The November issue of Consumer Reports magazine features "How to Bargain for Almost Anything." The section headings are:

1.      Gauge the seller's need.
2.      Be discreet.
3.      Know what's a fair price.
4.      Be empathetic.
5.      Deal with a decision maker.
6.      Negotiate from a position of power.
7.      Time your shopping.
8.      Find fixable flaws.

The top products or services that buyers were successful in lowering prices were:

1.      Furniture
2.      Medical bills
3.      Home electronic products
4.      Large and small appliances
5.      Floor and demo models
6.      Bank and credit card fees
7.      Jewelry
8.      Cell-phone plans

As Victor wrote in EdSpec, "If the speculator is not able to bargain for the best deal, I would advise that he ask a trusted friend to carry the ball."



Deer HuntnigOne of the blessings of a deer camp is the friendships you make. The bond that forms among people who spend time together doing something they love. That bond is especially strong when it's formed in deer camp.

I know golfers bond when they play together, and traders and speculators when they're together. But there's really something special about deer camp. It has to do with the fact that hunting is almost sacred to those who really "get it".
I've had the privilege of making two great friends in the last 6 years or so — Gregg and Justin. They're both at my farm, hunting right now. But due to business commitments, I an unable to go this weekend. So these two are up there right now (they have keys), not just hunting on my farm, but working there too.
You see, these two don't expect something for nothing. They come prepared to add value.
Here's what I mean. I'm everybody's best friend come the fall (deer season) or come spring (turkey season), but in between, there's a lot of work to be done. And most of those who want to come to my farm to hunt in the spring or the fall are nowhere to be seen in the off-season!
Much time, effort and care goes into making my farm a paradise for wildlife. I had a vision of what I wanted to accomplish, and decided it was going to be accomplished. I know that I'm not industrious enough to get done all that I've visualized for my farm. I knew I needed help from others who shared my love of hunting and the outdoors, and my dream of being able to hunt in paradise any time they wanted!
When I met Gregg and Justin, we quickly became fast and great friends. They knew I needed help and they wanted a great place to hunt. So for the last six years, whenever they come to hunt, they don't just hunt and then take a nap in between the morning and afternoon hunt. They work to help me sculpt and manicure Brooksfarms.
Not only do they work during hunting season, they also come down several times a year, during the off season. Hanging tree stands, cutting away branches and trimming shooting lanes when it's 90 degrees with 90% humidity and buggy is hard work. Planting food plots, fixing roofs, repairing equipment, mending fences, mowing food plots… If you ever want to sleep like a baby at night, come to my farm for the weekend and help out! 

There are lots of rewards associated with friendship. Besides the help, I get a place to hunt for them. You see, after six years of hunting on my farm neither of these two had ever shot a deer! They'd whacked their fair share of turkeys — but never a deer. You see, they honor my rules of harvesting bucks. It must be at least 3 1/2 years old and have at least 130 inches of antlers (for archery) or 140 inches of antlers (for firearms).
MissouriImagine that. Coming all the way from Minnesota to hunt in Missouri for six years and never even releasing an arrow. Oh sure, they saw lots of big deer when hunting and working around the place, but they never had one of the bruisers come into range — until tonight!
At 7:15 pm, a nice wallhanger buck walked out from big woods into the small clover patch by the bottoms. Gregg was sitting in the "small clover patch stand." He waited patiently for the deer to turn into position, carefully drew his bow back, and slowly squeezed the release. Thwack! A great broadside shot right thru the boiler room!

The buck bolted and ran toward the corn field and then headed up the fence row between the patch of woods and the corn field, toward the other clover plot. He went about 60 yards, turned to his right, ran into the patch of woods about 15 yards and expired. From the time he was arrowed to the time he expired was 7-10 seconds. A well-placed arrow is an incredibly lethal weapon!
So you can imagine the phone calls I got tonite! Boy oh boy, was it ever exciting hearing this story — and it was rewarding too! Gregg and Justin have put their heart and soul into helping me make Brooksfarms what it is and they deserve the rewards that go along with it!
I'm thrilled for Gregg and his beautiful harvest! I am so glad for all these help these two give me. They really add value to my life! And I'm honored to call them friends.



Botvinnik/FisherUntil quite recently chess games would be stopped after the first time control (40 moves in 2 or 2.5 hours) and resumed after dinner or on a separate day. The player on the move would write down his next move and put it in an envelope. This envelope would then remain in the arbiter's possession until it was time to resume, at which point the 'sealed move' would be played on the board. This apparently complex proceedure meant that both players were looking at the position in which it was his opponent's turn to move.

Naturally a whole culture emerged around the best way to deal with adjournments. At one time players would not seek outside help for the analysis of such positions, and indeed Lasker was appalled by the thought. But little by little adjournments became a team effort, with Mikhail Botvinnik reigning supreme in this now-forgotten art.

Essentially Botvinnik's proceedure was to consult colleagues immediately after adjourning (a kind of brainstorming session) after which he would retire to his room to work out the details alone. A scientist by profession, Botvinnik was very methodical and thorough in his analysis, this particular aspect of his game enabling him to save the 1951 match against Bronstein and his famous game against Bobby Fischer.

I mention this subject because of a conversation I had with a chess student this morning. Just recently I have started studying chess again, after a haitus of more than a decade. I have been looking at a particular type of position, which essentially involved reviewing some games annotated by someone else (familiarisation), searching for any further developments in a database and then trying to form my own view and develop my own ideas. It was the Botvinnik process, but applied to a particular structure rather than a specific position.

Botvinnik/FisherThis, however, was already at least two steps further than my poor student wanted to go. As a busy person I knew he wanted answers rather than ongoing enquiry. And this in turn made me think about speculative research.

The problem facing most people is that they are goal orientated, ie they want a particular result (wealth, for example) and will logically attempt to achieve it via the simplest and most direct route. Unfortunately this lays them open to the fixed system approach, relying on the untested views of others or hope that cycles will not change. It is, I believe, a psychological vulnerability.

Buddhists believe that our problems stem from first wanting something, and perhaps this is the very point at which the seeds of our downfall are sown. The correct attitude for study may be when we have no goal in mind but do something for its own sake. For it's only then that one is able to swiftly accept things that frustrate us in our goal, such as the flaw in our cogitations or the hidden counterattack.

So why would I waste time studying chess when my best days are obviously behind me? The answer is that it is a pleasure. So did Botvinnik analyze his adjournments for pleasure? No, but he was very disciplined.



Gene LindsayThe ACF (American Checker Federation) recently lost one of our Life ACF Members and a top Master player — Gene Lindsay of Tennessee. Gene was 52, never married and no children. He loved the game of checkers, as I and many others do as well. The ACF a couple of years ago hosted an International Match at the Plaza Hotel in Vegas and we paid for rooms and meals for visiting players from England, Scotland and Ireland and received some contributions to defray expenses. Gene told me then he had a dream of putting $100,000 into a trust account with the interest to be used to fund a tournament every five years — we'd alternate between their coming here or a team of Americans going to Europe to play. We discussed his idea at several tournaments.

The day Gene died of a massive heart attack I received in the mail from him a large packet of papers that he found from when he was ACF Secretary in the mid-1990s. That evening I opened the packet and was pleased at what he had sent and decided to call his cell and thank him. I got no answer so I called his home and Betty, Gene's companion of 20-some years, answered. Betty and I chatted and I told her I'd called to thank Gene for what he sent and Betty replied, "Alan don't you know?" and then told me Gene had died that morning at 10:30. I was shocked and speechless.

Nigel Davies adds:

Events like this put things into perspective, and there tend to be more of them as we get older. Of the things we leave behind personal wealth may be one of the most transitory, and I suspect there is strong mean reversion amongst the descendents of the wealthy.

This leaves things like 'creative output' and the effect (good or bad) we might have had on friends and family. And all this presupposes that we're not here to just have fun.



Breakup of Drug Ring Is Momentary Victory
Published: September 29, 2007

In 2005, Operation Gear Grinder, billed by the US D.E.A. as the largest steroid bust in history, led to the prosecution of eight other Mexican factories that supplied an estimated 82 percent of illegal steroids in the United States.

OK, now imagine if the DEA from, say, Iran, came to America and busted a bunch of no-goods. How would you feel? That your country was intruded upon, that your country kowtowed to the Ayatollah, or was impotent to handle such problems?
At the very least, would you not find it disturbing that your sovereignty was invaded or compromised by another power's entering your country and taking contol?

And you can buy most steroids legally in Mexico, without a script! So the Ayatollah comes to the States and busts someone selling wine, as it is illegal in Iran and gets smuggled there (I have had good American wine and even better Russian vodka in Tehran) — how would you feel?



In reality very few won big. A few guys lost big, but the vast majority of traders I talked to who talked to two friends and so on and so on didn't make squat. The small traders simply pulled orders, widened scales to (in retrospect) ridiculous levels and reduced leverage from 10-1 to 3-1. How to define squat? Under a 30% total profit for the quarter. No reason not to have made 50% or more in that move. That is the expectation.



 What comes to be known as being unknowable may or may not be consistent with randomness, rather than, what is unknown. Let unknowns be distinct from the random lest the spirit of inquiry, scientific or even otherwise, be stifled.

Within the unknowables, there are many types of problems (for one example, those suffering data insufficiency) that are not worthy of achieving the classification of belonging to the random. By the way, why does the classification consistent with randomness carry that less worthy connotation?

It is the consistency with randomness that helps insurance companies buy risk, shop floor foremen decide that maintenance shutdown is yet not required, two surfaces are allowed to produce sufficient friction to make the value of work to be non-zero, etc. etc.

A generalized extension is that all cognitive systems including human traders and non traders are able to undertake risk and achieve when they recognize that their willingness to assume the ascertained level of risk is going to produce a draw down, a negative incursion, an unprofitable outcome etc., over a course of several such ventures consistent with randomness. Whenever there is a risk expectation inconsistent with randomness the system would stop and re-evaluate if that is rather an opportunity playing the negative system.

To be consistent with randomness is not useless but useful in specific decisions. It is more valuable than what we do not know or will not know or will not be able to know.

The negation of a negative expected outcome is the way to capture positive outcomes.

If a regression of the results of the trading activity of various participants on an information curve ranked by their seniority would produce an R square that would explain how much of that information seniority explains the trading outcome and thus help explain to those existing at the bottom of the curve that there was no randomness in the impact of information and trading.

Thus, consistent with random is a classification within the larger subset of the knowns rather than unknowns.

Therefore I would surmise that for trading as much as any other human endeavor the idea is to filter the potential impact of consistent with randomness fate and luck away, and focus on effort. Maybe this is what is implied by the saying "fortune favors the brave."

Adi Schnytzer responds:

I'm sorry, Sushil, but I don't buy it. Imagine that you knew every order that was going to be placed when the market opened today and also knew all the financial details of all the brokers and traders and market-makers. And that you knew all of the news of the world and inside info. And, further, that you had a serious computer at your disposal. I suspect that little in the way of randomality would remain. In other words, in a market, I would argue that the "error term" is basically missing variables, many of which won't ever be known to any single trader even if all are known to the aggregate of all analysts. Bottom line: get the info you can and learn really well how to analyze it.

Kim Zussman adds:

The big Wall Street firms, hedge funds, etc., have the most accurate and up-to-date research, and it's hard to imagine we can beat them at that game. But what makes it still a game is that the reaction can be quite hard to predict — even if you could know the future.

For example, Ben's 50bp cut — only now in hindsight do we get to weigh his put (about 50 S&P points). However it was also possible the market could have taken these cuts to mean the risk of unpreventable recession was higher than expected, and they sold. That the prior week was up also threw a false signal — that the market had already priced a big cut.

Perhaps panning for fear in its many disguises, even getting it right only 52% of the time, is the best place to prospect.



Prac SpecTen years to save up enough trading capital to become a daytrader and — wouldn't you know it, after spending a few C notes to get some books on technical analysis, I pick up your book Practical Speculation at the local library and realize: hey, I need a mentor, a master, a humble genius.

I came late to the realization of positive capitalism (I guess it's all positive seen in some long perspective) but I've got this money that I want to grow now that I'm 55 and I have a young son and a need to leave a legacy.

I am not famous for the following quote, but I still believe it's a good one:

"There are more ways than one to skin a cat. However, if you go to the national cat skinning competition and watch the winner, you will soon realize that it doesn't matter how many ways, it only matters which is the best."

I believe you are the cat skinner I need to hang with to triumph with the rest of the optimists. I have always been about three years ahead of the curve for many things coming into the culture and this is a ride I want on before the real inertia takes off.



 In 1920, Gustav Cassel developed the theory of Purchasing Power Parity. PPP argues that currencies are in equilibrium when their purchasing power is identical in each country. Also known as the "Law of One Price," this means that the exchange rate between two currencies should equal the ratio of price levels based on identical goods and services. Put simply, a pound of dirt in Tyler, Texas should cost $1.50 when the same pound of dirt in Metz, France costs Euro 1.00 provided the exchange rate at the time is 1.5 to 1.

I believe dollar and other US asset bears are wrong thinking dollar weakness will cause panic and dumping of US Equities. Rather, US stocks will be snapped up like never before:

1. As we are now in a global economic landscape, you cannot tell me Citibank is suddenly going to be worth less than Deutsche Bank or HSBC because of the dollar's decline. The same can be said of Verizon versus Vodafone or Merck versus Novartis. If the dollar continues to decline on interest rate differentials and economic fears, then US stocks will ultimately have to be re-adjusted higher to keep valuations across geographic lines consistent.

