Both my grandfathers bought Exxon in some distant time. As my mother is fond of reminding me — it paid for her and my father's parents' retirement, funded some of my parents' endeavors (house, cars, etc.), paid for college for three children, (sadly) enabled her divorce, is now funding her and my father's (separate) retirements, and now is partially in the portfolios of the grandkids', where, presumably, it will be used to further fund great-grandchildrens' education, a retirement or two, etc. Exxon has been very good to my family on both the maternal and paternal side. A colleague tells me about how Disney stock has been very good to her family.

Buy and hold has been a very good thing indeed for me and mine. I hope I will have opportunity to gift my SBUX to a future generation as well. And before some spec comments — regardless of where it has been this year or last year or even 5 years ago, it is still way higher than what it was bought for and it has split several times (I stopped counting at the 3rd split, I think it was). Stocks may not progress in a straight line up but the line is clearly up over time.

That said, we will refrain from making much mention of the Bethlehem Steel stock in the family portfolio, though I imagine Exxon gains substantially outstrip the BS losses. I think.

Vic comments:

As the Abelprecbifurcflecprudents would say, there is little employment in Bethlehem right now, and many unused warehouses and railroad sidings.

J. T. Holley adds:

Yeah, and those Woolworth employees and their shelves seem very empty as well, not that there are umpteen million times more people shopping at Wallymart than ever shopped at the ole' Wooly.

Not to worry about the railroad sidings either, their foundations are put to good use across most of the U.S. through the Rails to Trails program. At least the labor that produced those tracks didn't die in vain!

Tom Larsen mentions:

Here is a buy and hold story that I think comes from a book edited by Charles Ellis called Classics: An Investor's Anthology

A money manager was called by a client's widow, who asked to meet with him about some stocks she had found in her husband's safety deposit box. When he examined the certificates, he came to the realization that the deceased had a financial secret. The money manager realized that each time he had bought a new stock in his client's managed account, the client had bought some more stock elsewhere and had it delivered out to be put in his safety deposit box. He had done this for many years. Many of the stocks were issues the manager had sold periodically for all of the usual good reasons, but that the client had put away permanently. The manager was amazed at the value of many of the individual issues in the box that he had sold over the years for small profits. So the manager was a good stock picker, but the client was a good stock holder.



The greatest lesson in golf is that every stroke counts the same, a 300 yard drive or a three foot putt.

Well, if it is not enough that Tiger Woods hits 300 yard drives, I heard that he has over 325 straight putts made from three feet and in. As I recall, the average for a professional from three feet and in is 90%. By making 100 percent of putts from three feet and in is often the difference in winning a tournament and finishing lower on the board.

Greg Norman had a reputation of being a total perfectionist. At the height of his game he would win one tournament of every five he entered. He, like Tiger Woods, would play a limited schedule and only the gold-level tournaments against the strongest fields in the game. He had a workout regime that, like Tiger's, was of Olympic proportions. His workouts would last for hours and he was extremely methodical in every aspect of the game.

Norman was an excellent driver of the ball, leading the tour many times in total driving. Total driving is a statistic that combines length with accuracy. He was not content just to drive the ball far; his goal was to drive it far and straight.

One of his short-game practice drills was to start off with 25 putts from three feet and continue with 25 from four feet, then five feet, then six feet. That's 100 putts in total. He felt that if he had great confidence in making the short putts it took the pressure off the other aspects of the game and allowed him to be more aggressive on his birdie putts. This attention to the smaller aspects of golf made him a very lethal force.

Great traders and speculators pay great attention to detail. While paying attention to large matters, they also focus on the small things. This can make all the difference between ultimately winning and losing.



The phenomena of serial errors is quite an interesting one, often prompted by a 'nothing to lose' or 'things can't get any worse' mentality. But things can always get worse and it is known that it is often good not to punish the first error by your opponent, as a few more are on the way.

How do you avoid serial mistakes? This is where objectivity and being honest with yourself comes in — it is vital to recognize any mistake and reach an emotional balance. And this is easier said than done.

I am not sure that Larsen, Kasparov or indeed Topalov have been very good at such a monitoring of emotions. But judging from his results Lasker was excellent — his scores after a defeat were no worse than after a victory.



Differences in s-xual appetite may be driven by evolution. A woman's s-x drive begins to plummet once she is in a secure relationship, according to research.

Researchers from Germany found that four years into a relationship, less than half of 30-year-old women wanted regular s-x.

They found 60% of 30-year-old women wanted s-x "often" at the beginning of a relationship, but within four years of the relationship this figure fell to under 50%, and after 20 years it dropped to about 20%.

Thus, men should create a financial crisis to disavow the perception of financial security every four years!



I just received this from a US expatriate businessman in Nicaragua:

You might want to spread the word; this place is going to Boom here after the election. HSBC just bought a bank call Banismo and now has a branch here, and it is just a matter of time before an American bank gets wind of the opportunity. My friends and I are meeting with all the presidential candidates on Fri. and will get a feel of how things are going to go. The down side to the election would be if Ortega wins, though it won't make much difference as far as the economy is concerned, just perception to Americans.



A popular talking point on CNBC is currently the rotation out of smallcaps into largecaps or how largecaps will now outperform smallcaps, but is it fruitful to think in such terms? Certainly smallcaps are more risky because of trading liquidity and various business risks such as lack of diversification and huge leverage, but if a company can grow in excess of 15% a year should the long term not outweigh the short? It seems the media has found a new talking point which is causing panics in various smallcap issues. I wonder if the old men are taking the canes out and buying merchandise on the cheap, or have the goods indeed spoiled?



An interesting approximate relationship, worth knowing, between Gamma and Theta is:

0.5 * S^2 * sigma^2 * Gamma = - Theta

To derive this relationship you can start with the B-S PDE and set the interest rate r equal to zero. Alternatively you can start with the expressions for Gamma and Theta and again setting r=0 show that the left hand side of the above is equal to the right hand side. [read more]

When r is not zero the relationship is only approximate, but in practice reasonably close. So we can write it with a "squiggly" equal sign.

When one hears that "good theta comes with bad gamma and vice versa" this is what is meant. A positive theta (i.e. you earn income from time decay) is associated with a negative gamma (you suffer losses from dynamic hedging) and vice versa.



One of the worst books ever written  is the Little Book of Scientific Principles, Theories and Things by Surrenda Verna, which introduces the 175 major laws and principles of science, and in which none of the explanations seem valid or scientifically accurate.

Despite its shortcomings, the book has inspired me on one of the strangest pursuits ever known to man — to find quantitative relations and regularities in the market, inspired by each of the 175 laws. In doing this I hark back to Chapter 1 of Don Quixote. In this chapter Quixote reads books of chivalry that contain such passages as the following:

The reason of the unreasonable treatment of my reason so enfeebles my reason that with reason I complain of your beauty

Or again:

The high heavens that with your divinity divinely fortify you with the stars, rendering you meritorious of the merit merited by your greatness.

Don Quixote's judgment was so discombobulated by reading these bad books, just as Laurel and I were similarly overwhelmed by reading comparable books about investments, that…

… he was seized with one of the strangest fantasies that ever entered the head of any madman. This was a belief that it behooved him as well for the advancement of his glory as the service of his country to become a knight-errant, redressing every species of grievance and exposing himself to dangers which, being surmounted, might secure to him eternal glory and renown.

The first principle that I was inspired by is Archimedes Principle that a body fully or partially immersed in a fluid is buoyed up by a force equal to the weight of the fluid dispersed by the body. Verma uses this principle to derive a faulty explanation of how Archimedes found out that the suspect crown was not pure gold. " When he placed a lump of pure gold equal in weight to the crown in the water; a lesser amount of water overflowed". Verma never mentions in explaining this principle that an object that floats in water displaces an equal weight of water to its own mass, and that, if needed, the volume of the object can be found by submerging it and measuring the volume of the water displaced, (or like Archimedes one can just compare two objects). In this way Archimedes found the density of the suspect crown in comparison to pure gold — the density of the suspect crown being lower because it contained lead.

The buoyancy of the stocks and the market is best measured by what happens to individual stocks when they sink or float on a big day of market declines. Do the ones that float show greater strength in the future? The problem is complicated by the fact that everything floats after the big market days of sinking. In general , the stocks that go down the most and those that go up the most do much better than the average during the week following big market sinks. But then, so does the market.

I also find, with the help of Mike Pomada, that individual stocks that decline 10% more than the average on days that the market is down by over 1% go up some 2.8% in the next week. However, the market itself goes up 2% or so also, (1998 - Present).



You marry your wife. You only go out on dates with stocks. You date them until they are no longer fun to date and then you dump them.

And unlike dumping a women (hell hath no fury like a women scorned), stocks will forgive you in a heartbeat and even better, you can go out on a date with them any time you want after you dump them, no matter how many times you dump them!

You gotta love the market mistress!



We are within a one day rally of an all-time high on the DJIA, augmented by the historically bullish Q4. This following a sell off May-July, and finally after more than 6 years past the January 2000 peak.

What does it mean? There are few stocks in the DOW, but the investing public might be interested in headlines and soundbites yelling "Stocks at all-time high". The S&P 500 and NASDAQ are still well below their climaxes, but perhaps they too can be hoisted up by their stodgy predecessor.

Will the regrets of the sellers of the past 6 years and hopes of new blood to the stock market combine to run the next bull?



I have been looking at S&P data for the first nine months/last three months of the year. What suggestions do the following percentage changes engender?

Year     First Nine Months     Last Quarter
'80           16                  8
'81          -15                  5
'82          -01                 10
'83           16                -01
'84           01                  1
'85           09                 16
'86           11                  5
'87           30                -23
'88           08                  2
'89           24                  1
'90          -14                  7
'91           17                  7
'92            0                  4
'93            5                  2
'94            0                 -1
'95           24                  5
'96           11                  8
'97           28                  2
'98            6                 21
'99            5                 14
'00           -3                 -8
'01          -22                 10
'02          -31                  8
'03           10                 11
'04            0                  9
'05            4                  1
'06            6

Gary Rogan adds:

I stuck the numbers in a X-Y scatter chart, and several features immediately stand out:

1. Any negative return in the first 9 months below -3% predicts a 5-10% return in the last quarter (doesn't happen to apply this year). 10-ish returns in the first 9 months also predict significant positive returns in the last quarter.

2. Low (sub-9%) positive returns in the first 9 months predict a positive return in the last quarter with 100% "certainty" (does apply this year). These returns come in two varieties: very low single digits (the most likely scenario) or large, above 14% returns (somewhat less likely). The large returns are clustered together in 98-99, which makes this seem not to be a likely outcome. Thus the prediction for the rest of this year is low single digits.

3. High (15+) positive returns in the first 9 months have little predictive power.

Mr. Red comments:

After reading your suggestion to do a piece wise regression, I broke down the data into 3 categories, but in a slightly different manner than Gary's. I chose to look at negative returns, positive single digit returns, and positive double digit returns. Interestingly, negative returns and positive double digit returns yielded negative correlations, while the single digit positive returns yielded a positive correlation (even if you decided to take out the years 1998 & 1999). This supports Gary's findings of significant positive returns. However, the one place we would differ is in his analysis of high positive returns. Using double digits, I come up with the highest R^2 at .3468 (while 15+ is far less at .088%).

Question: are we using a big enough sample set? Is 26 years enough data to draw a meaningful conclusion or for that matter subdividing data into subsets of 10, 10, and 6?

I ask as I have been looking at monthly changes in US 10 year yields for the month of October. When looking back from 1981, this data shows very strong negative changes (lower yields, higher prices) on a median and average basis, the same for using 20 years of data. However, I have seen a report that uses data from 1990, or 16 years of data, which shows wildly positive results (higher yields, lower prices). I would argue that the data from 1981 is better b/c of the larger sample set, but could this also be an example of ever-changing cycles, and if so how do recognize the difference.

Putting pencil to paper, I also did a quick regression of the returns you mentioned, and the returns of the last quarter have a negative correlation with the first 3 quarters of the year. Using the regression formula, it would imply a return of 4.565% for the final quarter of the year. However, given the small r^2, it leaves much room for variation.



This past weekend I had an opportunity to drive through the High Sierras along the Tioga Road, which is generally passable only during June (sometimes July) through October. While taking the time to leisurely absorb the magnificent scenery all around, granite domes, rugged canyon vistas, a sequoia grove, hanging valleys and pristine mountain lakes and meadows, I also had time to consider the behavior of the bears about which one is so thoroughly warned by the rangers. As I considered how to express some of the nature of such beasts and how it parallels the notion of bear markets, I came across the following excerpt from John Muir's My First Summer in the Sierras, and I realized that it would be all but impossible for me to express these sentiments in my own words with such eloquence. I think that it is an excellent preface to any study of the nature of bear markets.

So I crept to a low ridge of moraine boulders on the edge of a narrow garden meadow, and in this meadow I felt pretty sure the bear must be. I was anxious to get a good look at the sturdy mountaineer without alarming him; so drawing myself up noiselessly back of one of the largest of the trees I peered past its bulging buttresses, exposing only a part of my head, and there stood neighbor Bruin within a stone's throw, his hips covered by tall grass and flowers, and his front feet on the trunk of a fir that had fallen out into the meadow, which raised his head so high that he seemed to be standing erect. He had not yet seen me, but was looking and listening attentively, showing that in some way he was aware of our approach. I watched his gestures and tried to make the most of my opportunity to learn what I could about him, fearing he would catch sight of me and run away. For I had been told that this sort of bear, the cinnamon, always ran from his bad brother man, never showing fight unless wounded or in defense of young. He made a telling picture standing alert in the sunny forest garden. How well he played his part, harmonizing in bulk and color and shaggy hair with the trunks of the trees and lush vegetation, as natural a feature as any other in the landscape. After examining at leisure, noting the sharp muzzle thrust inquiringly forward, the long shaggy hair on his broad chest, the stiff erect ears nearly buried in hair, and the slow heavy way he moved his head, I thought I should like to see his gait in running, so I made a sudden rush at him, shouting and swinging my hat to frighten him, expecting to see him make haste to get away. But to my dismay he did not run or show any sign of running. On the contrary, he stood his ground ready to fight and defend himself, lowered his head, thrust it forward, and looked sharply and fiercely at me. Then I suddenly began to fear that upon me would fall the work of running; but I was afraid to run, and therefore, like the bear, held my ground. We stood staring at each other in solemn silence within a dozen yards or thereabouts, while I fervently hoped that the power of the human eye over wild beasts would prove as great as it is said to be. How long our awfully strenuous interview lasted, I don't know; but at length in the slow fullness of time he pulled his huge paws down off the log, and with magnificent deliberation turned and walked leisurely up the meadow, stopping frequently to look back over his shoulder to see whether I was pursuing him, then moving on again, evidently neither fearing me very much nor trusting me. He was probably about five hundred pounds in weight, a broad rusty bundle of ungovernable wildness, a happy fellow whose lines have fallen in pleasant places. The flowery glade in which I saw him so well, framed like a picture, is one of the best of all I have yet discovered, a conservatory of Nature's precious plant people. Tall lilies were swinging their bells over that be ar's back, with geraniums, larkspurs, columbines, and daisies brushing against his sides. A place for angels, one would say, instead of bears. In the great cañons Bruin reigns supreme. Happy fellow, whom no famine can reach while one of his thousand kinds of food is spared him. His bread is sure at all seasons, ranged on the mountain shelves like stores in a pantry.



Belief in the Law of Ever-Changing Cycles: The Best Way to Insure You Will Never be able to Accurately Predict Anything Ever Again.

Few players take into consideration the principle of ever-changing cycles of results. The would-be professional player must always understand that the form moves away from the public's knowledge. The principle of ever-changing trends works to force quick and drastic changes of results sequences when the public happens to get wise to a winning idea. — Robert L. Bacon, Secrets of Professional Turf Betting

When I first came across this idea, as presented to me by Vic in Education of a Speculator, I thought I had come across a huge revelation, an epiphany in the thinking of speculation. I came to find out rather quickly that this theory, while sound on some levels, can be one of the most ruinous patterns of thought one who must make predictions could ever fall into.

I have always been more than a bit intuitive. I learn by doing, and what I do I base on what I feel. Though raised by a highly analytical mechanical engineer, I have usually found that my initial thoughts on matters are often the most clear, and usually, the most sound. It is only after I really start to study and think things through over and over and start considering other people's opinions that I run into trouble. I am not the only person to believe in and notice the phenomenon of "beginner's luck." This is not to say I am faultless in my knowledge and anticipation of the world. I have made many mistakes, often ones that are obvious. I have held on to profits while watching them turn into losses, all the while thinking a bigger wave of profit was on the way that was never to come. At the same time I have refused to let go of losing positions until they reached enormous 70-80% losses, suffering badly from "get-even-itis." However, in doing so, I have gained knowledge of how to precede in my market career. I would never assume that because these actions cost me so dearly yesterday, that today they must certainly bring me vast profits.

The problem with the law of ever-changing cycles is that it destroys any sense of intuition, either God-given or hard earned, as well as evaporating any sense of confidence in one's self. I do not believe in the pure random walk, and neither do I believe that the market can be accurately predicted 100% of the time. What I do believe is that speculation is a skill that can be learned, and as with any other skill, through hard work and dedication, with time, it can be mastered (or close enough). This, combined with good money management, making sure you cut your losses short and never take on a position of such size that you can't get out of quickly, makes for relatively safe investing. However, belief in said Law, ruins all of this.

Take any investment strategy you might like, say even something as simple as checking which side of the level II book has the most inside participants at the open and then positioning yourself in accordance. I have used this strategy myself to good results in the past. Now apply The Law to it — since I have been using this strategy successfully for a while, it must surely be ripe to turn against me. "Nothing recedes like success." It is true, all empires eventually crumble, but the vital question, as it always has been concerning the market, is one of timing.

The safest time to invest is when everyone is selling. When the Buffalo are running themselves off the cliffs. Some random catalyst has arisen and everybody rushes to sell. The price charts obtain their most vertical angles and the volume bars spike massively. Eventually, the market will recover, it will reverse its course. This is a guarantee. It may not get back to its previous levels, and the reversal my be very short lived, perhaps lasting only an hour or so, but as sure as water is wet, there will come a point when the market will head back up for a period. Does this mean that every time a market has a particularly bad day that I should place a market order for the following day's open? Of course not. While one red day may be immediately met with a green day of equal force, it is just as probable that one bad day will turn into a string of bad days, perhaps a few bad weeks, or even months.

So, when should I begin to avoid my level II strategy, then? Or should I avoid it at all? Surely if The Law exists, it must itself be subject to the ever-changing. If the cycles are always changing, then eventually they are due to no longer change at some point. "Everything in moderation, even moderation itself." How long will it be until everyone catches on to The Law and it itself becomes useless? It is rather easy to see how this concept can slip one into a never ending downward spiral of self contradiction and doubt.

The only caveat here is that the definition does not call for all cycles to reverse all of the time, but only the ones that the public has caught on to. Of course, how does one track "the public?" It has been well documented that when any successful investment strategy becomes published, usually by academics; sooner, rather than later, it will cease to be effective. But again we have to deal with defining what signals declare that the public has caught on, and at what time it will pay to fade the strategy. An interesting study could be conducted here based on when strategies or new indicators are published, and how long on average it takes for them to become futile. But then again, The Law states if a relatively tight range of results is found, the average is due at a moment's notice to become of no use at all.

The only way out of all of this mess is to rely on century old market logic. The practice of waiting for confirmation. We must believe once we have found a strategy that is successful, that it will continue to be so until confirmation proves otherwise. Discussion of what this confirmation may be could take up another whole letter, but a decent signal may be the breaking of trendlines or ranges. If we were to chart the success of our system daily, and establish a lower range or trendline for our results; if that line were to be broken, and a subsequent short upswing were to occur which failed to take our results back in to the previous range, and then if another lower downswing were to ensue, it would be wise to start thinking about modifying or abandoning our set up. Eventually when the chart of our results reaches a drastically low level, perhaps only 10% of our previous success rate, the system may be prove useful again, but this time to go against.

