There is a book that lists most bestsellers from 1900-1999 called Making the List by Michael Korda.

You can claim "NY Times bestseller" status if you made the list one week, which is, theoretically, relatively easy to do (I overstate, of course) by selling 5,000 copies, give or take depending on what other books are selling in any one week period, through tracking accounts (such as Barnes & Noble, Borders, Amazon, etc.). Thus, one may be a NY Times bestseller and still sell relatively few copies. Conversely, a book may sell quite a lot of copies over, say, a year period and never make the NY Times list because: 1) other books outsold it in every reporting week period; 2) it sold through outlets not tracked by the Gray Lady; 3) it had legs vs. a one-hit wonder.

Marketing everything involves utilizing "ploys," much as I dislike that word. Whether we are selling a product or service or ourselves for a job or a romantic partner, we use anything that will give us an edge, make us seem sexy and appealing and wanted. Animals do it — the cliched example is the male peacock strutting his colorful feathers. Imbuing ourselves or our products with seemingly important or sexy attributes may be ploy but if we didn't do it then there would be no books, no movies, no Google, no Ford Explorers, and so on.

Why do some Specs have such disdain for "marketing"? How do they imagine that the companies whose stocks they buy sell their products and services? By magic?

Steve Leslie writes: 

I agree with Pamela. What is so unseemly about marketing? It may have to do with the people who work in marketing and advertising.

When you think about it, they are hired to do one thing. That is to represent the client and promote someone or something. Their tastes, political views, morals, opinions as to the quality of the product etc. do not matter. They are hired to do one thing and that is to sell a product to the public however unattractive that product may be.

There are some other professions that come to mind who perhaps stand out in this respect.

Lawyers for example. When you hire a lawyer it is for one purpose. They represent the client to the best of their abilities and with great passion and prejudice to their cause within the confines of ethics and the law. The lawyer has latitude to accept or reject representation but once they come on board they are expected to bring their full skills to the arena of play.

We hold athletes in high esteem, yet they are just paid entertainers who are promoting themselves constantly through their skills and statistics. And if there is a market for their skills in another venue, such as when Shaquille O'Neal left Orlando for Los Angeles and onto Miami, we soon find that they are more than willing to accept another offer.

My point is that everyone is involved in some form of marketing and advertising and even "ghast" selling. It is the form of the promotion which may be uncomfortable to the observer.

Look at money management. One may be one of the finest money managers around however that is defined, but if nobody knows about it and you don't have money to manage, then you won't be around for very long.

In my view, a professional can be both, excellent at their work and excellent at promoting themselves.



Henri Cartier-Bresson, arguably the most powerful street photographer in history, used only a Leica 3 with a 50mm f3.5. I enjoy his photo book very much.

Bruno Ombreux adds:

Robert Doisneau is great too.

Janet Murphy writes:

Eugene Atget photographed Paris years before Cartier-Bresson was even born. Both had a keen eye, and their photographs of Paris embody a quiet beauty that remains timeless.



 Japan (or the BoJ) seems to have found a new original way to create inflation and stimulate consumption at the same time: by taking Milton Friedman at his words and droping money from the sky! Unfortunately Mr Friedman never tested his theory in Japan, as it seems that ordinary citizens are declining the offer and returning the cash to the police. So Americans want to consume but they can't and Japanese can consume but they won't, what a world!

From the AFP (July, 28) "Mystery money in Japan appears in mailboxes, falls from sky"

A mystery gripping Japan over anonymous cash gifts has taken a new twist. For those who want the next batch of giveaways, the place to look is in their mailboxes — or even right at their feet. Residents of a Tokyo apartment building are baffled [over the appearance] of 1.81 million yen.

But residents became "spooked" rather than pleased with the anonymous gifts — and were too upright to pocket the money secretly. The predominantly middle-class apartment building in Tokyo is not alone. An envelope with one million yen was left in the mailbox of a 31-year-old woman in the western city of Kobe on Wednesday. Police admit they have no idea who is leaving the cash — whether a few people are behind the bizarre giveaways or if Japan is witnessing a craze of copycat benevolence. Since June, dozens of city halls and other public buildings across the country have reported finding neatly packaged envelopes full of cash in men's restrooms. The bathroom money has come with identical letters asking people to do good deeds — leading to speculation that the benefactor may be a public servant trying to cheer up his profession or perhaps a member of a new-age religion.

On Wednesday, bills worth 960,000 yen were inexplicably seen "falling" in front of a convenience store. "We can just say the money came from the skies," a puzzled police official said. "There were other passers-by outside and customers in the store but the incident caused no confusion," he said. "People thought it was too eerie to touch." The largest single drop-off so far was in the ancient city of Kyoto on July 23, astonishing a 67-year-old woman who found an envelope containing 10 million yen of stacked bills in her mailbox. Media tallies suggest more than four million yen, including some found last year, has been found in the public restrooms. 



I hypothesize that the higher purpose of the 2000-2002 decline was to scar for life a whole generation of the public… After that decline, many found the next way to riches in real estate. (Jeff Sasmor)

This may relate to a generalization of the Fed model and consumption wealth effect. Investors soured on stocks were incentivized by low mortgage rates and rising home prices to speculate in real estate instead of stocks. For families with roughly equivalent stock and real estate holdings, their net worth didn't change much through the stock bear/real estate bull market.

There is evidence that wealth effect (income+investments+home) at least partially propels the stock market. The richer people feel, the more they spend (goosing earnings) and the more they invest.

So where does the money go if both S&P and real estate go down? Perhaps conservation-laws don't hold because a stock can drop a great deal while only a few percent of the float trades. 



 One of the most fascinating events in nature is the collaborative schooling behavior exhibited by about 80 percent of fish species. Researchers Geir Huse, Steve Railsback, and Anders Ferno at the University of Bergen, Norway have been modeling migration patterns of herring and have come up with some interesting observations which may shed some light on the behavior of the markets as well.

In their paper entitled Modeling Changes in Migration Patterns of Herring by Numerical Domination , the authors postulate that first time spawning herring tend to learn their migration pattern from older and more experienced members of the school. This pattern, however, is disrupted when the first time learning class becomes unusually large. They note that there have been four years in a fifty year period in which the "newbie" spawning class was unusually large. Each of these four years produced significant changes from the herrings' previously established migration patterns. The authors propose the idea that there are so many learners in the school during these abundant years, they actually follow each other instead of the experienced fish. As a matter of fact, even the experienced fish will eventually follow the learning fish due to their strong desire to collaborate with the other members of the school. They use computer modeling of fish schooling to illustrate their point.

One could argue that the same schooling instincts exhibited by the herring is also at work in the markets. Under normal conditions, the feedback systems at work with experienced participants tend to keep market valuations in traditional ranges. This could be disrupted when there is an unusually large influx of new participants in the market. The boom in day traders in the stock market in the 1990s or the boom in house and condo flippers of this decade may provide two examples. It would be interesting to know if the herring experience a population collapse in the years after their errant migratory patterns and if subsequent spawning classes go back to the traditional patterns to once again build up their numbers, another ever changing cycle.

Gary Rogan writes:

I think the phenomena are related through the disruption of the existing order by a lot of new participants, but somewhat different in terms of their dynamics. A rising market attracts a lot of newbies who of course all buy and drive the price even higher. This is a positive feedback loop. The pre-existing participants don't follow the newbies as much as the resultant (and also pre-existing) positive momentum. A market in the middle of a mania cares only about one variable: the price momentum.

The fish situation is somewhat more complicated because there is no clear up and down (well there is, but not in terms of migrations), and the choice of whom to follow is somewhat more complicated. 



Milton FriedmanPrice Theory by Milton Friedman discusses Ceteris Paribus, which is the analysis of the demand curve where all things are held constant. Since all other things cannot be held constant, he uses an Engel Curve to define the demand curve by holding income constant. Under this theory what is the demand curve on the current market with recent drops in price and how will it act given real income? What is the elasticity of price? Certainly, the market this year that could not go down had little elasticity.

Recently the yield of the S&P has gone up since the income remains about the same, but the price is lower. Given a fixed income or amount of money, a trader can now buy more of the S&P than he could with the same money a week ago, leaving that trader with more income or more money left over after purchasing S&P say Friday at close or right at the recent open. Looking at alternatives, mainly bonds, the yield for bonds has dropped radically recently, making the S&P look even better.

This is the underlying theory behind the Fed model. Given that the measure of the nation's income is the GDP, and it remains about the same, as long as it keeps going up, under an Engel curve, the S&P will keep going up. Given in real terms, with inflation starting to abate, in fact the real yield of the S&P is going up even more, making it an even better deal under this analysis. The bottom line is there has not been much chance in the last year for a buy and hold type to get in. Now seems like a good time.



 Checking dates of the eight major (suspected or proved) Al Qaeda terror attacks against either US or US allies, I was curious about the possibility they time attacks to coincide with the falling US stock market.

Here are the dates, along with S&P 500 emini futures total point change for 20 days. PR20 is point total 20 days counting back from three days prior to terror attack — i.e., (t-3)-(t-23). The theory is that it takes a few days to execute the attack after down market has occurred. PPR20 is the 20-day sum of the period before the one just prior to the attack (as control for current market climate):

    N Mean    StDev  SE Mean
pr 20        8  -21.50  49.31  17.43
ppr 20      8   29.12  27.43   9.70
Difference 8  -50.62  38.07  13.46

95% CI for mean difference: (-82.4537, -18.7963)
T-Test of mean difference = 0 (vs not = 0): T-Value = -3.76  P-Value = 0.007

Date           pr 20    ppr 20
06/29/07 -40.75   34.00 Glasgow airport/London car bomb
08/10/06    5.25   15.50 London Heathrow plot
07/07/05   -3.50   23.50 London Underground bombing
03/11/04    5.00     9.50 Madrid train bombing
05/12/03   51.25   79.00 Riyadh Compound bombing
12/21/01   -9.50   60.50  Richard Reid bomb plot
09/11/01  -82.00    0.25  WTC attacks
10/12/00  -97.75   10.75  USS Cole bombing

I used paired t-test to see if the difference between pr20 and ppr20 was not zero, and it's not:

Paired T for pr 20 - ppr 20

    N Mean    StDev  SE Mean
pr 20        8  -21.50  49.31  17.43
ppr 20      8   29.12  27.43   9.70
Difference 8  -50.62  38.07  13.46

95% CI for mean difference: (-82.4537, -18.7963)
T-Test of mean difference = 0 (vs not = 0): T-Value = -3.76  P-Value = 0.007

Only 3/8 pr20 periods were markedly down, so it's hard to say they target declines. But the significant pre-attack decline from prior might suggest the market sees them coming. 



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

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

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

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



For S&P 500 index weekly returns since 1950, what happens after this week down more than 3%, last week down more than 1%, and none of the prior 10weeks were down more than 2% (i.e., the current condition: one of prior avolatility ending in large 2-week drop)?

Here are returns for next 1wk, 3wk, 5wk, 10wk:

One-Sample T: 1wk, 3wk, 5wk, 10wk

Variable  N    Mean       St Dev      SE Mean          95% CI                 T      P
1wk       11  0.00903  0.02487  0.00750  (-0.00768, 0.02574)  1.20  0.256
3wk       11  0.00267  0.03384  0.01020  (-0.02006, 0.02541)  0.26  0.799
5wk       11  0.00368  0.04448  0.01341  (-0.02620, 0.03356)  0.27  0.789
10wk     11  0.00873  0.10454  0.03152  (-0.06150, 0.07896)  0.28  0.787

Means all positive but N.S.

Date           1wk    3wk     5wk   10wk
01/24/00  0.047 -0.010  0.036  0.115
08/11/97  0.025  0.031  0.055  0.045
03/28/94  0.003  0.004  0.005  0.029
08/31/87  0.017  0.011 -0.018 -0.224
04/20/70 -0.016 -0.071 -0.075 -0.119
06/09/69 -0.020  0.010 -0.038 -0.028
11/18/63  0.052  0.064  0.069  0.107
01/25/60  0.007  0.011 -0.019  0.014
01/14/57  0.004 -0.030 -0.026 -0.012
01/16/56  0.003  0.010  0.049  0.122
05/14/51 -0.022 -0.001  0.002  0.047

07/23/07 1473
07/16/07 1534
07/09/07 1553

When it was 53…it was a very good year
A year of patterned girls…with independent means
When it was 53…
We'd ride in limousines
Until 4:15
When it was 53…

07/02/07 1530
06/25/07 1503
06/18/07 1503
06/11/07 1533
06/04/07 1508
05/29/07 1536
05/21/07 1516
05/14/07 1523
05/07/07 1506
04/30/07 1506
04/23/07 1494
04/16/07 1484
04/09/07 1453
04/02/07 1444
03/26/07 1421
03/19/07 1436
03/12/07 1387



 Sharks are not known to swim in a school. They are mostly known for being one of the top predators in the ocean, but they usually swim alone. When I think of a shark I immediately think of a great white shark and the movie, Jaws. But there was only one shark.

If traders can be compared to sharks, which they often are, then is there really a legitimate comparison in nature where we can find a bunch of sharks swimming around in a school? I didn't think so and I almost ended my little study until I found out about hammerhead sharks.

I soon found out that hammerhead sharks were an easy comparison to market traders. There are many different species of hammerheads (9), which come in all shapes and sizes (even their heads can be a different shaped "hammer").

The hammerheads practically span every nook and cranny of the ocean looking for food. They can be found close to the shores and very far from them, swimming over continental shelves, island terraces, passes, and lagoons. They can navigate and find food from a depth of 1-300 meters.

But the reason why the hammerhead sharks swim in schools is yet to be agreed upon by shark experts. However, Peter Klimley, from the University of California, who has been studying sharks for more than 20 years, has an interesting hypothesis. He thinks that they swim in schools because of the magnetic polarity of the sea mounts. They use these magnetic patterns like roads to guide them in their travels. As they continue their migration they follow these magnetic flows swimming from landmark to landmark. 

What is a rather interesting aside about these hammerhead schools, especially when compared with traders, is that the schools only exist during the daytime. Every evening, each shark leaves the group and spends the night alone.

