By following the links in the website below for 30 minutes, I altered the shape of my eyelids and brought up fond memories of personal vision experiments. I had every common childhood vision problem — or so was told — from myopia to astigmatism to headaches. Now I have none by having taken vision matters into my own hands. I reckon the ophthalmologists of tomorrow will look back on the ones today, more so than other medical specialists, and shutter.

1. My first experiment at age 20 while keeping a nighttime schedule was to willfully transform my vision to entirely B&W for the obvious purposes of contrast, quicker recognition of movements and patterns, and faster recall (All theories that have been borne out.). Note I can see color but have no recall in it without much concentration, and have not dreamed in color for three decades.

2. Next, in the early 20s, was to begin using the right eye to sense vision on the left side of the body, and vice version. This is to increase peripheral vision via exercising different optic muscles. Unlike the other trials listed here, it's just an exercise to keep and discard as wished.

3. Next, about the same time, was to concentrate images outside the optic macula where, I believe, most people unconsciously put most of their focus. This is a big, lifelong step to enhancing vision. My theory is that much more of the retina than just the macula can be utilized as a quasi macula.

4. My favorite vision research was at about age 30 when I determined not to waste time blinking. In the first day I blinked twice while performing routine tasks and reading around home. On the second day, I had to bike to town where the noise and movement made not blinking difficult, and I dropped the experiment with the conclusion that blinking is an overreaction that can be trained to minimize.

5. Certainly the most practical alteration in my standard vision started at age 35 when I first wrote in mirror image, and a day later read the first book upside down. The mirror alphabet is easily learned in one week by practicing twice daily for 10 minutes writing the letters and numbers as in kindergarten. Reading books upside down is easier still and more sensible since they are printed left to right, and reverse when turned upside down. The goal then of mirror writing and reading upside down is to cause the print to flow the opposite direction to exercise those tiny, different eye muscles. I can name them but it would be useless unless you've dissected a mammalian eyeball. The result is a larger ego from a better backhand (for right-handed players), and maybe saving your life one day when a car makes an illegal left turn from the right.

6. Moreover, at this instant, the eyeglasses I wear have one lens while the other inside the frame is open space. I bought the original 1.25 mag reading glasses at the Goodwill for a buck, popped the lens in my better eye retaining the one in front of my other. I've used this pair of uni-lens for a month in developing 10% better eyesight.

In conclusion, and before providing the website that launched this letter, I hope that others rather than raising eyebrows will adapt some of my rebellious visual techniques to perhaps hurry along the ophthalmology history and see the improvements in our lifetimes. Here is the page that, after following the links, provided thirty minutes of informative, stimulating reading.



Similar to the Chair’s admonishment that only the house can grind, Bacon in “Secrets of Professional Turf Betting” compared speculation and the grinding out of consistent profits to a pair of attractive sisters, either of whom might suit a man’s fancy, but one sister was married. Bacon explained that the grinding out of consistent profits was already spoken for by the track operators, leaving speculation as the only feasible route to success.



SAD, By James Sogi

October 31, 2006 | Leave a Comment

Big wave season is here - both in the ocean and in the markets. Time to dust off the big wave boards.

Yesterday at Mahaiula it was 15 feet and glassy with only four of us out. We had to paddle about half a mile out to sea as the waves were big. Surfing, running, biking, sit ups, push ups, weights, stretching helps get in shape. Out on the water it was cosmic. The moon was rising above the mountains in the distance, the blue water and spin drift from the big waves filled the air and the energy was big, but the water surface was smooth clam and glassy. To line up our positions to be in the right spot for the take off not too far out, but not too close in to be crushed by the waves there are a number of things to watch. I’ve been surfing 40 years and can modestly claim to have mastered the basic skills.

1. Line up the cosmic elements by lining up the moon, the tree and the two volcanoes and lava flows. This triangulates well to give a good analog location, but isn’t enough, It would be possible to digitally locate at N 19 degrees 47.496 by 156 W02.445 the theoretically historical take off spot but you still might get creamed. There are ephemeral and random factors at work that you have to be aware of in real time. Just the stats is not enough to hit the sweet spot.

2. The waves come in sets or series of 5 or more at a time with a lull in between. Just like the waves of day bars in the market in sets of five or six, and a big day up the last few months. We use the current pattern to choose the wave and where to sit. When the first wave comes, you cannot see over the top, but you can see off in the distance a group of waves coming and position accordingly. Never take the first wave, there might a bigger one right in back you can’t see and will drill you if you take the first one. This is an execution issue. The waves come in 12-20 second periods, and the set come in 15-20 minute intervals, and these facts are counted and out in the mental plan. Specs do the same.

3. We look at the shape of the wave as it wraps over the underground rocks and coral reefs and focuses its power. It varies according to the shape and size of the swell, and varies from wave to wave and varies with the tide. This helps refine the position as the waves roll through to be in just the sweet spot where one or two paddles send you off on a 20 foot drop at high speed along the face of the wave on a two hundred yard ride as the waves explodes right behind you and curls way up three times your height above your head.

4. I watch what the other surfers are doing. If the guy on the outside, who can see beyond the next waves starts scrambling frantically, you know a big one is coming and the 3 second head start may be just enough to make it over the crest before it crushes you. In the markets our list is really helpful to stay connected with other trades. Thanks again to Chair for hosting the site and the list.

5. We watch the water currents and the drift. There is a steady trade wind pattern that we watch. I always keep an eye in the water or big sharks who frequent the area. The current pulls you deeper into the line up and if not accounted for, you will end up too deep and get caught.

S.A.D. is not season affective disorder, here it stands for Surf ‘n Dine. After surfing we go three miles up the coast to the Four Seasons at Hualalai and eat at The Grille with Alan Wong chef, Yumm and sip Mangoritas with red and yellow color tomato soup with cucumbers and wasabi . Yes, its tough. If any of you come out here, Four Seasons is the best place to stay.

Gibbons Burke relates an industry story:

There is an interesting story, and perhaps a meal or two, about Gordon “Grubby” Clark, founder of the Clark Foam company in Laguna Niguel, Calif. This innovative industry pioneer abruptly quit making surfboard “blanks” - the polyurethane core of the board - which were the industry standard and the manufacture of which he dominated the world with a 90% market share:

The article includes a fax from Mr. Clark explaining in some detail his reasons for shutting the legendary firm down:

For owning and operating Clark Foam I may be looking at very large fines, civil lawsuits, and even time in prison. I will not be saying more than is in this letter so I hope you read it carefully. I do not want to be answering questions about my decisions for the next few years. Effective immediately Clark Foam is ceasing production and sales of surfboard blanks. I would like to give a lot more details but keep in mind that I may have both fines and criminal charges pending at this time or in the future. Therefore I have been advised by my attorney to say as little as possible. I do not want this document to be used as an admission of wrongdoing nor am i going to help the government prosecute me. I do, however, feel I owe everyone some sort of explanation- even if it is incomplete and not a full disclosure of my problems…

and ending with:

When Clark Foam was started it was a far different California. Businesses like Clark Foam were very welcome and considered the leading edge of innovation and technology. Somewhere along the way things have changed. The State of California and Orange County California are trying very hard to make a clean, safe, and just home for their residents. This is commendable and I totally support their goals. It is my understanding their plan is to remove selective businesses to make way for new, better jobs that will be compatible with the improved environment. They are putting an incredible amount of resources into their effort. This is a tough job and they are doing a good job of meeting their goals. The only apology I will make to customers and employees is that I should have seen this coming many years sooner and closed years ago in a slower, more predictable manner. I waited far too long, being optimistic rather than realistic. I also failed to do my homework. What will I be doing in the near future? There is a very good chance I will spend a lot of time in courtrooms over the next few years and could go to prison. I have a tremendous cleanup expense to exit my business. I have the potential for serious fines. My full time efforts will be to extract myself from the mess that I have created for myself. In closing I want to thank everyone for their wonderful support over the years. This has been a great ride with great people. I have loved this job and the people I worked with. Thanks, Gordon Clark

Echoes of Rand-ian heros Howard Roark, John Galt and Hank Reardon, no?

Prices for the remaining unsold Clark blanks took off after this event. Has the surfboard industry recovered from the blow yet?

James Sogi says not to worry:

Talking to my shaper, there are plenty of blanks now…from Mexico. All good quality, no problemo. Gee I wonder who is making them? The market always finds a way. Always one step ahead of government. Talk about government getting into bed how about Daylight saving time as the ultimate commie plot to extract more work out of the proletariat.

An offsite discussion of option trading led to this insightful post from a frequent contributor.



The discussion of window dressing by mutual funds as of their oft October month-end fiscal years elicits one to ponder many pragmatic and philosophic subjects. i.e. the last 11 last trading days of October, the market has gone up as of the open and two days later 11 times for a nice t-stat of 4, a 100% of the time, and an expected move of 1.5%. One ponders whether runs of 11 of a seasonal nature such as this are non-random, and notes that it’s only 1/2000 for such an event to occur and there are 250 days in a year, many 1, 2, and 3 day patterns, many markets, and a direction that are free, and quickly concludes that the one event in and of itself is completely consistent with chance. But in so many cases, this has nothing to do with its predictivity because for one all such events would be well known to those who study such things, and for two it would depend on how many patterns the average market researcher looks at, and what the degree of consistency that catches his attention is, and how many other such seemingly non-random phenomena but actually consistent with chance events also exist.

On another topic, two unusual round numbers appear. The Saudi Arabia index (SASE) at 9,673 down 3% breaks below 10,000 for the first time in 18 months, (oil down another 1% to a 13 month low) and the Israeli stock market (Tel Aviv 25) goes above 900; an all time high, up 1% for the first time ever (This latter must be sent to Dimson). One hypothesizes that doomsdayists, and ghosts will concentrate on the former.



I am attempting to consider the analysis of jokes, e.g. James Lackey’s often stated “…get the joke…” as an aid to market analysis. The work of Arvo Krikman on Contemporary Linguistic Theories of Humour has been helpful. He divides this analysis into:

  1. Incongruence theories; the intersection of two different planes, incongruities, contrasts.
  2. Linguistic theories; those based on similar phonics or normal interpretations.
  3. Freudian theories; those based on the theory of the effect of humor on the recipient in allowing release.

There are many events associated with markets that make one wish to roll on the floor with laughter. The selling out at the exact low, the attempt to make a profit without risk, the guarantees of profit, the attempt to make money the usual tested way that leads to oblivion because the cycles have changed, the assurance that the fund is in great shape the day before it fails, the loss of an estate built up over 60 years with one trade, the failure by one tick to make a good profit with a limit order, the trader that calls you with a seemingly good bid or offer that you trade on right before a number or news event or earnings report terribly against you that its 99% they knew about when making the quote, the change in position based on an economic number that’s completely random, ephemeral, and certain to be revised in your favor as soon as you get out, the market move that occurs way before the news, the constantly one sided analyst who explains every event, no matter how improbable as supporting his view, the forecasters who can’t forecast, the Chinese Wall that supposedly separates the buy and sell side and advisory role of Wall Street, the constant backdrop of explanations for the market moves and reasons to extricate from positions when buy and hold would be so much more appropriate, the shooting stars and falling comets, the attempt to couch a bearish sentiment in bullish terminology, the profits that can come from disaster and the losses from triumph, the inevitable fall from the top of yesterdays superstars, the inevitable results of overconfidence, the tweaking from the recommended 60% weighting in stocks to 58%, the flimsiness of the foundation for many runups or rundowns, the executive of the public company that chisels a hundred bucks on his expense account or dating of options when his salary is $100 million a year, the investments that’s made partly for reasons that make one unpopular in the hallways of the service that you lose your entire stake on, the commentator that’s always bearish who relies on the broken clock to be right once, the fundist who hits the top when his sector finally goes his way and receives great public acclaim for it.

All this humour, and so much more, which I call upon readers to contribute, calls out for a general theory of market humour which is falsifiable and predictive, and helpful to the trading process.

I am more partial to a mathematical theory which strangely I haven’t seen, i.e. most of humor seems to be based on two events in some sort of probabilistic relation to each other- contrasts, collisions, unusual couplings, ambiguities, startling events et al. usually of a pithy nature. That’s it. When an event A given B is highly likely, P(A|B) is near 1 and B occurs and not A occurs or P(A|B) is near 0 and B occurs and A occurs, that’s usually the foundation of humor. Alternately if P(A|B) is much higher then P(A|C) and A occurs, but even though it’s much more likely that B occurred, C really occured, then that’s another Bayesian revision sort of humor. A linguistic aspect of humor typified by the bronchial joke must also be considerd. That’s the joke where a very attractive young man with a bronchial condition knocks on the door of his Dr.’s house and whispers to his very attractive young wife, “Is the doctooor in?”. “No, come right in she says”. That would be typified by P(A|C) is much higher than P(B|C). C occurs and then B occurs but not A.

J.T. Holley responds:

The one that jumps out to me is the old formula that is not defined but given as:

Tragedy + Time = Comedy/Joke

The key being what is the definition of a tragedy and equally important what is the appropriate time elapsed?

Looking at 1819, 1837, 1906, all the “Black Days” in ‘29 - ‘32, Oct. ‘87, 10/27 in ‘97, ‘98 Ruskie, the Internet Debacle ‘00-’02, one would say that we have had our tragedies. Throw in the Hunt Bro’s, Nick Leeson, and now Brian Hunter and you have more to poke at, but is it appropriate? Is the punch line the drift that the Mistress gives? It ain’t funny when you lose, especially money. The further we do get away, time has a wonderful way of healing due to our tenacity to come back. The bear camp doesn’t see the tragedies as lines in the joke; they don’t even get to laugh with giggles of resiliency?

I am so glad that I have the Holley genes that makes me have a love of peanut butter on my pancakes, and a smile on my face. This has always been thrown back at me as a sign of not being serious about life, but I can’t act or see life any other way than as Nock stated “as it is” with that smile.

Jimmy Buffet wrote the line “if we all couldn’t laugh we’d all go insane”.

I was thinking that the opposite of the formula above is also a wonderful joke the market provides if you have a sick sense of humor:

Comedy/Joke + Time = Tragedy

How many think they can trade/speculate but really haven’t any clue and submit their money to the Mistress? They give and as Vic states “lose more than they have any right”. This is the sickest of sickest jokes involving the markets due to the plethora of examples many more times than that of Tragedies listed above. Maybe that’s a key to those that have been Body Snatched? They aren’t aware of the part they play in the joke?

Sushil Kedia adds:

  1. Newspapers : All newspapers that cannot refrain from offering explanations of market moves post-facto. Particularly the electronic screen famous for its dark- back ground-orange text, despite its outstanding analytical tools.
  2. Experts: Columnists, newsletterists, bar-waitresses, friendly cabbies all espouse opinions worth only the size of their exposure to the markets. The world doesn’t want to get the joke because the formal from such ones are the experts who are selling ideas which as though would otherwise still be getting rich on their own.
  3. Margin of Safety : So bad that one holy grail is believed to be truly existent since the wealthiest of the the investors seems to have actually implemented this but nothing else.
  4. Insider trading regulation: the assumption probably supporting such expenditure of effort is that one day they will be able to or willing to put to end from where information on each thing begins! End the beginning? What’d be leftover then?
  5. Free markets: well to put the idea getting my mind for a while on this core issue finally a joke: girl fights up with her boy saying he is being much of an easy flirt. Boy laughs back saying, “Well, you are quite a believer in free sex. Aren’t you?” Girl yells red-eyed, “free sex! My foot” Boy says with a deep cold sigh, “well just tell me then what have you started charging ?”

James Sogi responds:

Humor has the element of surprise, the unexpected. That’s what the market gives, the unexpected. Its never what you might think it is, its always something else, something counterintuitive, not what you expect. And it knows ahead of time what you are going to do and sees you coming. Like the thread on the group mean, the group knows everyone’s secrets, for it is theirs. The market trains you to go the wrong way, feints, always gets you off balance. You need to be a step ahead, look over the horizon, over your shoulder. You can’t be a step behind, reactive, you have to lead and take the initiative. Following is too late. The reflexes are not fast enough to defend in the market, you have to punch first, and let the others in the market defend, and have that split second initiative advantage. On longer terms get that strategic edge moving the troops first,. Like lack says, don’t let the joke be on you. You have to beat it to the punch line. Why do you think its called the “punch” line? Just like a punch, the reaction is always slower. Got to beat the market to the punch, bob and weave, come in low. Keep your distance. Always protect yourself. It really not all that funny except in a self deprecating sort of way.

Tom Larsen replies:

While I was working as a no-advice broker, a Texan who had added several spreads to his option position, told me: “I got myself so I don’t know what I want the stock to do”. Maybe it’s funnier when I say it out loud with a drawl. In any case, it shows how people think they have a simple financial product figured out and then realize that they are in over their head. Some people who hear this are laughing at the guy who seems inferior, but thinking, “this could be me!” Or it could be reminding us to not get too cute with our positions. Don’t take on more complexity than necessary. This is probably just a variant of a common form of joke where we laugh at somebody who gets confused. Superiority humor?

While working as an option market maker in the pit, it was common for traders to deconstruct the trading day in the brokers lounge after the close. During one such conversation another market maker told me that during the day he had been so desperate that he “would have paid anything for those puts. Fortunately no one would sell them to me.” This is very deep for me, and reminds me that sometimes you can be unaware flying full speed toward disaster, and the only thing that saves you is grace. and it reminds me not to panic. This joke is probably funny because of the reversal implied as the speaker is clearly aware of his good luck. It’s like the feeling you get when you tell someone about the near collision you avoided on the freeway. There is a release, relief and relaxation at the end.

James Lackey responds:

Why did god make chartists? To make weather men look good. The mistress of the markets can make traders look so foolish at times, it is much better to laugh than to cry. Your only as good as your last trade. However, your next trade might be your last, make it a good one.

The worst market jokes are those that everyone has known for years. The market makes “you feel” like a child. You start your joke to friends: a priest, Jesse Jackson and Clinton are all on an airplane that is about to crash. Your Dad, the old man immediately chimes in and crushes your joke “only two parachutes get back to work!” They have heard them all before.

The joke is “housing is a disaster, the consumer is all tapped out” the news tape blinks Bulletin: “US Housing lowest level in 30 years.” The market immediately goes to the punch line. The old codgers come in, at the market “take it and bid it.” The time and sales boys say “my limits never get filled all size trades the offer all day, who knew?”

Perma bear brain teaser: Bond prices fall as traders sell bonds to buy relatively cheap US stocks.. .interest rates rise, consumer sentiment falls, bonds rise on slowdown fears, stocks rise due to lower interest rates and future uptick in consumer spending, bonds fall as traders sell bonds to buy stocks. Market rallies 6 weeks in a row on short covering.

We watched Yes Men last night. The movie is a Sundance comedy. A couple of jokers start a website to mock the WTO. To their delight no one actually reads the website and offers them speaking engagements. They mock “free trade” and the “government of, by and for the corporation.” Their last speech they had to regrettably cancel their presentation to Australian accountants. Their reason for a program change was the WTO was to be disbanded. The post interviews with the seminar participants was hilarious. “its great to see an organization admit their faults, scrap the program and restart from scratch.” I was laughing so hard my wife called upstairs to see if I was okay! I said yea this skit is hilarious. Now the sad joke. She says, “that is good Jimmie, that is the first time Ive heard you laugh in 6 weeks” yes Jennifer as you have heard, the markets were strait up for 6 weeks.

About two weeks into the fall rally, the headlines read Ford Motor company might go private. All the talk of how bearish and difficult SBOX is for public companies we thought, wow a double bullish whammy for the indexes. IPOs are far more difficult, the cash flow rich, no growth, dead money stocks are going private, a simple reduction in supply. All that index money must be reinvested in the market. Ill buy the next pull back. What if there is no pullback? Joke is first down move was after a huge “made in China,” bank IPO.

Speaking of Chinese stocks…Is it possible to make an ETF of Chinese stocks that are unregisterable on the NYSE, yet float the ETF as a “Chinese investment”. Oh the joke is an ETF on private equity.

The daytraders joke they are never right, why bother? The funniest joke is everyone can be right if they wait long enough. You might go broke waiting, but eventually you can be right. Funny debate between admitting your wrong or the market is right vs. your right, just too early. Of course we strive to be rich rather than right, until your rich, right?

The worst market joke. Get even post from Mr. Clive. From the Yra Harris interview….Inside the house of Money:

The worst thing you can do in a trade is try to get back to even. I call that the “prayer trade.” I can spot guys on the floor who have it on because they shake back and forth, basically in prayer, mumbling, “oh, please God, just let it come back to me. Let me break even.” What is that? Break even? That’s a loser. I’m not in this business to break even. There’s always opportunity in the markets, so forget breaking even. If breaking even is your goal, you’re not trading anymore.

Rick Foust on traders:

Here is a short one that reminds me of some trades/traders.

Question: What is an Ohno bird?

Answer: A bird with 5 inch balls and 3 inch legs. When he comes in for a landing…

Quick followup.

I have this placard on the instrument panel of my Cessna.


Craig M. shares a market truism:

The best joke of all is that the market allows you to think you actually know what you’re doing at times, and while you may profit during these times you never ‘make enough’ and when you lose it seems even worse. The actuality is that you never really knew anything in the first place.



Time is the substance from which I am made. Time is a river which carries me along, but I am the river; it is a tiger that devours me, but I am the tiger; it is a fire that consumes me, but I am the fire…Jorge Louis Borges

The majority of human beings conduct themselves as if they intend to live forever. In essence, there is no systematic or productive review of the past, no real or meaningful planning for the future and minimal learning from the present.

Sigmund Freud posited that the unconscious mind does not have a notion of time, and that our deepest needs and wants remain, for the most part, unchanged throughout life. When you think about this, it is a compelling confirmation of the saying that most people lead lives of quiet desperation and die with their song still inside of them. They don’t take time or effort to find out the words or lyrics to their song, let alone try to sing it.

Crowd or mass behavior is even more primitive and impulsive than that of any one individual, since crowds tend to pay less attention to time. An individual alone can at least be aware of time, especially,when feeling lonely or longing. In a crowd situation, there is only the moment and there is no limitation on time. It is as if whatever is happening can and will go on forever (Party like there’s no tomorrow). Eventually, the music stops; however, crowds, in the heat of the moment, have little perception of time or limitations.

Gustave LeBon, the French philosopher and politician described in “The Crowd” a collective mind-set that is completely different from what that individual would feel, think or do in isolation. Freud believed that attitudes toward group leaders stemmed from childhood feelings toward the father–some combination of trust, fear, desire for approval and imminent rebellion. Group-think of this type can be regressive and infantile to the extreme. This is part of what manifests, on a larger scale, as panic buying and panic selling.

Mass mentality is magnified in real-time virtual stock trading rooms. The perceived necessity is to be part of this crowd by saying something which the individual believes to be clever, insightful or original so that one is not invisible, but makes one’s presence felt. This type of behavior can, if not modulated and regulated, go on for very long periods of time (since crowds have no real time perception) and result in escalating behaviors as various members of the crowd struggle for dominance or simply to be heard, seen or recognized. It is noise and more noise. In order to be recognized as part of the group, individuals may resort to verbal or physical behaviors which would not be recognizable to those who know them apart from the crowd situation.

In the case of a “virtual” crowd, such as a trading room, the verbal exchanges can take on even greater intensity, since one is ( for all intents and purposes) anonymous in cyberspace. The primitive, aggressive portions of the brain overpower the newer, more developed areas of the brain, often in ways which even the individual does not believe. How many times have you heard someone say, or seen someone type “Did I really just say that?” The individual is in disbelief that he or she allowed and could not control primitive limbic impulses and deep-seated drives. “OMG…sorry, I didn’t really mean that…or..I can’t really be saying that, can I? or “What was I thinking” or “Oops, wrong room LOL.” The use of emoticons and music further cloud ,deceive and add even more cacophony and tachistoscopy.