Of course, The Law states, that as this idea has now been published, even if only a relatively small scale, it must be, at any moment, due to prove useless. I for one however, find it more useful to believe in systems until they prove consistently faulty, rather than spending so much time empirically studying the market, only then to believe that our findings are of no use whatsoever. Indeed, Bacon himself seems to back up this claim in his own work:

The beginner plunges ahead on a favorite that loses, then bets lightly on a fair-priced horse that wins. He keeps switching amounts and positions, so that he never has a worthwhile bet on a winner at a worthwhile price. He is always one race behind the form of a horse and several races behind the rhythm of the results sequences.

It would seem here that the cycles are not external, but internal, and that the best way to guard against the ever changing would be to remain steadfast to one's own system.



Not being a technical analyst I do not know what the correct term for exhaustion is, or whether it can be tested, or even how to generalize it or if it is bullish or bearish, but it looks worth considering in both the long and short run.

Dr. Janice Dorn adds:

Pring described a number of technical bars, all of which I cannot recall, but included exhaustion bars. There is also the phenomenon of exhaustion gaps described by Farley. Certainly there are others too.

GM Nigel Davies adds:

The phenomena of exhaustion for a chess player is usually seen as moments of mustered strength (usually pride) amidst a gradually deteriorating performance. Yet how does one measure it?

One thought might be to consider again the Ryder Cup teams. What happens if we have a 'weaker' (various ways to measure this) team but with a couple of stars (e.g. Woods and Mickelson)? I figure we should bet against the weaker team just after the stars have played their matches.

Jay Pasch offers:

One might also test for predictive measures for exhaustion using a 3rd clearly articulated gap, especially on individual equities, as demonstrated by opwv:



The passing of golf great Byron Nelson reminded me that with all the games we play our legacy will still be the imprint we leave on our fellow man. Reading about his accomplishments on the golf course is mind boggling … 11 straight victories and 18 in total in 1945 with a scoring average of 68.33, 113 consecutive cuts made in his career and several major championships to his credit. However, this was only a small part of his legacy. The true measure of the man lies with his charitable nature, notably the $94 million dollars raised for various charities by his PGA tour event in the Dallas area.

One anecdote I heard tells you all you need to know about the man. Apparently he and fellow pro Ken Venturi used to playing various matches at clubs throughout the nation. It is said that the first question he would ask on the first tee was what was the course record and who held it. If it was held by the local pro, he refused to eclipse it. He was supposed to have said," He lives here, we are just passing through." He passed through leaving very large footprints.

J. T. Holley adds:

One thing that isn't getting the "wow" headlines or, it's just in passing that it's mentioned, is the fact that at age 34 this Great Man had the inner courage to say "I'm done", and walk away at a very high point. This reminds me of the other J. T.'s lyrics "the secret to life is enjoying the passage of time". Mr. Nelson with a lot of chips on the table and a grandiose set of accomplishments decided that being at home on the range was more meaningful to him as an individual than continuing a sport that he had dominated. The irony is that many probably thought it was too early and he had much more to earn, the greater legacy is that he got out to be able to enjoy his family and watch his "legacy" compound for another 60 some years "enjoying that passage of time". Talk about a great example of create, buy and hold, and watch compound.

How many money managers are willing at a young age to step aside after compounding client fees and incentives in a relative short amount of time, to devote time to what they truly feel as individuals is really important?

David Higgs adds:

So often it takes the sad passing of an individual before his/her accomplishments are widely magazine-ized or hard bound. Wow, he did all this in 1945. Yet who are the Byron Nelson's of 2006? One immediately thinks of Tiger Woods and rightfully so. Yet, why is it so often that only in hind sight are such events/accomplishments recognized. The truth is, there are many Tiger Woods on the courts, the fields, the lanes, the diamonds. Thanks to technology, the mechanics of individual super stars of their fields are studied to the point of ultra refinement. By studying swings, strokes, strides, young muscles can begin to emulate those of the great. I suspect there will be many Byron Nelsons and the likes to come. We yearn our roots in many respects.



So these are my "Ten Great Observations about Big Bank Internships". Having just endured this miserable joke, I thought some of ye older and wiser specs would enjoy a laugh at my right of passage.

For a little context, I am studying a double degree in Law and Finance. I have been trading stocks and options since I was 15 and have been lucky enough to have some success largely because I have devoted myself to the study of what can go wrong in trading (i.e. studying crashes, crash/blowup participants, behavioral finance etc) rather than reading hyped up "How to Trade for Millions!" type tomes. As a result, I'm a quiet, introspective, respectful and humble kind of guy; so imagine my shock during my foray into Wall Street. These are my tongue-in-cheek observations of the whole internship joke:

If you have any kind of ingenuity or entrepreneurial pizzazz teamed with some market-taught smarts about you, you will instantly be ahead of the game. Paradoxically, this will do you no favors at all as an intern — most likely you will be ostracized for it. MD's do not like you consistently outperforming them, or poking a hole in their "Great Investment Thesis! ™" because you happen to internally appreciate the concept - and have first hand experience - of a Leptokurtotic distribution coming to bite you in the ass. Well, that or they have never heard of NPV. Or, disastrously, neither.

99% of "professionals" are deeply insecure about their views. Lean even moderately hard against any trader or sales person to good-naturedly criticize their idea or test their thesis and they will crumble. They will then lash out at you for being a dilettante amateur who has no experience of real market conditions. Best to just nod and smile at that.

Strange economic phenomena/paradox: Sycophancy is much more highly valued than skill / results despite its absolute and relative over-supply on grad programs. So much for Economics 101. Thanks University, for nothing.

It is difficult to respect men who plough their cash into limited edition Ferraris and long liquid lunches at the local strip club and then demand your respect for their integrity, decision making skills and level-headedness under pressure … when they are only five years older than you. I cannot predict the future, but I have never come closer to seeing a man's future downfall than when said MD buys a new Ferrari, then invites his desk to come down and look at it. Admittedly, we were all gagging to. But to then see his face flush with pride at us "ooohing" and "ahhhhing"….never has such a grin of self-satisfaction and hubris so clearly indicated a very hard fall just over the horizon.

As it turns out, reducing weeks of research / investment analysis down to a single Bloomberg MSG screen so as to explain an idea to someone who has the attention span of a gnat is a "value-adding skill". This is actually sensible. It is not particularly intellectually satisfying when you basically come up with 5 bullet points that say "Buy XYZ because a) it is going up (b) soon (c) because there are forces in the market right now (d) that will make it go up (e) er, that is it. Trust me on this one, boss." but it will surely give the illusion of you being a switched-on kid though!

Stupidity and Parochialism. It is what is for breakfast. I think a certain degree of stupidity is actually hoped for in intern traders. One's boss wishes to demonstrate his superior skills, knowledge and insight. He wants your fawning praise and wide-eyed admiration for his well thought out plan to buy oil because of Middle Eastern instability (yawn). At your suggestion that current prices may perhaps already reflect this not-exactly-cutting-edge bit of analysis, you are scorned and your tickets to the next big sporting event are given to your assistant.

Markets are correlated. Except as far as anyone on your desk is concerned. If your job is to trade energy closed-end funds, who gives a rat's arse if natural gas is rallying 50% in just a few days? (Seriously, this happened to me. I remarked that a strategy we had going on was going to be materially affected because of whipsawing energy commodities prices. I was given a curt "Don't care". They then scratched their heads at the next NAV report and wondered why they did not see it coming.)

Have a clever arbitrage idea that you have painstakingly modeled, backtested and synthetically traded? It works? Great! Do not tell your boss. Just go start your own hedge-fund.

The bad bosses cannot stand to admit you might know something more than they do and just squash you. The good ones just steal your idea as their own. This is fine. Infuriating, but fine. The good ones will at least admit that your idea "was, in fact, good" to you before doing you over. At best, you will get a promotion, or not be as disappointed with your bonus. Such is the price of rising the corporate ladder, apparently.

Internships are a waste of time. Why spend millions on campus recruiting, throwing cocktails and dinner in nice hotels round the City, making you have thirteen interviews and cause kids deep anxiety about achieving a 3.8 GPA from the University of GreatMerit just so you can do what any 15 year old high school cheerleader could do? Because getting initiated into a culture of self-importance, delusion and self-aggrandizement is a must if you are going to last on Wall Street baby. All the recruiting propaganda about integrity, results-driven cultures, entrepreneurial environments, etc., etc. is just a joke. In reality, desks want frat boys. This is fine, just do not lie about it! Save your shareholders some money and openly do your recruiting on Facebook — most of you do anyway

Bonus: If who you are is synonymous with what you do… I cannot wait to trade against you.

Edward Talisse responds:

What an erudite and illuminating essay! Ned luckily caught on quickly. It took me 20 years to figure out the ins and outs of the Street. Maybe I can help by offering mid career types some observations after a long career at the bluest of the blue blooded trading firms:

1. There is massive confusion and misunderstanding between the concepts of skill and luck. Traders which collected bid-offer spreads for years discovered the painful truth once dealing spreads collapsed. They are left with no skill and no luck. Make sure you always study and keep ahead of the pack. Don't count on luck.

2. Pay and promotion is solely based upon current performance. It has nothing to do achievement in relation to opportunity or potential. That's why turnover is so high on the street. Get yourself in the best seat. Go for the hot areas if you want the highest pay.

3. Senior management generally does not know the difference between risk measurement and risk management. Middle office risk monitoring functions are not involved in the business. They simply are there to provide regulatory and legal cover when something goes wrong. You need to be your own risk manager.

4. There are very few real risk takers at the big Banks. The real emphasis is on collecting fees, collecting bid-offer spread where available and front running large client transactions. The real risk takers are purged at the first sign of trouble. The best ones go to Hedge Funds. Get out if you really believe you are a great risk taker. There are fewer constraints and bigger rewards outside the big Banks.

5. There is no more lethal combination than ignorance and arrogance. It usually leads to disaster. You'll encounter plenty of people with that combination. Avoid them like the plague.

6. You have to manage your own career. There is no real mentoring in the big Banks. Turnover is just too high. Beside, your appointed mentors are too busy worrying about their own careers to help you with yours.

7. There is a shockingly low level of basic finance knowledge in the big Banks. Sure there are plenty of very smart people in the banks but there is an abundance of knuckleheads too. It's about the appearance of knowing what you're talking about. Accountants call that form over substance and it's a great skill to have on the Street. Learn to shoot the bull.

8. It's important not to overstay your welcome. That was my mistake. I turned down repeated offers to sign on with smaller less "prestigious" firms. I still regret those decisions. Go with the Firm that best allows you to develop your skills, not the one that looks best on a business card.

9. Take advantage of everything the Bank can offer you, particularly ex patriot assignments. The experience may change your life and there are enormous opportunities for personal betterment.

10. Don't dismiss back office jobs. They are well paid and you can sleep at night. It's an annuity and you can ride the wave for many years with little or no pressure.

Honore de Balzac, the famous French author, once famously quipped that "behind evey great fortune, there is a crime." I think that is only partly true. Rewards will always be there for diligent, hard working risk takers.



A few of the women on the speclist, especially Debra Moon, have suggested that by analyzing the contents of this list, they could understand the market. There are many fruitful extension of this rich idea and they inspire the following.

One must start with the well known negative serial correlation of short term moves in stocks, the canes et al. Also the tendency of most comments to follow the price, with negativity increasing in relation to the past stock move down. Everything has to be adjusted for these, but leaving them aside for the moment …

One hypothesizes that the more negative the content of posts on a list, the greater the positive expectation going forward. This would be measured by the number of synonyms for good and bad in the posts, according to scales and calibrations contained in the work of Osgood. The same could be done for a column almost invariably as negative in tone as the bifurcated — let us say enigma — that came from us. Its base level is perhaps 95% negative as measured on the Osgood scale. But what about when it moves to 99%. or 91%? The former would occur in those one in three months say that the market goes down, and the latter would occur in a time when the market is at say a 9 month high, like above 1340 in the S&P when all shorts are suffering from squeezitis. So one's predictive regression would also have to take account of the past market move relative to its 90 day high or so.

Putting that aside also, one would like to test the negative content of news and reactions adjusted for past price move, the natural tendency to complacency, and the varying degrees of proneness to the overly favorable self reported evaluation of greatness biases, all as a predictor of future market moves. This could be classified by source, i.e. newspaper, email list et al. This is a nice problem in the un-tangling of hypotheses for which the confidence profile method, a method based on the multiplication of likelihoods, would be useful.

Big Al adds:

One thinks that Yahoo Finance headlines might be such an indicator. Anecdotal and imaginary, but it often seems that the day goes something like this:

By 10:30, S&P moves +5 pts
Yahoo Finance headline appears at 10:30: "Stocks gain as oil prices drop"
time to go short

By noon, S&P moves back to par
new Yahoo Finance headline appears: "Markets give up early gains on XYZ earnings"
time to go long again

At 2:00, S&P back to +6
Yahoo Finance headline: "Traders buying on positive inflation data"
time to close out

It just seems that it takes about the length of some moves for the news writers to "see" the move, write it up and get it posted.

Jim Sogi mentions:

Just as the number of trades carries more statistical significance than the sheer volume, the number of posts on various lists might carry more information than analysis of content. The content may be subjective but it has appeared that the main list, considered to be mainly bullish, is quite busy when markets are up, but at dark bottoms become almost silent and has been a good indicator for market operations. Another good experiment would be to find a list with a bearish tilt and count the number of posts at recent multi month highs and consecutive multi day highs. This is a methodology to test a contrarian indicator since the market is most bearish after numerous multi day highs, and new monthly highs, and most bullish at dark monthly lows. Underlying this method is the natural herding instinct and the reason markets tend to trend up, then down in cycles.

The May down cycle was 6 weeks and 8%, and the recent rally was about 8 weeks and 8%, and whether random or not, retrospectively creates the appearance of a cycle. The perfection and beauty of the wave over so many weeks and months as opposed to the apparent cyclic formations of a random walk , by eye at least, indicate to this observer that more is at work than random forces. If there are larger forces at work it would give a great advantage to a speculator to know by simple time measurement the time for a turn. In any case it is better to buy within a week or two of the bottom rather than buying at the top and selling at the bottom. The measurement of time might have information as distinct from the measurement of price. After 8 weeks up and 8% up do the probabilities favor another 8% move up for the next 8 weeks? Sampling methods on weekly returns might provide an antidote to the insufficient data points. Using the Professor's Fourier analysis (like his work on lunar cycles) on the random samplings versus the actual might indicate whether there are larger cyclic forces at work that might be harnessed. Does the actual have a greater degree of cycles than the random? What is the length of such cycles?

A few more ideas: Watching market depth on CME it seems that very high depth, which indicates high liquidity, suppresses price movement and variability, and that a lower amount of depth leads to greater variability. A curious thing happened the other day when Globex went down for a short period, the market had a bit of cheesecake and showed 10 levels of depth rather than the normal 5 for a while, and gave a glimpse into the inner workings normally hidden, like a quick peek behind the scenes.

Debra Belanger Kettle comments:

sheer volume and levels of hostility vs. camaraderie/politeness, even snoozeville (as in boring) seemed noteworthy when I first mentioned my observation … I was new to the list at the time and found the peace vs. conflict fluctuations of the posts quite fascinating.

I am not sure what it means though, or how to test … whether ipso facto or post facto it is something significant.

Dr. Brett Steenbarger offers:

I do think this would be a very interesting undertaking. My leaning would be to first examine grosser relationships, such as the frequency of posting vis a vis recent (and prospective) price change. I would also be tempted to examine the relative frequency of different kinds of posts (analytical ones, personal ones, etc) in that vein. Yet another measure would be the number of different threads and the extent of participation by various list members.

My preliminary hypothesis would be that people are more likely to post to the list and participate in threads during periods of heightened uncertainty. Posting, in that vein, would be seen by a psychoanalyst as a higher order mode of coping: a way of trying to make sense of ambiguity. One of the famous measures of coping styles breaks down the ways people deal with stress into three broad categories: problem-focused coping, emotion-focused coping, and avoidant coping. It would be interesting to categorize posts similarly, viewing the List as a social medium for dealing with uncertainty.

Freud postulated that, under conditions of duress, we regress to lower (developmentally earlier) forms of coping. Normal problem-based coping might regress to emotional or avoidant modes. One might expect market inefficiencies to be greatest during times of such regression.



News stories are abound that stocks in Asia fell for a third week, the longest losing stretch in 4 months. "The market has gone from worrying about US inflation to worrying about growth" said Praxair, according to a Bloomberg story. This story has so many hurtful things hidden amongst its agenda that one could write a book about it.

The main thing that one would like to ask is are conditions of lower interest rates based on lower forecasted growth bullish or bearish for stocks? The next thing is, are all moves in the market due to an increase in economic woes or interest rate woes, or are they somewhat random? Have such thoughts been discounted or increased, and if so, do stocks have more or less of a risk premium now? Do such explanations have any predictive power, or do they fit every scenario, and therefore have no way of being differentiated from any other explanation? Does such a backdrop add to the frictional woes that an investor faces, causing them to churn more than one should and increasing the frictional payments made to the market infrastructure and larger players, thereby maintaining the Pareto distribution of wealth for the foreseeable future?

One has not read Barron's since the financial weekly columnist came back, circa the S&P at 1240, 2 months and 7% ago, and said "the only question is whether we are in a secular bear market or a cyclical bear market." Such a description came in conjunction with the lows of July 21 and in conjunction with the spec party. The time has come to prevent people from losing so much more than they have to, by looking again to see why the Abelprecflecks are bearish now. One predicts that it will be a variant of the above.



The Math Behind the Music (Cambridge University Press, 2006) by Leon Harkleroad, will be of interest to musicians, mathematicians and marketicians. In a form that is accessible to every layman, the author describes the elementary mathematical principles behind sounds, instruments, compositions and visual aspects of scores in just 135 pages with a nice section of references and an included CD that covers examples of music that used math. No background is required as even such simple lower-school concepts as the factorial are developed by counting.

The first chapter is about the connections, history, common abstract patterns, and the composers and compositions that used math. The second chapter is about the physical basis of harmony, pitch and timbre that make up music. Considerable attention is paid to the frequency relations of various harmonies, and it's a good refresher for those who don't remember off the top that a fourth comes from any note by raising its frequency by 4/3, a fifth by raising its frequency by 1/2 and an octave by doubling. Sine curves are introduced to encapsulate the frequency patterns of various notes produced at different pitches by different instruments. Overtones are explained simply as the ratios of higher frequencies that a note produces that don't block out the original frequencies and the relation between harmonies and overtones is shown.

The third chapter discusses instrument tuning systems consistent with all the overtones and frequency relations between the notes of a scale.

The fourth chapter is the most interesting in that it shows how themes and melodies can be varied with simple rules such as opposition, inversion, and transposition. The relation between these simple rules and group theory are examined, and various ways of notating and combining the rules are covered.

The fifth chapter is about bell music, which is merely a variation of permutation and combination theory.

The sixth chapter is about randomization in music, with many of the same methods used to construct music as we use for simple simulations in markets.

The seventh chapter is about an attempt by one student to find the common basis, the patterns of harmony that make up the most popular songs. The eighth chapter is about how scores of music can be developed from visual cues, with rules to go from visual to music.

The ninth and final chapter is about failed efforts to combine music and math, with particular reference to George Birkhoff's efforts to develop a complete theory of aesthetics by developing a scale of beauty based on the simplicity-to-complexity ratio of a composition.

