There is an interesting divergence in the stock prices for offshore drilling and land-based drilling companies. Both are in the business of looking for energy.

In the past the two appeared to be more in step with each other as the price of oil fluctuated. Then came the (over)realization that the land-based drillers' objective is mainly natural gas. As natural gas reserves increased and natural gas prices went down, and the fear of recession and "global warming"/warm winters set in, the land-based drillers were sent to the "dog house".

But natural gas companies have an insatiable need to keep replacing reserves as they deplete quite quickly. Land-based drilling objectives have become much deeper and more technically difficult (i.e. horizontal drilling techniques) so it is not as easy to drill one well and move to the next quickly. And if there is a fair amount of cold weather this year there could be a significant drawdown on natural gas reserves going into next year.

Based on the cyclical nature of these stocks, past volatilities and recent quiescences, Wall Street's past infatuations and scant notice these days, future assumptions, and the limited supply of available, quality rigs, I wonder if there is some testable criteria (I have seen historical PE ratios used in the past as a point of reference) that would allow one to determine if the land-based group (and really only 5 companies are the owners of the majority of the land-based rigs in the US) is a good value at this point. It is a speculative area with many, many variables and quite risky at times.

In other words when is it a good time to go bottom-fishing and can that be determined for a particular industry group?

As a thin reed there appears to be a sharp increase lately in the hiring of geologists just out of school–at this point, however, it is probably due more to offshore petroleum-related work.

David Lamb adds:

As an addition to this discussion I asked my neighbor, who is a Reservoir Engineer for C*n*c*Phi!!ips, to add his two cents. My neighbor's comments:

"…give me a day or so and I will send you what you need to have a big picture - clear understanding of this and the oil gas industry as a whole (which is largely misunderstood by speculators right now). The mass hiring of geologist and engineers in general is absolutely true -this is a result of what happened in the early 80's where most petroleum engineering programs were closed as a result of diminished student interest. When OPEC reduced supplies in seventies - students flocked to petroleum engineering and US oil companies began drilling and producing at max levels. Rig counts reached double what they are today. When OPEC released its supplies in the early 80's there was a surplus of oil on the market and oil prices plummeted. Rigs where no longer economical and mass lay offs by the oil companies ensued. College graduates could not get jobs in the petroleum field and as a result interest by prospective students diminished.Nation wide the number of Petroleum Engineers graduating with a bachelors was reduced to the 200 a year range. Note that this took place in a time when the supply could meet and exceed worldwide demand for oil.

Worldwide oil production has remained relatively constant while the number or wells drilled yearly to meet this production is constantly increasing (this means we are now drilling more wells for less reserves and at higher costs than the wells of the 70's, 80's, and 90's). In the meantime worldwide demand has continued to increase. India and China demonstrating the largest increase in demand. With new competition in the worldwide oil market prices have soared from around $10 a barrel in the early 80's to near $100. Pure increase in demand and constant supply economic response. In the meantime - the petroleum industry engineers have aged, very little influx in new engineers since the late 70's. Therefore 70% of the current petroleum engineers and geologist are expected to retire with next 10 years. Petroleum engineering school have not however been able to increase there enrollments until the last few years. Therefore, there is not enough engineers graduating to replace the retiring force. Therefore, huge recruitment pushes have been made in the last few years with large salaries and signing bonuses to capture what engineers are available. I received 8 job offers with the lowest offering 70K and bonuses all months prior to my actual graduation. Geologist have seen some of the same trends although they have a larger pool of graduating students. Typical geology graduates with a bachelor could expect to make 35-40K but within a oil company they can start at 65-80K. Most large companies still require a masters in Geology for exploration and heavy drilling work. However, all drilling rigs employ a mud logger (geologist) to examine the drill cuttings as they come up during drilling to identify rock type, formation, ect. These loggers are in more demand lately as well and so salaries have risen from base to decent wages. In addition the type of drilling being done today requires much more technical understanding of rock formation and reservoir interpretation. Previously, vertical wells required very little geological interpretation. Now directional and horizontal wells require full time geological monitoring at costs sometimes exceeding 100 Million a well.

Many companies are offering huge signing bonuses (100K +) for experienced engineers (3+ years) to leave there current company and come to work for new company. Because the number of new Petroleum engineers is insufficient to fill new demands the petroleum industry has begun hiring all types of engineers and doing on job training in petroleum (these engineers receive base salaries above what they can expect working within their own field). Currently petroleum engineers receive the highest avg. salary of all engineers.

In short what we are seeing is that the amount of oil available is high, however it is in reservoirs that were uneconomical to drill at lower oil prices. However, the rate at which we can extract oil from these reservoirs (oil sand, heavy oil, deep offshore) is very limited. Therefore, although we are not looking at running out of oil in next few centuries we will likely never be able to increase actual available supply while demand should continue to grow. Unlike early 80's no one has capacity to flood market with additional supply. China and India will continue to provide more price competition for available oil and therefore Prices will continue to rise and this will negatively impact US standard of living.

Ethanol, Hydrogen cells, ect. are not viable replacements and will not be in near future (despite what the green movement would like you to believe). These technologies also require the input of large amounts of oil based energies to produce and this is rarely mentioned.

Natural gas supplies are huge. Traditionally much of the produced natural gas has been flared or reinjected back into the earth due to the lack of transportation piping available and the low costs per MBTU of gas. This continues to be true to some extent. Canada, and the U.S. have huge reserves that are not all being currently used due to cost of building gathering systems and low prices. New technologies are being used to convert natural gas to LNG (liquid natural gas) for transportation and marketing purposes. These plants cost 10's of billions and take years to build. In the future these LNG's will replace some of the oil demand and can be used and burned similarly. The natural gas stores in China, Russia, Middle East, and other places have not even began to be used and are large enough to supply worldwide energy for hundreds of years if they could be drilled and transported to the market place. These supplies will continually suppress the natural gas prices - as prices try to go up, new reserves will be tapped and increase supply and maintaining price.

The number of drilling rigs in the U.S. has continued to increase in the U.S. over the past 5 years or so. The number of rigs is still about half of the number achieved in the 70's. These rigs are drilling more complex and time consuming wells than the past and onshore drilling is focusing more and more on natural gas reservoirs.

Offshore gulf coast drilling continues to focus largely on oil but cost are huge and returns risky.

here are a few links that may be of interest. I will also send you a few additional charts that may help predict future commodity behavior."

Rig Counts

Oil Long Term Supply and Demand

International Energy Outlook 2007



Father/SonNoticing that my son (age 5) was not particularly assertive (e.g. if another kid took a toy he was playing with, he just cried) I decided to embark on argument training. The problem is that in this attempt at rounding I seem to have been rather too successful, and now he argues about everything. And that includes some chess positions, even though he can't play. He's also started memorialising examples of his being assertive in "folk tales," which need to be repeated several times a day. For example there was the time a 2 year old tried to take his plane in Pizza Hut…

I'm starting to wonder if the best someone can really do is to try to improve himself whilst just spending time with his kids, with no particular goal in mind?

Jim Sogi suggests:

One, no matter what, always let the child know that you love him, even when he fails or is bad.

Second, especially ages 2-8, be consistent with rewards and punishments.  Don't spoil the child, but guide him with firm rules. He will be happier for it in the long run.   I see so many parents unwittingly training their children to be spoiled brats, and they both end up miserable. After that, its almost too late.  Manners and etiquette should be a part of the  program.

See Living with Children by Gerald Patterson for specifics.

Kim Zussman remarks:

How to raise happy, well rounded kids? That's easy: stay married.

Mom and dad need to transcend herd psycoidology insisting that happiness-entitlement derives from the continuous hunt for new itches to scratch.  If this doesn't resonate, go to church. Then, when your kids grow up happier and well adjusted, mom and dad will be happy as well.

At a Bar Mitzvah yesterday, the rabbi and new man discussed at length the reluctant leadership of Moses on his way to Exodus, as well as themes of peace, forgiveness, avoiding war, etc.  Ironically 80% of the audience had been divorced, and the audience included numerous young people with various parent/step-parent complexes.  So much for Ashkenazi IQ.

Russ Humbert writes:

PuppiesWatching a dog raising pups, you will see that the adults are pacifist during the first weeks. The pups can cause all manner of pain and annoyance, and both the male and female dog will take it all without any aggression. Then, once they are old enough to understand, comes the discipline. They are taught to understand hierarchy of the pack. They are also taught to become top dog you must fight. This shows us several things about ourselves that many modern parents ignore.

In a society that is becoming less and less hierarchical in nature and more team oriented, less discipline is needed, but more proper peer pressure. And, governmental attempts to ban corporal punishment by parents is doomed to failure. Like prohibition, the war on drugs, and sexual abstinence. When you go against the brain's natural response, the police lose. Anyone who has been close to the foster care system in this nation, knows first hand how dismal this failure is likely to be all at the expense of the most innocent, the child.

I would suggest that in raising a child one must consider his innate strengths and weaknesses in deciding how much of team player/hierarchical structure he needs. But also one must consider that most parents simple follow the "team" approach because it is popular.

In other words, teach a child to stick up for himself, but draw the line when he disrespects you.

Scott Brooks follows up:

Unless there is something biologically wrong with a child, there is no reason for that child to become depressed and miserable if he is raised to be happy and find joy in life. Becoming "genius-like" I believe is far more about nurturing than biology. Sure, biology helps, but the right environment is far more important. A good environment can make a kid, whereas a bad environment can break him, even if has the grey matter necessary to become a genius. Training your children how to think is the key. Not just how to think about intellectual endeavours, but how to think about philosophical and emotional endeavours.

Being happy is a choice. Having a good attitude is a choice. Being smart is a choice. I was beaten down in school because they thought I wasn't very smart. They wanted to put me in special school, but my mom wouldn't let them. But I was always raised with a belief system that my life was my choice. When I went away to college, I decided to make a fresh start, since no one knew me. I played the role of the smart guy and — surprise — I was smart and got good grades. I credit all that to my upbringing: being taught to be happy, find joy, to look on the bright side and always believe that good things would happen. I "got smart" as a result of that.

Jeff Sasmor recounts:

I let my kids (girls, 14 & 16) mostly do what they want as long as they keep up good grades. When they don't I hire tutors. As a result one has an A average and the other B+ with no nagging from me. About the only exception is that I never let them fall behind in math. They have had unfettered and unmonitored Internet access since they were each about 5 or 6.

I let them explore what they want to do and I don't push them in any direction; rather, I think it's more appropriate to encourage them in what they appear to be interested in. One has become a really quite good writer. The other has self-taught herself to become a good artist and is starting a band with some friends.

They should explore while they are able; most adults do not have that luxury once they have to pay rent. They do have friends whose lives are scripted to strict schedules of sport and other activities. I don't understand this sort of parental behaviour, but then I don't understand many things that involve people's minds.



Just as many traders could be attracted to trading at round numbers, so might they be inclined to open or close trades at or near the clock-hour mark.  It seems possible that increased trading on the hour could effect volatility.  As a check on this, looked at range in the 10 minutes centered on each clock hour (ES 1/07-12/07), and compared with the 10 minutes prior (which was not on the hour).

Range in this case defined as [max(high)] - [min(low)] within the period +/- 5 minutes of the hour for continuous futures prices.  Used paired t-test to compare the peri-hour range to the range of 10 min prior (adjusting for local market volatility by comparing to adjacent range, tests whether difference is not zero). This test showed no difference between on the hour and pre-hour range:

Zuss1An additional test comparing variance of hour range and pre hour range showed no difference:

Zuss2OK, that was boring. However it was interesting to compare mean range (around the hour) for the different hours of the day-session. The mean range was significantly higher at 10:00 NY time, and lower at 12:00 and 13:00, than the global mean range.

Jim Sogi adds:

Financial Markets Tick by Tick, edited by Pierre Lequeux, has some studies of this nature on various markets which are in the same vein. Mornings and closes have the highest volumes and volatility, with midday being lower on both measures.



Standing Like a TreeRecently I started to crystalise some, let's say, 'intuitions,' into more conscious thoughts. The bridge between the two was to read quite a few books on Chinese martial arts and the concept of 'Chi' as a kind of life force. Despite a widespread belief in the existance of 'Chi' there is no evidence that such a thing exists. There is, however, some evidence for the health benefits of 'Chi generating exercises'.

To cut a long story short I decided to try it for myself and found classes for Zhan Zhuang. Frankly I was sceptical, as there was no scientific reason for doing so and no means of testing the outcome on my personal sample of one. The only means of judging would be my own senses.

My attendance at these classes naturally caused great hilarity when I told some hard-headed colleages about it. At this point I laid it on thick by explaining that ideally I should stand with my fellow trees in the park and absorb sunlight. Of course I was testing them, sensing their reaction as I built my hypothesis.

What is this hypothesis? Simply stated I suggest that the nature of a scientific education can actually lead to bad thinking, especially if it is pursued to the detriment of non-scientific activities. This is not so much the fault of science as the difficulty humans have in properly applying its methods. The search for a testable hypothesis causes the frustrations that lead to data-mining and failure to falsify hypotheses.

So where do the trees come in? Well, what I've noticed (and I know this is completely untested) since starting Zhan Zhuang is a much greater self-awareness, more energy and a reduction in tension. My chess experience suggests that such effects lead to better thinking, which in turn implies they'd probably lead to better science. The irony here is that many scientists just couldn't bring themselves to do stand like a tree because of the cynicism engendered by their methodology.

Some thoughts:

1) It's better to hire traders who like fresh air.

2) Science has nothing to say on the matter of various ancient practices which 'enhance the senses,' and this is why even really smart guys like Daniel Dennett manage to completely miss the point.

3) If you ever see a tree that tries to stand like a human, get the heck out of there.

Jim Sogi adds:

Studies of the brains of monks who have meditated for 20+ years show structural changes. Practice of breathing, meditation and other techniques manifest in physical changes, changes in alpha brain waves, change in heart and breathe rates. Practice of Kung Fu and other physical martial arts have beneficial health effects, and application to trading as well.

Nigel Davies clarifies:

There are two types of learning involved here. One is learning by 'reason', the other is subconscious 'body learning' of the type involved in Zhan Zhuong. The latter develops things like 'awareness.' My hypothesis is that those who rely on learning by reason alone (and this is the main focus of Daily Spec) are prone to a multitude of errors because they have not developed their 'senses' (or rather other parts of their brain that are not directly associated with reason). I have met such people both on the chessboard and in the trading world, and invariably they talk a good game but are unable to function well within it.

'Descarte's Error' is relevant to this way of thinking, with some brain-damaged individuals discussed therein performing well on 'tests' but failing hopelessly when they were let out onto the street. Substituting 'brain undeveloped' for 'brain damaged' and I suggest that we have a similar effect. Not of course the same level of disaster, but certainly an inability to function at the highest levels of difficult professions.

Marion Dreyfus extends:

The reports of changes recorded in the minds/cerebra of monks are numerous. I wonder if the same can be said of absence of sex? What the monks do is active: They actively calm their minds, and actively bring themselves in concert with their fellow chanters. They breathe synchronously and deeply. They sit in relaxed alignment. These are active conditions.

Is a mere absence of sex in any way equivalent? Not having sex is not a discrete action or series of actions deliberately undertaken. In fact one would argue that a person not enjoying this life-function practice is always on the qui vive to find sex and ameliorate the absence condition. One is always tippy-toeing to locate a prime subject of supply, as it were. But not finding it is not really like co-aligning breathing, balanced postures, deep meditation or efforts at releasing of tensions and earthly concerns. Contrarily, I believe that people who have not had sex for a while still ideate and fantasize and focus on Getting It much of their waking hours, so it is the inverse of monkish contemplation.

Thus I doubt that the two are parallel at all. I therefore doubt that sexlessness alters the brain over time. Except for men. (Who become crazed and completely nuts.) (Or so they would have us distaff siders believe.)



Research providing an optimistic starting point for many a New Year's resolution:

And yet research is converging on the conclusion that great accomplishment, and even what we call genius, is typically the result of years of passion and dedication and not something that flows naturally from a gift. Mozart, Edison, Curie, Darwin and Cézanne were not simply born with talent; they cultivated it through tremendous and sustained effort. Similarly, hard work and discipline contribute much more to school achievement than IQ does.



CookieDecided to order out tonight from our local Dragon House for my daughter and her three boys and the wife and me. After dinner my nine year old brought me his fortune cookie and asked if I had a pair of scissors.

He held the cookie while I snipped off the cellophane covering. He then asked me to read it to him and it said: DO NOT GIVE A MAN A FISH, BUT TEACH HIM HOW TO FISH.

Reminded me of something early on that Dr. Dorn once told me about Daily Speculations (when I was first introduced to the site by Vic and Laurel) about "meals for a lifetime."



Bohn's HandbookThe other day I added another book to my library: BOHN'S NEW HANDBOOK OF GAMES COMPRISING WHIST, DRAUGHTS, BILLIARDS, Philadelphia, HENRY F. ANNERS 1855.
This hardbound book contains 110 pages and lists and describes many games that are totally foreign to me: Whist, in four parts, Piquet, Quadrille, Ecarte, Cribbage (knew that one), Boston, Quinze, Pope Joan, Vingt-Un, Put, All Fours, Speculation (found this to be a card game), Brag, Roulette, Hazard, Division Loo, Backgammon, Draughts (same as Checkers), Chess, Billiards, Russian Bagatelle, American Bowls and a few others.

In its day this book was important to have on one's parlour table in one's drawing room to entertain family and friends before the advent of television and video games and the Internet. Looking through this book I see challenging and mentally stimulating games. Man has advanced and yet lost many things that made a family unit in its day what it was.
It is also interesting how the writers of years gone by described a game, for instance: "Draughts it should be remembered is purely a game of calculation, and as such craves wary policy."



CBOTI probably have enough info gleaned from old-time pit traders to write a large book. I loved to hear the stories and teachings those old guys had to share, and sought out as much of it as they were willing to tell me. However, much of that information is anecdotal and it would be hard to apply the scientific method to most of it. I did learn a whole bag of tricks for extracting extra cash while trading in the pit, but most of the tricks are either mechanical in nature, or educated guesses (such as estimating how much wheat is for sale in the pit at any given time).

I did learn one slam-dunk way of pulling out money out of the pit. I worked hard at identifying new, inexperienced traders who were certain losers, and fading all their trades. This technique worked out very well for me. However, identifying certain losers is a skill in itself and takes time to develop. Pit traders can have a special insight/feel for the market, but only the net winners have that feel. A majority of those who step up to the plate to trade don't make money, and fade into oblivion.

Steve Leslie responds:

In poker, the professionals are sharks; they prey on the weak, in poker vernacular, the dead money. That is why they are called fishes or pigeons. Professionals avoid tangling with each other — it is far easier to exploit the weakness of the youthful or inexperienced rather than the wizened veteran. Therefore the professional uses time to his advantage by patiently waiting for the amateur to venture out into the waters and make a mistake. It is similar to the Highlander television show from some years back. For the Highlander to gain more power, he must kill his adversary by taking off his head. Same in poker, by destroying your opponent you assume his chips and as a result, his power.

Larry Williams extends:

While the gummint guys say, and rightfully so, "Past performance is no assurance of future success" there is one exception to this I have found and isolated: Advisors, funds, newsletters, etc., that have not done well in the past will not do well in the future. Jeff's pit wisdom does spill over to outside the pits as well.

Phil McDonnell adds:

I performed an analysis a year ago that showed that among mutual funds the worst performers were predictably among the worst in the next time period as well. The results were statistically significant for the worst group. However among the best performing funds there was no correlation. Superior performance did not persist probably because many people  mimic the trading styles of the most successful traders of the last time period. It is a bit like the generals who are always fighting the last war.

Steve Leslie writes:

Ken HeebnerI hope this complements Dr. McDonnell's work since I am sure he did some deep research on this. With respect to his comments a few points can be made.