This situation is exacerbated further by the volumes of information, disinformation, misinformation and media verbiage that assault the trader’s mind, body and spirit every day. With few exceptions, this is deception, smoke and mirrors. The rat brain (paleo/archicortex), designed for flight or fright is attuned constantly to the possibility of attack, thus highly paranoid about and vigilant for the many types of deception that are perpetrated on a daily basis in the financial markets. The rat brain reacts with fear, greed, anger, retribution, sarcasm and loathing of self and others. The new brain ( neocortex) filters the information, makes a logical decision about its importance and then responds. Sometimes, the best response is to do nothing. Great traders know when to react and when to respond and are acutely aware of the difference between reacting and responding. Great traders have learned to make the old brain and the new brain work in harmony and flow, rather than battling continually with each other.

Time and price are facts of economic life. Because ontogeny recapitulates phylogeny, people repeat behaviors and cycles repeat. Windmills of your mind are simply never ending or beginning on an ever-spinning reel. The brain is a “time machine,” assert Duke University neuroscientists Catalin Buhusi and Warren Meck. Understanding how the brain tracks time is essential to understanding all its functions. There are cycles of weather, the moon, politics, commodities, currencies, stocks, sectors. art, fashion, food and just about anything that you can imagine.

Unfortunately, the majority of traders are unable to recognize these cycles because they are blinded by noise. It is only when traders are able to separate from the noise that they achieve the clarity of mind to recognize cycles and cycle changes. One way to attempt to filter the noise and look for order in the markets is through numbers. The work of Isaac Newton (1643-1727) and Leonardo Da Vinci (1452-1519) contains interesting correlates of numbers in the markets. Newton’s Law: for every action there is an equal and opposite reaction translates to the AB=CD parallel movement pattern of Gartley. DaVinci’s Codex notebook on the Fibonacci Summation Series illustrates the ubiquitous nature of these numbers throughout the entire universe. W.D. Gann wrote extensively on time, price and pattern. Gann ( who was born in 1878 and reportedly started trading in 1902) stated that time has the strongest influence on the markets because ” when the time is up, the trend changes.” The essential premise behind Gann’s use of charts to predict price was : history repeats.

A ton of stuff has happened since 1452. The markets have become more complex, global, computerized and trade essentially 24 hours a day. The herd mentality is at work, but on a much larger and highly magnified scale. Deception is more subtle and sophisticated. Time seems compressed and trade more frenetic . It is as if the logarithmically- accelerating rate of change of technology is permeating our minds and bodies in such a way that everything is urgent, breaking news, want it now, get in and get out quickly, take the profits and run. Is time all we really have so we must grab for all the gusto and goodies now, quickly, furtively, and then start looking immediately, frantically for the next big win? It is not without coincidence that frenetic is synonymous with inflammation which underlies a huge number of human diseases, many of which fall under the general rubric of “stress.” The toll on wellness and health is enormous, since stress debilitates and kills.

Accelerating change aside, human emotions have not changed. Greed and fear are the same now as they have been from the dawn of civilization. Those who win consistently more than they lose have learned to self-regulate the forces of greed and fear. They have trained themselves to harness and respect the power of numbers. They have learned that time takes time, and that a trade keeps working until it doesn’t. They allow time, price and pattern to play out.

Successful traders have learned to filter, modulate and use whole brain thinking to their advantage as they trade the numbers. They realize that when the time is up, it is up and they are able to get out and get ready for the next opportunity. They know that time is on their side, and they are prepared for it. From a place of relative calm, stillness and centering, they open themselves to receive and act on the messages that their whole brain time machine is telling them.

Time is nature’s way of keeping everything from happening at once…Howard Hoffman



2004: St Louis Cardinals
Regular season: 105-57
Best record in baseball.
Playoff record: 7-8
World Series: swept by Boston

2006: St Louis Cardinals
Regular season: 83-78
Worst record of all playoff teams, requiring a last-game loss by Houston to Atlanta to get into the playoffs at all, and Houston lost that game by out-hitting Atlanta 9-3 but leaving 11 men on base. Playoff record: 11-5
World Series: beat Detroit in five games

There must be some market lessons in there somewhere. Probably about randomness.

Steve Leslie replies:

I am not sure as to the market lessons here. However I do know something about playoffs in baseball.

Baseball is unique from the other two sports. In baseball the regular season record is completely meaningless. Due to one major factor. In the other sports, home field advantage is critical to getting to the championship series. In baseball, it is all about qualifying for the playoffs. After that, anything can and does happen.

Basketball is the most critical for regular season success. Without home field advantage you are swimming upstream the whole way. There is perhaps no greater factor in predicting a winner than looking at who has the home field advantage.

In football, if you have the best record, you are rewarded in two ways. First you get a bye week to get well and rested (and after 20 games this goes a long way to making your team well) and secondly, you don’t have to travel at all. When the regular season concludes, you can be at home for 3 weeks and only have to play 2 games. Plus your team is usually designed with the type of home field you play on.

Winning baseball games in the postseason is all about two things: Pitching and momentum. If you pitching comes out strong, like Boston two years ago or the Tigers this year, you can get on a roll and continue on a roll. Anecdotally, the Tigers lost their momentum by having to wait a week for the Cardinals to conclude their long 7 game series with the Mets.

Furthermore in baseball you can win a series by having your #1 and #2 pitcher carry the series. Who can forget Schilling bleeding in his ankle and giving the pitching performance of a lifetime. Or Kenny Rogers coming out of nowhere and pitching an amazing number of scoreless innings.

So if there are corollaries to be made to stocks, I will submit these two suggestions:

Pitching = earnings. great stocks have great earnings. They get their earnings from a great product with great margins. Microsoft in the 1980’s. Xerox in the 1960’s and Resorts International in the late 1970’s. I find it interesting that GE wanted to be #1 or #2 in the fields that they chose to compete. They were not interested in filling out the roster for the sake of filling out the team. The moral is if you have a great franchise coupled with a great product line, this will translate to success in the stock.

Momentum = trends. Stocks once they get on a roll, stay on a roll for some time. Look on Taser a few years ago. Oil stocks for the last year. Stocks tend to take on a character all its own when they become in favor.

There a many more examples and I hope I have stimulated some thought for additional corollaries.

Allen Gillespie responds:

Having the pain of being a Braves fan, I can tell you what it is. The regular season is long, so a deep pitching rotation is more important than a lot of good bats as the weaker teams you will beat with either and the stronger teams may or may not be focused on a particular night. So, if you have a strong 3 or 4 pitcher, then you will likely win one of those two games giving you a solid record. In the play-offs, however, pitching rotations are shortened so the best guys get on the mound more. In fact, it has been demonstrated that two really good pitchers are about all you need in the play-offs. You need, however, bats that go at least 5 deep with some moderate production 6-8. The one year the braves had 6 decent bats, they won, the other years, check the record. Painful.

The lesson I think is that for long pull trading, statistics and time work for you, while in short term trading and series being able to score quickly is critical.

Larry Williams responds:

Baseball has more stats than stocks; some are just obvious: for example, teams that reach the playoffs can be quite different later in the year due to injuries and trades — good to great pitchers are added to the roster of teams headed for the playoffs so the team then has more “mound power”. Case in point this year was David Wells going to San Diego.

It’s not just all numbers…

Steve Leslie replies:

My points are not assertions not supported by anything. I am not sure what you want to have counted. However if you want to go into greater detail about sports betting, I can tell you that it is an interesting exercise and in all likelihood futile because I have never met anyone who had a successful career as a sports handicapper. There are countless books on the market that one can research on the subject. I can not reference any since I learned years ago that sports bettors are losers.

I can tell you that the Yankee offensive lineup was so lethal this year that everyone went in thinking that they would overpower their opponents. They were overwhelming favorites to win the series. Until the pitching took over. In 2004 Boston was down 3-0 and won the series against the Yankees and went on to win the World Series. Thus momentum took over.

It is a fact, that good pitching trumps good hitting. This has been proven I don’t know how many times. Look back to Arizona Diamondbacks beating the Yankees and The Florida Marlins last World Series championship. Their team was loaded with young and great “arms”

As far as stocks are concerned. William O’Neill proved overwhelmingly that stocks that are in the highest quintile in earnings growth and relative strength outperform all other stocks. so when you combine these two facets your chance of success goes way up. especially in the long run which as far as I am concerned is a minimum of 9 months and longer. Read his books

Read William O’Shaughnessy book How to retire rich. He has some great strategies for success in selecting stocks. Look at an extremely successful no load mutual fund the Cornerstone Growth Fund offered by Hennessy Funds. This is a quant fund. or Bernstein’s book Against the Gods. The remarkable story of risk.

Other than that I am not going to type endlessly in an exercise to convince one of anything. If one does not agree with my points so be it.

As they say “That’s what makes markets.”

Professor Charles Pennington replies:

It is always tempting to say that some particular field, in which one thinks he has a special understanding, can not be approached through counting, but it’s usually not true, and especially not here.

For the examples here:

In baseball the regular season record is completely meaningless.

A rudimentary, better-than-nothing way to test this would be to look at the playoff series for the past N seasons and count the fraction of them that was one by the time with the superior preseason record. If it’s not substantially bigger than 50%, then that would support the claim.

[In basketball] there is perhaps no greater factor in predicting a winner than looking at who has the home field advantage.

Here you could take all NBA games played over the past N seasons and count the fraction that were won by the home team. If it’s greater than 50%, that would show that playing at home is an advantage. But is there “no greater factor”? Hard to prove, but you could try to DIS-prove it by looking at some other factor that might be important. For example, it’s possible that knowing which team has the best record over the past 100 games is more important. That could be tested as well.

Winning baseball games in the postseason is all about two things: Pitching and momentum.

For pitching: The question, I guess is whether pitching is more important than hitting in the post-season. You could take the past N series and count the fraction that was won by the team that had the better ERA during the regular season. Then you could count the fraction that was won by the team that had the highest number of runs scored per game during the regular season.

For momentum: For each series, calculate the fraction of games won by a team for the full series, call that Y, then calculate the fraction of games that they won when they also won the previous game, and call that fraction X. Now calculate X/Y for each series over the past N years. If X/Y, averaged over the past N years, is much bigger than one, then that would support the momentum idea.

Chris Cooper replies:

In contradiction, I have a close friend who has made a nice living for 15 years exclusively from betting football in Las Vegas. He is not a “handicapper”, though. He applies a computerized, brute-force strategy to tournament-style contests.



I read with respect your intellectual posts on privacy and the justice system, and wish to add solid ones of my own. Anyone who desires to take a job in the criminal justice system, including attorneys, first should be required to spend a night on the streets, a shift on police ride-along, a day as a spectator in court and, most vitally, 36 hours in jail. The latter I’ve formerly compared to a weekend seminar with better speakers, worse food, but it’s free. Any person who performs these four prerequisites for Life 101 may more expertly take a job of choice in criminal justice, or anyplace.

I grew up, as Ken Smith has described, as if on the cover of Look Magazine holding a fishing pool under a crescent moon. I still can’t turn my back on the shoeless kids I went to school with, but I eventually dropped the pole, went through eclectic vicissitudes, and landed at the far end of the bell-curve in Sand Valley, California.

Sand Valley is the choice toenail for ten sociopaths for good reason. Thank goodness I hadn’t this foreknowledge seven years ago on moving my belongings down from the Sierras in a utility trailer hauled behind a Honda 650 Nighthawk motorcycle with a sidecar and tow bar. I quickly learned in the Valley that the residents are obsessed and proficient at cherishing privacy.

Yet, there are constant tangles with authority since the area of my Rancho is the epicenter of what I term Desolation, California. That is the bleak region where individuality, save the Valley that is a true Galt’s Gulch (Ayn Rand’s Atlas Shrugged), is almost smothered by authority and the worship of the group. I can write on of my neighbors’ run-ins with the law, but shall relegate here to a few personal instances.

After three months of hard work to raise the Rancho out of the sand, one morning a sheriff drove up far from his tour ostensibly to run over a little tree in my front yard. He apologized and continued, ‘An old lady suspects there’s marijuana growing in your chicken wire garden,’ that was quickly dispelled as he looked over the unplanted garden. A year after, another sheriff drove into my front yard and ran over a second tree announcing that he wanted to check out the car in the driveway (mine) that he’d not seen before. I have a clean record, and that was that. A year after, two Feds with bolt cutters and automatic rifles drove to my semi-truck van that houses a library and, as I wasn’t there, my neighbor intervened. The Feds claimed a search warrant wasn’t necessary because there was a report of a meth lab inside, but the neighbor yelled them off.

Seeking autonomy, a few years ago the 100-square mile Valley had a neighborhood meetin’. They elected a Mayor, Sheriff and Judge to oversee their private affairs. A few auspicious discrete events followed_. The shotgun brandishing Mayor stopped a Marine convoy of tanks crushing his private road and turned them back to Yuma. The Sheriff grabbed a local cop, lifted him off the ground, and dialed 911 to make a citizens arrest for trespassing. The Judge sued the U.S. government and won a few thousand dollars after the Marines riddled his roof with helicopter machinegun fire. So, my personal anecdotes are minimal next to what can be done by seasoned privacy nuts.

The upshot is that anyone who wishes to take a job in criminal justice could consider, aside from a short trial on the streets, cop ride-along, court spectator, and jail, also visiting a beacon of privacy like Sand Valley within the dark depth of Desolation before it engulfs America.



Sabermetrician Bill James, from his 1981 Baseball Abstract, on the difference between sports writing and sabermetrics:

1. Sports writing draws on the available evidence, and forces conclusions by selecting and arranging that evidence so that it points in the direction desired. Sabermetrics introduces new evidence, previously unknown data derived from original source material.

2. Sportswriting designs its analysis to fit the situation being discussed; sabermetrics designs methods which would be applicable not only in the present case but in any other comparable situation. The sportswriter say this player is better than that one because this player had 20 more home runs, 10 more doubles, and 40 more walks and those things are more important than that players 60 extra base hits and 31 extra stolen bases, and besides, there is always defense and if all else fails team leadership. If player C is introduced into this discussion, he is a whole new article. Sabermetrics puts into place formulas, schematic designs, or theories of relationship which could compare not only this player to that one, but to any player who might be introduced into the discussion.

3. Sportswriters characteristically begin their analysis with a position on an issue; sabermetrics begins with the issue itself. The most over-used form in journalism is the diatribe, the endless impassioned and quasi-logical pitches for the cause of the day–Mike Norris for the Cy Young Award, Rickey Henderson for MVP, Gil Hodges for the Hall of Fame, everybody for lower salaries and let’s all line up against the DH. Sports writing “analysis” is largely an adversary process, with the most successful sportswriter being the one who is the most effective advocate of his position. I personally, of course, have positions which I advocate occasionally, but sabermetrics by its nature is unemotional, non-committal. The sportswriter attempts to be a good lawyer; the sabermetrician, a fair judge.

For that reason, good sabermetrics respects the validity of all types of evidence, including that which is beyond the scope of statistical validation.

Stefan Jovanovich responds:

Bill James picked an easy fight. The sportswriters have always been more clueless about baseball than any other American sport because it has no set plays other than the steal and the sacrifice bunt. Any fool with a Press Pass can learn the names of the pass routes for a wide receiver and then ask the coach why he called for the slant instead of a fade. It is no accident that the writers with the least experience in baseball have been the most enthusiastic supporters of sabermetrics. The statistics provided by Mr. James and others have become for journalists the core of their pseudo-wisdom.

Professional baseball started using statistics before American football players were allowed to use the forward pass and before Dr. Naismith cut the bottom out of his peach basket, but the players, coaches and managers have never believed that the box score was the game. Sabremetrics is deeply emotional in its belief that it is a “fair judge” of what happens on the field. Its “theories of relationship” are interesting but largely useless is determining the “character of the borrower”; yet character remains at the heart of what happens on the field - even in April. On that score alone Gil Hodges and Nellie Fox should both be in the Hall of Fame. James is right about sports writing being largely an adversary process, but then almost all journalism is now some form of “Gotcha”. His stats have become like the body counts in contemporary war reporting; the ultimate confirmation that the civilians pecking away at their laptops really do know more than the people wearing uniforms. But, the notes alone are not the music.



With a wry smile, Benjamin Franklin proposed the basic idea for daylight savings time to the Journal of Paris in 1784 but it remained dormant until 1916 when the Germans adopted the idea during WWI. The UK fell next, with Newfoundland and the US close behind in 1919. Despite small pockets of resistance in half a dozen states, it remains an accelerator to natural perception of the seasonal shift that kicks us into accumulation mode as daylight wanes.

The effects are felt across all age groups, all nationalities, all types of people. In the morning, 6 am looks like 7 am so the early risers feel behind right out of the gate. Lazy teens are no better as 11 am looks like noon and the days are short enough already what with school taking up most of the time anyway. Darkness arrives an hour early with predictable results on traffic. Monday’s commute will be one of the worst of the year as freeways crawl with light dependent drivers thrown into the black.

But instincts developed over millions of years quickly kick in. A sense of urgency prevades our existence as schedules shift to capture the dwindling daylight. With holiday shopping bearing down, we dig in and accumulate wealth as fast as possible. Everyone’s out for a quick strike. Festivals and rituals resonate the theme. It’s time to bring in the crop.

The markets show a confoundedly significant jolt around the rolling back of the clocks, though I leave the particulars as an exercise to the counters.



All bettors are losers…and baseball proves that past performance is meaningless…Yankee Fans were elated to get Kevin Brown. For what? $100 million? The top in that market! So many greatly paid athletes fall apart at their peak (that’s said with humor) and owners buy these guys when they could have picked up 10 equally good players for the same dollar amount.

My point is owners buy the highs in athletes…you’d think they would have learned by now.



“You’re not a bad daughter,” I told my patient, a grown woman with children of her own. Her body shook as she sobbed. Her 92-year-old mother was in failing health, living in an upscale assisted-living facility. Although she did not require a walker, wheelchair, feeding tube or oxygen as did many of the other residents, she complained incessantly — about the food, uncaring family members, the brusqueness of the staff. Julia tried to be an advocate for her mother but found it increasingly difficult in the face of her nastiness. Then there was her mother’s constant criticism of Julia’s children, who never called or visited. Julia thought that they were merely doing what she would have liked to do — but couldn’t. As a result, my patient found herself wishing that her mother would die.The more she wished this, the more guilty she felt. The more guilty she felt, the more she called and visited. If some animals attack when they smell fear, maybe the same is true with difficult parents who attack when they smell guilt. Whatever the case, the more Julia tried to appease her guilt, the more negative her mother became. The vicious cycle was pushing her into a clinical depression. I clarified what I was trying to say. Many elderly parents would be appalled, but not surprised, to learn that their adult children want them to die, I said. And equally as many adult children would be relieved to know they are not alone in feeling that way. These adult children, often in their 50s and 60s, live under a cloud that will not leave until their parents pass away. For them, there is no such thing as good news — not when their mother or father is chronically ailing or, worse, in good health but with a bitter or negative disposition. A sudden physical decline may trigger sadness or possibly a fear of the child’s own death, but a turn for the better can seem to delay the inevitable for a person already in physical, psychological or emotional decline. “Why feel glad to get six more months, just to have to go through the same process again?” they may ask themselves.

I told Julia that these thoughts are normal. Watching a parent become weaker, sicker or more enfeebled is stressful, of course, but most adult children can bear that. It’s when that parent becomes vicious, hostile and resistant to help that stress crosses over into distress. Then, the goal of assisting the parent to have the best life possible is replaced by the goal of relieving one’s own distress. If a parent’s attitude and behavior don’t improve, the child wants an end to the suffering. That can only come when the parent dies. The desire for a parent to die sooner rather than later can escalate to a point of obsession. At that point, it can take all of an adult child’s energy to keep such a death wish from wreaking havoc — making the child truly wish that a parent takes a turn for the worse and is closer to death. That was the threshold Julia found herself facing when she came to see me. She spoke at length of the frustration and exhaustion caused by overseeing her mother’s care. How, she asked, could a good daughter think such awful thoughts — especially after the many things her mother had done for her and her family over the years? I stressed that her feelings didn’t mean she didn’t love her mother. Nor did they mean she really wanted her to die. They simply meant that she wanted resolution — to put this chapter behind her. Furthermore, I told Julia that I thought she loved her mother deeply and that those feelings, not guilt, was what caused her to visit so frequently. What she didn’t love or like was how her mother’s negativity had so completely taken over her personality and reduced her to a bitter, angry shell of a person. Julia continued to visit with the hope of seeing the positive sides of her mother somehow show through.

When Julia realized not just intellectually, but emotionally, that she did love her mother but resented her behavior, she felt emboldened to stand up to her mother in a way in which she had been unable to in the past. On her next visit she confronted her: You’re my mother and I’m always going to love you, for as long as you live and beyond, but if you continue to act as negatively as you are, I’m not going to like you. And if I don’t like you, I’m going to visit you less often and shorten the amount of time I spend with you at each visit. What I will not do is let myself become so angry and so dislike you that I stop visiting all together. Before I do that I will shorten contact to minutes per week and check in more with the staff about you than visit with you. I am asking for your help in making the best of the situation — being respectful and kindly toward others and showing the dignity that I know you are capable of. Julia’s mom heard the resolve in her words and did what bullies often do when called on their behavior in a firm, no-nonsense way. She listened. What’s more, she changed for the better, and Julia was able to replace the “death wish” she had been harboring with the true desire to visit her mom. Like others who are exhausted by caring for a physically or emotionally ill parent, she eventually found solace in realizing that the thought is not the deed, that she was not alone in such feelings and that she was not a bad, or even, unloving child. She simply wanted to love her mother as she had been, not resent her as she did.

Mark Goulston is an author, speaker and psychiatrist in Santa Monica. He can be reached via http://www.markgoulston.com/. Copyright 2006 Los Angeles Times



The Bintel Brief, a Dear Abby type column that has been a regular feature of The Daily Forward for 100 years, had the following letter about a husband’s death. “…My husband died and…I don’t know how it happened that during the drive home from the cemetery, I was alone in the carriage with my husband’s friend. Seated in the carriage, I began to cry again, and the friend comforted me, patted my hands and begged me not to endanger my health. A thought came to me. Isn’t this more than friendly sympathy? Isn’t this perhaps the interest of a man in a woman? As he comforted me, the friend began to kiss my hands and I looked at him in amazement. Instead of drawing back though, he began to stroke my hair and swore that he felt toward his deal friend’s wife as toward an unhappy sister. He drew me to him, and kissed me passionately. These were passionate kisses from a man to a woman. But they were mingled with his tears for the death of his dear friend and for my fate. I swear to you that in my heart there was only one love, for my husband was barely two weeks in the grave when he asked me to marry him. I told him I would marry him a year after my husband’s death. My daughter realized everything. With tears in her eyes, she blurted out that her father’s grave was not an hour old when I already had taken a new bridegroom”.

One is reminded of this by the Amaranth death spiral about which numerous articles have appeared describing how the brokerage houses and banks that were customers and suppliers to Amaranth made billions on the liquidation.

Scavengers (vultures, hyenas), decomposers (funguses and bacteria) and detritivores (earthworms); all of whom recycle the remains of dead organisms, play a large role in the ecosystem and are useful in breaking down animal and plant remains so that their nutrients can be used again in the system. Many organisms have developed specialized equipment for such recycling of the dead as it is so much easier to prey upon an organism that can’t defend itself than to have to deal with all the defenses against death that living organisms possess, such as disruptive behavior and death throes.

I have found many traders and institutions that specialize in the dead, and the stories of the Long Term Capital demise relative to the decomposers that; even as they were alive sold positions in front of them, is one that can never be emphasized enough. I found many such organisms hovering around me when I tried to climb up the stairs a few years after my 1997 disaster. Often I heard them laughing as they ordered me to liquidate positions shortly after they had taken opposite sides. I heard and smelled many similar such organisms in all too recent times also.