I found myself thinking many times of the relations between music and markets as I read the book. The combinations of opposites and inversions (where the intervals above a note and played the same intervals below, and transpositions (where the same theme is repeated a given number of intervals up) happens every day in the markets. The notation that musicians have developed to grapple with these techniques, including the summary of horizontal and vertical movements in visual sightings that the composer Villa-Lobos used to construct symphonies that depict buildings in a city, seems like a very fruitful field to augment technical analysis of markets.

The book is full of anecdotes and charts and methods that will be right on the top of the page for market practitioners, and will spark many a fruitful extension by those who wish to take the pencil to paper, and systematize what they have been doing in markets or charting with the work of some great composers and mathematicians in this related field.

Laurence Glazier offers:

This sounds a fine book. Abstract shapes indeed can be used for thematic material, in my chess days I considered using the outline of pawn structures like black's in the Dragon Variation. My mentor uses the letters in his friends' names. Music is developed by changing patterns in various - ever-changing! - ways, whether transposition, inversion, speed-changing, and I would add to the list in the book the use of rotation, a technique Chris Sansom and I used in the Fractal Music software. All this (except presumably rotation) applies in trading. The issue is whether it is predictive for traders, and that is akin to trying to predict what a Bach would do, the patterns are especially evident once they have happened.



I had some fun developing a volatility breakout system back in 1996, which tested quite well until 2003. At the time I was not aware of the ever-changing cycle phenomena. Year after year I was observing increasing volatility and I thought that we would live with it (and possibly profit from it - a meal for a life time). However markets change, their structure changes, their players change.

That system is not testing that well at the moment. On the contrary, other systems which benefit from low volatility environments are doing well. If low volatility is here to stay, that is fine. But if the ever-changing cycle concept is true, I expect something new to happen again. In this contest, the "meal for a life time" concept should be reviewed and renamed in the "meal for the current cycle time".



Here is a thought for detecting over/undervalued markets with Amazon; use the sales rankings of the top 10 books from different search words (property, stocks, bonds, gold) and track them over time. The ratios between different subjects could well reveal undervalued and overvalued markets.



In Stumbling on Happiness Daniel Gilbert lists a number of ways regular people have an illusion of control (e.g. feel more confident of winning the lottery when they can pick their own numbers). This little white mental lie appears to be critical to self-esteem; the one sub-group who is immune to these illusions are the clinically depressed. (Kosztolany)



The European Court of Justice has just ordered the British to adopt some of the more rigid work rules of Continental Europe. One reason the British have prospered more and have almost half of the unemployment rate of Germany and France is the British have much more flexible work rules. Now the European Union demands the staff in British firms have at least 11 hours off between work days, a minimum of one day off per week, and an extended break at least every six hours. [read more]



The summer after freshman year in college a friend's father hired me for construction work, following a good showing pick-axing his manicured hillside for railroad-tie steps. Tony owned a successful contracting firm, and there was always a need for strong backs on the job.

The promised pay was good - more than double minimum wage. Each morning we would arrive by 7am for a full eight hours of pick and shovel with hard-hat, under the blazing San Fernando Valley sun. At 10 there was a break, heralded by the barrio horn of a catering truck. Orange juice! Soda! Sweet rolls, coffee! Anything please! Twenty minutes you could sit down and whatever he had, it was so good and warm or cold and almost the sweat would start to dry when it was time to go back again and swing that heavy tool.

A laborer; shoveling and cleaning up concrete debris, wood, sand, and mud around the foundations of recent block masonry, and trenches of proscribed depth destined for footings of a new building of industry. Every day. Hot. Dry. Dust. Muscles burn. Lungs burn. Eyes burn. At 4 we head home. Shower, dinner, a little reading, Star Trek, and exhausted collapse by 9.

Mother of puritan ethic always admonished hard work, "Or you will wind up a ditch-digger!" Which sounded horrible, but excusably my friend and I were there for the money for the life of guys. Motorcycle parts. Dates. We were to go back to our studies in September, but there were others with different purpose.

Porfy was a Mexican immigrant who worked alongside us every day. He was older, in his 40's, and had been with the company for several years. He rarely spoke as he knew little English, and there was suspicion that he was illegal and paid under the counter (Tony was not always up and up, and his heart gave out at 60). But Porfy never complained; about the heat, the dust, the tons of dirt and cement to be shoveled onto dump trucks. He squinted out from under his helmet with steady black eyes laid in sweat, and worked with purpose and efficiency missing from our strapping power. Because as I learned, he supported a wife and four children with this job - the same one I played at to score the smile of a girl at dinner and a trick fender for the Honda.

The first paycheck was pegged at $3 per hour, not the promised $5. What? All this for so Little? In what was the first of many discontinuities with authority, challenged the boss: Where was my money? "Well" he said, as if something else was promised, "You need to PROVE that you are worth $5 per hour." "I will ask your foreman Eddie, and if he agrees than you get your 5."

5 came in the next check, but the developer of the site ran short of money and the contractor laid us off - or so I was told. There was a kind of bounce off this job - which set me thinking about the people who make it happen by not complaining, rolling up their sleeves, and putting in good day's work. They are heroes too; like magnates and laureates, heart transplanters and evangelicals. They set aside great aspirations and risk, instead sacrificing hope of personal glory for the hopes and epic lives of others considered even greater.

There is a certain truth to goodness, even when wrongheaded, that imbues the spirit of leadership to the gallant efforts of workers who follow duty. Not everyone can be a great hero, but there is something transcendently noble in the silent toil of a family man.



Former HP Exec Saturates Washington Market
Monday, September 25, 2006; Page D02

For Washington area business leaders, the challenge in coming weeks won't be getting a chance to hear Carly Fiorina but avoiding hearing her speak for the third or fourth time.

She's ubiquitous;
TV, lectures, book signings.
The price of failure.



A note from Vic — the Minister first wrote and posted his 'predicted' column on September 17th, whilst the 'actual' column came out on September 23rd.

Predicted. A one Mr. G. Reaper just can't leave alone a certain Ms. Anna Nicole Smith, last seen in these pages on her betrothal to a somewhat more elderly gentleman who then accommodatingly perished, leaving her a not entirely parsimonious sum for her efforts. We return to her story now, having forgone, ahem, ample opportunities in the past, on the occasion of the near simultaneous birth of her daughter and passing of her son David, of causes that, at the time we grudgingly go to press, remain altogether undisclosed.

Actual. Unless the portents are all wet, there will soon be a number of vacancies on the board of Hewlett-Packard, a company, to its profound regret, much in the news these days. We'd like to suggest some possible candidates to fill those vacant directorships. We hasten to add that no one in authority at the company has asked us for our suggestions, but we're sure that's only because they're so preoccupied preparing their forthcoming testimony before a congressional committee on Thursday…Our proposed additions to Hewlett-Packard's board are: Mahmoud Ahmadinejad and Hugo Chavez, the presidents, respectively, of Iran and Venezuela.

Predicted. One can hardly breathe a word regarding Ms. Smith (and indeed she leaves us breathless) without pausing to think of the not altogether totally dissimilar predicament in which the up-until-very-recent Prime Minister of Thailand finds himself. Thai one on indeed! As Mr. PM sat in traffic here in our fair city, a subset of his countrymen, who one would have expected to be cooing over the tabloid travails of Ms. Smith, were instead coup-ing him right out of office. As he rested his constitution in the back seat of his darkened limo, they wrested the country's heretofore constitutional system and installed martial law!

Actual. The notion of weirdo and whacko as HP directors may strike you as absurd, although one could argue that recent disclosures about the company's approach to corporate governance strongly indicate they might fit right in. We're well aware, too, both suffer from some evident drawbacks. To wit: To judge by his history, Mr.Chavez, if irritated enough by bickering among the board, might easily be tempted to stage a coup, which we've not the slightest doubt would rub the present directors the wrong way. Even more serious, Mr. Ahmadinejad doesn't own a tie, a clear violation of the company's dress code, which mandates zero tolerance for such a major infraction, and, to make matters worse, he doesn't shave anywhere near often enough, either.

Predicted. Fitting for such an eventful week, we found ourselves privileged to meet with one Mr. Julian Smith, a name with which loyal readers over the past one score and ten years may not find themselves totally unfamiliar. He haunts the august chambers of Morgan Goldman, plying the trade of economist-in-chief, which, we aver, we do not hold against him. Mr. Smith's duties include not only the standard bottle-washing fare, but also the task of making predictions, moreover with regard to the future.

We found Mr. Smith in a mood that we would necessarily describe as not so completely altogether sanguine, if not to say perhaps a wee bit bearish, or even just a tad cranky, as this bold prognosticator directed us to the display below, showing the tortuous path followed over the past 160 seasons by his firm's Super-Sentiment-Indicator (SSI). Effusive as always, our perspicacious soothsayer observes that the reading today is higher, yes higher, than it was in December of 1974, reflecting the current effervescence seen both in the current markets and in the bosom of his namesake, the aforementioned Ms. Smith. He hastens to point out the silver lining of this billowing grey mass, that those far off levels of thirty and two years ago, just south of 600 in our old friend the Dow, represent what he avers is true "pound the table" opportunity for our bullish brethren, offering a dividend yield (remember those?) of 132%. Keep the powder dry.

Actual. The most obvious explanation for the market's recent favorable action just might be the favorable action itself, which invariably has a tonic effect on investors, as witness the steadily increasing chortling over the prospect of new highs in the averages. While, as we've noted, sentiment hasn't reached ridiculous levels of bullishness, it has been growing increasingly buoyant. At the very least, that's cause for caution.

As a shrewd market-watcher we know points out, for several months now this market has been prone, even while it was edging higher, to sudden reversals. No sooner do the bulls gear up for a sustained march higher than stocks do an about face, and no sooner do the bears start to enjoy life than the decline comes to a sudden end and share prices bounce.

He suspects, though, that such short-term swings of direction as they become the norm lull investors into anticipating an enduring pattern and set them up for a more pronounced and extended move. He further suspects such a move will be down, although he feels we need more febrile and widespread optimism before that happens.

We heartily second that forecast…this time, we fear, what we're in for is … a taste of the inevitable.



Peter Bernstein on Amaranth: Better to be Wrong Than Too Right

Peter "Against the Gods" Bernstein has delivered the choicest quote so far on the Amaranth hedge fund meltdown:

"What happened to that hedge fund shows that when you're really right, you always overstay the position and that's when you get murdered. It's better not to be right so much."

It's a lovely quote, and so spot-on. Diane Vaughan called it "normalization of deviance" in her classic book on the sociology of risk, but the gist is the same: Humans who are rewarded too often for taking ill-understood risks (or at least are not penalized) normalize the risk, and then take on even more risk. One day, of course, the whole edifice almost inevitably comes crashing down, sometimes literally, as in the case of the low-temperature launch of the space shuttle Challenger, which is Vaughan's subject. [read more]



There are many angles to the markets.

There are Gann angles, which of course make no sense, because angles on a chart are depending on axis units.

There is also the Cauchy distribution, whose fat tails are scaring away those who can remember 1987 but have never traded smallcaps or electricity. This distribution can be generated from angles, made by someone shooting randomly at a distant target. Where "randomly" means uniform. Hence fat tails are the property of some distribution of angles.

More interestingly, there seem to be a lot of statistical tests developed for circular data; that is angles. I found out about them in 100 statistical tests by Gopal K. Kanji. Just for fun, I gave a try to the V-test, or Modified Rayleigh. It is a test for randomness, checking whether observed angles tend to cluster around a given angle.

The data is JPY/USD monthly returns since 1965. One problem surfaced though — how to transform returns into angles?

I chose to project them on a vertical axis, in some reminiscence of the Cauchy target experiment. As a result, time is factored out of the study. It could turn it into what I think they call an "axial study", in which all angles need to be doubled in the computations. This could be a mistake, but it does not affect the results. The conclusion is the same whether the angles are doubled or not.

And the conclusion is that we reject the null hypothesis that angles are random around the zero-line, at the 0.0001 significance level. Rayleigh's V is 5.255. There is some element of non-randomness in monthly JPY/USD, which still need to be identified.

Here is the code for the test, except that V's significance had to be checked in a table, unavailable in any R package.

YEN <- read.table("MonthlyYenUSD.txt", header=TRUE)
Close <- 100*diff(log(YEN$Last))
Angle <- 2*atan(Close) #Axial data

xbar <- sum(cos(Angle))/length(Angle)
ybar <- sum(sin(Angle))/length(Angle)
r <- sqrt(xbar*xbar+ybar*ybar)
phi <- atan(ybar/xbar) # xbar>0, else add Pi radians
theta0 <-0 # theoretical angle direction i.e. null hypothesis
nu <- r*cos(phi-theta0)
V <- nu*sqrt(2*length(Angle))

Gibbons Burke adds:

I am no Gann fan, but Gann angles escape the aspect ratio problem you mention because Gann plotted his charts on paper of a constant scale, so that one increment of time was always kept constant in physical distance relative to the units of price on the y-axis. Typically it was 1 point in price = 1 unit of time. In this way, a 45 degree line always related to a rate of ascent or descent of, say, one point per day. So there was some internal consistency. Or, as Shakespeare put it "Though this be madness, yet there is method in't."

Early technical analysis software packages like CompuTrac let you draw angled lines which were completely arbitrary because of the vertical range in the time period plotted in the chart, but they were there because the TAG group threw just about anything into the program that users asked for. But they also had methods of drawing Gann angle lines with the consistent aspect ratio ability.

Bruno replies:

To answer my own post, I tried as much as I could to find randomness with circular tests, but could not. The reason is certainly that returns data is not circular. The way to make it circular is to introduce time. Divide the circle in 12 for monthly returns.

Then returns have to be in a third dimension. Fortunately, we have got spherical statistics!

Dr. Phillip J. McDonnell adds:

With all due respect, Gann realized his error only after he had been publishing for some time. It was a retrospective fix. But it is an inadequate fix.

When a stock splits 2:1 any normal chart is now no longer a 1 point to 1 time unit ratio. When Microsoft paid its 10% dividend is the new ratio now .90 to 1.00 or should it be 1.10 to 1. Gann is moot on the question.

When a stock pays dividends should the price be adjusted? Should the dividends just be ignored with the attendant error in rate of return?

What about weekly charts - is the time scale 5 units or 7 or just 1 (a week)?

What about monthly? Is it 1 unit, 21 units or 30 or the actual number of trading or calendar days?

With many angles, many time scales and dubious rules it should be quite easy to find many examples that come 'close' to turning points in the markets. In fact it is probably quite difficult to find any failures. This is especially true if one is allowed to define 'close' as whatever one needs to make the current data fit.

Even though the arcane mysticism of Gann is suspect, Bruno's ideas on angles may have some merit and should not be lumped into the same basket. The Cauchy distribution induced by the angle model can be problematic. During the 90's several advances were made by Zar and others in the statistics of angles and tests thereon. That area is relatively new but very workable.



Why did the US lose the Ryder Cup so badly? Much has been made of the fact that the result belied 'world rankings', but summing the cumulative World Rankings of the two squads, the European team appears to have been the stronger on paper.

With this being the US's third consecutive defeat, could it be time to turn this match into 'The Americas' vs. Europe? Or were other factors responsible?

Steve Leslie responds:

The reason the U.S. consistently loses the Ryder Cup has absolutely nothing to do with talent nor preparation nor team depth. In fact, if you look at the European team, six of the golfers came from England, Scotland and Ireland, two came from Spain, and two from Sweden. So population on its own can be ruled out as a factor.

The U.S. has the most extensive golf programs in the world and enough of the top players (Tiger Woods, Jim Furyck, Phil Mickelson, Chris DiMarco) to hold their own. The point is they have plenty of golfers to choose from. Eliminate the talent pool excuse.

The course at the K club is very similar to that of a U.S. country club, where target golf is de rigueur, and it is not a links club. The greens were medium fast greens and immaculate, so you can rule out the track as benefiting the Euros.

The weather was accommodating, a little rain but in no way untenable. Plus, they were in Ireland and not on the coast of Scotland where weather can be brutal.

All the players arrived in plenty of time to get ready for the event. Throw out jet lag as an excuse.

Nobody who qualified had to be replaced because of injury or default. Everyone was there who was supposed to be there. In fact, Scott Verplank, a captain's pick, gave a stellar performance.

The fault lies in their desire to play as a team. The Ryder Cup is all about team chemistry and a burning passion to represent their country and team. The U.S. players, no matter what they may say publicly, view this as an afterthought. Their season is technically done after the PGA and many of the top pros are beginning to shut things down. They have ended their tournament season and are on their way to corporate events where there is plenty of money to be had. Note the comments from team captain Tom Lehman, who has been quoted in the past as saying that the golfers should be paid for their efforts in the Ryder Cup. That is indicative of the mindset of the U.S. golfers.

U.S. golfers are corporations first, representatives of club manufacturers and clothing designers. They have their own planes, travel in pristine luxury and treated like royalty wherever they go. This is hardly the stuff of Palmer, Nicklaus, Wadkins, Trevino, Casper or Watson.

Practically all tournaments in the U.S. are medal play and are contested across 72 holes. Very few tournaments are decided by match play. This encourages consistency and an aversion to risk taking. Match play is all about risk taking, birdie making and intimidation. Plus it takes a certain arrogance to play match play.

A reporter asked Sergio Garcia after a successful match at this years Ryder Cup why he does so well in Ryder Cup competition. His reply was three words: "I love it!"



Taking Out the Cane

September 25, 2006 | Leave a Comment

A recent article from The Times, noticed by Sam Humbert, and another from Pearsons Magazine dated 1901, found by Ryan Carlson.



In his memoirs Albert Jay Nock always argued that a major purpose of politics, aside from the plucking of the geese with the least hissing, was to gain inside information for wealth building. Certainly the increases in fortunes of many politicians whilst in office would be consistent with that, to say nothing of the implicit gain in wealth from their post-political lives, what with their previous connections and reputation. An example is the $500,000 speech of the former Washington dignitary in the week after he retired from office, and the comparable book and speaking tours of the run of the mill politicians, as well as all the lobbying possibilities.

All this was brought home by the recent French media reports of Bin Laden's death. What's amazing is that the emphasis of the story was on how peeved officials in France were that the information was leaked — which undermines their ability to act first on inside information.

This leads me to reminisce on the first time I realized that news always follows the price, and more importantly, it reminds me that there are a million people who know more about the impact of news than the average layman or hedge fund manager or ghost or consultant. During the drive for independence in Poland, when Russian tanks were flowing in to maintain Russian control, I was short a huge line of silver. My partner; who was a very influential professor at an Ivy League school, specialized in raising money from mavericks who needed the prestige of the donation to said school and had lines in to every professor of policy at the university. Richard Pipes was then the world's foremost expert on Russia and the "Professor" was induced to make a personal call to Pipes to find out what would happen. "They can't let the revolt succeed because it would cause dominoes to fall," Pipes said. It had such gravitas, it was so inside, so salient, that I immediately covered my short. I lost more millions on that than almost anything else I have ever done, as silver promptly fell from $14 an ounce to $9 an ounce when the Russians did nothing.

Since then I have always tried to remind myself how many experts know much more about public policy than I, and how unlikely it is that I would be able to figure out whether the additional information that I can glean from a newspaper might be bullish or bearish in its ultimate effect on the market, relative to its already discounted nature.

Ken Smith replies:

Physicist Brandon Carter said about counting:

What we can expect to observe must be restricted by the conditions necessary for our presence as observers.

Therein lies the crux overshadowing any hope the little man with limited information has for success in the stock market. His position as an observer is restricted.

The news he gets is behind the price. The indicators he sees reflect his behindness. Thus it is he always falls behind.



The Modigliani and Miller theorem states that in the absence of taxes, bankruptcy costs, and asymmetric information, the capital structure of the firm does not matter.