First, I assume that he is talking about open-ended mutual funds. There are significant differences between open-ended funds and close-ended funds. And even open-ended funds who no longer accept new accounts but only money from existing shareholders. This is a very complex field, evaluating performance of mutual funds because there are so many variables that exist in the arena. Fund managers change, inflow of capital, hot markets such as large cap growth, value, international, etc. With respect to performance my first question would be how performance was measured. Was it against an index or against a peer group? For example if a fund were a midcap growth fund, was the evaluation against other midcap funds or against the Russell 1000, S&P, etc. In short, were these absolute performance or relative performance comparisons?

When I was a broker, I know that if a fund had exceptional performance the prior year, the sales rep for the company would come in and push performance. Then the brokers would take the literature and push it to the clients. Money would flow into the fund, making it more difficult for the manager to manage. Therefore the fund was a victim of its own success and performance would suffer. The most startling examples of this were in the late 1990s and 2000 when tech funds had great absolute numbers. Every sales rep who came into the office was pushing these funds. Dramatic amounts of money would flow into the funds thus putting tremendous pressure on the managers. All the clients wanted to buy were the hot funds. Nobody would buy value funds, which over the next several years would have been the proper investment.

Next is, what style does the manager employ, growth vs value, largecap vs midcap vs smallcap vs international? One year may be too short a time to evaluate superior performance of mutual funds — 3, 5, 10 year numbers are much better barometers of perfomance. Trends in the market can last longer than just one year. For example over the last 3-4 years international funds have had their day in the sun. I am confident the worm will turn and they will begin to tire. The next hot sector may be largecap U.S. growth, or other sectors. The jury is out on this. In fact, the Morningstar five-star ratings system is based on 3 year past performance. I believe the highest-rated Morningstar funds for the past three years tend to be worse absolute performers the next three. Conversely, the worst performers the last three years, the one stars, can be the best performance group. Once again the dynamics are in place for things to change.

Finally there are some fund managers who have withstood the test of time. Ralph Wanger, Kenneth Heebner, Bob Olstein, Bill Miller, to name a few, all have had stellar long term results but even they have had bad years.

Ken Smith remarks:

Performance in youth does not predict performance in aged. Performance in pre-marital bed does not predict marriage results. Performance in school does not predict performance at work. And so on.

Dr. McDonnell worked on performance of top mutual funds, found we can't predict future from present results.  I have looked at charts for many years, in fact I began at age 22.  Now just short of age 79.  Of course there was a hiatus when charts were not available.  Overall my experience determined a squiggle on a chart from five years ago will not correlate with a squiggle I will find when the market opens next year.

Marion Dreyfus agrees:

What Ken says in regard to former performance not being valid for future success should be received doctrine, and yet seems not to be. In terms of financial investments, people extrapolate out as if the law is concrete: If it returned 8% in the past 10 years, it will continue to run that way in the future. We take a lifetime to unlearn easy mistakes.



This brief smackdown of Keynes's 1936 "General Theory" by Garet Garrett is well worth reading. Recall Garrett wrote the wonderful novel Satan's Bushel.

Upon it has been founded a new economic church, completely furnished with all the properties proper to a church, such as a revelation of its own, a rigid doctrine, a symbolic language, a propaganda, a priestcraft, and a demonology.

To the socialist planners, it offered a set of algebraic tools, which, if used according to the manual of instructions, were guaranteed to produce full employment, economic equilibrium, and a redistribution of wealth with justice, all three at once and with a kind of slide-rule precision — provided only that society really wanted to be saved. And the same theory by virtue of its logical implications delivered welfare government from the threat of insolvency.

That word — insolvency — was to have no longer any meaning for a sovereign government. The balanced budget was a capitalist bogey. Deficit spending was not what it seemed. It was in fact investment; and the use of it was to fill an investment void — a void created by the chronic and incorrigible propensity of people to save too much.



NervousBack in my apprentice days in the wheat pit, a wizened old guy took me under his wing. Since he had been trading successfully since the late 1930s, I was all ears. One of the anecdotal statements he made to me was that "Nervous markets always close lower." I've remembered that sage bit of wisdom for all of these years, and have followed that advice with reasonable success. Lately, I've been wondering if there was a way to quantify that statement, or if anyone in this group can lead me in the right direction. I'd like to see what the numbers and percentages of nervous markets really are.
One might ask, "What is a nervous market?" The only answer is that I can't define a nervous market, but that I know one when I see it.

Bill Rafter replies:

There has been some work done relating volatility to subsequent price behavior. Volatility (depending on how it is defined) may agree with your description of nervousness. Generally the premise is that volatility is bearish, which would be in agreement with what the wizened old guy told you.

There are many definitions of volatility. My suggestion is to look at measures other than 1-day rates of change. Earlier this year I asked around for other measures of volatility, and got approximately 20 variations. Additionally, there are “handmaidens” of volatility, such as institutional holdings.

Jim Sogi adds:

Vic and Laurel recently hypothesized that afternoons closer to the low of the day in S&P could be thought of as you say "nervous." I've also been playing around with NYSE declining volume. Today 857k. Fairly nervous. Over 1m down before the end of the day is very nervous.

Phil McDonnell remarks:

"Volatility is bearish" requires considerable qualification. In my ruminations the results have generally shown that rising volatility is bearish on a contemporaneous basis and over the short run. However high levels of volatility can be quite bullish. It is important to define what volatility we are talking about.

Victor Niederhoffer investigates:

VictorMost definitions of nervousness refer to trembling, quivering, and agitation. I thought I would look at some qualitites of markets that seem to be of that nature. I started with markets that were up at the open, down at 11 am, up at 1pm and down at 3 pm. I found 17 cases since 1999 in the S&P futures, and nine of them went down from 3 pm to the close, with an expected move of three points. Such moves occur about twice a year. I found that a similar gyration, but down at 2 pm rather than 3 pm, which happened eight times since 1999, to be visited with four up from 2 pm as of the close and four down. I found eight cases of the first pattern in bonds, and the next day was 50-50 up with an expectation of four ticks up. In general, I would say that there is not much evidence that a quivering market with numerous crossovers to the down side is bearish. In another study, I found 22 cases since 1999 where the market was up at open, down at 10 am, up at 11 am, and down at noon. Eight of these occured in 2007. Thus, the market appears to be gyrating more frequently in a way most people would get nervous about if it were their limbs or sinews. Seven of the 12 cases showed a rise from noon to the close. Thus, nervous stock markets, defined in this way, did not show any non-random predictive tendencies, although the jury is out as to whether the market shows an inordinate tendency to tremble between hours.

Vincent Andres adds:

One classical way to proceed would be to have someone provide : 100 examples of nervous/non-nervous/"don't know", status markets. (Maybe more than those three classes). Each example being the price series and the graph. Of course, it's possible to ask several people to do the classification.

Some counting would probably teach things, hopefully reveal possible clusters in the appropriate measure space. Well used, tools like neural nets (many NNs are nothing else than stat learners) may be of use here. However, there is a preprocessing to be done on the price series before feeding the counter … and this will often be the clue. (Some ideas have been provided in this thread).

It is however quite a painful job, and requires a rigorous methodology. And even if classification succeeds, it's only a piece of the job. As  P.McDonnell said, nervous => bearish is not a 100% sure implication. And markets are dynamic, not well-defined, etc.



Imaginary WitnessIn "Imaginary Witness," now at the IFC, Greenwich Village, opening January 2008, the documentarians have produced a technically sophisticated, visually imaginative, scholarly documentary that manages in the space of 100 minutes or so to investigate the belief system and history of the Holocaust as seen through the eyes of Hollywood, the development of the anti-Semitic meme conflict (more accurately, the age-old revivified hate-Jews bloodlust conflict) and the aftermath of the H!tlerian Anschluss. The documentary's enormous achievement is in bringing all this together to show incontrovertibly the total misunderstanding of the US role that shaped the policy follies of the West in general and the U.S. and U.K. in particular. The potentially deadly results are summed up in the foreboding title. "Imaginary Witness." They marinated in their lassitude juice. They were pathetic witnesses of no value whatsoever, until it was far, far too late.

This viewer, considering herself knowledgeable, learnt that the Hollywood of the late 1930s and 40s were gingerly on the side of the Germans so as not to antagonize their film-going publics. Those who declared alarm over the rise of death camps and rumblings with statistics of dead and collected Jews were treated like prior versions of Kucinich-nutter Smurfs. Even flanks of bearded, congregational rabbis.

Narrated authoritatively by Gene Hackman, this film culls thousands of newsreels, films, TV serials, broadcasts and archival footage of Hollywood greats past and present to assemble a damning stab of shame at the lacklustre, not to say supine, reaction of President Franklin Delano Roosevelt, the Congress, and the public in general to the obscene plight of Europe's Jews.

ShoahThe standout reference I expected to see, the nine-hour documentary "Shoah," was entirely absent. I puzzled why. "Shoah" was not a Hollywood product, however: Produced by Claude Lanzmann in France and Poland, it fell outside the bounds of the archival deconstructions in "Imaginary."

Again and again through the lenser, the lucid and scalpel-sharp commentary and analysis by Fordham Law Professor Thane Rosenbaum, a personal favorite of mine from numerous symposia and film festivals he has helmed a few blocks from my home, himself the child of Survivors, pierced the Stygian black and white captures of sorrow and pity.

Featured throughout are film luminaries such as Charlie Chaplin ("The Great Dictator") and Stephen Speilberg ("Schindler's List"), and the thoughtful exegeses of other great analysts and scriveners who sat in on the writing of the plays, or screenplays, film or parody. Painful irony of the tacit cooperation accorded H!tler when he requested that all Jewish members of crews working in the European field be fired, and all were, was that every single one of the executives so doing were themselves emigres from Europe. All Jews.

"The Pawnbroker," "I was a Nazi Spy," "The Pianist," "Anne Frank," "Judgment at Nurenberg," "To Have and Have Not" and on and on. Not so many. But each adding to the canon of documenting the unheard of and unthinkable. Until very late in the game, all US films that dealt with the Jewish question were all in 'gentleman's agreement' code. Not one even mentioned the word "Jew" at all. Instead, the Power Lunchers That Be in filmland called the subjects of their risky A- and B-list films "non-Aryans." Don't hurt the feelings of the Germans. Watch those European filmgoing audiences. Globalize the suffering of Anne Frank so she is not too "ethnic."

This is not a rehash of other omnibus films on WWII. Much that is exposed is first-time compilation. It captured only seven people in the audience at the public showing at the International Film Centre in NYC, one person having the temerity to chew popcorn. But this is a film that will command its enduring, if deathly silent, audience.

And that email that's circulating, about how Ike wanted to capture and document the release of the death-camps, so ''no one would forget what occurred there," in 50 or 60 years? Turns out it's that rarity today: It's actually true. He sent in a flotilla of Hollywood cameramen to record what they saw.



JetKona, Hawaii used to be a quiet Hawaiian fishing village, but now is the second home and playground of the rich and famous, including Paul Allen, Michael Dell, Charles Schwab, Bill Gates, Neil Young, Earl Bakken of Medtroncs and many others. Each year around this time of year they flock here in private jets. My hypothesis is that these captains of industry have a good feel for the pulse of the economy and even they, despite their wealth, tend to be very cost conscious with their jet use when business turns soft. Last year had record numbers of jets, and this year seems to match last with over 65 jets counted and more coming in every hour. The base operator estimates about the same as last year with New Year's weekend starting tonight. What is the conclusion of the Private Jet Indicator? This coming year 2008 should still be a good year similar to 2007 with new highs, but not without turbulence, and certainly not the beginning of the big crash or recession that many predict. I predict and hope for a "soft landing" for the market, the economy and our friends in their private jets.

Pitt T. Maner adds:

Given that jet fuel is 30% higher than last year, this indicator may foreshadow a feather-like landing.  Let's hope so.



UrnIn a recent AARP Bulletin I noted a "Final Farewell" article that reminded me of Yankee ingenuity. More and more Americans are choosing cremation, which costs about $2,500, compared to more than $6,000 for a conventional funeral (plus burial costs).

Some funeral homes are offering balloon releases and wine-and-cheese parties as options that are "less of a funeral and more of a celebration." The Cremation Association of North America projects that by 2025 more than half of all decedents in the US will be cremated (I will be among those).

A funeral home in my area bought a vacated branch bank that had a drive-thru and remodeled the building. They now offer a meeting place after the funeral (for a price) for the family to gather. No drive-thru for viewing, as was being done in Florida some time back, for those too busy to go inside!

My best friend is Greek and some years back his father passed away and all those who went to the grave site were invited to their restaurant for dinner. Greeks celebrate death in this way, I learned.



Jim RogersListening to Jim Rogers's Adventure Capitalist lately in the car. He has funny stories about NGOs in Africa, like how a guy worked a Swiss NGO for $20M by "buying" his friends and relatives out of "slavery" in Sudan and then "freeing" them for the NGO's benefit (after they had memorized a suitably heart-rending story of their plight). I think it was Ethiopia where he talked about the guy soaking NGOs by running an "orphanage" where he would bring in kids from local villages when the NGO staff would visit to check on the "orphans." Then, after the NGO people left, the kids would get paid and go back home. And the scam of collecting clothing and other items at churches across the US, as donations to help poor Africans, after which they are shipped through consolidators to Africa and sold off to wholesalers who sell them in markets. Hey, at least that stuff is actually getting there!



In honour of Vic and Laurel, I suggest we start a new department called "Needs to be Tested," where refutable observations make it, while others bite the dust. I would invite readers to join with some testable hypotheses.

I will start with few of my own that I find to have some value for a meal for a day.

a) A market that goes down very hard suddenly in a free fall, then recovers immediately, will often revisit the low point as the original move was just the Mistress checking how many victims she can take with her. She then recoups and re-attacks and the low is often revisited in time after the big recovery that most green specs take as a bullish sign

b) When a big offer shows in a dull stock all of a sudden, expect the stock to move through the offer and well above it in the short term. This serves two functions. One is to grease the wheels of commerce from the fees generated from the execution of the big order and also a deception function is satisfied with the seller that is in a rush to sell while he is scooping the stock on the other side.

c) Markets sometimes have a delayed reaction to good earning reports and news. A stock that doesn't move immediately on good news often has a delayed explosion in the direction of the news. While the green observer would take the stock action as bearish, since the news must be priced in, it is often the wrong assessment and the stock moves in the direction of the news the following day.



One of the commonest grave errors in reasoning about numbers is to concentrate on the best or the worst, the tails, and not the entire distribution. That's why we use measures like the standard deviation or absolute deviation as a measure of spread rather than then range. It's also why we should never look at the characteristics of the best-managed or best-performing companies, and see what variables are associated with same, and then conclude that those variables, such as a focus on market leadership, have a positive impact on results.

We also see this mistake when we concentrate on the last 10 recessions, and look to see what characteristics they had in common, or the companies that perform best during a year. It's quite likely that the best and the worst companies share the same inordinate tendencies in the same direction. Furthermore, it's possible that the same variable that has an important differential impact on the likelihood of creating an extreme, has a very small overall impact on expected results.

There are numerous examples of this mistake, for example focusing on the variables that inordinately were associated with recessions in the past, e.g. the differential in the yield curve, so it would be good if you review your own favorite studies, including those of the Jim Collins variety of the 50 best-managed companies, to see the fallacious conclusions that concentration on the extremes alone can cause.

In a study I reported yesterday, I concentrated on extreme moves of 10 or more points in S&P, and I threw out all other moves. It left out much valuable information. To refresh, we were looking at one day moves and considering whether they swing from +10 to -10 or -10 to +10 to an inordinate degree. I pointed out that this was very different from the question of whether a move of + 10 was bullish or bearish, or whether a move of -10 is bullish or bearish.

I left out what happened in the vast majority of all cases when the one day move is less than 10 in absolute value, i.e. it's a small decline of less than 10, or a small rise of less than 10. The complete 3 by 3 table:

3x3 StudyWhat is clear from the table is that there is a inordinate tendency for move of less than -10 the previous day to be associated with large changes the next day. Indeed, there are almost as many changes of +10 or -10 the next day following changes of -10 the previous day as there are changes between -10 and +10. For the moves of less than 10 in absolute value, however, there are about twice as many small changes between -10 and +10 the next day, as there are big changes. The same is true for moves greater than 10 the previous day. For the individual cells in the table, you can compute a standard error of approximately 20. Thus, the entries in the first row are approximately two standard errors away from expectation.

This table shows clearly how concentrating on the extremes obfuscated much valuable information.



Lion KingKnowledge in the past was passed by the senior members of communities to the younger generations in a slow and steady flow of traditions, experience, culture.

This role is less and less evident in the Western world today. Parents and grandparents tend to lead their life getting the most out of it for their own pleasure and satisfaction. I sense less dedication and commitment to transmit the famil'sy and the society's values to the next generations. I do not intend to be negative. It is a change, however, that is impacting our lifestyle and it is caused (at the same time) by our life style. Both parents go to work to make ends meet and/or to fulfill their expectations. They may not have enough time to dedicate. Children and teenagers have started to make use of the network to find answers to questions. Usable knowledge may comes from a virtual (but real) mass of humans who interact and share information through chats and blogs. Some blog the most private details of their youth writing very personal diaries to get some type of support from unknown readers. Also children have started to live their virtual life in the network. Virtual characters websites are an example.

Values proposed as the basis of the interaction are those of the website developer. Values are also broadcast by the latest TV series on the fanciest TV channel. Media are powerful vehicles to develop knowledge through sharing of information, but the direction in which knowledge and education is developed has to be based on values, that cannot be provided by the network or a TV channel. It has to be based on something more individual than global, more private than public. Family members cannot and must not be replaced in this role. The family must fulfill a role that is given by given by mother nature. As a father, I wish I were able to transfer to my girls the best part of myself, as a man.

I wish to transmit the story of our family, what my dreams were when I was a child and what has become of them now.

I wish to let them understand my mistakes and how we can learn from them. I wish to share with them my hopes and future endeavors.

I wish to discuss with them what I see right for their future.

I wish to observe them and help them exploit their talent.

I wish to help them be happy about their life and positive.

I wish to learn and understand their personality and to respect them.

I wish to invest my time in their future.

I wish to try and answer their questions. As they grow up, I expect these questions to become more and more difficult.

It needs preparation, it needs commitment, it needs love.

This is what I wish for next year.

Sam Humbert extends:

Old Grand-dadI got to thinking about Dr. Pezzutti's wise words yesterday, on my daily constitutional, in this case through a 200ish acre woodland park a few miles from my house (Vic and Laurel have written often of the benefits of a quiet walk-in-the-woods, and I've taken their sage advice).

Since I'm in the woods often, I've discovered all the local teenage drinking/smoking hideaways. Yesterday I noticed with dismay, at one of these gathering-spots, a bottle of Bacardi Razz — a fruit-flavored rum-based product that tastes like flavored cough-syrup. I can't imagine voluntarily drinking this stuff.

For how many generations past, in affluent Fairfield County, have the underaged sneaked off with a bottle of Early Times or Old Grand-dad (or other dignified, respectable drink) to indulge in the timeless ritual? And where are their parents now, to educate them about what is meet and right?

Frank Corberts advises:

Sam, I can only conclude by your narrative that you, in fact, tasted from the bottle of Bacardi Razz that you found at said party spot. Are you in the habit of sampling random liquors found in the wilderness? If so, I believe that some bars may offer the dreck of unfinished beverages for a man of your distinction. You may wish to thank your stars that the teens had not substituted some more nefarious mixture in the bottle — say, Green Dragon.



SwingOne of the most intriguing questions about markets is whether they swing. The subject is a very difficult one, because random prices look like they swing, and if you look at a series of highs and lows of prices generated by a random walk, you'll be able to come up with times when it looked great to sell and times when it looked great to buy. The question is whether there are such points that can be ascertained in advance.

The question could be divided into many subdivisions, do prices swing, have they swung, will they swing, and what happens after they swing? If they swing, do they swing between fixed intervals or do they swing between prices without regard to a fixed rhythm.

