I got it completely wrong! VT covered the line and there were only 10 points scored in the whole game.

Russ Sears writes: 

Gamblers fallacy. Just because your luck has been "good/bad" doesn't imply it must change if the events are independent. In fact, "it" (calling randomness good/bad) implies that your perception of the odds are wrong. 



[A Barron's article, published in 2016, was concerned with a Tail Risk Protection product].

I'm a neophyte simpleton, but it seems to me that risk and reward have a linear relationship. How do you take less risk and get more reward in anything speculative?

Andy Aiken replies: 

He's proposing that far OTM put prices embed assumptions of solvency and central bank competence that are revealed to be untrue in a crisis. This is probably true to some extent. It's similar to betting on #19 on a roulette table month after month, at a casino where the (unlikely) policy buried deep in the published casino rules is that if the lights go out mid-spin, the player is declared the winner.

The payoff for a straight number bet at roulette is 36:1. Of course the probability of a straight bet winning is 1:37, so the expected value of the bet is 36/37.

Tail risk strategies are a bet that the probability of the lights going out mid-spin are significantly greater than 1:37.

The problem is that if a crisis is really severe, then no payoff may be possible.

Did the lights go out because the casino couldn't pay its electric bill (because it is bankrupt)? Did a 3-mile-diameter meteorite hit the casino? Did the Fed declare put contracts null and void, requiring redemption at the original purchase price? This problem is analogous to David Bernoulli's famous St. Petersburg paradox:

The game could be profitable if there were no tail risks on collecting the winnings themselves. Also, although there may be near-term anomalies/market inefficiencies enabling a "value" investment, the question is whether the strategy is profitable in the long run accounting for spreads, transaction costs, and tail risks on collecting the winnings. 



 A great read:

"Turmoil in Quant Land: A hedge fund's candid view why strategies that were once working regularly mysteriously stopped working"

J.T Holley writes: 

The Law of the ever changing. The rudder is still the objective standard. Just try a little bit harder.

Use the objective but become more subjective while using the objective as a ruler.

Count. Then count again. Count some more. Die counting.

Adam Grimes writes:

A broad question on this topic.

Thinking about volatility, I understand how selling vol can depress implieds. This is obvious and if there's an ever-present offer on volatility (e.g., from banks selling for "yield") this would have an impact on pricing of those derivatives… but am I correct in thinking that there's no mechanism whereby this can actually effect realized volatility? And if realized volatility were higher (it obviously has not been) then the mispricing of those derivatives would be clear and the sellers would be crushed. We also could not have a situation where pricing of implieds comes dramatically apart from realized vol for an extended period of time because there is a day of reckoning on most of those instruments.

I can easily understand how buying and selling might, for instance, erode cycles or seasonality in the underlying and would quickly erase arbs, but I don't see how buying and selling pressure in a derivative can affect realized volatility. (Again… just to belabor the point… impact on implieds is obvious.)

I could imagine being a very deep-pocketed seller of vol and then operating in the underlying to dampen swings there, but it would seem that I would quickly magnify my risks to unacceptable levels without any assurance that I'd be able to accomplish what I was trying to do.

Am I missing something here, or is there a missing piece to this low vol puzzle in general? 

Ralph Vince replies: 

Adam, YOU'RE not missing ANYTHING. The notion that too many sellers of options dampen implied vol., if it were true, would create a wonderful opportunity to buy options, which, ultimately, reflect outcomes consistent with the historical vol over the period the options have been held. That is to say, the actual outcome of price distributions between the day I buy the options and the day the expire is, datum est, a function of the historical vol over that time window.

Ultimately, like a psychotic mistress you cannot shake, implied and historical can never be too far away for too long.

anonymous writes: 

Yes, this piece seems to be catered towards those whom are subscribers or clients of the author. I like to think that longevity in systematic/quantitative strategies relies on creativity and flexibility more than a fundamental understanding of statistics or arithmetic.

As Chair said "don't try to make money the same way twice".

If too many people are only focused on selling vol because that has been the main source of alpha over the last 3 years, then it would seem reasonable to expect those same actors to see heavier drawdowns and volatility being pushed like a hydraulic press into over leveraged players. A more prudent observer would find a way to take advantage or quantity some of these "irregularities".

Zubin Al Genubi writes: 

A couple of questions remain unanswered: Why has volatility been so low?

Other questions: why is inflation so low with such low rates?

Won't some of the old strategies start to work again once this low vol regime ends?

Personally I don't even bother to trade the low vol. Better to travel. 

Paolo Pezzutti writes: 

The concept of ever changing cycles is always valid. Competition on a set of inefficiencies exploited by more and more actors reduces gradually the edge. It has always been like this. The issue is that no edge is given and working forever. Innovation and research can never stop. One has to continue counting, find new regularities , dismiss those who do not work any more. An area of research in this regard and discussed in the paper is how to exploit the growing sector of passive investing and etfs. What are the new regularities that these growing actors are creating for the speculators to exploit and profit from? 

anonymous writes: 

They didn't take on enough risk, it's THAT simple.

What a pile of yadda yadda, "We don't really know why things didn't work as well as they had in the past, but we've fixed it because we have a lot of smart people working for us."

A failure-justifying amphigory, and fails at that too.

anonymous adds: 

Managers have to have a story to tell, especially when they under-perform the benchmark. The negative effects of index funds and ETFs is a pretty common part of the story these days. I am very skeptical because, from the cheap seats, it seems that if you took all the passive money and gave it active managers, they would wind up in aggregate holding the same positions as the passive funds held, only minus bigger fees. Following that logic, one consequence of passive investments would be higher markets because more of the customers' investable funds actually reach the market rather than being siphoned off by intermediaries. Which means that intermediaries will need to find new ways to siphon off funds.



Probably the greatest lyrical example of Vic's suggestion to always having more than one mouse hole. It's an Elmore James song made famous by the Allman Brothers.

In honor of the late Greg Allman who passed away yesterday.



 QE is over, it's back to the same old money creation we've had for centuries — an idea which has actually levered the resourceful potential of man.

Your going to see a car drive in front of you as you stand on the curb, and it will be sans driver.

Your going to see a man in a drone, in a park, lift off the ground.

These things are here, and united airlines isn't in the game. Or any of the others for that matter.

And faster than you can gobble un croque monsieur, they will collide in a 3d, computer controlled "roadway," obsoleting cars and every minor roadway, parking lot and driveway,and traffic jams will be viewed as lice infestations of the past.

But it will take some forward-thinking and planning here. Wasting a trillion-dollar is rebuilding these roads, airports, etc. on an infrastructure plan, is not the equivalent social investment as building the interstate system in the 19 fifties was. This would be a trillion dollar simply to maintain that which we currently have, when the future is about to take an Abrupt turn. That's where we are to be funding things with public monies, as that's where the enormous multiplier in terms of social benefit derived from money spent will be seen much as it was when we built the interstate system originally. To spend that money an existing infrastructure which will soon become obsolete, is equivalent to porkulus, on a diluted scale.

Victor Niederhoffer writes:

Mr. Vince makes a subtle point that I think he means. The most valuable thing in the world is a person. They can make tremendous contributions that all can benefit from. Julian Simon is very good on providing statistics for this. And it is no accident that standards of living are so highly correlated coterminously with population like during the industrial revolution. As to which causes the the other, it's mute.

Ralph Vince adds: 

It is a bad bet to bet against the likes of Jonas Salk. But for every Jonas Salk, how many others of equal insight go untapped throughout their lives?

The population of the earth in 1960, five years after his vaccine was announced, was about 3 billion. It is now 250% of that. For every Jonas Salk of 1960, we would expect 2 1/2 of them….and for every untapped Jonas Salk….2 1/2 of those as well.

And virtually every varlet and their harlot(s) who are not the equivalent of Salk posses some sort of potential to add to the cumulative progress.

Why would you bet against the resourcefulness of man? All bear markets, since the invention of the hand axe, have been short-lived compared to their bullish counterparts, and every single market top over those millennia have been exceeded (save for 3/1/2017…..yet).

To bet against the resourcefulness of man is silly, ultimately futile, and it requires one to time things perfectly. It is a far easier proposition to load up long as when things are selling off, and manage your powder to see it through to the next new highs.

David Lillienfeld writes: 

Two thoughts:

1. There's lots of infrastructure spending to be done to support some of the newer technologies to which you refer. And it's beyond broadband. Just air traffic control alone could use a shot in the arm (well, more actually). There's also the reality that people like to physically move. And the way the society is configured, tire's no doubt that will figure out ways to do so as efficiently as they can within whatever infrastructure exists. Until motivations like sex or control disappear (which seems unlikely in the life span most of us associate with being on the face of the good earth), keeping the existing infrastructure going will also have its benefits. The interest in sex, for instance, isn't disappearing anytime soon, especially among those in their teens, who will do just about anything to get away from the clutches, eyes and ears, of their parents. That takes infrastructure.

2. I recall at the 1964 World's Fair, there was the ATT building in which there were picture phones with an assurance that certainly within 20 years, they would be omnipresent. Didn't seem to work that way. Ditto GM and the future of transportation. I've heard about the new technologies coming into use for more than 5 decades. Yes, the technologies do make it into use. But it takes a lot longer than anyone at first thought likely. Remember commercial supersonic aviation? I don't think it was ever fiscally viable. The story of how RCA came to dominate wireless communications is a case in point. Eventually, the new technology did triumph, but it took longer than anyone had considered likely.

Plank's law comes into play and is part of the explanation, inertia and lack of understanding of the potential of the new technology is another. Remember Amazon in the 1990s when it was starting to hit at sales at Books a Million and the other retail outlets? It still took 15 years for Amazon to practice its hegemony—which represented the triumph of the net over physical bricks and mortar. And even now, Amazon is putting up bricks and mortar. Isn't the internet supposed to displace such things?

anonymous writes: 

Sure trucks and jumbos full-o-junk and folks crossing oceans will still be needed.

But technology gets here in less than half the time anyone ever thinks it will.

And if we're going to spend 1-2 trillion on infrastructure, rebuilding existing assets will not pay off the way they paid off when they were first built; that's only a little better than giving it away to teacher's unions and far-lefty organizations. The electronic infrastructure for tomorrow's transportation would be a much wiser investment than rebuilding existing infrastructure.

J.T. Holley writes: 

Bruce's "Glory Days" lyrics give a beginning of explaining why throwing money at fixing all the decrepit bridges in Pittsburgh is a bad idea.

Now I think I'm going down to the well tonight
I'm going to drink to I get my fill
And when I get old I hope I don't sit around thinking about it
But I probably will
Yeah, just sitting back trying to recapture
A little of the glory of, well time slips away
And leaves you with nothing mister but
Boring stories of glory days

That is all that throwing 1 trillion is going to produce. Eventually just "boring stories". It's just to pacify the unions, steel, and cement industries. The Rust Belt vote will be needed in the future. Hats the only forward looking that is taking place.



 My Papa used to walk to town (8 miles round trip) just to get a RC Cola and a hot dog whenever the weather permitted.

I stayed with him during the Summer months as a kid and would join him for the walks.

He used to exclaim looking over at the streams while walking "The cows are up and walking. Good day to fish" or "The cows are down and laying. No fishing today."

I generally followed his sage advice in my adult life. It really did net more fish. Still does when I go to smaller streams and rivers when there are stretches with cows on the other side of the bank.

I asked him later in his life if it was just an ole wise tale or if there it had any truth. He exclaimed that it was sound. He let me know that when then cows were up and walking they stirred up all the insects. Swatting more flies as well as making grasshoppers make last second jumps. The fish know this and get excited.

It might not be sound science but I bought it. More observations like this were things that shaped my mind. Trial and error. Looking at outcomes from different attempts. Keeping things simple to get positive results.

Duncan Coker writes: 

Great post on many levels, about spending time with your father, fishing, nature, observing and prediction. I was trying to guess the connection before reading and thought it might have something to do with sunlight causing the cows to move seeking shade. Sunlight means the fish might be looking up feeding and easier for an angler to see them.

Statistically brings up good example, A (walking cows) are good predictor for B (catching fish). On the surface this seems an odd correlation, not causation, and tempting to disregard. But there is actual another factor C (insects) that is the explanation. Statistically, the cows are easy to see, small insects not so much. Question is even if we don't know about C or can't measure, should we still use the A as a predictor even if it does not seem to make sense. For fishing the answer is defiantly, yes

Charles Pennington writes: 

My fishing experience was mostly gained in Georgia, fishing for largemouth bass. That maxim seems right to me. On very hot summer days, for example, both the fish and the cows are listless from the heat.

Another bass fishing rule of thumb is that bass are total suckers for spring lizards as bait. The problem is that it's easier to catch a bass than to catch a spring lizard.



 Europe and emerging markets are the favorite topic of all in the coming months. Osmotic pressure?

Ralph Vince writes: 

But Stef, why screw around with those markets when the US is in a monster bull market — bigger than anything seen in over 50 years, or maybe in modern times? The US and the earth may have de-linked, and the US is, at least, a sure thing. We are in SUCH a raging bull market it's silly. This may be MORE than 1982, and the reason I am certain of it is because EVERYONE is SO RISK AVERSE. A planet of absolute weenies now.

I had some stooge tell me the other night, as I went to our myself a glass of tap water from the faucet of a friends condo here, "I only drink distilled water." Are you f***ing kidding me?

A bike helmet society. Since 9/11 and the crash, everyone is insanely risk averse. "The Presidents first priority is to keep Americans safe!" has been a common theme. That appears NOWHERE in the US Constitution btw, and I'm certain its framers - who were individually certified badasses, would laugh at such a statement. If you step outside of the day, if you transcend the era we are in and look at the bigger picture, it;s clear that never have so many people, been so motivated by fear in my lifetime. Maybe in 1938/9 people in Europe were, maybe in the Spring of 387 they were, Do you think this is not manifesting in the markets? Does anyone think that fear has dispersed yet?

Youth is steeped in it, and now, must be conditioned, only trough painful, firsthand experience to NOT be so risk-averse. The markets have never accommodated everyone, why would it be different this time around? Yes, there will be fits and starts and sputters, but the next 20 years are up and up and up and it doesn't matter what happens politically–this is bigger than politics, but is the market's reaction to one-sided human emotion.

J.T Holley writes: 

I completely agree with you Ralph. Having been a Father of three, Athletic Coach, and Boy Scout Leader I can tell you that there are two generations of folks that would rather be risk averse and maintain a lower standard deviation with their lives than take even the surest of bet!

The only other generation that might have had more fear would be that of the 1950's after WWII. That generation or slice of generation were the ones who did bombshelter drills, got under desks at school, and were spoon fed propaganda. They feared total nuclear annihilation. That eventually faded.

Ralph Vince writes: 

We're finally seeing what we "feared" for a long time, that all this inflating would result in a giant asset-bubble. This is now manifesting, but nowhere near to the degree it would to be commensurate with the size of the inflating that occurred.

If people are risk averse, the late-boomers, people my age, mid 50s to early 60s. simply want to be able to hobble into "retirement." They are not taking any risks. The younger set has been programmed NOT to seek risks. People of wealth are and have been hunkered down for a long time. Bank prop desks are dissolved…so very few are taking serious risks in the equity of assets–an endeavor the vast majority of people think is about finished for a variety of weak, small minded reasons.

Kim Zussman writes: 

Ralph I admire your optimistic enthusiasm. So much, in fact, I would like to adopt you as my brother (along with a select group of spec listers)!

I somewhat get the point about pervasive fear. But as a devil's advocate (and I'm not particularly bearish):

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum
2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order
3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode
4. Protectionism and withdrawal from international trade might not be good for many company's earnings
5. To the extent one cares about valuation, stocks aren't particularly cheap here
6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"
7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them?

You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

Would you suggest all-in, or scale-in on dips?

Ralph Vince responds: 

Kim, my response to your points is below: 

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum

This is already baked into the market.

2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order

Very likely they will do all they can to obturate things. But as I said, this saturnine, fearful sentiment is what drives markets, and it;s the same mechanism we saw, for the same reasons as in 09. Except the fear - at a deep and cultural level, has remained as an ocean of cash has been pumped into the system — still out there. The ascent of Trump merely gasoline on this deep, prolonged, over-arching cultural shpilkes.

3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode

At the short end. Mr market is telling us a differetn story at hte long end, where the free market for credit occurs. I'm looking for a 1 big handle on the thirty within a year.

4. Protectionism and withdrawal from international trade might not be good for many company's earnings

You're talking a zero sum game by definition. It may not be good for some, but people will still buy light bulbs.

5. To the extent one cares about valuation, stocks aren't particularly cheap here.

They aren't expensive either, the relationship being (earnings ^2 ) / ln(long rates). By this (linear) measure they ARE quite failry priced indeed, and at the 1 big handle on the denominator, well….

6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"

And where SHOULD Vix be? Is the pre-November historical level…… that same level where it should be? Everyone for months has been looking for Vix to spike. It will, of course, at SOME point,as stocks too will correct beyond a few percentage points, at SOME point.

As an aside — perhaps looking at outright vix levels is deceiving us, just as looking at absolute interest rate levels deceives us. Perhaps vix, like interest rates, should be looked at for the character of its term structure, rather than absolute levels? (and further, vix exhibits the character, ie.e the manner in which it moves, which is very similar to monthly unemployment — not that they move together, they do not, but they move with similar personality)

7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them? We haven't seen Dr. Greed enter the picture yet. How many guys do you know well past retirement who love to take a spec on things? Boomers aren't going to leave this game en masse — where will they get a return?

You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

We have similar fear today, and, just like 08-9, it is deep and culturally ingrained, far beyond the mere fear of capital market corrections. The difference is we've been further steeped in it, and the markets have continued higher, stoking hte fear further. By every metric, gun sales, political banter (on all sides, favoring "safety!") etc., we are a culture in a sort of tenebrous, deep fear, which has persisted well beyond a decade and a half now — I contend it is so deep and so ingrained that we aren;t even aware of it.

Would you suggest all-in, or scale-in on dips?

Timing dips is for dips who think they can. Why piddle when things are just going to keep making new all-time highs? Just buy and buy and keep buying. Come up with more money and buy some more. Add and add and ultimately cause yourself to have a bigger stake in it which has naturally averaged in. If you want you can protect it very cheaply for about 1-2% /year.



 Frank Tarbeaux says that speed with the gun in the west like speed with a trade in the markets is a matter of success or failure. He was pretty high frequency with a gun and killed his first man at 14. Here's how he did it. "The cowboys filed down their triggers until they hung on a hair or until they wouldn't stay cocked at all, just being discharged by pulling back the hammer and letting go." Their adversaries are as easy prey as such as we who are not colocated and don't have innovations faster than then speed of light. "The soldiers guns were hard to pull, a necessary army procedure to prevent the greenhorns from shooting each other by mistake. Lots of soldiers were killed." I would add that many a time I place an order and a high frequency trader, (indeed all the time), a high frequency trader is there ahead of me, and if the market would have gone in my favor, I end up with dead in the water with no fill, but if the market is going against me, I am the first to enter a disastrous spiral.

J.T Holley writes: 

Makes me think of the John Wayne movie The Shootist!

Gillom Rogers: But how could you get into so many fights and always come out on top? I nearly tied you shooting.

John Books: Friend there is nobody up there shooting back at you. It isn't always being fast or accurate that counts. It's being willing. I found out early that most men, regardless of the cause or need, aren't willing. They blink an eye or draw a breath before they pull the trigger, I won't.



Let's not forget that some people only work for 5-6 months and stop after they make 8000 grand so that they can get the earned income credit. They then take the remaining 6 months off. It's a crazy loophole that exists.

Says the man on disability.

It sure feels like 10-15% of folks are just flat out unemployable.

anonymous writes: 

The gist of your last remark shows up in anecdotes and studies of the current labor market. The quality/skill set/attitude/demeanor of job applicants is a frequent cause for lamentation.

The latest NFIB (small biz) report says 89% of firms hiring/trying to hire see few or zero qualified applicants. And 15% of all businesses say finding qualified workers is their single biggest problem. Both numbers are high relative to history.

Rocky Humbert writes: 

There are many different ways to slice and dice these complex issues. It can be argued that the root cause is the labor force is now unqualified. It can also be argued that employers are reaping what they've sown by investing less into the workforce.

Where you stand depends on where you sit.

Personally, I think this is a secular evolution with plenty of blame to go around. The key variable is that the median job tenure has been declining for years. No longer is a job at IBM or GM or GE a career that spans a lifetime. This phenomenon can be sourced to Jack Welch at GE. It spread throughout the corporate landscape (including to the Bob Rubin/Steve Friedman era at Goldman Sachs).

Some economists will say that this is a healthy sign of a dynamic labor force. Some economists will say that it's a consequence of the absence of defined benefit plans and union power. Some will say its the Gig Economy. It was part and parcel of the loss of job security and the solid American middle class.

But it is also clear that if an employer expects a short employment duration, he is less inclined to invest in his workforce (i.e. training/education) etc.

Marion Dreyfus writes: 

That uptick of .1% is a reflection of hope–people who stopped hunting a job now feel hopeful enough to set foot to pavement. I stopped for months, and notice I started looking again this past month. Many are like me.



 One thing that is almost entirely gone from baseball is seeing coaches arguing with the umpire.

Where are the Billy Martins and Earl Weavers of these last few generations?

Basketball seems to still have coaches in college and pros that work the refs. Coach K comes to mind. You don't seem to see many coaches purposefully getting T'd up anymore to motivate the team and sway a ref?

Where are the McEnroe's in tennis?

All sports have seemed to have lightened up a bit. Quite possibly it is because of "video replays" and "challenges" that have take the great theatrical performances away from the game of sports.

Could it have gone away from the markets too over the years? Can't blame or swear at an electronic fill? In the past you had the "lady in the wire cage" to blame, market maker in the jacket, and countless others.

Baseball theatrical tiffs are what I miss the most.

Steve Ellison writes: 

One of the great memories of my childhood was attending a Red Sox vs. Yankees game at Fenway Park in 1977 as the two teams were in a close race. At some point, a Boston player lined a base hit to right field in the general direction of Reggie Jackson. Jackson didn't get to the ball for some time, even though it was in front of him. Meanwhile, the hustling batter got to second base. Immediately, Billy Martin pulled Jackson out of the game. When Jackson reached the dugout, he and Martin got in a fight, to the great delight of the crowd. Despite the ongoing feuding between Martin and Jackson, the Yankees went on to win the World Series that year, and Jackson earned the nickname "Mr. October".

Hernan Avella writes: 

That observation–that a fight is an event very few people can turn their attention away from– has been used by Mixed Martial Arts promoters for a long time. The UFC (ultimate fighting championship) has to be the fastest growing sports franchise since 2000. The Fertitta brothers bought it for 2 million in 2003 and recently there was talk of selling in the range of 4-6 billion. 2015 revenues around 600 mill.

anonymous writes: 

How soon before we have Gladiator games? What's preventing it? If we have the so-called right to choose how we die, and legalized suicide then why not allow voluntary death by public spectacle? Million dollar prize money for the winner, and an annuity for a victim's family should he not survive the bout should make it worth it for folks without economic hope, or a fear of eternal Justice. Combine it with in-the-ring porn star rewards for the victor, and you've got a bread and circuses diversion superior to that of the Roman Empire. A new sport for a new blood-lusty God-less New Age.



 I gave in and rented An Honest Liar documentary about James Randi the other day. A rather decent documentary/biography. "The Amazing" Randi seems to have been an icon back in the 70s and 80s? Sorta the Father of Magicians and Illusionists following in Houdini's foot steps.

The movie opens and closes with Randi saying "no matter how smart or well educated you are, you can be deceived". A lot of what has already been discussed about deception over the years on this site is in the movie. Well worth watching even if for a refresher.

Through age and an almost tragic accident Randi is basically forced into retirement. He then becomes a crusader to expose those that deceive for profiting without being honest about their deception! Backwards I know. Hence the title of the movie.

He completely helps Johnny Carson foil and ruin Uri Gellar, the so-called famous psychic.

Randi exposes a Southern Evangelical that holds himself out as a "healer" fleecing crowded Civic Centers.

Randi feels that the practice of magic/illusion should be one that the crowd knows it is paying to see entertainment. To practice deception for the sake of conning and stealing is ironically morally unethical to The Amazing Randi.

The movie ends with Randi sharing personally that he was deceived and the impact it has had on him.

I feel it is worth the hour to watch. Countless market implications were in my thoughts while watching and thinking about the movie afterwards.



There is much pessimism on the site about the stock market. One thing I always like to ask is suppose it were true that the economy is really going to be weaker than people expect. Like we'll have 1 or 2% growth rather than 2 or 3. Why should this affect stock prices? What is the evidence that stocks do worse during periods of below average growth? Why should it matter? How does the rate of return on capital of businesses compare to the 30 year rate as stocks are valued based on discounted value of expected future earnings adjusted for risk, with the growth rate of earnings being determined by the rate of return on capital less the pay out on dividends rate. Is it better to buy stocks when people are pessimistic or optimistic?

All these things must be tested. I'm not saying that I'm bullish or bearish on stocks or that one should be. I'm just questioning the glue and the weakness type of stuff. Assuming it was true, which I doubt, why should that be bullish or bearish? Testing is required.

Steve Ellison writes: 

A regression of the 1-year S&P 500 return from 1981 to 2010 against the US unemployment rate reported the previous December shows a 16% positive correlation, with the regression line for the next year's S&P 500 net change being -1.9% + (1.9 * unemployment rate).

t=0.86, p=0.40

Leo Jia writes: 

I often ask myself similar questions but can not answer them. Perhaps one has to answer this question first: what percentage of the people in the market are rational? Or rather, what percentage of the money in the market is rational? Though I don't have an answer, I tend to believe that there is more irrational money than rational money in general. The clear problem is that the degree varies all the time.

J.T Holley writes: 

With the std dev of 18% and annual rate of 8-9%, I'll order a double helpin' of "drift" with a side of "thank you".

If that meal doesn't fill you up then you must question where you get your meals and disregard the gratuity the next time you sup.

Tim Melvin writes: 

Drift only exists if you have a 100 year time frame in my opinion. See 1970s and 2000 to present. Much of investing success last fifty years for most investors is result of membership in lucky sperm club.

Craig Mee writes: 

Doesn't one new variable in a mix during the testing period influence the outcome– QE, no QE, etc etc…(sure, there's been other ways of doing it). But how to judge what has the over riding influence on the outcome? This could vary under certain conditions. How much of the US equity recent rise is in default of Europe, just like EURGBP taking the heat…and how much of the current price is underpinning based on QE to come?

What has recent price action illustrated, if anything at all…

How should weaker growth effect share prices? I would argue that this would just be a further nail in the coffin, when all the ducks are lining up, but how can we say it's got more weight currently than some other significant half ? It's tough. Are the number of running variables any different than twenty years ago? Maybe not. Are market conditions, HFT, leverage, number of participants in the market any different? Certainly. Has this influenced price action? Maybe Richard Dennis may have some views here.

When does the variation in conditions influence the ability to test? I suppose this might be the question.



 Perhaps someone can explain this one for me:

Facebook is valued at an astronomical amount. Its revenue base is, basically advertising. But FB is sustained, use-wise, by kids and young adults ( <30 ), who at one time had a fair bit of purchasing power and/or influenced significantly what a typical family bought.