Another great comparative aspect about hammerhead sharks is the fact that really big hammerhead sharks, the sharks that have been around for quite some time, hardly ever take part in the school. The schools, it seems, are for the smaller, weaker sharks that seem to thrive on being a part of the crowd. In fact, their very existence seems to depend on the crowd theory.

Shark experts have been able to qualify and quantify which hammerhead sharks join the school. In other words, "the quantification of persistent psychological bias" (from Education of a Speculator) has been, and can be, performed in the shark world. Peter Klimley has spent 20 years of his life trying to figure out sharks and he's starting to "get it" in his particular endeavor. I have so far to go in trying to figure out what the "magnetic flows" are in the markets.



The following is from the article, Point Shaving in the NBA: An Economic Analysis of the NBA’s Point Spread Betting Market.

The setting of the point spread is inducing games to end up on one side more often than the other, due to the betting market's non-linear payout structure altering incentives.



 There is a higher purpose in every substantial market move. The higher purpose of the recent moves in stocks, the largest weekly decline in a week in five years, includes getting the Fed to reduce interest rates, reducing the rate on mortgages, which are now back to year-end levels, providing the opportunity to show that there is grave concern for the small person, the chance to move the dollar lower, and the clearing of the brush and canopy so that the sun can shine through and growth can be even more vigorous in the future.

The February 27th decline accomplished it in one day. This time it took two weeks, and 750 Dow points. Without making a prediction for the future, let us all stand back and applaud the beauty of this grand scheme.

Hany Saad comments:

 And here I thought the decline of 300+ of the 26th was to give the shorts, who were at the point of throwing in the towel after the magnificent rise, some hope to feed the system the little change they have left in their pockets. But Friday’s decline was more interesting. It is the clever mistress's way to console the shorts and lead them to believe that this time it's different from the other declines when the market retraced the down move with a following up day of similar magnitude.

I was lucky enough to be out of markets, albeit not short, these two days. But I can clearly see the luck changing with a long position in case of a down Monday open. 

Greg Rehmke adds:

For the New York Times, last week’s downturn shifted liquidity stories dramatically. For weeks the stories have all complained about too much liquidity flooding into every conceivable scheme to enrich hedge funds and investment firms taking companies private or bringing them public–each reported as a bad idea hurting workers, damaging small investors, and weakening businesses to enrich financial manipulators.

Now the bad news is all of vanished liquidity. All sorts of reasonable business ventures suddenly and ominously can’t secure funding. Story after story fill the business pages and NPR interviews. The porridge was too hot, and now it is too cold! Newspaper reporters seem to suspect evil intent whenever markets change, as they do whenever climates change. A tornado is a natural though violent event, transporting energy and serving a higher climate purpose. Maybe occasional market "tornadoes" are similarly necessary. 



If there really were a Plunge Protection team why didn't they come save the world this week? Could it be there isn't one, as certainly this week they were needed?

Charles Pennington comments:

Government likes plunges because they provide an excuse to seize new powers and enlarge the government footprint. It certainly worked out that way during the plunge of the 1930s.

If there were a government Plunge Protection Team, the government would heavily publicize it and its heroic role in stopping plunges. The Hong Kong government openly stepped in to buy stocks in the midst of the 1998 Asian market collapse — the intervention was announced in August 1998 — and to my surprise, the announcement just about coincided with the market low.

My theory, then, is that governments relish plunges and would only intervene if done with great fanfare to take credit. 

Kevin Eilian writes: 

Sometimes "plunge protection" can take the form of a wink and a nod, like the 1998 Russian meltdown/LTC deal. The knight gathered together the biggies from all participating banks (so I understand) and "asked" them to "coordinate" a de facto bailout. Now with huge consolidation among world financials, this type of pp (reminds of me of JP's role in the 1900s) should be easier.

The government will use plunges to assume new power - if it lasts (i.e., the 30s or the late 60s/70s for example). Since most of the world's politicians do not really understand economics (growth causes inflation, static budget analysis, cap gains balance the budget, etc.) the attempt to gather more power in light of a prolonged plunge is worrisome ("double whammy" potential).

I think most politicians dislike the uncertainty and potential shorter term election implications of a typical plunge and/or dislocation, so they'll do what they can to bring in a plunger. To me, whether it’s explicit (like r*bin), informal (like the knight in 98) or just day to day (central bank coordination) they are around. We just need to be careful what we wish for! 

David Wren-Hardin writes:

We're in just the first episode of a multi-episode drama. It's like in the comic books or cartoons where the evil overlord rises up, and a second tier superhero team from another country like Alpha-Flight or Justice League Europe tries to take him on, only to be crushed. Then the real superheroes come in.

We saw Plunge-Protection Team Europe take a swing. Bernanke is still ensconced in his Fortress of Solitude, waiting to call on the rest of PPT-USA. 



I have just discovered that I am old and boring; whilst on holiday I found myself reading Vic and Laurel's Practical Speculation rather than lazing by the pool reading a trashy thriller. I especially liked the Specs' chapter about Ben Graham and I am always surprised by the venomous attacks if you dare criticise (or simply fail to worship) established figures such as Ben Graham or Alan Greenspan. Maybe this chapter was particularly harsh, and perhaps they didn't emphasize Ben Graham's achievements, but the key aspect for me is to hear both sides of an argument and then to make up my own mind. I find that far too many people who work in the investment world learn only one side of the story, leading to trouble when their ideal conditions evaporate.



 I disagree with Vic and Laurel's statements that they do not think Technical Analysis has a scientific approach. I can find strong similarities between technical analysis and well-established scientific theories. How familiar are the Specs with quantum mechanics and Schrodinger's Cat? Essentially, you have to imagine a cat in a closed box which is armed with a gun, you hear a shot go off and you wonder whether the cat is alive or dead. You then open the box but it is only upon opening the box and after the event that the cat decides whether it is alive or dead. This has been used to explain the behaviour of some subatomic particles and their "spin". They exist in both possible states until you try to observe them, when they decide to select a particular state. I do find technical analysis highly accurate but, unfortunately, only after the event.

Steve Leslie comments: 

Let us assume that technical analysis has a scientific basis to it. The author suggests that it only has usefulness in hindsight. The major question now becomes how useful is it as a tool in making money. If it is only effective in hindsight then it has no practical usage. If it can be used by only a few then it has great value to those who have discovered its properties. If it has intermittent usefulness then it can be dangerous in the hands of the one who is attempting to use it.

Therefore it may or may not have practical use depending on who is trying to use it. One cautionary note here. Emerson said "to a hammer everything looks like a nail." 

Venkatesh Chari writes:

As the sampling frequency increases (and time period decreases), you see more of a noise and less of a signal. Also, I don't believe that anyone can really forecast or predict anything. If anyone can, he doesn't need to be in the "investment advisory" business. He can become a perpetual money making machine.

All I am saying is that there are certain market patterns (not geometry-based like drawing lines, rectangles, etc.), which give positive expected returns. And these I believe can be scientifically tested. If you had bought the new high on Malaysia or Thailand you would have made a lot of money. Of course, this was just one path and I am telling this with the benefit of hindsight, but you could have always played the same idea with a tight stop. Keeping an open mind is good for our wallet! 



 A friend's son at the American University in Cairo who majors in business administration was telling us his class was assigned a project where they come up with a product and sell it on eBay.

The rule is that if someone reaches a million dollars in gross sales, he automatically passes the course with an A-plus, and the other top three in gross sales pass with an A. The students also can choose to concentrate on the study material and their efforts will be marked as if the sales project didn't exist. Very similar to choices and decisions we have in markets.

Upon further inquiry, I discovered that the teacher is an American. While the majority consider this utter craziness, I think it is an ingenious way to teach this specific course. It involves so many more disciplines than is apparent on the surface.

First, the student has to strike a certain balance between how much studying he will need to do vs. selling, as he might not be on the top of the sales list.

Second, the student has to figure out how the others are faring with their sales to guess where he will rank and determine how he will divide his time between studying and selling accordingly.

Third, and most important, the student who chooses the sales side will need to think of a product, find a distributor, market it, and ship it.

Only an American would think of designing a course like this. To its credit, the AUC approved of this course.



 Rajkumar, a famous Bollywood star of yesteryear known for his powerful one-liners, said in the movie Waqt (means "Time") that, "Those trees that have an inability to bow down eventually break down." Days such as today point to the relevance of such a thought.

With many factors building in the background, still prices of certain stocks refuse to buzz lower, confusing students of the market. There is much strength in a market that is shrugging off various woes and concerns. However, price regimes that lack volatility eventually, in the growth and decay cycle, just break down.

A breakdown is a point of a new beginning. Precious soil, air and water supplies that were blocked out by a structure that had reached the limits of its growth are available again for a new cycle to begin.



The Nth time I saw Marc Faber's name cross the tape, I was inspired to run his name on blogpulse.com, to see how his mentions correlate with market action.

The graph speaks for itself.

Tim Humbert adds:

I used to follow his material while it was free, but lost track. And yes, it was quite bearish.

Someone mentioned his name a few weeks ago, and I decided to compare his fund's performance to the market's from 1998, when it's first listed on Bloomberg. He seems to have done well; though if you look from the trough in stocks in 02/03 he has underperformed. 

Faber    SPX

2006  188.90   146.28
2005  170.26   128.75
2004  169.39   125.00
2003  157.05   114.69
2002  147.85    90.75
2001  147.94   118.31
2000  137.99   136.06
1999  120.57   151.41
1998  106.36   126.67

Vance Humbert adds:

Try using the unyielding David Tice, whom Bloomberg quotes today as saying "this could be the big one," and a somewhat similar pattern emerges.



Since March 23, 1% boxes, 1-box reversal:

1556.2    X       X X
1540.7  X XO  X   XO O
1525.3  XO OX XOX X  O
1510.2  X  OXO OXO   O
1495.1  X  O   O     OX X
1480.2  X            O O O
1465.5  X
1450.9 *X
1436.5 O

The last seven marks have been made yesterday and today.



The White StripesI start out every year in my 401k with 75% S&P Index fund and 25% cash. I wait for major down days to redeploy the rest of my cash. My first five percent buy move was in the February selloff and I'm doing so again this morning. I try to deploy all my cash by year-end. With investment restrictions due to the bank I work for, I am limited in my speculation, but this system has worked well for me over the last five years.

After reading the site for years I'd like to share my favorite song to play on market days like yesterday: We're Going To Be Friends, a great Beatlesque tune by The White Stripes. This song to me represents the greatness of what is around the corner in life and the markets, for those who appreciate the beauty of continued learning. I listen to this during any market downturn. I just can't tell if the market mistress is Suzy Lee or the teacher. Anyway, I am optimistic. 

J.T. Holley adds: 

 The last Friday of the month is 401k day across the land in most plans. Such a sweet day today for the public to enter!

I like to strum a six-string and sing songs to my kids like I was Raffi. But when I have spare time I pretend I'm Jimmy Page. Jack White of the White Stripes is truly a genius, a producer and musician (not just guitar). They don't come along too often like him. He pretty much does all of this on his own, with the help of a single drummer.

Icky Thump is their newest album and the Icky is one of the best singles on the album. Reminds me of Led Zepplin.

White also produced Van Lear Rose for Loretta Lynn a few years back and helped her win a Grammy. Unbelievable, ground-breaking music.



 In was some time before 2000 that I sat in a giant bar on the outskirts of Sao Paulo listening to my friend Paulo carry-on about why the giant city was "really Italian" and why that was a good thing. He waxed mournfully about the loss of the colonial sector and assured me that had the city governors been true Italians they’d have preserved those fine, old homes and taken pictures of them and placed them on postcards.

What happened to the colonial sector? I asked Paulo. "Oh…just gone." he said, waving his left hand like a broom while motioning for a beer with his right. "You know," he continued, "this bar - The Penguin - has six kilometers of copper tubing built into it. And the beer you’re drinking has passed through every centimeter!"

Did you say six kilometers? I asked in surprise. "Sixteen!" he replied, his finger now on his chin. "And there’s no bar in the country or in Mato Grosso or in this hemisphere that has more copper! Those colonial homes probably had copper wiring in them. We use copper in Brazil!" he confirmed seriously. "We know how to use it best!"

I thought about this three nights later when I was nearly electrocuted taking a shower in my Alphaville condominium. And I’ve thought about it since…copper, that is.

My late grandmother, a native Louisianan of Alsatian ancestry once gave me the harmonious news that my great-great grandfather cooked with "good copp-uh" and "that cooking was ideal cooking!" She also told me, somewhat less harmoniously, that the contaminated strawberry scare in 1995 was "a government conspiracy!" And ordered me post haste to the nearest supermarket for a double basket. I trusted my grandmother.

It was late in the evening on a dirty remote road in central Chile that my brother-in-law parked his smallish Chevy sedan and walked me to the edge the roadway, looking down on the eerie glow of some kind of gigantic copper leeching pond a kilometer in the distance. "Under your feet," he said, it’s flowing." What? I asked. "The copper fragments. They reach speeds of two-hundred miles per hour in that underground tube," he said proudly. "That’s the fastest vacuum-generated mineral flow in the world!"

And I find that we have barely a sixty-year supply of copper, if the venerable New Scientist is your source of information. If you use the Copper Development Agency’s figures then we have a nearly limitless supply based on current extraction rates.

If you ask my contracting next-door neighbor you’ll promptly get, "somewhere in the middle of those two."

An engineer friend of mine in Chuquicamata states, "too much copper! Copper! Copper! Copper! We don’t dig as much as years ago. But we got copper from here to China!"

"Don’t kid yourself!" says the coin guy in downtown San Marco, Texas. "There’s not as much copper in coins anymore. There’s not that much left on the market."

"Why are you worried?" asks a friend of mine who works where you smelt things. "You just recycle the stuff!"

"That’s why they steal it!" says an electrician I know. "There’s not as much out there as there used to be."

"You’ll know when copper dries-up," says my brother-in-law. "All those eucalyptus trees down there will just fall over! Oh, you didn’t know eucalyptus trees need buckets of copper to stay alive? Look at them! See the way they wind down the hill? They’re following copper veins!"