It is interesting to examine how these specialists in death organize their activities. And to figure out how to prevent them from having such easy pickings. The Bintel Brief answered the lady harshly “…Better if she had opened the carriage door and asked him to get out. There is no excuse for the disgusting behavior of the young man after his friend’s death. It is possible the widow is making a mistake in deciding to marry him, because it is doubtful she can be happy with such a man”. It is doubtful that we can’t quantify some aspects of the death throes that these disgusting and all too common market specialists prey upon and preclude their undiminished happiness.



There was a New York Times article last week headlined, “In ‘97, U.S. Panel Predicted a North Korea Collapse in 5 Years.”

From the NYT article: A team of government and outside experts convened by the Central Intelligence Agency concluded in 1997 that North Korea’s economy was deteriorating so rapidly that the government of Kim Jong-il was likely to collapse within five years, according to declassified documents made public on Thursday.

This forecasting case study makes for a good addendum to Phillip Tetlock’s “Expert Political Judgment” (excerpt from “New Yorker” review below). Tetlock discusses the need for putting beliefs in testable forms, the tendency for statistical models to outperform human judgment, and the bias that motivates black swans to be overlooked.

From the “New Yorker” review: The accuracy of an expert’s predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge…

Tetlock is a psychologist-he teaches at Berkeley-and his conclusions are based on a long-term study that he began twenty years ago. He picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends,” and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert. Would there be a nonviolent end to apartheid in South Africa? … Would Canada disintegrate? (Many experts believed that it would, on the ground that Quebec would succeed in seceding.) And so on. By the end of the study, in 2003, the experts had made 82,361 forecasts. Tetlock also asked questions designed to determine how they reached their judgments, how they reacted when their predictions proved to be wrong, how they evaluated new information that did not support their views, and how they assessed the probability that rival theories and predictions were accurate…

Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys…

Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable … And the more famous the forecaster the more overblown the forecasts…

“Expert Political Judgment” is just one of more than a hundred studies that have pitted experts against statistical or actuarial formulas, and in almost all of those studies the people either do no better than the formulas or do worse…

Tetlock’s experts were also no different from the rest of us when it came to learning from their mistakes. Most people tend to dismiss new information that doesn’t fit with what they already believe. Tetlock found that his experts used a double standard: they were much tougher in assessing the validity of information that undercut their theory than they were in crediting information that supported it. The same deficiency leads liberals to read only The Nation and conservatives to read only National Review. We are not natural falsificationists: we would rather find more reasons for believing what we already believe than look for reasons that we might be wrong. In the terms of Karl Popper’s famous example, to verify our intuition that all swans are white we look for lots more white swans, when what we should really be looking for is one black swan …

[E]xperts routinely misremembered the degree of probability they had assigned to an event after it came to pass. They claimed to have predicted what happened with a higher degree of certainty than, according to the record, they really did. When this was pointed out to them, by Tetlock’s researchers, they sometimes became defensive.

And, like most of us, experts violate a fundamental rule of probabilities by tending to find scenarios with more variables more likely …

[Worse forecasters are] thinkers who ‘know one big thing,’ aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who ‘do not get it,’ and express considerable confidence that they are already pretty proficient forecasters, at least in the long term. [Better forecasters are] thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible ‘ad hocery’ that require stitching together diverse sources of information, and are rather diffident about their own forecasting prowess.

Tetlock also has an unscientific point to make, which is that “we as a society would be better off if participants in policy debates stated their beliefs in testable forms”-that is, as probabilities-”monitored their forecasting performance, and honored their reputational bets.”>

In the macroeconomic sphere the corollary to Tetlock’s work is this 2002 paper by Yale economist Owen Lamont. Lamont wrote, “[Wall Street forecasts are] not necessarily designed to minimized squared forecast errors; rather, forecasts may be set to optimize profits or wages, credibility, shock value, marketability, political power (in the case of government forecasts), or more generally to minimize some loss function.”

Also, following Greenspan’s Fed Chairmanship, WSJ’s Greg Ip described Greenspan’s approach to policy-making in the context of Tetlock’s book.



One of the Greatest Men I have ever met is Bill McCarthy, formerly a student of my father, and chief of the bomb squad in New York, commanding officer of the public morals squad, chief undercover cop, a professor at John Jay, a psychiatric nurse, a championship boxer, the author of Vice Cop, the best novel about police I have ever read or seen, and President of an international security consulting firm. The favorite musical of his wife, Millie, is the Fantasticks, and after Bill retired, she saw it 30 times or so. Often Bill would pick her up on Sullivan Street where it ran. Sullivan street was also the location of many of the clubs frequented by residents of the Italian underworld. Bill was well known on Sullivan street from his previous work in undercover, where he had made many of his thousands of arrests. And on each occasion that Bill met her on Sullivan street, the entire block would empty out as all the denizens of the club, warned by their lookouts, exited before the presumed arrests were forthcoming.

Acting in a self damaging way based on previous vivid memories (Bill had a patented method of making arrests by punching himself in the head hard in front of the criminal and asking if the criminal wished to resist), often occurs in the market. The October 19, 1987 crash has been a vivid memory that has kept too many out of the market since that time, especially around the anniversary of the event. As counted out here by Mr. McCauley, such anniversaries have been particularly bullish since that time. Indeed, it is no coincidence that on the 19th anniversary of the crash, the Dow closed above 12,000 for the first time in history.

Of course, now your average investor has a vivid memory of the breakthrough 12,000 on an anniversary, so one hypothesizes they will not be as wary of the October 27, 1997 anniversary today. One hypothesizes that weak longs still exist as of today, as compared to the aforementioned.



On Sunday, Oct. 22, at 6:34 a.m., the S&P spiked up from 1374 to 1396 in one minute, shocking the sensibilities of all shorts, raising the hopes of all longs, and alerting all risk managers to the possibility of a squeeze of shorts the same way they are always attuned to the bust of longs, from the work of the doomsdayists and their academic legitimizers. Within a minute it had moved back to 1376. and it seemed like just a bad dream to those caught the wrong way and to longs who didn’t take the profits. I was immediately reminded that the most important thing that the Palindrome taught me in the 16 years of our close relationship was always to use two cans of tennis balls when playing a practice match as it saves time, and the one and only thing that a personage who worked for me and then became a billion-dollar fundist specializing in wringing out 3% annual returns taught me was that when a terrible price against you appears on the screen, enough to take your breath away and give you a heart attack if you’re old and out of shape, and then you realize it’s just an error, forget about it — then you’re really in trouble, as shortly thereafter the market will inevitably go to that price and much worse. I believe that he called such events “Finnigans,” although when I took him out to dinner after giving him a drubbing in tennis recently he failed to remember the appellation. Such a “Finnigan” occurred on Oct. 22, as this week the S&P went from 1370 to 1395 in a gradual ascent over four straight days of rises — the same terrible distance as the misprint that was taken down by the authorities.

It’s Oct. 27 again today, the ninth anniversary of the only day that they closed the NYSE after the market declined the circuit-breaker limit of 550 Dow points, a day that will live in infamy as it was enough to bring me down, cause enormous losses to my customers and me, put an end to my customer business for many years, and appropriately humble me for the rest of my life (I was humble before also, but not enough). I have made it a point to remind everyone of how liable to error I am every week or so ever since, but it is always good to repent and reflect on the anniversary of such a tragedy (such tragedy a source of great merriment and misrepresentation and hoped-for recurrence by my enemies.

In the immediate aftermath of the Oct. 27 disaster, I received 50 copies of Tuesdays with Morrie, one of the most boring and depressing books I have ever read. Now, I receive many letters suggesting that I take the day off, and others inquiring indirectly and gently: “How are you doing this year, Vic? We were worried (hope, hope) that tragedy might have befallen you again. We heard you looked crestfallen at the Spec Party and you’ve stopped reporting your results.”

Yes, I have stopped reporting my results for the same reason that General George Washington didn’t report his troop strength during the Revolutionary War. If the situation were bad, then the enemies would gather strength and confidence and be able to attack with renewed vigor and impunity. If the situation were good, then he wanted the enemy to be overconfident so that they would be asleep on holidays, especially around the end of the year when great victories can be won. I answered such correspondents with the Washington lesson, and added that it is possible that the hoped-for reports of our demise, such as have appeared on the message boards and papers spawned by the enemies encamped with opposite positions and agendas, the same way the reports of Washington’s death that were spawned by the French generals who came to America hoping for prestigious positions only to be humiliated with token corporalships may possibly have been exaggerated.

The Fantasticks, currently running as a revival on Broadway, is the perfect musical, as it has all the elements of the whole history of musicals stripped down to bare essentials, the boy hero climbs a wall to assure his father that there is nothing on the other side (actually, there is a beautiful damsel he plans to run away.) It was one of those moments that seem eerily familiar; I had just read Frankensteins of Fraud by Joseph T. Wells after a very educational visit to the Fraud Museum in Austin, Texas (which I’ll report on in detail later). In one part of the book, Wells describes how the Crazy Eddie team was able to engage in a hundred different inventory frauds. At the top of the list was the story of how one of the Antars climbed a ladder to report inventory that was actually empty boxes or vacant space. Here’s a sample:


When the auditors came to make their counts [the warehouse manager] climbed on to the product stacks himself and called the numbers down to the person below. If the auditor insisted on climbing up, the warehouse manager held the auditor’s notebook and marked the contents himself. He used a range of inflationary strategies: counting empty boxes as merchandise, listing cheap merchandise at premium prices, building tall dummy columns at the edge of a large shelf and claiming the containers were stacked three or four deep when the rear area was in fact empty…The warehouse also fiddled with what retail people call “the reeps,” which are repossessions — products that have to be returned to the manufacturer, who then refunds the wholesale cost of the merchandise to the store. How easy it was to do all this! Pulling it off is like playing with kids. The big firms use their audit detail as a training ground. It’s not their fault, but these auditors, they’re kids just out of college — nice ones with 3.5 to 4.0 grade point averages. The auditors only took inventories at a third of the stores anyway, and I helped them decide which stores to look at. The auditor would hand a warehouse clerk a sheet of paper and say, ‘Make me a copy of this, will you?’ The paper lists the test counts showing which parts of the inventory the auditor planned to do tests on and which parts they’d just take rough counts. Of course we’d make a copy for ourselves. We knew where they were counting and where we could do what we pleased.


Considering the ease and variety of the frauds that this retailer was able to perpetrate, the methods of inflating comp store sales was particularly ingenious. The above is merely the tip of the iceberg detailed by the author, with much help from the divorce and family feuds between the parties. I have a certain skepticism for reports of fantastic profit growth from many fledgling retail chains, especially when the audits are not performed by auditors who don’t rely strictly on recent graduates, and if they do rely on old codgers, at least make sure that they do all the climbing of ladders and emptying of boxes themselves, with reports and notations to a member of their own staff rather than to the company representative itself.

How can one talk about the current bull move in stocks, from a low of 1223 on June 15, 2006 when the octagenerian Alan Abelson returned from his four months on leave to continue writing his humorous and acerbic bearish 40 year running column “Heard on the Street”. He returned with the query at the market bottom, “The only question is whether the market is in a cyclical or a secular bear market” and made witty remarks about how this time Chairman Ben Bernanke is truly serious about inflation. Since that time, he has been continuously bearish about the market trotting out what seems like (I have not performed the content analysis here the same way I did in Prac Spec, where I analyzed all of his permanently bearish columns from 1966 to 2002 while the Dow moved from 800 to 10000) over a hundred reasons to be bearish with nary a single column bullish and merely one nod to his cloudy crystal ball, as the S&P climbed continuously to its current level of 1389. What can one say about this documented record of what must be the least accurate but most influential forecaster since Cassandra and Laocoon of the Iliad 10,000 years ago? One can say that perhaps he is part of the necessary backdrop of pessimism for a bull market to occur and that it is not chance that his return from leave coincided with this continuous increase in wealth.

Dr. Phil McDonnell responds:

The Chair writes of a mysterious event called a Finnegan. During such time the market appears to hit an ephemeral number but it is quickly nullified. Market participants are induced to think about possibilities previously unforeseen. In like manner managers conducting audits are all too willing to believe inflated numbers. It feathers their own nest.

Such events should not be dismissed as mere urban legends. I have met Finnegan. He is very real.

When counting the tomatoes in my garden one would think that would determine how many I have. One would think that a bitch suckling her newborn pups would know how many mouths to feed. It is all a matter of counting and auditing. So one would think.

Finnegan has traveled about 10 miles from his home in Renton to our home. He never knocks or introduces himself. He doesn’t have to. I have seen him and know him from his mug shot Everyday when I check the garden there are more vegetables with little bite marks. Tomatoes which I had previously counted are now inedible. All my audits are completely useless. The only thing I am left with is a little green (*) souvenir with bite marks from a tiny mouth. For that I am grateful. Without that, my story would be just another Bigfoot or UFO anecdote. After all both stories started right here in the Northwest. Ostensibly the first UFO’s were sighted in 1947 by Kenneth Arnold flying near Mt. Rainier. Mt. Rainier is the biggest and probably the most spectacular mountain in the lower 48 states. It is located nearer Renton just a few miles South of here.

There is no doubt about which one Finnegan is. He is the one who built his nest in a particular tree with a vantage point so he could watch our dog. Of all the gray squirrels in that nest Finnegan stands out. When our dog barks at the squirrels Finnegan barks back. After all he was the oldest of his puppy litter and knows what it takes to be the alpha male.

For any doubters who think this may be an urban legend.



One wonders, too, if there are mechanical/behavioural dynamics. Are buy orders predominantly limit, and sell predominantly market? Or, if one had the data, would one find that “take-profit” sell orders on an up day tend to be limit, whereas “get-out” sell orders on a down day tend to be market? And what about stop-loss cascades?


This paper provides empirical evidence that currency stop-loss orders contribute to rapid, self-reinforcing price movements, or “price cascades.” Stop-loss orders, which instruct a dealer to buy (sell) a certain amount of currency at the market price when its price rises (falls) to a prespecified level, are a natural source of positive-feedback trading. Theoretical research on the 1987 stock market crash suggests that stop-loss orders can cause price discontinuities, which would manifest themselves as price cascades. Empirical analysis of high-frequency exchange rate movements suggests the following: (i) Exchange rate trends are unusually rapid when rates reach stop-loss order cluster points; (ii) The response to stop-loss orders is larger than the response to take-profit orders, which generate negative-feedback trading and are therefore not likely to contribute to price cascades; (iii) The response to stop-loss orders lasts longer than the response to take-profit orders. Most results are statistically significant for hours. Together, these results indicate that stop-loss orders propagate trends and are sometimes triggered in waves, contributing to price cascades. The paper also provides evidence that exchange rates respond to non-informative order flow.


Are Transactions and Market Orders More Important Than Limit Orders in the Quote Updating Process? Ron Kaniel Finance Department The Wharton School

Hong Liu The Olin School of Business Washington University

This paper details that transactions, market orders and limit orders are three major factors which affect a specialist’s information set and her inventory position. In modeling a specialist’s quote updating process, before any exclusion of any of these factors, one should first address the fundamental question of their relative importance in this process. This question, however, has received little attention both in the theoretical and empirical microstruc-ture literature. Using a simple nonparametric test we investigate the relative importance of these three factors. We demonstrate that both transactions and market orders affect the quote updating process signifcantly more than limit orders, and that transactions affect it more than market orders. Furthermore, we nd that market orders convey more information than limit orders about the value of the underlying security. These results hold even after controlling for transaction and order size.


The Limit Order Effect Juhani Linnainmaa The Anderson School at UCLA November 2005

The limit order effect is the appearance that limit order traders react quickly and incorrectly to new information. This paper combines investor trading records with limit order data to examine the importance of this effect. We show that institutions earn large trading profits by triggering households’ stale limit orders and that individuals’ passivity significantly affects inferences about their behavior. Individuals are net buyers on days when prices fall because institutions unload shares to households with market orders-and vice versa on days when prices rise. An analysis of earnings announcements shows that institutions react to announcements, triggering individuals’ limit orders: the orders executed during the first two minutes lose an average of -2.5% on the same day. Investors’ use of limit orders may help to understand many findings in the extant literature, such as individuals’ seemingly coordinated tendency to trade against short-term returns.

James Sogi observes:

Interesting that the sells tops are hidden, but the buys are shown to 5 ticks. Why is that? The finger revealed the various orders at a cheap price in the middle of the night.

Recently been missing fills on limits and the market takes off. Almost feel the need to just order at market to get a toe hold in. Not sure if this is just me or a changing market cycle?

Professor Pennington comments:

The paper by Linnainmaa is important.

The paper, from rigorous analysis of data on stock trading in the 30 biggest names of the Helsinki Stock Exchange, concludes that individual investors lose a lot of money by putting in limit orders that are far from the market. These orders become “stale”, in the author’s words, if and when news is announced, and the authors demonstrate that when such limit orders get executed, it’s bad news, on average, for whoever entered them.

Conversely, they show that market orders entered within the first 5 minutes after intra-day earnings announcements tend to make a lot of money. It’s easy to understand. An alert trader is monitoring the earnings news in real time. If a favorable report emerges, he quickly snaps up shares offered at a stale price by an individual trader who could be out playing tennis.

My bias is that limit orders are bad news, specifically limit orders entered by a trader who is not going to actively monitor the news on a minute-by-minute basis.



And that, finally, is perhaps the true glory of barbecue: No matter what barbecue you’ve eaten, someone will always tell you there’s better. No matter what “home of the original barbecue” you’ve visited, knowledgeable people will tell you it in fact lies elsewhere. “Best sauce,” most “authentic,” to rub or not to rub, baste with sauce or sauce-on-side - ultimately, who cares? To wander this country and this world looking for the best barbecue - and never actually finding it would be a life well spent, a delicious journey in which enlightenment comes with the search - not the arrival.



I announce the birth of my first grandson, Finn Revere Niederhoffer Springer born to Katie Niederhoffer and Derek Springer of Austin, Texas on Monday, October 23, 2006.









I’d like to say a few words about my Mum in celebration of her life, a life filled with music, family and friends.

Mum was an outstanding pianist and piano teacher. Gordon Green, a former Professor of piano at the Royal Manchester College of Music wrote approvingly not just about her capabilities, but also her character and personality. The conductor of an orchestra for which she played solos, Donald Price, wrote that she was ‘a most gifted and confident musician’.

Mum’s more prestigious qualification was as a Licentiate of the Royal Academy of Music. She was also an Associate of the London College of Music.

Throughout her teaching career Mum had literally hundreds of students, teaching them with patience and dedication. When one little boy announced that he would rather be watching ‘The Banana Splits’ on television rather than have his music lesson Mum calmly replied that he could watch it next week. Not all of Mum’s students went on to great things but most of them gained a love of music which will be passed on in turn to future generations. Besides her students, my sister Jacqueline and her children Gemma and Alastair are excellent musicians in their own right. In my case the musical talent appears to have skipped a generation, but my 4 year old son Sam enjoys listening to classic fm.

Mum met Dad through music and they performed piano duets together. A few days ago Dad told me about their first date at the cinema in which my father opened all the doors for her, including the one to the usherette’s changing room. Fortunately Mum was able to see the funny side, which brings me to her great sense of humour.

If Mum could be asked about today’s proceedings I suspect she’d quip that it was a bit grim. I found some quotes that I think she would have liked, such as Woody Allen’s comment: “There are worse things in life than death. Have you ever spent an evening with an insurance salesman?” There’s also Winston Churchill’s “I am ready to meet my Maker. Whether my Maker is prepared for the great ordeal of meeting me is another matter.”

Mum loved to entertain people and tell them stories, maintaining her jovial demeanour throughout her life and despite her long standing health issues. I think this is what many of us will miss most about her, Mum was great company.

At times like this I think we all reflect on our lives and what they mean, in Mum’s case she brought a great light into the world. I’d like to finish with a quote from the Roman philosopher Lucius Seneca: “The day which we fear as our last is but the birthday of eternity.”



Speaking of fraud, the first section of The Ludic Fallacy by Prof. Nassim Taleb seeks to combine elements of oenology (the sour varietal) with those darn tails:

It seems his current thesis has changed from “If you are so smart why aren’t you rich?” to collective academic regrets on missing the (huge) con-ponent of fraud in the game of life. Them’s smarts too!

So I offer this: forget the bulls and bears and learn to count.



For each of the seven years that I’ve lived in the Sonora desert there has been at least one upstart which the locals recognize as never having been ‘on the books’. I term these the Species of the Year, and in ‘06 it’s an oddball I saw over the weekend and came to call the Squealer Grasshopper.

New species, or at least drastic variations, to my way of thinking occur in a spot due to one or more of the following circumstances: An advantageous mutation (rare); a new wrinkle of an old variety that reproduces in abundance and quickly sided with a severe weather or predatory year (more common); or, an unprecedented movement for whatever reason of a fauna or flora into a by-and-large sheltered territory of ‘island isolation’ such as my Sand Valley (most common).

This Valley is a 100-square mile basin encircled by mountains that block the rain from the west, wind, and most live traffic except the airborne such as birds and helicopters to the adjacent Chocolate Mountain Bombing Range.

In the Spring of ‘01 the grand Species was the Painted Lady, a tart butterfly- I should say millions- that invaded in such clouds that breathing was difficult for weeks. Another year the unique intruder was the wolf_ One followed me long-tongued along a hike, and my neighbor, Laura, shot the scrotum from close range off another so it wouldn’t reproduce and eat the chickens. We decided the errant wolves either crossed the mountains to raid the coops or were introduced by the BLM. ‘04 was the year of the Flying Grasshopper, the largest I have seen around the world at up to 6′’, green, and with an absurdly high glide-to-drop ratio enabling it to soar without rest for miles over peaks.

Strictly speaking, four years ago the new species to my toenail of Sand Valley were the illegal Mexicans. My rancho lies 35 miles north of the border, and in a two-month period three groups totaling fifteen ‘wetbacks’ struggled fainting or sucking on barrel cactus onto my ten acres only to collapse in the trailer shade. They had been abandoned on the nearby gunnery range by ruthless ‘coyotes’ whom they’d contracted to transfer them to Los Angeles. There being no phone in Sand Valley, I helped them out in the most moral legal sense. There’s also a stripe of tracks between my library trailer and outhouse where the U.S. border Patrol pursued a van across the property and down a wash. A dozen Mexicans fled on foot after their van bogged in sand and the Border Patrol didn’t give chase. That may be the future bumper crop for a Species of the Year.

As for this year’s Species, I have never heard anything like the Squealer Grasshopper. Last weekend, I was resting under a Palo Verde tree and heard the familiar loud clap of grasshopper wings to my right, swiveled, and the insect kicked the dirt ten feet away shrieking like a stuck pig. A day later while hiking, a second grasshopper appeared with a wing flap followed by the same one-second shriek causing me to cast about for a tortured mammal. I walked over but there was only a large, typically brown & beige 3′’ desert grasshopper with a splash of yellow or red inside the wings.

I saw only two specimens of the Squealer this year and never before, however its strident call was enough to make me wheel. Hopefully, the shrill survival advantage, likely a mating call or scare tactic not to be eaten, won’t profligate to roaming herds that make sleep difficult and frighten off visitors. This grasshopper squeals only on landing to my knowledge. I believe it is caused by the wings but it could be vocal. I don’t know if the new feature is genetic or just a novel word in their vocabulary.

It is important to note that the new species introduced here are in the sense of fresh genetic material or an unprecedented appearance. My annual survey is a small unscientific sampling that any walker may replicate where there’s an element of island isolation. You don’t need to live in the wilds to study this. Try it on your daily walks in the city park, garden or basement.



Alan Abelson: Everyone is celebrating Dow 12,000, but it is silly to celebrate because the guys who predicted Dow 36,000 are still 24,000 points away. The sky is falling.

Page 18: Larry Ellison is taking a victory lap after successfully pulling off big mergers. However, the benefits of this are priced into the stock; investors are betting that there are no bad mergers or acquisitions in the future.

Page 19: Chicago looking up due to CME’s buying CBOT. But the stock is not cheap.

Page 21: Jones Apparel is a good deal at the current price, according to a guy from Lazard, and a guy from UBS.

Page 22: Agilent has some great products and a good outlook. Shares are enticing, says their IR guy, and a guy from Robert Baird.

