely minimum value for X … that permits the speculator to beat his passive index?

2) Let's assume that one's goal is to beat a passive index (again, it doesn't have to be stocks) over an X month period. And let's further assume that one is willing to exit the market "early," but also "buy early." Obviously, if one exits, re-entering is a necessary thing to do. As a statistical matter, what is the likely minimum value for X … such that the speculator can beat his passive index?

3) As a purely statistical matter, which should be better/worse : Buying early and selling early? Or, buying late and selling late ? And, again, what is the minimum X month performance period where either strategy has a chance to beat the passive benchmark.

William Weaver writes:

1. Disposition Effect

2. Great essay and the observation of defensive over aggressive is very good but I can't agree with purely taking profits unless there is a reason to exit. Assuming sufficient liquidity, in my humble opinion, it might not be bad to tighten stops (volatility historically has fallen as equities rise - though high levels in the late 1990's - so stops based on standard deviation should tighten anyway) allowing one to lock in profits but continue to profit from any trend that develops or continues. This seems to be a prominent trait of the most successful traders I've met; allowing profits to run by controlling for risk instead of picking a top.

3. The saying "There is nothing wrong with taking small profits" is a great way to lose everything if you don't also control for losses. In this essay there is only an early exit for profits.

4. His analysis of the equity premium to Treasuries is very insightful but I will leave that to the list for independent testing.

5. Every trader is different and must play to their own personality. For me, when trading intraday (which I am new to and still not the biggest fan of but am coming along) I will take off part of a position when anything changes, and this helps manage risk (leads to a larger percentage of profitable days). But will wait for long term momentum to reverse before exiting the last half as this is where the majority of my monthly profits come from. This way I can be a wuss and still profit.

6. Read The Disposition Effect if you have not and are interested in any type of trading/speculation. (To add to things to do to become a successful speculator: know, understand and be able to identify behavioral biases both in your own trading, and in the market).

Leo Jia writes:

I don't fully understand Rocky's 3 questions at the end. Guess they are meant for some real speculations, rather than for the Baron Rothschild Game, right?

If so, then I take Will's approach as described in his Point 2, except that I don't exit on instant stops, but on closing prices of certain intervals (30 minutes for instance for position trades) if the means of the intervals trigger my stops. My feelings about instant stops are that 1) they tend to have more execution errors (due to price chasing), and 2) either they get triggered more often or I have to set them wider (meaning more losses). I don't have concrete results about this and would love to hear other opinions.

I can't see how the game closely resembles trading. From what I understand about it, there seem to be many more winning cards than losing ones. So a strategy of simply selling on random cards gives one an easy edge to beat the dealer (though not necessarily achieving the best result). Am I missing something there?

Steve Ellison adds:

Turning to writings from 100 years ago, a friend found this book in his attic in Montana and gave it to me: Fourteen Methods of Operating in the Stock Market.

The first article in this book was A Specialist in Panics, which has been discussed on the List before. This method is to buy when there is a panic.

There was another article by H.M.P. Eckhardt, "Plan for Taking Advantage of the Primary Movements". He advised buying during steep market declines, as the Specialist in Panics did, but also suggested selling if a rapid rise brought profits equal to the interest the investor could have earned over three or four years. Mr. Eckhardt surmised that, with his money already having earned its keep for at least three years, the investor would probably get a chance to put it back to work in less than three years when another panic occurred.

For these sorts of techniques, Rocky's X is the length of a business cycle, which is unknowable in advance, but would normally be at least 48 months.

Alston Mabry writes:

Let's say you start at January, 2004 (arbitrarily chosen start date, but not cherry-picked, i.e., not compared to other possible start dates), and you go to January 2012. You have $100 a month to invest. You can buy the SPY and/or hold cash. You have a total of 97 months and thus, $9700 to invest. If you buy the SPY every month (using adjusted monthly close), you wind up with:


But being a clever speculator and wanting to buy the dips, you come up with a plan: You will let your monthly cash accrue until SPY has a large drop as measured by the monthly adjclose-adjclose; each time the SPY has such a drop, you will put half your current cash into SPY at the monthly close. To decide how large the drop will be, you compute the standard deviation of the previous 12 monthly % changes, and then your buying trigger is a drop of a certain number of SDs. Your speculator friends like the plan, but disagree on the size of the drop, so each of you chooses a different number of SDs as a trigger: 0.5, 1, 1.5, 2, 2.5, 3, and the real doom-n-gloomer at 4.

The results, showing the size of the drop in SDs required to trigger a buy-in, the final value of the portfolio, and the average cash position during the entire period:

SD / final value / avg cash
0.5  $11,522.13    $543.03
1.0  $11,328.42    $737.77
1.5  $10,885.80  $1,351.02
2.0  $10,884.15  $2,083.36
2.5  $10,655.96  $2,711.34
3.0  $11,005.72  $3,704.12
4.0   $9,700.00  $4,900.00

You, of course, chose 0.5 SDs as your trigger and so come out with the biggest gain. But your friend who chose 3 SDs says that he *could* have used his larger cash position to invest in Treasuries and thus have beaten you. You say, "Coulda, woulda, shoulda."

Mr Gloom-n-Doom cheated and bought the TLT every month and wound up with $14,465.56.



 I am often asked what ten steps one should take to become a successful speculator.

I would start by reading the books of the 19th century speculators, 50 Years in Wall Street, The Reminiscences of a Stock Operator by Markman, and others.

Next I would read the papers of Alfred Cowles in the 1920s and try to compute similar statistics on runs and expectations for 5 or 10 markets.

Third I would get or write a program to pick out random dates from an array of prices, and see what regularities you find in it compared to picking out actual event or market based events.

Fourth, I would read Malkiel's book A Random Walk Down Wall Street and update his findings with the last 2 years of data.

Fifth, I would look at the work of Sam Eisenstadt of Value Line and see if you could replicate it in real life with updated results.

Sixth, I would start to keep daily prices, open, high, low, and close for 20 of so markets and individual stocks and go back a few years.

Seventh, I would go to a good business library and look at the old Investor Statistical Laboratory records of prices to see whether it gave you any insights.

Eighth, I would look for times when panic was in the air, and see if there were opportunities to bring out the canes on a systematic basis.

Ninth, I would apprentice myself to a good speculator and ask if I could be a helpful assistant without pay for a period.

Tenth, I would become adept at a field I knew and then try to apply some of the insights from that field into the market.

Eleventh, I would get a good book on Statistics like Snedecor or Anderson and be able to compute the usual measures of mean, variance, and regression in it.

Twelfth, I would read all the good financial papers on SSRN or Financial Analysts Journal to see what anomalies are still open.

Thirteenth, of course would be to read Bacon, Ben Green, and Atlas Shrugged.

I guess there are many other steps that should be taken that I have left out especially for the speculation in individual stocks. What additional steps would you recommend? Which of mine seem too narrow or specialized or wrong?

Rocky Humbert writes:

 All the activities mentioned are educational, however, notably missing is a precise definition of a "successful speculator." I think providing a clear, rigorous definition of both of these terms would be illuminating and a necessary first step — and the definition itself will reveal much truth.

Anatoly Veltman adds: 

I think with individual stocks: one would have to really understand the sector, the company's niche and be able to monitor inside activity for possible impropriety. Individual stocks can wipe out: Bear Stearns deflated from $60 to $2 in no time at all. In my opinion: there is no bullet-proof technical approach, applicable to an individual enterprise situation.

A widely-held index, currency cross or commodity is an entirely different arena. And where the instrument can freely move around the clock: there will be a lot of arbitrage opportunities arising out of the fact that a high percentage of participation is inefficient, limited in both the hours that they commit and the capital they commit between time-zone changes. Small inefficiencies can snowball into huge trends and turns; and given the leverage allowed in those markets - live or die financial opportunities are ever present. So technicals overpower fundamentals. So far so good.

Comes the tricky part: to adopt statistics to the fact of unprecedented centralized meddling and thievery around the very political tops. Some of the individual market decrees may be painfully random: after all, pols are just humans with their families, lovers, ills and foibles. No statistical precedent may duly incorporate such. Plus, I suspect most centralized economies of current decade may be guilty of dual-bookeeping. Those things may also blow up in more random fashion than many decades worth of statistics might dictate. Don't tell me that leveraged shorting and flexionic interventions existed even before the Great Depression. Today's globalization, money creation at a stroke of a keyboard key, abominable trends in income/education disparity and demographics, coupled with general new low in societal conscience and ethics - all combine to create a more volatile cocktail than historical market stats bear out. 2001 brought the first foreign act of war to the American soil in centuries. I know that chair and others were critical of any a money manager strategizing around such an event. But was it a fluke, or a clue: that a wrong trend in place for some time will invariably produce an unexpected event? Why can't an unprecedented event hit the world's financial domain? In the aftermath of DSK Sofitel set-up, some may begin imagining the coming bank headquarter bombing, banker shooting or other domestic terrorism. I for one envision a further off-beat scenario: that contrary to expectations, the current debt spiral will be stopped dead. Can you imagine next market moves without the printing press? Will you find statistical precedent of zooming from 2 trillion deficit to 14 trillion and suddenly stopping one day?

Craig Mee comments:

 Very generous post, thanks Victor…

I would add, in this day and age, learn tough typing and keyboard skills for execution and your way around a keyboard, so you don't wipe off a months profit in the heat of battle. I would also add, learn ways of speed reading and information absorption, though these two may be more "what to do before you start out". 

Gary Rogan writes: 

Anatoly, I don't think really understanding the sector and and the niche is all that useful unless one knows what's going on as well as the CEO of the company, which means that in general understanding quite a bit about the company isn't useful to anyone without access to enormous amount of information. It's the subtle, little, invisible things that often make all the difference. There are a lot of people who know a lot about pretty much any company, so to out-compete them based on knowledge is usually pretty hopeless. It is nevertheless sometimes possible to out-compete those with even better knowledge by sticking with longer horizons or by being a better processor of information, but it's rare.

That said, it has been shown repeatedly that some combination of buying stocks that are out of favor by some objective measure, possibly combined with some positive value-creation characteristics, such as return on invested capital, do result in market-beating return. Certainly, just about any equity can go to essentially zero, but that's what diversification is for.

Jeff Watson adds: 

 In the commodities markets it's essential to cultivate commercials who trade the same markets as you(especially in the grains.) One can glean much information from a commercial, information like who's buying. who's selling, who's bidding up the front month, who's spreading what, who's buying one commodity market and selling another, etc. When dealing with a commercial, be sure to not waste his time and have some valuable information to offer as a quid pro. Also, one necessary skill to develop is to determine how much of a particular commodity is for sale at any given time…. That skill takes a lot of experience to adequately gauge the market. Also, in addition to finding a good mentor, listen to your elders, the guys who have been successful speculators for decades, the guys who have seen and experienced it all. Avoid the clerks, brokers, backroom guys, analysts, touts, hoodoos etc. Learn to be cold blooded and be willing to take a hit, even if you think the market might turn around in the future. Learn to avoid hope, as hope will ultimately kill your bankroll. When engaged in speculation, find one on one games like sports, cards, chess, etc that pit you against another person. Play these games aggressively, and learn to find an edge. That edge might translate to the markets. Still, while being aggressive in the games, play a thinking man's game, play smart, and learn to play a strong defensive game……a respect for the defense will carry over to the way you approach the markets and defend your bankroll. Stay in good physical shape, get lots of exercise, eat well, avoid excesses.

Leo Jia comments:

Given that manipulation is still prevalent in some Asian markets, I would add that, for individual stocks in particular, one needs to  understand manipulators' tactics well and learn to survive and thrive under their toes.

Bruno Ombreux writes:

Just to support what Jeff said, you really have to define which market you are talking about. Because they are all different. On one hand you have stuff like S&P futures with robots trading by the nanosecond, in which algorithms and IT would be the main skill nowadays, I guess. On the other hand, you have more sedate markets with only a few big players. This article from zerohedge was really excellent. It describes the credit market, but some commodity markets are exactly the same. There the skill is more akin to high stake poker, figuring out each of your limited number of counterparts position, intentions and psychology.

Rocky Humbert adds:

I note that the Chair ignored my request to precisely define the term "successful speculator," perhaps because avoiding such rigorousness allows him to define success and speculation in a manner as to avoid acknowledging his own biases. I'd further suggest that his list of educational materials, although interesting and undoubtedly useful for all students of markets, seems biased towards an attempt to make people to be "like him."

If gold is up a gazillion percent over the past decade, and you're up 20%, are you a successful speculator?If the stock market is down 20% over a six month period, and you're down 2%, are you a successful speculator?If you have beaten the S&P by 20 basis points/year, ever year, for the past decade, without any meaningful drawdowns, are you a successful speculator?If you trade once every year or two, and every trade that you do makes some money, are you a successful speculator?

If you never trade, can you be a successful speculator?

If you dollar cost average, and are disciplined, are you a successful speculator?

If you compound at 50% per year for 10 years, and then lose everything in an afternoon, are you a successful speculator?

If you lose everything in an afternoon, and then learn from your mistake, and then compound at 50% for the next 10 years, are you a successful speculator?

If you compound at 6% per year for 10 years, and never have a meaningful drawdown, are you a successful speculator?

If the risk free rate is 6%, and you are making 12%, are you a more successful speculator then if the risk-free rate is 0% and you are making 6%?

If you think you are a successful speculator, can you really be a successful speculator?

If you think you are not a successful speculator, can you be a successful speculator?

Who are the most successful speculators of the past 100 years? Who are the least successful speculators of the past 100 years? 

An anonymous contributor adds:

 In conjunction with the chair's mention of valuable books and histories, I would append Fred Schwed's Where are the Customers' Yachts?.

While ostensibly written with a tongue-in-cheek hapless outsider view of 1920s and 1930s Wall Street, it has provided as many lessons and illustrations as anything by Henry Clews. In this case, I am reminded of the chapter in which Schwed wonders if such a thing as superior investment advice actually exists.

Pete Earle writes:

It is my opinion that the first thing that the would-be speculator should do, even before undertaking the courses of actions described by our Chair, is to open a small brokerage account and begin plunking around in small size, getting a feel for the market, the vagaries of execution quality, time delays, and the like. That may serve to either increase the appetite for such knowledge, or nip in the bud what could otherwise be a long and frustrating journey.

Kim Zussman adds: 

The obligatory Wikipedia* definition of speculation is investment with higher risk:

Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term Investment is one of degree of risk. It differs from gambling, which is based on random outcomes.

There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing

By this definition one must define risk and decide what comprises high and low risk — which may be simple in extreme cases but (as we have seen repeatedly) is not very straightforward in financial markets

*Chair is quoted in the link 

Alston Mabry writes in:

I'm successful when I achieve the goals I set for myself. And rather than a target in dollars or basis points or relative to any index or ex-post wish list, those goals may simply be to act with discipline in implementing a plan and then accepting the results, modifying the plan, etc.

Anatoly Veltman adds: 

And don't forget Ed Seykota: "Everyone gets out of the market what they want". I find that everyone gets out of life what they want.

Plenty a market participant is not in it to make money. Fantastic news for those who are!

Bruno Ombreux writes:

This will actually bring me back to the question of what is a successful speculator.

In my opinion success in life is defined in having enough to eat, a roof, friendships and a happy family (as an aside, after near-death experiences, people tend to report family first). You can forget stuff like being famous, leaving a legacy or being remembered in history books. If you are interested in these things, you have chosen the wrong business. Nobody remembers traders or businessmen after their death except close family and friends. People who make history are military and political leaders, great artists, writers…

So you are limited to food, roof, friends and family. Therefore my definition of a successful speculator is a speculator that has enough of these, so that he doesn't feel he needs to speculate. I repeat, "a successful speculator does not need to speculate."

Paolo Pezzutti adds:

I simply think that a successful speculator is one who makes money trading. Among soccer players Messi, Ibrahimovic are considered very successful. They consistently score. They experience short periods without scoring. Similarly, traders should have an equity line which consistently prints new highs with low volatility and a short time between new highs. Like soccer players and other athletes it is their mental characteristics the main edge rather than knowledge of statistics. One can learn how to speculate but without talent cannot play the champions league of traders and will print an equity line with high drawdowns struggling losing too much when wrong and winning too little when right. Before dedicating time to find a statistical edge in markets one should assess his own talent and train psychologically. In this regard I like Dr Steenbarger work. In sports as in trading you very soon know yourself: your strengths and weakness. There is no mercy. You are exposed and naked. This is the greatness and cruelty of markets and competition. This is the area where one should really focus in my opinion.

Steve Ellison writes:

To elaborate a bit on Commander Pezzutti's definition, I would consider a successful speculator one who has outperformed a relevant benchmark for annual returns over a period of five years or more. Ideally, the outperformance should be statistically significant, but market returns can be so noisy that it might take much of a career to attain statistical significance.

Jeff Rollert writes:

I propose a successful speculator dies wealthy, with many friends. Wealth is not measured just in liquid terms.

Should a statistical method be preferred, I suggest he is the last speculator, with capital, from all the speculators of his college class.

In both cases, I suggest the Chair and Senator are deemed successful, each in their own way.

Leo Jia adds:

If I may wager my 2 cents here.

I would define a successful speculator as someone who has achieved a record that is substantially above the average record of all speculators in percentage terms during an extended period of time. The success here means more of a caliber that one has acquired which is manifested by the long-term record. Similarly regarded are the martial artists. One is considered successful when he has demonstrated the ability to beat substantially more than half of the people who practice martial arts, regardless of their styles, during an extended period of time. It doesn't mean that he should have encountered no failures during that time - everyone has failures. So, even if that successful one was beaten to death at one fight, he is still regarded as a successful martial artist because his past achievements are well revered.

With this view, I will try to answer Rocky's questions to illustrate.

Julian Rowberry writes:

An important step is to get some money. Preferably someone else's. [LOL ]



 When I was a Yale undergrad, I took a class called "Lessons of Japan." The course was a mixture of economics, policy and sociology, and the goal was to explain why Japan was so successful; how US industry should model itself after the Japanese; how the Commerce Department should be like MITI; and how the interconnected corporate holdings of Japanese companies ("Zaibatsu") were a key to lasting profitability and success. (There was also a mention of morning calisthenics for assembly line workers.)

It looks like Yale has updated its curriculum! From an interview with Steve Roach, former Morgan Stanley economist/permabear and now lecturer at Yale:

ROACH: … one of the great courses I'm teaching at Yale is called "The Lessons of Japan." You spend five weeks studying what happened in Japan and developing metrics to calibrate the excesses pre-bubble, the mistakes made post-bubble, and then we look at that template relative to other countries in the developed and developing world and there's a lot of striking similarities. Especially insofar as the U.S. and Europe let these bubbles and policy blunders distort the real side of their economy. It would be one thing if these were just financial or market-driven excesses. But they're not.

Read the full interview here. (By the way, I got an A in my class. It was a gut course.)

Dan Grossman writes: 

One of the great mysteries to me in recent years is why Japan is not doing better, its economy not growing faster.

I used to do quite a bit of work in Japan, and I was always impressed by the intelligence, hard work and cooperative dedication of Japanese businesspeople. Yes, maybe they screwed up somewhat from a government economic standpoint, but why should that be so important compared to all skills and expertise of major Japanese companies, and their position close to China where they can both take advantage of cheap Chinese manufacturing and serve as the gateway for many business interactions between China and the Western world.

Nor am I impressed by the conventional explanation that a part of the problem is Japan's failure to allow immigration, that its static population will doom it to know low growth and an aging population. I don't see that massive legal and illegal Hispanic immigration is so economically so advantageous for the US. And there are great advantages to Japan in maintaining its homogeneity and its happy, fairly classless interactions between all levels in Japanese society.

Actually I have heard from Japanese friends and visitors that life in Japan these days is quite good. The population is prosperous and happy, with far fewer problems than in the US and Western Europe.

I guess my puzzlement is why Japan has not been a better investment, why its stock market has not been performing better.



Last September 30th, I was highly critical of a fellow spec (no need to name names) who, amidst the S&P downgrade, the ECRI recession call , and a volatile and nasty stock market swoon wrote: "None the less I moved a large part of my 401 K to cash, and the rest in safer stocks today, giving me more than half in cash. This is as conservative a position I have been at including the 2008-2009 period. " With 20:20 hindsight, we should note that this fellow sold the "exact low" — a statistically improbable feat … comparable only with buying the exact low in natgas last week. He never wrote to us about if/when he became less conservative. One presumes that he continues to justify his decision with some rationalization like: "The risks were just too great to ignore." Or "I couldn't take the pain." Or "My wife would never forgive me if I lost everything."

As I wrote at that time, I thought that there is always a risk of things getting worse, but that I was nibbling into weakness — because my disciplined analysis (which has worked for decades) gave the most probable 3-5 year return of high single digits…and that was sufficient grounds to be adding to exposure — not reducing exposure. I'm not giving away any trade secrets when I note that different asset classes behave differently, and my willingness to nibble at stocks during last summer's swoon is not inconsistent with my unwillingness to aggressively buy natural gas futures at its recent 10-year low prices. Now that Mr. Market has risen a cool 21% — and the Dow Jones is back to it's early 2008 levels, I would bless and compliment anyone who wrote that they were thinking about taking some chips off the table — in large measure because the most probable 3-5 year return in the S&P is back towards the low single digits…and there is considerably less palpable fear; there is little or no value in US fixed income; and European headlines are currently in abeyance. I have no clue whether the next 10% will be up or down — but if it's up (and occurs in the next month or two), I'll be taking some chips off the table too. Everyone makes mistakes. Only fools make the exact same mistake twice. Learn from your mistakes, and you'll be a better trader and a better person too.

A Repentant Man Who Did Not Use a Cane writes in: 

I will own this mistake. I have learned from it.

I have thought of that post often, and my macro call's results have been worse than you infer: Because of a new process for transfers, I did not complete the transaction on the 30th. I was not aware of it until Monday, I did not get my confirm and the transaction actually was completed at the close of the 4th.

The S&P was 1131.42, 1099.23 and 1123.95 respectively on those days.

Rather than tell how my account has performed since then let me tell what I believe I learned.

Early on in my history of on this list, I told my one exception to the cane rule:

"When there is a liquidity crisis all bets are off". This worked during the 08 meltdown. I suffered some pretty big hits, but there were more coming once the banks were begging for cash after Lehman. However, it did not work in September because there was no crisis. Being unleveraged I should have stuck closely to the rule, I incorrectly believed that I could have saved a lot of power by anticipating the crisis rather than getting out once it happened. Now, I still believe that if you are a leveraged trader, not going all in with a liquidity crisis forecasted is a prudent thing to do. You may miss a big gain, but your chances of blowing up has increased beyond what is predictable by the historical numbers. If you want to turn to the scientific method during these periods, it would appear that there is significant parallel to what can happen in the chaos of population growth. That is if one resource is depleted you must adapt rather than use the same old tricks.

Now the converse side of the liquidity crisis rule is once the creators of money flood the market with liquidity, then this is the time to pull out the canes again.

I will leave it the everyone to shred this or to educate me further…before the market does.

Gary Rogan writes: 

Rocky, the point about selling low seems pretty clear. Are you saying though that you have some evidence that when the expected return falls below low single digits one should "take some chips off the table"? Clearly both points are of the "is motherhood good? is apple pie good?" variety, especially the first one, but much as many people recommend buying low, a lot fewer recommend "going to cash" when the Fed model or whatever is pointing to low expected returns for their core portfolio, if that's what you are talking about. 



If you are a closed-minded, statistically rigorous, intellectual who cares about sounding smart at cocktail parties, stop reading this post right now!

If you are open-minded and worship at the Church of What Works, and furthermore believe that indicators are generally predictive before they become mainstream (and statistically meaningful), feel free to continue reading this post.

I've previously noted that the new ONN "risk on" and OFF "risk off" Fisher-Gartman Risk ETFs have lost money overall (despite the fact that they should move opposite to each other). Since inception on 11/30/11, ONN has returned 1.83% while OFF has returned -2.97%, which suggests that the "right" trade was to be net short both risk-off *and* risk-on. That is, it's been profitable to be a contrarian to the contrarians — which is another way of saying "my enemy's enemy is my friend."

Nonetheless, I think there could be utility to these two ETF's as a new (and totally objective) retail market sentiment indicator. If one plots the open interest (shares outstanding) of ONN versus the open interest (shares outstanding) of OFF, one can see a daily quantitative measure of retail risk-on/risk-off sentiment. Unlike the AAII surveys (and most sentiment measures), this involves real money — and so isn't prone to myriad polling biases.

Obviously the data history is extremely short, the ETF size is small, the baskets are constructed in suspect ways, the liquidity is limited, and it has the eponymous moniker of the "world renowned" Dennis Gartman. Yet if those issues really concern you, you didn't follow my instructions to stop reading this post at the end of the first sentence!

A number of specs have written to me that market participants already use the leveraged S&P long and short funds as sentiment indicator in a similar ways. I'd note that the S&P is only one part of the (world-renowned) Gartman risk-on/risk-off basket. W.R. Gartman also includes bonds, crude, copper, gold, silver, corn, etc.; so its behavior and information content may be quite different from the S&P etfs.



 I've read some good pieces about why US Treasury prices should decline. However, this could be the WORST essay that I've read on the subject and it reflects badly on both the writer and those who forward it. This essay might not even meet the minimalist criteria to be a Zero Hedge post! Anatoly asks: "Where is the essay wrong?" I answer: "Where is the essay right?" Let's start with the statement: " As yield goes up, bond prices decline in a precisely proportional manner (and vice versa). "

1. I'm not going to waste everyone's time to explain that yields and prices do NOT move in a precisely proportional manner. (See "convexity" for an explanation.) But it's this sort of sloppiness in thought that renders the essay less than useless.

2. To characterize foreign central banks as "frantically" dumping treasuries is another example of misleading hyperbole. Frantically? Dumping? Please. (And even if this were true, where are the proceeds of those sales being invested? Silence is the answer.)

3. "When there is a sudden explosion of supply, the price buyers are willing to pay for that good plummets until enough new buyers enter the market to soak-up all of that excess supply". Yes, we've heard of supply and demand. But "Sudden explosion?" How about continued expansion? And he completely ignores the deleveraging in the private sector, as well as the persistent investor disinterest for other asset classes and a preferences for US sovereign paper.

4. "We have no visible buyers for U.S. Treasuries, yet seemingly infinite demand. More specifically, we have no visible sources of capital to even finance the purchase of all of those Treasuries". No visible buyers? Treasury reports the complexion of buyers after every auction. The Fed's balance sheet is relatively transparent about its holdings too.

5. He completely mischaracterizes and obviously misunderstands the recent announcement by Japan — (and conveniently ignores the fact that Japan's sovereign balance sheet and demographics are far worse than the USA at the moment.)

About the only point that I can find which is accurate in this puff piece is that the Fed's monetary policy is levitating the bond market. So long as the dollar has a bid, this can continue ad infinitum. I am not a bull on US Treasuries. Far from it. And I believe the Fed's current policy is reckless and misguided. But, this is not fraud, as they are being transparent about their methods and goals. Lastly, if you want to short the US Treasury market based on his worthless analysis — be my guest. But I'd guess Anatoly will have better success calling the bottom in natural gas!



 I have no basis for either believing or disbelieving that certain market participants had advance information and/or profited from 9/11. The literature is not compelling because while there was indeed some elevated put buying, there are other discrete examples of elevated put buying when nothing horrible happened. I will, however, point out the following irrefutable facts:

1. Post 9/11, AMR stock dropped from about 28.125 to about 20.00 per share when it re-opened on volume. A loss of about 30%…for a truly rare catastrophe.

2. Just a few weeks ago, on 9/30/2011, AMR stock dropped from 3.00 to 1.75. A loss of 42%. (Where are the academic papers about insider trading on this date?)

3. AMR's stock from the period of 9/17/02 to the present went from 20.00 to 0.40, a loss of 98%. This demonstrates once again that the really big money is made in being right about the underlying fundamentals of a company. And, it further illustrates Warren Buffett's saying that investors would, as a group, be better off if the Wright Brothers had crashed and burned at Kitty Hawk. The airline industry continues to produce an ever-growing lifetime net loss for investors; why people (other than index funds) ever own airline stocks (except as a short term speculation) remains a mystery to me.



 1. Every store in London was having a sale of 50% or more except for the Bates one I went to to buy a hat, and all the big stores like Harrods had queues of at least 2 hours. In Paris, no stores had sales and business seemed quite slow except for the health food stores that substitutes quinoa for rice and hummus. Why is there so much better retailing in London than Paris? Does it have to do with the service rate or National Character? The marginal utility for consumers to buy goods in London and Europe rather than property seems to be a function of the much larger ratio of space to population in US versus Europe. When you have 100 square feet to a person, goods seem very attractive and the Holidays with all their bargains, bring out in London "50% of the population". By the end of a week, people are willing to spend a lot more to buy things than at the beginning when they're still testing the waters and looking for bargains. Can this be quantified in markets?