2. The obvious: US Exports might get a boost — bullish for US stocks. Foreign earnings components should increase — bullish for US stocks.

3. European shares will likely feel the pain in comparison.

The Fed's actions last week were brilliant. Yes, they needed to create an environment that would continue to support asset prices as bank balance sheets have ballooned to extreme levels. But more so, the Fed's choice to drop the dollar just might be the action required to finally get our current account back in line over the long term.

Riz Din comments:

The relationship between exchange rates and equities has also been playing on my mind of late. Two thoughts on the topic:

1. The counterpoint to (2) is that while exporters may get a fillip from a lower dollar, US consumers are effectively being taxed by way of higher import prices. We may find consolation in a recent Fed study that suggests that inflationary pass through from a weaker currency is relatively limited, but with a weaker dollar playing a driving role behind rocketing global commodity prices and with China revaluing their currency over time, inflationary pressures may be in the wings yet, and it is probably worth keeping an eye on US import prices.

2. As James points out, recent US equity gains could be a purely monetary effect, in the sense that foreign investors can now buy more US shares with each euro, GBP, yen etc., so they will bid up the share prices until their values are restored in local currency terms (the Law of One Price). Furthermore, foreign investors will likely demand a higher US equity risk premium in order to compensate for the risk of further USD depreciation, so perhaps domestic investors can look forward to further price gains. This paper from the ECB discusses what it calls the 'Uncovered Equity Return Parity' condition (URP), where the described parity condition is used to explain the variability in exchange rates (although in our example the causality runs in the other direction, from exchange rates to equities).

Building on the above, I am led to wonder whether equities are a good hedge for a weaker currency, and indeed whether there is a profitable trade in there somewhere (if I was in Zimbabwe right now, I'd be asking for my wages to be paid in stocks!). In developed countries such as the UK and US, the theory says that a 5% currency depreciation should produce 5% inflation, but we know this doesn't seem to happen in reality. So, while foreigners may end up bidding up domestic equity prices to maintain prior purchasing powers, domestic investors can buy local stocks and arbitrague the fact that the 5% inflation is not going to arrive for a long while, if at all.

Andrea Ravano adds:

I think the main problem of an extreme dollar weakness, could be a sharp interest rate rise. The bondholders of the world could use the ultimate hedge and get out of the free falling buck by selling their holdings, which should cause higher interest rates.

In the end though, the real problem of a weak currency is not in the short term but the long. In weak currency economies products become more valuable than competing peers because they are cheaper; not because of increased productivity or industrial design, but simply for the devaluation of one of the cost components.

Take Italy as an example. Italy has used the competitive devaluation strategy for the Italian lira since the early '70s. By doing so the system has prospered , but only to discover, after the introduction of the euro and the subsequent forex stability, that the economic system as a whole had productivity and price competitiveness which had been left behind during the ephemeral times of currency devaluations.

The pattern at the time was that before devaluations interest rates would rise sharply and drop sharply thereafter.We must consider the fact that we had a fixed currency system which made adjustments much more abrupt. 



The following article was brought to my attention from Forbes Small Business (October 2007):

A computer-aided-design program converts 2-D or 3-D images into a format compatible with the printer. An image is sent to the printer, which takes anywhere from minutes to hours to re-create it, layer by layer, in plastic. The finished object is removed from the printer, dipped in an "infiltrant" for hardening, and then painted. [Read more]

I am very interested in where this stuff is going.

For a very edifying book on the subject of personal fabrication I recommend FAB by Neil Gershenfeld, director of the Centre for Bits and Atoms at MIT. His book covers multiple aspects of cutting, shaping, and such.



MayflowerIt is always good to go back to our roots, whether we look at the history of where we were born/where we live, or study the different environments of our ancestors. These studies show us our links to the past and the foundations that others have laid down for us to grow from.

Nathaniel Philbrick tells the story of the roots of America in his book Mayflower. The foundation of modern America begins with four hundred English Puritans who moved from England to Leiden, Holland in the early Seventeenth Century to found a purer version of the Anglican Church. One hundred of these Pilgrims carried on their journey under treacherous conditions, with low supplies, all the way to Plymoth (now Plymouth), Mass., arriving in 1620 — on the run from English agents in Holland.

The Pilgrims were financed by a profit making company, the Virginia Company, that was down on its luck because of a previous venture to Jamestown in 1607, where during the first year, seventy of one hundred and seven settlers died, and during the second year, four hundred and forty of five hundred settlers died. These Jamestown settlers died mostly from starvation and attacks from hostile Indians.

The Plymoth Puritans knew that they would be facing equally hostile conditions, but, "No small things could discourage them as … they knew they were pilgrims."

In the years following 1620, the Pilgrims were joined by many waves of adventurers, motivated mainly by profits. Philbrick's Mayflower is about the religious practices, politics, day to day life, key leaders, economic arrangements, climate, geography, survival techniques, and defensive and offensive strategies that the Puritans and the adventures forged in an effort to prosper in this hostile environment.

For fifty years, there was a relative harmony with the Indians, but this broke down with the death of Massasoit, the leader of the Wampanoag Confederacy, in 1661. Within a year of his death one of the deadliest wars (in terms of percentage of population killed) in American history broke out. Philbrick is a historian with great expertise in maritime, political, military, and natural studies, and on this subject, I believe he tells a convincing story about many events that were previously in the realm of folklore.

On the characters of the time, Philbrick tells us that Squanto was a duplicitous Indian, constantly changing sides, who attempted to lead the Mayflower Pilgrims and adventurers to their destruction at times, but was very helpful to them on other occasions in establishing relations and communications with the Indian tribes. We learn that Miles Standish was a martinet, who was constantly losing his temper, leading the settlers into disaster, and had the settlement in constant military mode.

With the time the settlers spent on military and religious pursuits, it is amazing that they had any time left for survival and the pursuit of happiness. Philbrick tells how in the second year after settlement, the Pilgrims learned the power of incentives, and gave each settler the rights to the fruits of his own labor on his own land.

He points out how much more adroit the Indians were at deception than the settlers, and how they were always ambushing the settlers when they were not prudent or silent enough. Eventually, the only way that the settlers could battle the Indians on equal terms was by enlisting friendly Indians to be on their side, and who showed them how to cope with the deception of the other Indians.

Philbrick tells a great story, and derives many insights that are applicable to life — for example, he talks about the importance of trade with the Indians in creating harmony. Based on his study of the Pilgrims during the first 50 years, Philbrick believes that the essence of Americanism is criticism of authority by self-promoting men. He finds the archetype in the hero of the story, Benjamin Church, a frontiersman who is a combination of Davy Crocket, Daniel Boone and Jack Aubrey.

Like most historians trying to write popular history, Philbrick strives to focus his story on a extreme event. Almost half of the book is devoted to the war of 1670 between the Pilgrims and the Indians, and much of the commentary about the war is about the atrocities, broken promises and misdeeds of the Pilgrims. There is not enough emphasis on the trading relations with England and the other colonies, or on the spirit of incentive that led to the success of the colonies.

Overall, I can heartily recommend this book, as it is interesting, informative, and helpful to understanding the foundations of our country.

Pitt T. Maner III adds:

A visit to Plimoth Plantation a couple of years ago really brought the history to life. The actors and actresses at the historical site were so well versed in the history and the dialect that you were literally transported back in time.

They told me that I must be an escaped slave of the Spanish since I came from Florida! Quite fun. Well worth a visit.

George Zachar writes:

My parents and older brother literally got off the boat here in the US in 1949, and my childhood understanding of the world was based on what they went through in Europe before getting here.

Reading the unending litany of whining in the daily press, my default reaction is, wtf are these people complaining about? With a little focus and effort, the upside here is limitless!

Stefan Jovanovich comments: 

Complaining has always been a part of the American tradition. It is the source of our humor (what else is a wise crack?); it is also the reason the varieties of psychological counseling have found far more fertile soil here than anywhere else in the world.

Even Philbrick's otherwise admirable book ends up literally whining about the past — i.e. if only the Pilgrims had been more understanding, King Philip's war would never have happened, etc.. His premise is the ultimate therapeutic fallacy — that quarrels over culture and property can somehow be mediated if only people will sit down and talk forever.

Philbrick is a marvelous scholar and writer, but as Vic notes, in Mayflower he falls prey to the standard (at least these days) academic and journalistic presumption that, ultimately, whatever went wrong is somehow the "Americans'" (sic) fault. Even though his book has an elegant description of the sparring of the Spanish, French, and English explorers, adventurers and merchants that preceded the landing at Plymouth, Philbrick concludes that the Pilgrims and Bay colonists should somehow have avoided the follies of war and strife that tortured Europe in the 17th century. He also accepts the perversely racialist notion that the Indians (sic), like other historical losers (blacks, Palestinians, etc. but never, of course, Jews) are automatically entitled to exemption from any critical judgments.

George and James have each once again gone to the heart of the matter. The essence of being an American is that you have to make your own deal, no matter where you come from. Washington and Otis and Warren believed that America was special, not because Americans were somehow unique but because, through the accidents of history and geography, Almighty Providence had given the sons and daughters of Virginia and Massachusetts the unique blessings of individual liberty.

What made these men truly revolutionary, to this day, was their perverse belief that the same liberty was and always should be the birthright of every human. Or, as the rattlesnake flag puts it in classic American vernacular, "Don't Tread on Me." 



The behavior of total return swap CLO deals over the last few months has been interesting. As the loans have been marked to market with deep discounts, huge stop loss orders have been triggered in the past few months.
Did the creators of these fixed-rule systems realize that they would cause forced liquidations at the worst possible moment? In essence, they piled a mountain of stop loss orders simultaneously at the same price levels. It is the old conundrum: If you trade your equity position in a leveraged trade (and not the market), how do you avoid being the weak hand? Buy high, sell low.
The indentures of individual portfolios map out coverage tests (margin requirements) that must be followed by the asset manager. If the tests are not met, a part of the portfolio must be liquidated until the portfolio once again passes coverage tests. It is all very sensible, a rational plan easily understood by investors who fear the leverage. They are protected from the possibly aberrant judgment of the asset manager.
Yet when masses of such tests are breached on many deals at once, the prices move to hurt the weak hands and pricing no longer seems rational beyond this internal logic.
As the weak flounder and unwind, the strong eat the weak. New structures are created with higher equity positions and firmer footing. The rejuvenating spirit of capitalism lives on.



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

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

Phil McDonnell explains:

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

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

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

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

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

David Lamb extends:

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

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



 One can laugh at the following story, but not too long ago Orson Wells was scaring the heck out of the American public with the landing of Martians. Several water towers were shot during or following Welles' broadcast. Many of the sci-fi movies of the '40s and '50s continued to play on the fears generated from the Cold War.

Collective fear in different cultures is an interesting subject. Are we all just as susceptible to such things today, despite advances in communication and education and having seen it a thousand times before? Is it hard-wired in that when someone says "boo" we still respond? Do markets in other countries respond differently to various worries — more sensitive to some and not others? Perhaps demographics play a role.



I'm experimenting with Gmail and find a few apparent weaknesses. Oddly, they are mostly in the area of "search":

–Can't sort by size of attachments, or search for only large attachments, or even see size of attachments. (These things would be good for getting rid of the largest attachments in order to cut back on memory usage.)

–Search only displays 20 items at a time, and I don't see any immediate way to change this. Suppose I have 500 items from Aunt Betty that I want to delete. How do I do this? Search for "Aunt Betty" in "from", go through page by page, 25 pages, each time hitting "select all", then "delete".

It's possible that there are ways to do these things and I just haven't found them.

Outside of these issues with search, I find the Google spam filter is a little bit overzealous, filtering out a significant number of non-spam messages. Maybe it will get better with training.



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

Alex Castaldo adds:

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

J. T. Holley remarks:

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




I recently represented a sales trader who received a Wells Notice, alleging that he had violated the rules of fair practice by "url guessing." It seems that a public company was not particularity concerned about the publication of its earning releases, and numbered them sequentially - the press release for the first quarter ended in "1", the release for the second quarter ended in "2", and so on. In September, before the release of the third quarter earnings, analysts at the firm tried to find the press release - and they changed the URL of the second quarter press release URL from a "2" to a "3". Much to everyone's surprise, the third quarter press release appeared in the browser.

Analyst told sales trader, sales trader told customer, customer purchased. NASD investigation ensues, and we successful argued that "url guessing" was an accepted practice in the Internet age, that the issuer had actually released its earnings by posting the release in an unprotected portion of their web site.

While it is unclear if the NASD agreed, we received notification, after a receipt and review of the Wells Submission, that the NASD had decided not to proceed with an enforcement action.



In radio rotation this week: Lyle Lovett's latest CD It's Not Big, It's Large is doing well on the charts covering Texas music. But the rage is about another Texan, Alison Krauss and her new CD with Robert Plant (Led Zep singer, for the youngsters out there). Really good stuff and not a gimmick. Again proves the talent of T. Bone Burnett as producer. He should be inducted into the Music Hall of Good Taste for all his work.



The new issue of Conde Nast Porfolio has some great pictures of trading floors around the world:

Nepal Stock Exchange
Nairobi Stock Exchange
Dubai Stock Exchange
BM&F Sao Paulo
Tehran Stock Exchange
Kuwait Stock Exchange
Hong Kong Stock Exchange

The instant I first saw a futures trading floor in person, I knew that was what I wanted to do in life!  Even better than the pictures in Portfolio, I have photos from Getty Images of all the futures exchanges past and present hanging on my walls.  All the stock exchanges look like a tea party in a retirement home compared to the futures floors.