Page 27: Barron’s race by race examination of the mid term elections says GOP will continue to hold both Houses of Congress. The main factor is money raised, which they say has a pretty good track record, although they are sometimes wrong. Democratic takeover will hurt SLM, help FNM and FRE.

Page 31: Barnes and Noble looks iffy due to concerns over growth prospects, but has a strong market position and generates cash, something private equity firms will notice, so perhaps a buyout is coming. Shareholders should get a 25% premium in a buyout.

Page 33: Nokia has not had the hippest phones like Motorola, but they have kept operating profits high by sidestepping that battle and concentrating on cutting prices to keep market share. Now, however, they have the thinnest phone. Things look good for NOK.

Page 34: Tech industry doesn’t look good, except for GOOG and AAPL.

Page 35: Regulators not so hot at policing small caps, so websites such as stockim.com are filling in the void, but some people who post on them are morons.

Page 37: Guy who runs Value Line Growth and Income Fund figures that with 200 stocks and 25% fixed income, he’s protected from disaster. He likes dividend-paying stocks. Unlike everyone else in the world, his biggest holding is GE, followed up by MSFT and PFE.

Page 39: International mutual funds have been taking in more scratch than domestic mutual funds, but on the margin the flows might be greater to the US next year since the Dow broke 12,000. There are various socially responsible funds out there, but the debate never ends as to whether or not they are worthwhile. A new one called Blue Fund claims that companies that give dough to Democrats do better.

Page 41: Guy from Wells Capital Management says the rally still has life. Prefers small stocks to large, despite all the talk about large stocks lately. P/E boom means there is too much liquidity in the system.

Page 44: The credit derivative party is huge, and it centers around the Wall Street banks, but the Chicago exchanges are eyeing a piece of the pie.

Page 46: Cruise lines are doing well, boosting payouts.

Page 48: Econospinning is a good book. The labor markets in Germany and France are no good.

Page M3: Dow pauses to contemplate the view. Columnist Michael Santoli likes to ascribe human emotions and thinking to a price-weighted index. The new milestone is important because he thinks it wakes up investors to what they have been missing. Also of note, stocks are generally up this year. If you owned the weaker sectors, you did worse than by owning the stronger sectors. CS derivative guys suggest buying SMH and shorting SWH.

Page M6: Larry Ellison said that SAP is losing ground to ORCL, but that claim isn’t really true. Prudential PLC routinely makes claims that they don’t live up to, and they wind up looking foolish.

Page M7: Egor Rybakov of Tradewinds Capital says Asian finance companies look cheap.

Page M9: The Yen carry trade is a big play again, but if the dollar declines the yen carry traders will get burned.

Page M12: Ag report about a smaller than expected corn crop has sent corn prices up. End of year inventories will be down due to ethanol demand. As a result, corn acreage will be up big time next year. People have various opinions about all of this.

Page M14: It’s trendy again to be bullish with options strategies.



For anyone interested, I thought I would post a link to a chapter by chapter review of the oft recommended book in these waters, Triumph of the Optimists…



Being a contrarian doesn’t mean taking an opposing view just for the sake of it. Being a contrarian is all about asking oneself why everybody is following the same idea, mirage or hope, in order to determine which course of action is best suited for the money you are managing. Indeed the contrarian strategy is no longer a feasible one in a financial world lead more by lawyers than investors. Therefore the capable speculator will take the contrarian advice with all the care it needs to avoid lawsuits and such. This year winner in contrarian strategy was for me the Se*@ono saga. The Company announced , sometime between the end of 2005 and the beginning of 2006, that it was for sale and that it was seeking buyers. The stock started a robust and relatively fast climb from chf 800 to chf 1100 (rough numbers). When the stock peaked along with major world stock markets , the owners of S-@ono announced that since no real bidders showed up, the company was no longer for sale. Bad news for the “longs”. The stock fell from chf 1100 to 900 and, just to add a little “peperoncino” to the sauce, said that at that point it was seeking capital in order to buy a small-medium sized company; enough to send the shares to 800 chf. The question was, why on earth would a smart CEO change its strategy on such a short notice and in such a clumsy way? At times the easiest answer is also the right one: at 1100 chf the company was too expensive for a potential bidder. It became clear to me that the owners never had any other intention than selling the company, but needed a bit of marketing strategy in order to convince shareholders. In September of 2006 the company received a bid for 100 pct of the capital at chf 1100.



My father told me the best way to invest was not with your head, but with your seat. “Just sit on the stocks.” During the last half of the 20th Century this was certainly good advice. Despite the aberrational volatility at the turn of the century, it almost seems like my father’s advice is still good today. Since the War started, we’ve been on a steady grind up with hardly a major pullback in this bull market, almost like in the old days as prices just grinded up and up and dividend checks came every quarter. As I get older I realize how much smarter my father has become.

Larry Williams counters:

But what if your drugs of choice were Intel, United Airlines, GM, Kodak, Polaroid, Albertsons, etc? All “great growth stocks” at one time, but now disasters.

James Sogi responds:

Diversification helps avoid total loss. I’m not a stock picker, but now we have ETFs. The Dow just made an all time high.



Note from Vic and Laurel: this essay contains much material and a framework we don’t agree with, but as Bo is always insightful and fruitful to read and know, here it is for his current and future fans.

I get so tired of the genetic prattle in the news. It’s a stunt. If kids are pre-programmed for low intellect then why am I beating my head against the blackboards to teach them in school? If there is a gene for drunkenness then why is AAA successful? If there is a killer gene then why not string up babies as they hit the sheets? The answer to these and other media paradoxes lies not in our genes but in the environment in which we and the genes live.

Not all scientists think genes are all that important. Dr. Ruth Hubbard of Harvard University states in a book Explaining the Gene Myth that we are not simply blobs of DNA. We are complex organisms that are more difficult to understand as individuals and in the scope of evolution. She says that the myth of the all-powerful gene is based on flawed science. She disagrees with the notion that genes are responsible for our future mental and physical health, and offers instead that some geneticists and the press cloud the true issue of environment.

My college genetics teacher Dr. Mathew (not his real name) was a genius with a fondness for Drosophila, the fruit fly. The professor spent the first day of class thanking all the Drosophila that had made his career. In the first week he also memorized the names of each of the two hundred students who asked a question. There were many since genetics is tough to understand. My daily job after Veterinary school was to monitor through a little glass window the steam room at the Intramural Building to curtail a rash of men passing chocolates on the benches. One day a tap on the other side of the glass took my eyes up from a text to behold Dr Mathew shouting, ‘Mr. Keely! I’m so glad you asked about Drosophila.’

Fruit flies are revered by geneticists because they have only eight chromosomes instead of the human 46, they reproduce very quickly and have lots and lots of offspring, they’re teeny and take up little room in a lab, and they don’t eat much. So awestruck was I by their import that for three months I didn’t clean the garbage out of the dump where I lived, cooked and slept. Clouds of thousands of tiny flying insects reproduced that were closely enough related to fruit flies that I theorized that I didn’t want to stake my future health on further experiments with them.

Years later in 1995, not because of my sheepskin but due to a rather cutting racquet and story telling, I stayed for one week with James Watson at his home near the Cold Springs Harbor Laboratory. I have five memories of the short stay. His two pet expressions that juxtaposed the past and present were, ‘It’s because we are wired that way’, and, ‘The future!’. The third recall is at the daily breakfast table where he uncannily put one eye on the newspaper and the other eye on me, and the next morning quoted the previous day’s headlines and our chat. The fourth is his lamentable tennis backhand, ‘Wired that way but think of the future!’ The fifth is the Human Genome Project started in 1990 that was in full swing among international geneticists to map the human DNA. That’s about 30,000 genes. The primary goals of the program were to impact the future of medicine and to better understand our place in the world. Dr. Watson toiled, was ebullient and formidable.

A year after the Watson visit, I decided to chuck it all to step off the front porch of a Connecticut manor under a backpack and walked a patchwork of trails north for 500 miles to Canada. Somewhere on the Vermont Long Trail on a helix ascent of a treacherous mountain, I met a steel-haired 65-year old gent in his retirement who was hiking my path except that he’d started three months earlier in South Carolina. We stood facing the same mountain as he soberly advised, ‘You have a choice, guy: Hike an hour to the top, or take the five minute ski lift.’ Earlier he had climbed it, and as a reward had descended the lift and was about to ride up again, and continue to Canada.

Similarly, every individual evolves with his choices, even as the species develop with theirs. There are many ways up the same mountain, real or metaphor, and I believe that we should take the slow, hard paths early in life to enjoy the fast, easier ones later as rewards and overviews. Behavioral genetics and gene therapy remind me of the original sin and confessional. Genes and sins, sins and genes.

I think the modern fast forward into a genetics revolution involves much sleight of intellectual hand to divert we the people from the true issues of overpopulation and toxins filling the earth and ourselves. Is it easier for you to accept an inexpensive snip at your next child’s DNA to ensure his healthy delivery and life, although it’s placebo, or to start riding a bicycle to work and join others in spending a few billions to clean up the environment?

I believe our stable of problems to conquer this decade includes an overly acidic diet, premature hormones from early s-x, processed foods and additives plus preservatives, over-prescribed medication, street drugs, in utero toxicity, city water, amalgam fillings, car exhaust, pesticides, industrial pollution, and not cannibalizing psychologists. If we continue the genetic waltz then these real causes of individual and societal behaviors and diseases will be ignored and forgotten. Be on your toes for theater. Dolly the lamb was born from the DNA of a mammary cell and named after Dolly Parton for obvious reasons. This is genetic hype the public feeds on. We are not prisoners of genes as much as of our thoughts that comfort us.

I may be wrong. I’m sitting at my evening date with a bare light bulb at the Subway Shop in Blythe, California reading The Complete Idiots Guide to Decoding Your Genes. I feel like just another person trying to understand the universe. However, unlike many, I don’t swallow easy solutions just to ease my brain. A kid just walked in from the rough neighborhood and bragged to someone, ‘That’s our homeless teacher, Mr. Keely. He read books upside down to improve his eyesight.’ He didn’t say there’s a gene for homelessness and reading right to left, and that’s the kind of hard facts that I appreciate.



I met Marty Whitman a couple of weeks ago when I was in New York City. Fascinating guy. At 80+ he’s in better shape than I am. But I think Curtis Jensen has a little too much tech focus. Balance sheet analysis doesn’t work as well; techs can have a ton of cash on the sheet and just run through it over time. He’s good, but he ain’t Marty. Also, I hear Marty’s real big in Hong Kong real estate right now.



I’ve always enjoyed Rod Stewart, including especially his remakes of the songs of others, such as “Handbags and Gladrags” (Cat Stevens), “I’m Losing You” (Rare Earth), “So Far Away” (Carol King), etc. My aunt was always partial to his disco era “Do Ya Think I’m S-xy”. In his early career he had much street cred as a rocker, singing great songs, accompanied by the very best instrumentalists, such as guitarist Jeff Beck. He’s long since become the accommodating butt of jokes, and there’s a mutual understanding between him and his audience that though he long ago sold out, the sell-outs are quite enjoyable, and they keep selling out. After a lucrative foray into the world of non-rock standards, he just released a new album of rock song remakes, including versions of:

…and more!

Yes, yes, the album is a little bit by-the-numbers, but it’s still enjoyable. He’s picked out good songs. He does them in his distinct voice, and you end up liking them as companions to the versions of the original artists.

“Father and Son” is another Cat Stevens tune. Stewart-Stevens is a nice collaboration. The original Stevens versions can become a little bit too dark if you listen to them for ten minutes or so, and Rod takes some of the edge off.

“It’s a Heartache” is a nice choice. Bonnie Tyler, who did the original version, has raspy voice that’s similar to Stewart’s. Compare/contrast/enjoy.

“Have you ever seen rain?” Who wouldn’t like this song? And the funny thing is, when you hear a Rod Stewart remake, you don’t tend to resent that it’s supplanting the original. They can live side-by-side.

“Love Hurts” Originally by the Everly Brothers. Then remade by metal group Nazareth. Finally, now remade by Rod Stewart. Who’s next?

Finally, for the ladies, here’s what this s-x symbol looks like these days, lounging on his yacht.

And for the guys, here’s a candid of Barbra Streisand.



This is real life stuff from someone I met a few years ago. It's a sad story of the downward spiral of a trader — but there are lessons here:

Dear Mr Williams,

Of course I don't know if you remember me. In 2003 we wrote some emails to each other. I'm the now nearly 28 year old man who wanted to raise a fund at that time. I was very passionate at that time and had a date with a special lawyer to take this initiative. He told me that this would take €120,000 to get it ready for real sales. Because I've not had this money I forgot the project and also forgot replying this to you.

Another result of our contact three years ago was that I bought your book "Right Stock at the Right Time" and was so convinced of the "Darlings of the Dow" system, that I bought the book another three times and presented it to people I like and recommended it much more often. Unfortunately I didn't follow the system, because I wanted to make "fast and more money" than 25% per year!

So I've lost and my portfolio has had a drawdown from €50,000 (much money for a 25 year old, I think now) at that time to now €30,000! I became a victim of banks and lost €10,000 with options. I wanted to make fast money and this try had to fail, I think now. The drawdown of the Turkish ISE Index two years ago cost me another €3,000. I invested €2,000 in two-day-individual-coaching by a top German trader who specialized in Fibonacci. If I had bought myself a good cigar and lit it with a bill I would have had a better return!

My last try to make fast, good money and maybe to live from my profits was, that I opened an account with a Swiss forex broker. In theory it worked, which means I ended the first two month with profits of 140% and 80% respectively. Unfortunately, this was a demo account! With maybe too much confidence in myself and the broker I opened a live account, and need I say that this Swiss broker plays customer tricks. So there is no comparison from demo to live! Although I thought I was prepared, well, this try failed too and I lost a further €5,000!

Now, I'm the disappointed owner of a €30,000 account and don't know what to do now. My goal is to live from my profits. In accordance to that I established contact with ###### (you probably know this Hong Kong system developer). He was so kind as to provide me with a performance report on one of his fully automated trading systems! Immediately I was convinced by a system which made 400% last year with a drawdown of only 10%.

In my opinion ###### is nice, but when I wanted to open a trading account with the only German broker who uses his strategy-runner, they warned me urgently. In their opinion he also plays tricks on customers. I phoned another German investor who bought one of ######'s systems and is trading a "big account" on it, and he also subscribed to the bad opinion of him.

Honestly I don't know whom to believe. I don't know what ######'s advantage would be, besides the leasing fee of $120 per contract per month, providing customers with non-working trading systems. All think that his systems are "optimized" on past data and will not be profitable with real money!

Sincerely, ###### ######

Mr. Albert replies:

This type of story is so prevalent in the day trading shops I've been in. Not having to listen to these anguished tales is the primary reason never to go back. I still blame myself for not shaking my friend as he froze and let a $5,000 loss turn into a $100,000 loss in the space of an afternoon in the fall of 1998. He lost his account — all funded on credit cards in his wife's name — and I never saw him again.

One lesson I've taken from my own recovery, and from watching too many guys lose much much more than they could afford to, is to have a back up non-trading plan and pick a loss number after which to stop trading for a while.

Of course, it seems like most successful traders have had at least one period of total ruin and several of massive loss. In fact there are very few great traders that I can think of who have had long term success without at least one total blowup. Often this story is the first chapter of a guy's figuring out a new method. If he can come back and find something that will work for him, then this first experience will be invaluable to him later on.

Ken Smith adds:

Thousands perhaps are in the backwaters of life because of the debacles in 1997 and 1998. These stories should be a lesson to those trading today, with the same systems enlivened with better kinds of flashing lights.

It was some kind of miracle that I took $25,000 and turned it into $115,000 back in the heydays. The market just went up and up and I could not pick a bad stock. I would make $10,000 in a few days.

Then the market turned and I did not recognize it, played the same game, did not change my style, kept reading web pages from the bulls. But the bears had taken over.

Then by the time I recognized my error the bulls had taken charge again and by that time I was listening to the bears. I lost both ways.



I use an intuitive and unscientific rule of thumb derived from a law of cybernetics.

To forecast/control a system of degree N, one needs a system of at least degree N+1. Positing an arbitrary hierarchy of markets systems: years > months > weeks > days, means that to forecast one day ahead one needs to look at weekly anomalies.

That is sets of five trading days. Since in a parametric setting one needs at least 20 to 30 data to converge to a normal law, the minimum length of data is 5*20 to 5*30, that is 100 to 150 days, to operate at the daily frequency.

Paolo Pezzuti replies:

My opinion on this issue is that the length of data should not be defined as a fixed number (e.g. 150 or 200). Data selection to run the tests should reflect criteria of behavior observed in relationship with the scope of your test objectives. In the everchanging cycle process you might recognize that a cycle has changed because of increased volatility or directionality or what else you have identified as your guiding parameters of the market “personality”. In this case your length could vary a lot. For example, if you assume that a new paradigm began in 2003 with a low volatility environment, etc. and this is relevant for the type of assumption that you want to demonstrate with your testing activity than you could use a 600-days data test set.



I am reading The Elegant Universe by Brian Greene about the development of Super String Theory. Greene, a leading physicist and string theorist, traces the development of the ideas which led to General Relativity and Quantum Mechanics in the clearest explanation I have seen yet. If an idea can’t be explained in simple non technical terms then it is not really understood.. They don’t really yet understand Super String theory, but have some interesting ideas.

General relativity came in part from the idea that accelerated motion and gravity are the same to the person experiencing it. Gravity is an artifact of the shape of space and time. Motion approaching the speed of light reduces space and time. So light should be timeless, and the same stuff that was around at the beginning. One of the main insights of quantum mechanics is that our predictive power is fundamentally limited to asserting that such and such outcome will occur with a given probability. Quantum mechanics arose form Max Plank’s discovery in 1900 that rather than picturing energy as waves, lumps or packets is a better description in the form of probabilities. Super String Theory attempts to unify the conflict between relativity and quantum theory and their differing results in the macro and micro world by removing the infinite probabilities outside of the 0:1 framework. Super String Theory replaces the points of Quantum Theory with strings or Kalusa-Klein curls of multiple dimensions. (Out of Flatland revisited!) As an aside my theory is that our universe will be found to curve back on itself at the ends, and that it is just a Planck’s length inside another bigger universe, and that the little Planck length curls inside the strings are separate little universes themselves and so on ad infinitum bigger and smaller dimensions.

Despite Doc’s admonishment, the same ideas that helped physicists discover new tools should help market speculators model the markets. Markets and physics both rely on probabilities which is why physicists are seen on Wall Street frequently. Markets tend to look like waves, but we know that it is better to regard them in probabilities, and that it may be appropriate to see them in packets. An example is the last three months have been lumps of price clusters with jumps between them, five days of price clumps, then another big jump, like the hotel maids I wrote about last year. A continuous model has difficulty capturing these packets of price and then the quantum jumps to higher levels. Rather than model on linear time the Calabi-Yau idea of multidimensional time provide a good model. Tick charts are a start in this direction as they model a different dimension other than time. Market depth, order speed, order source are all dimensions other than time upon which to model markets,

Another example is microstructure theory as a parallel to micro physics. To the retail investor, the Dow represents the market. When it hits news high, he feels it is a good time to buy back into the market. To the public price is a defined point. To the chartist, the market waves outline meaningful relationships. To the speculator the price action is an transitory iteration of probabilistic sequence and uses statistics to model probabilities. Even deeper than the point of price are the deeper structures of the markets that like space and time to the relativist, and energy packets to the quantum mechanic, market structures shape the form and function of price movements and allow market events to occur and define the artifacts of their shape. To the market physicist, price is not just a point, but rather a field of probability spread out over a range over a period of time. The probability field is a better way to regard the markets.. Focus on point and execution can be misleading. Closer examination reveals that price is quite ephemeral. It jumps, changes, flips, and at deeper levels is based on much different criteria than simple price quotes against linear time. Modeling these things in markets is as important as the study of physics to modern life. The study seems pointless at times, but one or two breakthroughs can be indeed ‘meals for life’. Why stay in Flatland and live a 2 dimensional existence?



On earnings: If you take SPY daily closes for earnings-reporting months (1,4,7,10) and compare with the non-earnings months (2,3,5,6,8,9,11,12), we see that for earnings months variance (F-test) is significantly higher:

F-Test Two-Sample for Variances         

             Variable 1        Variable 2

Mean      0.000664        0.000353

Variance 0.000141        0.000103

Obs          1153            2309

df             1152            2308

F        1.36085

P(F<=f) one-tail 4.17E-10

F Critical one-tail 1.086825

And even though return for days of earnings months are higher, the difference is N.S.:

T-Test: Two Sample Assuming Unequal Variances        

           Variable 1        Variable 2

Mean     0.000664        0.000353

Variance 0.000141        0.000103

Obs          1153            2309 

Hypothesized Mean Diff     0

df                              2017

t-Stat                  0.762086

P(T<=t) one-tail    0.223049

t Critical one-t       1.645609

P(T<=t) two-tail    0.446098

t Critical two-tail    1.961141

Thus earnings months are more volatile.

James Sogi adds:

The ES CME mini seems to have several modes of moving. One is the steady grind up on high volume a the buying just eats away at any selling with high volumes of bids and asks on both sides of the market, but at a slow steady pace. The odd thing is that the market grind sup through higher ask than bid. The other mode of movement is the airdrop such as this morning when all the bids seems to dry up and the market falls fast, not due to the ‘grinding action’ but more of a vacuum effect. This can happen even when the numbers at bid are higher than the asks. There is movement with up and down jittery price action and movement steadily in one direction. There is movement within quantum levels, and movement out of the levels which like boiling water takes more energy. The micro structural elements should be able to be quantified to signal at least descriptively what is taking place. Prediction is of course harder, but the precursor conditions ought to help prediction.

As to whether stocks fall faster than they rise, Vic and Laurel’s studies disprove that. The vacuum effect described above can happen to the upside and frequently sharp rises occur, as we have seen this past few months, with rises as fast as if not faster than drops. The rises are fueled by the short covering as well as the vacuum effect and can be even stronger. This rapid rise is what I call the ’swoosh’ effect. This also oddly happens when the ask volume is higher than the bids. As usual, its not what you would expect. Another issue is whether the vacuum drops and pops are connected ala Lobagola effects. It would make sense. George Zachar has said that volume is not predictive, and I agree, but something else is going on, and I intend to find out what it is and why it does what it does.

Steve Leslie replies:

Intuitively I understand the aspect of crowd behavior and a group think mentality. I have also read where analysts are slow to increase earnings estimates usually taking 9 months or more to actually catch up with the company. It is probably due to and it certainly is exacerbated by some companies not revealing all of their cards. They therefore give out parcels of information over time. It also may be due to lazy or fearful analysts who key their work off of others. They just mimic what every other analyst is saying. That way if they are wrong they can state the obvious, that everyone else was wrong therefore it was due to faulty information rather than their own ineptitute. . Blaming an uncooperative exec at the company for not disclosing pertinent information for them to do their job is often a proper copout.

I liken this phenomenon to elected officials who like to keep their jobs by not necessarily doing anything big but not making any big mistakes either. We based our decision to invade Iraq on faulty CIA intelligence.

Execs who make big mistakes can get fired quickly. There just isn’t much upside to being flashy when being average is just as financially rewarding.

On the other hand, how often do you see a stock get repriced overnight with a 30% haircut. Once again, fear may just be taking over. An money manager, hedgefundist, institutional investor, or similar professional may be saying well lets just step aside for now and see where the dust settles. There may be another shoe to drop and I don’t want to be around when that happens. So what is it to me to sell 1/2 of 1 % of my portfolio. To that end, they are being very reactionary and the insiders the market makers and specialists step back and let the stock fall. And they execute the stops on the way down.

