Today we were treated to yet another Fed Day dipsie doodle move. What is remarkable is that this event is so predictable on Fed day. It happens almost every time they make an announcement after their meeting.

Instantly, at the moment of the announcement, the market moves dramatically in one direction. This disruptive behavior causes everyone to second-guess his positions. Thoughts of "maybe a drop in interest rates is really bad" crossed many minds. Today's drop of about 12 points in the S&P cash index in just a few minutes was sufficient to free up lots of short term stock.

Just as swiftly the market zoomed upward. All the lost valuation was restored within just a few minutes. The market even added on some ten more points to break into new high territory for the day. "Hooray, it was really good news after all!" Or was it? As this is written it is about an hour after the event and the market is slowly settling back to its level before the announcement came out.

Bruno Ombreux recalls:

Ten years ago I visited a bank trading room on a Fed day. They probably have been replaced by robots now, but back then they had human traders waiting for the Fed headline to print on the screen, with one finger on the sell hotkey and one on the buy, and they sent orders within one second of the headline's printing.

This contrasted with my then-employer's practice. Currency and fixed-income traders were forbidden to trade around headlines. After a Fed communique, the trading manager and senior traders left the trading room to meet in a quiet office. They analysed the Fed action to reach a consensus decision within 15 minutes, after which they walked back to the trading room, gave instructions to execution traders and then the whole room went rock and roll.



GoogleToday Google crossed the $700 level. I heard an announcer comment that it is up 30% in a month. In a year and a half it has doubled and since its IPO it has increased in value 10 times.Apple is now approaching the $200 level. In two months it has gone from 135 to 195. In a year and a half it has gone from 55 to 195. Now here is the rhetorical question from the balcony: how many of us own either stock?

There have been plenty of opportunities to have owned either or both. Vic and Laurel commented, when Google was at 350, that they were aboard. They practically hammered the computer keys extolling the virtues of Google and its competitive advantage. My question is: if you don't own it, why not? Better yet: if you have never owned it, why not?

For the record, I currently do not own either stock. I have in the past, but chose to trade rather than hold. I suggest that for those who do not have these two in their portfolios there be a bit of soul searching and analysis and that the lessons learned here be used in the future to identify the next great stock or stocks. A meal for a lifetime.I hope that my portfolio currently has at least one or two that will mimic these two great stocks. Time will tell.




When tech stocks were rising fast and drawing in numerous active but inexperienced investors, two problems arose. First, most had experience only with rising stocks so thought of each leveling off or dip as the market "catching its breath" for the next climb. As new investors experienced gains and experimented with leverage, they realized how much more they could have made had they leveraged earlier investments. And seeing their portfolio gained most with tech stocks, they poured even more into stocks in order to make even more.

For most though, it was much less clear how to "invest" in falling stocks, or how to leverage such bets. To what extent did this asymmetry about speculation contribute to the unfortunate final year or so of the dot.com boom? This is not so much a question of optimists vs pessimists, but one of rates of growth. Even optimists prefer stock prices not rise faster than reasonable present values of future returns. So tech stocks finally crashed wiping out many who just wanted to invest in the future and hadn't thought market valuations could be so far off (Sun Microsystems stock dropping 90%, for example).

Next came the housing crunch. Baby-boomers burned by the dot.com crash turned to "safer" investments in housing. Tens or hundreds of thousands purchased larger homes or a second or third home, using modest down payments for easy leverage. I thought housing prices were way high when I moved to Seattle in 2003, so I chose to rent. But prices went way higher, and anyone then speculating in housing doubled and tripled their money. But it is much easier to buy five or ten houses as investments or speculation than it is to sell five or ten houses on speculation. So again the asymmetry pushed prices up. People who felt housing prices were too high could sell houses they owned, but could not easily sell houses they did not own.

Now, as housing prices stagnate and drop, investors and speculators will lose much, though homeowners will lose only the imaginary valuations of the last few years. Those burned but not educated by tech stocks and housing, are looking for another "hot" investment. How many have turned to energy stocks and oil?

Again, for new investors, it seems like oil prices can only go up, and stabilize just to catch their breath on the inexorable march to 100 dollars a barrel and beyond. Environmental investors are on board too, and perhaps think of their oil and energy bets as helping "save the Earth" as well as sticking it to SUV owners (not to mention the hope of making big bucks for themselves, of which they silently pledge to donate a portion to eco-charities).

Many of course expect oil prices to fall, especially at some future point when the U.S. government stops threatening to bomb or invade major oil-producing countries. But still, the oil skeptics are overwhelmed by the legions of newby investor-speculators betting on higher and higher oil prices.

Apart from the media misinformation on oil scarcity and peak oil, is there an asymmetry with investment tools for oil that tilts oil investments toward prices increases, as seemed to be the case with housing and tech stocks? Or is it just as easy for the average investor to bet on oil prices falling as it is on rising prices?



Rank the following three networks by prime time viewership:

Black Entertainment Television
Cable News Network
Food Network

Answer in the "Primetime" table of Inside Cable News..

Rod Fitzsimmons Frey haikus:

Appetite trumps race
Gourmets buy more stuff, I guess
But both beat bad news



OpenOfficeA few of my PCs don't have Microsoft's Powerpoint installed. I looked at buying it, but it's not particularly cheap, so I tried downloading OpenOffice , which is an open-source office suite.

In short, OpenOffice, and specifically "Impress", the OpenOffice alternative to Powerpoint, is great. A Powerpoint user will have no problems using it without any special instructions. I can't think of any useful feature that it doesn't have. It also has one big advantage over Powerpoint: you have the option of exporting your presentation to pdf, even if you don't own Adobe Acrobat. You can also export and open files in .ppt format, so a Powerpoint user can open and edit your files. I wonder why everyone doesn't just totally switch over to OpenOffice.

Troy Torrison adds:

Another presentation alternative is Apple's Keynote . If you’ve ever seen Steve Jobs give one of his presentations, you’ve seen Keynote in action. It’s reasonably priced (comes bundled with the Apple iWork suite) and quite powerful. Best of all, its built-in templates sport tasteful typography.



Two DeerThe day started with David and I heading out to the crossroads/T-junction on the back part of the farm. There's an old dead tree that we like to sit against. It affords us good cover and a good area of view. The tree is starting to rot, so as leaned against it, it would periodically disintegrate and cruft would fall down the back of my shirt and down into the my underwear — a slight indignity to be suffered for the right to spend this quality time with my beautiful son! We were there only briefly when I noticed a "slight abnormality" across the field. I grabbed the Swarovskis (great optics, by the way, I highly recommend them), and glassed the area of the "abnormality." What I saw was a small buck, right inside the woods, 200 yards away, working a scrape and racking his antlers through a low hanging tree branch above the scrape. I informed David of what I saw and he wanted to look. I told him to keep his eyes on his area as it was fairly chilly, and the rut was going — a good combination for deer movement.

After a few minutes I got out my Canon 3CCD pro/am video camera to get the hunt on film. I set up the tripod and told David that we needed to do an interview. I trained the camera on him, had him look away, hit the record button, waited five seconds and then gave him the signal to turn to the camera and tell the story of what were were doing here. For a kid who's never at a loss for words, he sure didn't know what to say! But he's done enough of these that he was able to fumble through it.
After the interview, I was turning the camera off, when David said, "Dad, deer! In the crossroads gap." Sure enough, a deer had materialized and was standing right in the gap facing us. I turned the camera towards her, and turned it on while David got into position. He had the .30-06 pointed in her direction. She started to come closer and closer — but was facing us and David has been trained to wait for a broadside shot, so he waited. I glanced over at him while he was waiting and noticed he wasn't looking at the deer through his scope. I told him to get the deer in the scope and put the crosshairs on the kill zone, which he did. Then another deer appeared behind her. It turned out to be a yearling buck, and he wasn't just "behind her", he was trailing her. You see, the rut started early this year and this doe was almost ready to breed, or at least close enough to get this young buck's attention.

She came closer and closer, but then something alerted her. I'm not sure she saw us, but she definitely didn't like what she sensed. She got nervous and turned sideways. She was now broadside! I had the camera carefully trained on her and sitting on a tripod (sitting on a tripod is important, as it's nearly impossible to hold a camera still when a gun goes off!) and I waited patiently for David to shoot. Nothing, no shot. Nothing at all! 

I asked David what was wrong. He whispered, "I can't see her through the leaves." There were a few leaves in the way and he couldn't find a gap to shoot through. Actually, there were only a few leaves in the way that he could have easily shot through, but I was I proud of him for waiting for a "sure shot" rather than take a chance on wounding the animal. I believe that shows a lot of character on his part. He definitely respects the animals we hunt and doesn't want to take a shot unless he's sure he can make a clean, quick kill!
She then wandered off down the finger heading south and was quickly out of sight. Our chance was gone! I was so excited to have the chance to harvest a deer before 8 am the first morning, but it was not meant to be.
 30 06 Bullets
We kept waiting for other deer to come back. We saw two others come by in the crossroads gap, but they went right by in the direction of the first two. So David and I decided to do a stalk to see if he could get on the deer that just went by. We stalked over into the gap, hugging the right (south) side of the weeds/woods line as cover. We saw one deer out in the field, but not the other one. David carefully trained his gun on the deer to take aim. "Dad, that looks like a yearling buck, can you see a set of small antlers on it?". I glassed it and agreed it was a small buck. That meant that on my property, it was a protected deer (we don't shoot bucks unless they are at least 3 1/2 years old and have at least 140 inches of antlers. Again, David made a wise decision. Even though he wanted to take a deer, he honored the rules.

We saw a few more deer, even had two more yearling bucks walk up on us, but then it started to get really warm and the wind started blowing hard — a terrible combination for deer hunting. As a rule, I usually stay out all day for the youth hunt, but I decided to break with tradition today and asked David if he wanted to go into town for pizza. I didn't have to ask twice. 

Then, that night, David and I sat in the box blind on the bottoms. This is usually a good spot to sit if you want to see deer. Behind the stand is a freshly harvested cornfield that deer and other animals like to pick through to shore up their winter fat. In front of us was a sparse food plot of corn, to our left and right, clover and alfalfa! The creek is on the other side of the corn field (behind us) providing a great place for the deer to bed down. Usually near dark you can see the deer begin to file out of the woods by the creek. To our right was a finger that leads to the "Big Woods" about 200 yards away, an area rich with acorns and cover for the deer. To our left was the 10 acre wood lot (about 300 yards away), also rich with cover and acorns. We were positioned in the middle of the food and the center of one of the two main travel corridors on my farm.

We sat there for about two hours and saw absolutely nothing. Finally, near dark, an owl landed on top of a small evergreen about 80 yards in front of us. David was fascinated by this owl and wanted to borrow my binoculars. He was determined to see the owl turn its head 360 degrees. As it got closer and closer to "magic time" (that few minutes of dusk right before dark), I told him he needed to start paying less attention to the owl and more attention to watching for deer. He asked if he could watch the owl for just another minute and then all of sudden said, "Dad, there's a deer!" Yes, just like that. As they so often do, a deer appeared out of nowhere. 

David waited patiently for the deer to move into position. After a minute, the deer went behind the evergreen with the owl on it and disappeared. After a minute or so, as it came out from behind the tree, David took careful aim. Bam! A .30-06 going off in a wooden box blind is quite loud. The deer seemed to drop, but then ran into the corn food plot just up the hill and disappeared.
We waited for a minute and then went up the hill to look for the deer. As we approached the corn food plot, I saw movement. I looked through my binoculars and saw the deer moving around. I told David to get his gun and get ready for a follow-up shot. It took him a few seconds to find the deer in his scope. He took careful aim and "click." Nothing. He tried again. "Click". Nothing. "Dad, my gun isn't going off." I grabbed his semi-automatic .30.06, ejected the shell and made sure another shell slammed into the chamber. He took aim and then the deer started to move. He shot and missed. The deer went behind another evergreen. When it came out again, he shot and missed again. We waited for a minute thinking we'd find the deer down in the finger it had just run into. We searched for a few minutes, but upon not finding it, decided to back out and wait until morning to come back and track the deer. It was simply too dark to see anything by then. 

On the way out of the woods I told David we should have checked the first area we saw the deer when he shot, instead of looking up the hill for the deer. It could have been two different deer we were seeing. But by then, it was very dark, so we decided to just come back in the morning and look. 

JerkyWe got back just as it was breaking day and waited for light by the box blind. As it got lighter, I decided to start up the hill and look for signs that David hit the deer. I went directly to the approximate place where I figured he shot the deer, and, lo and behold, there lay the deer. He had dropped it in its tracks with one shot! Apparently the deer had moved just as he shot, and he didn't hit it exactly where he was aiming, but he did hit it in a good spot. I won't say where exactly he hit the deer, but I did call him "Lee Harvey" the rest of the day — and made him look up why I was calling him "Lee Harvey," just to mix in a little history lesson with the hunt. Apparently, there was another deer behind the first one (in the corn). When the first deer moved just as David shot and then the other deer jumped, directly behind the one that was shot, it gave the illusion that the first deer ran into the corn.
But, still, we had shot at the second deer thinking it was the first deer, and though I was fairly certain he hadn't shot it, we had to make an effort to recover the deer. I have a strict code of ethics that I apply to myself and all hunters on the farm. You make every effort to recover all game, no matter how time-consuming it is.
So I used the opportunity to teach David some tracking skills. I went into the ditch and told him to slowly walk down the south side of the ditch (which ran from east to west) taking two steps at a time, then scanning the area in a complete 360 from an upright position, then squatting down and repeating the 360' scan. That may seem redundant, but it really gives a completely different view of the area, and I've found deer that I missed when scanning from an upright position.

We did this until we worked our way completely down the ditch, then repeated it out into the corn field to the north of the ditch. Here is where the real lessons started. I took the outer edge and told him to work his way into the corn plot (which is very weedy and thick), about 15 yards to my left. I told him that we were going to do the exact same thing we did in the ditch — two steps, 360' scan, squat and 360' scan, then take two more steps and repeat. But he had to pay close attention to where he was in the plot in relation to me. I wanted him to stay within 15 yards of me the whole way up the hill. He did a good job of following instructions. Once we got to the top of the hill and out of the food plot, I told him not to move.
The next step was for me to pivot off his mark and move 15 yards to his left (north of him). Once I was there, I told him to move 15 yards to my right (as I was now facing downhill). I found a tree to mark myself off of (since we didn't have the edge of the food plot as a reference point any more). I put my orange hat on the ground to mark my spot and walked over to him. I found him a tree to use as his "aim point/reference point" in working his way down the hill. I told him the goal was to walk toward that tree and make sure that he stayed within 15 yards of me, all while doing the "360', squat, 2-step." It was slow and tedious, but we did this for over 90 minutes looking not just for the deer he'd shot at, but any sign that he'd hit the deer (blood, hair, bone, etc.). We found nothing, so I'm confident he missed the deer.
But while we were looking the plot I took the time to teach him some important lessons. I went through and told him why were being so meticulous in looking for the deer and how this would help him become a better baseball player, basketball player, and how it would help him become a better trader. I told him that the meticulous attention to detail that he was paying would spill over into other areas of his life. We discussed how the keys to success are in paying attention to the little details. We discussed how his favorite athletes would perform great acrobatic feats and make it look so easy to do the "big things". I explained that getting the big things to work out in your favor was actually pretty easy. All he has to do to get the big things to go his way, is to take care of the little things, the fundamentals. Pay attention to details and develop habits of excellence in all areas of his life.