We know, of course that these assumptions do not hold true. The tax treatment of debt financing vs. equity financing provides an incentive to carry debt. At the same time, bankruptcy costs reduce the incentive for carrying debt.

Hence, firms carry debt to the point that the marginal benefit of the tax treatment of debt meets the marginal predicted bankruptcy cost of that debt.

Bankruptcy costs can be represented by the cost of a bankruptcy times the likelihood of a bankruptcy. The likelihood depends on the volatility of the assets of the firm.

Hence, firms with low asset volatility, such as utilities, tend to carry more debt than firms with higher asset volatility, such as software companies.

Bankruptcy costs are the reduction in the value of assets of the firm that result from bankruptcy. This is not just the money eaten up by lawyers and investment bankers, but also the ease with which assets are transferred to another owner.

So, for example, if an E&P company hits bankruptcy, it is very easy to transfer ownership of wells to a new company, meaning the bankruptcy costs for energy companies are low. The same goes for railroads. If the primary asset is track and rolling stock, it is very easy to transfer the assets to a new owner.

For firms where the asset is primarily intellectual or relationship based, bankruptcy costs are very high because the knowledge and individuals with relationships cannot easily be "re-painted" like a box car and sold to another company.

With Amaranth, the asset is roughly $4 billion in financial markets positions (perhaps levered to a much greater amount than that), as well as intellectual capital. The finance industry is notoriously poor at being able to hold on to intellectual capital, so Amaranth's intellectual capital will leave. This is because, 50% in the hole, Amaranth will not be able to earn performance fees until its high water mark. This means that other funds can poach Amaranth talent by offering higher pay than Amaranth can possibly offer.

Hence, Amaranth will have to ultimately either close up shop or become a much smaller organization based on the strategies that the founder can run himself, assuming he is willing to stick it out without performance fees for a while.

Therefore, there is a huge bundle of financial assets coming on to the market. The question is, how easily are those assets repainted and sold?

Theoretically, it is very easy to repaint the assets. All it requires is exchanging the title of ownership at the brokers/clearing houses.

The problem, however, is that others are able to short these assets, in essence front-running Amaranth.

One cannot really do something like this in the corporate world. If BNSF goes bankrupt, one cannot borrow and sell box cars and engines, hoping to cover at the BNSF box car auction.

One can, however, do that with financial assets.

How this plays out at Amaranth will have repercussions for years to come. Presently, banks are willing to lend vast sums to hedge funds. So long as margin calls are met, there is not a great deal for the banks to lose. But what happens if the bankruptcy costs are higher than pre-supposed, i.e. the value of assets used in calculating margin calls is not as great as believed due to the bankruptcy costs being higher than the Street assumed?

If things do not go well, credit on Wall Street could become much tighter.



This weekend I was in San Diego at a periodontal convention, and on Saturday I took an all-day course in advanced pre-implant bone grafting. Most of the session was devoted to "monocortical block" grafts, which are plates of bone transplanted from thick areas of the chin and back of the jaw to deficient areas destined for dental implants. Though these techniques are in fairly wide use, the combination of substantial surgical risks with uncertainty whether grafted bone is actually supportive, suggested caution and sticking with more predictable cases.

We also toured the nearby wine-country of Temecula, and enjoyed wine-tasting with a couple we met at a winery. Celebrating their 30th anniversary, the gentleman told of his long career as an underground line electrician, and how the 13,000 volts can kill by electrocution or burns. On hot days, when electrical loads burn out transformers, they use an infrared gun to check the temperature of the transformers prior to opening them. In the days before such technology, if the transformers were too hot they would explode on opening. Then, the decision to open was based solely on experience.

As usual when visiting new places, one morning was spent jogged around the hills and canyons. This part of California is arid and warm, and though the picking season had passed some of the bunches were not harvested and there was the fragrance of fermentation on the vine. These grapes shrivel like raisins, and with high sugar are often made into delicious dessert wines such as the sweet pear Chardonnay and jammy Zinfandel varietals we tasted.

The Temecula valley is an eclectic mix of equestrian ranches, vineyards, tract homes, and large custom estates; all manifestations of various booms endemic to the area. The community has the ubiquitous turf battles, in this case between real estate developers and "save the vines". In that there is both a world-wide wine glut and cataclysmically declining real estate values, it is hard to tell just where the dust bowls first will howl.

On the drive back I was paged and had a terrible shock: on Saturday a colleague was struck by a car while cycling and had been killed. He was a humanist, extremely well regarded in the community, with a large, successful practice, and had left behind a wife of 25 years and two teen boys. He and I rode together several years ago, and in between steep hills we'd talk about life. This was before I gave up cycling following an accident that convinced me this wasn't the sport for a father. Recently, whenever I had see him he would chide me: "When ya gonna ride with us again?"

At the office today there were hushed tones as everyone discussed the tragedy, and some thoughts revisited from the past when others had died. There was guilt; I should have spent more time with him and now the opportunity is lost. Someone remarked, "Had he just left 5 minutes sooner, or later, or had the old woman driving altered her schedule, none of this would have happened".

The scientist explained that it was completely random; if you ride a bike there is always risk, and you cannot die in a cycling accident if you do not ride. And there were intrusive thoughts that were strange but familiar. Try to remember….what was I doing when the accident happened? Was there anything odd that day? The elderly driver who swerved as I jogged along the road? The fragrant grapes hanging too long as if by accident? Did I wonder about an inexplicable sadness in the eyes of the electrician, or the gait of an injured horse?

Even when we cannot ride together any more you teach me about the romance of senselessness.

Bruce Lee comments:

I offer you my condolences. I had similar misgivings about cycling (in Manhattan), but was fortunate to have my bike stolen, because it was doubtful I would have stopped. Before then, I came across the bicyclesafe website. The tips are common sense, but it is often useful to review the obvious anyway.



New record number for sale on eBay, now 244. The significance of the Ferrari Indicator this time around is in the distribution, as several are of the more recent models.



Back in the late winter of 2006 rally, I was asking myself ,and indeed the list members, why was it that M&A activity was so fierce close to market highs rather than bottoms. One will note some very interesting answers and comments on the subject, although none really final and conclusive. At the time Merck was trying to take over Schering, only to be beaten on the final stretch by rival Bayer. Vivendi of France saw some aggressive purchases by funds almost at the same time of the Schering takeover and Thales witnessed some interesting movements on its capital structure. Now, 6 months later, Merck is back in the game, launching a 16b chf takeover bid on Serono; the bid , seemingly greeted with a large smile by the Bertarelli family, 75 percent owners of the company, comes with the stock markets close to their highest mark of the year. there are other rumors, gossip is growing ,at times literally like mushrooms — out of nowhere and after a heavy thunderstorm.

Of course some fierce selling of commodities and the Fed's keeping on hold breath and rates, have helped the bulls make their point. Cane lovers will note only a handful of markets are left behind , like tired bikers trying to catch the group uphill, (namely the US market, and especially considering it from a none US$ point of view.)



Cab Calloway's singing, dancing, and his fantastic band are just hypnotic to see with video. I have seen some of them once or twice as random fillers on TV, but now here they are for the viewing on YouTube! [clip 1, clip2, clip 3]



Do you think the people who were trying to reach the top of Everest were not full of doubts? For a hundred years, people tried and lost their lives. Not even their dead bodies came back. But still, more people tried…risking…knowing that they may never come back. Why? Because it was worth it. Because in the very risk something is born inside you: the center. It is born only in the risk. That's the beauty of risk, the gift of risk. — Paraphrased from Osho (1931-1990), Indian Professor of Philosophy, Spiritual master.



I have  read a couple references to the Equinox and just too many cases to not to at least be respectful.

Legendary trader WD Gann claimed that more than any other day Sept 22 marks a turning point in capital + commodity markets. September 22nd (Friday) as a cycle date is Autumnal Equinox. The window includes the day before and after.

Could it be Natural Gas? Amaranth's long positions are probably squared now. Finally gas can rise? Could it be oil? Arbor's DSI Matrix shows oil's bullish sentiment at record lows as the price hits 9 month lows.

Could it be stocks? The Dow is just 200 points from an all time high. S&P trades are at a high for the year and the highest since February 2001, but in yearly resist 1301/1338.

Could it be bonds? The US 10 year is at a 6 month low yield.

It could be that the Autumnal Equinox passes without hitch, however it is worth noting that the few days around September 22nd have in the past marked major highs/lows and markets are trading at extremes.

Dr. Kim Zussman responds:

This looks like a testable question, so for a quick look I used SPY daily closes (yes, with dividends, including effects of deletions, additions, etc) since 1993 in the following scheme:

At the turn of each month, I noted the high close of a period of 7 days centered around the 22nd of each month. Then I compared this high with the high of a 40 trading day period centered on the same day. If there is a match, then the high close around the 22nd is a "major high" (not to be confused by anyone growing up in the 60's), and then note the month. Thus, if highs occurring around the 22nd of each month are major highs, and these are more common around the autumnal equinox, we would expect September (month 9) to dominate. BUT here is the list of months when highs around the 22nd corresponded with centered 40 day highs:


OK, no Septembers. Nor Novembers or Decembers.

My bet on margin is that equinoxes correlate best with calendar dates when the sun spends nearly equal time above and below the horizon.



ABC NEWS Sept. 18, 2006 Would Americans Buy Cars From A Company Called 'Gord'? Times are so tough in the American auto industry that the country's two biggest nameplates have actually talked about a massive combination. Reports out of Detroit suggest that GM and Ford had discussions about the possibility of a merger or alliance.

Ford and GM merge
Money-losing "synergy"
From Carly's playbook?



I recently finished reading the Island in the Center of the World, by Russell Shorto. I enjoyed the book very much and it contains many Daily Speculations type themes, notably, trading, speculating, sea adventure, Wall Street, markets and New York City. The book is about the origins and development of the first Dutch settlement of the New World, New Amsterdam, circa 1650-1670, which would later become New York.

The book is fascinating on many levels. It is non-fiction but written in a narrative style, telling the story of three characters of history. They are Peter Stuyvesant the strict military ruler, Adriaen Van der Donck the visionary pioneer, and the fledgling colony itself, part military outpost, part trading company, part lawless village, part gateway to the continent. At that time New Amsterdam was just one of many settlements along the eastern seaboard including those of the English, Swedish and French. The way the New Amsterdam came to succeed and dominate all the others and eventually shape the whole country is the subject of this book.

The authors generalizes and makes a bold claim that it was the Dutch not the British that would lay the foundation for the city and the country we know today. I think he supports this claim well throughout the book. The themes of tolerance, inclusiveness, free trade, and incentives were Dutch ideas. Though shaped in Europe, they were first put into practice as governing ideas in New Amsterdam.

The author describes the period in great detail and allows you to imagine how the island must have looked to those first Dutch traders. Hudson was commissioned by the Dutch to search the area for what he thought was a quicker route to India. It was a commercial venture of the East India Trading Company. They found no route, but instead a land rich with forests, wild life, vegetation, fish, and abundance of all kinds. All this was set in the most perfect natural harbor imaginable with a river leading north to a boundless continent. In short order the trading company recognized the value of this area, claimed it and set up their first outpost in the New World. A settlement based on commerce, but with military backing just in case.

The book describes the progress of the early traders and how they negotiated their deals with the local Indians. They learned the many languages in the area, and competed with the French for better trade deals. The Indians were good negotiators despite the legend of Manhattan being bought for 50 beads. In fact the local Indians got much more including full use of Manhattan whenever and however they wanted, an alliance with the Dutch against local enemies, and trade concession for their thriving fur business. Later as trade expanded the village became a major port for merchants and privateers. (The distinction between pirate and privateer was small, the privateer being legitimate due to an 80 year war against Spain.) In all, it is a description of a vibrant and wild place, rich with commerce and a truly international setting.

The author goes on to describe how the village begins to convert itself from an "ad hoc collection of soldiers, fur traders, and whores" to an independent city with rights and laws based on the liberal European thinkers of the time. The ideas of self government, free speech, open assembly, representation, tolerance, were all somewhat new ideas at the time. It was through the clash of two large personalities that this all came to be, Stuyvesant the military commander and Van der Donck, the lawyer activist. The book outlines their various alliances and battles as the city forms around them.

Beside an informative history it is full of interesting factoids, for example: Yonkers is actually a Dutch term for "gentleman" and was an area granted to Van der Donck for his farm. Breuckelen is also a Dutch name for the small village across the river. There were four accepted currencies at the time beaver pelts, polished sea-shells, Spanish pieces of eight and the Dutch guilders. There was of course a wall along Wall Street, and it marked the northern the edge of the original village. It was there primarily to keep the English out as they began to encroach their way over from Long Island.

The lasting impression I have from the book is the credit we should give to our Dutch forefathers for their bravado in taking on the venture that would become New York. The vibrant, multi-cultural, open community that is New York is due in large part to their example. Though the Dutch would eventually lose the city to the British in the late 1600's, by then New York had already secured its own identity and its place as the center of commerce and culture in the world.



Nobody asked me, but one of the commonest errors in trading is to assume that you have perfect knowledge of an event. Such an error is behind all the mumbo jumbo about the end of the Fed cycle being bearish. One does not know what and when the Fed is going to do. Often their moves are anticipated by big market rises. The dating of their announcements has always been problematic, and the tendency for anticipation has changed drastically. In the bad old days, the market would invariably rise on the morning of the day they eased. With about 15 changes in direction of easing and tightening over a 100 year period, the opportunity for multiple comparisons is 100%, and any hypothesis can be supported if you weasel enough with Fed Funds, Discount rates, time between announcements, etc.

Along this line, the book Meta-Analysis by the Confidence Profile Method by David Eddy, Vic Hasselblad and Ross Shacter gives methods and programs for the synthesis of hypotheses using general and easily understandable methods. It points out that there are problems that scientists face such as multiple pieces of evidence, different experimental designs, different types of outcomes, different measures of effect, biases to internal validity, biases in comparability , indirect evidence that must be considered, mixed comparisons, etc. Their methods are designed to interpret, adjust and combine all such problems in each experiments.

The problems that quant investors face are similar to those that the three Doctors face. There are conflicting patterns, different conflicting relationships, overriding considerations relating to drift and Fed moves, cycles relating to seasonal factors, drift relating to the difference between bonds and stocks et al. These factors must all be combined and the confidence profile method is a good way to do so.

Finally, I remember the chapter in the Monthly Illustrator of June 1883 on Tips and tipsters.

There are many men who haunt brokers officers without any apparent purpose. They are well dressed and appear to live well.. Some of these have confederates in various parts of the world to give early information. 'Are the employees of a railroad talking about striking?' 'Is Congress going to approve a committee to investigate some trust?' This information is conveyed at once to the tipster and by time it is made public he has arranged a deal. It is almost impossible to carry through any important deal in the Street in perfect secrecy.

It was always the custom to buy a tipster lunch in case his tip were to pan out, although such a deal was not enforceable by the courts, as "they have held that his contracts are mere gambling agreements."

The next time you receive a tip of impending doom, and it happens to be that one in three time that the market does spend a quarter down, remember that the lunch is not enforceable.



Nobody asked me, but I am amazed by the bizarre ad links Google offers with my online brokerage statements. What algorithm did they use to calculate that the following might fill my needs?

Secondly:  rooftop gardens. As a garden, the rooftop of the Metropolitan Museum of Art in Manhattan leaves something to be desired; it is concrete, with merely a hedge, and precious few benches. The magic comes in the sense of being in a ship floating among the treetops Central Park and seeing the skyscrapers of the city rise above in the background, like being in a sea of giant dark green swells and seeing Manhattan as an island, which of course it is.

Finally: To defend, attack. In his UN appearance today, the Iranian guy accused the US of the very misdeeds of which his own government is on the hot seat for: making nukes, letting terrorists run free. A beautiful propaganda technique. But George Bush had the best line of all in addressing the assertion that the US is destabilizing the Middle East: "It wasn't stable to begin with."



One of the great things about the list beyond the incredible benefit of the mutual education and the camaraderie we share, is the opportunity to be involved in events and activities we might not otherwise have been. Often times, participation can spawn spontaneous learning, self-improvement, or perhaps even a conversion experience. This was the case for me over the past few days. It goes like this …

There is a certain waterlogged spec who likes to see himself as a womanizing rake, a bounder of sorts. He is in fact a thoughtful and quite lovable wanker who writes prolifically and very well when he wants to, treating us to observations on the seasons and tomes that remind us of the spirit of the holidays. There are lengthy missives on the joys of major league baseball and the NCAA's, lurid accounts of barely-there bikini contests at the dock bars, and rambling but oh-so-entertaining trip reports, all interspersed with kind words of gratitude for the chair and others here he calls 'friend.'

Though I have been relatively incommunicado for the past couple of years for reasons I will not articulate here, during my absence, this spec encouraged me to engage in a certain 'competition' which I theretofore believed was principally intended for dumb-jock-wannabe's who never grew up, as well as others who had no life and were determined to fill the void with something … no, with anything! This, my dear fellow specs, is the world of fantasy sports … or so I thought. Though my spec friend likes to consider me addicted, he, in fact, badgered me incessantly and mercilessly to the point I agreed to 'compete' in last year's football extravaganza just to shut him up. This was really the last thing I wanted to do. You see, the problem for me is not addiction, but when on the field of battle, mine is a competitive spirit that operates in constant overdrive, forcing my involvement beyond compulsion. I knew that fantasportatition, as I call it, would result in long hours of study and management and encroachment upon other parts of my life. I would have to think and guess and be stabbed in the gut by the each new entry to the disabled list. Still, I agreed, and last season competed reasonably well, enough to prevail and sit atop the football league in my first ever season. Not bad, methinks, but nothing else would have done.

So, now let's rewind to spring '06. The smell of pigskin is still in the air and 'what's this?' My spec friend is back at my in-box badgering, that's what. "It's time for the 'national past time,'" he whines. "Oh, bite me," says I. Yet, fresh from my victory lap, the smell of dirty jock straps in the locker room and the ghost of The Mick upon me, I am easily persuaded and succumb, this time with baseball. There I was, back at it some 24 weeks ago, girding my loins for battle with 11 other hearty and worthy spec competitors. Developing a strategy, setting priorities, pouring over statistics sorted every which way, and asking my wife to pay the bills for the next five months and to shove a pizza under my office door every so often.

[read the rest of the story]



Having previously debunked love as panacea and the Golden Rule as hogwash, I will proceed to explain that humans are as breeds of dogs, and try to make you happy about it. This first step of cooperation may be the only way, outside eugenics, to rescue our faltering world.

My credential for this essay begins as a semi-feral kid living across a northern swath of American states who took behavioral and social cues from animals. Not surprisingly, I became a veterinarian daily walking for a few years lines of hundreds of kennels of cats and dogs and stalls with horses, cows and pigs. I left that calling to travel the world for a decade under a backpack studying and taking notes on the myriad aspects — toes to earlobes and the conduct — of the peoples in 96 countries. I specialized at once on either end of their bell curves thinking that once these border pieces were in place, the rest of the puzzle of humanity and solution to the world falls into place.

For example, I remember trailing in the streets of Maputo, Mozambique an albino black man I silently called Oxymoron until he noticed, stopped and confronted me. I explained forthrightly that I was interested in his anomalous color to which he intoned, 'Follow me.' We went straight to a laundromat where I met his lovely jet black wife and identical twin albino girls. 'The doctors tell me they are probably the only albino twins in this country,' the wife reported.

As certain as we are individuals, each type in the crayon box of humanity has varying capacities for physical and mental performance. White trash like me think slow as February molasses but are thorough, Mexicans talk rapidly as auctioneers, Orientals have heart and beehive minds, Indians bend and multiple faster, if only Jews could drop their Bible and climb as a superior race, Native Americans booze and brawl, and my favorite line on the football field is 'Did you ever try to catch a black guy.' These and other 'tribes' are the world orchestra sections of evolution.

