NYT, February 28, 2007 ECONOMIX A Recession That Arrived on Cats' Paws

By DAVID LEONHARDT The nation's manufacturing sector managed to slip into a recession with almost nobody seeming to notice. Well, until yesterday.

The misleading New York Times headline suggests recession is here. The bias is manifest. I guess liberals want a larger market correction?

George Zachar replies:

You're way too kind. They want a visible recession and a nasty asset price decline to use as rhetorical clubs through the 2008 election cycle. Their academic sock-puppets hit my email box this morning with gloating doomsterism. Expect at least a full week's news cycle of chronicmania.

Unless there's a photo of Anna Nicole necking with Elvis in a Des Moines Burger King…



 Tsunamis occur for which the orgin is unknown in that no source has been discovered. They are called orphans. This week a shock, like a tsunami, hit China and the shock wave extended around the globe. It could be called an orphan. Not accompanied an origin.

Orphans appear out of nowhere, are not predictable, and leave damage that takes time to repair. Lives are lost.

In Japan, officials recorded an orphan tsunami — unconnected with any felt earthquake — with waves up to ten feet high along six hundred miles of the Honshu coast at midnight, January 27, 1700.

So far I've not heard of lives lost this week, no accounts of stockholders jumping from high windows above streets teeming with anguished investors and traders.

Only accounts that were weak suffered losses. However, shock waves reverberate and second waves are common. Today is all we have for knowledge; what happens at the open tomorrow is unknown.

Jim Sogi adds:

Interesting how the wave traveled and continues to travel around the world, and how Japan follows US action later in the evening. The flu pandemic, which there will be at some point, will follow a similar path, and change many things, such as travel and free trade, more so than terrorism did.

Many lessons from DailySpec are coming in handy these past few days, on such topics as canes, leverage, liquidity, and survival. More heed might have been taken though to the bears' arguments the past few months, as they were not entirely wrong or foolish. Never underestimate the opposition. It is easy to be self-deluded as we, the market, were.

The biggest drop since 9/11, oddly, since there is nothing really wrong, as there was on 9/11. Just one of those panics that come with the regularity of the seasons, or the years, as the case has been. The news is good, the economy is good, the market is good, and even the price is good. Anyway, seems like a good time to get long, as it has been difficult to do so for months now.




 I don't know why the recent remark from Prince Charles annoys me so much more than any other politically correct celebrity pronouncement. I guess it's just that this elitist wimp, who has never worked a day in his life, would casually call for the "banning" of the world's largest restaurant chain, a company that provides clean food (not to mention Professor Pennington's morning Egg McMuffin) at reasonable prices to literally billions of working people and their families worldwide. It is so mind-bogglingly inappropriate and unintelligent.

Nigel Davies writes:

This, from YouTube, will make you feel better, we Brits have used it for years.



 I started trading option spreads in SMH, which trade in pennies, and my initial opinion is that it is great for off-floor traders. In some equity options, I used to wait days on my limit because I didn't want to give up a whole nickel. Trading SMH, this is now unnecessary. Penny increments let me gradually give up two cents to get done. This is a huge savings.

For example, trading a 20-lot spread, my commissions are $40, but if I have to give up a nickel on a spread, it costs me an extra $100. If I give up only two cents, I save $60! Obviously, I also save money when I trade out of the position. My commissions are already as cheap as I could hope for, so narrowing the spread is far more beneficial than any further commission reduction. I'm inclined to increase my trading size.



Stand-in mistress sought to take wife's abuse…

Monday, Feb 26, 2007 7:40AM CST

BEIJING (Reuters) - A Chinese businessman has advertised on the Internet for a stand-in mistress to be beaten up by his wife to vent her anger and to protect his real mistress, Chinese media reported on Monday.

"When the woman found out her husband had a mistress, she insisted on beating her up," the Beijing Youth Daily said, citing the advertisement posted on a popular online jobs forum on sina.com.

More than 10 people had applied for the job, the newspaper said. The "successful" candidate would be 35 and originally from northeastern China and would be paid 3,000 yuan ($400) per 10 minutes, it said.

Many Chinese businessmen keep mistresses in second homes, a trend banished after the Communists swept to power in 1949 but which has made a comeback with market reforms in recent decades.

Susan Turner remarks:

This has a Doug-and-Dinsdale sound to me. Why not just beat him up? No doubt this has already occurred to many people reading this…



 Having continued with Jay Pasch's counting of the Chinese carnage of Tuesday (as published here on Feb 28th), and instead of using confidence intervals, I looked at extreme values. Based on daily returns from the 2nd of January 1987 utill today (4992 obs.), here are the left and right tails of the return distribution:

%return    <-% obs        normal dist    >+% obs

0.1            2184              2321                2418
0.5            1466              1865                1663
1                876               1337                1041
2                334                 596                  371
3                140                 182                  136
4                  69                   50                   61
5                  36                    9                    27
6                  23                    1                    15
7                  18                    0                     9
8                  12                    0                     5
9                   8                     0                     2
10                 6                     0                     2
What is clearly striking is that declines of three percent or more have been observed more frequently than 3+ percent increases. If one were to use a normal distribution to describe Hang Seng daily returns (which is rejected at any level of significance), one would clearly underestimate the frequency of extreme returns of ± 4 and surely of ± 7 percent. Which distribution would thus fit Hang Seng returns, and also its asymmetry in extreme values? 



Measured yesterday's SPX closing price as a percentage decline of more than 4 standard deviations below the average one-day percentage change measured over the last 30 trading days. Examined the dates in history of like moves and the percentage-change T-days out. History shows a strong bounce averaging 4.3% by 2-days out, 9 of 10 winners and 1 no-change, t=3.2 at day-2.

Bernd Dittmann adds:

I continued Jay's counting, but instead of using confidence intervals, I looked at extreme values. Based on daily returns from Jan. 2, 1987 till today (4992 obs.), here are the left and right tails of the return distribution:

%return  <-% obs  normal  >+% obs

0.1           2184        2321       2418
0.5           1466        1865       1663
1                876        1337       1041
2                334         596          371
3                140         182          136
4                  69          50            61
5                  36           9             27
6                  23           1            15
7                  18           0             9
8                  12           0             5
9                   8            0             2
10                 6            0             2

What is clearly striking is that declines of 3% or more have been observed more frequently than 3%+ percent increases. If one were to use a normal distribution to describe Hang Seng daily returns (which is rejected at any level of significance), one would clearly underestimate the frequency of extreme returns. Which distribution would thus fit Hang Seng returns, and also its asymmetry in extreme values?

Larry Williams remarks: 

Traders should carefully note which stocks in the Dow were the least resistant to the selling pressures yesterday. An important subject, raised by Victor and Laurel a few weeks back.



 The size of yesterday's decline in stocks was in the top several since the 1990's, however, since volatility and the size of moves in general were greater in the past, one way to put today in context is in comparison to recent market behavior.

This kind of analysis could pertain to trader herding: Long periods of small moves punish those betting on big moves while rewarding small patterns (and vice versa for volatile markets). In terms of environmental pressure, recent market behavior selects for followers, but such easy feeding may occasionally lure them to extinction.

SPY daily returns since 1993 were checked for cases where the close to close move was bigger than 2% (up or down). At each such instance, the prior 100 day mean and standard deviation were calculated and used to determine how many (recent) standard deviation units the big move (in absolute terms) was.

For big moves compared to the prior 100 days, todays decline of almost 4% in SPY was over eight standard deviations more than the mean move; ranked 1st of all such moves in relation to standard deviation.



 On a day like today, one is sure to see the deepest darkest side of the financial markets and the financial pundits. And the bulls and bears are going to choose sides, and start to fight things out in the short term.

Being a veteran of more than 25 years of trading stocks and stock indices and living through the events of 1984, 1987, 1991, 1994, 1997, 1998, and 2001, my perspective is this:

One monkey does not close the show. A big decline like today does not lead to an end of the world or a China Syndrome.

It takes time for sanity to return to the markets on such a day as this. This means that the money will need to be sorted out and there will be continued volatility and big swings for the next several weeks.

Financial shows are in a war mode where they will begin to fight over viewership. Consider this akin to sweeps week at the networks. Financial advice will be ubiquitous. Remember, the more public the advice is and the more readily obtained it is the less valuable. The best bet is to not watch television, particularly the financial shows. Especially avoid the cable news shows. They are in the entertainment business not the moneymaking business.

Avoid all or none thinking. Eliminate Schadenfreude from your thinking. Avoid self-pity. As Bill Parcells says, "you are what you are."

Ignore the nattering nabobs of negativism. They are out there to rubber stamp their careers with one lucky call. Do not help them. Their opinions do not count anyway.

This is where all the practice, mental preparation, training, and professionalism become critical. General Patton would say, "This is where all the training pays off."

Be your own man. Make decisions based on your beliefs and your philosophy for better or for worse. If you had a good plan going into today, chances are it will be a good plan going forward.

Don't change tack. Any sailor will tell you to steer the vessel in the wave and head directly for it. As long as you have power, you have control.

Focus on what you have control of. Manage the trade; don't let it manage you.

Vincent Andres writes:

I ask myself, is it so important to identify the precise stimulus that triggered the market? There was probably one. One little shock, maybe, on one little fissure, which was enough. This is because it was applied at the right moment at the right place. But I'm afraid those remarks are of no predictive value. It is impossible to identify all possible little shocks and all possible little fissures. That's looking for a needle in a haystack.

But the market was in a state such that a little shock on a little fissure could propagate, coming from a microscopic, invisible level and emerging at the macroscopic visible level.

Why was the market in this state? Stress, pressure, tension. How to measure when the market is in such a state? I bet that some physicists have some ideas about this question.



According to ADP data, all of the last two years' US job growth has come from businesses with fewer than 500 employees.

A useful stock screen? A comment on relative regulatory burden? A factor in outsourcing/ offshoring/ trade?

From Stefan Jovanovich:

In California, the regulatory burden begins with five employees. Once you get to 25, your reporting, regulatory and liability burdens as an employer in this state are the same as General Electric's. Status outsourcing - reducing the number of direct employees and using outside contractors instead (which are invariably privately-owned corporations with only a few hundred employees at most) - is probably a bigger factor now than overseas outsourcing.

Most of the publicly-held companies that do business in California now have explicit policies to reduce their overall employee head counts in the state. I suspect that quality improvement from the use of digital technology is also a factor - as Jim Lackey pointed out yesterday about cars. If your business uses computers and digitally controlled machinery and your people are smart, you can now produce more and better with fewer bodies.

In the dot.com boom even the large-cap Bay Area tech companies were hiring anyone who could pretend towards geekhood. Now they are limiting themselves to people who have computer science degrees and have (gasp!) actual work experience. The military services are going through the same transformation (part of the evil Rumsfeld's legacy). They are reducing overall numbers even as they increase the number of boots they can actually put on the ground.



Sasha Goodman's useful R-Seek page is quite recent (begun in February) and it works well. There were three R search engines announced this month… all mainly due to lack of specificity of the "R" keyword.

Also, since I subscribe to several R mailing lists, I have put online an R mailing lists survey page.



 I define a fakeout as a session in which the S&P 500 futures move in one direction from the previous close to 9:30, and then move a greater number of points in the opposite direction from 9:30 to the close. I counted 21 fakeouts in the 57 trading days ending Jan 14, 2007. Of the 21, 15 consisted of an initial move down that reversed to a gain for the day.

Since mid-January the market has been faking the daily direction much less, but the rarely seen fake up, close down appeared yesterday, Feb 26, 2007. Only the fourth fakeout day of the past 29 trading days, and two of the four were miniscule.

A team that is stronger than the opposition has little need to fake; it relies on superior execution. In the Woody Hayes era, everybody knew Ohio State's game plan would be "three yards and a cloud of dust," but few teams could stop the Buckeyes.



 I have finally moved from Rome to Norfolk with my family. A big change! I have a NATO assignment for a three-year tour.

I am really excited although it is not easy to settle down. The culture, the food, even the simplest things are different. The fact that houses are made of wood is also quite interesting. Last night there was heavy rain in the area. I have just rented a home and was still asleep on a mattress as my furniture has not yet arrived from Italy. Suddenly, I noticed that water had infiltrated through the roof and had come down to the living room. Very nice start I have to say!

Electrical outlets are different, so I had to buy all new electronic devices. Heating is different. Even the washing machine works differently. And in Italy, dryers are not very common.

What really impressed me, however, as soon as I arrived last month was the housing market in general. There are so many houses for sale in the area that you are brought to think that something is wrong. I do not know the US market and this area in particular, but the volume of housing for sale is huge. From what I understood, however, prices are still high and sellers, I have tried to test them, are not so inclined to reduce the price.

The rental market is different. I could not find so many houses for rent. And prices are quite high. Eventually, I decided to rent the house for the next 3 years. Currency risks and the weak housing market led me to make a very conservative choice. But with this type of market it might also be possible to find good bargains. I need time to search, and patience.



Invitation to Roundtable Discussion on Neuroeconomics.

I am writing to draw your attention to a roundtable discussion on neuroeconomics being held at the Philoctetes Center at 247 East 82nd Street on Saturday, March 17th at 2:30pm. The Philoctetes Center holds some of the most interesting conversations in New York City. Admission is free and open to the public. Daniel Kahneman, winner of the 2002 Nobel Prize in Economics, will be participating in the discussion.

It's a good idea to arrive 20 minutes early.