It could also be a “gentleman’s” agreement on the part of the specialists and market makers to work in concert with other mkt makers to set the price and execute the outstanding tickets that may already be in the system. This way the “bookies” get rich and the public eats it. I suspect this is where the chair may fall in on. Just one more way to screw the investor for as we know most investors are long siders or “right way bettors” This way it can destroy the psyche of the individual make them easy prey for the predators and the scalpers (brokers included) and once more fulfill the prophecy of in the end the John Q. Public eats it. The publics time frame compresses and therefore they become the hunted rather than the hunter.

This is the stuff that runs through my mind and others are welcome to chime in. Or not.

As is one of my favorite lines from the movie “It is a fool who looks for logic in the chambers of the human heart.”



Here’s something I’ve just noticed GOOG is doing. Page Rank originally looked at how many other sites linked into another site. Their new tool, Custom Search Engine, allows them see which sites people specifically want searched every day. If I were still playing the search engine “optimization” game, I’d be hard at work on this angle, as GOOG no doubt uses this info in the current version of Page Rank. The more times a site is searched, the more valuable it is.



One theory is that incumbent parties grease markets before elections. In that September and (thus far) October has been good for stocks, how do these two months compare for years with elections vs. not?

Checking SP500 index monthly closes (with dividends) since 1980, two-month non-overlapping returns were compared with two-month Sep-Oct returns, counting back every two years from 2006:


Two-sample T for election vs all 2 months

              N    Mean   StDev  SE Mean

election   14  0.025  0.0637    0.017

all 2mo   156  0.017  0.0646   0.0052

T-Test of difference = 0 (vs not =): T-Value = 0.44  P-Value = 0.667  DF = 15

Though Sep-Oct returns for election years are better than average two-month returns, the difference is not significant. But perhaps the levers are longer term. The same test on July-Oct returns of election years vs. all four-month returns shows election years to be lower:

Two-sample T for elect vs all 4 months

          N    Mean    StDev    SE Mean

elect   13  0.0160  0.0926    0.026

all 4m  77  0.0332  0.0913    0.010

T-Test of difference = 0 (vs not =): T-Value = -0.62  P-Value = 0.544  DF = 16

For two- and four-month moves prior to elections, it seems the greater powers which are working are not political parties.



John Grisham’s new book The Innocent Man is really about four innocent men, all railroaded to death row or life in prison in Ada, Oklahoma, where my wife was born.

I know many of the locations in the book, having been to funeral’s at Criswell’s, the funeral parlor in town. I also was married in Ada, although not at any of the churches mentioned in the book.

I was encouraged to read the book by my mother in law, who knows most of the characters in the book. She grew up with and was/is pals with one of the judges who figures prominently in the book, and one of the accused’s lawyers was her divorce lawyer many years ago.

This book was extremely disturbing to me. Despite the fact that I generally have a negative view of government as a whole, I found the complete and total breakdown of justice in this case to shatter my entire view of the US justice system, particularly in light of the fact that two of the innocent men are still in prison.

I have long been a proponent of the death penalty in theory. Per the thinking of Jon Locke, I believe that since all humans have equal rights, once you take away the human rights of another, you have essentially taken away your own rights as well since yours were equal to those of your victim. Hence, I have no problem with the execution last night of the Gainesville serial killer.

The issue, however, is that I no longer trust the government to only execute guilty men. My first major doubts began a few years ago when I read the book “Death and Justice” by Mark Fuhrman. Death and Justice covered the sordid tail of phony convictions across Oklahoma due to the fraudulent lab work by Joyce Gilchrest.

“The Innocent Man” covers two trials in Ada during the 1980’s. During both of them, two men were convicted of murders with almost zero evidence other than videotapes of suspects relating dreams that they had about the murders.. the details of such dreams being totally conflicting with each other and having no relation whatsoever to the actual crimes.

In both cases, police employed jailhouse snitches to relate supposedly overheard conversations in the Ada jail, despite the fact that in certain cases the person claiming to have overheard a conversation was physically not in any position to do so. In fact, the same check-bouncing jailhouse snitch figured prominently in both trials.

Grisham tells a story of corrupt police, prosecutors, and crime lab personnel fixing evidence, encouraging false testimony, and failing to consider (or turn over to the defense) a multitude of evidence that clearly led to other suspects.

The judge in both cases failed to recognize that one man was clearly insane and not fit for trial, and in another case held a hearing on the prosecutions failure to over-turn evidence (the video-taped confession of another man) AFTER the trial was over and the verdict reached.

Ultimately, two of the innocent men were freed after DNA evidence was analyzed due to the work of Barry Sheck’s “The innocence project”. Unfortunately, two innocent men, Tommy Ward and Karl Fontenot, remain in prison. How this can be is frightful. More importantly, why those who faked evidence, both in these cases and in the Mark Fuhrman book, are allowed to walk the streets is mind boggling. To fake evidence and encourage false testimony in a capital case is nothing short attempted murder, and those responsible should be charged with such.

James Sogi responds:

Our legal system has many defects, and has great room for improvement. Yet it is among the best the world has ever seen in history. If you think the fog of war or the uncertainty in the market is great, you have never been in trial where the world can seem to turn on its head. As in the markets, the probabilities favor the proper outcome. Tell that to the unjustly accused, the wrongfully sued. I see many things in the smooth, fast, efficient electronic administration of the markets that the justice system ought to adopt such as standardized contracts and electronic filing. The system is slowly moving in that direction such as the Uniform Codes, use of standardized forms, arbitration, mediation, but the friction is very high. The friction comes from the participants, the litigants, the business people, who want, but cannot get, guarantees.

In an adversarial system where half the people lose, the common talk on the street is bound to have a large negativity factor. Who among you will volunteer to have your case be streamlined, and set aside the historical precedents that brought the US to where it is now to help speed up the system? Who will pay the extra costs to have a private qualified arbitrator decide the case and bypass the free service provided by the government for citizens to resolve disputes. Who has not thought that extra judicial process, such as Acme collections, guaranteed service 24 hours, 50% commission might not be preferable to the interminable delays, excessive fees in the short run, but which will leave us like Gaza, Iraq and Afghanistan? Who among you will ask their lawyer to skip steps, to take short cuts to save some fees? Would you ask your doctor to skip tests for your child? As your resident legal eagle, I apologize to all of you for the expense and slowness of the system, but do not think that throwing it out the system is right or reforming it will be easy or fast, nor is it all bad as you have claimed. You must understand that we are only historically one step away from trial by combat used a millennial ago in English jurisprudence. Though the adversarial system is difficult, like the markets adversarial nature, it helps arrive closer to the truth. Let those who criticize attorneys and the legal system step up and be the first to give up their rights for which our troops fight. If we were to listen to the losers in the markets one would think it should go as well, filled with scams, frictions, dishonesty, poorly qualified operators, underperforming funds, and brokers with divided loyalties and conflicts.

Stephen Jovanovich adds:

I hate to be arguing with James; but the primary virtue of the American legal system was that it had a relatively limited reach. That is no longer the case. For the statistically average American family with an income of $50,000 and assets of twice that much, a summons is the equivalent of a serious illness that is only partially covered by health insurance. Win, lose or draw the costs will be financially devastating. I write this as someone who spent a good deal of 2 decades being the lawyer (but, Thank God, never the plaintiff or defendant) in California’s criminal and civil courts; but my best evidence is the experience I had while working my way through law school at Berkeley as a process server. If the legal system were not a financial horror for the parties, the lawyers whom I served would not regularly have threatened to (1) kill me and my few remaining Serb ancestors or (2) perform unnatural acts free of charge (an extreme example of pleading in the alternative).

The only cures for the extortionate costs and for the regular abuses of prosecutorial discretion that have also become imbedded in our system are to adopt the sensible rules of our British cousins: the loser pays the winners costs AND legal fees, and there is no pretrial disclosure or publicity of any kind in criminal cases.

Prof. Adi Schnytzer reminds:

Anyone interested in this issue should read Bleak House by Charles Dickens. It may be the finest novel in the English language and tells us as much about the legal system as we would ever want to know. Plus ca change …



Abelson: Karl Rove is the man behind the curtain, tells W what to do. There is no October surprise, except for the bad economy. A smart guy from Merrill predicted the bad GDP numbers, and he thinks housing is going to get worse. For some reason, the stock maket has been strong. Google is so overpriced, that Abelson admires them for using their overpriced stock to buy things. It’s not just the economic fundamentals that look bad, Frederic Ruffy says the techinicals look bad, too. The sky is falling.

Page 19: Canadian Natural Resources is sitting on a high-growth project in the Alberta Tar Sands. Wall Street worries that it will spend too much money developing it, but over the last 20 years CNQ has done a great job with acquisition and drilling activity, so the shares are enticing.

Page 21: Verizon is a great company. Buy now. In May, Barrons recommended Sovereign Bancorp, and it is up 20% since. Now it is a buyout candidate. Buy now.

Page 22: Tellabs went from over $60 in 2000 to $10.30 today. But it has great long term prospects and is undervalued.

M4: The market goes up, and it goes down, so don’t sweat the fact that it went down on Friday. Coming off of last week’s assignment of human character traits to the Dow, Michael Santoli is upset because this week the market was not forthcoming with us about why it does what it does. Anyway the rally is legit, because a lot of people haven’t participated in it, and are now itching to get in. The options back-dating scandal still has legs, and will hit a bunch more companies.

M8: The Airbus deal with China presents a lot of problems for Airbus because working out the logistics of the production agreement will be tough. Royal Dutch Shell paying top dollar to minority owners of Shell Canada. Costs in their tar sands operations are way over budget (but don’t let that scare you away from CNQ, mentioned earlier).

M9: Sinopec (SNP) looks cheap.

M13: In case you have been on a desert island, GDP growth was bad, and the housing market is bad. Washington and Wall Street will be watching October’s employment data, due out Friday.

M15: Sugar supplies may dissolve quickly in early 2007, due to the vagaries of the sugar market in Brazil. Somebody says prices could top out at 13.50. Due to ethanol used in Brazil and elsewhere, sugar prices are now influenced by oil, somebody points out that if crude remains high, and lot of Brazil’s sugar will go to ethanol. Corn futures were up.

M18: When MSO reports earnings, option traders, like Dan Quayle, will be expecting the unexpected. Therefore, options traders have all sorts of different positions.

Page 25: United Health is looking good now that they have raised earnings projections and fired their chairman. Christopher Bonavico says the stock is dirt cheap when he considers where earning could be in three years.

Page 26: Feature article detailing the fact that the tech sector is very competitive. Paul Wick of Seligman Communications and Information has done a good job of picking the winners and losers. He likes ASML, CYMI, KLAC, MFE, STX, SYMC, SNPS. He hates APCC, AVCI, CCI, DELL, NTES, NYT, KNOT, WBMD. Dell is a one trick pony and the trick is gone.

Page 30: Chrysler and Mercedes haven’t meshed well because Mercedes doesn’t want to ruin its image by being associated with Chrysler. Chrysler is a mess, and CEO Tom LaSorda has lost credibility despite his legendary record on the field. Chrysler, however, is doing what it can to improve.

Page 32: The guy on page 26 was wrong, Dell is at the bottom, and there is real value in it. The release of Vista ahould help.

Page 33: New rules for options margining, now you can take a “portfolio approach” to your position, and net out your long and short positions in the same stock when calculating maintenance margin.

Page 34: Former Columbia Professor Michael van Biems now runs a value focused fund of funds. Says it is impossible to forecast growth, so he likes value strategies since they don’t try to forecast growth. He doesn’t like leverage. He has $155 million in his funds.

Page 35: Fund of funds are listing on exchanges in Europe, people like this because it provides liquidity. There are also tax efficiencies.

Page 38: Before you buy a Chinese index fund or ETF, figure out what you are buying. Different funds have different construction rules. The Powershares global dragon fund is based on the Halter USX China index. This Halter guy has a side business having Chinese companies do reverse mergers with shells that he has an interest in, and then they make it into his index. This could be good or bad.

Page 40: M.D. from Stifel Nicolaus ponders various telecom issues. Says the most important issue for the next two years is what happens with the direct-broadcast satellite companies. Lots of different things could happen to them.

Page 46: Capitalism is the answer to health care costs. In Maryland, the state is reneging on promises it made to its deregulated utilities.



After having the program for over a year and subscribing to a newsletter on the program, I finally figured out how to calculate t-scores within Metastock. Needless to say it’s not in the manual but you can do it if you ‘work around’ what the program was really designed for — assorted TA rubbish and highly optimized randomness.

I wasn’t sure about my work, so I cross-checked one system in Excel. Turned out that there was a discrepancy in the standard deviation — Excel had it as 11.33, my Metastock version had 10.85. I then tried recalculating the standard deviation ‘longhand’ in Excel and got a result of 11.28.

I ‘think’ these are rounding errors and someone in a Metastock newsgroup confirmed this by informing me that Metastock has only single digit precision. Now in the hurly-burly of real-life trading my t-scores probably aren’t going to be affected that much. But I got a better understanding into the minds of the purists who insist on doing things the hard way, in S-PLUS, R, Gauss or Matlab.




Japan is in play. Largecap stocks are languishing in 2006 after outsized gains last year. Smallcaps, however, are down 50% in 2006. That’s right, 50%! Japanese smallcaps indices are called “MOTHERS” and “HERCULES”. Plus, no one has a clue about the BOJ. It seems that they want to hike rates again but persistent worries about deflation still haunt them. We’ll see. Anyway, I did a little counting last night. The weather in Tokyo has been horrendous. Typhoon type rains and winds for three straight days and nights. I took a cab from my gym in Otemachi to the Grand Hyatt in Roppongi. It’s a 15 minute ride. The cost? Y660, or about $5.50. Further, I counted more than 200 empty and available cabs on the road during my short journey. I’ve lived for long stints in NYC, London and Paris. There is no way to get a cab in those cities on a rainy night. Certainly not for $5.50. The point is that a shrinking population has all sorts of negative consequences on growth and prices. Where will the drift come from — or should it be a negative drift?



One underappreciated aspect bond investing is that for long term debt, the reinvestment rate of the coupon stream dominates the total return profile. So there is short-rate risk built-in to long term debt portfolios.

Prof. Ross Miller explains:

I cannot emphasize enough how important this comment of George’s is. In teaching fixed income to students (including my intro MBA class), I make a major distinction between instruments with bullet cash flows and those with multiple cash flows (for example, bonds). I point out, though I doubt students grasp it, that all numbers associated with “bonds” are bogus because of the unrealistic implicit assumptions made about the reinvestment of the coupon payments. I highlight this by pointing out the “future value” of a bullet security is obvious (it’s the amount of the bullet payment), but the future value of a bond a maturity is unknowable because what happens to all the coupon payments before the bond matures is outside the model. Finance textbooks gloss over this because it undermines the use of their most sacred of tools, NPV. They do bring up the reinvestment issue with respect to IRR, which they delight in bashing, but usually fail to note adequately that NPV has a similar problem, because this is much too subtle and disturbing a point for most finance professors.

Let me provide the following example:

Consider a 2-year T-note trading at par on issuance date.

Its PV (under assumptions that are often taken for granted) is 100.

The FV of the embedded principal strips in two years is 100.

The FV of the bond is 100 + last coupon payment + future value of the three coupon payments made prior to maturity.

In a world with no uncertainty about future interest rates (of which the permanently flat yield-curve world that is implicit in most textbook models is a special case) these future values can be readily computed by projecting the coupon payment into the future at the fixed interest rate. In a world with a stochastic yield curve, like the one that we live in, the future value is dependent on how one models the stochasticity and, in any case, the typical result is arguably a meaningless number.



When I first started deer hunting, I didn’t have a clue what I was doing. I borrowed a friend’s 30/30, he gave me a half full box of shells, I bought a $7 tag, and off I went to my Grandma’s farm in Steeleville, MO.

My very first morning I went out, I didn’t have anything to sit on, so I grabbed one of the kitchen chairs and dragged it out into the woods. I must have been quite a sight.

I set the chair next to a big oak tree and waited.

Within 30 seconds, a deer appeared up the hill from me. It was moving parallel to me. I waited until it stopped and then shot. I had no comprehension of my gun, its range or its capabilities. I couldn’t tell you if I hit the deer or not. All I know is it ran off and I started to chase it. I chased that deer for about a mile. It kept stopping and looking back. Every time it stopped, I would stop and shoot. Finally, it just turned on the afterburners and was gone. In hindsight, that was very atypical behavior for a whitetail.

Frustrated, I went back to my kitchen chair to sit down and continue my hunt. I couldn’t find it. Having not developed any sense of woodmanship, I was completely and utterly lost. It took me about an hour, but I did find way back, after I stumbled onto one of my hunting buddies who told me which way to go.

Arriving back at the chair thoroughly exhausted, sweaty and cold, I sat down to wait for the next deer.

About 30 seconds later I heard a noise behind me. I turned around to see three deer coming. Man, deer hunting is easy!

One of the deer was coming right towards me! I sat patiently waiting, with my gun resting on a branch. It came closer and closer and closer. I waited patiently for the deer to turn sideways so I could shoot it through the chest, as I had been advised by the brothers back at Sigma Chi fraternity house. It never turned.

So I had this deer facing me, straight on, at about the feet. Yes, three feet! I figured I could shoot it straight-on at that distance, so I shot. The deer did a black flip and landed on its back. I jumped up and down in exaltation. My first deer!

Then the deer got up and started to run! Remembering what had happened only a short while ago, I was having nothing to do with that. So I worked the lever on the 30/30, aimed and shot the deer again, right in the butt. It did a front flip this time and went down. I jumped for joy. I had my first deer!

Then it got up and ran again. Enough of this! I shot it again. And down it went.

Not taking any more chances, I decided to not jump for joy, but instead to jump on the deer. I dove for the deer, which was still only about 10 feet away, and landed on top of it, determined to hold it down.

It didn’t get up!

I then began the task of field-dressing the deer. I was totally clueless. My Sigma Chi fraternity brothers told me to cut its guts out, but neglected to go into any useful details as to procedures.

So I did my best, which wasn’t very good.

When I thought it was completed, I slung the gun over my shoulder and looked at the kill before me and then realized that I had to get it back to the cabin. So I started dragging it, and dragging it, and dragging it, until I realized that I was not going to make it back to the cabin in the near future. So I enlisted my friend to help me. Two dragging a deer is whole lot easier than one.

We got it back to the cabin, and a neighbor came by and showed me how to complete the job of field dressing the deer. I had thought I was done, but he showed me how far from done I was.

I threw the deer in the trunk of my car, drove it to my Grandpa’s and let him butcher it.

We got some great freezer meat out of the deer. We’d have had more if I knew anything about how to shoot a deer.

Here’s an economic note. That deer cost me $7 for the tag and less than $15 for the gas for the trip. So the entire deer cost me basically around $20. We probably got around 40 pounds of meat off of it. That’s $0.50/pound for the meat. Not bad!

Nowadays when I shoot a deer, the freezer meat we get costs more per pound than weapons-grade plutonium.

J. T. Holley adds:

The first thing I ever shot was a 20 lb. groundhog that kept invading my PaPa’s garden, eating up all the veggies. I begged PaPa from a young age to teach me how to hunt. The summer of ’80 he handed me a .22 rifle and said “If you can’t hit that big ol’ whistlepig then I ain’t teaching you how to hunt anything else.” I came through. It wasn’t easy to say the least. Took me two days, but I finally got him.



A dollar for one donut makes it hard for bums to justify sitting in Dunkin’ all day eyeing mom’s overstuffed low-hanging purse. Perhaps it is just a wise ‘customer sorting’ measure, bringing the retail big spender, families, full tickets, dozen buyers and not the 50 cent penny pincher/bum/lowlife who won’t spend much anyway/complains the most/scares off the grandmas, families and women. Send him over to your competition to keep them busy making nada.

I learned this in the auto glass replacement biz when I stopped doing mobile chip repairs for $35 and side view mirror replacements for $60 and instead booked all mobile jobs at a $160 profit minimum, same as all my other glass jobs. Forwarding them to my keenest competition overloaded them with the worst jobs and added about $160,000 a year to my model, and kept them busy not getting the high paying jobs as they were ‘booked’ with low paying ones. Also, a customer ordering a $35 dollar service was five times more likely to cancel/no show, so this dropped my cancellation percentage.

Clive Burlin adds:

Speaking of coffee and donuts, with their rapid expansion in the NJ/PA area, I think Wawa is going to put 7-11 under enormous financial pressure.

To give a simple example, 7-11 has been forced to start selling cigarettes at state minimum since Wawa started encroaching on their territory where before they were 50-60 cents more expensive. A few other reasons why Wawa is going to hurt 7-11:

1. A lot of their new stores are opening up with gas stations attached and the gas prices are ultra aggressive.

2. Coffee is not only fresh (a pot has to be discarded every 20 minutes), but they have at least 12 different types, from Kona to flavored.

3. Clean bathrooms. 7-11 doesn’t have facilities.

4. Made to order hot and cold sandwiches. 7-11 has a small selection of premade.

5. Free ATM machines. 7-11 has Citibank, which charges a fee.

6. Three or four registers going at once instead of the 7-11’s one.

7. Huge, well-lit parking facilities.

8. More selection and better pricing on groceries.

If Wawa keeps expanding across the country, 7-11 as we know it may not be around for too much longer.



It is sometimes helpful to understand the infrastructure of Wall Street and LaSalle Street. Consider what must go through the minds of margin clerks and risk managers and heads of firms when the market can spike up by 20+ S&P points in one minute on light volume. That’s a $5000 per contract move in the big S&P, and any margin account that couldn’t stand that and be in good shape at the time, would cause great trepidation. Consider also, the others hanging onto their shorts. “Dear, don’t give me that ‘d#mned broker’ stuff any more. If it had stayed up there for one more minute, you could have gotten a call and we would have had to cancel the vacation and send Joe to State College. Promise me that you won’t put us in that position again.” You can try also to put yourself in the minds of those who were short and saw themselves on their knees or backs, and were repreived when Clever Hanses knocked the price back from 1398 to 1376. “My goodness, tell me again how close to death I was before they defilibrated me? I promise I’ll give up smoking now.”

Jason Goepfert replies:

While difficult, I would suggest that everyone try to find a way to observe the inner workings of a brokerage firm margin department.

I managed such in the late 90s for the discount side of a large bank. When traders are heavily margined and facing a call, the vast majority do not use objective analysis, or even limited intelligence, in making their decisions. They use raw emotion.

And what most don’t realize is that those on the other end of the phone are subject to the same. There is an extraordinary amount of pressure on the margin clerks and managers, and when faced with settlement deadlines, their pulse quickens as well - it is not all about rules and procedure.

One nasty day in particular a large client dipped below his equity requirement and was up for a forced sell out. None of my margin clerks could reach him - it turns out he was in the championship of the World Series of Poker at the time.

At the 11th hour, he called frantically insisting that he had the funds available in a bank safe, denominated in poker chips. Given the amount and the client, the decision of whether to sell him out went all the way up to just under the CEO. He said sell, so we did, adding not a little pressure to the current market decline.

The client promptly sued us. And won. A lot.

While I believe the impact of margin selling on overall market performance is greatly exaggerated most of the time, in times of duress it is not as wave after wave of sell orders emanate from these shops, often in close proximity as the guidelines from firm to firm are fairly close.

Dr. Kim Zussman adds:

Adaptive Optics is a technology used by astronomers to counteract atmospheric blurring effects which degrade images for earth-based telescopes.

One method uses a laser to project to the upper atmosphere, creating an “artificial star”. Images of this star, which contain information about how light waveforms are distorted as they fall through the local atmosphere, is used to modulate a flexible mirror which corrects the wavefront and greatly sharpens actual star images.

Might “fat finger” events or other strange/large trades represent a form of artificial star designed to perturb markets for the purpose of sharpening the real picture? If so, who are these astronomers and can we benefit with our own specs?

Vincent Andres responds:

Another image which comes to my mind is that such events may be a voluntary stress applied to the market in order to visualize where may be germs of possible fracture lines.

Not obvious to exploit when seeing only the input signal’s echo and without precise dating.