Today, however, that demographic group doesn't have that kind of purchasing power. So what's the appeal for advertisers in supporting FB? Is there any data to suggest that ad buys on FB have a higher ROI than other media venues?

If not, is FB just a lousy investment, or a good one because these things are temporary?

Anatoly Veltman writes: 

Also, consider the theory of reflexivity in the case of FB, of self-perpetuation. I notice that my 11 y.o. daughter has gained self-confidence (and self-absorption) via FB-ing.

Those kids flaunt their "social edge" over the older purse-holders, and pull on purse-strings with ever-increasing zeal.

Like Henry Ford said, "I'll pay my workers enough to buy my cars", FB is fostering its own consumer channel.

Gary Rogan writes: 

The hope with large end-user software companies has always been that they (a) create dominance in their particular specialty (b) use this dominance to figure out as yet unpredictable way to monetize way beyond their current valuation (c) use this dominance and their speed of execution to stay ahead of adverse end-user trends. If often hasn't worked out this way, but of course when it does you get outsized returns.

Stefan Jovanovich writes: 

For the most recent quarter FB generated roughly $.5B in EBITDA - the same result that my favorite submarine with screendoor investment - AMAT - produced. FB did it with 1/4th the number of employees and 40% of the revenue. Does that justify a valuation 5 times what the market now pays for Applied Materials? Yes - if the belief continues that network effects will predominate in social media as they have in paid search. The world will need the production of foundries - both steel and silicon - but it will only pay a premium for businesses that promise that their profit margins will increase on marginal sales because there is no used/distressed inventory out there to compete with the "new" products. The answer will be No only if the world of corporations and teenagers decides that Google+ is a better way to sell their virtual images to the world. (Note to file: since those of us here at Chaos Manor now buy and own stocks as if they were cars and houses - i.e. once we find one we like well enough to buy, it is usually a decade and more before we even think about selling, these comments are only for people - all 3 of you - still willing to attend early morning mass at the church of Buy and Hold.)

Peter Tep adds: 

Above all else, Facebook is just a huge time sink and besides being a networking tool, is another place for people to gloat and boast or climb the social hierarchy — meant in a non negative way. With so many kids using it and literally connected to it 24-7, it's probably going to be a good investment if Facebook finds more ways to market to it's users on an even more emotional level. Has anyone seen the series posted on Ritzholtz blog about this?

I guess it is a great investment because it keeps people emotionally connected, like a great movie is playing out in front of them and they are part of it. If Facebook refines its marketing strategies even more using its users' data, then I guess the sky's the limit.

Jack Tierney writes: 

David asks some important questions regarding FB and its value. I agree that the current price is astronomical, but have very little knowledge of the operation — I am not a member and, barring any unforeseen developments, will not join. I have followed FB for sometime and have not joined because of the incredible amount of information they can gather regarding your personal history, preferences, and affiliations.

That very knowledge, though, explains why this could be a very rewarding investment. Back when I was still employed I did some work with the "research and marketing" groups. One of the first puzzling discoveries I made while going over some data was that, although our newspaper regularly received a huge amount of national food advertising, the relatively small markets covered by the Miami Herald and the Milwaukee Journal, received more.

It was explained to me that both cities were unique in that they were split almost evenly demographically. The wealthy, well-to-do, and upper middle class occupied one half of town, those not that well off, the other. This gave General Mills, Coca-Cola, Proctor & Gamble, etc. ideal platforms from which to launch new products, different packaging, innovative couponing programs, size and container preferences (12 oz. cans vs. 16 oz. bottles).

These two cities gave marketers some valuable insight into buyer preferences…yet it was no where near good enough. The Holy Grail, what each individual preferred, was not only impossible to discover, but impractical to reach. That may now be achievable with FB.

While many who are members argue that they reveal very little about their preferences, few are aware of how much their "friends", directly or indirectly, reveal about them. The most memorable story sent to me regarded an English woman who had been "on the dole" for a couple of years, receiving whatever that country's monthly stipend is for an unmarried, unemployed woman with two children. Someone from Inland Revenue (apparently the equivalent to our IRS) decided to check up on her. Rather than checking her page, he started with the pages of some of her friends.

He happened to come across one that featured a several month old picture of the woman in question, relaxing on a beach in some exotic, expensive European resort — with her new husband. Her friend also happened to mention how fortunate she had been to have an employer who let her take a month long paid vacation.

Well, the outcome was not a pretty one. But the story illustrates that if a "friend" should just happens to mention you're a pizza lover, expect to get an uncommonly large number of pizza promotions - from Pizza Parlors in your very own neighborhood. (How did they know???)

If FB plays this right, they could pull in billions. Marketing has always been about reaching the maximum number of potential buyers for the least cost. From what I've read about FB, this is within their reach. If they follow through, or allowed to follow through, their reach is incredible and I would consider buying.

J.T Holley writes:

I'm 41. I choose to "like" The Jefferson Theater so that I could see the feeds/updates of concerts that were being booked. I got notice that they were having a Southern Rock Band "Blackberry Smoke" play on July 25th. They also said that if you "liked" the announcement then you would be put into a drawing for free tickets. I won. I have two free tickets and allowed them (they asked) if they could say that I won.

GM and all others that don't understand the power of FB are foolish. It reminds me of A. Miller's "Death of a Salesman" and Charley's wise words:

"The only thing you got in this world is what you can sell. And the funny thing is that you're a salesman, and you don't know that." Charley

and he best double negative ever to be used in writing when Charley addresses Willy (foreshadowing).

"Nobody's worth nothin' dead." Charley

Google became the yellow pages.

FB is becomin' greater than the yellow pages.

It's a tectonic shift that many aren't willin' to accept or grasp. I'm nobody and humble and I get it.

Dylan Distasio writes: 

While I think your example is a good one of what Facebook COULD monetize, they are far behind Google on most advertising metrics and have a very low click through rate on the ads they do allow. It's understandable, Google is in the business of ads and has been at it for longer. Zuckerberg seems hesitant to admit or embrace the fact that FB is also in the business of advertising.

And the fact that Google is a yellow pages should not be scoffed at. It is a large part of why their ads in search work and demand higher prices. They are for things people are looking for and highly targeted.

I think with the amount of personal data Facebook has, they have great potential to monetize ads. The big question is whether they are interested, and if so, will they be able to execute.

The current issue of MIT Technology Review has a great article on a team at FB that is looking at the bigger picture in sociological terms of what they can do with the data. While their explicit goal is not focused on monetizing the data, some interesting techniques for doing so may come out of it indirectly.

Facebook has to be careful about how far they go in using people's data in the interest of monetizing it, and has to build a more sophisticated toolbox of ad types and techniques if they want to compete with Google. While they have certainly reached what appears to be critical mass as a social network, people can be fickle with their allegiances, and are happy to jump ship to something else when they get bored or feel slighted. FB will be forced to walk the same tightrope Google does if they want to seriously compete with them.

It should be an interesting couple of years watching this unfold. That said, I think based on the current view of things, FB is tremendously overvalued unless they are willing to start heavily exploiting the data in their possession. I'm not sure Zuckerberg is willing to, and he controls the company with 51% of voting shares. He's now a billionaire and can run his own agenda for quite awhile at the shareholders expense. As an example, I would question his acquistion of Instagram for $1 billion dollars but I guess time will tell. It will help them in the mobile space where FB is currently very weak, but we'll see if it was worth a billion to buy a company with no revenue.



 There are only 5 things you can speculate in categorically that have volume that is present in the World. Yes, there are those that will respond with other ideas but I tried to narrow such to the main categories. They are as follows:

1) fixed income i.e cd's and bonds
2) equities i.e stocks
3) commodities
4) currencies
5) antiques and collectibles

Yes, there exists derivatives on all those, they need not be mentioned because they are based on the root basis.

The category that is the least liquid and has the least volume is number 5.

The last Honus Wagner card was brought to auction in Maryland from a heir of a Catholic Nun. He profited and dispensed according to his preference.

Now we have an even bigger find.

This find not only carries the name Wagner, but Cobb, Young and Matthewson. The fact that it was stowed in the attic for a couple of generations is amazing considering the heat/humidity that helps in preservation versus the humidity of a basement that produces decay of paper.

The market to bid on such cards is far and few percentage wise across the globe. It will be interesting to track and see the results.

Ironically I know a heir named Mrs. Cobb that lives in C-ville, VA. I help her with her retirement income. She is a fan of her families name sake. When shared she was disheartened in that she wouldn't be able to add to her "two card" collection of her family name. She mainly wants to update the condition of her two cards from poor to good. She understands that she'll never be able to do such and that she is grateful to have such cards. Mrs. Cobb knows that the accomplishments of her husbands family is forever priceless and that she is just excited whenever it is brought up. She is one lady that I know understands speculation, risk v reward, and value. She also has a firm grip on thinly traded markets. I've pointed out to her numerous times that the verbage in her trust doesn't mention any of her cards that she owns that were handed down. She told me that her husband upon death gave her the instructions to make sure that the ashes of those cards were spread with hers as he was tired after all of those years with dealing with the compounding and expectations of their value. The trustee is working on adding it to the trust, but ironically she is reluctant to pay him for the new docs!

What treasures are in your attic? library? basement? safe deposit box?

Jim Sogi asks: 

JT, Is Ebay an okay place to sell my old 50's era NY Yankee cards? Do you sell them one by one? or lots? How do you value or price them? Is there info somewhere that's good?



 One visited Belmont Park as a guest of noted handicapper, writer and spec Keven Depew's family on a beautiful Saturday afternoon with great gratitude. The place reminded me of a mausoleum. Right out of Rosebud. More empty betting booths than customers existed. Hundreds of unused betting booths with lettering from the 1960s that hadn't been used in decades stood unattended. About 1000 were at the track which sits on at least 100 acres and houses thousands of employees.

The average handle per race was about 150,000 including all exotics and simulcasting. And that's 25000 per race to the associating. The average purse was 60,000 of which about 80% is paid by the track. The losses on the Belmont Park must be of the order of 50 million a year, and taking the opportunity cost of the land on the park which is worth billions, it's a billion dollar a year loser. Naturally the state just agreed to take it over, so the losses will escalate and the ordinary citizen will pay for the entertainment of a dying breed of 90 year old bettors, and for maintaining the status of the owners and horsemen.

Throughout the industry, there is devastation, degeneration and loss. The breeders are desperately trying to sell their farms, and the attendance and handles are decreasing. Not much attention is paid to the losses except that an indirect effect is that twice as many horses are dying each year from the races. We only saw one death on Saturday in the 8th race, and it was properly handled with a black screen, and an ambulance truck. Apparently it's the norm because the purses are getting bigger as an offset to on track occasions and the trainers have more of an inducement to get their horses into the races with greater frequency.

In the good old days, on a nice Saturday with a 300,000 high stakes race like the mother good handicap, we would have seen 60-75,000 in attendance. No touts letters were available and the usher who had been there for 45 years said he hadn't seen the Lawton brothers' the famous clockers, or any replacements there in 25 years.

The mother goose handicap was won by the beaten favorite at 5 to 1, and he had been 2 to 1 against the same field the previous two races. A good lesson to learn for speculators. Laurel got the exact on the mother goose with the help of Lila Depew who knows horse racing so well, and makes one wish that one had half the knowledge in his own field as she does in hers where she runs online racing for the racing form. The average racehorse costs 35,000 a year to keep in a barn and race. With 85,000 foals born each year from the breeders, that's 3 billion a year in costs. The average horse at Belmont wins about 40,000 a year, of which the owners take is say 30,000. Let's say 10,000 of them race each year, making their prize money about 300 million.

Whatever the economics of breeding are and some horses produce 600 foals at 20,000 a foal, there is a tremendous loss to the horse racers. It has to be done for prestige and enjoyment. The race tracks themselves must lose another billion or two a year considering the opportunity costs. No wonder the NY government is taking over the racing association, as the owners can't afford it any more. In New Jersey however, with attendance at The Meadowlands down from an average 0f 25,000 10 years ago to 1,000 these days, all the barns are being torn down, and a grandstand 1/5 the size is being built at a cost of 85 million in the futile hope that a reduced size will make the place look less like the mausoleum that all the non-casino racing tracks looks like.

The main reason for the decline in racing handle is that the average bettor is 90 years old. Young people these days don't wish to spend a whole day at the track for action when they could be playing video games or watching porn. The off-track take of 20% is much higher than they can get at the casinos, and they are not comped and romanced at the races. The price of admission to Meadowlands I believe last time I was there was 0.50 but to its credit Belmont maintains a 2 buck admissions charge, although there is a rebate of 1 buck for most circumstances.

I liked the nice touch that when you come into the horseman's area, it's a jacket and tie policy only. There were about 25 in the only restaurant on premises, and the restaurant looked like it had a capacity of about 600 from the good old days. I was reminded of how uncle Howie walked through the Loews Hotel with a yarmulke on to go to his wedding in one of the private rooms there, and the general manager walked up to Howie and told him to remove the yarmulke as it might offend the guests. Howie has always rued that day to the present. He was so revved up for the wedding that he completely overlooked knocking the block off the general manager, cursing him out, creating an uproar in the hotel and canceling the wedding. As I saw the forlorn handful of bettors straggling at the finish line, I thought of what many commodity brokers have told me. "It's so sad to see Smith trading now. He used to trade 1000 lots. Now he's reduced to trading one lot, and we're on his back every moment to see that he doesn't stiff us if the loss goes above the margin."

There but for the grace of the good one be I and all other gamblers. Laurel is a big gambler and bets much more heavily than I do, and one couldn't but be thankful that …

David Hillman comments: 

It's taken three decades, but this is a pretty god description of what's happened at Pimlico in Baltimore. Absent the Preakness, I have to wonder if the course wouldn't have been dismantled already.

J.T  Holley writes:


Back when Lila and Kevin lived here in Richmond she invited me to bring the kids down to the 17th Street Farmer's Market that she ran. She told me that I should play Tony Cibo in checkers. At that time Tony was 86 years old and was a master of the board. Lila was so nice to walk around with my children after they watched their father get beat in the first two matches. After I realized that it was hopeless and I didn't have a game I asked Tony if he could talk with me about his win against Tom Wiswell. He broke out a newspaper article that was preserved. It had a picture of him sitting at the table playing with Tom and mentioned the feat attained. I asked Tony how he did it and he said "practice", "memorization", and "studying books" from the greats.

That was the first time I also learned about St. John's and being a "Johnnie" as Lila told me of her education. She is awesome and Kevin and her are really great people.

I take my kids to Colonial Downs here in Virginia whenever I can. On Sunday's the place is a ghost town, but they offer a 16 dollar package. You get 4 admissions, 4 tip sheets, 4 hot dogs, 4 drinks, and entry into prize drawings for only those attending that day. I've never been where one of my children didn't win a half way decent prize due to the small pool of attendees!

I don't know how the Jacob's Family is profitable owning that track? I've always thought that it had to be the satellite-casts that they are a part of because the place is complete empty the majority of the time. Heck even the Virginia Derby that is coming in a few weeks only has around 10,000 attendees.

Anything that I've learned from Horse Racing has come from your book/posts over the years and Kevin.

The other slice of heaven that I would recommend people to visit is Montpelier the former home of James Madison. The Orange County Fair is there annually and it is a true historic agriculture fair. It also has been turned into a thoroughbred rescue and has some of the most amazing horses that I've seen. Yes, they have fox hunts, polo matches and steeple chases there as well. Don't go there on any days of those events though. Go when there isn't anything planned. The silence is powerful and Montpelier sits there as if you have been placed back in time. You can listen to the horses in the distance stalls and running around in the fields. It isn't a commercialized landmark but one that is barely kept up it seems and the raw preservation is still intact.

There is a nostalgia that seems to hang onto Mr. Jefferson. I wonder if many who hang onto such nostalgia even have read much about Mr. Jefferson? He actually passed away indebted and broke, if I remember my readings the bankruptcy laws were different back then and when your parents and inlaws passed you inherited their debts. Not many know either that he had a nail manufacturing facility and worked hard with incentives "red coats" to further produce and profit.

One of my favorite quotes by T.J. is in a letter to his daughters. They wrote him and asked him to help buy dresses that were fashionable and newer. His response was "dress like the others, be different with your mind". Far from buying farmland to be fashionable and doing such for nostalgia or to foxhunt and having an expensive hobby.



 The market was gyrating so much last night in a negative direction that I didn't even have time to see how badly the Knicks got killed while I was out. And the regression bias has never had a better examplar than the Knicks. Luck + skill determines every outcome. The luck is random. Whenever the Knicks have a good win, the luck factor was highly favorable. And then the next time out they lose by 47.

J.T Holley writes:

It's very much the same as my beloved Va Tech Hokies in all their sporting events. The listing of the samples for the regression bias can be used with football and basketball which makes it all the more interesting when I gather data.

The ultimate highlight that sticks out in the sampling of being a fan is 11-0 regular Season with Andre Davis on the cover of Sports Illustrated with the caption "Do They Belong?", meaning to me that luck got them there. Lost in the NCAA Championship to Fla. State in a 46-29 nail biting game that is still talked about as one of the greatest losses, great loss yeah right? That loss was 1/4/00, the S&P 500 top ticked within days of the loss.most recently to add was the NCAA committee somehow having watched the Hokies fight and claw with 7 players to beat Duke at home while ranked #3 only to follow up to losses to Boston College and Clemson in final two regular season games. Be casted in typical fashion as a bubble team. Go into the ACC Tourney win, then beat Fla. State on a tenth of a second made shot that was canceled after regulation. They must've said luck, thus snubbed from the NCAA Tourney for the 4th straight time after a couple years back being the only 10 game ACC winner not make the Tourney. S&P 500 is at hand in gyration.

It's sad and the life of a Hokie, but the regression bias to the S&P is there as well.

I have often wondered now as a grown man looking back at this game against Florida State (yes the Seminoles again) and the luck + skill that it required didn't curse or hoodoo Virginia Tech in some way?

I dare not even pull data from 1980 to see what the S&P did days after. It's like I know it somehow wouldn't even effect the averages in the regression bias if it was positive anyways.

Alston Mabry writes:

The Hokies got stiffed again. This year, though, I think they may be standing in the "stiffed" line behind Colorado. Not only did Colorado (overall 21-13, 8-8 conf) go 6-3 in their last 9 games, including a win over now-4-seed Texas, but in that stretch they won their first round game in the Big 12 tourney against Iowa State, then in the next round beat Kansas State for the third time this season, and finally went up against Kansas, a team that along with Ohio State forms the most common prediction for the NCAA final game…and Colorado scores 83 points against Kansas in a tough loss. But Colorado doesn't deserve any place at all in the NCAAs? They can score NBA-level points in a tournament game against one of the consensus two best teams in the country…but they don't deserve a slot in the NCAA tournament. If that makes sense, explain to me why Villanova isn't headed for the NIT.

Once one examines these situations at Va Tech and Colorado, as well as other seeding and bubble-team choices, one can't help but think that perhaps the committee is screwing this whole thing up on purpose so they can say, "You're right! We messed up! The only solution is to expand to 96 teams!"

J.T Holley replies:

Very simple. The NCAA Committee is made up of only TWO people that have played basketball or coached basketball.

The answer to Villanova is that they are in the Big East. The Big East gets a bias and free pass. They have the most Teams in 11 being selected for the Tournament. No other Conference constantly gets more at large bids, yes I'm aware they have the biggest conference with 16 Teams. There are what 37 at large bids. 11/37= a tad bit biased under 30%.

My conspiracy theory is the following: The Big East is such a lackluster Football Conference in the past decade that the NCAA overcompensates for them in basketball due to their humiliating play on the gridiron and the fact that the BCS favors the SEC.

Note that Alabama an SEC team was 12-4 and won their side of the conference in basketball in the SEC and got snubbed as well by the NCAA Committee?

Worth noting is the eventual winners and why the bias now? Who was the last Big East Team to win the NCAA Tourney? '04 UConn then prior it was '03 Syracuse. That is over 7 years ago? In the meantime either the ACC or SEC has won 5 of the last 6 Titles?

Also worth noting is that the NCAA now owns and operates that other Tournament "NIT". They own the NIT and have its Final Four and Championship held at the Madison Square Garden in Big East territory? Too funny.

I'm not some anti-monopoly guy, but hey the NCAA just needs to come clean and say we do profit and that's the way its going to be fella's.

I like Bobby Knights words "Let's just expand the Tourney to 128 Teams and everybody shut up", but then the NIT wouldn't be a money maker would it?



 On a day when one can be tense or at least answering calls of margin or questioning positions, I give this to all specs that aren't lurkers or bar flies:

The house of the chief rabbi of Dantzig caught fire, and the contents of his good cellar suffered. The Jews took counsel what to do for their beloved rabbi. A handsome subscription was first proposed, but overruled; then another idea was mooted, then another, each less costly than the preceding. At last it was agreed that everyone should visit the house on a certain day, bringing a bottle of fine wine. After an appropriate speech of greeting, everyone would descend into the cellar and empty their bottles into a vat prepared for the purpose. The day came, and the chief rabbi listened with delight to the flattering addresses of his guests. When the ceremony concluded, he went to the cellar with his family, all brimful of kindly feelings, to taste the result. He turned the tap, a beautiful fluid ran into his glass; he raised it with gratitude to his lips, and suddenly his countenance fell; he slipped a second time, and confirmed that the fluid was pure water. The fact was that each guest had said to himself, "What does it matter whether I put in wine which costs money or water which costs nothing? My own contribution will make no sensible difference to the total result."

I also suggest that you click on the Philosophy link of this site that is directly towards the top to the right of the letter "r" in a woman's name that is held in high regard and read the first paragraph and that which follows.

In my humble opinion, of which I hold myself accountable, too much opinion, politics, religion, and diarrhea of the mouth has been shared of late and over the last few years. It has always been present since I've been on this Spec-List and one that will always be present due to the human condition and speculation. If you feel that you don't like this then please start your own blog, self promotion, email distribution list, or newsletter.

However, there are us that remain constant. Diligent in pursuing a better way to profit. One in which follows a Scientific Method or at least a way in which that we can hold ourselves accountable or existentially are aware of our choices and what we share amongst ourselves while deviation from the philosophy is tolerated.

No, I'm not some, diehard, policeman of the List, nor dogmatic narcissitic bastard. I"m simply a speculator like yourself that wishes the Spec-List would get back to its roots as the Chair intended them to be. I've benefited from it and am grateful. If you've have too, then humbly state such. If not then please talk about bbq or something that pours wine into the Rabbi's vat that can be tested/counted or substantiated to any degree other than emotion or opinion.

With deepest respect and friendship,


p.s. No, I haven't been the victim of a margin call today.



Something just occurred to me that the Heat with their 5 game losing streak and still at the top of the Southeastern are playin' the Lakers with their 8 game winning streak tonight and are gettin' 2 1/2 points at home tonight at 7pm. The term "beatin' favorite" comes to mind? Surely, if the streak is extended to 6 consecutive losses and the trough of humiliation is reached at the hands of Mr. Bryant then the "beatin' favorite" must be doubled down against Memphis on Saturday?



 This is a funny rag on 50 Cent: "50 Cent's Investment Library"

But once done laughing, you might enjoy the excellent book by Robert Greene with 50 Cent's name on it, The 50th Law.

Here is a quote from the book:

"The greatest fear people have is that of being themselves. They want to be 50 Cent or someone else. They do what everyone else does even if it doesn't fit where and who they are. But you get nowhere that way; your energy is weak and no one pays attention to you. You're running away from the one thing that you own - what makes you different. I lost that fear, and once I felt the power that I had by showing the world I didn't care about being like other people, I could never go back."

- 50 Cent

J.T Holley writes: 

I get the joke, but he actually chose the name as a metaphor– "Change". He took it upon himself to make something of himself other than what he was accustomed to seeing in Queens.

I think the Wall Streeters who bash him are just a little bit on the "sour grapes" side. He moved from Queens to Farmington. Those MBA's probably don't like that and neither do all the other critics who reside elsewhere. Ironically, the Farmington mansion was owned by Mike Tyson whose former bodyguard put 9 shots into .50 cents body. Just a theory, but I think the house was purchased as a personal mark of his own overcoming.

His success as an entrepreneur is something that isn't appreciated and should be looked at in my opinion quantitatively by his checking account and its sustainability thus far. He is an entrepreneur. Took the effort and time to do such. Get's paid for his services. He has his critics and they don't like it. Go figure.

I like when he was working on the movie and soundtrack to "Get Rich or Die Tryin'" he was asked when he found time to sleep. He was either working on the film or the soundtrack and people took notice. His response, to paraphrase, was "Sleep is for people that are broke, I don't sleep. I have a small window to make my dreams reality".

Also when shown or quoted 50 almost never seems like a braggart. He appears humbled and utilizes his time to profit.



 A card game I played a lot in my school days we called "who is bluffing?". It was based on the bids each of the four players would make on the total points they were going to score and where the Queen of Spades, a full thirteen points, would be. The winner would be the one making the least points.

On an uncommon day such as today when equities, most of the commodities, and the Dollar are all up together, one can't help but reminisce about the simpler days of "Who is bluffing?".

Headlines like these make one ask "who is bluffing?"

J.T Holley asks:

I haven't done this one in awhile but historically thinkin' about the asset classes stocks, bonds, commodities, real estate, and art/collectibles, I would be inclined to say that off the cuff (countin' faux pax) that the two classes that start with S and C are correlated more than the ones that start with B, R, and A.

Dare I mention that Mr. Total Return has been on record that Ibbotson's SSBI and Triumph of the Optimists are two coffee table books he has out in his home. Wonder what he thinks of this and game of Spades?

Remembering the SBBI text that Morningstar own's now, Somehow magically everyone forgets that in one of the most highest inflationary times in the last 50 years equities did quite well to keep up and crank out above historical returns.

The above is obviously a broad, non-tested statement utilizing memory from texts read. please take and do your own countin' before making your bets or how many tricks you can take.

I just pulled a rudimentary spreadsheet that had the following from Jan' 70 to Dec '05 that I did, wow six years ago? Both returns are CAGR.

 S&P 500       GS Commodity

Avg       -      11.13            12.45
STD      -      17.06            21.35

Tons of stuff to poke holes in these numbers 1) Fiat currency infancy with dollar 2) trendfollowers early dream come true in '70's 3) weighting of GSCI 4) only 7 NBER recessions in that period Dec '69 - Nov '70 was a short one to begin the study 5) historically it includes peak inflation apex points of '75 and '80 6) many many more things that I don't know and am ignorant of.

Speaking of strategy in Spades, I'd much rather be holdin' the Queen on the deal than to have it amongst the other three at the table. Especially if I have at least 3 more Spades in my hand and only two other cards of another suit.

Sushil, I've played Spades, thousands of hands (Navy game onboard ships), and also Hearts. Isn't Spades the objective to get the lowest points to be the winner, but Hearts the one where you bet tricks or hands taken being 13 total a la "Boston"? It seems to me the game you mentioned "who is bluffing" is a joint venture of both combined? I'd like to know the game as I'm a card playing fanatic and love to learn new games?