2. The drop and close below 1200 on Dec 19, 2011 is right out of the playbook of the Trojan War. Time and time again a day before the death of one hero or another, in this case Hector as he firebrands the Greek ships and kills and wounds one Greek defender after another, including Ajax, Menelaus, and Odysseus, the Gods look down, especially Zeus, and say, "look he's going to die tomorrow, let him have a blaze of victory today before he goes to Hades as he's put up a good fight and is the favorite of a few mistresses and daughters." One receives a pretrial settlement letter from Dan about a HP executive's harassment of a party planner, including his showing her his million dollar balance at the ATM. And it gets him in trouble because there is an obvious attempt to cover up through his assistant who might not be buyable off now that he is no longer top guy. It's right out of the Trojan war where all the problems arise from romance and the fate of the war hinges on who can seduce Zeus the last, and which Goddess is consumed by revenge the most because Paris chose Aphrodite and how they can use their wiles to turn the tides of war.

3. A trip to the British Museum starts with a building cramming exhibit of Russian Architecture right after the Revolution to show the Russian's spirit and intelligence, and the love and egalitarianism of Russia by the British right now. But at the British Museum a room is devoted to Roman everyday life then compared to England today, and the conclusion is that it's pretty much the same with the soldiers being able to retire to a nice plot of land after 20 years of service then and now. But on looking closer one sees that most of the wealthy in Greek times were the freed slaves who were able to fill the everyday jobs of merchants, doctors, and financiers since they were not tarnished by striving for money and didn't possess extensive land holdings.

 4. Throughout Europe the opportunity cost of time is close to zero. Queues are everywhere because free admission is given to all the attractions. One can only get into the Louvre through a back entrance as the lines at the front are 3 hours long, but when you do get in, you have to walk through 10 miles of religious paintings depicting sacrificial and revengeful scenes from the Bible. No such luck at a the Musee D'Orsay where one would have to wait 5 hours to get in, even after purchasing a ticket at the only billetiere open in Paris.

5. London is the theater capital of the world, and it's nice to see the common man at all the events, enjoying his ice cream between acts at 1/4 the price of US events. I have to walk out of Crazy for You and Matilda, two of the hits there, because the music is terrible, and the plots totally contrived and hateful to the business person. The Crazy For You plot is exactly the plot of the current Muppets movie with their depiction of the heartless business man who wishes to close down the theater and the decent poor folk who must stage a show to earn enough to buy out the theater from the evil profit mongers. I enjoyed Three Days in May which shows men as they should be with compromises between Churchill, Chamberlain, and the Hunting Saint that led to the British refusing to surrender as it becomes clear that France was going to capitulate in a week. "Neville, can I chat with you for a half hour before the meeting tomorrow. Without your support, I'll have to resign because I don't believe we should give up," Churchill said. How many times one has been in that position as every man was for himself as in this case the estimate that came back from the front was that 2000 men would be returned from the Dardanelles rather than the 250,000 that came back. Worst of all as Churchill pointed out to his cabinet dissenters, is a show of uncertainty and disharmony as the public would leap on the weakness and the whole battle would be lost. One finds the courage and diplomacy of Churchill inspiring in this case, and one did have it in his rackets career.

 6. A highlight of the trip is a visit to Ile de la Cite to see the prisons where the upper class and producers were kept before being guillotined. But instead one lands at the Sainte Chappelle where one is seated in the first row of this 14th century church, to hear a medley of Renaissance music with harpsichord, viola, various flutes and a singer. The highlight as always is a Couperin and Bach piece which is invariably ingenious and beautiful compared to the predecessors. One was mistakenly given a VIP seat here as the reservation made from a fancy hotel and I am reminded of the most valuable thing I got from Soros other than the two tennis can thing. Once I had pneumonia and the hospital mistakenly heard that I was a partner of Soros and they gave me the best room in the hospital, about 2500 square feet with a beautiful view of the park. I did meet a great Dr. there, Dr. Lou Depalo, who I would recommend to anyone with a respiratory problem of any kind, who bought me a Barrons, and I bonded with when it turned out that he had a total love of the Master and Commander canon and unlike me was a nautical personage.

Gary Rogan comments: 

I was in Paris with my wife and daughters over the week preceding and including Christmas. We didn't do much shopping since it was mostly about taking the kids to the main museums, and they all know how much I hate "shopping" but we did spend a couple of ours at Galerie Laffayette, their main shopping mall, on Christmas Eve and the level of energy seemed pretty good to me, but I don't have too many comparison points. I also didn't see any sales signs, but could that be a sign of strength?

The outdoor shopping area at the lower end of Champs Elysees was so crowded in the evening it was almost impossible to walk, and this is definitely not the height of the tourist season. The faces of people on the metro which we used a lot seemed somewhat grim, but that's also hard to interpret without recent comparison points.

Rocky Humbert comments: 

 1. Back when I lived in the UK in the 1980's, there were semi-annual sales (post-Christmas and July). This was a tradition at the likes of Selfridges, Harvey Nichols, and the other serious London department stores. Prices were generally not discounted except during these sales. No self-respecting Londoner would shop at Harrods (except at the food court) — as it was mobbed with foreign tourists, and the prices were exorbitant. Perhaps a current Londoner can share whether the semi-annual sale pattern still exists.

2. In comparing London and Paris, one recalls Adam Smith's (and Napoleon's) observation that England is a Nation of Shopkeepers.

3. The Chair asks, "Why is there so much better retailing in London than Paris?" As Perry Mason would say, "Question assumes facts not in evidence." 

Bruno Ombreux comments:

1. About the traditional semi-annual sales (post-Christmas and July), it is the same in France, but the Winter sales are starting only next Wednesday. Which explains why there were sales in London and not in Paris. Different calendars.

2. About the English nation of Shopkeepers, it can be explained by different cultures too. Sales are widely attended in both countries, but from my anecdotal experience living both in London and in Paris, they are really a sacred institution in London compared to Paris.

Steve Ellison adds:

Kathryn Schulz, in Being Wrong, one of the books on the Chair's recommended reading list, wrote:

In short, we are wrong about love routinely. There’s even a case to be made that love is error, or at least is likely to lead us there. Sherlock Holmes, that literary embodiment of our … ideal thinker, 'never spoke of the softer passions, save with a gibe and a sneer.' Love, for him, was 'grit in a sensitive instrument' that would inevitably lead into error.



 Here are a few more random comments on Sears and real estate:

1. It seems correct that the balance sheet carrying value of the some of the owned real estate is below its market value — if the pieces were sold in an orderly fashion. This statement is confirmed by the last 10K (page 24), in which they did a couple of sale & leaseback "S&LB" transactions. For example, they did a S&LB on a Sears Auto Center in October 2006 — and for accounting purposes, the excess of proceeds received over the carrying value of the associated property was deferred. [BUT, we] closed our operations at this location during the first quarter of 2010 and, as a result, recognized a gain of $35 million on this sale at that time. Note: they don't disclose what it cost to cancel the lease. And furthermore, given that they have a junk bond credit rating now, any S&LB's that they might enter into would have to be done at unattractive prices. That is, the cap rate for a Walmart S&LB might be 4% or 5%; my guess is that for Sears, it is now well into the high single digits…

More importantly, the problem with valuing Sears on the real estate portfolio is that they are the elephant in the room. When Alexander's went bankrupt, the stock actually rallied because they had a crown jewel in their 59th Street NYC story — and they could then reject the other leases. Because Sears has such a huge and geographically diverse portfolio, it's unclear to me how they could monetize it in a meaningful way except for S&LB (not an option right now). There is not enough commercial demand.

2. As I noted in my original post about Sears, Eddie's story was originally a real estate/asset play. That was 7 years ago. Generally speaking the retail real estate market is obviously quite soft, and there are few big footprint vendors who are expanding at the moment. This will eventually turn. A national tax on internet sales could help. So could a turn in the economy. But that's macro stuff.

3. It's notable that they sold $240 million of commercial paper to Eddie Lampert's Hedge Fund. (page 88) during 2010. In the latest 10Q, Eddie's commercial paper holdings declined to $220 million (page 18) and $100 million of the money was identified as Eddie's Personal money. This bears watching. Because as we know, during 2011, Sears drew down about $400 million in its bank lines.

I think the bullish case for Sears is that they find a new store format/model that works. This is what they've been trying to do with their throwing spaghetti against a wall. Once they do, the can continue to shrink the portfolio of existing underperforming stores. There is some historical precedent for this: For example, Melville Corp (aka Melvillle Shoe Co) was founded in 1922 had 7,282 stores at one point. They shed all of their retail chains … except for CVS (40%) … and today CVS is a successful drug store operator. Similarly Dayton Dry Goods Company (founded in 1902) had a series of successes and failures before they morphed into Dayton Hudson and now the successful Target Corporation. Most attempts to turn these companies around fail however, etc. Ames, Caldors, Montgomery Ward, Woolworth's. Even now-successfull Macy's went through bankruptcy.

So, if you want to give Sears the benefit of the doubt, I think what you need to see is a new store format that WORKS. They are not investing the required capX into their existing stores. And if they lose the confidence of their bankers and vendors, they implode. Lastly, the pundits who say that they've got tons of cash never mention where the cash is coming from. It's coming from Eddie's hedge fund and from the revolvers that they are drawing down. Also troubling is that even if they find a format that WORKS, how are they going to finance the conversion to the new format. That takes a ton of capital, and their cost of capital is going through the roof. The time window is quickly closing for them to succeed at a turnaround.

One last thought: Apple computer has about $40 BILLION in cash on their balance sheet and has almost no long term debt. They have 929 million shares outstanding. So that's $43/share in cash! So, with the stock trading at 400 minus $43(cash) = the stock is really trading at about $350/share. They are supposed to earn $35/share next year. So the stock is trading at 10x earnings *net of cash* for the "premier" sexy tech/retail(cult) stock that is financially strong and doing great (right now). I have no opinion on Apple. I mention this only because as an investor, one should not only consider whether Sears is "cheap" or whether it will succeed. One should also consider alternative uses of one's capital …. and I subtract out Apple's cash in this example because Charles' theme was to subtract out Sears' real estate. Just a thought.

Finally, Eddie & Co own about 61% of the outstanding stock now. The company has repurchased about $6 Billion in stock over the past 7 years (at much higher prices). So, the float is thin. The stock could be extremely volatile (in both directions) because of this.

Happy new year.



 Bill Gross recently penned an essay in the FT entitled "The Ugly Side of Ultra-Cheap Money". He makes some provocative (and questionable) generalizations regarding the effects of zero interest rates on the real economy, but:

1. He importantly ignores the important differences between zero nominal interest rates and zero real interest rates. (Due to deflation, Japan has run a tight monetary policy for years, and the Yen's multi-decade appreciation to 78/$ provides a reasonable proxy of the relative inflation rates between the USA and Japan.)

2. He fails to openly acknowledge that ultra-cheap money is terrible for his business. He laments people keeping dollars under their mattress (because it pays the same as money market funds). Yet, he doesn't mention that the current interest rates out to the 5 year result in his management fees being rather larger than the investor's yield to maturity.

I submit that there IS a pretty side of ultra-cheap money:

Mr. Market (and foreign owners of US debt) are giving a gift to the US Treasury that is truly remarkable. A Bill (the paper, not the Gross) yields 0% (negative ~3% trailing real yield) and the 5-year yields .9% (negative 1% real). Most of the US debt maturities are 5 years and under. And the Fed owns about 10% of the total debt…soaking up the outter maturities. This means, with $15T in debt, the REAL static debt burden is decreasing by about 600+ Billion per year. (Of course, when Mr. Market grows angry with the US Treasury, this pretty picture could viciously swing the other way as various pundits, including Taleb, Grant, Mauldin, etc are warning.)

Here's a chart that shows the US Debt Maturity.

Yes, Viriginia, there IS a Santa Claus. If you pull off the long white beard, you'll see Santa is actually the people who are buying US Government paper and holding cash. And we should all thank them as they come down the chimney.

Ken Drees writes:

Forget Santa, what about VIXen? He is laid out, 5 months cold. Is it another Christmas in July for the VIX?



If you use the NAR sales and inventory data in a model, you might want to pay attention to this  and this. This downward revision will also feed through to the Commerce Department data series… That is, the GDP component from home sales from 2007 to 2010 will be lowered. And people complain about the "quality" of Chinese data!



 This paper from the New York Fed blaming the real estate crisis partially on the flippers (speculators) is actually a rather sensible paper that makes some obvious and more subtle points. Most interesting is they quantify the extent of speculative purchase activity during the bubble years in some creative ways.

They note:

1. Housing is both a consumption good and an investment/store-of-wealth. During the bubble years, the latter trumped the former and attracted speculative/investment interest. i.e. irrational exuberance.

Investment/Speculative buyer motivation can be based on (1) rental income; (2) buy and hold for long periods; (3) buy & flip. #3 grew to be a major factor near the zenith.

3. They demonstrate that 1/3 of ALL home purchases were 2nd buyers during the bubble years, AND, in the worst states (NV, AZ, FL etc), more than half of the purchasers were second home buyers and/or flippers and/or multiple lien holders.

They are quantifying what we already knew — that the seemingly endless demand for homes was coming from investment/speculative buyers. However, unlike during the internet bubble, these speculators walked away (as many had no-money-down) and they handed the keys to the banks…

It would be analagous to having a leveraged trading account with no initial margin….!

Stefan Jovanovich comments: 

And, no recourse. If the speculators were clever/dishonest enough to state on the disclosure forms that they were buying the properties as principal residences, here in California and Arizona and the other non-recourse states, their liability was limited to their option payment - er, their down payment (which could be as little as 3%). Here is the list of the non-recourse states:

Alaska (AK)
Arizona (AZ)
California (CA)
Connecticut (CT)
Idaho (ID)
Minnesota (MN)
North Carolina (NC)
North Dakota (ND)
Oregon (OR)
Texas (TX)
Utah (UT)
Washington State (WA)

The rumor is that the AGs have reached a settlement.

The settlement of $25B is not going to make much of a dent in the outstanding mortgage deficiencies that are recourse. Core Logic says that 10.7 million houses (22.1% of all residential properties with a mortgage) were in negative equity at the end of the third quarter of 2011 and an additional 2.4 million properties (5% of all mortgaged residences) had less than 5 percent equity. The negative-equity and near-negative equity mortgages accounted for 27.1 percent of all residential properties with a mortgage nationwide. But there is good news - Core Logic says the 27.1% is down .4% from the total in the 2nd quarter.

Also, the Federal Reserve's calculation of "owner equity as percentage of household real estate" was 38.6% as of Q3 this year; in 2005 it peaked at 60%. Approximately 1 out of 3 homes in the U.S. has no mortgage. I may need Big Al's help (as I did when calculating the current market price of the U.S. Treasury's gold reserve) but my handy calculator suggests that this leaves 40% of homes that are "conventional" - i.e. neither free and clear nor so leveraged that they have negative and near-negative equity. The bad news is that, after you subtract 33% from 38.6%, that means the average cushion for the conventionally-mortgaged homes is 5.6%/40% - 14%. Didn't someone say something about this being a solvency problem and not a liquidity problem?

Final random thinking:

According to the folks at Calculated Risk, there are now 4.1 million seriously delinquent loans (90 day and in-foreclosure). In a "normal" market there a 1 million seriously delinquent home loans. Recently, there was "good news" (sic) about the decline in the numbers of REO properties held by Fannie (in Q3 their REO inventory fell to 122,616 houses, a decline of 10% from the number at the end of Q2). That made it the 4th straight quarter in which Fannie's REO inventory declined. One small problem: this is the same period during which foreclosures ground to a halt because of the litigation over mortgage servicing (robosigning, etc.). While it is likely that some of the seriously delinquent loans will cure as part of the settlement (see below), many more will go into foreclosure; and Fannie's inventories will rise. 

Alston Mabry writes:

In Phoenix the RE bubble started in the valley and then moved up into the mountain towns 2-3 hours away, where people have summer homes to escape the heat. It was like a tide of money that rose up the mountainside. In August/September 2006, I was driving around and listening to NPR, when a report came on about the local RE market.

A woman who was a broker in the mountain towns said that business was absolutely booming…oh, except that last week there was nothing…strangest thing…but we're sure it will pick up again next week, after the kids are settled in school, etc etc.

An image popped into my mind: A flipper had an open house, but the only people who showed up were other flippers, and by that time they all knew each other. They looked at each other and said, "Holy sh*t…", and got in their cars and left, wondering how quickly they could unload their properties. It was over. And the tide rolled back down the mountain.



 Have you seen this article about the top 5 regrets of the dying? It is a must read. 

Gary Rogan writes: 

I really liked all of them, except based on everything that I know I disagree with the statement that "happiness is a choice". Irrational fears are not a choice, depression is not a choice, and neither is happiness.

Gibbons Burke writes: 

Well, happiness is dependent on one's attitude, and in many cases, you can choose, control or direct your attitude.

My theory is unhappiness and depression happen when reality does not live up to one's expectations of what life is "supposed" to be like. I think the key to happiness is letting go of those expectations. That action at least is within an individuals purview and control. There is an old Zen maxim: If you are not happy in the here and now, you never will be.

Russ Sears adds:

I think most irrational fears and depression stem from the unintended consequences of one's choices or often, the lack of decisions, such as little or no exercise. However, I believe many of these choices are made when we are children, and we do not fully understand the consequences. Many of these bad choices may be taught often though example by adults or sometimes it is just one's unproductive coping methods that are simply not countered with productive coping methods by the adults in their lives. I think some people are more prone to fall into these ruts, but most of these ruts are dug none the less.

Jim Sogi writes: 

The regrets are perhaps easily said on the deathbed but implementing these choices in life is very difficult. Many can not afford the luxury of such choices. When there is no financial security hard work is a necessity. Such regrets are not much different than daydreams such as, oh I wish I could live in Hawaii and surf everyday. The fact of the matter is that the grass always seems greener on the other side. Speak to the lifestyle guys in their old age. Will they say I wish I worked harder and had a career and made more meaning of life than being a ski bum or surf bum? 

Gary Rogan responds: 

What you say is true about the effects of exercise. But that's just one of many factors that are biochemical in nature. Pre-natal environment, genetics, and related chemical balances and imbalances are highly important in the subjective perception of the level of happiness. There are proteins in your brain that effect how the levels of happiness-inducing hormones and neurotransmitters are regulated and there is nothing you can do about it without a major medical intervention. Certainly some choices that people make affect their eventual subjective perceptions through the resultant stresses and satisfying achievements in their lives, so the choice part of it can clearly be argued. My main point was that by the time the person is an adult, their disposition is as good as inherited. They can vary the levels of subjective perception of happiness around that level through their actions, but they are still stuck with the range, mostly through no fault or choice of their own.

Since a few literally quotations on the subject have been posted, let me end with the quote from William Blake that was used before the chapter on the biological basis of personality I recently read:

Every Night & every Morn

Some to Misery are Born.

Every Morn & every Night

Some are Born to sweet Delight.

Ken Drees writes in: 

I believe that you must put effort towards a goal and that exercise in itself begets a reward that bends toward happiness. It's the journey, not the end result. You must cultivate to grow. A perfectly plowed field left untended grows weeds–the pull is down if nothing is done.

Russ Sears adds:

 It has been my experience with helping others put exercise into their lives that few teens and young adults have reached such a narrow range that they cannot achieve happiness in their lives. This would include people that have been abused and people that have a natural dispensation to anxiety. Their "range" increases often well beyond what we are currently capable of achieving with "major medical intervention". As we age however our capacity to exercise decreases. While the effects of exercise can still be remarkable; they too are limited by the accelerated decay due to unhappiness within an older body's capacity. Allowing time for our bodies is an art. Art that can bring the delights of youth back to the old and a understanding of the content happiness of a disciplined life to the young.

Peter Saint-Andre replies: 


Yes, hard work is often a necessity. But hard work does not prevent one from pursuing other priorities in parallel (writing, music, athletics, investing, whatever you're interested in). Very few people in America have absolutely no leisure time — in fact they have a lot more leisure time than our forebears, but they waste it on television and Facebook and other worthless activities.

Between working 100 hours a week (which few do) and being a ski bum (which few also do) there lies the vast majority of people. Too many of them have ample opportunity to bring forth some of the songs inside them, but instead they fritter their time away and thus end up leading lives of quiet desperation.

It does not need to be so.

Dan Grossman adds: 

Jim Sogi has a good point. The deathbed regret that one didn't spend more time with one's family is frequently an unrealistic cliche, similar to fired high level executives expressing the same sentimental goal.

The fact is that being good at family life is a talent not everyone has. And family life can be difficult, messy and not easy to make progress with. Which is perhaps one of the reasons more women these days prefer to have jobs rather than deal all day with family.

Being honest or at least more realistic on their deathbeds, some people should perhaps be saying "I wish I had spent more time building my company."

Rocky Humbert comments:

 I feel compelled to note that this discussion about deathbed regrets has been largely ego-centric (from the viewpoint of the bed's occupant) — rather than the perspective of those surrounding the deathbed. I've walked through many a cemetery, (including the storied Kensico Cemetery) and note the preponderance of epitaphs that read: "Loving Husband,"; "Devoted Father," ; "Devoted Mother," and the absence of any tombstones that read: "King of Banking" or "Money Talks: But Not From the Grave."

Notably, Ayn Rand's tombstone in Kensico is devoid of any comments — bearing just her year of birth and death. (She is, however, buried next to her husband.) 

In discussing this with my daughter (who recently acquired her driver's license/learning permit), I shared with her the ONLY memory of my high school driver's ed class. (The lesson was taught in the style of an epitaph.):

"Here lies the body of Otis Day.

He died defending his right of way.

He was right; dead right; as he drove along.

But now he's just as dead, as if he'd been wrong." 

Kim Zussman writes:

Is an approach of future regret-minimization equivalent to risk-aversion?

Workaholic dads have something to show for their life efforts that Mr. Moms don't, and vice-versa.

If so, perhaps the only free epithet is to diversify devotions — at the expense of reduced expectation of making a big mark on the world or your family.



 Hurricane predictors admit they can't predict hurricanes :

Two top U.S. hurricane forecasters, revered like rock stars in Deep South hurricane country, are quitting the practice because it doesn't work. William Gray and Phil Klotzbach say a look back shows their past 20 years of forecasts had no value.

The two scientists from Colorado State University will still discuss different probabilities as hurricane seasons approach — a much more cautious approach.

But the shift signals how far humans are, even with supercomputers, from truly knowing what our weather will do next. Gray, recently joined by Klotzbach, has been known for decades for an annual forecast of how many hurricanes can be expected each official hurricane season (which runs from June to November.) Southerners hang on his words, as even a mid-sized hurricane can cause billions in damage.

Last week, the pair dropped this announcement out of a clear, blue sky: 'We are discontinuing our early December quantitative hurricane forecast for the next year … Our early December Atlantic basin seasonal hurricane forecasts of the last 20 years have not shown real-time forecast skill even though the hindcast studies on which they were based had considerable skill.'"

Yet…they just released their latest prediction here, in which they write:

"t this extended range of lead time, we're better off kind of examining four different scenarios, and then trying to assign a probability to the likelihood that each of those would occur," says Klotzbach….

Or perhaps, they should consider becoming market strategists for a Wall Street Brokerage Firm, where their track record might be forgiven.

Gary Rogan adds:

Rush tied the ability to predict hurricanes and to predict global warming and its effects together in his show today. This persistent belief in man-made global warming and its deleterious effects continuous to fascinate me as an atypical "delusion and madness of crowds". Many people who had ardently supported the theory in the past now simply hate the topic, it seems boring to them. Yet they continue to persist in their beliefs that nothing much has happened to disprove the "consensus of science". Most delusions of this type peak and then die a horrible death, but this one is stuck in some sort of purgatory. Whenever this topic comes up, I invariably say that it's a hoax, as I have said for years, and just like a few years ago the reaction is usually disbelief that I can hold this opinion while so many countries are supposedly on board, but the reaction is much less energetic than it used to be.

Luckily Canada has just "irresponsibly" and "recklessly" withdawn from Kyoto .




 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?



 Hello everyone,

I'm at my local lumber yard and a salesman for various materials is here and stated that on the first of next year all drywall manufacturers are increasing their prices 35 per cent!

That should really help new homes built and all remodeling… and all commercial jobs.



Rocky Humbert writes: 

Firstly, I'd like to thank Alan for bringing this to my attention. This sort of anecdote can have some important market significance. However, in order to analyze it, one needs to ask the following the questions:

1. What is the marginal cost to produce drywall? How does the current (and proposed) price compare to the marginal cost of production?

2. What is the price history of drywall? If the price has previously dropped steeply (due to the economy), then a 35% price hike (although eye popping) might be reasonable.

3. What are manufacturer and lumber yard inventory levels? Could the announcement of a 35% price hike be an attempt to front-load orders/purchases before year-end? … to clear out inventory?

4. At what % of utilization are drywall plants currently running? Has capacity left the system over the past few years? And if so, at what price will that mothballed capacity come back online?

I think an ambitious spec could call US Gypsum's investor relations office with these questions; get the answer; and have a better understanding of both the drywall market; the state of the housing market; and the state of the economy. I think there is also some risk that this 35% price hike could stick — not because the economy is healing, but because productive capacity has left the system ….and will not return until growth is considerably higher. This is the stagflationary outcome that some people fear….

The bottom line is — a few well placed questions and answers will turn Alan's anecdote from dinner party chatter to an economic/market insight.

Henry Gifford writes:

1. Energy is a significant part of the cost, as is shipping the materials and shipping the finished product.

2. I dunno the price history.

3. In urban areas, there is no significant inventory - the stuff just takes up way too much space. For jobs involving multiple apartments, or one large house, the lumber yard is not really a dealer, but more of a broker, as the boards are "drop shipped" from someone else to the job site, only the money goes through the local lumber yard. Maybe in Alan's neighborhood they can build up significant stock, though.

4. Someone in the business told me all plants generally run at full capacity all the time, including through downturns, because during a downturn they take their slowest plant and shut it down and revamp it with the newest electronics to become their fastest plant, restarting in time for the next boom. He said with a smile that they never worry, the timing is always reliable - boom and then bust. They haven't added any new plants in decades, they just speed up the old ones, like the paper industry has done to keep up with the "paperless" office.

There is really no substitute for gypsum board on the market - no boards means no new houses or other buildings.

The industry is now shifting to "paperless" gypsum boards - fiberglass instead of paper - because of increasing mold problems with paper-faced boards. Buildings are starting to get significantly insulated, which means walls have a cold side in the winter, and a cold side in the summer, and cold means damp, which can mean mold. Also, backup materials used to be masonry which absorbed a lot of water from leaks, then were wood, and are now metal, which absorbs zero, meaning a small leak gets to the paper and causes problems. Combine cold and no absorption/storage with no attention to stopping air leaks in construction, you build a recipe for disaster, not all just insurance or hysteria driven rumors. If anyone invented paper faced gypsum boards now, the lawyers would never let them sell it. I expect it to all be gone soon, the changeover will be "interesting" somehow.



 Some questions about the Fitch announcement:

1. When a ratings service says there is a potential for contagion if the situation worsens, is this bullish or bearish.

2. If it were true, is it bullish or bearish.

3. What are the chances it is true?

4. Why does it happen at 310 so as to liquidate longs.

5. Is it subsumed by the next highly important piece of data like the state of manufacturing in the phil area?

6. Does is serve any purpose except to create friction so the strong can take chips from weak.

7. When the market drops 2 % in a half hour like it did, is it bullish or bearish?

8. Is the sentiments of a rating service related to the threat by the French to vet all their methodologies and to switch in the future? How does this relate to the profit margins and survivability of the services

9. Do the sentiments of one rating service tend to be unduly reversed by an announcement from the next rating service?

10. What other queries would seem relevant?

Rocky Humbert adds: 

About the Fitch announcement:

1. Why do people tend to attribute market price moves to announcements by credit rating agencies? Has there been a single news story that notes that the US Treasury is higher versus when the USA lost its AAA; whereas the French 10 year is roughly 8 points lower since it held its AAA at the same moment in time.

2. Why do people think that falling gasoline prices are bullish but spiking WTI prices are not bearish? Why do people choose to pick particular headlines as "explanations" but ignore the other hundreds of headlines that appear coincidentally? (i.e. MF Global's bankruptcy judge yesterday withheld his ruling on the release of billions in frozen collateral (which isy leveraged into massive liquidity)…and this non-decision arguably has a much bigger impact on the day-to-day price moves)…etc.

3. The ratings agencies receive no compensation for their ratings of the G7 sovereign debt. They do this as a "public service" and a legacy. Why do they do this? If they ceased to issue sovereign ratings, would anything change? Would that be bullish or bearish?

4. After a multi-week/multi-month period of downward prices, a 2% spike in the last 30 minutes brings out the naysayers "the market cannot be trusted," "it's a bear trap," etc. But I've found with absolutely no statistical significance (due to insufficient data points) that it's often a very tradeable bottom. In contrast, a 2% decline in those conditions rarely makes the news.