Their symphony today offers the crash of egalitarianism, the belief in the equality of people. My experience is contrary, that different strains of humanity offer varying capabilities. In a sentence, a barnyard version of George Orwell's Animal Farm reads, 'All humans are equal but some are more equal than others'. This is the specificity of evolution. To embrace its truth is to take one giant step forward in your life as well as be entertained.

Suppose an egalitarian physician is called to set the broken toe of a man and instead goes out and breaks a toe each of nine other men, explaining that it will make them feel better. The study is written into the AMA journal and Congress passes a law that everyone must go about on crutches. That's where the world stands now.

Instead, go forth with compassion to look for the relative pluses and minuses of each race that bring greater vitality and color to life. By giving the next person the benefit of doubt when greeting him, you create opportunities that will not be available if you assume the worst in others and act like it. Oxymoron in Mozambique invited me to dinner after the laundromat which I politely accepted, and that led to mutual gain.

Pay attention to this truth, exert your will, and choose happiness for everyone.

Pamela Van Giessen adds:

Beautiful post. We are like dogs, and that is actually a good thing. I can not imagine a life with just one breed of dog any more than a life with just one sort of human.

Some dogs are flushers, some retrievers, some working, some herding, some are ratters, some are for sitting pretty on lovely ladies' laps. Each serves an important function. I do not always want them all but I admire all of them from Affenpinchers to Yorkies and everything between. Each has something amazing to offer though not all are great at all things. Just this weekend I was perusing my dog books, thinking about which breed would make a good companion for my Newfies as a personal trainer, and there was not a one that did not have wonderful strengths but also some shortcomings. I am leaning toward a Petite Basset Griffon Vendeen or a Brittany for the Newfs.

Bo has written a very wise thing. One can take it even further and recognize that you do not train all breeds the same way. Newfies demand training at a young age, but a soft touch. Rotties need a firmer hand. Pointers are super smart but can be skittish if not given purpose. Springers never stop moving, and Goldens are children well into adulthood. All are great if trained according to their disposition and strengths. But at the end of the day, Clumbers just won't do well in obedience competition, St. Bernards rarely excel in agility competition, and a Pomeranian isn't going to a pull a heavily weighted cart . No amount of training or work will ever overcome their physical limitations and DNA. I often gasp when I see people who insist on forcing an issue with a breed where success is most likely outside the realm of possibility and from which there is rarely a good outcome. If you want to excel in agility why wouldn't you get a dog that is physically appropriate for the task instead of forcing a square peg into a round hole?

Dylan Distasio comments:

In contrast to the previous replier that found the parent post a beautiful one, I found a lot of dangerous posturing bandied about with little scientific evidence for most of the assertions made, some borderline if not outright racial slurs, and an incredibly flawed analogy involving crutches. I may be at a disadvantage in this response, if the parent was actually a satirical post, but I have a hard time reading it that way.

I will also try to set aside my bias of disliking most dogs as pets versus work animals as I find their slavish devotion and dependence on their masters an undesirable trait. That, alas, is a topic for another post …

Bo wrote "These and other 'tribes' are the world orchestra sections of evolution" after opining on the traits of various races. Assuming for a moment these generalizations are true (which I don't in general), there are no allowances made for cultural versus genetic transmission of these traits ( i.e. meme versus gene). The word "evolution" carries a connotation of selection pressures on the gene pool. I am not aware of conclusive scientific evidence for any of these assertions.

Culture is a powerful transmission medium for changes. People cut loose from their historical culture who emigrate to the US develop a new one that is often strikingly different from that of their ancestors within a few generations.

The parent's lumping together of races with an enormously broad brush done with sloppy abandon. "Orientals" (who I am not sure enjoy this term for the most part these days) have a wide variety of cultural traits across tribal and state borders. I don't think a Korean or a Chinese person would appreciate being thrown into the same bucket as a Japanese one. The comment on the Native Americans is flat out derogatory and racist, nuff said on that one.

Would the parent also have us believe that the Jews have a special need for religion in their genes that is not present in the genes of other races?

And while I will grant that selection pressures may have created some physical differences in muscle type distributions across races in general, there are exceptions in every pool. I am not sure that there is even conclusive scientific evidence in this realm, but then again, I'm not up on my eugenics reading.

The assertions made about meaningful differences in intelligence across race is spurious at best, and destructive at worst especially considering the difficulties in defining and measuring intelligence in general.

We are also blessed with this gem "All humans are equal but some are more equal than others'. This is the specificity of evolution. To embrace it's truth is to take one giant step forward in your life as well as be entertained." I'm sure Orwell is rolling in his grave seeing a satire used to rally against the Stalinist corruption of socialism used to argue for the inequality of the races based on a eugenic argument.

The physician analogy is flawed and laughable. It left me speechless; I confess to being unable to elaborate on it.

As the parent closes, we get some mixed signals such as "By giving the next person the benefit of doubt when greeting him, you create opportunities that will not be available if you assume the worst in others and act like it." which sounds like a good idea that would argue for recognizing the individual not the stereotype the parent elaborated on earlier.

However, we are left with a closing that sounds like fascist propaganda "Pay attention to this truth, exert your will, and choose happiness for everyone." In other words, embrace a worldview based on perceived genetic differences of races based on broad stereotyping, and exert it on others.

I can almost see that the parent's intent was good here, it is a shame it's wrapped in a message of stereotype, abuse of the scientific method, and at times outright racism.



Given that wine is so personal, I thought I would share some finds and add a little comment to spur others to enjoy.



There was an excellent article by Rebecca Henderson and Kim Clark in 1990 about cognitive shortcuts and the results of their use in changing product markets. A radical new technology innovation has many aspects, all of which are subject to change. However, over time a dominant design emerges, consisting of components and an overall architecture that consists of the relationships of the components. Once the dominant design is in place, successful companies focus their limited attention on improving the components and often organize departments around the components. The architecture is taken for granted and tacitly encoded in information filters, communication channels, and problem-solving strategies.

A problem can occur when a competitor introduces a new design with the same components but changes the relationships among the components, i.e., changes the architecture. Suddenly, a firm's information filters, communication channels, and problem-solving strategies are all wrong, and the firm often does not realize it. Henderson and Clark studied four major architecture changes in semiconductor equipment. In all four cases, the company with the largest market share of the old architecture lost its leadership position when the architecture changed. The continued use of perceptual filters led to mistakes that seem hilarious to outside observers. For example, a team of engineers, evaluating the product of the competitor that had captured 67% of the market, failed to recognize the competitor's key technological advance and pronounced the competitor's product a copy of their own.



Be mindful of confusing cycles with hikes. This article on the Fed lists 14 cycles of tightening, and the current round of 17 hikes constitutes only one cycle.

While it is admitted that the Fed's actions are more transparent than in the past, a lot of the market participants are simply not looking. For example, currently the Fed has tightened the monetary base to the point at which it is 3.6 percent below the long-term fit (I contend the fit is a "target"). This level of tightness surpasses that of 1998 and 2001, and is only exceeded by 1990. This data is thru 9/13/2006, while certain players were talking of a Fed reversal of policy in August (and maybe before). Here is a quick visual illustrating the Fed's tightness

But note that there are not enough observations of the extremes of accommodative or restrictive policy to have statistical reliability, and thus the chart must be viewed as anecdotal.



It is helpful to study universal principles so that all activities, including those related to the markets, BBQ and books can be fitted into a framework for proper decision making and understanding. The best universal principles I have found are in Hoagland's book, The Way Life Works, but they should be augmented by the study of universal principles in all fields ranging from ethics to the origin of life. This is important so that one does not blow like a leaf in the wind, and especially for those who are prone to "switches" as described by Bacon.

In studying a few of the 684,000 entries under Universal Principles on Google, I came across one set that was so important it is worth memorizing by market practitioners. These are the Four Universal Principles of Criminal Behavior contained in the UPCB, namely Ideation, Communication, Facilitation, and Actualization.

The principles are based on an actual robbery and involve getting the idea for the crime and fantasizing about it, communicating the idea to a partner through physical signals, facilitation of the crime through getting near the scene and gaining equipment to do the crime, and actualization, and doing the crime itself. The problem with this set of principles is that it is completely descriptive and nonpredictive, and almost everything anyone does could be forced into this model by a zealous bigot. I am reminded of Rose Wilder Lane's description in Liberty of the search of a neighborhood in Hungary for people without an I.D. card, and the smug self assurance that the Policeman had with their guns and night sticks. As the English Bobby observer said "Oh, that's great, but in England they would never go for that regrettably — Every man's home is a castle and all that baloney."

Before making a move against you, the market likes to fantasize about it , by moving in the direction and back, just to test the waters, like going down much from open to low at the beginning of a day and then coming back, just to see how many prisoners they it take the next time. Or one small day down after seven up days, like today perhaps, just to test the waters. Then it must happen that the move is communicated to another market, first the Swedish market for example, then the German, then finally the Far East, all giving the strongest and the best capitalized a time to prepare for it and issue their margin calls. The facilitation occurs when the opening occurs the next day, and the trap is sprung, and the actualization is the move.

This important subject has many highways and byways, and I would seek your guidance as to universal principles for proper behavior in markets and life.

To read a previous post on Hoagland by Victor Niederhoffer.



Does fear in sport , as in the market put your opponent in the drivers seat? or does it depend on the personality of the warrior / trader, as to how this will effect the final outcome? I forward to you an article from Buenos Aries:

We hate Hewitt, says Nalbandian — From correspondents in Buenos Aires. September 20, 2006.

FORMER Wimbledon finalist David Nalbandian stirred the seeds of animosity ahead of the Davis Cup semi-final clash between Argentina and Australia by claiming his teammates don't like Lleyton Hewitt.

Hewitt has been at the centre of several spats with Argentina over the past few years and the ill feeling has grown to such an extent that he has reportedly employed two Australian bodyguards for the trip to Buenos Aires this week.

"No-one is friends with Hewitt and he does not worry me at all," Nalbandian, who was beaten convincingly by Hewitt in the 2002 final at the All England Club, said.

"We won last year over there (4-1 in Sydney) and now we will win here."

There had been talk that Hewitt would pull out over security fears but Nalbandian thinks his presence in the team will make little difference.

"With Hewitt, this tie will be a little more difficult but that doesn't change much really," added the world No.4.

"Whichever team comes here to play knows that at home, we are very strong, and now we have a great chance to make the final."

Argentina captain Alberto Mancini echoed Nalbandian's sentiments, claiming the circus surrounding Hewitt's appearance would not distract his team.

"The issue of Hewitt and his security (which includes six local security personnel) is something that everyone is talking about but it's not something our team is worrying about," he said.

"We respect Hewitt but my players can beat him."

Earlier, Argentina's Jose Acasuso blasted Hewitt for overreacting to the perceived animosity he will encounter.

"Hewitt seems to think that he's come to Iraq, that they are going to plant a bomb," Acasuso said.

"But we're not bothered because this is the circus that he wanted to set up. Nothing's going to happen and we shouldn't pay any attention to it.

"We're just worried about Argentina. Whether Hewitt has one bodyguard or 500 bodyguards, that's up to him."

Former world No.1 Hewitt, who was named alongside Mark Philippoussis and doubles specialists Wayne Arthurs and Paul Hanley for the tie, had previously expressed reservations about playing in the tie because of security concerns.

The bad blood between Hewitt and Argentina began at last year's Australian Open when Juan Ignacio Chela took exception to the Australian's histrionics and spat at him as they changed ends in their third round match, copping a fine for unsportsmanlike conduct as a result.

John O'Sullivan answers:

Yes and no, if we take cricket as the sport in case. There are few more exciting sporting spectacles than a contest between a hostile fast bowler and an aggressive batsman in international test cricket. A truly fast bowler is capable of delivering the 5 1/2 oz hard leather ball at speeds approaching 100mph. Over a 22 yd pitch that takes just over 0.5 seconds to arrive at the batsman. The batsman must select and execute his shot in that very short interval. Remember that in cricket, it is perfectly legitimate for a fast bowler to deliver a "bouncer": a short pitched delivery aimed at the batsman's chest, throat or head. Obviously, the aim is to intimidate and unsettle the batsman. Often a simple, straight ball aimed at the wicket will follow. This is a classic fast bowling sucker punch - a scared batsman will fluff the shot, and get bowled out.

From personal experience I know that no other sporting experience produces an adrenaline surge like going in to bat against a really fast bowler. The ball may be traveling so quickly that you can barely see it. In the amateur game the pitch may well be uneven, leading to dangerously unpredictable bounce. As a batsman you know that when the bowler releases the ball it may well be flying toward your face or ribs at 90mph half a second later. If you get your shot wrong, you'll get hit, and it will hurt like heck.

The fear causes a massive adrenaline rush. As a batsman you must harness that rush, as it sharpens your perception and quickens reactions. You must concentrate totally and absolutely on the ball in the bowler's hand as he runs up. And you must try to play freely and naturally.

When an aggressive batsman faces a hostile fast bowler, they will seek to dominate each other. The bowler will bowl bouncers to intimate the batsman. The batsman may "hook" those bouncers. The hook shot requires tremendous nerve and skill. The batsman doesn't attempt to duck or swerve the ball, but stands in line, allowing it to approach his face. He then plays a cross bat shot hitting the ball high, behind and to the right ("to leg") just as the ball comes on to his face. If he can execute this shot correctly he will score heavily, and dominate the bowler. If not, the bowler dominates, and the batsman may be hit in the face.

All batsmen where padded gloves, pads on the legs and a "box" to protect the groin. In recent years helmets have become common place. Less confident batsmen may add arm guards, thigh pads and chest guards.

The more heavily padded a batsman is, the less free his movement. Helmets can hinder vision. So the more protection a batsman has, the less able he is to apply technique to deal with the threat.

If a batsman is confident in his own abilities, he won't hinder his movement with too much protective padding. Market analogy: confident traders will not use stops.

A great batsman must have natural ability: eagle eyesight, quick reflexes, strength and nerves. Market analogy: a great trader must be a quick & confident thinker and have iron nerves.

A great batsman must practice endlessly. He must have a complete array of shots that he can select instantly and instinctively in response to the bowler. One can only learn by doing over and over again. Market analogy: a great trader's instinctive reactions can only be honed by being in the market in all conditions.

Cricket is a team sport, but a lopsided one: the batsman is on his own against the 11 men of the fielding side - the bowler, the fielding captain, and the fielder are all conspiring to get him out. The batsman stays alive and prospers by wit, skill and judgment. Market analogy: the trader relies on his wits to survive against the combined force of the market.

One mistake, and the batsman is a failure. To be a success, he must get it right over and over again. One error, and the batsman gives a catch to the fielding side, or he is run out. Or he is bowled out. To build a big innings, to score heavily, maybe a century, he must get it right over and over again. He might face hundreds of deliveries from several bowlers over the course of several hours, with the fielding side constantly conspiring against him, in order to build a big score. His concentration must be unremitting, and application of technique fluent and correct. One error and he is gone. Market analogy: the successful trader must constantly make correct judgments on placing, pulling and sizing orders and positions. One mistake and he is underwater, maybe even wiped out.

Craig Mee responds:

I believe the great Vivian Richards who averaged 50 runs every time he walking out onto the pitch with bat in hand, and faced some of the fastest bowlers ever to play the game, never wore a helmet in international cricket. Maybe the answer lies here, in this one individual, though I believe he may have been two standard deviations away from the mean, as the downside of getting hit, well for us mere mortals, is 'there goes the account.!'

Adi Schnytzer comments:

Although, to be fair, the nastiest fast bowlers in Richard's era were on his team! Donald Bradman, the greatest batsman that ever lived, and by a fair stretch, claimed in an interview that he was only ever hit once on the body by a ball! He wore no body protection to speak of and evidently needed none. Even the fast bowlers were scared of him! I once saw Richards make 200 in a Test match at the MCG and watching that innings I could not help wondering how anybody could ever make 300 in a Test in one day (Bradman at Leeds way before my time). Watching his interviews, one gets the feeling that the man had no need for adrenalin at all.



Eventual buying opportunity? Statistical outlier?

Foreclosure rates in Palm Beach County soared in August to more than four times the national rate — and rose a sobering 226 percent compared with the same month last year, a study released Wednesday shows.

The RealtyTrac foreclosure report provides grim evidence that the pain many local homeowners are suffering is real. As the five-year housing boom winds down, that includes creeping mortgage costs, soaring insurance premiums, rising property taxes, stagnant home prices and a growing inventory of houses for sale. [read more]



There has been bad blood between the local librarian and me that was settled today as the smoke cleared the room.

A high schooler I know from subbing walked up to the librarian to ask for for a good book to read. I shot across the room, "Try the three most useful books from my lifetime. The first is The Memory Book by Lucas & Lorrayne. You will study faster with less effort to get better grades."

"What's the second?" asked the drawn student.

"What Smart Students Know by Adam Robinson. There are a hundred tricks to study and test taking beyond being just smart."

"And the third?" spoke the librarian for the first time to me … "The Ayn Rand Lexicon," I replied. "This stock turns the reader into an objectivist in one sitting."

One by one, the librarian typed the titles into the library computer and came up with zero. As quickly she ordered them …

Then she looked up and smiled, "These books are peacemakers."



Is it wrong to assume that every market has a specific "personality"? Players are different, the underlying security has different fundamental characteristics, the market structure (rules, procedures and technology of the exchange) may be different. If you take, for example, the average daily range/average price expressed as a percentage, you notice the difference. The NASDAQ has higher ratios than currencies or the S&P, therefore you would expect different trading opportunities. Short-term traders prefer higher daily ranges. But can we use this information to try and understand the "quality" of a move, provided that prices represent at any moment a balance between buyers and sellers?

When markets trend you would expect to see an expansion in volatility in the direction of the trend. That means bigger daily ranges in the direction of the trend. That implies that the public participation in the move is high and pushes prices higher. You can also experience low volatility trends, when prices drift higher without the classic thrusts. For example, the up leg started on the S&P, the NASDAQ and the Dow Jones which all have this characteristic. A low average daily range move may be a warning that this uptrend has not enough fuel to continue above certain levels? How do we test this concept?



 Easy, good, and cheap:

– Getting a reasonably good haircut, usually from a recent immigrant (mine Israeli, many Eastern European), less than $20, fast, open on Sunday. In Norwalk, CT I was paying over $40. The haircut was not better, and I think the "stylist" prolonged it all unnecessarily to make it seem more like I was getting my money's worth.

– Laundry wash/dry/fold — less than $20 for a big load, done very, very quickly, without paperwork … they can just remember which bag is yours without even putting your name on it … all cash … and yes, stereotypically, they are Chinese.

– Chipotle — Despite being on very pricey real estate, the prices are still cheap..the premises are very clean, including restrooms … on off-hours you can even get a big table and read a newspaper … unlimited refills on soft drinks … all just like suburbia.

– Of course the subway is a good deal. Taxis are not at all that bad either, and not outrageously expensive, considering all that is involved.

– Jogging — There is the problem of getting stopped at red lights, but once you get in Central Park you are home free. It is easy to jog for an hour without noticing the passage of time. There is a jogging path along the East River, but I often see rats there, which is no fun.

– Food from street vendors … Had a totally excellent chicken gyro from a vendor around Park and 52 or so, and a Coke, and if I remember correctly the total was $4.

Expensive but good:

– Tennis — If you want to play without too much extra time overhead, you really just have to pay…on the order of $100 per hour (plus or minus a factor of 2). There are many choices of surface though. If courts seem unavailable everywhere, you can probably still get one on Roosevelt Island, where the tennis club spans the full width of the land.

– Parking in a garage — Of course this is outrageously expensive. If you do shell out for it, though, they do treat you very well, making you feel at home.

– Obviously, restaurants, Broadway shows, operas, ballet … expensive but very, very good and in endless variety.