 There is something about True Grit that is truly loathsome. Each of the 3 main characters is deeply flawed. Marshall Rooster Cogburn is a drunk and dead beat who speaks unintelligibly. Texas Ranger LaBoeuf is a show off, loser, and a chauvinist. The girl is sharp tongued, litigious, and naive (no wonder she didn't get married). It all fits in with the idea that has the world in its grip, that the purpose of life is to keep oneself small by sacrifice. There is no chemistry or romance between any of the characters except for Pepper the Quixotian leader of the outlaws, who as could be predicted was the only man good in his every day business of being a outlaw. No wonder this Western follows the code of the west breaking, denigrating Brokeback Mountain and no wonder that Louis L'Amour's novels have sold more than all western authors combined since the beginning of time, and that they dare not make one of them or an Atlas Shrugged, in favor of this disrespectful Portis trash that violates all the rules of good mystery by having one hair breadth, extraordinary, lucky escape after another, and stereotyped snake bite scene (a la Larry Mcmurtry) release the tension.

P.S I have never written about a subject not directly related to the multivariate analysis of time series that Mr. Jovanovich has not corrected and amplified on where I was astray. And I must admit that I didn't realize that the Western Novel was yet another of his expertises. Okay, I want to know from him if he agrees with me, on this one point that Monte Walsh is the greatest western novel, (if the chapter where the accountant comes to reduce the pay of the hands that took vengeance on the trainmen doesn't make you cry, I'll eat that hat the accountant wore that was so tempting to Hat, Cal and Monte), and the best business novel of all time.

Stefan Jovanovich replies: 

Grub street used to honor the basic code for reviewers: read the book first, then slander the author. We should do the same. Portis' book is like neither of the movies; the John Wayne version comes much closer in spirit, but it is still far, far too "nice". The actual novel is a memoir written by a tough-spirited, one-armed spinster Presbyterian capitalist remembering the one man whom she loved and how they avenged the murder of her father when she was– by other people's standards– "still a girl". Blaming authors for what Hollywood makes of their books is like blaming men for the conduct of their ex-wives after they finish paying the alimony; all the authors can be held accountable for is the size of the check they cash.

I am old enough to have lived near (but definitely not in) Beverly Hills when Louis L'Amour still gave readings at the library. He was a great and good man, and– yes– Monte Walsh is the classic. As is often the case, my anger is misdirected; what infuriates me about this latest version of True Grit is what is says about the Coen brothers' decline and fall. The novel will survive their abomination of it; hell, it will probably be reread again. But for the Coen brothers, what hope is there now? Intolerable Cruelty is the best and funniest film ever about Hollywood and lawyers and now the guys who made it can only do splatter trash.

P.S. Eddy just called. She thinks our only hope is to pray that South Park's explanation once again holds true and blame it all on Matt Damon and his friend. 

Dylan Distasio writes: 

At the risk of raising some hackles, I'd make the argument the McCarthy's "Blood Meridian or the Evening Redness in the West" is one of the greatest Western novels in that genre and one of the best I've read from 20th century authors in general.

J.T Holley writes:

If you like Blood Meridian then go read Suttree. IMHO, it is an existential masterpiece. Cornelius being a man of the "made, trust-fund baby, life of given not earned goes to be a fisherman in TN. Though the content could be considered as a rebellious misguided stab at the establishment, I found it a read that was of self-introspect, self-realization, self-reliance while battling vices with choice by going to the extreme to find such. Once again not oft mentioned amongst Cormac's works, I feel it is one of my favorite reads to crack open and read again. I'm a Southerner so the read is much suited to me, so some of the "in between the lines" stuff might not be appreciated.

Jim Wildman writes: 

My personal favorites in the Western genre.

"The Virginian" (Wister) if for no other reason than "Smile when you call me that"…and the baby swap prank.

"A Man Called Noon" (L'Amour) always makes me think about how I define who I am.

In "The Last of His Breed" Mr L'Amour applies similar themes from his Westerns to modern times. For my taste, the book is a bit long, but in fairness, it takes a while to walk across Siberia. And it has a great last line.

Trader Craft comments: 

Another great classic of the West is Thomas Bergman's "Little Big Man". Much better than the Dustin Hoffman movie.

Scott Brooks writes:

 As one who doesn't read a lot of westerns, (and I'm sure the purist will scoff at me) I have to say that Larry McMurtry's, "Lonesome Dove" is my favorite of that genre.

Good guys and bad guys. Multiple story lines all intertwined. Sudden and unforgiving death. Fortunes made and fortunes lost. Adventures piled on top of adventures. Good choices and bad choices. Friendships that are strong, but that don't override honor. Human foibles that override honor to do what is perceived as the "right thing". False friendship's that never were except to be used as seen fit by the "user".

Story of youth and aging and lesson's learned, lessons shared and lesson's taught. Love found, love spurned, and love lost. The superficial wannabes intermingled with the intellectual drivers. The high self esteem and low self esteem of characters revealed for the world to see.

Characters that arrive unexpectedly and stay and others that depart just as unexpectedly. Ego's that clash and feelings that are hurt. Life and time wasted on loves that can never be.

High risk adventures fraught with deadly consequences. People that love risk, taking more and more risk because the downside never happens to them…until it does.

Their are cowboy versions of "Eddie Willer's" (hard working and reliable) tying their horses to the wagon's of cowboy versions of "John Galt" (hard working reliable, but intellectually superior)…..but in a much more realistic sense….i.e. there's no mythical "static electricity generator" or "nearly infallible hero's"….just really smart people who make more good decisions than bad decisions…but who make bad decision…sometimes with catastrophic consequences.

I could go on and on, but something has just struck me as I write this general description of "Lonesome Dove"… I describing a Western Novel, or the modern day "Spec List".

Jack Tierney writes:

The Chair's mention of L'Amour reminds me that I've neglected to comment on the man's autobiography, "The Education of a Wandering Man". Unpublished during his life, the manuscript was found in his desk only later. The author of the Introduction speculates that L'Amour purposely put off publication fearing charges of braggadocio.

After reading the book, it's a possibility. For many years he kept a written record of the books he had read– the selections are so diverse and numerous that it's impossible to pigeon-hole his preferences or determine how he found the time.

Because of finances, he left home at early and, Hoffer-like, rode the rails in search of employment. He also shipped out for as many foreign ports as he could find, baby-sat an abandoned mine for three months in the middle of nowhere without any human contact, and took up small-town prize-fighting when he really needed money and the locals really needed a fight.

But no matter where he was or how broke, he always had books. If there's any drawback in his story it's the realization that one could have read much, much more if he hadn't been sidelined by trivialities.

Pitt T. Maner III writes:

 It looks from L'Amour's autobiography that, from the years from 1930 to 1937 in particular, he tried to read approximately 100 books and plays each year. They were not what you would think a man writing Westerns would be reading.

Not a bad New Year's resolution if one has the time. It takes discipline too.

A quick perusal indicates he liked to read several books by one author or playwright that he liked within each year. Certain themes or genres captured his attention. Perhaps he was buying books in bulk or series from bookstores.

In 1930, for instance, he read many of the plays of Eugene O'Neill. In 1931 he read Flaubert. Shakespeare and Detective stories were popular with L'Amour in
1932. It looks like works by H.G. Wells and Conrad were favorites. L'Amour's lists are interesting because there are many books included that are not commonly read these days.

For instance "Trader Horn" by A.A. Horn and Ethelreda Lewis was a book made into a movie with filming done in Africa under extremely difficult conditions (they don't make movies like the used to).

The world was less explored and a bit more mysterious just 80 years ago.

The best writers often do a tremendous amount of critical reading and know a little bit about a vast array of subjects— even things that would be considered controversial today.



 The leading historian says that he'll buy me a $ 8 cup of coffee under certain considerations. And I don't know much about coffee. But I've had occasion to have coffee at Stumptown Coffee, an Oregon firm with branches in New York now, and it's far and away the best coffee i've ever had. Next in line is the coffee at Kaffe that Mr. Florida surfer has recommended. The web mistress is a vegan, and I don't pay her that much to do all the editing and picturing so she usually doesn't put our stuff on barbecue up unless I get her mother on the case, which isn't that effective since she doesn't believe in coercion. Let us expand our mandate from bar b que to good beverages like coffee and tea.

Vince Fulco comments:

I wouldn't say THE top tier but for solid, day-in, day-out coffee, a NYC mail order institution which we order from is portorico. It's been around for over 100 years and we especially like their couple times a year sale with numerous versions of beans $5.99-7.99/lb, a veritable bargain when retail goes for similar prices for 10 ounces. They also have a weekly sale of one kind or another.

Jeff Sasmor writes:

For NJ suburbanites, the local roasting of primo beans and a nice college town quasi-hipster atmosphere is provided by Small World Coffee in Princeton. In spite of a Starbucks opening around the corner, Small World has actually grown larger.

David Hillman writes:

Stumptown is among best ever drunk here, too. We have a pound or two shipped in regularly. They ship the same day they roast and deliver in about 2-3 days, so coffee is very fresh. Currently in the cabinet is Indonesia Sulawsi Toarco and the African's are exceptional this year. An admirable direct trade business model worthy of support.

 Also, when in Portland, breakfast at Mother's. They serve Stumptown varieties in a french press at the table. That and the wild salmon hash is more than worth the long weekend a.m. waits.

Boom Bros. in Milwaukee is also happily recommended. Excellent roastmaster, their Velvet Hammer is the 'every morning' coffee at Cafe DGH.

Another favorite is this coffee from the D.R. Very cheap, very good. Best drunk in a cafe on the beach in Sosua. Maybe there's a Caribbean store of some sort in NYC?, but if not, there's always Bonanza:

"…..Always the most fresh production guaranteed! Manufacturer send my orders 3 times a week…..Thanks for looking!!!"

Chris Cooper writes:

Coincidentally, I have recently embarked on a quest to brew (consistently) the best cup of coffee. I have started roasting my own beans, and now it is evolving to importing my own green beans. Next month on the container arrives 300 kg of single-origin green beans from Indonesia from five farms. We call them Bali Kintamani, Java Jampit, Aceh Gayo, Sumatra Lintong, and Torajah Kalosi. I guess this may become more than just a hobby.

 While Mr. Surfer and family visited not so long ago, we served some Kopi Luwak, famous due to the journey of the fresh beans through the digestive tract of a civet. It turns out that there are various grades of Kopi Luwak, and since that time I've found a verifiably authentic version, which is rarer because often the growers will mix in other beans. I may try to import that as well, but it's very, very expensive, and I can probably only get 10 kg per year. The taste is really different, much earthier.

Larry Williams comments:

My cup runneth over with coffee from these guys, but thanks for the tips. I will begin my journey again for greatest java.

By the way, seems to have the best deals on espresso machine.

T.K Marks writes:

All this talk of coffee has gotten me nostalgic for one of my life's more squandered opportunities.

There was this little coffee spot on the Upper West Side, just a stone's throw from Lincoln Center, called Cafe Mozart. I used to spend much time there.

I would get a pot of coffee. Once even this thick Turkish stuff that perhaps made one look of Left Bank sensibilities, but tasted like tar. Would while away the hours there with reading, backgammon, or chess. It was a peaceful place.

So one night I'm sitting alone at my table reading when walks in and approaches, a woman.

A woman with a very fetching smile.

Bob?…she asked hesitatingly, as one would when meeting a blind date.

I stood up politely, smiled at her for a few seconds, and, No, was all I said.

Till this day I regret not lying through my teeth.

Had nothing to lose.

Jeff Watson writes:

 Many of my friends are coffee experts but I am sadly lacking in that department. One thing I do know is how to make is one of the better pots of coffee on the planet. The following recipe will even make even the most mediocre coffee taste good, and good coffee taste……delicious.

1. Wash an egg then break it into the bottom of an old fashioned metal campfire coffee pot, beating the egg slightly, leaving egg, shells and all in bottom of the pot..

2. Add a cup of very cold water to the pot, covering the egg and then add a pinch of salt.

3. Pour in a whole cup of course ground coffee to the water and egg mixture, and stir it up.

4. Pour enough boiling water over the coffee, egg, mixture to almost fill the pot up, and stir until mixed.

5. Cover the pot and plug the spout with a dish towel.

6. Put the coffee pot over a fire, heat it up to a gentle boil, back off, then let it simmer for a couple of minutes.

Take the pot off of the fire, let the coffee settle for a couple of minutes then add a cup of very cold water to precipitate the coffee grounds/egg mixture. Let the coffee settle for another minute, then serve.

My grandfather was taught to make coffee this way from some real cowboys when he went to the Arizona Territory for a trip sometime before 1910. He taught me how to make coffee when I was around 7 or 8, and put me in charge of the coffee every time there was a family picnic or outing. The secret to wonderful coffee is the egg, the pinch of salt, and good water. Coffee prepared in this manner evokes many good memories, and the good smell alone will attract any friends or neighbors in the near vicinity. Once in a great while, I will make this coffee on the stove and it's almost as good as on a campfire.

I have often wondered what a Kona coffee would taste like if prepared in this manner.

J.T Holley writes:

 I'm not a professional roaster or barista, but the keys that I learned in the 8-9 years that I mentored to roast, grind, and brew coffee are the following:

1) The time between roast and grind needs to be minimal (oils of the roast and storage important)

2) Method of brewing important to your individual tastes (percolate, press, or electric drip)

3) Water is 99% of a cup of coffee! Good tasting waters need to be used and free of chlorines, flourides, and impurities

4) Filtration choice and cleanliness of the brewer of choice imperative for consistent cups of good flavor

5) Once pot is brewed then stirring the pot and stirring the cup is important regardless of cream and sugar for consistency of coffee.

That's the basics!

All good shops should know this regardless if its a private house, private shop, franchise or friend.

Kim Zussman queries: 

How can coffee gourmets taste fluoride but not civet excrement?

Jim Sogi writes:

Chris's special Java java was distinctive and earthy. A treat especially in the palatial surroundings.

The key to brewing good coffee from whatever origin, is:

1. Be sure the parchment is sun dried, not machine dried. It has a much mellower smooth flavor.

2. Roast your own coffee. My favorite roast is 462 degrees, 11 minutes give or take based on humidity and ambient. Roast until the oil just starts to show, but is not oily. The oily roast is more for show. Roast only what you can use in 3 days.

3. Grind your own fresh roast. This is the most important of all. Don't try to freeze coffee beans.

When brewing in filter, only pour a little, not boiling, water through at a time.

Oh yes, Kona Coffee is without doubt the best in the world.



 This story about the auctioning of the most sought after baseball card in history is something of interest to me. Though my time is better served now elsewhere, it still is worth mentioning. I once had a gentleman breakdown the following to me as places to invest your money:

1. equities

2. fixed income
3. commodities
4. real estate
5. arts and collectibles

Now we all know of the derivatives and options that exist of the above so this list is just for simple purposes. The auctioning and selling of arts and collectibles seem to take place only in bankruptcy or death at estate auction? The Nun inheritance of this card is baffling on many levels. The brother of the Nun who died knew what he had, kept it, just didn't get to sell it. I would like to know the cost of purchase for the card from the brother to use the auction price to determine percentage appreciation. I'll assume zero though.

I know the sports card market very well and have met with the best of the traders in this market and talked with "hedge fund-like" partnerships. It is amazing that this is kept on the low down as much as it is until only a prized jewel emerges?

It is in my opinion that on that day in November don't be surprised if an anonymous buyer gets the winning bid and that this buyer will probably represent the greatest hockey player to play in the NHL. He's done this trade before!

I need to pay more attention to Mr. NHL, I sit on a pile of Canceco's, Bond's, and others that reality depreciated recently! I'm a small tiny ghost walkin' around Trinity in the sports card world.



 Some advertised black swans that are market killers:

–commercial real estate next shoe to drop
–dollar going to zoo

–Hindenburg indicator–Prechter's warning
–foreclosure mess
–healthcare going to kill us all
–astrological death formation –grand cross
–banks still closing
–hft / flash crash 2 is due
–bonds are topping for the final curtain

The "QE" moon rises into a dark and scary night near the foggy pond and the swans paddle into the shadows, melting into reeds and rushes.

Just in case –get your canes ready for a walk down to the church.

J.T Holley writes:

 My still in progress theory is the use of alliteration in Wall Street propaganda. I'm still collecting samples and building the database. 



 I took the kids to see Secretariat at the movies this weekend. Doswell, VA is just a hop, skip, and jump from Richmond. Chenery's Meadow Farm is now a part of the new Virginia State Fairgrounds and a monument to Big Red and Meadow Farm.

The movie is a must see for readers of this site. Filled with strategy, come-from-behind, coin toss, determination, empirical touch by Mrs. Chenery's decision of choice, working with nothing, maintaining morals while striving for profit, lesson of why not to brag or boast and be humble, and Family devotion. There literally is a part in the movie for all topics that have been discussed over the years on this very Spec List for those that have been here and committed to the topics and digested them for nutrients while giving and sharing as well!

Some of my favorite parts were:

1) the scene of Mrs. Chenery-Tweedy walking into the Gentleman's Club to discuss choices

2) Eddie Sweat, the empty bucket of oats and him humbly walking out on the dirt of Churchill Downs in the early morn and yelling to no one of what was about to become

3) the use of the producer for the second race to make it not at Preakness, but in the home of the Tweedy Family in Denver

4) Choice of Oh, Happy Day to set the tone of not only of the Virginia roots, Gospel music, but the theme of reward from sacrifice (taking religious connotation out)

5) The intensity, amazement, and disbelief of greatness tone set at the Belmont by all in attendance, but the ones with hearts and profit on the line still hangin' and rejoicing.

6) acknowledgement and hand shake of the "House-wife from Denver" by Sham's owner after the race.

7) Luscious burning the old "losing" clippings and letting go so change could take place and

8) the many parts of Mrs. Chenery looking inward/outward using reason with heart coupled with common sense.

Powerful movie!

I wouldn't be surprised if the cinema photography of this movie is nominated for an Oscar. Equally, Diane Lane's portrayal of Mrs. Chenery and John Malkovich's portrayal of Lucian Laurin probably will be nominated as well. Great choice of cast in the movie all around.

This movie has to be put on the List of Spec Movies to watch!

Ralph Vince writes:

Not looking to take anything away from the topic here of "Secretariat," But saw "Jack Goes Boating" which I must say was the best movie I've see n since "Babble."

The characters played by the Hispanic couple in the movie (I don't know their names) are absolutely superb.



 Worst of all was a trip to the Jefferson Memorial which is riddled with apologies for the ideas behind the Declaration, appeals to the adolescent nature of Jeffersons' longing for the Arcadian days when the Saxons lived harmoniously in the forests with representative government, and the naivete of his ideas that out of of their own bounteousness and munificence, the original Americans came here without any assistance from the English and thus no revolution was required to reclaim what was rightfully theirs and ours from the beginnings.

In a Zacharian your own man thing, Ellis, the chief contemporary biographer of Jefferson, and the only such book for sale in their book shop,  joins the Jefferson as racist, slave master, father of the black Illinois Jeffersons from the Hemmings union camp, a view memorialized in all the written material around the exhibit that would make Jefferson small.

And indeed all of Washington today it would seem is designed to show the need for redistribution and the great unworthy gulf between the rich and the poor, and that is why the Great Mall outside the White House is unfit for civilized occupation as it is completely taken over with bums and the homeless —the idea being to show you the great gulf, ( especially when the homeless are not using their cell phones and blue-tooths as they were on my visit).

Charles Pennington comments:

Another approach to Jefferson is that he is an "enigma", as in the liner notes to Ken Burns' documentary:

"Revered as the author of the Declaration of Independence, the most sacred document in American history, yet condemned as a lifelong owner of slaves, Thomas Jefferson remains the enigma that is America."

He wasn't much of an enigma. He wrote and advocated eloquently and at length for the cause of limited government, but that needs to be whitewashed. 

J.T Holley adds:

I was walking the streets of Charlottesville some years ago with my children and came across Nock's Jefferson in hardback. Paying only a buck for it and it being in great condition I felt like I had a precious gift in my possession. It proved that and more.

There are to many things to list about Jefferson that I've learned through studying the Enlightenment, hours of History credits, and reading Notes and a couple of biographies, but here are a few:

1) He technically didn't own his slaves. They were purchased through levering mortgages or notes. He couldn't free his slaves if he wanted to.

2) It is amazing how such a public figure made himself such an "anonymous man" in all aspects of his life that he could.

3) Upon the death of his wife he burned all of their shared writings.

4) When addressing his daughters on choice of dresses to wear he said "Wear what all the other girls are wearing, if you want to be different then do so with your thoughts and mind". I'd like to find the source for this paraphrased quote if anyone knows, it's just stuck with me over these years.



Plaquemines ParishI have a client that is in the "well off" category. He surprisingly decided to be inspired to be a little anti-gov't and decide to head to the Gulf himself in "my car" to help with the clean up of the oil spill. I've been googling and searching all night for volunteer organizations and such. If anyone in the greater FL, AL, MS, and LA areas knows of a place where someone could volunteer there time please contact me.

Pitt T. Maner III writes:

I would just point out that you need to be careful with crude. It can have a sickening odor—lots of volatiles, PAHs , carcinogens—and is generally unhealthy to be around, breathe, get on your skin, etc. Trouble is that as it gets hotter and more humid it is difficult to wear Tyvek suits, protective gloves and respirators with filters. You need to be properly fit tested to wear a respirator. This will be a very difficult job down in those bayous. Young guys can wear ice vests that help a little bit but heat stress after 30 mins becomes a factor. You have to rotate crews–lots of hydration, cool down periods, etc. Cleanup is much more complicated than one might think. It is critical that the source is eliminated.

The epicenter for the hardest hit area of course is Plaquemines Parish and Mr. Nungasser is the parish president–so that could be a good point of contact at this stage. 



 Aristotle once said, "All paid jobs absorb and degrade the mind" Is there any way of quantifying this, and are there any implications in the markets, life, and trade?

Aristotle also said, "We are what we repeatedly do. Excellence then, is not an act, but a habit." Does this extol the virtue of practicing until we get it right? How does one know if they are getting it right, and if they have the proper tutor.

Aristotle wrote in his Nicomachean Ethics "It is not always the same thing to be a good man and a good citizen." I've been wringing my head trying to figure out all of the different philosophers who have borrowed this idea, and have come up with a list of at least 20. Any help in compiling a complete list would be appreciated.

He also wrote in Nichomachean Ethics, "It is possible to fail in many ways…while to succeed is possible only in one way." I would like to disprove this as there are more than one path to success.

Kim Zussman replies:

Do a twin study:

Find pairs of identical twins (same genes) with different employment histories. Best would be congressman vs. doctor. Failing that, find pairs with large differences in total hours worked to date.

Perform intelligence testing on the pairs, and use paired t-test to check for difference as a function of high vs low prior work/brain wear.

A related study could be done on the productivity effects of wearing robes and fondness for little boys.

Jim Sogi writes:

At the risk of disagreeing with Aristotle, excellence is a constant struggle. At least for me it is. Habit implies some sort of easy continuation. Constant vigilance is very very difficult. Excellence also connotes superiority over others. Thus there is a the constant pushing and straining to excel over others who try even harder.

J.T. Holley replies:

I don't think Mankind or Aristotle (all thought is a mere footnote to him in Philosophy circles) should be given a break at their points in time now that we've evolved Capitalism to the point it is today. Seems to me that the most important principle here is that what was shared by Susan Niederhoffer the other day "everyday seek out knowledge". In the agrarian society that was around in Ari's time we can certainly understand that doing some "meaningless paid job" took away from the devotion, persistence, focus and the ability that Ari had at driving forward to thought and knowledge. He is reluctant to realize though that the underlying power of Capitalism and his own mind freed him up to pursue his own thoughts and not degrade his mind.

"We are what we repeatedly do."

I happen to agree with this but not in totality. His teacher Plato spoke of to paraphrase "to know the good is to be the good". Much more objective than Aristotle's "do do the good is to know the good" of which leans towards being subjective. I think both are acceptable in "being". Case in point is Plato's "Allegory of the Cave". Being tied to the post the man competed and "repeatedly" learned to beat his peers at guessing at the shadows, but once freed and outside the cave he saw the light! The objective in this allegory trumped the subjective that was thought to be the truth. The objective with the subjective seems to be balanced though if we apply Aristotle's "golden mean" that he also mentions in Nich. Ethics. A wonderful balance of both instead of just one or the other.

"Nicomachean Ethics," he said, "It is not always the same thing to be a good man and a good citizen."

Kierkegaard found and wrote of this as well. He found great power, strength, and lessons in the paradox and hypocrisies of life. His three stages of life's way is a good example of this with the movement from aesthete to ethical to final religious. In the final stage of religious for Kierkegaard he used the Paradox of Abraham to find his strength. Being told by Gawd to go to the mountain and sacrifice his son what thoughts must have been in his mind and that of his town or family? He was either a lunatic by most or the most devout believer in Gawd's word. Kierkegaard spoke of the "fear and trembling" that must've been going on as the knife was thrust to the air to the point to where it was almost at apex to come down into his young son's chest. "good man" or "good citizen"? "religious" or "crazy"? Of course as the passage goes he didn't have to ultimately sacrifice his son but the lamb. The paradox was there though when thought and decision was made to be true to himself.

He also wrote in"Nichomachean Ethics," "It is possible to fail in many ways…while to succeed is possible only in one way"

to quote the Chair "The best way to achieve victory is to master all the rules for disaster, and then concentrate on avoiding them." Trial and error is important in life and speculation. The pain from failing can often lead us to being better individuals and profit takers.

Nigel Davies writes:

GMI think there are a number of problems in discussing 'ancient wisdom', for example culture, language and context. One might ask what defined paid and unpaid work in Aristotle's time? I'd argue that to really understand what he was saying one would have to be a several thousand year old Greek.

As for the internalization of excellence (i.e. habits), the valuation of such may depend on whether one prefers 'reason' to 'intuition born of vast experience (ie habits)'. Taking a different angle on this, does an inexperienced but opinionated newcomer deserve to win against an old hand? Humans value their reason, but maybe this is just vanity talking.

Peter Grieve adds:

I bow to no man in my admiration for the literature of classical Attica, but Nigel has put his finger on a weakness. The surviving philosophical writers did tend to value reason over experience. This may be why they made tremendous progress in mathematics, but were dreadful scientists and mediocre engineers (Archimedes came later, and was a Syracusean). Their mathematics was largely intended to support astrology, for heavens sake. This is in line with their feeling that people who actually produced anything were of a lower order. Apparently people were amazed when Socrates spoke to artisans in an attempt to find answers. Aristotle's attitudes about paid work may reflect this bias.



22In thinking of long distance shooting I thought of the technique that I was taught by my PaPa. He taught the popular BRASS acronym: Breathe, Relax, Aim, Slack, and Squeeze. I from young age till now if I picked up a rifle would go through this as if it was second nature. The two Ss are the hardest for me, the slack to those not in the know is the give in the trigger up to the point of release, the squeeze is preferred to a Pull so as not to move shot to the right (righthanded shooters). I learned this with a .22 hunting squirrels from 50 to 100 yards, no sight.

Similarly I was taught a golf swing by my Uncle Wayne with similar ritual though no acronym. Five step dance. First grip the club, second address the ball, third place right foot, fourth place left foot, fifth swing the club. Though it isn't as robotic and choppy as when I learned I still have this same approach to a golf ball today. It is much more fluid and effortless but the same five stages are there.