5. What does bullish or bearish mean?

John Floyd makes three points: 

1. Today's action in Europe provides and interesting contrast. Amongst other negative factors the Spanish bond auction was by almost accounts a failure and yet spreads are tighter between Spain-Germany, Germany yields are up, the Euro higher, etc. So perhaps there are many factors at play that determines what drives prices and it is instructive to observe how the market moves relative to a given piece of news in comparison as to how one would expect it to react. For example if Spanish bond spreads had been tightening the past few days prior to the auction would they react the same?

2. I am not sure given the daily volatility in SPX and the track record or operations of rating agencies that they are able to time and focus on the minutia of the market in such a way. I would need to look but I imagine there are instances like the Spain one above where the market acts in opposite fashion as to what one might expect.

3. I would liken the rating agencies to a biker in the back of a peloton, or a swimmer behind a pack of others, they are getting dragged along by other forces en masse, not breaking new ground. There is the consideration however that a ratings change may cause sales (or buys) buy making an asset class unavailable or available to a subset of market participants. 



 Sears started as a catalog/mail order company and will eventually turn back to its old roots–shed the real estate, close all the stores and sell from the internet only.

Just a thought.

Rocky Humbert comments: 

Interesting timing for Ken's post!

Exact 7 years ago today, (11/17/04), Eddie Lampert announced the acquisition of Sears by Kmart. Lampert took control of Kmart during its bankruptcy.

Eddie (a fellow Yalie and GS risk-arbitrage alum) is a very smart guy. His resume includes the improbable feat of having talked his way out of a kidnapping, and some fabulous investments, including Autozone.

Alas, Sears was Eddie's biggest transaction.

And how have Sears shareholders fared? Not so good. The Sears story morphed from a real-estate play (which quadrupled the stock) to cost-cutting to "we're not going to sacrifice profits for revenues"  to who cares about sames-stores-sales to the present morass.

Since the merger, the S&P 500 has returned +23.1%. Walmart has returned 24.1%. Sears has returned negative 24%.

Which raises the tasteless counterfactual question: How would have Sears performed if the kidnappers had not been persuaded?

The lesson: always have an exit strategy other than the graveyard.

Stefan Jovanovich comments:

This is Sears' own potted history of its going into store building:

The first Sears retail store opened in Chicago on February 2, 1925 in the Merchandise building. This store included an optical shop and a soda fountain. During the summer of 1928 three more Chicago department stores opened, one on the north side at Lawrence and Winchester, a second on the south side at 79th and Kenwood, and the third at 62nd and Western. In 1929 Sears took over the department store business of Becker-Ryan Company. In 1933 Sears tore down the old Becker-Ryan Company store in Englewood, and built the first windowless department store, inspired by the 1932 Chicago worlds fair. In March of 1932, Sears opened its first downtown department store in Chicago on State Street. Sears located the store in an eight-story building, built in 1893 by Levi Z. Leiter, which for years housed the Stegel-Cooper department store. The original Chicago occupant on this piece of land was William Bross who in 1871 mounted his house on wheels and rolled it down State Street to the corner of Van Buren Street. He kept his house on wheels for several years because of the marshy conditions of the land. The Leiter Building, designed by famous skyscraper architect William LeBaron Jenny, included walls of New England granite.

The store sat on the corner of Van Buren, State and Congress streets and cost over a million dollars to refurbish. A 72-foot long electric Sears sign greeted shoppers at the front entrance. A stunning black and white terrazzo covered the main floor. The State street store was the first Sears store in a downtown shopping district, the sixth store in Chicago, and the 381st store the company built. Opening day for the State Street store took place deep in the Great Depression. Local newspapers reported that 15,000 shoppers visited the new store and several thousand people flooded the store's employment office. Sears did everything it could to help put people to work, employing 750 Chicago workers for four months during the renovation and staffing the new store with over 1,000 people.

Illinois Governor Louis Emmerson in a message to Sears Chairman Lessing Rosenwald stated, "I cannot help but feel that this opening will mean a great deal for your organization as well as for your city." Rosenwald proudly proclaimed that, "We regard the opening of our new store on the world's greatest thoroughfare as one of the high spots of our company's history." Within the store the sale of tombstones, farm tractors, and ready-made milking stalls caught customer's attention. The sporting goods department featured a model-hunting lodge. Other attractions included a candy shop, soda fountain, lunch counters, a shoe repair shop, a pet shop, dentists, chiropodists, a first aid station with a trained nurse, a children's playground, and a department for demonstrating kitchen utensils.

The company's chronology of its adventures in retailing in North Carolina is revealing. It did not build stores outside of the major cities– Charlotte, Durham, Goldsboro, Raleigh, etc, — until the 1980s! Meanwhile, some bright people in the truly small town of Wilkesboro had started their own enterprise, now known as Lowes.

Market Caps today (according to Google Finance):

SHLD - 6.83B LOW - 29.98B



 The term Roach Motel ("where roaches check in, but they don't check out!") was coined by Black Flag pesticides in 1976. Judging from my experience yesterday, Groupon membership is quite similar.

Groupon (GRPN) went public recently after some kerfuffles with the SEC. (The SEC demanded that their stated revenue be reduced massively.) In the IPO filing, GRPN stated that they had over 50 million subscribers as of December 2010 (page F-37 of Form 424B4), and by September 2011, that number had grown to 143 million (page 1)! Notably, in 2009, they had only 152,000 subscribers (of which 43,000 made purchases) whereas in 2011 "only" 29.5 million purchases were made on the 143 million. That means purchase activity among Grouponers declined from 28.3% to 20.6%. (If one considers the fact that 16 million customers made multiple purchases, the activity percentage is declining much faster.)

That GRPN has never been profitable is beyond the scope of this post.I don't like crowds, and I didn't like being one of the 143 million Grouponers. Also, as a bald man, I had grown especially weary of the daily 20%-off Groupons for hair removal services. (There were never any discounts for hair retrieval services.)

Hence I tried to "cancel" my Groupon membership yesterday. Alas, there is NO ability to do that on their website, and NO instructions on how to cancel membership. So I sent an email to the GRPN "customer support line," with the question: "How do I cancel (and close) my Groupon Account?

The response: "You will no longer receive any promotional emails from Groupon. Please note that in the future you may receive transactional emails regarding past or future purchases made though your account and important business announcements that could affect your rights as a customer. You may receive an email if we update our privacy statement or our terms of service."

One can interpret this to mean that they may still count me as a "subscriber" for the purposes of the 143 million, but they won't count me as a subscriber to their daily emails. Gone, but not forgotten….

Misquoting Shakespeare, "I come neither to bury Groupon, nor to praise him. But the email address that Groupon captures lives after them."

[Disclosure: I have no Groupon position. I note that Blag Flag Roach killer comes in both "fragrance free" and "fresh pine scent." Here, I smell a rat.]



 Real interest rates are back near their recent record lows (5 year TIP= negative 1.2%; 10 Year TIP= negative 0.15%); and gold's recent behavior is once again consistent with these facts. Riddle me this, Batman:

If I buy a 5-year TIP at a negative 1.2% real yield, and hold it to maturity, that means I am certain to lose 1.2% of purchasing power over the next five years. BUT: Were I instead to short a 5-year TIP at a negative 1.2% yield, and hold the short to maturity, does that mean I am certain to make 1.2% of purchasing power over the next five years? And, how can BOTH of these statements be false?

Private riddle for The Chair:

What do Galton, Batman, and Robin have in common?

The Riddler's False Notion:

Robin: Holy molars! Am I ever glad I take good care of my teeth!

Batman: True. You owe your life to dental hygiene.

Sushil Kedia writes: 

Logic Riddle is a misnomer for what is truly a contradiction. The presentation has a contradiction. In life, in markets there are no contradictions. Allow me to quote Ayn Rand from the Atlas Shrugged, "If there is a contradiction, check your premise".

Rocky, your logic is based on inflation remaining what it is right now the same also during the maturity and at the point of maturity of the 5 year TIPS! Market is not pricing that! Market is pricing inflation will come down! That's all. Check the premise, there are no contradictions.

Purchasing Power is a good term to help create this contradiction. Purchasing power will be Cash in your hand on day of maturity Divided by (1+inflation)^5 if I take the Annualized realized inflation readings. Realized Inflation readings five years from now will be known only then.

Rocky Humbert responds: 

Dear MisterMeanor:

1. You should check your bloomberg before you check your premise. These bonds are trading above 105 in price (even forgetting about the inflation adjustment).

2. That means it's possible to have not only a negative REAL YIELD but it's also possible to have a negative NOMINAL RETURN! (So much for the risk-less treasury market.

3. Your definition of purchasing power is unusual. Purchasing power has absolutely nothing to do with the cash in your hand. It's WHAT YOU CAN BUY with the cash in your hand. (Stefan — please elucidate this point).

4. Your statement "Market is pricing inflation will come down! That's all. Check the premise, there are no contradictions" is 100% UPSIDE DOWN. There is little justification for locking in a negative 1.2% compounded real yield UNLESS you have no alternative investment that does better. You need an inflation assumption of RISING INFLATION not falling inflation due to the way these seasoned bonds behave.

I reckon, back of the envelope, north of 3.8% compounded CPI…. is required to have these TIPS beat the bullet 5 year … and even then you still lose 1.2% of purchasing power (compounded) per year. If you want to bet on disinflation/deflation, you would short these bonds at 105 with an inflation factor of 226/220 with abandon, and buy 5 year bullet bonds to term.

Batman just ended. The Flintstones are on now.

Charles Pennington writes: 

That's a very nice riddle.

These bonds trade dearly I think because there aren't many other competing foolproof CPI inflation hedges.

Obviously if you short the bonds AND hold the short sale proceeds in cash, you are at risk of losing money. You short $1 million in bonds and hold the $1 million proceeds in cash. The bonds could go up in nominal terms by a factor of ten to $10 million. Meanwhile your short sale proceeds sit there in cash, still just $1 million, and when you cover, you lose $9 million. That's a loss in any terms.

Of course, if you could use your short sale proceeds to buy something that tracks the CPI without the built-in "negative carry" that the TIPS have, then you'd have a perfect arbitrage. But such a thing doesn't exist.

(Does it?)

Tyler Mcclellan comments:

A 1 year bond is four three month bonds.

A three month bond is a treasury bill financeable for cash as legally defined by the government at the rate set by the federal reserve.

If ex ante you knew that rate, let's say it would be zero for the next year, then if the one year note traded at 1 percent, there would be risk free arbitrage in buying the note (because the note is defined as acceptable collateral to get cash without exception at the overnight rate, it is perpetually fungible).

But all of this is true because arbitrage needs a unit that you're left with at the end, say for example cash, to make the calc.

I will not solve the last part of your riddle yet Rocky.

Let me ask, can the fair value of cash, the unit of account in arbitrage, which is merely the desire to lend known resources today for unknown future wants x years from now, change?

I don't want to lend at these rates.

I'd rather just have the money in the bank.

But if you know the money in the bank is guaranteed to earn zero shouldn't you buy the bonds and finance them at zero?

And if you know that the nominal bond is priced on the arbitrage condition above, and you believe that inflation will be three percent,t hen if you short the bond and earn the overnight rate risk free, and buy the tip and pay the over night rate risk free,and you hold these positions to maturity, since they are both fungible for cash, then you are guaranteed to earn the difference between future CPI and the ex ante break-even, which is an unknown variable free to take any value.

If you had an opinion on the future rate of inflation you could express that view only because of the other variable being priced to remove arb.And the riddle you speak of which seems to be, why would you commit ex ante to a negative real return can be answered by saying arbitrage of the other instruments demands that only the break-even and not the real rate is solved for by the buyers and sellers in the tips market.

Then What is the real rate set by? That is a very tricky question. The answer is in the above, but not obviously.

Duncan Coker writes:

I believe selling the 5 year Tip and buying the 5 year bond would do better than 1.2% (anti negative real rate) and would actually capture the inflation rate of around 2%. Empirically if you convert them to zero coupon for calculations then sell the 5 year tip around 105, buy the 5 year bond at 95, this makes for a compounded return of around 2%, 10 profit, holding to maturing. But then again there is a reason I don't trade bonds much.

Michael Cohn comments:

 I think of tips only in term of the real yield. It would take a very unusual set of circumstances to get me excited about investing in a situation where I can earn a negative real return. These bonds, if I recall all have CPI floors built into them so persistent deflation while sapping a bond of its built in inflation accretion can't turn the redemption figure below par. Each bond has a different sensitivity to the built up inflation component depending upon when issued. This is because the bond pays the same real coupon and the principal balance is adjusted by prior CPI (riding on a train so can't look up)

Certainly these bonds are one of the only high quality ways to hedge inflation. There are a number of global ways to do this but France, etc. Have bigger issues.

So what can happen when you short one of these. I wonder for those who can obtain info what the cost to borrow for the short is here. Obviously the overnight reinvestment is not a plus here.

Seems like I should expect to earn the real yield in this case which is a depreciation toward par but what is my short cost?

Tyler McClellan responds:

 I set up my example clearly.

The reason the thirty year bond cannot be arbitraged to short term rates is very simple. There is no way to credibly make the claim that short term rates will be X for thirty years. There is no institution that can impose the stick. I put very little weight on all the other things. Its the fact that short terms rates could be radically different in the future that generates the volatility not the other way around. Long bonds are very convex and thus this is a major reason they should have a lower yield, offsetting the term premium.

Your examples about LTCM and MF Global are meaningless. Their assets were never fungible at 100 percent leverage for the overnight rate. The Fed conducts monetary policy by making cash and bonds of certain maturities exchangeable for each other at certain overnight rates. To compare this to MF global where the bonds are explicitly not instantaneously fungible with cash (euros) is very odd.

Your example about RV strategies in fixed income is a good counterpoint to the limits of arbitrage. I agree that a one year rate 29 years forward is not subject to the same laws of arbitrage as other instruments. This is for a simple reason. The one year rate 29 years forward is not something that is dynamically set in the market by participants trading until equilibrium. It is an artifice of other things that are traded in this manner and thus it "falls out" of other asset prices.

In general arbitrage is the mechanism by which the sum of views in the market derive their equilibrium condition. You have to have a variable that reflects some view for arbitrage to do heavy lifting. I cannot arbitrage a one day interest rate 17.75 years forward for the simple fact that there are no views on that variable and thus it is merely an artifice that arises from the ecology of the market.

As for mingling "real and nominal". You do not understand your own analysis. The market already believes that we will have about 2% inflation and is nonetheless holding cash at 0%. So the accepting of negative real returns ex ante exists in many markets as a necessary fall out of accepting other variable. To say that this comes from the TIPS market is strange. All the tips market does is allow people to have differing views on the future rate of inflation. Everything else is determined by much more liquid (and therefore likely to be subject to arbitrage pricing) markets.

You will get negative real returns (your vaunted guaranteed decline in real wealth (a phrase that I dont understand)) ex ante in either the nominal or the TIPS market. If you reread what you wrote, you will understand this has nothing to do with TIPS.

As for your last question. You already understand the answer rocky. You get more than PAR day one for being short the TIP.

If you

1) take all those proceeds and reinvest them at the fed fund rate at the future path

2) and if inflation is equal to the breakeven-rate

3) then you will lose the real value of the capital lent to you at exactly the same rate that the market says the real value of the capital lent to you must go down ex ante.

Put another way,


1) you must earn the nominal return priced in the market,
2) experience the inflation rate priced into the market,
3) and deposit your funds at the monopoly price set by the FED,

then you are indifferent between the two outcomes and are guaranteed to earn the same negative return. Which is of course why there is a market. All of which i wrote a long time ago as a explanation for why it might make sense to be short tips but if an only if you could tell me why based on your estimate of the above three variables. Any speculation on the real rate is meaningless, it is not a variable one can have a view on outside of the above (if and this is a key assumption, cash money from the fed reserve is the unit of account you wish to sum all the steps across. Its very possible the real term structure of other commodities is different)

Rocky Humbert responds:

I will address your many points more specifically when I have some time. But I will make a very simple observation (which you ignored)….which has to do with the interactions between inflation and tax policy and the zero interest rate boundary problem.

Let's assume a simple Taylor rule and that the fed sets overnight funds at inflation+100 basis points. Let's further assume a marginal tax rate of 30%.

Case I) Let's assume that inflation is running at 5%. Then fed funds is 6%. Then my after-tax nominal return = 0.7x 6% = 4.2% and my after-tax real return is negative 0.8%.

Case II) Let's assume that inflation is 2%. Then fed funds is 3%…and my after-tax nominal return = 0.7×3%= 2.1% and my after-tax real return is positive 0.1%.

Case III) Let's assume that inflation is NEGATIVE 2%. Then fed funds is 0% … and my after-tax nominal return = 0%, but my after-tax real return is positive 2%.

This is a clear example where real after tax returns behave in counter-intuitive ways…. and so the apparent negative return on TIPS might have less to do with inflation expectations per se, and more to do with the tax effects…. (or more succinctly, an investor in Case III above would be willing to buy a tip that has a negative 2% real yield and would be indifferent to case II, where the same TIP has a +100 real yield.) Just a thought

Tyler McClellan writes:

Very true. I once worked with Paul McCulley on the tax implications of same. As you never posed that as a question I didn't address it.

I agree with your points and thing it is a modest contributor the the current equilibrium pricing.

 Philip J. McDonnell writes:

I think one point that has not really been made in this discussion is that TIPS are paid back at the greater of inflation adjusted value or par. This means that they have an implied deflation protector built in.

It is like a deflation put which has intrinsic value in and of itself. In many ways we are in a deflationary environment caused by the great credit bubble unwinding throughout the world economy.

Gary Rogan comments:

I just scanned the riddle discussion. It seems to me that the reason you can't make money shorting TIPS is like the obviously idiotic action of shorting dollars in dollars. Let's say you decide to short a million dollars, and sell it to someone for a million. That's what shorting is, and yet you are in exactly the same situation as you once were.

If TIPs are losing purchasing power against a basket of commodities, but dollars are losing it faster, if you short TIPS you get something that loses purchasing power even faster than TIPS, hence no gain. If you could find a way to get paid for your shorted TIPS with a basket of commodities, and there is high inflation, you can buy them back with fewer commodities, so you make a profit.



 To the tune of "When I was a lad…" from HMS Pinafore.

Sir George:

When I was a lad I ran Quantum.

We traded in the Dollar and the German bund.

Then I bet against the Pound with such great glee

That I made a billion overnight so famously.


He made a billion overnight so famously.

Sir George:

I wiped up the floor with the BOE

And now I have opinions on the whole world scene!


He wiped up the floor with the BOE

And now he has opinions on the whole world scene!

Lord El:

At the IMF I made such a mark

That I went from Smith Barney straight to Harvard Yard.

With some great timing, I quickly left that job,

And now I'm here at PIMCO where we own the bond.


And now he's here at PIMCO where they own the bond.

Lord El:

I got myself to PIMCO so skillfullee

And now I have opinions on the whole world scene!


He got himself to PIMCO so skillfullee

And now he has opinions on the whole world scene!

Sir George and Lord El together:

We give our interviews in expensive suits

And boggle all the doctors at the institutes.

We're working on the Fed and the ECB

And winding up the Germans oh so skillfullee!


They're winding up the Germans oh so skillfullee!

Sir George and Lord El together:

We're winding up the Germans so skillfullee

And talking our own books against the whole world scene!


They're winding up the Germans so skillfullee

And talking their own books against the whole world scene!



In the quest for the truth and the elimination of ballyhoo, one must get through all the BS to find the kernel of truth. Here is a very important glossary of mathematical mistakes that are commonly seen in the popular culture and often repeated as the absolute truth.


It would be an interesting exercise to see what we can add to the list, either in the popular culture arena, or market lore.

 Ralph Vince comments:

 How about (cultural ballyhoo) "After all, we're a very litigious society!" (this is usually accompanied by the reminder of some anonymous woman scalded by coffee at McDonalds being awarded an amount so ghastly that poor McDonalds will have to make up that amount against the rest of us somehow!)

I would posit we are not litigious enough. One need only sit in any municipal court or state appellate court for a couple of hours and see the litany of individuals being hauled before the altars of justice by the financial institutions or the paint manufacturers whose lead was ubiquitous, or any other host of entity vs the individual going on. Truly, I almost NEVER see an individual as plaintiff in one of these unless they are going after another individual. The vast majority of what goes on in the courts WE PAY FOR are actions brought by those who do not pay for these courts, against our neighbors.

Yet, our class action rights are eroded under our noses repeatedly and recently. The only ones in favor of so-called "Tort Reform," are the insurance companies. The medical professionals who think they will financially benefit by this are delusional. The delusion is further propagated to the hoi polloi under the even falser notion that the medical community will share these newfon legislated riches amongst us.

 Rocky Humbert writes:

 After reading this, it's unclear to me whether Ralph is in favor of, or opposed to, tort reform.And, arguably, he's guilty of a bit of cultural ballyhoo here. He writes, "The only ones in favor of so-called "Tort Reform," are the insurance companies."At a macro level, it's not obvious why insurance companies should necessarily support tort reform (or even care about it.) Insurance companies raise premiums to offset the costs of litigation. Their profits (the combined ratio) are the "spread" between premiums earned and the settlements paid.

If the costs of litigation decline, so will premiums — and if there were serious tort reform, it might actually damage insurance companies, since their products would no longer be required!!If there were no tort litigation, insurance companies might go out of business en masse!!! The visible and direct costs of litigation (to which Ralph alludes) are minuscule compared to the invisible costs. The invisible costs include the innovation and investment which are forgone because of the FEAR of litigation; the incalculable dead weight loss; the practice of defensive medicine which wastes resources (and which applies to other industries as well).

"Loser pays litigation costs" combined with allowing third parties to finance and benefit from winning litigation — would be a fine first step towards balancing the scales between plaintiffs and defendants. But to suggest that insurance companies actually want tort reform ignores their raisson d'etre.

 Stefan Jovanovich comments: 

 Ralph omits the largest part of the litigiousness of our society, which I pray will be largely eliminated some day - the criminal justice system. Since misdemeanors rarely go to trial, they will be absent from the municipal court dockets; and state appellate courts are usually not the best venue for criminal appeals (the Feds are usually better) so Ralph may not have had a chance to see how much of the "justice" system is about law and order.

A visit to any Superior Court or Federal District Court would probably change his view; at present, the largest single obstacle to an individual seeking civil damages is that their right to a speedy trial is non-existent.As one defendant put it, "The United States of America versus Alphonse Capone! What kind of odds are those?"

 Ralph Vince responds: 


I'm not an attorney — and I AM a little over-impassioned about the subject, so don't be surprised by my phreneticism here on this subject, ok? I am utterly opposed to this (altogether speciously misnomered) "Tort Reform," idea!

Where you say ". If the costs of litigation decline, so will premiums," I could NOT disagree more. When the Bankruptcy Act of 2005 was passed (presumably, among other things, so that the costs financial institutions were having to suffer as a consequence of personal bankruptcies not be passed along to the rest of the peons like me) did we see credit card interest rates reduce as as result? Did we see banking fees come down? No, the margin gained by such legislation accrued to the banks.

Profits ONLY flow upwards. Those paying down here do not participate in profits. If we did, those $150 running shoes made in Jingalia would only cost us about ten bucks.

The notion of a frivolous lawsuit is something cast in sand, and something the courts can deal with already via sanctions, etc. Just try to get an attorney to take a patently frivolous lawsuit to court — or see what happens if a non-attorney attempts one pro-se. They will be clobbered by the courts.

In fact, I say to the average Joe F. Blow out there, just try to take his NON-frivolous lawsuit to court. Go see how easy that is. Go see what the typical attorney will require of you up front. He is already, effectively blocked from the system, Bleak-Housed out from the very courts his tax dollars pay for. And again, if you take from people their venue for settling disputes in a civil manner, they are then likely to settle them in an uncivil manner. What is wrong with allowing people the venue of settling their disputes?

Our courts are NOT clogged incidentally. These are not a natural resource of finite size. If we need more courts — set em up. More insane judges. No problem. Homer Simpson is a little sick of sitting at that control panel at the nuclear facility, he can sit on on the bench for us.

Finally, when I speak of profits only flowing upwards, I don't mean it with respect to tort reform alone. The notion is integral to the specious arguments we are subject to every day to try to stifle our abilities of thinking critically for ourselves (I am not referring to you personally here, you seem to do so quite well except when it comes to your interactions with women). We hear repeatedly how free trade brings the cost of goods down (taking away US jobs) or how if we don;t have illegals picking our produce that tomato will cost 5 bucks.

Nonsense. Perhaps there is a scenario, but I cannot think of one wherein Joe F. Blow benefits because the cost to producers is reduced legislatively. To do so but taking Joe's right to settle his disputes — against individuals AND entities — away from him, is the real crime.

 Stefan Jovanovich responds:

 Neither Ralph nor I is an attorney, but I am guilty of having been one in California for nearly 4 decades. I stopped being one when the State Bar of California decided that it has absolute jurisdiction over any commercial transaction of my companies simply because I was an officer of the court. What that meant in practical terms was that any business partner or even customer could claim I owed them a fiduciary duty as a lawyer even if our dealings were purely commercial. As W.S. Gilbert put it, "here's a pretty mess". Eddy's Mom and I decided that resignation was the better form of valor. It took us nearly 2 years from the Supreme Court's clerks to decide we really meant it; the last letter we have from them is one suggesting that we might want to reconsider because we would be losing all the member benefits - i.e. access to State Bar of California credit cards and life insurance.

The greatest obstacle to "the average Joe F. Blow" is the current system of pleading; it is archaic to a degree that would astonish Lincoln or any other railroad lawyer of the 19th century. David Dudley Field would not be amused, especially since his reforms were adopted in Britain with much greater success than they have been in the United States.


http://en.wikisource.org/wiki/The_Mikado/Here 's_a_how-de-do

 Ralph Vince writes:

Stefan, we evidently live in different universes. I routinely get called to jury duty in Cuyahoga County, Ohio, losing a week every two years. This is a court for monkeys.I have been through that system on the wrong side. Ex-parte rulings, convicted judges, FBI swarming, lower court transcripts LOST going to the appellate courts, corrupt clerk of courts, corrupt sherrif's dept., (all have plead guilty), routine over-charging of defendatns hoping for the routine, gullible jury, etc.

I will tell you what I tell the prosecutor in voie dire. "There's no way in hell you will get me to convict my fellow man of anything. Bring in the DNA evidence, the video, of this child-molesting cop killer. I wont convict anyone here in monkey court."Then….the resultant litany of threats levied upon me. I do my week and I go home. At least where I am here, in this universe, there is NOTHING WHATSOEVER about "Justice."



A good friend of my daughter asked me for advice on the best way of winning a man's heart on a first or second date.

I told her to use the Jennifer Flowers Gambit (the surprise erotic interlude when stopped on a drawbridge) or the Lee Raziwell gambit (listen intently to everything he says and ask about his expansive greatness), or the Leona Helmseley Gambit (pretend that there is another suiter waiting for you that evening so you have to leave at 11 pm as nothing inflames a man more than competition) but I feel that others here are more sapient in this area and others and I  would appreciate your insights.

An Anonymous  writer comments: 

My conclusion is that the number one sign of a good long term relationship with a woman is based on the quality of her relationship with her father.

I am basically engaged to be engaged with a woman, and the emotional commitment on my end happened after a dinner where much of the conversation was her describing her relationship with her dad, and how he helped her with her math and physics homework, and then they would walk to the store for a treat, etc, and just the general way that her face lights up when talking about her dad.

So anyway, that's what worked on me. Perhaps she should try it.

/my 2 cents

 Gary Rogan responds: 

This sounds like good advice and the father thing is pretty well-known, but I'm just amazed that you have made some conclusions about long-term relationships after having dated women in around ten countries over two years. 

 Pitt T. Maner III comments:

Well then there are some who base decisions and strategies on a few minutes of observation. The HFT of the dating scene—your most important impression—the first 3 seconds!

 José Bonamigo shares:

From Forbes Magazine:

The mating practices of human beings offer a reason for thinking beauty and intelligence might come in the same package. The logic of this covariance was explained to me years ago by a Harvard psychologist who had been reading a history of the Rothschild family. His mischievous but astute observation: The family founders, in 18th-century Frankfurt, were supremely ugly, but several generations later, after successive marriages to supremely beautiful women, the men in the family were indistinguishable from movie stars. The Rothschild effect, as you could call it, is well established in sociology research: Men everywhere want to marry beautiful women, and women everywhere want socially dominant (i.e., intelligent) husbands. When competent men marry pretty women, the couple tends to have children above average in both competence and looks. Covariance is everywhere. At the other end of the scale, too, there is a connection between looks and smarts. According to Erdal Tekin, a research fellow at the National Bureau of Economic Research, low attractiveness ratings predict lower test scores and a greater likelihood of criminal activity.


Best regards from Brazil


 Gary Rogan inquires:

 After a while this degenerates into just socially dominant and not necessarily intelligent men. This modified effect can be readily seen in the Charles/Diana coupling, at least in the older Prince William. Of course how did Charles come about if the theory is correct? 

 Stefan Jovanovich comments:

Trusting Forbes magazine on stories of family history is more than a bit like buying a Degas ballerina sculpture from Toby Esterhase's Soho gallery. The notion that the 5 founding brothers were "supremely ugly" is part of the standard viciousness of the portrait of the Jewish banker as Shylock that survives to this day. There is no evidence of any special ugliness in their portraits.