He asked me how this meticulous search for the deer would help with his trading and sports. I told him that excellence is not something any of us are born with. Excellence is something that we all develop, and we develop it through habits — by developing good habits in one, then two, then three (and so on) areas of our lives. We eventually develop good habits in all areas of our life and come to expect excellence from ourselves. 
Excellence in tracking a deer leads to excellence at baseball, which leads to excellence in basketball which leads to excellence in trading. By paying attention to the little details and always drilling yourself at the fundamentals.
As we kept searching, he asked me, "Dad, aren't I only supposed to shoot one deer in the youth hunt?" I told him that was correct. He asked, "Well, what happens if we find the second deer?".
"Well, we'll have to call Jim (the local game warden) and tell him that you accidentally shot two deer." He wondered if he'd get in trouble. I told him he might, but that I would tell Jim that I had you shot at the second deer, and that if I had been hunting by myself, I would have made the same mistake. Further, that I would ask Jim if he must write a ticket for this infraction, if he would please write the ticket to me, since I was the one telling you what to do and you were merely following my instructions.
David wondered if Jim would write me or him a ticket. I told him that I didn't know for sure, but I think Jim knows us well enough by now that if I tell him it was an accident and that you were following my instructions, he'll likely not write you a ticket, and and if he has write a ticket (which I told David that I doubted he would), he would write it to me. David agreed that it wouldn't be much fun, but it was the right thing to do. Needless to say, I was proud of my son that day! He's growing up to be a fine young man! 



Abandoned Baby: A rare reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day.

A tested bearish candlestick pattern, Abandoned Baby , completed today, close to what was described by Steve Nison in his Candlestick Course book. Recall the last occurrence preceded the big July market drop. Prior historical occurrences tended to be bearish over next day or so. Hard to tell with the FOMC tomorrow though. We'll see what happens. My son pointed this one out to me.



The money quote from Fed mouthpiece Ip in this morning's WSJ…

"…for policy makers, the decision is between the quarter-point reduction and no cut at all. A half-point cut is unlikely to get serious consideration from Fed officials…Ordinarily, meeting market expectations isn't a goal in itself for the Fed…"

…has drawn a universal <snort> <roll eyes> from the professional Fed-watching community.  With financial stability JobOne at the Eccles Building, November Fed Fund futures putting a 94% probability on a 25 bp cut, and America's highest profile broker fielding retail phone calls about its financial stability, the notion that the Fed is seriously thinking of not moving rates is just laughable.  In September, it was UK Northern Rock's bank run on page one that cemented the Fed's panic half-point cut. Think Bernanke will sit still with MER on the ropes? Neither do the currency traders.



PumpkinTonight I watched 100 carefully wrapped pumpkins thrown off a second-story roof by two overzealous pumpkin tossers. My nine year old grandson's pumpkin was one of those tossed. It survived and he got a free book of his choice as a prize. My wife yesterday selected a small and firm pie pumpkin rather than a larger one.  She decided the smaller one would survive the fall (reduction of risk) better than a larger one (more exposure to risk) falling two stories.  Packaging is the key so this morning I visited a UPS store and bought a 10×10x10 box, shipping 'peanuts' and a roll of good strapping tape. The pumpkins falling and some splattering all over the ground remind me of investing and deciding if more or less exposure is the best route to follow. Also, finding ways to insulate your exposure (doing careful research) in stocks make sense. A good time was had by 200 students, parents and grandparents.



Now that the Red Sox are finished kicking the Rockies around we can go back to studying markets. There has been a fair amount of talk about how a few large cap stocks are carrying the market higher. The so called Hindenburg Omen is one such measure. The concern is that faltering breadth is a bad sign for the market.

To test this we can look at how the big cap weighted SPY ETF performs with respect to the equally weighted RSP ETF. Note that both funds are based on the same 500 stocks in the SnP average. So if the rally is broad based then the RSP should perform better. If it is concentrated in big caps then the SPY should be the better horse.

A simple ratio of SPY price divided by RSP price was the metric chosen. To establish what is a large variation in the ratio the min and max levels of the ratio for the last 20 days was chosen. Following are the returns for the subsequent 10 day period:

.       After  After  After

.       Max     Min    All

Count    80     162    1087

Avg.   .26%    .31%    .44%

Std.  1.96%   1.90%   1.87%

Based on the results above we see that when the ratio was at one extreme or another the market actually slightly underperformed the average of all time periods.

Alston Mabry takes it one step further:

Inspired by Dr McDonnell's use of RSP and SPY to measure the small/large-cap relationship, I did a study using the Russell 1000 (RUI) [larger cap] and the Russell 2000 (RUT) [smaller cap].

Data: March '93 to present. For each day, calculated the previous 60-day % moves in both the RUI and RUT and the simply subtracted the RUT% from RUI% to get a net difference: positive means the large-cap RUI has been outperforming; negative, the small-cal RUT has been outperforming. Also calculated the forward 60-day % move in the S&P. Then pulled out each 60th day so as to have non-overlapping data points.

count: 60

mean RUI%-RUT%: -0.21%

sd: 6.70%

mean 60-day forward S&P: +2.16%

sd: 6.29%

And here are the means for the quintiles, with the data sorted by RUI%-RUT%, as well as the mean forward 60-day % change in the S&P, and the z of this S&P change:

RUI%-RUT% / S&P / z

+8.28% +6.34% +2.30

+2.45% +3.54% +0.76

+0.64% +3.33% +0.64

-2.90% -1.76% -2.16

-9.54% -0.64% -1.54



Marathon records are amazing. One fellow did one every day for a month — this is very hard! I used to do one on a Saturday and then one on Sunday — I cannot imagine a steady diet of 26 mile runs. A buddy does lots of 100 mile runs, all in the mountains, at elevation) I asked what was the most difficult part about it. He replied, "the second sunrise."



When I took Goldman's Where Do I Fit In? quiz , I got "Credit Risk Management" and "Investment Banking." I was hoping for "Committee to Run U.S. Monetary System" or "Shadow U.S. Government," but apparently they don't advertise those…



Picture of the day: An animated image demonstrating the Quicksort algorithm used to sort a list of items in computer programming



The Myth of the Robber BaronsThere are many reasons to read the Myth of the Robber Barons by Burton Folsom.

1. It shows how the key to business success in those days was lower costs, through attention to detail, hands on management, improved technology to produce a higher quality product, accurate predictions of where the market was going, price reductions to increase markets, sound financial structure to prevent getting in over the head, swooping down to buy their competitors out during times of panic.

2. It shows that the great entrepreneurs of the late 19th century, Vanderbilt, Hill, Rockefeller, Mellon, Schwab, Scranton, made their $100 million plus fortunes, by passing on their improved efficiency to consumers thereby widening the market, and allowing better utilization of the technologies they developed.

3. It shows that economic history as it is taught is completely wrong concerning that era; especially that the myth that these legends were robber barons is completely untrue. There were Robber Barons, but because most of them developed inefficient methods because of government subsidies they eventually succumbed.  It was the partnership of government with what we would now call political rent seekers like Collins, Cunard, Harriman, Leland Stanford, Villard, that were the evil doers.

4. It provides an introduction to three of the greatest and most able businessmen who ever lived, Andrew Mellon, James Hill, and George Scranton.

6. It contains numerous hints on how to run a business successfully.

7. It makes you understand the sources of wealth and progress in our society.

8. It provides a snapshot of the interaction of business and finance and the stock market at the turn of the 20 th century.

It will be impossible to summarize all the techniques that the entrepreneurs used and how they compared to the non-innovative and fixed methods of doing business that all their competitors used. However, here are some isolated facts about cost reduction that were the cornerstone of the better efficiency these entrepreneurs were able to achieve.

Vanderbilt made his fortune in steamboating by reducing the price of passenger travel from $7 that Fulton's rival steamships were charging to $3, then to 10 cents, then free. He did the same from New York to New Haven, reducing the prices from $5 to $1. Schwab and Carnegie in 1897 installed new furnaces and reduced the price of finished steel by 34% and passed the saving on to increase markets by reducing the price of rails by 60%. Hill reduced the cost of travel from Minnesota to Washington from $50 to $10 one way. He reduced the price of transporting lumber from Washington to New York by 50%. The key to Hill's success was a lower cost structure, constantly improving technology, a better foundation than any of his competitors, and a vision to build markets by lowering prices. This enabled him to survive hard times, and buy them out during times of panic. Here are some facts about Hill's methods but they provide almost a composite of the secrets of success of the other famous and usually villified entreprenuers of that period, including Rockefeller, Carnegie, Vanderbilt, and Scranton. Hill's goal in building his railroad was to use the best possible rail, to go the shortest distance, the lowest grade, and least curvature. He then provided research and low transportation costs to his passengers so he could develop more of a consumer base for the rail traffic. He rode horseback himself to find the shortest route and found the Marias Pass in the Rockies, shortening the route to Washington by 100 miles. He purchased his coal at $2 a ton less than his competitors, and was using coal when they were using wood as fuel. Then when the depression of 1893 came, all his competitors went into bankruptcy and Hill with his lower costs was able to buy them out. He purchased "steel rails, ballasting track, transfer yards, terminal facilities, new equipment, new shops" and thus had lower fixed costs than all of his competitors . He was able to make a profit while the others that had relied on an inefficient rail system descended into bankruptcy. He then expanded his market by building steamships to take the freight from Washington and the East to sell cotton, copper,and wheat to Japan. He built the rail system in Japan, bidding 20% below any of his competitors.He developed the Washington lumber business by lowering freight rates by 50% and selling 1 million acres to Weyerhauser at $6 an acre, which turned out to be half its value. The themes and case studies in The Myth of the Robber Barons as well as all the follow up material for each of the greats available on the search engines are well worth studying because they are timeless and provide invaluable lessons for success today.

Mikhail Osipov adds:

It’s unfortunate that many view the world as a fixed-sum game and conflict ridden where A’s gain is B’s loss. Institutions that provide a framework for free markets and private property, allow for mutually beneficial gains via voluntary interaction, i.e., a positive-sum game. As Vic pointed out, Hill’s success was largely due to his entrepreneurial ability to constantly come up with novel ways to reduce costs which he passed on to the consumer in the form of a lower price. You can only increase revenue by lowering price if the demand for your product or service is relatively elastic, which implies that other alternatives and substitutes exist for your product or service exist. And to consider someone like Hill a monopolist or a robber baron contradicts basic economic principles.

I am an avid reader of Daily Speculations, an admirer of Vic and Laurel's work, and a PhD student in Economics at George Mason University. Just a few days ago I was reading up on rent seeking and one analogy came up that I think may have something to offer in terms of an insight into how markets behave. The analogy has to do with the competition among Bull Moose during a mating season. After my midterms I will complete this piece and would like to submit it to you.

Robert McAdams writes:

Thanks for the heads-up on this book. When one looks at the wealthiest people in history, they have one thing in common: volume. If you can convince more and more individuals to engage in voluntary exchange with you, your wealth explodes. Toyota has made far more money than Lamborghini. Further, one of my definitions of profit is: “profit is what happens when you save someone else time or money." Vic's quotes from the book back that up. I support free markets and oppose those that try to use political maneuvers to erect barriers and prevent competition.



The work of John Kanzius was discussed this weekend at a cocktail party I attended. Amazing stuff and rather ground-breaking if it pans out. Nice to see creativity, necessity of invention and inspiration coming out of someone like him.



There is a saying in the construction business that 'rounding' will get your estimates in trouble! All insurance adjusters hate 'rounding' of insurance estimates that a contractor prepares and submits. An estimate for insurance repairs will have smooth sailing with an adjuster (for the most part) if you use odd dollar and cent amounts for each item you are bidding; this will make the adjuster smile from ear to ear. I had a mentor years ago who specialized in fire loss restoration who told me to break down each segment of the estimate; this way you have less chance of missing anything and can get more out of the job.

Having a penchant for detail is good in construction estimates, evaluating a checker or chess move, or looking at a market move in detail before you hit the 'buy' button. In all three cases a handwritten manuscript will allow you to do a synthetic study of past performance and to see how it applies in your current scenario.



The Farmer's WifeA book recommendation: The Farmer's Wife by Idries Shah (Hoopoe Books, 1997, pbk. 2005). I enjoyed reading it with my seven year old son. A tour de force of higher order thinking, randomness and unforeseen outcomes. A story for children at first glance that is actually a blueprint.



I played the guessing game that Poe described [see Luck Logic and White Lies] with a 1 year old son. We noted that Monday, October 22, the 3:30 to close was up 10 so I held out my hands and asked him to guess Tuesday. He said well it was up 10 , so I'll guess the same. Tuesday 3:30 to close was up 6. The same happened on Wednesday, he guessed 6 but it was up 5. On Thursday he guessed 5 but it was up 10. On Thursday he guessed 10 but it was up just 4. Sometimes it pays to be one year old.



My favorite stats resources:

sci.stat.*  (Usenet)

R-help (Mail-list, very heavy)

R-sig-finance (Mail-list, reasonable traffic, interesting)

See also Statistical Software List Subscription Service



CubsI was in the LA wildfire this weekend, and I can tell you that having been in hurricanes, this held up in comparison. We had a thirty person Cub Scout camping trip to Leo Carrillo State Park campground, five miles north of Malibu. Friday was quiet, but the wind started picking up about midnight Saturday night. By 1 am, gusts were at 60 mph, and I had to wake about half the sleeping campers at other campsites to put out the fires they had left unattended (140 campsites). One guy had embers blowing about 20 feet. Our campsite was at the end of a box canyon, so with the wind at our back we'd never smell the fire coming if these bozos caused one. I kept a few people alive that night. By 3 am, the gust were up to 80 mph. My son and I were lifted and moved just short of two feet in our pup tent — while we were lying down in it trying to sleep. Surprisingly, only one tent shredded in the wind that night. When the wind lifted us, it blew our ground cloth away — out from under us. I guess we weren't in Kansas. We were told to evacuate at 8:30 am and drive to Oxnard. Up to that point, the skies were azure blue all weekend and the weather was incredible. Right now in Pasadena, you would think it's sunset.

Alan Millhone writes:

To earn my First Class in the Boy Scouts I had to "get a message through" in Morse Code, 20 words in a minute. I still have all my Cub and Boy Scout manuals and all my scouting items! Fond memories of a much simpler time in America. I am proud to have been involved in Scouting.  In today's world Scouting should offer a merit badge in the markets — a real challenge for proficiency!



Anyone remember how we used to fight for three-point moves earlier this year?