The training of those two things in my life came with practice and a quasi-scientific approach. What idiosyncrasies do you have for trading?

Mine are:

  1. hypothesis
  2. test
  3. confirm
  4. place trade
  5. monitor trade
  6. exit trade

Steve Ellison adds:

PDSAA technique taught in Six Sigma quality methodology is Plan, Do, Study, Act (PDSA).

Plan: Decide a course of action, and predict the results. The first three steps in Mr. Holley's list could be input to a trading plan.

Do: Place, monitor, and exit the trades.

Study: After a reasonable number of trades, analyze results. How profitable were the trades? If they were not profitable, why not?

Act: Based on what you learned, make an improvement to your trading process.

A typical improvement effort might have many cycles of PDSA. A good starting point for more information about PDSA is here .



"I had guides skiing up in the wilderness, who have a lifetime of experience and reference. Like markets, if you lose your reference point, you're dead in short order." JS

In the spirit of drift, randomness, and our Dear Mr. Sears a very famous runner once said "The only good race pace is suicide pace, and today looks like a good day to die" (Steve Roland Prefontaine). To tie a few posts over the last few days Surfer asked when a mean would equal zero? I took that as if zero is good when the world is red… Well if 8-10% is the annual pace when 18% is the stdev of historic returns since ground zero (early 1930's) then the math to get the drift from 8 to 10 down to zero would be twice that, at least  18%, if the VIX hits a historic then the average must be altered as well and its stdev is altered. The Chair also shared recently those words of Galton that the herd of fish all have terror in witnessing their brethren fall victim to the artificial fly, but yet they must eat. How do the fish then decide? How do the fish choose then to eat amongst all that hits the water, fake or real opportunity? How tempting is it to choose for a starving fish in some Sartreian way through "free choice" that is so scary a fly that ripples the water when the fish that the fly falls to a fish when the fly is so many stdev's away from the norm of day to day feedng with it's ripples? That my fellow dailyspecs to me is speculation! Both as the fish and the fisherman. I am not a fish, I am a fisherman. It is not a matter of right or wrong, it is a matter of profit. My PaPa taught me over many hours of fishing that a fly is no more than an enticement of the natural day to day of the fishes appetite, we can only merely mimic the natural. To catch the biggest fish is to understand the hatches and the common "drift" as Mr. Prefontaine understood the correct winning pace. If the stdev's of the market are compromised for whatever reason to either tail then as fishermen we must adjust the fly of choice to fill the creel to eat as must the fish to avoid being caught. During extreme draughts of not catching fish knowing that the flies that usually gave quantity and size we must give the imitation up and go to the banks of the creek and switch to live bait or introduce bait at least to entice profits that the fish has never seen to entice a bite and bare profits. Just as mentioned prior we have to find that amongst either the most common days to profit or be creative enough to introduce new to the fish of profits. This though makes us as fisherman of profits to get into making those scary choices that may make us get in way over our head as the Chair has warned or as Bacon warned of switches.

Reference points are nice but are no Archimeadean point. Nor is a ship's destination once at sea no matter how certain the Captain is from point A to B.



 When you maneuver a ship, there are controllable forces, such as propeller and rudder effects. There are also uncontrollable forces, such as wind, current, sea conditions. Moreover, each vessel has different characteristics and reacts differently. You have also to take into account the characteristics of your ship that may not be constant and given, such as ship loading and hull conditions. As a result, a captain works in an environment where a ship's behavior is not observed in exactly the same way and each situation is different from another. A maneuver is a dynamic process. You have your plan and when you execute it, you want to have a continuous update to understand the effect that your order has achieved and the next course of action in order to be able to follow your plan. Each time you find yourself in situations where your ship reacts differently due to everchanging combinations of speed, rudder, wind, current, sea state.

You need to be adaptable to the environment. Often, a too frequent assessment of your orders is not good because you need some time to let the ship react to your order because of its inertia. At the same time, if your feedback cycle is too slow, you might not have enough time to correct your action. You might end up not being able to follow your plan any more. In that case, the wisest thing you can do is give up and start again the maneuver from scratch instead of trying improbable corrections.

In markets, you do not have controllable forces, but you have expected crowd behaviors. In this context also each situation is different. A trader establishes a plan and during the trade execution, as new data come in, he/she assesses the market's behavior. The frequency at which this feedback process is done is critical. Traders may overreact and be deceived by the short term noise (you need time for the trade to develop), or they may be too slow to realize that the trade is not going as expected. How much data do you need, how often? How is the behavior different from what is expected is an interesting parameter. What is the threshold that makes you realize the trade went wrong? A ship maneuvering characteristics can be modeled mathematically, but in real life captains have to apply their experience and judgment to work in an observe-evaluate-decide-act cycle, which is very similar to what a trader does in a real time environment. Similarly, the market can be modeled, but most of the times expected outcomes require judgment and interpretation. It is all about the human dimension, where the action-effect cycle is matched against broad assessments of a generic "system" behavior.

Jeremy Smith comments:

“Consider how often a vessel must change its course in leaving a harbor, yet once on the high seas a single heading may bear it to its destination. Only
a major navigational hazard could change it.”

 – Louis Auchincloss, The Embezzler [1966]

J.T. Holley adds:

In the spirit of Patrick O'Brian I would have to disagree or at least add to this quote. Pirates, Enemies and Gov't can cause navigational changes in both the ships directions and destinations as well as in the markets. Seamanship by David Dodge is a excellent book that discusses the navigational patterns as well that the U.S. Navy utilizes. Having served onboard the U.S.S. Stark I can assure you that rarely is "a single heading" utilized to reach a destination. Sure it is the broad direction, but there are other directions that are in between when going from point A to point B.

Pitt T. Maner III writes:

Let me add a nice quote from The New Dictionary of Thoughts (1963). I wish I knew who "Anon" was:

A smooth sea never made a skilful mariner, neither do uninterrupted prosperity and success qualify for usefulness and happiness. The storms of adversity, like those of the ocean, rouse the faculties, and excite the invention, prudence, skill, and fortitude of the voyager. The martyrs of ancient times, in bracing their minds to outward calamities, acquired a loftiness of purpose and a moral heroism worth a lifetime of softness and security. Anon.

The pdf of the book is searchable and many a fine old quote can be found there. 

Jim Sogi adds:

Jeff is right. A sailing ship in particular will sail the best course made good, rather than rhumb line. For example, it will take the best angle to the wind, for the ship best speed, even though off rhumb line, for best course made good. A catamaran, for example, will go faster tacking down wind, zig zagging rather than shortest distance. I think day traders know this instinctively. It's quantified in markets in the absolute volatility numbers, or in Sharpe result numbers.

Another curious effect is when there is a strong current setting the vessel down. The vessel aims at a different point than where it intends to go, and 'crabs' along its course. This is hard for people to understand, as they can't really see the current, but one has to be aware of the motion of the ship in relation to the course, which is a derivative function. I suppose this might be thought of as Sharpe as opposed to gross dollars in trading or percent.

Another odd effect I experienced last weekend up in Alaska skiing was during a white out, a sense of vertigo. There is no visual reference point to balance, and its easy to lose balance in total white out conditions. While standing still, a small avalanche passed by, and though I was standing still, seeing the snow pass by gave the impression of motion, and threw me off balance. Or there is the feeling of standing still, then all of a sudden hit a bump and realize the skier was moving, but couldn't see it. The idea is that sometimes the perception is not correct and some other reference is needed. Pilots know this. This was one of the main points in survival. Loss of a reference point often lead to panic and death. In the markets, it's easy to lose reference. Chair's international numbers, I believe, are an attempt to get some sort of reference point. I had guides skiing up in the wilderness, who have a lifetime of experience and reference. Like markets, if you lose your reference point, you'll be dead in short order. 



 One of my favorite lines in a philosophical novel (Sophie's World) is "Why is Lego one of the most ingenious toy in the world?" My thoughts are that it is timeless, creative beyond imagination, durable, ageless (adults can play too), and global. Stocks are I feel parallel in that they too have to be one of the most "ingenious speculative toys in the world". What are some of the reasons for you? Many are the same for me as for Legos. 

V. Katsenelson adds:

This is what I wrote awhile back about why I love investing: I love everything about it:

The uncertainty of every decision. The intellectual exercise of putting different pieces of the puzzle together while never having enough information at your disposal. The constant battle with one's emotions, the hardest and the most important battle of all. The never-ending pursuit of perfection despite its unattainability, how just when you think you have figured it out, the market has a new lesson in store for you. The humbling aspect of the market, arguably the most humbling mechanism ever invented by humans. The people, the debate, the search for the truth. The fact that for every trade there are two opposing sides (buyer and seller), and time is the variable that separates them from discovering who was right and who was wrong. And finally, the hidden, rarely recognized, but fascinating impact that randomness plays in many outcomes.



F & SOver and over again, we see the market moving in trepidatious concert with the father figure of the moment. It used to be the fake doc and then it was the scholarly economist chair, and now it's the former chair of the white shoe firm that maintains the Chinese wall with its former colleagues. On past occasions it's the Sage, and every now and then, a big executive like the head at Intel or the basketball player from Conn.

What's particularly damaging to the market is when these people bow. The spectacle of the Intel chief bowing and begging forgiveness I believe forever tarnished the aura of high p/e deservingness that his company with 59% profit margins might have deserved. The news that the former white shoe chair knelt in front of the chair of the Democratic party and begged her to pass the bail out bill was the death warrant for the market for a time. And now that he changed horses in midstream and gave up on buying mortgages directly, a position he had previously begged for, "based on a different set of circumstances" was the death knell for the market.

The trader has the Dostoiyefskian tendency to feel guilty about their activities from the time they were small. And they wish their father figure to be strong and not to kneel. When these figures regain the respect of their kids by being strong, maintaining the stiff upper lip, etc., we can expect a much better market. How would you quantify this and what other instances of kneeling as a bearish indicator have you seen?

Anatoly Veltman writes:

You mean like when Chancellor of the Exchequer raised discount rate 9/16/92 three times (from 3% to 7%), before rolling it back to 3% by the end of the same day… and recognized that ERM snake was in fact beheaded?

James Lackey replies:

The return of the dipsy doodle is a good start. The most damaging current meme is that the markets are at fault…  and market prices do not forecast. "Free markets need help and regulation from governments," The dog is chasing its tail. Government regulations are what cause markets to come up with crazy schemes to avoid the previous market patches, in Microsoft terms, a "hot fix."

A more direct answer is price discovery. Once we all figured out too many prices were rigged they panicked and traders bought as usual. Then when the father figures changed the rules to bailout their kin, we went on strike. No traders, no liquidity for the markets. Now the prices are caught in the crossfire of the Hatfield-McCoy feud. Do not blame the hired guns.

Art Cooper adds:

Obviously the market and economy respond positively to strong leadership, as this relates directly to human emotions (animal spirits) which are so essential a part of Main Street economics, finance and the financial markets. Hence, the Great Depression market responded positively to a strong leader who declared that "The only thing we have to fear is…fear itself," even though his economic policies were in fact counter-productive to recovery (see Jim Powell's "FDR's Folly").

Kim Zussman interjects:

The child is racked with disorienting insecurity when they first witness their parents own uncertainty, indecisiveness, and fear. Now the children are being dragged by their mother to a new daddy with undetermined rules of discipline, while being told that the last daddy was really an immoral fraud.

It's hard growing up, especially with a fickle mother.

James Lackey writes:

I listened to Santana's show tour warm-up in 2002 or so. Later that evening he was on an interview, local radio, and was describing his so called comeback. His rebirth was through collaboration with new young artists. His quote went something like, "I wanted my teenage kids to know dad can jam, and how the system works, sure they saw my old awards and shows from back in the day… but to a's now that counts." The gist was, the only reason he did the work was to prove a point to his children… boom… the return of a father figure.

J.T Holley writes:

Highly apropos, like all great literature, call me crazy if ya'll don't see it that way, this has been written in William Golding's Lord of the Flies.

Kids abandoned due to crash from adults.

Ralph pleads with Piggy about Simon's death: "You were outside, Outside the circle, Didn't you see what they did" (paraphrased).

Piggy before his murder: "Which is better? Law and rescue or hunting and breaking things?" (paraphrased). Then the rock falls.

Kids rescued from abandonment and panic/chaos when Ralph looks up at Naval Officer (adult).

I guess the big question right now and maybe one that Golding proposed is who is going to rescue the naval officer and his boat? In other words who saves the adults themselves?

Now substitute War, Atomic Bomb, Ralph, Jack, Simon, Piggy, Naval Officer, Naval Ship with traders, investors, banks, citizens, government, and politicians.

Kevin Eilian writes:

Before it became a quote dejour by Mac and others, R*bin's upper lip, bone straight poker face, "the economic fundamentals are strong,"– you believed it. He made sure he did, too, as his net worth was tied to white shoe IPO.

James Sogi says:

Demographics is the counting of the "father figure" issue. We saw the effect in the aging of Japan. Now we are seeing the aging of America. The rest of the world is quite young, averaging something like 15 years old… Many of our parents are sick, old or dying or died. There is a changing of the guard. The boomers are retiring. America is aging and gaining weight. Though America "the great white father" is kneeling or brought to its knees, the emerging world will rise in its place over time. I would watch this trend over the long term. The world is becoming multicultural. Witness, O witness, the non white majority in California.

Russ Sears adds:

I have been thinking for the last few weeks that all of this could have been avoided if the investment bankers had learned a few lessons on risk management from a mother of a smart, curious two year old or a teenage boy. You can't just tell them no and then ignore them once they've moved on and not still expect some experimention to happen. The alerrt mom always seems to have an instinct, before the father, when silence is a clue they are into something or when the truth has been stretched. How the mother always is prepared to contain while still delighting in their first taste of chocolate cake or discovery of girls and love. The good mom has the sense to help them limit these new found divine obsessions, before they ruin their mental and physical health.



VNThere are many unprecedented events that we are witnessing these days. To me, the most amazing is that on 12 31 1982 the Nikkei closed at 8500, by no means a local high as it was 9000 a year later.. On 10 15 2008 it closed at 8458 thereby marking a 26 year period where a major enterprise stock market moved without a rise. The S&P stood at 800 to 900 in mid 1997 and reached 1000 in early 1998. Thus, 11 years without a gain in the US. Is there a single overriding reason?

To me, the key aberration occurred in the two weeks of 9 26 2008 to 10 10 2008 when the S&P moved from 1218 to 891 and the Nikkei plummeted from 11920 to 82760.

To gain perspective, I looked at weekly prices:

date       sp     nikkei    bonds    euro   crude gold   wheat vix

0919     1246    1192       118 5   14466   10254  834   718   32

0926     1216    1189       117 1   14609   10618  879   716   35

1003     1108    1094       11920   13772    9301  835   640   45

1010      891    8276       11620   13408    7799  849   563   56

A preliminary insight is that vix and the dollar rise and crude were the major harbingers of the unprecedented decline the week of 10 10.

I always believe that markets and prices are the key and that interrelation and the web is always there. The problem is they're always changing. But at least we've got a description.

Anatoly Veltman adds:

My hypothesis at this hour is that the currency markets are destined to wash-out first, with world equity markets grudgingly following. The reason, obviously, is that margin liquidation in FX takes plays instantly - while generating and then instituting collection on stock margin calls takes time, not to mention timezones.

Kim Zussman wonders:

Couldn't help wondering when/if backbone financial theories (such as high allocation to equities for long term investors) will become so unpopular that demand for courses in financial markets will dry up. Y@le had a guest lecture from David Swensen earlier this year, will he be invited back next year?

Charles Pennington comments:

For any remaining fans of the Fed Model, here are some numbers from the Financial Times (page 23, "Market Data"):

country      earnings yield %      10-year gov't bond yield %
                         8%                3.7%
Germany               10%               3.9%
UK                        13%               4.6%
Japan                    9%                1.6%

J.T Holley writes:

body snatchersThe web now includes for me the Vix trading higher than a barrell of oil at one point, and for me a first, the cash trading more than the Dec mini S*P contract. What is next– dawgs n catz sleepin' together? Be very very careful, brainwashin' is in effect and bodies are being snatched!

Stefan Jovanovich replies:

Starting the Index of home prices at 1995 overstates the run-up of home prices. It would be like starting a stock market Index at 1982. Kim may disagree, but house prices here in California in 1995 were still recovering from a boom-bust cycle that was almost as dramatic as the current one. The current boom didn't really get going until after the bust; 2002 was really the first full year when housing prices only went up no matter where they were.

Time for Oscar Hammerstein and Carousel (first sung on Broadway by Jan Clayton aka Lassie's Mom):

"When you walk through a storm,
Hold your head up high,
And don't be afraid of the dark,
At the end of the storm is a golden sky.
And the sweet silver song of a lark.
Walk on through the wind,
Walk on through the rain,
Tho' your dreams be tossed and blown,
Walk on, walk on, with hope in your heart,
And you'll never walk alone.
You'll never walk alone :| "

Time to buy because it is way too late to sell, and all the canes have been swapped for walkers.



J T Sometimes I think that all these banks with brokerages attached are issuing 8%-9% preferred while simultaneously driving down their own common to be able to buy back their own stock later on the cheap and ride it back up gaining momentum until the 2013 call dates on all these preferred where they'll do secondary offerings pay off the preferred and the beat goes on! I know it ain't that simple but it sure looks like that is what is going on to me. I mean the real probability of a bank run has what been elevated from what, 2%, to 2.5% probability? Similar to foreclosure rate going up and everyone already assigning in their heads a permanent straight line to 100% foreclosure, heck the White House might have to be foreclosed on in that picture accordin' to many.

Y'all think Ms. Whitney seems to have all the answers [22 minute video dated May 27 2008, Transcript]?

Value investor Tim Melvin replies:

Read the FDIC website, it is worse than you think.

Read the various statistical reports… loan loss reserves and net chargeoffs continue to grow and credit is getting tighter by the day.

J. T. Holley replies:

There are over 8000 banks under the FDIC umbrealla; if 2% failed that would be 160 or more banks. Right now on the list it’s only 11 with close to 20 shutting down in the ’00-’03 recession. So we could be possibly over halfway done for all you know?

Tim Melvin is not amused:

Fine, buy 'em all… especially if the NPA's are over 2% and climbing. It will be fine.

Ignore the rising charge offs, foreclosures and loan loss reserves. Derivative exposure means nothing. Just buy 'em all.

Equity to assets failing? No worries it's bullish. Consent letter signed? Buy it up.

Halfway done implies another 40% drop in valuation so, yeah, maybe we are halfway done.

J. T. Holley answers:

I certainly understand your feelings and am not ambivalent to the situation at hand but a very good analogy is my experience in the Navy with crabs and most venereal diseases. When a sailor ports his mind is on usually two things that being booze and the opposite sex. This led this middle class white boy from Virginia to experience things that had never been a part of the spectrum of my life. When a sailor contracted something and was revealed once we set sail he was avoided and condemned. Kwell was passed out and penicillin was on hand. Everyone had a sense of cleanliness that wasn’t felt ever in my life. Toilet lids were swiped four to five times. Contact was avoided at all costs. Mattresses were burned and/or thrown overboard into the ocean (this was 1990). After a while the exiled was allowed back amongst the population and normalcy came.

The banking sector has crabs/vd. Not all banks are bad. Not all of them are going to go under. Yes, they all are playing defense right now to dress up the pig with lipstick. I never said no worries, just not fear of economic nuclear winter that seems ever so present. I didn’t even say buy ‘em, buy ‘em all? I just simply wanted to say that it ain’t as bad as it seems. Feelings seem to be dominating way too much. I know before you get to 160 you have to pass through 10, 11, 12, 13, 14 and such but geez I’d rather see negative PE’s across the board (no such thing) and 80 banks gone under or merged before I’d feel the fear that most feel right now?




"In the coming depression, pawn shops will be a profitable business". A Daily Speculations reader.

Finney had a better ending in 'The Body Snatchers' book than the movies. The dynamic duo of Bennell and Driscoll torch the pods that they find. This is important and I believe that Finney purposefully wrote it that way because it came at a time of hopelessness and desperation where everything seemed like it would be over and the world would come to an end. Guess what, the aliens in the fictitious book that survived the fire died off according to Finney and the world was saved thanks to backbone, effort and not rolling over and saying "well, we are going down".

Just as the torching does take place in depressions, look at the returns the markets brought forward from '34 - '36. Anyone that has burnt a field down due to overgrowth of weeds and thicket knows the beautiful greenery that comes the following spring. Finney I feel knew this and therefore provided an appropriate ending. A ending where life prospers and advances. Fittingly this week the Olympic motto is "Citius, Altius, Fortius" aka "Faster, Higher, Stronger".

I'm a little old fashioned, but to think that one can predict with certainty depressions or heck even recessions for that matter seems a little self centered? Am I wrong in thinking or feeling this?

Kevin Depew replies:

K DThe stock market bottomed in 1934. But the economy and the stock market are not the same thing, perhaps that is the disconnect. There are far more people with exposure to economic conditions than to stock market returns. I have not been able to figure out how stock market speculators can win by following the economy, or how those who are more dependent on the economy for survival can win by paying attention to the stock market.

Jeff Watson adds:

With economic slowdowns and recessions being part of the natural order of the economic cycle, I look at them as just another season, much like the solar or lunar cycle. There are many trading opportunities during slowdowns, and somewhere in the world, there's always a bull market. To quote Chance the Gardener in "Being There", "In the spring, there will be growth…." Metaphorically speaking, Chance, (who had no clue about anything) hit the nail on the head. The question remains, when will the spring time appear? The astute speculator who can identify the change of spring time will prosper.

Janice Dorn reveals:

Dr DornI am the Daily Speculations reader who stated "In the coming Depression, pawn shops will be a profitable business." Human history seems logical in afterthought, but a mystery in forethought" — William Strauss and Neil Howe from their book The Fourth Turning. I believe we have left fall and and are now entering winter. With all due respect to the general optimisim of this site and my high regard for Vic and Laurel, what has been going on since 2001 has been ordained by history. It is our responsibility to ourselves and those we love to protect ourselves and survive through what is coming. After the purge, there will be a new awakening, but many us alive today will not see it. If we are not prepared to go into deep survival mode, we will not make it through the coming crisis. Even if the fourth turning — winter — does not occur within the next two years, the lessons of the third turning will serve us well and strengthen and preserve what we have.

Dr. Dorn is the author of Personal Responsibility: The Power of You, Gorman, 2008 



In discussing history the other day with a client he happened to mention, and educate me on, his family's losses in the Kuwait's Souk al-Manakh Stock Bubble of the 80's and the dabbling in foreign markets. He said that the lessons learned were obviously numerous and that the recent Dubai boom "to him" smelled of the same setting in other asset categories. Anyone remember this or have experience with such?

Greg Van Kipnis replies:

I remember it well.

The Kuwait Souk al-Manakh was an over the counter exchange largely designed for speculation by guest workers and immigrants. The official Kuwait exchange was off limits to all but citizens.

The bubble was financed by virtually infinite leverage. Speculators were allowed to put down margin in the form of post-dated checks and/ or un-cashed checks. The market soared, then crashed, and the Kuwaiti Gov't intervened with a bailout. There is a lot more to the story.



PhilMost of us are aware of the benefits of portfolio diversification. The simple fact is that it pays to have diversified positions in different industries, countries and even diverse markets. The key to it all is to look at the correlation between the various components of the portfolio.

However there is another kind of risk that many investors are exposed to. It can be fairly assumed that the vast majority of investors are exposed to this single risk in all of their positions. Simply put it is the risk of default if your broker goes under.

There are two ways to defend against this risk. One is to assess the broker's financial position personally. In particular look at how leveraged the broker is. As a rough check one can simply look at the stock chart of the broker if they are publicly traded. If the stock has been tanking faster than the industry it is a clear red flag.

Secondly the investor can identify multiple brokers who appear sound. But even then it makes sense to diversify using multiple accounts with two or more brokers. Remember if a broker shuts down losing half your money is a whole lot better than losing it all. You can still come back.

None of this discussion is meant to assert that the SIPC, FDIC and the many other protective agencies cannot perform on their guarantees for investor safety. Probably they can. But in the eventuality that a decent sized firm goes down, the process to sort the mess will undoubtedly takes months or years. After all it is the government at work. At best you might get all your money back but a very long time from now. Certainly you will miss any buying opportunity which develops from this crisis.

George Parkanyi remarks:

That’s why I pay a little extra commission to deal with a Canadian big five bank’s discount brokerage and not, say, E-Trade (at least not in this environment).

Another point to add is that certain types of accounts are segregated. Registered accounts for example are held in trust, so if your broker goes under, the assets in those accounts are yours. They can’t be touched. It’s margin, short, and option accounts where you have the risk — because the assets are commingled with the firm’s. I believed cash accounts are also segregated.

But if your boutique broker does go bust, it may take a while to sort out the mess and be able to access your segregated accounts, so it’s still a good idea to either steer clear or diversify brokers, as Dr. McDonnell recommends.

J.T. Holley writes:

With FDIC the thing no one realizes is that you are only getting your principle back!  They don't care that you bought a 5 yr CD in 2005 that was yielding 5.5%!  Now get to the back of the line and wait for your $100k!

I had a wonderful lady who happened to be my client back in '01-'03 who passed at the age of 98.  She was risky as heck w/ her "discretionary" money, but her fixed income side of the portfolio was rock-solid.  I once was assisting her with her 1099s for the tax season and noticed that she had 15 $100k CDs at 15 different banks in the area.  I asked her why.  She said that was the limit at each and she didn't want to go through "it again". I asked her to explain and she said she had her money taken in the Great Depression before FDIC at the age of 22. According to her, the only way to properly have your money diversified is as Dr. McDonnell explained! 



BearsHedgefund monitoring service Greenwich Alternative Investments reports 58% bears on the S&P, 58% bears on the dollar and 67% bears on the 10 yr T-Notes. Sentiment is overwhelmingly negative.

Nigel Davies replies:

Seems odd that these learned gentlemen would be so bearish on both the dollar and the S&P. I would have thought there'd come a point at which a weak dollar would start to get good for exports.

Jim Joyce writes:

Sentiment stats must be tested. One can't just glibly assume they are contrarian indicators.

Victor Niederhoffer remarks:

The key to this market was when Abbey Cohen refrained from making any more bullish forecasts and it was accepted that we were in bear market by Goldman itself.

Stefan Jovanovich explains:

Measures of the current cycle need to include adjustments for the change in the value of the dollar. If those changes are included, the S&P 500 at 1374.9 is still down roughly 25% from its 12-month high on May 29th of last year and down 7% from its 3-month high at year-end. One could argue that the "bear" market is still intact — given that the S&P 500 adjusted from the value of the dollar is down 60% from its high on August 30, 2000 and up only 17.3% from its low on March 3, 2003. Comparisons with 1938 seem appropriate when looked at with this particular historical lens.

Nigel Davies agrees:

It is helpful to consider the value of assets relative to other assets rather than just the dollar. The dollar is by no means a fixed entity, though when one talks about 'bottoms' or 'tops' in assets like stocks or gold, there's an implicit assumption that it is.