The Rothschilds married money - the Ephrussis, the Guggenheims and the Oppenheims. One suspects that, as in most things, the question of beauty was left to the beholders.

In the 19th century the great minds were certain that criminal behavior could be predicted by examining the bumps on people's heads. It should hardly be surprising that we are back to estimating future viciousness by measuring the asymmetry of human features.



 Jim Wildman comments:

I would say that she can't on the first or second date. Winning someone's heart in a deep, lasting way, takes time. Anyone can fake interest for a while. What about when she is sick? When he is grumpy? When life intrudes on the lovers? Are their hearts still connected?

Granted, I haven't dated anyone for over 3 decades, but I have watched 3 daughters struggle with guys..

 Marion Dreyfus questions:

My question:

And some may find this offensive–

Does the ubiquity of pornography, specifically for the ones who purvey it day and night (I understand that equals a LOT of the male population), make falling in love with and making love with real women –including the physical aspects of affection–much more difficult than it used to be before every late-night channel offered a raft of such virtual substitutes for real relationships?

Rocky Humbert comments: 


(a) Korean BBQ. Nothing excites a man more than watching a lady handle chopsticks amidst an open flame. Alas, times change. Woo Lae Oak has gone out of business. http://nymag.com/listings/restaurant/woo-lae-oak/

(b) Take whatever advice a parent provides, and do exactly the opposite.

(c) Que Sera, Sera

(d) http://www.datingish.com/695368212/how-to-win-your-guys-heart/

Score 1 point for picking the right answer. Deduct 1/4 point for picking the wrong answer.

 Bill Rafter writes:

When you are fishing, you need to match the bait to the fish. Striped Bass like clams, but Bluefish and Flounder will eat anything, so you might as well use bunker. Think of it this way: a young lady would wear one kind of dress on a date and a different dress when meeting the young man’s mother.

If a man is 25 or younger he is probably only interested in one thing and he is not looking for lasting qualities. Not that there’s anything wrong with that. The interlude on the drawbridge is something he will never forget. A woman with an interesting job is attractive as long as it does not threaten him.

At some time the man starts to look for additional qualities in a mate. Maybe because of pressure from his parents he starts to think of having a family. Then he starts looking for someone who might be a good wife and mother. A schoolteacher is attractive in this case.

In foods, women are attracted to chocolate whereas men are attracted to cinnamon.

 Tim Melvin writes:

I told my daughter in response to a similar question that anything won so easily or quickly likely had little value in the long run. She should be herself at all times and the man who liked and fell for that woman was likely a better match. I taught all the tricks her old man had used over the years to win fair lady specifically so she could avoid them.

 Jose Bonamigo responds:

My intention with the Forbes extract was not to present solid evidence, just a likely explanation for couples like Charles and Diana (a common combination), as Gary pointed out.

Looking at the portraits it seemed to me they were "regular" uglies (just kidding)…

For a more scientific approach, at least in the physical part of dating:





1. The hft boys play exactly the same role that insider traders do. They get there first with better information. They take out many billions of dollars from the market. The argument exists that insider trading and hft is good because they move prices to where they should be faster. I don't buy it. The hft compete against those with short term horizons as do the insider traders. There is only a certain amount of chips to go around. The special hft and insider traders take those chips away and make it impossible for the average person to profit and for everyone else to get a fair deal. This stuff about liquidity provision is a canard. Yes, they get in and out ahead of you. They provide liquidity to other people, not the short term traders under consideration.

2. The bond stock ratio has moved about 10 percentage points back to where it should have been from the exacerbated levels it was at with bonds [futures] at 144 and stocks [S&P futures] at 1100.

3. The holidays are the worst time to trade as the markets move to create margin calls and wipeouts only to reverse as soon as the normal volume gets back.

4. The snakes have two main ways of killing. One is by constriction like the boa and the other by sharp fast thrusts from out of the blue like the viper. Which way do you generally die on your trades? A visit to the Bronx Zoo reptile house might be in order.

5. I loved when the reason given for the crony bank to receive 100% of the amount due on its trade with the insurance company was that the French banks insisted on 100% payment or else they would have violated a mandate. I am reminded of that by the Fed minutes which say that the reason that the Fed can't lower the 1/4% they pay on reserves is that it would upset the equilibrium of monetary affairs. The entire minutes seem like an exercise in euphemism and reaching out to the public to seem omniscient, judicious, equipoised, and at the same time benevolent. Much better to think of it as Nock did I think —- flagitious et al.

6. The market went from 1200 to 1000 without a break and then back again in true Lobogola fashion. When will a theory of lobogola moves be developed that is useful and predictive.

7. All the very predictive patterns of 2008 didn't work in 2009, and all the predictive patterns of 2008-2010 didn't work in 2011 until the "terrible" month of October.

8. My terminals like to go blank and disconnected so that I am rudderless whenever I have left in a big order that must be monitored on a second by second basis. How does it know ?

9. The intrade prob of a Obama win is steady at 48% and the moves above and below the magic number of 50 one predicts will correspond inversely to moves above and beyond the magic number of 1200 in sp.

10. In addition to Patrick O Brian and Frederick Forsyth, David Mamet seems to be the only writer that appreciates business as our engine for improvements in material well being and personal freedom. Along those lines, it was amazing to see that Moneyball didn't contain all the hateful, supercilious, and envious stuff about the rich that characterizes all else of his work. One must credit Billy Beane as a great manager and human being. Who else do you know that gave up a 10 million increase in salary because he wanted to be with his family. Or could it be that he objected to trend following?

and just one more:

11. The sensibilities of those buying the refunding are always hurt by even a momentary loss, and like nite precedes the day the flexions let all the bad news out before the auctions so these sensibilities will not be offended. I always think of Enoch Powell railing against a price fixing board who were similarly offended by a recipe for Bernaise sauce that they didn't feel justified an increase during the English march to agrarianism and the EC.

Rocky Humbert comments: 

Firstly, I would like to compliment The Chair on his recent 10 thoughts list, which had some genuine pearls of wisdom. However, I cannot help but note that there was an "11" as well — which, along with his comment below is seemingly written in the key of D minor. Nigel Tufnel would note, "D minor is the saddest of all keys. People weep instantly when they hear it, and I don't know why." I think I know why. Because The Chair's writing (and the key of D-minor) triggers receptors in the anterior cingulate cortex, yet it does not pass muster from a rational analysis of the facts and history.

Back in the 1970's if you wanted to buy and sell 100 or 10,000 shares of IBM, you paid (fixed) commissions and bid/ask that amounted to 1% (or more!). And a great business (for the NYSE specialists) it was.Back in the 1980's and 1990's if you had a membership on the MERC or the CME, and you stood in the pit, you earned the bid/ask spread, and front-run your customers and made a great living sucking the blood out of your customers. (Until the occasional customer blew up and bankrupted you.) And if you were willing to make a tighter bid/ask in the pit, you could take all of the business/flow that your heart desired.And now, the game has changed again, and the competition grows fiercer to earn the bid/ask spread, and it's delicious irony that a libertarian claims "foul" because someone has innovated and made his approach obsolete. Somewhere missing from this is the obvious point is that the raison d'etre for capital markets is not as a gambling casino — but rather to move capital to where it's most needed.

Hence, if I want to buy a quantity (Q) of an asset at a price of P, I will bid P for Q shares — and if there is a willing seller of enough quantity at P, I will get filled. Whether it's on the bid or the offer should be entirely irrelevant if the bid/ask is tight. What matters is buying Q at P. Remember that the HFT/market maker/specialist needs to find a home for Q — and if he's paid P.001, and I (and my breathren) stay firm at P, we will get filled. And the fact that the HFT stepped in front of me is completely and totally irrelevant UNLESS I fold, and play his game, and lift the offer.

The HFT people make money ONLY because other market participants choose to allow them to do so. If the real money in the markets go on strike and never pay the offer or hit the bid, the HFT people don't make a dime. (Duh.) Yet, I am quite content to pay that extra .005 cents if and when the offer is P and the size is Q. The same libertarian who claims foul about how technology has given an "unfair" advantage to others and left him wanting, would be advised to consider whether the game is rigged or whether he's still driving a Studebaker and was just passed by a McLaren F1. When I see tearful laments in the future, I'll spare the verbosity and just type: D-Minor. 



 One notes that since the current Europe-is-a-disaster and the USA is-going-into-recession meme took hold, there have been several rallies — the magnitude of each has approximated a typical year's S&P gains. Each one of these rallies persisted for approximately six to eight trading days. Using the same rubric, today is day seven. Primarily because I only have ten fingers with which to count, I predict that this rally will go to 11. (Ok, I'm joking. The real reason for my prediction is the insights and inspiration that I've gleaned from This Is Spinal Tap.

Victor Niederhoffer writes: 

The sensibilities of those buying the refunding are always hurt by even a
momentary loss, and like night the day the flexions let all the bad
news out before the auctions so these sensibilities will not be
offended. I always think of Enoch Powell railing against a price fixing
board whose sensibilities were offended by a recipe for Bearnaise sauce
that they didn't feel justified an increase during the English march to
agrarianism and the EC.



The stock market today [Thursday 2011/10/06] is gunning it into the close ahead of a good jobs number tomorrow?

James Lackey responds:

I dunno Mr Ken, and I don't care about such things. The number will be produced by the random news generator at best or rigged by The Man at worst… but it's not a meal for a lifetime… Please do not send such comments! Thank you.

 Anatoly Veltman writes:

Lack, this is not about the number. It's about expectation, based on market moves ahead of the number. The lesson to me is calendar-based trading - where money is made because the number is scheduled. Not because you know the number. Is there lesson in that?

Rocky Humbert issues a challenge:

You guys want a meal for a lifetime? How about this meal for the day:

Here are the most likely NFP numbers:

A) between -100k and -50k
B) between -50k and 0
C) between 0 and +50k
D) between 50k and 100k

The person who best assigns a 4pm SPX closing price to each of these 4 choices — and gets the answer right within 10 spx points — will receive a dinner voucher for 2 at my favorite restaurant. (That is, an acceptable submission would look like A=1102, B=1120, C=1160, D=1190.)

The purpose of this challenge is to demonstrate that EVEN IF you knew the NFP, you still won't be able to accurately predict the market's reaction (unless it's a complete outlier).

The judge's decision is final.

 Sushil Kedia responds:

Without any intent to contest the judges decision, my two humble cents:

A reflexivist, who often is a winner in the markets, may need to put up an answer most of the time, as E = 1155, irrespective of where the NFP numbers come.

If the judge so wishes that it may be proper for a complete illustration on the futility of information being beyond markets, may consider providing such a fifth choice. Up to the judge.

The unemployment number is released at 8:30am Eastern Time on Friday. Rocky Humbert responds:

Mr. Collins: One notes that the NFP headline number was 103k — which was above the choice D range (+50k to +100k). The judges are conferring as to whether this constitutes a scratch. They will announce their decision forthwith.

Nonetheless, and for good order, here were the entries in the contest:

Anatoly: SP will drop 90 points

Jonathan Bower: 1125 1125 1125 1125

Mr. Rogan: 1130 1140 1150 1170

Tim Collins: 1099.22 1119.66 1131.24 1149.86

Sushil Kedia: An "unlawful entry" of 1155 in all cases. (Because of his "unlawful entry," from this day forward, Sushil shall be known as Mister Meanor.).

Alex Forshaw: 1155 - 25= 1130; 1155 - 35= 1120 ; 1155 - 45 = 1110; 1155- 55 = 1100

Rocky Humbert writes further: 

I am penning this at 3:43pm — and due to the impending holiday, I need to leave early and hence will not know the final challenge result for about 30 hours. The point of this challenge was to convincingly demonstrate that EVEN IF one knows a macro data point in advance, it's frequently impossible to know Mr. Market's reaction. The signal-to-noise ratio is simply too low. Whether or not my primary point is accepted, (as of this moment) it looks like I've also convincingly demonstrated an equally important truth: "Even a blind squirrel finds a nut." (Or more accurately, it looks like Mr. Rogan has won the challenge.) But I cannot depart for my day of atonement on that note. Tomorrow (Yom Kippur) ends the Ten Days of Repentance (Aseret Y'mai Teshuvah).

 It is a requirement that during this period, one must make amends to those whom we may have hurt in the past; and to ask for and to grant forgiveness to those who ask for it. It is not sufficient to ask God for his forgiveness. One must ask for the forgiveness from one's fellow man. Mindful of the fact that I've dished out some harsh words over the past year to some of you — and I apologize for that — and I hope that you forgive me. It's especially poignant that Mr. Rogan appears to be the winner of the challenge, as he has been the target of some of my more vituperative slings — I apologize to you Mr. Rogan — and I'll try to do better in the year, 5772.

 Gary Rogan responds:

 Hey Rocky, it appears that I may not have won after all, but I appreciate your apology although no offense had been taken. You made me realize how important it is to take the Prozac regularly instead of at random intervals and varying amounts so it's all good. Happy atonement!

 Rocky Humbert responds:

I have re-emerged from atonement and post-atonement eating to find an envelope with the judge's FINAL decision. The winner is: Mr. Tim Collins who was within 6 points. The biggest loser is Sushil (aka Mister Meanor), who almost perfectly nailed the closing price, but because he was more interested in sounding smart than being right, he is guilty of a misdemeanor charge of "unlawful entry" s and walks away empty-handed. There is a meal for a lifetime here too. If Mr. Tim will mail me his US Mail address (off-site), his dinner voucher for 2 at my favorite restaurant will be posted forthwith. Thank you to all for participating and demonstrating many useful points. 



There's always a bull market somewhere. Right now it's seemingly in long bonds and the dollar. Both of which elicit howls of skepticism from the muffin-top crowd. As for the stock market, I noticed that the sagacious British stock market pundits posted signs throughout the London Underground, warning investors to: "Mind the gap."

[Definition of a muffin top: A person, or group of people who, consistently and unprofitably, call tops in markets. After getting their faces schmushed multiple times, their countenances bear an uncanny resemblance to a blueberry muffin top; and their demeanor bears a resemblance to pickled herring (in wine sauce. Not cream sauce).]



Unless I am mistaken, the "twist" is not duration neutral; whereas
real bond investors tend to be duration sensitive. That is, selling $1
billion at the short end and buying $1 billion past the 10 year is
roughly equivalent to putting 7x the amount of real investor money into
the market. This is a point that has not been widely discussed — and
may explain why the bearish effects at the short end will be dwarfed by
the bullish effects at the long end.

Alston Mabry replies:

If 'duration' is the sensitivity of price to a change in 100 basis points of yield, and the Fed sells 2's and buys long bonds in equal amounts, and the Fed is effectively increasing their portfolio duration, does it follow necessarily that the Fed is putting around 7x more money into the bond market?

Doesn't it matter how the rest of the market participants decide to adjust to what the Fed is doing? What if long rates go up? I'm not saying they will, just wondering. Once QE2 was announced, the 5-year rate went up and stayed up until the end of QE2 was in sight. Now the Fed was actually printing money with QE2, and so the rise in the 5-year rate was coincident with a huge run-up in the stock and commodities markets. But it wasn't unreasonable to predict that QE2, aimed at 5-6 year maturity, would push the 5 year yield down.

Paolo Pezzutti writes:

For those who want to try and find quantitative relationships between Fed intervention and market moves…this operation schedule may be useful.

Bud Conrad writes: 

I still wonder how they sell off the short end and maintain ZIRP. Something will have to give, and I expect it to be the selling of short term. 



 Jamie Dimon on his last quarter earnings conference call said: "We maintained our fortress balance sheet, ending the second quarter with Tier 1 capital ratio of 10.1% JPM corporate debt rating: AA-/A"

Today's GM press release announcing a new labor contract read: "Importantly [the contract] preserves GM's fortress balance sheet."

GM corporate debt rating: B/BB-

If one only looks at the debt on the GM balance sheet, things look ok (about $10 Billion in LT Debt).

However this ignores the fact that GM has a $31 Billion (and growing) underfunded pension liability. Unlike most of the debt which was extinguished, this monster pension liability survived their bankruptcy reorganization.

Not all fortresses are created equal.



 The FT (via Bloomberg) is reporting that industrial giant Siemens withdrew 500 million Euros from a French bank and put it on deposit with the ECB. The story says that they now have between 4 billion and 6 billion euros on one-week deposit at the ECB. (They were able to do this because they have a "banking license.")

Putting aside the obvious troubling implications, this story raises interesting theoretical questions regarding the conduct of monetary policy, and practical questions regarding the role of commercial banks in a dysfunctional financial system. Macroeconomics final exam question: What is the monetary effect of funds being withdrawn from commercial banks and placed on deposit with a Central Bank, while the same Central Bank simultaneously provides unlimited liquidity to the commercial banks to finance those very withdrawals?

The image of a hamster on a treadmill comes to mind. Here's the link.

Rudolf Hauser replies:

 This is an interesting question. The first question is the impact on the money supply. If Siemens were actually a bank and its deposit at the ECB represented bank funds, they would be excess reserves. The commercial bank would get a corresponding amount of reserves because of an ECB loan. If the commercial bank lends out the money or invests it, it would result in a corresponding increase in deposits held by others. In that case money would be unchanged. But if the commercial bank having raised the funds by selling assets or reducing outstanding loans decides to keep those ECB loans as excess reserves, money as measured would be reduced. But while Siemens may have a banking license, in practice I assume those of liquidity reserves of an industrial company to be used for its own purposes.

The idea behind money measurement is to view balances in the hands of those who might be influenced to make purchases of goods, services or securities with those funds, namely consumers and businesses other than banks. So while the Siemens deposit might not be counted in the traditional M1 type definition, for practical analytical purposes, it probably should be counted. In that case, if the commercial bank does not keep the reserves it gets from the ECB but relends or reinvests them, de facto if not de jure money supply would be increased. In that case the reserves Siemens keeps at the ECB would practically be the same as if it kept those balances unused at a commercial bank.

Whether the commercial bank is better or worse off depends on what it has to pay for its funds- the amount charged by the ECB versus that it effectively paid Siemens for those same funds. Whether the commercial bank is less worthy as a risk depends on its assets not whether the liability is to the ECB or to Siemens. In a way it was greater when it was to Siemens as Siemens could withdraw those funds forcing the bankt to sell assets at distressed prices whereas the ECB has no reason to do that as long as it still guarantees the commercial bank. If the commercial bank liquidated not so great assets to accommodate the withdrawal and keeps the funds from the ECB as excess reserves, it is actually safer than before.

Stefan Jovanovich comments:

 "Out" is the key word. In fact, the First Bank of the United States lent most of its money "in" - to the Treasury - during its early years. By 1796 60% of the bank's loan balances were to the Treasury. The Treasury bailed itself out by selling its 20% interest in the bank to private investors and using the proceeds to pay off some of its debt. By 1802 the bank was entirely in private hands. All the histories of the First Bank discuss how successful it was in acting as a central bank - like the Bank of England - but its actual history was very different. The bank acted mostly as a broker, not a taker of deposits; and its activities never included being a lender of last resort. When William Duer got into trouble in 1792, the bank did nothing to reassure the markets or support Duer; his collapse produced the first numbered "Panic" in U.S. history - the Panic of 1792. Hamilton, as Treasury Secretary, did intervene in the markets but he did it to reassure the European investors in Treasury debt, not to "save" the economy. When Jefferson decided to take Napoleon's offer, the First Bank was in position to "fund" the purchase. Its only involvement was to be the U.S. correspondent for Barings and Hope & Co. who were the actual underwriters.

The mechanics of the deal are representative. In 1803 Francis Barings got the French to agree upon a price of FF80 million (the equivalent of US$15 million). FF20 million (US$3.75 million) would be paid by having the U.S. Treasury assume the French government debts owed to US citizens. The balance - FF60 million (S$11.25 million) - would be paid in U.S. Treasury bonds - the first every issued by the U.S. Federal government. The bonds had a 6% coupon with interest payable half yearly installments in Amsterdam, London or Paris, with an exchange rate of 4 shillings 6 pence (22.5p) to the dollar and were to be redeemed between 1819 and 1822. Barings and Hope & Co. agreed to buy the bonds for FF52 million - a 13.3 per cent discount - with payment to be made in installments of FF6m up front and 23 monthly installments each of FF2m. A year later Napoleon - who was always desperate for money - pressed for immediate payment. The full balance was paid off by Barings and Hope & Co. in April 1804 at the cost of an additional FF1.65m commission. Most of the actual money for the loan was raised by Barings and Hope & Co. in Holland; their contemporaries said that "Francis Barings owned the Dutch market."

It is doubtful that any real comparisons can be made with either the First or the Second Bank of the United States and modern central banks. The ECB and the Fed hold gold as part of their reserves, but, unlike the U.S. Banks, they have no obligation to pay it out. Their paper is legal tender simply because they say it is, not because it is payable in Coin. And that one fact makes all the difference no matter what the speed of modern money.




Last year at this time, I theorized that Utility Stocks "UTES" might be a better investment than TIPS (inflation-linked bonds). It's time for an update.

(Disclosure: I have a small investment position in utility stocks.)

Since 10/8/10 … when I posted the idea: TIP (tip etf): Total return (coupons reinvested): 7.75%VPU (vanguard UTE etf): 10.85%SPY (S&P etf): 5.72%AGG (Total bond market etf): 4.20%

Source: Bloomberg.

So as James Brown would say: "I feel good."

What's surprising to me is that UTES beat both the AGG and the SPY! I would be very surprised if the UTES continue to beat both the AGG and the SPY over the next 12 months, but I would not be surprised if they continue to beat the TIPS. Contrary opinions are always welcome. But my inclination is to continue to sit on my hands — because most of the time that's the right investment decision. AND it's cheaper than wearing mittens.

From that email exchange:

I thank the speclisters who kindly pointed out (offlist):

1) During the 1930's depression, utility stocks held their dividends… And people who paid their bills saw higher rates to compensate for the people who did not pay their bills.

2) The TIPS will return par at maturity — there is no similar guarantee for utility stocks.

3) Because TIPS are currently trading at a premium to par, outright deflation can be injurious to their returns.

4) Utilities are taxed as corporations — and are also subject to the risks of cap&trade etc. However, the state rate-setting boards may/may-not compensate for the increased costs of cap&trade with rate hikes.

The daily and weekly statistical correlations between utes and tips are quite poor. But as the attached chart shows, they do seem to move in the same directions.

Perhaps foolishly, I'm least worried about technological innovation — because the primary motivation for investing in a regulated utility is that they set rates based on a statutory ROE….



 The ECB has announced a dollar-based liquidity operation to last through the end of this year so that European banks can access dollar liquidity that they have been shut-out of by the market.

Rocky Humbert writes:

Those of us who follow the US$ money market fund holdings see that the big European banks have gotten shut out of the US$ funding market. While they already had effectively unlimited liquidity from the ECB in Euros, they needed a counterparty to swap those Euros into Dollars. No private counterparty was willing to do this in size, so the Fed and the ECB engaged in this swap. If the collateral that the European banks post to the ECB have declined in value when the swap comes off, the ECB will still have to make the Fed whole — and the only way to do that is to print more Euros, sell them, and buy Dollars. That's not bullish IMHO.

The only people who are stunned are overleveraged idiots whose positions blow up on a move than is less than 1 ATR. My currency view (which may be proven wrong) is predicated on fundamentals AND technicals. The fundamentals haven't changed. And the short-term technicals haven't either. (yet). Like I wrote before, check in with me in a few months.

Gary Rogan writes: 

They are trying to fix the whole world by monetary manipulation! We have a much more tightly coupled system, and it's bursting at the seams. You can of course stick with the optimism, and now that it's becoming clear BHO is unlikely to get reelected this may be the right course, but I believe we will get wherever we are going sooner if they somehow resolve the European mess once an for all, whatever current pain is involved instead of being so ingenious about pushing the can down the road.

Stefan Jovanovich writes: 

I agree with your diagnosis, Gary. But, the Congress and the President and the elites they usually represent have been doing monetary manipulation and other things to fix the world ever since the Republic was founded. I make no bets on BHO's re-election. Incumbent Presidents have a massive advantage; it takes extraordinary circumstances for them to be voted out of office. Without Ross Perot Bush I would have been re-elected; without the Iran hostage crisis and his attempt to become First School Teacher/Preacher of the nation even Carter would have had a better than even chance. (Look up the polls for September 1980, and you will see how likely it seemed that he would earn a second term.) I place my confidence in Hamilton's Curse/Treasure. Our first Secretary of the Treasury's theory was that the Federal government could succeed if we followed the British model and had a "City" interest that insisted the national Treasury not be raided so frequently that the currency would be trashed. That was true for much of the country's history; our greatest failures as a nation have come when the "City" interest became more interested in working the government (the cotton land boom, for example) than in securing safe returns for the money the Treasury already owed them. We now have a revival of that traditional "City" interest, not on Wall Street but on Main Street. The Baby Boomer present and prospective Social Security recipients represent the largest group of U.S. IOU holders ever assembled. Their interest will supersede all others, and the House of Representatives will vote that interest. How can we geezers lose when everyone agrees that you should not "scare" the seniors by suggesting their claims are anything less than secure?



 1. An appreciative shout-out to the sympathetic specs who checked in with me during the recent hurricane. I'm happy to report that neither the family nor our two genetically optimized felines suffered any bodily harm. The experience, however, was a "refresher" course in fluid mechanics, and more specifically, the awesome power of Hydrostatic Pressure. Like many in the Northeast, we lost electricity for an extended period of time. Fortunately, my prescient wife (who oversaw the construction of her corporate headquarters a decade ago) designed her HQ building to not only maintain the utmost Feng Shui, but also survive a 1 megaton blast (and remain fully functional until the fallout cleared) — hence my business activities continued uninterrupted while sitting in one of her "work rooms." It was also fortunate that my wife spent the entire period traveling out-of-state, so she did not have the opportunity to remind me that I had vowed to install a 200A Transfer Switch and diesel generator at our home some years ago. She saved that reminder for her return. (Obscure pun for those who haven't mastered Chinese from reading fortune cookies): Feng Shui literally translates as "wind-water" in English.

I am SHOCKED, just SHOCKED that the highly intelligent members of this forum have mostly refrained from extensive discussion of the Swiss National Bank's peg decision. (Disclosure: I had no CHF position prior to the news as my Purchasing Power Parity rules prevented me from staying with that trend.) I submit that this has all of the elements that makes ever-changing cycles ever-changing. I also submit that, despite my complete antipathy towards the Chair's embracement of so-called Flexionism ("can you say Military-Industrial Complex?"), that the SNB's Hildebrand (a former Louis Bacon protege/employee) should get the Flexion Of The Week award. Leaving the economic discussion for the next bullet point, his play yesterday made Mr. Soros's Bank of England trade look like a piker. I reckon Hildebrand made about $25 Billion yesterday. Here's his flexionic bio.

3. As for the CHF peg, I think that this deserves some serious discussion and contemplation — as it may be (a) a game-changer for Europe; (b) a harbinger of the next step in Central Bank policies; (c) arguably a much bolder/riskier move than everything which we've seen from the Fed. Just imagine what you all would be saying if, instead of the Fed buying FNMA/FRE paper or various other securities backed by US-based real estate, the Fed committed to UNLIMITED purchases of Euro currency??

Here are some questions for you-all to think about:

a) What are the similarities and differences between the Swiss situation and the Japanese situation?

b) Will the peg hold? And if it does, will the Japanese try it? What about the Brazilians? If the peg doesn't hold, will the Swiss really buy "unlimited" amounts of Euros?

c) Are we on the cusp of a new Bretton Woods accord?

d) Should this news be bullish or bearish for gold? And why?

e) What does this mean for Switzerland's trading partners? If other countries adopt similar regime changes, what does this do to global trade? For stock markets?

f) This is the FIRST NEW CURRENCY PEG IN 30 YEARS! (The world had been going in the opposite direction — with China slowly moving towards a floating currency.) Is this a fluke? Or if the uber-righteous Swiss say it's ok to peg, why won't everyone else peg too? Is this perhaps a harbinger of exchange controls?

g) Must this be inflationary? If the Swiss print tons of cash to hold their currency below 120, they will be buying more Euros (and by relationship more Dollars) at prices that are still extreme based on PPP. Why should that cause inflation? The Swiss economy looks more like Japan than any other right now.

h) The Swiss stock market rose 4% yesterday (while other European markets plunged). Should one buy Swiss stocks now? (Even though the currency remains horribly overvalued.)

i) Switzerland is the world' oldest continuous Democracy; and is a direct Democracy. (Swiss referendums include the most mundane topics.) Excluding the non-Democracies, they are also in the top 10 GDP's in the world. Hence, is it appropriate to dismiss this as a footnote that is irrelevant to your "counting." Shouldn't one be asking whether this is a REALLY BIG DEAL? And whether something very important cyclical/structural changes are afoot. Did Switzerland just become part of the Euro zone??? (Note that there have been quite a few calls for Hillebrand's resignation. How does one say Ron Paul in Schweiss-Deutsch?)