Ah, the good ole days
Of high volatility
Don't seem so good, now



FenwaySupposedly tonight will be the first game of this year's World Series. The Boston area weather report casts some doubt upon that with an 80% chance of rain, but still it is time for the fall classic. This year's series has some great story lines. American League versus National League. Junior circuit against senior circuit. Good versus evil. Those scum sucking no good rat fink bast.. oop.. I mean the Boston Red Sox with the best record in baseball against the unlikely Colorado Rockies. Boston's dominance of the league and Colorado's record breaking 20 wins in 21 games to get into the series. The Rockies were thought to be out of it as September rolled around. The Red Sox almost blew a 7 game lead with three weeks to go in the season. It has the making of, well let's be honest it has the makings of a Boston blow out. They are too good. I hate them. I detest their trend following fleecer of a public owner. I wish Josh Beckett was an Oriole and that Curt Schilling would take his darn bloody sock and go back to the National League. I wish David Ortiz would get sucked into some magical vortex that made him disappear for the next week. I wish Manny Ramirez, like Sampson, would get a haircut and lose the ability to hit a baseball. But, all of that is unlikely. They have the hitting, the starting pitching and as long as they keep Eric Gagne away from the mound, the bullpen. Although Paelebon will probably have to get his ERA down. After all in the post season it is a lofty 0.00! I hate them. I will be rooting for the Rockies. I suspect I will not like the outcome of this series. My only hope is that Big Poppi can't be DH in the National League Park. The man can hit but give him a glove and interesting things happen. However, the rat bast.. I mean the Sox have home field advantage so that's not really an edge. More of a delusion.

So tonight the field at Fenway Park (another reason to hate the Sox. What a great stadium!) will be draped in the familiar red and white and blue bunting. A celebrity of some sort will throw out the first pitch. It will be the World Series in all its glory. Except it won't. Today the Super Bowl looms much larger across the sports landscape. So does the NBA finals and the Daytona 500 for that matter. Baseball is losing its lofty perch as America's pastime. Today we prefer the NFL with all its violence, pageantry and barely dressed cheerleaders. Much as Romans eschewed chariot racing for gladiators we have traded the stately game of baseball for the rock and roll fest of football. Please don't get me wrong. I like football. But I still have that decade long love affair with baseball. With my track record I have no personal knowledge of this kind of thing, but I think baseball is like a long term spouse for me. She is perhaps fading with the years and to others she is not as beautiful as she once was. But I look at her and see only the beautiful smiling young woman I fell in love with.

I think back as I sit here to the first World Series I can remember. The Dodgers-Orioles of 1966. I was 5. I didn't know the combination of Drydsdale-Koufax was supposed to wipe the birds off the face of the earth. I just knew all my friends' Dads were worked up about it and spent a lot more time playing catch with us and talking about the Orioles. I did not know it was considered something of a miracle that the Orioles won in 4 straight. I didn't know that it would be the last time Sandy Koufax would explode form the mound, curling and hurling his entire being into an exploding fastball or devastating curve ball. I just knew that my friends and I were enthralled and entranced by each and ever pitch. I fell in love with the game. I remember 1968 with the glorious matchup of Gibson and Lolich. Unfortunately I can still recall 1969 with the powerhouse Orioles being dropped in their tracks by the Mets. 1970 with Brooks becoming inhuman to the point of godliness on the third base line, the return of heartbreak in 1971 with Roberto Clemente almost single handedly beating the Birds. The long haired brightly colored Oakland teams of the mid 0's. Reggie's three home runs to become Mr. October. I still can't hear We Are Family without recalling our second loss to the pirates in 1979. Cal Ripken catching the final out of the 1983 series just days after my father passed away. One of my most vivid memories is reaching for the phone to share the moment with him before I realized he was no longer there to take the call. The earthquake series when I lived in central California. There are literally too many to recount here.

Life has changed a lot since then. It was, I suppose, the legendary oft cited simpler time. We played baseball from sun up to sun down back then. Kids play today but usually in organized Little League and the game takes a second place to soccer and lacrosse here in the mid atlantic. No organized ball for us. In the street, the field across the street, the common area of the apartment complex. We didn't care where. We played with baseballs cadged and cajoled from parents for the dollar was a big deal for a new ball. We played with tennis balls liberated from the courts of the upscale development across town. We played with wiffle balls and duct taped them when they splintered until they resembled silver orbs hurtling through the afternoon sky. Gloves were carefully oiled and wrapped each night. If it was raining on a Saturday we watched Joe Garagiola and the NBC game of the week to watch teams from across the league play. We fell asleep with transistor radios under the pillow to listen to the Robinson Twins, Belanger, Powell, McNally, Palmer and Cuellar restore justice and righteousness to the universe in the form of three run homers and blistering fastballs. There was no umpire and balls and strikes were argued with the intensity of the McCarthy hearings. Baseball. We loved, played it, watched it, listened to it, talked about it. A simpler time. Today, it moves too slow for most. The NFL and the NBA are the dominant sports. If kids play pick up games it's probably hoops. Little kids dont get to watch in breathless wonder as the home team takes the field in a blaze of popping flashbulbs against the red white and blue backdrop of the first game of the series. They are long in bed by the time the first pitch takes place. Life has changed. I look at the world around me populated with taxes, bills, ex-wives, ex-girlfriends, wish they were girlfriends, wanna be girlfriends and miss those days when all you needed were a couple of friends, a battered mitt and dirty much abused rawlings to experience the sublime. I look at my son and feel a little sad that he never had a passion for a game not involving a TV and controller. Life has changed. H&ll, look at the markets. Back then you had the American League and the National League and you had stocks and bonds. Today we have futures, options, options on futures, swaps, straddles, hedge funds, fund of funds, CM's, CDO's and virtually every other derivative and contrived trading instrument you can think of. It is a small wonder that faster paced sports have replaced the timeless game of baseball. Still, I miss it.

I shall sit this week and watch the games. I shall cheer, perhaps in vain, the Unlikely Rockies. I shall curse the Red Sox. I shalll think back to a much simpler time. In all likelihood I shall cook some hot dogs to watch the game. Instead of the cola in a paper cup of my youth it will be scotch in a lead crystal glass. But at some point I will, I hope reconnect with that little boy who held his breath as the teams took the field and the game got underway. With the teenager who could still be captivated away from teenage cynicism when Brooks Robinson stopped your heart with his spectacular play. With the young expectant father who missed his own Dad. With all the moments and times and stages of my life when in October baseball was king and the World Series was serious.



Senior GolfersMy daily walk takes alternate routes through the week.  Each route takes me past many property "For Sale" signs.  Most houses up for sale are unoccupied — owners abandoned, flew the coop, gone with the wind.

Now the first of the boomers are retiring, with homes for sale, the only asset they have other than the fat hanging from their bodies, which they can burn off during the time it takes to sell their property.

Boomers will want to engage in the activities they have been dreaming of for the past 50 years. Golf, travel, visiting grandkids in far flung places, moving to a warm place for the winter.

They are in for a surprise.  If they can sell their property, when they sell, they will find prices for their retirement dream will exceed what they obtain.

We have visited retirment villages in the Pacific Northwest.  A small one-bedroom apartment rents for $5,000 a month, including three meals. Parking for a car is extra, small storage if available is extra, phone extra, gotta tip the maid or give an Xmas bonus, etc.

If boomer has a home fully paid-for and can get $500,000, then pays out $6,000 per month as cost of living and travel, then the $500,000 will keep 'em going for only seven years. They'd better plan on euthanasia.

How many boomer homes are fully paid for? Their homes have been ATMs for the past 20 years.



Doyne FarmerA recent paper by Doyne Farmer and Ilija Zovko of the Santa Fe Institute shows what I believe is an incredibly interesting approach to diagramming the ecology of the markets, a phrase that has often arise on Daily Speculations.

While I find the conclusions and statistical work not particularly interesting, the research approach in the beginning of the paper is fascinating. The authors look at coded order flow on the LSE and categorize each player on an hourly basis as either a net seller, buyer, or inactive. Then they plot that behaviour for all eligible periods during a month and see what the plots of this behaviour look like on a case by case basis.

Next they look at correlations in a given period between groups of buyers and sellers (for example, do the same groups always sell at the same time, and do they always sell to the same counterparties?). Their conclusions because of constraints upon their data (actually what they can share of their data, as they note briefly) are not particularly enlightening but the extension of this approach if one could secure the data seems a treasure trove of potential research.

How valuable it would be to have these plots, for example for the 50 biggest player in a given stock!



No statistical technique can prove causation without a controlled experiment, which is not possible with the markets.

Stefan Jovanovich recounts:

David HumeMy dear wife and I once spent the better part of an hour searching the graveyard in Edinburgh for David Hume's final resting place. Finally, Susan found it. Over his agnostic bones his sister-in-law had erected a truly monstrous white marble statue of an angel. I doubt Hume would have minded. However, I think he would have objected to the notion that "controlled experiments" prove causation. This is a crude paraphrase, but Hume was rather insistent that our capacity to associate differing perceptions and to define those associations symbolically does not "prove" anything. All it grants us is the capacity to formulate hypotheses and to observe which hypotheses seem more useful than others. As Hume put it, "… that the sun rose today does not assure us that it will rise again tomorrow." Even the most common sense hypotheses can -logically - be treated only as conjectures, not certainties.

Tyler Mcclellan writes:

Causation is ironically exactly equal in logical form to the foundational principles of mathematics. They are both a priori, synthetic formulations that are both deniable and non definitional.

Ironically, Hume failed to understand that arithmetic and causation belong in the same category of thought, but Kant's brilliant insight into Non-Euclidean geometry and Gödel's work in arithmetic theory advanced that thinking to its current general acceptance. One believes Hume would likely have accepted causation if he knew he would be forced to reject along the same lines the foundation of his empiricism.

I believe the above has relevant corollary to the market because the now accepted method of scientific inquiry is that which is also repeatedly offered by Vic and Laurel as the foundation for sound investing: falsification. And why I believe The Logic of Scientific Discovery is the single most important book for applied scientists/thinkers in the modern time.

Stefan Jovanovich replies:

Immanuel KantI think Hume would have applauded Tyler's description of causation as an "a priori, synthetic formulation that (is) both deniable and non definitional." I am not certain that I fully agree that Hume would have been comfortable being described as an "empiricist." He seems to me someone who thought that the human understanding of the universe would, with luck, grow and flourish; but it would not — contrary to Kant — ever become more than our own speculations about what might or might not be. Thought, whether pure or unpure, would not let us see G-d. Like many genial people who are deep skeptics, Hume was comfortable with the notion that human thought itself was a form of revelation. (I think that is the main reason he was an irksome outlier to all celebrants of the Enlightenment - both past and present.) He would certainly have agreed that falsification was a better working hypothesis for handling money and stuff than any other, and he would undoubtedly have wanted Vic and Laurel to handle his money; but I suspect he would have sided more with Wittgenstein than the non-Euclidean positivists who are the wizards of the markets. My hypothesis is that his answer to Tyler would have been this: Even when humans discover where the square root of an imaginary number lives, a full understanding of what that mathematical tiger of the universe is saying will still elude us.



While imperfect, "The Kingdom" addresses the push me/pull me aspect of our ''allies", the Saudis. They are 'helpful' when face to face, less helpful in all other encounters, making redress of terrorist outrages hard to accomplish. (By the way Jamie Foxx gets better and better). The film spent months being sampled and screened, ostensibly waiting for a new hook of some sort of terrorist explosion that, thankfully, failed to materialize. Jennifer Garner is in the film, barely; I was hard-put to explain what she was doing there, especially given her unSaudi skivvies and camo gear. (Where was the official complaint from the royals? Where was her burqa?) The thumbnail non-Robert Wuhl mini-history at the start of the film is alone worth the trek to the ‘plex. In its complex back and forth of Saudi cooperation, hostility, insolence and veiled hatred in the unraveling of blame for a ghastly explosion killing many Americans resident in the US compound there, the film serves to remind viewers that Saudi Arabia is but another of the many coiled snakes hissing at us with forked intentions in that part of the globe. This movie is what I like to call an actioner. The last part of “Kingdom” releases weeks of your suppressed animosities and rage with its shooting, carnage and revenge opera. My kind of flick.

Reservation Road” could be termed a non-buddy film starring two strong male actors who otherwise would be viewed as likely Butch Cassidy and Sundance Kid types. In the film, tension over an accidental fatal hit-and-run builds almost unbearably, with the audience subtly cheering on the perpetrator of the crime, Mark Ruffalo, as the sympathetic hero, versus the obsessional, unrelenting Jean ValJean [anti-]hero of Joaquin Phoenix. Both men turn in taut and stomach-churning performances, abetted by the somewhat over-the-top ministrations of the ever lovely Jennifer Connelly. Computer search plays as large a role as any of the live actors.

Sleuth” reprises the film and dramatic Broadway productions of the past 30 some years, starring Michael Caine as the older, wealthier, cuckolded older playwright, and the handsome, feckless but not unresourceful Jude Law in the role once played by both Michael Caine and the late and much-missed Christopher Reeve. This too is a non-buddy partnering of matched opposites, with the sleek, techno-gee-whiz centerpiece home of the older Caine playing a significant role in the proceedings. Law is having it on with Caine’s lissome missus, and Caine makes Law pay for every illicit assignation. But getting to the dénouement is more than half the frissonage and fun. It has its charms, especially if you haven’t seen the earlier incarnations of this classic standby of point-counterpoint of men over a woman. And of course, it’s more about matching wits against an egregious opponent than it is about jousting for the favor of the female.

Melancholy and occasionally plain unbelievable, the film instantiation of the popular book by Gabriel Garcia Marquez, “Love in a Time of Cholera,” features amiable and unforced performances by Javier Bardem and numerous buxom beauties, much breastly bareness, and the requiting of long, long unrequited flames from youth. The protagonists age astoundingly gracefully over the course of 50 years, and the heroine is only the slightest bit tinged by the passing cavalcade of annii. Bardem has his way with ladies only too willing to avail themselves of him for some reason (he asserts after 616 or so that it is because he is so “accommodating,” but he has the temerity to tell his long-lost love after all these on-screen assignations that he has—of all the brazen balls!—remained a virgin waiting for his one true love). Early on, the capable Liev Shreiber and incendiary John Leguizamo perk up the film, largely wasted talent cameos that go nowhere, apparently. The book was less unlikely, though there is always a surrealistic, almost hyper-fantastic element to the works of Marquez.

Probably a strong contender for the Oscars is Philip Seymour Hoffman’s gritty and thrombotic performance in “Before the Devil Knows You’re Dead,” also starring Albert Finney, a sclerotic Ethan Hawke, a sometimes-nude Marisa Tomei, and a tight ensemble in this heist gone terribly wrong for all the tragic yet expectable reasons. I thought nothing could top Hoffman’s Truman Capote, but this one is feral and dark, unforgiving in its sweaty trajectory into the unforgiving abyss. Not one character in the lot has a smile for the entire duration. Surprising passages give the viewer a dyspeptic view into his or her own difficult yet rationalized moments. This film was probably the poster child for that despairing not-so-bon mot: “Sh!t happens.”

The most important of the documentaries seen recently is “Unknown Soldier,” which puts the lie to those tunnel-visioned Germans who for the past 60 years pretended only the SS was responsible for tormenting, abusing and killing average Jewish citizens in Germany during the lead-up to WWII and the infamous Camps. The documentary scrupulously examines the vast paper archives newly discovered and calls on eyewitnesses to lift this particular granitic elephant. The squalid moral self-blindness is forever laid bare as the grainy footage and the damning documents and the survivors point imperturbable fingers at the vast mass of those Germans, who can never again claim they “didn’t know,” or certainly “were not implicated” in the horror of the Holocaust. They did. And they were.



BakedReceived my vehicle registration in the mail last week. This time around the State of Arizona (aka California II) is letting people pay for two years instead of just the one.

Why would anyone pay for an extra year?  No worries — the state has put a nice little flyer in there to explain why you should pay an extra year in advance. There are five reasons. four of them are of the "less hassle — that way you won't forget" variety.  But number four struck me: "protect yourself from future tax increases."