HumilityFrom the Autobiography of Ben Franklin:

…I added Humility to my list, giving an extensive meaning to the word.

I cannot boast of much success in acquiring the reality of this virtue, but I had a good deal with regard to the appearance of it. I made it a rule to forbear all direct contradiction to the sentiments of others, and all positive assertion of my own. I even forbid myself, agreeably to the old laws of our Junto, the use of every word or expression in the language that imported a fix'd opinion, such as certainly, undoubtedly, etc., and I adopted, instead of them, I conceive, I apprehend, or I imagine a thing to be so or so; or it so appears to me at present. When another asserted something that I thought an error, I deny'd myself the pleasure of contradicting him abruptly, and of showing immediately some absurdity in his proposition; and in answering I began by observing that in certain cases or circumstances his opinion would be right, but in the present case there appear'd or seem'd to me some difference, etc. I soon found the advantage of this change in my manner; the conversations I engag'd in went on more pleasantly. The modest way in which I propos'd my opinions procur'd them a readier reception and less contradiction; I had less mortification when I was found to be in the wrong, and I more easily prevail'd with others to give up their mistakes and join with me when I happened to be in the right.



Stonington BankPrior to the Federal Reserve, there were private bank notes. They traded freely, such that if a bank was deemed to have too few reserves, the notes traded at a discount. In the late 1800s there was a big information problem, not only on the quality of the banks, but also authenticity of notes, because of distance. Does someone in St. Louis recognize a bank in New York?

All those problems would be gone today. Citibank and B of A would issue currencies. They would be backed with real assets (like a money market fund, sort of). Everyone would have a real interest in bank solvency, and if banks did silly things, their notes would trade at discounts and their customers would be miffed.

Vitaliy N. Katsenelson replies:

By definition banks cannot have all of their debt backed by liquid assets, as banks have little equity (around 8-10%) and a good chunk of their loans are illiquid long-term loans that may or may not be salable on a secondary market at a fair price in a prompt way. To some degree this is the role the Federal Reserve is supposed to play, being a lender of last resort. If all customers came to their banks at once and demanded their money back, banks would simply go bankrupt overnight as they would not be able to pay off all the debt at once. This is a run on the bank. We just saw a mini version of it play out in the UK, where the UK's central bank bought loans from Northern Rock, thus granting instant liquidity and thus preventing a run on the bank, and actually a run on the whole banking system.

Gordon Haave explains:

Banks wouldn't need to have all of their debt backed by liquid assets. They could simply have the currency that they issue backed by liquid assets. And the currency needn't necessarily be backed 100%. The required reserves for people to accept the currency at face value would be set by the market.

Stefan Jovanovich writes:

Head TellerLong before common stocks became important enough in the public mind for American publishers to print their daily quotations, there were regular circulars assessing the discounted value of state-chartered bank notes. Merchants would subscribe to the circulars to determine how much of a discount to the value of specie was appropriate for accepting in payment the notes of the wildcat bank of Up In the Mountains, Name Your State. Theoretically, all bank notes were redeemable in specie when presented to the issuer; but the Sheriff in Up In the Mountains might be less than enthusiastic about having someone actually removing from the jurisdiction the four gold pieces held by his brother-in-law, the Head Teller.



IranSomeone invited him into the USA and Customs admitted his entry. Now we get him here and he is subjected to ridicule and verbal abuse. Two wrongs don't make a right! Even President Bush got his jabs in. The US should show we are the better people and not lower ourselves with verbal tirades while he is a guest in America. If his mind is ever to be changed (perhaps it cannot be) America and its leaders need to set a pristine example. I totally disagree with Iran's terriorist ties and abuses of human rights — but we did invite him here.   

Nigel Davies writes:

Reminds me of a live televised discussion I once saw between a British and Russian school, back in the days of the USSR. The Brit kids were incredibly obnoxious, using it as an opportunity to lambast the USSR without really knowing what they were talking about. The Soviets kids, on the other hand, were really nice and polite and tried very hard to have a normal civilized conversation. As this was televised live in Russia too, it was quite a coup in demonstrating the superiority of the Soviet child.

This sensitivity might be a games player's thing. In our tournaments and travels we have to get on with a wide range of folk who can be culturally very different. I don't see much sign of it in the Western mainstream.

Eric Blumenschein responds:

I don’t believe appeasement as a geopolitical strategy works. Neville Chamberlain was very polite to Adolf Hitler and WW2 still came around. If I am correct, Ahmadinejad was invited to the UN, not to the USA. If he thought Columbia University was going to fold over like sheep and give him the podium unchallenged, then he was obviously mistaken. Kudos to that university to call him out in a way that would never happen at the UN.

Nigel Davies replies:

Chamberlain tends to be dredged up a lot with such issues, but there is middle ground between appeasement and plain rudeness. The way this has been handled the guy will look like a hero back home for sallying forth into a hostile land. And now if they invite Bush to Iran and he declines, it can be portrayed as cowardice back home. You’ve gotta consider the other guy’s moves.

Adi Schnytzer remarks:

My understanding is he came to visit the UN and as such the US government was forced to let him in. Columbia then decided to invite him and in the spirit of democracy (which was the original excuse for inviting him) they permitted an expression of views contra his own.

Nigel Davies responds:

The issue as I see it is one of strategy. He will soar in the opinion polls back home because of his 'courage' in going to a hostile land and fighting the infidel.

What about just not giving him quite so much attention? If he can't distract the Iranian population with his slanging matches with external enemies, they're more likely to judge him on his actual leadership qualities.



BoI ride for transportation. CSX runs like clockwork and is faster then Greyhound or Amtrak. CSX has 50 trains a day in each direction were I live, Amtrak only three. Also I can't and won't drive because I dont trust sharing a road or a bed with people I don't know.

As far as these mythical yuppie hobos, I have not seen them lately in the East. A bunch of them came in to Burlington, VT a while back, and I sent them out on the next train.

I once got so mad at CSX (marrriage of B&O and Penn Central) that I did the what the American system is best for: I bought and paid 50.00 for a share of stock and went to the Annual Meeting in Indiannapolis and gave them a peice of my mind. I also scarfed down all the free pastries that I could get my hands on at the five-star hotel!

Now as far as excutive hobos, I say to them: Go out and support the American railroads by shipping your products by rail and if you want to travel, rent a private rail car and travel in style. The American Association of Private Railroad Car Owners would love your business. You don't even have to rent the whole car — a number of them have co-op charters.

And if you really want to save American railroads buy a short line that is about to be abandoned and save it from becoming a rail trail! Trains Magazine has a list of bits and pieces of rail line that are going by the wayside.



How sad what's happening in Burma (what the world insists on calling Myanmar) and how predictable. In the 1990s I published a paper that modelled the peaceful revolution in Eastern Europe and explained the numbers of demonstrators in different places fairly well. Freedom is a public good and people will only contribute to public goods provision if the price is low enough. Bottom line: If the dictator doesn't respond to demonstrations, they will grow in size over time until the dictatorship becomes non-viable. Why? Because when a soldier's wife or parents of kids are demonstrating, he won't fire on them. Therefore, in order to survive, the regime must put down the peaceful demonstrations brutally. Deng knew this and so we had Tien An Men. The Burmese dictator seems to know it as well. So, is there a solution? Only one: external miltary intervention. Boycotts are useless because Japan and China, to name just two, have been breaking all current boycotts against Burma, and will continue to do so. Now, who's got the guts to try military intervention? No one.



David CarradinePhilosophers know all things must pass. It is the key to understanding life and the universe. How long conditions last is also a good question. How long do we live? How long are economic expansions? How long are recessions? How long does a range persist? How long do uptrends last? How long do high volatility events last? How long do low volatility regimes last? It is an answer to the question of changing cycles approached from the endings rather than trying to identify the beginning which is difficult. Survival statistics based on an exponential distribution are helpful but not accurate. Hand counting seems best. Knowing when something is about to end is a very valuable piece of information. Classifying market conditions by their half-life would be a good study in itself as a scientific approach and would surely be a meal for a lifetime. It would be periodic table of the elements of the market.

The current range lasted for three days, a typical length for a range. There are some bears flashing some big size on the offer here at the bottom of the range, but then they back off.



My in-laws, who own cotton land near Lubbock, report local buyers are going direct to farmers to try to contract with them to secure their cotton.  This happens only when there is great fear of buyers' inability to deliver to their end users. My uncle-in-law says it's been years since there was this much activity by the buyers.



Hedge Funds and Private Equity Alter Career Calculus

“I don’t think you will see M.B.A.’s less represented in executive suites, but you may see M.B.A.’s less represented in the lists of the world’s richest people,” Professor Schmalensee says.

So is business school a waste of time, or worth it for a young person starting out in a career in finance?

Peter Earle replies:

Getting an MBA was helpful for me as my academic background was in Comp Sci and History and, despite having read every book I could get my hands on, there were many gaps I needed to fill. Plus — although far less than 10 or 15 years ago — I'm told that for a sizeable number of finance/economics/business positions it remains one of the criteria used by HR professionals to screen a large stack of resumes on a "first pass" before digging deeper.
I wouldn't describe it as a waste of time, but in retrospect my career wouldn't have been much different without it. Your mileage may vary.

James Lackey asks:

What is the outcome you desire? If you want to work for Goldman you'd better start early to get into Harvard. If you want to work for the government, make connections early, be a clerk. The military, do ROTC. If you intend on working for yourself, it's best to get started early.

Without Vic and Laurel and their circle of influence, many of us would have missed out on the contacts we have made. To find a circle of erudite benevolent friends, perhaps again the Ivy League is the place to be. I was very lucky to be at the right place at the right time to meet Vic and Laurel.

What is the point of business school or being a businessman? What is your definition of success? Mine is the ability to do exactly what I love to do as a career, profit from meaningful work. Yet the huge catch: I do not want to answer to anyone.

Alston Mabry writes:

These days one must also be wary of the University of Phoenix effect. The Apollo Group has made a pile of money offering distance learning courses and degrees, and now nearly every traditional higher-ed institution is trying to compete. Distance learning wasn't invented by Phoenix, but they have used it to change the industry.

One upshot of this is the lowering of standards in many situations, especially when a degree program can be offered online and/or at night, to working professionals whose employers are willing to foot the bill. There is an incentive for the students to just "get the degree," and a big incentive for the institution to just collect the fees and definitely not to flunk anybody. Actual education, learning takes a back seat.

Henry Gifford writes:

A few years ago I spent some time at the business school at Columbia University. I was studying math for a few years, in a different building, but when my classmates wanted to study together, they usually wanted to meet in the library at the business school, thus we spent a lot of time there. The male students said they wanted to study there because the females there were better looking than elsewhere on campus. The female students said they wanted to study there because the library was the nicest on campus, and the male students said the females wanted to be there to meet a male who had high earning potential.

I sometimes read the student newspaper for the business school, and attended a lecture or two, which I think gave me some sense of what was going on. My clearest memory was of an article about a business school trip to an African country. The first day the students met with an economics minister, the next day they went on a tour of a coffee roasting facility, and the third day they went on a tour of the local Coca-Cola bottling plant, where their van got stuck in the mud. The reporter was skillful in vividly describing the complicated interactions and various stregnths and weaknesses of the different people involved with pushing the van. Then they spent the next five days at a resort on the coast, and the article ended with a request for donations to send money to help the country out of its endless cycle of corruption and poverty.
AfriqueI wrote in suggesting the best way to help the country out of poverty would be for someone to write a business school newspaper column analyzing the various stocks offered for sale in that coutry's stock market. The column could discourage buying stock of companies run by less honest management, and encourage each student to buy five or ten dollars worth of other stocks, thereby creating a source of income that the local corrupt politicians had little power over, and a source of experience and possible profit for the business school students. For some reason my letter went unpublished.
The newspaper also made it clear that students in each class were put into small groups, to encourage stronger connections between students during school, and after, when they could help each other get hired or promoted. There was also a lot of mention of the positions held by graduates, implying the purpose of the school was to have alumni provide a leg up for recent graduates. I saw little or no mention in the newspaper of actual business principles, theory, strategy, management, or sources of information on these topics.
I was left with the feeling that it was a large fraternity house subdivided into smaller clubs, which served mainly to prepare people for corporate culture — the right way to act, how to talk without saying anything, when it was neither appropriate to be silent, how to maneuver through the office/group politics, whom to challenge and whom to back down from, etc. All the skills nescessary to survive in a large organization, obtain connections that would be useful there, and have a chance to start at a level significantly above the bottom. I thought the school would be very worthwhile for anyone interested in those things.

Albert remarks:

For me B-school has provided an invaluable education. Whether it helps with job searches in the future I can't say. But I'm coming out understanding so much more of why the world works the way that it does than I did when I started.
I will say too that for a person who goes to a good school full time, the recruiting benifits are enormous in the industries that respect an MBA degree. But it is critical for a person going full time to go in knowing where they want to go afterwards as summer internship recruitment starts in the first few weeks of the first year and typically the summer internship leads to an industry job the following year.
So, like everything, it depend what you want to do with the degree.

Vin Humbert writes:

I've just started a Masters in Financial Economics programme at Oxford. I think the curriculum (as well as the physical surroundings, which are lovely) will be a good backdrop for my current stage as a student of the markets — after several years of balancing a law career with studying the markets, I'm moving towards being a full-time trader.

Orientation started today so I can't really say too much yet about the extent to which the programme is meeting my expectations. It's a pity they use MATLAB instead of R — but just as musical training in one instrument can have benefits on another instrument, I think the MATLAB finger exercises will be useful.