4. As everyone knows, I have no clue where market prices will be next week or next month. However, my models (which have served me well over the years) now suggest that the most probable result is that we'll have a compounded high single digit return in the broad US stock market over the next 3-5 years — absent something that is exogenous. This isn't particularly exciting, until one considers what treasury bonds yield. Hence I am an occasional but persistent nibbler of stocks at these prices, torn between the realization that stocks could drop a lot more; and that my excess liquidity (i.e. cash) is losing value every day.

5. There's a famous old advertisement, "They Laughed When I Sat Down At The Piano … But When I Started to Play!". See l I use a slightly different version: "They Laughed When I Sat Down At The Piano … I didn't know someone had pulled the stool away!"This relates to my less-than-glorious exit in HPQ. For those who took the other side, congratulations: you made a couple of points as should happen more than 90% of the time. I will observe that it has now traded well through my exit price. So as Mr. Seykota is fond of saying: "Everyone gets what they want out of the markets." In my case, I got what I wanted out of the market, which was to be out of the market.



 My suggestion [for understanding market inter-relations] is to set markets against each other and then look at how they react to a common metric. What you will find is that such an exercise yields valuable timing information. What many perceive as the most difficult part (choosing the metric) is often nothing to worry about. That is, almost all of them work, such that the news of markets turning is writ large across the landscape.

The first consideration however is to compile the various markets as assets in which to invest. That is, instead of using yields, one must use prices as it is prices by which they compete. The best trick I can pass on is for the game theorist to start by looking longer term and then shorten up. Think years and quarters rather than intraday.There's more if there is any interest.

Rocky Humbert writes: 

One notes that "real" interest rates have backed up about 40 bp in the past week, and gold is responding in kind. Eddy Elfenbein is one of several people who have postulated a relationship between Gold Prices, Real Interest Rates, and Gibson's Paradox. Correlation is not causation of course — but his model has been working brilliantly. Read about it here.

It's also a good moment to brush up on Gibson's Paradox which notes that interest rates follow the price level and not inflation (when operating on a gold standard). According to what I've read about Gibson (which is very little) , everyone from Larry Summers to Milton Friedman accept the existence of Gibson's Paradox … but noone seems to agree on the underlying theory.

Just a quick and dirty note: Eddy Elfenbein's model says that for every -1% (annual) move in real interest rates, gold compounds upwards by 8% (annual). So back of the envelope, a 50 basis point rise in real yields "should" clip gold by 4 or 5 percent or so … and amazingly that's what happening. Now … all I need to do is PREDICT where real interest rates will be next week…



People are lining up in Wesport, CT to sell gold coins, according to a report on Seeking Alpha .

Has anyone ever reliably made profits from bubbles? If so, their existence can be prospectively determined, if not there is no clear answer. It's true that there may be people who know a bubble with 100% certainty, but they don't know where they are in the cycle so they are too worried about shorting them. This is pretty morally equivalent to having no idea about the existence of a bubble, although not quite. I'd say if someone can reliably predict that within a "reasonable" time the bubble will deflate below the current level, and are willing to bet on that, they "know" the bubble exists.

Jeff Watson writes: 

Look at the 1980s Hunt Brothers silver debacle. Despite the big move in silver, I never knew anyone that made a boatload of money off of that huge move. I heard lots of tales of people getting rich off the silver market, pyramiding $5,000 into millions, but those people were always friends of friends twice removed, and nobody in my clearing firm, none of my buddies ever nailed silver. I suspect those people who got rich off of the silver market are as elusive or mythical as the Yeti. I also suspect that if you were long that silver market with a $5,000 account that you would have stood a better than even chance going bust.

Rocky Humbert comments: 

The Hunt Brothers episode was a corner in an overleveraged market. I'd argue that the gold story today is totally different. Importantly, it's not a leverage-fed, euphoric or happy bull market. It's a funereal bull market. Because if gold is right, and it keeps going and going and going (?5,000? ?10,000 ?20,000 +++) all of one's paper assets will be worth what they are printed on, and the Chair will find out exactly what 2008/09 would have looked like without massive central bank liquidity infusions. (And being short stocks won't help either, since there won't be anyone left to pay you back.)

Hey Gary — for someone who thought total financial collapse was the "ONLY" outcome, how can you NOT be massively long gold??? That's not a bubble! Or is it? As I've been writing for two years now, gold's ascent is a confluence of negative real interest rates; undisciplined central bank behavior; a growing loss of confidence in government policies and financial systems; loss of Swiss bank secrecy; an accumulation of economic wealth by individuals in parts of the world without stable property rights and rule of law; etc. The CME can raise margin requirements all they want; but there needs to be a change in the underlying fundamentals (and/or perception of the fundamentals) to end this period. What will that change look like? Shouldn't that be the question on the table ….

Gary asks, "Can anyone reliably make profits from a bubble?" Hmmmm. Warren Buffett keeps a sealed envelope in his desk drawer with the name of his successor. In contrast, I keep a sealed envelope in my desk drawer with the EXACT high price in gold. Neither of us allow any peeking (or peaking.)

Note to Anatoly: You recently wrote that you think gold won't go all the way back down. If you believe that this is a genuine bubble, then you'll have been wrong on the way up. And on the way down. See Jeremy Gratham's extensive work on bubbles — and his observation that they retrace >100% of the parabolic extension.

Stefan Jovanovich says:

The U.S. Treasury had enough gold to be able to promise to redeem the customer balances of every member bank of the Federal Reserve in the United States in 1930; had that step been taken, the U.S. would not have suffered the extraordinary collapse in demand that created the death spiral of world trade

Tyler McClellan asks: 


Just for fun, how would you have lowered real interest rates in the US, without dramatically widening the gold points, or say just abandon them all together.

Stefan Jovanovich replies: 

Why would I want to administer interest rates at all? The problem with the Federal Reserve system is that its underlying premise is that the government should do so. Nothing can prevent speculation from having a component of folly and ruin — like all of life. The idea that the government — which is itself an interest group of the employees and beneficiaries of government borrowing and spending — can somehow avoid the same folly and ruin in its speculations seems to me to be the funniest of all the lunar illusions. Remove the notion that somehow banking is a special kind of business that requires absolute government guarantee (which, as we have seen, the government cannot afford any more than anyone else) and a great deal of the folly and ruin disappears because the truth — that everyone in commerce works without a net — is transparent. As someone once said, the illusion of safety is the most dangerous of all ideas.



 One has found that when companies pay up like this it is the handwriting on the wall.

Anatoly Veltman comments: 

True. I wonder, in addition, if the new world order means that Gold also looked at that.

Mr. X. writes:

One notes that the target of this transaction was Motorola rather than a certain Canadian smartphone manufacturer who gained a certain personage's attention based on similarly superficial and glib generalizations.

One wonders what this personage's knee-jerk reaction to the deal would have been — had the CEO of the acquiror been a god-fearing male Democrat-leaning Yalie, over the age of 65, who cheats on his wife, plays golf on Sundays with government officials, and tennis on Tuesdays with other prominent financiers…. Might that have taken the writing off the wall?

Importantly, one notes that Bloomberg is reporting that the Google agreed to pay a shockingly high $2.5 Billion breakup fee if the deal doesn't close (an amount more than 6 times the typical amount). This is bizarre and hardly subtle — so the buyer is either an idiot or he knows something that we don't know. Before rushing to judgment, one is inclined to believe that there is more than meets the eye here — and some elucidation may be provided in the soon-to-be-filed merger proxy statement.

Dylan Distasio writes:

I think at the end of the day, when all is said and done, assuming this deal goes through, the price will appear to have been a bargain. Google has had phenomenal success with Android, and as a result is in the crosshairs of both Apple vis a vis their patent battle with HTC, and with Oracle who in typical Ellison fashion picked clean the bones of the once mighty Sun, and let loose the lawyers of war. Oracle is going after the core of Android by claiming infringment on their acquired Java portfolio. With 17,000 patents just added to the Google portfolio, give or take, a cross licensing agreement with either opponent is much more likely as a worse case scenario for Google, IMO.

Motorola, despite their tarnished reputation compared to their go go days, also brings a hardware design and manufacturing ability that Google is sorely lacking in house. They took a gamble on Android, and were there with the original Droid which with the help of Verizon's heavy advertising really did more than anything to bring Android to the forefront. Google will now be able to realize their vision of what a flagship Android phone should look like with more success than they had with the ill-fated Nexus launch. They will have the capability to leverage the hardware to the hilt with the guys and gals writing the drivers in house.

The one area they will have to be careful about is alienating other major Android players like HTC. HTC's CFO was towing the line so far this morning, welcoming the deal. Microsoft is going to be heavily courting the large players for the Windows 7 phone OS, so there will be at least one alternative available to other Android handset manufacturers. I'm relatively confident Google will tread lightly though, and at the end of the day, Android is now a relatively mature OS that is FREE to the other manufacturers.

Google had a large warchest of cash, and a smash in Android that needs to be protected. I think for once, the premium will be money well spent. The landscape of tech mergers and acquisitions is littered with disastrous decisions and lack of the ever evasive synergies. I'll go on record as saying, this time it will be different, assuming the deal is not derailed by the Feds.

Drinks are on me if this one doesn't pan out over the next few years.

Gary Rogan adds:

I can't imagine that Google will not sell or spin-off the hardware business or the mobile phone part of it and keep the patents. They got MULTIPLE Android makers mouth exactly the same party line today, and they either threatened them (unwise, and hard to achieve reliable results so quickly) or promised neutrality. Keeping the smart phone manufacturing is a sure-fire way to sow discord in the eclectic Android community which can't be worth it for them. All they need is the hardware slaves killing each other making more and more popular phones to keep the advertising dollars coming in.



This is a lot less exciting that Bob Prechter, but have any readers noticed that M2 has suddenly started accelerating ; and M1 is picking up again too?

From last Thursday's Fed report:

13 week annualized rate of change: M1=14.2% M2=9.0%

26 week annualized rate of change: M1=14.0% M2=7.2%

52 week annualized rate of change: M1=13.6% M2=6.3%

Perhaps this is somehow related to money moving into banks ahead of the US Government default deadline? If so, we should see it start to reverse in tonight's report.

But if not….??

("Inflation is always and everywhere a monetary phenomenon.")

Rocky Humbert followed up Thursday night:

Following up on my original post (which pre-dates the ZeroTruth Post ), there was no sign of a decline in either M1 or M2 in yesterday's numbers. The revised growth rate is:

13 week annualized rate of change: M1=16.2% M2=10.1%

26 week annualized rate of change: M1=14.2% M2=7.8%

52 week annualized rate of change: M1=14.3% M3=6.6%

I'm going to offer a new (unproven) hypothesis: Can the ongoing spike in US M2 be explained by cash flowing out of European banks and flowing into American banks (as a safe haven?)

That is, is it possible that the M1/M2 spike is actually a European bank run?

I was unable to find any real-time ECB monetary statistics. Here's the ECB monthly data (last updated in May) … which shows a 2.2% growth in their M3.

Does anyone know if the ECB has more current monetary statistics?

Lastly, this is a question for monetary economists: Is it possible to have money supply collapsing in Europe and money supply spiking in the USA? And if so, what is the theoretical effect on the exchange rate?



 Between and betwixt all of the market volatility, there was an under-reported litigation development on Thursday — which can both explain some of the volatility in the financial stocks AND can explain BNY/Mellon's decision to impose a fee on parking cash. This development could be a game-changer for the capital markets. (Bigger than Spitzer going after AIG for example.) During the week, the New York Attorney General sued BONY/Mellon for breach of fiduciary duty as trustees/custodians! (I suspect almost nobody noticed this.) They are the largest custodian in the USA.He's seeking penalties and restitution.

The issue at hand relates to their role in the 8+ Billion settlement with BAC (which was on the rocks already). HOWEVER, that the AG would sue a trustee/custodian (at all) and under these legal principle is a game changer — that could have repercussions for the way the entire capital markets function — and the costs of being a custodian/trustee. Being a trustee/custodian has always been a sleepy business — where you collect a couple of basis points — and fill out forms. To the extent that trustees/custodians now have billions of dollars of liability changes the landscape forever.

Jim Lackey writes:

Someone posted a chart Friday of Preferred stock index or ETF. It was down near 2% and the posted yields on some of these things are near 7%…. like ISEE after the '09 bank lows. There was one other hick up in April 2010. It was calm seas until Thursday. Friday am looks like get me out now orders. 

There are only a handful of global custodians — and when the stock market is gyrating, it's different to discern the chaff from the wheat. However, I believe that the AG's interfering in private litigation under these legal principles is just as shocking as BNY/Mellon's charging a fee for holding cash. The timing of both announcement, I believe is not a coincidence. IMHO this litigation was by far the most bearish development of the week.



 I cannot find a single compelling reason to own Japanese stocks (but for one.) The demographics are horrible. Their debt problems may be worse than Greece. They get hit by catastrophic earthquakes, tsunamis and radiation. Even Toyota is a mess. So (other than the fact that their stocks are reasonably priced, and in some cases, extremely cheap), am I systematically nibbling at Japanese stocks with a *10+ year* horizon? The answer is: any country that doesn't like the cult of apple cannot be all that bad. check out this article on the subject.

James Goldcamp adds:

As a casual observer another interesting anecdote confirming the degree to which Japan is out of favor is the bleed out of assets in Fidelity's Japan and Japan Small Companies fund. Not surprisingly in a yield hungry world their junk bond (C&I) and floating rate loan funds (variations of low quality debt) are near an all time high.



 My friend Russ Sears and I were talking, and he was differentiating between "crooks" who behave with rational motives and "pathological liars."

He told me, "in 6th Grade I had a friend that was a pathological liar. He would lie even when telling the truth would have been more beneficial to him. He simply could not help himself, when he was asked a question he had to lie. He had a platform to showcase his "talent" and he could not tell the truth no matter what."

Without regard to whether politicians are necessarily pathological liars, his 6th grade friend brings to mind Smullyan's "Knights and Knaves " logic puzzle — which (as opposed to a meal for a lifetime) can cause indigestion for a lifetime. That is because a pathological liar is vastly preferable to an "alternator" who alternates between lying and telling the truth; and is also preferable to a "normal" who says whatever they want.

Knights and Knaves is a type of logic puzzle devised by Raymond Smullyan.

On a fictional island, all inhabitants are either knights, who always tell the truth, or knaves, who always lie. The puzzles involve a visitor to the island who meets small groups of inhabitants. Usually the aim is for the visitor to deduce the inhabitants' type from their statements, but some puzzles of this type ask for other facts to be deduced. The puzzle may also be to determine a yes/no question which the visitor can ask in order to discover what he needs to know.An early example of this type of puzzle involves three inhabitants referred to as A, B and C. The visitor asks A what type he is, but does not hear A's answer. B then says "A said that he is a knave" and C says "Don't believe B: he is lying!" To solve the puzzle, note that no inhabitant can say that he is a knave. Therefore B's statement must be untrue, so he is a knave, making C's statement true, so he is a knight. Since A's answer invariably would be "I'm a knight", it is not possible to determine whether A is a knight or knave from the information provided.In some variations, inhabitants may also be alternators, who alternate between lying and telling the truth, or normals, who can say whatever they want (as in the case of Knight/Knave/Spy puzzles).

A further complication is that the inhabitants may answer yes/no questions in their own language, and the visitor knows that "bal" and "da" mean "yes" and "no" but does not know which is which. These types of puzzles were a major inspiration for what has become known as "the hardest logic puzzle ever".



 Tone is as important to music as pitch. You've heard a new violin player playing the notes on the chart but the tone is awful. Yo Yo Ma plays sweet modulating tones. Focusing on just price without regard to tone leaves out relevant and important information.

The market has tone. Quiet, jumpy, weak, anxious, thin, bullish and dense internals. The environment, political, news, economic, social, international also establishes a mood and tone to the market that cannot be ignored except at your own risk. The prior tone is also relevant as music is not discrete tones and notes, but a integrated statement over time. Emotion is the main vehicle of music and also with the markets.

Tone both creates emotion and is the result of emotion. Voice carries emotion: The cry of a baby, the angry tones of politicians, the whine of the complainer each has distinct tonal qualities. The tone carries meaning and has persuasive force. The question is how to quantify it or even qualify it to learn the meaning in the market.

Emotion also has established patterns: Denial, anger, acceptance; fear, capitulation, numbness; catastrophe,catharsis; infatuation, love, boredom, hate. If tone both reveals and creates emotion, understanding the tone of the market will reveal its emotional state and reveal its emotional stage giving a clue to the next phase.

Jordan Low writes: 

The yogis believe in seven chakras in the human body, each corresponding to one of the seven pitches, each corresponding to a different emotion. The stages of grieving you describe go from lower chakras/pitch to higher.

Soros reacts in his gut, which is one of the lower pitches — probably a survival type of emotion. The tone probably is the intensity of the energy at that chakra — I am thinking market volume. We are probably saying the same thing — I find it interesting but am adding quite little.

BTW, the chakras also correspond to the colors in the rainbow, red with the lowest frequency is below.

Laurence Glazier writes:

 For these reasons I find alternating attention between composing and trading congruent, as they are carriers of emotion at different scales.

From my point of view the Elliott Wave framework fits well, being a sequence of eight stages whose final three are labelled A, B, C. As I often use a fractal structure in music, that is another similarity. I may be slow, but it has taken me years to internalise patterns which are lately becoming clearer to see.

Yesterday I put sixty years of the S&P into Advanced GET. The astonishing rise from the doldrums must, in part, be a distortion reflecting the love of printing money, but even were this transcribed from dollars to ounces of gold, I think the ascension of computer followed by internet technology would show how much these developments have added to the wealth of the world.

As I move between Monthly, Weekly and Daily views, the software messes up the precision of my placement of wave counts, and I am thinking to move the whole thing into a graphics program, with the different scales, whether grand or minuettes, callable up via layers. This would help me watch day by day what's going on, a work of art within an art program.

It is impossible to experience in full a piece of music from a short excerpt, and I think likewise the Market, with all its waves and eddies, needs attention from up close and afar.

Also, the rainbow, the universal belief that there are seven colors in it may stem from Isaac Newton's assertion, which was based on his mystic ideas about numerology.

However if you look at a rainbow and count, it is not clear whether blue, indigo and violet are really three colors or two. Also the yellow band is very narrow, though often depicted as equal to the others.

I think context in time is part of what the Market (like a human being) experiences, so as well as volume one might want might look at moving average based indicators, and fractal perspectives.

Laurel Kenner writes: 

Mr. Sogi is exploring an endlessly fascinating topic with his exceptional lucidity and depth of experience. Great performers play the heartstrings by varying tone within phrases. (They also vary dynamics and duration of individual notes in phrases.) They learn how to do this by spending years with master teachers and figuring things out on their own. That's why synthesized music can sound only like an approximation of the "real thing." Because the market is a bazaar of human voices, expressing workaday practicalities, aspirations, fears and strategies, I don't think it's unduly anthropomorphic to look at it as a great performer. And while some of a great performance is spontaneous, much involves muscle memory that training has made reflexive, and must therefore be susceptible of being "sussed out."

Rocky Humbert writes: 

 There's an old game/tv game show called "Name that tune". The gist is that competitors would try to identify the title of a song by hearing only the first X notes; the winner would correctly name the tune in the fewest notes. Human memory being what it is, it was possible to name many popular pieces and classical symphonies by hearing only the first measure of a piece.

However, if one picked a RANDOM measure from somewhere in the middle of the same piece, it was vastly more difficult to identify the title correctly with the same consistency.

This is a reflection of how our memories work; and this phenomenon may have relevance for people looking for patterns in the middle of time series — as opposed to the beginning and ends of time series.

Alan Millhone writes: 

Hello Rocky,

My old friend and top Master checker player, Karl D. Albrecht from Michigan was walking around the playing room full of players at the Tennessee tournament. As Karl walked by many games that were being played into the mid-game he could by sight and memory accurately tell you from what checker opening each board position originated. I found this remarkable.





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.



 This morning something called "OTR Global" started a rumor that RIMM will discontinue the Wi-Fi version of the PlayBook tablet. This was picked up by an exceedingly large number of blogs and later more serious websites. In particular, the widely-read, openly pro-Apple BGR blog I had mentioned before picked this up and published an article without the "Wi-Fi" in the title, with a headline that RIM is about to kill the Playbook altogether. It later added the "Wi-Fi" to the headline. In the article it now cited Mike Abramsky of RBC who has recently turned dramatically anti-RIM with the following: "In a note to investors Monday afternoon, RBC Capital Markets Managing Director Mike Abramsky reiterated an OTR Global report that Research In Motion is possibly planning to stop production of the BlackBerry PlayBook’s Wi-Fi model." Interesting choice of words, "reiterated…possibly planning". I could "reiterate" that Hu Jintao is "possibly planning" to personally pilot a new kamikaze nuclear-tipped missile into a major US city, and I wouldn't even be lying. I mean it's not very likely, but possible. Later in the day RIM tweeted that this is "pure fiction", but who will notice? This denial is now on a few obscure websites and some comments elsewhere, but the damage has been done. They are truly trying to kill it.

This morning some Forbes columnist in his blog wrote another deathwatch post on RIM that was widely distributed as well. In it, it stated that RIM is planning to release QNX phones at the end of 2012. I posted a comment on his blog article saying that the company had repeatedly said that it would be in EARLY 2012. He replied that that wasn't true, although I have personally heard it in the quarterly call and also read it in a live blog from the shareholders meeting. He was later called on it by another commenter.

I just find this to be an amazing effort.

Rocky Humbert replies:

Mr. Rogan: I don't think this subject is boring at all; it's a live laboratory experiment in all of what makes up speculating, investing and more generally, human psychology. It's generally accepted that a speculator should primarily concern himself with what other market participants are currently thinking — and what other market participants will be thinking in the future.

In contrast, an investor should be focused on his assessment of the intrinsic value of the enterprise and whether Mr. Market is pricing the enterprise sufficiently below its probable future intrinsic value so as to provide a margin of safety and attractive return on shareholder capital. It's critically important to not confuse the two, or as Keynes said, "In the short term, the market is a voting machine, and in the long term, it's a weighing machine."

If, based on your research, you have decided to own this stock for a few years (as an investor), you might consider tuning out the market chatter since it's value is relatively limited for someone in your shoes. However, I believe that chatter becomes important for investors only when the chatter (and speculative flows) cause feedback loops. A falling share price (and credit rating) causes an increased cost of capital for an enterprise. That harms the enterprise's competitive position (versus companies with lower costs of capital); it makes recruiting and retaining talent more difficult; and it can also scare off potential customers (even if the product is excellent). These feedback loops (a variation of Soros' reflexivity) can help explain why certain trending strategies appear to work.If you believe this pernicious feedback loop is underway, it may reduce the future intrinsic value. Lastly, assuming that RIMM survives in some form, I believe the most difficult question for a value investor is when and how much capital to commit to a stock that is declining while other sexier stocks are rising. If the investor's money management is flawed, or his timing is flawed, RIMM may prosper yet the investor doesn't.

Lastly, I'd argue that one of the biggest mistakes any investor can make is thinking "I just want to get back to even." Because if RIMM turns around on its business execution, you will surely be tempted to exit in the high 40's … whereas all of my work suggests that you should consider buying more RIMM should the fundamental turn — rather than selling.

Dylan Distasio writes:


If RIM actually delivered a quality product that people wanted, all of the below would be a moot point. People trading RIM stock might have skin in the game on the short side, and be enjoying churning the rumor mill, but again, if RIM actually made anything people wanted to buy, the stock price would eventually follow the sales/earnings. RIM is headed the way of PALM if they don't get their act together soon. Balsillie and Lazaridis are on another planet, and refuse to acknowledge the dire situation they have put their company in. In addition, they have not been making friends in the press or with analysts.

I'm not sure what is so amazing about this effort. The weak are preyed upon in both the marketplace and the stock market. The vultures are circling, and shorts are doing what they always do, piling on as much as they are able to. If you're buying what RIM is selling, look at this as a buying opportunity.

FYI, I have no exposure to RIM or any of its competitors, so I have no axe to grind, but what is happening now appears to be out of the standard playbook for a heavily shorted, potentially dying entity.



 It is, as usual, all about money. One has to question how a relatively poorly paid maid, already represented by NY's formidable prosecutorial team, found it necessary (or affordable) to hire barristers Kenneth Thompson, Jeffrey Shapiro, and Norman Siegel to represent her interests.

True enough she has since economized, releasing both Shapiro and Siegel, while retaining Thompson (who gave a real stem-twister presentation of her case immediately following the NY announcement that GSK would be given a longer leash).

The points underscored by Thompson clearly indicate that while the criminal case may be in doubt, the civil case still has legs. The always-available Susan Allred was brought on to re-emphasize the important "preponderance of evidence" guidelines that make civil cases (supposedly) easier to win.

However, there are still a few rarely referenced voices out there harping on the fact that besides GSK's "threat" to Sarkozy, the man had expressed the heretical idea that perhaps the bond holders, and not the public, should be tagged with any losses incurred with past and present bail-out packages.

In short, a dangerous man (to certain political and financial interests) has been effectively removed from the board. Frankly, what I find most disturbing about this case and other similar ones, is the government's increasing willingness to "leak" highly prejudicial information well ahead of it being substantiated.

Topping off this questionable (if not unethical) conduct is the burgeoning of coverage by Nancy Grace and her spawn. These so-called "legal experts" and their guests remind one of Madame Defarge (with little possibility of her eventual comeuppance) and her compatriots.

Sad to say, my wife is a huge fan of this programming (Casey Anthony being the villainess du jour). If that case, or any other like it, ever ends up with a hung jury (an unlikely event), one wonders if much of the jury pool for any subsequent trial is irrevocably poisoned.

I sure as heck would give serious consideration to pleading down (regardless of my innocence and/or bankroll) before giving those supposedly non- biased vultures a second crack at my bleeding (but still-breathing) body.

Stefan may disagree, but the price of justice is just way too high for the average guy to get his (equitable) day in court. Many of us would stand a better chance if we were to go back to "trial by ordeal." There, though overmatched against a seasoned knight of the realm, we might get lucky with a wild swing of the broad sword. Though unlikely, the procedure would be faster, far less expensive, and neither party would have to share with an "advocate" whose interests might well not extend beyond the pecuniary.

Rocky Humbert writes:

Although these pages were filled with cynical comments regarding DSK; there has been "radio silence" since we discovered that his rape accuser has a credibility problem (to say the least). My point is not to criticize fashionable Speclist cynicism, but rather to salute the hardworking (and comparatively low-paid) lawyers in the NY District Attorney's office on this Independence Day weekend. The DA has a sworn constitutional duty to upload our laws — and when he discovered that his case had some serious problems — the office promptly disclosed this to the Court and the Defense — rather than burying the facts in a back desk drawer (and hoping the defense wouldn't find the same facts.) If this case is dismissed (as it should be — in a he-said/she-said case where the accuser has no credibility and/or is deported for immigration fraud), then it will be an embarrassing political setback for Cy Vance Jr. (the DA), but a testament to the greatness of the US criminal justice system. Lady Justice is not only blindfolded, but her head swivels too! 

Here is a copy of the DA's letter. It says that the DA's investigators discovered DSK's accuser:

1) Lied abut her whereabouts and activities after the tryst…

2) Admitted to felony tax fraud.

3) Admitted to perjury regarding on her asylum application to the USA.

4) And other juicy tidbits….(And she had a good lawyer too.)

Marion Dreyfus writes:

Tarnishing one's reputation is a huge malevolence that cannot be expunged easily. I abhor women who accuse their soon-to-be-ex husbands of rape or abuse of their minor children if these are false. These charges are beyond ugly, and the man is often pilloried with no proof of wrongdoing– such women ought to be jailed and fined if their lies are uncovered.

He may be guilty, but her new facts are certainly exculpatory for his having 'raped' or 'forced' her– she was deliberately gunning for him, and she was less a maid than … made.



 There are several reasons that cynics are on the rise in my opinion.

1. People assume the cynic is the expert. The cynic has an aura of authority.

2. Cynicism is masked as realism.

3. People assume the cynic is a healthy skeptic. On first encounter these two are hard to distinguish.

4. The cynic guards against disappointment.

5. The cynic creates an “us” against “them” world. "We won't be fooled again" by "them".

6. It is easier to find a problem than create a solution or even understand how complex creativity works.

7. It is easy to ignore the positive. Hard to ignore the negative.

8. People assume their bias is only one sided: When they like something too much. People recognize their biases when there is favoritism but justify their biases when there is disdain or prejudice. The cynic reinforces that their biases are the only morally defensible ones.

 9. The cynic has many times when he is proven wrong, but it is often hard to pinpoint the opportunity cost to that cynicism (for ex. the profit he missed by staying out). However, when he is proven right, it is very easy to see how much he has saved.

10. The belief that Type II errors or believing falsely in a person are much more damaging than Type I errors or not giving a good person a chance. Despite the time it takes for a person to prove she is proficient and the moment it takes to lose trust-worthiness.