"I hope it doesn’t run out!" says the nurse-wife of a friend. "We use it all over the hospital. Kills all kinds of bad stuff!"

Then it hits me. My brother-in-law mentioned "eucalyptus". Don’t Koala bears eat eucalyptus? Isn’t that all they eat! What happens if copper does run out? Does that mean Koala bears run out?

And so I say, I should go long on the best, fastest, depleted, limitless, germ-killing, beer-shooting, particle zooming, electricity-conducting, aiguillette-frying metal in the world. And I can do with fifty years to spare before the Army of the Night tears through my grandson’s home to make off with his ice-maker hose.

Or, maybe I should just call my broker and say, "I short Koala bears!"



 I have heard discussion lately about the market shaking out weak positions on a decline, but I think that the whole concept of "shaking out" weak longs is, on its face, silly.

Let's say, for the sake of argument, the DOW is at 1500. That 1500 is made up of the shares outstanding of the Dow, times the prices per share.

So, the Dow falls to, say 1490. What has happened at an underlying basis is that net money has been pulled out of Dow component stocks.

Then, say it quickly bounces up to 1500. What does that represent? Net money flowing into Dow stocks.

The pundits will say that there was a "shakeout of the weak longs" on the drop, which somehow makes the market go up under some sort "a chain is only as strong as its weakest link" theory.

But what really happened? The same amount of money that flowed out flowed back in.

How can we possibly interpret what that means? Was the money that flowed out weak money, with the money that flowed back in "strong"? How is a guy that wouldn't buy at 1501 a "strong" sort of bull if he buys at 1499?

I don't buy it.

Charles Pennington replies: 

The only rigorous thing we can say about a 10-point down move followed by a 10-point recovery is that the magnitudes of the two changes in market capitalization are equal.

That doesn't preclude the idea that the down move might have been from something like forced selling due to margin concerns, or as one might put it, the sellout of the "weak longs". It's not silly to talk about weak longs; their selling could be different. It would be by definition hurried, and not reflecting the sellers' opinion of the market.

One could also speculate that once these margined-up traders have sold, they won't be selling again, and that that's bullish.

That may or not be correct, but it's not a silly idea.

James Sogi comments:

The market can drop like the breathtaking morning and midday airdrops Wednesday when buyers pull bids reducing liquidity. An example is when price skips over a price tick down when all the bids are pulled or the spread becomes .5. Here is a situation where no money is changing hands but price drops not due to selling pressure, but due to lack of a bid and Globex moving the inside market.

There is no "money flow", rather there is drying up of liquidity. This can be quantified rigorously in microstructure. This is the third and fourth dimensions behind most screens. The afternoon runs back up were even more violent and sudden than the drops, which had a measured quality to them except as it culminated.

It is ironic and a consummation of recent moves that after all the fireworks today we are just above where we were last night. 

Adam Robinson writes:

I understand the point Prof. Pennington is making about weak and strong longs, and while it may be useful as an explanatory or thinking construct for interpreting market action — I use it myself to distinguish the "strength" of conviction" (largely a function of capitalization, of course), I don't see how this notion has any predictive value.

More fundamentally, on reflection, the entire notion of weak vs. strong (as well as the notion of "smart money") seems suspect even as a construct.

Let's agree, arguendo, that a weak long is a trader less able or less willing (than a strong long) to tolerate adverse movements or adverse "noise" (i.e., random fluctuations against his position). (By the way, the notion of "noise" itself in trading is problematic since the analog, carried over from information theory, assumes the existence of a "true signal". That is to say, you can't have noise without having communication, just as you can't have dirt without having an underlying system in which the matter is considered dirt.) To return, let's say that the market moves against our "weak long" and he sells. He is forehead-slapping "weak" only if the market moves up shortly after he sells.

But if the market continues down, our bull was lucky he was weak. Had he been stronger and the market decline more protracted or precipitous, he'd have endured more pain before ultimately abandoning his position.

But even more fundamentally, these distinctions also confound process and outcome by ignoring the impact of random fluctuations (i.e., luck).

A speculator can analyze the market as "correctly" as his insights and statistics allow, put on a position, and yet the trade can be a loss.

More simply put, a "correct process" does not always guarantee a favorable outcome, owing to the intervention of luck — at least in the short run. In the long run, the correct process should prevail (although even that may be tautology).

As Damon Runyon said, "The race is not always to the swift, nor battle to the strong — but that's the way to bet." 

Ronald Weber adds:

Why don't we just call them margin-long and cash-long instead of weak/strong long, then everyone would be happy!

The fact that many names ended well off their lows could indicate that the shorts are "weak" (or "timid") and eager to close their positions, or that the margin-longs have been taken on a ride! We'll see…



 Sometimes the market reminds me of playing a worse endgame against someone like Mikhail Gurevich. They move you back and forth, slowly improving their position whilst testing your nerves and patience. The advantage may not be much at first, but when compounded by some small mistakes it becomes much more serious. Strange things start happening when you're put on the rack, opportunities are missed and the mind starts playing tricks.

The following quote from Belavenets appears in the endgame section of Kotov's 'Think Like a Grandmaster', which is good advice for a would-be torturer and well worth being aware of if you're the victim. And I start to see where the chair is coming from with his interest in point and figure.

The basic rule of ending is not to hurry. If you have the chance to advance a pawn one square or two, have a good look round, and only then play it forward one more square. Repeating moves in an ending can be very useful. Apart from the obvious gain of time on the clock one notices that the side with the advantage gains psychological benefit. The defender who has the inferior position often cannot stand the strain and makes new concessions so easing his opponent's task. Apart from this, repetitions clarify the position in your mind to the greatest possible extent.



 It's about having meat on the table for dinner.

I grew up on five deer a year, two antelope, and an occasional elk. As soon as the kids left home, Dad stopped hunting for the most part. Our family, like so many in Montana, depended on game to live. We did not go to exotic places, drove as few miles as possible to hunt, and made every bullet count, just as our neighbors did.

Assuredly some hunt for the bang of it all, but I think they are fewer in number.

Robert McAdams adds:

Every fall while growing up in Michigan I witnessed the mass exodus of auto workers from the big cities to the Upper Peninsula to deer hunt. These people made plenty of money to eat and usually came back with nothing. There is just something basic about getting out in the wild!

East Sider advises:

Always check that it's a real deer -


Harare (dpa) - With meat now in desperately short supply in Zimbabwe, a
group of men from the eastern city of Mutare is urging residents to try
eating dogs, a local newspaper reported Friday. In a case that has
shocked city residents, four men barbecued and ate a dog they had
stolen, the Manica Post reported. On being quizzed, the men first
claimed they were barbecuing a buck. But when a member of the family
that had lost its dog looked carefully at the meal, he was not
convinced. Bits of fur still on the meat matched those of the missing
canine, the newspaper said. 




A unique aspect of Bernanke's recent Hill appearance was how the legislators continually badgered him to step up use of all the regulatory mallets in the Fed's closet. They pretty much said "use 'em or lose 'em," and being responsible for maintaining the Fed's power vs. other DC players, Bernanke has little choice.



 Reading the Bond Guru's August 2007 Investment Outlook, I'm forced to consider the psychological condition known as Stockholm Syndrome, whereby individuals in close proximity with those exerting power over them come to not only sympathize with but in some cases actively defend and endorse their captors.

Peppered with class warfare ("private equity and hedge fund managers.. aided and abetted.. at the expense of labor") and the politics of envy ("trust funds," "inheritances," "ego-rich donations" described as "egregious and wasteful"), one wonders: does years of contact with Treasury officials, central bankers, federal/state/municipal politicians, perhaps coupled with immersion in the detailed study of government statistics and the consideration of various parties' policies, inevitably lead one to an appreciation for, or embracing of, statism?

East Sider adds:

I think the Bond Guru is positioning himself to take Sage's spot as the "own man" cited by the press as promoting pernicious state activity despite seemingly capitalist credentials.

When I read the Bond Guru's article, I thought of my many track friends that bad-mouthed the sprinters. The sprinters were often headed for big bucks in the NFL. They were blessed with the right talent to make big money. You see the same thing with the old guys in three major sports complaining about the youngsters now getting the big dollars. These complainers think that they where in the "athletic" business. That they got paid for their competitiveness. What they miss is that they are in the entertainment business. Their game just is not as entertaining as the major sports games have become.

Russ Sears adds:

He thinks he is in the investment business, just like them. What Gross misses is he is in the risk-taking business. No doubt his is a good investor, perhaps better than the guys pulling down the bigger bucks. But he is not a good risk taker.

But what else it reminded me of was when I first married my wife. We would go visit some friends, farmer daughters. The farmer wife would join us staying up late, playing card or talking. While the farmer sat in the back of the house flipping channels to find the most depressing newscast available. As only tired but intoxicated with life young girls in front of a young guy can, they would giggles and laugh in such fits till the old farmer would yell, "stop that laughing out there! You girls are driving me crazy!" Then I would hear latter that the girls got a stern lecture on being so unproductive and frivolous. It was probably the most productive night of the month on that farm.

In short he forgot how to enjoy life, enjoyment’s infinite value, and forgotten how motivating that can be.

Ronald Weber writes: 

I believe one should just see him as a good salesman doing his job, in his case: selling bond funds! And for people to buy his funds he needs of course to spread negative news flows.

Actually, he does a pretty good job at sales; but somehow most of the investor’s community take him way too seriously as a "financial prophet"! I like to think of him as a good "dramatic" entertainer before Leno’s Tonight Show and after a noisy day from the "neo-comic" NBC/Bloomi/Analysts crowd! 



 Thinking about use of manufacturing control systems to time market cycle-changes, take the example of a Malibu Oxycontin 120 tablet machine.

Say the FDA specifies that the tablets must have 120 mg of oxycodone with a standard deviation of 1mg. From this you can determine the frequency of pills which are too high, and adjust the machine (and keep checking it) so that it "never" makes 130 mg tablets (never > 10 st dev, etc).

But is the market like a pill machine that gets clogged with chemicals or wears out, and can be adjusted back to good behavior?

Here, for example is check on frequency of SPY c-c drops <-1%. The control system is regression of wait times (in trading days) between 1% drops vs. arbitrary timescale:

Regression Analysis: wait versus td

The regression equation is wait = 6.59 + 0.115 time.

Predictor     Coef     SE Coef     T      P
Constant     6.588    2.917  2.26  0.026
time            0.115    0.055  2.09  0.039

S = 14.1789   R-Sq = 4.6%   R-Sq(adj) = 3.5%

Looks like the wait gaps between such days is increasing, so is it time to adjust the machine?

More on engineering control:

"His face is melted to the wire!"

"The flies are on him!"



The two recent 1% plus declines in the SPY (07/20 and 07/24) were separated by an up day. It turns out there have been no other 1% plus down-up-down combinations like this since October '05. Below, I have charted them back to January '03, with returns for the next one, two and three days:

  Date        1d       3d       5d
10/20/05  0.004  0.017  0.004
05/12/05 -0.002  0.014  0.029
03/15/04  0.005  0.017 -0.010
09/24/03 -0.008 -0.002  0.010
07/21/03  0.009  0.002  0.016
06/27/03  0.000  0.022  0.031
06/25/03  0.013  0.001  0.023
02/26/03  0.013  0.010  0.002
01/24/03 -0.014  0.001 -0.004

avg          0.002   0.009  0.011
sd            0.009   0.009  0.015
z              0.732   3.159  2.299

Andrew McCauley adds:

So far this year there have been seven declines of 20 points or more in S&P 500 futures. On all occasions the next day provided a positive outcome. 

avg 1.00%
n 7
sd 0.71%
t 3 (versus all other one day returns for 2007)

Referring to Dr. Zussman's previous post, a case of "buying the dips before they occur." 



 I enjoyed The Illusionist. It is set in Vienna in the 19th century. The plot is driving, the characters are well-developed, the acting and cinematography are superb. The ending is fantastic.

Illusions are wonderful creations, fed by people's willingness and desire to believe, driven by their needs and agendas, their eagerness to blame others rather than themselves. The power to control or if not to control, to act advantageously upon other's mistaken beliefs is a formidable power. We see it in spycraft, in politics, in entertainment, in law, and, of course, in markets. Illusion is used in entertainment, in martial strategy, in love, and on many levels in many areas of human and natural life. Animals use illusion.

The market is full of illusions and is the master of deceit, subterfuge, of creating a set-up. A big illusion is the the impending crash, the wall of worry, keeping so many out of the market. The other illusion is the onset of the crash, the big drop, only to reverse violently, in a prestige as the illusion vanishes. Another illusion is the breakaway bull run, dragging in many soon to be disillusioned. Another illusion is the ease of making money in the market. False earning warnings, are illusions. Many crashes are illusions, only to reverse.

The key is to see the illusion, to see the set-up, to see the participants falling for the trick, and to act accordingly in your, not their, best interests. Some market illusions are not the simple variety of the stage, but rather complex, drawn out, many-staged illusions, similar to the illusion created in the movie, with illusions upon illusions, preying upon the minds and motives of many, not just one.



 I once learned a very costly lesson in the art of banking. Talk about alligators! It's a long story, but here is a very short version:

We bought the bank for no money down as a friend was effectively being kicked out of it by the regulators, the FDIC. So we took over not realizing how bad the bad loans were and then had a good loan turn bad on us. Local banks have to maintain cash ratio to loans and we were behind from the get-go.

About the only money we made was on a position in Long Island Light and Power bonds that were way below par with expiration coming soon. In an election year we bought a bunch of them; I did not think the government would let them default on the bonds and I was correct.

The FDIC flagged that as one more risky move on our part. More capital was called for, and it became clear they wanted us out of the business.

The good news was the bank was a small bank so we only lost 'small' — a few million.

Lesson learned: don't buy on margin, or if you do take just a small position. Also, best to stick to what you know with people you know.



Ex-Newark Mayor Pleads Not Guilty to Corruption

Published: July 24, 2007

NEWARK, July 23 — At his arraignment in federal court Monday, former Mayor
Sharpe James pleaded not guilty to corruption charges.

After scanning this morning's New York Times offering on Newark's ex-mayor, I had a flashback to a lecture by a (literally) communist professor I had in college.