 It's spring in Hawaii. The free-range chickens in the yard are having little chicks. They are really cute. The clutches vary from three to 10 chicks. They all follow their mother hens around and peck at little worms. They struggle to keep up with mom, across the grass, up the rocks. Sometimes when the mother is spooked, she reverses direction really fast. Some of the chicks are not paying attention, or are not as fast, and are left behind. The Hawaiian Hawk, or Io, is cruising right above in the trees and swoops down and grabs a chick. Out of ten chicks, maybe two or three survive to maturity. Execution is swift.

That reminds me that when he market changes direction, not everyone is paying attention, or can't move as fast, and some few are left straggling in the wrong direction. A good spec is on the alert and can swoop down for a meal. That brings up the subject of execution. It can account for several percentage points of return, no matter what the system. There is always the tradeoff in fills, between size and accuracy. One can't have both. That brings up alpha. How much alpha is execution? A part of any system is its executability and accounts for a chunk of alpha. Many systems look great, but will they execute? A poor system can turn out great with great execution.



 What do hedge funds look for in a proprietary trader?

Independent, entrepreneurial team-players. Aggressiveness, with the ability to integrate information quickly. Essentially, the ability to make quick decisions on incomplete information.

The longer the track-record the better. Consistent profitability with low volatility of profits, where "low" will depend on the fund. Some will look askance at "too low" volatility, figuring there isn't enough risk, or that you're afraid to put it on. Be able to explain the scalability of your trading, and how you can increase or decrease volatility, i.e., risk. Maybe you had to play it safe because of margin constraints, broker constraints, etc. They'll want to know how quickly and how much you can scale up whatever it is you want to do.

As to education, the traditional degrees, Finance, MBA, etc., are easier only because you don't have to explain yourself. People know what you know. An ex-scientist or ex-engineer will constantly be asked why he switched careers and the applicability of his background to trading. A different degree helps you stand out, but it also moves you from being a safe, and easily defensible choice, to a risk.

Your cover letters should be short and to the point. No one is going to sit and read a long essay from someone he's never met. Generally, funds are looking for junior people from groups they know at banks they know.

Everyone is hiring, to a certain extent. They may not be publicizing it. Almost any fund will listen to someone they find intriguing. There are recruiters all over the place, playing up their hot contacts and jobs.



 I'm only 34 but I have been involved in sales for 16 years, when I started selling ads in a magazine. At some point I managed a sales force of fifty and I found the most successful salespeople to be hard working single mothers who needed to work hard to raise their kids. The best salespeople I know come from the lower classes, driven by the desire to have a better life. I can't recall a single good salesman coming from the upper levels of society.

Mark Goulston adds:

People who play in competitive team sports are sought-after for sales positions because of their ability to "take the hit," face, and deal with a reality in their face that produces an unambiguous score.

James Sogi extends:

 The benefit of sports to a child, which leads to success in life, is the ability to face, accept, and overcome loss. A sporting loss is not life-threatening or career-ending, and the sportsman learns to overcome adversity in a controlled setting. Furthermore, he learns the rewards of effort, ultimate effort, training, discipline and competition. He learns, perhaps the hard way, that he cannot succeed without extra effort, hard work. These are over and above the benefits of health and fun and camaraderie from sports. These are lifelong lessons. 

David Lamb writes:

Many Wall Street firms hire ex-athletes, who are sought-after due to their competitive nature, their ability to take a "hit", and their desire to excel.

Steve Ellison replies:

It is not a Wall Street firm, but tech giant EMC that has built an outstanding sales force by seeking out athletes. I know a manager there who was a college hockey player. He says that he would give preference in hiring to anybody who was a student-athlete because it takes excellent time management and organization to be able to compete at the collegiate level while completing a college education.

Russ Sears adds:

Quote of the day from the sports page describing the Duke lacrosse team's motto for this season: "Succisa Virescit," Latin for "Cut it down, and it will grow back stronger."

To compete, in sports, in sales, in business, even in life and perhaps eternity, it is not enough to learn to "take a hit." Even the losers who barely survive will learn to take a hit.

To thrive you must learn to embrace the pain, to accept that success has a price. This will take you beyond the masses. The runt playing football or basketball for the love of the game will learn this.

To be a champion, you must find your niche; find that pain that makes you stronger. You must learn what exists inside you that, when it is cut down, makes you grow back stronger. You must learn to reinvent yourself until your dreams run parallel to your ability. You must learn to evolve.

Many great successes do make great salesmen. They don't make great salesmen, however, by just selling anything. They must sell something they believe in, on their own terms, not somebody else's.



 How else to explain this unprecedented swipe at a money-machine for the Democrats?

The Media Equation — Someone Give Geffen a Day Job, by David Carr.

There is a danger that if the coming election becomes David Geffen's full-time hobby, his precision ruthlessness will distort the public process. 

The NY Times, with its long history of covering for dictators and ridiculing freedom, pouts about "ruthlessness" threatening to "distort the public process."

Damn. My irony meter just shorted out.



Here is a link to Vaclav Smil's recent piece on Peak Oil.

Ken Smith writes:

In fact, when the price at the pump hit $3.00 a gallon last summer, it was America's number one gripe.

Filled tank yesterday, price of gas was just short of $3 a gallon for premium. Bought 12 oz of coffee at Starbucks for $1.80 plus tax, just short of $2. There is no shortage of coffee beans. Shortage or supply has nothing to do with price of coffee. Demand for coffee in relation to price is economically irrational since a cup of coffee is mostly water.

What is the cost of water per cup? A cup of coffee and a gallon of gas, what the hell are people bitching about when they buy gas? They should be bitching that coffee cost so much. Gasoline is a bargain. Coffee is expensive.

Kevin Bryant writes:

 The professor (Vaclav Smil) may be an expert in many things oil related but I'm not sure he understands the definition of peak oil, at least as Hubbert expressed it. Hubbert himself is sometimes blamed for the confusion until he clarified his methodology in 1982.

Hubbert's theory
proceeds from a graphic representation of yearly production divided by cumulative production (an expression of production rate) on a y-axis and cumulative production on the x-axis. On this graph, "peak oil" is that point at which half of total reserves have been produced. Estimates of total reserves are of course up for debate; however, Hubbert's graph can be used quite neatly to extrapolate this value.

After the early production years, data points on the graph form an uncannily straight line. The theory or the main point of the graph is not to predict annual production or even when annual production will decline, rather, it highlights that the ability to find oil is principally determined by the fraction of oil yet to be discovered. One of the best analogies I've come across is the one about fishing in a pond: the more fish you catch, the harder it becomes to catch the next fish. Unfortunately oil has no offspring making the comparison less dramatic than it could be.

Corollaries from Hubbert's main theory then suggest that once peak is reached, production begins to fall precipitously and/or the marginal cost of production increases geometrically. Actual production experience for single wells seems to corroborate the significance of the halfway point. There may be a lot of oil left in the ground but getting it out in ever increasing amounts becomes an increasingly vexing and costly challenge - the Canterell reserves and the tar sands of Canada are prominent examples of these dynamics in action.

For a more detailed discussion of "Hubbert's Peak," Ken Deffeyes (dismissively referred to in the professor's article), also a geologist, has written two books on the subject: Hubbert's Peak: the impending world oil shortage and beyond oil, and The View From Hubbert's Peak.

Stefan Jovanovich adds:

 Hubbert will, of course, ultimately be right; there is only a finite amount of petroleum and other usable hydrocarbons in the earth's crust. What Vaclav Smil ("the professor") and others in the oil & gas business have been trying to point out is that most of the planet has not had anything close to the intensive exploration that the United States' lower 48 had gone through when Hubbert first shared his magic curve with the world. They also find Hubbert's "discovery" of a perfect bell curve evidence of how little he understood the "erl" business.

Global Reserve estimates are like CBO projections of future deficits - very big numbers that have only political meaning. "Proven reserves" - the amount of oil and gas that a company knows is there under the ground because they have verified that it - never go out more than 2 decades of current production. The reason is very simple: "proving" that the stuff is there (as opposed to simply pumping it out of the ground) is the major variable cost. This is why the pond analogy is all wet (rim shot, please!). The size of the pond is a function of the amount of capital and ingenuity people are willing to put into the discovery of new reserves, and the present value of any discoveries they make.

Hubbert's Peak as a theory is analogous to a professor from the business school measuring Wal-Mart's inventory against its revenue history sales and "discovering" (sic) that the Walton brothers were running out of peanut brittle. The Walton brothers were (and measured against historic sales) always will be running out of peanut brittle. Hubbert's "methodology" is an accounting truism about any business that has an inventory; it's called the inventory to sales ratio.

I once asked Buster Turner about Hubbert. Buster had an advanced degree in petroleum geology from the University of Oklahoma, and his best fishing buddy was the State geologist who was a full professor at I.U. He was not a man who scorned academic learning. Quite the contrary. But he thought Hubbert was a perfect example of academic arrogance, what he called "the damned professoriate." Hubbert, he said, didn't even understand how much the tax code had favored finding and pumping oil and gas out of the ground in the domestic United States instead of exploiting overseas reserves. As Buster put it, "Congress had been sending everyone in the oil & gas business a telegram for 50 years that said 'Drain America First."' And so they did.

Kevin Bryant adds:

 You put your finger on the key issue it seems to me, moving from the theoretical to the practical. Enlarging the pond requires capital. Investing capital requires appropriate risk/return. There's a reason there haven't been any super giant oil fields discovered in the last thirty years. All the low hanging fruit has been picked. Further discoveries will require significantly more investment relative to output.

Again, Canterell and the tar sands are evidence, in my opinion, that further discoveries will be found only after significant time (I understand several years will be required to bring the "new" Canterell discovery to production if further tests bear out its potential) and expense. Otherwise, neither project would be as seriously pursued given their less than ideal economics.

Whether or not oil depletion is decades away or centuries away, the costs of exploration and production are likely to increase dramatically, which points to higher oil prices over the next decade.



 Yesterday I sat with a Honda salesman, agreed to price for an Accord, pulled out my checkbook to pay in full. The salesman shoved papers at me to fill out. These asked personal questions that in my view had nothing to do with the sale.

You got a car. I got cash. That's all there is to it as far as I'm concerned. No. Must to complete the papers and sit with the finance officer.

What kind of business is that? Should be like buying a sack of onions, go to the cashier and pay, walk out with onions. I walked out. Still looking for a car dealer to take my offer.

James Lackey writes:

 Yes, back to the good old days when we waited three days for a check to clear, then marched ourselves down to DMV to register the car before we drove it.

Oh, and how could that pesky finance man try to sell us something after securing a loan for 4% under the Fed Funds rate? Do not take the Japanese rate of 0.9% — best deal Honda offers is 3.9% for 60 months.

Never pay a 2% premium on a Honda for a full factory 100,000-mile warranty. Let's all just complain that our four-year-old car with 70,000 miles on it broke down and cars are much too complex to work on nowadays. Worse, we can just trade in and buy new cars every 2.5 years once they reach 36,000 miles.

New Honda tech that is wonderful unless it breaks:

1. A Drive-by-Wire throttle system helps to smooth the power delivery. And the Maintenance Minder system monitors how you drive and reminds you when it's time for service. VTEC adjusts valve timing and lift to increase low-end torque as well as high-rpm power. In the 2.4-liter engine, i-VTEC adds Variable Timing Control, boosting power and economy.

2. The Accord automatic transmissions use Honda's Grade Logic Control system. This system differs from other computer controlled shift programming because it can detect vehicle driving situations and then set appropriate shift points for the car. This avoids gear-hunting on uphills and descents, and downshifts for added engine braking.

3. Vehicle Stability Assist with Traction Control is a sophisticated safety device that aids the driver in retaining control of the vehicle if wheel slippage is detected. When the driver is cornering or must make a sudden maneuver, the system can sense over steer and under steer and can brake individual wheels and/or reduce power to restore the driver's intended course.

4. Power sliding doors — my favorite on the minivans!

And this is the simplest of mass-produced cars. You should read the Lexus tech specs. Unreal. Awesome. New cars and the deals are amazing. If anything, they are "too good" to the consumer — as far as stocks and profits go.

George Zachar adds:

Lack's hosanna prompted me to ping the CPI database to see how these advances showed through to the reported price data. Thanks to hedonic adjustment and price compression, the government's CPI series for "new vehicles" shows prices are unchanged since September 1994. For geeks, the series is CUUR0000SETA01.

Roger Arnold adds:

 My 1999 Nissan Maxima GLE with all the options had a sticker of $32,000. The new loaded Maxima has a lower sticker. In real terms, without hedonic adjustments, that's 30% lower. With hedonics I don't know what it would be, but as James pointed out, it has to be a lot.

Nissan said they would give me $10,000 for my 1999 with 94,000 miles and get me into a comparable new car for an extra $20,000. Is that a good deal? My 1999 is perfectly fine and in near-new condition.



 The strategy of the people blowing up chlorine tankers is based on the combined hopes of foreign intervention and American surrender. As James Dunnigan puts it, "Most of the terrorist bombings these days are the work of Iraqi Sunni Arab organizations, who still believe that if you make the Iraqi Shia Arabs mad enough, they will get so nasty that neighboring Sunni Arab nations will feel compelled to invade." The bombers' other hope is that the nightly pornography of splatter on ABC, NBC, CBS, and CNN will prove that the war is "unwinnable."

Even the most optimistic believers in the Crusade for Sharia have their doubts that the Saudi Army can be persuaded to leave their barracks and start driving towards An Nukhayb. On the other hand, the prospects for unilateral American surrender seem fairly bright - at least in the eyes of the seasoned, if not to say pickled, political press in the U.S. and Europe. The American Congressional leadership has already accepts the judgment of military experts like John Murtha, John Kerry and Chuck Hagel ("we all served in Viet-Nam and we are still pissed about it"), and nearly everyone agrees that it is all Donald Rumsfeld's fault.