Expensive and a Pain:

– Groceries at D'Agostino's … no self-checkout … no express lane … cashiers are dumb (sorry) and get snagged on anything. An Orwellian "D'Ag Tag" required to buy anything at a reasonable price … lines very slow even though everyone is buying just a few things. The groceries are expensive.

– Blinds from Home Depot … I already wrote about this topic. In the end I had to ditch Home Depot and went with a higher end, custom guy. Only had a few windows. The blinds ended up being outstanding, both esthetically and mechanically. But do not deal with Home Depot on this one.

– I have not experienced this personally yet, but I am sure my first experience with the BMV will be difficult. It is hard to imagine though, that it could be worse than Connecticut.

Reasonably Good but not as good as elsewhere:

– McDonalds. I wrote about the great McDonalds on Main Avenue in Norwalk. The McDonald's on 53rd and 1st Avenue is ok, but it can't approach the Norwalk location. Multiple days with the credit card reader broken … no strawberry jelly, only grape, and sometimes out of stock … slower service and, of course, no drive-through, inadequate climate control, effectively no air conditioning…relatively leisurely employees. (See Chipotle above, which is owned at least partially by McDonald's. Somehow they do a very good job with Chipotle here.)

Special category:

– Boston Market. I have not gone to a Boston Market in Manhattan, so this is a comment on Boston Market in general. It is also owned by McDonalds. Boston Market is a disappointment — the concept is good, but the experience is always a letdown. The wait in line is longer than it should be (unlike Chipotle), and for some reason it always seems a little too chaotic, with lots of kids milling around, people who cannot make up their minds, and, especially, slowness at the register. Then when you actually sit down … again it feels a little chaotic … there might be a fly landing on your food occasionally … the soft-drink fountain might be broken … the "Thank You" trash can might be overflowing. None of these things seem to happen at Chipotle.



A few weeks ago James Sogi wrote about Kai Lake and his friend who is a professional wood craftsman. His website is worth a look if only to remind yourself that mankind does add to the sum beauty of the world.

Crafts are rich with metaphor for traders, but what strikes me most when viewing work like Kai's is the separation between the novice and the master: the gap that exists between the weekend warrior and the true student. I am a dabbler: I make things from wood that my family admires, and visitors to my home have even commissioned a piece or two. But my advanced-amateur status only makes me more aware of the divide between people like me and the likes of Kai, Krenov and Nakashima.

If I were to meet one of these luminaries, I would ask him if there was one skill that was most indispensable in bridging the chasm. Was it cutting to a line with a fine saw? Controlling a chisel to slice a 1/500" shaving from a tenon? Developing one's eye to recognize instantly a good or bad design? Learning to hand-plane a surface so beautifully that putting a coating on it seems sacrilegious?

Fortunately, many have written books, so I have met them, and they have answered my question. Perhaps surprisingly given the range of skills required, there is one fundamental skill. It is sharpening.

It is the lack of keenness on edge tools that leads many woodworkers to think that a bit of a gap in a miter is normal; that everybody has a bit of rough-tearout when they hand-plane, that an ill-carved surface is evidence of "hand-worked" and therefore acceptable. Many woodworkers have never had exposure to a truly sharp tool: until one has held a much-sharper-than-a-razor tool and sliced end-grain with the slightest of effort, it is easy to let sharpening lapse. After one has held that tool, it is impossible to ignore the stone.

A dull chisel forces one to push too hard. That would not be terrible if working plastic: but wood is a variable medium. It transitions unpredictably from hard to soft, it resists mightily on instant and not at all the next. When one is pushing too hard, as one must with a dull tool, when the nature of the work inevitably changes the tool will lurch forward uncontrollably, and another "hand-made" object is born. Furthermore, a dull tool is dangerous to the craftsman: it can easily lurch out of the work and into a palm, thigh or wrist. The link to trading is obvious and poignant.

Sharpening is a very simple job: hold a tool at a constant angle and rub it on an abrasive surface. Use finer abrasive surfaces to get a sharper edge. But it is boring and it takes practice to get it right. So many woodworkers never bother: they make-do with semi-sharp tools, or they regard edge tools as disposable and buy new edges from the store, or they rely on power tools to shield them from dull steel. Store-bought chisels are not sharp enough to do fine work. And professionals like those above rely on power tools to get close, and hand tools to finish. So the gap gets wider.

We amateurs in the trading world face a similar challenge in bridging the gap. What is the fundamental skill? Is it money management? Is it finely tuned entries and exits? A keen eye for a beautiful chart pattern? No. It is counting. It is not complicated, as the Chair has repeatedly mentioned: imagine two categories, make a two-by-two or four-by-four table, and count. It cannot be ignored, and it is not something you do early and forget: it is done repeatedly and often. The resulting sharpness allows one to use exactly the force required: the changing conditions of the market do not cause the account to lurch dangerously. Such flaws are no longer regarded as normal and necessary, and the gap starts to narrow.

But counting is not glamorous, and except for some it is not exciting. So we amateurs buy our edges from advertisements in this magazine or that, and when they stop working we discard them and buy another. Having never held a truly sharp edge we do not know that those store-bought systems or indicators were never sharp enough anyway. Or we hand our money over to a person or automated system, and get results that, although safer, are tragic because we never even tried to cross the chasm to truly fine work.

Time to get out the stones.



As Larry remarks, most markets are very different from each other and to take this further so are most time periods. One of the biggest mistakes traders make is that they assume markets are homogenous or they assume that what works well in one market should work well in another.

What works well for one day or for one hour can be completely different for another day or hour in the same market. Daily range can also be deceptive. To assume that a market that has a high daily range is a market that trends is also false. Markets with low volatility often trend better than ones with high volatility. Daily range and its implications also work very differently in certain markets like currencies which trade 24 hours a day. How significant is the range in Asian time of Dollar/Euro? Many commodities like gold for example also trade virtually 24hrs a day but the futures are only open for a few hours. Concepts like average true range take the day open to previous day high and low, and average these, so some specs prefer this measure.

What is a trend exactly and how long must it last to be labeled a trend? A trend is defined as "a general direction" of something. More specifically it is defined by market technicians as the general direction of the market. In the classic book Technical Analysis of the Financial Markets by John J. Murphy he states that a trend has three directions. Herein lies the first contradiction. The three directions are up, down and sideways according to the well respected Mr. Murphy and he states that most people think of trends as either up or down, however the markets spend at least a third of their time in a sideways trend. If a market is moving sideways is it then a trend? How is the word "sideways" compatible with the word "trend"? Most technical analysis uses tools that try and identify a trend, try to identify the breakout of a trend or try and identify the end of a trend. Even if there was a clear cut rule based definition of a trend (a solid testable hypothesis) and one could somehow magically know when a given market w as trending, there still would not be any guarantee that you would make money. This is because a trader needs more information that just the direction of a market even though the choices are really up or down. A lot of the material on the spec list deals with these facts about markets. Speculating involves many aspects like leverage, time frame, risk vs. reward, timing, short term events, stop losses and many other short term factors that could wipe out ones funds very quickly if not taken into account.

All these factors need cognizance if one is to successfully trade a trend, because as Mr. Murphy has stated they (trends) are not always present. It is precisely the times when they are not that trend followers lose severely because it is at these times that inevitably their positions will be the largest.



The S&P's sport a $20,000 margin, and Cattle $900. Do you think there is a difference between the players in these games?

Cattle, wheat, beans get delivered whereas there are no real deliveries in most financials. Does that matter? For sure.

There are huge fundamental difference between markets; $10 stocks or hot issues on the Vancouver exchange do not trade like blue chips that are fund driven. Seasonals, deliveries, protein content of KC wheat vs. Minneapolis or Chicago wheat.

I could go on… so I won't.



It is amazing how often the way something works in one area of life is similar to the way something else works in a different area. We often find ourselves thinking that the computer works exactly like the brain, or that the techniques used to win board games are similar to those that are appropriate for winning in markets. Music is one of the fields where the techniques and procedures often seem directly transferable to another field like art or games. Perhaps this is because it is a universal language of its own, and as such is subject to the same general physical and biological regularities as other 'languages.' The similarities between different fields are often so great that I find myself working in one field, then I find that just by changing the nouns, or substituting a market for a physical device such as a machine or magnet or resistor, the meaning is entirely transferable.

Perhaps this is due to the general applicability of physical principles, like the conservation or gravitation laws, or perhaps the similarities occur because of the common principles of life contained in Hoagland's The Way Life Works, which can never be repeated too often.

I have felt for a long time that everything that happens in the world of electronics specifically, how the components and all the circuits work, is an exact analogy to how the markets works. I am going to focus on just one aspect of this today which is the uses of comparators based on op-amps. I am going to use Michael Merchant's chapter on op-amp applications from the book Exploring Electronics, a highly recommended non-mathematical text for trouble shooting in the field, filled with diagrams and simple examples. As a second source, Try here.

I will focus on applications of the op-amp that deal mainly with comparators and skip some of the more involved applications that relate to filters, oscillators ,summers, integrators and differentiators. An op amp is a integrated circuit consisting of a differential amplifier with two inputs ,and a following output. The inverting input sends out a voltage completely opposite in phase to the input, (turns positive to negative, or negative to positive). Depending on whether the net sum of the voltage at the source is positive or negative, the output is magnified about 100,000 times up to the total voltage supplied by the power supplies — usually 16 volts. a good diagrammatic description of it can be found here.

The whole idea of an op-amp is based on negative feedback. The output gets connected back with a wire to the inverting input thru a component like a resistor , a capacitor , or a diode, in order to stabilize the output and reduce the gain from 100,000 to a moderate level. Amazing things can happen with negative feedback in electronics or the markets.

Let us start by looking at the most basic application of an op-amp ,one that does not involve feedback: the comparator. The idea here is to compare the level of the input to a certain specified value, and then take action based on whether it is above or below that value. The procedure is to establish that basic level on the inverting input and then let the positive input vary above and below the basic level to detect the threshold. Such a circuit is often used in real life to sense temperature or wind, light, sound or pressure. Actions are then taken to control a device such as a motor or machine. Indeed, in the my home, such a procedure is used to automatically open and shut a toilet cover.

In the market, such a circuit would be used first to compare the moves in price to zero, or perhaps to the previous high or low. When the signal moves to above the level, action is take to buy or sell.

The next set of applications involves a Schmitt Trigger. The idea here is to let the input swing to two certain levels, called the upper and lower threshold, which trigger a new reference level in the op-amp, which then takes action only when the input goes above or below the new reference level by a certain amount. This is an example of hysteresis, a delay between changed action. The idea here is to reduce the frequency of false detections in the signal due to noise or randomness.

Such a situation arises in markets often. The prices moves near a high or low. But action must be delayed to see if it is a true move, or whether it is caused by merely running or stops, an ephemeral factor relating to news, or perhaps just some random buying or selling by a big player (where the market moves completely out of bounds to accommodate and give bad fills to such a player.)

The next set of comparators is based on bounded comparators, i.e. window comparators, where the configuration is set up to detect whether the signal is within a window — between the upper threshold and the lower threshold. Such a configuration requires feedback in the circuit through diodes. The idea here is to see if the input is within a normal range.

The market situation here is, for example, whether to continue a buy and hold strategy. Such would depend on the stability of another signal that you were watching, say the moves in interest rates or foreign exchange. Or perhaps you have a position in a stock, and you wish to measure its strength relative to the market, triggering investigation or action when it goes outside of the window. All quality control actions where no-action is taken as long as the output is within control bands would seem to be of this nature.

The next set of op-amp applications seeks to find the peak or minimum voltage of the input. Such a circuit usually requires two components , a diode and a capacitor in a negative feedback configuration. and allows for constantly changing levels of the high and low. The usual application would be to see if you are nearing the breakdown level of the input or output you are controlling. Is the noise too loud, or the pressure being applied to the output above the breaking strength of the material?

Applications where the market is constantly monitored require more effort in markets also. When you are going to buy or sell would often be effected by whether the highs or lows keep going in the same direction. or whether a previous level has been broken by the current high or low. Indeed, the entire basis of pivot or swing trading would seem to be subsumed by peak detectors.

Other applications of op-amps relate to the creation of oscillators where an output is created that stays within a cyclical pattern, as long as the input signal is within certain bands. That would lead to the whole subject of cyclical moves in the markets, how individual cumulative changes in the input should be amplified, what frequency of individual time intervals would be considered, and the levels from peak to low that would be allowed to happen?

Another set of op-amp applications is based on the instrumentation amplified, which is used to detect signals that are very attenuated or subjected to noise. This is used to detect and amplify the true signal and eliminate the random component. Such configurations are a bit more involved in electronics, often requiring three or more op-amps before actions would be taken.

The market applications would involve more complicated procedures such as to consider the moves in markets that are not based on ephemeral factors such as economic announcements, or hyping by brokerages. Or perhaps the idea would be to eliminate all moves in an average that are caused by a individual component that goes above or beyond a peak level of 10% or so? The applications here are move involved and sophisticated, limited only by one's imagination, and as in the case of the instrumentation amplifier, require the monitoring of several different inputs.

The extent of op-amp applications is endless. Indeed, many programs have been developed to show the output that can be developed if various components of varying magnitudes, are connected to the input and output. A random simulation of what might happen by starting with some of the usual electronic components such as resistors, inductors, capacitors, diodes, transistors, switches, lasers, etc. might be of interest to the electronics engineer. In turn, the study of the uses of op-amp circuits that have been used by engineers in practice and that cover almost all digital and analogue configuration would be inspiring and fruitful to the market engineer.

These are just preliminary thoughts, but the subject seemed rich enough to put up in order to gain feedback both positive and negative, so that our knowledge can be improved upon.

Jeff Sasmor comments:

The history of op-amps stretches back to the time of vacuum tubes and analog computers. Today's digital computers use the binary number system to represent quantized, discrete-time values; analog computers used voltages and current to represent continuous voltage and time along with math operations (hence 'operational') like addition, subtraction, integration, etc. When I first started in electronics (around the time when Fred Flintstone was still listening to his avian record-player) op-amps were just transitioning from modules a few square inches in size (containing discrete components such as transistors and resistors 'potted' in epoxy) to inexpensive integrated circuits like the infamous uA741 from Fairchild Semi-conductor. It was cheap in price and lousy in performance. Audio ciruits created with 741's were disdained by audio folks as Pieces of $%*&.

It is no stretch for any googler to find interesting and informative articles on analog computers or op-amps.

One informative statement that I found was:

The similarity between linear mechanical components, such as springs and dashpots, and electrical components, such as capacitors, inductors, and resistors is striking in terms of mathematics, or even as it were direct mapping as in simulation. They can be modeled using equations that are of in essence the same form. Other methods include direct observation without the aid of mathematical operations. For example, water pressure can be simulated by voltage and water flow in terms of gallons per minute can be simulated by amperes. [read more]

I agree with what the Chair has said regarding similarities between electrical circuits and markets; I recall this subject has come up before. In June '06 there was a thread about Hysteresis - part of my comment is appended to the end of this post.

One of the interesting differences between op-amps was a parameter called slew-rate. It is the speed at which an op-amp circuit can move from one voltage level to another. Audio designers (such as myself at one point) usually went for the higher slew rate op-amps (when we could convince my boss Richard at Eventide Clockworks to spend the extra pennies) due to their reduction in distortion — they could follow the high-frequency waveforms with greater accuracy.

I have been playing around with the notion of price-change slew rates — how to quantify them and how to interpret them. I have been writing some Tradestation code in this vein, for example, there seems (to me) to be a big difference in how to react to a slow-moving intraday change in price as opposed to a fast-moving one.

Fast-moving price changes tend to overshoot major price points like whole-dollar amounts (also .5 and .25), anecdotally I see more overshoot (or undershoot) for faster-moving price than slower. It seems to create larger retracements (or bounces). Apologies for hand-waving here … but the analogy to electrical circuits is very apt and fits my intuition. Fast slew-rate in op-amps allows the output to more closely follow the input but also adds overshoot and undershoot (distortion) effects that the designer needs to control.

From 6/06:

I suppose you could somehow model the universe of all markets as a very complicated electrical circuit. Certainly the money flow into and out of various securities can be considered to be an alternating current (of money).

There is probably a relation between futures and their underlying; they could probably be modeled as capacitors and inductors. Futures as capacitors because the current (money) leads the voltage (price) in phase (time) and stocks (commodities, etc) as inductors because the price (voltage) leads the current (money) in phase. That may sound weird, just think about it a bit.

The reactance of the overall market is thence a complex function; actually, a time-varying complex function (even worse). Push/pull a lot of current (money) in/out of it and the voltage (price) reacts accordingly. I think that this applies to an individual component of the overall market, like the stock market. Overshoot and undershoot from step functions in price (gaps) help a lot of people make money every day.

Jim Sogi mentions:

Speaking of amplifiers, an electric guitar sounds best through vacuum tube amplifiers. One of the best amps is a 1972 Fender Pro Reverb which is known as a "vintage amp" based on technology that was popular during the 2nd World War. In fact it is hard to get vacuum tubes now except in places like Russia, China and Slovakia where they must still use them for other purposes as well as playing rock and roll music. Another great amp is a new version of the old amps.

Tube amps are an endless topic of discussion among guitarists seeking the perfect tone. What goes on in the amps is not well understood and has a degree of mysticism involved. It is not well understood what is going on inside the vacuum tubes as they glow and hum with an eerie glow as power surges through the ether. Some time in the early 1970s CBS bought out Fender and in an attempt to improve the circuits made modifications which made them sound worse. Now the older pre-modification amps are prized for their tone and amps are routinely returned to the older specs before the "improvements" . I sent my 34 year old amp to Kendrick in Texas who completely rebuilt my amp to the old specs and now its sounds better than ever.

The tone of the amp when playing a guitar is based on the fact that the amps have a clean sound, a distortion/overdrive mode, and a feedback mode. The clean sound is the country sound, Chet Atkins. Distortion over drive is used by Blues guitarists like BB King, Stevie Ray Vaughn to give a warmer tone. Feedback is the sounds of Jimi Hendrix. This article has a good discussion and some quantitative specs on the balance of inputs and tone which might apply well to market input and volatility and tone. The excerpt below discusses the effect of increasing supply on the market dynamics. The vintage tube amps had a balance of dampening and power transformers dual stage amplification that allowed versatile tone, clean sounds, overdrive and feedback all in one amp.

As applied to markets in line with Chair's idea, the Fed model is a power supply idea basically. Other sources of power input might be the bond market, money supply, foreign buying, internal buying, insider buying, payrolls, buybacks, productivity gains, crude price increases, real estate increases, interest declines. The dampening provided by resistors are the market mechanisms and rules, and the market makers themselves. When the resistance is overcome by input a feedback loop generates.

Markets have tones. The clean tone is the average daily range with partial oscillations within the day. The overdrive distortion tone are the days with expanding intraday ranges or swing within the day that are as great as the daily range and rougher sine wave oscillations comparable to those of distorted guitar sounds. Feedback days are the days like last week where the tone outputting circled back to the input and buying began more buying driving the market up into new highs. From a quantitative view point, the market tone set early in the day seems to set the rhythm and tone for the day and the market player seem to play along like a band in a jam session.

Feed back in guitars, when controlled can sound good, but for vocal microphones it is bad. Often the acoustics of the room affect feedback loops and you only hear feedback in certain frequencies, usually the higher frequencies. The same seems to be true in the markets. The acoustics of the market tend to encourage feedback at the high price ranges. A noticeable number of the large traders seek confirmation and momentum, and pile in on new highs in strength. While these are descriptive, prediction is difficult, but as with guitar playing after hours and weeks and years of practice these ephemeral conditions can be harnessed through feel to create good tones and music. There are some digital signal processing algorithms that have been applied to markets in various ways and may provide a good basis for testing.