He said visiting Soviet officials marveled at how in our putative decentralized, capitalist, pluralist, free press, the material was so uniform across media and across the nation.

They always asked "How do you do it?"

Well, given that yet again the former "newspaper of record" pointedly failed to mention the political affiliation of an accused politician, I can only assume one thing:

The Times's internal word processing software automatically deletes the word "democrat" by default, if the word "corruption" is elsewhere in the same block of text. Certainly no meatware system could be so consistent. 

Sam Kumar remarks:

This inference drawn from one instance is probably false. The tenor of the post is that of a joke, but a propaganda message is clearly being sent here.

George Zachar adds:

This morning's front-page NY Times piece on the misuse of state police for political purposes in Albany, fails to mention the party ID of the suspects or their masters. This is noteworthy in light of East Sider's observation.

Press-as-partisan has a long history in the US. What's different with this cycle is the false-flag pretense of objectivity. 



 One of the qualities by which a client rates his bank or broker on is the ability to work things "quietly" — execute an order in a discretely to achieve a good fill. This is because participants are generally unaware someone out there has a buy or sell order and won't strive to squeeze you. In that respect, anonymity is a good thing.

Yesterday I was booking a hotel on a website, and came across a variation of this, where top hotels are willing to unload inventory at knockdown prices, but they do so "anonymously" through an intermediary website. They want to sell a few extra rooms, but don't want to publicly quote the price because it will impact their pricing power.

I considered going with one that offered a reasonable rate and gave general details about location and specs of the room, but at no time before paying would I know they name of the hotel. It mightn't sound like a big deal, but if I were handing over a few hundred Euro, I'd like to know more about the premises. In the end I didn't pull the trigger — I went for somewhere a bit more expensive, where I knew what to expect.

Afterwards, I thought about it and asked whether I lost out on a good deal and whether this anonymous selling is a good idea and will succeed. My own view is it won't, because hotel rooms are among the most expensive transactions people make regularly on the Web, and travelers are quite risk averse when booking. They want reassurance — number of stars, brand name, location — before paying, and are quiet skeptical about descriptions (I can tell you from experience there is nothing regal about the "Royal Hotel" in Tipperary town).

Moreover, the hotels are over a barrel, because if an anonymous five-star hotel is offering rooms at 75% off, people think it can't really be that good, of there is something fishy; and if they are only slightly under a similarly priced but known hotel, people will pay that slight bit more to avoid uncertainty. So they are also looking for information in the price.

Sam Humbert writes:

When I've used PCLN for hotels, I've gotten, broadly speaking, good value for money. Generally there's been a reason a particular hotel traded cheap-to-the-curve — construction noise from building a new wing, or the pool's closed for repairs. Also I've found desk-clerks exude bad juju when you check in/out on a PCLN reservation — they don't view you as a "real customer" who's loyal to their hotel brand.

Craig Mee adds:

Reminds me of a friend who was a manager of a world-renowned hotel chain. Two things he told me –

1. He told his hotel counter staff never to give poor service, even if there are discrepancies with the bill and customers are disagreeing. What he said made perfect professional sense, "once you're committed to not charging the customer for the said amount from a business standpoint wear it on the chin and be as nice to that customer as any other." Then he added quietly, "besides, it's usually the cleaning staff taking liquor from the mini-bar, not the patron."

2. Specials are special on the menu for a reason; don't go near them. They usually jazz up something that is "on the way out."



Record of Value Line rankings for timeliness (allowing for changes in rank each week, arithmetic averaging), six months ending June 29, 2007:

 1    12.8%
 2    12.5%
 3     9.4%
 4     6.2%
 5     8.2%
DJIA    7.6%
S&P 500 6.0%

Record of Value Line rankings for timeliness (allowing for changes in rank each week, geometric averaging), six months ending June 29, 2007: 

 1    10.8%
 2    10.7%
 3     7.7%
 4     4.5%
 5     5.3%

Record of Value Line rankings for timeliness (without allowing for changes in rank each week, arithmetic averaging), six months ending June 29, 2007:

 1     9.2%
 2     9.2%
 3    11.4%
 4     8.6%
 5     3.4%



First Bank of the United StatesUS financial watchdog says economy at risk from 'non-ally' bondholders

Suzy Jagger and Gary Duncan

America's leading public finance watchdog has sounded a warning that the US economy is vulnerable to hostile financial actions by nations that are not its "allies".

David Walker, the US comptroller general, indicated that the huge holdings of American government debt by countries such as China, Saudi Arabia and Libya could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.

Charles Geist's Wall Street: A History notes that seven million of the original eight million dollar subscription for the Bank of the United States was held by foreign interests and that more than half the debt was held abroad in the early 1800s. America attracted risk-takers — and low interest rates simply do not excite them still.



 In referring to the failure of the Roanoke colony, founded by Ralph Lane in 1585 in Virginia, Paul Johnson in his History of the American People says that it was a blessing in disguise because if had been successful, Spain, which was then more powerful than England, would have send out an invading force, destroyed Roanoke, set up forts and claimed the entire Eastern seaboard.

Johnson's history has a nice blend of entrepreneurial, commercial, freedom-loving and religious explanations for what happened to America, and has many anecdotes about the greats who made it happen and the role chance played in the path it took.

Stefan Jovanovich remarks:

The Spanish did claim the entire seaboard. By 1570 they had already landed a Jesuit mission on the James River. According to D. W. Meinig, the Spanish ended their push north from St. Augustine not because of the failure of the first English Virginia colony but because of the increasing need to secure their treasure fleet against the buccaneering of the French, Dutch and English privateers. See Atlantic America 1492-1800, the first volume in Meinig's life work, The Shaping of America. Meinig thinks the Huguenots set in motion the chain of events that led to the loss of Spanish hopes for dominance in the mid-Atlantic region. His radical thesis — for which he has a good deal of evidence — is that the French Protestant mariners 'taught the English how to sail beyond Ireland and the Dutch how to sail to the Indies and (later) up the Thames.'



 I've heard that Karpov is a natural at other games besides chess, figuring out the odds and efficient strategies very quickly. He shares this with a lot of chess pros, for example Grischuk doubles as a professional poker player.

A lot of the criticism leveled at Karpov by Kasparov, Korchnoi, Bronstein and others boils down to his open rejection of risk and brilliance in chess together with his efficient adaptation to life in the Soviet Union. Karpov figured that his own best interests were served by not rocking the boat, whilst others suffered varying degrees of personal hardship for taking a more 'principled' stance, both on and off the chess board.

One of the ironies of this is that Karpov might actually have been more in tune with Western individuality and efficiency than those less favored by the Soviet state.



Potter's realm? Wall Street.
Hubris, stealth, misdirection.
It's always a dame.



 Early last spring, Vic and Laurel mentioned they were doing something they had not done before and were making a personal investment in Google stock. I recall this because it reminded me of when Jim Fassel, then head coach of the New York Giants, made a bold statement that the team was on their way to and through the playoffs and on to the Super Bowl. Everyone who wanted to be a part of it had better get on board. Those who were not willing to make that commitment could just get off.

At the time the stock was approximately $350. Around the same time, Jim Cramer devoted a show to Google and said the stock would climb above $500, noting fundamental reasons such as its per-share earnings and its ability to hold a 50 P/E.

Naturally there was the usual back and forth discussion. Google commentary was ubiquitous and bull and bear camps were established to debate the merits of the stock.

Today, Google is $514 per share. One year ago, Apple was $50. Today it is $144. Garmin was around $50, and now it is $80.

The lesson to learn from this: Great stocks are to be owned. Companies who dominate their space are to be kept and allowed to grow. Those who have built fantastic franchise names should be accumulated. Buy Google over Yahoo. Apple over Dell. And most importantly, the speculator should be willing to hold on, eschewing the quick buck in search of the really big gains that can be achieved through diligence and patience.

Easan Katir remarks:

"Pride cometh before.." notwithstanding, I feel compelled to relate that Thursday afternoon after hours I shorted GOOG at 547. Instant gratification feels good! Most trades have elements of shoulda woulda coulda been bigger, better, higher, lower, earlier, later, faster, slower. But not this one. This time I earned my keep! Please forgive this anecdotal, non-counting, horn toot.

Steve Bal writes:

The market favorite GOOG last week became the poster child for a market sell off. Was this the result of great earnings? If I hold average securities whose earnings are average then what chance do my stocks have of rising when GOOG, with great earnings, is selling off?

This impact is significant in the short term as stocks that have earnings releases early this week may come under selling pressure. However, by Wednesday we come up against the firm that has been setting higher records than GOOG, has rallied more than 60% this year, and has more earnings than GOOG. That stock is the new poster child for a great stock, AAPL. 



 Publishers reject classic titles

Only one out of 18 publishers managed to spot plagiarized versions of Jane Austen novels, a writer says.

David Lassman, 43, from Bath, had his own attempt at a novel rejected by a string of publishers.

So he retyped parts of Pride and Prejudice, Northanger Abbey and Persuasion, before sending them to publishers and agents.

Not only did most of the literary experts fail to spot the trick -none offered him a book contract. [Read More …]

In defense of the publishers, if someone composed "Beethoven's 10th Symphony", i.e., totally captured Beethoven's genius but wrote music from the point of view that existed during Beethoven's lifetime, it just wouldn't work.

If someone painted a new Sistine Chapel, it would succeed nowhere but in Las Vegas.

Publishers don't have time to thoroughly read everything that lands on their desks. Many may have immediately reacted with a rejection after concluding that the author was a hack trying to imitate the style of Jane Austen. Others may have realized the plagiarism but felt they had nothing to gain in mentioning it.

Marion Dreyfus remarks:

I briefly dated Jerzy Kosinski. I was quite privileged that he spent time with me. He was a fascinating man, not for a second boring, full of ideas and a river of intriguing hypotheses, intense and involving.

He laughed that when grad students retyped his prize-winning PEN-winning novels, they too were not recognized, and rejected forthwith. His books are hot, quite recent, relatively, and famed — immortal modern classics.

Ken Smith adds:

I can always bring The Painted Bird to mind. Kosinski put prejudice, discrimination, scapegoating in a perfect setting. It couldn't be done better. If only his material were mandatory reading before kids get out of high school.



Should you ever question the fragility of life and our own vulnerability to tragedy, consider this article. Statistically, the chances of this happening are most assuredly very rare, however it still happened.

Minor league coach dies after being struck by ball. The Associated Press, published: July 23, 2007

NORTH LITTLE ROCK, Arkanas: Minor league coach Mike Coolbaugh of the Tulsa Drillers died Sunday after being struck in the head by a ball during a game, police said.

The Texas League game against the Arkansas Travelers was suspended in the ninth inning after Coolbaugh was struck by a hard-hit foul ball off the bat of Tino Sanchez and taken to Baptist Medical Center-North Little Rock.



 (Louis Gave is the CEO of Gavekal, a very well respected research and investment firm) 

I hope you are all well. I just came back down from climbing Mt Rainier with a friend of mine (who has climbed Everest four times and Cho Oyu twice). We had a great time even though the weather was miserable. We were caught by what I think is the worst storm I have gone through on the way back down. It was a tough six or seven hours of work to make it back down. A great mountaineering experience though.

I include Charles' latest ad-hoc piece entitled Hermes Ties, Longines Watches & Sub-Prime Bonds, which I hope you will all enjoy. 



I did a quick check under the AAPL tree and looked up earnings report dates from 1/05 to the present. I then checked returns for the three days prior (to the close of announcement day), on just the earnings day, close to following close, and three days after (close the day after announcement to the close three days later). I did this, not only for AAPL, but also for SPY, and QQQQ.

Here is three days prior:

One-Sample T: AA3d pre, SP 3d pre, QQ3d pre

       N       Mean     StDev   SE Mean             95% CI                 T      P
AA   10  -0.00490  0.03970  0.01255  (-0.033315, 0.023497)  -0.39  0.705
SP   10   0.00366  0.00923  0.00292  (-0.002940, 0.010274)   1.26  0.241
QQ  10   0.00082  0.01510  0.00477  (-0.009981, 0.011625)   0.17  0.867

I found that there was an insignificant pre-earnings drop for AAPL, and SPY was up slightly over the same period.

My next check was the day after earnings announcement: 

One-Sample T: AAer day, SP er day, QQer day

      N       Mean     StDev   SE Mean             95% CI                T      P
AA  10   0.01325  0.06872  0.02173  (-0.035904, 0.062418)   0.61  0.557
SP  10   0.00141  0.00693  0.00219  (-0.003541, 0.006378)   0.65  0.534
QQ 10  -0.00511  0.01064  0.00336  (-0.012734, 0.002497)  -1.52  0.163

Here there was nothing much with AAPL, but QQQQ was somewhat down.

Next I checked the three days following earnings announcement (from close the following day):

One-Sample T: AA3d post, SP 3d post, QQ3d post

      N       Mean     StDev   SE Mean              95% CI                 T      P
AA  10   0.01002  0.04008  0.01267  (-0.018647, 0.038697)   0.79  0.449
SP  10   0.00150  0.00910  0.00287  (-0.005008, 0.008016)   0.52  0.614
QQ 10  -0.00271  0.01481  0.00468  (-0.013312, 0.007881)  -0.58  0.576

Again nothing much.

Now what does AAPL do on the day after earnings announcements, as a function of the pre-earnings three day return?

Regression Analysis: AAer day versus AA3d pre

The regression equation is AAer day = 0.0179 + 0.946 AA3d pre

Predictor     Coef     SE Coef     T      P
Constant    0.0179   0.0195   0.92  0.385
AA3d pre    0.9461   0.5123  1.85  0.102

S = 0.0610337   R-Sq = 29.9%   R-Sq(adj) = 21.1%

There is a positive correlation between AAPL post-earnings day returns and it's prior three day return. What about the next three days in QQQQ vs. AAPL post-earnings day?