Of course, it is not. Like Winfield Scott, Rumsfeld will not get the credit he deserves when victory comes, but he is the author of the first strategic success in a foreign American war since Korea. For investors the parallel is worth noting. Market observers then continued to worry about the "record" (sic) highs in the Dow just as they are worrying now.
No one knows the future, but the one bet few people are making is that 2008 will equal 1954.



 If you are looking for another movie that promotes individuals following dreams intently, second chances, father-son relationships, anti government with their frivolous laws, individuals making choices, and unconditional love, then go see Warner Independent's Astronaut Farmer.

Billy Bob is excellent for the part and the only other human I think that could fill the shoes of the role Charlie Farmer. Bruce Willis plays an antagonist in the film. Anyone looking for a film that involves the brighter side of existentialism other than the Woody Allen take will also enjoy this.

Of course, those on the Spec List that seek and need great examples on non-altruistic heroes will get their fill with ole' Charlie Farmer! Couple of lines that I love were as follows:

(When pulling his son out of of school for a month) "You are here to teach him History; I'm going to show him how to make History"

(After burying his Father-in-law he sees a man on the ranch looking over things, and finding out he was an appraiser for the bank going through on foreclosure) "How many head of cattle you got here Farmer?" He replies, "Enough." "How many acres?" He replies, "Do you know how hard it is to find a dead body on 362 acres?"

There is plenty of Countin' dealing with "rocket fuel" and tons of lessons on risk and reward. One of the main themes is "you have to take big risks to get big rewards." Capitalism is portrayed in a favorable light as well utilizing NASCAR!

Great film. The boys and girls of Hollywood really let the government know how they felt with this one.

It is PG, and I took my 4, 6, and 8 year olds with me. Those more conservative than my family might want to go at it alone or with the spouse.



 Today's Wall Street Journal front-pager on how the Fed now purports to think about tradeoffs between inflation and unemployment is a must read for folks who play in debt, seeking to divine how the children on Constitution Avenue want us to think.

Executive summary: The Phillips Curve is dead. Employment is no longer the Fed's jumping off point for rate-setting decision-making. It's been replaced by (bear with me) the Fed's perception of the public's perception of the Fed's credibility in ensuring core inflation reverts to about a 2% zone.

I am still mulling the implications of this, but suffice to say this mushy standard marks a new "high" in the migration of monetary theory, from the now archaic phrase "gold standard."



…and taxes too low, just wait:

Compared SP500 monthly returns since 1950 under Democratic and Republican presidents (from inaugurations in January). Turns out under Dems stocks do a little better, but not significantly:

Two-sample T for Dem ret vs Rep ret

                N       Mean      St Dev      SE Mean
Dem ret   685    0.0073    0.0408      0.0016 T=0.51
Rep ret    410    0.0060    0.0429      0.0021

Notice the standard deviation is a little lower for the party of redistribution, so maybe their appeal is less volatility?

Test for Equal Variances: Dem ret, Rep ret

95% Bonferroni confidence intervals for standard deviations

               N      Lower    St Dev      Upper
Dem ret  685   0.038     0.041        0.043
Rep ret   410   0.040     0.043        0.047

F-Test (normal distribution) Test statistic = 0.90, p-value = 0.252

Depending on your definition of what "is" is (as well as significance of DNA on children's clothing), Dems do have slightly lower market volatility (N.S.) as well as possibly better skills subduing the mistress.  



 Umberto Eco is the master of how not to run a typical library, one that makes it impossible to take out books, or photocopy anything, or use facilities, or fill out a card, or use the stacks. He studies such libraries to get a feel for what's going on in the world of information.

I wondered if it might be good to consider how to run a trading operation the wrong way in the same vein. Here are some rules.

  1. Be sure that there is much frivolity and high five-ing whenever there is a good trade.
  2. Do mix in much personal business with the trading, as this will get you excitable and ready to pull the trigger.
  3. Have all bills from the service and other agencies come directly to the office and the trader so that they will wish to trade better to cover the bill. 
  4. Be sure to have a voluptuous other in the room at all times so that he or she can be impressed at all times with the big stuff you're involved in. 
  5. Pay much attention to what's on the tube, especially rumors of terrorist action and who's buying and selling as if you're able to react in a nanosecond you could make the bid asked.
  6. Be sure to go for small profits as you can't go broke that way, and perhaps you will be able to cover the transactions costs, when your expectation if you do make the profit is a small part of the grind.
  7. Have much badinage about the money won at Vegas or lotteries, as this is a good substitute for trading.
  8. Always have a pure mathematician at hand so you can solve theoretical problems from the stochastic calculus and really keep track of the latest papers from quantitative finance which are so relevant to trades today.
  9. Be sure not to have any prospective files on hand but use the retrospective ones so as not to interfere with what you actually could have done.
  10. Only look at data series that go back at least 1000 observations and include the 20s and 70s because p/e were so much lower then and interest rates really didn't affect stocks.
  11. Keep track of what's working on the last 3 trades as if something is hot, why you might as well assume that no one else knows about it and you can follow it with impunity.
  12. Do make sure that all meals are taken off the trading floor so you can have a break of at least 2 hours for food and drink and have a fresh start as to where things are and what the rhythms are.
  13. Have very crowded facilities so that one can always be in discomfort and never have patience to put a trade on.
  14. Make sure your brokers call you up at all times to tell you that the reason that the market just went up or down a few percent was that the white shoe firm was buying.
  15. Keep in touch with many lieutenants of the big traders as it's good to know what the big boys want you to know about why the market is so good or bad. Ditto for what the big mutual fund players just sold or bought.
  16. Forget about all markets except the thing you're trading as every trade and individual market must float on its own bottom.
  17. Be sure to find out what the masses of traders are doing on such things as nobletraders.com. They once had big profits and they're very eager to share their wisdom with you on the chance that you might do better than them.
  18. Much argumentation with your colleagues is good as that's the way the unusual ideas can percolate and harmony might elicit zone type ideas.
  19. Be sure that trading sheets are hard to get to so that you can really recheck what happened from memory or based on what your counterparts or brokers have memorialized.

    Please augment with others of an Umbertoan nature.



     On January 22 I took my older daughter to the allergist for a checkup; she's been having allergy shots for about a year. Prior to seeing the doctor (a cursory exam where he mostly talked about his real-estate taxes, essentially the same conversation as last year. I didn't have the heart to tell him I have it even worse than he does) a nurse did a test using a device that I'd never seen before called a Peak Flow meter. It's used to test the airways of asthmatics. My daughter isn't an asthmatic but they test everyone.

    A Peak Flow meter is a small tube that you blow into after taking a deep breath. My daughter registered about 350 somethings. Curious, I decided to try it as well. I took a huge breath, thinking that there would be some resistance and blew hard - and to no one's surprise, with a result of about 550 somethings, I am quite the blowhard. Interesting, there's almost no resistance at all. The nurse told me that the idea is to measure the volume of air that comes out, not how hard you can blow.

    So naturally on a slow day like today (Friday) when I watch the Brownian motion of numbers and screen-wigglies up and down, my mind began to wander and I thought about the Peak Flow test and how we've been having a situation where lately there's no resistance at all to blowing through one peak after another. Almost like blowing into the Peak Flow meter.

    Spec Listers often talk about the market mistress (if you Google "market mistress," the only direct hits seem to be the Daily Spec blog), and I for one have an anthropomorphic view of the market organism as well. However my personal visualization is of a character, a group mind, that's definitely manic depressive, often paranoid, and certainly schizophrenic. Not a nice thing to say about a lady. Or a fellow, for that matter.

    Maybe today he or she was catching its breath? Maybe she can only take a deep breath and blow a 550 a certain number of times; then she has to take a day off? I was glad that he did. Maybe she was taking the day off to think about what to do next. How to confound those who are trying to foretell, the bulls who are looking for a nice neat 10.00% pullback to some recognizable moving average, or Fibonacci retracement so that they can load up again on stocks, or the bears who predict that mortgage derivatives have already bankrupted a bunch of hedge funds and banks last week due to Thiotimoline contamination, and we should all buy gold.

    I have no idea. Maybe that's the best approach as I can't be wrong that way. Nobody knows what will happen Monday at 9:30 EST. I could guess. But I'd probably be wrong. There's a signpost up ahead. It's a 4-way stop. Four cars (interesting that the character for the '4' key is a '$') waiting to see who will go first. Each one edges out a little bit to see what the other guy will do. If they figure it out, it's orderly. If they don't, it's a crash.

    Now I have to take off my thinking cap and get ready to watch Bill Maher insult President Bush on HBO.



     I wanted to alert specs to some new books they may find of interest, the first of which I published:

    The Science of Success: How Market-Based Management Built the World's Largest Private Company, by Charles Koch should be read by anyone who works in any kind of organization. I am terribly biased but I have never before seen someone take the free market view and apply it to actual business management. When I read the manuscript for this compelling book my first thought was 'Wow. Now I get how the economic principles that Heyne so wonderfully explained works in real business on a day to day, ground level.' Koch may be the most under appreciated yet brilliant businessman in the world. He's also a succinct writer that should appeal to ADD readers. When I am queen of the world, I will run it Charles Koch's way.

    Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement, by Brian Doherty was reviewed last week in the WSJ. It is not succinct (clocking in at over 700 pages), and I'm not done reading it yet but it's proving a fascinating read that is the first libertarian history of which I am aware. The index is a who's who of so many of specs' favorite thinkers and writers.

    A big thank you to Chair for his recommendation of His Excellency George Washington, by Joseph Ellis which tops my list of best reads for 2006. Extraordinary and I didn't want it to end. The lessons I learned will, hopefully, stay with me forever.

    Finally, I am also finding The Island at the Center of the World, by Russell Shorto utterly fascinating. NYC owes the Dutch almost everything. . . which takes us back to Charles Koch who is, coincidentally, of Dutch ancestry.



    From Peter F. Drucker, The Essential Drucker:

     "There are innovators who are 'kissed by the Muses,' and whose innovations are the result of a 'flash of genius' rather than of hard, organized, purposeful work. But such innovations cannot be replicated. They cannot be taught and they cannot be learned….

    "But also, contrary to popular belief in the romance of invention and innovation, 'flashes of genius' are uncommonly rare. What is worse, I know of not one such 'flash of genius' that turned into an innovation. They all remained brilliant ideas.

    "The purposeful work of innovation resulting from analysis, system, and hard work is all that can be discussed and presented as the practice of innovation…. And the extraordinary performer in innovation, as in every other area, will be effective only if grounded in the discipline and master of it.

    "Purposeful, systematic innovation begins with the analysis of … the seven sources of opportunity: … [which are] the organization's own unexpected successes and failures … incongruities … process needs … changes in market structures … changes in demographics … changes in meaning and perception … [and] new knowledge. All sources of innovative opportunity should be systematically analyzed and studied. It is not enough to be alerted to them….

    "An innovation, to be effective, has to be simple and it has to be focused. It should do only one thing; otherwise it confuses. If it is not simple, it won't work. … All effective innovations are breathtakingly simple. Indeed, the greatest praise an innovation can receive is for people to say, 'This is obvious. Why didn't I think of it?'"

    Dan Grossman writes:

    In considering innovation/invention, I would add the US probably has a more flexible society for welcoming change, and a more varied capital market for financing innovation, which is probably why innovation seems to do better here.



    The current popular explanation for the market's persistent strength is "worldwide excess liquidity" (a la Sam Zell's singing Christmas card).

    Under this view,

    1) Where is all the excess liquidity coming from?

    2) And why is there more liquidity being created now than in normal other good economic times?

    Dan Grossman writes:

    Maybe the world is awash in liquidity and maybe it isn't. But the central banks of the number 1 and number 2 economies are restrictive and have been that way for some time:


    Jim Sogi writes:

     I am sure everyone has noticed that the market refuses to go down. Every time the bid pauses, after a small airdrop, buyers come back to bid it back in force. The liquidity is a tectonic event, like the movement of plates. Once put into motion by years of pump priming in the US, in Japan, in China, it is hard to hold back.

    While the monetary authority is restrictive in its pronouncements, it is not necessarily so in practice, with low rates below short-term rates, which would cause liquidity to flow to equities under the Fed model. Typically, as with any political movement or group situation, once a consensus is created it is hard to change the direction and the momentum tends to overshoot the changing circumstances. It is a typical group dynamic caused by the difficulty of getting people to agree. And as with the gambler's being more certain once the bet is made, decisions become etched in stone and are hard to change. When currencies move, they tend to overshoot their mark. When risk is deemed to be low, the consensus continues even beyond the time and circumstances justify. Remember 1995? It seemed the market was really high then. But it shot up like crazy over the next five years.

    Old metrics of liquidity such as M3 don't work. George and Phil mentioned the role of derivatives. Is there a way to measure the derivative market? What are the indicators? Currencies measure the relative strength of flows of capital, goods, and fiscal and monetary balances between nations, and are important measure to consider in a multivariate way similar to gold and commodities that reflect and predict equities.

    Japan's new equity highs and yen lows reflect a political and economic dynamic of a growing economy with its monetary gear in reverse. Very odd. Both the US and Japan benefit from weak currencies against the Euroland, and despite the jawboning and posturing, the currencies stay low. The fiscal power is exercised by the Executive but the power, in theory, is in Congress. This is separate from the monetary power of the central banks. The two are related, but are not formally coordinated. The size of the currency markets surpasses equity and debt and is subject to intervention in scope beyond both.