Ok, here's the punch line..

The state has a surplus this year. 

Get the joke.  



SeedlingAre you having a bad week? Judging by the Dow and the S&P averages the market was really bad this week. Both are down more than 3% over the last five days. But that is only part of the picture.

The QQQQ is nearly unchanged over the last five days. The cubes (or quads) consist of the 100 big cap Nasdaq stocks and are tech-laden. The Nasdaq index overall is following suit and is down only a little for the same period.

We appear to be in a phase transition. Risky loans are out. Much of the value stock and dividend stock performance of the last few years has been fueled by the ability to borrow cheaply and reinvest in somewhat higher yielding equity value and asset plays. As long as the dividend covered the borrowing costs, it was a safe form of the carry trade. This sort of trade was epitomized by the private equity firms.

Those days are gone. Now it is no longer possible to generate growth through leveraged magic. The market is now favoring companies which have real businesses that are growing. Growth is back.

Samuel Eisenstadt writes:

Amen. Since the beginning of 2007, growth has been in the driver's seat, as evidenced by the superb performance of Value Line's Timeliness Ranking System. The System is having its best performance in years. As Value Line readers are aware, the system is largely driven by earnings growth, momentum and earnings surprise, attributes largely ignored in recent years when "value" was the best game in town.

You might be interested in Mark Hulbert's article Value Line Profits from Patience in MarketWatch.com for October 23.

James Tar suggests:

A simpler expression: Nasdaq stocks have balance sheets that are virtually debt-free. No credit risk equals safety.

We can expand the divergence concept. Now could be an ideal time to consider going long Emerging countries that possess current account surpluses while shorting Emerging countries that have current account deficits.

Emerging countries with either a surplus or deficit have all been scorching higher on the inflationary/liquidity/carry trade going on all over the place the last several years. I suspect this is going to change.



Pinning, from Tom Larsen

October 21, 2007 | 1 Comment

PinIn the 1970s I worked for OCC. Every expiration, we spent all day working with employees from OCC member brokers, retrieving exercise instructions from them for everything that was in the money. We would run two batches, and usually it would take all day because many people had to be called regarding their exercise instructions. Then OCC hit on the idea of having "automatic exercise" thresholds. At first, they were 75 cents in the money. So people signed disclosure documents authorizing this in their accounts. Before that time, there were all these phone calls employees had to make to find out if the customers wanted to exercise their options and the answer was always, "of course," because by Saturday, what else could you do? Over time, costs fell and so did the threshold.

It is frequently a good idea to totally avoid this threshold issue, by taking advantage of the fungible nature of listed options and trading out of them, which also prevents "pinning" the stock at the strike which can create havoc with a complicated position. For example, you might have to guess whether you should exercise a long to offset an expected assignment on a short that may or may not occur.



There have been comments from analysts recently about changing correlations, for example, this from Morgan Stanley:

US Equity Derivative Strategy
Getting the Best and Worst of Correlation
October 09, 2007
By Peter Polanskyj, Christopher Metli

Correlation between sectors remains high: Correlation among the various sectors of the S&P 500 remains elevated on average, although off the peaks of late August/early September. Among sectors, recent short-term relationships have in some cases differed meaningfully from longer-term relationships.

Correlations among single stocks within specific sectors are a mixed bag: Several sectors have seen correlations among their constituents drop to relatively low levels, including Healthcare, Food/Beverage/Tobacco, Technology, Media, Software, Consumer Services and Food/Staples Retailing. Several sectors have continued to be highly correlated on an absolute and relative basis. Financials are prominent in that landscape.. Full text

Three years ago, Dr. Castaldo commented that changes in correlation may relate to changes in volatility, due to technical reasons and not to changes in the underlying stochastic process. More recently, an article by Harry Kat at City College of London referred to some of the same research around changes in correlation.

In the spirit of "know your tools" (and correlation is an important tool), these three papers seem most often cited:

Pitfalls In Tests For Changes In Correlations

Brian H. Boyer, Michael S. Gibson and Mico Loretan

Evaluating "correlation breakdowns" during periods of market volatility [pdf]

Mico Loretan and William B English

No Contagion, Only Interdependence: Measuring Stock Market Co-Movements [pdf]

Kristin Forbes, Roberto Rigobon

Boyer, Gibson, Loretan (BGL) make algebraic and empirical arguments. They create two randomly-generated series, x and y, with a correlation coefficient p : 0<p<1, and show that the correlation coefficient of a subsample of the two series is proportional to the overall p, as the variance of the subsample is proportional to the overall variance of x. That is, as the volatility of x increases, so does correlation between x and y. Here is a graph that is one take on the overall argument. The graph shows how both volatility (measured as sd of x) and correlation vary together over two randomly-generated and positively-correlated series (x and y).

Bruno Ombreux adds:

I have been reading generalist books on statistics written by biostatisticians and social scientists. As a rule, they don't like correlation coefficients. Since these coefficients are symmetric/non-causal, they are useless in advancing scientific knowledge.

In finance too, some people don't like correlation coefficients. See for instance these two articles by Embrechts and Alexander [pdf] . They are making points that are in addition to the ones in the links you kindly provided. Some issues are very ivory-towerish: elliptical distributions or joint covariance stationnarity. Others are more down to Earth: extremes creating "ghost effects" in coefficient estimation.

Anyway, the consensus is that correlation coefficients are not a panacea. Actually, it is better not to use them. If one absolutely wants to use them, rank correlation is not as bad as linear correlation. I feel the first article is dismissing rank correlation a bit too fast on the grounds that analytical complexity hinders further mathematical derivations.

What to use instead of correlation? Both articles are promoting their modern alternative pet method for measuring dependencies (copulas and cointegration, respectively). I prefer instead to follow the social scientists' suggestion and build regression models. The nice thing with regression is that assumptions are clear and easy to check. When assumptions are violated, there is a whole slew of more complicated regressions that can be applied.

Phil McDonnell suggests:

To use regression instead of correlation is misguided. They are the same! After all the square of rho is the same as R^2 from the regression.

Bruno Ombreux counters:

Yes, but isn't there more information in regression than in correlation? R-squared only gives the proportion of Y explained by X. The regression coefficients together with their standard errors add more information.

In addition, correlation is symmetric: cor(X,Y) = cor (Y,X). X and Y are playing the same role in regard to any possible explanation or causality. Whereas the regression of Y against X is not the same as the regression of X against Y. These are two regressions lines with different slopes. These create a difference between X and Y, there is an explained variable and an explaining variable. Then adding a time dimension one can introduce causality, like Granger causality .

I think that regression contains correlation but it is not the same concept.  Regression is a procedure that examines a number of different statistics, checks residuals, reformulates the equation if necessary.

Sam Humbert comments:

Another correlation quirk, from Rene Carmona, "Statistical Analysis of Financial Data in S-Plus" Springer-Verlag 2004, pg 99:

"Problem 2.4 This elementary exercise is intended to give an example showing that lack of correlation does not necessarily mean independence!"

Carmona defines X as N(0,1) and shows that Y, a simple function of abs(X) (thus entirely determined by X) with mean 0, variance 1, is uncorrelated with X.

A did a quick R-script to demonstrate; every run will have a slightly different result, but X and Y are always ~0 correlated -

X<- rnorm(100000)

Y<- (abs(X)-sqrt(2/pi))/(sqrt(1-(2/pi)))


mean(X); mean(Y)

var(X); var(Y)


Sample run -

> X<- rnorm(100000)

> Y<- (abs(X)-sqrt(2/pi))/(sqrt(1-(2/pi)))

> cbind(X,Y)[1:10,]

X           Y

[1,] -0.7878436 -0.01665691

[2,] -0.4779746 -0.53069754

[3,]  1.3390446  0.89772859

[4,]  0.3362482 -0.76580698

[5,]  1.3081312  0.84644648

[6,]  1.1859110  0.64369580

[7,] -1.6717642  1.44967611

[8,] -0.3082874 -0.81219113

[9,]  0.5582608 -0.39751106

[10,] -0.2235637 -0.95273902

> mean(X); mean(Y)

[1] 0.001646453

[1] -0.00657469

> var(X); var(Y)

[1] 0.9952368

[1] 1.004244

> cor(X,Y)

[1] -0.001873391


Also, Carmona does a good job of introducing the copula (mentioned in Dr Ombreux's post) as a generalized correlation, and, earlier in the book, nicely motivates kernel density estimation as a generalized histogram, a tool for exploratory data analysis.

At an S-Plus seminar I attended 7ish years ago, Carmona, one of the instructors, spent much time on the copula. Soon afterward, the concept became "famous" via the work of Dr Li  and others.



Blackbeard the PirateWhile spending some time in the Outer Banks of North Carolina I had a chance to read "Blackbeard the Pirate" by Robert Lee, published 1974. Blackbeard often sailed in this area and met his bloody end in Ocacoke inlet at the southern end of the Outer Banks. Born as Edward Teach, he was from Bristol, England, and perhaps from an educated family. He quickly went to sea on an "expedition" to the West Indies. The author argues that at this time in history most sea adventures were mainly plunder activities, which lasted for several years and were often hugely profitable. For example a century earlier, Francis Drake's famous three-year expedition earned 1.5m pounds. In Blackbeard's time, around the turn of the 18th century, ventures would routinely bring back 200,000-800,000 pounds. This alone would be strong incentive to go to sea to seek fortune. In addition, England was constantly at war with either Spain or France and often employed privateers to disrupt enemy shipping. This distinction gave private ships a license to plunder at will enemy ships abroad. Pirates would do the same, though without license, so technically illegal.

The Bahamas at that time was under the authority of the England, but had no rule of law to speak of other than that of the pirate and privateers. They had a semi-democratic system of government, though most disputes were settled by one of the captains, at the tip of a sword. The formed a loose Alliance and called themselves the Brethren of the Coast. While at sea, the Brethren would never attack one another. Outsiders like Spanish or French trading ships were fair game. On land the pirates broke few laws other than drunkenness and small arguments. Blackbeard apprenticed here under another captain and showed all the core traits for a successful pirate. Highest among these was an excellent knowledge of the sea, navigation, and naval combat. He was also ruthless, violent and aggressive in his pursuit of "prizes." After several years, Blackbeard took over one of the captured sloops and command of a crew of 50 men.

Blackbeard cultivated his reputation and was feared across the sea. Many under attack would surrender before shots were ever fired. He was tall, did indeed have a long black beard, carried two pistols and a cutlass, the pirate sword of the day. He would, oddly, burn rolls of hemp strung from his hair to add to the image. Blackbeard enjoyed a decade of successful plundering during the early 1700s. One of his boldest acts was a blockade of the city of Charleston, which he held for ransom. At that time he had four ships under his command. It goes to show how defenseless and lawless the early colonies were. No one was killed in this blockade, and he collected only a small ransom of medical supplies, which apparently were highly valued at the time.

Blackbeard's FlagOften when ships would approach at sea they would fly false colors to confuse the other ship. Most ships carried at least six flags. So it was a dance as they would approach, each knowing the other was trying to deceive and each changing flags as they got closer. Usually it was only within shouting distance that they could identify the other party and know his intentions. For Blackbeard it was an ultimatum: surrender and he would grant quarter; resist and all would be killed.

On land, many of the local economies were based around the pirate trade. Brokers thrived by trading the riches pirates had obtained, often bought at a huge discount. The taverns, brothels and inns catered to pirates. Piracy was accepted as a business activity of the time by the locals, though still not legal. Blackbeard, when on land, was very popular with the fair sex. He was a softy with women and would many times marry as he left port, thought maybe never see his new wife again. He was married sixteen times. Often when a war would end in Europe, the Crown would offer clemency to existing pirates, if they swore an oath to stop their ways.

Blackbeard is believed to have gone into semi-retirement around this time in 1716, near the town of Bath in North Carolina. Though he still took small prizes in his local waters, his major ventures into the West Indies came to an end. However, after several years even these small conquests were noticed by authorities. As a result the governing authority of Virginia sailed south and came into battle with Blackbeard in Ocracoke inlet. After a bloody day, Blackbeard was killed, taking five bullets and dozens of sword wounds. Blackbeard died as he had lived. Virginia took 2200 pounds from his ship. But his real treasure, many times greater, was believed to be buried elsewhere, and is searched for to this day. His reputation and place in history were welled earned. He is deservedly the most famous and successful pirate of his time.

Alan Millhone writes:

In 1985 my late father took my younger brother and me to Normandy to see all the landing points of the D-Day Invasion that our father was a part of in the Signal Corps. One day we took a catamaran from France to Jersey. On the approach, our boat guide told us the fortress we saw ahead at the tip of Jersey was once inhabited by Blackbeard and later by Sir Walter Raleigh as the island's governor. Both men literally lost their heads in their later days.



Suppose you bought any Friday where the stochastic indicator was oversold at the close. What is the percentage of winning trades, placing a sell limit order of c+x points for Monday? I checked in the past 10 years all the situations. If the order is not filled, you exit at Monday's close.

 3 points 96%
 5 points 86%
 7 points 80%
 9 points 70%
11 points 65%
15 points 63%

Larry Williams explains:

the problem is  such an approach has massive equity drawdowns and small average profits per trade. The losses, when they come, are much bigger than the gains. Accuracy alone does not make for a good system or trader. Risk/reward trumps accuracy every time. Eventually large losses devour strings of wining trades.
To evaluate such an approach, look at the equity curve; not just the numbers.

Jim Sogi adds:

The equity curve Larry talks about is a thing of beauty. We all know what happened after 1987 as well. The survivors prospered. If you want to argue sample, only time will tell. History unfolds in mysterious ways and you can never know the future. If you always look at 1987, you'll never trade. One way to avoid annihilation in addition to money management is to stay nimble in addition to having deep pockets. Wall Street has deeper pockets than you.

Phil McDonnell writes:

Phil McDonnellAs an augmentation, the following discussion of the features of a normally distribued random walk with absorbing upside barriers should prove helpful.  Naturally as traders this simply means using the theoretical distribution with an upside profit target.

Using a profit target will:
1.  Double the probability of being at or above that target at the end of a fixed period of time.
2.  Have no impact on your expected gain or loss.
3.  Reduce your variance and standard deviation
4.  Result in larger losses than gains

This result derives from the fact that the normal distribution is symmetric and self-similar.  Thus it obeys a property called the Reflection Principle. Each price path has an equal and opposite mirror image.  Each price point reached has a distribution of points past it and an equal and opposite distribution of points which were 'reflected back'.   Elementery proofs for the analogous case of stops, using nothing more than high school algebra, are given in my book Optimal Portfolio Modeling.

It should be emphasized that this is the theoretical model.  To the extent that one can find empirical evidence that the market does not conform to this, there may be something tradeable.  But just because you can manipulate your distribution to double the probability of a winning trade does not mean that the average winnings will be any better My Motto: You need an edge — never let your money leave home without it.



Viacom opens up Daily Show archive
October 18, 2007
Viacom has put online the entire eight year archive of its top rating comedy series, Daily Show with Jon Stewart, in a move which will be closely watched by all the major networks, advertisers, telcos and the burgeoning new media video industry..