J.T. Holley replies:

The dark clouds cover only the Big Apple. The dark and dirty forecasts are associated with NYC. My assumption is cutbacks, losses, write-offs, and a slowing beat of the heart of the financial world. Outside NYC, in beautiful Brentwood, TN where the buds are blooming, daffodils sprinkle the green fields, and opportunity is much appreciated, I'm as bullish as ever. It seems that far and few are remembering the drift, that bear markets exist only by looking at the rearview mirror, while one is driving forward utilizing the windshield to block the bugs and grit. 

Kim Zussman reports:

Yesterday was third highest first day of month in 14 years (SPY c-c). Those >3% gain were, on average, followed by gains the rest of that month:FDOM



ShootistI remember John Wayne played J.B. Books in the movie "The Shootist." Ironically, the Duke played a role of a gunslinger dying of cancer. A boy in the movie had read all of J.B.'s legendary gunfights and commented to him how fast on the draw he musta been in his prime. J.B. answered to the young man that it wasn't a matter of how fast, "It's a matter of being willin'".

The funny thing is I feel that I'm more prepared to face the markets than ever before in my life. I realize those words in the movie also couldn't be more true, it doesn't matter how "quick to the draw" I am, it's a matter of bein' willin'! I wonder how many feel like me that their wills are being tested like never before?

I get the joke.

Steve Leslie adds:

This was the Duke's last movie, as he succumbed to cancer himself shortly thereafter. Ron Howard was the young reporter and the gunfighters who met him in the saloon for the final shootout were Richard Boone, who played Paladin of Have Gun will travel. His trademark was a chesspiece, the Knight, and it appeared on his calling card. Hugh O'Brien played Wyatt Earp in the 60s.This was also one of the rare movies that John Wayne actually died in. There were seven others:

The Cowboys (Killed by Bruce Dern)
The Alamo (Killed by Santa Anna's army)
The Sea Chase (Lost at sea)
Sands Of Iwo Jima (Killed by enemy sniper)
Wake of the Red Witch (Killed by giant squid)
Reap the Wild Wind (Drowned)

Special note: The Man Who Shot Liberty Valance, Jimmy Stewart, who played Rance Stoddard, visited his grave so we can assume that he died in the movie but not sure how.

All in all The Duke had starring roles in 142 movies. I'm a huge fan of the Duke.



I took my Cub Scout den to the Norfolk Zoo aka Virginia Zoo last night. We had what is called a Zoo Snooze. We were "locked in" at closing time and got to tour the place with flash lights and see the nocturnal animals at play. Amazing experience. This morning we got to go see the lions fed hamburger mush and get within three ft of them behind a cage — intense! They roared and nearly made everyone see the Pearly Gates! We did a slew of other things as well, including dissecting owl pellets. Highly recommend. Cost was 35 bucks.



KimIn checking historical US stock returns, the probability of loss declines as the holding period increases. Twenty years is commonly touted as safe, but there have only been 4 such (non-overlapping) periods since the Depression so it's hard to feel secure.

(There is also the problem of whether this came by "luck": e.g., look what happened to German and Japanese markets when they lost WWII)

There were four non-overlapping 238 month (2 short of 20 years) periods in DJIA monthly returns 1928-2008. The compounded return of these (w/o div) shows only one which was down (with ending dates):

Date 20Y cpfactor
2/1/2008    5.994
4/4/1988    2.264
6/3/1968    4.941
8/2/1948    0.721

(Dividends formerly a bigger part of total return, so exclusion under-estimates final compounded return)

Randomly re-ordering the same empirical monthly returns into 100 simulated 80 year series, I calculated compounded 238 month returns and checked for up and down periods. Of the 400 simulated 238 month periods, 47/400 were declines (12%). This is about half as often as actually occurred, suggesting that the negative market momentum around the Depression may not have occurred as result of random ordering of monthly returns.

Kevin Bryant counters:

In the grand span of economic history, 100 years of stock market data is barely a drop in the bucket. This is why I derive little comfort from this kind of analysis particularly during the current period which is quickly proving to be well outside normative experience.

Kim Zussman replies:

Just because long-term stock returns are positive, it doesn't mean they continue into the future, but begs the question whether there are better indicators than history. And a related but very different question is the feasibility of deploying insights/leverage to beat buy-and-hold without increased risk of ruin.

That 3 out of 4 twenty year periods in stocks since 1928 were up should make young people with 401K's feel better, but seems dangerously irrelevant for day traders using leverage.

Riz Din adds:

'In checking historical US stock returns, the probability of loss declines as the holding period increases.' - Kim

My favourite chart to illustrate this important point is Figure 76 in Chapter 7 of the Barclay's Equity-Gilt Study. Limited observations, international examples, and changing times provide good reason to be cautious, but it is all to easy to get lost in the month-to-month or year-to-year volatility and lose track of the extent to which downside risk (negative real returns) have rapidly disappeared over time. Indeed, when looking at the UK data (1899-2005) the study finds that 'For holding periods of five years or longer, the incidence of losses greater than 5% or 10% is the same for equities and gilts.'
Over the long haul, the real returns to UK assets have been 5.3% for equities, 1.1% for gilts and 1.0% for cash. For the US since 1925, the numbers are 7.1%, 2.3% and 0.7% respectively.

To quote Christopher Walken in Wedding Crashers: "We have no way of knowing what lays ahead for us in the future. All we can do is use the information at hand to make the best decision possible."

Phil McDonnell writes:

PhilThere can be no guarantee that history will repeat.

Those words, in one form or another, are found in virtually every prospectus ever offered by the financial industry. The main reason is that they are true. There really is no guarantee. But to the speculator the real question is how should one bet?

The converse of the history repeats proposition is that it does not repeat. Should one bet on something that has never happened before? Clearly betting on something which has happened frequently in the past is the better choice than something which has not happened. The best of all worlds is to combine a frequentist approach based on counting, tempered with a modicum of judgment and reason based on any changes in the contemporaneous financial landscape.

J.T. Holley comments:

I couldn't agree more, the art w/ the science. I've often thought in reference to Monsieur Le Cygne Noir why one would bet with such conviction on Sisyphus not to roll the rock up the hill, but furthermore that the rock wouldn't come right back down for ole' Sis to push it back up again? It wouldn't take me too long watchin' that rock n roll to place a bet, I'd be there taken the scrapes from those that thought otherwise as well, but not denying them their fair attempt.

Jim Sogi concludes:

The proper questions to ask are: How are things changing, and how does the trading strategy need to evolve to adapt. A dogmatic approach will not lead to good analysis and will lead to mistakes. Things are changing from the 2003-06 regime.

1. Volatility is up.
2. Global influences are greater
3. Governmental influences are increasing.
4. The industry is consolidating and shifting to electronic.

Time series sample selection in data becomes more important since last year. The idea of regimes being helpful in cycle analysis.



CubeAll my life, I've heard the familiar refrain on how "So and so is such a lucky person, they always win." I've been to the track and seen guys sweep the whole card of trifectas, much to the chagrin of the losers who attribute this feat to that elusive concept called luck. I've seen people throw away all of their money in pursuit of the long shot, afterwards labeling themselves as "Having a streak of bad luck." The concept of luck always intrigued me, and caused me many sleepless nights in grad school trying to prove, or disprove luck's existence. After a few months of thought, I eventually came up with a very elegant proof that denied the existence of luck. Ever since that moment, equipped with a new mind set, I have viewed all events as random occurrences that are subject to the laws of probability. This idea served me very well over the past few decades, and allowed me to eliminate one more emotional distraction regarding my management of risk in trading, at the track, or at the poker table. I simply denied the existence of luck for the past 30 years and chalked up all occurrences to probability.

About a week ago, my lovely wife, who's assimilated a lot of knowledge about trading through osmosis, came out with a startling statement regarding luck. We were discussing her illness when she blurted out, "You know, luck is a zero sum game." She made that profound statement at a time when I was vulnerable, and it got my mind spinning. I started to revisit a few thoughts about luck, and the meaning of luck. For simplicity's sake, I decided to define luck as a positive outcome to an event, random or otherwise, and bad luck as the opposite. I saw that my wife had a good point, provided that luck exists in the first place. She went on discussing that rain might cause good luck for the farmer while at the same time cause bad luck for the concert promoter who's outdoor concert was rained out. She gave about 10 more like examples of good luck/bad luck, and they all ended up having a zero sum, canceling each other out. However, I brought up the concept where one might have good luck, and the opposing party did not have bad luck, or merely had a case of lesser good luck. I mentioned a poker table where there was one big winner, four smaller winners, and one loser. I revisited the rain being good for the farmer, but too much rain might be bad. My lovely wife brilliantly speculated that there might be a big clearing house somewhere in the universe that dealt with luck, transferring the luck to the clearing house and doling the good and bad to random parties. A cosmic Karmic clearing house, so to speak. The clearing house analogy got to me, as I didn't even know that she knew what the function of an exchange clearing house was. All of this philosophical discussion finally got to her, tired her out, and she finally had to get some needed rest. Meanwhile, I was left with something very insightful to ponder, that zero sum concept of luck. In my usual attempt at avoidance and to remain dispassionate, I got back to my sugar position. Someday, I better find that old journal and revisit that proof.

Kim Zussman cautions:

We attempt to apply Statistics to markets because we see an analogy between markets and gambling. You bet when the deck is rich; count the cards and you will know.

But what if the dealer of the markets:

1. Shuffles under the table or may not shuffle - you cannot know (without inside info)

2. Might be using more than one deck

3. Sometimes uses a deck which favors your opponents

4. Usually favors you but occasionally ruins you

5. Knows that you need the action and abuses this knowledge

6. Knows that you will exploit your knowledge of him to others, especially the weak, ignorant, and women

Henry Gifford writes:

Simple proof that luck doesn't exist: You can't measure it. 

J.T. Holley adds:

The key to quantifying luck is (to paraphrase Thomas Jefferson) "the harder I work, the luckier I get".

If I was going to quantify luck this is where I would start going forward.

Those that have windfall luck from pure chance without doing anything usually lose the benefit within a short time it seems to me. Those on the other hand that receive a windfall from hard/smart work usually compound it from that point.

Vince Fulco agrees:

In his latest book, GM Gary Kasparov harps on this point.

"One interesting, and humbling thing I've noticed while analyzing my own games for publication is how poor some of the ideas I prepared really were…Only a fraction of these ideas every saw the light of day, either because my opponent didn't fall into my trap or because I found a better variation to play. Now I see that in many cases that was not a bad thing….This kind of preparation served me well in a way I never quite appreciated while I was working on it with such determination. These periods of intense preparation were rewarded with good results–even when I didn't end up utilizing the fruits of my labors. There was an almost mystical correlation between work and achievement, with no direct tie between them.

There is also a practical benefit to "wasted" effort. Work leads to knowledge, and knowledge is never wasted…"

Adam Robinson adds:

This sentiment echoes that of another strategist, General Eisenhower: "In preparing for battle I have found that plans are useless, but planning is indispensable."

Perhaps Kasparov romanticizes, however, in the "mystical" lack of correlation between his preparation and his later results. Surely having immersed himself in a position or a variation for some hard thinking, even though over the board he played "something different," he subconconsciously gained insights that facilitated his over-the-board analysis.

Writers experience this phenomenon all the time. You write something, read it over, and then scrap it and write something "completely different" that you realize now was what you meant to say all along. But you couldn't have gotten to that insight without first going down the "blind alley." I once scrapped an entire book manuscript and rewrote it from scratch for the same reason.

Alan Millhone relates it to checkers and stocks:

The late Checker World Champion, Tom Wiswell,  once told me to always make your best move in a game and never assume your opponent will make anything but their best move each time it is their turn. Play for superior position in your game. Luck comes to those who are well prepared.

Being prepared in the Market would be no exception. In Checkers I study past games of top players, keep a hand written manuscript , have a large Checker library for reference. Luck is when preparation meets opportunity.

In the Market one has to know your stock in every detail to make effective trades (like good moves in a Checker game).

The late and great Vince Lombardi said it best, " Luck is the residue of preparation ".

Sam Marx makes a distinction:

I will have to admit that my two most profitable moves in my lifetime were in investments and they were because of luck, also they were relatively cheap and I held them for a long time.

My success in trading, however, was not luck but based almost entirely on probabilities.

Investments vs. Trading. Perhaps luck plays a greater part with investments than trading and we should make that distinction.




SignsPolice and government officials seem to feel there is a legal distinction between rights and privileges. For example, driving is frequently referred to as "a privilege, not a right."

Despite having attended Harvard Law School (maybe I was asleep during the privilege discussion), I am unable to follow this distinction for such a basic means by which one is able to get around in modern society.

Especially for this liberty-oriented site, I would think driving is clearly a basic human right, like free speech or walking or s-x. Subject to reasonable regulation perhaps like having to take a driving test, or not having been convicted of drunk driving. But it seems to me everyone who complies with this reasonable regulation has an absolute right to drive.

While I would be wary of questioning such a favorite phrase when next stopped ("Officer, I think you are playing with words: Driving is obviously a right, not just a privilege"), is there some distinction here that means something or is it just officious silliness?

Russ Herrold replies:

tFrom ancient memories, formerly rights/privileges had differing meaning, but there is a line of cases post-Reconstruction, keying off the 14th Amendment's application of federal Constitutional limits upon the states ('Privileges and Immunities') at the federal Supreme Court. That line whittled away to nothingness the former [Founders'] distinctions of States Rights vs Federalism, and with it, the judicial need for a way to distinguish and dis-agregate rights from privileges. 

J.T. Holley writes:

I was taught by my father (a truck driver) that it was a privilege to drive on Interstates! They were built by the "Gummit" and maintained by the States. Now where I'm from anything dirt or gravel is your own and is a right.Don't know if anyone has every written or spoken of roads but to be observant you can see the straighter the road the more a privilege, the curvier the more a right! I guess out West it's a little different? If you go through rural Virginia you see wavy roads that meander. Most visitors ask "why is it so curvy?" The reason is that they go along property lines. Those lines can't be violated, and if so then it is a privilege to do so, but if you remain on your own property then it's a right to do so!



EmmaMy daughter Emma came to me this morning and told me she could count from fifty backwards to zero. I sat and patiently witnessed her spit it out with little hesitation.

I did notice though, and light bulbs went off, that when she hit 41 through 39, and 31 through 29, there was a pause, but when she hit 21 through the teens the same pause was non-existent and she trucked it on down to zero.

She asked me to do the same thing from one hundred. I also paused at the 1-0-9 turns but not the 21-20-teens turn.

Could the markets have the same pause? Is there a natural tendency at round prices to halt, pause, take a breath?

Possible hypotheses abound. Easier to fall from 1540 to 1520 than from 1520 to 1500? Once 1500 is broken, smoother movement on through the 1490s?

We both tried counting fast and had less hesitation or pause on the way up, though, and that is where breath is taken in.



The work of John Kanzius was discussed this weekend at a cocktail party I attended. Amazing stuff and rather ground-breaking if it pans out. Nice to see creativity, necessity of invention and inspiration coming out of someone like him.



Triage TagOverheard at the deli last week, paraphrased to give you the gist of the conversation. Two local hospital administrators:

Hospital admin #1 "No, it's good these people are coming to us"
Hospital admin #2 "What are you talking about — they have no insurance"
Hospital admin #1 "Right, so AHCS picks up the tab"
Hospital admin #2 "Oh yeah, right"
Hospital admin #1 "And the state pays faster and never argues unlike those a$$h&les at Aetna, United and Pacificare"
Hospital admin #2 "Great"
Hospital admin #1 "You just triage them a little lower in the ER to keep the paying customers happy"

J.T. Holley responds:

Here's my neighbor's response; he's a ER doc here in a Richmond, VA hospital commonly referred to as the "Gun and Knife Club of Richmond."

Probably goes on, but it is illegal and if anyone had good data that this happens, then that hospital is at risk of losing every last Medicare/Medicaid dollar. Usually not worth that big of risk. EMTALA law forbids the ER triaging based on insurance status.

There are pretty straightforward criteria to triage patients based on vital signs, chief complaint, etc. It really isn't worth the risk to get you're a$$ sued or have an EMTALA violation for one or two "satisfied" customers.

Don't know who those admins were, but they sound like dumba$$es as well as unethical — both no big surprise.

Tom Ryan extends:

RaytheonIt's not about the healthcare, it's about the money. Healthcare is just a small microcosm of the bigger picture problem which basically boils down to this: Once you create a system where a substantially large portion of your population derives their paycheck either directly from the government (in my community that would be the University, the Air Force base, the Border Patrol, the list is endless) or say one degree removed (again, in my community one of our biggest employers is Raytheon), once that group gets large enough as a proportion of the total population, you reach a turning point from which there is no going back. That group will simply just keep voting in their economic interest and expand like a virus. More programs, more jobs, more money, bigger budgets, larger departments, War on Drugs, War on Immigration, War in Iraq, War on Terror — Now we will have a war on healthcare and a government sponsored healthcare industrial complex - the list is endless and expanding. It will never stop until we are bankrupted and have to show ID just to get across town. My friends who call themselves "conservative" are just as responsible for this expansion of government as the liberals. They may be "conservative" in a gods-guns-gays way of thinking, but in my book they are proponents of big nanny government just like the liberals.

Gary Humbert explains:

Rent-seekers become successful by rewarding special interests at the expense of the general public, since the amounts are huge to the special interests, but the costs are spread around over the general public.

Hillary's mistake the first time was to take on the healthcare industry as a whole.  She will not make the same mistake again. She will simply raise taxes to spend on a nationwide health insurance program, getting industry to agree by promising to spend a ton of money on them.



SartreA big part of trading is determining ahead of time where prices will be, for profit. You can use what has transpired as a rudder to achieve this goal, or you can go on the assumption that future events are independent of current events. In the first thought, there is a hint of determinism and fatalism. Every event yet to occur in the future is more or less scripted. In the second case, there is the strictest acceptance of free will, or whatever is yet to happen acts independently of what has happened.

Which is correct? I feel these perspectives coexist in that things at times are predicted with great accuracy but at others times it seems futile. Is time the bridge between fate and free will? Luck either bad/good the conduit? Last night I sat back to take a look at the big picture. Deeply appreciating the tools of counting and the law of ever-changing, these questions popped out.

Phil McDonnell explains:

The ultimate question. Is our fate (and trading success) predetermined or do we have some control over it?

Perhaps a better way to express the problem is through the paradigm of statistical thinking. In statistics the central concept is randomness. Randomness is actually a very deep philosophical issue. It is not the same for all people. Rather randomness depends greatly upon what you know, and different people know different things.

Suppose a company has a great quarter. During the quarter many employees will have a pretty good idea that the quarter is going well. Those at the top such as the CEO and CFO will have a very clear picture. After the end of the quarter the outside auditors may get a good idea as well. Then some time later the earnings report is released to the public and the stock moves unexpectedly. To the outside investor the event seemed random and unpredictable. But clearly someone knew.

The central point is that from the perspective of those who knew of the coming announcement in advance the event was not completely random. From the perspective of those who knew nothing the event was unexpected and seemingly random. Randomness and non-randomness can coexist in different people with different information. So then the best definition of randomness must ultimately be egocentric. What is random to me is that which I do not know and cannot predict.

This concept can be quantified very nicely by various statistical ideas. For example when one performs a regression analysis of something like the Fed Model there is a statistic called the R-squared which embodies the percent of the variance explained by the model. So if the R squared was 30% the model explains 30% of the variance leaving 70% unexplained. If we only use the Fed Model as our predictor then the world is 30% less random than before but 70% is still random to us because our knowledge is limited to that model. A little counting can greatly reduce the randomness in our trading.

David Lamb extends:

Through experiences in my life I have come to understand that when I brainstorm with someone upon an idea or topic it seems as though the sum of our thoughts exceed that of only two persons, as if 1+1=3.

If this is true, is it possible that nothing is really random, given a number of participants that are knowledgeable in a given arena? For instance, if we took the topic of market direction and asked each Daily Spec contributor to give his thoughts on the subject along with providing his reasons why, then produce quantifications with qualifications, could each of our random market movements that we experience be sufficiently squashed?



WheatWith the amazing moves in wheat lately, I'd like to recommend The Plunger by Edward Jerome Dies. Published in 1929, The Plunger focuses on Benjamin Hutchinson, a legendary Chicago trader. 'Old Hutch' was King of the Wheat Pit in the late 19th Century and I read in awe about how he dominated trading at the CBOT. There are reprint editions made in the mid 1970s at a reasonable price.

Alex Castaldo adds:

As a reminder of how difficult it is to hedge a generalized deflation, let us look at a chart of wheat prices from Kindleberger's book The World in Depression, on page 88. If wheat prices in 1929 are set at 100, they subsequently plunged to under 50 in 1931, 1932 and 1933 before gradually recovering and reaching 100 again in 1938.  In the prosperous year of 1925 they had reached a maximum of 120. A terrible time for wheat producers indeed…

J. T. Holley remarks:

I have on the back of an envelope somewhere a study I did on softs/grains. I did this study to learn scale trading. The counting that stuck in my head is that when corn, soybeans, and wheat reached the top five percentile of their historical price distribution they were significantly lower two years from the date of entry. My staring point was that 1974 high of 650, which was probably breaking massive statistic rules!



Only my wife would find this! She follows TMZ (rumor mill online) religiously. The other day she said she saw Vic in a video of Brad Pitt with his kids in Central Park. I didn't believe her, so she sent me the video, and bam around the 27 second mark here comes Vic looking like he's wearing a Spec Party 2007 shirt! He walks from right to left as Brad Pitt is in the background.



rotavirusThis weekend is one you’re glad is behind you. We had two of three children pick up the rotavirus and it blindsided us. Ironically this comes after the Purell comments. Needless to say our house is cleaner now than the day we moved in. Honestly, if you could bottle rotavirus you could win a war.

Having this hit my family the weekend after the downturn in the market brings an interesting metaphor. Everyone seems to attach such a permanency to moves in the equities markets especially when they move sharply down. It's like they instantly feel that zero is the next round number that will be met. Viruses run their course and immunities are built up. Wouldn't that be a good testing hypothesis for the S&P, the duration of a "hit" being sick and the time it takes to flush out of the body and back to normalcy?

But from recent experience, when one is sick all you can focus on is that sickness. The fact that it's a 24-hour bug and that 24-hour-x is getting closer doesn't even cross the mind. Do we in essence become immune and our trading gets strengthened by the experiences that we go through?

Drift cures all in all time frames, just as individuals aren't sick with bacterial infections and virus everyday. Only on occasion do we experience the worst of the worst. Time heals all.



 I think I've found a key to the "gun issues" that many people have. I really think it's a phobia or deep-rooted fear. The people that are the most avid anti-gun law supporters tend to be those who also can't stand being around guns, or even fear them. It's like there is a snake in the room. Even if the gun is not loaded they fear it. It could have a trigger lock, be shelved or encased, and they still get jittery.

Is it similar to those that are afraid of heights? It's not being high up that makes them scared, it's the thought of actually being compelled to jump. Equally with guns, just because a rifle or pistol is in the room doesn't mean it's going to go off. Is it really the fear that they can't hold themselves back from picking it up and discharging it? If so, why would they think it has to be aimed at a person? The statistics behind such an event's taking place are way to the left tail.

Similarly with the markets and speculation. "Don't trade options or any other derivatives because they're too risky!" I understand risk. Why would people say that? Is it because they fear it themselves and to actually own something in that category would cause them great angst? Is it more that they lost money when they tried? Is that why there is always a great pull for the pessimistic to be in hard assets such as gold, timber, real estate?

Adam Nelson replies:

With derivatives it is the leverage that causes many people to fear them. Also, they are more complicated — you have to understand not only the movements of the underlying but also the relationship between the underlying and the derivative.

The fear arises from a lack of understanding of how they work and what they do. If all someone knew about guns were knowledge obtained from the media, it’s entirely likely he would have a very different impression of what they do and how they operate than that of someone who shoots regularly. Also, the stories about derivatives are almost always about a fund's blowing up often due to its exposure being larger than expected or misunderstood. If the only knowledge one had of derivatives were stories from tail events, it would likely skew the risk profile a bit.

I agree on the hard asset exposures and have no explanation for why pessimists prefer them (especially gold).



Eddie Van HalenShowing the green behind my ears, this is the first time in the 10-plus years that I've been in this wonderful industry that M&A has been so plentiful and shown the effects on the markets it has with one-liner headlines.

The one thing that I have had experience with, though, is the IPO markets and remembering what they did to emotions of investors once companies came to market, and the stampeding that they created to pump up equities and expectations.

Why isn't anyone discussing the IPO market and the deals that are taking place and the capital that is being raised for future profits?

To borrow from Troy Smith (last pick in the NFL draft) when the rookies all sat down with Commissioner Roger Goodell had him tell them of the cracking down on the negative image that players portray, "Why aren't you focusing on the positives" of the many? When perplexed, confused, and on the spot Mr. Goodell simply dodged the question and Mr. Smith the recent Heisman Trophy Winner hit the high hard one back saying, "You didn't answer my question".

Why can't the brainwashed, negative, half empty glassed people out there see that there exists an unabated movement that is called drift that is picked up and carried magically by things that they don't even see or acknowledge? Can't they see that the engine gets greased and refueled daily, weekly, monthly, quarterly, and yearly? Do they not understand the Van Halen lyrics, "Everybody wants some, I want some too"?

Scott Brooks comments:

I love how J T wove in a great philosophical lesson and tied it to the markets and sports, then brought it all together with a semi-obscure 1980 Van Halen reference. Of course, referencing that song also ties into what is one of the biggest drivers of the markets: Sex!

Here's an interesting site to reference for song facts.  



 There is a proposal before congress (H.R. 2755) to abolish the Board of Governors of the Federal Reserve System and the Federal Reserve.

Jeff Sasmor adds:

This is the second time, it seems. The first time was in 2003.

Scott Brooks remarks: 

I'm starting to become a Ron Paul fan. But I'm worried about what I've referred to as the Russia effect, meaning that Russia melted down into chaos after they went straight from socialism to capitalism resulting in anything but a capitalist society.

As much as I want to abolish the IRS and 99.99% off all government agencies, what thoughts are there on us melting down into chaos if that were to occur, i.e., abolishing the fed?

Stefan Jovanovich writes:

"Russia melted down into chaos after they went straight from socialism to capitalism" is not a very good description of what happened after the U.S.S.R. formally dissolved.

Runaway drunkenness, near demographic suicide by abortion, absenteeism rates that made Lordstown look like a Toyota factory, extortion so much a part of ordinary life that someone's not demanding a bribe was cause for paranoia, had all been part of Russia life even before the defeatism and self-doubt that came after Afghanistan. Scott's post assumes that Soviet governmental authority had some moral force in 1988. It had none.

None of us can predict the future, but I would argue that the odds for Russia's future are as good as those were for what used to be known as West Germany in the 1950s. Then there were no local German politicians who could pass muster as anti-Nazis, and the new republic's democracy was a very brittle artifact. If Russia's current leadership seems tainted by associations with the old tyranny, that situation is little different from what was happening under Adenauer.

Ironically, Scott is far more likely to see Ron Paul's monetary regime created in Russia than in the U.S. I leave it to those who really know about currencies to correct my usual amateur errors, but it seems to me that the ruble is the one world currency that can currently be seen as being entirely backed by a gold/petroleum standard. 