    As the floating fiat currencies mature, the competition between nations may become more intense. While liquidity is good, now, there is not much of a squeeze. Reading some of the old books, there were some tense moments when bars of gold had to be shipped from England to New York to keep things afloat. Benjamin Franklin argued for printing money to stimulate commerce. All nations have incentive to inflate their currencies to keep growth from falling back into recession. What happens when the confidence, rather than gold, that keeps the currencies afloat turns dark?

    It's a very difficult issue to understand. Thanks all for your help.

    Bud Conrad writes:

    Nice charts. I appreciated your sharing them. I agree with your base point, and want to see if I understand the importance of this analysis.

    A little more explanation would help me apply the observations. The red curve fit looks like it is at a higher rate for the Japanese. Can you give me your fit percentage annual growth for each? The size is hard to read on my small screen.

    Do you have an explanation of the big drop in Japanese monetary base? I think there were shifts in the policy of the BOJ in May 2006, around going off the Zero Interest rate policy but I can't recall the actions taken. Would they fit though the Japanese end point were higher or lower than the US? Is the monetary base an important measure now that there is so much credit created outside the banking system that is not regulated, and for which there is no reserve requirement, and now people prefer paper money to credit cards?

    From Bill Rafter:

    U. S. Monetary Base is the combination of currency in circulation and deposits in Federal Reserve Banks. It is released bi-weekly in seasonally adjusted form by the St. Louis Fed. It is also released weekly in non-seasonally adjusted form. I can seasonally adjust the weekly data myself, but then I would be the only one with that data. Since much of market action is sentiment-based, it's best to see what everyone else is watching, so I use the default.


    The Base must grow at the rate of the population growth and economic growth or risk causing deflation. Thus in the long run the Base growth will be exponential with some positive and negative feedback influences. The best way to fit it would be with a parabola. That's what the red line represents. The software that I use (our own*) does that easily and produces the formula giving the growth rate. Off list, I will send you a text file with the base and parabolic fit numbers. What is absolutely amazing is that the fit is so perfect from inception. To me this means that there is a "natural" target for the Base. Whether the Fed admits to a target or not is inconsequential. One exists. Once you have acknowledged that, then it is a small step to say that growth in excess of the target is accommodative, and less than it is restrictive. The two spikes (Y2K and 9-11) prove that the Fed has control.

    The Japanese Monetary Base numbers are available monthly. They consist of currency and deposits and are available raw and ARIMA adjusted. I used the latter in my chart. The Bank of Japan did have an inflation epiphany last May, when the numbers showed a huge contraction. Some have attributed the sell-off in our equities markets at that time to the BOJ action. Yes, the growth rate in the Japanese Base is considerably greater than that of the US. Please don't flame me for saying so, but I attribute that to (a) inexperience and (b) BOJ having less independence from the government than our own Fed does.


    Credit is created outside the central bank infrastructure, but sooner or later, that money hits the banking system where it is recorded in the Base.

    Note to members: I would be happy to produce additional information based on monetary numbers from other countries. Send me links. Europe would be particularly useful. Australia and Russia are probably just warts on the elephant's butt. China is a question mark. I assume that even the rural areas are somewhat dollar-influenced. I don't know how China's banking system works, but assume it is run by benign neglect. Therefore, a lot of what goes on there shows up in the U.S. numbers.

    * To all: I have previously offered the software free to list users. That offer still holds. Just send me an email if you want a serial number.




     Traders Expo was held this past weekend in NYC. The exhibit was filled with vendors and traders. Seminar topics ranged from 'Basic Momentum Principles' to 'High Probability Pivot Systems for Swing Traders' to 'Candlestick Essentials and Beyond: Catching the Next Move.' In general, there was a strong bias towards finding the next trend and locating breakouts. Much emphasis is on risk management, as if your strategy doesn't matter as long as you have a good risk management system in place. Stop-loss is of course the central theme in all these techniques.

    One vendor received much attention, VectorVest. They challenged the audience to pick any starting date over the last 10 years and their system would beat any given benchmark over the period up till today. You can apparently buy this system, which must be classified as the Holy Grail of investing, for the price of $9.95! Should one laugh or cry?
    Maybe the savior for the scientific minded investor is the sentiment at Traders Expo, since it seems like ballyhoo investing still very much is the mainstream.



     The psychology of the market is what has always drawn me to it and I find it very interesting how this thing we call "the market" has so many diverse faces. Most interesting to me right now is how intuitively it is a market of which you should be leery.

    But although you can cite so many sentimental measures that point to topping action, the sentiment I feel is anything but that of a toppy market. This from the little guys in Middle America who are so reliable.



    Our Feb. 1 Junto (Latin for "meeting") celebrating the 102nd birthday of Ayn Rand was a great success. More than 160 people turned out to hear about Rand from many who knew her, including our special guest, Patricia Neal, who starred in the movie version of The Fountainhead.

    Our next Junto event is on Thursday, March 1. It features Steven J. Milloy on Using Capitalism Against Capitalism. He'll talk about how leftist activists harness the power, resources, and influence of publicly-owned corporations to advance their social and political agendas. Milloy is the publisher of JunkScience.com and is a manager of the Free Enterprise Action Fund. Our meeting is at the General Society Library , 20 West 44th St. in Manhattan. Our gathering begins at 7 pm with discussions about what's on anyone's mind. We bring the speaker on at about 8 pm. Admission is free. Daily Specs readers are invited to come, bring their friends, and say hello to me.



    My firm, Manchester Trading, got its start some 40 years ago, based on the idea that interactions between multivariate time series were important. Since then we have proven this fact many times over. As in ecology, 'there is always a food web between the various species in an ecosystem', but our problem is that the web is always changing. There is always an intimate relationship between concurrent correlations of changes of commodity pricing, but the predictive properties are always changing.

     In the bad old days of the early 80s it was very common for days like yesterday to occur. A tremendous increase in gold in conjunction with rises in all the grains, and a decline in bonds. Those days it was always good for a major decline in stocks that day or the next. Yesterdays move in gold, up 21.5, in conjunction with a 2% increase in the Goldman futures index and fantastic up moves to multi day highs in all the grains and metals, brought back those ugly memories.

    To put things in the simplest perspective, taking a page out of the book of yesteryear, and from localized contingent regression predictions, I found that gold on the day has been up two standard deviations or more on 58 occasions since 1996. The impact on stocks five days later is down half a percent, with no significant effect on bonds, gold, or any other commodity. But still, ugly memories …



    There's a Mistress who's sure all that glitters is gold
    And she's climbing a stairway to heaven
    And when she gets there she knows if your shorts are all closed
    In a day it will go up even more so

    Woe oh oh oh oh oh
    And she's climbing a stairway to heaven

    There's a chart on the wall but she wants to be sure
    'Cause you know sometimes moves have two meanings
    There's a page in the book by a bull always sings
    Sometimes all of bear's hopes are misgivings

    Woe oh oh oh oh oh
    And she's drifting up stairways to heaven

    There's a feeling I get when I look toward Wall Street
    And my spirit is crying for leaving
    In my dreams I have seen smell of smoke in tea leaves
    And the voices of dead from two thousand

    Woe oh oh oh oh oh
    And she's buying a fairway at the seventh

    And it's whispered that soon, if we all heed the tune
    The bull piper will lead us to reason

    And a new day will dawn for those who stand long [actual]
    And the patterns will patter will all be reversals
    And it makes me wonder (am I getting younger?)
    If there are shortputs in your hedgerows
    It's just a spring clean for the May Queen

    Yes there are two paths you can go by
    but in the long run
    There's still time to realize the dependency on them



     Late last month, New York Times writer John Tierney posted a good description of cognitive dissonance. To what Tierney wrote, I'll add another cognitive dissonance experiment that has obvious market parallels.

    From Robert Cialdini's "Influence: The Psychology of Persuasion" comes:

    "A study by a pair of Canadian psychologists uncovered something fascinating about people at the racetrack: Just after placing a bet, they are much more confident of their horse's chances of winning than they are immediately before laying down that bet. Of course, nothing about the horse's chances actually shifts; it's the same horse, on the same track, in the same field; but in the minds of those bettors, its prospects improve significantly once that ticket is purchased … Thirty seconds before putting down their money, they had been tentative and uncertain; thirty seconds after the deed, they were significantly more optimistic and self-assured. The act of making a final decision - in this case, of buying a ticket, had been the critical factor. Once a stand had been taken, the need for consistency pressured these people to bring what they felt and believed into line with what they had already done …". 



     Now on a visit to Venezuela, I thought I would share some highlights on what's happening here from a ground view. Though I am mainly at resort type areas away from the city, the spirit or how things are done here or not done can still seen.

    The black market for dollars in very active, changing daily and at a 30-40% premium to the stated bank rate. It is actually very difficult to change the local currency, Bolivares (B) to dollars, other than through the black market. The spread on the exchange is about 10%. So going the other way and changing $200 for a week's expense in B's garners a nice profit for the locals. Unfortunately the black market is used mostly by the wealthy and connected here as a vehicle to siphon funds. It work like this: the government will exchange B's for dollars at the fictional rate of 2150 B/$ for certain business. They have to justify a "need" to buy imported goods and then can get the very favorable and fictional bank rate. These exchange rights are given to government cronies for big infrastructure projects, of which there are many.

    The dollars are then sold back on the black markets at 3300B/$, and they just used domestic suppliers. I imagine this is funded by oil profits that bring in dollars to the treasury, but amount to a heavy indirect tax on the country. Gasoline, however, is government controlled and incredibly cheap, about 40 cents a gallon. There are shortages for other goods caused by price controls, mostly on food distributors who have no incentive to supply at capped prices. It varies from week to week. Sometimes chicken, sometimes meats, dairy, or other. There is very little regulation or laws on ownership for property or vehicles. One of the locals tells me, regarding cars, "If you have the key, you own it." Chevys and Jeeps are very popular here and made in the country. Land titles are slightly more organized but involve much greasing of the wheels.

    On a more uplifting note, I saw some incredible bird life while on the island of Los Roques, where pelicans in particular are abundant. When they are feeding they have a signaling element for the local fisherman. Like the seagulls in the Northeast showing the way to the bluefish, the pelicans feeding on bait fish are usually followed by tarpon and red snapper. The feeding skills of these predatorily birds are incredible.

    Related to this is my pursuit of bonefish and tarpon. With a fly fishing rod, I'm always honing proficiency. While casting I have been thinking about the steps that lead to the best casts. It is a series of counterintuitive things. You start with creating line speed by swinging loops in the line with the rod. You try to maintain a tight loop, to keep the line loaded. In other words you prefer a v-like line to a u-like line up in the air and taught at all times.

    But the most important step is then abruptly and dramatically to stop the movement of the rod. The line continues in the desired direction towards the fish you have your eye on. But the stopping is the key and the difficult part. You have to move the rod tip away from the fish in order to get the line to the target. The closest example I can think of is the action of cracking a whip.

    I have been thinking about what stopping techniques are used in trading. If the stopping is the entry of a trade, then I view it as getting in with confidence and size, not limping in afterward. Chasing the trade afterwards is like dropping the rod tip, losing line speed. Another part is to allowing the line to reach its target. It is better to set wide perimeters for profits, not to take quick ones.

    Basically, let the line reach its target. The best casts are unforced, combining patience and timing. Sometimes you have to force yourself to relax even in the face of a fast-approaching school of bonefish that will be quickly past you. Relax, but be quick; generate speed, but then stop. It is a combination of counterintuitive actions, much like trading.



     The market has days when it consolidates, then breaks out of the range to a new level, like the discussion of bird nests. Counting the last three months by hand shows a count of the number of days to build a bird's nest. 7+5+5+5+3+6+6=37 /7 ~ 5.

    The average is around 5 days, after which time the chicks fly off. Today is the fourth bird nest building day. The boughs seem to have bent but not broken. Three times have been breakdowns, 4 times have been up. It's the same idea as the room cleaners in the big hotel. Clean rooms, move to the next floor.



    (That is to say, selling OTM Nasdaq puts + long high beta small caps at multi-year highs.)

     Here in Southern California, the drug rehab business seems to be booming. In Malibu, there are several such facilities conveniently located across the road from The Colony where all the celebs are ensconced.

    Lately these "clinics" (with 70% 1-year relapse rate), which charge thousands per day, have been good local employers of therapists, counselors, cooks, etc.

    What about a Hollywood hedge: Company which simultaneously opens pricey rehab centers co-located with medical/dental offices staffed by foreign-trained doctors versed in the Rx's du jour (Vicodin, Percodan, Oxycontin, Methadone, Phenodammital, etc)?



    Dick Sears writes a column each week on his GT Index which we have a link to on the right hand sidebar of our website, because of its consistent high quality. The current column is so good that we have re-produced it below as well as linking to it, despite it being our policy not to reproduce work published elsewhere. Dick Sears and I have known each other for so long and have so much respect for each other that it is often hard to tell our thoughts apart. Everything he writes could have and should have been written by me …

     Rational Exuberance

    We continue to make good progress, with the GTI up 3.6% this week.

    Of special note: ANAD up 16.0%, HITT up 24.98%, QCOM up 11.0%. ANAD is now up 46% for the year, which is only a month and a half old.

    All of this fills me with exuberance, which my dictionary defines as joyful enthusiasm. Yes, that describes the feeling.

    There are those who insist such exuberance is irrational. But why is it irrational for the market to go up? Maybe what's irrational is for the market to go down. Maybe the bears are suffering from Irrational Depression.

    There seem to be plenty of reasons right now for the market to go up, to exhibit what I consider rational exuberance. Some big ones:

    1. Internet traffic is zooming, thanks in part to online video, the latest killer app, which means a significant increase in business for the Telecosm, whose day seems finally to be at hand.