In order to make a start on this I looked at all moves of 10 points or more on two consecutive one day periods, either plus or minus.

10 Point Swing StudyResults of this very preliminary test do not indicate that big moves swing on a 1 day basis for S&P. Note that this is a very different question from whether it's good to buy after a down 10 point move. It turns out that the expectation the next day after a down 10 point move is the same as after a up 10 point move, about 1/2 a point, just enough to cover commissions on a day with a standard deviation of 17.

There are numerous extensions of this line of consideration.

Alan Millhone adds:

In further thinking…  Maybe the market is the constant and it makes the investor swing to the market's music ?

I was building a house one time and a fellow was watching the bricklayers apply the exterior to the house and he remarked to me, "Does the mortar hold the bricks together or do the bricks hold the mortar in place?"

The market can't exist without investors and in turn the investor either buying or selling makes the Market Mistress dance to various melodies. Some are cheery and some are not.



MLS OnlineFor two days I've been clicking on homes in the Seattle area, at MLS Online. Some drops in price are noted in the advertising of homes. Some homes have been updated to attract buyers.

All in all I have not found a deal that leaves profit for me in the current economic morass. I found a few properties that come with enough land to sub-divide — if I were a builder. That was the focus for many contractors recently, but I suspect they have backed off on this strategy.

There is an active group that deals in foreclosures. An auction occurs on a regular time schedule and the experts make a living with this tactic. Others are neophytes and some are fools. This old man would not venture into that game. Too many hidden traps.

I need a whole-house rewiring to bring my older property up to code. Hardwood floors need refinishing. Walls need repainting. Yard needs a landscape touch-up. I would take on these tasks if it would pay off; but my offhand guess is that there is so much competition, so many houses for sale, so few dollars available to buyers, that to remodel at this time would not provide an advantage as a seller.



KosmosKosmos has an excellent chemistry set available for the American market, and all its products are of the highest German quality, including their physics, electronics and solar sets. Truly remarkable to see in America, considering Toys R Us and Walmart don't carry hobby items any more, and it's very hard to get LBG 16 gage train equipment for kids at reasonable prices in the US. The only science items I see at the mass marketers are logo type licensing or naming-rights items associated with a quasi-governmental museum that are are totally third hand — except for the Elenco line of snap circuits and the University of Cambridge line of electronics laboratory gear, which, although vanities like the Smithsonian's, do not appear as derivative. I was responsible for getting Kosmos into the US (but it cost me, it cost me) after pining for their products for my kids after seeing their beautiful sets available only in Europe in Germany. The two best toy companies I have ever seen are Galt Toys in England and Kosmos in Germany. I wish I had more time to play with all their great products myself — my children and grandchildren will provide that function.

Marion Dreyfus adds:

With reference to trains and sophisticated toys, my friend's father has an entire room of considerable dimension set aside for a smashing Lionel railroad, with scenery and fire engines and bridges and cabooses and all manner of extremely costly but exacting trains and paraphernalia he has been pretending to fire up and furnish with more and more amazing controls and bells and whistles (literally) for so-called grandchildren. But whether he has granduns or no, he is down there playing with the immaculate miniature chuggers. He of course hopes for the rationalization of grandkids, but if they don't come, n'importe… It is always a deep pleasure to be able to take the controls and send those eight-car similacra racing over hill and dale. to be invited into this sanctum is high privilege and I cherish the engraved invites I have been accorded.

Marlowe Cassetti reminisces:

I quick search found many physics and chemistry sets from Thames and Kosmos, and on Amazon they have an array of science kits from physics to microcontrollers to perfume to fuel cells. Oh, if they were available in the 1940s when I was a child! I did have a chemistry set, erector set, and microscope. My father, a physician, valued learning. And what discoveries I made as a child — it opened up a world of wonder. Then as a twelve year-old I branched off into model aviation and that changed my life forever. My father was never supportive of that hobby. He considered it play rather that anything useful, but it taught me the foundations of physics and engineering. Years later he put my NACA and NASA research reports in the trunk of his car and would show them to anyone who asked about me. I'd finally arrived.

Ken Smith extends:

Your chemical experiments brought to mind Leon Lederman, who works with particles, enjoys the things as if they were toys. All he would want for Christmas is a new particle. In one of his books he wrote:

When I was growing up in the Bronx, I used to watch my older brother playing with chemicals for hours. He was a whiz. I'd do all the chores in the house so he'd let me watch his experiments. Today he's in the novelty business. He sells things like whoopee cushions, booster license plates, and T-shirts with catchy sayings. These allow people to sum up their world view in a statement no wider than their chest. Science should have no less lofty a goal. My ambition is to live to see all of physics reduced to a formula so elegant and simple that it will fit easily on the front of a T-shirt.

Particle physics folk are looking for a formula so simple a child can play with it, like a toy perhaps. They'd like a formula that did not cover the entire blackboard.

My trading could use a formula like that. The nearest I've found is P&F squiggles!



Trees loaded with fruit tend to bend lower (except perhaps coconut). Humility.

Sun Tzu said, feign strength when weak and vice versa. Deception.

And in the rivers that flow quietest, the waters run deepest. Viscocity.

Amongst the flowers, those that can attract the agents of pollination by their strong aromas are less colourful. Least Effort.

Lions do not accumulate food. When a lion has had its fill, the antelope play nearby with bliss. Ants and birds and man accumulate. Path of Least Resistance.

All of these examples have different degrees of the same theme –that Nature has structured itself such that the stronger are subtler.



Dr. StrangeloveOr, how I learned to stop worrying and love the market.

The really old people on this site (myself included), will realize that this is a reference to the classic satire film Dr. Strangelove, one of the great cult movies of all time. It presents a scenario as to how simple it could be to effectively start a nuclear war. The storyline is about a Lt. Colonel who goes insane and orders a nuclear attack on the Soviet Union. Only the President of the United States (impeccably played by Peter Sellers) can avert the tragedy. Is this comedy? Is it drama? Stanley Kubrick, who directed the movie, leaves it up to the audience to decide, by marvelously weaving a tapestry of twists and turns that, in the end, leaves the audience wondering: can something like this really happen?

I mention the movie because I am fascinated by the human condition and moreover I marvel at the predictability and unpredictability of man and his impact on the markets. What does this have to do with the speculator? I think this has everything to do with the speculator.

While watching CNBC this morning, I noticed that the staff and producers are reaching into their bag of tricks to fill in air time on a truncated day due in part to the market's being attenuated by closing at 1PM and traders having other thoughts on their minds with visions of sugarplums dancing in their heads. Many have already left their stations and either have taken the week off or might even have taken the rest of the year off.

The show is bringing on the same old tired guests with the same old stories and banging the same old drums. Seemingly anyone who can fog a mirror is invited to appear. Original thought is all but absent. Where is the best place to invest for 2008? What year end strategies should be practiced at this time? On and on goes the same old tired wheel and its grinds and it grinds.

How might the speculator take advantage of this.

First and foremost, I would begin by putting in the effort during this slow time to evaluate the effectiveness of whatever investment strategies you utilized this past year. Now is the time to be brutally candid with yourself and determine where you had your greatest successes where you failed and where you might improve. Most importantly, how did such strategies and methodologies translate in money over the year. How can the successful strategies be replicated and which ones need to be abandoned.

If done properly, this will take some time. It is not a 15 minute exercise. Many of us will not do this as it is far easier to avoid pain than it is to seek pleasure. Or as Al Pacino said in "Scent of a Woman", for me I knew there were two paths that I could take the easy path and the hard path and I chose the easy path because the other one was just too damn hard.

Bear Bryant said The price of success is high. That is why many are not successful. They just do not want to put in the extra effort. They want the success, they just don't want to work for it.

Secondly, if you have not already done so, start your business plan for the next year. Remember there is no time like the present to do this. Also remember that most speculators do not do this. The successful ones do. I believe that the number one reason why people are not successful in investing is that they do not take the time to work on their craft. And many more wait too long to put their plan into place.

Someone also said successful people hate doing the same things that unsuccessful people hate doing but they do it anyway. And if it is worth doing at all, it is worth doing well.

It is an interesting phenomenon that Health Clubs experience their greatest membership increase during the month of January. They also witness the largest attendance to be on the first day of the week. By the end of the week, many health clubs are like ghost towns. The ones who experience the largest results and the ones who treat December like January and Sunday like Monday.

Donald Trump regularly states that the main reason that he was able to survive through the late 1980's and early 1990's and ultimately prosper in the latter years is that he never gave up. He kept pushing onward long after the writers stopped writing about his demise. Say what you will about Trump and love him or hate him, he does have some qualities that can be studied and embraced. Tenacity could very well be one of them.

Thirdly, the speculator understands that in order to be successful that they need to learn to respond to the markets and not react. It is better to respond than react. When a physician prescribes medicine for you, if the results are positive he states that you are responding to the medication, if the results are negative, you are reacting to it. Anticipate and then adjust. Aye there's the rub!

Finally, the speculator understands that there is no quick fix to anything. That investing is a journey rather than a destination and in essence they never arrive the evolve. Markets are to be played by the year and not the day. Work each day with focus and clarity and the year will take care of itself. The highs and lows will ultimately be flattened out and the median will become defined and hopefully, they will experience some joy along the way to make the journey worthwhile.

I hope that this holiday season is one of enjoyment and pleasure and the New Year brings you everything that you hope and dream for.



The issue at stake before the global markets in layman terms appears to be the classical factors of demand as well as supply both being a function of willingness and ability. Whilst the Central Banks are displaying ability with the mint to churn fresh currency out the willingness is what is dwindling lower and further.

There are two possible scenarios here. The possible death of willingness in credit marts is being visualized by the majority of columnists as not only highly probable but also that would lead to the deterioration of willingness in other asset markets (for us of major interest is equities, ASSuME).

The other scenario is one where the perceived spread of the death of willingness is leading to an underbought state in several other asset markets on one hand and the creation of a liquidity implosion. By implosion I mean a system that has gone past the kindling temperature, a configuration that has received all the catalysts, a process which has unplugged all incubators yet it is tied down with the strong threads of unwillingness (or perceived unwillingness across all assets). Such a system rather than dying out as a failed device is more likely to implode before failing.

Given that for the first time in the history of the universe a concept of free money has existed for several recent years (The ground wire in the currency marts made so well only by Japanese technology) that my mind would read the odds to be favouring the sustenance of the biggest bubble in history further.

Inside a bubble who said disbelief, shock, pain, fear, panic cannot be seen multiple number of times? Why are these emotions to be seen only after a bubble has reached its logical conclusion of a burst? Why can they not be essential ingredients of the process of the formation of the bubble itself?

The lesser thought and spoken about possibility at the moment is the latter one. Without the numbers available for counting, one would thus still incline to count the probability more in favour of that. The bubble is only beginning to form, it is quite far from bursting down yet.

Now a third improbable possibility does exist as well. That's imagining without any reason or rhyme though. Perhaps it is how the devil would think if not its advocate. In a situation such as the one prevailing currently including the balance sheets and the minds a larger event such as one that happened with Russia in 1987 could perhaps throw all counts haywire and make the first possibility more true. So, if China is known to be the supplier of volatilities in recent years to different markets it can exert an influence on what stops them from jolting the system hard enough? That leads to another question if I could imagine such in the middle of the night what are the minds of those, who are controlling the mints around the globe and who can figure this out and have the might to stop China from endeavouring such a thing, thinking and doing at the moment?

Since this third bit is hopefully only a third rate imagination for now and in any case ordinary mortals like me cannot have any ascertainment of the chance of such or equivalent black swan appearing I would still believe the biggest liquidity implosion will cause the bubble to start swelling for now rather than burst it before it has swelled.

Hopefully this last one ain’t a self-fulfilling prophecy that a known risk is no longer the risk that will play out since markets will respond to an anticipated event differently than the unanticipated one, I might as well imagine China will try its best to play the same games they are known to in markets ranging from Nickel & Pig Iron to finally the currencies and bonds as well. If many others will believe, despite China trying its hand out market would in the medium term have all the chutzpah to surprise the bears.



HuckabeeMy wife and I both noticed an amazing proliferation of John Edwards signs while driving through Iowa for our many Christmas celebrations. He has far more signs up in yards than Hillary. Obama has more and bigger office decorations than anyone else on the Dem. side. Perhaps this means Edwards is making a run with the general public, but pro-biz Dems like Obama? I could see how that would be true, because my take on Edwards' recent statements is that personal responsibility will end with his administration. We can just count on the government for everything.

On the Rep. side, there are several big nice Romney signs at big nice houses. There are also lots of small Paul signs around the U. of Iowa campus. Huckabee signs are becoming much prevalent, especially in rural areas and on country roads. I can't recall seeing anything for Giuliani or McCain.

Based on yard signs, I'm predicting Edwards and Obama in a close 1-2 finish with Hillary a distant third. Huckabee will squeak by Romney with Paul having a small but vocal third place finish. We'll see how things turn out on Jan 3.



 The Monetary Base continues to indicate restrictive monetary policy, whereas MZM indicates an accommodative monetary policy. That is not a conundrum as long as one leads the other, and several posts here have demonstrated that MZM leads the BASE.

Heres our current 2-cents worth: The BASE is presently some 6.5 percent below what we refer to as its target. More on that in a minute. MZM is 3.8 percent above its target. Both of those are big numbers. In fact, the BASE has never been this far below its target since the data started. If the BASE were the only tool we had, we'd be very pessimistic right now about the economy. But since we know that MZM leads the BASE, theres less to be concerned about.

How do we arrive at the target? We simply imagine that the Fed knows what it is doing, and has a target rate in mind. All we do then is fit the most appropriate mathematical line to the data. In our opinion that line is a parabola. We could also take a log of the data and then fit a straight line to the logged data. We will leave that to others for another day.

Heres the BASE , and here is MZM .

There are many other relationships that can be hypothesized. This chart looks at smoothed t-bill rates of change vis-a-vis the BASE.



 One of the virtues of an appreciation for economics is that it enables you to assess the root causes of common facts, fallacies, and propaganda about ideas and numbers on the declining role of manufacturing in the US. Such items often affect the markets when numbers on such things as the factory index in New York, Philadelphia, or Illinois, the industrial production figures, or the ISM manufacturing index, or the trade deficit ares announced, rumored or discussed. There is usually a pronounced immediate move in the direction of the strength or weakness in the figures, then a correction, and then if the number was weak, the propagation of various agrarian reformist fallacies relating to the declining competitiveness of the US, and if the number is weak enough hopeful arguments from chronic bears and bond bulls that a depression of the scale of 1929 is coming, especially if the stock market has gone down big on the item.

I have come across many such fallacies, and they're usually self serving things such as the leading bond funds' mismatched scale charts showing that the number of real estate agents is rising while some measure of US manufacturing is decreasing.

The economic analysis of manufacturing versus services starts with the notion that wealth consists of what people value. Trade increases the total value because both parties are benefited. Specialization enables individuals and countries that have a comparative advantage in one good or another to concentrate on what they do best without wasting resources in what others could do better. Heyne, Boettke and Prychitko summarize the fallacies in chapter 2 of their magnificent and earth clearing economics book "The economic way of thinking" nicely. "Exchange ( and the provision of services) is as much a wealth creating transformation as is manufacturing or agriculture. Exchange is just an alternative way of producing something. " As we get richer, the opportunity cost of using our money and time for purchase of domestic physical assets such as buildings, equipment, and land increases and it becomes more profitable to purchase these items from others whose opportunity cost is not as high. The principles of comparative advantage that lead to trade hold for trade between you and the supermarket, and the decisions that companies make as to whether to manufacture their goods in one state or in another country.

Such analysis gives one a rudder when the stock market declines much and the bears predict a depression. They hoped for it after the 30% 2 day decline on October 19, 1987, and they hope for it again as the financial service companies, banks,  brokerages and real estate cos. suffer in 2007. It never comes true because they don't take account of the main source of wealth, the intangible assets, knowledge, education, skills, and training that are the main repositories of wealth as they lead to people being able to make an income. Estimates of Becker put this source of wealth at 80% of the total. With the total stock of wealth in US at 40 Trillion or so, a decline of 1 trillion, caused by a 500 point drop in the DOW for example can be put in proper reasonable perspective.

All this is very well and good except that many people buy such arguments as those propagated by the bond sponsor to support his Dow 5000 predictions as well as his current tack in fixed income. If specinvestors believe that others will trade based on such faulty economic analysis, it can cause self fulfilling prices, a stampede, or herd affect.

A little testing is in order. I looked at the movements in the market in the half hour after the report of the trade deficit, the ism manufacturing report, and the beige book to see if movements in one direction were followed by reversals or continuation in the rest of the day. I found the tendency to pronounced overreaction, ie. too much pessimism or optimism to be particularly evident for the Ism announcement on the day, but particularly underreactive on the beige book days.

There are a myriad of ideas and implications that arise from consideration of the importance of manufacturing, including the relative concentration of research in manufacturing industries, the induced output that each dollar of manufacturing causes, the outsourcing of manufacturing by countries such as US and England, the German model where manufacturing is supposedly highly efficient and profitable, but highly unionized and subsumed within rigid rules and regulations, and the general more important question of whether there is such a thing as a business cycle as opposed to business fluctuations around say a random walk. I would be interested in any augmentations and ideas you have on these or related fronts. 

Ken Smith follows up in a Ricardian vein:

In Washington State two-thirds of the total economy is based on one industry, Boeing Airplane Company [Ed.: actually closer to 25%]. Another big slice is applesauce, from Eastern orchards. What remains comes from the Port of Seattle, imports from Asian producers flow down Puget Sound in container ships, unload in Seattle and Tacoma.

Many times I've read one should not put all eggs in one basket. Do not, some say, place all funds in one asset; rather it is preferable to scatter your oat seeds here and there in the hope that one or two fields will fructify, one or two out of many.

In my experience diversification of funds has diluted returns. And in the case of Washington, hereabouts, limiting investments to one or two areas has paid off handsomely.

If wealth consists of what people value it is clear people value flight and applesauce, foremost. Second, they value shipping. Hereabouts. In Kansas they gotta grow wheat and pump oil.

And that makes trade possible. Here we trade applesauce for bread, as an example. Here are up to our ears in applesauce. We can only use so much applesauce and must find ways to trade out of it.



[Scott Brooks said: "I've come to realize that farmers are, literally, the ultimate speculators."]

Farmer School, lesson one:

Some people when milking a cow for the first time try to stay a bit away from her. That is the wrong approach because if she kicks down at you then, she will get full leverage with her leg and it will hurt more. Instead, you should: squat down, near her, low, while keeping the leverage of a leg down small enough to not hurt you.

It is similar to taking on a position in the markets where you also should: squat down, buy her, low, while keeping the leverage of a leg down small enough to not hurt you.

And if she does kick, you may want to be very careful because she might stay a bit wild for a while as kicking by cows seem to cluster. It is similar to the markets…

Next week's subject: Sowing and reaping.



I am fascinated by the concept of market inefficiency. From my perspective, the concept is related to the price formation mechanism. But more educated. An inefficiency can be exploited from a trader's perspective only if it is significant enough to overcome the transaction costs. Spread, commissions, etc. can make it not tradeable. This is true especially if the inefficiency occurs in very short time frames at the intraday level.

From a speculator's perspective, a methodology should be in place:

- to identify whether a new inefficiency is created. This should allow, while monitoring the market, to spot a new inefficiency with a very low delay.

- to determine the end of an ongoing inefficiency with a minimum delay, in order to limit losses that come from continuing to trade it.

One issue I see is related to the amount of data necessary to assess and validate a candidate inefficiency. 10, 100, 1000 bars/days? This choice affects directly the delay with which a speculator spots a change in the pattern. But the length of data influences also the probability of mistakes and false assessments. The methodology to follow to identify an inefficiency should follow a scientific approach.