Alex Forshaw writes:

Hmmm…with regards to Russia, the so-called "free/ democratic institutions" that "evolved" were anything but. It's one thing to have measured, organic evolution of a free press and robust markets as the US did. But in Russia, the robber baron tycoons immediately built up media machines to massage their public images.

Putin destroyed Russian "free media" because it was Boris Berezovsky's tool, and Berezovsky probably achieved greater control of the Russian economy than the Politburo did (with lots of help from Chechen gangsters, car bombs for his competitors, Russian government force, and other ridiculously coercive methods).

Stefan Jovanovich adds:

The admiration that the official American press (Time, WP, NYT - the usual suspects) showed for the "free/democratic institutions" that Professor Sachs helped "create" (sic) has its historical match in the obtusely wrong-headed enthusiasm that the Jeffersonian press showed for the progressive insanities of the French Revolution. 

Scott Brooks responds: 

Both Stefan and Alex are doing a better job of making the point I was trying to make. These countries were run by demagogues, despots, and gangsters who simply changed their styles, but ultimately remained in charge. They changed from being in charge in the form of a government to being in charge in the form of being the most powerful gangster. The gangsters, of course, whether under the guise of a legitimate government or as just plain gangsters, were able to manipulate powerless people because the gangsters had made them dependent on them.

In the US we don't have gangsters in charge per se, but we do have a system where a large group of people like welfare recipients (no offense intended) who are dependent on the government. So I ask if a country can go from a "dependent system" to one of independence overnight? If not, then how does one move away from that system? 

Alex Forshaw replies: 

If by "welfare recipients" you mean agribusiness, the tort bar (and to a lesser extent other unnecessary functionaries which use "the law" as an excuse to siphon money from businessmen who would otherwise have no need for them) then you're getting somewhere

Just in personal experience, I'm 21, I trade about 150k total in political futures (snobbier people would call it "gambling," I laugh at the pseudo-distinction). To get even the most rudimentary legal structure (a "pooling of interest") to facilitate moving the money offshore, (because it's simply stupid and/or prohibitively expensive to risk regulatory harassment over high-risk, novel securities trading in the United States, without the economy of scale of a tens of millions of dollars of a capital pool), I had to utilize the services of two accountants and a securities lawyer.

Fortunately I had friends of the family to do it for me, but what about someone who isn't as privileged as I am? Legal overcomplexity is an incredibly high fixed cost/ barrier to entry in this country.

And I don't even have day to day interactions with other people, unlike the Korean immigrants in DC who got sued for $100 million because they refused to give a lawyercrat a $1000 new suit, or the cerebral palsy doctor ruined by John Edwards.

Stefan Jovanovich writes:

I will let Alex speak for himself, but that is not the point I was making, Scott. No ordinary Russian thinks that the changes over the past 20 years have been merely a change of styles by "demagogues, despots and gangsters".

For one thing, there is now actual freedom of conscience. (Yes, I know the Russians are giving their own national faith preference and have been less than open to proselytizing by Westerners; but that is a world of difference from the situation that had Jews, Seventh Day Adventists, and devout Orthodox regularly jailed simply for what they believed.) It is also now possible for people to have savings that are not controlled by the government and private land ownership.

These are real changes for the better that have affected millions of people, and they are occurring. But at the same time the conditions of actual life continue to be dreadful. As for the question of dependency, that seems to me a near universal. I have never known a libertarian who actually turned down the offer of a good government job. As the first Mayor Daley once said, "Everyone wants a little honest graft."

No society has ever reached that peak of pure individualism that Ms. Rand dreamed about, but we can hope for a world with enough contending interests to limit the amount of loot that any one group can haul away. 

Gordon Haave remarks: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. Besides, there is no reason why abolishing the Fed would create a chaotic situation.

George Zachar writes: 

Russia went from a closed-economy kleptocracy to an open-economy kleptocracy. The commanding heights of Russian industry never saw capitalism. The looting, aggregation, and export of its wealth are well-chronicled. Using the word "capitalism" in the context of Russia is to deliberately smear the term as gangsterism. 

Peter Earle comments:

The Federal Reserve, when set up, was ostensibly created to maintain a stable value for the dollar. Looking at the 90%+ drop in the value of the dollar since the creation of the Fed, I'd say there's reason to doubt their somewhat self-serving perspective. A look at Panama, where there is only nominally a central bank, may be instructive as well. 

Stefan Jovanovich continues:

When Queen Elizabeth I came to visit the United States after WW II, my grandfather, who was born in Old Serbia, wrote about the news to my dad, who was born in the coal camp near Ludlow, Colorado that has now physically disappeared. In his letter Tata wrote to his American-born son that "your queen" is coming for a visit. What he meant was that Americans, regardless of their origins, end up having an Anglo-centric view of the world - at least as far as Eastern Europe is concerned.

The Hungarians, who were fervent Nazis and are more completely thorough anti-Semites than anyone to the east, got a better press in London and New York in 1946 than our allies, those awful Russians. They still do. The economic successes in Eastern Europe - Croatia, Slovenia, Poland, Hungary and the Baltic states - have far more to do with their proximity to Germany, Austria, and Scandinavia than with any special qualities of jurisprudence in "eastern" Europe.

For their citizens and for the average Rumanian, Serb, Bulgar, and Ukrainian, the rule of law is no better than it is for the average Russian. What is better for all of them is that now the police are merely corrupt; they are no longer true Marxist believers dedicated to liquidating all class enemies. 

Gordon Haave adds: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. 

J T Holley asks:

Can't we simply start with the IRS first as a warm-up? 

Gabriel Ivan writes:

Having spent the first 20+ years of my life in Eastern Europe (Romania) and being exposed to the first 13 years of transition from communism to capitalism, I can second Scott's comment about the melting into chaos in all Eastern Europe, not just Russia. The looting was mind-blowing and cannot be explained if you didn't live it.

With rampant inflation, no social net whatsoever for maybe 80% of the population and opaque legislation, I'm surprised things didn't get more explosive in all these years. I personally witnessed two national distribution companies with strong brand names and infrastructure vanishing in two weeks due to central bank's policies on the exchange rates. And this was '99 - '00 after 10 years of "free market economy".

Unfortunately, fundamentals haven't improved much despite the real estate boom and commodity prices run-up masking an economic growth that is not healthy. High profile businessmen - bank presidents - still get shot in daylight in Bulgaria, (the country is a member of EU for six months now… what a joke) due to their affiliation to organized crime (there is no other way to run a business). Imagine Sandy Weill getting whacked in a drive-by shooting to understand the strength of their banking system.

I expect the majority of "emerging markets" money managers to be separated from their wealth in the foreseeable future due to their lack of due diligence and reliance on official statistics.



 I often wonder why the public can be repeatedly misled by forecasts that are consistently wrong, and by forecasters that have no raison d'etre. I believe the underlying reason is that we are brought up to be insecure, and we look to others for the sources and solutions to our problems, rather than looking to ourselves.

Such forecasters as the weekly financial columnist, can be consistently wrong, (he has been bearish every week since the Dow was at 800), and yet be among the most revered and respected forecasters of all. For an answer to this, I turned to Harry Browne's book, Why the Best Laid Investment Plans Go Wrong.

I always start with the Humble Pie with Whipped Cream, on p.43, where Browne points out that the archetypal forecaster looks for anything in his forecast that happens to have the vaguest resemblance to the ultimate outcome, and then tells you in subtle ways that "he told you so" or "it was so clear from this or that indicia."

Browne reviews the yearly self-evaluation of an investment adviser, who might be prone to using levels and ranges as his weapon for misdirection:

He almost always seems to have been around 87% right … He usually cites some examples that turned out to be wrong – "I was a bit too optimistic about the high in gold, I said 450 when it was actually 406." You can see that he's being more than open and honest, and he demonstrates that his talent and even his standards tower far above yours and mine … Any man who's wrong 13% of the time, and who's that close when he's wrong must be a genius … When I check, however, I find that his original forecast was "Gold's high will be between 450 and 500," and this was made when gold was already at 406. So he missed the high by 15% and failed to note that gold actually ended the year at 350, down 15% from his forecast.

For many years, I have believed that there is little correlation between the past record of an adviser or manager and his future success. Too often, adviser get good results with small amounts of money, but the market loves to let you make a small amount of money, just to encourage you to then raise a larger investment to lose.

I believe that the period of 2000-2002, where advisers and managers made money by being hedged or net short, was a period that was particularly detrimental to investors, in that it has led so many of them to stay with those who were relatively successful in this period. These managers and advisors have lost their investors so much more money in the subsequent period, when the markets have doubled, than the amounts they made their investors when they initially began investing.

I try to eschew from forecasts on this self improvement, mutual education, deflation of ballyhoo, forum. For one, I know how fallible I am, and second, I am cognizant of the principles of ever changing cycles, (Robert Bacon.) If we did forecast, many very potent readers might mistakenly believe that what we have to forecast is better or worse than average, and in either case it would be detrimental to all concerned. Also, I would find it hard to make a forecast where I didn't have a position, because I trade often … and if I did have a position, my position could be helped along by my communiqué. Furthermore, when I got out of the position, I would be hard pressed to be so fair and honorable that I would let all of my readers extricate themselves before I did, to my disadvantage.

Of course, if I were an innocuous type, and was prone to forecast without having a position, then I would be subject to making absurd calls, without possible economic feedback, and could possibly be wrong as consistently as the weekly financial columnist, or others of his ilk. I would never know how much damage and harm and loss my forecasts might cause to those poor souls who actually placed any reliance on them.

Harry Browne's book is a treasure trove of insights as to how one can watch out for being misled, and I recommend it highly. I also encourage all of you not to rely unduly on forecasts in the future.

As an afterthought, while considering this question, I couldn't help but notice that the Fake Doctor might do well to refrain from making so many forecasts in future. His former economics forecasting company was not well known for its accuracy, and recently he has been involved in an orgy of forecasts on such things as interest rates, the extent of reserves in the earth, and the likelihood of gains in the Chinese markets.

Browne lists several criteria for evaluating the likelihood of a forecaster to stand out from the crowd, such as talent in the field, and expertise. Other caveats, like the self interest they might have in their forecasts, the ability of those who follow them to extricate safely, and the likelihood that their own expertise in areas like geology, or Asian activities, might not be greater than average, should be considered also.

Riz Din writes:

Judging by the content in much of the media, there certainly seems to be an education of insecurity taking place, well beyond the realms of the financial forecaster. Combined with the tendency to focus on the shorter-term and not to cultivate the big, broad outlook, these are good conditions in which the pessimistic forecaster can flourish. I also wonder whether their is an evolutionary component that plays a role in this game, since the average human is a risk-averse individual.

Regarding the Fake Doctor, in March of 2004, he commented on exchange rate forecasting that,

…despite extensive efforts on the part of analysts, to my knowledge, no model projecting directional movements in exchange rates is significantly superior to tossing a coin. I am aware that of the thousands who try, some are quite successful. So are winners of coin-tossing contests.

He is obviously now paid to have a view, but I wonder whether he really believes it.

Sam Humbert comments:

To all the good arguments for abstention from forecasting, I'd like to add: publicly touting one's views leads to psychological lock-in ('getting married to a position'), because changing one's mind and dumping a losing position will result in a loss of face, in addition to the (perhaps less costly and painful) loss of dollars.

Riz Din adds: 

Adding to Steve's point, the problem of 'lock-in' of public forecasts may be exacerbated by the fact that much time and money is often spent generating a forecast and thesis. From the sell-side, creating a unified thesis across research departments is no small feat, and new data that are coming days and weeks may be judged less on their own merits than on how they can be interpreted to fit with this thesis, i.e., going about things backwards. I'm guessing the ability to turn on a dime is a valuable advantage to the likes of Soros and other nimble macro players.

On a separate note, I recall when I was working in the prediction business. It would be about a month or so before the start of a new financial year when clients would call asking for various forecasts for the year ahead, sometimes even further out. I'm sure many of these folk knew better, but they did it any way. They had spreadsheets to fill in.

It reminds me of story about the general who told his team of weather forecasters, "I appreciate being informed that your forecasts are no better than random, but please keep sending them on, as the army needs your predictions for planning purposes."

Charles Humbert extends:

There are three classes of money managers:

1) If your edge is unreliable, or modest to nonexistent, then your best approach is maximum publicity. If you're good at promotion this may lead to much greater benefits than you will derive purely from money management.

2) If your edge is positive but not spectacular, you should try to manage OPM. In this case a little bragging is part of the game; but it must be done with discretion. The goal is to be credible thus attracting investors and increasing your earnings in direct proportion.

3) In the rare case where your edge is outstanding, shut up and trade. If at all possible trade only your own money. Resist the temptation to make your brilliance visible to all. Always keep in mind the goal, which is to last as long as possible before the competition catches up.

Trading is a cutthroat business. If you make it easier for your opponents you eventually make it harder for yourself. The only reason for making public forecasts is to feed your ego. But those who deserve it most are the least well-served by such promotion. 

Nigel Davies writes: 

One of the tactics that can be used for nobbling a tournament leader is to congratulate him on his fine performance and asking what the secret is. The self-consciousness and commitment induced by a reply can take them out of 'the zone' with a bump. Not that I'd use anything like this myself, it's just something to watch out for if one is in the lead.

I think a similar effect can be at work when players write books. Besides making them a target should they publish anything too valuable, there's a certain inflexibility that can be induced by the 'lock-in' affect of going to print. 

J T Holley contributes:

There needs to be if not already a study of the "Power of Anonymity".

It is the spirit of the AA program and one that Mr. Bill must have suggested or he saw this same powerful principle in its possession.

Having quit smoking numerous times, I know that I tried I didn't lick it until I remained anonymous about my intentions. The minute you tell people they will ask you when you bump into them, "still cravin'?" "want to smoke?" "how you doin'?" Even with their good intentions the first thing you do is start thinking about smoking and it simply fuels the fire. Maybe this is why you shouldn't share speculation positions as well.

Doing a quick count I can think of very few times where I've gone out and said something in the touting category and come across a winner. Yet being the anonymous I have risen to the occasion and accomplished magnificent goals. Card games and betting are the horrible exception because one must always be vocal with intentions and can never be silent.

If you look at the risk/reward of touting vs. non-touting it seems so unaligned to me. Even if you tout and succeed then you still lose it seems. You are disliked, set up to be the "one" to knock down and most of the time left doubting the outcome or feeling a Nietzschean withdrawal. Does touting burn unwarranted energy and power as well?

The anonymous one walks freely and has the power. Think of sports when something great happens and the comment is "who was that guy?" This years Masters is a good example.

I think anonymity has got to be the most powerful principle next to compounding.

Anthony Tadlock remarks:

It seems that forecasters and others with the most bearish and pessimistic outlooks don't actually own any stocks and generally never have.

Steve Wisdom replies:

I especially like these standard tropes from bear newsletters: "We advise you to liquidate all stocks," and "We advise you to take profits on stocks now,"… Begging the question: ‘What stocks? If I believed your newsletter, I'd have sold all my stocks years ago.’



In an idle moment I checked the classic Donchian moving average cross (5/20) over the last 3,000 days and gave it the advantage of only trading the long side. Even so the whipsaws were so many that it produced a loss, and that before commissions and slippage.

But it was interesting to see that this system produces a profit when applied to a stock/bond ratio over the same period, on both the long and short side and in both stocks and bonds. It even beats buy and hold, though I didn't include commissions and slippage.

I mention this because the first just gave a short signal after a long run on the long side. But the second has not.

I don't actually think this is a good system or I wouldn't be posting it. But the result seems kind of interesting and may be food for thought.

J T Holley adds: 

Having read and heard numerous presentations from well known and lesser known Donch's over the last five years it is always amazing to hear them down-speak equities. and if you look, their "diversified approach" index futures tend to be a smaller allocation. Their answers to questioning tends to be:

"Equities tend not to trend."

"The whipsaws don't justify a bigger allocation."

"This is the last frontier in trend following."

Nigel's study shows why they make those replies, but they still try. I often asked them "why not just take them out of your allocations?" with no good answer. I guess it is some Edisonian effort to persist or maybe Vic's often quoted "lose more than they should."

Once the Donch's deviate from the fixed system and try to screen, filter, and curve-fit a new fixed I have often wondered why in their attempt at scientific discovery don't they realize the "Law of Ever Changing," and abort the 5/20 or any variation or breakout in same fashion for another method?

One is only left with the assumption that they too have been Bodysnatched! 



 "Aspen, has an enormous sun block called Shadow Mountain, which does cast a chunk of downtown into the shade every day starting well before sunset. And the Castle Creek spreads of folks like Martina Navratilova don't trade at top dollar because they're nestled in cold, dark canyons just south of Aspen." George Zachar

This brings up several good points related to survival, traveling, and maybe speculating.

1) I've always tried to time day hikes, overnighters, and hikes on the Appalachian Trail so that I'm on the sunny side come daylight. My logic was for both warmth and alarm clock. If you stop early on the eastern side then you get this advantage. But it's a judgment call with distance traveling and you compromise earlier in your hike. If you needed the heat for survival then I'd rather awake with warmth. Isn't the coldest part of the night only hours before sunlight?

2) When you are traveling east to west on highways always make sure you travel through big cities and sleep in a motel on the western side. This serves the purpose of not worrying about morning commuting traffic. If you woke up on the eastern side and you'd already be through the city. The sunshine delays that morning commute. If you are traveling west to east then definitely go through the city at night towards eastern side because you'll be double whammied with sunshine delay and morning traffic on the west. My dad the truck driver taught me this one.

3) I'll leave the speculating up to future testing! Is trading a western to eastern traveling path since we read words and data most dominantly from left to right? Does after-hours trading eliminate the need or necessity to stop and shack up on either side of the big city? Would there be a comparable sunshine delay in trading? Big up days (1-3%'ers) bright and sunny versus big down days (1-3%'ers) dark and cloudy? Is traveling at night harder due to less visibility due to lack of liquidity? Or is traveling in the daylight better due to liquidity? 



The following song came home in my son's folder yesterday. I thought that I would share. I asked Jacob what the lyrics to the song meant. He replied, "We have the freedom to buy and sell what we want to as long as we have money". Then he asked, "When can I make money?" I said soon enough.

(To the tune of Row, Row, Row your Boat)

Lesson 4 Activity:

Buying and Selling (verse 1)

Goods, goods, goods are things

That we make and use.

We're buying and selling.

And buying and selling.

Any goods we choose.

Economics and Children's Literature - Supplement 3, 1998 SPEC Publishers, Inc.



 The following interview with Yvon Chouinard, the CEO of Patagonia, was sent to me yesterday. I feel that a lot of the points made and discussed are amongst the principles that have been discussed on this forum. Some of the highlights and quotes are as follows:

"I don't have much faith in that the government is going to do anything, but I can tell you that there is a revolution in business going on right now. And it's only been going on for the last two years, maybe the last year or six months."

"Yeah, well I used to hop freights when I was in high school a lot. I'd go up and down from L.A. to San Francisco. Once I was hitchhiking across the country and hopped a freight and got caught by some railroad bulls. I was thrown in jail for 18 days in Winslow, Arizona."

"What some people consider risk, I don't consider risk. I've been a mountain climber all of my life. I do a lot of risk-type sports: whitewater kayaking, surfing and things like that. I don't think there is risk whatsoever if you've done your homework. That's the whole thing. It's managed risk. I love living on the edge in some of these sports, but I never go over the edge. I think the biggest risk is just to be stupid, to not do your homework. That's where I see a lot of businesses go under."

"And I think these days, a lot of kids are trying to live their lives out through celebrities. They have no confidence. They have to buy the same surfboard that the world champion rides because they don't have any confidence that they'll be able to ride any other board. Or they have to have the same tennis racket that Roddick uses. I think having the confidence that you can change things makes you an effective leader."

When having everyone in his shop read a book on "peak oil," he wonderfully evoked and used the "Law of Ever Changing" and realized that Patagonia makes a lot of winter or cold weather clothes. So they started to get into the surf business because "the waves are only going to get bigger, the storms are going to get bigger and people are going to go to tropical areas."

While I don't believe that we are in environmental crisis, I do feel that awareness, respect, and preservation are important. We are gradually adapting to this and finding ways to profit as companies, and this is awesome. I was raised to always walk out of a room and have it in better shape than when I went in. The Navy was the same way to me. And the outdoors, while implementing a "no trace left behind policy," is very similar.

The part he mentions as a revolution having recently been started certainly seems to be true. It's nice to see free markets and capitalism do their thing and profit during this process almost as if it was in perfect harmony.

Now one thing I'd like to mention to Mr. Chouinard is if he feels that all young kids do is "watch TV, play Gameboys, and sit on their butts," then he better be picking them up. They are the ones that'll be buying his clothes!



Overcrowding, adaptation, supply and demand, and many other interesting points are present in this one article.



"The reason for this is not that they couldn't get the parts needed to keep things operating, but the process of procuring and stocking parts was so screwed up and inefficient that they couldn't get parts in a timely enough fashion to keep things operating. So they would have huge piles of tires, far more than they needed but no brake parts for example. It's like the joke in Contact. The first rule in government procurement is why build one when you can build two at three times the price?" — T.M. Ryan on the problems of nationalized Oil Companies

When onboard my ship in the Navy we would have to take enormous amounts of time ordering supplies for various things. I remember that it took way too much time trying to match up what "normal" people call simple office products to what the Navy had named them, for instance:

In Navy-speak, "fastener" and "disposal container" mean "paperclip" and "trashcan."

The list went on and on. I was criticized for even trying to translate. My Chief told me to utilize the order manual that was given!

From Stefan Jovanovich:

For those wanting to learn more of the currently useful and useless military euphemisms, I recommend Embrace the Suck, by Col. Austin Bay. 



Here's a technical question for experts on the operation of the NYSE and Amex markets.

For listed stocks with large volume, there is a daily "open" and "close" print at which a large number of shares usually trade. Ideally one can trade with a market-on-open and market-on-close order and avoid paying the bid/ask spread.
However, it seems to me that the open and close crosses have much smaller volumes for ETFs.

I'll compare Newmont Mining (NEM) and a gold stock ETF (GLD). Both are listed on NYSE. Both average about 5 or 6 million shares traded per day.

This morning 101,000 shares of NEM traded at the opening print, and 130,000 traded at yesterday's closing print. GLD, however, had a lot of volume this morning, including pre-market, but there was no obvious opening print. The largest single trade between 9:30am and 9:40am was only a few thousand shares, and that was by no means the first trade.

Are there different rules for ETFs in terms of the open and closing crosses? Is there a way to participate in some kind of crossing trade for ETFs?

David Wren-Hardin explains:

The short answer is, yes, there are opening crosses. The issue as to why a lot of them aren't seemingly efficient as stock crosses is that a lot of ETFs are traded as an arb. If there's a large buy imbalance in the QQQQs, the marketmakers and specialist will simply skew the market to where they can get their futures off to offset the trade and lock in their profit.

Unlike a stock, where the open and closing imbalance can be seen as the market's arriving at a conclusion as to the value of the stock, with an ETF, either the market knows what the value is because of an electronically traded future, or it doesn't, because the value is determined by a basket of stocks. In the first case, someone sending resting opening orders knows he will get a fill away from true value almost by definition. In the second case, the marketmakers and specialists can't figure out what something is worth until the basket of stocks is open, which all have their own opening imbalance games going on.

So in the case of something like GLD, which includes illiquid names with all sorts of late opens, the marketmakers would be fools to lay any sort of tight market. Anyone who traded against them would be doing so because he had a much better idea of where the underlying stocks are going to open.

Charles Pennington responds:

I don't understand the argument. The GLD ETF, as you note, would be the second of your two scenarios. That means there is much uncertainty about where it should open. I add that that's also the case for a regular stock. So what's the difference between an ETF and a stock in this regard?

David Wren-Hardin clarifies:

I was thinking of something like OIH. If there are 500,000 shares to go on the open, how are the marketmakers going to get their hedges off? Typically, they will wait until all the stocks are open, so they know what the value is. Of course, by this point, the world knows what the value is, and there's no longer need for price-discovery, and the customer will get arb'ed against. So if a customer is willing to do that, then he is essentially saying he know more about the opening or the post-opening than is obvious, and the trade will only be a loser for the marketmakers. Maybe he is leaning on the open prints in the underlyings in order to pick off the marketmakers.

The difference is who trades stocks, versus ETFs, or the perception of who trades them. ETFs are driven to a large degree by speculation. People trying to get in and out, people trying to capture an arb. They are often seen by marketmakers as smart money. Stocks, on the other hand, can often be driven by a different type of customer, such as a mutual fund. Their opening or closing order is just seen as a block of stock moving at some easy to mark price where the mutual fund is assured of some level of price-discovery giving them a fair price. Therefore, marketmakers, or even other customers, are more willing to step up and offset the balance.

Charles Pennington replies:

OIH is another example of a very liquid ETF which has very little volume on its open and close. Both OIH (the ETF) and SLB (Schlumberger) trade on average about 10 million in volume per day.

This morning, SLB traded 69,000 on the open, and OIH traded only 10,500. Yesterday SLB traded 36,500 on the close. My source of time and sales doesn't show any obvious large closing trade for OIH.

So there seems to be a big systematic difference.

Another Spec asked me what I meant by "closing cross". Here's my understanding:

One type of order that can be entered for NYSE stocks is a "limit on close". (There are also "market on close" orders.) These orders must be entered before 3:40pm EST, 20 minutes before the closing bell.

All such orders are held until the close. Then the specialist determines at what price the maximum number of orders can be crossed. If I have a limit order to buy at 50, and someone else has a limit order to sell at 49, then our orders might be "crossed" at 49.50. The specialist determines the price at which the cross can take place. Ideally there will be a price such that the buys and sells balance each other, and the specialist doesn't have to get involved in buying/selling. If not, then there is an "order imbalance".

However, NASDAQ over the past few years has added a closing and opening cross for its stocks, and they call it the "closing cross". I've been very satisfied when I've used it.

J.T. Holley notes:

From the AMEX webpage,

Rule 131A-AEMI. Market on Close Policy and Expiration Procedures. The following procedures apply to stocks and closed end funds and do not apply to options or to any security the pricing of which is based on another security or an index (e.g., Exchange Traded Funds or Trust Issued Receipts, securities listed under Section 107 of the Exchange Company Guide, warrants and convertible securities).

Looks like ETFs don't have the applicable MOC trade.

And it seems that they trade till 4:15pm in "broad index" cases.

David Wren-Hardin remarks:

That might be the case for products still listed on the AMEX, but doesn't help you if you're worried about things like the iShares.

There's an informal 4:00 closing price in the SPY for brokers/customers who want to mark their SPY against the 4:00 broad market close, then a formal closing rotation at 4:15.

Kevin Depew adds:

From the iShares Web site:

iShares ETFs are traded like stocks on an exchange where investors buy and sell them just as they would any other publicly traded security. And because iShares ETFs trade like a stock, investors can benefit from features like intraday pricing and trading, the ability to place stop and/or limit orders, and the opportunity to sell iShares ETFs short.

Like other exchange-traded securities, iShares ETFs will trade subject to a bid-ask spread. Spreads may fluctuate in response to supply and demand forces, overall market volatility, and other factors ? in other words, the same factors that influence the prices and spreads of stocks. But unlike stocks, the ETF's creation and redemption process not only helps to minimize the bid-ask spreads, but may also reduce the premiums and discounts that can develop between the iShares ETF market price and the Net Asset Value (NAV).