Some of Ben Bernanke’s minions at the Fed (and to a lesser extent Ben himself) understand that they may have failed to plunge the stake through inflation’s heart. Anyone who has played serious golf (or, better yet, serious miniature golf, with or without vampires) can understand the problem that inflation presents.

What does golf have to do with inflation? It is simple. When putting, one has the best chance of making a putt if one aims to get the ball past the hole rather than to get the ball as close to the hole as possible. That is because the ball cannot go into the hole unless it travels a minimum of the distance to the hole. The downside of the intentional overshoot strategy is that when one misses, the next putt will, on average, be longer. Interestingly enough, this means that the most critical part of one’s golf game is the ability to make putts in the three to six foot range. Not coincidentally, this is one category in which Tiger Woods truly excels. If you are going to be a Tiger, you cannot always expect to have a tap-in for par.

Ben Bernanke is not yet in Tiger mode. He appears to be going for the perfect putt that makes its last rotation as it falls into the hole. The problem that he faces is that if the putt does not reach the hole, it may well roll all the way back to his feet and he will have to do things all over again. During the present pause, everyone is watching the ball roll toward the hole and we are waiting to see it if goes in. If the ball does not go far enough, Ben may have a much tougher second putt than he bargained for, windmill or no windmill.



Every day when I walk into the soup kitchen in Blythe, CA, it’s like opening a Louis L’Amour novel where I learn a dozen useful facts of life. On today’s “menu”:

1. How to hang a door: Better hang it before you frame it, like the legal system, to ensure no cracks.

2. How to straighten a newborn chick’s legs: Peel back the shell of the abandoned egg, put the chick in the sunshine and dose it with a drop of vinegar and water every hour until it walks.

3. How to become an Indian for $100: Locate someone on a reservation to get the name of a recently deceased Indian and his birth certificate.

4. How to enter jail: Preclude hardships by entering with a full stomach, empty bladder, laceless shoes and beltless trousers (laces and belts are confiscated), warm shirt, memorized phone contact for bail, and cigarettes sewn into your clothes for barter.

5. How to make better soup: Join a food line.

Ken Smith adds:

I was in that kitchen with Bo Keely for a noon meal, on the house. All the throwouts from local restaurants went into a huge soup kettle then were ladeled out the local members of indigent society who shuffle around the town, sleep under abandoned houses, camp under bushes by the nearby Colorado River.

I was not able to figure out how Bo differentiates himself from these bums, but his mind is compartmentalized, with these bums in one compartment and himself in another. The main difference is Bo acquired an education, was once a national paddleboard champion, racquetball player, and knows how to artificially inseminate cows. And he walked across 95 countries around the world.

Why he ended up eating in a free kitchen soup house and sleeping in his car is a mystery. I visited him twice with to discover how I might affect his life. Alas, such intentions are common to fools. Moses couldn’t change his tribe; as soon as he turned his back they reverted to character. Jesus failed also, nothing has changed in human nature since he ascended to the heavens. I guess he’d had enough for a couple million years and will renege on his promise to return.

Bo has been out of work for years, to my knowledge. His last occupation was substitute teaching in the local high school. Out of work so long he has no employment record from which to draw unemployment benefits. In times past could be arrested for “no evident means of support.”

One thing likable about Bo is he doesn’t give a hoot what anyone thinks about how he eats or dresses. Truly he has created his own life.



The Zurich Axioms by Max Gunther is one of the worst books ever written. There are a dozen axioms about cutting losses and cutting profits. But either there’s momentum or there isn’t, and it has to be tested. He doesn’t know anything about modern portfolio theory and says that you should double down in such things as commodities when you think they’re good, or stocks, but doesn’t tell you how this affects the risk or return. And the problem is when things look good, they’re usually bad, and vice versa. Nothing is tested. Everything is secrets from his father, and he tells you always to take your profit too soon. But an equally anecdotal person, Peter Lynch, has just the opposite view that you should hold every investment till it becomes a 10 bagger. For stocks, especially meme-driven companies such as retailers, that have the ability to replicate, my tests tend to show that Lynch is right. Like most books, since nothing is tested or documented it’s impossible to tease out the good from the bad. So when he tells you such things as disregard the majority opinion, you don’t know when you should do it, if at all. He tells you not to plan, but that’s the only thing an investor should do, as his life cycle, and choices among consumption and saving, is the main thing he should take seriously as he plans how much of his wealth he should have in liquid and risky investments as his needs for current and future satisfactions changes. The book is replete with anecdotes that are available for every point, and he summarized things like the wisdom of Getty, and the difficulties of General Motors, with the focus of a dilettante who has never actually invested or traded. A totally worthless book.

GM Nigel Davies replies:

The book has many flaws, and I got the impression the author is a playboy who had a wealthy and clever father. But I did find a number of things that were useful, namely the insights, probably second-hand, about different psychological states in trading and investing. It’s very dangerous to underestimate the importance of psychology within this or any game, not least because most people’s brains turn to jelly under fire. I posted before about police in shoot-outs being unable to count things like the number of bullets they have fired, and I have no evidence that traders perform better under fire in the markets. Even if they don’t fall apart completely, their thinking can show bias in favor of the hoped-for outcome. Thus, countists can be biased in that they will hone in on patterns that show the positive whilst ignoring the negative, failing to falsify their hypotheses by selectively hypothesizing.

I found the first axiom, “Worry is not a sickness but a sign of health; if you are not worried, you are not risking enough,” useful because of its contradiction of the deeply-held cultural belief that life should somehow be about relaxation. It’s a good point that people will be more worried when they don’t have a clue what they’re doing. But even if they do, and have “everything quantified,” there’s always risk. If anyone was long in May and June and not worried, he either had some screws loose or became punch-drunk.

Many of the other axioms are similarly useful; for example, the one on mobility recalled Lasker. But the examples used to illustrate them and attempts at application are just rubbish because of the total lack of methodology and the author’s apparent inexperience with trading and investing. It seems Gunther is a natural at psychology and got some second-hand wisdom from his father, but neither of these qualifies him to write an investment book. But there are worse trading books. And if any countists believe they are immune from the psychological weaknesses described, they are in serious danger.

Larry Williams adds:

I thought “Axioms” was a very good read from which I took away some good lessons. It is not a book that will give you a key or formula to the treasures but I think there is some wisdom there, or at least it was there for me.



IBM had an e-commerce group in its Watson Research Center back in the mid-1990s before anyone had heard of e-commerce. The group was organized as a patent mill, with everyone’s compensation directly tied to the number of patents they ground out. People would brainstorm and come up with some truly bizarre things, but overall it is hard to imagine an area of e-commerce where IBM did not get to the patent office well before anyone else with something that can stick .



Well, it’s that time of year, the time I look forward to the most!

This afternoon I head up to the farm for my annual month long deer hunt. This is a like a dream come true for me. One of the goals I set for myself when I started in this business is that I wanted to build an infrastructure that allowed me to take the month of November off and spend it deer hunting. Little did I visualize the potential of the Internet and handheld devices to would allow me to fulfill my dream yet still be in touch with my analysts while sitting 15 feet up a tree. A handheld in one hand, and an implement of destruction and mayhem in the other.

It starts off with setting up special stands for the boys on Thursday and Friday, doing laundry in scent-free detergent and storing scent-free clothes in scent-locked plastic bags until 5am Saturday morning.

My dad Roy and I will take the boys out Saturday and Sunday for the Missouri youth hunt. Roy will take my seven year old Boosh with him, and I will take my older son Deuce with me. The boys have renewed our annual traditional deer hunting bet again this year: a dollar a man. First group to get a deer wins $2 for the other team.

Grandpa and Boosh vs. Daddy and Duece! Pure, raw excitement that makes the World Series pale by comparison!



I am sitting in a cigar bar in Orland Park, IL right now with a view to the (largest I have ever seen) humidor, the center of which prominently displays "Ghurka" brand cigars that are $500 per stick. The only other cigars I know of that can come close to this are the pre-embargo Cubans (recalling Kennedy who began the embargo and purchased 10,000 of his favorite cigars prior to announcing same) and the aforesaid Cohibas.

$500 for a cigar is asinine, but I imagine I will see someone smoking one sometime soon while despereately scanning the room to see if anyone notices he has the most expensive cigar ever. It's just impossible for a cigar to be 100 times "better" than something you get at your local smoke shop.

The Cuban cigars are inconsistent, as the soil has been suffering for years from deteriorating farming infrastructure, ageing and defecting rollers, bunchers, etc. That said, there is no better cigar than a good Cuban. The "Ghurka" brand is made by another cigar company, Turano. It's purely a marketing thing, as are most cigars.



Interactive Brokers certainly leads in a number of areas. In contrast to recent articles about hacking online brokers, IB tells me they have never been hacked successfully.

Russ Herrold replies:

The casual advice about problems-solving which the IB frontline representatives offer is not compatible with CISP grade practice, in my experience. Informal assertions of “never hacked” are perhaps comforting to a layman, but should not offer real piece of mind, nor assurance to the receiver. “An absence of evidence is not evidence of an absence” of issues. Define a published process, and sell SLAs, and I will listen more carefully. Computer and network security is not an attainable Platonic absolute; it is the process of risk identification and reduction. I taught a course on networked host security in a limited context of “Hardening Linux” last year, and left the course materials online.



Zack Hample was featured on the CBS Evening News last night with Katie Couric and although he appears a little obsessed with the pursuit of snagged baseballs, it was interesting to see the methods he employs to increase his chances of obtaining them. He is even able to plead for a baseball in many different languages in case he is watching a game with foreign players.

In a sense, his positioning in the stands would have to be based on statistical modeling of player tendencies and where they might hit a ball. And his using a bit of deception and clever ways of snagging free balls raises interesting ethical questions.

Well, “the squeaky wheel gets the oil” and “he who asks gets” and “the early bird gets the worm” are three sayings that come to mind in Zack’s case. Assertive ball snagging.

Here are some of Zack’s tricks for catching baseballs:

1. Get to the stadium early and claim a spot near the field during batting practice.

2. Know the players. During batting practice, call them by their first names and specifically ask for a ball.

3. If you know a player speaks Spanish, Japanese or another language, learn how to politely ask for a ball in his language.

4. Avoid crowded games. Try going to the first game of a double-header or a game on a rainy day.

5. Watch games on TV carefully to see where balls are most likely to land in your stadium.




The visual evidence of Life adapting to ever changing environments over geologic time is one of much interest to the ichnologist (and hopefully to some on this board). Ichnology is an arcane field partially contained within the bounds of paleontology that employs a rather unusual, behavior-based taxonomic nomenclature for the often intricate and geometrically diverse traces left behind by life forms (i.e. tracks, tubes, burrows, fecal material, etc). Many times the actual creatures that left the traces are not known.

Beyond enjoying the outdoors, the wonders and expressions of nature, and beating at rock outcrops with an Estwing hammer, why (you may ask) the heck would anyone other than an eccentric geologist be interested in such an esoteric area of science? Well for one, the folks who spend billions of dollars a year drilling for petroleum like to develop models of past environments that will give them an edge in locating (or extending) reservoirs of oil. Recognizing depositional patterns can greatly increase odds of drilling and constructing a well in the right place (vertically and horizontally) and finding areas where source, reservoir, trap, and seal come together in perfect stratigraphic harmony. For the oil man there is nothing worse than throwing money down a hole— particularly an expensive “dry” hole.

Charles Darwin too had an interest in and a profound appreciation of what now would be called neoichnology when he wrote his study entitled “The Formation of Vegetable Mould through the action of worms with observations of their habits”. Darwin was very impressed by the cumulative effects created by the small, daily efforts of the common earthworm—the long-term creation of a soil horizon and the recycling of organic material on the surface of the Earth. In fact Darwin stated “The plough is one of the most ancient and most valuable of man’s inventions; but long before he existed the land was in fact regularly ploughed, and still continues to be thus ploughed by earth-worms. It may be do doubted whether there are many other animals which have played so important a part in the history of the world, as have these lowly organized creatures.” Many of his observations on the ichnologic equivalent of bioturbation were no doubt done at his country home outside of London.

For the most part, however, ichnology is a field with a relatively young history. As related in his American Scientist Online article, “In Search of the Optimal Scumsucking Bottomfeeder”, Brian Hayes notes that trace fossils provided “the inspiration for one of the earliest computer simulations of animal behavior, published in 1969 by David M. Raup of the University of Rochester and Adolf Seilacher of the University of Tubingen”. Later artificial life simulations also show the influence of trace fossil research.

But are the wondrous, geometrically-aligned, trace fossils visual representations of animal behaviors focused on the optimal means to acquire food with the expenditure of the least amount of energy? Are they an animal world corollary to Chair’s observations on Man trying to “satisfy his desires with the least amount of effort”? As Brian Hayes notes the food foraging model “…is still the leading hypothesis, but perhaps there is room for doubt”. There also is some doubt as to whether these behaviors really evolved in complexity over time or that different trace types are even representative of different behaviors.

In “Let Us Prey: Simulations of Grazing Traces in the Fossils Record”, Plotnick and Koy of the Univ. of Illinois at Chicago, suggest that “Changes in the occurrence of trace fossil types over time, in particular during the Precambrian-Cambrian transition, may thus be largely a consequence of the development of spatial heterogeneity on the ocean floor, rather than the development of new and more complex behaviors.” In conclusion Plotnick and Koy state “…that it is possible to simulate many possible trace fossil morphologies, including random movements, zigzags, and spirals, with a single simple behavior.” Touche for the lumpers.

One might take away from all this that one has to be careful with conclusions drawn strictly from visual data and the gravitational effects of hypotheses presented by earlier researchers. The mind seemingly also has a strong tendency to embellish with interpretation of visual data. An intellectual shave with Occam’s Razor to one’s scientific theories, however, appears preferable in most cases to a buzz cut from the Mistress of the Markets.

It is an interesting parallel that some of the complexity, fractal and physics-wielding gurus, brought their expertise to bear on the subject of paleontology. Like their forays into the financial realm they have found things in the “soft” life science field to be a bit more complicated than they imagined. Lesson: conclusions drawn strictly from formulae and without knowledge gained from real world observation also can lead one astray.

Ichnology then is a science that seeks to understand the environmental influences that effect Life’s movements through the substratae of the Earth and to identify and interpret components of behavior that are random and those that are representative of organized activity — all the time that the local, regional and global environment is being changed by that behavior.

Remind you of anything?



Isn’t it best to follow Dr. McDonnell’s advice and use out-of-sample testing? In-sample may lead off the cliff when cycles changes. Trades that work across cycles are better than cyclic, are they not, despite their rarity? Though you capture the cycle, you don’t know they have changed until you’re drawn down. Shortened data also lowers the usable time frame for testing.

Victor Niederhoffer replies:

All I can say is:

You are right                                                          

And we are right                                                       

And all is right as right can be                          

And I expect you’ll all agree                                   

That Sogi was right to so decree

From — Our Great Mikado, Virtuous Man

I like to condition things on the last 100 or 200 days of market moves and run tests within that framework. Ideally, one should do everything on prospective basis, constantly updating the hypotheses based on data available to you at the time.

GM Nigel Davies responds:

To capture ever-changing cycles there’s a case for using very recent data wherever possible, and perhaps three years is enough. But then, how should one deal with the rally from July, which has made just about every aggressive short-term system look rather good? They also looked good in April.

Is there not a case for using test data up to the last time the market was at a similar rank (e.g. I have Friday’s close as #2 from the last 20/50/100 days) in order to get more realistic test results?



Kenny Rogers, pitching ace of the Detroit Tigers, is today an overnight sensation at the ripe old age of 41. In 2005, despite pitching with All-Star credentials after a 17 year career with seven different clubs, he achieved notoriety when he shoved a cameraman who was, he felt, too close to his mug while documenting a disagreement Rogers was having with his then employer (Texas) over not extending his contract. This one indiscretion in an otherwise sterling career threatened to render his accomplishments insignificant as he became the poster boy for what many of us hate about pampered athletes today. The story could have ended there… but it didn’t.

Resurrected in Detroit, leading a band of misfits who had not had a winning season in 12 years, he has become the beating pulse of a team best defined by their heart. What’s more, judging by the emotion he’s displayed on the mound and in the post game interviews, I sense he understands that the only true road to redemption is to shock the world, to achieve such amazing results that the resulting antiseptic closes the previous wound so completely that though the scar remains, it becomes a remembrance of survival, his badge of courage, rather than the open sore it once was. Twenty-three scoreless post-season innings, heady stuff, surpassed only by the likes of Christy Mathewson (27 innings in the early 1900s).




1. Future market moves in the S&P are independent of the relative size of past moves in the S&P, Dow, and Nasdaq. Thus, a rise led mainly by largecaps, such as that decried by Alan Abelson in his current bearish column, is not more or less bullish than one led by the Nasdaq. A less restrictive null is that the relative ranking of the three aforementioned is not predictive of future moves.

2. Last Friday was one of those typical diabolical days. The S&P futures ended up a half point on the day, and a quarter point from open to close. Thus, all those who like to reverse the previous move will be short as soon as they can borrow funds from their others. But the market knows this, and reversals — or mean reversion, as some experts like to call it — don’t figure in such situations.

3. The Jonestown 909 went quietly to their deaths, led by the charismatic Pentecostal preacher from Indiana, who gained stature from frequent visits by Democratic presidential candidates who had the same message of “from each according to his ability, to each according to his need” as the preacher. Similar orderliness is shown by the hundreds of thousands of bears, led by their preachers, who gain stature from the shrewd and savvy friends who share their views that the economy is going to be much worse than anticipated.

4. I was on the tennis court with a hoodoo today for three minutes, and we spoke. The last time we did so, we played for an hour, and he told me his wife was going to Beirut for a vacation with the kids the next day, and the war broke out three days later — so I hypothesize that the market will have a major move against me in the very near future, but one that will only be 3/60 as severe as the previous beating he exposed me to.

5. Markets tend to reverse the corresponding monthly moves from last year in the last half of the year, but tend to follow the corresponding monthly moves from the previous year in the first six months of the year.

6. Stocks that show great rises in price with low profit margins will display lower performance in the next periods than stocks that show great rises in price with high profit margins.

7. The mistress of the market will remember all the easy ways she made money for the higher feeders in the market chain in the previous year, and will tend to repeat that method much more often in the future than would have been the case without it. Take the nice rise in vol in spring 2006 in conjunction with the staged speeches of Fed governors proclaiming their vigilance about inflation, in conjunction with earnings woes for the second quarter.

Russell Sears observes:

Regarding the first hypothesis…

Future market moves in the S&P are independent of the relative size of past moves in the S&P, Dow, and Nasdaq. Thus, a rise that is mainly led by large caps, such as that decried by Abelson in his current bearish column is not more or less bullish than one led by the Nasdaq. A less restrictive null is that the relative ranking of the 3 aformentioned is not predictive of future moves.Are moves in the Dow relative to S&P a leading indicator of Euro to $?

While my weak stats could not decide the best route to interpret this chart. But know enough to know these ratio, and timing things often seem plausible but are totally spurious. Also my lack of a personal trading venue for exchanges, left little motive, to persue much credibility to give this chart.

But a normalized (ratio starting at 1) chart of Dow to S&P since 1999 seems closely related to a normalized Euro to $, 1.5 years latter. The size and duration seem to match closely. Which would imply the Euro will fall some more but slowly over the next 1.5 years.



As a wonderful illustration of the harmonious accord and pedagogical perfection that prevails on Daily Speculations, I cite the example of Hermogenes, student of Socrates, as he appears in Plato’s dialogue “Cratylus”. Listed below is Hermogenes’ side of the dialogue, with Socrates’ parts removed. You will see that Hermogenes always finds a way to agree, though with a variation each time that keeps the conversation lively.

He starts with an elegant “That is my notion”, followed by spare “Yes”, and then a “He would, according to my view.”. Note that even apparently negative words such as “No” can actually be part of the process of agreement, as in “No indeed”. It is acceptable to display disagreement if it is a disagreement with a third party, not present, as in “There have been times, Socrates, when I have been driven in my perplexity to take refuge with Protagoras; not that I agree with him at all.” And don’t forget one-worders like “Precisely” and “Certainly”.

[Her.] That is my notion.
[Her.] Yes.
[Her.] He would, according to my view.
[Her.] Certainly.
[Her.] To be sure.
[Her.] Yes; what other answer is possible.
[Her.] Certainly.
[Her.] No; the parts are true as well as the whole.
[Her.] I should say that every part is true.
[Her.] No; that is the smallest.
[Her.] Yes.
[Her.] Yes.
[Her.] Yes.
[Her.] So we must infer.
[Her.] Yes.
[Her.] Yes, Socrates, I can conceive no correctness of names other than this.
[Her.] There have been times, Socrates, when I have been driven in my perplexity to take refuge with Protagoras; not that I agree with him at all.
[Her.] No, indeed; but I have often had reason to think that there are very bad men, and a good many of them.
[Her.] Not many.
[Her.] Yes.
[Her.] It would.
[Her.] Impossible.
[Her.] He cannot.
[Her.] There cannot.
[Her.] I think, Socrates, that you have said the truth.
[Her.] Yes, the actions are real as well as the things.
[Her.] I should say that the natural way is the right way.
[Her.] True.
[Her.] Yes.
[Her.] True.
[Her.] I quite agree with you.
[Her.] That is true.
[Her.] True.
[Her.] Precisely.
[Her.] I agree.
[Her.] Yes.
[Her.] Certainly.
[Her.] True.
[Her.] An awl.
[Her.] A shuttle.
[Her.] A name.
[Her.] Certainly.
[Her.] Well.
[Her.] Very true.
[Her.] To be sure.
[Her.] I cannot say.
[Her.] Certainly we do.
[Her.] Yes.
[Her.] Assuredly.
[Her.] Yes.
[Her.] That of the carpenter.
[Her.] Only the skilled.
[Her.] That of the smith.
[Her.] The skilled only.
[Her.] There again I am puzzled.
[Her.] Indeed I cannot.
[Her.] Yes, I suppose so.
[Her.] I agree.
[Her.] The skilled only.
[Her.] True.
[Her.] Certainly.
[Her.] To the latter, I should imagine.
[Her.] I think so.
[Her.] Yes.



Poker is a game that is part science and part art.

No-limit poker has been described as hours of boredom wrapped around a few moments of sheer terror. The feature of no-limit poker that makes it a game of terror is the all-in bet.

Let’s take a look at the all-in bet that makes it unique in poker.

Poker can have three types of betting structures and they are designed for a variety of reasons. They are limit, pot-limit and no-limit.

Limit poker is also called structured poker. That is, the player is limited to a size of bet he can make at any particular time. For example, a $10-$20 hold-em game means that the blinds are $5 and $10 and that an individual must wager $10 on the first two rounds of betting and $20 on the last two rounds. They also can make a maximum of three raises during each round.

Pot-limit means that at any time a player can wager the size of the pot. Once again, in a $10 pot-limit game, the blinds would be $5 and $10, and then the next player can bet the pot if he so chooses. In this case the bet has to be at least $10 and can go as high as $15. If that player does bet the pot of $15, the next player must either match the bet of $15 and can then bet as much as $30 the size of the pot at that time. As you can imagine, pot-limit can become very complicated and very expensive. The game is usually played only by the most experienced poker players.

No-limit, also called table stakes, is just as it sounds. At any time the player can bet everything that he has in front of him. This is the game that is unquestionably the most popular game around today, and almost every poker tournament uses this format. This makes no-limit unique and an extremely aggressive game and why it is referred to as the Cadillac of poker. It is the defining moment in every tournament. It can take you from chip leader to getting knocked out all in the space of a few moments.

The experienced poker player understands the all-in bet and uses it for a variety of reasons. The most common reason is to attack weaker players and force them to make a critical decision for all of their chips. For if they should lose this hand, they will be knocked out of the tournament. Psychologically, it is a very pressure-filled moment. It is the most wicked tool at the disposal of the poker player.