    2. The global economy is exploding, as the spread of free-market capitalism creates prosperity in formerly have-not nations.

    3. The stock market has good recent gains, but it still has a long way to go to make up for the losses it suffered in the Millennial Crash. Just look at the table at the bottom of this column.

    There are always kill-joys out there to tell us that the market (or the sky) is falling. You'll usually find them among bitter old men (of any age), who resent youthful optimism, and among academics and journalists, who envy the high rewards that go to risk takers.

    Sometimes these bears carry the day, as they did this past Monday. But in the end, optimism triumphs. Man continues his inexorable march from the Stone Age to the Space Age and beyond. The stock market returns its habitual 10 million % per century. Man overcomes all adversity.

    One of these days the pessimists are going to have to abandon the market to the bulls and retreat to their caves. At least there they'll be protected from global warming, er, climate change. Damn it's cold here!



     From The Washington Post's Book World: "Measuring the World" has been on the German bestseller list for more than a year and sold more than 750,000 copies (2006).

    From Publishers Weekly (Nov):

    Loosely based on the lives of 19th-century explorer Alexander von Humboldt and a contemporary, mathematician Carl Friedrich Gauss, Kehlmann's novel, a German bestseller widely heralded as an exemplar of "new" German fiction, injects musty history with shots of whimsy and irony. Humboldt voyages to South America to map the Orinoco River, climb the Chimborazo peak in Ecuador and measure "every river, every mountain and every lake in his path." Gauss is the hedgehog to Humboldt's fox, leaping out of bed on his wedding night to jot down a formula and rarely leaving his hometown of Göttingen. The two meet at a scientific congress in 1828, when Germany is in turmoil after the fall of Napoleon. Other luminaries appear throughout the novel, including a senile Immanuel Kant, Louis Daguerre and Thomas Jefferson. The narrative is notable for its brisk pacing, lively prose and wry humor (curmudgeonly Gauss laments, for instance, how "every idiot would be able to… invent the most complete nonsense" about him 200 years hence), which keenly complements Kehlmann's intelligent, if not especially deep, treatment of science, mathematics and reason at the end of the Enlightenment.



     Via the Mises blog:

    "The Vampire Economy, by Guenter Reimann (1939), is a rare and wonderful thing. It is a detailed account of how the Nazis crushed the private sector and hamstrung the economy with vast regulations, violations of property rights, inflation, price controls, and taxes."

    The book is a 12Mb pdf, with 366 pages. It is one of the most powerful volumes I have ever read. Long tracts of it read like the middle chapters of Atlas Shrugged.

    Excerpts as follows:

    The capitalist under fascism has to be not merely a law-abiding citizen, he must be servile to the representatives of the State. He must not insist on "rights" and must not behave as if his private property rights were still sacred. He should be grateful to the Fuehrer that he still has private property. [Page 20]

    Private speculation has not disappeared, but it operates almost entirely outside of the official Stock Exchange. The greater part of the sales and purchases of stocks and bonds is executed at quotations which depend on individual arrangements and which often differ greatly from the official quotations on the Stock Exchange.

    State Commissar Martini of the Berlin Stock Exchange complained that instructions for control of the sales of securities "turned out to be ineffectual in practice."

    The office for the listing of new securities, he said, is of no use if "an increasing number of the most respectable companies fail to have their securities listed because they fear the inconvenience of a far-reaching disclosure of their situation, and want to save the cost of listing on the Stock Exchange. . . . Disadvantages of not having an official listing are so slight that they are disregarded. . . . There are innumerable independent brokers for transactions in unlisted securities . . . satisfied with market reports, the publication of which is not yet forbidden. The securities business has therefore largely circumvented the Stock Exchange Law and follows its own easier course. Even companies of high standing are willing to sell their securities in the free market without official listing on the Exchange. The embargo on new issues has favored this development. There is still a third kind of securities business, the so called telephone business conducted over the telephone. It avoids all control. The volume of business done by telephone sometimes exceeds all other securities transactions." [Page 179]

    The bureaucracy of the Nazi State is a special phenomenon. It is like a huge and growing incubus living off the body politic and becoming more parasitic as it increases in size and numbers… [Page 292]

    The middle item above startled me. Someone doing historical research on Sarbanes-Oxley precedents couldn't draw a more damning parallel. 



     During the old days of pools and syndicates in bull and bear stocks, one key element in the pool, when distribution was at its climactic moment, was to dispatch lieutenants into the field to fan the flames of impending dividend increases, acquisitions, and favorable changes in trolley legislation, et al. This was done so that the head of the pool could unload her stock.

    I am reading a great account of that now in Ticker Magazine, Vol. 2, 1908. It's so representative of what we see so often today:

    "Floor lieutenants are called up and given instructions before the opening of the day on which the climax is to be reached. They are to bid the stock up at every opportunity but to take no more than is compulsory in order to sustain the market.

    Naturally these gentlemen begin to bubble bullishly. Bulletins are prepared showing the effect of the new departure. They are held ready to "spring" at the proper moment. Prominent officials of the company, financiers, and others are interviewed. All give very bullish opinions (or in the case of certain lieutenants throughout last year, bearish ones, about the impending doom).

    Predictions are freely made that it will eventually sell (at the key level of) from 50 to 60 as a result of these developments, all of which are served up with brass band accompaniment. The stock is kept strong for some days or weeks depending upon the quantity of such to be unloaded, and the power of absorption displayed by the public, after which the lieutenants retire to their perches on the steps of Trinity Church and wait for the next member to come along."



     Is ROIC (return on invested capital) a viable alternative to measures such as information ratio, Sharpe ratio, etc.? It appears to me that even some of the marquee hedge funds employ a lot of capital in order to realize ordinary returns.

    Should one be using net exposures or truly looking at gross exposures, or are there alternative measures that would be useful?

    Gordon Haave notes:

    The problem with ROIC is that it doesn't account for the level of risk the capital was exposed to in order to generate the returns. 



    Here is the quick and dirty of SP500 index since 1951, number of months up in each year, as well as year return (not shown regression results yr return vs number up RSQ64% T=10). 2006 was tied with 1954 for first place:

    year #up yr ret
    2006 11 13.6
    2005 5 3.0
    2004 9 9.0
    2003 9 26.4
    2002 4 -23.4
    2001 6 -13.0
    2000 4 -10.1
    1999 7 19.5
    1998 9 26.7
    1997 9 31.0
    1996 10 20.3
    1995 10 34.1
    1994 7 -1.5
    1993 8 7.1
    1992 8 4.5
    1991 9 26.3
    1990 5 -6.6
    1989 8 27.3
    1988 8 12.4
    1987 8 2.0
    1986 8 14.6
    1985 7 26.3
    1984 5 1.4
    1983 8 17.3
    1982 6 14.8
    1981 4 -9.7
    1980 9 25.8
    1979 8 12.3
    1978 7 1.1
    1977 4 -11.5
    1976 5 19.1
    1975 8 31.5
    1974 1 -29.7
    1973 3 -17.4
    1972 10 15.6
    1971 6 10.8
    1970 7 0.1
    1969 4 -11.4
    1968 8 7.7
    1967 9 20.1
    1966 4 -13.1
    1965 7 9.1
    1964 10 13.0
    1963 7 18.9
    1962 6 -11.8
    1961 10 23.1
    1960 6 -3.0
    1959 8 8.5
    1958 11 38.1
    1957 5 -14.3
    1956 6 2.6
    1955 7 26.4
    1954 10 45.0
    1953 5 -6.6
    1952 7 11.8
    1951 6 16.3



     In 2003 I extensively analyzed the movement of markets during weeks with scheduled Fed events. I have yet to find robust enhancements to that work, but I continue my reading and research, although my day job occasionally intervenes. I am finishing a book on CDO Investments by Fabozzie et. al., and Robust Statistics, by Maronna, Martin, and Yohai, published by Wiley, just arrived from Amazon, along with Neoclassical Finance, by Stephen Ross, the latest installment of The Princeton University Series of Lectures. I previously enjoyed Bill Sharp's book in this series. It neatly explained utility functions, and deals with issues the author had with his world famous models. I also recommend The Volatility Surface, by Jim Gatheral.



     Just got my copy of this newly published book and feel waves of sadness as I read David's conversational prose. I get several mentions, for example on page 31:

    "From Bergen I flew to Oslo, to an international open tournament. I was met there by grandmaster Nigel Davies, whose acquaintance I had made back in 1988 in Protvino, a small town not far from Moscow. At that time we talked a great deal, and I expressed plainly everything that I thought about modern chess. And it was pleasant for me when, after producing a small flask of Scotch, Nigel said: 'David, I have been thinking a lot about your ideas and I see now that you were right!'. We drank to this, regretting only that it was just a small amount… Now I regret something else. Until recently Davies was the chess consultant for Batsford and I think that he could easily have persuaded the owners of the publishing house to publish my new book. But who now will say a word on my behalf?"

    I can only say that I never knew that David had another book in preparation; the secret notes really were quite secret. And given my early dissatisfaction with Batsford in its various incarnations (before bankruptcy and afterwards, and I quit them twice) I would have advised that he find a publisher that would have done his work more justice. In the end he found an excellent one in Olms.



     I thought this would indicate some stepping stones to predicting history and lessons unlearnt.

    1. Islamist Terrorism in Northwestern Africa - A 'Thorn in the Neck' of the United States? by Emily Hunt. From the Washington Institute for Near East Policy. (Policy Focus #65, February 2007; 20 pages).

    2. The Israel Security Agency's 2006 Report. (Shabak). This  report asserts that Hamas has taken over the Gaza Strip with the support of Hezbollah and Iran (February 10, 2007).

    3. An Assessment of Growth, Distribution and Poverty in Egypt: 1990/91-2004/5 - Is Poverty Declining in Egypt? by Hanaa Kheir El-Din and Heba El-Laithy. A research paper for the Egyptian Center for Economic Studies (ECES) and Global Development Network (GDN); (December 2006; 36 pages).



     On a television channel dedicated to religious topics, a clip of Daily Spec contributor Larry Williams appeared within a segment on Bible Codes. Larry, a journalism graduate, dug up information about Moses and wrote a whole book on the material he found. I was surprised to learn of Larry in this context, since he is best known for other marvelous achievements.

    The Bible, according to cryptographers, is replete with predictions written centuries ago and found to be accurate by the events unfolding in our time.

    Kudos to Larry for investing his time and expertise, his flair for language, in this remarkable project.

    Nigel Davies writes:

    This is highly analogous to searching for Codes within the markets, with many of the same problems applying. I understand that one of the bones of contention is the asking of the questions and that sceptics have found apparently similar Codes in Moby Dick and elsewhere.

    One of my acquaintances ended up becoming ultra-religious on the strength of Bible Codes. I guess he might have wanted them to be there or he'd have tried to falsify them before donning the black hat.

    Such proof would also contradict one of the major philosophical ideas of Judeo-Christianity in that any 'struggle with G-d' would essentially be over once 'proof' were discovered. I guess they figured it was more important to get bums on seats.

    Adi Schnytzer replies:

    There have been (unsuccessful) attempts by statisticians (but what would they know, right?) to refute the Codes, but I don't want to spoil Nigel's day with facts. If he really cared about this beyond heaping contumely on it, a little Googling would go a long way. 

    Gordon Haave responds:

    Please! Let's not get into fantasy. Numerous statisticians have shown what a fraud the Bible Code is. But, even if you want to go back and forth between competing websites, all you need to know is that there have been no "predictions" at all. After certain things happen, the Bible Coders go back and data-mine the bible to see if the event was predicted. When they predict something unlikely in advance (not a vague "there will be trouble between Israel and Palestine") then get back to me. 

    Adi Schnytzer retorts:

    Well, I guess I'm going to have to blind you with facts! The paper that studied the Codes was written by Doron Witztum, Eliyahu Rips, and Yoav Rosenberg and is entitled Equidistant Letter Sequences in the Book of Genesis. It was published in the very respectable journal Statistical Science in 1994. An attempted rebuttal was published by Brendan McKay, Dror Bar-Natan, Maya Bar-Hillel, and Gil Kalai in 1999. See Ralph Greenberg's site for links. For myself, this will do:

    "The present work, represents serious research carried out by serious investigators. Since the interpretation of the phenomenon in question is enigmatic and controversial, one may want to demand a level of statistical significance beyond what would he demanded for more routine conclusions… The results obtained are sufficiently striking to deserve a wider audience and to encourage further study."

    H. Furstenberg, the Hebrew University
    I. Piatetski-Shapiro, Yale University
    D. Kazhdan, Harvard University
    J. Bernstein, Harvard University"

    Laurent Glazier remarks:

    I am not sure what this particular example might mean, but because a Canadian academic has succeeded in finding similar patterns in the text of Moby Dick it has been widely assumed that this invalidates all Bible Code findings. Similarly the artificial construction of small scale crop circles in England has led people to conclude that all such formations, including those on a huge scale, are artificial. These conclusions are appealing, and may be true, but are not logical.

    The Bible Code discovery I found most intruiging was that the encoded occurrences of the Hebrew names for tree species are nearly all found hidden in the verses describing the Garden of Eden. Designing statistical tests to prove the likelihood or otherwise of such patterns, found in context, has caused great difficulty in the past to fine minds, largely because preconceptions can interfere in setting up the tests.

    Testing for geometric patterns in star formations is another matter, especially Mark Vidler's unpublished discovery of the clustering of bright stars at multiples of 10 degrees from Regulas, as seen from Earth. Another issue entirely would be looking for a cause of any established patterns.