The market presents a behavior which is the (weighted) sum of the behaviors of all market participants. A change in behavior of one or more participants can modify the market characteristics of a specific product. This is very likely what happened since last summer after the financial crisis developed. Why the big ranges? What has changed? or better: who has changed what? I am not able obviously to answer these questions, but the change has been evident to everyone. What is the impact on existing inefficiencies? Is the new environment creating new opportunities? If yes, how to spot them? In this case the length of data to use may be easier to identify as the break with past low-range days was very clear. In other cases, it is not. The parameters to be monitored to categorize market behavior are important. I could find several great ideas on the this web site, but theoretically I lack a comprehensive and systematic view of the approach to take.

Once a pattern is identified, it is important to assess whether it is tradeable. Under specific conditions may the market behave inefficiently. One aspect is related to the validation process. How and how much does the behavior need to be "different"?

The other aspect is that this observation has to become a strategy, with proper entry and exit rules. Which makes things difficult especially when you have to find adequate exit rules in case the pattern does not work out as expected, heavily impacting returns in some cases.



With the market up a few percent this year, and daily ranges often running 2% or more, it becomes more important to have some sense, some base of operations regarding what these ranges imply. To start with, one would make the obvious point that the ranges are designed by the invisible evil hand, the bad market mistress et al. to relieve you of good positions. Since many of the market hands are addicts however, the mistress has had to go deeper and deeper into the bag of tricks to get you out. She's given us 23 days of up 40 or more since 1996 , none since October 15 2002, and then 2 this year. On the other side, she's given us 19 down 40 big points or more since 1996, none from 9 17 2001 through year end 2007. And then given us 5 in 2007 to date. At least we're making it harder for her to do her work. And when she does relieve you, it hurts.

Other base of operations stuff to follow such as Nasdaq up very big while S&P up just a little. The fantastic moves from 330 to close just when you're complacent. The big range early in the day just to be recapitulated on a Lobagola basis the rest of the day. And most of all, the look like the end of the world on a Thursday, with the leak of an announcement saving the day before the actual move on Friday. Then of course the fantastic run of big down opens totaling 30 points that follows the one big up 30 the preceding day et al. And of course the fake moves before the big announcements often tripping the stops. Oh, the stops. How the market seems to know exactly where they are, even when the screen is opaque supposedly, and worse yet, when only you know the stop. And the beautiful moves in Vix that always seem to precede the next days moves on a reverse basis. Oh what a beautiful and complex thing it has become. Things like that have to be put in the manuscript of all good market players. I 'll try to quantify some of the meals for a lifetime in similar things provided they are not overly meal for a dayish.

John Floyd adds:

Adding to the complexity of this: the shifting correlations between asset classes, and the economies that are, in part, the drivers of these assets. For an example today (Dec 21) one can look at the moves in gold, the G10 FX carry index (Bloomberg ticker for one is fxcarrsp index) or some of its components by default (yen, nzd, and aud), bond yields, oil, and Emerging Market currencies to name a few.

From an economic standpoint one only has to look at many of the components of growth and see the recent correlations and drivers. Whether it be the influences of housing on growth on the U.S. and U.K. or the export oriented growth of Germany and Japan that now is fading and lacks strong domestic demand to pick up the slack. One can look at what is priced in to interest rate markets in terms of central bank expectations over the next year and see that roughly 80-140 bps of easing is priced for the US, Canada, and UK, not much change for Switz, Europe, and NZ, and small tightening for Japan, Aust, Sweden, and Norway.

Investigating how to best capture the leads and lags here on both a day to day and more medium term basis seems like a potentially profitable exercise. The day to day volatility has increased and the short term ranges often exceed multi period point to point moves by large amounts. Look at the Sept 09 Eurodollar as an example where it has circulated roughly between 96.40 and 96.00 about 5 times in the past 11 days as an example. 

James Bitumen adds:

The big boys who are up on the year are not participating in these markets, unless there is free money up on the table — that they surely take.

Flows are being dictated by two types of market participants:

1. The smaller guys who typically trade all the time and are regular market participants. Through leverage, they still possess a considerable amount of firepower.

2. Managers who run sizable books who are clinging on to flat, or only slightly positive, returns on the year. Even moves of 50-60bps might determine their annualized outcome just a week away. They do not want to play, but they are forced to play in order to achieve a neutral outcome in 2007 for their clients, or maybe catch a year end move that could provide some grotesque form of consolation.



[Editor’s Note: This is one of our favorite stories at this time of year. We hope you enjoy it, and we wish you Merry Christmas. — Victor Niederhoffer and Laurel Kenner.]

High on the mountainside by the little line cabin in the crisp clean dusk of evening Stubby Pringle swings into saddle. He has shape of bear in the dimness, bundled thick against cold. Double stocks crowd scarred boots. Leather chaps with hair out cover patched corduroy pants. Fleece-lined jacket with wear of winters on it bulges body and heavy gloves blunt fingers. Two gay red bandannas folded together fatten throat under chin. Battered hat is pulled down to sit on ears and in side pocket of jacket are rabbit-skin earmuffs he can put to use if he needs them.

Stubby Pringle swings up into saddle. He looks out and down over worlds of snow and ice and tree and rock. He spreads arms wide and they embrace whole ranges of hills. He stretches tall and hat brushes stars in sky. He is Stubby Pringle, cowhand of the Triple X, and this is his night to howl. He is Stubby Pringle, son of the wild jackass, and he is heading for the Christmas dance at the schoolhouse in the valley.

[For the entire text of the story, please follow this link or this link].



Vitaliy N. Katsenelson, CFA wrote: "Over last two hundred years every secular bull market was followed by a range-bound market.". Test this and discuss your results. 

There are a number of ways to test this, but here is a first look:

SP500 1950-present (monthly) was used to calculate Dec-Dec returns (w/o dividends), as well as check for intra-month high and low. The intra-month high and low for Jan-Dec were used to find annual high and low, and the annual range was defined as [(max monthly high)/(min monthly low)]-1

Annual range for the series ranged from 0.10 (1993) to 0.66 (1974); 2007 is 0.16

First, what effect do last year's range and return have on this year's return?

Regression Analysis: nxt yr rt versus yr ret, yr range

The regression equation is nxt yr rt = 0.0537 - 0.069 yr ret + 0.151 yr range

Predictor    Coef   SE Coef      T      P  VIF
Constant   0.0536   0.0551    0.97  0.335
yr ret    -0.0691   0.1361   -0.51  0.614  1.0
yr range   0.1510   0.1782    0.85  0.400  1.0

S = 0.165498 R-Sq = 1.8% R-Sq(adj) = 0.0%

Durbin-Watson statistic = 1.92818

Both annual return and range have insignificant effect on the following calendar year's return (though there is positive correlation with range and negative with return).

Second. What is the effect of last year's return on this year's range? Here is regression of this year's range vs last year's return (ie, does last year's return predict whether this year has big or small range?):

Regression Analysis: this range versus last yr rt

The regression equation is this range = 0.303 - 0.292 last yr rt

Predictor     Coef  SE Coef    T      P
Constant    0.3030  0.0179  16.87  0.000
last yr rt -0.2921  0.0959  -3.04  0.004

S = 0.116678 R-Sq = 14.9% R-Sq(adj) = 13.3%

Sure seems to be predictive and in the hypothesized direction, but is the correlation due to prior years which are down or up? Ran another regression: Dependent var = this year's range, IV's are last year's return if up (otherwise zero), and last year's return if down (otherwise zero):

Regression Analysis: this range versus last up, last dn

The regression equation is this range = 0.241 + 0.023 last up - 0.982 last dn

Predictor   Coef  SE Coef      T      P  VIF
Constant  0.2411   0.0281   8.57  0.000
last up   0.0229   0.1457   0.16  0.876  1.4
last dn  -0.9822   0.2659  -3.69  0.001  1.4

S = 0.110013 R-Sq = 25.7% R-Sq(adj) = 22.9%

Durbin-Watson statistic = 1.88298

The effect stems from prior years which were down. So you can't say that this year will be range-bound if last year was up big, but you can say that if this year was down - the bigger the decline the larger next year's range will be. (Actually you can say whatever you want because Putin is not running here).

Conclusion. Since declines and high volatility tend to come together, and volatility clusters, it makes sense that big down years are followed by large range years. A more correct restatement of the original hypothesis would be: large secular bear markets are followed by wide ranging markets.

Vitaliy Katsenelson writes in:

Kim took the following phrase and tested it: Vitaliy N. Katsenelson, CFA wrote: "Over last 200 years every secular bull market was followed by a range-bound market."

I understand the desire to test things, but it is also important to test the RIGHT things. My book is written about secular markets, not minute, hourly, weekly, monthly, or even yearly (if you choose to look from a single time perspective) markets. Kim tested something that has no relevance to my book.




CountingEverywhere I go, everywhere I turn, I am beset by people who believe this is the time to get out of the market because it looks bad. They have many reasons for feeling things are bad. The latest is a spate of forecasts based on inefficacies of the central banks, solar spots, and likely changes in pessimism. I would urge those who have given up the quantitative approach to come back to their roots, realizing the following:

 1. When the market looks bad, it is more bullish than when it looks good, e.g. after a series of down weeks.

 2. When there is a 10% a year drift, you have to overcome above a 1/2 point a day drift for each day that you're out of the market. If on average, you're out of the market for 60 days, while things look bad, that's 2% you're giving up.

 3. In order to time the market you have to find a time to sell and a time to get out. If you time it by getting out when the market moves X% below a Y day moving average, and get in on the reverse, you'll have the worst of all worlds quantitatively.

 4. When the market is down, of course the news is going to be bad. But is that good or bad for the future? I don't believe the news is worse now than it has been on other occasions where the market is down 5% in two weeks or so, and if it were worse, I don't know if that's bullish or bearish, except for what happens when such occasions occur without regard to any Monday morning quarterbacking.

 5. The forecasts by the big houses of up 10% to 15% based on the differential of the earnings yield and bond yield have been extraordinarily accurate on a prospective basis over the last 15 years as witnessed by the work of the Spec Duo and Mr. Downing on this front.

 6. If you return 14% a year for 10 years you'll end up with 2.5 times as much money as if you grow by 4% a year, and five times as much after 20 years, And that's the underlying compound interest factor that makes the differential return models work. That kind of difference is impossible to beat on a 20 years (or a one day) basis with consistent trading. Keep that in mind as you consider stocks versus bonds.

 7. Especially toward the end of the year, reversals are most prevalent and predictive, with work on individual stocks often showing that those down the most in the last quarter are up significant double digits in the first part of the next year. Is it time to get them now, or to wait until things look good?

 8. After years like 1907, which this year is so reminiscent of for some sectors, what happens the next year?

 9. When considering the hornet's net of worries that the stock market has been exposed to each year over the last 100 as we have documented on Daily Spec, are these troubles that much more significant? And if they are, have they been discounted, and what happens when troubles are more or less than usual relative to the market move? A quantitative approach here would be apt.

10. The market's been more volatile during the last two months in terms of ranges and big moves in an hour than ever before. Is that good or bad?

Before giving up the quantitative approach for a cyclical view of bull and bear markets and hoping that you can time them, I would encourage a little counting.

Alan Millhone remarks:

MoneyIn 2008 I will come into some money (not exactly sure how much) and plan on opening a growth fund for my two younger grandsons (ages 8 & 11). This is money I would not normally have on hand. I have been reading all the Daily Spec postings and learning about the Market Mistress. There is no better place in the world to live than America. Yes, this country has a lot of problems, but what country doesn't? If you have no faith in our economy then you need to crawl into a hole. American has always recovered and rebounded and opportunities will always abound for making money in the land of milk and honey. What other country can change Presidents and keep going strong without missing a beat? Victor's posting makes a lot of sense and is excellent food for thought. Currently bank CDs pay around 4.75% to 5%. There is a lot of turmoil at present and likely always will be. We all know that a new President won't be able to change all that much. So we forge ahead and work with the tools at hand. I am a dyed-in-the-wool optimist with respect to investing in America.

Anatoly Veltman extends:

GoldI am a die-hard value seeker myself and Victor makes a point dear to my heart. There is one caveat, that I feel is applicable to the current environment. We (more to the point: equity markets) have enjoyed the longest period in modern history, of (at least, we were told) subdued inflation. What if that changed? Then operating margins would suffer.

I got the hint that something is going amiss when my indicators on XAU, GDX, ABX, NEM all flipped into down-trend a week ago, while the same Gold Cash and Futures gauges remained in up-trend.

I scretched my head; then PPI and CPI came out and it dawned on me: traders in-the-know held on to the bullion, while getting rid of their ownership in operating concerns! And the Fed will have a job cut out for them, to reign in inflation's ugly head.

Now, since I feel a lot of the Gold Stock move has occured (gosh, GDX is down 21% in a month!), I'm trying to get short stocks that haven't fallen as much yet. Also, Gold should correct somewhat. And Platinum traded $1,529/oz record this morning, not far off my calculated $1,552 target — it should technically correct $300 for starters. Beyond that, I wouldn’t be surprised if it eventually dropped two-thirds of its current price.



A friend from the other coast writes:  "There is a complete collapse in demand. We here in California are almost certainly in the midst of another property slump." 

Haven't we seen this movie before? California and nearby boom states see moonshots of value and bull-market property geniuses, followed by cyclical shakeouts, despair, lather, rinse, repeat.

In places where property itself was a central business — Miami condoland, the Inland Empire of SoCal — the ugliness can be protracted. Add in the visibility of the problem, and you have the storyline being promoted by The Thundering Herd and other recession-callers. 

Let us look at some national figures.  From today's GDP report: Residential Fixed investment dropped 20.5% (annualized Q/Q change), its contribution to the change in GDP was -1.08%. This data shows how much damage has been done by the contraction in housing. A 20% decline in the sector lopped one percent off GDP. But residential real estate is still "only" ~5% of the economy, and it makes sense to keep that in perspective.

Stefan Jovanovich dissents:

Guys, I am not saying that this is the end of the world; but what used to be a real estate problem has become a banking problem. The Financial Times says that real estate loans are now 40% of bank assets.

I was all-in only a few months ago and took money out of the market only because I wanted to buy a new business. What convinced me that this was not just another slow-down was the spread between our bank's normal jive talk and what they were actually willing to do. We have had the same business in the same location long enough to have seen our "local" (sic) bank morph from Security Pacific to the B of A, and we have seen literally half a dozen people come and go as the branch managers. This is the first time, however, that no amount of collateral was sufficient to get them to say "yes" to a loan even though they are now dealing with a potential borrower who has no debt! They didn't even bother with the usual soft pass — "Have you considered an SBA Loan?" The silver lining that, in this environment, people are going to be able to "trade up" houses is comforting; but it is pure fantasy if the suppliers of actual credit have frozen up - as I think they have. Of course, it could be my bad breath and my charming manners. We shall see. 

Phil McDonnell says:

"News follows price." After a decline bad news will come out to explain it; after a price rise good news stories will come out to explain it.

To some extent the markets are pretty good predictors of events. That partially explains the relationship. However there is a deeper truth in the News Follows Price saw. Simply put the media needs something to write about. They sell fear, they provide information. It is all in pursuit of market share which ultimately leads to advertising revenue.

An author writes a book if and when  he has something to say. The situation is quite different for a media writer. He HAS to say something everyday. It doesn't matter if he actually has something important to say today. His job is to write something anyway. Ideally it will be something so compelling that you, dear reader or viewer, will stop your busy life and check it out.

One of the classic ways to make up a story every day is to look at the market action and try to explain it rationally. After the fact you can always write keen insights like 'The market went up on higher interest rate fears'. The next day might be, 'The market went down on fears of higher interest rates'. Invariably this leads to reinforcement of the meme of the day. In the 90's it was the dot com meme. Recently it has been the declining real estate meme.

But memes evolve. They evolve because the media is under pressure to make the story new. A new twist or angle keeps the meme fresh and compelling. First it was the real estate bubble has burst. Then it was the sub prime mortgage market collapse. The latter evolved into the liquidity crisis. Then the Fed eased. Oops, better not talk about that too much that could be good news. It is better to milk this meme for all it is worth. Then it was the dollar is crashing. But when a meme has been around for a while it gets stale. The media needs to turn to the 'how bad could this get' angle. Perhaps you have heard the old Johnny Carson jokes. Carson could tell a new 'How cold was it' joke every night for decades.

That is why we are seeing stories about recession. More media is piling onto the meme. This could lead to recession, global warming, nuclear winter and a falling sky! Today's article featured the new angle that real estate prices are inaccurate. It is really worse than they are telling us! The article cited one estimate that 1.5% of houses in Denver might be reported as 10% higher in price than they really are. Do the math. That would result in a .15% overvaluation in the Denver market stats - a fraction of 1%.

Quick! Check the sky! Is it still there? I live in the Seattle area so I can't check the sky, as usual. But I trust it is still there.

Bruno Ombreux agrees:

News coming after price has often very low (0) information-content. Easily/rapidly written/understood.

- Easily written: one must be amazed how newswriters are able to produce/pick descriptive "models" in often less than 24 hours ! (should they have thought of it some hours before, they would be millionaires !). Or maybe those models are just fake ?

- Easily understood, at least for people confusing understanding and memorization.

- It's either tautological "markets up because they didn't range nor gone down",

- Or completely incantatory.

Just some words from the liturgy, put together. No predictive power, even not explanatory power. But it may _look like_ something. That's enough. A majority of people will be happy with it. Thanks for this good stuff for self-deception.

- The most elaborate form may be a linear model: "things will continue". Tautological, incantatory, linear … what are others forms ?

After a market move there is always an open question : why ? Few people have time/skills/tools/data to count/answer. Even few people have time/knowledge to read a true, but a bit long and complex, explanation. (A frank explanation being most of time: "we don't know"). Though, we need to fill the question's volume, to reassure ourself, keep up appearances.

Better a void/fake explanation than no explanation at all, At least, better than an true explanation beyond ourselves.

Vincent Andres asks:

After a market move there is always an open question : why ?

The post-mortem explanations of market moves show the huge random element combined with human weakness.

Humans don't want to believe that things happen without a (knowable) reason. Ego, insecurity, uncertainty about death after life. So we ascribe explanations irregardless causation.

This is well exemplified by many of the SP500 moves in response to FED rate announcements this year. On Sept 18, they dropped 50 BP and the market jumped 50 points, because "The FED put is still there" (they will counter market declines). OK, but it is also possible the market could have dropped 50 on the same news, because "The FED sees the economy as sliding into recession", and that they cannot stop it.

Then on Dec 11, they dropped 25 BP and the market tanked (biggest drop on a FED day in recent history), "Because traders were looking for a cut of 50 BP". Yes, but it could also have gone up because the FED determined that recession risk was abating and the original crisis overblown.

Some non-human animal experiments are relevant. Recall the pigeons who were fed after pecking a lever: When the feedings came at random intervals, they began to repeat movements and rotations they thought caused the food to appear - not realizing their dance accomplished nothing. Or the rats with electrodes attached to their tails: One group had levers which stopped the painful shocks, the other's levers worked only intermittently. The rats who couldn't control their stress lost weight, shed fur, and became unhealthy, whereas the ones with control remained normal.

The terrible pain and joy generated by markets and other mostly random gambling is more than enough to bring out the animals, as well as herd them to the chapel on Sundays to ask for explanation.

Save my seat!




Sets that I have and like:

"The World at War," >15 volumes, Laurence Olivier narrating, fantastic
"History of England," 5 volumes, Simon Schama, interesting and fun
"The First World War," 4 volumes, Ian Kershaw

I have a preference for history or science.

I find that DVDs with the History Channel label are usually not as good as those from BBC. History Channel seems so disappointing these days — always shows like "Modern Marvels" and shows about infantry weapons in war. Would be a lot more interesting to see something about history!



In my postal mail today I noticed an incoming holiday card with a stamp — "real postage" printed at home, bearing an image supplied by the sender. A cute idea, as an alternative to photo holiday cards. It's a bit late this year, but I'll try it next December.