ETFs are very different from closed-end funds. A closed-end fund's shares are fixed, which is why they frequently trade at a premium or discount to NAV. Although they both trade on an exchange, the ETF shares can be created and redeemed throughout the day.

Also, it's important to get a handle on the composition of ETFs. The Biotech HLDR, with fewer than 20 members, is two-thirds weighted in AMGN and DNA. On the other hand, IBB, with more than 150 members, is only about 12% weighted in AMGN, has no exposure to DNA. That's a significant difference for two funds labeled Biotech.

David Wren-Hardin replies:

Kevin makes a great point. HOLDRS were invented by Merrill Lynch, and unlike other ETFs from the Spyder family (SPY, DIA, XLE, et al.), they never rebalance, and their composition does not change unless a company is taken over or goes bankrupt. That's why AMGN and DNA have taken over the BBH, as opposed to IBB, which is rebalanced from time to time.

In addition, it's more costly to create/redeem out of a HOLDR than a SPY, It costs $10.00 per 100 HOLDRS to create or redeem, That works out to a dime a HOLDR share, a pretty hefty premium. SPY, on the other hand, is a flat $3000.00 charge. The minimum creation unit is 50,000 shares, so that's only six cents, 40% cheaper already. But its $3000,00 for 50,000 or 5,000,000, and at that level the fee becomes a much smaller cost.

Also, HOLDRs pay their dividends straight through. If INTC goes ex-dividend, the owner of the SMH gets the dividend the same day as a regular INTC owner, minus a touch since fees are taken out of the dividend stream. Spyder products and their ilk accumulate the dividends over time, and pay it out quarterly. 

Art Cooper remarks:

An excellent resource is Russell Wild's Exchange Traded Funds for Dummies.  



This price movement of June bond futures on the morning of Apr. 23 taught me a lesson.

From 7:52 AM to 8:55 AM (slightly over an hour) the market went from 111-10 to 111-01. During this period it traded 19,459 contracts. There were no announcements during this time frame.

Then from 8:56 AM to 9:57 AM the market completely reversed its direction and went from 111-10 to 111-01, exactly where it began two hours previously. The additional contracts traded in that time frame: 20,469. Almost the exact amount as on the way down.

Why would market participants all of a sudden change sentiment, when there were no announcements? What makes participant bias change so abruptly without news?

Robert Ray replies:

A nine tick Lobagola? Take that same move from the perspective of someone that wasn't watching every tick and it would appear that not much at all went on as the price was the same two hours later. There is a meal here in how one perceives things.

Edward Talisse remarks:

This behavior happens all the time, not only in US but in Bunds and JGBs. It's the hedging of new issue deal flow. As corporate bonds are priced, dealers (read: swap desks) trade the order flow but usually end up flat. It has nothing to do with availability of new information.

George Zachar adds:

Deal flow is information, and gaming the hedges and their lifting is a major part of the debt market's micro-process.

Phil McDonnell explains:

A price quote is for a completed transaction. It is always between a buyer and a seller. So the number of buyers always equals the number of sellers — no exceptions. Only the price adjusts. So logically the number of long contracts equals the number of shorts always, all futures markets — no exceptions.

You can infer something about the initiator of the trade. He is often a market order coming from off floor. The market order will cross on the floor (or in a computer) with the current bid or ask. So a down tick usually means an off floor trade crossed with the bid. An uptick often indicates an off floor market order crossed with the current best ask. This is only the commonest case and must be tempered with the realization that limit orders will appear as bid/ask quotes as well and may be confused with market maker activity. Also you cannot know if open interest is increased or decreased by a single trade, but you can track it on a net basis over longer time periods.

Victor told the tale of the elephants always returning by the same path in his book EdSpec. It was a story originally told by Lobagola. The story holds true for markets as well. Markets tend to retrace the same ground — often many times.

Is there statistical evidence for this? One need look no farther than Doc Castaldo's recent post on the Pythagorean scale and markets. His data showed that markets exhibit small changes far too often for it to be chance. This is the salient feature of speculative markets. It happens all the time. Huge amounts of money are made and lost on the very numerous small change days.

Consider the idealized model of a market with a single market maker. He quotes 100 to 101. Someone sells to him at 100. So he drops his quote to 99 to 100. The very act of dropping the quote inspires more selling. He drops his bids to 98, 97, 96 then 95 in succession as more sales come in. His average cost is about 97.50. Now at 95 a funny thing happens. He hits somebody's threshold of pain, whose stop is executed at 95, and our market maker winds up too long. Now he holds the price firm or even raises it.

On the perception of firming or even rising prices speculators start to nibble. Our market maker now slowly raises prices back up to where they were before. Only this time he is supplying at the ask price. So he makes his spread which he tries to maintain at one point. By the end of the day the quote returns to where it was before. Our market maker has sold his inventory at an average of 98.50. The market has done a Lobagola down then up. The news reports the market was unchanged today and everyone yawns. But our intrepid market maker made his spread going down and then back up. He can afford to eat at Delmonico's yet another night.

Sam Marx adds:

As a former market maker on the floor, I can say that this description is a good approximation of what happens. That's why the distribution of prices is higher at the middle than the normal distribution. The market maker is more confident within the existing range.

Also, when there is an large influx of sell orders, the market maker steps aside, buying smaller quantities, a minimum number of lots at each lower price to perform his function, and lets the price really drop. When buy orders start coming in, or when the sell orders stop, he starts buying. That's why the price distribution is lower than the theoretical normal distribution a short distance from the middle of the curve. A leptokurtic distribution.

J.T. Holley extends:

I'm looking at long bonds today. The UK 50 year yields 4.1% and the French Euro 50 year around 4.0% Does this mean that the US long bond is going to 4%? Has anyone with a scientific bent studied/counted the ratios/differences of these instruments' yields?

Faisal Essa responds:

The UK and EUR long bonds are said to trade at those levels because of the local pension and insurance company law changes that have forced pension funds to match their long duration liabilities with long duration, high quality bonds. This has led to reduction in allocation to equities and a shortage of long bond supply relative to demand. To make matters worse, restrictions on currency exposure and derivatives overlays force the funds to stay in their own market rather than buying other countries' long bonds. This legal framework is quite unfortunate for Dimsonian pensioners.

This situation (along with changes in US pension fund law) does have some influence on US long bonds and long TIPS.

Charles Sorkin suggests:

If the media decide to exploit the notion that the American homeowner needs to be bailed out, bonds could fly. An interesting hedge (although extremely difficult to model and get the ratio correct) would be a short bond position hedged with long support-class POs. Difficult for the small investor to find, but some pieces have been floating around lately in the upper $30s to upper $40s on long paper. Such securities could return your principal within two years on a bond rally of 100-200 bps. 



"If You Think You Can Beat Buy and Hold, Try Looking at Taxes"

Standard and Poor's gives SP500 returns with and without dividends back to 1990. Here are the returns at year ends, without and with dividends:

date       1yr rt  total rt
12/1990 -0.066 -0.031
12/1991  0.263  0.305
12/1992  0.045  0.076
12/1993  0.071  0.101
12/1994 -0.015  0.013
12/1995  0.341  0.376
12/1996  0.203  0.230
12/1997  0.310  0.334
12/1998  0.267  0.286
12/1999  0.195  0.210
12/2000 -0.101 -0.091
12/2001 -0.130 -0.119
12/2002 -0.234 -0.221
12/2003  0.264  0.287
12/2004  0.090  0.109
12/2005  0.030  0.049
12/2006  0.136  0.158

Mr. B. Holder (BH) puts $100,000 into the SP500 index 1/1/90, reinvests dividends into the index at year end, and pays tax on dividends out of his salary as school janitor. BH sweeps into retardment 12/2006, and notices that without taxes his initial investment became $555,637, including reinvestment of $22,271 in dividends along the way.

For this exercise, let's assume that long-term capital gains and dividends are both taxed 20% (they are currently taxed less, have been taxed more in the past, and will no doubt be more in the future). When BH cashes out 12/06, he gets to contribute $91,128 and keeps

Also in 1990, recent refugee Natasha Otradeskaya (NO) plows $100,000 of hard stolen capital into a U.S. trading account. Like others from her country, NO has degrees in math, physics, and nuclear medicine, but unlike competitors in the US and A, does well enough with trading (after slippage, commissions, and opportunity costs) to exactly equal yearly SP500 returns including dividends. Exhausted after 16 years and 10^16 quantitative studies, she decides to look back at her results:

date      100000     P/L     tax        net
12/1990   96896   -3104       0
12/1991 126416  29520   7925  118491
12/1992 127526    1110    333  127193
12/1993 140004  12478   3743  136261
12/1994 138060   -1945        0  138060
12/1995 189939  51880 14980 174959
12/1996 215129  25190   7557 207572
12/1997 276825  61696 18509 258316
12/1998 332140  55315 16594 315546
12/1999 381941  49801 14940 367001
12/2000 333588 -48354        0 333588
12/2001 293938 -39650        0 293938
12/2002 228973 -64965        0 228973
12/2003 294665  65692        0 294665
12/2004 326724  32060        0 326724
12/2005 342770  16045        0 342770
12/2006 396907  54137   4490 392417 <<<<Final balance

NO trades full-time 100% of her account every year, and pays income tax of 30% on her gains (the calculation carries forward losses, which are balanced against future gains; which is the case for a trader who has no other income tax to offset capital losses. Note also that losses carried forward from 00-02 are not used up until 2006). Thus she is unable to reinvest what is lost to taxes, and these amounts do not compound.

In the end, BH cleans up: He gets paid an extra $72,093 for not doing studies or trading frequently, and uses it to order a new bride who happens to be NO's grand-niece from the old country.

J T Holley adds: 

The old gray mare ain't what she used to be. You can actually get no load low M&E annuities that aren't as bad as you would think. Most people think though that investing should be free and that one bp is too much.

Vanguard's isn't in the example above but its M&E is .20 basis points with a .10 basis point administration charge and the S&P 500 clone sub account is .44 expense, bringing the total to 74 beeps. Anyone counting this out remember that annuities are like mutual funds and take fees out daily on an annual basis.

I'll take the ordinary income later in life over the stg/ltg now and avoid Uncle Sam. Even with the 74 beep vig annually that is better than the taxable stg/ltg combination paying taxes now, that the S&P 500 tax toll can be annual. I like the compounding and pay later acting as a quasi spigot trust if you have enough time and persistence.

Steve is right though. There are tons of annuities that have a lot higher costs. The industry average is around 250 beeps in M&E and charges, but even these higher vigged charges show the tax deferral outperforming the pay as you go in a taxable account if you hold long enough to let it happen.

Also, annuities have a 10% penalty much like IRA's if you yank out before 59 ½, unless you 72T. I would recommend neither unless "liquidation" is really needed.

Mr. Sears might help us here. I'll defer all annuity and running knowledge to him.

Steve Leslie writes:

ETFs are not fairly new. Diamonds and Spiders have been around for a decade or more. And irrespective of their longevity if one's goal is to replicate an event using an ETF, what difference does it make how long they have been around? This is not Morningstar; as we know track records do not matter.

There is a big misunderstanding as to the elimination of estate tax law in 2010 and the questions surrounding it. The reason there is a gap in 2010 is that it is my understanding tax law cannot be written for more than 10 years. So it is clear that the next administration will rewrite the tax code. Who knows what they will come up with then?

There are some very low cost variable annuities which stripped down to the bare minimum may have an attractiveness. When I was a broker (sounds like my father) the lowest cost one we sold was the Nationwide Best of America. Still, be very careful that there are some pretty good back end charges if you redeem the annuity. I think there are some no load annuities with low M&E perhaps in the Vanguard family. M&E is mortality and expenses.

This is where all the hidden charges show up. You pay for that death benefit. And the charges are rarely below 1% and then you add management fees of the funds on top of that. The management fees can be higher in annuities if they are funds outside the annuities family of funds. You pay to play. And once again there is no stepped up cost basis on date of death. That is an extremely expensive thing to have the heirs have to face should that happen.

I still argue there is no perfect solution, however, ETFs stack up very well against no load index funds, in performance for expenses and after tax return ease of ownership and liquidity. One added thought; they are a heck of a lot easier to track the cost basis for reinvested dividends than mutual funds. You do not get average cost basis. First in first out, etc.

I am not sure about the dividends being left in cash as Mr. Sasmor suggests. I thought by definition they try to be as fully invested as possible. Not even open-end index mutual funds are fully invested at all times. They do by the mechanics of the machine have to keep some cash on hand. And in open ended mutual funds, when a run on liquidity happens they must sell stocks accordingly to handle redemptions. Whereas with closed end funds this does not happen. There may be times when closed end funds trade at a discount to the NAV. Open ended mutuals are marked to the market on the end of business. And purchases are restricted to last day's closing price.

Bill Rafter adds: 

Regularly I get an idea from an investment professional who typically does not do any quantitative research, but has a "hunch" that he thinks will work. More often than not the investment pro got the idea from some huckster. Investment professionals are really no different (nor less vulnerable) than the public at large. To keep the investment professional devoted to quality research, I have to disprove the cockamamie hunches, lest he wander off following outlandish ideas.

The latest is the "gravity idea" based on "celestial mechanics". Every good con job contains a certain amount of truth, and this one evokes Isaac Newton, Kepler, and some other luminaries. The celestial mechanics is BS to make the huckster sound important and establish him in an intellectual pecking order. I think this is something they teach in huckster school on the premise that the mark has to look up to the huckster.

The system the huckster is peddling is really just based on tides, which of course is a function of celestial mechanics. But neither the huckster nor the mark knows that. I can tell the huckster doesn't know that because he claims to use both the celestial cycles and the tides, which in his case is redundant.

The huckster uses tide schedules from a point in Delaware Bay. I cannot really find out why because all conversation has to go through the mark. Apparently the mark has told the huckster that he has had conversations with another one of his confidants (me) who is skeptical. This gets the huckster's back up: how dare the mark give any credibility to non-believers! Another lesson from huckster school: get indignant when challenged and threaten to cut off communications. The mark always wants what he cannot have.

The huckster really has the mark convinced. I try all sorts of arguments, like why we cannot find any evidence of these cycles using Fourier analysis. And if the idea were true, why isn't there more volatility during the "spring tides" when the earth is at perigee? However, I'm getting nowhere because the huckster has a track record with great performance. Of course there are reasons why he cannot show it, so no one has seen it.

Well I don't want to go searching for the Delaware Bay tide schedule. And since I live near the seashore, I have the Barnegat Light tide tables bookmarked on the PC. That data are neatly presented in a spreadsheet with the date and four columns representing the two daily high and low tides. The similarity with bar-chart data is overwhelming, so I copy the data, import it into my charting software and have it displayed as open, high, low and close. I send that chart back to the investment professional with my commentary that the highs on the 2nd of the month will be higher than the highs on the 16th, and the lows of the 23rd will be lower than the lows of the 9th.

At the end of the month the investment professional (i.e. the mark) gives me a call and tells me that my trading signals were right on target, and the gravity man (i.e. the huckster) complements me on having mastered the technique in such a short period of time. I know the trading signals did not work and I suspect that the huckster is now using me to validate his own importance. This must be another lesson from huckster class: if confronted with an outside challenge, turn the challenge around to support your own claims.

I have no choice but to have a personal meeting with the investment professional and show him exactly what I did, which takes about two minutes. He really doesn't want to believe me, but when he sees that my tidal signals did not work and then realizes that the gravity man is just playing him, I finally win him over.

Hey, anyone want to buy my gravity system?

Steve B. adds:

The con game is not so much about the con be it in financial services, health and beauty, or the red-hot real estate (mortgage) market. The con game is about the mark - the one who must get conned for the game to work. The con in this game has the advantage of instant feedback from the mark. The mark is spotted by the type of work he does, the kind of car he drives, his or her age. These are just general and to get specifics he needs to talk directly with the mark.

How is it that the con can come to know about us? We provide him the information via physics and other shamsters. But in this case we feel we are dealing with a respectable person and our guards are down. Basically, one starts with general statements and through feedback (verbal and body) the con figures out which of his general statements are specific to you.

We all have the desire to trust our fellow human and the con operates with this advantage. You may not always know when the con is on but if you feel the flattery (and a feeling you may miss the boat) then you may be a mark.

From Henry Gifford:

While it seems so many con games include some true physics in the story, the physics are usually redundant (as already mentioned) or not relevant. My favorite is energy-saving devices that incorporate the use of "bipolar" magnets. As all magnets have two poles, the statement is meaningless yet true. 



By reading Victor and Laurel's books many times over I've absorbed the wisdom that they wrote about. My suggestion is to get copies of EdSpec and PracSpec, take off the dust covers and set them aside, invest in a highlighter and a good pen, and begin to read and highlight and underline those things that are important to you and relevant to what you are trying to accomplish.

After that task is done then go get another notebook that will be a journal. As soon as possible do the following in any order that you'd like and record the results:

  1. Grow a plant
  2. Take a hike down a path
  3. Visit a stream, river, and ocean
  4. BBQ amongst friends
  5. Watch a sporting event
  6. Ride a bicycle
  7. Play a game of chess or checkers
  8. Learn to program a computer
  9. Make a homemade volcano
  10. Fly a kite
  11. Jump rope
  12. Go to store, view the variations in vegetables
  13. Count different birds in a park, their sounds
  14. Try to solve Pi manually
  15. Bake a cake and apply icing
  16. Go fishing
  17. Run a mile as fast as you can
  18. Listen to The Four Seasons by Vivaldi
  19. Make a campfire
  20. Tell a stranger hello
  21. Grab some clay and make something
  22. Identify different clouds for two weeks
  23. Watch the squirrels in a local park
  24. Fold a newspaper in as many shapes possible
  25. Go bowling
  26. Play poker

Bottom line: if you want to think outside the box, then really get outside the box.



 It's been questioned by a friend whether I broke a six minute mile in this decade. He's obviously seen my ample frame in the last couple of years.

I can assure you it was 5:48 in 2001, with a stop watch on a regular 400m track. I played rugby at the time.

I can do it again if anyone wants to give me a month and bet me 100 bucks, but I would rather stick to running sprints and suicides at the local YMCA.

I used to run track in high school to stay in shape for football. I would run the 400m, and the 300m hurdles. These two events were usually back to back with little rest in between. I would turn in 1:03 to 1:05 (never cracked one minute) in the 400m and :44 to :45 in 300m.

Times have changed though!



 Do any of you still have your marbles from when you were little? I have a few that were my father's when he was a boy. They are clay fired and quite old. I have a jar full of my own when I was a youth. I also still have a couple of my leather marble bags that I used when in grade school.

I can remember at recess a few of us gathering and someone would take a stick and draw a circle in the dirt and then make a small notched mound in the ring's center to rest marbles that we would shoot at from outside of the ring. If you leaned 'in' too far someone would shout "no hunchies."

Most of us had our own favorite 'shooter' marble and we all dreaded losing our prized shooter in a game. My area years ago had the Vitro Agate Marble Company, long gone. I still have marbles from that company and they made beautiful cat's eyes.

Every year in St. Mary's, W.Va., they close of the streets and vendors come from all over to set up and hawk their marbles to collectors who come from everywhere to buy and sell. Marbles are beautiful and some are highly collectible. Yes, I have a few good ones tucked away.

The Discovery Channel had a nice program on the making of marbles tonight and it made me think back to my youth and the fun I used to have shooting marbles.

J. T. Holley adds:

My son has his marble belt loop from Cub Scouts. Many vintage games are still part of the Cub Scout program. I get a kick out of remembering and participating in the games with him as we move through the ranks. We have a marble racer game and invented a marble soccer game, and we also spend hours playing traditional marbles.



 Previous posts have focused on signals that baseball players make before the pitch, and the efforts that teams make to hide their own signals and decode the enemies'.

I have often thought that there are hidden signals in markets. My favorite signal is silver, which I call the omniscient market in that whenever something is good or bad it seems to hit the silver market first. Recently, I have been discovering the hidden signals in the Dow Jones, which seems to go the 50 and 100's during the day, much more than randomness would suggest. Another hidden signal is the movement in bond prices that always seem to predate a major move in stocks. Another one is the Israel market, which I have found quite useful in predicting where the US markets will waft.

In particular the move in the Israel market on the Tuesday morning before the war in Lebanon started was or should have been quite helpful in predicting the war. I note that the Israeli market at 1004 is at an all time high. I predict a good first day of the new quarter based on this signal.

Rodger Bastien writes:

I have spent some time in the last day or two trying to discern whether there are predictive signals one can ascertain prior to a baseball game that might parallel what has been mentioned here, as one seeks an edge in determining how activity in one market may be a precursor to a particular move in another. I would compare this to the preparation that a hitter or pitcher goes through prior to a game studying previous starts by said pitcher or at bats for hitters.

There is a tremendous amount of film study these days due to the availability and the predictive nature of the human animal, that has been successful and will be repeated. Taken further, it's no secret that crafty veteran pitchers will often change their pitch patterns, recognizing that success is often found by throwing the unexpected pitch. The truly clever don't wait until their pattern has been revealed before they change the pattern. Just as a pattern of trading is seldom successful in perpetuity, so goes a pattern of pitching.

Much has been made of successful pitchers pitching "backwards," that is to say, throwing a breaking ball on a fastball count (2-0, 3-1 etc.) and a fastball on a breaking ball count (0-1, 0-2 for example). Though not your classic example of signaling, it is certainly a great example of the importance of preparation and varying patterns to confuse the adversary.

Alston Mabry writes:

"Stylometry" is the use of quantitative methods to determine the authorship of written works. Methods have varied over the centuries, but much attention has been paid to a writer's use of unusual words or word pairings. The problem is that unusual words and word pairings are easy to mimic, should one intentionally seek to create a forgery.

However, because of modern stylometry's reliance on computers, researchers can now analyze a writer's use of very common words and word patterns. It turns out that these common words and patterns are much more subtle, tend to be generated habitually and unconsciously, and are, therefore, much harder to fake or to hide.

One thinks at least of the relationship between what is highlighted in the media, and what occurs in markets.

From J.T. Holley:

For what it's worth one of my favorite card tricks involving an accomplice is utilizing any of the four tens. You lay out ten cards making sure that one and only one of the ten cards is a ten. When they are set up you have it look exactly like the ten as such:

5H              2S

3D      JH      10C

6C      5H      KS

4D              7C

You simply ask the person involved in the trick to pick a card while your accomplice has his back turned. When your accomplice turns back around you start asking him "is this the card," "is this the card." He'll keep saying "no" until you give the hidden signal with the ten card (ten of clubs in the above example layout). You always must lead with placing your finger on the exact card that the person participating has chosen. The real magic though is when the person participating chooses the ten! Then your accomplice can guess it right out of the gate with the first guess. It never ceases to amaze me that very few people figure this out.

The Mistress might be playing the very same card trick as Vic mentions above. The Israeli market being the card the market points to first, then leads to let you know where the magic returns are going to be. Or could she have the ten chosen being the silver market whereas it is the one to be in first and right out of the gate?

Oh well, magic has it's own set of signals.

Easan Katir adds:

One hidden signal (perhaps hidden only to me) I've researched is stock option volume or increased implied volatility predicting a move in the underlying. An anecdotal example was GM in February. 30 February puts were extremely overvalued and stock proceeded to go straight down from 37 to 30.

Hany Saad writes:

This is very enlightening. One wonders why Vic thinks the Tel Aviv market is leading or helps predicting the American mkts. Now, for what it is worth, the best trader I know operates out of Haifa and we correspond daily. His very rare recommendations are money in the bank.

Kovner had a theory that the Russian markets were the same and his theory was that they open our mail.



 Errors are rewarded in strange fashions, ways which are abnormal and thus unperceived by individuals with normal perceptions; meaning a right-minded person does not expect strange types of reinforcements to be in the mix of rewards.

One instance of strange reward I know of is referred to in some circles as a drive for self-destruction. Normal individuals perceiving an individual persisting in error that is harmful will not catch on that the error is accomplishing a reward, that reward being harm, and harm not generally acknowledged as a reward.

The hawkers of doom who get paid for their opinion to be persistently gloomy are being rewarded by an audience who appreciate the darkness. These readers return again and again to renew subscriptions with enthusiasm and this rewards the hawkers. In brief, doom hawkers speak to an audience of believers.

Stefan Jovanovich writes: 

Marshall McLuhan's theory was that the advertisements in the newspaper were the "good" news; the "doom" was the necessary bad news that allowed the ads to stand out. I suspect that, if McLuhan were alive today, he would stand by his theory but point to Google instead. The news is usually gloomy but the paid search ads promise wealth, happiness and good looks all for the low, low price of $xx.99. McLuhan would probably also suggest that the relative decline of newspapers' ad revenues compared to their Internet competitors was an indication of the fact that "good" news these days was more about price and less about image -just as it had been in newspapers' heyday (1870-1925).

Victor Niederhoffer adds: 

A correspondent from Canada writes to me that the move today in oil up and down in the five minutes after the Ahmadinejad awarding of the medal, lead him to query ways of generally profiting from such false and ephemeral signals.

I immediately thought of the many times that it looked like a vivid event that had been associated with the tremendous market decline might be occurring again, and the many opportunities that provided. Indeed, I have a confession. During the summer there was a time that I was short a line of stocks. And a former Yankee pitcher played too near an apartment building. The rest of the story is too sad to tell. However, all parents should play "a boy stood near a railroad track" for their kids.

But this method must be generalized. It only happens about five times a year, and the 50 or so points you'll make from it each year must be counterbalanced against the expert sage Mohammed's view that big risks are not properly priced so that the one time you lose, let's say in 10 years, it will be more than 500 points.

Here's one attempt. I wonder if there is a very big list out there in cyberspace of people who like to read about scandals and failings among liberals, and negativity. Much of the economic news on such a list I would presume is planted. I would assume that the source might not be an overly reliable in informant or forecaster for various reasons. These include the lack of evidence of forecasting ability of the planters, their temptation to feather their own nest (except for their high moral turpitude and altruism and the checks and balances that the receivers and transmitters of such info must have), the anonymity of the source, and their insulation from the consequences of good or bad calls.

I would speculate that such economic news would tend to lead to ephemeral moves that are copperful to the caned when directed south. Such would happen, I would speculate, much more often than 10 times a year.

However, one seeks to generalize on this subject. We all know such people. Why can some people be wrong so often and yet maintain a following? We all know such people, the financial weekly news columnist for example is one icon in this regard. The economist who is always bearish in public but even more bearish in his private briefings is another. The technician who always sells the lows and buys the highs is another. The person who writes a book that's very persuasive and then starts a fund and loses hundreds for his clients but then rises up again and again like the Phoenix in another context. A consultant is another (doubtless many of my enemies will use this opportunity to say this about me). The self-indulgent authoritarian chief executive with a terrible management philosophy who hangs on and on is another.

Still another is the old eminence Arcadian who hasn't changed his views about anything and wants to do things the same way as the past and who eschews modernity like Chair Volcker (who, when I saw him in 2004, told me he sees no need for modern things like tape recorders).

I have written on Delphic forecasts. A condition for these people to hang on is often the couching of their statements in fuzzy irrefutable terms. That would apply to most of the ones I know.