This means much less than it appears to. South Park is, by far, the Comedy Channel's prime earner; its reruns, on cable, generate more income from advertising than the Daily Show's original programs, and no one — even in the "burgeoning" (sic) new media video industry — has yet been foolish enough to suggest the public might want to own or rent the Daily Show's regular episodes on a DVD or see them as reruns on TV. In that regard this announcement says far more about the fact that the future looks very much like the past: no one has yet found a way to make money in show business except by (1) selling tickets or selling merchandise or (2) getting advertisers to buy interruptions to the free show. The second model works only when the show is an original (like a Google search) or so wonderful that people want to see it again (like I Love Lucy, CSI or South Park). Mr. Stewart (unlike his colleague Monsieur Colbert) has yet to achieve that level of wonder. so the Comedy Channel has decided that his reruns can safely be given away for nothing. As Mr. Flannigan, the executive vice president of digital for MTV Networks Entertainment Group put it: "It's not a show that would go on DVD and it's not a show that would go into syndication, so it's essentially been lost to history."



In honor of Friday's perilous drop, checked October Friday (Ths cls-Fri cls) and weekend (Fri cls-Mon cls) returns in SP500 index, both before and after Oct 1987. Its being 20 years since that fateful month, the post-sample is 1988-2007 and the pre-sample 1967-1986.

Here is regression of weekend vs Friday pre-1987:

The regression equation is
F-M pre = 0.00071 + 0.462 Fri pre

Predictor    Coef   SE Coef     T      P
Constant  0.0007  0.0011  0.65  0.520
Fri pre      0.4617  0.1313  3.52  0.001

S = 0.0103498   R-Sq = 12.4%   R-Sq(adj) = 11.4%

Weekend strongly correlated with Fridays.  

What about Octobers after 1987?

The regression equation is
F-M post = 0.00145 + 0.0333 Fri post

Predictor    Coef   SE Coef     T      P
Constant  0.0014  0.0012  1.13  0.261
Fri post    0.0333  0.0969  0.34  0.732

S = 0.0116829   R-Sq = 0.1%   R-Sq(adj) = 0.0%

Poof! No more weekend effect.

As an extension on this extension, here is a check on symmetry of pre-87 weekend effect.  Re-ran regression with 2 independent variables:

Fri preUP = Friday return if up, otherwise 0

Fri preDN = Friday return if down, otherwise 0

The regression equation is
F-M pre = - 0.00147 + 0.732 Fri preUP + 0.019 Fri preDN

Predictor       Coef   SE Coef      T      P
Constant   -0.0015   0.0017  -0.87  0.387
Fri preUP   0.7324   0.2061   3.55  0.001
Fri preDN   0.0190   0.2922   0.06  0.948

S = 0.0102408   R-Sq = 15.3%   R-Sq(adj) = 13.3%

Prior to 1987, positive weekend correlation with Friday returns arose from continuation of up Fridays (as opposed to continuation of downs)



Post CaptainI started Master and Commander a couple of times, and for various reasons, didn't get into it. Also, while on the road, I bought a copy of Post Captain on tape, but again, my listening was interrupted by events, and I never returned to it. I wound up convincing myself that the Aubrey/Maturin series just wasn't my cup of tea.

But then, the other day I pulled the box of cassettes of Post Captain off the shelf and decided to take it with me on my afternoon hike. Suddenly, it all makes sense to me, and I'm hooked. Mr Tull's reading is just the right pace to give me time to understand and enjoy. I admire Aubrey but resonate more with Maturin — and I think I, too, would have a thing for Diana V. Now I have all twenty novels to look forward to. What a pleasure.

Paolo Pezzutti adds:

It is exciting to read about traditions, situations and procedures that are still in use in navies worldwide. Most of all I like reading about the organization of the ship, the role played onboard by each member of the crew. The basic organization still stands the test of time. The type of relationships and the psychology between the Captain and his men are still there. At the Spec Party I had the pleasure to discuss this with Vic and Laurel. Promptly the question was: If this type of organization is so successful that is still valid after centuries, do think it could be applied to other types of organizations? I had to expect this question from Vic and Laurel because of their multi-disciplinary approach and their efforts to see links between different disciplines. Of course, I did not have an answer ready at the time! A partial answer could be that the organization used on board a ship can work in small and vertical organizations, up to a few hundred people. This is because personal relationships are important and the possibility to vertically control the organization cannot be effective when you have too many layers. The business of the organization has to be operational. The mechanisms to delegate activities but not responsibilities are very well established. Procedures and roles are clear. In an operation-like environment the Captain takes care directly of the operational outcome of the actions, while his executive officer works on the internal routine aspects of the organization. On board a ship there are also apects of a matrix organization, especially in combat. For instance fire-fighting, firing a gun, boarding another ship: it requires horizontal coordination of competences and services. This critical aspect of coordination is more complex in big organizations. This organization can fit in situations where your operation is performed throughout the 24 hours. Operation centers of any kind — security, production, monitoring, emergency services, construction, etc. May be even a trading room that operates globally. With this in mind, when I read Patrick O'Brian now I always start to build relationships and find parallels of how we could reuse that expertise today. It is a nice exercise to train your mind.



Function MMAP on Bloomberg produces a table very similar looking to what may come up when one visualizes Vic and Laurel's thoughts on constructing a periodic table of stocks. Bloomberg has chosen to call this table by another of Vic and Laurel's terms, Heat Map. Across rows are industry sectors (selected from pulldown menus) and across columns are marketcap sizes. That seems like a small tweak of Vic and Laurel's original thought of transposing the valency and atomic mass from columns to rows and vice versa. Based on a variety of menus of fundamental and technical variables, classification along rows and down columns can be produced with a few clicks. MMAP produces a frequency table along the rows as well as down the columns. Other than plotting frequency of observation within a particular classification, I wonder what else can be achieved using MMAP?



TreeGoI just spent some time in Vancouver and took an afternoon to visit Wild Play. It was phenomenal and I highly recommend it to anyone looking for an adventure. The staff were extremely friendly and gave me rides to and from the ferry dropoff point.

I did the ziplines through the forest and over the river and had a blast. Then I moved on to TreeGo, which is an obstacle course up in the trees. It took about 90 minutes, going through numerous swinging ladders, rope nets, and shorter ziplines. You're always safely latched in but it doesn't feel that way.

One lesson for Specs comes from the swaying ladders. They are rope ladders laid out horizontally between trees that are 50 feet apart. If you are trepidatious and walk slowly, it is really hard to keep your balance and you have to depend on the safety line to hold you up. If you sprint and trust your balance, it's easy, fast and fun. Same thing with tremulous markets — if you trust what you're doing and rely on yourself, you can do it.

Riz Din adds:

escAPEA couple of months ago, I did some very similar tree swinging in the UK with a company called GoApe. I would recommend it to people of all ages.

If you do go, it's worth taking the time to get comfortable with the heights involved and with the idea that you are safely harnessed, so you can then do exactly as Dr Ott says and be aggressive and enjoy the day. Or you could challenge yourself by aiming never to rely on the harness as the course gets progressively more difficult. Or you can switch between modes from tree to tree. Either way, it's all good fun. Everyone walks away with a smile on his face and sleeps well after a day of physical activity in a natural environment.

A big problem with trading is that you don't know how reliable your harness is until you fall. Indeed, quite often we think we are latched in when we aren't. That said, I strongly feel that once we are comfortable and familiar with the riskiness of our approaches it is on us not to be shy when it comes to running the course.



Two years ago, I just about jumped out of my skin when I walked into a convenience store and saw a large sign saying "October 19, 1987." A closer examination revealed the purpose of the sign: "You must have been born on or before this date to purchase cigarettes."

Marion Dreyfus recalls:

On October 19, 1987, a friend sent me a two-pound box of Leonidas to commemorate the flight I was on wherein he met me. He went on to Paris, I to London. When I arrived, I was told the market had fallen 500 points. I was in shock, thought my informant was joshing cruelly. But these layers of deliciousness are almost a suitable make-up for the huge loss suffered.

Sam Marx writes:

I remember that weekend of October 1987 well. The Dow was around 3,000 and Friday had a 100 point selloff.

That evening on Rukeyser's Wall Street Week, Martin Zweig predicted a crash for Monday, which did occur. That prediction truly cemented his reputation. If anyone hears or reads of a Zweig prediction this weekend, please tell me!

But to compare that weekend to now without taking into account the underlying technical structure (market P/E, option implied vol, etc.) is misleading. For example, implied vol then was very low, today it is moderate.



NEW YORK (AP) - Harry Potter fans, the rumors are true: Albus Dumbledore, master wizard and Headmaster of Hogwarts, is gay. J.K. Rowling, author of the mega-selling fantasy series that ended last summer, outed the beloved character Friday night while appearing before a full house at Carnegie Hall.

Billowing silk robes
obscured the true passion of
Hogwart's Headmaster.

What did he see in
The Mirror of Erised?
Elton John? Boy George?

The last Potter plot
did revolve around finding
a really long wand…



 It is appropriate that the best book on games extant today is totally German in its authorship and first publishing, since Germany is mecca for games, with the average family owning 25 of them. The book "Luck Logic and White Lies" by Jorg Bewersdorff, originally published in Germany but translated into English in its third edition by David Kramer, is a masterpiece, an encyclopedia of strategy and solutions to almost every game under the sun, and a great exercise in logic and decision making, and a guide for how to have fun with your family. The book is divided into three sections, games of chance, games of combinations, and games of strategy. Each chapter in each section starts with a pregnant situation from a typical game from that section, traces the historical development of the game, shows how to play it better, and then contains mathematical excursions on how to solve the game. Games covered in the chance section include lottery, dice, roulette, monopoly, blackjack. Games of combination include Nim, backgammon, Go, dominoes, Mastermind, Concentration. Games covered in the strategy section include rock paper scissors, poker, chess, baccarat. Building blocks covered to help you solve and play games include a study of the normal and Poisson distributions, a primer on expected values, Markov chains, Monte Carlo methods, minimax solutions, linear optimization, the game theory work of Von Neumann and Morgenstern, the geometry of symmetry, the value of experience. All these building blocks are developed naturally and form a foundation for understanding how to play the games properly as well as providing a brush up on techniques that one is accustomed to using in other fields. The book is readily accessible to all who like numbers, but provides many extensions that will challenge even the most competent and advanced thinkers in mathematics. Morgenstern studied games because he felt every decision in life was comparable to one of the chance, combinatorial or strategy games that evolve in the normal course of life. I would recommend traders study games because each game has a natural extension in the trading world. Let's take a simple strategy game formulated by Poe and developed in the rock paper scissors chapter. One player holds the marbles in one hand, and asks the other player whether the number is even or odd. If the guess is wrong, the guesser loses. And if right, the guesser wins. One boy wins all the marbles from everyone in school. He had some principles of guessing. He sees whether his opponent is a simpleton. His amount of cunning is sufficient to make him change his guess based on the opposite of the right answer the previous time. But with a simpleton a degree above the first, he would propose a simple variation. And think that the simple changing is too easy and guess the same the next time. The boy who wins figures out what degree of simpleton he's playing against and wins all the marbles. But isn't this the same situation we play with the market each day. It has a certain pattern that would have led to a great win. And depending upon your estimate of the degree of simpleness of the other players in the game, you figure out the optimal strategy. Strangely, there are ways of playing these games that increase your expecation, especially those that rely on changing strategies based on experience. Similar principles and mathematical excursions that are appropriate for solving combinatorial games, like Nim, where one works out the entire distribution of outcomes as in computing the value of an option, or chance games like monopoly, where one takes account of the changing values of a position based on the liquidity and expectations, are appropriate to every decision a trader makes. One can not recommend this book too highly for the family person and trader.

Bruno Ombreux adds:

BattletechThis brought to mind an American game that was kept alive by a German company after the American shop that created it folded up. A few months ago, it went back under American control, but the Germans kept the flame alive in the interregnum, because the game has lots of fans and good sales in Germany. This game is Battletech.

The game is set in a deeply rich science-fiction universe, with an evolving storyline and a set of characters one gets attached to. It is a board game played on hexed terrain, with miniatures and dice. It is all about manoeuvring to get into favorable positions. But it is different from chess because:

- Luck is important. Dice affect the probabilility of hitting and getting hit, as well as hit locations.

- There is an incredible number of factors to take into account: terrain type (woods, rolling hills, city, etc.), type of forces under control of players (e.g. fast light unit with long range weapons against heavily armored slow unit), enemy skill and psychology.

I feel a game of Battletech is closer to trading than a game of chess or Backgammon!

Because of the absolutely huge number of factors to take into account, one must rely on heuristics and rules-of-thumb, rather than on mechanical probabilistic plays as in Blackjack. In the markets, luck of the draw and the complex interplay of many factors are also prevalent. I feel this is making a case for moving away from rigid rules and even methodology, toward flexible rules-of-thumb. Move the cursor away from the quantitative toward the qualitative. Even though those trading rules-of-thumb are driven by odds as in Battletech, they ought to be vague enough to accomodate the sheer number of influential parameters and to create the conditions for dealing with a wide variety of situations. A example of a good qualitative rule, grounded in numbers yet flexible enough, is Vic and Laurel's principle of buying into panics.



Maindonald & BraunI am reading Data Analysis and Graphics Using R by John Maindonald and John Braun, and really liking it so far. There are almost no mathematical formulas, but there is a lot of illustrative R code, so it is perfect for those that don't like the hermetism of some stat books, but can write a computer program. It is also written by two authors who are obviously practitioners of statistics, as opposed to theoreticians, which makes it very practical.

Denis Vako remarks:

The most practical one gets in programming is when one has source code and a debugger; these two make magic in terms of knowledge discovered, which feels better than a good book. The downside — you see what and how, but sometimes cannot figure out why. I also think statistical software help files are a treasure, e.g. those of NCSS.



I've recently switched to an index trading strategy using QQQQ options which I now want to broaden, spreading my risk into similarly priced very liquid option-based instruments which are not very correlated with the main market indices, or each other, and am looking to maintain four such positions. However I'm having trouble finding low-correlation instruments with liquid options that I can use in the same way as I treat the QQQQ. Do Daily Spec readers know of ETFs with highly liquid options, or some other similar instruments?

George Zachar mentions:

The Select Sector SPDR correlation tool might be of value to you.

Phil McDonnell warns:

Careful! Before you rely on it, you want to make sure their correlations are based on net changes — weekly, daily or whatever.  Correlations based on price levels are spurious.  I did not see any mention of their methodology on their page so it would be good to check.



Chinese CheckersEvery other day or so my son and I take a break from homework to spar on the battlefield of Chinese checkers . The games begin on the house board but routinely transition to an Internet board for a chance to test our skills against four other players.

When my son began playing he demonstrated the typical childhood propensity to act on the first move he saw. Later, he became more aware of multiple jump moves, and ultimately the concept of the open space gave rise to the notion that one might go backwards in order to go forwards. Finally, at the end of his first phase of learning he grew to value the actual length of a move in relation to ground covered.

We watched the computer, time and again, seemingly stymied in the center, pull-off a spectacular nine-jump move, positioning itself boldly a full leap from its home.

My son later made the statement, "Everything is clogged-up in the center, Dad! Nobody can move at all. Then all of a sudden everything breaks free and the colors head to their homes like there's nothing in their way!"

I asked him what the catalyst for this "break-up" could be and he began to study the board more intently during the middle of the matches. After a couple of weeks he pushed the laptop away and grabbed a can of Mountain Dew stating, "Somebody does something he doesn't want to do!"

"What?" I asked.

"That's what breaks open the big pile!"