And, indeed, just as Albert says, classes haven't even properly begun yet and I am already supposed to be looking for a job for after my graduation in July!



How We Got HereAs an explanation of everything, I liked How We Got Here by Andy Kessler, available free online. It covers the invention of nearly everything from the steam engine to the Internet and touches on issues dealing with patents and banking systems along the way. It's his best work and well worth reading. He inserts levity and explains things very well. I also liked Running Money and Wall Street Meat by the same author, but found his latest, The End of Medicine, worthless.

George Zachar writes:

Hans-Hermann Hoppe explains pretty much everything in his 33 page essay Banking, Nation States and International Politics, tying together gold, fiat currency, banking, the State, the evolution of the Euro….



CanadaCanada dollar at parity with $US… Lots of products, such as books, have the price listed in $US and $Canadian, based on old exchange rates. Buy products in US, rent van, take them to Canada, return them. Rinse and repeat. Consumer goods arbitrage increases market efficiency by forcing producers to stop being silly about their pricing.

Jason Schroeder adds:

eBay is a Canadian's best friend. Of course, the customs dudes are profiting from that arbitrage themselves. Getting goods across the border is taking a rather long time. Getting packages from the UK, on the other hand, is faster than in country.

Gabe Carbone remarks:

There was a topic paper done by the economist at one of the Canadian banks in the past couple months on this. He listed off the top goods with arbitrage opportunities.

Sam Humbert extends:

A cross-pond arb I stumbled on: I bought a copy (UK version) of "The Seven-day Weekend: A Better Way to Work in the 21st Century" by Ricardo Semler, for a couple of dollars at a yard sale, and have been skimming it. I was curious to see how its AMZN reviews looked, so I checked AMZN/US, and was surprised to find the book is rare and valuable,

6 used & new available from $66.46

Then I noticed that at AMZN/UK, it's a penny + shipping,

58 used & new available from £0.01

A project for Prof. Haave: Buy all 58 UK copies and eBay them in the US..



A property statistics observation, prompted by this item:

Buy Houses in Detroit for $1500, Monthly Pmt. = $7

More than 15% of the homes for sale in Detroit, or almost 1 out every 7 homes for sale, is priced at $20,000 or less.

How much of the statistical weakness in house prices is related to utter freefalls in dead-end places like Detroit, Cleveland, Buffalo, etc., pulling down the averages?

Average income in Manhattan is a truly meaningless stat, as both seven figure compensation and welfare checks are common here.

What about "average" house prices, lumping together entire neighborhoods that are bidless along with suburban stretches just "giving back" the last couple years of appreciation?

Is this a meaningful distortion?

Tom Larsen remarks:

FlintI look at houses on line from time to time in Flint, MI. I look at my old neighborhood, and the houses are still going for the price my Dad sold his for in the 70s. The main difference is the factories are gone and the people are poor. Oh, and there weren't any drive-bys when I was growing up. You got beaten up, but no shootings. A house two blocks from where I grew up is listed for $25,000 on Zillow. At least it's not a dump. Maybe someone could make money buying these places. I'd live there (though my wife wouldn't), except I moved to San Francisco many years ago, and let's just say Flint is short on the amenities I enjoy here. Michigan has always been my "put" — if we run out of money, we will have to go back there.



ParentsI've regularly encountered parents who push their kids too hard. How do I know it's too hard? Because I can see the stress in their game. I stopped coaching one kid many years ago because he got so scared of losing that he kept offering draws. I told his dad that we needed to make the lessons "lower key" so the boy would actually treat them as something more like fun and try to win his games. Instead the father insisted that we double the coaching sessions. So I quit. They got other coaches and then finally the kid stopped playing altogether.

To a greater or lesser extent this is very common in the chess scene. The parents argue that they are doing the kids a good turn by helping develop their skills and besides, little Johnny 'likes' chess. The kid gets parental approval when he does well so he goes along with the process. Everyone is happy. Or are they? Doesn't it depend how one defines happiness?

For some it's achievement. In our culture money is a biggie. People define themselves according to how much of it they have — if they're rich they figure they must be happy, smart, etc. and be more important than those without. This is fine until the cracks begin to show between what they have and who they are. That's when their lives disintegrate, and suddenly all that really matters to them is whether Mum and Dad really loved them. The thought in the back of their minds is that it was really just self-love, with the kids being a shiny reflection of themselves. Amore propre tranferred to parenthood.

What really matters is whether you're patient with your kids, spend time with them and take time to listen. The "education" side may be secondary at best, and, at worst, sow the seeds for the disintegration of their lives.

Mark Goulston adds:

Any parent this applies to might enjoy my essay Grow Your Company Without Shortchanging Your Kids.



Sept. 21 (Bloomberg) — Calyon's global head of credit markets left the investment bank after it said an unauthorized proprietary trade cost the firm 250 million euros ($347 million). Loic Fery, 33, who oversaw credit markets from London, left the bank this week…

Call me old fashioned, but I would have expected the "global head of credit markets" at a major bank to have seen at least one credit cycle before attaining command of the balance sheet.



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



CavalryAll the stock market gains this week came in 20 seconds when the cavalry arrived to save the day. But with no dip to the dippety-do, it was impossible to trade — one had to have already committed. The week before was also straight ups with gap ups and no entries there either, so the only way was to have come in holding a position as either a speculator buying during the dark days of the prior bottoms, or as a strong long-term holder unconcerned about a 10% drop in asset value. Only the holders from the dark days of August during the height of the so-called crisis benefited. That's why it went up so fast. There was no easy way. It was a tough trade. As Tsunetomo Yamamoto says in Bushido, The Way of the Samurai, the only way when faced with a choice, was to choose death and move forward with a clenched stomach.



BreadCan the global macro boys explain to me how wheat is up 60% for the year but i can get a loaf of bread or a box of Wheaties at the same price as 2006? Would seem the producers of food hedge their costs so as to control both the cost to consumer and their profits from the best recurring biz in the world — food.

But if they hedge then of course the must hedge at certain levels and if it keeps going they must keep hedging until the reflexive traders are satisfied and in the end it seems only the consumer gets the bill, so there must be inflation upon us as a result not only of the quants but also of the global macro reflexive crowd.

Jason Thompson replies:

First, I'd very much question the observation that you are paying the same price YoY. This is certainly not the case here in Chicago as Wheaties, along with Raisin Bran, Cheerios and Cornflakes are measured as part of a basket in a private inflation survey. They are up roughly 9% 3rd Quarter to 3rd Quarter and will experience price increases (already announced by manufacturers) of 10-12% to be seen within the next six months. It's very likely what you are missing is the reduction of discounts. By this I mean there are fewer promotions, coupons to the consumer, or rebates being offered to the grocery store. The price quoted on the rack may not have changed, but the average price paid by the consumer has increased.

I'm much more perplexed by your observations on bread, as that has seen the one of the largest increases in our basket of food, outside of milk and cheese, and some fruits and vegetables. Bread here in Chicago is up 18% YoY.

David Lamb extends:

WifeI've got to be luckiest husband on Daily Spec. My wife makes our bread and she orders hard wheat for $6-$7 per 25 lb. bag.  It takes 12-13 cups to produce five pounds of wheat flour, which is needed to make five loaves. We go through five loaves every week (she gives away half of it). Therefore, she spends $6-$7 per month on our breadstuffs (rolls, loaves of bread, etc).

Compared to store bought bread — well, there is no comparison, at least in taste. However, if we bought the same number of loaves at a store it would cost us, for the cheapest bread at WalMart, almost $2 a loaf. That would be $40 a month. Yes, I have seen an increase in wheat prices but the greatest wife in the world can handle it!

Riz Din replies:

The cheapest bread in the UK is less than 50p a loaf. Currently, £1 (or two UK cheap loaves) buys two dollars (or 1 US cheap loaf). Perhaps the international cheap bread arbitargeurs have helped to lower the USD/£.

Eli Zabethan explains:

Most food producers hedge out several years, but now there is little carryout as supplies are being used for alternative energy projects.

Kurt Specht replies: 

It's true that most food producers (and processors) hedge out several years, but the levels of hedging and the duration can vary widely by company and by item.  Several companies have cited various raw materials increases in their quarterly earnings reports this year as a cause of diminished earnings per share, but as the prices of commodities rise and more time passes, more and more of these companies will have to raise prices to keep up.



 By reading the biographies of great people, I learn much about how our world has been shaped, gain insights into how they thought, and through this find avenues for self-improvement.

My favoritie biography is Memories of My Life by Francis Galton, and no matter how many times I read it, I always come away more thoughtful, amused, and creative. Above all, there is a feeling of calmness and awe that comes from knowing that a person of his genius, wisdom and versatility actually existed. Galton wrote this biography at the age of 86 and it is as fresh to me as Tom Sawyer.

In broad outline, it shows the development of his contributions in the fields of geography, medicine, meteorology, photography, electricity, anthropology, psychology, statistics, heredity, and forensics. Some of his most notable contributions include the invention of correlation and regression, weather map composite photography, fingerprinting techniques, twin studies (in eugenics and genetics), and a handheld heliostat for signalling over long distances.

Almost every page of Galton's book has an example of one of his ingenious inventions, contributions, or observations on life. His insights are so great and his interests so broad that almost anyone who reads the biography will come away wanting to follow up and re-examine some insights that Galton gave that are applicable to his or her field.

I will concentrate on some insights I gained into the markets:

1) The influence of rhythm. Galton writes about the influence of rhythmic gestures in creating mass behavior, after noting how famous preachers and politicians of his day were able to influence people by personal (vocal) ascendancy. He offers the story of a college classmate who with the mere movement of a glass was able to drive assembled students into an ecstasy of enthusiam. He concludes that:

"Human senses when rhythimically stimulated by certain exact cadences are capable of eliciting overwhelming emotions not yet sufficiently investigated."

I find that market practicioners when stimulated by certain opinion leaders can fall into similar overwhelming emotions. The stimulation is heightened by the rhythmic movement in prices that accompanies the gestures. Since there are innumerable influences on markets, and an emotional reaction to one opinion leader or another is likely to lead to excess, the job of the market practicioner is to find when the rhythmic movements have run their course, and then profit by the excess of enthusiasm.

2) Positions of stability. Galton was the first to systematize the use of finger prints, as a note in the book from Bertillon confirms. Galton writes that there are quantum differences in the patterns that fingerprints show, that are similar to the different genera in nature. He notes that these patterns could not have come from natural selection but must have come from internal conditions of the structures in the hand. He generalizes the finding as such:

"The number of positions of stability in each genus must be limited, There are limits which if they can be overpassed without disaster would require a new position of stability."

He points out the analogy of the quantum leaps in fingerprints between leaps and whorls and relates it to the question of the importance of mutations versus small improvments in the theory of evolution, and he points out that these questions also arise in the fieldd of glaciers, which are formed by a succession of refreezing and crunches… in other words by successive conditions of stability of state.

What are the levels of stability in markets that correspond to these refreezings and crunches? Laurel and I have often proposed that round numbers often are positions of stability to which markets tend to move with inordinate frequency. I beleve this holds true for the 100s in the Dow Jones, the 10s in the S&P, and the previous close in any market. By testing the paths that markets take when near these numbers, we can develop insights into when disaster or equilibrium is more likely.

3) The influence of Visionaries. Galton notes that there are always visionaries subjected to fantasies that have no place in the real world. Usually the visionaries are laughed at or subjected to reality checks that discredit them:

"When popular opinion is of a matter of fact kind, the seers keep quiet as they dont want to be thought mad. But let the tide of opinion change, and grow favorable to supernaturalism, then the seers of vision come to the fore."

Most of the market visionaries in ordinary times are subject to a similar process of reality and discredit. Those who constantly posit a big decline in stocks, are subjected to the reality of the 10% a year drift over the last 100 years, but let a month or two come along with a decline, and these visionaries come out of their lairs with all reasonable safeguards broken.

SlicerNo discussion of anything written by Galton is complete without remarks on the ingenuity and sagacity that leaps out of everything that Galton touches. On one page you can find his index of boredom, measured by counting the number of fidgets, and on another a contrivance for sending telegraphic signals through the use of needles mounted on each other. Other pages include a discussion of how to divide prizes among the top three contestants in a competition, how to cut a round cake on scientific principals, or a way of measuring how horses gallop. The appendix of the book enumerates 192 of Galton's inventions and papers and offers an overview of how he developed most of them.

Memories of My Life has a freshness and decency of spirit, and is an illustration of how amazing and creative the human mind can be. It has insights into most scholarly fields, and advice and examples of living a good life on almost every page. I highly recommend it as a source of rejuvenation and growth, and as a reminder of how far the human mind can travel.

Pitt T. Maner III adds:

The collected published works by Galton are available at Also, according to Wikipedia, Terman estimated Galton had an I.Q. near 200, or about as high as it gets. How would he have fared in today's academic environment? A free thinker such as he would be quite controversial nowadays, Victorian England's somehow being more accepting of individual genius and eccentricities. 

Vitaliy N. Katsenelson notes:

Google allows you to download the book for free. Here is why: "It has survived long enough for the copyright to expire and the book to enter the public domain. A public domain book is one that was never subject to copyright or whose legal copyright term has expired." On the top right-hand side click "Download PDF" ( 8.5mb) and you are ready to go. Thank you, Google!