But also, the ability to retaliate with force when their views are found to be falsified. This would apply to the Jonestown type error person as well as to the adviser who will sue you if you say anything about their record.

I would add that in the cases where the errorful have good motives their inabilities seem to be inordinately associated with a lack of education. They tend to be unaware of current scholarly work in their field, but hide behind a veneer of pseudo scientific talk as described by Marin Gardner and exemplified by Velikofsky, et al.

I'd be interested in augmentations, even example of why errors persist so that we can try to reduce the hard and persistence of same.

Jim Sogi adds: 

It is gratifying to disparage our opponents, however, even as we dismiss the turtles or news oriented lists, breakouts/breakdowns which have not worked for years seem to be occurring more and more as ranges widen again. The market seems "newsie" moving on Fed news, oil news, war news, and economic announcements. Contempt can breed complacency. 

From J.T. Holley:

Two things stick out for me: the lack of recognition of change, and laziness. The pack, herd, society, for the most part, don't like change. They would rather hang themselves and repeatedly take the easy way out than utilize anything remotely scientific that requires blood, sweat, and toil.

Miller's Willy Loman is a wonderful example of this. He would rather stick to his old sales ways than change like the young guns. Get rich quick schemes involving his son show this as well by Miller. Even in the end, Willy tries to leave more for his family by suicide but fails. This was laziness and lack of effort involving changing his ways.

I don't know. My PaPa told me on his deathbed to embrace change. It was like they were the most important words to me than anything else he had taught me up to that point. From that moment on I have always seen that as a sign of success in others, their willingness to be flexible and bend.

The persistence of errors-types would rather die in all forms than change! They'll take their hardheaded ways to the grave. This is laziness. Why else would someone be willing to succumb to such? How could you face the truth dead in the eye and not change? Denial must have its talons deep within people of this nature.

Once a charismatic type possesses both persistence of error disease and gathers a congregation it becomes lethal and the flock thrives.

Guys like us who are individuals, hardworking, non-altruistic, and embrace change, don't have big congregations! We just have empathy to fire us up occasionally.

Abe Dunkelheit writes: 

The errors persist because, psychologically, there is no alternative. One could go on and on, but everything would come back to the same basic thing: the impossibility of living without repression.

"[M]an is the more normal, healthy and happy the more he can … successfully … repress, displace, deny, rationalize, dramatize himself and deceive others." [Otto Rank]

The whole dilemma is perfectly elucidated in the Pulitzer Price winning book The Denial of Death, by Ernest Becker. But I am not sure if one should want to know too much about it.

When we say neurosis represents the truth of life we mean that life is an overwhelming problem for an animal free of instincts. The individual has to protect himself against the world, and he can do this only as any other animal would: by narrowing down the world, shutting off experience, developing an obliviousness [to facts] to the terrors of the world and to his own anxieties. Otherwise he would be crippled for action. (p. 178) 



 The best coffee is Arabica. You guys drink the worst coffee. I'll bring some good Kona stuff out when I come next.

I got a sampler of eight different international coffees with the new iRoast 2, in green bean from Mexico, Peru, Timor, Sumatra, Congo, Panama, Nicaragua, Guatemala, and a few others. I'm not sure if it's what they're trying to sell or just trying to get rid of, but none held a candle to fresh roasted homegrown hand-picked sun dried Kona Coffee. Most were bland. Peruvian was about the best of the bunch, but still rather bland. Some were close to undrinkable. Sumatra tasted like dirt, Panama very bland, Nicaragua very bitter, and Peru mellow, good to mix 10% with 90% Kona.

Sam Humbert asks:

Why does anyone voluntarily drink "flavored" coffee? I'm having a cup just now, because "hazelnut flavored" beans were all we had on hand in the office today. But I feel like the high-school stoner who's so desperate he'll smoke roaches. The stuff tastes like something the EPA would send HazMat-suited guys out to Jersey to detoxify.

Who buys it? Is it a ladies' drink? Would appreciate insight.

Yishen Kuik adds:

A coffee importer once told me that the flavoured coffee industry grew out of a desire to use cheaper robusta beans and yet avoid the inferior aftertaste that caused manufacturers to prefer arabica. But then flavoured coffee took off. 

J T Holley writes: 

Having earned and financed my college education working at various coffee shops such as Mill Mountain Coffee and Tea in the Roanoke Valley, and Food For Thought in Missoula, MT, I can tell you very few [buy flavored coffee]! Most coffeehouses have pots of coffee lined up on the counter of some sort for self pouring. The ratio to the best of my knowledge on refilling those was around 5 to 1 compared to regular coffees of many varieties.

Not that what you drank was good but there are two ways to flavor coffee. I have utilized both ways. One is with a horrible flavored oil and the other is via bottled syrup. The oiled way is to roast a rather cheap Columbian bean and then mix the oil and coat the beans (like applying chemicals to kill weeds). The other is much better and that is having an individual cup of coffee and adding a shot of flavored syrup. This seemed less toxic to me even though both are probably the same.

I witnessed very few people other than women that would order flavored coffee. Espresso drinks would be the exception to that. I would classify flavored coffee along the lines of 100 cigarettes. We used to joke that those extra long 100's were for people that like to ash not smoke. They don't smoke the cigarette they simply puff to be able to "ask" so they look sleek and sexy or something. Same with flavored coffee drinkers I've witnessed. They don't drink coffee like you and me, they sip and end up throwing half of it away in those plastic lined trash cans that weren't made to hold liquids!

My experience in the Navy taught me something about coffee as well. Cream and sugar were rarely added to a cup on my ship. Your sexual orientation back in the early 90s when I served was questioned if you had a stir stick in the cup. It was taunting or hazing thing on my ship. Words were slung at you in humiliating ways and made a man either quit drinking coffee altogether or go with the straight black cup of coffee to avoid the hassle.

It's amazing how psychological warfare works. I drank my coffee straight anyways so it wasn't a bother to me, but literally saw fights break out. Can't even imagine what would've come about if someone would have brought their own International Flavored Coffee onboard.

On a lighter note, I spent 6 to 8 years of my life roasting and serving coffee in all of its varieties. I have to confess that it is amazing how much caffeine is abused and that literal addicts consume the beverage. The mark-up on a cup of coffee from raw bean, to roasting, to brewing and serving is utterly amazing to me as well. The shops that I worked in did absolutely zero advertising as well, another fascinating fact of the coffee business.

Pitt Maner adds: 

I hate to think of the abuse one might get for using the following, but based on a crude experiment it does seem that cold brewing makes for a smoother (some say lack of) taste.

With respect to Nicaragua there seems to be a fair amount of variability in the taste of the coffee. The best coffee growing region is up around Matagalpa and Jinotega in northern Nicaragua.

The Nicas seem to like to drink it black with a fair amount of sugar.

Problem with all coffee though seems to be how long it has been sitting on the shelf. You don't always get a "born on date" on the package. Of course you can pay $9 a pound for some of the brands that are sealed with nitrogen gas.

I know of someone who actually was marketing small discs that you put in your coffee maker to flavor the coffee of your choice. Better living through chemistry indeed. 

Pamela Van Giessen writes: 

The Irish coffee flavored stuff is the worst. My mother served it to me once when I was visiting. Being sleepy I didn't focus on the malodorous nature but the second it hit my taste buds I literally spit it out. Thankfully we were outside. I think that stuff was made for older ladies. 

Scott Brooks writes: 

Chicory is a plant that I use in my food plots to feed and attract deer and turkey. It is highly desirable, palatable, and nutritious to deer and turkey as well as many species of birds, and other assorted animals.

Gordon Haave adds:

I am a big chicory fan. The only kind to get is Cafe Du Monde. Every other kind I have tried is terrible. That being said, I don't know that it mellows the flavor, unless the underlying coffee is much more harsh than regular. I drink it with sugar and cream. 



 OK, Disney pulled off another great movie. This time it was a non-Pixar that has libertarian tones, individualism, splashes of scientific method, Good = Positive thinking vs. Bad = Negative thinking, Galton type counting, and the wonderful lesson of trial and error involving frequent failing to get to the good/right. There are plugs for Einstein and Edison as well.

An orphan named Lewis is the epitome of rejection in that he has failed miserably in school with tons of inventions and gadgets that he creates. He also has been rejected 123 times by families that have interviewed to take him home as a son. Through all of this rejection, though, a little boy becomes 12 and realizes that life is about "choices." Choices are the freedom that unchains oneself from any environment that a person thinks is bad or unbearable.

A touch of existential "thrownness" is apparent. So is seeking out both the beginning of one's life and life's future, and pulling it into the here and now to be able to move forward. This is the bottom line lesson that even my son and daughter at age six and seven took away. Of course my son loved the dinosaur part as well and my daughter the dancing singing frogs.

I would recommend this movie to anyone that has kids. I don't think we have a Finding Nemo type blockbuster on our hands but it is a good quality movie with a fantastic spirited theme that doesn't often make it to the screen. It is one of those films that you can leave the theatre and immediately discuss the main points with the children as an icebreaker in parenting.



 The combination of hysteria about sub prime which presumably has a one percent impact on big banks, a recent decline of some 10% in many of the bank stocks, (the KBW bank index fell from 122 to 111 in last month), and good dividend growth and return on capital would seem to provide meals for scientific study and or caneology.

To me, the case for avoiding these stocks seems particularly like pseudo talk. It depends on a general tendency of banks to lend too much in good times, and to gamble. I've never found banks overly aggressive in lending to anyone I know, and I see no reason to believe they are not as good at learning from past mistakes and getting a proper return from the risk they take as others.

Nor do I believe that the financial market suffers when weak fringe players are forced to go to bigger entities to help bail them out. this happened in the Long Term Capital case, in the large and in the small, every day, when banks confide to their stakeholders how their privileged position often enables them to make opportunistic investments in times of crisis for the common good.

J T Holly adds: 

I myself am taking the cane out and looking more into finding the hypothesis that will unlock the significance other than my intuition. A couple of things that seem different this time that the "critics" and "bear camp" aren't taking into consideration have to do with legislation and government doings that make banks more apt to produce revenues since before the reversal of legislation happened.

1) Clinton signed to reverse the Glass Stegal Act. Banks now are not only banks but also brokerages, trading houses, insurance companies, and lend in millions of ways via auto, credit cards, and such.

2) "Do Not Call List." Having experienced the adverse effect of this as a broker in a former life, the banks use this to their advantage whereas the smaller players can't "reach out and touch someone." They have the legal right to call existing clients and cross sale products that the first aforementioned points allow now.

3) Bankruptcy Act recent development. Complete utter hypothesis on my part or conspiracy theory, but banks don't make any margin on perfect scores or good credit other than those folks feeding the system with deposits. The ability of banks through forcing those who are losing more than they deserve to go below 700 on a round number and be classified as sub prime allows them higher margins. The average score across America is around 670 allowing for this higher margin to be maintained. Not to fuel the Dead Horse last week, but this wasn't mentioned in the espousing.

It's plain and simple. They have the government, numbers of clients, and ecosystem to survive flourish and devour and recycle their own folks and keep on truckin'.

I had a client when I got into this business who told me that the best business to run was a whorehouse because "you got it, you sell it, and you still got it." It seems banks these days are about as close to this as possible.

The only legislation that I could find that limits growth and has prevented me further is some 10% rule that states that they can't have more than 10% of the total amount of money in circulation in business. Are C and BAC the closest if not at the max? Does anyone have more clarity or know of such Fed Reserve law that prevents this? I guess they can't make acquisitions or grow organically. It seems like an anti-competition type law, like in Atlas Shrugged!

Mathematically most pay a yield of around four and higher via dividends, and you have the wonderful drift of the market that they belong in to add on top of that. If you look at the Fed Fund Model, they are a sexy and attractive piece of the pie. To be able to get that which is equivalent to risk free and have something also that is apart from the earnings yield of the S&P is nice.

I guess the bear camp feels that the dividend can't be maintained. They can't re-invent themselves over and over like they've done thus far. It is called Citicorp not Citibank! I always have to remind myself that they get paid to write, versus getting paid to be right.

J T Holly continues:

The other one to test is the old utility adage that everyone hangs onto: "They are heavy borrowers and go down when rates rise." It's like they don't see the diversification that utilities have gone through for the past two decades. They also have a government hedge internally with fixed cost controls that they've adapted to and work to their advantage.

Andrea Ravano adds:

The first reason one should be interested in banking stocks is of course the fact that the industry is selling the "do it yourself" online strategy as a great breakthrough, whereas what it amounts to is just pay less for employees, get rid of risk, and get fees.

I suspect that the years to come will see the trend of home banking increasing to the point of having a human-free bank. It's every banker's dream to be able to use a switch to stop operations instead of laying off people. Yet the greatest interest lies in the fact that the banking industry is scattered around the globe, fragmenting the market pie in such a way that none has a dominant position.

The epitome of this is Italy, where the banking industry's biggest players don't exceed five percent of the entire market. Hence, I believe more takeovers, mergers, and other such measures to consolidate and reduce the number of players in the market will and must occur. As I'm writing the market buzz is on Barclays, which should announce merging activities with ABN Amro bank of Nederland. This would have been hardly thinkable just a few years ago.

Other reasons include the combination of hysteria about sub prime, which presumably has a one percent impact on big banks; a recent decline of some 10% in many of the bank stocks (the KBW bank index fell from 122 to 111 in last month), and good dividend growth and return on capital. 

Jeff Rollert adds:

I have found bankers at large firms (not referring here to investment bankers) do not share much investment courage as it isn’t part of their compensation plan.

Small and community bankers are pure salespeople, chasing after the highest spread product to the greatest extent the regulators permit. They start, build, sell, repeat. They also have higher construction and R/E spec lending.

Regional bankers are difficult, as they have both personality types. My point for making money is that their manner in approaching risk is very different.



 The cry "ship ashore," a call for action for wreckers to save the hands and cargo of a foundered boat, has traditionally galvanized coastal communities into action. Fortuitously, my recent vacation to Key West, the richest city in the US during the mid 1800s and whose economy was built in the main on the profits of the wreckers, coincided with a foundering in the market. Thus, it became appropriate, perhaps even imperative, during this visit for me to visit all the wrecking buildings and museums in the area, and see what lessons could be drawn.

To put this in perspective, a good way to start is to consider 5% declines in the market in 5-day periods, events that are current as the market declined from 1454 on 2/23 to 1372 on 3/5, a decline of 5.6%. Such events have been followed by an average move of 2.5% from the close of the event to the close 10 days later with a 75% chance of a rise, and a standard deviation of about 5%, with a t unadjusted for overlap of 3 during the period. Thus there are profits to be made, a la cane trading during such periods. This is the case despite low confidence since there were only 21 independent events during the period. And the last such decline occurred January 27, 2003.

The economics of the wrecking business were good in Key West from 1820-1900 because the Gulf area around the Keys was littered with uncharted coral reefs, currents that were among the most treacherous in the world, and lighthouses were not available. Moreover, shipping was very active as this was the major port of entry for European, South American, and Caribbean ships exporting to the US, often via the Mississippi and the Great Lakes.

It is documented that the wrecking business was so profitable during this period in Key West that along with New Orleans it was the wealthiest city per capita in US.

One of the key aspects of the wrecking business was the specialized equipment that the wreckers used to ply their trade. The most visible were the watchtowers that extended 200 feet high above the roofs of the wreckers' places of business. The watchtowers were equipped with lights and telescopes and railings to prevent being blown off. The search for the wrecks was supplemented with ships that sailed among the reefs waiting for the wrecks to occur and to provide an early warning. A signaling system between rival ships developed so that no wrecks could be missed. As might be imagined, there was considerable folklore that the wreckers themselves induced the wrecks by false lighting and even direct damages to ships in peril.

The ability to spot a wreck is crucial in the market. The attempt to spot one is determined by many technical tools, such as moving averages and breakouts. Regrettably, many of them are prone to false signals. And those who make their living by waiting and hoping for them often find the pickings very slow. Many players make their entire living by waiting for wrecks and then plundering them. Unlike the wrecking ships of the day, that were required to save the passengers on board first, the legend is that those in the wrecking business in markets today are more interested in the plunder than saving the passengers. Indeed, in the days before 1820 when American Indians served as wreckers, the custom was to take the boat-hands as slaves. Instances of this were much more common in markets in the old days. When foundering occurred the wrecked party might been asked to work as a night clerk, watchman, or sports coach for the plundering party in exchange for his liberty. However, the wreckers of Key West were kept in line by reasonable checks and balances including a good admiralty court in the area. Similar authorities seem to provide a reasonable balance today.

The specialized equipment of the wreckers consisted of ships with shallow drafts and large holds. They were able to maneuver flexibly and quickly near the wrecks, and to store the plunder once they were able to get it. The market wreckers of today use split-second communication devices to get to the wrecks quickly, and Dow Jones reports. For example, they are now coding their messages so that the content can be analyzed electronically before the message can be read, to take account of all the fast moving participants that follow critical announcements. The holds of the wreckers are large because financial resources are necessary to inventory and hold all the baggage of the wreckers. And often it takes considerable time to auction off the proceeds of the wrecks.

Other specialized equipment that the wreckers carried were heavy anchors, heavy ropes, and large fenders to secure their boats to the wreck and to stay in the area. Such equipment would correspond to the infrastructure that big firms have today to deal with the wrecks. This includes teams of lawyers, lines of credit with banks for such special opportunities, and ample capital structures to absorb the goods in an emergency.

Key to the wrecking business was getting there first. The captain that did so was entitled to orchestrate the wrecking process. This involved setting the shares for all the other boats that were required to help in the process. Divers were critical to the process, too, and in the Allertown wreck they report that the divers who could hold their breath 6 minutes were paid $500 a day versus the $1 a day for those who hauled the proceeds.

This aspect of the business brings back one of my favorite anecdotes from my employees on the floor. One, Mike Desaulniers, who is as fast as lightning, said that during a crisis when prices flew every which-way and spreads were enormous, he was often knocked down, and outrun in the pits by much older and more ruthless participants. Another of my employees, one with a very dear place in my heart, found herself blocked out from participating in crisis situations by a circle of men about 3 times her weight and 25% taller. I am also reminded of Wilt Chamberlain's report that he must have had heard 40,000 people claim to have seen him score 100 points (March 2, 1962, as a Philadelphia Warrior against the New York Knicks) when official attendance for that game was listed at 4,124. I have met hundreds who have told me that they made their entire fortune during the October 1987 or 1997 blowups at the expense of the Palindrome or of others to whom I have been or are close.

One of the key questions I had was what induces a man to risk his life to become a wrecker? The danger is great, as their trade is plied during periods when others have met disaster, the weather conditions are bad, the ships they are plundering are in danger of toppling or burning. It's a 24/7 job and there is immense competition from others sharing a life or death mentality. The answer is incentives. The wreckers received about 25 to 40% of the profits from the goods, the owners got about 25%, and insurance companies another 30%. With about 200 wrecks a year in the 1850s, it was enough to risk life and limb. Almost all the fine houses in Key West, including the Hemingway House, the Washington House, and the Audubon house, and the Taft Museum were built from the profits and, indeed, the wood and pegs of the wrecks.

Studies of the economics of individual companies that are near bankruptcy indicate a persistent tendency for them to underperform. As memorialized in an excellent paper, "A Wrecker's Theory Of Financial Distress," the key finding is that the stocks of distressed companies vastly underperform those of financially healthy firms, because the wreckers and inside controlling interests siphon off much of the profits.

Alas the wrecking business ended in the early 1900s. Indeed, Key West itself went into bankruptcy during the 1930s. The demise was caused by modern technology and light houses and railroads. A business that only receives its revenues sporadically, like buying during panics, is often not as good in the long run as one based on the steady drift of commerce.

I would suggest that whatever the profits available from the business of wrecking during market panics, they are inferior to the buy and hold.

Steve Ellison writes:

One 19th-century Key West preacher reputedly used his elevated pulpit to advantage in spotting wrecks. If he noticed a wreck during the sermon, he would call for the closing hymn and lead the congregation in a processional exit. Once outside, he would dash to the wreck ahead of all the others who were still filing out the doors. 

J. T. Holley recalls:

 One of the deceptions Blackbeard would employ on the Coast of North Carolina was causing ship wrecks by raiding the lighthouse and turning the bright light off, then having men on horseback comb the beaches at night or in storms with large lanterns in hand. From afar this would be the direction that the ships would sail — right into the hands of Blackbeard and his men.

Those moving averages and fixed systems are Blackbeard's men! Wreckers that plunder and pillage.

Ken Smith adds:

The movie The Shipping News tells the story of a house once occupied by a family that made their living (killing) by moving fires that were beacons for ships sailing along the coast, some set to enter a nearby harbor. Moving the beacons set the ships on a course to ground on rocks. The family went out like pirates to slay the sailors and steal the cargo.

Great movie starring Kevin Spacey and Judi Dench. The story takes place in Nova Scotia. Bitter, howling winds, icy storms. How could they live there!?

George Zachar replies:

 Nova Scotia is physically spectacular, and well-situated for shipping and fishing. Halifax was a major seaport for all of North America in the heyday of sail.

Also, given how apparently widespread the practice of false beacons was, why didn't captains adopt other navigation strategies? 

Stefan Jovanovich adds:

Until the widening of the St. Lawrence, Halifax was the principal seaport for Eastern Canada. It is the site of the greatest man-made disaster (other than a battle) in the history of North America — one for which the people of the city still hold an annual memorial.



 If you are looking for another movie that promotes individuals following dreams intently, second chances, father-son relationships, anti government with their frivolous laws, individuals making choices, and unconditional love, then go see Warner Independent's Astronaut Farmer.

Billy Bob is excellent for the part and the only other human I think that could fill the shoes of the role Charlie Farmer. Bruce Willis plays an antagonist in the film. Anyone looking for a film that involves the brighter side of existentialism other than the Woody Allen take will also enjoy this.

Of course, those on the Spec List that seek and need great examples on non-altruistic heroes will get their fill with ole' Charlie Farmer! Couple of lines that I love were as follows:

(When pulling his son out of of school for a month) "You are here to teach him History; I'm going to show him how to make History"

(After burying his Father-in-law he sees a man on the ranch looking over things, and finding out he was an appraiser for the bank going through on foreclosure) "How many head of cattle you got here Farmer?" He replies, "Enough." "How many acres?" He replies, "Do you know how hard it is to find a dead body on 362 acres?"

There is plenty of Countin' dealing with "rocket fuel" and tons of lessons on risk and reward. One of the main themes is "you have to take big risks to get big rewards." Capitalism is portrayed in a favorable light as well utilizing NASCAR!

Great film. The boys and girls of Hollywood really let the government know how they felt with this one.

It is PG, and I took my 4, 6, and 8 year olds with me. Those more conservative than my family might want to go at it alone or with the spouse.



He hovered nightly like a dove around its pillaged nest.

 Bird nests provide an environment of shelter and protection for eggs to develop. The exquisite variety of the construction techniques, building materials, and camouflage used in these nests, and also their importance to the ecology of birds is described here. Numerous articles cite the importance of nest building in birds as an essential aspect of their evolution, and such articles include Dawkins The Extended Phenotype For Behaviors. With something as important as this, one would expect that markets would have borrowed from nature and that there would be numerous areas where the mistress and the invisible hand would have developed comparable features in market behavior for the development of the young. Yet a search shows that the main references to bird nests in markets are to the habits of very successful Asian traders in eating gourmet delicacies such as birds' nests rather than using them for profit in their strategies. As a start, this must be remedied by me and the colleagues here.

Undoubtedly, the main application of nests to markets is the protective function that companies in one index play with respect to their graduation to the next stage of life. The mid market S&P 500 is always the best bet for young companies to develop into the big 500. The Nasdaq is a nest for the NYSE, and the S&P small cap is a nest for the midcap. The IPO's are a stage in the life for future NAS 100. What strategies do such companies play? Do the parents of the index themselves play to separate the survivors from those who decay? Are there comparable forms of altruism that some companies play as they do in birds' nests where the young devote their life to feeding their kin knowing that it will lead to a much greater overall transmission of the essence of their being?

Another area where nests are found is at levels of price that bring one into a new class. One level would be the movement from below five where stocks are usually not eligible for margin to above five where companies are eligible for inclusion in most portfolios. The same would happen for a company that starts paying dividends for the first time since certain funds and institutions are restricted to dividend payers only. At a more general level, big orders often rest to provide nourishment for a company. It could be from a buy back program or perhaps an insider who is accumulating Insiders often accumulate stock in their companies. This is sometimes a signal that a change in state, like an acquisition, is in the offing or perhaps a buyout in a going private transaction.

Option strike levels provide barriers and nesting sites for traders to nourish themselves until the price is ready to come out of the nest into an area where real buying, selling, exercises and conversion of the stock are possible. Considering the strategies of nest building, in particular the effort that is put into its construction with reference to the probability of survival for the egg to maturity, one should consider the many fledgling companies that are incubated in research laboratories, entrepreneurial efforts within companies, and previous acquisitions that are being nourished for a proper time in the market.

May I suggest that we expand the subject to the many fruitful areas that could be considered and fomented by a general study of bird behavior. Such questions as the following would only be a beginning. How do the feathers of birds enable them to fly? What are the special functions of display behavior in birds that are so successful in the sexual selection of their partners, in particular, the back and forth strutting that stocks often do to attract the interest of the public and the dealers? What are the migration patterns and timing of stocks that follow in the footsteps of our feathered friends? Most important of all, what are the functions of birds, the stocks and companies that fly about in the general structure, growth, and stability of markets? What songs do markets sing to attract, warn, and establish territory?

From Alan Milhone:

"Birds of a feather flock together." Is this the same with investors and brokers in that they all want to stay with the winners (performers)? I liked the way you described the construction of a bird's nest, guess that is where the term 'nest egg' developed? Or 'putting all your eggs into one basket' meaning one should stay diversified? The strong and secure nest is analogous to a strong and protected portfolio.

I enjoyed the Chair's article and it gave me a different perspective on nesting & ways of attracting investing. Not sure about songs used for attraction. My guess is how online or televised marketers vie to attract a potential investor's attention in hopes of getting them to buy into their program, much like a male bird hoping to attract a female's attention. The male bird's 'chirping' is music to the females' ears (hopefully) and the online/televised promoter of various stocks and investment programs is hoping to lure our attention in similar ways.

Jim Sogi writes:

Another bird nesting behavior in the market is the bunching of the price range within a certain area. For example over the last few days we see the bunching nesting behavior in the 1256 area, and before a nest was built in the lower branches at lower levels. When the little birds are strong enough, they venture out and start to fly from the nest, taking forays flying to higher levels.

There is busy back and forth activity as the nest is build. The nest normally must have a structure and normal time to build before the birds either venture out or, for some reason, the whole nest falls out of the tree an on to the floor, as in rare occasions it does, killing all the little chicks. Bigger birds like eagles that build bigger nests at higher altitudes soar higher. Perhaps that is why Dow big birds are hitting all time highs and SPs are still moving up to their all time highs, in sight a couple bird nest levels away.

J. T. Holley writes:

On a similar note [to previous post] you can look down the option chains intra-day and see birds perched either on nests or on wires and see them "spooked" as higher and higher numbers are reached historically. It's almost like opening up a dark room and seeing the cockroaches scatter when the light of day hits them.

keep looking »


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