"Hmmm," I thought, it's simplistic but maybe…"

He activated several games in a row until he was fully convinced that, with the help of the CPU, he'd successfully clogged the middle to test his hypothesis. "See." he said, running his small fingers over the screen. Yellow doesn't have a move. Red and purple are all blocked up. Blue can only go here. Green still has three right here, and it's light blue's turn."

"It's not good to be light blue." he said, faking remorse. And he hit the button moving the light blue marble meekly by one space. "Now watch!"

With that the board began to roar back to life, first around the fringes and then weaving valleys through its center. All the while light blue seemed to lag to the point of delay in asserting his marbles. "You can't let 'em force you to move, Dad!"

I thought about his theory and wondered how many times, late at night, watching the blip, blip, blip of the dollar that I'd felt compelled to make a move that I didn't want to make. Could it be that a lack of nerve at the critical juncture is really just the "unwanted move", the one trader or collective of traders that perceive their limited options and act with a sort of "default spontaneity?"

Gradually, over time, my son was able to avoid taking that "unwanted move". He got closer and closer to winning. One day he blurted, "the winner likes all his moves!"

"And what separates the winner from the other five players?" I asked.

He answered, "Every round there's a player that makes a move he doesn't want to make. The winner knows the "unwanted moves" better than the other guys. And it takes a long time to know them all!"

With that he got up and grabbed his cycling helmet. Walking to the door of the garage he swung it open and I could hear the squeak of his scooter heading towards the sidewalk.

I waited until he was out of earshot and walked over to look at the laptop.

"Light blue wins!"



A recent trip to Los Angeles provided a virtual laboratory for the complex mechanisms of crowds and groups and game theory with many lessons for the market researcher.

Part 1 ( of 4)

The congestion on the freeways in Southern California is a prime example of a congested complex system. When crowds of cars enter the freeway's limited space, the traffic slows and creeps forward, and sometimes almost stops. Unlike the freeways, the markets have no red lights on the on ramps to regulate new participants crowding into the order queues at new market highs. The number of orders is very high with billions of dollars on each side, so the price has no ability to move, and the price effect is a grinding creep, just like a congested freeway. Since the public and big buyers are there to buy the new highs and the great conditions reported by the news, the only way to get filled will be to take the offers. One can bid all day on a trend day and not get a fill. Micro structural theory says with 1 offer and bid, a market order will move the price up, and that is what we see in aggregation. A slow creeping up, up, up at market highs, often displaying trends up with little or no volatility and no pullbacks. No one can cut through the large orders to move the market. This condition appears at market highs, and is the opposite of the bottoms where there is little congestion and the price moves up and down, creating volatility. At tops. bears flash huge offers to try scare off the bull, but its really a slow speed stampede and nothing stops the grinding upward except for a change in sentiment which usually is quite close at these points.

Part 2 (of 4)

At the USC Trojans game this weekend one of the rules in football is that if your team makes 10 yards, they get another 4 downs, which gives your team another chance, and provides momentum. This rule is at the heart of the strategy for the game. In the markets a similar rule applies. The question is to figure out what the rule is as it changes from time to time without warning and no one tells you until after the fact how many points are needed for a first down. Say the market moves up or down big in a short play, like say the Fed move up last month or the 20 point down afternoon last week, or this afternoon's recovery for that matter. A big advance gives the players another 4 downs (4 days?) to try make some more new ground and generate some momentum. Like the Trojans this weekend, the last three years have not been very successful on capitalizing or getting their first downs, but there is some talk among the old hands that old things that haven't worked for years may see their cycle in the sun again. The line of scrimmage is often yesterday's close, but can be other yard lines as well, prior highs, prior swings, yesterday's hi/low. Today we close near the line of scrimmage. As in football as in the snap, every play in the market seems to begin with a short retreat back into your own territory. Unless one fumbles, or screws up and gets downed behind the line of scrimmage, the idea is to make forward progress. 10 yards, 10 points seems like a good rule for a first down in normal circumstances. This afternoon recovery qualifies our team for a first down.

At the USC Trojans game over 200,000 people there all were wearing Trojan Crimson colors, hats, shirts, jackets, painted bodies, painted faces. I mean all of them. It was kind of scary. I asked a friend if someone told them to wear those colors. No, there is no rule or any rule requiring this attire. It was a remarkable example of herding behavior of crowds. We saw the stampede action today in the market as well. Stampede up gap, stampede down, stampede back, close to place of start, like buffalo. fish and elephants. Many lessons can be learned about crowds, herds, and stampedes to be used in market operations.

Part 3 ( of 4)

The Getty museum was one of the most impressive art museums anywhere in the world, not necessarily because of its collection, but the presentation, the architecture, the location. The third level of the West Wing overlooking LA is the a truely memorable and impressive view not to be missed on a clear day. In the collection is a set of medieval illuminated music manuscripts. The old style notation is not the fixed note per note that we use now, but rather a notation showing the relative moves, up or down of the notes. This provided a reminder to musicians who knew all the tunes already anyway. This might provide a good market notation system to catalog the various ups and downs that make up the regular tunes the markets seems to play. Just as history does not repeat itself, it rhymes, the market does not repeat it self, but it does harmonize, engage in contrapuntal variations on well known themes. The rhythms often stay the same and are more limited than the melodies. The rhythm of markets can be as important as the melodies. Oddly European music has no true rhythm nor is it notated in standard notation even today. There is only a cryptic mention of "march", "shuffle" or "lively beat", "andante" or some unquantified mumbo. The time signature gives only a vague hint of the rhythm. A good musician knows all the rhythms and changes. A trader should also, but unlike common TA patterns, there is no language or model for market rhythms. At Disneyland riding the train, there was a Morse code being tapped out. Even Alan Greenspan learned the Morse Code as a kid for fun. That is a good example of coding various simple rhythms with specific patterns to meaning. The same type of code ought and could be used in the market classification. 

Part 4 (of 4)

An interesting lesson from LA is their peculiar measure of distance. When you ask them, "How far is the coliseum ?" They invariably answer, "About … minutes away", a measure of time not distance. At dinner, an astute market expert asked, what other x axes are possible other than linear time? A suggestion might be to use percentage or point change, rather than linear time. An obvious measure is ticks or other micro structural market time. The important measure of a trade really is the return not how long the trade lasts. 1% is a great trade in a day, but not for a year. The Y axis becomes fixed and linear and time is unstated. This is the opposite of linear time chart in which return is unstated. Interesting relationships might be uncovered. For example exponential moves in linear time become linear in ticks or return.

Related to time to destination is speed. Unlike time, speed is variable. Everyone in LA drives 80-90 mph plus. Driving at 60-70, everyone is passing you by. I am used to driving about 25. If the speed increases, say to 100 or 120 plus, you get places twice as fast, but the risk of crashing increases. Skill matters, but what about the other idiots on the road, or road and weather hazards, or the tunnel up ahead with a blind curve hiding the tractor trailer around the bend, and the three tractor trailers right behind you, defects in the roads, and other drivers that limit speed. It happened while I was there: a 15 trailer pile up in a tunnel.

That brings up the issue; is there a speed limit in the market for safe driving? Drive at high gear and make great returns, but what is the best speed, ie annual return, one can drive year after year without any accidents, and still get to the destination. The optimal speed should be able to be calculated. One experienced practitioner and theorist thought that 20% is a consistent speed to keep up year after year. That sound right to me. Much faster and accidents become more likely. How can this be quantified? Optimal f and Seattle Phil's formulas claim to measure this, but Moe's point that it is necessary to look at a full history and see the systemic risks as a measure too. The normal distribution assumes safe roads and that people obey the law. There are systemic risks and risks from other market participants tendency to herd, stampede and panic, or to drive too fast or drink,take stimulants, drive too long which lead to big pile ups. Or the Fed to raise the speed limit to 100 mph. Of course driving to slow is no good either.

The time in market is relevant as well. Sharpe measures, risk/drawdown measures, Sortino and the like measure these. Measures of speed and risk must change over time rather than be fixed. That is probably the real challenge. A fixed limit which results from looking at the entire history will either hold one back, or contribute to excessive risk depending on the market. Alex's comments Friday are an example of this problem. One will never trade if tomorrow is going to be Black Monday. Just as one changes speed for the road conditions, how does one quantify changing speed in the markets. How do you know there are hidden curves ahead, road hazards and if tomorrow is Black Monday? One suggestion is looking for anomalies like 9/18 and C-C-C start to appear. Chris suggested a few others. When the market creeps up in low and up 8-11 new highs or more in a row is a good bet that vol is about to sky rocket as everyone else is cranking up leverage with borrowed funds. I think the 1980-90's were different though. Other times leverage is forced on you when market Road Warrior is chasing you down and you have to jump to high gear in order to escape. Other times it is good to hit the pedal to the metal in high gear, then immediately back off. This is very hard to do, but a model would help. What is that model? Please help.



Are they worried about black Mondays in October?  If so, one might expect Friday returns (Thr close - Fri close) for Octobers to be lower than other months, as there would be selling to avoid down opens on Mondays.

Tested this using SPY 93-07:

Two-sample T for F cc vs oct Fri

          N    Mean   StDev  SE Mean
All Fri   742  0.0003  0.0107  0.00039 t=-2.3
Oct Fri   64   0.0039  0.0120  0.0015

No, they are not afraid to own Fridays in October. In fact October Fridays are significantly higher than all Fridays in the period.

Are October Mondays blacker than the rest (Fri cls - Mon cls)?

Two-sample T for F-M all vs oct F-m

          N     Mean   StDev  SE Mean
All F-M   672  0.0010  0.0108  0.00042 t= 0.8
Oct F-M   65  -0.0004  0.0124  0.0015

October Mondays are slightly lower than all Mondays, but not significantly.



The longest winning streak in baseball since 1920! I follow the NL West very closely, and even I can't seem to get my head around what is going on with the Colorado Rockies. They have gone from fifth place to the World Series in five weeks, winning 21 out of their last 22 games. Honestly, I just don't think they are the best team in the NL West. I don't even think they are the second or third best team in the NL West. But they are on one heck of a win streak. It's like a commodity contract opening limit up 22 days in a row. Have no clue as to how Vegas can handicap this coming World Series. By my calculations the probability of my getting hit by a meteor tonight is higher than the Rockies' winning 21 out of 22 and 19 in a row. Depending on what probability you assign their winning a game, the probability that they would win 21 out of 22 is somewhere between 1e-06 and 1e-07.



 MZM Chart

This graph shows moonshot one-year growth of Money of Zero Maturity, a proxy for money supply.

Jeremy Smith adds:

In contrast to this, the year-over-year change in the real Monetary Base has been negative lately.

Bill Rafter explains: 

Yes, Monetary Base growth is still hugely negative. But George is also correct that MZM growth is hugely positive. The missing connection is lag. MZM significantly leads Monetary Base.



XII Views on Sub-prime

The Fed before:
Speaking of legacy, what a retirement party!
Here have another drink.

The Huckster:
Hey buddy, have I got a deal for you.
Who wouldn't want to live in this house?
No money down, a year interest free same as cash.

Party's over, dude. Stick it with a fork,
Where's the door.

Investment Banks Before:
It wasn't me.
It was him. And it was him.

Fraudulent underwriter with mortgagee:
She told me she was single!

SIVs [Structured Investment Vehicles ]:
Where did that come from!?
I was just cruising slowly through the School Zone
Then BAAM.

Investment Banks After:
Now how do we add another layer on this cake
And cut a bigger piece for me?

The New Fed:
Watch the interest rates swing back and forth.
You are getting sleepy, sleepy...

The Vultures:
I Love Circling Around  and Around Looking, Looking
Not for corpses, but for the best place at the best table?

Politicians to Public:
Come in from woods. My dear child, I will comfort you.
My what big teeth you have Grandma.

The Media:
Classic example of capitalistic greed
And why US is going to fail.

The Doomsdayist:
I told you it was coming. Didn't I tell you?
Want in? I am still waiting to make the real score,
Need right entry point, then next day, to the MOON!

The Public:
Why? Oh, why does it always happen to me?
Left holding the bag again!




"Leading Change ," John Kotter, HBS Press 1996

 I'm not an enthusiast/ connoisseur of business books, and have little basis for comparison of one versus another, but "Leading Change" came highly recommended to me, so I gave it a read, and found it well worth the time.The book is breezy/ PowerPointy in format. Kotter outlines his "Eight-Stage Process" for initiating and executing radical change in ossified organizations,

  1.  Establishing a Sense of Urgency
  2.  Creating the Guiding Coalition
  3.  Developing a Vision and Strategy
  4.  Communicating the Change Vision
  5.  Empowering Employees for Broad_Based Action
  6.  Generating Short-Term Wins
  7.  Consolidating Gains and Producing More Change
  8.  Anchoring New Approaches in the Culture

A few memorable/critical points from some of these,

1\ A sense of urgency is critical, to overcome the gravitational pull of inertia, complacency, comfort-zone, ain't-broke-don't-fix. Most change initiative fail at this early stage, because the urgency of change isn't broadly understood.

2\ A guiding coalition must include top decision-makers. Often initiatives are turned over to internal visionaries/ young Turks, or outside consultants who lack the gravitas to force through painful but necessary decisions, and to keep the organization focused.

4\ The change-vision must be communicated relentlessly. A few mentions, or even a few dozen, in the company newsletter or similar channels is insufficient. The key metric is: what percentage of all communication, including day-to-day, involves the change-vision?

6\ A multi-year change-vision won't succeed without small victories every month/ quarter/ year. Lack of visible successes will open the door for office-politicians/ obstructionists/ revanchists to badmouth and undercut the change-initiators.

Also Kotter frequently discusses "management" versus "leadership", which he's written about elsewhere. Roughly speaking, "management" is about the situation as of 2007, "leadership" about what can/ should be the situation in 2012.

I've seen Kotter's change-initiation dynamics play out over the past 2- 3 years in the experiences of a friend who sought to change each of three different organizations in which he was active: a for-profit firm, a non-profit, and a civic group.

One of his initiatives was a success; the urgent need for change was well-communicated, leadership got on board, and the organization is now much stronger. Another was mixed — some progress, jury is still out. The third was a failure; complacency wasn't replaced by urgency, the change-vision was under-communicated, top leadership never truly signed on — and the organization disintegrated.

All in all, a good, fast read, and one of those books that offers some possibly life-changing bullet points.



ShoeYears ago a friend of mine applied for a clandestine job at a major intelligence agency and was invited to McLean VA for a series of interviews. His story may be of interest if you are looking for a similar job.

The first interview was quite uninteresting, even boring, according to my friend. He was ushered into a small nondescript office by an average looking guy who seemed to want to do most of the talking. My friend perhaps expected the agent to "sell" the agency to him with recitals of interesting adventures during his career, but it was nothing like that. The man talked mostly about himself, but in a dull, matter of fact way, full of details. Just as an example of how boring and pointless the conversation was my friend said that on two occasions the man pulled out a battered wallet and showed him pictures of his children; the second time my friend's eyes glazed over and he looked away. My friend was not impressed by the caliber of people working at the agency, to say the least.

After 45 tedious minutes the meeting was over and my friend went to his next appointment with a man who was obviously a top official, sitting in a nice big office. Now the real interview began, as the official fired question after question at my friend: Tell me about the man you just met: what did he look like, what would you estimate his height and weight? Did he wear brown shoes or black? Please summarize what he said. Did he mention anything about American policy in the Philippines? How many children does he have? Are they boys or girls? Unfortunately my friend had not paid enough attention during the first meeting; he thought of himself as detailed oriented and having a good memory, but was surprised at how difficult it was to come up the information requested.