Regression Analysis: QQ3d post versus AAer day

The regression equation is QQ3d post = - 0.00420 + 0.112 AAer day

Predictor       Coef      SE Coef      T      P
Constant   -0.00420   0.00432  -0.97  0.360
AAer day    0.11230   0.06505   1.73  0.123

S = 0.0134105   R-Sq = 27.1%   R-Sq(adj) = 18.0%

There is some tendency for a positive correlation between QQQQ three days after and AAPL post-earnings day. However tests with SPY shows much weaker results:

Regression Analysis: SP 3d post versus AAer day

The regression equation is SP 3d post = 0.00085 + 0.0495 AAer day

Predictor      Coef      SE Coef     T      P
Constant    0.00085   0.00289  0.29  0.777
AAer day    0.04950   0.04344  1.14  0.287

S = 0.00895612   R-Sq = 14.0%   R-Sq(adj) = 3.2%

From this it seems hard to conclude that AAPL moves the market much, but maybe some industrious spec can check on interactions between GOOG and AAPL. Here are the AAPL dates and data:

Date AA3d pre AAer day AA3d post
04/25/07  0.048   0.037   0.006
01/17/07 -0.009  -0.062  -0.038
10/18/06 -0.007   0.060   0.026
07/19/06  0.068   0.118   0.024
04/19/06 -0.012   0.030  -0.022
01/18/06 -0.021  -0.042  -0.038
10/11/05 -0.002  -0.045   0.085
07/13/05  0.003   0.063   0.060
04/13/05 -0.062  -0.092  -0.005
01/12/05 -0.055   0.066   0.001



 Watching emotional stocks reminds me of the behavioral patterns I see in the psychiatric patients I deal with every day, especially when it comes to the beginning or ending of a trend.

When a patient loses control of his behavior he often becomes a danger to himself or others, requiring intervention on the part of the hospital staff to keep someone from getting hurt. Having observed the buildup to acting out behaviors many times, I have noticed they usually follow a pattern.

First, there is an event that the patient perceives in a way that provokes anxiety, leading to a progressive buildup of tension. The tension can sometimes be released through safe means, like a private discussion of the situation or voluntary medication, but that is often rejected or is not enough, and the patient reaches a point where he explodes and must be restrained before he hurts someone (usually himself). The emotional peak usually lasts until he is restrained, either physically or with involuntary medication, but regardless of the means, he tends to act out until he reachs a point of maximum emotional outburst and is unable to continue further.

The change at that point can be dramatic, and even the most angry and violent patients usually have an emotional collapse at that point from the dissonance of wanting to act out but being unable to do so. The most common behaviors at that point are either crying uncontrollably or falling asleep, and often one leads to the other. It is the job of the hospital staff to guide the patient from emotional extreme to stability.

There are useful parallels between the emotional state and behavior of the acting-out patient and an emotional market. If you fight the trend you can expect a battle, but when the momentum and emotion can't move the market any farther or an event causes an emotional shock then you have a tradable opportunity, and can expect a regression to the mean (and maybe a lot more). At the least, one is likely to see a market stop trending and go sideways for some time. Once in a while though, the patient (or the market) fakes you out and continues the previous trend or behavior despite everything that happened. If that happens, either get out of your position fast or call the police for help — depending on which situation you're dealing with.

Learning to discern a significant emotional change from one that won't have a lasting effect is the art. I'd like to find a way to quantify these emotional turning points, but I haven't found one yet. Until then, intuition and experience will have to suffice.

Denise Shull asks:

Can we say for sure that quantification produces better results than intuition and experience?



I've been hearing my coworkers talk more frequently lately about how much they are making in the market and how smart they feel because of it. These are not market-literate people, and if they are feeling like market geniuses then I can't help but wonder if this bull run might be entering its last leg. That observation and an article from CNN Money caught my attention.



 There are often blessings in disguise for the market that seem quite fateful in retrospect. One has to be last week's action. The Dow hit 14,000, closing above it in the last seconds of Thursday's session, but then dropping 200 points to its low on Friday.

During the week, every bad omen was greeted by terrible declines of 2% or so, whether an Intel report, a hedgefund loss in subprime, an earnings warning, or fear of a terrorist incident in Grand Central. Each decline was followed by an immediate rally towards the fateful Thursday round number Dow close.

Finally, on Friday it was Google's turn, and it had a fateful decline like the other days, but this time, after looking like it was going to turn exactly as the others had, it went down to the lows at the close, only to be visited by fateful buying in the last minutes.

It was a beautiful performance. But the fateful, blessing in disguise aspect of it was the the 10 year bond yield fell below 5%, to 4.95%, and closed at its lowest level wince June 04. The main prop of the bears is gone, the Fed Model forecast is intact, the two up weeks in stocks have been reversed with a down week, a big decline in stocks occurred in conjunction with a big rise in bonds.

In short, it was guaranteed to happen, and a blessing in disguise.

What are some other blessings in disguise? These come to mind –

When the stock market goes down sharply before a Fed meeting, because then the Fed is less prone to do something to cool the economy on their mistaken belief that the stronger the economy, the worse it is for inflation.

When the transparency of financial reporting is increased because of oversight as in the Yukos case or Sarbanes-Oxley, investors are more willing to pay up for earnings.

When a better-half forces a trader to get out of a position when he's in over his head, before a total disaster ensues.

When real estate price increases slow down, making home prices, rents and business costs cheaper, then profits can increase and stocks follow their normal inverse quarterly correlation with real estate prices.

When an octogenarian CEO shuffles off the mortal coil, thereby increasing the chances that the new CEO will be less rigid, or that the company will be bought out for estate purposes, as with Beatrice Foods and Occidental Petroleum.

When the stock market goes down before an earnings report, it's discounting the headline number to be reported and surprises on the guidance are likely to change expectations for the better.

When at the start of his trading career a speculator realizes a string of losses, thereby discouraging himself from pyramiding for the rest of his life, and giving him an understanding of risk management.

When a speculator loses money on a short, thereby reminding him of the long-term upward drift and the possibility of short squeezes.

When you aren't admitted to your pet university, like the Sage's rejection by Harvard, which put him in the class of the Founder of value and fundamental analysis, and gave him the opportunity to buy GEICO from him, the only company the Founder made more than a market return on in his investment career.

When you are forced to work in industry during your college years, thereby learning how hard it is to make money and how competitive the real world is.

When stocks are so weak that they force bonds to a one or two month high, thereby making the allocators move money into stocks, with Joe Public then realizing it's better to make 10% in stocks than 5% in bonds.

Steve Bal offers a few examples:

1) Investors pile into gold and start talking of the immanent demise of the US dollar as the standard world currency, and that the Euro is about to replace it. (It may but not in the timeframe of these traders).

2) Selloffs take place in small cap securities as the larger caps remain calmer.

3) During selling the bids keep getting taken out as market-makers know investors will eventually have one final sale all together.

4) Investors are only too happy to pay for volatility (hoping this is the big one).

5) Talk that a rally in the US dollar is bad for stocks or that a decline in the US dollar is bad for stocks (these things just happen to fluctuate).

James Lackey writes:

Seventy percent of nothing is nothing. A blessing in disguise was the first time I left one trading firm for another. It was a total disaster. Payout and buying power is far less important than restrictions. Many firms have so many rules to reduce risk and generate commissions that a double payout can be useless.

Professional short-sellers are to be avoided. The blessing in disguise is we were first trained by big short-sellers. From the owner of the firm to the office manager, everyone made his big money shorting. We were taught that if you didn't short some days of the week or keep a balanced position you were not a real trader. It was so difficult for any trader to know, yet for a newbie to know when to be short vs. long is near impossible.

After the fact we noticed the big sellers made big money only once a year or so. They had a ton of small losses and a single huge profit for a good year. Conversely I noticed we had a ton of small losses from cutting losers and a few decent profits. Many small losses will add up to a huge loss. Everyone runs around saying how if he didn't have that one huge loss per year he would be profitable. The end result –in avoiding a loss you become risk adverse and do not make the zillions of small profits when it's seemingly too risky out there.

In 1998 finding times to short seemed easy. In 1999 it was too difficult, yet playing both sides made for much less of a long profit. That was a blessing as in 2000 I clearly got the joke. I made money shorting tech and day trading. Yet the trader who sat behind me did just as well trading a third of the time, long only. I was caught in some fantastic squeezes, only to cover on the next small down for even, then the market would drop much more.

On those squeezes the long traders would press and squeeze, laughing all the way into the close. They would drive the Nazz up huge, 200 points. I would just shake my head, thinking how easy it was to squeeze the market. Today the blessing is the exact same thing, only on the occasional big down day. I might have gotten this joke late for the past year, yet perhaps it will work for a few more years.

At a funeral in 2001, guys were discussing the impending doom for day traders. My comment was that at least we all had a chance to make some good money. We felt sorry for all those guys who started trading much earlier than 1997 and were always scared to buy because the markets were up so much. An old friend scowled at me, stated he had been through the crash of 1987 and this is why everyone would fail we were in a bear market.

That blessing is for times when the markets goes up seven days in a row and all our friends are screaming bearish, losing, and saying how stupid this market is acting. It was a blessing as I can picture the guy scowling at me because he didn't make much for years. At first the comment was, at least I am not short. Yet, we are just starting to get the joke, perhaps we could find a way participate a bit more in the bullishness as the no-fear-newbie traders do.

Blessing in disguise was when my clearing firm went bust and took out 200 traders. There were so many blessing from that disaster. One was I was still shorting 100% of my line on any given day. So from Jan 1 to Mar 15 2000 I was essentially out of the markets, shopping for a deal and planning to move across Florida. I can't imagine the losses I would have had from that melt up in the Nazz. At best I would have been a weak short on the break in March. My first day back trading full time, I was sitting next to my brother. He said "see, you just can't short this thing." The next day the President made a speech on biotech and the rest was history. My brother got smashed buying limit down, where I covered. The second limit down came on. He got out on a bounce and looked at me and said "well, at least we are together at the top."

My brother thought it was a blessing that I was now his partner in a room where no one sold short. The real blessing is my brother backed me. The lessons learned from my clearing firm's disaster in the huge up market saved me in the down. All the bravado and mumbo I heard during Jan-Feb 2000 from trading shops was over by May 2000. I ended back where I started in 1997. The firm rule was they never hire back anyone who quit.

That was a blessing is disguise because they were willing to hire me back but at the worst possible deal. This was such a blessing because it upset my brother, who took out a big loan to back me. We did a 50-50 deal on the first $100,000 and I paid him back in the first month. I made 5x for my family what I would have trading for the firm.

What a blessing it is to have friends and family. I have had many more blessing is disguise since July 2002 when so many disasters hit at once I gave up trading stocks and moved to the futures. Many of them are meals for a lifetime given to me by Vic and Laurel.

On the site, Vic and Laurel tore day traders apart one meme at a time. It was a blessing because the markets became too difficult to overcome vig. The only way to make it was collecting fees or trading very low fee futures.

Yet the cycle has changed and stocks are definitely back. A good example is AAPL on Friday vs. the broad market. A stock's strength and weakness vs. the index is how we played it. It must be obvious to get the slow movers in, and the stock's move must have follow-through to profit, since the costs of business are 400% higher to day trade stocks vs. the S&P futures. But the level of competition trading futures is much higher than stocks.

The last blessing in disguise is my wife, who realized years before that never being happy with your trading performance leads to higher profits. She has two comments, "you'll make it back" after a disaster, and "good!" after my complaints. I need to be at such a high state of focus to perform at a high level, even to be profitable at all. For whatever reason over the years, a big loss, a disaster, a business problem, tax time, a family feud, when things are not right, let me take it easy so we don't lose. Thee result is, we never make much profit or at all.

I guess the joke is if you're not all fired up and focused you might as well not trade. The markets will always be there. The markets are far too competitive to let those who are taking it easy profit much.

Jay Pasch offers:

Vic said: 'When the stock market goes down before an earnings report, it usually is discounting the headline number to be reported and surprises on the guidance have more of a likelihood of changing expectations for the better…' The following chart shows NVLS when the company guided lower and then 'miraculously' beat its lowered guidance. The red arrow shows when the company guided lower, and the green arrow is when it then beat its new guidelines.



 I'm sure the Rio trade (well at least the myth) was alive and well on every major exchange floor in the world. It was the last salute, the final straw. When a local trader had just about lost the lot he jumped in a taxi, called his "give up" broker to buy maximum size at the market, and when he got to the airport he made the same call. But this time he asked for the price. If he were in the money nicely, he told the taxi to turn around and head back to work. If not he was on the next one-way flight to Rio!

Today I watching the final round of the British Open, Andres Romero, to name but one professional golfer, had the same sort of explosion, but this was with plenty of cash in his account. He was leading with two holes to play and in trouble, so he goes for the Rio (a difficult low percentage shot). The outcome was no longer in contention — a four shot turn around and a big opportunity, maybe even a lifetime opportunity kissed goodbye!

Admittedly, the trader in trouble is driven by sheer panic. But for the golfer in control it must be too much adrenaline, too much confidence, and how much this victory means that drives everything else literally out the window.

Next time anyone thinks about gearing up above and beyond what they should do with their account size, it may pay to watch a rerun, of the 2007 championships final holes. If the pros are trying it and failing, then best we mere mortals stay right away.

Riz Din writes: 

It was beautiful watching how the final two holes at Carnoustie humbled so many players. Romero rose and fizzled like a firework. He took crazy risks toward the end but he had already taken quite a few wild shots on the back nine, and had been rewarded with endless birdies after pulling off one magical putt after another. Before he walked on to the final two holes, I caught him almost laughing to his caddie; even Romero was bewildered at what was happening. Perhaps it felt like an out of body experience. So, come the final two holes, should he suddenly change his game or keep on playing as he had been? Golfers, like tennis players, are a superstitious bunch, and I can see why he chose not to moderate his game.

In trading I believe it is important to set limits and parameters and to modify these constraints only gradually, but in sports the self-reinforcing cycle of the 'mind game' component seems considerably stronger, and it just didn't seem right to deny the gift from the gods of a 'hot streak'. Importantly, Romero didn't seem upset one bit at the end but was highly emotional and what he had achieved. It seemed to be a rare situation of where a player may have had to play below his capacity (at the time) to ensure a win, and brings about many questions about motives and objectives (playing your best vs. winning).