Sam Humbert notices:

Nass#m Tal#b discusses Galton, The Bl#ck Sw#n, pg. 244 –

Sir Francis Galton, Charles Darwin's first cousin and Erasmus Darwin's grandson, was perhaps, along with his cousin, the one of the last independent gentlemen scientists — a category that also included Lord Cavendish, Lord Kelvin, Ludwig Wittgenstein (in his own way), and to some extent, our uberphilosopher Bertrand Russell. Although John Maynard Keynes was not quite in that category, his thinking epitomizes it. Galton lived in the Victorian era when heirs and persons of leisure could, among other choices, such as horseback riding or hunting, become thinkers, scientists, or (for those less gifted) politicians. There is much to be wistful about in that era: the authenticity of someone doing science for science's sake, without direct career motivations.

Unfortunately, doing science for the love of knowledge does not necessarily mean you will head in the right direction. Upon encountering and absorbing the "normal" distribution, Galton fell in love with it. He was said to have exclaimed that if the Greeks had known about it, they would have deified it. His enthusiasm may have contributed to the prevalence of the use of the Gaussian.

Galton was blessed with no mathematical baggage, but he had a rare obsession with measurement. He did not know about the law of large numbers, but rediscovered it from the the data itself. He built the quincunx, a pinball machine that shows the development of the bell curve. True, Galton applied the bell curve to areas like genetics and heredity, in which its use was justified. But his enthusiasm helped thrust nascent statistical methods into social issues.

Denis Vako extends:

Another confirmation of the positive linear growth rate in economic activities of civilizations can be found in the works of Fomenko, whose main conclusion was that there never was such a thing as the dark ages, lost civilizations, abrupt destruction of technological and material achievements and there never existed an age of barbarians or renaissance. The history of human civilization, Fomenko indicates, is the positive linear growth from one invention to another, with one discovery on top of another, it is an almost evolutionary process, always onwards and upwards.

Hence I propose that the 10% drift was not only for the last 200 years, but rather at least for the last 800 years as covered by Fomenko.

Steve Ellison adds:

I am not familiar with Fomenko's books, but I just started reading The Renaissance by Paul Johnson. Mr. Johnson says that much more innovation occurred in the Middle Ages than in the Roman Empire. The Romans had many slaves and resisted labor-saving advancements because they feared unemployment and social unrest would result. Conversely, medieval Europe had a shortage of manpower as Christianity phased out slavery. The Black Death made the labor shortage more acute. There was great incentive to develop and deploy labor-saving technology. Many watermills and windmills were built. Medieval mariners, lacking Roman galley slaves, greatly improved sail designs, making possible larger ships that could sail much greater distances.

"Thus in the later Middle Ages, wealth was being produced in greater quantities than ever before in history" (p. 13).

Denis Vako comments:

I have never read Mr. Johnson, but at a first glance this paragraph looks a little too smooth and ideal. Renaissance, black death, middle ages these are interesting titles … but on my second thought may be they relate to real history as much as bear or bull markets labels relate to the market?

Does one really know at the time if there is a bull or bear market?

Presumably we now have better decision making tools than throughout history — databases and computing power to process and categorize knowledge — and yet the only answer we can give to the above question is no, one does not know for sure! But we can say what it was after the fact, right? — July and August was a bear market in stocks.

but then someone may justly ask: a bear market for whom?

Isn't it strange that now, in the present, after the fact, with all those great tools, it is not easy to define what really happened in the market in July and August, yet when it comes to history it is all so clear?

Suppose the market goes up 100% over the next 5 years, then July-August will be called "a minor interruption of galloping bull market"; if the market goes sideways perhaps it will be named "the beginning of maturing top formation"; and yet if it falls 50% it will be named "the start of the vicious bear market."

Anatoliy Fomenko concentrates first on time: he shows the difficulties and limits, and the proofs by calculation, based on planetary movements, then instead of 'feel good' story telling and emotions, he goes for logistics of language, weapons, fighting methods, writing style, coinage, prices and taxes, dress, burials, transport, communications, food and food supplies, buildings and building tools, climate, terrain.

He said that essencially all history is re-written from original chronicles … many of which have vital parts missing.

On mass infectious diseases he says that

"Once it was determined that people were dying from an epidemic, they were entirely exterminated in their localities by the army — all killed to save the healthy, as medical preventive injections and quarantine as we know it now was not known back then, the decision was made simply to kill."

Why the hoax, why the fake and cuo bono of historians? He indicates that too.



From a US perspective, dollar depreciation will cause the price of luxuries to go up, the price of foreign vacations to go up, and the price of foreign assets (real or portfolio) to go up. But the cost of consumer and industrial goods may not change much, due to competitive and substitution effects such as:

1. Many foreign-labeled cars, chemicals, industrial products are already produced in the US.

2. Producers of goods exported to the US will fight hard to protect their markets. They will cut costs, margins, and aggressively change sourcing to offset the dollar depreciation.

3. Buyers of imported goods will shift to lower cost sources.

The bigger threat from dollar depreciation is if raw material producers, particularly oil producers, change their pricing from dollar-based to another currency or basket. Right now, as the dollar depreciates, the cost of oil to Europe goes down, but the cost to the US remains unchanged.



If the Fed hadn't cut this week, wouldn't the stock market continue its natural long term upward drift anyway? Now that they did cut, what are the longer-term implications for equities given the move in commodity markets?



A E NIn the the July/August drop, which we now look back on as a mild "correction", the market participation was very low. This is counted by the depth on the tickers averaging less than 2,000 orders showing on either side of the book. Contrast that to today at high price levels, and also at the prior highs this June when the order book is typically showing cumulative depth of over 15-20,000 orders per side.

Oddly, at the same time the orders are numerous, the volume the last few days is a third to a half less than in the "correction" and dip. At this writing, the bid shows a cumulative depth of over 19,000. This has a few obvious effects. At the top, with such a high number of orders on the inside, the price is boxed in and can't move, except to grind upwards.

17,000 orders represents $8.5e+08. At bottoms, with fewer orders, big orders will clear out 10-20 points, so the price is flying around eating up orders. The volume at the lows is double, so its just a few guys are doing big volume down there. The larger droves come out to buy at the tops with Helicopter Ben's money?

It's easy being a hero after the rescue. Who does speculator's work at the bottoms?

Another one of those changing cycles, but its hard to test with ephemeral data.



People play games for many reasons, but increasing numbers are finding that they are a great way to size up potential partners.

Close observation of how people play tennis can reveal some interesting things about them. Do they try to finish points quickly with riskier winners down the line or are they willing to "grind it out"? Do they hook the lines and call balls out that are clearly in? Sometimes people act differently when playing a game then they do under normal circumstances. Many of the things that Borg and McEnroe did in their real lives, for example, would not have been anticipated by their court demeanors. — BBC News

[Read more]

Riz Din adds:

I play golf on occassion and love to read people's attitudes from how they play the game. For instance, when players are always looking over their shoulders to the party behind them and are rushing their game or feeling nervous on the tee, this reveals they care greatly about what other people think of them. I'm not saying this is necessarily a bad quality, but it sure doesn't help their play!



As with chess, there are two different types of thinking in markets — tactical specifics in which specific and concrete calculation is require, and long term strategy which relies on understanding, logic and perhaps a high level synthesis of these, intuition. Jim Rogers recognizes this in his claim that he's the world's worst market timer. Unlike chess there seem to be very few people who are good at both types of thinking.



A trader I speak with made a good observation/hypothesis about a year ago on the inverse $/S&P relationship — that the S&P would tend to stay constant in "global currency" terms.  Seems that is exactly the way it has been, and is, playing out.




This is comforting!

Years back, I worked with Monroe Traders, but they didn't do mortgages (although I see they do now — I'd assumed they perished along with Quotron and Telerate). We needed "yield books," which were slowly replaced by mainframe computers…

Sam Humbert adds:

Hard to imagine why anyone would buy a machine such as the Trader II that's hard-wired for certain security parameters, given that Wall Street is forever manufacturing new-and-improved products. Wonder who their target market is — clearly not bulge bracket or hedge funds.



EUR/USD, from Riz Din

September 20, 2007 | 3 Comments

This morning EUR/USD sliced through 1.40 like a knife through butter. The next pair on the 'round-number watch' is USD/CAD, which is getting close to 1.00 parity.



"The flight animal wants only to reproduce and survive; fear is the tool that allows him to survive. Humankind, however, is a fight animal. Our preoccupation is with the chase, and having dominion over other creatures in order to eat them or use them for our own ends." — This is a quote from the book, The Man Who Listens to Horses.

Wikipedia provides a partial explanation of the function and purpose of the stock market:

"The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities." [Read more]

There's nothing negative or predator-like in this description. It seems to fit Monty Roberts' description of a flight animal that only wants to "reproduce and survive". In my opinion, it seems that many of the variables that make up the markets provide us an outstanding example of a gregarious animal.

For instance, Galton describes how a herd of oxen is always watchful, although each ox must spend time resting and, therefore, inattentive:

But a herd of such animals, when considered as a whole, is always on the alert; at almost every moment some eyes, ears, and noses will command all approaches, and the start or cry of alarm of a single beast is a signal to all his companions.

To live gregariously is to become a fiber in a vast sentient web overspreading many acres; it is to become the possessor of faculties always awake, of eyes that see in all directions, of ears and nostrils that explore a broad belt of air; it is also to become the occupier of every bit of vantage-ground whence the approach of a lurking enemy might be overlooked.

The protective senses of each individual who chooses to live in companionship are multiplied by a large factor, and he thereby receives a maximum of restlessness.

The market provides protection, security, and liquidity to companies by providing a "sentient web" full of businesses. Although one area of the economy (or web) may be in "placid rumination" it can very well be protected from complete annihilation by other members of the web who are not in a stupor.

I have included a link to a very fascinating clip of a herd of water buffalo and a pride of lions. It's long but well worth it because it demonstrates the strength of the herd when they act as one. For a few moments the lions seem to get the upper hand on a young, weak buffalo. They even take it down and start eating it. But the "web" soon comes together and produces an escape for the little one and they chase the pride away.



I was reading an interview with Orrin Pilkey and Linda Jarvis-Pilkey, and found the following question both fascinating and relevant: 

Q: You've written numerous books on coastal hazards and how we should respond to them. Why did you want to write this book about the abuse of mathematic models?

Orrin H. Pilkey and Linda Pilkey-Jarvis: For more than twenty-five years we have monitored beach nourishment projects around the United States. In order to secure federal funding and justify the enormous costs of these projects, anyone undertaking one must make a prediction of how long the sand will last on the replenished beach. The predictions are based on mathematical models that are said to be sophisticated and state of the art, and yet are consistently, dramatically wrong-always in an optimistic direction. In the rare instances when communities questioned the models after the predictions of a long healthy replenished beach clearly failed, the answer typically was that an unusual and unexpected storm caused the error. Well, the occurrence of storms at any beach is neither unusual nor unexpected. Eventually we became interested in how models were used in other fields. When you start looking into it, you find that a lot of global and local decisions are made based on modeling the environment. There are some fascinating (and discouraging) stories of model misuse and misplaced trust in models in the book.

Kim Zussman comments:

This relates to the question of "what to study?", and the fact that well-described numerical analysis can be used to convince in most arguments.

For example, say you are feeling quite bullish. At any moment, there are scores of patterns which could be described (what happened this hour, morning, day, overnight, week, month, in reference to prior periods, events, other markets, valuation metrics, etc). Since your job is convince yourself to buy, your objective/multiple-hypothesis approach combines with carpe trade'em urgency to screen up bullish-testing patterns.

Of course you may find, to your surprise, that most of the tests are bearish. In which case you can argue that the run of bearish historical results is ready to be broken.



The wise Doctor Brett
Goes hip-hop in naming his
value grid: Style Cube.



 When I was in grade school, my dad went on a business trip to Vegas. I gave him a quarter and asked him to "win me some money". Dad came home and didn't have my quarter or my winnings — he lost my quarter in Vegas!

A few nights after he came home, he had his buddies over for a poker night. I got to sit and watch them play. If memory serves me correctly, my Dad talked the group into playing Black Jack. Instead of one guy being the dealer, they took turns dealing passing the deck around the table clockwise (just like in a normal poker game).

As I sat there and watched, I became enthralled by what I saw. Little did I know, the seeds were being laid in my mind for a very powerful money making idea.

As I watched the game, I noticed a clear pattern develop. It didn't matter who the dealer was, the dealer won a disproportionate number of times. Now, at the time I wasn't able to ascertain completely what was happening and why the dealer won so often, but it was clear to me that dealer had have some advantage.

So the next day, I grabbed a deck of cards and started to play black jack against invisible opponents. As I dealt the hands out, I would always play each hand honestly, just like I would have played the hand if I was only that particular player. Even as I played against myself, I always came to the same consistent conclusion. The dealer won far more often than not.


Well as many of you well know, I'm not the brightest bulb around, but I am extremely tenacious … so I kept playing and playing and playing … until one day it hit me like a ton of bricks. The dealer won so often because in many cases, he didn't even have to do anything to win! He could sit there and watch others play and go bust without doing a thing!

So after many weeks of practicing and testing and practicing and testing and more practicing and testing (you need to do a lot of practicing and testing before you take a big leap with real money), I took my cards and got some of money out of my piggy bank (I was a prodigious saver), and went to school.

Once at school, I told my friends about this great new game and taught them all how to play … with no money involved at first. Then I took a deep breath, laid my money on the locker room bench and told the guys, "I'm willing to play all of you for money. And I'll take all of you on … it will all five (I don't remember how many were) of you against me. You should be able to take my money since there are five of you and only one of me!" (now keep in mind that may not be exact quote because we're going back 30 plus years in time here … but you get the idea).