Well, he did not get the job, but instead joined a big accounting firm, became a partner and lived happily ever after.



TeslaI went to a presentation by Martin Eberhard, co-founder and President of Tesla Motors, on Wednesday. I've seen one of the eight cars built and it is slick: 0 to 60 in 3.86 seconds with no shifting. And Eberhard is a slick presenter. Arnold Schwarzenegger has ordered a car.
But they have a huge mountain to scale with gargantuan problems, not the least of which is the distribution and service. They have taken the unprecedented step of making a completely new car that is to be status symbol and new technology at once. It is a complete design from bumpers and fenders to suspension and the electronically controlled antilock breaks. I think they have bitten off too much. Battery technology is the latest lithium, but with stacks and stacks of cells, it is a huge battery. It takes all night to charge from a 220 electric dryer but does go for 250 miles. The electricity is cheap at pennies per mile. The car is expensive at over $100K. Divide that by 100,000 miles of useful life and you have capital costs of $1/mile.
Great breakthroughs in technology, but the take-out is a rich Asian car company with lots of dollars. Reminds me of Tucker Car that after WWII developed the best technology but was squashed by the big guys.

Alan Millhone adds:

Nice to see something new and innovative in the automotive area! My first car was a 1964 Mustang fastback that was raven black with a white interior, 289 H.P. and a Hurst shifter and Hurst mags. I ordered it from the factory for $3,105! I still have the original owner's manual, bill of sale and a sterling Mustang tie-tack (still on the card). The car is gone, but the memories of taking possession of that car at the dealership will stay with me like it was yesterday. America has always had a love for the automobile and I hope the Tesla will have its own following.

J.P. Highland remarks:

For $100,000 I would rather buy a Porsche Cayman and a Toyota Tundra, one for the fun and the other to be my workhorse.



SalvationWhat to join? I think it matters a lot. People join groups for advantages, and weigh advantages of one outfit aside another. Choosing an outfit to join is crucial to success in many walks of life.

I've heard a lot about networking. It's supposed to be more important than many other strategies. I am a loner and have never had the advantages derived from memberships. I've always been disconnected.

One can think of the hypocrisy involved, but humans probably don't. Survival mechanisms are not based on ethical principles, they are based on the reptilian brain, that small core mass of tissue which sits between the end of the spinal cord and then beginning of the larger brain. Can be likened to crocodile brain tissue.

A recruiter for Opus Dei mailed invitations to me for a couple of years, maybe got my name from The Catholic Wanderer, or parish list where I attended daily 6 am mass for a long time.

I read a lot about Opus Dei, and declined the invitations. I just could not join. I can say I joined the Teamsters Union and the Inlandboatman's Union and the Sailor's Union of the Pacific. These were job related, so to survive, membership was mandatory.

Thinking back in time I remember going to a summer camp with a Boy Scout group, but did not join as my family was poor during the Great Depression. My tuition to the week long camping experience was probably funded by members of a Pentecostal Church where my mother played music, sang gospel, and preached to skid-row indigents, drunks, homeless characters, prostitutes, as the folk in the Salvation Army used to do. Play music in the streets, draw a crowd and voice invitations to sinners to be saved.

I thought about joining the Salvation Army once. I got tired of looking at my wardrobe daily, trying always to decide what to wear for the day, the trip, the movie, the event. I noticed the Army members always had just one outfit, a uniform. It seemed efficient to me that if I joined I would eliminate the stress of deciding what to wear every day. Just put on the uniform.

But joining just for the fashion would've been hypocrisy, huh?

Stefan Jovanovich extends:

One of our family's favorite movies is Grosse Point Blank. It is excessive and self-indulgent at times, but it has true wit. Our daughter Nora loves it because the music was done by Joe Strummer, her all-time favorite rock and roll musician. What we all love is the absurdist subplot in which Dan Aykroyd's character is trying to organize a union of assassins, and he is recruiting John Cusack's character to join. Aykroyd meets with determined sales resistance, and by the end of the movie he and Cusack are trying to kill each other in a gun battle. But, they still have time to carry on the discussion about the assassins' union while shooting at each other. At one point Cusack asks "Are there any meetings?" Aykroyd replies "Of course, there are meetings." As he returns fire, Cusack shouts "No meetings!"



I'm trying to collect the following daily data from around 1998 to the present: share price, volume, option prices, volumes and implicit volatilities. I would be prepared to pay if need be and the source is "official." I need these data for stocks traded on Wall Street, though I'm not yet sure which.

Sam Marx replies:

I recommend that you start with the CBOE itself and if you need more, they may be able to assist. Check with the CBOE website as a start.



KB/MSClearly, it's not just the Martha Stewart brand that's succeeding right now in residential real estate. Branding by way of coming up with unique and repeatable ways of adding quality to residences is super hot. The building boom of recent years produced stamped-out and almost universally identical homes — McMansions. I spent part of today with a marble and granite wholesaler and his business is going gangbusters as renovators and home-sellers are trying to put unique touches on their properties that buyers won't get either through a development builder or from the neighbor trying to sell. New paint, carpeting, and stainless steel and granite in the kitchen doesn't cut it any longer. That's all assumed by buyers. What buyers want now are the custom touches, limestone walls and ceiling in the bathrooms with heated floors, floor to ceiling marble on the fireplace wall, heated garages, etc. — which development builders can't do because their designs, supply contracts and assembly line procedures and business models are not equipped for it. So everyone in the renovation business is experimenting, trying to find what works. The discounts available for buying superior building materials in bulk is substantial. Buyers are also no longer impressed by off-the-shelf upgrades they can easily do themselves, steamshowers, LCD TVs, fancy appliances. Buyers are beginning to show a strong preference for workmanship. The skill most in demand, I find, is stone masons, mostly for building or rebuilding real fireplaces. All of the true stone masons I have been privileged to meet were Italian. It is a vocation that has been beaten down for the past several decades. I hope it has a resurgence.



I have always been told by my father, who has been in the markets since the early 1950s, that bull markets try to scare you out by running too much and selling off quickly and hard, while bear markets fool you into staying in by easing down and promising recovery. I think both the credit crunch and today's quick slide qualify as bull market activity.

A three-week consolidation, including this week, would be natural as earnings are processed. To me this whole episode looks like the ease, hike, ease, pattern of late 1979 to early 1980, just after the S&P 500 hit a seven year high. This time the hike was in credit and the drop not quit as violent as then. The best thing Greenspan ever said was in 1998, that the solution to moderating and preventing crises is more equity.

David Higgs remarks:

ING Funds has a flier showing overall dividend yields over the past five years of an assortment of countries. New Zealand for the most part had the highest yield in 2006, 4.46%. Compare that to the USA at 1.76%, seems like the guy with the CD in the end wins over the big risk taker, as with the tortoise and hare. But how can a country of sheep farmers continue to be a payer of high dividends year after year?




I've been studying complex variables lately because I find the imaginary very important these days, and I had to brush up on them for one of my daughters.

It led me to consider the imaginary part of the moves during a day or week, and the real part. Consider last week. O/H/L/C:

9/28 1538.20 1545.20 1519.00 1538.10
9/21 1491.80 1552.00 1485.20 1534.40

The real part of the move, from 1534.40 to 1538.10 was 3.70. The low of the week 1519 so there was a -15.40 point imaginary negative part, and the high was 1545.20 so the imaginary positive part was 10.80.

A similar calculation could be done for the day, looking at the amount below the previous close, the amount above the close, and the final move.

We can look at the two points on an Argand like diagram. I claim that the length and the angle between the two lines connecting the negative and positive imaginary could be useful as a predictor. Better yet, the two angles themselves and the real part. Similarities might be useful. Such angles should be quantified , classified, and subjected to prediction and falsification.

Another example. The week of August 17 showed a real move of -1.10 and a negative imaginary of -76.00 and a positive imaginary of 21.50.  A small real move but non-negligible imaginary moves.

Laurence Glazier adds:

I'd also be interested in trying volatility as the orthogonal parameter (it is to do with the imagination after all.)

Michael Cook follows up:

I love complex variables - it is one of the most beautiful subjects in mathematics. Everything comes together and illuminates and integrates everything that's gone before in the traditional mathematics curriculum.

I don't understand how you are defining the imaginary part of price moves - can you clarify? I am intrigued!

Alex Castaldo explains:

If I understand Vic correctly, he defines two complex numbers, the AboveMove and the BelowMove:

AboveMove = (c[t]-c[t-1]) + i (h[t]-c[t-1])
BelowMove = (c[t]-c[t-1]) + i (l[t]-c[t-1])

And plot these as two vectors on the Argand diagram. The real parts are the same, but the imaginary parts are different (and always of opposite sign). Next you can get the angles and the lengths.

Adi Schnytzer queries:

Are these the complex components of the change simply because they exceed the bounds of the price at the start and end of the week? If so, why a week and not a day or a month? And perhaps more to the point, can the maths of complex numbers then be used to predict? Analyze the moves?



If we learned anything over the last couple of months it is that we don't know the second and third derivative of how badly things will play out.

We knew that the housing market was in a bubble, but what we did not know was how its deflation would play out, i.e., a commercial market freeze. We did not know that that it would resonate in Germany or that it would cause a run on the bank in England. We did not know that Russia, a country that is supposed to be swimming in cash from oil revenues, will be tinkering with financial crisis again (at least we did not expect it with oil prices at $80).

What we know now is that our economies are a lot more interconnected than we ever imagined and also that the consequences of use of leverage will be found in places we never expected.



CheckersThis past weekend in Richmond, KY, I was playing Checkers with Don Brattin and made a move that enticed him to move out of his king row and put the 'squeeze' on one of my pieces. He thought I would 'close up' the position with another of my singles. Instead I moved a piece from my king row and allowed him to jump two of my pieces. Then I took two of his back and got an early king and got behind his singles and won the game on position. This past weekend I finished second, my top finish for a long period of playing in tournaments. I only lost one game out of 14 played and had two draws with the player who won. He won his other six rounds and I was the only player to draw him two games. I have not been studying much, but feel that reading Daily Spec has greatly organized my mind and thought processes and I find myself in complex checker games looking at positions in a far different way than I have in the past. In Ohio recently at our yearly tourney, World Champion Alex Moiseyev told me that my game has improved and in Kentucky last weekend two players told me the same, so it is not just my imagination. I read every posting on Daily Spec and try to garner positive information that I can use in everyday life, in my business and in competitive checkers. 



"The readiness with which Korchnoi makes concessions
to his opponent is the readiness of the spring to be
squeezed. While allowing his opponent to take vital
space and handing him the initiative Korchnoi quietly,
little by little, prepares the blow. Korchnoi's real
element, the element in which he has no equal, is the
counter-attack." Vasiliev

Never seen anything quite so reminiscent of the S&P. What's also interesting is that Korchnoi's main weakness arose when his opponents would stay back and get him to make the running. For example against Petrosian in the early days he was likely to overextend, though this changed with their matches in 1977 and 1980.



Milton FriedmanWhen he visited the West Coast in the 70s and 80s, I was my Dad's on-call chauffeur. Besides getting the benefit of parental lectures about my dissolute, self-employed ways, I also got to listen to his discussions with authors. One of the conversations that I remember vividly was a discussion with Milton Friedman about his "school voucher" initiative. Dad agreed with Friedman that education should not be a government monopoly, but he urged the Professor not to present his case to the voters in terms of "vouchers." The word had a terrible connotation, he said. It suggested that people were getting education Food Stamps. If Friedman wanted to allow Californians to be free to choose, he should structure it in terms of changing California's Education Code so that parents had the right to send their children to any school they wanted to or to homeschool them. I remember Dad's saying, "If you make it about money, Milton, you will organize your enemies. The parents in the rich suburban districts and the people who have no economic choices about where their kids go to school will both vote against it." They did; and they still do. Vouchers remain a stone political loser, for all of their seeming intellectual merit.

Back then I was still young enough to assume that Professor Friedman would appreciate getting free political advice from someone who had become a multi-millionaire by navigating the shoals and rapids of 50 State Boards of Education, thousands of local school boards, and the recently created Federal Department of Health, Education and Welfare and had made Friedman himself a millionaire from book royalties. Wrong! The Professor lectured Dad about the absolute necessity of vouchers as part of the initiative. If there were no vouchers, then giving people the legal right to find alternate paths would be meaningless. Dad's reply was "Milton, if people have the right to pursue alternatives, they will find the money. Hell, the money will find them." That comment effectively ended the conversation. It left Professor Friedman literally sputtering with incomprehension. He simply could not conceive of the idea that capital would flow to a new and better idea for education — simply because it was a better idea. The Professor was, for all his wisdom, as completely bound by his academic horizons as any of his more liberal colleagues. He assumed that the government had to pay for schooling — one way or another.



Wednesday, 19 September 2007, 11:05 GMT 12:05 UK

New burial powers come into force

Graves filled at least 75 years ago can now be re-used under new powers to ease pressure on London's cemeteries.

The plots can be deepened with room for up to six new coffins to be placed on top of the older remains.

I don't want to be buried. Sooner or later, somebody is going to dig you up. Plus, I think its weird when people talk to gravestones, and I don't want my kids to feel guilty for not doing it.

Cremation has its problems. For example, my great grandmother was cremated back around 1990. My aunt took her ashes. One day a package showed up at my dad's office, and it was a bag of ashes in a carboard boxes. It's been shuttled around ever since, and I think is in my dad's basement.

Also, if you go into an urn, someday one of your relatives is going to knock you over and feel guilty about it.

Cremation could be cool under circumstances. I think it would be cool if McSorleys mixed my ashes in with the sawdust on the floor.

But ideally, I want a Viking funeral pyre.



I am thinking the debts will not be paid. No one will suffer for paying that debt. May suffer for something else, however.

All nations will simultaneously declare a Jubilee Year, and all debts will be forgiven. Life will begin from square one.

This idea stems from readings in Leviticus, Chapter 25.

Practically speaking, how would it work out, could central banks arrange a Jubilee with hedges and counter hedges, with derivatives and fiat illusions?



The spirited Nasdaq appeared to to be fighting the downward gravitational pull of the Dow and S&P earlier in the day. Succumbing to gravity in the early afternoon, tech has summoned a second wind and is tugging the other indices to join. Another gravitational picture for tech that comes to mind is a satellite, orbiting a planet represented by the previous close. They both move through space and time toward a greater destination. Alternatively, Nasdaq looks like it's snowboarding a half-pipe. Does it fall back into the pipe as we close? Or can it jump out of the pipe, and cruise along the rim? Meanwhile S&P fell into a canyon for a day's journey. Does it has the legs left for the climb by the close to see Grofe's sunrise?



Shape of LifeRecent study of the work of Rudolf A. Raff, including his book The Shape of Life, inspired by the supposition of Galton that there are only a small number of forms that are consistent with life based on biological and physical limitations, has led me to consider the specific fixed forms that a species and a market can take. Many of the fixed forms at the basis of the phyla seem to start with a pipe: a mouth, a gut, and an excretory organ. I find that many times the market displays such pipes. Another line of inquiry are the architectural forms that the market displays. Today, the market action in S&P looks like a cathedral. The study of the shape of life raises many fascinating questions as does the architecture of the market. How they be classified and predicted, is a good starting point.