The other lesson came from Open champion, Padraig Harrington. Before the playoff, he sunk the ball into the water twice on the final hole. Watching him play through the 18th, you couldn't tell whether Podraig was playing for a double bogey or a birdie. He gave it his best right at the point when it seemed to be over. Maintaining one's composure at this turning point is very difficult - even Tiger mumbles curses as things go downhill, before switching right back. I believe it is crucial in succeeding in life's competitive endeavors, regardless of the eventual outcome. 



 Herman Weyl's Symmetry, is a small book, modest in approach, but has huge ideas addressing core issues in philosophy, math and markets. He addresses symmetry from a generalized qualitative method, gives fascinating specific examples from biology, phylogeny, ontogeny, crystals, bee honeycombs, Egyptian, Greek, Persian, Sumerian art, math, physics and then generalizes to a an astonishing mathematical model right in line with the speculative approach with a multitude of trading applications. One of most fundamental ideas is that symmetry is more than just an aesthetic quality, but one of the core laws of the universe and leading to predictive application.

Symmetry arises from the very mapping of space and time and lies at the core of relativistic thought. Time is symmetry in the past and future revolving around the here and now relative to light and the point of observation. It is present in all higher life as bilateral symmetry. Life has laevo and dextro forms, a left and right. A regular symmetry in time is called rhythm in music. Art forms are filled with examples of symmetrical patterns in friezes, architecture, vases, floor tiles, in art. Symmetry is the basis of beauty and aesthetics. Curiously, in all life, my daughter tells me, DNA is left handed.

The quantitative model defines symmetries by defining the groups and examining the congruencies or mirror images in 2d or crystalline structures in 3d and reality in 4d or higher dimensions. The simple form of the bilateral congruencies, which applies to market common two axis lattice approaches is AB-BC: AC. By examining the mirror images, one can define the axis of rotation with obvious market application at 1/2a. Weyl examines transformations of the groups and claims that there are limited essentially different congruencies, which for markets can basically be described as patterns. The underlying characteristics can be rigorously defined.

In one of the most fascinating sections of the book, Weyl discusses the problem that the Pythagoreans guarded as a great secret and divides the schools of geometers from the algebraists. The essential problem is that algebra cannot solve the relation of a diagonal with its squares due to the irrationality of the square root of two, or curves due to pi, but solutions to that and many other problems can be solved with a ruler and compass. Weyl introduces Cartesian manipulation to solve the Pythagorean dilemma that was solved in in Universal Math using simple arithmetic and avoiding the irrational number problem.

Market symmetry is found in its basic microstructure of bid and ask. There is essential symmetry in the market negative correlation. The key is to find the axis of symmetry. Here is the key to investing, trading and identifying changes in cycles as well.

Weyl's method of defining auto morphisms Symmetry underlies Chair's examples such as Lobogola, cane investing, release, consummation, penumbras. No less important are the asymmetries of drift, vig, information. The market desires and demands symmetry. It is not satisfied until the moves are consummated. There is the symmetry of equal length of moves in the waves of various durations and in the retracements. Sometimes simple symmetries provide the greatest profits without resort to math but by use of two fingers.

Bill Egan notes: 

I have a different example for you. Drugs are asymmetric; highly symmetric molecules generally do not work well in optimization programs in drug discovery. I refer to the actual 2-D/3-D shape of the molecule. 



Wyatt EarpChess master Shelby Lyman writes:

I am reminded of a much different protagonist, the lawman Wyatt Earp who famously survived many gunfights.

His adversaries usually emptied their gun or guns as rapidly as possible in his direction. Earp's modus operandi was markedly different.

Not succumbing to fear or desperation, he calmly and deliberately aimed and fired with devastating accuracy and results. Aware that the revolvers of his time were clumsy and hard to aim, he maximized his chances by emphasizing accuracy rather than speed.

The story of the gunfight reminds me of my college roommate who earned money in the summer as part of a Wild West show. It was not so much a show as it was an experience. Tourists would come to town and my roommate Matt, along with his father, brother and others, would be dressed as real cowboys in a real saloon or blacksmith shop. The whole town as supposed to be authentic (except the tourists). Staged bar fights would break out from a poker game gone bad, live cattle would be corralled. You name it; they had it.

Matt's job was as a gunfighter (same as his dad and brother). People would challenge Matt to gunfights. He would take them out on the street, face them and draw. The winner was the one who shot first (no points for accuracy when shooting blanks).

Matt and his brother made a lot of money betting people that he could beat them in a draw. He never lost. He would even give his adversary the advantage of holding the gun out in the front pointed directly at Matt. Someone would count down, 3, 2, 1, and then they would shoot at each other. All the adversary had to do was pull his trigger before Matt drew his gun and fired it. Matt never lost.

Sound's hard to believe, doesn't it? It did to me. As Matt was telling me this story in our room in the fraternity house, I told him I didn't believe him.

So Matt went and got out his revolvers. He and I both confirmed the chambers were empty. He let me pick whichever gun I wanted. He strapped on the gun belt and holstered the other one. He told me to point my gun right at him and cock the trigger back.

I didn't even need to fight the hammer when pulling the trigger, I simply needed to lightly pull the trigger and click, I would win.

Matt stood in front of me, his fingers lightly feathering his gun. He asked me how much I wanted to bet. Not being stupid (I could smell a hustle and was beginning to doubt my earlier disbelief), I decided we'd do it for fun.

He said, "I'll count to three and then we'll draw." He even did a dry run (of counting) so that I could get the cadence down. He asked me to not pull the trigger before he said 3 and I agreed.

He counted.

3, 2, 1, click.

He won.

To tell you it was a blur would be an understatement. So we repeated it again, and again, and again. He won every time.

Being a good friend, he gave me some lessons drawing a weapon.

First of all, in the movies they show guys drawing their weapons, raising them and shooting. That is all wrong. Matt would grab his gun, withdraw it from the holster while tilting it toward his adversary, and at the same time, the tip of his thumb would be pulling the hammer back and his index finger would be depressing the trigger — all of this happened simultaneously.

When the gun was level and pointed at the adversary, all he had to do was slide his thumb off the trigger (only the very tip was on it) and click, the gun would go off. The gun never left his side. He did not raise it in front of him, he simply slid it out of the holster and shot from the hip. In the old West, as Matt told me, the gunfighters actually wired their triggers back (the trigger was already pulled back), so all the had to do was pull the hammer back with the tip of their thumb and release.

He had been doing this for years, practicing for years and was a master of the quick draw. It was a real treat to watch a true master at work. And it gave me a whole new respect for what it took to be a quick draw artist in the old West.

I would have to surmise that most quick draw artist didn't have very long life expectancy in the old West. Watching Matt, I concluded that no matter how fast you were, the bullet couldn't travel fast enough to make a difference in the nanosecond between the fastest and the second fastest. They would certainly kill each other.

The only way to really win at fast draw was not to play. There is always at least one loser, and sometimes two.

I've found that sometimes in the market, people take things too seriously and feel they have to beat the other guy. They have a sense of competitiveness and ego that requires them to trounce whomever they consider their opponent. The beauty of the market is that no one necessarily has to lose. Since there is a long term positive drift of around 10%, everybody who can stomach the roller coaster ride will win. Sure, there will be bigger winners and lesser winners.

The discrepancy between the big winners and lesser winners comes from ability to exploit human nature coupled with a clear understanding of what the rules are, how the game is played, and that there are true masters out in the world that you simply can't beat, or at least can't beat often enough to make it worthwhile to step in the arena against them.

Unlike a fast draw contest or gunfight against my friend Matt, or John Wesley Hardin or Billy the Kid or Wyatt Earp, where you stand almost zero percent chance of surviving (let alone winning), when playing the market, a simple understanding of the rules and how the game is played, will allow everyone to step into the arena and come out a better and wealthier for having played. 

Ken Smith remarks:

Fast draw gunslingers in real killing events did not fire from the hip; it's done only in movies and tourist shows. You can't aim from the hip, at a vital target, a specific body part, as the heart — which is a killing event.

The best guy with a gun took aim and fired, letting the hip-ster beat him to the draw. The draw was not the critical element in the shoot out; it was the aim, the gun the shooter used, the firepower of the load; these were the critical elements.

So, next time an armed criminal draws his weapon, don't worry. Let him take a quick shot while you calmly get a firm shooting grasp of your weapon and take a stance. 



 The fixing scandal involving NBA referee Tim Donaghy raises many questions for markets. Who would have known that one of the key insights that he gave other gamblers was information on who was going to ref the game, which affected the outcomes of games because of how they were going to call offensive and defensive fouls?

Also, he was able to ply his trade without any of his fellow refs or even the players knowing he had an ax to grind. Particularly creative in this regard was his adding an extra 1.2 seconds on the clock following a missed Portland shot in the Dec 1, 2006, Orlando-Portland game, won by Orlando 91 to 89, with Orlando favored by 4 points. The game would have gone into overtime without it. It appears Donaghy also used technical fouls and mismatched fouls.

In racket sports, I always could tell when a player was fixing the game. Often my own partner in handball was fixing the game against me and I had to kick him off the court if I couldn't beat him up. In tennis you can always tell if the other side is trying to lose by their muscle moves and gait, and apparently a sister game was once found out this way.

If basketball games can be fixed this way, how much easier is it to disguise stock market fixes?

Vance Humbert replies:

A couple of examples I view as fixing the game-

1) In the hedge fund world, there are many managers labeled "talented" and "consistent performer" by external analysts, but who are in fact blessed with a few Street relationships that provide most of the generated alpha. I think back to certain convertible arb funds in the early 2000s with stellar returns which were a function of taking every new deal that came down the pipe as a matter of facilitating the issuance process. It was common knowledge that, within a matter of hours to days, they could flip the bad deals back to the underwriter for a .20-.50% loss but the good deals they would hold for 1-3% gain. Where is the portfolio management skill when you have to take every deal?

2) Referring back to perceived stellar high frequency managers, how about the one who takes down a bunch of stock and then strongly suggests the sell-side analyst change his rating for the better? Of course, this is all in the name of improving fundamentals. But it doesn't hurt that the fund does a lot of transaction volume with the firm. Once the rating change is announced, the hedge fund's minions make sure to call all the other research desks on the Street to ensure they are aware of a "good call" by another house. While the stock ramps, they unload their inventory.

Steve Ellison comments:

 One evening last summer while playing blackjack, I began to suspect the dealer was cheating. Four times, the dealer's face-up card was a five. The best playing strategy in this case is generally to stand on any hand of twelve or more. In no circumstance should the player risk busting because the dealer is at high risk of busting.

In all four cases on this evening, the dealer managed to draw a third card with a value less than ten that brought the dealer's total to 20 or 21. Of course, it could have occurred by chance, but Edward Thorp documented in Beat the Dealer various sleights of hand dealers can use to view cards still in the shoe and deal the second card rather than the top card.

Andrea Ravano adds:

The first and most important principle here is of human nature. What is it that motivates Americans, Chinese, Italians and everyone else? Greed, passion, hatred? There are many desires that make up the complexities of human nature, but the afore mentioned are among the strongest in determining our actions.

Thus, corruption in all its parts, belongs to our nature regardless of our culture. Weak people will always seek a short cut to obtain what has been built by endeavoring , trying, suffering and sweating. Racists will tell you that a certain culture, brings about corruption and weak thoughts, as if a political system or a social group could stand up and offer the perfect model for us to admire.

Einstein said "it is easier to break the atom than prejudice" and the same goes for the markets. Prejudice is your worst enemy. The lack of clarity when analyzing data, or your inability to understand the nature of the ever changing cycles, will lead you directly on to the wrong side of the trade.

My grandfather considered the stock exchange a place for depravates who didn't want to work and sweat, and he taught his children to keep investing their assets in "real" economy. His ideas were largely influenced by the fact that one of his brothers (out of a family of fourteen brothers and sisters!) had lost a considerable amount of his fortune in the 1929 Stock market crash. Thus he taught his children to stay away from the corruption of the faster moving parts of the financial world and to keep investing their money in a sound way.

When the time came, after his death, to sell assets and increase financial holdings, none of his sons thought of doing so as the great early 80's bear market in shipping wreaked havoc among ship owners (which they were) and brought to its final conclusion the danger of believing in an idea without testing it: prejudice had taken its toll. 

Steve Leslie extends:

Poker is a game that lends itself quite nicely to fixing because there can be up to 10 people at a table during the course of a game, and the players are constantly touching the cards. Poker can be manipulated in a variety of ways.

The obvious ways to cheat in poker:

1. Mark cards

2. Manipulate the deal

3. Bring extra cards in and out of a deck such as the occasional ace to fill out a hand

4. Post incorrect bets

5. Pull back a bet when it is obvious that you are beat

6. Deal from the bottom of the deck and "deal seconds"

7. Conspire with the dealer to steal an occasional pot

Less obvious ways to cheat include:

1. Play teams at the table, splitting the winnings with an accomplice

2. When handing out chips or changing out a player, giving an incorrect amount

3. In tournament play, having an accomplice dump his stack to you by going all-in with a vastly inferior hand in heads-up play

4. Having an accomplice consistently raise the pot while you hold the best hand, drawing attention away from you

5. "String betting"

More subtle ways include:

1. Having the more experienced players go after or attack the weak and unprepared "fishes" or "pigeons" at the table

2. Having the large stacks go after the small stacks

3. Having dealers rake more money than they should

As they always say, if after 20 minutes you can't figure out who the pigeon is at the table, it's you. Always ask yourself why you were invited to the game in the first place.

John Lamberg replies: 

Casinos do not have to cheat to be profitable. The only time I suspected a blackjack dealer of cheating was at a small casino where the dealer, who was hand-dealing, correctly announced the next two cards by suit — an ominous warning to run to the exit.

While basic strategy does call to stand on 12 or more against an up five, hitting a 12 against a five would be an appropriate play if the count supported it. In a situation where the dealer repeatedly makes a hand on a "weak five or six" (or repeatedly beats my hand by one), my strategy is to find another table or sit the rest of the shoe and evaluate the next one. Red flags, whistles, and bells now sound when a player announces in frustration or anger that the cards can't be that bad and have to turn soon.