The other reason a player might use an all-in bet is to protect his hand and eliminate those with weaker hands or those on a draw. For example, let’s say there is $1000 in the pot and you are dealt Q-Q which is the third-best hand possible pre-flop. The bet comes around to you and you have decided that you definitely want that $1000. Instead of making a bet that will allow the other players to match and possibly outdraw you on the flop, you go all-in. This is an indication to everyone at the table that you are not fooling around. You are risking everything you have at this time, and they must match your outsized bet to compete for the flop.

A player who has a reputation of being an aggressive player and is willing to use the all-in bet is one to be aware of at all times. He must be respected, and this can lead to energy expended to watch him. This is the style of the new young poker players. They are very loose aggressive players. They raise with nothing, go all-in on stone cold bluffs, and constantly push the action.

The all-in can also be used at any time during the hand and that brings with it implied power. For example, If someone behind you has a big stack of chips, and has an image of being aggressive, you will respect that fact alone and may avoid playing hands that you might normally play. Or you might just call a bet rather than raise. This foces you to adjust your play and tighten up until that player either loses his big stack or gets moved to some other table. Thus they can pick up pots just by having an implied threat with the potential of the all-in bet.

There are other examples of where the all-in can be used but perhaps the one that has the greatest visibility and notoriety is to carry off the bluff. This is where you have nothing of real value in your hand, or you had a good starting hand but missed the flop completely. Since the all-in is so powerful it can be used to win pots while still having the weakest hand in play.

The all-in is the most potent tool of the poker player and it is a skill that should be developed and mastered to precision. After adding it to your arsenal of weapons, it will give you a greater chance of cashing or winning more tournaments.



A Meaningless Milestone?
Friday, October 20, 2006; D01

The Dow Jones industrial average logged another record yesterday, closing above the 12,000 mark for the first time. Despite the fanfare, it could be argued that the milestone is more symbolic than meaningful. A look at some other “milestones”:

The U.S. population tops 300 million
Coldplay’s “Speed of Sound” is the 1 billionth song sold on iTunes
Museum Lichtspiele in Munich celebrates 30 years
of daily screenings of “The Rocky Horror Picture Show”
Mary Kate and Ashley Olsen turn 18
Gasoline hits $2 per gallon

The Washington Post still substantially sets the agenda/tone for the national punditocracy and its followers in local newsrooms around the nation.

The Post has decided the only way to deal with objective undeniable widely-known good economic news is to declare it irrelevant, smearing it by association with banal trivialities.

Propaganda students, take note.



Flying is a miserable experience. I’ll leave it at that, but trust me, I could rant, if anyone would like to hear it.

Here, though, is a tip. Fly early in the day. Here are the statistics on four American Airline flights from LaGuardia (LGA) to Atlanta (ATL), for the time period Jan 1, 2006-Aug 1, 2006:

Flight#  SchdDeprTime  #LateFlights/#AllFlights
2377       640AM               30/211 
4864      1215PM               43/182  
2393       355PM               68/200
1297       740PM               117/196

So the 640AM flight was “late” only 30/211 times, or 14% of the time. The 7:40PM flight was “late” 117/196 times, or 60% of the time.

On average, the 640AM flight departed 27 minutes late. This is the average lateness of all flights, not just the “late” ones. (It actually arrived 5 minutes early, on average, because of schedule-padding.) The 740PM flight departed 70 minutes late, on average, and arrived 42 minutes late.

This material can be looked up on the BTS site.



I recently reviewed a paper which drew my attention to the long term rise of the US Treasury long bond future (continuously adjusted with all contract shifts), showing a price rise from 78-20 to 114-06 from 1977 to present. The question we are batting around the office is whether there is any economic reason for there to be a long term upward drift in prices. Such a drift would be related to the normally rising structure of the yield curve, with long term yields higher than short term. The upward shape is supposed to occur because of increased price variability of the long term bond vs. short term and liquidity preference; the desire to have your money sooner rather than later because your risk on holding the investment until it expires is greater. Liquidity would also seem to relate to the ability to trade the issue at tight spreads. Any educated comments on the subject would be welcomed.

Prof. Charles Pennington replies:

I assert that Treasury futures will have a long term upward drift if and only if long term bonds outperform short term in total return, over the long term.

Suppose that a bond maturing in 30 years is trading at price 100, and let’s assume that long term yield are 10% and short term yields are 2%.

Consider a futures contract on 30-year bonds that settles in one year, and suppose that this contract is trading at price P.

We could construct a risk-free portfolio consisting of a long position in treasury bonds and a short position in the treasury bond futures contract. This should earn the short term risk-free rate (and let me assume that 1 year is close enough to being “short term”).

Let’s also suppose that after one year, the price of the 30-year Treasury, which will also be the settlement price of our futures contract, has risen by $1 to a value of 101.

The final value of our portfolio, which cost 100 initially, is:

101 + 10 + (Pi-101)

(The “10″ is the dividend, and “Pi-101″ is the gain or loss on the short sale.)

This final value should be equal to 102, since we should earn the risk-free return. From that, we can solve Pi and get 92.

So in this example, the total return of a Treasury bond was 11% (10% dividend and 1% capital gain). The total return that we would have had by going long the futures contract would have been (101-92)=9, or 9% of the notional value. That’s equal to the total return that we would have had from holding the bond minus 2%, the short term rate.

In other words, the return from the futures contract is “as if” we had borrowed at the short term rate and bought the long term bond.

If that strategy makes money over the long term, then the continuous futures contract will show a long term upward drift. The Siegel book indicates that that strategy was about breakeven from 1802 through about 1980 and then did quite well since then.

Paul DeRosa Responds:

It is true that the bond future trades at a discount to its delivery value equal to the positive carry on the cash bond. If that carry is negative, the future will trade at a premium. There are hundreds if not thousands of traders who spend their days bent over desks enforcing that condition. It doesn’t necessarily imply the price of the futures contract will drift upward over time. They drift upward only within each quarter. So in the example you give, the contract will start each quarter at a discount of 2% to its maturity value. If the level of market interest rates were to stay at 10%, the next contract also would start the quarter at a 2% discount, but it would have the same maturity value as its predecessor. I would add one caveat, which sounds like a technicality but who overlooking as been the cause of tens if not hundreds of millions of dollars in trading losses during the past 30 years. The 2% discount I alluded to can be reliably captured only by owning the contract and being short the so called “deliverable” bond. At any point in time, several different bonds can satisfy the delivery conditions against the contract, only one of which is cheapest to deliver. Being long the contract and short the wrong bond can lead to any one of several outcomes.

George Zachar replies:

Yes. The accretion of the forward months should be identical to the positive carry one would receive by owning the underlying bond outright and financing it at the overnight/repo rate. You can make the money by carrying the “cash” or buying the forward, but the dollar amounts should be the same. This is carry and not drift/true price appreciation.

There is very slight positive carry on bond futures now:

USZ6 Dec06 110-18
USH7 Mar07 110-17
USM7 Jun07 110-16

The two-year future shows the impact of negative financing/curve inversion, where holding the instrument costs money (as your asset yields less than its cost to carry).

TUZ6 Dec06 101-28 3/4
TUH7 Mar07 102-02 s

The carry/deliverables/basis on these contracts is perhaps the most “crowded” trade on the planet.

“In the day”, one could make money in the forward mortgage market, when lenders would sell their production forward at a discount to carry. Those glorious days are long gone.

Carry hogs, er, traders have been known to “ride the Japanese curve” with enough leverage to make your eyes tear.

JBZ6 Dec06 133.56
JBH7 Mar07 132.83

They’d buy the forward Japanese bond, and pocket the carry, enduring the interest rate, yield curve and currency risks along the way.

The takeaway here is that one must be aware of all this when looking at fixed income debt futures prices. To evaluate long term interest rates cleanly, it is best to look at yields of relevant “constant maturity” indices.

Earlier posters observed that very long-term secular trends of dampened reported inflation and declining risk premia since the financial shocks of the Volcker era account for the observed trend toward lower yields and higher bond prices. I wholeheartedly second that analysis.

Stocks, famously, have unlimited long-term upside. Fixed income has the “zero bound” on rates, and central banks who have shown themselves willing to ensure that Deflation is rarely seen. Therefore, with an assurance that there’ll always be a little inflation, debt instruments are effectively capped out when their yields reach the low single digits.

Michael Cohn responds:

I would recommend everyone find a way to get “Rolling Down the Yield Curve” by Martin Leibowitz, circa early 1980s. Few articles as clear about how bonds work. I stopped trading basis myself in 1989 when four JGB basis-traders for what was then Mitsubishi Bank took me out to lunch one day in Japan.

Very little can go wrong when you are long the cheapest to deliver and short the future. Depending upon the set-up it was also a way to play changes in yield curve shape but now there are so many instrument, such as swaps, to play it an explicitly.

Jon Corzine made his name at Goldman by trading the delivery options and the dead period after the US bond contract stopped trading each delivery cycle. The legendary trader Mark Winkleman at Goldman made his name buy buying the bond basis and funding it cheaper. He had it to himself and our friends at Salomon. The old days were relatively easy.

You need to have a firm grasp of reverse repo rates for the deliverable bonds, and yield curve volatilities, to play from short side where you are short the bond and long the future. I recall the programs at my firm for modeling the change in deliverables to be extensive, as I use to play the bund basis, but with no apparent skill as I did not control the collateral, as could a German insurance company.

Dr. Alex Castaldo responds:

The question that started this thread was: is there an upward drift in fixed income markets like there is in equities?

The article by Vesilind claimed that this is so, and this drift arises from the fact that the yield curve is (on average) upward sloping due to the “liquidity preference hypothesis” and/or the “preferred habitat hypothesis”. In other words the “expectation hypothesis” of interest rates does not hold and there is a non-zero “term premium” embedded in interest rates.

Certainly there have been plenty of academic articles in recent years saying the expectation hypothesis does not hold. But I am more interested in the practical money-making potential here.

A simple strategy to capture the drift, that works well according to Vesilind, is to be long the “fourth nearmost eurodollar future”. I decided to test an even simpler strategy: each September buy the eurodollar future with one year to expiration and hold it until expiration.

You can think of it as a test of the good old “Keynesian normal backwardation hypothesis”: is the price of the future one year before expiration biased low compared to the expectation of what the settlement price will be.

Here is the data:

Contract       Date      Price      ExpDate  Price    Chg

EDU6 06 9/19/2005 95.690 9/18/2006 94.610 -1.080
EDU5 05 9/13/2004 97.045 9/19/2005 96.080 -0.965
EDU4 04 9/15/2003 98.165 9/13/2004 98.120 -0.045
EDU3 03 9/16/2002 97.535 9/15/2003 98.860 1.325
EDU2 02 9/17/2001 96.425 9/16/2002 98.180 1.755
EDU1 01 9/18/2000 93.470 9/17/2001 96.890 3.420
EDU0 00 9/13/1999 93.755 9/18/2000 93.340 -0.415
EDU9 99 9/14/1998 95.040 9/13/1999 94.490 -0.55
EDU8 98 9/15/1997 93.825 9/14/1998 94.500 0.675
EDU7 97 9/16/1996 93.700 9/15/1997 94.281 0.5812
EDU6 96 9/18/1995 94.260 9/16/1996 94.440 0.18
EDU5 95 9/19/1994 93.180 9/18/1995 94.190 1.01
EDU4 94 9/13/1993 96.070 9/19/1994 94.940 -1.13
EDU3 93 9/14/1992 96.140 9/13/1993 96.810 0.67
EDU2 92 9/16/1991 93.550 9/14/1992 96.870 3.32
EDU1 91 9/17/1990 91.670 9/16/1991 94.500 2.83

Avg 0.724

T Stat 1.940

At first the results look impressive: there is a 72.4bp per year gain, with a t-statistic near 2. However, much of the result is driven by the first two years (1991 and 1992) when interest rates were dropping rapidly. Without these two years the gain is only 39 basis points with a t-statistic of 1.15.

As mentioned by others, it is difficult to distinguish the term premium from the general interest rate decline after 1990.

George Zachar adds:

The Vesilind paper is an excellent and reasonably accessible overview of mechanistic currency trading systems that execute carry trades based on yield differentials, and volatility (implied riskiness).

The authors find, retrospectively, that during a period of irregularly declining rates and risk premia (1993-2006), rotating capital between currency pairs offering high yield spreads at times of high perceived risk earned worthwhile alpha.

The carry/risk aversion trade is a standard formula for speculating in currencies, and the authors “kept it simple”, making evaluation of their strategy relatively easy.

The study’s charts neatly show the performance of different strategies as the cycles change.

I must, however, disagree with the chair that currency pairs trading per se can be said to showcase “drift”. The time period involved was particularly favorable to yield chasers, and the regular shifting of positions from one set of underlyings to another strikes me as antithetical to the notion of passive drift.

That said, I believe there is a different speculative lesson to be drawn from this study, and that is the seeking of relative value within the confines of a large, complex set of related instruments.

Relative value among currency pairs based on yield/return vs. vol/risk strikes me as analagous to relative value within the stock market between sectors and individual stocks. There’s no shortage of relaive value measures with which to “count” fundamental and performance dispersion in stocks. Ditto risk/vol.

The paper at hand provides a nice introductory framework for setting up relative value/risk matrices.



For the past four years I have tried to reduce the prevalence of all doomsday talk on this site, as I believe it misses the forest for the trees in that the return from stocks is some 5% per year more than bonds (6% + 5% growth rate, versus 4.5%), and I felt that the doomsday arguments were economically nonsensical in that they didn’t take account of the fundamentals of entrepreneurial ability to earn a return and investor willingness to part with money for that return equilibrating economically and empirically at 10% a year, regardless of the backdrop of negatives, usually already discounted, and overwhelmed by numerous positives. I have tried not to allow the this site to be littered, as are so many financial sites, with hateful anecdotes about the weakness or problems in this or that, as I felt that this will miss the main chance, the beautiful woman with the 10000-fold return per century, lighting up the future with a torch in her hand. There is a certain satisfaction today as the Dow trades above 12,000.

Before anyone upbraids me for patting myself on the back, note that I’ve posted 1000 memos, and written two books, discussing the long term drift in stocks and its inevitability over reasonably long periods. I have saved countless individuals from the doomsday scenario so prevalent on other sites, and which could have overwhelmed this site. Why should I not remind others of these long term factors at the dinner party I host, as it should be a cause for mutual celebration? Like most, I have not participated as much as I should have in this long term drift, but I have eschewed the terrible catastrophe of ever being short, and my constant drumming of this message has been a highlight of my productive years, and thank goodness I was able to at least bend a few at this dinner party in that direction or at least against a self destructive alternate.

I N D U   - -   D O W   J O N E S   I N D U S .   A V G

W  10/18    12025.50
T  10/17    11950.02
M  10/16    11980.60

F  10/13    11960.51
T  10/12    11947.70
W  10/11    11852.13
T  10/10    11867.17
M  10/ 9    11857.81

F  10/ 6    11850.21
T  10/ 5    11866.69
W  10/ 4    11850.61
T  10/ 3    11727.34
M  10/ 2    11670.35

Richard Gula adds:

There is no one lonelier in the world of fast money than the lonely bull. AbelandCain has had the public leaning the wrong way for years. Staying positive in this business strains every element of your soul. Keep smiling through the pain of optimism!

James Sogi responds:

The question is: how many have been long the whole bull run since July? The second more important question is how do you capitalize on such bull runs while avoiding May’s bear market?

Prof. Gordon Haave replies:

I am not a full time speculator, although, as I say almost every day “soon” I will be again. I would, however, proffer that the very nature of our good friend Mr. Sogi’s question is at the root of many problems that speculators have. The drive to miss every downturn causes one to miss the upturns. We see this time and again on studies of individual investors, and how they routinely earn 4-5% per year instead of the 10% year offered by the market. Catching the upturns is more important than missing the downturns, simply because there are more of them.

Most of us are trying to do much, much more than “catch the drift”. If one uses leverage to accomplish that, then suddenly avoiding the downturns, or at least the worst of them, is very important if you want to avoid ruin.

But let’s all be clear that to simply catch the market drift, one shouldn’t worry about the downturns at all.

P.S. Here is an example of someone with probably little detailed knowledge of the financial markets, yet caught the drift (money quote: “she liked blue chip stocks”).



I was watching the final spin cycle at the Laundromat this morning when a muffled voice broke in, ‘Mr. Keely!’

I whirled to face a former student, an attentive youngster and with a penchant for athletics and girls, to my recall. How quickly they grow up to their own wash.

‘Nice to see you,’ I greeted warmly. ‘You became a cop, but where’s the uniform?’ He confided, ‘After one year, I got tired of the cliques, brutality and hopelessness. Maybe in response to your be-true-to-self stories through high school, I quit. Now I work a different County job that I can live with.’

‘This is serendipity,’ I bid, ’since there is a question on a common issue of handling policemen from a recent event. Will you comment off the record?’

‘You were candid in class, so I’ll return the favor. What happened?’ he asked.

I quickly related ‘Midnight Desolation’ of two weeks ago when a Riverside, Ca. sheriff browbeat me on a dark desert road for consent to search my car. ‘Had I not been a teacher and threatened to spill the beans in every class, he would have hauled me to jail.’

His fist slammed the laundry counter. ‘Where have you been since I graduated, Mr. Keely? Of course he suspected you. Nearly every loner in southwestern California is strung out on meth.’

‘I hardly know what meth is,’ I protested. ‘Must the innocent suffer to catch the guilty in this desolation?’

‘The cops’ world isn’t a classroom of thirty-five students,’ he explained. ‘It’s city blocks of thousands, so the police must profile.’

I threw up my hands in the Laundromat.

‘You’re a character, Mr. Keeley. Look at your wrinkled shirt! You have a choice in the fine legal print: Conform to citizen standards, or get hauled to jail once in a while.’

‘I know the boys down at the local station. I once trained and acted the same way as your midnight cop. The goal of the officer is to get consent to search your vehicle for hard evidence. I press, press, press the perpetrator until he says or does something stupid. I use it to pry his consent to search his vehicle. If he doesn’t break under the press, I look to the vehicle for something wrong to allow me in. If there’s nothing, and he continues to give me a hard time by refusing permission or a reason to search, then I tell him that I suspect he’s driving under the influence. It could have gone easier for both of us, and I take him to jail. The car is impounded, and ultimately searched. The hard way costs me an extra thirty minutes and paperwork, and it costs you a couple hundred dollars tow fee. The pity is that the jails are so full that the meth is confiscated and the offender released.

‘The next time you’re stopped, Mr. Keely, ask the arresting officer to call a supervisor to the scene. Better, call an attorney on the spot, or hook up with an online legal service that fields calls 24-7. When the officer returns with your license, hand him your cell to speak to your counsel. Best, what officer wants to tangle with a teacher of the sons and daughters of every parent in town?’

‘I’ll stand out, thank you,’ I said lowering my hands. ‘And assure them at the cop shop that I didn’t tell any students but wrote a vignette.’

‘Take a copy down to the station and put it on the sergeant’s desk,’ he suggested. ‘They’d string me up,’ I whispered back. He brightened, ‘On second thought, give it to me.’ But I refused.

‘I hate this!’ he said sipping Starbucks. ‘Teacher, let me know when you find a lesson in it.’

The drier buzzed and I opened the door. ‘After reaching voting age,’ I said pulling laundry, ‘give people the freedom to hurt themselves. No more seatbelt rule, illegal drugs, or laws against things that don’t hurt others. Let grown citizens learn the hard way rather than have eternal parents.’

I folded my shirts, shorts and socks knowing it wouldn’t happen in this community where the ex-police would bankrupt unemployment.

I shouldered my wash as he called, ‘Be careful, Mr. Keely. It’s a classroom out there!’

Kathryn Lang replies:

In response to Bo’s bid to allow adults unfettered freedom to smoke, shoot, snort, and go without helmets or seatbelts, I’d like to point out that these are the same freespirited souls who routinely end up uninsured in the ER with head trauma after overdosing and/or being ejected thru the car window. Hospitals pass along these costs to insurance carriers with padded bills (the $12 aspirin), who hand them right back over to the more fiscally responsible. What they can’t pass along they try to absorb, sometimes unsuccessfully, resulting in hospital closures, which in the grand economic picture may be expected, but really stink if you’re having chest pains at 3:00 am. Same theory with your car insurance premium (and who enjoys receiving that bill?). Only two states have no pay-no play statutes (NJ & CA). Trust me, the free soul who enjoys the wind blowing through his hair while on his Harley won’t hesitate a millisecond before filing suit after you cut him off and he fractures his skull on the asphalt. Babysitting statutes aren’t Big Brother, they’re good business sense. Few will “learn the hard way” — they just transfer their losses to the rest of us.



In times like this isn’t it only prudent to consider taking some profits, or at least getting off margin so that one can have ample buying power for when there is a downturn (as in May), and we can remind ourselves of the drift while the world around talks of doom.

Victor Niederhoffer responds:

Such an idea would be right most of the time, but I think it would have a negative expectation. For example, it would miss most of the 1950s and 1990s while waiting for the pullback.

Dr. Rudolf Hauser replies:

There is a very important consideration in deciding how much one should pull back to a less leveraged, less invested position, namely what one has to take out each year to meet regular living costs. If one does not have another source of income than trading, the percentage of one’s net worth that one has to spend for such living purposes increases as net worth declines. That means your net worth will not recover its loss when the market recovers to it prior high. That might not be a significant problem is your required drawdown at the prior peak was less than 1% and/or much of the drawdown is for discretionary spending you can easily cut back on, but could be a major problem if it is a much higher figure such as 10% and most of that is for necessities. Another advantage of cutting back in times of what one believes is temporarily too high is that one is less likely to make stupid mistakes because of panic if one feels one is not in over his or her head. I agree with Vic that going short is a risky position as you are betting against the long-term trend.

GM Nigel Davies adds:

One thing I’ve noticed about good attacking players is that they constantly strive for the initiative they are often happy to make light material sacrifices (for example a pawn, or rook for bishop and pawn). Bit they will tend not throw in the kitchen sink too early, instead holding back reserves. And often they will take time to pick up a pawn or two in the midst of their onslaught.

This contrasts with weaker players, or those less skilled in the attack, for whom nothing less than checkmate is good enough. They appear to be very insecure being material down without a clear means of forcing a win. But by setting their goal so high they reject many good moves along the way and often fall flat on their faces.

So one thing to look for when you are preparing to play someone is how comfortable they are in the attack and with material imbalance. Against players not adept at this it’s often good to snatch material and watch them ruin their positions in their attempts to punish you.



It was Fall of 1985 in Lansing, Michigan, sixty years after the last hobo class had been taught in America. Dusting my clothes after a rough and tumble summer in boxcars, jungles and skid rows around the country, it dawned on me as the first snowflakes fell on my nose that those who can hobo do, and those who won’t any more teach.

There is no more fertile ground to plant a romantic theme than a campus. I walked cold into the Sociology department at Lansing, Michigan College and shook hands with Dr. Dean Heater. ‘My name is Doc Bo, and I want to teach a class about hobo life in America.’ He turned white behind that red tie but his blue eyes twinkled and he surprisingly replied, “Tell me more.”

‘This is the season,’ I explained, ‘when hobos beat a path to winter quarters, and I haven’t picked mine.’ I enumerated that I was a jack-of-trades including a veterinarian, author and publisher, pro jock, landlord, speculator, and world traveler. I had been a boxcar tourist for ten summers in riding all the high irons west of the Mississippi, plus many of the mains to the East. I had attended five national hobo conventions in Britt, Iowa, collected maybe the world’s only and largest hobo library and, smiling quickly, added, ‘I need to make a stake for the spring.’

“Okay,” said Dr. Heater slapping his thigh. ‘Sign up the minimum eight students and you have a hobo class.’ I pumped his hand optimistically and blurt, ‘I’ll call it ‘Hobo Life in America’.

To continue reading this light hearted tale, follow this link.



Dow 12,000/4 minute mile = 3000, my point being that after Bannister did it other runners soon followed this supposed ‘limit of the human body’.