I had put the bait in the water and these five guys had bit, so I reeled them in.

I took most of their lunch money that day……Mrs. Mooney in the cafeteria was probably wondering why there were so many IOU's for lunch that day.

My little enterprise grew and I made more and more money. Older kids (who had more money) got involved in playing and I made more and more money.

This was great! I was making a few dollars a day (which back in the early 1970's wasn't bad for a kid who was only ten years old!). I had visions of grandeur, wealth and treasure! I could see myself building a small fortune this way. Then, as all things that aren't thought through seem to do, my little enterprise began to unravel.

TaseYou see, there were "unforeseen" consequences to my actions. As my little game got bigger and older kids were playing and trying to beat this little snot nosed kid, I discovered that some people don't like losing money, even if they lose it fair and square. One day, I realized that it was in my best interest to "give back" the money that some bullies had lost, rather than face the fury of their fists. My game came to an end.

My buddy told me to go get one of the Jr. High tough guys and get him to act as my body guard and pay him a cut to protect me, but I couldn't bring myself to do it. First of all, I didn't think it was fair that I had to pay someone to protect me when I was playing an honest game (how naive I was), and secondly, I didn't want to put myself in a position where I could get hurt. I did live in a fairly rough neighborhood.

So I retired to my house and had to be satisfied playing black jack against myself … which got to be pretty boring. So I decided to figure out how I could, as a non-dealer have an advantage. I concluded that I had to know what cards were played and memorize every card that I saw come out on the table.

Not being as clever and as intellectually gifted as many of you, I had to take a more tenacious and persistent route to remembering cards. Vic asked me once how I became a good poker player and how I remembered the cards so well. I was embarrassed to tell him the truth, but here is how I became great at memorizing cards: I practiced and practiced and practiced and practiced … and I did it constantly.

I would take the deck of cards in my left hand, turn the top card over and say, "two of clubs". I would then turn that card face down on the table. I would then say, (in reference to that one card pile) "the two of clubs". I would then look at my left hand and name off every card that was in my left hand that I hadn't turned over.

That may sound easy to do. It is. Now repeat it again….and now you've got 2 cards face down on the table. Name both of those cards and then name the 50 remaining cards in your hand.

Then do it with a third card. Then a fourth, then a fifth, then a sixth. Do it until you have every single card face down on the table … and do it until you can accurately name every card from that deck identifying where it is … in your left hand or face down on the table.

Then play 7-card stud against yourself … and play every hand honestly. Play with seven imaginary players, bet as you would bet, fold when you would fold. And then, when the game is over and all the cards are face down on the table (still in their respective piles) accurately name every card in each pile, and then when you're done, name the remaining cards that are still in the deck.

After a while, I could see all 52 cards in my mind, neatly lined up, in order all suited up, and then when a card came up and I saw it, I would "check that card off" in my mental deck. So I always knew which cards had been played and which ones were still available to help/hurt me.

So anyway, time progressed and I got into playing poker. I never got into weird games like a lot of my friends played. I didn't like games with a lot of wild cards, or with too many random things happening that could change everything. I liked straight seven card stud. I loved (heck, I ate up) the wealth of information that was on the table.

As time progressed, and I got so good at remembering cards, I started concentrating on reading people. Remembering cards became second nature … literally a habit.

As for reading people, I do not know how I do it. You see, in the movies, Hollywood shows poker players having a "tell". Usually, they play with their ring, or twist their Oreo cookie (like in the movie Rounders), or some other overtly obvious thing that only an idiot could miss. I can tell you, that does not happen in real life, and if it does, it doesn't happen often.

It really came down to little, almost imperceptible clues. And I really can't do a good job of describing it to you either. All I know is that all I had to do was glance at the table to take in the data from the known cards that I could see (and check them off my mental list … all of this was done in a second or so), and then I could concentrate on the people and their reactions … and watch for little inconsistencies and little clues. Did they blink a bit differently? Did they seem a slight bit hesitant? Did they glance the wrong way? Did they pick up or put their cards down differently? And even when I did spot something that gave me a clue as to if they were bluffing or not, I still rarely ever went against the statistical odds that my mind was "seeing" when it looked at mental deck in my head.

As a result of this practice practice practice, I developed a keen ability to play poker and win far more often than not. And if I did have a losing night (which I have to say, was very rare), I didn't lose very much. As a result, I was able to pay for my senior year of college, and that's because I was introduced to whole "poker underground" that I participated in.

But that's a whole different story, and I'll make a point to tell it soon. I think it's a good story and many of you will like it, but I will tell you the ending now. I do not play poker anymore, because I became a great player …and I won a lot of money. And everyone that I took money from was a gambler, and they stood absolutely no chance of beating of me, and I couldn't stand to look myself in the mirror any longer knowing that I was taking someones mortgage payment or the money they needed to buy food.



 The following is an extract from

Credit crunch aside, commercial real estate sales in Manhattan have already surpassed last year's record total, according to a report released Wednesday by Cushman & Wakefield Inc.

The real estate company estimates that in the first eight months of the year, sales transactions that either closed or are under contract totaled more than $40 billion. In all of 2006, transactions amounted to $34.7 billion.

The first half of the year was the strongest six-month period ever reported for commercial sales, with transactions reaching $34.1 billion, up from $18.58 billion in the corresponding period in 2006.

Cushman notes that the credit crunch has led to more stringent underwriting, more expensive lending terms and an increase in the amount of equity required for purchase. It says that eventually the market turmoil could lead to fewer property sales, fewer bidders and ultimately lower prices for buildings. However, for now, the company says property values have remained strong.

At mid-year, Cushman pegged the class-A vacancy rate at 5.4%, the lowest since 2001. The average asking rent was $69.58 per square foot, a record high and up 38% from the corresponding period in 2006. [Read more]



 A couple of years back I advised aspiring investment book authors how to best load up their manuscripts with Buffettisms in order to get published (see my previous comment here). I can find few more exemplary books in this regard than The Dhandho Investor by Mohnish Pabrai. There are endless "margin of safety"'s, scores of "circle of competence"'s, and the "moat"'s number more than the stars in the heavens.

There is a good three page treatment of the momentous story of the American Express Salad Oil Crisis of 1963, which led Warren to invest $7 million. This story must be told and re-told until the end of time, or until American Express has another salad oil scandal, at which point I will be ready. (Remember, investing is like batting in baseball, except that you get an unlimited number of pitches.)

Most of the standard value investing humor is there, including the great "Rule No. 1: Never lose money; Rule No. 2: Never forget rule No. 1". My only quibble is that his presentation of this old chestnut is uninspiring–he simply sets it off in block text, with no special table or appendix. Ideally, it should have been in the title.

Here is a passage from the book that illustrates Pabrai's facility with the language:

"The Dhandho investor only invests in simple, well-understood businesses…we must be down to only reading up on simple, well-understood businesses. We must remain squarely in our circle of competence [sic] and not even be aware of all the noise outside the circle…Every once in a while something about a business will jump out at you. If there appears to be some meat on the bone and you sense that the business might be underpriced compared to its intrinsic value, it is time to hone in…Drill down and see if it truly is an exceptional investment opportunity…Most times it won't be as cheap as you'd like or something will bother you and you'll take a pass. In that case, go back to scanning the radar within your narrow circle…Do not make the fatal mistake of looking at five businesses at once." [Editor's note: Shouldn't the last sentence read "Put all you eggs in one basket and WATCH THAT BASKET"?]

Pabrai's only major blunder is that the title itself is not a Buffettism, but certainly he does very well on chapter titles, which include: "Invest in Businesses with Durable Moats", and "Margin of Safety–Always!". There are a few other weaknesses and oversights. He presents an interesting and inspiring history of how Indian-Americans, and mostly those having the surname Patel, have become the leading proprietors of our nation's motels. That's fine as far as it goes, but that chapter contained zero "margin of safety"'s and no mention of the fact that the only good use for a computer is to play online bridge. There were no mentions of Katherine, or (preferred) Kate, Gorat's Steakhouse, or Cherry Coke. Perhaps these oversights will be covered in "The Dhando Investor Part II".

Despite these quibbles, Pabrai's book is a book that I understand, that is within my circle of competence, with an intrinsic value that exceeds its price with a sure margin of safety. I say buy it and hold, with my favorite holding period, forever.



Optimal PortfolioRalph Vince, in Portfolio Management Formulas, says money management analysis is as important as trade system selection. Daily Spec's own Dr. Phil McDonnell improved Vince's management ideas by using return rather than drawdown in his soon to be published book Optimal Portfolio Modeling, which I look forward to buying.

Vince mentions a number of staking schemes. Vince and Bachelier refer to the basic martingale. The martingale word is derived from an equestrian device attached to the horse's bridle to prevent the horse's head from rearing back, but allowing it to lower forward. A martingale staking scheme doubles down on every loss and takes profit on the first win. The problem with the martingale is that when there are too many random consecutive losses, capital exhaustion, or casino or exchange limits, may stop it. The small martingale adds bets down per a predetermined list. Stopping is another staking system in itself. The anti-martingale is known as pyramiding. Fixed fractional system is a small anti-martingale. The reserve strategy trades base plus a reserve of the winnings. A fixed stake is another system. Vince says a proportional fixed fraction is the best. The method to determine the fraction or multiple is the question. Taking money out of trading is another staking method. Adding down and selling a portion of gains, lowering basis but keeping stake constant, is another staking system.

Some years ago Dr. McDonnell proposed the following management formula, and has further explained it to me:

Maximize: C = Sum( f * ln r(i) ) / n

 maximized over all f.


 n - the number of outcomes in the backtesting
 f - the maximum fraction of your capital to invest
 r(i) - relative profit outcome for backtest case i,
 note a 1% profit means r(i) = 1.01, a 2% loss
 means r(i) = .98
 ln is the natural log

Determining the stake on an additinoal forward expectations factor would improve return as well. The goal is maximum captial appreciation and looking at computations and equity growth is as important as trade selection as long as the expectation is positive. A losing system is always a loser and no money management scheme can turn it positive.

Vince bases his calculations on a single trading system where the consecutive losses are independent. He says the calculations are harder for multiple systems, however expectations for multiple winning systems and the equity curve should be better and smoother, which should affect staking.



I had a philosophy professor stand up at the beginning of class one day and state that he didn't know what was real anymore; you're not real; I'm not real; everything is just a big joke being played on us but that we really don't exist anyway. He then walked out of the classroom and we didn't see him until the following week.

Rod Fitzsimmons Frey adds:

I had a philosophy prof, mid fifties, fat, short and bald except for the fringe-ponytail and scraggly white beard. Stopped mid-sentence in the middle of a lecture. Got a thoughtful, faraway expression on his face. Undid his trousers, dropped them to his ankles, smoothed his shirt over his white boxers several times, raised his trousers and repositioned his suspenders. He then resumed his sentence where he had left off.

Advanced philosophy education should come with danger pay.



Franschhoek is about 40 minutes drive from Cape Town and is considered the food and wine capital of South Africa — it is on the wine route and there are many superb restaurants in the village and on the surrounding wine farms. In the village, Le Quartier Français is great — one of the World's 50 Best Restaurants.

Camps Bay also has great restaurants on the beaches as does the suburb Constantia, which is also a wine area. The V & A Waterfront is great to visit and shop but very expensive for food and not good value for money — too touristy.

Cape Grace is an excellent hotel, as is 12 Apostles. As to restaurants, Ginja in Cape Town is a must. Bukhara has great Indian and Baia at the Waterfront has the best seafood.



Here is the key inflation issue: the Fed know core CPI is flat or falling and that the price of everything a person actually needs to live is rising rapidly (food, energy, healthcare, education, insurance, etc.). Plus, they believe the disinflationary effects of emerging markets has diminished which is evident from the fact that Indian firms are not outsourcing to Mexico where wages are cheaper (as one example). So, there is now an important (but quiet) debate in the FOMC and among the staff about whether more attention ought to be paid to headline inflation as well as core.

Plus, digging a bit deeper, they fear that real interest rates may already be negative if you adjust your numbers using headline instead of core. Or, even worse, you could think about using the inflation numbers that arise from the old methodology before they stripped everything out of it. That calculation (see John Williams' work on Shadow Statistics) shows inflation running at 8-10%.

So, there is much more worry than the market realizes about cutting rates now and essentially pulling the ripcord that unleashes an inflation which will be hard to deal with later (a la Greenspan's comments over the last few days).

George Zachar adds:

It is comforting to know that, under the surface, there are folks in the monetary clerisy that "get it" vis a vis honest-to-G-d inflation.

Unfortunately, the Fed's calculus is complicated by political and systemic risk factors. The left controls the political and media agendas, creating a fierce headwind against discipline.

And there's something about bank runs (albeit in the UK) that's apt to focus a central banker's attention on immediate problems, leaving longer-tailed inflation concerns for another day.

Greenspan publicized the notion that the Fed would try to make its mistakes in ways that could be remedied — that is, if they were going to screw up, they would do so in a way that left them policy tools to address the problem.

In the case of deflation, they deliberately stayed too easy too long, to make sure they didn't have "a Japan problem", assuming they could always jack rates up to mitigate subsequent inflation.

I fear/suspect that a similar calculation is being make now: Is it better to extinguish the systemic risk fire now with a big ease, and then later have to tighten even more? Or to make a half-effort now on the liquidity side, hope that's adequate, and promise to ease more if required?