On occasion, I will watch a player fight the cards and wait until he either blows out or gives up in frustration, take his spot, and enjoy the blackjack he just missed. Nice parlor trick when it works, but certainly nothing to bet the farm on.

Sam Marx comments: 

I think the term "fixing the game" as applied to the market should be made more clear. What is included in "fixing the game"? For example, I believe you would include "trading on inside information." 



Randy NewmanWhen Ulysses Grant said he knew two songs — one was Yankee Doodle Dandy and the other wasn't — he was being his usual wry self. The journalist he spoke to, a gentleman from the New York papers (who else?), took it as further proof of Grant's cultural inadequacies (the fact that Grant could read French and German somehow was ignored). What the President was saying was that, in matters of taste, there is ultimately only what you enjoy and what you don't, and disapproving of other peoples' tastes is a bit like cursing the darkness because you can't find a match.

One of the reasons that I love Randy Newman is that he writes the kind of songs that can clear a room of sanctimony. For lefties "Rednecks" always does the trick, and for everyone else "Short People" is usually enough. "Political Science" remains the ultimate test.

Charles Pennington replies:

I'm disappointed! Randy Newman's MO is this: a rant by a fat-target narrator (e.g. one who hates short people or foreigners) coupled with a sappy whispered or implied corrective ("Short people are just the same as you and I." Well, thank you very much.)

What am I missing?

Stefan Jovanovich responds:

For some of us the politics of smart people can be very, very funny. Who else could complain with a straight face that "I left Harvard with no real awareness of the awful inequities in the world" but Bill Gates? I don't think Mr. Newman is targeting the narrators of his songs nearly as much as you hope, Professor, and he really is satirizing the PC notion of "one big community" in offering his "correctives."

If you have spent as much time among the millionaire leftists of Beverly Hills and their children and grandchildren as the son of Alfred Newman (film composer, not MAD magazine icon) has, laughter becomes the primary defense against the undying hypocrisy that goes with so much "elite" (sic) opinion. It is the only way to wash away the anger.

Gordon Haave extends:

Having moved from Greenwich, CT to Oklahoma, I've noticed just how elitist the rest of the country's view of country music is. Here, walking into someone's home or business, one is more likely to hear country (or "contemporary Christian") than to hear "pop".

Country singer Dwight Yoakam created perhaps the only cover song ever that is better than the original.



I would like to offer my suggestion on a tasty summer Chilean salad dish.

The "Chilean Salad" or simply, "la ensalada" in Chile, is very simple and pairs well seafood, meat, and even chicken, albeit with a subtle variation on the wine selection.


 2 large homegrown tomatoes
 1 large mild onion
 1 handful of fresh cilantro
 1 teaspoon table salt
 1 tablespoon of vegetable oil

 1. peel tomatoes
 2. chop onion
 3. chop cilantro
 4. mix ingredients
 5. add salt
 6. ladle oil over mixture slowly, touching all parts
 7. toss gently

The Chilean salad mixes well with all dishes, especially seafood. The Chileans are especially fond of this side dish alongside fresh, mashed potatoes and pan-fried sea bass. It mixes well with both red and white wines, though not so well with Pinot Noir.

My brother-in-law, in his weekly phone call providing me the count of the full copper trucks leaving the Colina plant will normally comment, "All those tomatoes are going to burn your esophagus!" - a testament to my love of this simple dish and its popularity in my home. 



 One of the few pleasures I have in old age is traveling by automobile. We have journeyed around more than half of America, highways and byways.

We arrived at Lake Chelan without a reservation and stopped at Best Western, the nearest lakeside accommodation. The place was nearly full if the parking lot was an indicator. I inquired the rate and was told $200 plus per night. I said it was too high; is there a place around for half that, like $100?

As a senior citizen with a shaved head and no teeth my appearance must have induced empathy. She said she might be able to find an alternative. She picked up the phone and called a compatriot in town. She got us a room at a riverside inn for $105 with tax.

As we left I asked the desk clerk "what if I get there and I don't like the deal?" "If you come back I'll give you a 40% discount." She indicated her recommendation was so convincing in appeal I would not be returning.

Sure enough, the place she recommended was very suitable for $100, set by a small park, on the river bank with a walking path around the river via two bridges set a few blocks apart. Lots of trees for shade in the Eastern Washington heat.

Not only that, the small motel had been renovated with new electric outlets, plumbing and paint. The room was very small, but efficient. The place had been done with a maritime theme. The owner was a retired submarine commander.

Naval symbolism was everywhere. The restroom adjacent to the dining area was labeled "Head." Photos of subs were on the wall; a painting of the commander between two photos of his submarine. Nautical terms were used for items. Bollards and cleats were in the yard, an anchor too.

I did not feel comfortable around the commander. When talking to him his gaze was too pinpointed, too direct, almost aggressive, as if his vision was penetrating, x-raying my brain. I mentioned my work as a tankerman and he said he had seen us in his periscope.

Greg Rehmke writes:

I highly recommend Lake Chelan. I spent many summer weekends there through my twenties. Lake Chelan is 50 miles long, winding into steep hills to the small town of Stehekin, which you can get to only on foot or by boat (a long ride on the Lady of the Lake). Most of my friends in Chelan were in the apple business as the lake was long surrounded by rich green orchards. Now many more houses are scattered among remaining orchards, and in recent years, vineyards. Tsillan Cellars opened next door to my friend Steve’s place. Wapato Point is on the far side of the lake, past Chelan.

President Bush signed an act of Congress for a 99-year lease in March to allow a new development nearby in the town of Manson, on Lake Chelan. This Bureau of Indian Affairs land is apparently managed by BIA for 33 American Indians who are descendants of former Chief Moses. And of course, there is a casino nearby (Mill Bay Casino). 



Akira KurosawaI'm becoming a big fan of Akira Kurosawa's movies, despite only having watched two so far (Dersu Uzala and Yojimbo). I commented earlier on Dersu Uzala.

The storyline and elements of Yojimbo can be seen in many Westerns. But there's much more to Yojimbo, mainly because of the insights we gain into the mind of the enigmatic lead character, a masterless Samurai (we never learn his real name).

The film starts with the Samurai throwing a branch in the air to determine which road he will take. Arriving in a town he discovers there is a conflict between two warring clans and soon has them competing for his services.

Yet as the film continues we start to discover that his true motive is not money — he later gives his entire fee to a family he saves (simultaneously describing them as 'pathetic'), and apparently leaves without making a penny. So what is it that makes the Samurai tick?

I believe that much of the answer can be found in Japanese history. With the outbreak of peace that came with the Tokugawa shogunate, many Samurai found themselves with nothing to do. Yet generations of Samurai had devoted themselves to warfare and the perfection of their skills, with warfare and honor being in their blood. Could they simply forget about this and do something else?

Apparently not, as the Satsuma Rebellion (very roughly portrayed in 'The Last Samurai') was to demonstrate. History ascribes this rebellion to the loss of status the Samurai had to suffer, but in Yojimbo there is a clue to another element. When a man has lived for an appointed task (whether it be warfare, chess or trading), he is only truly alive when given the opportunity to ply this trade. Take the trade away and he becomes a kind of anachronism, but one which will search for pockets of meaning.

This, I believe, is the dark secret in Yojimbo which Kurasawa was no doubt aware of (he was born into a Samurai family) but which I don't think will be widely understood. When one compares the Samurai with, for example, the character William Munny in 'The Unforgiven' , Munny is given a financial reason for embarking on his killing spree (failing farm, kids to feed and then subsequently the murder of his friend) with his darker side being something akin to Dr. Jeckyl's Master Hyde.

The Samurai, on the other hand, kills because of what he is, the gradual emergence of his humanity being an endearing weakness that almost costs him his life. The brusqueness of his final goodbye shows that he doesn't intend to let it happen again, and not because he fears death. It's more a question of professional pride. 

Kim Zussman comments:

I am reminded of the busted traders of yore hanging around Wall St. If markets evolve, there must be extinctions as well as successful mutations. Is it possible that new and profitable traders must defeat the old lions, and have the advantage of not yet holding a deep identity as market maven? Once deemed a master it will be difficult to accept the possibility that old market understanding has become obsolete, and what should be a logical inflection becomes instead a battle to the death.

Similarly, success at trading begs to be made a continuous career; though there is pretty good evidence that tradable periods are ordered irregularly in time.

The best lady’s-men are truly indifferent. 



 When I was much younger in the small town on the Arkansas/Texas border where I grew-up I'd spend time with my father, an aspiring Cherokee Medicine Man and member of the Western Tribe (second string) of the Cherokee Nation.

Being proficient in animal behavior and especially in regional native zoology, my father is even now a great resource for general wildlife information. I asked him on a recent visit why we never saw bobcats when I was younger. He replied that we didn't see them because that was the way they liked it, and also because their range (about 10 square miles) made an encounter unlikely given their keen awareness of their surroundings. I do recall him telling me that I'd likely meet a bobcat the same day I discovered a black bear - both of which he assured where in plentiful supply.

Several days ago I was speaking with an employee of mine who revealed that she moonlights as a bead-seller. When I asked her in what location, she responded "oh, mostly in doctor's offices, hospitals, restaurants, and such as that."

I was not prepared for this revelation. First, San Antonio, despite its Mexican cultural influences, is not known for being a Mecca for peddlers of any stripe. Second, I frequent many of the restaurants that my employee named and I have never seen a peddler in a hospital or doctor's lobby either. When I showed amazement at such a discovery she was just as shocked at my ignorance. I've never seen anyone selling anything at those restaurants, much less at the hospitals. I said. To which she replied, "That's strange. Every time I'm in the medical complex I see the rolling massage guy. And the first thing the nurses at the hospital tell me every Thursday is 'the purse lady was just here!’"

I take pleasure in thinking that both my old, black woods back home and the wood-grained black market of Old San Antonio are thriving, even if I just discovered both.



 For most of my investing career, which goes back to the mid-1940s, I have been attracted to technical analysis. It also helps that my degree is in engineering and much of my aerospace engineering career has been associated with the solution of engineering problems. So it was natural that I was attracted to technical analysis. Through my investing experience I have become a skeptic of all the magic powers TA is suppose to have.

I recently got a query from a friend who wanted to discuss Fibonacci levels as they applied to the current market. He was upset when I gave my opinion that Fibonacci numbers, although relevant to the physical world, were an illusion when applied to the markets. He responded that financial prices almost always followed Fib levels.

After our discussion, which ended in agreeing to disagree, I recalled the first UFO Arnold reported seeing boomerang-shaped objects that flew like speedboats in rough water or saucers skipped across the water. A junior news reporter trying to squeeze his article into the newspaper reported flying saucers were spotted.

From that point forward, there were thousands of flying saucers sighted but no flying boomerangs. Why? Believing that strange sightings are saucers gives reports of saucers. Believing prices must fall to the third Fib line before recovering to the second level (or whatever) is reinforced by the imagined view of looking at the charts. Believing is seeing.

Denise Shull writes:

The human mind reacting to the ebb and flow of prices is always entertaining. Becoming objective about the tricks that our minds play on us presents the true eternal challenge of successful speculating. 

Stefan Jovanovich remarks:

A now-gone wise man, who was a cop for 30 years in my Dad's hometown of Denver, once explained the problem of auto theft thusly: "People steal cars because they are out there on the street. If people left their bathtubs outside at night, all of us cops would have to become experts on what American Standard sells and faucets would have VIN numbers."



About two years ago, Vic and Laurel discussed control charts. I use a similar concept by tracking the drawdowns of various trading strategies. If a strategy is working well, there will be drawdowns, but the drawdown amount will repeatedly return to zero as profits exceed losses. Conversely, if a strategy is losing, the drawdowns will get further and further away from zero. Thus, a drawdown that exceeds a preset threshold or fails to return to zero for an extended number of trades might indicate that the cycle has changed.

Andrew Moe adds:

Improvements to control charts can be made by upgrading the fixed window look-backs to exponential or DSP style windows (see Ehlers, Jurik, et al). Information theorists will find additional gain via the use of fast-responding windows on the entropy. These methods are used to turn various strategies, traders, and funds on and off. I particularly like Mr. Ellison's idea of return to even from the max vis-à-vis survival statistics as traders tend to get paid on making all-time highs, and the distance and journey between tell much about the method.

Vincent Andres writes:

Cycle changes are not directly viewable. Hence we're often trapped.

I believe cycle changes are only viewable in some slightly more indirect universe of parameters. Don't look at prices or first differences of prices.

Cycle changes are of course written in them, but a bit too deeply to be seen just on the surface (price). We must go one (or more) levels downstairs. We have to search/compute indirect/deep parameters from the prices.

Plotting those deeper parameters will of course show deeper things. Just as using a microscope or X-Rays. Some parameters we may consider:

1. Correlations (in many ways)
2. Regression coefficients
3. Lags
4. Price distribution parameters

Scatter-plots may also be of interest. Points clusters may correspond to regimes.

Vic and Laurel recently had an interesting post about ordering/ranking. In a general sense, rank measures can be used in many ways — what's the cluster of the leading horses, and is it changing?

A great part of physics is simply building measurement tools. Then using them. Is market physics so different from other physics?

Adam Robinson explains:

Vincent's insights answer his own query, for the difference is fundamental and ineradicable.

In the physical world, phenomena consist of relations among unvarying "observables", and even at the quantum level, observing those phenomena offer us at worst a position vs. momentum tradeoff. Light quanta might shift a subatomic particle we have in our sights, but they don't usually change the particle.

With markets, once one or more traders observes a phenomenon (e.g., equity markets are rising as the yen falls, whatever — even spurious correlations) they begin to trade/arbitrage away the phenomenon so that it diminishes or even disappears entirely.

Hence ever-changing cycles that vex and humble us.



 The wife asks, "How was your day?" Grumble, grumble: it is never good. Lost money, or could have made more. Vic and Laurel wrote that in 10,000 days in the market they never had a satisfactory day. On the too frequent days losing, it is never pleasant, and for the occasional wins, the leverage was never enough, or too much was left on the table, and could have made more. In thinking about this and experiencing it, it has to be like this in order to maintain proper money management.