Kashi Vishwanath comments:

Victor mentions "…the same general …regularities" between seemingly disparate fields. I couldn't resist bringing up Christopher Alexander's wonderful A Pattern Language and Danny Hillis's The Pattern on the Stone. The former is about universal architecture principles followed (at some level of the (un)conscious) by people of disparate cultures around the world and over the eons. The latter is on principles of software and computer engineering by one that has been at the cutting edge of that field. Written well after the former and obviously very influenced by it, Danny comments with fluency and erudition on how patterns and themes in software engineering are alike to those mentioned in Chris Alexander's treatises. Fascinating reads, both.

Gary Rogan adds:

One of the most interesting things about how op-amps are used is that a powerful, yet extremely variable component is converted by relatively simple means into a much less powerful, but much more precise one. Op-amps by their very nature have very high amplification, but the absolute magnitude of it is not well controlled: for a particular type it could vary from, say, 20,000 to 70,000 (and I am not even going to get into their "frequency response" problems). However, if you surround them by two resistors which are easy to make precise, but are obviously not "powerful" in any meaningful sense, you can get a circuit that amplifies by a relatively small factor, like 10, with a degree of precision limited pretty much only by the precision of those resistors, thus .2% is fairly easily achievable given .1% resistors, and with a frequency response so high and relatively more predictable that you often do not have to worry about it. There has got to be a general lesson about taming powerful forces in there.

Interestingly, the triumph of digital technologies over analog techniques (as in digital computers replacing analog ones that used to use op amps) is more of the same. We give up even more of the raw capabilities of the underlying circuits to switch fast to have them switch precisely and between only two levels, 0 and 1.

What is the unifying theme? Predictability. It's worth a very high price.

On another note, the non-intuitive idea that I should magnify my response and gain precision by adding dampening is a key feature of the nervous system. Our brains are full of inhibitory feed-back circuits, and cases of parallel inhibitory circuits to stimulatory ones.

The retina, for example, performs a huge amount of edge-detection by itself before the information even enters the brain. The photo receptors are stimulatory, and synapse on several inter-neurons, one type of which are horizontal cells, which are inhibitory, passing an inhibitory signal to regions nearby. These inter-neuron layers propagate forward to the final output of the retina, the retinal ganglion cell. The response of a cell is a classic center-surround field. where light in the center of a cell's receptive field stimulates the cell, and light off-center inhibits it. If you record from these cells, and throw the stimulus response patterns across the retina up on a screen, you see gross representations of the edges of the image.

Parkinson's in the motor system is a classic case of the inhibitory system being impaired, and throwing off precision.

The implications for trading systems are clear. One can sharpen one's responses to a trading stimulus by looking for ways you should inhibit the response, perhaps using orthogonal information, or looking for cases of negative correlation. I've long thought that that would be a great way to hone a trading system. We spend so much time looking for ways things are correlated with each other, but perhaps we can build a more precise system by adding in non-correlated or negatively correlated information. I'm sure there are very smart people, probably on this list, who are already doing this and are telling me to keep it down.



The good Lord gave you a body that can stand most anything. It's your mind you have to convince. — Vince Lombardi

When you get older you think you have pretty much seen everything, heard everything and discussed all you need to discuss and then you come across a story that makes you just have to sit back, open your mouth and say "Wow". This evening was such a time.

I witnessed the greatest display of courage and character that I have ever seen, or heard of in my entire life. Today I saw a short documentary of Terry Fox. Unless you are a Canadian citizen or a cancer survivor chances are you have never heard of Terry Fox.

Terrance Stanley "Terry" Fox, CC (July 28, 1958 - June 28, 1981) was a Canadian humanitarian, athlete, and cancer treatment activist. He became famous for his Marathon of Hope, a cross-Canada run to raise money for cancer research, running with only one leg. He is considered one of Canada's greatest heroes of the 20th Century and is celebrated internationally every September as people participate in the 'Terry Fox Run', the world's largest one-day fundraiser for cancer research.

Terry was born in 1958 in Winnipeg, Man. A few years later his family moved to Port Coquitlam, B.C. As a kid, Terry was always enthusiastic about sports, even when he was the worst player on his Grade 8 basketball team. A teacher encouraged him to go out for cross-country running, a sport in which he had little interest. But Fox was determined to be better and to please his coach.

Terry Fox was 18 years old when he was diagnosed with osteogenic sarcoma (bone cancer). At that time, a common treatment for this type of cancer was amputation and Terry had his right leg removed six inches above his knee. It was also during this time that he became determined to do something to prevent people from going through what he did. Terry decided he wanted to help find a cure for cancer.

Knowing that cancer research was severely under-funded in Canada, Terry decided to run across the country to raise money, and awareness, for cancer research. He called his journey the Marathon of Hope.

When he began training, he kept his dream a secret. He told his family he was training for the Vancouver Marathon. The beginning was tough. He spent most of his time falling down and picking himself off the floor. He kept going, though, and after more than a year, and over 4,800 kilometres of running, he announced his plans to his family. He said his goal was to collect $1 for every person living in the country - at the time Canada had a population of about 24 million.

With fierce determination, Terry started his fund raising journey on April 12, 1980 in St John's, Newfoundland. Terry ran 42 kilometres (26 miles) every day for 143 days but was forced to stop running in Thunder Bay, Ontario when Terry began to notice chest pains. That amounted to 3339 miles total.

Terry was sent to a hospital in B.C. where doctors discovered the source of his chest pains: cancer had spread to his lungs. The Marathon of Hope would have to go on without him. In the months that followed, donations kept coming.

By February, 1981 Terry's wish of raising one dollar from every Canadian was realized - the Marathon of Hope fund totalled $24.17 million.

Terry died of cancer in June, 1981 at age 22.

The most important legacy of Terry Fox has to be the hundreds of millions of dollars raised for cancer research by him and in his name. Part of the research has gone into improving treatments including that of the cancer that ultimately killed Fox. Children who now are diagnosed with osteosarcoma will rarely have amputations, and their lifespans have been greatly increased.

The other lasting legacy of Terry Fox has been the creation of an annual international charity run that raises money for cancer research. The Terry Fox Run was established a few years after his death and has raised hundreds of millions around the world.

On March 14, 2005, Terry Fox became the first Canadian whose image has appeared on a general-circulation Canadian coin. He is pictured on the reverse of the Terry Fox commemorative $1 coin, wearing his Marathon of Hope T-shirt. The detail on his face shows his determination and anguish as he ran the equivalent of a full marathon daily. The Queen occupies her usual place on the other side of the coin. By September 2005, an estimated 20 million of the coins had been produced.

In summary, if you ever have a dream which may be on a grand scale but are afraid to go beyond the discussion stage, think on Terry Fox and realize that nothing is impossible to those who have the dream, the desire and the commitment to see it through.



One important conclusion is that the more differentiated a product is, and therefore less competition it has to contend with, the greater that company's profit margins.

I think Citigroup's position on the list of Dow companies ordered by profit margin belies this theory — there is nothing more commodified than borrowing and lending, since money is the most fungible commodity around (pretty much by definition; if another good was a better means of exchange, we would use it as money instead). Perhaps returns on capital would be a better indicator of differentiated products, since returns on capital measure how high returns would be for a competitor, if this competitor could do everything the given company does?

I think the theory is basically right, but if it is not expanded to deal with cost-of-capital and return-on-capital, it is going to lead to errors when applied to industries with unusual ratios of sales to assets.



Private military contractors are war zone speculators and the new book from Robert Young Pelton gives an enjoyable glimpse into the history, formation and daily activities of these contractor companies.

Licensed to Kill does not go too deep and bore the reader but rather makes the most of Pelton's vast contacts and personal stories from operating in various war zones. His balanced writings give him access to the major players in the industry which allows him coverage that other writers cannot match.

The book opens up with an email which was circulated amongst contractors that summarizes their outlook and reasoning for such a job.

One investment theme that I continue to pursue is the government contracting out of infrastructure to private companies, and I felt the book was a great insight into the beneficiaries in global security infrastructure. Countless examples are given of the military being replaced for non offensive duties by fewer and more highly skilled contractors in a trend that gains momentum.

An important theme throughout the book is the difference between a mercenary operation and security contractors. The line is occasionally blurred but the greatest distinction is that mercenaries conduct offensive duties and security contractors only act defensively. Discussed in this regard are the Sandline affair and the failed coup attempt in Equatorial Guinea by former Executive Outcomes personnel

A few of the contractor companies mentioned in the book are Blackwater USA, Triple Canopy, and SCG International. Some offer interesting emails which update and assess the security situation around the globe as well. I am a big fan of anything Pelton puts out and if anyone has further interest in his works you can check his webpage.

Peacekeeping is a growth area for the contractors, and the President of Blackwater states in the book that, "We are going to field a brigade-sized peacekeeping force. You can quote me on that."

For instance in regards to Darfur, Blackwater's President elaborates that, "We are turning a CASA 212 into a gunship that would cruise around at thirty-eight degrees…and when we find the bad guys, we would lay into them." The Director of Business Development then followed up to say, "Yeah, Janjaweed be gone!"

One effect of market forces upon the contractors is the cost of an armored drive from Baghdad's Airport to the Green Zone along Route Irish. Pelton reported in July that the price of an airport run is as low as $1500, down from upwards of $20,000….but this is one expense not to skimp on! Perhaps the run is simply getting safer but I imagine that competition plays the largest part in the price drop.

In regard to everchanging cycles, it is also noted that suicide bombers would approach the convoy initially from the rear until the convoy gunners learned and would shoot anything that came close. To adjust, the bombers would slow down from the front and when that failed to consistently work, they began to drive from the opposite direction and over the median into the convoy. All that in addition to roadside IEDs makes for a lot of uncertainty.

Also, a useful technique that Pelton observed during training for new contractors at Blackwater was the role reversal where the trainees would act as terrorists assaulting a convoy and the instructors would act as the convoy. This enabled the trainees to get into the mind of their enemy and probe for weak spots which were fully exploited. In the markets, how many price takers fully understand how price makers operate? Very few in my opinion.

Yishen Kuik adds:

Oddly enough, all of the points in Mr. Carlson's post are directly applicable to aficionados of team based first person shooting PC games like Day of Defeat. Someone who has played the Axis team on a given map becomes much more effective when playing the Allied team. Hiding spots, ambush points become clearer.

On changing cycles — an Axis sniper in a church tower can rack up kills, but will also eventually draw enemy fire. A skilled player knows when to move on to the next spot, for soon the tower will be strafed with machine gun fire and rockets. This also has parallels to fixed systems. The market will adapt and take you out.

When such an ambush point becomes 'hot', enemy forces will continue to deliver precautionary fire on it, regardless of whether anyone is there or not. It then becomes a very dangerous spot to be near - this is the trough of the cycle.

However, again very much like markets, if the church tower is left unoccupied for a long enough time, the enemy's wariness of it slowly diminishes, and the skilled sniper knows when the time is right to re-occupy it.

In fact, very good players make it a point to cycle between ambush points, leaving just before the previous point draws fire, moving onto a new point and then returning to the old point once it "cools" down.

First person team shooters are a wonderful laboratory of group dynamics. I've seen the above cycles again and again over hundreds of games.



I am studying nothing. But that does not mean I am not studying anything! In fact I am reading Nothing That Is, A Natural History of Zero by Robert Kaplan about the development of the mathematical symbol zero, one of the most important advances in math.

There are more ideas or concepts than there are words to express them. The Hawaiian language for example has concepts that do not exist in English. There are concepts that have not yet been articulated clearly. The development of science and math is the development of new ideas and concepts that had not been thought of before, such as calculus, limits, asymptotes, statistics, the law of large numbers and laws of convergence and probability. Great discoveries in science by Copernicus, Galileo, Einstein, Laplace and Galton among others, allowed man to make computations and models that had practical applications. In politics also, ideas of freedom and democracy and equality have resulted in huge changes.

Fibonacci's book mainly concerned trade and divisions of profits among partners and the calculations of interest. These appeared in the same book as his popularized sequence. He was one of the first European adopters of Indian figures or Arabic numbers and explained in detail how to do the computations. It was required reading for business school back in the middle ages.

Why did the Greeks and Romans never have the number zero? Where did the symbol first arise? The Sumerian's cuneiform numbers first used the idea of a place holder, but it was the Indians who first properly conceptualized, used and symbolized the zero. The metaphysical tradition made the Hindus peculiarly well suited to invent the concept, and thus they had a symbol to signify both nothing and large numbers in different contexts.

How did this come to be that the same symbol has two very different uses? Consider that the oldest verbs such as to be, are classified as one verb, but the conjugation I am, he is, they are, are so different that they are actually different concepts lumped together by a modern English teacher rather than a philosopher. The existence of self, and the awareness of others is epistemologically a completely distinct function. So too is the use of the zero as a place keeper and as the symbol for nothing. Conceptually it is difficult to have a word for nothing.

In markets we are all looking for the next big thing that will help us decipher the markets. It might be a quantitative model or even an new breakthrough in mathematics that sheds a new understanding of the market functions. Numbers are changing now. Rather than use names like googolplex, or 10 million we use notation such as 1e-08 from computer notation. Recent developments in probability and computational math are constantly pushing the thresholds of our abilities to perceive and understand the data in the markets. Mathematical models allow accurate quantification of the relationships, the changes occurring second to second, faster than the mind can comprehend. These models give the mind added powers of huge memory, speeding complex calculations on huge incoming data streams, just the counters on sand boards doing Arabic computations with a zero, enabling faster and more complex computation had an advantage in commerce and business over those using their fingers or beads or the eye to count, those with the fastest, best, most powerful tools in the markets will have the advantage over the slow moving, over the old technology, over the backward looking, over the mechanical, the non adaptive, or the dogmatic. No man, no matter how smart, can absorb all that is presented or can compete with the power, speed and unflagging attention of the computers.

Taking for granted as fixed current financial, mathematical, political systems stultifies the mind. The ideas that language, math, the political system, the social system, the financial systems are status quo and locked in place or that they have always been like that or always will be, leads to dangerous complacency. Looking back at the amazing discoveries in science and math and the benefits flowing gives hope that things as we have them now can be changed and give way to newer and better discoveries that will push the boundaries of human thought and comprehension and bring profit and enjoyment to those who do it. It also helps to know the weaknesses and limitations of our current systems so as to better understand risk. Risk is in part based on the financial structure as it has pieced itself together. Past failures give clues. But the continued ever upward spiral is most apparent. There is no plan, and no one can control or regulate the development and growth of the financial system. Profits are to be made at the ragged edges, by pushing the envelope, and perhaps doing some counting on the back of the envelope on the way.



In reference to recent posts, one cannot explain the world war of 1914 without reference to the literal rage for empire among the English, French, Belgians, Dutch, Italians and the peoples of both German-speaking empires. None of the governments or popular majorities questioned the right of Europeans to carve up ownership of the rest of planet in the name of the White Man's (NB: not Woman's) Burden. The greatest public gathering in England between the observance of the death of Queen Victoria and the coronation of Elizabeth I was the spontaneous celebration for the relief of Ladysmith - a town where the imperial forces were under siege for 118 days during the Anglo-Boer War which, as Churchill addicts know, was also the central event in his young life. The notion of free trade was considered a quaint relic of a prior age when "uneducated" (sic) people failed to understand the essential role of government in the conduct of economic affairs (Marshall wrote something like that, but I cannot find the exact cite for it right now.) Keynes may have questioned the weight of reparations from the Treaty of Versailles, but he had no doubt about the justice of the French, English, and Italians taking over the German colonies or the importance of Empire for its own sake.



Venture Capitalists' Pay Is Better Than Their Returns, WSJ Says

Sept. 14 (Bloomberg) — Returns on venture capital may have been poor of late, but the salaries and bonuses enjoyed by executives of venture firms are still gratifying, the Wall Street Journal said in its "Tracking the Numbers" column.

Here's the fee menu:

I wonder what the menu of a fund-of-private-equity-funds would look like?



The movement of prices relative to the high and low of the day has always struck me as highly non-random. Holbrook Working had a test for the range of prices using the individual tick moves and the number of transactions — based on a simulation.

I believe the gist of the problem is more that the market moves a lot to generate trades, and the ranges are much higher than they should be considering where they end up. I also think that a test based on this ecological fact would be more to the point. I would be interested in ideas as to how to illumine this phenomenon for its relevance to natural philosophy and profits.

S P Z 6   - -   S & P   5 0 0   F U T U R E

  DATE   OPEN     HIGH     LOW      CLOSE

 T  9/14 1326.70  1329.80  1324.70  1329.40
 W  9/13 1323.40  1331.90  1322.60  1329.10
 T  9/12 1313.50  1326.00  1313.30  1325.10
 M  9/11 1306.10  1314.60  1302.70  1311.60

 F  9/ 8 1308.90  1312.30  1306.30  1310.50
 T  9/ 7 1308.70  1313.70  1304.00  1307.40
 W  9/ 6 1319.70  1320.10  1312.20  1314.00
 T  9/ 5 1324.30  1327.50  1321.70  1326.00
 M  9/ 4 

 F  9/ 1 1321.10  1325.00  1318.00  1324.00
 T  8/31 1317.80  1319.50  1316.00  1316.90
 W  8/30 1317.00  1319.80  1315.50  1316.40
 T  8/29 1315.30  1318.50  1309.50  1316.50
 M  8/28 1307.70  1318.50  1307.30  1315.10



One of the problems that I see repeatedly in my work is the confusion over probability regarding a single event, vs. the probability of a sequence or continuum of events. A good example would be Steve Irwin's show stopping stunts, or a question recently posed to us by one of our clients regarding mining safety, or trading, or the topic of this morning's coffee … which was bicycle commuting. Although most people can easily think in terms of probability for a single event (e.g. there is a 50% chance of the roulette wheel hitting black or a .00000001% probability of being hit by a car on my commute) they have a difficult time integrating this probability over a long period of continuous exposure. To do that you have to do a Pulaski/Feynman "invert, always invert" and look at the probability of an event not happening given a certain long period of continuous exposure. Continuing with the bicycling analogy, as long as bikes and cars are sharing the road, and given some basic newtonian physics (F=ma), the mass differential between a car and a human on a bicycle, there is a finite, albeit low probability (lets say 1e-08?) of being hit by a car and getting killed as it goes past you. No matter the speed limit, size of bike lane, cell phone laws etc, there is a chance you will get mowed down from behind, as a good friend of mine found out last year (he survived, barely).

So lets say your exposure is 1e-08 to any one car, and 100 cars pass you on your commute. The probability of being hit by a car for the total exposure must be evaluated by looking at the probability of surviving which can be approximated by (1.0-[1e-08])^100. Which means that for that exposure you have a .999999 probability of survival or a 1e-06 probability of getting hit. This can be expanded for longer and longer periods of exposure. Lets stick with a single event probability of 1e-08 for now, and 100 cars per commute to keep it simple.

1 commute, 1-e06 (.0001%)
10 commutes 1e-05 (.001%)
100 commutes 1e-04 (0.01%)
1000 commutes 1e-03 (0.1%)
10000 commutes 1e-02 (1%)
100000 commutes 1e-01 (10%)

The point is that any one ride is not that risky, but if you look at the risk for longer and longer time periods or more and more continuous exposure the behavior can start to look a bit risky.

This gets back to Steve Irwin, why people should wear their seat belts, and why when you get the 30 year term life insurance there are three pages of fine print about what behaviors are not covered. What can seem responsible behavior for a single event can start to look a bit dangerous given a long enough exposure to the hazard. This is where the media tends to fall down when reporting on things like Steve Irwin's unfortunate incident.