    Kim Zussman adds:

     The movie "Pi" (3.14159…) is about a mathematician who suffers from severe migraine and mental illness, and is deciphering hidden numerical codes like Fibonacci series in The Kabbalah. He is pursued by a rabbi who is also a mathematician.

    G-d's commandment is to index: shouldering the risk of capitalism while not attempting to gamble or covet other people's wives is written in the WSJ between the mutual fund quotes.



    Before George W. there was another George W. . An essay on succession planning, ego and being presidential, by Dr. Mark Goulston



     Investors are often perplexed by the lack of warning of market tops and bottoms, until after the fact. There is no alarm bell tolling. However, there are warning signs at the tops usually based upon enthusiasm, and at the bottom signs based on despair. Didn't Mutual Fund Magazine close its shutters at the end of the last bear market, ringing the bell near the bottom? So now we have a new FOX Business Channel to start broadcasting this year.

    Is this a warning bell that the market is flirting with the top?

    Victor Niederhoffer writes:

    This is all very well and good except that there are approximately 1 billion qualitative events like starting a new business channel that come within a month of all market tops, bottoms, and continuations. It is impossible to differentiate the cause, effect, or any other factor related to the seemingly and for the large part random movements from drift.

    From Jason Goepfert:

    My local Barnes & Noble is relatively small and its business magazine section is sparse, Forbes, Fortune, BusinessWeek and not much else.

    Last year, they started carrying Active Trader, which I found at the back of the top rack. If I weren't 6'6", I never would have seen it.

    This weekend, on the second shelf, I was taken aback when I saw the following magazines all prominently displayed: Active Trader; Equities Magazine; Technical Analysis of Stocks & Commodities; Traders Press; Trader Monthly; and Bloomberg Magazine 

    Jim Sogi writes:

    My daughter called last week and said, "Dad, I want to buy some stocks, now." I said, " Wait till they go down a bit." She said, "You always say that." I told her that, as with the rest of the public, with recent all time highs, the urge to buy stocks at high levels is typical but often wrong. It is better to buy stocks when they are down so you aren't down a couple percent as soon as you buy. She looks at her stocks about once a quarter.

    From Stefan Jovanovich:

     The actual use of canaries in coalmines fails to provide the historical lesson that the metaphor promises. Mining for "sea" coal (named because the earliest pits were at the coastal towns like Newcastle in what is now the United Kingdom) began in the 1400s. Canaries were first used in British coal mines in 1911. As part of the political alliance between the Liberals and the new Labor Party, parliament adopted regulations requiring that two canaries be placed in every mine. That, of course, required that someone be assigned the job of canary keeper.

    The requirement for canaries was finally abolished in 1986. There is no evidence that the canaries served any useful purpose; the scientific justification was so weak that they were first described as being uniquely qualified to detect carbon monoxide. When that proved not to be the case, they were rationalized as being peculiarly sensitive to methane. The canary in the coalmine is probably better compared to the caboose on the rail train, a "safety" requirement that provided a comparatively soft berth for the man assigned to the useless activity.



     At the Daytona 500 finish the boys were running three and even four cars wide at 185 mph. Ex-champ Darryl Waltrip was announcing and said "on the next caution" and laughed as he said there will always be a caution when they run four wide into the tri-oval.

    This year's Daytona 500 was rather boring until the finish. Goodyear brought a new, hard tire compound for the race. Teams seemed to struggle with the tire during qualifying. Yet by the race it was obvious the tires held up and the cars ran with more down force this year for more traction. There were few cautions until the end when everyone had to stand on the gas and run three wide, or finish at the rear.

    The worst markets for traders or guys with cars that don't have the backing of big banks, are caution-free. It takes plenty of buying power to run up front in strong markets. The best markets for traders are constantly changing.

    There are a few stories out there on our current situation. First the bond market's movement has been so low that even the big banks don't find dealing in government bonds worth the profit. Second, as almost all stocks go up in the current rising tide, advisers of short sellers have lost their audience. Even companies with bad fundamentals keep going up. Last, it's a global rising market. One guy told me he has never seen all markets go up at once like today. It is rather amazing to see oil even gold higher over the years with the SNP and world markets up.

    It's never a matter of if we have a panic in the markets, only when. The problem is always: how to predict. When we hear we have not seen a 10% correction in X days we all cringe. It hurts bad to get caught in a panic, yet it can hurt much worse to sit out a huge rise, only to see a 10% panic conclude at prices much higher then where you bailed.

    The market is not about you. However, a the joke to get is the market's ecosystem. Sooner or later, the market starts feeding on itself. It's not bullish or bearish, it "is". The market needs a tremendous amount of energy to sustain itself or it will grind to a halt.



     Ulf af Trolle was a famous Swedish business consultant who was fond of saying,

    "If you really have to make an economical prediction, then follow this golden rule: Make the prediction optimistic. If you are right, then you will get a reputation to be extraordinary skilled. If you are wrong people will sympathize with you. At least you did your best. If you instead make a pessimistic prediction, and get it wrong, then you are a klutz. And if you are right, then you will be blamed for creating the situation."

    I am not so sure that Mr. Trolle kept positive all his life though. Late in his life, he worked 13 years on his magnum opus, a book about Swedish economical solutions. Then he took his only original copy of the 250-page manuscript to be copied — only to have it shredded to 50,000 pieces when a worker confused the copier with the shredder.



    Some Specs have been discussing water-related investment opportunities. This article describes a working desalination pilot plant in Long Beach, CA.The use of nano-filtration is described, and the method is discussed in an overview manner. Unfortunately, the online article does not include the diagrams and illustrations in the print version of the article that appears in the February 2007 Water Technology magazine.

    Following is intro to the article:

    The Long Beach Water Department (LBWD) has developed and patented a two-pass nanofiltration (NF) process, called NF/NF, to desalinate seawater to drinking water. Over the past several years, the LBWD has been testing the hybrid desalination process in the 9,000-gallon-per-day (gpd) pilot scale unit at its groundwater treatment plant. The two-pass, multistage nanofiltration membrane process can treat water at a lower operating pressure and energy than a conventional, single-pass seawater reverse osmosis (SWRO) desalination process that uses cellulose acetate or thin-film composite membranes. A key component is the second-pass concentrate recycle loop, which dilutes the feedwater and makes the use of nanofiltration membranes feasible. LBWD has constructed a 300,000-gpd prototype seawater desalination facility to validate the performance results observed during initial pilot testing, and to test the long-term operating characteristics of the hybrid desalination process. 



     The folowing excerpt from Samuel Beckett, is a backward-looking old man reviewing tapes of his youth with scorn and disgust not only at his former romantic primitivism, but again now at his own lonely state obsessed with bodily functions, perfunctorily organized painful memories, and drinking.

    Tonight we saw this one-act play in an unusual way: a company which performs using sign language (and voice) for the deaf. And Krapp's signing and gesticulating made his frustration and pain remarkably more palpable, even for those of us unable to read signs.

    The themes of love lost and the delicious impossibility of savoring the present until it is too late, are familiar memorials to all the many squandered opportunities of then and now.


    "Ah well . . ."

    Pause. (Krapp rolls the tape of himself at age 39…notice how the answers to key questions are always edited out)

    "Spiritually a year of profound gloom and indulgence until that memorable night in March at the end of the jetty, in the howling wind, never to be forgotten, when suddenly I saw the whole thing. The vision, at last. This fancy is what I have chiefly to record this evening, against the day when my work will be done and perhaps no place left in my memory, warm or cold, for the miracle that . . . (hesitates) . . . for the fire that set it alight. What I suddenly saw then was this, that the belief I had been going on all my life, namely–(Krapp switches off impatiently, winds tape foreword, switches on again)–great granite rocks the foam flying up in the light of the lighthouse and the wind-gauge spinning like a propeller, clear to me at last that the dark I have always struggled to keep under is in reality–(Krapp curses, switches off, winds tape foreword, switches on again)–unshatterable association until my dissolution of storm and night with the light of the understanding and the fire–(Krapp curses loader, switches off, winds tape foreword, switches on again)–my face in her breasts and my hand on her. We lay there without moving. But under us all moved, and moved us, gently, up and down, and from side to side."


    "Past midnight. Never knew such silence. The earth might be uninhabited."


    "Here I end–" Krapp switches off, winds tabe back, switches on again.

    "–upper lake, with the punt, bathed off the bank, then pushed out into the stream and drifted. She lay stretched out on the floorboards with her hands under her head and her eyes closed. Sun blazing down, bit of a breeze, water nice and lively. I noticed a scratch on her thigh and asked her how she came by it. 'Picking gooseberries, she said.' I said again I thought it was hopeless and no good going on, and she agreed, without opening her eyes. (Pause.) I asked her to look at me and after a few moments–(pause)–after a few moments she did, but the eyes just slits, because of the glare. I bent over her to get them in the shadow and they opened. (Pause. Low.) Let me in. (Pause.) We drifted in among the flags and stuck. The way they went down, sighing, before the stem! (Pause.) I lay down across her with my face in her breasts and my hand on her. We lay there without moving. But under us all moved, and moved us, gently, up and down, and from side to side."




     After a tree dies and falls in a forest, there is an opportunity for greater sunlight and nutrients from old decaying matter to nurture new growth in the vacant space. New plants develop in the open space and often grow vigorously. Other plants that grow on the old branches are called epiphytes, generally lichen, algae, mosses, and orchids. Often their growth and stability are amazingly vibrant and fecund. A great example can be seen not in a natural rain forest, where they usually occur, but in the greenhouses of the Bronx Botanical Gardens.

    The movement of stocks and markets after a disaster is often similarly vibrant. Take the Israeli market, the Tel Aviv 25, which after moving down to 778 in September 2006, in the aftermath of the war with Lebanon, moved above 1000 for the first time on Monday Feb 19.

    As I write at 730 AM EST, the upward march of stocks after the end of a war seems to be a general phenomenon. And one of the first studies that I performed in business was on the buoyancy and above average growth of US stocks after the end of the Vietnam War with particular reference to the surge after World Wars I and II. The sources of that growth appear to be both economic and psychological.

    A general study of the markets and individual sectors that grow best after disasters such as bankruptcies, hurricanes, and fires, as well as the much more common artificial disasters and squeezes which are the meat and potatoes of the "locals," would seem to be in order. There is no better way to start this than by reviewing the Wikipedia article on Epiphytes.

    From Scott Brooks:

     There is a synergistic rhythm to cycles of life and death, with life being dependent on death for the source of energy, nutrition, and general opportunity. That is why optimism should always rule the day, especially in the face of great adversity.

    Hurricanes, fires, tornados, ice storm, and avalanches all change the landscape and create great opportunity for growth, regeneration, and life in general. The same thing could be said of war and man-made calamities. An unfortunate fact of life and human nature is that men do battle and battle creates great adversity, death, mayhem, and destruction. As much as we would all like to have world peace, it is simply not something that is attainable. Therefore, we have to look for the seed of opportunity that lies in the great adversity of that happening (an adversity, that I'd like to point out, is out of the control of anyone one person reading this).

    Some of you may take what I'm saying to be harsh or callous or mean spirited. I would submit to you that you need to look at the facts of what I'm saying and then ask yourself "is anything he's saying not the truth?" Also, finding the seed of opportunity does not mean being immoral or unethical.

    Was it a mistake for me to invest in the Israeli stock index a few days after Hezbollah attacked last year? I say no. The mistake was when I sold my position after six weeks for only about a 6% gain. I should have held it longer.

    We also have to watch out for people that are "Life Bears." These people are always pessimistic. They can always find negative in anything that occurs and turn it into "the sky is falling." I believe that the global warming bunch is a great example of Life Bears. They see global warming as a way to force the rest of us to comply with their vision of negativity by forcing us to give up the one thing that can save us, progress via the Mind of Man. You see, if we follow their prescribed methodologies for solving the problem of global warming, we halt most of the progress that will likely solve the associated problems.

    Keep in mind what I've said many times on this list, quoting Napoleon Hill, "the dominant thought that you hold in your mind will manifest itself in your life in some form of outward reality." The global warming crew holds a preponderance of negative thoughts in mind, and they are working fervently to make their view of negativity come true, so they can have the ultimate satisfaction of being able to say, "See, I told you so."

    Even if their "solutions" cause more problems, it will still fulfill their vision of negativity, and they will take no responsibility for it. They will simply say, "See, you should have acted sooner and done more of what we said to do."

    You see, Life Bears have to ignore facts in order to support their negative view. They look only for white swans and thus proclaim, "See, all swans are white." They ignore history in reference to global warming and cooling. They ignore the facts that state the earth and our sun go through cycles where temperatures and conditions change. Therefore, we need to prepare for those changes by finding the opportunities that are embedded within them.

    And what better source of finding the embedded opportunities than the free market! Entrepreneurs using their keen minds and intellects to find a way to create great wealth and prosperity out of adversity. What we need to do is not curb carbon emissions; we need to unleash the Mind of Man. That is our only hope of solving adversities!

    But the Life Bears cannot allow this to happen. They cannot allow an environment where the mind of man has the opportunity to roam freely and create solutions. Therefore, Life Bears have to stifle their mortal enemy, the Mind of Man. They stifle it by slowing it down, by creating a yoke like the Kyoto treaty that ties the Mind of Man to the wagon of Life Bears.

    They have to tax it. By taking away an ever increasing portion of the wealth created by the Mind of Man, the Life Bears stifle a percentage of further growth (I wonder if the percentage that is stifled is equal to the marginal tax rate?), and on top of that, the Life Bears get funding to pay for the further spread of their poison propaganda. It is interesting to note that Life Bears are wholly and completely dependent on their mortal enemy, capitalism, for the funding of their very existence.