Very rarely can one go in all guns blazing and catch the bottom tick with maximum leverage. It cannot be, for it is too dangerous and would be a violation of risk guidelines.

A poignant comment made by a wise man when reminiscing over the happy years raising young children, "The days are long, but the years are short." In the markets, the days are never good, but the years or quarters can be. Two completely different sorts of consciousness are at work in the two time frames. The long term is not readily comprehensible by humans, and thus the application of the present to a long term outcome is difficult to visualize and execute.



David's Wife Files for Divorce
Funnyman Larry David's wife of 14 years has filed for divorce. Laurie David filed court papers in Los Angeles Superior Court citing irreconcilable differences on July 13. The 49-year-old producer of An Inconvenient Truth is seeking joint custody of their two children, Cazzie, 13, and Romy, 10.



 It is almost impossible for most of us living now to imagine a world in which Sam Walton's motto — Save and Do Better — was the majority view of politicians, but that was the general opinion. Kennedy, like FDR, campaigned on a platform that accused his Republican Presidential predecessor of being extravagant (partly true in Hoover's case; laughable in Eisenhower's). What changed things forever was the wholesale acceptance of Keynesian economics at MIT, Harvard and even Chicago. That gave respectability, nay, wisdom to the inclination of politicians in both parties (Johnson nationally, Rockefeller in New York State) to indulge once again in the fantasy that it was OK to for governments to borrow more and more money as long as they spent it as quickly as possible. One reason for the continuing Anglophile disdain for the French is that they were the first to say that the United States was no longer serious about gold and the dollar being equally scarce monetary commodities. Of course, they were right; and we have yet to forgive them for being so treacherously truthful. That abandonment of all fiscal common sense is what took us off to the races in 1964 and 1965; some would argue that we have been running ever since. Eisenhower, like Grant, receives far too little credit for his monetary frugality. Belief that the Treasury would only spend a small part of what American earned is what established the "soundness" of the dollar and allowed the U.S. economy to enjoy its greatest period of real growth since the 1870s and 1880s.

George Zachar replies:

Insufficient cynicism.

Eisenhower is damned as a do-nothing, caretaker president, whose popular references now are largely comprised of golfing photos and sneering references to his VP.

The only presidents getting "credit" in the history departments and newspaper clippings are those who manfully strove to expand the government's footprint.



 In the paper recently was a half-page article on the rising cost of cheese. Block cheddar cheese — the benchmark for mozzarella and other cheeses — reached $2.08 a pound on the Chicago Mercantile Exchange, up 78% from $1.17 a pound a year ago! Experts see no immediate relief in sight for pizza makers. The article featured a photo of a worker at Constantly Pizza in Concord, N.H. preparing a pizza and carefully watching his cheese use (skimping on how thick they pile on the cheese?).

My family prefers The Pizza Place because they use a first-quality cheese on their pizzas. Some others use a type of artificial cheese and you can tell the difference.

Atlanta-based United Dairy Industry Association says corn prices have risen amid growing demand for ethanol fuel. Also driving higher cheese costs has been a strong U.S. and global demand for dairy products.

And speaking of corn, in our area some of the best corn comes from along the Ohio River at Reedsville, Ohio. A dozen fresh picked ears runs $4.00 at a local roadside market.



 The basic reason for why there is a CDO problem is the same reason why there was a "derivatives problem" in the 1990s.

It lies in the principle-agent problem.

In many forms of investing, the agent is highly incentivized to take risks with others' capital. Sometimes, this is a good thing. Many investors seek out risky hedge funds, and want their capital at risk.

Often times, this is not the case. Pension funds, endowments, and insurance companies might place a high degree of importance on preservation of principle, and will seek to limit the amount of risk-taking.

Investment managers for these assets may still have an incentive to take excessive risk. Even if there is no direct performance fee, a manager (internal or external) will be rewarded for good performance. If there is bad performance, that manager can just walk away (it's not his capital at risk).

Thus, pools of money implement investment policies and various risk controls to try to minimize the principle-agent problem.

For example, the average pension fund (except for a carved-out piece that might be in hedge funds) will not allow its equity for fixed income managers to use leverage. That keeps the risk down. The pension fund might limit the amount of equity investment in tech stocks to keep risk down. The pension fund might limit the amount of money that fixed income managers can invest in low quality bonds.

But, the individuals doing the investing still have the desire to take risk at the expense of the beneficiaries of the assets.

So what happens? Wall Street invents new products that, while serving legitimate purposes, also serve to mask leverage.

So what is it about CDOs? By dividing them into tranches, one can take the same underlying credit, but magnify the returns based on the level of support in the tranche. From the perspective of the agent who seeks out leverage (since personal upside is big and downside small) the difference between the high support and a low support tranche is essentially leverage — a difference in expected return based upon the bet on how the loans will perform.

Since it is a relatively new product, the agents are able to pass these leveraged bets by the principals.

After this year, it won't happen any more.

Then Wall Street will come out with a new product and the cycle will start all over again.



From Point and Figure Charting by Thomas Dorsey:

Page 5: "A long time ago when I was a stockbroker at a major firm on Wall Street, I learned there is no Holy Grail."

Page 367: "It wasn't until 1978 that I came across the Point and Figure method of analysis purely by accident. When I learned it, I realized I had found the Holy Grail of investing."

Ken Smith remarks:

I still have a booklet published by Chartcraft in 1990, written by Michael L. Burke: Point & Figure Construction and Formations. I believe very little has changed in the basic approach since the first use of this method.

What Dorsey has done is market the method. His marketing includes seminars and workshops. He's been giving them for years and has a large following. His book is just a starter. His total program for subscribers is the meat of the method.

What makes it successful is the great number of subscribers. Chart constructions are simple to evaluate. But when an unknown large number of subscribers jump on a pattern the predictions in the pattern become self-fulfilling.



 How easy it is to be right, yet lose money in the market! Today the Dow achieved its goal of 14,000, crossing above and below some 14 times, and you couldn't tell until the close whether it was above or below if you wanted to short it when it went above. This is similar to all the fallacious studies that rely on price/earnings ratios relative to announcement dates. You'd think that given the announcement dates, knowing if it goes up or down before would prove valuable. but the problem is that the announcements are so variable that when you predict it and try to buy before the announcement you get hit by the announcement, like the famous IBM leak when the stock went down 10% before the announcement, and exceptions such as that erase the entire predictive effect.

Of course, the old studies of the real estate maven, who's been chronically bearish almost as long as Abelson, don't take account of the facts that earnings announcements were completely non-existent for the old earnings that make up the entire low p/e return effect, and that assuming perfect knowledge of the earnings as of year-end leads to enormous regression biases, with the stocks with good earnings going up from year end to real announcement, thereby making the p/e on these, assuming perfect information as of year end, artificially low. The effect is totally a property of random numbers.

It's amazing that with all the retrospection, and assumed perfect knowledge and revisions, of these studies that even then the real estate maven was unable to get a direct effect but rather had to use 10 year averages of the independent and dependent variables. It's risible that effects such as these drive the value studies, and I want to cry when I consider the level of such researchers and the fools they make of the public in the hands of the Market Mistress.



 Computers crack famous board game Game of draughts (Eyewire)

Draughts has about 500 billion billion potential positions. It could be a case of game over for draughts - scientists say the ancient board game has finally been solved.

A Canadian team has created a computer program that can win or draw any game, no matter who the opponent is.

It took an average of 50 computers nearly two decades to sift through the 500 billion billion possible draughts positions to come up with the solution. Writing in the journal Science, the team said it was the most challenging game solved to date….

Nigel Davies writes: 

During my last visit to Chessbase I learned that they're working on a 'universal game program', by which the computer is told the rules of the game and then figures out the best strategy. Naturally I started wondering about market applications. 



 In the Q&A yesterday, before the House Committee on Financial Services, Bernanke said: 

"…the fact that there are some very wealthy people doesn't necessarily make me or you worse off if they're creating value. You know, I'm a baseball fan. I like to watch Alex Rodriguez. And I don't particularly care that he earns a lot more money than I do."

What Bernanke might have been implicitly referencing:

"…End state" entitlement theories require continuous interference in people's lives. For example, argues Nozick, if people choose to give their money to Wilt Chamberlain (boy, are we dating ourselves), and Chamberlain gets rich, then the state redistributes his wealth for the sake of equality. And the next year when we go to the Lakers' game and give Wilt more money, the state will have to come in and seize it again, and again, and again, and again, forever.…"



Parameter: the Dow cash closes above a 1,000x round number for the first time in last 20 days.


percent positive: 46.34

But recently this has been bullish, (the last 10 following day moves are listed below):

2,34,25,31,58,2,0,30,0,-9,15  Dow points.



I have been batting the ball around the paddleball court and came up with a tennis training tip for youngsters. Run a string at mid-racquetball court from side wall to side wall and tape it at the height of a tennis net. Supply the children with any sort of racquets and ball, and use tennis rules, except there are no out-of-bounds lines. The walls and ceiling are part of the field, and points are won only on misses. I suppose this same court could be used as a solo adult drilling tool where the player strikes the ball over the net and the 'opponent', the far wall, returns the ball back over the net. Note that the string may have to re relocated for this latter match.



 I looked at the depth in cm of snowfall per year in the Thredbo ski resort in Australia, from 1968-2006. The average was 193.925.

It appears to me that you want to be a buyer at 100 cm and below, and a seller at 280 cm and above. After the two worst years, 1982 and 1993, depth increased for the subsequent three year period, and after the worst year on record ever, 2006, 2007 is turning out to be one of the best with powder everywhere in the mountains.

As a trader, it may be possible to come into the chalet market after a season like 2006 and buy up all the leases for the following three years, at bargain basement prices, as the doom and gloomers take hold and global warming reaches fever pitch, only to sublet as the bumper season the following year begins. Alternatively in the record years, sublet any holdings in advance and hit the South Pacific tropical islands for the much earned rest and relaxation!



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

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

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

Adam Nelson replies:

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

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

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



Tower and suspension bridges are good market models, but an important structure is the truss.

The zig zag price over the last three months and beyond forms beams with zig zags between, and larger truss structure in the June July area. The reason for a larger beam would be to support more weight. The current structure this week reminds me of cable stay bridges.

Mixed metaphors seem to work well in the market, and the classic Beethoven's Fifth pattern, di- di- di- dah, played out its tune. In the Fifth, Beethoven plays the signature lick twice, the second time a little bit lower and slower as the set up.

Alan Millhone writes: 

Some years ago in checkers there was an author by the name of Ben Boland who wrote many ending books on the game. One was Boland’s Bridges. This is where you have supporting pieces in your king row (usually on 2 & 4 or 30 & 32).

Peterson's Drawbridge is a standard checker ending that can be won or lost according to positioning of single pieces around the bridge. In checkers at times your bridge is 'blown' by your opponent and your 'position' is crushed as your bridge collapses. I can see this happening in the market as you attempt to shore up a shaky position. In construction, loads, and the proper calculation of loads are critical to maintaining safety. 'Spanning' the market with safe positions is just as critical.



 The Deal:

M's to pay Ichiro through 2032
July 18, 2007NEW YORK (AP) — The Seattle Mariners will be paying Ichiro Suzuki for at least a quarter century.

With interest, to boot, and the perks ain't bad either. Fitting for one of the few who may actually be worth it. 

The Meal:

When asked Wednesday how appreciative he was that the Mariners went far beyond a basic contract for him, the 33-year-old Suzuki said through his interpreter: "I spoke about the contract on the day I signed. I would not like to talk about that any more."

Refusing to be sucked into answering stupid and potentially embarrassing questions so some idiot can have his way with you. Beautifully done. 

The Unreal:

A baseball official with knowledge of Suzuki's new contract — and his current one that ends this fall and is paying him $11 million this season — said the perks were also in Suzuki's previous deals and were not a major negotiating issue this time around. The official requested anonymity to honour the Mariners' policy of not discussing contracts.

Since when does 'requesting anonymity' in betraying a confidence constitute 'honouring' that confidence? Huh! Great value system. Honour, my arse. 



1999: Buy dips after a week or two
2000: Wait two years to buy dip
2006: Buy dips after a day
2007: Buy dips before they occur



Beautiful Code got me thinking about "How did these guys get better? How did they get to the place where we wanted to listen to their answers in the first place? How does Jon Bentley know he wants to write 'the algorithm he never wrote'?"

I think a book on "How I got better" would be much, much more interesting.



 A day like yesterday (07/18/07) deserves memorializing because it was the Market Mistress at the top of her game. She returned with one of her favorite methods of making us all do the wrong thing — it was the old Morse is Back Trick (read Stories, by Victor Niederhoffer), but this time with Bear Stearns stock down 5% and the market down 1%, and then both ending the day nearly unchanged. It was a typical day when she wished to unleash weak longs from their positions — a selling climax, with the bears hoping for an afternoon collapse.

First it was a couple of bad earnings reports used to shake out the weak hands, then it was the return of subprime woes to the speculators' thoughts — news that is already discounted — then it was the thought that last time Bernanke testified it went down, so let's take it down this time too. It was also bearish sentiment on Intel, reporting earnings up only 50% and projecting a 3% increase in profit margins next time — somehow seen as a cause to take it down, "they're losing business to AMD."

It was also that the Dow tested the 14000 round number but couldn't hold it, and the same happened to the DAX at 8000. The sad part was that with all that was going on, the 10 year bond yield fell below 5%, and this was enough to keep some players in the game, like gold in the late 70s or grain when there is a crop shortage — poised for the inevitable reversal.



Here is the Fed model update from the second section of the Monetary Policy Report that Bernanke submitted today:

…The spread between the twelve-month forward earnings-price ratio for the S&P 500 and a real long-run Treasury yield–a rough gauge of the equity risk premium–narrowed a bit and now stands close to the middle of its range of the past few years (…)

Separately, here's the art world's doppelganger of Alan Sokal.

Victor Niederhoffer replies:

A much better effort is the empirical regression of forecasted earnings e/p versus bond yield as the independent variable, and stock price change as dependent, as in my work with Laurel and Tom Downing.

keep looking »


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