James Sogi augments:

Both Weyl and Wolfram consider the basic forms of bilateral symmetry as being intrinsic to natural processes in art and nature. (See Wolfram's artificial leaves). Weyl attributes symmetry to even deeper metaphysical processes. The market's basic bilateral process of bid and ask with two opposing forces of buying and selling tends toward the creation of bilaterally symmetrical forms. This lends itself to many predictive applications and the formation of generally negative correlations within lower time frames. The general rule seems to be negative correlation with bouts of correlation breaking out for limited durations. What is not so regular is the durations of said regimes. Study of endings and durations are more robust than study of new beginnings. In other words it is hard to recognize the new regime when it begins, but one can tell when an existing cycle is long in the tooth. On the counting point, Weyl studied the alternating symmetrical patterns prevalent in ancient art friezes. With a typical pattern coming in 3's or other odd or prime numbers, the bilateral symmetry of the market would tend towards an alternating pattern as well. This has predictive application.

Bruno Ombreux adds:

Sand DollarBilateral symmetry is prevalent in nature and the markets (for instance Lobagola, as Vic and Laurel coined it). But it is not the only form of symmetry. Sea urchins display pentagonal symmetry. Could one find higher forms of symmetry in the markets too?

One obvious market is the oil market. There is a fundamental source of of triangular symmetry in the interplay of heating oil, gasoline and crude oil, tradeable in various crack spreads. Going up one further level, oil arb relationships, geographical, time-based and qualitative, are creating a web of multilateral symmetries that are there for the taking.

Changing subjects but keeping with the symmetry theme, I am wondering about the Magic T theory, which is mentioned on pg. 72 of Vic and Laurel's book. Marty Schwartz was a successful S&P trader. He allegedly was a big fan of this so-called theory, though he didn't invent it. The name Magic T is ridiculous, evoking the worst of technical analysis. But it is some kind of Lobagola/mean-reversion theory. There could be something in it. Yet it is not easy to test.

Russ Sears ponders a related question:

A question I have asked myself, but have never studied in life forms is "why is it that the hierarchical ancestral classification of families of animals done many years ago (Linnaeus, etc.) was proven uncannily correct by modern genetics DNA research?"

The basic classification system was based on the outstanding/noticeable physical differences in life forms. This was well before the complex understanding of the chemistry of life existed.

Obviously, the divergence from normal of the life form filled a niche and created a branch. But why would the visually noticeable difference matter, as much if not more than the hidden chemical differences. Especially when the hidden differences are often the more fundamental or theoretically obvious difference of successful adaptation.

I suspect that once the more fundamental difference occurs, the visually obvious adaptations and physical evolution occur quickly.

A clear case of death to the unfit would be lack of immunity to disease for example. For a converse example the difference between herbivores and carnivores. Fundamentally is a difference in stomach chemistry, not a outward appearance. However, a well known adaption is that herbivores have eyes on their sides to see more of everything, whereas carnivores have eyes in front to see specific targets.

In other words once the subtle difference occurred did the physical difference form rather quickly. Or did large physical obvious differences come first and the subtle difference taking more time follow.

For a speculator, I propose a analogy for carnivore/herbivores eyes. The optimist seeing a vast sea of potential food, must be alert for the sudden unexpected attack. The starving pessimist must focus on the targeted prey. However, both should understand how the other view differs from theirs. The optimist to learn how to shake the predators when he is in their sight. The pessimist, should understand that the optimist has a more rounded view, to see where the opportunity truly is when it appears to come from out of nowhere.

Phil McDonnell adds:

The two key driving forces of evolution are survival and reproduction. Sometimes these are characterized by the phrases:

1. Survival of the fittest
2. Survival of the s-xiest.

In order for an animal to reproduce it must first identify a mate. For most animals the primary identification sense is eyesight. This is not to exclude other senses. Certainly hearing comes into play in the form of mating calls and territorial calls. Smell, touch and even complex courtship behaviors are all used to identify and woo potential mates. So to answer the question why is there such a strong correlation between the outward appearance of a species and its DNA we need only to realize that to reproduce the animals must first recognize each other!



 Counting is great, but without trading ideas to test, it will go as far as a Ferrari without gasoline. Let's number "Generating trading ideas" as step zero in the "Counting in 11 steps" manifesto, a variation on Dr. Steenbarger's Opus.

With this in mind, I took up the study of idea manufacturing. One of the shortest books ever published is James Young's "A Technique for Producing Ideas". It is only 48 pages. It was written in the 1940s by an advertiser. Predictably, it is about generating ideas for advertising. But the process is the same in other fields like science or speculation.

Interestingly, the author starts by drawing a distinction between two types of people. Borrowing from Pareto , he presents the "speculators", creative people with ideas, and the "rentiers", unimaginative people thriving in routine. He wrongly translates "rentier" as stockholder when in fact this word means "bondholder". But this is a minor peeve. The translation might not be so wrong: I believe the word stocks was used for bonds in England in the 19th century. This mention of speculators in a book dedicated to idea production is interesting, but not central. The main thesis is that new ideas are a combination of existing ideas. Since existing ideas are needed to produce new ideas, one must have a big store of existing ideas. There are two sources:

- A deep knowledge of the subject under consideration.
- A knowledge of as many other unrelated subjects as possible.

One needs to be both a specialist and a Renaissance man.

Victor is widely recognized as one of the greatest trading idea generators ever, and this site is a reflection of his personality. It deals with a wide variety of subjects, from hunting to BBQ, while displaying a depth of financial knowledge and experience. It took me a while to understand the greatness of this modus operandi. Young's little book helped me pin it down. I am forever grateful to Victor for his teaching by example, showing how by being both an Homo Universalis and an Homo œconomicus, one can create the ideas that are a prerequisite to counting.

Nigel Davies adds:

This echoes the advice of Alexander Kotov, in Think Like A Grandmaster, that the best way to study openings is to know something about everything and everything about one thing. And I am also very grateful to Victor for his lessons on such matters.



Leaving last weekend's Richmond, KY, Checker Tournament, on I-75 I saw an overhead sign and could not believe what it said:


I found it to the point and a real attention-getter! I think South Carolina, and my own state of Ohio, are the only two states without a motorcycle helmet law in place.

David Hillman explains:

Helmet LawIt's far more complicated than that. Only four states have no helmet restrictions; South Carolina and Ohio are not among them. Colorado, Illinois, Iowa and New Hampshire are. Ohio and 18 other states exempt adult riders [age 18+]. South Carolina and six other states exempt riders age 21+, and 20 states have full helmet laws [everybody wears]. The full helmet law states are predominantly West coast, Southeast and Northeast. if you're cagey, you can actually ride from Phoenix to Dover, DE without ever donning a hard hat. You see, we hilljacks and clodhoppers out here in the Midwest and Plains [except Michigan, Missouri, Nebraska] don't care much about head injuries. It's true there's not much uglier than a deer strike on a bike, but, hey, give us freedom and/or give us death.



Wrestling with the question of where to place a stop on a position intended to be held for a day, one approach I took was to start with the probability of being stopped out.  If I wanted, for example, a 10% probability of being stopped out, I could look at the last year's daily lows, express each as a percentage decline from the prior close, and find the 10th percentile of these daily maximum adverse excursions.

In datamining with S&P 500 data from the 1980s and 1990s, I found that the tighter the stop, the better the total return.  Had one decided at the advent of S&P futures trading in 1982 to buy the close each day and sell the close the next day with a stop placed so as to have a 75% probability of stopping out, based on a one-year lookback — resulting in stops as little as 0.1% below the prior close — the theoretical return without considering commissions, slippage, rounding, and gaps down would have been an incredible 7,918% by the end of 2000, versus a 528% return for buy and hold.

Alas, this effect disappeared completely after 2002.  The same strategy would have returned only 14% from the end of 2002 to last Thursday, versus a 64% return for buy and hold.



Alan Greenspan's autobiography "The Age of Turbulence" provides a snapshot of establishmentarian economic thinking, including a panoramic view of of how we got here, what "here" is, and how one very clever man prospered in a variety of challenging settings.

We hear the well-known story of Greenspan's rags-to-knighthood ascent from Washington Heights to Washington's heights. Students of the Beltway memoir genre will recognize the name and venue dropping.

The latter portion of the book, Greenspan's critique of the current economic/political landscape, would be familiar to anyone who has followed his work, and kept up with the musings of bien penseurs.

Miscellaneous nuggets:

1) "Forecasting is simply a projection of how current imbalances will ultimately resolve." (p. 48)

2) Institutional capture upon becoming Fed chair: "The staff prepared a series of intensive tutorials diplomatically labeled 'one-person seminars,' in which I was the student — senior people from the professional staff taught me my job." (p 100)

3) Still a libertarian? "Unqualified democracy, where 51 percent of the people can legally do away with the rights of the remaining 49 percent, leads to tyranny." (p. 345)

4) A climate doomster? "There can be very little doubt that global warming is real and man-made." (p. 454)

5) Inflation fatalist: "For the most part, the American people have tolerated the inflation bias as an acceptable cost of the modern welfare state. There is no support for the gold standard today, and I see no likelihood of its return." (p. 481)

Folks seeking initial compass points on the intersection between the Beltway and Broadway will learn a lot about the current state of play.

Cynics like me can troll for amusing anecdotes, marvel at the near adoration offered a certain impeached ex-President, and shelve the book for future reference.



PoohAmazing Bear Rescue

A bear was walking across Rainbow Bridge (Old Hwy 40 at Donner Summit, Truckee) on Saturday when two cars also crossing the bridge scared the bear into jumping off the bridge. Somehow the bear caught himself on a ledge and was able to pull itself to safety. Authorities decided that nothing could be done…

There is a distribution of intelligence in wild animals, just as in humans, and increasingly there is evidence intelligence is partly inherited. Now in this case the authorities gave the bear a night to either fall off the bridge and perish or figure his own way out. It wasn't until the next day that for public safety reasons (onlookers) they decided to rescue the bear. And I don't have a problem with that. However, if we rescue every whale that swims up the Sacramento River or every bear that walks onto a bridge then we circumvent the natural order of things — which is that in the wild, the stupid animals perish and the smart ones propagate. The net effect of protecting the animals from every dumb move they make is Eloi-like wild animal populations. They are wild animals and not domesticated pets and they have to be allowed to fail. Otherwise as a species they will not be able to learn and adapt to the changing circumstances of the world in which they live.

Alston Mabry haikus:

Bridge-bound bear is saved.
Sunbaked berates bold rescue.
Which is more foolish?

Having been stuck on
a few high bridges myself,
I feel for the bear.

Dean Parisian extends:

I am a waterfowl hunter. Geese and ducks. I have killed lots of smart geese and lots of dumb geese. What kills the smart ones is their relationship with their life-long mates, causing them to fly back into the goose decoy spreads looking for the mate that just dropped out of the sky. Most geese killed over decoys are responding to the greed factor that the geese on the ground (the decoys) are feeding on food the geese in the air want.

These two basic goose-killing methodologies have significant lessons for market players. One, don’t fall in love with your positions because you can be gunned down at any time if they get you into strange territory. Two, don’t get yourself into situations where you “need” to be in the trade with everyone else who is feeding at the trough. That will get you killed faster than anything. One more thing, when you exit a position where shots were fired and you escaped, don’t come back and visit any time soon. There are lots of greenbacks in other places. Just keep looking until you find them.



I need a new/different perspective. Can anyone recommend a few stocks (not indices) that have met the following criteria: The stock was originally not volatile, but then became volatile for at least some time. Use whatever definition you want for "volatile". Any time frame is okay. I need only a few examples. I'm just testing some new algorithms.



A new Python mag out — first issue is free.



Don't automatically select as lifetime mate the gal you spent a few hours with in the back seat of your old car. It was probably dark there and you couldn't see the details that are important. Just as females have different hair color, skin color, finger size, you know, different anatomical structures, as some have knock knees — so they have different genitalia.

Female s-x therapist Betty Dodson published a small manual in 1976 on the subject. She obtained a graphic artist to work with her in her therapy sessions. This artist took part in group sessions where females sat in a circle naked, assumed positions that enabled a good view, and the artist drew each female's genitalia. These drawings appear in the little manual on s-xuality which Dodson published. There are 15 drawings.

Every man should have this manual to get an assessment of what type is most interesting to his own senses. Then go out and seek to find.

Dodson's work, detailed in her manual, helps women overcome reticence to look at themselves and helps them find joy in pleasuring themselves. Manual is instructive. Should be read by all men that nature has prepared.



Bubba's BBQ is the only spot to find bbq and home cooking in Jackson WY. The rest of the town has raw fish and vertical food morsels on large plate,s so this is an oasis amid the pretense that is the former cowboy town.

Bubba's serves brisket, ribs, and pork as well as a BBQ bird or two. I think the brisket and birds are your best bet. Good size servings and Southern vegetables too. A good stop on the BBQ trail.

Didn't try desserts, but one woman makes her husband drive her from Salt Lake City, four hours away, to eat the buttermilk pie.



The first two bearish economists I've seen said this morning's data "only look strong," and that the deeply obscure metrics (one of the diffusion indicies, for instance) tell a tale of ongoing weakness.

Yeah, a lot of this was unwinding the big miss on Government payrolls last month, but given the amazing noise generated by the August market debacle, it's telling that more than half a million folks chose to enter the workforce in September, and 463,000 of them got jobs.



Today I attended a talk by David Hightower. The title was "The Inflation Spiral, Part 2". He's bullish on many commodity markets. In the next 6-12 months, he expects gold to reach $820 per ounce and crude oil to exceed $90 per barrel. He was careful to hedge his forecast by saying he was short-term bearish on energy (because of the end of the hurricane season) and agricultural commodities (because of the harvest).

Other key points from his talk:

- The emergence of China and India creates an increasing demand for natural resources, which will continue to result in cost-push inflation

- The emergence of not only the Euro, but also many formerly neglected currencies such as the Brazilian real, has created many alternatives to the U.S. dollar, which will probably continue to slide

- The Fed crossed an important threshold in September when, for the first time in 30 years, it cut rates despite a clear inflationary threat

- Despite a "shockingly large" corn crop this year, there is no glut

- There will be a "battle for acres" in agricultural markets going into 2008 that will link these markets together and make prices likely to go up

- When sugar exceeded 18 cents per pound last year, the Brazilian government diverted sugar supplies away from energy production in order to ease food inflation

- Stocks are going up in anticipation of an October rate cut. If anything happens to make a rate cut less likely (e.g., a strong employment report), stocks will decline

- The Fed was forced by the subprime crisis into reluctantly cutting the funds rate and will raise the funds rate as soon as the subprime crisis is over.

Roger Arnold replies:

I'm all for forward thinking and looking for where new and divergent patterns and trends begin or become apparent. It's a necessary process to go through so that your brain doesn't atrophy.

But, the number of guys, usually commodities, calling for a dollar crisis, with all of the attendant reflections in foreign flows, commodities, etc. is kind of spooky.

They never seem to provide the caveat that their prognostications for a dollar crisis — not just and end of dollar hegemony but a reversal of that hegemony — are without historical precedent and should be considered very very carefully before placing that bet.

And outside of opaque discussions of the rise of the Euro, the real, and even expectations for the yuan, they never ever take the logical next step in their argument and conclude with what currency or basket of such will replace the dollar.

keep looking »


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