 A Walrasian Auction is a market model in which a price is called and the participants decide if they are net sellers or net buyers. The price is adjusted until the net intended buying and selling are equal. Then the trades are made. It is a market clearing mechanism. The old Paris Bourse worked like this. Gold is set like this in London. What I propose is to approach the market from a reverse Walrasian viewpoint. In our markets, prices are theoretically continuous. At each price level, net selling and buying change and differ. This is one way price is changed. If one had a net long position which would be adjusted at various price levels, one could count or infer the net selling and buying, and take a contrarian position. The contrarian premise is that the selling panics are wrong and when net selling occurs, be a net buyer and vice versa. This strategy targets area of disequilibrium and walks hand in hand with cane investing. When there is disequilibrium, price moves large amounts as well.

Stefan Jovanovich adds:

If you own an operating business, you are always a net seller in the marketplace of the goods and/or services your company offers. One of the attractions of hedging for non-financial businesses is that it seems to offer the promise of allowing the business to take the other side of the trade. The problem is that, in almost all cases, you the business person are going from a position of at least reasonable knowledge to one where you are more than likely the sucker at the table. The panic right now among California small business people is that we can't even find a game to sit in on. This spring I wrote about how much confidence the local electricians and plumbers I know had about the remodeling market. Those same guys now are so discouraged that, even though they have plenty of time on their hands, they are not working on their own houses. They don't see any profit in spending any money on their own properties, and they wonder what will happen to them if homeowners generally come to the same conclusion.

Steve Ellison suggests: 

Larry WilliamsTrying to apply some of what I learned from the Senator's writings, I might look for Walrasian logic in the Commitments of Traders data. The commercials are buyers and sellers of last resort. If open interest increases while price moves primarily in one direction, the order flow is one-sided. If most speculators are rushing to buy, soon the only sellers left will be commercials. As commercials' hedges increase, the marginal utility of additional hedging decreases, and the commercials require better pricing to hedge more, much like dealers and market makers who have more inventory than they want.

As an example, consider the natural gas market. On October 30, the open interest was 742,551 contracts. Commercials were net long 21,792 contracts. The January contract price was 8.354. In the most recent report, as of December 11, the open interest was 829,008, and the January contract price was 7.085. Commercials were net long 74,850 contracts.

Comparing the two reports, open interest increased 86,457. One can infer from the commercials' increase in net longs of 53,058 that the majority of new contracts were initiated by speculators wanting to go short, with commercials taking the other side, as price decreased by 15%.



1450, from James Sogi

December 19, 2007 | 3 Comments

1450A few months ago I counted how many times S&P crossed 1450. Yesterday adds two more. A few years ago I studied whether gaps tend to get filled as trader's lore has it. Not much there then. The large gaps in this regime are different than the typical small gaps of the past and today was a better example of trader's lore as the 11/28 gap got filled. It had been there nagging for weeks. Tests last year of round numbers were also inconclusive, and it's problematic defining the test. From my point of view, however, these two phenomena combined today in an elephant stampede in and out, effectively shaking out the last remaining shreds of hope of the prior night, and when the last hope was gone, allowing a huge rally back to the starting point. Typical of the market to scare the living daylights so violently only to end up near the start. I read recently that the NYSE specialists' job is to provide some sort of continuity in price and avoid huge gaps. With the Japanese, then the Germans, tag-teaming the US at night, and the ECB's jamming the thermostat full tilt, the bathtub is sloshing over. The recent average gap is over 10 points, as opposed to a normal mean of four. In the Logic of Failure, one of the side effects of this kind of out of control hysteresis creates is cynicism. In a contrarian way, that might be good. To give an example of this last point, "Contrarian" brings up 1.6 million Google hits. "Trend following" brings up over 6.6 million.

Anatoly Veltman remarks:

Talking contrarian: everyone believes the seasonal patterns favor a December rally, a January rally, or both. I was bullish and eager to exploit this tendency myself — until my trend indicators turned down 12/11. That includes SP, DJ, NQ, Russell, DJT; even Goldman Sachs (GS) and gold stocks (but not gold itself) fell into my down-trend designation last week. Only oil and utility stocks remained in up-trends; plus a few individual issues, like AAPL, MO, MCD. I'd venture and say, that the next crossing of 1450 to the down has a lot of potential to not retrace.



I remain a complete sucker when it comes to charities for the military (whether right or left, secular or devout) and it is that time of year again when we Deist morons are compelled to cast our bread upon the waters. A suggestions of where to send money:

Wounded Warriors
1719 N 60th Street
Omaha, Nebraska 68104



Lou HoltzOne person I have admired over the years is Lou Holtz.

Louis Leo Holtz (born on January 6, 1937 in Follansbee, West Virginia) is an author, television commentator, motivational speaker, and former NCAA football and NFL head coach. Holtz is the only coach in NCAA history to lead six different programs to bowl games and the only coach to guide four different programs to final top 20 rankings. He is also a multiple winner of Coach of the Year honors.

Many remember him as head coach of one of the most storied college programs, The University of Notre Dame. There he took over a program in 1986 that was mired in mediocrity after suffering for five long years under the guidance of the very forgettable Gerry Faust. By his third year he led the Irish to an undefeated season and a national title. Between 1988 and 1993, Holtz's teams posted an overall 64-9-1 docket. He also took the Irish to bowl games for nine consecutive seasons, still a Notre Dame record despite consistently having one of the most difficult schedules in the country.

Prior to Notre Dame, Lou developed a reputation of being a turnaround specialist, dramatically changing around such programs as North Carolina State, Arkansas, and Minnesota. After a brief retirement in 1999 he assumed the head coaching duties at South Carolina, which had just completed a 1-10 record. Holtz went winless in his first campaign but in his second year his team went to the Outback Bowl and defeated Ohio State. The next season the team went back to the Outback Bowl and defeated Ohio State again.

He is consistently sought after as a motivational speaker and is a sports commentator on ESPN.

I had the pleasure of meeting Lou in Orlando when he was a guest speaker at a sales conference some years back after his retirement from Notre Dame. His enthusiasm was overwhelming and his speech was polished and compelling and despite his diminutive size of 5'9" and 150 lbs he is a commanding presence and personality. His speeches are a blend of Mark Twain and Will Rogers, and once you have been around the man you won't soon forget him or his message.

There are many great quips that I could quote but I will share one particular one that I think is quite appropriate for one who speculates in the financial markets.

"In life things are never as good as you think they are nor as bad, they are usually somewhere in between."



 Reading my daughter Kira's physics textbook PSSC Physics by Schaim, Cross, Dodge, and Walter, which tries to teach physics from the ground up through experiments, rather than mathematics or principles, I was struck by the many beautiful experiments involving the buildup of electrical charge by contact, by the mere proximity of a charged object to a conductor, electrical induction and the electroscope. In brief, as many will recall, if you place a negatively charged object, like a piece of amber rubbed by fur (where is Soros with his world famous amber collection when you need him?), near a conductor, like silver, the negatively charged free electrons in the silver are repelled by the negative electrons in the amber. The result is a net positive charge on the side of the silver near the amber, and a negative charge on the other side. The entire body of silver is attracted towards the amber because the positively charged side is closer to the negatively charged amber than the negatively charged further away side. The force of attraction of two electrically charged objects varies inversely with the square of the distance.

Similarly if you bring a positively charged object such a glass rod rubbed with silk, near the silver, the free negatively charged electrons in the silver will be attracted by the glass rod, leaving the side near the glass rod negatively charged and the side further away from the glass rod positively charged.

The whole situation and all the experiments with the electroscope seemed exactly like the buildup of buys and sells at a price , the repelling of buy orders as a price falls to a level,and then after failing to touch it, moves back to some higher level, and the net positive charge that remains on the side nearer to the price as it moves back up. Similarly, it corresponds to the negative charge that results when a price rises to a level, fails to touch it, and then moves back to some lower level. There is a net negative charge on the side nearer the fallen price and a positve charge on the other side.

The whole situation called for testing. To do so I started with 2 pm prices each day from 1999 to the present and noted how close they were to the low of the day. I hypothesized that 2pm prices very close to the previous low of the day would be attracted to the low, and such prices would be bearish until the close.and that this force would vary with the square of the distance from the previous low as of 2 pm. Furthermore, I hypothesized that 2 pm prices that were very close to the previous high would be bullish and that the bullishness would diminish the further away the 2pm price was from the previous high.

The results confirmed my hypothesis. For example with S&P futures prices there was 190 occasions when the price at 2 pm was a mere 0 to 1 point above the previous low of the day. The expected move to the close was -0.7 points to the close with a standard deviation of 5 full points. Conversely, for the 243 occasions when the 2pm price was just 1 or less below the previous high of the day , the expected move to the close was 0.6 point with a standard deviation of 5.6. Varying the distance of the 2pm price from the lows and high until they were very far away came up with results similar to the inverse square laws experienced in electricity.

Aside from the fact that the results have not held up very well during the last year, the results are quite interesting and suggestive.

I would be interested in other ideas that readers have on the buildup of charges by touching two dissimilar objects,or prices, moving them close together, or the actual flow of electrons or buy and sell orders, when hooked up to an external energy source,of varying strength, i.e. current and voltage, how it related to distance, and the conductivity of the materials and markets involved.

Rod Fitzsimmons Frey reminisces:

Back around 1973 (when 13) while in Junior High School I found a nice little project to do for the school science fair in a book of experiments. The project involved, to my recollection, filling a short paper tube with nails and then coiling copper wire around the tube and finally connecting the leads to a variable transformer left over from a model, electric race car track. Then a separate coil of wound electric wire was made (believe all wires were left coated for safety) and a small light bulb attached.

By creating an electromagnetic field with the nails and coiled wire, that varied or fluctuated to some degree with the AC current, all you needed to do was bring the secondary coil with the small light bulb near it and the bulb would glow. It was fascinating and appealing to see a light come on with no direct connection to an outlet–especially when you are conditioned to things being run by wires– a bit magical really for such a simple device.

The science fair project was named, "What is Induction?". The effect is called "Lenz's Law". There are many demonstrations on the web.

I still remember though the much more elaborate and original science fair displays put together by some of the brilliant kids in the county (with perhaps a wee bit of help from their doctor or engineer mother or father) that were put on display at the local mall. Young kids can do a lot with just a little bit of pushing (not too much).

Interestingly enough there have been recent articles on using induction (which Tesla really thought of doing a long time ago) in order to have wireless lighting and appliances in the house.

Fred Unka adds:

Along the same lines, you may be interested in a toy I built for my father-in-law, which demonstrates some principles of physics and, I believe, markets, especially with regard to volatility, and if my limited testing is not mistaken, especially in markets between countries.

I started with some disk-shaped rare-earth magnets . These magnets have exceptionally high power for their size. I used a stack of 5 disks, although 1 would work as well.

An aluminum tube with an inner diameter slightly larger than the magnets' diameter had holes drilled radially along its length. The holes don't affect operation but let the magnets be seen inside the tube. The tube needs to be non-ferrous and a good conductor.

Now drop the stack of magnets into the tube. They will float down very slowly, almost hovering in the tube, until they get to the bottom where they will fall normally. It is astonishing and delightful to watch them seemingly defy gravity within the aluminum tube.

The effect comes from the motion of the magnets inducing eddy currents within the aluminum tube. The eddy currents, being circular, induce their own magnetic field, which opposes the magnetic field of the disk magnets. That opposed magnetic field, created by induced currents from the original magnets, influences their progenitor and suspends the physical disks. But there are losses in the system, so the drift wins in the end.

Kim Zussman adds:

Recent posts have revolved around physics, so here is a link to one of the free and popular physics lectures given by Walter Lewin, through MIT OpenCourseWare.

And here's the NYT article on Dr. Lewin:

At 71, physics professor is a Web star

CAMBRIDGE, Massachusetts: Walter H. G. Lewin, 71, a physics professor, has long had a cult following at MIT And he has now emerged as an international Internet guru, thanks to the global classroom the institute created to spread knowledge through cyberspace.

Professor Lewin's videotaped physics lectures, free online on the OpenCourseWare of the Massachusetts Institute of Technology, have won him devotees across the country and beyond who stuff his e-mail in-box with praise.



HGHGiven the remarkable performance of older players like Clemens and Pettitt, has anyone pointed out that perhaps one of the main thrusts of investigation should be whether there would be a beneficial effect for all of us in using moderate replacement quantities of substances like steroids and HGH that decline significantly with age?

I for one would like to know more and would appreciate article citations, book recommendations, and information on physicians specializing in the field.

Chris Cooper replies:

Such beneficial effects are apparent to anybody with an open mind. Nevertheless, the idea that a performance-enhancing drug might actually make you healthier is the kind of message that is not acceptable to the mainstream.  Aging is not "normal", it is a disease, and should be attacked like any other disease, with an eye to minimizing the deleterious effects.

What you are referring to is often called hormone replacement therapy (HRT).  The approach is to use drugs and nutrients to bring the body's hormonal balance back to what it was when you were a young man.  Is it surprising that if you achieve this, you actually feel much more like a young man?  Why does our culture consider this to be undesirable?  My goal is not simply to be healthy as it is commonly defined, but to strive for optimal health, a very different concept.

A good book to start with was written by my doctor Philip Lee Miller, called Life Extension Revolution: The New Science of Growing Older without Aging. Dr. Miller is in the SF Bay area. Also I've heard good things about the Kronos Centre in Phoenix.

Janice Dorn writes:

One of the contributors to my just-released book is a world-renowned authority on optimal health.  I took nine years of my life, and traveled 1.5 million miles outside of the United States to every country in the world (some many times) in search of life extension and radical wellness methods. Needless to say, it was an incredible journey, and it continues to this day.

Caveat Emptor. There are many charlatans out there, and we are in largely-uncharted waters. It is a passion for me, and I believe that the goal in this area of life is to delay, avoid and eventually reverse death.

Jim Sogi suggests:

SurfPerhaps a better way is hard effort. I still get out and surf 20 foot waves last week and take time to surf at least four times a week and train when there is no surf. No pill will keep you in shape without effort. Just the thought of a pill is enough to kill the will to motivate effort required to maintain and build strength, flexibility and stamina. It's like technical analysis, it offers an easy way without the work, and will lead to more harm than good. I see many men really going downhill. They don't stay active. Laird Hamilton says, "Keep Moving!" That is the best way to stay fit. I compete with the young guys everyday in a competitive lineup in the water for waves. I can't outperform them, but have other strengths which give advantage.  It's hard work. It takes hours everyday to stay moderately fit, and more to build strength. That's the problem, most don't and won't take the time and effort to maintain and build strength and gradually lose it. Strength from a pill won't help without the agility, flexibility and stamina that are the other components of fitness. Don't worry about the pill, just get out and spend the hours everyday to stay fit.

Chris Cooper responds:

BodybuilderYes, a better way is hard effort. I have gotten more benefit from the sports that I train for than I have from the drugs that I take. The drugs are an incremental benefit, though, and I am certain that I am better off with them than without them. And you may find, as I do, that instead of being de-motivating, they actually increase one's desire to participate.As an example, suppose you are taking testosterone. If you are not exercising, it will do little to build muscle. You still get the other benefits, such as general feeling of wellbeing, increased libido, increased optimism. It enables you to build muscle faster, because that only happens if you put in the effort. It's not magic, you still have to do the work — but testosterone also makes it possible for older men to train as hard as they did when they were younger, because your body will recover more like it used to. 

Larry Williams opines:

The flap about HGH in baseball is pure propaganda, based on my personal extensive testing of it. I concluded it was expensive and of little, if any help, in waging the war against old man age — a view that is now also backed up by science.

Ken Smith responds:

Studies are studies and not reports from individuals. I am an individual. The studies cited older people. I am an older people. My individual report differs from the studies as reported.

I can tell you resistence exercise will promote better body tissue and that the same exercise will tear tendons, ligiments, induce on-going pain. There came a time when the benefits diminished and the pain increased.

I am reminded of a story told by an author about his last visit with his grandmother. She was quite old, in her 90s As they conversed during her feeble days, on one of those days, her last it turned out, she asked him for a small glass of wine, told him there was a time for everything, sipped the wine, closed her eyes and passed on to the next dimension.

Russ Humbert remarks:

I would not be so quick to rule it out Growth Hormone for enhancement. The Chinese women seemed to have had much success with using it for distance running in the mid 90s. Several of the women were running times better than the men. However, they also ran extreme high mileage and were practically starved while setting several women's world records before their coaches where caught transporting drugs through customs before an international competition. Several of the stars went insane under such a regiment. 

Charles Pennington enquires:

Dr AliI'm open-minded about this, and I went as far as to buy the book written by Chris's physician, who seems like a reasonable guy. But the Life Extension directory of doctors isn't re-assuring. There is just one doctor listed in Manhattan, Dr. Majid Ali, whose website is Featured there are "Hydrogen Peroxide Baths and Foot Soaks" "The Oxygen View of Pain Management," "Bowel Detox," "Water Therapy," and "Dr. Ali's Castor-cise."

I also checked for a practitioner nearby in Connecticut. Doctor Warren Levin, in Wilton CT, is at The general garishness of the site, the endless list of specialties — "Magnetic Field Therapy," "Juice Fasting Therapy," "Auriculotherapy" — and even the Ron Paul promotion (Ron Paul == more permissive environment for quacktitioners [which is fine]) all leave me skeptical.

I wonder if Chris's physician could recommend someone in Manhattan who has a more rigorous, scientific approach than these guys.

Chris Cooper replies:

Perhaps these links will be more productive:

American Academy of Anti-Aging Medicine

The American College for Advancement in Medicine

Steve Leslie extends:

Philip MorrisI think back to the 1960s when the medical profession and the tobacco industry discounted the evidentiary link between lung cancer and smoking as anecdotal. And for 40 years after that the tobacco industry still fights in courts as to smoking and COPD, lung disease, heart disease and emphysema — long after they have paid billions of dollars to settle various class action lawsuits and agreements with attorneys generals throughout the country and have watched 450,000 American citizens die every year from smoking related illnesses.

I watched my father wither away and die as a result of a lifetime of smoking cigarettes.

Now some want to debate that the beneficial effects of steriods and HGH in adults outweigh the anecdotal risk. And I think of those in professional wrestling such as Chris Benoitk who committed multiple murders of his family and then suicide, professional footballers such as Lyle Alzado, dead from brain cancer, professional baseball players such as Ken Caminiti, dead and an avowed steroid abuser, high school boys by the tens of thousands who experiment and take steroids and commit ‘roid rage and suicide, and the untold thousands of recreational users who develop enlarged hearts and forms of cancer such as prostate cancer while juicing just to get bigger muscles.

Chris Cooper clarifies:

Chris BenoitThere is no medically documented connection between suicide and anabolic steroids. The medical data also say, "Supraphysiological doses of testosterone, when administered to normal men in a controlled setting, do not increase angry behavior." 'Roid rage is a convenient media myth. Steroids may very well cause changes in feelings, but that is far from causing major behavioral changes like those suggested above.

Take Chris Benoit as an example. When doctors examined his brain they found that it resembled the brain of an 85 year-old Alzheimer's patient. It had suffered so much trauma and had so much dead tissue that normal function was not a possibility — while dangerous personality, behavior, and temperament changes were more than probable. During his time as a professional wrestler with the WWE, Benoit had subjected his body to head trauma hundreds of times, most notably with his signature "Flying Head Butt" as well as dozens of other highly flashy (and dangerous) moves.

Steroids are being unjustly demonized, just as marijuana was in Reefer Madness, followed by equivalent media behaviour regarding LSD, Ecstasy, and many other drugs. Certainly steroids have their downside, and just as with recreational drugs, should certainly not be used by minors. But perspective is not allowed in times like these, where fear is inflamed to further the objectives of those who will benefit. 

Steve Leslie continues: 

Taylor HootenI dispute Mr. Cooper’s assertion that the is no medical documentation connecting steroids and suicide or rage. That is ridiculous. At a Senate Caucus hearing Don Hooten testified that his son Taylor, while in high school, began using and abusing steroids and committed suicide.