    They have to regulate it. Life bears can't completely tax the free enterprise system. That would be the equivalent of a parasite killing its host. Therefore, since Life Bears need the existence of their mortal enemies, the Capitalist, they have to devise some methods of controlling them. So they regulate the Capitalist. Usually the more successful the Capitalist, the more they have to regulate them, as too much success is a black swan, and Life Bears can not allow the existence of a black swan. (Well, at least not the existence of one that they cannot ignore or control enough to deny the fact that it's black.)

    So taking this back to Vic's original point of tree's, death, and life…

    The death of a tree is no tragedy. Its death will release nutrients and allow sunlight to reach the ground, thus allowing the seeds that may have laid dormant for years to spring to life. New life will spring up all around it; and new life equals new opportunity. The death of a company, although seemingly tragic (Enron, Arthur Anderson, Global Crossing, Adelphia, Worldcom, etc.) is really just an opportunity in disguise.

    It is an opportunity to release the nutrients of those involved in the collapse. That is to say the minds of man that had been stuck in a rut working for a steady paycheck and doing their job by in a reflexive, non-creative manner. It will release those employees who thought about going into business for themselves (because they had a great idea of some sort, or maybe just the desire to be free of the shackles of an 8 - 5 job), but feared the loss of a steady paycheck and the unknowns of entrepreneurship. Now they are given that opportunity.

    The death of these companies allows new sunlight to get to the ground and new companies that may have laid dormant or been under-utilized to spring up and fill the void. Just like seeds that had no chance of competing against a giant oak tree for sunlight, new entrepreneurs that had no chance of competing against a giant company like Worldcom, now have the opportunity to step up and make a go of it.

    But just as hard as the Capitalist is going to work to find "the seed of equal or greater opportunity," the Life Bears are working to undermine them (i.e. Sarbanes Oxley, The Kyoto Accord, etc.).

    So Capitalist must be ever diligent and hard working and continue to have a never give up attitude. We must push forward even though we will be fought every step of the way by the Life Bears.

    And we must be ever diligent with a simple understanding of 3 things:

    First, The Life Bears will never go away. No matter how hard we try, they will always exist. Second, Capitalists have no, absolutely no use for Life Bears. We have no need for them whatsoever. But they will still be there. Therefore, we must find ways to minimize their impact. And we do that by doing what we do: Be capitalists! Finally, the Capitalist can take solace in this one simple fact: Life Bears do not exist without Capitalist. They're like incurable tapeworms. Since we can't get rid of them, we may as well resign ourselves the fact that they are going to act like the parasites that they are and suck a small amount of life out of us. So we may as well go about our business and do the best we can and smile at the fact the parasitic tapeworms like Life Bears are completely and wholly dependent on the largesse of wealth we create!

    Steve Leslie writes:

    To follow up on this theme, if one were to look at world plagues one would see similar events and how they set the stage for growth. One third of Europe was destroyed by the black plague that began in Southwest Asia and spread throughout Europe in the 1340s. It is estimated that at least 75 million people were killed by the disease. It was thought to return every generation with varying degrees of intensity up to the 1800s. The cause was a bacterium and it was spread by fleas. It was a horrid disease of acral necrosis which is a blackening of the skin caused by subdural hemorrhages.

    Its effect was to profoundly and irrevocably change Europe's social structure. It was a serious blow to the Roman Catholic Church, Europe's predominant religious institution at the time, and resulted in widespread persecution of minorities such as Jews, Muslims, foreigners, beggars, and lepers. The uncertainty of daily survival created a general mood of morbidity influencing people to live for the moment, as illustrated by Giovanni Boccaccio in The Decameron (1353).

    Historians postulate that the Great fire of London in 1666 may have ended the plague by killing off the black rats and fleas that infested them and carried the disease to their human counterparts.

    The great and concomitant result of the plague:

    The great population loss brought economic changes based on increased social mobility, as depopulation further eroded the peasants' already weakened obligations to remain on their traditional holdings. In Western Europe, the sudden scarcity of cheap labor provided an incentive for landlords to compete for peasants with wages and freedoms, an innovation that, some argue, represents the roots of capitalism, and the resulting social upheaval caused the Renaissance and even the Reformation. In many ways the Black Death improved the situation for surviving peasants. In Western Europe, because of the shortage of labor they were in more demand and had more power, and because of the reduced population, there was more fertile land available. However, the benefits would not be fully realized until 1470, nearly 120 years later, when overall population levels finally began to rise again.

    On top of all this, the plague's great population reduction brought cheaper land prices, more food for the average peasant, and a relatively large increase in per capita income among the peasantry, if not immediately, in the coming century.



    These are the daily closes in the SASEIDX index starting Monday, January 30.

    Jan. 30    6940
    Jan. 31    7041
    Feb. 03    7198
    Feb. 04    7134
    Feb. 05    7118
    Feb. 06    7269
    Feb. 07    7328
    Feb. 10    7383
    Feb. 11    7356
    Feb. 12    7533
    Feb. 13    7707
    Feb. 14    7881
    Feb. 17    8021
    Feb. 18    8056

    To put these moves in perspective, note that as of the year end of 2000, the index was 2310, and it moved up to 5000 in mid 2004, then rose to 20000 in mid 2006, and then back down to below 7000 on Jan. 30, 2007. Many interesting hypotheses are generated by such movements. The first is whether serial correlation such as trends are much greater for newer, smaller markets than older markets. A related query is whether it is at all possible to make money for the public in small markets where there is so much less to go around. The third is whether it pays to reverse a market or to stock on its way back when it has gone down 65% from a high in a year. The fourth is whether a move to above 8000 is in some way a song of confidence. The fifth is how this is related to or indicative of oil moves in the past, present or future.



    He hovered nightly like a dove around its pillaged nest.

     Bird nests provide an environment of shelter and protection for eggs to develop. The exquisite variety of the construction techniques, building materials, and camouflage used in these nests, and also their importance to the ecology of birds is described here. Numerous articles cite the importance of nest building in birds as an essential aspect of their evolution, and such articles include Dawkins The Extended Phenotype For Behaviors. With something as important as this, one would expect that markets would have borrowed from nature and that there would be numerous areas where the mistress and the invisible hand would have developed comparable features in market behavior for the development of the young. Yet a search shows that the main references to bird nests in markets are to the habits of very successful Asian traders in eating gourmet delicacies such as birds' nests rather than using them for profit in their strategies. As a start, this must be remedied by me and the colleagues here.

    Undoubtedly, the main application of nests to markets is the protective function that companies in one index play with respect to their graduation to the next stage of life. The mid market S&P 500 is always the best bet for young companies to develop into the big 500. The Nasdaq is a nest for the NYSE, and the S&P small cap is a nest for the midcap. The IPO's are a stage in the life for future NAS 100. What strategies do such companies play? Do the parents of the index themselves play to separate the survivors from those who decay? Are there comparable forms of altruism that some companies play as they do in birds' nests where the young devote their life to feeding their kin knowing that it will lead to a much greater overall transmission of the essence of their being?

    Another area where nests are found is at levels of price that bring one into a new class. One level would be the movement from below five where stocks are usually not eligible for margin to above five where companies are eligible for inclusion in most portfolios. The same would happen for a company that starts paying dividends for the first time since certain funds and institutions are restricted to dividend payers only. At a more general level, big orders often rest to provide nourishment for a company. It could be from a buy back program or perhaps an insider who is accumulating Insiders often accumulate stock in their companies. This is sometimes a signal that a change in state, like an acquisition, is in the offing or perhaps a buyout in a going private transaction.

    Option strike levels provide barriers and nesting sites for traders to nourish themselves until the price is ready to come out of the nest into an area where real buying, selling, exercises and conversion of the stock are possible. Considering the strategies of nest building, in particular the effort that is put into its construction with reference to the probability of survival for the egg to maturity, one should consider the many fledgling companies that are incubated in research laboratories, entrepreneurial efforts within companies, and previous acquisitions that are being nourished for a proper time in the market.

    May I suggest that we expand the subject to the many fruitful areas that could be considered and fomented by a general study of bird behavior. Such questions as the following would only be a beginning. How do the feathers of birds enable them to fly? What are the special functions of display behavior in birds that are so successful in the sexual selection of their partners, in particular, the back and forth strutting that stocks often do to attract the interest of the public and the dealers? What are the migration patterns and timing of stocks that follow in the footsteps of our feathered friends? Most important of all, what are the functions of birds, the stocks and companies that fly about in the general structure, growth, and stability of markets? What songs do markets sing to attract, warn, and establish territory?

    From Alan Milhone:

    "Birds of a feather flock together." Is this the same with investors and brokers in that they all want to stay with the winners (performers)? I liked the way you described the construction of a bird's nest, guess that is where the term 'nest egg' developed? Or 'putting all your eggs into one basket' meaning one should stay diversified? The strong and secure nest is analogous to a strong and protected portfolio.

    I enjoyed the Chair's article and it gave me a different perspective on nesting & ways of attracting investing. Not sure about songs used for attraction. My guess is how online or televised marketers vie to attract a potential investor's attention in hopes of getting them to buy into their program, much like a male bird hoping to attract a female's attention. The male bird's 'chirping' is music to the females' ears (hopefully) and the online/televised promoter of various stocks and investment programs is hoping to lure our attention in similar ways.

    Jim Sogi writes:

    Another bird nesting behavior in the market is the bunching of the price range within a certain area. For example over the last few days we see the bunching nesting behavior in the 1256 area, and before a nest was built in the lower branches at lower levels. When the little birds are strong enough, they venture out and start to fly from the nest, taking forays flying to higher levels.

    There is busy back and forth activity as the nest is build. The nest normally must have a structure and normal time to build before the birds either venture out or, for some reason, the whole nest falls out of the tree an on to the floor, as in rare occasions it does, killing all the little chicks. Bigger birds like eagles that build bigger nests at higher altitudes soar higher. Perhaps that is why Dow big birds are hitting all time highs and SPs are still moving up to their all time highs, in sight a couple bird nest levels away.

    J. T. Holley writes:

    On a similar note [to previous post] you can look down the option chains intra-day and see birds perched either on nests or on wires and see them "spooked" as higher and higher numbers are reached historically. It's almost like opening up a dark room and seeing the cockroaches scatter when the light of day hits them.



    "One of the things I look for in DVD reviews on Amazon is extreme and opposite reviews. That is, where the DVD is completely loved by some and hated by others. With such a movie, the chances are that you too will either love it or hate it. However, if you are afraid of losing $15 on a bad movie, you will also miss the great movies. Examples of this are the reviews for the movie "The Thin Red Line."

    For what it's worth, I think the movie is amazing. It just popped into my head that perhaps there is an application to the markets. Here it goes:

    In my first job out of college, I invested in deep-value and distressed situations. Typically, nobody ever had mixed opinions on these investments. Anyone with any opinion on them typically loved or hated them.

    From this came big losers, but big winners also. One could not, in my opinion, have had the big winners while also having some big losers. I considered the big losers to be the price of the big winners, and since so many investors won't pay that price, there is a fair amount of alpha to be had in those strategies.

    Back to the Amazon reviews: Now that Wall Street analysts occasionally tell the truth and put out negative opinions on stocks, might a good way to screen for ideas to be to search on stocks that only have very positive and very negative opinions on them?

    Perhaps this could be done using a measure of earnings estimates divergence (one would have to adjust for financial and operational leverage to compare estimate divergence across companies, i.e., a 30 cent divergence on a utility might say more than a 40 cent divergence on a tech company).



    Finally (yeah right), "how low can it go?"

    Using same SP500 series of 20 day standard deviations, only 57/719 (8%) periods had st dev <0.004 (0.4%) like the period before last (1/19/07=0.0038). In the past 57 years, what happened in the 20 day following those with st dev<0.004? The next period st dev mean was 0.0044, slightly higher.

    But interestingly 25/57 (44%) were actually lower the next period. So it seems looking back that volatility has frequently gone lower from periods comparable to today, even before we were protected by world-dominating military and Ben Putnanke.

    This and the trumpets blowing for the breakout/new highs/Dow theory crowd doesn't look good for us skeptics.



     In my town, the realty mavens were shocked by last year's $25 million print for the Phil & Marlo house, per NY Times:

    "New In The Neighborhood Herbert M. Allison Jr., the chief executive of TIAA-CREF, may have taken a big pay cut when he left Wall Street, but he can still afford to live in rarefied company. In what may have been the most expensive home purchase ever in Westport, Conn., Mr. Allison, who was the president of Merrill Lynch until 1999, bought a waterfront estate from Phil Donahue and his wife, Marlo Thomas, for $25 million. The couple had put the 7.7-acre property on the market last year."

    But in this week's paper I notice a new listing, of a property very similar, and not clearly better than (e.g., on a smaller lot) the Phil & Marlo house — for $38 million!

    I thought at the time Allison was getting a good deal, despite the "all time high" aspect (I doubt any home had traded higher than the teens in Westport before). His lot is subdivisible into three (as is the new listing, as it happens) so he was paying $8 million per building lot — cheap'ish for prime waterfront.

    Probably some kind of lesson in all this — "anchoring," as Twersky might say. Hard for buyers to imagine paying $25 million for a home when their perception was "anchored" by prior sales in town. By breaking free of that bias, and bravely "being the high," Allison is up $10 million or so on his purchase (assuming the current listing is tradeable anywhere close).