Recently we were examining a mining safety situation and looking at PDI (prob. of individual death) and PDG,n (probability of death for a group of size n). There are no mining industry standards, but some general ranges that are well accepted. Generally PDIs for a one year exposure of less than 3e-05 are considered 'low' risk, 3e-05 to 1e-03 'moderate' risk and anything above 1e-03 'high' risk. People's risk acceptance however tends to vary between voluntary (surfing) and involuntary (my job) tasks. For example when we looked at traffic safety records for the highway between Safford Arizona and the mine at Morenci, we found PDI's (based on miles traveled annually commuting to/from home/work) between 2e-04 and 6e-04. A panel, of which I was a member, could not find any job related position at the mine which had a PDI exceeding 3e-05. Yet both regulatory personnel and the workers considered working "more dangerous" than commuting.

How this relates back to the market is that the markets are in many ways a "perfect trap" for the fund investing public to make poor risk taking decisions over long time horizons. You have relatively low barriers to entry which results in a high level of competition, ever changing cycles which makes it hard to predict long term effectiveness of strategies, and a lack of control which lends itself to an involuntary risk perception. This is a long winded way of saying "stay out of the switches" and focus on the longer term but that is why I think passive index funds are so valuable to the layperson investing for long term horizons … because they allow anyone with a bit of math background to estimate risk in a quantitative fashion, which then allows one to set their own risk levels and create a portfolio that meets their long term goals.



I have never noodled. However, I possess some qualifications to speak on this subject:

1. I am from Missouri

2. Half my relatives still live in homes with wheels

3. My relatives and friends go noodling

4. I am bi-lingual. I can speak their language. I can speak English and "white trash"

5. I grew up in a WT neighborhood. Basically, I am "escaped white trash"

6. If I had not escaped, I would have been expelled from the WT neighborhood as my IQ is on the wrong side of the bell curve

Therefore, when it comes to noodling, I will say the following:

Snapping turtles.

If that does not get your attention try this:


It is like playing Russian Roulette with a much more painful ending. On top of that …

Catfish have big nasty mean spikes on their bodies that hurt real real bad when they stick you. I am not talking about a little pain. I am talking about a pain that will alter how you walk for the next few days.

And while you are at it, lets add alcohol to the mix. It is a necessity. You need something to numb the pain of the having your arm torn up from the elbow down, and to get up the nerve to dive down underwater and swim up into a log or into a hole in the bank (still under water) and stick you arm into a catfishes mouth, grab his gills and then try to pull it out without getting tangled up on something, getting your hand irretrievably stuck in the fish, or having the fish win the battle. Think about it. If you grab a 30 pound catfish, remember, you are in his environment. He is P.O.'d and he is going to try to go deep, while you are trying to get up for air. Many a white trash funeral has as its impetus a dude in a wife beater shirt that lost a battle to a catfish.

But wait … there is more!

Hopefully you will not stumble onto a nest of water moccasins or copperheads. There is nothing that says fun like grabbing onto the gills of a big catfish only to discover that you just stuck your hands into the mouth of a 70 pound snapping turtle that will not let go, while at the same time disturbing a nest of water moccasins, while you struggle to not scream, while trying to get to surface to breath all while being swarmed by snakes …

YEEEEEE HAAAWWWWW. Man that is fun!

And most of the guys who die each year (and there are always some), all die saying those famous last words of all white trash……"Hey everybody, watch this!"

Even Steve Irwin did not noodle!



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

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

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

Rod Fitzsimmons Frey adds:

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

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

Not quantitative, unfortunately, but relevant to market activities.

C. Kin comments:

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

Vince Fulco mentions:

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

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

Jeff Rollert adds:

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

Steve Leslie says:

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

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

Kashi Vishwanath mentions:

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

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

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

Jan Petter-Janssen continues on the topic:

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

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

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




Welch: HPQ's board
"dysfunctional." Like GE's
exec comp panel?



Volatility of stock returns has declined markedly after the onset of Iraq II in March 2003. The price stability of the current period has been compared to the mid 1990's, as well as the event horizon at the edge of a black hole (terra no can see ya'). How stable is it?

DJIA daily returns were partitioned into non-overlapping 500 trading day (about 2 year) segments counting back from today to 1931. The standard deviation (vol.) of each segment was calculated, as was respective mean daily return.

Without giving away the entire plot, the answer is "A lot lower". The current 500 day standard deviation ranked 10th lowest out of 39 such periods. (You will get to see Hilly after the upcoming classroom scene).

Over most periods, high volatility accompanies concurrent low returns. This relationship was confirmed by regressing each 500 day period's mean daily return against the same period's standard deviation:

The regression equation is: mean return = 0.000769 - 0.0515 sd

Predictor       Coef       SE Coef      T      P
Constant       0.0007687   0.0001712   4.49   0.000
sd            -0.05150     0.01507    -3.42   0.002

S = 0.000496235   R-Sq = 24.0%   R-Sq(adj) = 21.9%

Looking further at whether the prior 500 days' standard deviation predicts the current 500 days' mean return, as usual, came up empty (slope coefficient N.S.). So it would seem that from a long-term historical perspective, current low volatility portends neither doom nor boom.

As promised, here are the dates and standard deviations of the 500 day periods, ranked low to high. One also notes the high vol. periods near the bottom, mainly around the depression, 1988 (containing 10/87), the start of WWII, and our old friend 2002:

Date        StDev.            Date        StDev.
12/23/1964    0.0050          1/15/1971     0.0084
1/23/1953     0.0054          12/9/1980     0.0087
1/16/1945     0.0057          11/20/1984    0.0090
1/19/1955     0.0057          12/23/1976    0.0093
1/21/1969     0.0059          1/20/1937     0.0094
10/12/1994    0.0060          10/29/1990    0.0096
12/16/1966    0.0063          1/22/1947     0.0097
1/9/1973      0.0065          12/1/1982     0.0101
1/3/1961      0.0066          9/16/2004     0.0109
9/11/2006     0.0066          9/20/2000     0.0116
10/3/1996     0.0066          9/28/1998     0.0116
1/9/1959      0.0070          1/20/1941     0.0127
1/22/1951     0.0074          1/2/1975      0.0129
1/20/1949     0.0074          9/20/2002     0.0140
1/15/1957     0.0075          1/19/1939     0.0167
12/15/1978    0.0078          11/4/1988     0.0175
1/19/1943     0.0079          1/23/1935     0.0214
12/28/1962    0.0082          1/14/1931     0.0218
11/13/1986    0.0082          1/11/1933     0.0312
10/20/1992    0.0082



I babysat my eight-year-old nephew Luke yesterday. We spent some time flying a kite and staring at the clouds.

Luke tended to spot the livestock in the sky: he would point out the horse, or the elephant, or the giraffe. He did spot two trucks and a train as well. I tended to see people: an old man with a hooked nose, a tennis player, a mom beside her minivan. I also found a map of Canada and a totem pole.

What was remarkable was how easy it was to point these shapes out to each other (Luke was skeptical about the map, though). Despite the obvious difficulty in following somebody's pointing finger to a single cloud, and in adopting the other person's imagination, it was usually only a couple of seconds before one would say "Yep! I see it too! Wow, an elephant!".

We did not see any head-and-shoulders, cup-and-saucers, or triple-tops. But on the walk home I thought we might as well have.



Neo is looking at a bank of computer screens. Figures scroll down the screen in columns. To the casual observer it is just gibberish. Neo is watching the matrix and a world full of life with action. I imagine being Neo watching my bank of computer screens. Figures scroll down time and sales. Its not gibberish or undecipherable numbers. The stories unfold, there is action. The 1 lot gang is always busy with random action. The 20 or the 50 lotters have certain habits. The 100-400 lot players have certain characteristics. Different groups play at different times. The 800 lot and 1000 lot guys like to chase momentum and have times they like to show up. Players have habits. I can just see the bank traders chasing the ask to fill their orders for the day. Its almost funny, but after a while staring at the screen you get to know the players. You can see them buying up surges or breakouts. You can see the shorts getting squeezed like today up at the 12-14 area or above the round on the index. When the market tanks, you can see the people panicking. You can see who is in trouble. You can see packs attacking the bid and breaking down the price until it crumbles. You can see the bottoms break and the dams breaking. You can see bridges being built. You see ephemeral ideas take hold like yesterday's 9/11 dip. It is imaginary stuff making people do silly things. Then you see the order flow move to the ask and the market changes direction. Its so fascinating, except when you become the hunted. Then its no fun…until the table turns again. What a world! The Matrix.

Some quotations from the movie that may be relevant to speculating …

Trinity: The answer is out there, Neo, and it's looking for you, and it will find you if you want it to.

Spoon boy: Do not try and bend the spoon. That's impossible. Instead… only try to realize the truth.
Neo: What truth?
Spoon boy: There is no spoon.
Neo: There is no spoon?
Spoon boy: Then you'll see, that it is not the spoon that bends, it is only yourself.

Morpheus: This is your last chance. After this, there is no turning back. You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes.

Agent Smith: Never send a human to do a machine's job.

Morpheus: Throughout human history, we have been dependent on machines to survive. Fate, it seems, is not without a sense of irony.



Conversation over a rollicking summer BBQ tends to magnify one's perceived abilities, especially when challenges of a physical nature are issued by the opposite gender. Somehow, the fact that I run a few miles every morning was transmogrified by my wife into my ability to swim a mile for charity, which does not sound too bad until they tell you it is out and back into the Pacific. As in swim 1/2 a mile out where all the big fish are, then high tail it back in. But no worries as it is a big event and there will be lots of swimmers in the water so the likelihood of sharks is very low. Safety seemingly assured, I plunged.

To prepare for the event, my runs were exchanged for a few days each week in the local pool, eventually building up to a mile. I learned the importance of rhythm and breathing and built a nice system tailored to my style. Stroke, stroke, stroke, breathe. Despite or perhaps because of no prior swimming experience, I made quick strides in getting up to the full distance. Paper trading like a champ, I began to envision a fast start and low time.

Heat 2 of the 77th annual Oceanside Pier Swim lined up on the cool sand at 8:45 AM. The surf was flat, but lifeguards watching Heat 1 advised of a strong drift south so the main pack started about 300 yards north of the pier with instructions to swim straight out and let the drift bring us back around. "But you're all experienced enough to know that," chuckled the lifeguard. I didn't get the joke until much later.

The horn sounded and around 150 open water vets sprinted into the water. Years of surfing provided an edge in getting out past the breakers ahead of the pack, but the early dash caught me out of breath as an unexpectedly large set rolled in just after our initial clearing. After fighting through the choppy monsters, I found myself sitting near the front but gassed from the effort.

Flipping over to do a little light backstroke and catch my breath, I was nearly mowed down by a churning mass of determined swimmers who had also just passed through the surf and were steaming out to sea like they just left port. Stroke, stroke, stroke, breathe went out the window as panicked reality was more like stroke, breathe, stroke, breathe, breathe, stroke, gasp, choke, swallow, stroke, breathe. Regularity turned Brownian in a hurry but what really scared the Hades out of me was the way the ocean looks through swim goggles.

In the pool, the crystal blue water provides a superb lens through which one can navigate lanes, lengths and laps. In the ocean, limited visibility magnifies the unknown. Terrifyingly long tentacles of kelp strain to wrap themselves around you and mysterious dark shadows cruise the murky bottom. It's like swimming across the top of a teeming rain forest. Gripped by fear, I chucked my goggles less than 200 yards into the race. CNBC had to go.

In the pool, I thought the water choppy when another swimmer was in at the same time. In the ocean, 3 foot swells quickly redefined my notion of a flat surface. At this most opportune time of embattled revelation, I became acquainted with the drift. Because I was moving slower than the field, the drift affected me more. That was good for a while, as it got me out of the grinding pack, but when I got too close to the pier, my perspective on drift changed.

Suddenly, it was like shorting a runaway bull and I had to fight my way back going 1/2 speed at triple effort to get around the outside buoy. I rounded the turn dead last, which is particularly bothersome considering everyone in my heat was wearing a neon green swim cap. We looked like bait. Discovery Channel aficionados know what happens to those who stray outside the safety of the herd.

But the turn for home was a rally point. It was like being down big all morning, only to have the market reverse and move back to breakeven. What a relief it was to be heading back. I found stroke, stroke, stroke, breathe rhythm across the swells. The drift became my friend as I plowed for shore.

Laying it all on the line as I approached the beach, I was suddenly lifted up by a breaking wave and slammed deep into the slop. Normally, I am good for about a minute under the surface. By the end of the race, I was down to about 5 seconds. Thoroughly mopped after a good thrashing on the way in, I staggered to the beach with about 1/2 oxygen, 1/2 seawater in my lungs.

Just when I thought I was out of the trade and done with the whole thing, I realized the finish line was another 100 yards up the beach through the soft sand. My kids were going nuts and the crowd was roaring so I pulled out all the stops and dashed for the line. It reminded me of chasing the ask as I try to unload a position into a dropping market. Every time I enter a limit order at the ask, the spread drops another tick and I have got to drop my limit, then it drops again. Like running in soft sand as it gives way before you.

But I finally crossed the finish line. Despite my poor performance relative to the competition, I did something I have never done before. I know I can do it again. All in all, I would say it was very much like my early days of trading futures. Reality is far different from theory. In the pool, you can always grab an edge. In the ocean, it is sink or swim.



In several of Patrick O'Brian's novels, Jack Aubrey's warship carries political officials to or from remote locations. Unlike the crew, these dignitaries are willing to directly state grievances to the captain or openly criticize the captain. In one case, Jack is told that an official has conveyed frustration with the slow passage. Aubrey asks incredulously, does this man not realize that these ships are utterly dependent on the wind?

Speculators are in a similar position. We try to profit by harnessing forces far larger than ourselves that we cannot control and that can be lethal at high intensities. Consider volatility, for example. This word has a negative connotation in the financial media. Volatility allegedly undermines the public's confidence in markets and dissuades some from participating. Consider, however, what would happen if there were no volatility. Like a sailing ship becalmed in the equatorial doldrums, using up its stores and surrounded by increasing filth generated by its crew, a speculator in a market with little or no price change can get nowhere. Such a market would become increasingly unhealthy if the lack of volatility persisted.



The beauty of Judo is that it is a very subtle sport yet a very lethal one. In fact Judo means "gentle way" in Japanese. One soon finds out that there is not much gentle about it. It is still a martial art.

Judo is an isolated sport, often a lonely one. It is just you and your opponent and the battleground is the center of a mat in full view of the audience. There are no teammates, nobody blocking for you, and nobody hitting behind you. And no excuses. Plus, you are always in direct contact with your opponent. There is literally no let up and no time outs. It is combat at the highest level. Balance, strength and explosiveness are critical skills. And you have to be constantly aware of your opponent because one misstep one false move can instantly end a match.

Judo emphasizes fighting (randori) as its main form of training. Half the combat time is spent fighting on the ground, called ne-waza and the other half standing up, called tachi-waza. Actual fighting, albeit within safety rules, is considered to be much more effective than only practicing techniques, since fighting full-strength develops the muscles and cardio-vascular system on the physical side of things, and it develops strategy and reaction time on the mental side of things.

Judo's balance between both the standing and ground phases of combat gives judoka the ability to take down opponents who are standing up and then pin and submit them on the ground. A Judoka can also force an opponent to submit through a chokehold or a joint manipulation such as an arm bar. Thus multidimensional skills are essential to develop to becoming an accomplished judoka.

The skills in being a successful Judo champion and a successful speculator are very similar. Both require a great deal of discipline, awareness, and specific mastery of skills and techniques. Plus strategy and attention to detail are prime requisites for success. In addition accountability is paramount as there is none to blame for failure than oneself. In the end it is the combat, the battle, that determines the ultimate victor. There is no statistical bias no French judge who grades the combatant lower through political favoritism. The contest is decided on the mat. And the results are final. The vanquished accepts this and validates it through a final acknowledgment of bowing to an opponent who has bested him in the arena.

Bruno Ombreux offers some similarities between Judo and speculation:

Hard work. All the skills you mentioned can only be developed through hard work and practice. Provided weights and technical levels are not too far apart, the judoka who trains 4 times a week will beat hands-down the one who trains only twice.

Successful speculation is hard work.

Bruises. Pain in a full-contact martial art as judo, goes beyond muscle ache normally associated with sport practice. Shiai - the competitive form of randori - is very intense. First degree burns on the neck, resulting from judogi friction, are common. (judoki is the outfit worn by judoka). Passing out from strangulation happens too. Broken members also. My personal souvenirs from judo are a broken nose and a permanently paralyzed big toe.

Speculation is a source of bruises in the form of losses. One has to pay his dues.

Specialization. Every judoka has a "special". This is a throw that he excels at, often because his morphology is well suited to this particular move. For instance, morote-seoi-nage, a shoulder throw, is said to be favored by smaller players, because it is easier for them to get inside and under the opponent gravity center. The judoka trains his "special" more than any other move. He is going to use it a lot in competition. The idea is to excel at one thing rather than be average at many.

This analogy with speculation needs not be explained after Chair's post on Specialization and the Division of Labor.

Focus on the wrong the methods. For years, proponents of strikes-based martial arts like karate or kick boxing, proclaimed their superiority over wrestling styles, like judo, "a mere sport for schoolchildren". This changed with the introduction of "Mixed Martial Arts" fights. Evidence surfaced that in real-life, unlike in kung-fu movies, one-on-one fights with no limiting rules most often end on the ground after the exchange of a few blows, a grapple and a throw. The most efficient fighting style was Brazilian ju-jitsu, because of its emphasis on ground combat. But judoka and wrestlers also performed very satisfactorily.

In speculation, people focus on the wrong methods, as explained again, by the Chair in the first-half of Practical Speculation. Then reality kicks in.

Impossible mastery. It is impossible to master judo. It is an endless study. That is what the "do" in ju-do stands for. It is a "way". An endless voyage whose final destination is never reached.

This one is easy. Speculation too is a "do". An endless study in which perfection is unattainable, and the best one can hope for is improvement.

Principles and tradition. The other side of judo beside combat, kata, is a codified series of moves, almost like classical ballets. The first kata focus on basic throws, on mechanics. The last kata, which are learnt by very few people, focus on entirely different things.

Itsutsu no-kata, taught to 6th dan black belts, features only 5 throws which are supposed to contain the essence of judo. Those throws do not even have a name, yet they embody the principles of judo. They are simple, fluid, beautiful.

Koshiki no kata, taught to 7th dan, is an ancient kata from the Kito-ruy school of ju-jitsu, which was attended by Jigoro Kano. It is a throwback to medieval Japan's fields of battle, a series of throws designed for combat in samurai armor. Ideally, this kata should be performed in such armors.

Who knows what Jigoro Kano meant by the inclusion of these two final kata in his curriculum? It is perhaps that, in the end, one should focus on first principles and a study of tradition.

That is not too different from the site, focusing on principles is learning how to fish, reading old books is integrating ancient wisdom.

Education. I could go on and on drawing other parallels between the site and martial art education. Teaching by showing. Use of arcane yet limpid language, "when the yellow bird sings, the sun sets on the jade mountain, little Grasshopper". err…. Too many Hong-Kong movies. Haiku and people taking their shoes off before entering the dojo…

But that's not about judo anymore and I must trade the last half hour.



After a decade of breathless hype peddling real estate to space starved New Yorkers, today's NY Times notes that, y'know, you oughta be careful in picking a pad!

… problems - like impaired views, lack of light and high maintenance or common charges - retain their repellent qualities in any slow market. Other immutable lemons include properties with extraordinary flip taxes, which may limit sellers' ability to negotiate, and buildings that don't own the ground beneath them….[read more]

I recall looking at flats in several buildings with ground leases, and upon learning about them, I just walked out.

I do not recall ever seeing a Times article warning about these risks during the upslope of the housing boom. How telling it is that this is now "newsworthy" during the press campaign to embolden buyers, not sellers, to bargain hard.

To "trend followers" I suggest adding the term "trend enablers".

keep looking »


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