Mr. Cooper furthermore claims that Chris Benoit murdered his family and then committed suicide because of years of suffering numerous concussions and possible dementia. Did he personally perform an autopsy on Mr. Benoit? Has he examined the autopsy report? Where does he draw his conclusions from? In short, what specific research does he quote? Furthermore, what are Mr. Cooper's qualifications in forensic pathology and/or psychiatry?

Mr. Cooper further argues that it is some sort of a myth, steroid usage and its association with massive mood swings and subsequent rage. He then compares steroids to marijuana and says that it is being demonized by an uninformed public. Not to stop there he equates such unfair demonizations with LSD and ecstacy and “other drugs.”

He diminishes the risks to an absurd level and I am severely shocked and alarmed.

Chris Cooper responds:

Don Hooten runs the Taylor Hooten Foundation, established after his son committed suicide. Now Mr. Hooten runs around the country telling everybody that it was because of steroids, when there is no evidence pointing to that. According to,

There had been no active anabolic steroids in Taylor's body for two months prior to his suicide (according to a report on the THF website) At 17, when he killed himself, his hormone levels had likely returned to completely normal, and only metabolites of nandrolone (not active compound) were still detectable.

And no, I didn't personally perform the autopsy. But here is a quote from the doctors who did, via,

SLI's tests showed that Chris Benoit's brain had large amounts of abnormal Tau protein in the form of Neurofibrillary Tangles (NFTs) and Neuropil Threads (NTs). Multiple NFTs and NTs were distributed in all regions of the brain including the neocortex, the limbic cortex, subcortical ganglia and brainstem ganglia, and were accompanied by loss of brain cells, a condition for which no other neuropathological evidence for any chronic or acute disorder could be found.

Gordon Haave adds:

QuoteIt is silly to say that one can't quote the work of someone else. That is, one can't comment on an autopsy unless one performed it himself. If we took such an approach all of the time, there would be nothing to write about.

Furthermore, in the interest of scientific inquiry, providing anecdotal stories to a statement about a lack of research does not prove anything. I have no dog in this fight, but I admire people who challenge orthodoxy.



Victor Niederhoffer reviewed Luck, Logic & Whies Lies by Bewersdorf which discussed computational methods for optimal and pure strategies for various games based on simplified models. In the even/odd marble guessing game the optimal defense by the simpleton against the smart player to foil the advantage is to use a random choice. This is the basis of using a behaviorally optimal "mixed" strategy to foil the opposition who is guessing your strategy by alternating between two advantageous strategies.

The market could be modeled as a zero sum game with imperfect information. The goal is to find the pure strategies or behaviourly optimal strategies against opposing strategies than the ones already being used and by how much could the winning expectation be increased? The market modeled can be further simplified as a two person game in which one bids, one offers. The initial choice is whether to bid and offer. If the market goes up, bidder wins, if it goes down, bidder loses. If the market was random it would be a coin toss, but due to drift the odds favor the upside. This pure strategy conclusion is not trivial.

However there is more to the game. To profit one must exit. The next decision is when to exit. Analyzing the buy side of the decision tree to model the situation, buyer wins by selling before his opponent with a profit. If he waits too long or for too much, and seller sells before he sells, and price goes down, he loses. The balance is between time and profit. To find the optimal strategy Bewersdorff models an analogous poker betting situation on a decision tree. The optimal strategy requires some sort of mixed strategy for optimal results. He speaks of a realization plan using a sequential form of analysis. A way to solve this involved a linear optimization method developed to solve military procurement. The linear optimization was applied to the decision on what quantities of various products should be produced to maximize profit realization given a choice of resources. The limits of the resources and the limits of capacity or given by a series of inequality formula and are solved by looking at the largest profit distribution. This analysis might be applied to a trade by looking at the profit potential and probability of various time/profit target lags and solving for the optimal. Or it might be applied to leverage calculations. It is solved with the Simplex Algorithm. The method would be to choose two strategies say x period or y period, or x percent or y percent. But therein lies the rub. I have not tested these simplex solving tools.

Larry Williams replies:

Simplex ain't gonna work…

"Simplex is quite good for solving static, linear (and thus rather well-defined) problems."

… markets are not well defined. I suspect hold on to winners with trailing stops and ditch losers is much more elegant.



DadIn the checkout at Blockbuster a few days ago, a thirtysomething man with daughters in tow was ahead. There was no ring, and the kid scanned his key-chain barcode card and looked down while saying there was a $24 balance on the account. Dad shuffled around a bit and told the clerk he would come back later, then gathered his daughters and left without the evening's movie.

The girls looked a bit puzzled, but they were still young enough to revere him and didn't question as they skipped gayly ahead. Maybe he would read to them this night. Probably television.

Once you recognize the syndrome, you see them often at family restaurants and theatres on the weekends. They are a secret society — the living dead of the hormone wars. Shepherds of the gene-product ransom extracted from ageing stallions of all species.

Ken Smith remarks:

About single dads.. Last day or so Comcast News had piece about a school teacher in Florida, heavily in debt, behind in child support, harrassed by lawyers and court officials, with two children, and former wife living with a woman.

Stresses were too much for him. He could not think his way out of despair, out of debt, out of his relationships; could not get relief from court system, could not get sympathy from ex-wife, relief from her demands.

He was at a dead end as a single dad. Made adecision — shot two kids, shot wife, shot her roommate, shot himself — all dead.

His problems were resolved by violence. We spend billions in social programs in this country and yet things like this occur.

Stefan Jovanovich explains:

The billions "we" spend on social programs are not spent on the poor or the needy but on the nice, middle-class children who are credentialed helpers. It is leaf-raking in the park for the offspring of the "educated". No wonder most Americans trust the military far more than any other bureaucracy. Even with all the perfumed princes in the D-Ring, it is still the only place where you can get a government job without having spent a fortune on tuition first. The reason Americans are adamant about protecting Social Security and Medicare is that those are the only programs where they actually get to see the money. Everything else "we" spent somehow never quite gets to the supposed beneficiaries. Perhaps that is why the currency has said Trust in G-d. His were the only words that could be taken solely on faith.



When the Fed lowered rates to 1% in 2002 did JDSU or any of the old high fliers of 1999 make new highs on the easy money? Okay if that analogy is stupid, its that simple. People are smart. If they do not get the joke, they will tell it to their friends after laughing or crying. Yet, they wont continue to make the same mistakes over and over. Only the insane do that. Most are too rational to take much risk if any at all.

Thousands descended on the NASDAQ to day trade. They failed. Thousands became home flippers. They failed. Is there a "moral hazard" or if the fed takes off the price controls to its own clients (ugg) will the banks be stupid enough, will home flipper be dumb enough, will Lack go back to Boca Raton and trade 200 Nasdaq stocks per day? No way!

If das Bundasbank gave free money would the Germans flock back to Spain? Sure it was global. Once the Chinese make a buck per hour and some one realizes there are three factories for every part machined, the order that doesn't come through was a communist take over, the part that does come through the next price quote is up some 200% perhaps Peoria will become more competitive. Judging by recent price action and anecdotes from friends, that is sooner rather than later.

Its never been about Nazz stocks trading 100x sales. Its not about whether a house should be 70 bucks per Sq Ft vs 170. It is about the wives. The joke is "where are the clients?"

Everyone has a wife, or a friends wife that had some brilliant business idea that can't work. Its not that the idea was bad. Its not that the business plan way bad. Its the competition that is ruinous. You cant compete in business vs people that do not need to profit. HUH?

Yes, there are always moments in time where the cost of capital is so much lower for a few, that they do not need to profit. In the simplest terms I call it the wives club. There are thousands of wives of lawyers that have nothing to do with their time. Their husbands back their business without a need to profit. The Wives Club accounting method is such, that if the loss of the business is less then the expense of frivolous shopping, it's a "net savings": "Look dear how much money I saved us"

Economists call this overcapacity, but it's not. From restaurants that go to the markets for lower costs of capital and string up 1,000 bad diners across the country. To the Walmart's that strong arm Local governments for Tax breaks and use the Welfare system in their pay plan for employees. To the Chinese that dump so much pollution into the air that there is no way in hades I am going there for the BMX worlds this spring. Yet the Olympics will be fine as they do a Chrysler and shut down their operations for a few weeks. It's simply bad business. Sooner rather than later wives get sick of working. People get sick from pollution. Citizens get sick of taxes for everyday low prices on shampoo.

To the Pparsimonious that state "we should all be debt free". The significance and fun in life are bargains. Everyone wrongly acquired "stuff" by finance that was too cheap? Is it that you do not like everyone having "stuff" or is it that your cash competitive advantage is too low and you don't like that? Or is it everything is a bargain and the challenge is lost?

For the Prudent that call out historic lending spreads. Was this the Was the internet and price discovery, data mined information on risk taken too far? The repricing of risk! Yes, lets go back to the days where banks only lent money to people that do not need the money, the parsimonious or the endowed.

How long does it take for "unrealistic price levels" to become fact? Wasn't it a bitch to the Soviets to realize, "damn that capitalism deal isn't falling apart." Oh perhaps it was just bad luck? If they Commies had 5 years of Ups in Oils could they have made it? My goodness were they so stupid to realize all they had to do was start a war to get oil up, cause the USA to print money for war?

Okay my rant has gone too far. Just as the global thermal credit crunch meme has gone waaay to far. Yet the joke is it's in the banks best interest not to reprice these pools until every single mortgage broker is dead. The Fed with their client Banks and juvenile ego's vs the Prez with the regional banks VS congress and FNM FRE for the good of the people… Oh my goodness… get that joke. It's financial war!

Now back to the original gist… Is it bad to bail out those with debts or let them go belly up quickly and start over? The day trader in me says take the loss and move on. However my personality and the way I view life is what one in a million? You would literally ruin an extra 1-2 million marriages, children's families all in the name of prudence? Good grief… price the funds rate at 2.5% and tell everyone you have 5 years until its back to 5, period? Better yet scrap the price controls all together and let the market work YEA! Whoa, wait are you nuts? Let me, a trader set the funds rate? Goodness, not the traders, call a real firm like Goldman. Wait a minute what about leverage?

Insurance is regulated. Let's not get into all regulated business and the power grids, telephones and taxes for now. Lets look at insurance and the balloon head from Nebraska's comments after Sept 11th  "there will be a nuclear attack". Now the head of an insurance company speaketh on the net for the good of whom? If this was 1942 he would have been summoned to DC to sell War Bonds. Wait, No its the new economy. Congress please help with a back stop and a lift of price controls. Is the reason insurance companies try to never pay claims is price controls?

Is the reason the insurance market on the SNP, rises very high, for just a few short days, to stop out and ruin so many every few years, because it always pays its claims? Is the SNP 500 too big that if the market's traders had the ability to shut off short term funding it could not in a few days (like short options) drop some 55% to stop out many a leveraged account in America? Is 50% margin debt not prudent? Should all stock accounts be cash?

What are the differences in this money panic Vs 1907? Why is it JP Morgan said to sell down to a sleeping level? He was buying your sleep. Why is it Rothschild's said to buy when there was blood in the streets? They are already long.

During 2000 the Fed should have never run up rates again and again. No one complains about Greenspans 1pm rate shot in 2001. We were already long. Everyone snivels about last week because they didn't give most enough "time" to square the trading books. Is it not obvious that the central banks took rate hikes too far again? There are complete nut jobs out there saying they should raise rates! Oh wait they are not nuts they are prudently short banks.

In 2000 I heard on and on how the inverted yield curve wasn't bearish because the US treasury stopped the 30 year new issues. This time it was because if you "test it" and pick a time frame to support your mumbo its not bearish. Yet no one besides Goldman Sachs figured out how to profit off the inverted curve. Sell everything in debt land short. It was

Now that Goldman runs the Treasury Dept, the state of NJ, Merrill Lynch, the NYSE and soon to be Britain's Northern Rock what will Bernanke do? Will childhood battles prevail? Or is it the "Traders" vs the Academics with the Lawyers and the Wives Club elected by the people for the people?

Will the Sheiks and the Red Chinese get the joke and help their best client? Or will crash like the Nazz from some 75%?

Lower the cost of capital for everyone and leave it alone! Only those with want those with out to pay more. The housing crash the dot com crash would have never happened in such a short time without price controls. Sure over time everything returns to a norm. Give it time! Either that or let everyone have a "do over" not just the clients of Goldman.



MiningMany researchers only have very limited data to play with and are not necessarily required to know the perils of data mining. With abundant data, however, the perils must be fully recognized. The most popular paper in modern mid-ocean-ridge geochemistry and geophysics was about a correlation between sodium content (adjusted to a constant magnesium content) and the thickness of oceanic crust. When the chief author of the awe-inspiring paper was asked how one could even think of such a correlation, she said with the large quantity of global data set they just collected, they simply plot anything against anything else (how a smart way not to miss any possible correlation I thought at that time) and the above-mentioned correlation appeared. They came up with a grandiose explanation for the correlation. I was never able to fully appreciate that paper as most of that correlation comes from one outlier location (Iceland) and on local scale (meaning each location studied along mid-ocean ridges) that correlation either disappears or is the reverse. In addition, my test showed that the adjustment to a constant magnesium content itself produces that same correlation.

To apply the plotting anything against anything else approach in trading, I tested trading methods based on all combinations of a very large number of entry and exit criteria. Needless to say, a large number of trading methods that could produce over one percent daily returns appeared. Once I further tested these methods using outside trading data, however, all their grandiosity disappeared. The above sodium correlation has not been similarly tested.



DenaliNOVA just rebroadcast their episode called Deadly Ascent which explores the difficulties of climbing Denali (Mt McKinley). The show highlighted some intriguing parallels between mountaineering and trading.

Experienced climbers describe Denali as not a technically daunting mountain. Climbers can make the ascent without having to scale huge rock faces or ice falls, the kinds of things you see when they do the Eiger or K2. The thing about Denali is the environment: That beautiful massif pushes up into the sky, and the volatility is the weather combined with the altitude.

A local guide talks about the deceptive qualities of Denali in particular, about how a group of climbers will make the ascent safely in good weather, come back down and tell their friends how easy it was, and the friends will put together a team, make the attempt and die.

The NOVA team was composed of a man and woman, both experienced mountain guides, and an astronaut, John Grunsfeld. One of the technologies they used to explore the effects of altitude and cold was a "thermister" pill, a small thermometer that is swallowed and then transmits data on the subject's core body temperature. An important part of the data-gathering effort was to track external weather conditions, as well as the internal body temperature of the climbers making the ascent.

There was an interesting comparison between the astronaut, Grunsfeld, and one of the experienced guides, Caitlin Palmer. The thermister readings showed that when Grunsfeld was climbing, his core body temperature would spike to as high as the 103-104 range. Then, when he stopped and rested, his core temp would plunge rapdily to as low as 95, near hypothermia. Caitlin Palmer, on the other hand, maintained a narrower range of 100-96, with slower changes of temperature. She was able to function more effectively in the extreme conditions. Grunsfeld eventually had difficulty at their camp at 17,200 and descended with Palmer, without making the summit.

George Zachar adds:

Thinking of volatility, and of the markets in the last two weeks, I enjoyed looking at these photos of a monster roller coaster at Cedar Point.



Here is a small offering for BBQ. Make your own sodas. Make simple syrup using 2x water, 1x sugar, boil till clear and cool. Take a variety of natural juices, mango, pineapple, lemon, lime, passionfruit, cherry, cranberry, and mix with club soda and simple syrup to taste. You can also add your favorite alcohol.



Gordon HaaveWhat is a credit crunch?  At least in simplistic terms, one would think that it is a situation where credit is hard to come by.  Yet, per this graph prepared by the St. Louis Fed, bank lending is holding up just fine, despite a brief dip a few months ago. Yet, we hear constantly about a credit crunch, and the difficulty in borrowing money.

Let me explain something very, very clearly: If you put a lot of money on your credit cards, and default on them, you are going to have a hard time borrowing money shortly thereafter. That is not a credit crunch. Similarly, if you borrow a lot of money in order to lend to unworthy credits, you are going to have a hard time borrowing money shortly thereafter. That is not a credit crunch, it is the most basic works of a free market system, where capital is moved rapidly from productive uses to non-productive uses.

The capital markets have realized that it was a mistake to allocate vast amounts of capital to SIVs and hedge funds who added no value, but merely leveraged up loans to risky borrowers and/or sliced up assets a million different ways and passed them around in a daisy chain, while adding on a huge fees for their "genius".

Their losses have caused dislocations in the credit markets, and there me be worse things yet to come.  But, entities that don't actually add any value in the world should have a hard time borrowing money, that does not mean there is a credit crunch.

Alston Mabry explains:

A credit crunch is when I have trouble covering my action.

Anything else is natural market forces, clearing prices, etc., etc.

Russ Humbert writes:

While agreeing with much of what Prof. Haave said, there is a credit crunch of sorts, a loss of confidence in the rating agencies. A quick look at the investment grade ratings credit spreads confirms this. Going from year lows OAS spreads of 33, 54, 74, 104 for credits AAA, AA, A to Baa. (9 year lows ); Jumping to 84, 153, 179, 222 at end of 11/30, with AA reaching record spreads; higher than 2000 and 2002. The AA to Baa spreads seem to be moving in parallel while this occured. Hence rather than simply fleeing from poor credit, the risk premium has increased for most of the investment bonds equally. It would be as if, in your analogy, many deadbeats found how to sneak in an raise themselves to a very high FICO score — ruining your high credit rating.

Ken Smith ruminates:

Seems to me no one in government is producing a graph that extrapolates the above data to the future. What about that? Kurt Vonnegut inquired aloud "Why is there never a Secretary of the Future?" Government has Secretary of Defense, Secretary of Agriculture, etc. but no Secretary of the Future.

In short, no one is dedicated to plan for the future; every bureaucrat and every CEO and every householder is dedicated to short-term goals.

You might chime in to say everyone in the financial industry is dedicated to the future; with due respect I decline that argument. Yes savings are now in the form of 401k and IRA funds, these purportedly are future-thinking instruments. Purportedly. That's the joke. None of them have calculated taxes and inflation that occur in the future.

Taxes and inflation wipe out all gains that purportedly will occur in the future. A simple experiment with extrapolation will prove this to any and all who take on the task of proof. We cannot escape three things in life: taxes, inflation, death.

Three things. But of course there is more. Health, for one thing. A health issue can and does and provedly wipe people out — financially. Who can plan an individual future with such an issue? We don't know ahead of time if we will wake up one morning with dementia. 

Greg Van Kipnis critiques:

I am not sure who Prof. Haave is debating or criticizing, however,…

… a credit crunch usually can be defined by the result of a general drying up of short-term credit such that the yield curve inverts. Many things can cause such an outcome, but they are all destructive to economic activity in the near-term.

In the current situation we have something different happening which I am calling a mal-distribution of credit. Obviously the yield curve is not inverted in the treasury market, but it seems to be for poor credits as evidenced by the widening of credit spreads at the short end.

The leading issuers of credit are hemorrhaging equity due to mortgage-related asset write-downs more rapidly than new sources of equity are being tapped to create credit to satisfy the needs of traditional borrowers. Good credits are still able to offset lost access to money markets, e.g. witness the shrinking CP market, by raising money by other means, which currently are lumped by the Fed into the C&I category. As your graph shows that category is exploding. Poor credits are getting rationed out. Many anecdotes are showing up in recent weeks to underscore that development.

If everything happened simultaneously the negative effects of the mal-distribution would show up immediately. The squeeze is likely to intensify as more financial institutions are credit downgraded. To head this off the brighter firms are doing what UBS did and the rest will wither. The 4-fold Fed/Treasury actions of the past month (MLEC , mortgage-terms jawboning, FF/ Discount rate drop, TAF/Swap-Lines) are all attempt to speed the restoration of the mal-distribution of equity. Collectively these are unprecedented historical developments.