On May 6, 1954, the Englishman Roger Bannister ran the first sub-four-minute mile in recorded history at 3 minutes 59.4 seconds. Six weeks later, John Landy, an Australian, followed suit with 3:58, breaking Bannister’s record. In November, 2005, Forbes magazine declared after interviewing a number of sports experts that Bannister’s four minute mile was “the greatest athletic achievement” of all time. Source: Wikipedia

Russell Sears replies:

I would hardly say the four minute barrier is equal to the index barriers.

I defined an “index barrier” as not setting a new record high for at least 100 trading days prior and then setting it. I looked at the Dow and the S&P since 1950, then I looked at the next 10 and 100 days index exponential return (that is without dividends); then I compared these results with the average 100 day return.

Barriers Broken: 16
10 day return 0.19% w/sd of 1.90%
100 day return 3.53% w/sd of 6.96%
unconditional 100 day return = 2.86%

Barriers Broken: 19
10 day return -0.40% w/sd of 1.85%
100 day return 4.15% w/sd of 6.85%
unconditional 100 day return = 3.08%
My two-cent contribution to the offering plate of the ministry of non-predictive studies.



There are so many things associated with Diwali that to connect all of them together in one single perspective may be a difficult exercise. However, the salient mythological/religious/social ideas are:

1. Lord Rama, one of the 10 incarnations of Vishnu (the Senior most God amongst a million Gods that Hindus worship and the creator of the Universe) triumphed over Ravana the senior most demon of that age after a long struggle of 14 years. Rama symbolizes the ideal human conduct - truth, trust, patience, virtue. In fact Hindus call this incarnation of Rama as Purushottam Ram.

Purush means Man and Uttam means the best hence the best man ever Rama. The epic Ramayana depicts the ideal manly conduct as per the scriptures. Now the lighting of lamps, the fireworks and celebrations and mind-numbing spending on new clothes, truck-loads of gifts and everything is supposed to have been continuing for tens of thousands of years since the day the Favourite Prince Rama returned back to the State Capital of Ayodhya after triumphing over evil and bringing back his kidnapped wife Sita with him. The citizens of the kingdom had been atoning for the sins of the Queen Mother due to whose Machiavellian antics Rama was forced to confine himself to the jungles for 14 years renouncing the ascension to the throne in favour of his younger step-brother. So the denizens of the empire celebrated with lights, crackers, sweets, new clothes, renovation of homes and offices upon the return of the favourite prince from exile and the triumph of ideal over evil. Diwali always falls on the New Moon night and the lighting of lamps is interpreted by many as the citizens’ zest to welcome the Prince back with as much light as could be.  

2. The worship of Goddess Lakshmi who as per the Hindu mythologies is the wife of the Supreme amongst Gods — Vishnu is incidental. Because of the state-wide civilian mourning for over a decade even merchants of the empire decided on Rama’s return to open new books of accounts on the festive day of Diwali; it has per tradition continued to remain until today to be the day of initiation of new books of accounts, re-invigorating business relationships. Worship is the most widely prevalent religious ritual in Hinduism.

3. The mythological descriptions of different Gods (well we have a God and many more demons for each and everything) have been conveying since ages that Laxmi - the Goddess of Wealth is the wife of and thus only under the willful control of the most powerful in the Universe - Vishnu. For all others including mortals She is only a guest flowing at free will and never staying in any one’s house permanently. Depending on how much and how well you welcome her and treat her appropriately she chooses to be your guest for that much longer. Clean homes, clean minds, clean attitudes and “appropriate” treatment of money make the one who causes all the flows to enjoy the appropriate ambience you setup for her at your abode. Worshipping is the ritual, while most have lost the pursuit of figuring out the message behind the rituals. The association of respecting and worshipping Laxmi on this day of the Calendar was a byproduct of the new initiatives merchants in Rama’s Ayodhya took up eons ago. By now, merchants as well as the rest continue to follow it.

Laurel Kenner responds:

I learned about Diwali this week from some Indian friends down the hall. I had known from books and movies that Diwali is the festival of lights and that people light lots of candles. But there’s more to Diwali than candles. Here is what Alka Singh, a charming and formidable U Chicago grad, told me:

The celebration of Diwali lasts five days. The earth is lit by lamps and candles, and fireworks illuminate the sky. People decorate their doorsteps and courtyards, and hang garlands in their doorways. They buy gold ornaments, clothing and things for the home. Everybody wears new clothes for Diwali.

In the evening, people worship coins, representing wealth. They light hamps and conduct a special ceremony to welcome Lakshmi, the goddess of wealth, into their home and hearts.

I was astonished at the contrast with the complicated Western feelings about riches. In past centuries, Americans saw wealth as a reward for virtue. But in the past 100 years or so, aside from Ayn Rand, who adopted the dollar sign as her ensign (and Jon Hoenig, the Capitalist Pig), I think the unabashed and joyous worship of wealth has no parallel in the West. Perhaps some of our cultural experts and Indian specs will add to my understanding of this.

Pradeep Bonde elaborates:

The Hindu religion lays out four ‘Purusharthas’ or goals of human life. Each individual is expected to achieve these. The concept of Purusharthas in Hinduism emphasize a life of balance, achievement and fulfillment.

Purusha means human being and artha means object or objective. Purusharthas means objectives of man. According to the Hindu way of life, a man is expected or should strive to achieve four chief objectives (Purusharthas) in his life. In order of importance:

1. Dharma (righteousness)

2. Artha (material wealth)

3. Kama (desire)

4. Moksha (salvation)

Hinduism emphasizes the importance of material wealth for the overall happiness and well being of an individual. A house holder requires wealth, because he has to perform many duties to uphold dharma and ensure the welfare and progress of his family and society.

A person may have the intention to uphold the dharma, but if he has no money he would not be able to perform his duties and fulfill his dharma, therefore material wealth is the second most important objective in human life.



The one fact about Thorstein Veblen that stuck to my sieve of a brain was that the then Dean was perpetually embarrassed by Veblen’s walking across the campus in what would be considered shabby attire. One day, when the Dean happened to be escorting some important donor across the quad, he ran into Veblen shambling along with an attractive young woman keeping pace. Since there was not enough room on the path for four people walking abreast, introductions could not be avoided. The Dean made them ending with “and this is Professor Veblen’s niece.” Veblen’s reply was “One of many.”




A regular tendency of the market is to provide an outcome that is contrary to what was, or might have been, expected. The Anniversary of the October 1987 Crash is a prime example.

The irony of a record close on Crash Anniversary day would not be lost on the long term drift.



The academic studies showing superior performance of low P/E stocks are completely misleading. Usually they assume perfect knowledge of earnings and perfect knowledge of the earnings announcement dates. Even the latter are unknowable, because when a company has something bad to report it often pushes the date up, and that changes the conclusions of the studies. Much worse are the studies that report the significance of P/E in the 1880s, when earnings weren’t even announced, or those that assume in the first part of the 20th century, when earnings were announced in the first quarter, or those that throw out the red earnings because they don’t like to divide by negative numbers, or those that assume they knew which companies were in existence at the time or disappeared after. It’s a comedy of errors.



For those interested in the recent move up in agricultural products like wheat and corn, you may enjoy this read by Jim Sloman. Here is an extract:

The Great Plains of the United States is the world’s bread basket. Half of all the grain exported in the entire world comes from the U.S. Great Plains.

Beneath the Great Plains is a vast underground reservoir of water called the Ogallala Aquifer, laid down through eons of geological time. Water drawn from this aquifer through millions of wells has helped to greatly increase grain yields in the last half century because the water can irrigate crops whenever and wherever desired.

Similarly, there are vast underground aquifers beneath the farmlands of China and India-who along with the U.S. account for half the grain grown on the planet-as well as in many other countries around the world.

The experience in the United States is being replicated in these other countries. That is, water from these gigantic aquifers has been tapped in the last 50 years to greatly increase crop yields worldwide, particularly on lands that are dry or somewhat dry.

However, there’s a catch. The increased use of electric and diesel pumps since 1950 has hugely increased the amount of water that can be brought to the surface, but in doing so the amount of water in these deep aquifers has been dropping.

I certainly know that things here in Australia (the drought) haven’t been this bad for a very very long time, from the West to East Coasts almost all areas — cotton, wheat, and fruit crop lands –are in dire straits and most have had only one decent season in six years. And the weather and rainfall are worst than ever. (Sydney has just had its hottest October ever with consecutive days of 35C)

Prof. Gordon Haave replies:

This story is a little bit alarmist, at least as far as the U.S. goes. The U.S. has been harvesting its aquifers for a long time now, and the decline has been slow (although I suppose that is a relative term). What is obvious, although not mentioned in the article, is of course that aquifers are replenished over time. Now, we might be taking water out faster than it is being replenished, but it’s not like one day the water runs out and there is no more. The required cutback might be rather small.

The real problem, of course, is simple economics. Scarcity dictates that the sum of wants for any particular good that is free is greater than the supply. Property rights, the free market, and the rule of law overcome the scarcity problem.

However, property rights have not really been extended to aquifers in any meaningful sense. Extending property rights in some form or another will solve the aquifer problem, but of course those who get something for free have a strong interest to lobby the government to keep it that way.

J. T. Holley replies:

I would definitely like to say that the “invisible hand” of Smith shall take care of overage of price and the underage of water. Latin America is slowly and rather quickly in other aspects becoming the “bread basket” of the World. In the “Global Economy” in which we all chip in, food is Latin America’s contribution. Need I mention most U.S. restaurants in the last five years having “Chilean Sea Bass” on their menu’s? Also, Julian Simon if alive might make a bet with you concerning the upswing in prices of corn, wheat and such? I certainly will sell you some long term calls if you’d like? Desalination will most certainly be a technological breakthrough in years to come with entrepreneurs flooding (no pun intended) the space in my opinion. If we can produce “grass seed” for my yard to make “drought resistant seed” then I assure you that corn and wheat can be accomplished in the same manner.



Regarding the recent college football brawl between University of Miami and Florida International, news reports state:

Shaking her fist for emphasis, Miami president Donna Shalala said Tuesday that sanctions levied against 13 players for their role in a sideline-clearing brawl were fair, justified and strong enough to satisfy the university.

All that, though, came with one big caveat: Miami athletes simply can never fight again, she said.

If you have children who go to college or are anticipating it, you should be aware of the absolute way that many of these Colleges are out of any type of control. Evidence of this can be seen at Colorado, Wisconsin, Cal Berkeley Harvard, Columbia and others by the way the professors speak, write, teach and instruct. Or how they encourage radical thinkers such as the President of Iran to speak or Cindy Sheehan to spew their vitriolic hatred. We had a professor who was arrested in South Florida for allegedly supporting terrorists financially.

That said, when I think of Donna Shalala shaking her small fist and standing on a box to see over the podium, I envision Bill Clinton sitting while squinting one eye like Popeye and waving his crooked finger in front of the camera. This is after being coached carefully by the Tomlinson’s to say “I did not have s-x with that woman, Miss Lewinski” This is what happens when you put a former diplomat and a lapdog for the Clinton Administration in charge of a university.

I am sorry but these people are so calculating so orchestrated so theatrical, they have no soul, nor do they cast a shadow, or have a reflection in front of a mirror. They have no moral character nor consideration for young adults today. Parents of their children should be aware of this if they actually cared.

Every thing to them is situational. They never see anything in black and white. They see it all in the form of populist polls.

On any and every level, the fight this weekend between the University of Miami (UM) and Florida International University was the absolute low in the history of college sports. It surpasses that of when a fight broke out on a basketball court in the seventies between Minnesota and Michigan and Rudy Tomjanovich was punched in the eye socket by Kermit Washington and nearly ended his basketball career and his eyesight..

The only thing that could be seen as more detestable was the fight with the Indiana Pacers and the Detroit Pistons and it continued in the stands with Ron Artest and Stephen Jackson fighting with fans.

For Donna Shalala, president of  UM, to say that we will not tolerate this behavior ever again in the future is the most disgusting display of yellowness an executive could ever have. It sends a clean message that at Miami University you get one great chance to foul up greatly and then we put you on “Double Secret Probation” And if you are part of our profitable football program, we will try to do everything we can to water it all down until it goes away or gets diminished by the liberal media. After all we are talking about big money here and big money trumps education or anything else every time at some colleges. And for colleges such as UM in the present or other colleges such as Nebraska in the past, it becomes the standard.

We are entering a new phase in our nation’s history where everything is settled by violence, be it by fists on a sports field, or on a high school campus by insane maniacs who deem it noble and exemplary to indiscriminately shoot and kill children. Or where a pre teen brings a gun to school to kill their teacher because they just do not like them. Or they disrespected them.

The message that children continually see and hear is that to: Do what ever you feel like doing and don’t listen to nor have any consideration for any lives that you might affect. The hell with anything. It is any wonder that our children are dying and are being victims of violence on an ever increasing scale on a daily basis. How teenage girls are being abducted from bars and found dead days later. How they are snatched from their beds at night and murdered by pedophiles who lives next door.

After listening to her defense of her suspensions of her players, I feel nauseated.

No. I am sorry. Some people just don’t get it and Donna Shalala is one of them. I never cared for her when she was pandering Bill Clintons policies as Secretary of Health and Human Services. Obviously, she has not changed her style one bit in the 5 years that she has been president of UM.



Danny Litwhiler, former St. Louis Cardinals centerfielder and my college baseball coach, was fond of saying, “Liars figure and figures lie.” Therein lies the problem with Moneyball and its application to baseball, especially in the post season. I find it bordering on ridiculous that talking heads insist on trying to handicap teams in the post-season based on measurables because to me, a baseball game — more than any sporting event — is dictated by the many intangibles. A ballgame turns on too many broken bat singles, home runs that graze the foul (fair) pole, checked swings that are ruled a strikeout, attempts at diving catches that roll to the wall; the list is endless and the difference between being a hero or a goat is the width of an eyelash. I love baseball because you can at once spend hours dissecting the mountain of available statistics or you can be absolutely simplistic in your analytical approach. I choose the latter. In the post-season, good pitching will always trump good hitting. I think that who wins or loses has more to do with who gets on a roll in these short series than empirical comparisons based on the 162 game marathon of a season which creates the compilation of those statistics. That’s my analysis. The rest is statistical noise, fodder for water fountain discussion and “Baseball Tonight” on ESPN but not much else. These games involve way too many variables to be predicted and to me it’s the convergence of the multitude of these variables and the impossibility to predict them that creates a ballgame.

Further evidence that empirical analysis of baseball is often fruitless in last night’s 4-2 Cardinal victory:

1. Chris Duncan became only the 3rd left handed pinch-hitter to homer against a left handed pitcher in post-season history.

2. Cardinals pitchers have now allowed zero runners in scoring position (RISP) to score in 31 chances over the last two play-off series.

3. Jeff Weaver, released by the LA Angels (in favor of his brother), 8-14 in the regular season, is now 2-1 with a 2.16 ERA in the postseason.

4. Jeff Weaver, released by the LA Angels (in favor of his brother), 8-14 in the regular season, is now 2-1 with a 2.16 ERA in the postseason.

P.S. You had to believe that the insidious nature of these markets would repel us from the comfortable (momentary perch) well above 12,000 this morning. Nonetheless, I share in your congratulatory mood in once again having your bullishness rewarded.



I can never read a book by Louis L’Amour without finding a hundred things that the heroes of his story know and do that would be good for me to incorporate into my life, especially when it comes to reading sign, or tactics in war. Mojave Crossing is one of his rather minor books, that I have never seen as recommended among his top 50 but here’s what I learned from just the first few pages of the first chapter. Tell is carrying some gold he bought on the cheap in Colorado on a speculation that he can sell it in California. “It was talked among the Arizona towns that speculators out there would pay 18 maybe 20 dollars an ounce for gold while in the mining towns a body could buy it for 16.” L’Amour notes that the differential was caused by the risk of being killed by outlaws and Indians in transporting it.

I note that almost all arbitrages have that same kind of risk, and the Amaranth disaster was a case in point and this time the Indians and Outlaws were the members of the Merc and the big houses that knew of the route that natural gas arbitrages would take from spring to fall in an attempt to catch that 10% differential. I also note that the time was 1870 and gold was 16 an ounce and it’s was 300 in 1980, a 20 fold rise in 110 years compared to the 10,000 fold increase in the average stock during that period. The power of compound interest in magnifying a 3 % a year return in the archetypical commodity versus the 10% a year return on the randomly selected stocks, and all that I have said about the differences between the long term returns of the two, and the terribly misleading academic studies that show commodities comparable to stocks, is illumined.

The instinct to trade as well as the instinct to throw a ball are perhaps the two characteristics that most distinguish a human from the other animals and even a novice like Tell, who “had never been dealt any high cards in society “, expressed that human tendency when he saw a 10% arbitrage differential. He also knew enough to take account of reducing frictional costs by buying mining equipment in California to take back to the Colorado gold seekers thereby completing a round trip with profits on both sides. The great increases in value that the companies catering to this trading instinct have had, including the recent acquisition of CBOT by the CME, and the performance of EBay show how catering to that natural inclination of humans can be so profitable.

L’Amour knows to start all his books with a gripping beginning which he learned from his days of stop them in their tracks immediately or else they won’t read your story in the pulp adventure magazines he started working for. The openings of the markets serve the same purpose in inducing action and all the other emotions that lead so much to the frictional costs that so many of the ephemerals contribute to the higher trading firmament.

In this case, a beautiful woman causes Tell to remember that it’s necessary in the hills to sleep with a bible under your pillow because before a bad one can count every word in it, the night is over, and there’s no time for mischief. The adage is followed religiously by most good chess players, who are always ready to Schtaaaaaal by sitting on their hands, and writing their moves down before they move the piece, as well as rechecking before they move, a very good procedure showing the weakness of the Gladwell blink procedure in all elementary games. It’s also a very good lesson for all traders who should count all their moves in advance to have a proper foundation for a trade. The beautiful woman’s eyelashes in this case causes Tell , who “was more trouble than all the snares in the creeks of Tennessee” and that underlines lesson number 1 of trading ” Romance and Trading don’t mix. ” .I have been very fortunate since my debacle in 1997 not to be able to afford a beautiful black haired woman with the “clearest, creamiest skin you ever did see, and a mouth that prickled the hair of your neck” although 30 years ago I did violate this rule with Susan Niederhoffer, and it’s the exception that proves the rule. L’Amour is concerned not only because he doesn’t have a bible handy for proper counting, but because he saw dust on his back trail like “maybe there was someone back there that wanted to keep close to me without actually catching up”. How can that one be quantified? How about the small rise the previous day that started out looking terrible, but then really led to trouble the next day, when the decline caught up, like the Monday October 16 rise followed by the ambush before high noon on Tuesday, October 17 in S &P. These are just a few of the thoughts from just the first few pages of this great adventure which I listen to going back and forth to the trading floor, in the new Blackstone edition, which for once doesn’t have the world’s worst narrators, and actually enhances these classic adventure stories instead of ruining it the way so many of their previous narrations were likely to do.

Kind thanks to Ckin for supplying the photo of one of the main roads through Mojave on the way towards Kelso Station.

Bo Keely responds:

I’ll wager that the Mojave Crossing that Vic describes that Tell traveled is the Mojave Trail that I walked four years ago and wrote about. It’s the famous old Government Road that was the original passage for the Indians, then the soldiers followed by the settlers– from Arizona on the Colorado River and on west toward Baker, California — where today you can see the world’s tallest thermometer that usually tops 110 degrees.

It was only 100 when I began the 150 mile trail from the Colorado River in September of  ‘02. Look at the photo that Vic attached: The sky and shadows suggest that the pictured highway runs north-south and its appearance is like the only paved road that I crossed in my western passage. After crossing (I believe) the paved road and climbing a few miles into the scraggily hills, I stumbled onto a ghost town as described in my short story The Mojave Road:

Walking to investigate, there was a sign “Black Cat Bar” and another on an adjoining building “Riley’s Hotel”. Yet as I walked into the area all was still. I thought I had entered a set for an old West movie, which in truth I may have. Striding into the barroom a breeze entered with me. A card from a dusty deck blew from a card table and I gazed around with an eerie feeling. It was as though I had stepped through a century in time for the shelves were stocked with essentials from that era. Same with the Hotel. Nearby sat an outhouse with a sign “Judges Chambers” that made a good picture. I walked from the tiny ghost town not knowing quite where I had been.

Water was scarce, but there were springs every two days that sufficed. Like Tell in L’Amour’s book, I was speculating but not for the price of gold. I was looking for land to settle. Old corrals and adobe houses dotted my trail usually near the springs where I hoped to pick up a parcel on the cheap. However, one thing stopped me short: The Mojave Rattler. This is the most venomous (neurotoxic as well as hemotoxic) snake in the USA, and I saw a couple very pretty lime green ones that paid me no trouble. At Marx Spring, however, I looked upon an abandoned ranch and squatted before a weathered adobe hut minus a roof to snap a photo. There was a clicking as I released the shutter; it was not the camera — I had inadvertently framed a rattlesnake.

Crazy. I wouldn’t buy dirt in that place where Tell had passed if you paid me in gold. I finished the trail in one week and caught a fast freight train home. But I recommend you read L’Amour’s book before taking my word about the habitability of Mojave Crossing.



I want my foreskin back. It’s gone forever though. I did not ask anyone to take it off. That violated my person. Religious ideas took away a precious part of the most sensitive organ in my body. They should go to jail for that, for life.

I was not asked about it and in fact could not have understood the language because I was too young to have a language. Religious criminals took away the skin that nature provided for protecting and acting as a cover for lubricant to the tip of my organ.

Rabbis and priests should have to suffer for the millions of foreskins that have been tossed into a hospital garbage can. These are crimes of abuse against infants.

And don’t blame my mother for being a simple dupe who believes religious crimes are justifiable. She was a good woman, acting in accordance with superstitious articles of faith passed down to her from the dark ages of ignorance.



My idea is directed at fixed income types but should apply to other asset classes as well. Here goes:

Death of Salesman, RV Salesman that is: Most Relative Value (RV) ideas peddled on the street are not really RV trades at all. They are just another form of directional bets on whether the market will go up or down. And we all know that is pretty much random, at least in the short term. Can we measure how much “directionality” is contained in RV ideas? Sure. Simply look at the implied forwards against the current spot levels. If the spot vs. forward differential is anything larger than a normal bid-offer spread, then your RV trade is directional. Let’s look at an example. One of my favorite trades is the 5y- 30y swap spread in Japan. The spot spread was +135 on October 3rd and the 3m forwards implied a spread of 10 bp lower, or +125 bp. Ten year JGB futures, JBZ6 on your Bloomberg, was also a point higher at 134.61. Let’s further say you wanted to put $100,000 of risk to work on the 3rd of October. You either did 5y 30y spread for pv01 of $100,000 or you sold 119 lots of JBZ6. Today, the curve is 10 bp flatter and JGBs are down one point. So the PNL on both trades is about the same. But the return on the JBZ6 is much better since we used a lot less capital (leverage capital, and credit capital) to execute the trade. Further, the futures trade returns cash each day when there is positive MTM. So if you have positive expectations on your trades, and you should, futures are much better. You get to use the cash as it’s realized each day. How about a quick a dirty way to decide if an RV idea is better expressed by a simple directional trade? Simply divide the spot/forward differential by the RV Zscore. I call it the DZ score. A ratio of 1:1 is awesome but is tough to find. As the ratio moves further away from +1 it s gets harder and harder to justify an RV trade. The next time Mr. RV Salesperson knocks on your door, ask them how the DZ ratio looks. If it’s far from one, you’re better off kicking some futures around. This all comes down to the very obvious point that the amount of risk capital is potentially infinite whilst the amount of available alpha (sorry for the buzz word) is limited. It pays to be selective. Wait for the juicy pitch.

Ckin responds:

Some relative value terms that I often hear:

1. I can’t even create new bonds at this level!

2. This is the cheapest bond in my inventory on an option-adjusted spread versus libor.

3. That swap I proposed gives up 5bp in yield, but picks up 7bp compared to swaps.

4. This swap gives up 5bp, but you take out 4 points in cash and shorten option-adjusted duration by 2 1/2 months.

keep looking »


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