11. The cynic is elevated as “your own man” by the media and politically. Thus becoming the “go to person” when they want something said or done. This creates all sort of side agreements and quid quo pro understandings.  Every TV program needs the phone numbers of a few favorite cynics.

12. Ironically, the person most likely to publicly be called down for their cynical tendencies is the person that is cynical towards the celebrated cynic.

Con-artists understand deeply the appeal of cynicism and use it against their prey.

The cynic is the ultimate champion for the status quo. The cynic can define people by their weaknesses not their strengths. Since everybody has weaknesses, they can dictate who is important by defining who is not important. Old man’s disease is giving in to the appeal of cynicism.

Rocky Humbert writes:

 "A cynic is a man who, when he smells flowers, looks around for a coffin."

H. L. Mencken

In the spirit of not being a cynic, I note today's news story reporting that volunteers in Japan are being asked to grow sunflowers to produce seeds … so even more sunflowers can be grown in areas contaminated by radioactivity from the Fukushima disaster. The proponents say sunflowers can efficiently absorb radioactivity from the soil in a process known as phytoremediation. Here's the news story.

The skeptic (as opposed to cynic) in me thought that this sounds like an example of "green" people confusing Flower Power with nuclear physics. But a little bit of research reveals a bit of "sunny" science for the weekend. There is REAL science here! Sunflowers (and certain other plants) CAN decontaminate radioactive soil faster and cheaper than many other approaches. Chernobyl was a large-scale proof of concept. Here are 2 of academic papers on the subject:"Screening of plant species for comparative uptake abilities of radioactive Co, Rb, Sr and Cs from Soil,"Gouthu et al ; Journal of Radioanalytical & Nuclear Chemistry" and  "Uranium Absorption Ability of Sunflower, Veiver and Puple Guinea Grass," Roongtanakiat et al (2010)

SO THE MORAL OF THE STORY IS: "A cynic is a man who, when he smells flowers, looks around for radioactive contamination."


Pitt T. Maner III comments: 

The phytoremediation and bioremediation fields have bloomed to aid companies tasked with difficult cleanups. Even earthworms can be useful with certain contaminants (PCBs).

Larger trees also can be used to influence the flow of impacted groundwater so that contaminants do not move offsite—effectively they act as small pumps (think of all the Florida maleleucas used to drain wetlands, now designated as "noxious weeds"). Trees can help with the treatment process through the uptake and concentration of contaminants or the breakdown of contaminants in the bacteriologically-rich portions of the root system .

The economics can be interesting and one can only imagine what they are in the Japanese case and how they affect current land values. Those with an understanding of the actual risks involved and the ability to cost effectively clean properties have in certain instances done well:

"Acquisition, adaptive re-use, and disposal of a brownfield site requires advanced and specialized appraisal analysis techniques. For example, the highest and best use of the brownfield site may be affected by the contamination, both pre- and post-remediation. Additionally, the value should take into account residual stigma and potential for third-party liability. Normal appraisal techniques frequently fail, and appraisers must rely on more advanced techniques, such as contingent valuation, case studies, or statistical analyses.[11] Nonetheless, a University of Delaware study has suggested a 17.5:1 return on dollars invested on brownfield redevelopment.[12]"

Kevin Depew writes:

Why do you believe cynicism is on the rise? In my opinion, the < 35 generation doesn't really understand it or ignores it. I don't have access to it now, but I saw some large scale polling data on Friday that was remarkable in the cross section spreads between < 35 and those over, especially > 65. The gist, based on this polling data, is that if one is > 65, one is likely to find the country going to hell, the economy going to hell, that politicians are evil and stupid and that all bankers and finance people are crooks by a wide, wide margin over younger subset. If interested I'll forward data when I get back in office Monday. I was looking at it in the first place because there is a wide divergence between consumer comfort and confidence data vs market that is outside of 25 year norms and was just curious about the asymmetry in both economy and the polling data.

Victor Niederhoffer writes: 

Artie wrote a book on cynicism in the police force that attributed cynicism as a variant of the authoritarian personality. He believed that police became cynical because they saw so much evil that their own persona looked relatively good compared to all the evil, and their cynicism and corruption was a natural outgrowth of the impossibilities of fulfilling all the requirements of an all too demanding job with conflicting goals. I believe we become cynical on the list because we see such ephemeral behavior by the public and funds, and such inside maneuvering by the cronies and flexions. It's hard to maintain a proper chivalrous attitude when confronted by these things day after day.

Jeff Watson adds:

But that cynicism, if allowed to fester, will have profound effects on one's trading. I've seen it happen too many times to people and they end up losing their edge.

Ken Drees writes:

Cynicism towards markets and politicians is healthy, but toward general mankind or society, probably not so well placed since hope and belief in goodness of the total gives one an overall positive tendency towards world view but also a well placed skepticism at certain segments.

The idea of erosion is interesting where the rigors of the job or the constant focus on conflicting outcomes that collide with the overarching worldview wear down the person's belief in good. One thought along these lines that I have is that by the end of one's life you are so distilled down in terms of your true character that its impossible to change. You are either that positive and generally nice old person, or a frown wearing old crank; the thoughtful scientist who never stops learning, or a worn out 24/7 TV watcher.

Russ Sears adds: 

I believe it also has to do with the narrow vision we have of public versus personal life of the cynic. We do not see that like a partying narcotic addict, the soul has been sold for a very narrow gain. The personal life is full of turmoil and eventually rots the productivity out of the person. Think about the cynicism required of the steroid user or EPO user for example.

I believe that many companies demise starts when a new "C" position arrives within it- the Chief Cynic. If not confronted as Artie did, often this position is allowed to become an all consuming cultural force.

Vincent Andres adds:

"the cheaper money tends to drive out the dearer"

(the money of lower value drives out the money of higher value)

–Nicolas Oresme

(« la mauvaise monnaie chasse la bonne » )



Anyone have any advice on passive investing– there is no timing the market, so one therefore invests with an eye to neither highs nor lows of a particular day or time or season?

Ralph Vince writes: 

Correct, but there are now two "flavors" to such, as you will, as an advent of "active" indexes. Typically, one would mimic, say, the S&P 500, and the returns would be those of the S&P 500 (there is a problem with reinvestment of returns here often, and of additions and withdrawals, but in theory, you would track the index).

"Active" indexes typically seek the same underlying components, but the weightings into the components tend to be dynamic, so the returns tend to be those of the underlying index with an upward bias.

Rocky Humbert writes: 

Ralph raises a brilliant point. Over the last 20 years, the Russell 2000 (small stock) index and the S&P500 (large cap) stock index have both returned about 8% per year.But from 1993 to 1999, the S&P returned 24% per year while the Russell returned 12% per year. A 200% outperformance for the big cap index…Next, from 2000 to 2011, the Russell returned about 7% per year while the S&P has returned 2% per year. A 350% outperformance for the small cap index…Today, the Russell is trading at 35x trailing p/e … while the S&P is trading at a 14.6x trailing p/e. In order to justify this record valuation difference, small caps must grow their earnings twice as fast as big cap companies. While small companies often grow faster than big companies (due to the math of compounding), arguably Mr. Market's pendulum has swung too far — and it's improbable that the Russell 2000 will outpeform the S&P500 over the next 5-10 years FROM THE CURRENT RELATIVE VALUATIONS.

Note: Dr. Zussman, I (and many others) have studied this phenomenon, and we've not found any consistent explanation for these swings other than investor preference…. and these cycles/trends last years and go further than "sensible" people expect. However, if I were starting a passive investment strategy today, I certainly wouldn't pick the IWM (Russell 2000) as my investment vehicle with a 5-10 year time horizon.



"I love the AUD, it is up more than the S&P" - A DailySpeculations Reader

Below is a table with the Purchasing Power Parity "PPP" for some currencies as calculated by Bloomberg.

The US Dollar is approaching undervalued extremes that (historically) result in global macroeconomic shifts and realignments, and cyclical/secular bottoms. These realignments are beyond the attention span of most so-called professional traders.

So, buying the Australian Dollar at a 35% PPP overvaluation may be profitable for the next hour, but probably not the next decade.

Currency / % Over-Valued

Australian Dollar 34.76 %

Swiss Franc 31.75

New Zealand Dollar 30.53

Danish Krone 23.38

Euro 22.28

Canadian Dollar 18.9

Norwegian Krone 18.25

Japanese Yen 12.96

British Pound 12.31

Swedish Krona 1.07



 On a weekend trip.

1. We head to the Watchtower by the Brooklyn Bridge and they don't have the sign up any more that says, "the dead will rise". But it's there in my mind from the 1970s still. And eventually it will apply to tech.

2. Williamsburg itself is thriving with all the old factories now being converted to condos and family residences and boutique shops. If there is a good infrastructure and the buildings are strong, they will eventually find a good and productive use. The same thing applies to Coney Island where the crowds there now rival what they were in my day in the (I look around 3 times ) thirties. How to differentiate this from the situation in Detroit where the buildings sell for $50 or so. Is it just the unions?

3. We go to Zura's loft where hundreds of immigrants are doing sculptures out of metal working that they learned in Russia and making a good living, and they build model motorcycles and chandeliers among other things in the Mill building which was converted from a Mill 100 years ago when I was a boy. The immigrants are the dynamic entrepreneurs that make jobs for everyone and do things that enable us to augment our horizons.

4. We go to the Hall of Science in Flushing and the circus science is very good, and it shows that things are seldom what they seem. All the contortions and balancing can be learned with practice and family training. A contest between two balancing acts in Niagara Falls in the 1870s shows the importance of competition. One of the balancers had no hesitation in carrying Prince William across on his back as he crossed Niagara on a one inch thick tight rope successfully and dipped down to get a drink from a passing paddle wheeler for sustenance. The unusual is always the usual for the market, and what seems impossible will ultimately happen.

5. As we go home, our door snaps open and grazes a Russian's car, and he extorts us for hundreds as time is not meaningful to such. They were laying in wait for such to happen like a spider in his web. Time has a different value to all, and along with their low service rate, is the key determinant of why the Asians have and will surpass us.

 6. "Times have changed"

"In olden days a glimpse of stocking was looked on as something shocking but now the Good one knows. Anything goes".

Aubrey and I saw Anything Goes.

I am thinking of 10 lessons we can learn from Anything Goes. You can help if you will. The first lesson is that in old times if you beat earnings estimates, nay, if you just reported a positive quarter, it was enough, a glimpse of a rise was sufficient. Now you have to beat the earnings estimate, you have to beat the sales estimate, you have to give an upbeat guidance for the future, and your margins have to improve.

7. Also, like in Anything Goes, the crooks are considered honorary captains of the ship. Many admire Madoff 's market making operation and his capacity to lead the auditors to think he was going to be the next head of the agency. The heiress Hope Harcourt (any relation to Jov?) has to marry the wealthy English Lord because her family has lost everything in the depression. However, her father jumped off the ledge of the stock exchange like a Yale man, so his death was honorable.

To be continued.

Rocky Humbert adds: 

 For what it's worth, the Jehovah's Witnesses sold the Watchtower building some years ago, and it's now an NYU dorm. Notably, they didn't replace the "Dead Will Rise" with ""Perstando et Praestando," …

The lack of signage might be due to infighting between the dead (and not rising) faculty of Brooklyn Polytechnic (whose campus was absorbed by NYU)… as they are still lobbying for Virtus Victrix Fortunae. 

Useless fact: Brooklyn Polytechnic may be the only US university that produced Nobel Laureates AND went out of business.

Jason Ruspini adds: 

 Have they have already surpassed us? It looks more like American/European technologies and institutions have just diffused over to their many people. What are the innovative contributions to world society coming out of Asia? They have some tall buildings and big casinos.

If long-termism manifests itself as rigidity, that is a weakness. Not to extrapolate the Fukushima situation to all of Asia, but it does give a general impression of flimsiness under a facade of success and technical prowess. (Japan needed our robots. They will never live that down.)

Math/science that is actually innovative will win in the long-run, but America hasn't been bowed yet.



 My wife and I are making our way from Houston, TX to central OH and back over the next 2 weeks with our truck and fifth wheel trailer. Sunday was Houston to Dallas, yesterday was Dallas to Little Rock, today was Little Rock to Sikeston, MO. (I45, US380, I30, I40, I55). Because of time constraints and the size of our rig, we tend to stick to the interstates, but explore when we are unhooked. Just thought I would share some business/market related observations with the list.

1) Traffic composition. I typically drive 40-50K miles a year, mostly interstate, and would say I have a good feel for what traffic looks like. I've been struck by the composition of the traffic so far. It is very truck heavy, more like what I would expect for late night (midnight to 6 AM). I did some estimating and would say it is about 60-70% trucks, all apparently well laden (ie, no bouncing trailers). Good mix of flat, van, reefer and tank. So companies are ordering stuff and it is being delivered. There are enough loads that the trucks do not have to run empty. People are not traveling casually; in particular, the RV traffic is very light. I've been making reservations as we go, but no park has been full yet. Hotel/motel parking lots are vast waste lands. Think the travel industry is in for a rough summer.

2) Truck speed. Typically a good percentage of the trucks have the "hammer down" and are traveling well above the speed limit. Not so the last 3 days. My cruising speed with the trailer is 65MPH (or the speed limit which ever is less). I've yet to have a truck blow by me at 75MPH. And East Texas and Arkansas are prime speeding zones (flat and straight). A good number of the trucks are running 60-65, even when the limit is 70. Very unusual. My guess is that they are all looking for the sweet spot (RPM, engine, transmission combo) where they can milk the mileage allowance for an extra penny or two a mile. No more racing to be an hour early. The price of fuel is starting to cool the American racing tradition. This might have the effect of reducing demand considerably. Depending on the driver, you can vary from 6 to 10 MPG with a semi (I have 2 children who are/were drivers). So if a significant number are being incentivised to save fuel rather than deliver on time, it could have a major impact on diesel consumption. I'm also seeing a lot more trucks with under the trailer skirting and tight fenders over the tractor rear tires, which are both fuel saving devices. The under the trailer skirting almost all looks hand made (ie, semi pro body shop). Again, the truckers are facing tight enough margins that they are willing to sacrifice some load capacity as well as maneuverability (the skirting will hit the ground on railroads, etc) in order to gain a few pennies per mile. If this works, then the big fleet operators are either going to retrofit their trailer fleets or replace them.

3) Small town death While we drive mostly interstate, we do get off for food, fuel and sight seeing. Small town rural America is in deep trouble. Lots of empty stores. Many towns appear to have done some 'revitalization' or 'historic district' which all appear to be failing. Pretty banners, nice signage and empty store fronts sandwiched between antique shops, hair salons and second hand stores. The nicest building is usually the offices of the "economic development commission", or the bank. Was there Federal largess doled out in the last few years for this type of activity? If so, it has failed and appears to have dried up. While not strictly a "small town" North Little Rock has a beautiful riverfront trail and minor league baseball complex. The homeless seem to appreciate the nice grass to sleep on and the restrooms to cleanup in. One intersection appeared to have a section of bleachers for the homeless/pan-handlers to sit on. Not sure if the bleachers (one section 4 rows high) was provided by the city, or if the users had the gumption to haul it in from somewhere.

 4) Agriculture Crop planting is WAY behind. I already knew this since my brothers in central Ohio are just now planting corn, which should all be in the ground by May 15. I can just confirm it based on my own observations. The numbers say that they have already lost 25% of their yield potential by missing the optimum planting season. In years past, significant acres would be switched from corn to soybeans (which get planted later). I need to get the details from my brothers, but I think the government "price support/insurance" programs have become so lucrative, that it is better to plant the corn, harvest what you can and collect the difference from Uncle Sam. If this is true, then there will be extra payments due from the Treasury in the fall that are probably not accounted for anywhere. And in the great scheme of things, it is probably only a few billion (rounding error). Perhaps more importantly is what a 25% crop short fall will do to the world and domestic supply, demand and pricing. I am not really in tune with agriculture anymore, but it should make for an interesting commodities futures ride.

5) Outdoor advertising. Lamar (the most common name I see) and similar are in for a rough time. LOTS of empty billboards, or billboards touting the advantages of bill boards. Also a lot more of churches, hospitals, public service announcements, short term (gun show, event, concert). I take all these as indicators that the market is still very soft and that the billboard companies are dredging the pond looking for new customers, and adjusting the pricing to fit.

6) Replacing rest stops Texas, Arkansas and Missouri are all redoing rest areas. It seems to be driven by green/ecology forces. The new ones feature "eco friendly" designs, solar power, recycling toilets etc. Again, is there Federal largess involved? Or are the states just trying to save some operating costs by reworking old high maintenance rest stops into lower cost "green" ones? I doubt that this is a very consolidated market, probably lots of one off designs.

7) Arkansas Freeways. The state appears to be figuring out how to build smooth freeways. Though stretches of I40 still make you want to walk. And it is not potholes, they just did not understand how to lay 2 slabs of cement beside each other in a level fashion! I've been on gravel roads that were smoother than the remaining bad sections of Arkansas interstate.

Scott Brooks writes:

 If you pass thru Sikeston, MO again, you MUST stop at Lambert's Cafe (Home of "Throwed Rolls"). It's something that must be experienced at least once!

If you are passing anywhere near St. Louis on your way back, stop on by my house and I'll throw some pork steaks and venison (from my farm) on the grill and give you a real St. Louis treat!

And as always, all specs are always welcome to stay in my guest house anytime they're in St. Louis!

Rocky Humbert adds: 

Revisiting this post, a little bit of arithmetic puts point #2 into clear perspective, and allows one to calculate the optimal truck speed versus truck driver hourly earnings. The Kenworth Truck Company website says: "A general rule of thumb of thumb is that every mph increase over 50mph reduces fuel mileage by 0.1 mpg" See this paper.  

That means reducing the average MPH from 75mph to 55mph will increase the average fuel economy by 2mpg.

Let's assume that a typical day's journey is 500 miles. That means the journey will take 9.1 hours at a speed of 55mph or 6.7 hours at a speed of 75mph. And increasing one's fuel efficiency by 2mpg will burn approximately 16 less gallons of fuel. So, if diesel fuel costs $4/gallon, reducing the speed takes an extra 2.4 hours of driver time, but saves $64 in fuel. So the incremental driver time is worth $26.66/hour.But if fuel costs $4.5/gallon, reducing the speed takes an extra 2.4 hours of driver time, but saves $72 in fuel. So that's worth $30/hour.Everything else is ceteris paribus. Conclusion: if the trucker's salary is less than $50,000 per year (and most are, based on industry surveys), then it makes sense to drive slower…. and the pivot point is likely somewhere around $3.75/gal … which is EXACTLY the current national average diesel price.




This paper examines the investment performance of diamonds and other gems (sapphires, rubies, and emeralds) over the period 1999-2010, using a novel data set of auction transactions. Between 1999 and 2010, the annualized real USD returns for white and colored diamonds equaled 6.4% and 2.9%, respectively. Since 2003, the returns were 10.0%, 5.5%, and 6.8% for white diamonds, colored diamonds, and other gems, respectively. Both white and colored diamonds outperformed the stock market over our time frame. Nevertheless, gem returns are positively correlated with stock market returns, suggesting the existence of stock market wealth effects.



 The problem I have had with the former advertising manager's methodology is that it is not clear to me that any studies show that value outperforms growth, and I am not convinced he used prospective files for his studies, even though the rumor is that the Columbia students he hired to do his research did so, and the results in his books are completely random, as well as the wide diffusion of his seemingly random and regime based studies.

Allen Gillespie writes:

The misapplication comes by using P/B to declare stocks growth or value. The best growth stocks have little in way of book but much (non-book) goodwill (though not always booked goodwill) associated with the product or brand. In fact, some of the best growth stocks show this interesting pattern (high sales and earnings growth) while the value competitor shows on Altman Z-Score screens (think SNDK/EK, NFLX/BBI). One grows by eating the other (monopoly rents) and rebirth. How many stores did Walmart eat? If one looks at the pure style indices (RPG and RPV etfs) v. the old Russell two way classification (IWF and IWD) one will find the excess returns above cash for the growth and value risk premiums are equal and greater than the traditional growth and value classification (where there is a value bias). This makes sense, as the pure style indices are more concentrated into those stocks that actually exhibit the growth/value factors. Particularly regarding growth, imagine the age distribution of a population, it will have more adults than children because more are grown than growing. If you sliced it in half you will have one set with some growth, but highly diluted. This also presents an index problem as by definition young companies are likely not to be included in the indices initially and will be underweighted even when they are. None of this, of course, is to deny that there aren't cycles where the relative spreads between the combinations don't over or under shoot the trend.

Industries, of course, can regenerate by cannabilizing themselves at times (I am watching closely) the combination of high fuel prices and cars– the fuel efficient fleet will ultimately eat the existing stock leading to a long number of years of above average growth into a downsized industry. This is the value players dream situation as the stocks will be priced on the history with the future ahead. 100 years ago horsepower add horses, even on the tracks unfortunately.

Rocky Humbert writes:

(With SAT test season approaching, I humbly request that fellow specs weigh-in with the current usage in my paragraph 2 below. Should the correct form of to-be be "is" or "are"? [….a portfolio of stocks which *is* trading…] If we cannot reach consensus on the proper rules of English usage, there's no hope for other conciliations.) 

A problem with the problem is the definition of "value" versus "growth." S&P's methodology is to put stocks with low p-e's (or p/b's) into the value category, and stocks with high p-e's into the growth category. The approach is self-referential, and although convenient, it's arbitrary and silly.

Yet, if one takes the S&P approach ad absurdem, The Chair cannot quarrel with the proposition that a portfolio of financially strong stocks which is trading at 5x earnings (and which is paying out 100% of earnings as dividends) will eventually outperform a portfolio of stocks which are trading at 1,0000000000x earnings. The asymptotic nature of compounding and the laws of economics ensure that this will be eventually true. Once The Chair accepts the irrefutable truth of this observation, the discussion becomes much more nuanced — leading to an analysis of what conditions lead to Value outperforming Growth or visa versa.

Lastly, one must note that, in general, the volatility of stock prices is greater than the volatility of the underlying business performance. This is the essence of "taking out the canes" — and one wonders whether value investing is a second cousin of Mr. Clewes?

Tim Melvin writes:

Let's use Walter Schloss's definition and see if any testers with better databases and math skills than I can compute the results.

True value investing as practiced by Graham, Schloss, Kahn, Whitman et al looks something like this:

price below tangible book value

debt to equity ration below .3

profitable or at least breakeven

closer to lows for the year than highs

a minimum of 10% insider ownership

Using pe or relative value is NOT value investing as best and originally define.



 Jackson Hewitt, symbol=JHTX, the nation's 2nd largest tax preparer filed for Chapter 11 Bankruptcy this morning. In the press release announcing their bankruptcy, Philip Sanford, President & CEO wrote: "….The Jackson Hewitt brand is greatly strengthened by the actions we are taking today, and we can confidently begin our preparations for the 2012 tax season and beyond…"

Might I offer a bit of unsolicited advice for Jackson Hewitt's CEO:

Filing for bankruptcy is NOT a brand-enhancing event — and especially not for a tax-preparation company. Accordingly, I'd suggest that he cancel the upcoming TV advertising campaign which uses the slogan: "File your taxes with Jackson Hewitt, and we'll show you how to go bankrupt….We're the Experts!"

(A better approach towards enhancing the brand might have been to cut the SG&A over the past several years.)



 Danielle Chiesi who had "intimate relations" with 3 of the prosecution witnesses is an archetype that deserves drilling and generalization– one hopefully will not be remiss on this front from the coasts to Midwest.

Her activities are part of the general tendency for older executives to wish to retire to a life of romance rather then making money. Such a tendency leads to all sorts of unintended consquences including the heightened tendency of older CEO's to be takeover targets, and the reduced premiums that their stocks acheive when they are bought out. It is reminiscent of the general tendency of older people of substance to be vulnerable to delegating work to their trusted subordinates and turning them on an instant when it will hurt their romantic life in the future.

The general utility of cane buying is illustrated by the moves in the stock market the last 25 fearful days of Friday the 13th, and on the even more fearful day of the open market meetings when the average moves of the market on these terrible days, 123 observations in all, is 0.4%.

Since the upside down man has issued his bearish call for bonds, they have very quietly risen 5 percentage points. They are now in a situation where when the economy is strong, buyers appear for bonds on the grounds that the accompanying strong commodity prices will weaken the economy, (how could the economy be strong with oil above 100?), and they go up when the economy is weak on the grounds that the Fed will not reduce its balance sheet or take back money from the cronies.

The influence of romance on markets is a field that needs to be studied in much greater detail. The performance of companies should be stuided classified by the age of their CEO and their marital status, and the frequency of their past divorces. Always to be kept in mind is the Sorosian adage that you should never cement bonds with a partner that you wouldn't wish to divorce.

My general point is that old CEO's delegate all their dirty work to their trusted subordinates and then turn on them when the paint hits the wall, and then call up the chief enforcement officer the same day to exonerate themselves. This is part of the more general point that the older CEO's are all too interested in sex a la the golf player at the silo company and let the business slip as they take care of their romantic proclivities, and I still say that any young attractive reporter is not safe in the corn belt.

Rocky Humbert responds: 

Perhaps you should therefore limit your investments to the following 15 Fortune 500 companies: Sara Lee, Yahoo, Wellpoint, Xerox, Sunoco, Western Union, Reynolds American, Avon, Dupont, TJX, Pepsi, Kraft, Rite Aid, BJ's Warehouse, and ADM. The commonality of these large enterprises vis a vis your observation is left as an exercise for the reader.

(This is neither an endorsement nor a rebuttal of your theory.) 

Anatoly Veltman writes:

Is it at all odd: Bunds and T-Notes are rising at seemingly equal pace, while the FX rate is fluctuating significantly? I understand that arbitrage is impossible 10 years out. Still, this may be a tip toward a simple explanation: that investment money is passively (and massively) reaching for miniscule nominal yield improvement, without a care to speculate on other variables.



Does the incessant parade of illegal/insider trading, government manipulations, etc, of smart Ivy grads evidence the difficulty of getting rich in markets, or simply that dishonesty and greed is pervasive at all intelligence levels?

Gary Rogan writes:

It's probably evidence of both, but also of the illusion that highly successful people often seem to have of being invulnerable to normal negative forces, such as being punished for attacking hotel maids or being revealed for having a secret "love child" while running for the Governorship of California, or having an easily identifiable affair while running for the presidency. 

Bill Rafter writes: 

Don't the B Schools all have required ethics classes? Come to think of it, doesn't the industry regulators also require ethics classics?

Rocky Humbert writes: 

The United States has an incarceration rate of 743/100,000 population.

The New York City's financial industry employees 344,700 employees.

If the pro-rata incarceration rate for Wall Streeters were at the national average, there would be 2,561 Wall Streeters in the Big House right now. Or, with 35,400 employees, 263 of these people would be Goldman Sachs employees.

Since neither of these facts are true, the inescapable conclusion is that Wall Streeters are either more lawful than the national average (or they have better defense lawyers).




 Jeremy Grantham is a well-known "bubble-burster"– who has spent decades studying popular delusions and the madness of crowds– with a mean-reversion mindsight. It's therefore shocking that he has declared the multi-year commodity market rally to be in a "paradigm shift" (as opposed to an asset class due for mean reversion.) Admittedly, the timing of this April essay couldn't have been worse….

Without offering any opinion on his arguments, Specs may find the essay interesting– and especially Specs who cut their teeth over the past 100 years with a doctrine that real commodity prices must decline over time.

Ken Drees adds:

Generally, when you hear "paradigm shift" or "this time it's different, it's under bubble froth conditions" or "well on the path of", Grantham is fleshing out the conditions and making the bull case even though we have had a temporary bubble top in 08. This research seems pretty straight forward and understandable based on current conditions.

I wonder what the path of least resist is for oil– seems like most people already stopped crying about 4 dollar gas.



 Here is an interesting article on the age of chief executives versus chances of acquisition. It shows that older CEO's are more likely to accept deals and also lower premiums. It's part and parcel of my investigation of how romantic urges of older CEO's often lead to hurtful results for stockholders from the Midwest to the coaches.

Rocky Humbert writes:

Interesting paper. But if I understand their methodology, they note that the chances of a bid is about 5.5% for geezers over 65, and under 4% for the younger CEO's. But their study seemingly only looked at the CEO's of companies that received takeover bids. They didn't look at companies which did NOT receive takeover bids. Hence, the subset that they analyzed has an obvious bias…. and it's possible that the stock of a company w/ an old geezer CEO of a company (which doesn't get a bid) has generated better long term performance than the stock of a company with a younger CEO. Surely there must be a paper out there which regresses CEO age versus stock price performance (over time). Doctor Z — have you seen such a study?

Victor Niederhoffer writes:

How could they come up with the chances of a bid without the total sample? Even an academic other than Sornette or the derivatives expert wouldn't make that mistake.

Rocky Humbert replies:

I didn't read the paper cover to cover, but section 3.1.2. and 3.1.2 defines their sample. Their study ONLY used the SDC US Merger and Acquisition Database….and CEO's who fell into that database.

The results are still interesting– but they would be much more interesting if they had looked at the bigger question. 