So far no one has been "bailed out", whether they are stupid derivative issuers or investors, or stupid mortgagees or mortgagors. There will be bankruptcies, shot-gun marriages, and arrangement of necessity before this is over. The key for the monetary/fiscal authorities is to replace destroyed credit with new credit so the general economy will not be crippled. To pull this off successfully will require extraordinary good luck and judgement.

Gordon Haave responds: 

I wasn't debating anyone in particular, but rather the global meme that the financial system is in collapse.  It's not. Credit is being denied to people who are bad risks.  Because those people tend to be somewhat powerful, they have created this credit crunch meme in order to try to get bailed out. So, I agree with almost everything that you wrote, except that I disagree re: the monetary and fiscal authorities having to replace destroyed credit with good credit.  They don't need to do anything. All they need to do is let the markets clear.  

A few months ago,everyone said that the monetary authorities needed to do something, meanwhile the markets have been clearing, the prices have been set (as seen by the equity injections into the banks).  There is nothing to do except let the markets clear.

There is a market rate for credit.  It reflects time preferences.  If the Fed creates extra credit, it distorts the markets, it makes it appear that people are demanding more investment than they really are (hence the real estate boom).  When it becomes clear that was not the case, that investment gets cleared out. The answer is not to keep distorting the market, but simply to let it clear.

Carlos Nikros remarks:

Like the definition of an asset price bubble, there's much subjectivity in the definition of crunchiness. Although I mostly agree with Prof. Haave, some aspects of the current economic backdrop are not favorable for borrowers with good credit, as opposed to impeccable credit. For instance, A2/P2 commercial paper isn't an easy sale right now. Yes, the corporate bond market is open for business, but if an issuer is not a well-known credit, it has to fight for attention in order to get its deals done smoothly.

Gregory van Kipnis concludes:

Amish BuggyFor an analogy for how we can be of the same moral-philosophic persuasion yet have significant differences, consider different 'sects' of Amish. One splinter group was called the 'motor-Amish' and another the 'electric Amish' and the third the 'mirror' or 'image Amish'. The first believed that using motor vehicles for certain applications was OK, the second condoned the use of refrigeration and phones for a subset of the congregation to satisfy the FDA rules for milk or getting emergency help, the third did not ban mirrors or any reflective metals from the household. They were all still Amish, but they fought like heck on Biblical interpretation.

Well, I do believe that markets will clear and should be left to clear. But, just as a winding mountain road without guardrails will clear itself of many foolish divers who will go off the cliff, many innocents will be carried away as well. If the damage were only limited to single drivers I'd be content to leave things as they are. Even the most ardent Austrian School adherents understand social costs and the proper limited role of government to address them, however. If markets were atomized with numerous buyer and sellers, no impediments to entry and exist, and wide distribution of information, the 'clearing' process would be swift and fair. Our markets are semi-rigid and relatively concentrated due to complex institutional arrangements. They won't clear neatly. Many innocents will be carried away.

So when I spoke of replacing destroyed credit with new credit, I had in mind the lessons learned and taught by Friedman and Bernanke (among others) in their studies of the causes of the Great Depression. They were clear that many stupid things were done to trip the economy into recession, but when credit was extinguished, partly due to loans' being called in to meet runs on banks, and was not temporarily replaced by some Governmental agency, the recessions cumulated into a disaster.

I know, I know, I can already hear a response from someone that "once you start with regulations to protect people in the name of the people (men united in councils), then lies and deceptions will begin" (I badly paraphrase Tolstoy and Leonard Read). That is the risk we take when we create government. If we are led by men of high standards, who vote their conscience and willingly take personal responsibility for their decisions, the risks are small. I believe the Fed, at least, is governed that way today.

Stefan Jovanovich voices his dissenting view:

The revised standard version of 20th century American history that Dr. van Kipnis is preaching is very much the current gospel. It is what William Poole means when he says that "(m)acroeconomists today do not believe that policies to stabilize the price level and aggregate economic activity create a hazard. Federal Reserve policy that yields greater stability has not and will not protect from loss those who invest in failed strategies, financial or otherwise. Investors and entrepreneurs have as much incentive as they ever had to manage risk appropriately. What they do not have to deal with is macroeconomic risk of the magnitude experienced all too often in the past." Poole quotes a passage from David Cannadine's recent biography of Mellon as an indication of how truly awful things once were before we had professional economic management. "Mellon constantly lectured the president on the importance of letting things be. The secretary belonged (as Hoover would recall) to the "leave it alone, liquidationist school," and his formula was "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

Alas, what Governor Poole fails to note is that this is very much Hoover's version of history. To the end of his life Hoover blamed Mellon for questioning Hoover's presumption that he could "re-engineer" the American economy in the same way that he planned food relief to Belgium and Holland after World War I. Governor Poole and Gregory would seem to share the former President's abiding faith that the application of science could domesticate the feral wildness that results from unregulated buying and selling. What they also share is a complete absence of any skepticism about the unintended effects of allowing "some Governmental agency" to "temporarily replace" "extinguished credit". When the government tries to manage economic risk, it either debases the currency by handing out far more money or promises of money than it can reasonably expect to take in or it establishes a world where prices are administered, not negotiated. In either case, the efforts of "men of high standards" (sic) to "stabilize the price level and aggregate economic activity" create a hazard that is far greater than any credit crisis. They destroy growth and pricing itself, and they risk turning nearly every citizen into a lobbyist or (worse) a lawyer. Friedman and Anna Schwartz are quite clear that the primary causes of the Depression were (1) the passage of the Smoot-Hawley Tariff (which Mellon literally begged Hoover to veto) and (2) the Federal government's attempt to administer the economy through the NRA, etc. Compared to Mellon's prescription (which was to let the markets find out on their own what stocks and farm land were worth), the Hoover-Roosevelt solution was the one that truly ended in liquidation.

There is no way that limited or unlimited government can "address" the problem we have right now without creating greater harm. The mountains of imaginary wealth created by loans against the security of 1800 sq. ft. stick and stucco 1950s bungalows in Pacoima are simply not worth what people thought they were - just as RCA stock was not worth what call loan supported buyers bid it up to in 1928. One does not have to be an economic fundamentalist to believe that common stock valuations usually have some discernible relationship to companies' cash flows from operations. It is also more than a matter of faith to think that, as wonderful as California real estate is, its prices most of the time have at least some distant connection to the ability of their owners to pay their mortgages. Until the homes in Pacoima once again have some vague relationship to what new buyers can afford to pay, the crisis will continue; but it will end - just as past real estate slumps have ended. But, if the wise men (and occasional women) of the Federal Reserve, the Treasury and the Federal government decide that they can "fix" the problem by legislating price levels for the paper issued on the security of those California bungalows and New York condos, we may see the People's Republic of Santa Monica bring the rent control to Iowa. "Credit creation" that tries to restore former unrealistic price levels in the midst of a panic is a bit like having alcohol for breakfast as a cure for hangover. It will - temporarily - take the edge off, but it only makes matters much worse later on.



Even if the random-walk model best approximates reality in the short run, long speculators could still profit from long-run price changes if average upward price changes exceeded average downward price changes. If there is an upward bias, do speculators profit solely and simply because they bear the risks that hedgers transfer to them, or do they profit because they can forecast prices successfully? The 'risk premium' concept is a common point of departure in the literature of futures price behavior.

Whether or not here is a risk premium and, if so, whether it leads to a reasonable expectation of profits, there may be enough observable biases in futures prices to give hope to a speculator attempting to forecast prices.

R. Teweles, F. Jones: The Futures Game - Who Wins, Who Loses, Why? McGraw Hill, 1987



New YorkerMany have indicated to me that they read the New Yorker article and after reading of my infamy felt impelled to see or communicate with me before I died. It is inappropriate, I believe, after losing as much as I did to offer a hornet's nest of excuses, explanations and defenses in response to such well-meaning people. I have great sadness about the money I recently lost for some of my customers, and great regrets about the far, far greater amount than their total that I lost myself. But I am not the total loser that the article depicted. Certain publications love to write about a formerly successful man who goes to the bottom, and their readers love the Schadenfreudian sensations derived from such material. I was a perfect target for their article at the time but I am not now, nor would I have been at any other time in my rather full life except for October 1997 and the time shortly before my forced retirement from squash in 1964, after my many defeats. Nothing in the New Yorker article should detract from the idees fixes that I have communicated in my books, website, and day-to-day activities in business. The major lessons to be drawn from my recent losses are "never get in over your head" and "never play in a game where your opponent controls and can change the rules and exit points" and "the mouse with one hole is quickly cornered." I knew these lessons before, but I was remiss in not balancing the gains that arise from taking risk and buying during panics against the vulnerabilities that arise playing on such a field.

Neil Raphel writes:

Neil RaphelOne aspect of Victor's business career the New Yorker article failed to adequately portray is his willingness to instruct and inspire. When I joined his commodities trading firm in the early 1980s as an extremely green recruit, he bought me copies of Entrepreneur magazine, encouraged me to study horse-racing books, and regaled the office with tales of the nefarious exploits of so-called "pres-ti-gi-ous" Wall Street firms. He graciously replenished my house trading account after my ill-advised initial forays into the market. My experience was not unique. He has mentored countless other traders and business people. Despite the vagaries of Victor's trading results, many people, including me, are grateful for his encouragement.

Arman Agdaian adds:

Victor changed the way I look at the markets, and I thank him. I am a commodity broker to clients and trade my own money. After reading Education of a Speculator, I have become a better speculator.



 The usual way to quantify intraday range is some comparison of high to low. But this misses another dimension - the length of the path traveled by price, which is related to speed of the market (since o-c time is constant, for the entire session  market speed = path length). For example there could be two days, between 930-415 ET (405 min), both with H-L = 20pt (ES). One goes steadily from low at open to high at close, a path length of 20 pt and rate 20pt/405m = 0.05pt/min. The other is a wild day, with a 20 pt gain followed by a 20 pt loss (net unchanged). The wild day path length is (simplifying) 40 pt, which is a rate of [20 + 20]/405 = 0.1pt/min.

Considering just the constant open-close daily period, market speed = path length (a potentially potent area of study is the reaction to market speed in short time intervals, but I will leave that for later). Exact path length would require summing tick data for each day, but for a reasonable estimate here I use 5 minute closing prices and estimate path length as sum { abs(5min moves) } for each day from 930-415. Here are the largest o-c path lengths since 1/07, along with the o-c return (ES points):

date     sum_abs oc
08/16/07 233.25  24.75
08/10/07 212.50    5
11/08/07 185.25  -7.75
08/01/07 185.25  12.25
11/20/07 176.50    9.5
07/26/07 175.75 -20.75
08/09/07 173.25 -20.75
11/02/07 161.50   -2.5
07/27/07 154.50  -31.5
08/17/07 151.00     -7
10/24/07 150.25   2.75
11/09/07 148.75  -3.25
08/15/07 148.25 -15.25
12/12/07 146.00    -22

Notice the big move yesterday is only 14th longest path length YTD. Since that path length is a form of volatility, I compared o-c return with contemporaneous path length and found the usual negative correlation:

Regression Analysis: oc versus sum abs

The regression equation is
oc = 4.49 - 0.0648 sum abs

Predictor      Coef  SE Coef   T      P
Constant     4.490   1.636   2.74  0.007
sum abs    -0.0648  0.019  -3.27  0.001

S = 11.7078   R-Sq = 4.3%   R-Sq(adj) = 3.9%

Gibbons Burke asks:

Do you consider in this calculation the distance from the previous day's close to the current period's open? If not, then a gap day's net price path sum won't include the overnight move in the path.

Larry Williams adds:

It is not just the range and such but which side is moving the market on that path. It is clear to me the gap from last night's close to today's opening is public activity, the path from today's open to the close much more professional activity; that's the key to the numbers as I see it.

Jim Sogi remarks:

I agree with Larry, but for different reasons.  Rather than just pro/public, the night session is related to the global situation and large gaps seem to be a whole new area recently developing. Yet another new different unseen cycle. 

Paolo Pezzutti suggests:

There are at least two dimensions in play: one is speed, which is somehow associated with concepts such as range and volatility. Another is related to directionality. According to different combinations of these two dimensions you could build a matrix of market behavior. The areas would be:

1. volatile; directional
2. non-volatile; non-directional
3. volatile; non-directional
4. non volatile; directional

The problem is related to indicators to be used to efficiently define these areas. How you identify the borders/lines of contact between areas? This classification can be useful when trying to identify the proper tools and techniques to use in each area. What kind of indicator could one use to take into account speed? What can we use to identify directionality?

Steve Ellison responds: 

In his book "Trading and Exchanges", Larry Harris identifies two types of volatility. Fundamental volatility results from changes in fundamentals. Transitory volatility results from excesses of uninformed traders who move prices away from fundamental values. Price moves caused by transitory volatility are likely to reverse as informed traders take advantage of bargain prices to buy or rich prices to sell. Price moves caused by fundamental volatility are much less likely to reverse.

A hazard for a contrarian trader is falsely assuming volatility is transitory when it is in fact fundamental. Dealers and market makers protect themselves from this risk by widening spreads when the order book is one-sided.

I propose a 2×2 matrix of the actual type of volatility and the market's perception of the type of volatility:

.                     How most market participants
.                     perceive volatility
.                     Fundamental          Transitory
type of
.                     Price quickly        Price trends
Fundamental           establishes a        as disbelievers
.                     new equilibrium      change their
.                                          minds one by
.                                          one
.                     Market reverses      Price quickly
Transitory            dramatically         reverts to
.                                          previous levels

For years, the trading literature was very heavily slanted toward trend following as the road to riches, which biased many traders toward assuming any volatility was fundamental. However, with much money having been yanked from trend following funds this year, the upper right quadrant is occurring with more frequency.



 As the splashes in a bathtub subside after jumping in, as a pendulum slowly comes to a standstill, and as a vibrating spring slowly stops, due to friction, the market after a big splash slowly spins to narrowing ranges. We see it in the cycles in so called common triangles, flags and pennants. Friction or other dampening mechanisms act on price swings. These phenomena are well measured in physics and led to powerful understanding of the nature and a similar measurement ought to be productive and predictive in the markets. Today's lowered range of 15 points is about the long term average. As Vic and Laurel noted, the last few days were above the 99th percentile. What is the mechanism and the measurement of such change?

Marco Loureiro writes:

The lookback period plays an important role when forecasting market volatility. In addition, the lookback period size often affects the convergence of different volatility models. Interested readers can refer to Stephen Figlewski's overview paper Forecasting Volatility as a good source of insightful information.

Lawrence Schulman adds:

Ultimately you need to decide the lookback period you want to examine. I did check the 600 day moving average for the true range for the S&P 500 and it was 14.5, so Mr. Sogi is right on, today's range is very close to a longer term moving average. Vic and Laurel did something a little bit different. Instead of taking a moving average, he added the extreme down/up movements in the S&P 500 that occurred in the last hour and a half of trading to the opening of the next day. There's more than one way to measure schizophrenia in the market.

Doug Kass offers:

Doug KassDaily Speculations is forever lost in the glory of numbers and esoteria — and absent simple logic.

The current credit crisis emanated from the unprecedented growth in debt over the last two decades, which was accompanied by the cessation of lending/borrowing judgment.

Historically low interest rates (brought to us by the prior Fed Chairman) encouraged the quest for yield, and normal due diligence was abandoned. The outgrowth is a world awash in an unwieldy and unregulated derivative market that managed to bypass traditional banking regulation. It is a setting in which patchwork mortgage proposals and/or creative Fed initiatives will not likely remedy in short order.

The markets are beginning to accept the notion that the financial workout will take time and, in all likelihood, can only be relieved by the natural forces of an extended recession. Corporate profit, business spending and personal consumption forecasts are going to be revised down -— by consequential amounts.

It is only at that point of time that stocks will become cheap again.

The truth shall make you free.



J WI have found that with airlines hosting "Express Check-in" (security) lines for luxe class members (First and Business class seats and loyalty/upgrade members), it is enough to simply look business to pass through and avoid the long cattle-chute line for the "poor" people. Three times now (twice in Chicago and once at another airport) I've used these despite my economy class ticket — just flashed my boarding pass with my thumb over the word "Economy" and bypassed the long line. The checkers at these things don't care enough to bother as long as you don't look like riffraff.



I played football against the then-named Bobby Knievel. Best story was barreling along a Montana freeway late at night — when there were no speed limits — at about 180 mph. My other 'Butte America' buddy, Billy Peoples (handball champion) told Evel we'd had enough, he could slow down.

Knievel replied, "Billy, at this speed you won't feel anything, anyway."



As some of you may remember, my son David has wanted to open a trading portfolio for some time. I told him that he could as soon as he saved up $1,000. Well, he accomplished that pretty quickly and opened an account.

He was lucky enough to have a few different readers of this web site give him some advice and guidance and proceeded to make some purchases.

He initially bought WFR and made a tidy little profit. Then he sold out and reinvested in BIIB. He proceeded to make a killing! First BIIB shot up for a tidy profit… then came the buyout rumors and the stock shot through the roof!

As his father, I was a bit concerned. As much as I wanted him to make money, I didn't want him to think that it was that easy. The good news is that he kept his head about him and didn't allow his ego to expand in proportion to his gains (well, most of the time).

It made for very interesting conversation in the dug out of his Little League games and at Boy Scout events. It was fun watching him talk about his gains to his 11, 12, and 13 year old teammates and their inquiring about how they too could make that much money… not normal conversation for that age group (at least not here in the Midwest).

Well, today it happened. As many of you may know, BIIB announced that it was going to go it alone and not be bought out and the stock plummeted 27% (as of this writing, 11:14 am Central time).

He was busy doing school work upstairs when I went to break the news to him. He already knew. He said, "that really stinks, I should have sold out when I had such huge profits. But I'm not worried about it, I still have a small profit and will make it back. But next time I'll take profits, sooner!"

Although he has a lot to learn (heck, don't we all… I know I sure do), I was very proud of his "matter of fact" attitude about the losses.

This loss was a great lesson for him to experience at such a young age and when the money he lost (actually, he really only lost most of his profits) isn't that painful to him. It's not the gains that make us what we are, it's the losses that separate the men from the boys! And today, David took a great step towards manhood by handling this loss with dignity and a positive attitude! I am proud of him!

Ironically, when I went to see him and tell him about the loss, he was doing his daily homeschool reading session…..and he was reading Bill O'Neil's book "How to Make Money in Stocks" (for the second time). I'll get him to read "Practical Speculation" soon and then "Education of a Speculator" sometime after that. In homeschool each week the kids do a section of Paul Heyne's book "The Economic way of Thinking" or Henry Hazlitt's book "Economics in One Lesson".

He just turned 13 and is more interested in sports and his Xbox 360 at this time … and I think he's started to notice girls too …so we'll have to deal with that added distraction next to compete with his studies!

Steve Leslie writes:

I have been a mentor to David and his schoolteacher and I can tell you the lad is enjoying his childhood. His father is a wonderful man and the boy is extremely well-rounded. David is bright, articulate, an outdoorsman, an athlete and a genuinely nice boy who wants to learn about stocks and investing. He has a thirst for knowledge and a desire for growth as a boy into manhood. 

Marlowe Cassetti suggests:

You might encourage your son to look at ETF investing where he can get an appreciation for broader market themes, while reducing company specific risk. I know it is hard not to become enamored with individual stocks, but this example can be a learning experience. I have published an article on Seeking Alpha on this topic that mentions BIIB. 



NinjaNinja Warrior, a Japanese television show, was playing incessantly on one of the cable channels when we were in the Caribbean a couple of weeks ago. Great fun for both kids & adults. Contenders (some of them real athletes, Olympians & etc.) try to scramble across an obstacle course without falling into the moat below, while a breathless hysterical announcer (whose comments are printed as subtitles, in a sort of ESL English) encourages and heckles them. To get the flavor, run the "Top 5 Wipeouts" clip on the site.