Computers are not very good at bridge. It is easy to fool them. If you don't play by the book, they are at a loss to read your cards. Interestingly, this means that they are better against strong players than against weaker players. Their algorithms are noteworthy, however. They are probabilistic in nature, which is closer to the markets than to chess.



Does anyone know how to use Taqtic? I'm trying to extract options implied volatilities without much luck.



I noticed on R-Help: Many of the presentations and posters from UseR! 2007 are now available online.



Steve Vai Battles Karate Kid is the best guitar duel i've ever seen/heard. Long, 8:46. No vocals. Even without knowing aforehand the Devil was in the audience, one can easily see why he tore up the "contract."



Gas PumpGas station owners, regardless of the price of gasoline, have the same static dollar level profit built into each gallon. Whether gas is $1.50 or $3.00 per gallon, they make only $0.06 per gallon profit.
Credit card companies don't pay the gas station owner $1 for every $1 charged — they pay $0.98 for every dollar charged (the reduction discount to the actual amount charged ranges from 1% - 5%, with 2% the average), making the credit card company very profitable even if you pay your balance off in full every month.
That discount decreases the profitability to the vendor. At $3.00 per gallon, when you charge your gas, the gas station owner can see all or most of his profit disappear due to the credit card discount. In some cases, he can lose money! 

Clive Burlin adds:

A BP gas station down the road from my house that had been closed for tank repairs is preparing to reopen. Passing by this morning I noticed they are going to have two pricing tiers: one for credit, the other for cash. Is this a pricing scheme already in use elsewhere in the USA or it it a harbinger?



Barney FrankIt is looking politically probable that the new GSE loan limits will be increased substantially above expectations for 2008 along with other changes, although below what Barney Frank has been suggesting he would like.

Probable changes for most areas:

1) Fannie and Freddie loan limits to $500,000 from $417,000
2) FHA / VA loan limits to $500,000 from ~$370,000
3) FHA / VA will allow for refinance into them.  Previously disallowed.

Limits for California, Hawaii, Alaska and the Virgin Islands will be ~50% greater.



Commodity trader who has been fantastically rich, and then broke, a few times, decides not to meet his margin calls, and, as a well-known adventurer, knows exactly where to say he's going, then disappears such that people will look for weeks and weeks, while he suns himself in Panama.

You heard it here first!



 I've been around horses most of my life but it wasn't until I read about Monty Roberts that I learned how to really treat and understand them. It is only recently that I have found some parallels in the markets with the way Monty understands horses.

At seven years old Monty figured out one can "talk" with horses by body language. He named this language, "Equus." He tried to master this language and many years later would be able to understand and use over a hundred different body movements that meant something to the horse.

Monty witnessed his own father beating and submitting horses when growing up. He thought then that there had to be a better way, a way to make the horse want to be with you and work with you. He said that most trainers are burdened with the great weight of the male ego.

"You walkin' on the fightin' side of me when you say my daddy didn't know what he was doin'. I got horses — you couldn't get close to 'em. You admit to me now, that there's a time when a horse needs a good whippin'."

He set out to disprove this and, indeed, he did.

"What I can do with horses is the result of long hours of observing them in the wild."

At 13 years old he set out on horseback to the Sierra Nevadas, and beyond, to study the wild mustangs. The very first encounter he watched them, through binoculars, for eight straight hours.

For a four day period Monty witnessed the lead dun mare of a particular herd educate one of the adolescent rebel rousers. Here is what he wrote:

"As I watched the mare's training procedures with this adolescent and others, I began to understand the language she used, and it was exciting to recognize the exact sequence of signals that would pass between her and the younger horses. It really was a language — predictable, discernible, and effective."

A couple of parallels to markets that I found in the above paragraphs are, (1) I must sit and watch the markets for long periods of time, and notate my observations. This allows me to see the market participants react to many different stimuli. (2) Preconceived notions about markets, how they interrelate with one another, or notions coming from the poorer market participants, will yield great misunderstanding.

Only after Monty spent countless hours of observance and gradually applying what he had witnessed was he able to be successful at his endeavor. By the time Monty was 70 years old he had trained some 10,000 horses all over the world, including the prized horses of Her Majesty Queen Elizabeth II. Just imagine, a country bumpkin from Salinas, California knowing his trade well enough that a Queen requests his attention.

There is so much more to Monty's story that I find applicable to the markets, and to life, but I am afraid of being too lengthy in this post. The book is called, The Man Who Listens to Horses.



Oil, from Jeff Rollert

September 18, 2007 | 1 Comment

The difference between the current spot price for crude oil, and the moving average for one-month and three-month contracts is really wide. Crack spread is also out of whack. I would suggest that we may see a snap back post Fed on spot oil, with no change in gasoline prices. Or the next few weeks are going to get back in line with products moving up and/or spot coming down. Gas is already back up to $3 for regular in CA, after being 2.65 a week ago.

Gordon Haave remarks:

Large crack spreads are good for the producers, such as Devon, that also own midstream assets.



"It's not that I disbelieve Northern Rock," customer Anne Burke, 50, said as she waited with her 90-year-old father in a line of 130 people outside the Brighton branch. "But everyone is worried and I don't want to be the last one in the queue. If everyone else does it, it becomes the right thing to do." (Bloomberg News)

This is an interesting example of mob psychology and herd behavior, particularly in light of the following facts:

1) The Bank of England has declared Northern Rock to be solvent, and is providing massive liquidity to meet withdrawals. Additionally, the British FDIC equivalent guarantees deposits up to 31,700 pounds.

2) The credit default swaps on Northern Rock are trading around 170 basis points — rather tighter than several big US broker-dealers.

3) Alliance & Leicester's (the 7th largest bank in the UK) stock price fell about 30% today as the panic spread to a second institution. A company spokesman said that he "knows no reason for the share price fall."

The last time the Bank of England provided "emergency funding" to a bank in these circumstances was 1973 — when the economic landscape was obviously very different.

The Chancellor of the Exchequer just issued the following statement:

"I can announce today … should it be necessary … we with the Bank of England would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability."

It sure isn't 1933 …



I was reading CFO magazine and a story on how retailers are becoming more systematic in their application of markdowns. In fact, it mentions Oracles markdown-optimization software. It made me wonder if such strategies could be applied to a list of stocks. It mentions strength of inventory by store and item. It mentions categories by color, size, and style. It mentions optimizing inventory replenishment rates. In an analogy to trading, size and style are easy, but what would constitute location, color, etc..

"the software can monitor sales through the selling season, compare them to non-linear forecasts generated from sales of like items in prior years, look back to historical sales data, and predict how the item will sell fro the remainder of the season. If it looks like the product won't sell out, the software can look at how similar items responded to past marketdowns, then test a variety of pricing strategies to identify the one that will result in sell all the merchandise." [Read More]



 Dead Man starring Johnny Depp is beautifully framed as a late 18th century existentialist western, in black and white. Depp travels out west by train to the end of the line for a job that doesn't materialize. Tragically he ends up wounded, wanted, and on the run. A philosophical Indian named Nobody accompanies him on his existential quest to the end of his life.

The film has a great edgy western solo guitar soundtrack by Neil Young. The supporting cast of fantastically comic characters is a foil to Depp's characteristically understated William Blake. The movie is subtle in its beauty and magnificence. Everyone dies before the end.



Passing the TorchBritney's MTV performance has been universally skewered, to the extent that the latest mega-viral video on YouTube is an androgynous figure in tears about the injustice.

My take on all this:

1. The song itself, "Gimme More", is very catchy. If Britney had released it before her meltdown, it would be viewed as a Britney tour-de-force. It's got a propulsive beat, and it's sexy. The appropriate foil for Britney is Justin Timberlake, her old flame. The universal wisdom is that Justin is 'da man, and Britney is history. To me, Justin's stuff seems terrible, a laughable, transparent attempt to run away from his heritage as the leader of a boy band, and to project himself as an honorary gangsta. I think Justin should be seen as Vanilla Ice part II. Britney has none of that phoniness. She's just building on the image that she developed for herself–a girl coming of age and progressively transgressing more boundaries, which in a larger picture, have already been transgressed by everyone from Madonna to Pat Boone. In this song, she dares to use the "b" word.

2. She is said to be too fat, and she is indeed a little too plump for my taste. But cut her a break–she's had kids! Also realize that if she were a little too thin, the tabloids would say she has an eating disorder. This is not a fair criticism. Perhaps it's fair to say that she should have gone with a less revealing outfit, which had stripper overtones.

3. Her dancing is said to be lackluster. This is probably a fair criticism. Her moves could have been a bit more crisp. But she was one of about 40 dancers up there, including several provocative pole dancers. I thought the show overall was not too bad, certainly not an embarrassment, by the standards of these things.

The overwhelming negative reaction to Britney's performance is a collective phenomenon, initiated by a few well-placed opinion makers and then repeated everywhere.

James Wisdom writes:

Keep in mind that this performance was presold to the public as her “comeback” appearance after a series of smaller shows this past year. While I appreciate the author’s apologia, let us not forget that Britney’s career is built on sex appeal alone since we all know she’s not writing the songs, performing any of the music or singing. Therefore, with such a narrow offering to begin with, it is appropriate for us to criticize what little she does do — look good, dance, and lip-synch. In this example, none were passable, especially in the context of her “comeback” performance — where she was supposed to provoke the sheeple to keep buying her records and merch.

The media have merely expressed the collective schadenfreude of the millions who look at Britney’s brand of mass-produced “music” with utter disdain. Perhaps if she had offered the world something of more depth and value the wolves may have paused before feasting on her flabby, glassy-eyed, bungling performance.



… according to a new book by Ian Ayres, an econometrician and law professor at Yale, this is a microcosm of a powerful trend that will shape the economy for years to come: the replacement of expertise and intuition by objective, data-based decision making, made possible by a virtually inexhaustible supply of inexpensive information. Those who control and manipulate this data will be the masters of the new economic universe. Ayres calls them "Super Crunchers," which is also the title of his book, the latest attempt to siphon off a bit of the buzz that surrounds the hugely successful Freakonomics.[Abstract from Newsweek]

Intuition replaced by statistics. Should one therefore learn to ignore one's intuition or at least ascribe less value to it? And what about quick heuristics, rules of thumb, 'blink'-like judgments… and millions of years of instinctual bias?

Roger Arnold asks:

Are there computer systems that are being designed to handle macro issues as well? I would think that would be highly complex and beyond the scope of computers today.

Nigel Davies replies:

MasadaI can answer that for you - they don't have a hope. And I can tell you exactly why:

Despite huge resources' having been pumped into "solving" a tiny, limited game called chess, computers are just rubbish at the kind of creative synthesis of ideas at which the human brain excels. And it shows. They are totally unable to balance factors such as doubled pawns against the initiative. They just don't "think" like that.

Sure, they've made "progress," they can now beat human chess players by employing huge processing power, crunching a zillion variations a second and never getting tired. The Romans had a much better win when they took Masada.

Vincent Andres remarks:

You don't have to commit suicide! Computers are our allies — we just have to use them. Of course we have to learn to speak to them.

"I hate computers: they always do what I tell them, never what I want!"

Nigel Davies explains:

Deep Blue vs Kasparov 1997 Game 6There have been attempts to run tournaments with the players having assistance from computers — they call it "Advanced Chess." But in activities which enhance our experience of life, computers have no part. It's kind of like having computerized yoga.

The suicide has been the chess world's insistence on pitting man versus machine, which brought the computer manufacturers their Phyrric victory and allowed claims that computers were now showing "intelligence." But to me this is like claiming a Porsche is an athlete if it can beat a human in a marathon. Computers are still just number crunchers as far as I'm concerned.

I like computers; they are nice obedient slaves. But the claims they are showing any kind of intelligence is just bunk. All that has happened is that they're crunching faster.

Does fast crunching lead to consciousness and the human ability to reason? I don't think so. Humans crunch very slowly but are nonetheless able to deal with problems in which crunching is less effective. One demonstration is the miserable failure of computers in Go, which is still a closed game but "bigger" than chess. As for non-closed systems they will, therefore, be utterly hopeless.

There is another issues arising from the way that many humans are now assuming that computers have intelligence and assuming that computerized models are going to work. This viewpoint is not only wrong, the reliance on computerized models can lead to people's suspending their own intelligence or subjugating it to the computer's ideas. This is one of the main problems when human Grandmasters try to look at a chess position with a computer running in the background — they end up letting the computer take the lead.

These are very complex issues which the world will be addressing over the coming decades. But there are great dangers here, and I believe this effect was behind both LTCM and the current banking crisis.

Vincent Andres responds:

Brute force algorithms are used in chess. But they are so many other ways! Computers are doing many other things in so many and so far different ways than brute force. Chess was a challenge for number-crunching, but please don't reduce computer science to that.

Do not confound newspapers and computer scientists. We knew for years what the end of the chess story had to be. Nobody is surprised, nobody is overproud. It was a tedious job — but it had to be done. 10^30 computations had to be done, 10^31 were achieved.

In the computer science community there were few remaining people interested by the human/machine chess battle. Even the finances for the projects were questioned. A complete battle of the past, as far back as 1995 for many of us.



A Wrinkle in Time"Who is Charles Wallace?"

Those to whom this question resonates will likely have appreciated the masterpieces of Madeleine L'Engel, who died a few days ago.

A Wrinkle In Time, and to some extent the later work A Wind In The Door, discuss the full battlefield on which the human story has unfolded and continues to unfold.

Much as Ayn Rand inspires independent thought and action, L'Engel gives a resonant perspective to the work of artists, whom she regarded as soldiers in a metaphysical war.