Kim Zussman adds:

Here are some somewhat relevant papers from SSRN:

This paper examines the influence of CEO career horizon on the future performance of firms. Specifically, we argue that CEOs with shorter career horizons (as measured by their age) will adopt risk-averse strategies that will, on average, adversely influence future firm performance. Further, we argue that at relatively high levels of CEO ownership control, this relationship is exacerbated. Using a sample of US-based firms from the S&P 500, we find that future financial and market performance are significantly lower for firms with older CEOs but only when those CEOs have strong ownership positions. We conclude by discussing the implications of CEO career horizons in the content of various levels of CEO ownership power.

The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction.

While individually age and tenure are only weakly correlated with the stock price reaction to a sudden death, the reaction is strongly positive (5 to 7%) if (1) the executive's tenure exceeds ten years and (2) abnormal stock returns over the last three years are negative. In a number of cases, part of the reason for the positive stock reaction to sudden executive deaths is apparently because in the stockholders' view, an obstacle to a takeover has been removed.

In this paper we examine the cross-sectional determinants of idiosyncratic volatility of biotech IPO firms. We extend current research in two directions. First, we test whether CEO stock options impact on idiosyncratic volatility. Second, we test new hypotheses that relate some easily identifiable managerial characteristics to idiosyncratic volatility. We find that the CEO stock options, resource dependence capabilities, and the age of board members help predict idiosyncratic volatility

A dailyspec classic: 

This paper shows that the time of year of a person's birth is an important factor in the likelihood they become a CEO, and conditional on becoming a CEO, on the performance of the firms they manage. Based on a sample of 321 CEOs of S&P 500 companies from 1992 to 2006 we find that (1) the number of CEOs born in the summer is disproportionately small, and (2) firms with CEOs born in the summer have higher market valuation than firms headed by non-summer-born CEOs. Furthermore, an investment strategy that bought firms with CEOs born in the summer and sold firms with CEOs born in other seasons would have earned an abnormal return of 8.32 percent per year during the sample period. Our evidence is consistent with the so-called "relative-age effect" due to school admissions grouping together children with age differences up to one year, with summer-born children being younger than their non-summer-born classmates. The relative-age effect has been demonstrated in numerous sporting and other contexts to last to adulthood and to favor older children within a school grade. Those younger children who nevertheless succeed by overcoming their disadvantage have to be particularly capable within their cohort. Together, the advantage enjoyed by older children and the particularly high capability of successful young children explain the statistically and economically significant findings. 

And just a few more: 

Regardless of retention , shareholders of acquired firms whose CEO is at retirement age receive lower premiums than shareholders of acquired firms with younger CEOs. This lower premium seems to be explained by the apparent reduced acquisition value of firms led by retirement age CEOs rather than by the target CEO conflict of interest.

Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how career concerns affect the real investment decisions of younger and older CEOs. In contrast to prior research which has examined some specialized labor markets, we find that younger CEOs undertake more active, bolder investment activities, consistent with an attempt on their part to signal confidence and superior abilities. They are more likely to enter new lines of business, as well as exit other existing businesses. They prefer growth through acquisitions, while older CEOs prefer to build new plants. This busier investment style of the younger CEOs appears to be relatively successful since younger CEOs are associated with higher plant-level efficiency compared to older CEOs. 



 I keep wondering if AAPL will be the first $1T-market-cap company. It's hard to accept that number if you're an old fart with a set of mental reference points that do not encompass market caps that begin with "T".

Right now AAPL has ttm net income of about $20B, and sells for 16x that number. So at the same multiple, $1T in market cap would require roughly $65B in net income. Is it possible they could get there in the next 3-4 years? They may break $100B in revs in calendar 2012. They also have $65B in cash on the balance sheet right now. By 2015 that will be…$150B? $200B?

The first $100B market cap was a big deal, too, though I don't remember which company it was.

Tyler McClellan writes: 

The reason apple will never get close to a 1 trillion market cap is very intuitive.

At that level they would be the largest net lender to the U.S. economy other than Japan or China. What are the prospects of a company that lends all its profits to the U.S. at zero percent interest rates. 

In fact, I will go further and say that the cash on the balance sheet at Apple is exactly equal to the amount of savings that society wants to do and apple refuses to accommodate.

For all of you who think you understand economic theory very well. What company supplies net capital to the economy at ever increasing rates even as its own prospects continue to improve vis-a-vis the economy?

Apple is a great lender to you and me, who have no need and no want for these lent funds, in exactly the opposite proportion to the amount you and I want to save in apple given its huge scope of opportunities.

Apple positively refuses to allow people to save. They force people to dis-save.

And for those of you who think the impetus to competition makes up for this (i.e., inducement effect of high market cap). Microsoft makes more net cash flow than all of the venture capital in the united states.

Apple itself makes nearly as much in free cash flow as the entirety of venture spending (that's in all categories at all stages).

Jeff Rollert writes:

Aren't market caps just measures of human preferences? If so, then they are good measures for where you are, not where you will be, as much of this behavior mapping is coincident.

A trillion seems to trite these days. 

Alston Mabry writes:

I think size matters.  Here are some more stats for AAPL:

last two quarters' YOY rev growth: 70%, 82%
last two quarters' YOY earnings growth: 74%, 91%
annualized growth rate of net income since 2005: ~60%

PE based on most recent 4 quarters: 16.3
PE after backing out $65B in balance sheet cash from mkt cap: 13.2

Now, imagine you saw those growth rates for revs and earnings, and that PE ratio, in a company with a $1B market cap, a company that had relatively limited market penetration for most of its products. "Is that something you might be interested in?"

So why aren't we more interested? Because people think AAPL is too big already. But maybe we have entered a new era of an expanding global economy in which there will be many companies with trillion-dollar market caps. As a popular and much-quoted writer and self-styled philosopher called it: the "JK Rowling Effect".

At one point in January 2000, the top ten (or twenty…I can't remember) stocks in the Nasdaq 100 had a total market cap of $1.6T and aggregate net income of about $19B, for a PE of 83. AAPL's current ttm net income is $19.5B, it's market cap $320B.

Frame of reference…point of view…big round numbas….

Alston Mabry asks: 

So you're assuming that rates will still be zero in, say, 2016? Could be. But what if the whole curve is pushed up two or three hundred basis points by then?

Tyler McClellan writes: 

Their actions as representative will force the rates to be low.

If the worlds most rapidly growing large enterprise refuses to borrow funds at 70% internal growth rates and is more than happy to lend them at 0% interest rates, then what possible companies demand to invest more than their willingness to supply savings?

It's a big fake that no one is supposed to talk about, our best companies don't want any money no matter how fast they grow, and in fact the faster they grow the less money they want. But wait, that's great, you say, because it means they create value out of nothing, and that what economics is. And isn't it true that companies can have value only if the sum of their discounted cash flows are positive, so doesn't that mean were wealthier if all of our companies have really high net cash flows.

And of course the answer to the above is categorically no, but I don't suspect what I've written to make a bit of difference, so back to my little day solving equations. 

Rocky Humbert writes: 

Tyler: I'm not sure it's appropriate to generalize from AAPL to the entire economy. AAPL is sitting at the top of the technology food chain, and they are benefiting from the investments being made underneath them. It's surprising, but Apple is NOT investing in R&D in a meaningful way… and this demonstrates that they are much more of a marketing company (like Proctor&Gamble) than a technology company. Hence they will eventually need to either buy back stock or pay a dividend….

R&D as a Percent of Revenues:
AAPL: 2.7%
P&G: 2.5%

INTC: 15%
MSFT: 13.9%
GOOG: 13.0%
IBM: 6%
(Source: Bloomberg, FA IS page, trailing 12 months)



 Has any one commented on the subtle reasons that the accounting firm that made the audit report for Berkshire on the Sokol trading did not ask him one question or have one meeting with him before the report? There must be a legal reason for this. But to the layman, it would appear to be that they were afraid of having to report his response.

Henry Gifford comments:

An apartment house was built in Manhattan with parapets (those brick walls at the perimeter of the roof) which leaked so much water into the apartments they were removed and replaced at great expense. The architect was one of the people sued. The architect pointed out that the contractor did not build the parapets according to the plans, thus the architect was blameless, and was dropped from the lawsuit, and was not further involved in the next two removals and replacements of the parapets in further efforts to remedy the problem.

Perhaps the architect could have been asked to refund the fees paid for supervision of the work, but nothing more.

Numerous people hired to do designs in the construction industry advise never physically going to a construction site, thus there is no responsibility for defective work.

It would be interesting to know the physical location where the auditor's work was done, and to know if there are any standards of conduct that require a visit to an office, a visit to a business if the work exceeds a certain size (such as the business I once visited that looked very prosperous until I noticed the phone almost never rang), seeing originals of documents, seeing documents while no other parties are in the room, having documents in possession for a certain period of time before a report is due, or if all work can be done remotely based on copies of documents faxed over few minutes before the report is due.

Rocky Humbert writes:

The Chair writes: "…subtle reasons that the accounting firm … did not ask him one question or have one meeting…"

From a
partner of Munger Tolles & Olson (a very large corporate Law Firm (not accounting firm) which represents Berkshire):

"Mr. Sokol was interviewed at least three times regarding his Lubrizon trading activity and contacts with Citi bankers. In connection with the preparation of the audit committee report, a request for a further interview with Mr. Sokol was made to his attorney. Mr. Sokol was not made available."

On the advice of his attorney's, Sokol stopped cooperating. What's subtle about that?

Victor Niederhoffer writes: 

There's nothing funny about that. What's funny is how the attorney for Mr. Sokol said that "without the care and deceny to ask even a single quetion of Mr. Sokol". Only two lawyers or Sholem Aleichem could show how both lawyers could be right in what they say.

Rocky Humbert adds:

A little talmudic interpretation may help:

Sokol's lawyer wrote: "I am profoundly disappointed that the Audit Committee…would authorize the issuance of its report to the public without the care and decency to ask even a single question of Mr. Sokol."

This is semantic deconstructionism worthy of Bill Clinton's the meaning of "the".

Sokol's lawyer didn't say that the Board didn't ask him questions. It says that the board didn't ask him questions about the issuance of the report! 

Stefan Jovanovich writes:

Has no one heard the joke about the lawyer, the accountant and the engineer trapped on a sand bar surrounded by tiger sharks with the tide coming in– the one with the punch line of "Professional courtesy"? What else would 2 lawyers say? The R-Man is nearly infallible; but he is wrong about Charlie Munger's firm being "very large". In the world of bulk word carriers, it is not even a PanaMax.

That does not prevent MT&O from preserving its reputation for Janus-like integrity. Before we surrendered our tail fins as LA lawyers, Eddy's Mom and I used to play a game of identifying the local law firms by show tunes. From Day One MT&O was always matched with Kurt Weill's signature tune.



Chemists and chemical engineers among us will remember the old Beilstein Handbook of Organic Chemistry — a relic of the pre-internet age that sits humbly on every self-respecting geek's bookshelf next to the CRC Handbook of Standard Math Tables. With gasoline prices approaching record highs (record=363 on 7/11/08; last=330), but natural gas stuck in the basement (7/11/08 price=13.60 ; last=4.55), it's a good time to revisit the conversion of natural gas into hydrocarbon liquids (including gasoline and jet fuel).

The "established" technique for this conversion is the Fischer-Tropsch Synthesis   "popularized" by the Nazis during WWII. However, chemistry has advanced a bit since then — and a quick google reveals that there are several companies with natgas-to-gasoline conversion patents. This story titled "Natural Gas to Gasoline"   appeared on August 25, 2008 — an inauspicious moment in the history of finance, venture capital, and energy prices. With financial conditions rather different today (and every attempt at rallying Natgas failing,) it's probably a good moment to take a fresh look at these ventures.

South Africa-based Sasol is the most obvious company that deserves a closer look.

Other companies mentioned: GeoGas Development Corp, Synfuels International

Other suggestions would be welcome — including the possibility that the very appearance of this post is a great indicator of a top in the gasoline market!



 Umberto Eco wrote a great essay about how when new products start they are used first by high end users, and then gradually diffuse to the masses so that by time the masses use them, the marginal utility keeps reducing and the first users that got real value out of it stop using them. He points to such things as railroad use and cell phones as examples.

We have see how IPO's prospectuses follow this model with info in it being completely worthless as they have to go through so many hoops that it becomes merely a boiler plate to reduce the settlements in class action litigations when the case is settled.

One notes now the apparently standard thing in financial statements "cautionary note regarding forward looking statements".

I note in a company like Rimm 30 cautionary notes including "difficulties in forecasting quarterly results" and "regulation certification and health risks". My goodness, there was a time when management statements could actually convey useful information that had a high marginal revenue.

Could we attribute this syndrome to crony capitalism or flexionism or just a natural outgrowth of the law of diminishing marginal utility? 

Rocky Humbert writes:

While the chair's assertion that disclaimers have proliferated since the passage of the PSLRA is correct, there is scant evidence that management statements ever have consistent predictive value w/r/t either the organic performance of the business or its market valuation — over a reasonable investment time period. See wikipedia on the Private Securities Litigation Reform Act.

One reason for this is that companies which are performing well have no need for management cheerleaders or CEO soothsayers; the market will eventually figure that out on its own. In fact, the worst companies are the ones where the CEO is front and center (giving "upbeat" guidance) when things are rosy, but then when things turn challenging, release 8-K's on Friday afternoons using terms such as "exogenous factors" and "one-time adjustments" (and the CEO is nowhere to be seen.) Citing Philip Arthur Fisher's Rule #14: "Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?" It's a rare company that does an IPO or secondary when business is sickly (the exception being banks which sell stock at the behest of regulators.) Hence the entire IPO process can be viewed as a possible violation of Rule #14.

On a related point, one notes that INTC stock (which was mentioned recently by Dr. P) has a compound annual return since 1982 of about 15.6% per year (versus 11% for the S&P). During the same period, AAPL stock has produced a 17.5% compound return. Yet, right now, INTC has a 10x p/e and AAPL has a 17x p/e. Both of these companies have demonstrated good long-term organic growth, RoE, product innovation, and impressive market dominance. Yet, if Mr. Market would reward Intel with only a market multiple, it's return-to-shareholders would blow away Apple — demonstrating once again that Mr. Market's valuation at any given moment dwarfs every other factor for a profitable enterprise. I submit that it's folly to attribute this irrefutable statement to crony capitalism or flexionism or the law of diminishing marginal utility. The blame should be place squarely on the market participants who continue to make the same mistakes (such as buying INTC at a 70x p/e on 3/1/2000) but shunning it at a 10x p/e on 3/1/2011. 

Ken Drees writes:

Consider the cell phone and its recent tracking news out of apple– or police being able to plug a device into your cell phone and download all your data from it– the high end user will now need tech applications to shield their privacy and will demand a next generation product that the masses do not have– a private communication device. The cycle keeps moving forward. Maybe a self destruct feature will come on the scene.on the subject of mumbo useless jumbo in fin states. Is not persistency of litigation like ants digging into the timepiece to blame for the creeping destruction of worthy information?

Bill Rafter writes:

In looking to eliminate stocks in mergers or merger talks I cannot always get that information as quick as I would like. Sometimes I have to resort to looking at the individual stock's news headlines. Before I even get to the news about the merger I see the inevitable: "The law office of Dewey, Cheetham and Howe launches an investigation into possible breaches of fiduciary duty by the Board [of the company]…"

That, I contend, is why you don't get useful information.

An Anonymous Commenter writes:

I recently read an article that the author was try to further disgrace a Euro based company whose board member had made a remark at a meeting referring to "the weaker sex". The article told of the various ways, non business groups and political active parties tried to protest these remarks. However while raising a good smoke screen; the parties complaining were inefficient and did not understand business. Has any body done a study on the stock price of a company whose leadership made non PC remarks? Could it actually increase the price, due to the signal of boldness and management willing to think outside the box? Would not such a study have been quoted in these articles that hold a company up to ridicule? Could such a study have been done but be not published due the opposite than hoped for results?



 Much ink was spilled over the recent "downgrade" of US government debt by S&P. A second-order effect — which has obvious and important business consequences — occurred with much less fanfare.

S&P's downgrade of the US Sovereign was accompanied by a similar downgrade of the five most highly rated US insurance groups: USAA, NY Life, Northwestern Mutual, TIAA-CREF and Knights of Columbus Fraternal Benefit Society. All of these insurers were previously AAA, but along with Uncle Sam, they were downgraded to "negative outlook."

"The ratings of these five US insurance groups are constrained by the sovereign rating on the US because the insurer's businesses are concentrated in the US, and domestic assets account for a large proportion of their portfolios," S&P wrote in a news release (which didn't make the front page of the Wall Street Journal.) "We factor direct and indirect sovereign risks — such as the impact of macroeconomic volatility, currency devaluation, asset impairment, and investment portfolio deterioration — into our financial strength ratings. The rating and outlook on the US constrain the ratings and outlooks on these five insurers. If we were to lower our ratings on the US, then we would also likely lower our ratings on the insurer[s]."

As S&P's singles out these five insurers (which survived the recent financial crisis with hardly a scratch), it demonstrates the capricious nature of S&P ratings (i.e. why is Northwestern Mutual more vulnerable to macroeconomic volatility than GE, Berkshire Hathaway, and Chubb?), and it also underscores some longer-term consequences should the US Sovereign lose its AAA. Put simply, an insurance company's ability to compete and write new policies is directly related to its credit rating. If/when S&P further downgrades the US Sovereign, these insurance companies will be among the most obvious innocent, first victims.

Sam Marx comments:


Would you say that there's politics involved with the people at S&P who do the ratings?

Imagine the effect on the presidential election that could be had if in late October 2012, they actually downgraded U.S. Government debt.

Russ Sears writes:

If the first law is survival, you have to wonder if the threat of the "nuclear" option was a response to the rumors of Congress taking away the rating agency immunity from investor lawsuits.



 During the third week of 1980, silver made a high of about 49.45/oz– and then collapsed, taking Nelson Bunker Hunt, William Herbert Hunt (and eventually Continental Illinois Bank) into bankruptcy.

Today, about 31 years later, silver finally reclaimed that "glorious" price … and traded at 49.79/oz….proving many market saws — including, EVERY market forecast will eventually be proven correct– it's the timing (and margin clerks) that make things difficult…

(A belated happy 85th birthday to Nelson Bunker….).

Recap from January 1980:

Fed Funds rate: 14.00%           Today=0.25%
10-year treasury yield: 10.6%  Today=3.4%
Dollar Index (DXY) = 86           Today=74.0
DowJones=875                        Today=12,400
CRB Continuous Commodity Index=290   Today=682
US CPI Index=78                     Today=223



 I have been asked if a lower yield after seemingly bad news like the S&P downgrade is bullish for bonds. A lower yield than before happens often. Is it bullish or bearish? If you specify the time and the magnitude and the other conditions it can be tested. Such tests must be made conditional on the time of the day. As a hint, such tests as of the end of the day do not support anecdotal assertions being made here about qualitative factors, and sensible sounding technical shibboleths. The problem with qualitative analysis is that there are so infinitely many smart people constantly tinkering to get the right price, that the right price is the result of so many people like Paul DeRosa and the palindrome, the former of whom is completely sagacious and knowledgeable, and the latter of whom takes along with him trillions of fellow travelers that are part of the affinity group, as well as the wisdom of all the flexions that rely on such as the upside down man and he for guidance as to what they should do to finesse their positions along. Furthermore the wisdom and the access to such info from all these types is always varying, and depends on the ethos with which they look at things, which is often right during bad economic times for example for the Man of Many Books. Sometimes they're good and sometimes bad. So it's hard to follow a qualitative guru, and even more difficult to find a qualitative divergence. Certainly impossible is to make money following a shibboleth that hasn't been tested, and to extent it has, one wouldn't be writing that it's worthless unless it were truly wrong.

Rocky Humbert responds:

Here are some stats:

1. Japanese National Debt/GDP = 228%. Yet their currency is very strong; and their yields remain near record lows.
2. Italy Natioanl Debt/GDP = 115%. Their yield is 120 bp over bunds.
3. US National Debt/GDP = 97% (if you include social security etc); 60% if you don't. Yields at 10 bp over bunds.

Although academics try, it's clearly impossible to draw a straight line between National Debt/GDP and nominal sovereign debt yields.

Furthermore, and more on point, last week Gallup (and Google Trends) showed the US Budget Deficit had risen to be the "Nation's Most Important Problem." This story moved to the front of the pack — displacing job; war; healthcare; and Charlie Sheen.

That Obama gave a speech on this and that S&P issued their non-news is simply a mirror of the established public mood. Therefore, definitionally, it's in the price.

One more thing: Normally, a company PAYS MONEY to S&P to get a credit rating. That's not the case with S&P's rating of US Government debt. Hence I think we taxpayers should all thank S&P for their incredible generosity — providing their useful, cerebral and predictive analysis of the United States of America — totally free of charge. (Either that, or you get what you pay for.) 

Ken Drees writes:

Looking for the next trend or meme– could this all be a preamble to QE3 in June or the no mas to GE? So it's a battle stations type of market that comes to us this summer with much more volatility then we have been conditioned for? I wish I could quantify the persistence of trend beyond the rational into some type of indicative feature. Financial alchemy– chasing that idea.

Gary Rogan comments:

How high the debt to GDP needs to be before a country goes kaput is clearly numerically an unsolvable problem, especially for sovereign money printers like US and Japan. If the bond market keeps buying the debt this can go on essentially forever. If the economy is barely making it but trending upwards there doesn't even have to be any appreciable inflation for an unknowable period of time. Therefore it's not clear what the rational approach should be to evaluating the situation, and then people focus on the differences like the Japanese debt being owned so much by the internal population, and that population being so thrifty. Clearly part of the reason that the debt has risen in importance is not the absolute level but the seemingly uncontrollable actions of those who are creating this debt while paying lip service to "living within our means". People don't like it because to them this symbolizes irresponsible behavior, because they know that their neighbors or relatives who do that get in trouble, so then there are political consequences to this behavior and the opposition party makes even a bigger issue, and so it goes and goes. This is totally different from the bond market making a judgment about the country in question defaulting. I personally think its the ridiculous that the main generator of this debt has just made a speech in which he proclaimed that we can't spend more than we take in, and have heard it compared to Colonel Sanders making a speech declaring that we can't just go on killing chickens this way. And yet I don't know where it's all going any more than the next guy.



The results of "stock screen" Friday provided a fun and surprising riddle:

Among all of the developed markets, what is the ONLY mega-cap stock (>US$ 50 Billion) which is currently trading at under 65% of it's stated tangible book value?

Hint: It's not Berkshire Hathaway, but the company does have something in common with Warren Buffett.

Tim Melvin writes:

It's AIG, but that tangible book is a moving target at best.

Mark Schuetz writes:

I see both MTU (Mitsubishi UFJ Financial Group) and NTT (Nippon Telegraph & Telephone). I guess I'm not enough of a Buffett follower to make the connection though.

Rocky Humbert responds:

Mark, you get the buzzer– and lose everything in the final jeopardy round!! Although Bloomberg shows NTT to be trading far below book in their screening algorithm, a closer examination of NTT's balance sheet reveals Bloomberg is wrong!

Tim Melvin writes:

It's below stated book but at roughly tangible book right now…

Rocky Humbert writes:


So, the meal-for-a-lifetime thought follows:

MTU is trading at about 65% of tangible book. Citi is trading roughly at tangible book. And Citi got a Get-Out-Of-Jail card from the US government. Yet — over the past 5 and 10 years, MTU stock (despite a horrible RoE) has still outperformed Citi nicely in local currency terms!!And for US$-based investors, MTU has outperformed Citi substantially.

Nonetheless, Mr. Market is now offering a 35% haircut for MTU's assets and a 0% haircut for Citi's assets…. a striking commentary about investor preference and expectations. Note also that the slug of MS stock that MTU received this morning (as part of the perferred conversion) is trading around 114% of book.

p.s. I still remember attending a roadshow for Japanese bank stocks in the late 1980's during which the White Shoe underwriting firm explained that Japanese banks deserved a price/book multiple of 250%-300%. Presumably, the same analyst is today explaining why the same companies deserve a price/book multiple of 0.6….



 1. "There is no such thing as easy money"

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

[An example supplied on April 18 by Mr. Rogan: "The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday" (zerohedge )]

3. It's bad to try to make money the same way several days in a row

4. Markets that have little liquidity are almost impossible to profit from.

5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

6. The market puts infinitely more emphasis on ephemeral announcements that it should.

7. It is good to go against the trend followers after they have become committed.

8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you'll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

10. A meme about the relation between today's events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

11. All higher forms of math and statistics are useless in uncovering regularities.

Mark Schuetz comments: 

A point about # 2: This one might be fun to try to rigorously measure and test, looking at price movements in the time leading up to and including certain announcements (knowing this type of thing has been shown by list members before, but usually it's more descriptive instead of measured). Is it possible to show which types of announcements are more often known by participants beforehand as opposed to other types? Also, if certain participants are informed ahead of time, how far ahead of time do they know and in which way will they "front-run" the announcement (there can sometimes be many different ways to make a position on one economic statistic) ?

Victor Niederhoffer replies:

Certain participants know it and they react to it, and you can figure out which announcements are go with and go against——-but but but. The pre and the post regularities are always changing vis a vis the flexions and cronies and their nephews.

Ralph Vince writes:

What a great post. Thanks Vic. I certainly must second points 1 and 11, the bookends….and they have me thinking…

1. There is no such thing as easy money

This is so true, in the markets, in everything. Those who happen upon money where it DID come to them easily, it seems, as a witness, have had it very fleetingly. In my own case, although I am supremely confident in the profitabliity of what I am doing, in practically any market, in virtually any "regime," doesn't mean it's easy. It works like clockwork and is incredibly painful and distressing. It would be so much easier to simply sell buckets of blood."

11. All higher forms of math and statistics are useless in uncovering regularities.

Certainly in a post-'08 world, quants are out of favor, and for good reason. Most anyone I know who DOES make money in the markets, does so with very simple, robust techniques. Having considered going to quant school, and studied a good deal of it, I finally came to the conclusion that they are simply working with "models." Models of how the world behaves. unlike hard sciences like Physics and such where you can perform a test, come back a year from now, perform it again and get the same results, you don't have this in financial modeling. And I think this is where the quants have fallen short. Models are NOT reality, and they never got down to the bedrock, the reality of what his game is about. Of course it had to fail, and in a large way, at some point. A good rule of thumb is that if I need a computer, if it isn't simple enough to do in my head on the fly in the foxhole after I have been awake for over 100 hours, I can't use it. 

Jim Lackey writes: 

About point # 10: It takes no time at all for the information to spread. Yet how many times have we acted, lost a bit, recovered, then seemingly too much market time expires, and we close out a position. We say "awe everyone knows that it's priced in." The meme is then repeated for the 57th time and on a low pressure day, month, or year and then, kaboom!

Of course, I can think of the few times where we missed a huge score, being short YHOO in 2000 or selling some short in 2008. Yet there are hundreds of low magnitude fantastic long only ideas that we forget about. I look back 6 months later and say wow look at that beautiful rise, what happened? It went up very small, day after day, and only buy and hold would have worked.

Alston Mabry adds:

 12. One should not make one's analysis more precise than one's actual trading could ever possibly be.

If the rational mind has not determined the parameters of a trade, then upon execution, the lizard brain will decide.

14. Never go on vacation with open trading positions.

Or, zooming in:
<click> home

<click><click> to lunch

<click><click><click> to the bathroom 

Paolo Pezzutti writes:

One could test how the stock market reacts to good (very good, wonderful) or bad (very bad, terrible)(a sort of matrix) news when the news is released and after some time. It might help build a strength indicator. Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Alston Mabry comments:

Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Chris Tucker adds: 

Stick to your guns, but realize when you are wrong. Easier said than done. Good ideas can lead to conviction, but only experience can strengthen ones resolve. Forget the last trade, look to the next. Try, try, try to learn from your mistakes, but also from your wins.

Anton Johnson writes:

15. When correlations among many typically disparate markets become high, one should reassess leverage and seek novel opportunity.

Jeff Rollert writes:

17. Sell side liquidity is an inverse function of cell signal strength and micros0ft patch frequency, especially at lunch time.

Rocky Humbert writes:

The First Law of Rocky – In every "macro market" (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. This Law is true 99.999999999% of the time.

The Second Law of Rocky – Rocky always keeps his calculator precision set to two decimal places. Any trade that requires more precision than the hundreth decimal place, is a trade that Rocky leaves for smarter participants

Jeff Sasmor writes:

About Jeff R's # 16:

16a. Never go to the doctor when you have a profitable position as it will reach its maximum profit and reverse exactly at the time that you enter the doctor's office.

Happened to me yesterday…

Ralph Vince comments:

With regards to the First Law of Rocky…."Unless it is a new high, that price has already been seen before."

Victor Niederhoffer adds:

Beware of using hard stops as it's bad enough that the floor can always know your physical hard stops.