     From prudent bear, February 15:

    "It is worth noting that restaurants sales decelerated notably, posting a 5.2% increase, the weakest since February 2005. We have been paying close attention to restaurant sales, since this is the most discretionary purchase consumers can make…. Another sign that the manufacturing sector experienced a slowdown last month was the announcement from Parker Hannifin that its January orders increased 1%."

    Why is it those who are fixed in their ways, the establishment, take such great pleasure when the upwardly striving, the entrepreneurs, those with innovations, and non blue-blood fall down the stairs? One believes that like the stopped clock, the prudentabelghostethans will have their day. And the vengeance they will take on those who looked with disdain on such statements as above, (statements that could have been taken from the "Duke," who mark twain could have put on the boat with Huck) will be terrible.

    I feel the foreshadowing.



    Gold, from Easan Katir

    February 16, 2007 | 1 Comment

    In the past few weeks I have endured three separate impromptu lectures from acquaintences on how gold is just starting a big run, the US dollar is trash, put all your children's college funds in gold, etc. Makes me muse that the gold gods might be tempted to provide another lesson for a lifetime.



    Looks like a thoughtful and remarkable piece of work . The gist of this article is that coaches should go for it on 4th and short more often. I don't know pro football (I last watched a game in 1986) but the behavioral parallel to "taking a small profit" in the markets, i.e., the field goal rather than staying in for the full move, the touchdown, leaps off the page.



     I have no response that could place this within any kind of rational frame of reference.

    Very little of what is occurring in the capital markets today makes sense to me and I understand it less every day. Twenty percent on the SPX in the last seven months…VIX and spreads are at all-time lows…talk of a permanently flat yield curve…infinite capital?

    Maybe it really is different this time, no more recessions, no more business cycle, and we all live happily ever after. Except me - I am still here with my tinfoil dunce cap on, waiting for the sky to fall.

    Bud Conrad writes:

    This is one of the best summaries of the changes in the new Financial Engineered Credit markets I have ever seen laid out. Thanks very much. If you have some sources on the bigger credit picture, such as where are the numbers on percentage of loans from outside the banking system, that would be of great interest. 



     I was watching On the Money, with Rebecca Quick, last night on MSNBC and toward the end of her segment she remarked that the Dow Industrials, Transports, and Utilities all hit all-time highs yesterday.

    This confluence is rarer than one might think, just five occurrences in the past 30 years. Following this event the Dow has gone up four of the five times.

    Mike Ott adds:

    Also, CNBC has been talking about energy all week because of the CERA Conference in Houston. They are talking about biofuels tomorrow, and will interview one of my board members, Ed Williams. He'll appear live on CNBC at 8:45am Central time tomorrow morning, Friday the 16th, to discuss the effects of the biofuels boom on the rural economy. Tune in or set your VCR if you can!



     Walking through this mining and fishing town after ten days on the desert trail, looking like poncho villa's left hand man in hiking boots, a dusty pack and beard. A Mexican kid runs up and hands me hard rolls and dashes off with, "Say no more." An ancient miner sides me to shout, "You have chicken legs… like my son." The latter materializes next to him with those legs and tattoos from waist to chin. "I have one wood leg myself," says the old man, limping off. A marine veteran of 37 years here for sport fishing gives me a ride to a 20-dollar room on the beach and tells me of an investment opportunity.

    Escalada nautica is the scheme of some American lady operator to form, as the Spanish term implies, a 'stair for boats' from the pacific to Cortez, where I just walked. That is, private boats from Los Angeles and San Diego now come to this Cortez town of Bahia de Los Angeles, which has one of the prettiest harbors I've seen. But they must sail around the tip of the Baja Peninsula to arrive.

    The concept underway is to build boat lifters in a little town on the Pacific that will place boats on truck flatcars and transport them on an existing road 100 miles overland to the bay. A large resort is planned and this town, which is bustling with construction. The idea is solidifying slowly for need of investors, I was told. There are already a couple dozen newly built asphalt turnouts on the cross-land road for the boat trucks (to allow traffic to pass) that I've seen. And I hitched a ride on a truck the other day with wooden power line poles that will bring electricity south from Ensenada on the Pacific across the land to Bahia de Los Angeles.

    So there you are.

    Jeff Rollert writes:

    One of the newest things is an entire boat, with rigging, a boat that fits into a shipping container so you can have it ocean-freighted to your area of choice, without sailing there.

    Of course, you are likely to be a hazard to all upon arriving, without any sense of where the shoals are.



     Yesterday's bond move from 111 20/32 at the open, had by the close taken bonds back above their 2006 year end level of 111 14/32, and raises many interesting questions. This is the first move from the red to the black so to speak, with the closest previously being January 11th when the bonds closed at 111 6/32. What happens when a market moves from down on the year to up? Is it the same for individual stocks, as well as for companies whose cumulative 12 month earnings go from red to black?

    Also, do any effects found work in reverse, when going from black to red? I think that there are numerous meals for a lifetime to be found in the hand calculation of the answers to these questions.



     'Empty voting' ploy used by hedge funds is on SEC's radar By David Hoffman February 12, 2007

    PHILADELPHIA — The practice of borrowing company stock to manipulate the outcome of company votes has piqued the interest of the Securities and Exchange Commission and has rekindled a debate over stock lending. In at least two speeches this year, SEC member Paul S. Atkins talked about the practice, which has been dubbed 'empty voting.'

    If investor A doesn't care about the outcome of a vote, and investor B does, why shouldn't investor B be able to pay investor A for the right to vote investor A's shares?

    This is in fact economics at its best. If investor B's voting harmed the long term interests of Investor A, then investor A wouldn't lend investor B the shares.



     I am often asked why I don't believe in trends despite the great profits of some selected trend followers. The main reason is that standard measures in statistics, like the serial correlation coefficient or runs or Goodman tests for m dependent time series, are designed to test trends. I have not found many market series that show consistent departures from randomness on such tests. Nor, more important, have I ever found a series that looks like it has a trend, whether it be a moving average or lagged momentum type, that doesn't show some serious evidence for non-randomness as measured by the above mentioned tests. VN

    My question regards the last sentence. Isn't this interesting? That is to say, if you tested runs at the craps table, with fair dice, you would find no evidence of non-randomness, and discern that you couldn't make money. But if there was evidence for non-randomness, wouldn't that imply an opportunity to make money?



     I am glad to consider Larry Williams as a friend, so it is was with great enjoyment that I read his recent book. One of the great pleasures and benefits of knowing the Specs is being able to meet and discuss market ideas with the best.

    The commitments of traders report provides good additional information to speculators in the futures markets. Larry presents many good ideas for quantitative specs to test, and even hints at some of the many tricks he has up his sleeve, without giving away the family jewels. The book's use of charts is aimed at the less quantitatively inclined beginner, and while some of the chart-based reasoning suffers from chartism's typical retrospective bias, Larry does have a chapter on quantitative tests, although limited to win/loss ratios and amount of wins, and briefly discusses down days in S&P. However, any astute spec can test the many good ideas rigorously and develop his own more precise methods.

    Ideas for new trades can come from any source, as the Specs have shown us, and new ideas are necessary to keep an edge in a competitive market. Rather than try to find entries base on comparing chartpoints and indicators which is non predictive, better to use the ideas and data to refine the entries. It is in this spirit that the book is helpful to a speculator. It's a fun an quick read, in Larry's breezy and folksy style.

    In many ways the most basic and important call in the market is if it is going up or down. Seems so deceptively simple, but the paths it takes throw one off the track. Good information, just a bit more than the next guy, is what it takes to head in the right direction, and the COT report may give an edge.



    An Update from Bo Keely

    February 15, 2007 | 1 Comment

     Bo Keely is a Hobo who has been friends with Vic for more than 30 years. Bo has walked across 95 countries, has floated and paddled down the Amazon, been struck blind in one eye by poisonous insects, plunged into a coma and was discovered by an Indian who saved him from death at the jaws of exhaustion. Bo's many feats of physical endurance and stamina, going without food and water, pushing forward in extremes of heat and cold, are matched only by the quality of his adventures. We periodically post updates on Bo's progress, a collection of which can be found here .

    I have been in Baja, Mexico for two weeks hiking. I walked from the Sea of Cortez to the Pacific Ocean via the ruins of the mission Santa Maria in five days. There were serious times without water in the mountains above the Pacific. I found a windmill and sat on my pack with a belly full of salt water, surrounded by ten horses and a burrow deciding which direction to go. I was rescued by a fisherman who took me to the bucolic bay of Puerto Conajos on the ocean, a camp of eight fishermen. I awoke the next morning in a shack on the bay with the campo empty of people and a Destroyer lying a half-mile off in the bay. A swat tem of four, in black 'Marina' (the navy), with ak-47's landed in town for the first time in history to investigate the gringo that traveled by foot. They suspected drug trafficking but were friendly on discovering I had walked five days from Cortez. Then I walked to the remote ruins of mission San Fernando, and on to mission Camolejue, then took a bus here to Bahia de los Angeles.



    Daily Speculations is a benevolent forum to encourage good thinking about the market, and material is provided free by us and our readers. Because incentives work, and to augment the mutual benefits of participating in the forum, we offer awards each month for top contributions. Our most recent (though slightly belated) award goes to Prof. Robert Z. Aliber for his December post 'On the Housing Market'.



     There are several things going on down under I thought Daily Spec readers might enjoy hearing about…

    The first of course is the incredibly strong performance of the stock market. This is due in part to the fact that all Australians must pitch in part of their earnings to an investment program. It is privately managed, meaning a huge amount of money comes into their market month after month after month and keeps driving prices higher. Also, for the most part, their stocks are undervalued versus other stock markets in the world.

    But all is not that well here…

    At dinner the other night a friend told me he had a knee operation. I said, "Well that didn't cost anything; that must've been nice." His reply was, "It cost me quite a bit. I had to pay cash because in the publicly supported medical system it would've taken a couple of years to get an appointment." I confirmed that with a jogging buddy today, who said the same thing. There is a fast track for emergencies, for instance if you're in a car wreck. But for any significant discretionary operation you will wait a long time

    His wife added that since there is no cost to go to a doctor, the doctors are flooded, as there is no disincentive to seek care.

    This was the one that got me: After employing someone for 12 months it is mandatory to give him a one-month vacation. I've never had a one-month vacation in my life. Who would want one? You couldn't work. Nonetheless, when the worker gets that vacation he gets it with pay plus 19%. In other words, he earns 119% of his base salary on his off month. The thinking of the labor union leaders is that the vacation will cost him more money than staying at home. So he is entitled to more.

    One of the big issues in the upcoming election will be free dental care. My dentist here doesn't do anything for free. I don't blame him, and we both wonder: who's going to pay for it? Obviously, it will be paid in some form of higher taxation, something politicians here and everywhere seem to enjoy. There is a 40% tax on wine made here, which means I can buy the same bottle of wine cheaper in America.

    I could go on and on with other examples of the difficulty of running a business here.

    It is a lovely country with great people and great future, but it seems to have been overrun by socialists and labor union leaders, which certainly will have an impact on the economy at some point.

    Adi Schnytzer writes: 

    And just imagine, there are millions of people all over the world just wishing they could get a visa for Australia. Go figure!

    Larry Williams replies:

    Sure! Can't get fired for stealing, get a month's paid vacation at 119% of base after 12 months of lounging around, free stuff! Ya, man let's go!

    My point is that business people have read Atlas Shrugged and see it taking place here.

    Adi Schnytzer adds:

    Larry, how many people die for lack of operations, medicines, and doctors in Australia? What is the per capita number in the U.S.? No health system is perfect and no economic system is perfect and, yes, there are some stupid taxes, but how many homeless have you tripped over lately? If you want to compare Australia with the U.S's, the former being too socialistic for some tastes, why not do it properly?

    Larry Williams replies:

    I see about 100 homeless people here every day. Some are real characters to talk with. Come on a walkabout with me. They are flagrant and stink like heck but are courteous. They are all over here, on every major street. I certainly see more homeless people here than in San Diego, a city very similar to Sydney.

    I do not know how many people die for lack of operations, but I suspect it's the same as in the U.S or U.K.

    If an employee is caught stealing from you, all you can do is write a letter. It is not until the third time you can fire him.

    Virtually every older Aussie I know vents these same complaints. I am just the reporter here!




     I bought the director's cut of Last of the Mohicans. I have always found that film to be remarkably beautiful, both the scenery (filmed in the mountains of North Carolina) and the last 20 minutes of the film, particularly when Alice leaps to her death. Anyway, if like me you always wondered which of the Mohicans was last (the dad, or Hawkeye, the adopted Mohicans), it is settled in the directors cut. At the end of the film the dad proclaims himself the last of the Mohicans.

    I don't necessarily recommend the director's cut. It's really only an extra 10-15 minutes or so, and most of that is filler (the Mohicans spending more time running through the woods). The two notable scenes are the bit at the end when we find out which Mohicans is last, and there are 3 extra minutes or so at the siege of Fort William Henry, where major Heyward leads a column of British troops outside of the fort to fight the French and the Indians.



     The Swedish Riksbank today raised the benchmark interest rate .25% to 3.25%. The decision was awaited, but the main thing today was the Riksbank's new report.

    Before, they have made an inflation forecast, and as their stated goal was to keep inflation around 2%. This report has been the basis for markets expectation of what the Riksbank will do with their benchmark interest rate. From today, the Riksbank actually forecasts what they will do, saying that they probably will raise the rate 0.25% within the next six months, and then be able to keep it there for a while. They also give an explicit forecast for the benchmark (quarterly average) until 2010.

    I note that most market forecasters had forecasted a higher rate of increase than they currently do. We'll see what happens, but it is interesting with such openness, modeled I believe after their Norwegian colleagues.

    keep looking »


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