When I solve a challenge of harmony or structure, I feel like a soldier who has dispelled entropy. I know I have added to the coherence, logic and beauty of reality, even though a musical idea cannot be grasped in the hand, but needs eternal practice, or indeed vigilance. While we must measure what we can, I know at its core that reality is measureless.

Her depiction of the battle ranges from within the body (illness), to planetary and interplanetary zones, everywhere that differentiation tries to assert against the forces of uniformity.

Good books for children. Even better for adults.

James Wisdom writes:

AntL’Engle’s books were favorites of mine when I was a child of eight or nine, and I reread the Wrinkle In Time series a few years ago. For me, the inclusion of abstract concepts such as tesseracts into the storyline, along with simple line illustrations to explain them, truly set her work apart. Her explanation of the “folding” of space and time as an ant crawling along a string opened my eyes to a whole world of creative possibilities as a child (and began a love of Sci-Fi that lasts to this day).

Further, her characterization of the light and darkness in the world is discomfiting and adds a wonderfully frightful tension to the story that compelled me to keep turning pages despite being well past my bedtime (both then and now). It’s a shame that she passed on but I have no doubt that her work will last on for many, many years.



Iron WorksCouple of BBQ spots in Texas, from a recent quickie trip:

Goode Company BBQ in Houston was essentially unchanged from my last visit 20ish years ago. Get in line, grab a Lone Star or two from the ice chest, make your way to the counter, rattle off your meat and sides order as fast as you can, get your plate of food 15 seconds later, grab a slice of pecan pie, check out, walk outside to the picnic tables. I got brisket, and the wife/kids chicken. This is what we always order; the kids don't especially like BBQ, and at best they'll nibble on a drumstick. Brisket was good, not extraordinary. Sides were tasty. My wife rated the pecan pie the best she'd had.

In recent years Goode has morphed into a casual dining empire; on the same block on Kirby is now found Goode Taqueria, which features TexMex, burgers and a few grilled entrees. Like Goode Company BBQ, it was bustling with locals. My family actually liked it better than the BBQ restaurant, especially when the manager graciously replaced the cheeseburger and fries my seven-year-old dropped on the floor. I ordered the pork chop, which was fantastic, big, tender, juicy, fresh off the grill.

Goode also runs a seafood house, but I didn't get to it.

In Austin we visited Iron Works, on the south edge of downtown. It proudly proclaims itself Dubbya's favorite BBQ spot (as attested by wall-mounted notes to the owner from the then-Governor). Tough to imagine a restaurant back home in bluestate USA boasting of an endorsement by Dubbya. The restaurant in housed in the former workshop of Fortunat Weigl, a well-known (and widely collected) ironworker. We got in just before the rush, and ordered the same spread as at Goode Company, with much the same result: good, not extraordinary, brisket, reasonably good chicken, tasty sides.

Austin locals told me The Salt Lick, southwest of the city, was a must-visit, but regrettably I didn't have time.

Cole Walton writes:

Being a native Houstonian and fellow BBQ lover, I feel qualified to comment. First of all, Goode Company is decent, but in recent years has become a little too commercial/touristy for my taste. Your wife is correct — the pecan pie is by far the best item on the menu, followed by the chopped beef sandwich.

On your next trip to Houston, I recommend stopping by Luling City Market on Richmond right off 610 for a big helping of their brisket and potato salad. Make sure to slab a bunch of sauce on your brisket because nothing beats the homemade BBQ sauce Luling serves up out of old Tabasco jars.

Also, for the best ribs in town, try Pizzitola’s BBQ on N. Shepherd. Hands down, this eatery, founded by former Aggie Jerry Pizzitola, serves up the best ribs in town. If you go later in the day, make sure to reserve a banana pudding right when you sit down. Rumor has it they are made fresh every day by Jerry’s mom. Homemade or not, I guarantee it will be some of the best banana pudding you have ever tasted.



Niels BohrWhat theory exactly do I test, and how is it put together on the basis of history? In the physical sciences, the answer is, ironically enough, often gut feeling and intuition. Bohr's "crazy" ideas about atoms are an example. That is what makes counting so difficult: What the heck do I count? Statistics and econometrics are fabulous tools, but applying them to forecasting is tough!

Rod Fitzsimmons Frey adds:

I agree that is the crux of the issue. The inductive leap that all scientists must make is a mystery that is not itself explained by science. Francis Bacon, who convinced me to ditch philosophy and take up engineering, hand-waved it away by putting a philosopher-king at the head of the rational, scientific state, with all the other citizens scurrying about gathering data to test the hypotheses that he came up with.

Nigel Davies remarks:

The reason a chess player should practice analysing positions is in order to cultivate intuition. Many players wrongly believe that the idea is to find specific improvements from specific positions, but they rarely get the opportunity to spring their cooks.

I have come to believe that the same role is played by counting for traders, that the main goal should be to cultivate understanding and awareness rather than devise specific trades. And one can find many other examples in difficult human endeavours, such as the importance of kata to the martial artist.

Bill Rafter explains:

Bill RafterThe answer to "what to test?" is "everything."  You try to break everything down to its smallest components and test each.  You keep records and their summaries on everything.  If you learn of something new, you have to go back and test everything again using that new method.

Suppose you know with certainty that the market is headed up in the near future.  A simple and intuitive strategy would be to buy the high beta stocks.  But testing that strategy would prove you wrong.  You cannot know that unless you test.  Okay, now let's consider the reverse:  you know with certainty that the market is headed down.  What about selling the highest beta stocks?  Test and you will find out.

One of the big topics now is volatility.  How do most people define volatility?  Are there any other ways to define volatility?  Is there any symmetry to the various definitions of volatility?  That is, does it work the same way in up days/weeks as it does in down days/weeks?  If you define volatility as one-day rates of change, the answer is affirmative.  But not so with other definitions.

Most researchers make the mistake of testing their ideas against "the market".  Well, the market is just the average.  You are not going to find any leading indicators by looking at the average.  So let's say that instead of looking at the S&P 500, you do your research on the 10 Sectors.  The results are different.  So then you drill down a little more to the 24 Industry Groups, and then to the 60+ Industries. If you are "on to something" you will find that the results get better with additional focus.  Your universe is the same 500 stocks, but you are no longer averaging to mediocrity.  Note that I didn't say this was technical or fundamental research; it's just research rather than intuition.

Most people do research badly.   Let me give some examples. (1) One of the major data suppliers (50,000 subscribers) gives its users the ability to construct their own portfolios.  That's important, as you may just want to work with stocks of companies with positive cash flow.  However a call to the support department of that data supplier will inform you that virtually none of their subscribers make their own portfolios. (2) The research software platform with the highest number of users does not even allow users to construct their own portfolios.  They give them pre-constructed portfolios of the S&P, Russell, Dow, etc. Take it or leave it.  (3) One of the leading (at least by reputation) institutional and retail providers of fundamental research allows its users to screen stocks on the basis of certain factors.  Their screening tool does not work correctly; giving the wrong results.  It's been that way for the two years that we have had a comp account.  No one has fixed it, most likely because no one has noticed.  We noticed, but of course we're not going to tell them.

So if flocks of "counters" or "quants" did poorly in the recent selloff, it may not be because counting or quant research is a flawed concept. It may because the researchers are not giving an honest day's work for their pay.  They are pretending to do research.  Their version of the scientific method is shoddy at best.  But that's okay.  To be a consistent winner, you need a supply of losers.

David Lamb writes:

"What to test" brings to mind the passages on counting in Vic and Laurel's books. In one, Artie, Vic's father, was writing on a yellow pad of paper while he was watching handball players. Upon a completion of a point Artie would notate: OTWK (off the wall killer); KW (killer, winner); DW (drive killer); A (ace); AW (angle winner). He was trying to calculate "the chances of winning the next point after runs of winning and losing points of different magnitudes."

And Dr. Rafter's comments on not testing ideas against the market, due to the market's being average, if further demonstrated by Artie's note taking during handball matches. He wasn't watching average players, he was watching a particular "sector" of players. In this case it was the best players.



 It is debate season and high school debate students nationwide are researching and debating public health aid to Sub-Saharan Africa. I write articles and give talks on the economics of each year's debate topics, and on Tuesday spoke to some 500 students and teachers at the Kansas State Fair. I was providing economic comments after a series of demonstration debates.

Debaters on the negative in one round ran a off-topic China DA, that is, a China Disadvantage. They argued that the affirmative's plan for Africa would cost billions and those extra billions added to the current deficit would push the U.S. economy over a cliff. The "brink" would be that the extra debt would cause China to sell its holdings of US debt which would wreck the U.S. economy and lead directly to global thermonuclear war.

The strategy for debaters is to link the affirmative's plan with unintended consequences so terrible that the judge should vote negative just to be safe.

I commented mostly on other issues covered in the debate, but spoke briefly on the China DA. Thousands of top high school students attend debate camps each summer, and they all learn market-failure arguments, so if any Daily Speculations readers have responses to the ongoing "China could destroy the U.S. economy" fears please add your comments. I will promote them to the high school speech and debate community.

Here is what I said: Could China destroy the U.S. economy by selling all or most of its U.S. debt holdings? No. The Chinese government can try to sell large quantities of U.S. Treasury bonds, but who would buy them? If the Chinese government tries to sell too many, "dumping" them on the bond market, the price of these bonds would likely fall. The cheaper the bonds are to purchase, the higher their effective yield, so the more attractive they become. These are bonds already issued and each provides a fixed interest rate that the U.S. government has promised to pay over the life of the bond. The Chinese government has already purchased these bonds. When they are sold on secondary markets that doesn't change U.S. government obligations.

Natural market processes dampens erratic moves in markets. When investors are spooked for some reason (say, for example, by negative reporting by journalists and bears seeped in market-failure ideas in college), and the price of stocks falls, the further bond prices are pushed down, the more attractive the stocks look to other investors. Dividends look more attractive when stocks are cheaper and lower stock prices don't directly hurt company earnings, so investors are drawn to the stock to capture dividends or expected future appreciation or both.

When bond markets are spooked and scared investors sell bonds, prices similarly fall and effective interest rates paid rise. Again, if the Chinese or Japanese (who hold more U.S. debt than the Chinese according to the U.S. Treasury), sold large amounts this could indeed start a brief "panic". But what "panic" selling means to the media is not what it means to the market. Even small dips in bond prices and small upticks in yields are big news. The idea that a U.S. bond-selling contagion could grip the world and push prices down dramatically is like pushing an object toward the speed of light, it takes dramatically more energy as you get close to limits, and infinite energy to push bond prices to zero.

And the worst case scenario: interest rates for U.S. Treasuries rise significantly. That makes it more expensive for the U.S. to issue new debt, that is, harder for the U.S. government to borrow more money to waste on building bridges to nowhere and thousands of other pork-barrel earmarks. Higher interest rates would encourage the U.S. government to spend less and borrow less. And that would not be a bad thing.

So, these are were my general comments on the "China DA." If Daily Speculations readers and writers have further comments, observations, and insights that might help students better understand financial markets, please post them.



Ben BernankeLarry Williams has pointed out he is concerned about returns on the day prior to the FOMC meeting, which coincides with the former Fed Chair's big appearance on most media. One wonders if his aim is to steal some thunder from his successor, or a deft move by his agent to sell books. Either way, Big G now playing for his place in history as a friend of the common man by saying he tried to help but didn't know the evil private sector would take advantage of his policies — to the point of sounding as if he thinks we should see a 50bp cut.

I don't think a tweaking of rates either way will matter much. To end inflation, it would take Volker's disdain of politics to raise rates 400-500bp and commit economic hara kiri in the Western economies; and, to stimulate it would take 200-300bp of cuts to float the miscreants and that would take a Big G like attraction to the limelight. Little B is more political scientist than politician.

One survey that crossed the wires while I was out in Jackson was the Duke Fuqua survey of 840 CFOs of major US firms. Despite assurances from human resources surveys that hiring will be about the same as last year, 16% of the CFOs say the credit crunch has them reducing hiring growth and 30% reducing capex.



New Star Trek episode: World Enough and Time, based in the original Star Trek milieu. Starring George Takei ("Sulu") and a few other originals you'll notice (like Yeoman Janice Rand). Really quite well done; consistent with the original in style. Highly recommended for those who enjoyed classic Star Trek! The ending is quite touching. Following the ending, there's a teaser for the next episode. Streaming video, 65 minutes, requires Flash player.

Rich Bubb agrees:

World Enough and Time rivals any of the original and the subsequent Star Trek spin-offs. Very well done writing, good plot weaving. Special effects and sound effects are very similar to the original Star Trek, but not exact copies. The actors are darn good too. And no commercials!

Vitaliy N. Katsenelson extends:

TV-Links contains links to every TV show and most newly-released movies. Not all the links work but a good portion do. I tried Stargate Atlantis and Star Trek: The Next Generation — both work. I even watched The Illusionist.



Big contango: big bullish move ahead! That's an old speculators' principle on Dalal Street. Essentially if the market witnesses high contangos it reflects that speculative demand for stocks is continuing to either persist or is being forced at higher costs of financing. If prices of the securitiy/stock continue to remain firm despite a high contango (read: high cost of speculation) it reflects larger bullishness ahead.
Similarly this time round oil has hit a new high and the blogs, yet the print and broadcast press have, to my eyes and ears, not given this event the usual high decibel attention. Is it a reflection that finally the world is willing to accept that in growing economies a higher energy bill is less a worry, but more a proof of reasonable well-being in the underlying real economy? Or is that worries about oil prices is an old boring story?

keep looking »


Resources & Links