Jay Pasch comments:

No wonder over-leveraged daytraders always lose as they are required to deposit a hard stop with their leverage, along with their hard earned money…

Ralph Vince adds: 

Despite numerous posts on this thread, it has not been opened up beyond Vic's original 11…

T.K Marks writes:

Aristotle felt the same way about drama, posited that it could be comprehensively reduced to 6 elements. And any additional analysis would by definition be but variations on those original half-dozen themes:

"…tragedy consists of six component parts, which are listed here in order from most important to least important: plot, character, thought, diction, melody, and spectacle…"

Jim Sogi writes:

Always be aware of and consider current market conditions and how they might affect or even negate your prior analysis.

Even the the weather forecast says sunny, if the clouds look dark and the wind is blowing, stay home or dress warm.

James Goldcamp writes:

One good anecdotal rule I've found that works for investing is that the market that causes you the most psychological pain, revulsion, and visceral response from prior bad investments, or overall perception, is probably currently the best opportunity since others may also have a similar overly pessimistic view (or over assign risk premium). This seems to be especially true for post calamity emerging markets, high yield bonds, and fallen growth stocks (tech). If for no other reason, this is why I think stocks like Citi and the West Virginian's company are good buys now (and perhaps government motors and Russian stocks).

Ralph Vince comments: 

 Thinking on this a great deal the past 24 hours, I think I would add one more, which is to me the most important of them all perhaps, or at least tied with #1 and #11. And that is that most people have no business being here. They don't know why they are here, and, if pressed, can only give a sloppy, struggling answer. "I'm here to make money." "I'm here to improve my risk-adjust return," or some other nonsense.

They are here for action– whether they know it or not, whether they acknowledge it or not. The market is a magnet for gamblers, a magnet for those who compulsively seek out the very action she puts out. People are here because they want to feel they have one-up on the masses, the system, or that they are not as inadequate as they suspect. The very proof of that is their utter inability to instantly articulate their criteria in specific terms. Absent that– they're in a bad place.

They're looking for girls in the wrong dark alley.

It makes no difference how well-capitalized the individual is. The world is full of guys with $10,000 accounts who will lose it all and then some, and full of guys with very fat checkbooks who will lose all of it equally as quickly, in similar fashion.

They still think it is about what you buy, when you buy it and when you get out, facets that have nothing to do with what is going on here (which is specifically why mathematics, simple or higher-order, fails in this endeavor; people are applying to aspects they mistakenly think this thing is about.)

If you examine institutions, they may be equally as clueless as to what this thing is about, but they have one big up on the individuals– they have a specific, well-defined criteria in most cases about what they are in this for, what they are willing to do to achieve something very specific.

Most individuals– of all gradations of wealth– can't, and that's the red flag that they here for all the wrong reasons.

Jeff Rollert adds: 

Amen. If it doesn't hurt a little, you're wrong.



 We might witness something very historical in a few days. There is a good possibility the nearby month of corn will trade at a higher price than the nearby month of wheat.

Rocky Humbert writes: 

Perhaps the futures market is awakening to the fact that a box of Corn Chex cereal is already more expensive than a box of Wheat Chex cereal.

More seriously, during the summer of 1996, the price of Chicago front corn exceeded the price of Chicago front wheat. This also briefly occurred in late 1983/1984 as well as June 1977 and June 1969. In 1969 and 1977, this unusual occurence foretold an important bottom in the grain markets. In 1983/84 and 1996, it foretold a top in corn.

So while it's unusual to see Chicago Corn over Chicago Wheat, it's not unprecedented. Also, as Jeff will attest Minneapolis & Kansas hard wheat is at a large premium to Chicago wheat and corn would need to rise another 25% to close in on that spread.



 Concerning Gross Vs. Van Hoisington, don't listen to what they say. Listen to what they do. Or more precisely, how they've done for their customers during bull and bear bond markets:

Hoisington has one public bond mutual fund which is named the Hoisington US Treasury Fund (and he has the discretion to move his duration from 0 to 25+ years) but only owns US Treasuries. His performance is shown here.

His 1year/5year/10year returns are: 4.42%/4.77%/6.31% versus the Lehman Agg Index of 4.93/5.8/5.61. .

Pimco's Total Return Fund
can invest in all sorts of fixed income, but they keep their duration at 4.30 years +/- 2 years. Gross' 1year/5year/10year return are 7.31%/8.12%/7.16%

So — Gross has outperformed VH substantially over the past 1 and 5 years. And over the past ten years, Gross outperformed VH by about 85 basis points/year. Most importantly, Hoisington LOST 22.6% in 2009 while Gross made 13.8% in 2009. Which superficially makes Hoisington look like a one-trick bull-market pony….

George Zachar writes: 

There's an apples-oranges element to this analysis. VH has only one risk parameter to play: treasury duration. Gross can play that AND sector/credit rich/cheap. The ability to play in spread product is easily worth dozens of bp in annual performance pickup.

Both men are arguably brilliant…but they do different things with different toolkits.




I am sorry for you personally that your job hunt is frustrating - however, I think some of your points defy logic and can lead you to the wrong place. I'll offer some (hopefully helpful) other ways to think about your observations. You wrote:

In my opinion, there exists a very large disconnect between the stock market and the jobs market. As a job seeker I can tell you what I am seeing, no jobs. - Frustrated Job Seeker

Stock prices represent the discounted future value of corporate profits. They are not a proxy for the unemployment rate; in fact, nothing could be further from the truth. If a company can produce the same profits with fewer employees, productivity and profits rise. And the stock price should rise too (ceteris paribus). This has been true since the industrial revolution, and it's true today. The challenge of a economy with a large number of displaced workers is to have those workers (a)accept lower real wages; (b) acquire new skills; and (c) avoid permanent unemployment. Additionally, in an economy with an increasing concentration of wealth and income (such as the USA has had for the past several years), this situation can be persist for a very long time. (This isn't an argument in favor of wealth redistribution, just an observation that structural unemployment isn't necessarily related to corporate profitability and stock prices.)

Those of us who cleaned toilets to pay our way through college always find it perplexing when people talk about graduates who cannot find jobs. It's a shame (and economic loss) if you're a PhD in computer science and forced to work as a cashier. But instead of blaming others, one needs to do what one needs to do — and in this regard, I highlight the shortage of workers in North Dakota . I'll happily mail you a Greyhound bus ticket to Fargo (gratis) if that would be of any help!

The stock market rise is just another Fed induced low rate driven bubble - Frustrated Job Seeker

Your comment ignores the way monetary policy is intended to work. The entire principle behind classical monetary policy is that by lowering the price of money and credit, people will be more inclined to spend, invest and borrow. Stefan and other gold standard bearers wince at this, and they have an intellectually consistent basis to do so. However, that's not the regime we have. We have a fiat currency and fractional banking system. And under this regime, the reaction of financial markets is (in part) a reflection of the incentives that the central banks are providing. And, combined with fiscal spending, monetary policy a potent stimulant to SHORT TERM demand and consumption. (Its effect on LONG TERM growth is a different discussion.)

It is true that the reaction of unemployment to the cycle has become more muted over the past 25 years in part because the percentage of US workers in direct manufacturing industries have declined. The days when Ford and GM and US Steel would layoff 100,000 factory workers during a recession — And then hire them back 15 months later — is long gone. The hiring/firing cycle for white collar workers is vastly different and much slower post-recession. When you read that the number of jobs created post-recession is the lowest since WWII, you should bear this structural change in mind. (Also, it's worth examining the structural unemployment rate in Germany over the past 25 years for some interesting contrasts.)

Fed policy has been a failure on the unemployment front, at this point doesn't it make more sense to raise rates a bit in hopes it signals the all clear, even at the risk of a short term adverse reaction in stocks? (stocks have already doubled from their lows, after all) - Frustrated Job Seeker

You can reasonably argue that the fed funds rate is currently too low. And you can further argue that QE2 is not a constructive idea. However, there needs to be a sound intellectual framework for deciding on the appropriate short rate. Why raise rates 25 basis points? Why not raise rates to 6%? Why not let the fed funds rate float and target money growth (ala Volker)? Or why not just have the fed funds rate set every month at CPI minus 25 basis points? There are endless papers on this subject - but no serious person suggests raising rates 25 bps to simply signal "confidence."

You point to the doubling of the S&P off it's low as meaningful. I suggest that it's not. What you fail to consider is that when the S&P was at its low, it was a reflection of the fact that the commercial paper market had frozen. The money market system was facing a run. And there was (to quote Mr. Rogan ), "No way out other than total financial collapse." That Mr. Rogan has been proven wrong (and the world has not ended yet), has not elicited any mea culpa from him — nor has he evidently learned anything about economics — but rather he's turned his perpetual malice toward Bernanke, Boehner and China. In sum, rather than showing any signs of optimism, he's an angry old man. In contrast, you are not an old man. You are still young. You are actively looking for work. And I encourage you to be optimistic — since enthusiasm and optimism are necessary ingredients for success. To summarize, don't let yourself become depressed. Don't let the stock market influence you. Just keep your chin up, be realistic, and things will eventually turn out fine. Oh, and if you need to clean toilets for a couple of years to make ends meet, that's not the end of the world either. It's what makes America great!

Gary Rogan replies:

Ignoring the ad hominem part of Rocky's argument, it is absolutely clear that the Fed operates under the traditional monetarist assumptions that postulates that "by lowering the price of money and credit, people will be more inclined to spend, invest and borrow". My problem with Mr. Bernnake is that he treats this as an irrefutable law of nature. There is clear anecdotal evidence, as in the expressed opinions of multiple CEOs (the recently mentioned Mr. Zell in a different testimony being one of the recent cogent examples) that it is the uncertainty introduced by the various medllings of our government in the private sector that is keeping them from hiring more people and not the availability of credit, especially when large corporations are involved.

Furthermore it is unclear whether the entire reason for  Mr. Bernanke behavior is just his monetarist belief system or perhaps in part a desire to accommodate the government spending that is occurring independent of the monetarist concerns. His intentions may very well be totally pure, in that he sees himself as doing what's strictly necessary to save the country, I simply disagree with the actual role he is playing.



 With all the attention the Federal Reserve has gotten lately, Rothbard's "Origins of the Federal Reserve" has been published in pdf form. Very interesting read.

Stefan Jovanovich writes:

Veronica Wedgwood said somewhere (sorry– I can't find the reference) that the test of a historian is whether he or she lets the facts change opinions. Wedgwood herself passed that test in her own work. That is why her history of the Thirty Years War is still the definitive work– 75 years after it was published.Wedgwood also said that a book was only worth reading if you could take its facts and find that they were true.

I wish I could share Jeff's enthusiasm for Rothbard; but, when I took one of the first paragraphs in Rothbard's book and put it to the Wedgwood test, it failed badly.

"The alliance of big business and big government with the Republican Party drove through an income tax, heavy excise taxes on such sinful products as tobacco and alcohol, high protective tariffs, and huge land grants and other subsidies to transcontinental railroads. The overbuilding of railroads led directly to Morgan's failed attempts at railroad pools, and finally to the creation, promoted by Morgan and Morgan-controlled railroads, of the Interstate Commerce Commission in 1887."

The Revenue Act of 1861 was extended in 1862 to apply the excise to gunpowder, playing cards, feathers, iron, leather, piano, billiard tables, yachts, drugs, patent medicines and whiskey. At the end of the war, the taxes were repealed on everything; only the traditional excise - on liquor and tobacco - remained. The same Revenue Act of 1861 enacted the income tax. It was a flat tax - 3% on all income above $800 (what would be $20-25K now) - and 5% on the income of all Americans living abroad. The 1862 amendments changed the income tax to a progressive tax system; they also included an explicit date for its repeal - 1866.

Rothbard is correct in noting that the Morrill Act introduced "high" protective tariffs; but even that statement is out of context. The overall tax rate under the Morrill Tariff was 26%; for dutiable items the average rate was 36%. That was higher than the Walker Tariff rates (17% overall, 21% dutiable). The rates in the 1820s had been much, much higher (roughly 50%).

At heart Rothbard is making the standard Mises.org/diLorenzo/never-mind-the-facts doctrinaire Libertarian argument that the sons of the South were only seeking liberty and small government (never mind the first attempt at the legislative reach of Obamacare - the Fugitive Slave Law). But, try as they might, those who try to make the Morrill Tariff and not slavery the central cause of the Civil War/War Between the States run up against two very inconvenient facts: (1) President Buchanan, a Democrat, signed the Act into law and (2) Morrill's bill would never have passed the Senate, let alone gotten through Conference if the Secessionist Democrats had not already left the Senate.

I will spare everyone any further lectures for now, but I promise to return to those thrilling days of yesteryear and explain why Rothbard's history of the Interstate Commerce Commission and the Indianapolis Monetary Convention is just as specious.


I promised to return to Rothbard's history of the Indianapolis Monetary Convention.

First factoid: "the Rockefeller forces, dominant in their home state of Ohio and nationally in the Republican Party, had decided to quietly ditch prohibition as a political embarrassment and as a grave deterrent to obtaining votes from the increasingly powerful bloc of German-American voters".

Since all political parties are coalitions, there is a hint of truth here; but only that. The Republicans, in general, favored the "dries" - Methodists, Northern Baptists, Southern Baptists, Presbyterians, Disciples of Christ, Congregationalists, Quakers and Scandinavian Lutherans. The only concession made on the issue of prohibition was that McKinley decided to serve wine in the White House, symbolically reversing Hayes' no-alcohol policy. That was hardly "ditching" prohibition; neither political party dared publicly come out for "rum" or even "beer".

Worst factoid: "As soon as McKinley was safely elected, the Morgan-Rockefeller forces began to organize a "reform" movement to cure the "inelasticity" of money in the existing gold standard and to move slowly toward the establishment of a central bank."

Rothbard reads into the Report an elaborate Rockefeller-Morgan conspiracy to defeat popular opinion when the issue was anything but hidden from the public. The country was openly divided on the question of bimetallism with the Democrats supporting it as a means of issuing "cheap" dollars and the Republicans opposing. Even the Prohibitionists were split among themselves. The "gold" Prohibitionists - i.e. those who sided with the Republicans on the monetary question– won control of the Prohibition party itself .

For James Lawrence Laughlin and others, the purpose of the report to the Indianapolis Monetary Convention was to escape, once and for all, the snare of bi-metallism. The Report is unambiguous about that purpose. Here is the preamble:

We submit, for the reasons hereinafter stated, a plan of currency reform, in the hope that it will, if enacted into law, accomplish, so far as possible, these results :

1. To remove, at once and forever, all doubt as to what the standard of value in the United States is, and is to be.

2. To establish the credit of the United States at the highest point among the nations of the world.

3. To eliminate from our currency system those features which reason and experience show to be elements of weakness and danger.

4. To provide a paper currency convertible into gold and equal to it in value at all times and places, in which, with a volume adequate to the general and usual needs of business, there shall be combined a quality of growth and elasticity, through which it will adjust itself automatically and promptly to all variations of demand, whether sudden or gradual ; and which shall distribute itself throughout the country as the wants of different sections may require.

5. To so utilize the existing silver dollars as to maintain their parity with gold without imposing undue burdens on the Treasury.

6. To avoid any injurious contraction of the currency.

7. To avoid the issue of interest-bearing bonds, except in case of unlooked-for emergency; but to confer the power to issue bonds when necessary for the preservation of the credit of the government.

One more thing:

John Taylor finds himself once again defending his Rule.

The questions that James Laughlin would have wanted to ask Professor Taylor and Chairman Bernanke are these:

(1) how can you have "reserves" in a banking system with a sovereign monopoly on legal tender and no specie exchange requirement?

(2) if a rule is to be the only constraint on unlimited "supply" of money in a world where money and sovereign credit are synonymous, how can the rule avoid circularity when sovereign spending is one of the major components of "growth"?

Rocky Humbert writes:

And for reasons related to Professor Taylor, one finds oneself again poking fun at Anatoly's continuous calls for a top in gold.

On February 9th (18:45), Anatoly wrote:

"We used to be mesmerized by round numbers. But ever since Crude topped at that $147.27 print, I've gone on red alert well on approach of 150-ish. Lo'n'behold, next came an all-time high in 30-y bond futures at 143. And Gold print of $1431, in my opinion, will stand for years…Nothing beats an audited track record (and an internet paper trail) to debunk nonsense and test veracity…for both traders and central bankers."

Anatoly wrote: "…the gold print of 1431 … will stand for years…"

It didn't even stand for 8 weeks!!!!

Even before this latest crude spike, real interest rates were re-testing their record negative yields. Now, the feedback effects of negative real rates are percolating even faster ….

P.S. The gold price continues to rise at a 27% annual rate. While gold options have a sub-15% volatiltiy. Get the "drift" ???? With a nod to the options quants who wince at this bastardization of black-scholes, this risk-averse speculator gets the drift.

Russ Sears writes:

 When hundreds if not thousand of people are dying in the streets from their own government firing at them, millions more hungry because of rising food cost creating the helplessness needed for uprising, and the emerging markets have billions people with new found wealth to protect and a long tradition of hoarding gold for the hard times… the demand is not all about trader/speculators.

I have told the story to the list more than once, how my grandmother's family came to the US with only the gold they had around their house in lamp-stands, candle sticks and silverware made of gold, when their factory, land and home were taken by the WWI revolutionaries, leaving them to flee for their lives. She was seven at the time but she told the tale every time "gold" or "silver" was mentioned in her presence. Tell her gold is useless. The demand does not have to be a bubble soon to bust. Without the shock and awe of the US or Britain and especially not the Israeli military intervening, I would say we are in for a longer haul of uncertainty to the unrest than has been the case to most recent Middle East wars.

Rocky Humbert writes:

Howard Marks (Oaktree Investments) wrote a nice essay on this subject. Because he's a respected stock & bond guy, his articulate thoughts are worth a read.

One of the more pithy things he writes:

My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists, or that God doesn't exist. The believer can't convince the atheist, and the atheist can't convince the believer. It's incredibly simple: either you believe in God or you don't. Well, that's exactly the way I think it is with gold. Either you're a believer or you're not.

I'll add that a speculator has a slightly different spin on this. A successful speculator needs to assess the conversion rate from gold atheist to gold believer to gold atheist.

One remembers that when Moses returned from Mt. Sinai, he saw the Israelites worshipping the Golden Calf (Exodus 32:4). This posed a "problem" because it was both wrong for the Israelites to be engaged in idol worship, and it was wrong for them to ascribe a physical representation of God. (Both acts are forbidden.) Nonetheless, 5000+ years ago, Anatoly would have bonded with Moses — because both saw the Golden Calf as an "outrage." Yet the successful speculator would have been long gold — while the calf was under construction — but it's unclear whether the speculator would have subsequently shorted gold due to the nuances of the Biblical story.

Gold prices will rise and fall — based on supply and demand. However, the belief that stocks are (in the long run) are the best performing asset class has elements of religion too — as this too requires "faith." Just faith in different things.

Anatoly Veltman defends himself:

My trading biases come from chart structure - but I would never bet money on something I don't understand. To that end, before putting up $10,000 deposit to Comex - I'd make sure that charts mostly reflect the supply and demand, both near- and long- term.

My family also fled Europe, albeit not in WWI - but in the course of more civilized era of a mere Soviet excursion into Afghanistan and subsequent US-led Olympic boycott. We were able to make necessary transatlantic connections over the phone to arrange currency swap of Russian Rubles here for US Dollars there (at four times premium to official non-competitive exchange rate). Thus, we didn't have to risk trafficking gold through customs. I guess, my bias in that sense is slightly different. I'm not a believer in impending world currency backwardation, and I see even less sense in Silver playing any role in this. So as an investor, I was always very interested and Long Silver in $4-$5 historical areas - when it would languish for a long time devoid of any speculative interest. I remember a stretch of over 5 straight years (and possibly even 8, depending on stats reliability), in which silver usage outstripped silver mining - yet world price hasn't perked by a penny!

Going into Labor Day 2010, I commented that Silver is obviously breaking out of an unprecedented protracted base in $17 handle - and that Shorts will be 100% squeezed. Rocky, who has apparently kept up an e-mail folder of "Anatoly's predictions", should be able to dig it out. Now, since price doubling has been fulfilled - I try to use events like Lybia to invest in Shorts.



 A couple of weeks ago, The Chair discussed a dinner he had with Dimson — and that Dimson noted the "long term rate of return for everything other than stocks" is around 2.8%."

This morning, Steve Landsburg articulately expanded upon one of my points regarding utility value– demonstrating that headline numbers regarding long-term returns can be horribly misleading. In particular, he addressed James Glassman's recent WSJ op-ed where he admits that his Dow 36,000 call was wrong. But importantly, Glassman's mea culpa was wrong for the wrong reasons.

Landsburg's essay reminds me of the adage: "There are sardines for trading. And there are sardines for eating.

Duncan Coker writes:

I have known a number of developers as friends from having once lived in a resort town. During the go years when they would sometimes present a deal to me for a small share, I would point out the implicit 5 to 10 times leverage, or the large share of sweat equity they usually wanted. They would always look at me like I was an uneducated amateur who did not understand the main unspoken premise of building. Build it and they will come is always the motto, and you do have to admire their optimism.

Kim Zussman writes:

"The truth is that stocks appreciate faster than houses precisely because a house does not just sit there; it provides shelter, warmth, and closet space every single day that you own it. Stocks need to appreciate faster to compensate for the fact that they don't provide any comparable stream of services. If stocks and real estate appreciated at the same rate (counting the dividends as part of the appreciation, as Glassman does), nobody would own stocks."

Margin issues notwithstanding, very few would choose homelessness to be in the stock market. A better comparison would be a rental house held as an investment - where the shelter utility is capitalized - vs (initially equivalent value) investment held in stock(s):

Over time, stock will pay dividends (or reinvest earnings, etc), and the investment will grow by capital appreciation + dividends Over time an investment house will pay rental income, and the investment will grow by appreciation + rental income - upkeep

The Case-Shiller home price index shows real house prices approximately flat (with considerable variability) over the past century, whereas the stock market is up. It would be interesting to compare rental property - including rental income - to stocks over the same period. In theory rentals should go up more, to pay for the aggravation of being a landlord.

Henry Gifford writes:

An important factor usually left out of such discussions is that houses can be bought on 80% or 90% "margin," with fixed interest rates, in effect, being a giant option on the US dollar, favorable to the real estate owner in times of inflation, when real interest rates can be negative.I think this is how most people who make money on real estate make money on real estate, although few talk about it this way. 



 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"?



 Say you're a little perplexed by a slow creep-up in commodities last few sessions. On the one hand, most commodities have been now climbing day-in day-out for months - so naturally a contrarian, or value seeker would look to be a seller. On the other hand, you are not really getting a tremendous spike, a blow-off into which to sell. So here comes Cotton to your rescue!

You see, Cotton just nearly tripled in the two-quarter period. Obviously, it's a top-of-the-needle daily war of attrition right now between the Longs and the Shorts in that market. Margin hikes by the exchange, price-limit moves adjustments and all that jazz… So watch closely; and the moment that Cotton finally reverses - there will be your indicator that the drift is changing in commodities. Whether it will be orchestrated (in Cotton) by one or another power-party - the jig will be up that, temporarily, Bull market deflation is favored by someone with influence

Ken Drees writes: 

A friend just called me this morning saying he heard on Glenn Beck radio about cotton and clothing price hikes– I would be in the cotton correction camp, if I traded this item–usually when a not often talked market is in the news it's time to consider exit door locations.

Anatoly Veltman reponds:

Because of likely limit lock-down in many of the sessions– the outsiders will be confused as to "real" dimension of price changes and balance-of-power day to day. My point was that someone not taking position in Cotton per se– will still get a hint of shifting wind for all of the inflated markets! Remember that today's markets are arguably the most manipulated in decades. Thus, it's doubly important to be tipped-off as to when the flexions decide to loosen the upward pressure valve.

Rocky Humbert writes: 

I think Anatoly's focus on cotton as a "tell" is misplaced. I think the entire commodity complex is keying off of Netflix stock (NFLX). As soon as the farmers stop watching videos and get back on their tractors, Netflix stock will crater, and so will the grains…

(Calculating the R-squared between Netflix and one's favorite commodity is left as an exercise for the reader.)

Craig Mee adds:

Talking to a mate in Singapore today in a trip to the sunny island, and he mentioned a farmer in China, who has stock piled cotton: "he has 6 tonnes of the stuff, taking up every inch of his shack, stock piling with price where it is, no interest in selling." I suppose why would you, with price ferociously in the one direction. Though two questions remain, is this a trait of the Chinese race in general… accumlate accumlate… and for such a specie position…is it another reverse market indicator?



I just finished browsing the 2012 Federal Budget Proposal. If you believe the Economic Assumptions, Dow 36,000 is a no-brainer. But see my comments at the bottom.

Here's the link. see Table 2-1

Here's the meat:
2012 Real GDP = 4.0%
2013 Real GDP = 4.5%
2014 Real GDP = 4.2
2015 Real GDP = 3.6%

2012 CPI = 1.8%
2013 CPI = 1.9%
2014 CPI = 2.0%

Wages & Salaries:
2012 Growth rate YOY= 5.8%
2013 Growth rate YOY= 6.5%
2014 Growth rate YOY = 6.5%
2015 Growth rate YOY= 6.2%

Average Tbill rate:
2012= 1.0%
2013= 2.6%
2014= 3.7%
2015 = 4.0%

Average 10 year rate:
2012 = 3.6%
2013 = 4.2%
2014 = 4.6%
2015 = 5.0%

I don't have a crystal ball. And it's certainly possible to have nominal GDP growth of 6-ish percent. However, the historical anamoly would then be in the interest rate forecasts. Since the 1950's, and except for two very brief recessionary periods, the 10 year Treasury yield has ALWAYS exceeded the year-over-year change in real GDP — with the average (eliminating the 1975-85 inflation) — being about 200 basis points. So, if you accept their real GDP forecast, the interest rate forecast is implausible. And if you accept their interest rate forecast, their GDP forecast is implausible.


Ralph Vince writes:

Out of curiosity, maybe George Z can chime in, are these GDP assumptions typically unrealistically rosy?

George Zachar obliges: 

Well, since you asked…

2013 Real GDP = 4.5%
2013 CPI = 1.9%

That gives us NOMINAL GDP of 6.4%, which happens to be the high end of the range going back two full decades.

Not bloody likely given the current configuration of economic, demographic and political forces.

Wages & Salaries:

2013 Growth rate YOY= 6.5%

With existing slack/low participation rates? No way.

I think these figures were calculated by guesstimating what they could publish without folks bursting out laughing…and then multiplying by 1.2.

Rocky Humbert comments:

 Might I suggest that the interesting reactions to my post regarding the 2012 Budget/Economic Projections should cause some introspection.

As I noted, the projections seem historically improbable and incredibly optimistic — but just like that Goldman Sachs economist who projected the outlier of 6% or 7% growth this year — they are NOT impossible. And if they turn out to be even close to correct, the upside in the stock market could be mind-boggling. That was my point. And for the umpteenth day in a row, Mr. Market is again voting for the improbably bullish outcome even though GZ's helpful comments have much better odds!!. See this old post.

I cannot overlook that Mr. Rogan in his replies, yet again, mistakes ZeroTruth (excuse me, Zero Hedge) to be a source of wisdom. It's particularly ironic when Mr. Rogan writes "to be an intelligent liberal today is to actively promote lies" when in fact, actively promoting lies is the essence of Zero Truth's business model. A question for Mr. Rogan: Why is the propaganda on the White House Website more troubling to you than the propaganda on Zero Truth website? Perhaps you only object to "lies" when they are from someone who doesn't share your idealogy?

One of these days the stock market will decline. And cotton will go down. And we'll have another recession. I only wish that I was smarter so I could know when that will happen. I don't know. And that's why I always hedge my bets. And that's not just bearish hedging. It's bullish hedging too. And I'm glad I'm hedged bullishly right now!!



 They are not parked outside of Barclay's Capital….where you can buy some new ETN's based on the Barclays "Turn of the Month Index Family."

This isn't an April Fools Day Joke! (I'm now inspired to approach Barclays about licensing my Westmister Kennel Club Stock Market Indicator — which is unquestionably also "more efficient … than a traditional buy-and-hold approach." But efficient for whom?)

See more here:

The Barclays Capital Turn of the Month Index Family (TOM™ Index) has been constructed to enable investors to access equity indices in a more efficient way than a traditional buy-and-hold approach. The Barclays Capital TOM™ Index family is based on the TOM™ Strategies that provide a transparent and easy to understand mechanism which hypothesises that the performance of the stock market depends on the trading day during the month

The Barclays Capital TOM™ Long Index invests in the relevant underlying equity benchmark Index on the close of the 4th business day before each month end and closes this position 3 business days after the same month end. The Long Index is not invested during the rest of the month. The TOM™ Long index is available in price return, excess return and total return versions.

The Barclays Capital TOM™ Long/Short Index takes a short equity position on the close of the 11th last business day before each month-end and closes this position on the 5th last business day before month-end. It then takes a long position Index on the close of the 4th last business day before each month end and closes this position 3 business days after the same month end. The long/short index is not invested during the rest of the month. The Barclays Capital TOM™ Long/Short index is available in price return, excess return and total return versions.

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