Michael Ott adds:

My favorite show along that vein is Most Extreme Elimination Challenge (MXC), which airs on Spike TV.  It's an old Japanese show that has been re-dubbed by comedians who make fun of the participants.  They come up with hilarious names and preposterous occupations while the contestants do ridiculous stunts.  It's a fun way to waste half an hour. My favorite contestant name is Mahatma Running Bear, who is half Indian and half Indian.



Michael B Smuck (I kid you not) has gone bust for the second time in his career as a real estate mogul. Twenty years ago the 1986 Tax Reform Act was the alleged culprit; this time Katrina was the very real catalyst. M. Heschmeyer reports : "As of last month, Smuck-affiliated companies had as many as 65 other loans totaling more than $900 million spread across 36 CMBS deals. Most of the loans were taken out since 2000, some as recently as this year. Nearly two-thirds of those were reported to be at least 30 or more days delinquent, according to analysis last month by Roger V. Lehman and Julia Tcherkassova, CMBS strategists for Merrill Lynch. The delinquencies and defaults were expected to spread to the remaining loans.

To put that number in perspective, Fitch Ratings counted only $96.3 million in total delinquent multifamily loans across all CMBS deals in October. MBS Companies delinquent CMBS loans in November were already more than six times that amount, and could go as high as 10 times that amount. Multifamily delinquencies in Texas already account for more than half of all CMBS multifamily delinquencies. That figure could rise to more than 90%."



When I was about eleven I was in the car with my mother's father and we noted a person going through my small town with a suitcase in hand. Grandpa looked over to me and remarked, "There goes one of Hoover's Tourists." Grandpa then briefly explained the Great Depression and all those out of work and many who (like this person) became transients. Today in traffic I saw a man with a backpack and he appeared distressed. In his hand was a sign reading "CHAS. W.Va." Of late I have noticed an increase of people walking with pull-along bags and/or backpacks traveling through my area. I feel in the last six months displaced people have increased in number.



The Fed's upcoming liquidity swaps will be keyed off the OIS rate for one month funds, which I mistakenly assumed was roughly the rate for a term loan of the duration.

I have since learned that the OIS is effectively the same as the rate on the second Fed Funds future, which is currently ~4.20%, a modest discount from the spot target rate of 4.25% and substantially lower than the 4.75% discount rate.

This makes the upcoming set of auctions a one-off discount rate cut, albeit in relatively small size. The two day window between bid submission and auction award announcements further muddies the program's value.

Alex Castaldo remarks:

I have the impression that the Fed is experimenting with a view to a permanent auction mechanism for supplying liquidity, based on this paragraph in the news release:

Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve’s current monetary policy tools–open market operations and the primary credit facility–with a permanent facility for auctioning term discount window credit.

This mechanism would be similar to the weekly auctions that the ECB holds (the so called main refinancing operations). From ECB web site:

Main refinancing operations are regular liquidity-providing reverse transactions with a frequency and maturity of one week. They are executed by the [National Central Banks of the Eurosystem] on the basis of standard tenders and according to a pre-specified [weekly] calendar. The main refinancing operations play a pivotal role in fulfilling the aims of the Eurosystem's open market operations and provide the bulk of refinancing to the financial sector.

European fashions in Central Banking coming to the U.S. ? We shall see.



Of late I have received several emails wanting me to borrow on my home, which happens to be a brick duplex. I live in one side and rent the other. The rented side pays all my overhead for living in my side. It is not a mansion, but it is paid for and mine. Home equity lines of credit are okay if used responsibly, just like a credit card. In Vegas they give you chips to gamble with and you feel it is only play money you are using. If you were using your own cash you would be more cautious when making bets. Now is a good time to play close to the vest.



There is much talk about how to interpret the bearish Open Market Committee announcement followed by the bullish joint injection of reserves which led to the greatest absolute value of moves ever from 2:30 to close and close to open, 85 S&P points in total.

Many will try to interpret the content, the whys and wherefores of what was done, and the timing thereof, but I am tempted to cut to the chase and say that it is the like the final blast of the fireworks, or the finale of a classical symphony, or the final minutes of a sporting event such as a bike race or basketball game or 100 yard dash, where everything hangs on the last ultimate effort.

Rather than searching for more analogies, I will go out on a limb and say it appears to be the final disruptive move, the boiling water that the frog is thrown into to get him to jump, the greatest observable difference of Fechnerian Psychology. Merely the final attempt to loosen the weak from their positions.

There's the rub. Which side is trying to loosen which? I don't know. There have been seven days in the last 12 years where, like the last two days, there has been a high to low range of more than 45 points. The range Dec 11 was 56 points, and Dec 12 was 46. The last time it happened was Jan 3, 2001, where a 46 point range was preceded by an 81. Of the seven occasions, three were followed the next day by a rise, and four by a decline.

In closing I must tip my hat to the highest up open in futures in history (on a non-holiday), 34 points yesterday, surpassed only by the 36.5 on June 2, 2000 which followed a Memorial Day holiday, and surpassing the 32 point up open on the day after the Fed first lowered the discount rate this year (August 17, 2007).

Anatoly Veltman writes:

Bernanke & Co. managed to screw up a perfectly good market — and market participants will not forgive them! Tuesday: Fed fell prey to a technical set-up in bonds, that even many an experienced chartist didn't anticipate. Wednesday: they made an elementary timing error, much easier to avoid. I can't remember the Greenspan Fed erring on intra-day timing, except maybe in the first half-year of his tenure — when he could hardly fill Paul Volker's shoes in May 1987. All Bernanke needed to do: wait with the intervention announcement until well into the trading session — not release the golden goose a half-hour before the open! The result: we just completed two high-volume stock market sessions, both opening high and dropping all day! To add to the bearish sound of it: it's also happening during futures rollover — which enabled Wednesday's close well off the low, and right below the middle of two-day range. So, what do we have piled in electronic trading books for the remainder of the week? Offers on every stock right above the market — from participants let down by the Fed, and just praying for an up-tick — so they can get out, and call it a year. Well, those who pray instead of reason usually get carried out. The market will tire of knocking into their offers — and turn down. Will there be bids right below? Bid on new front month S&P 10.00 dearer than the one in front yesterday? There could be slight mental block about that — or am I the only guy in America loving stock specials?

Kim Zussman comments:

I am not knowledgeable enough to draw a constructive analogy between markets and nature.

A (popular type of) supernova is when a star runs short on hydrogen for fusion, cools and collapses, and in a huge explosion higher order fusion occurs, creating the heavy elements essential for the formation of life (as we understand it). Typing is complicated, as is the astrophysics, but in all cases it is a catastrophic explosion which would sterilize a large local sphere. Long ago I read that if the bright star Sirius, eight light-years away, were to supernova the radiation would end life here. (Our sun is too small for this, and supposedly in four billion years will run out of hydrogen and swell up as a red giant, engulfing earth. I am not too confident there will be sapient beings around then to worry about it).

Presumably the analogy is about how destructive supernovae are seeds of new life. In markets there seem to be periodic events which destroy longs, and shorts, and then maybe new life starts. The problem is they occur with day-week-month-year timescale, and only maybe you and three other people can see these in real time — the rest of us in retrospect.

Just isolating on human affairs, I can't imagine a real-estate decline compares with war, famine, epidemics, etc.



Alan MillhoneTo be totally safe and protected from exposure you would have to avoid the market altogether. Or like me, not have any rentals and thus I would avoid all bad renters. Trading and real estate gets into our blood and there is a certain thrill or 'rush' in dabbling or being immersed! Also in many of our cases it is all we know. I watch the market, but I am not savvy enough to be a investor.

Janice Dorn adds:

To be totally safe and protected from exposure, one would have to be dead. Even then, one wonders if there is safety and protection from exposure. The most common cause of respiratory illness is breathing. So- do we all stop breathing? Move to a high mountain area to get "better air" and then risk other challenges to our body, mind and spirit?

Life is about risk. Life is risk. We risk from the moment we come into this plane. There is risk in everything. The challenge is not to avoid risk, rather to embrace and manage it. One of my favorite verses:

There once was a very cautious man who never laughed or cried.

He never cared

He never dared

He never dreamed or tried

And then, one day, he passed away and his insurance was denied.

For since he never really lived, they claimed he never died

Jim Sogi marvels at the day's events:

At 9:00am the White Knights ride in, save the situation after the huge  drop late yesterday. That was quite a move. Do they plan this kind of thing on purpose for dramatic effect? Or is just to squeeze the the last few drops of blood out? What a rinse. They obviously knew ahead of time.




My name is Bo Steven Keeley, and I have been a substitute teacher in
Blythe, Ca. daily throughout this school year. I have a Doctorate in
Science, Psych Tech Certificate, and taught professional sports for ten
years before teaching in Blythe. I prefer sub teaching, as I recently
informed the Palo Verde School District Assistant Superintendent who
dismissed me, because "A sub sees each of 900 high school students in
most of the rooms on campus each month, and this cycles. On the other
hand, regular teachers see only 160 students in one room all year long.
Subs have their ears to bottom board of education, so if you want to
know what's happening in your schools, ask a sub".


See full text of letter in our archive. 



I will be interviewed by two ladies named Jess and Bren about Checkers and my being President of the American Checker Federation. They host a program on sports called "Beyond the Balls." I am to be called at 6 PM MST 12/12/07. They are in Fort Collins, CO at KRFC 88.9 FM. You can hear the show live at The 'listen' link is on the left side of the page.



FOMC meeting day (SPY cls-cls) return for today (-2.74%) is the second-worst of all 94 FOMC days since Jan 1997. Here are the 10 worst:

09/17/01 -5.2%
12/11/07 -2.7
03/20/01 -2.7
11/12/97 -2.1
12/19/00 -2.0
02/05/97 -1.9
08/13/02 -1.8
08/21/01 -1.7
09/24/02 -1.6
01/28/04 -1.1



The bond move the last three days is down three full handles from 117 3/4 to 114 3/4. That's the greatest three day move down before a FOMC meeting in history, I believe (my data cover only the last 94 FOMC meetings from 1996). The closest contender was March 17, 2003 where a decline of 2 3/4 occurred. The bond market must not like price controls.

Anatoly Veltman writes:

Both the up-swing (to 12/4 118′22 high) and the down-swing (to 12/10 114′12 low) were on reduced Open Interest, allowing me to play reversals with greater impunity. O.I. tipped covering: it meant that fewer stop-loss orders have remained resting; a factor that substantially cushioned risk for the near-term value-picker. More interesting, both reversal trades were obvious to me in real-time; and the slight O.I. data lag was not hindrance.

The top was a double-top in price of the 10-year (and a secondary top in all Treasuries, from 2-30year); while O.I. displayed Bearish Divergence.

The ensuing chart decline was symmetrical to November's chart rally (the chart “symmetry play” piqued Victor’s interest on 12/4), and pointed to low-volume, thin chart space all the way down into the 114 handle. At the minute 114′12 traded, for 10 consecutive futures sessions O.I. cumulatively slid over 100,000 lots (10% of the exchange total)!

So, .25 on Fed Funds and .50 at the discount window — or any other combination, plus “all-important” Paragraph Three FOMC mumbling — the trade here is technically solid. My analysis is performed discretionarily in real-time; I suspect 21-century black boxes execute these trades quite ahead of me, unfortunately!

Carlos Nikros adds:

I suspect that lots of fixed income securities just became substantially longer in duration last week, as well, necessitating the usual hedging and pruning.

Andrea Ravano observes:

I think the fear factor that pushed bond prices to their limit is fading. If we consider yield moves instead of prices we get the following picture :

Mat./1week ago/Yesterday/Difference

2 Yr. 2.87 3.20 +0.33

5 Yr. 3.28 3.60 +0.32

10Yr 3.93 4.18 +0.25

The data along with the collapsing spread between Tips and vanilla Treasuries points to a "normalisation" of the bond market to pre-subprime panic levels.Which, of course, does not mean one should not be worrying about inflation in the long run, but short term wise, the move in bonds might be explained with year end book squaring and the end of the worst in the sell off of the stock autumn bear market move.

Alan Millhone remarks:

I wonder how many other UBS types will fall victim to the subprime debacle before the dust finally settles? May be a long and cold winter for builders/investors/developers. Investors look to the Feds to step in to stabilize. Fed intervention to me looks like a form of price controls, much like price freezes and rationing in the Second World War.

Victor Niederhoffer offers a postscript:

One can now see what the purpose of the four point drop in bonds in the previous three days before the Open Market meeting was: to vigilantly control the Governors from overly inflationary activities.


Barry Gitarts adds:

The equity sell-off today at 2:15 was almost expected to happen as it did when the Fed cut rates last time. What's unexpected was that the market kept going down and did not stage a turnaround at 2:30 - 3:00 pm. Maybe it became too obvious and the daytraders with their one hole located at 4:00 pm got cornered. Maybe the market will resume its upward course tomorrow after feeding the big fish today.



KudlowLast evening, I had the pleasure of tuning in Kudlow and Company. I was reminded very quickly why this is the best financial news show. Unlike the wags you see on other networks, such as Neil Cavuto, Brenda Buttner and friends on Bulls and Bears, Lou Dobbs and the other talking heads, the producers at Kudlow and Company really give you your money's worth by displaying some of the top people in business, investments, politics and finance. Moreover, they are unfettered and are free to present their thoughts and opinions and it is up to the viewer to decide what is relevant to his own financial future.

Last evening, Bill Seidman was on to discuss the current financial crisis in real estate and its relationship to the S&L crisis and the commercial real estate crisis in the 90s that he presided over. In addition, Fritz Meyer of AIM Investments, Mark Skousen and Gary Shilling were on board for a investment roundtable discussion on the outlook for the economy and the Federal Reserve decision on interest rates. Equal time was given to Robert Reich and the Wall Street Journal's Steve Moore to debate the likelihood of a recession and Reich was his usual argumentative self.

Larry Kudlow is a devout Republican, outspoken supporter of the Republican candidates and staunch conservative but it does not prevent him from offering equal time to the other side of the aisle to present its case and views. It is a tough, hard-hitting one hour and one that a serious investors should attend regularly. It can be seen on CNBC at 7PM est.



Jeff DavisFrom "The Rise and Fall of the Confederate Government" by Jefferson Davis:

The issues of Treasury notes were increased until, in December, 1863, the currency in circulation amounted to more than six hundred million dollars, or more than threefold the amount required by the business of the country. The evil effects of this financial condition were but too apparent. In addition to the difficulty presented to the necessary operations of the government, and the efficient conduct of the war, the most deplorable of all its results was, undoubtedly, its corrupting influence on the morals of the people. The possession of large amounts of treasury notes led to a desire for investment; with a constantly increasing volume of currency, there was an equally constant increase of price in all objects of investment. This effect stimulated purchase by the apparent certainty of profit, and a spirit of speculation was thus fostered, which had so debasing an influence and such ruinous consequences that it became our highest duty to remove the cause by prompt and stringent measures.



StolichnayaAfter 16 years of almost no contact with my Russian high school and college friends I stumbled on, a website very similar to I reconnected with a lot of childhood friends. It was a very nostalgic and quite depressing experience as I found out two of my close childhood friends and five classmates died from drinking — most were in their mid-twenties. The story is the same — drinking a couple days a week leads to drinking every day, get fired, wife leaves, no source of income, sell apartment, money doesn't last long, start drinking technical alcohol (used to clean engines), death from heart shutting down. What made this even worse: I remember most all of those friends when they were only teenagers. My sister-in-law's cousins, one is 33 another 41, drinking heavily, ditched by their wives, sold their apartment — well, you know what is coming. I don't know if living in a city where winter lasts eight months a year has anything to do with it, or just simply Russia being Russia. It is probably that latter. Life expectancy for men is 59; for women is 72. I bet drinking accounts for a very large portion of this gap between men and women. I remember vaguely when I was very young that almost all of my neighbors were drinking. One would get drunk and beat up his wife, so she would hide in our apartment to avoid the beating. Another would pay a regular weekly visit asking for money or alcohol. It always upset me when Americans, after finding out I am Russian, would start talking to me about Russian vodka. Well, I guess Russia deserves that reputation.



I get ideas for reading from many sources, including Daily Spec, as well as "Best of" and other recommended lists.  Below is a collection of links to various "Best Books of 2007" lists and similar links for children's and young adults' books.

For adults: 

Financial Times
The Economist
NYT Sunday Book Review: 100 Notable
NYT Sunday Book Review: Top Ten
Publisher's Weekly
New York 'Zine: The Best Novels You've Never Read
St Louis Dispatch
Kansas City Star
Boston Globe
Washington Post
Amazon UK
American Booksellers Assoc
Sydney Morning Herald
Sunday Times
Natl Books Critics Circle Rec List
Village Voice

For kids and teens:

School Library Journal
Association for Library Service to Children
Young Adult Library Services Association
Kirkus Children (6meg pdf)
Kirkus Young Adult (4meg pdf)
Miami Herald



ClockThe recent loss of Master checker player Gene Lindsay could be a wake up call to get our affairs in order. Mr. Lindsay left a handwritten will that is now being challenged to some degree in a Tennessee court. Gene loved checkers and has left 50% of his estate to the American Checker Federation, 10% to establish a permanent International Fund, 10% to the WCDF (World Checker Draughts Federation), 10% to the Tennessee Checker Association and 20% to a young lady Gene raised. He never married and had no children.

Gene had 35 or so apartments and other assets and those will be liquidated and then the money pooled and distributed. I had my local attorney draft a pro se paper that the ACF will file to protect our interests. I may have to hire a Tennessee attorney (I live in southern Ohio) and I may have to personally appear in Court to watch over our 50%. Some of Gene's language is being questioned. 

A person can never have things in perfect order, but our best effort needs to be made to reduce later problems for family that is left to defend questions like I described in Gene's will. Just a reminder that all of us are mortal here on Earth and all of our days are numbered. I do my best to try and do some good in some way every day.



 I remember when Philip Carret appeared on "Wall Street Week" at age 98. Louis Rukeyser asked him in what he invested at such an advanced age. Mr. Carret replied that he was 100% invested in stocks. But, Mr. Rukeyser asked, what about the common advice to subtract one's age from 100 to determine the percentage of one's assets to invest in stocks? Hogwash, replied Mr. Carret. Stocks provide the best return on investment.

I recently read Mr. Carret's 1931 book, "The Art of Speculation". I know this is not a new book for this website. Victor Niederhoffer wrote the foreword for the Wiley Investment Classics version. However, I will note a few things from the book that I found instructive.

Definition of speculation (from Webster's dictionary): "the act or practice of buying land or goods, etc., in expectation of the rise of price and of selling them at an advance". Mr. Carret felt the use of the word "expectation" instead of "hope" was very important. Speculation is based on an intelligent expectation of a change in price. A trade based merely on hope is not speculation, but gambling.

Philip CarretCommon stockholders are last in line to receive assets of a bankrupt company. Thus they take more risk than bondholders or preferred stockholders. Beginning with this fact of capital structure, Mr. Carret shows why common shareholders must also, on average, receive higher returns than bondholders or preferred stockholders. Bondholders and preferred stockholders have fixed claims on a company's assets and cash flow. When a company grows, all the benefits of the growth go to common stockholders. It works like leverage. Common stockholders' equity may be only 50% of the assets of the company, but 100% of the benefit of profit growth accrues to common stockholders.

Using similar logic, Mr. Carret shows that non-dividend-paying companies should on average provide superior returns to dividend-paying companies. He presents data from the 1920s showing that a sample of non-dividend-paying stocks indeed had superior returns to a sample of dividend-paying companies.

Seeing the constant fluctuations in stock prices, many people think it would be easy to make profits buying at price A and selling at price B. However, most people fail at speculation because:

- Good buying and selling points are obvious after the fact, but hard to forecast

- Those who trade frequently to catch small fluctuations are killed by vig

- Most traders tend to sell winners quickly, but stubbornly hang on to losers, eventually suffering huge losses "Having no sounder reason for his purchase than a tip the average trader has little courage and is easily frightened into taking small profits. On the other hand, he is stubborn enough to feel that any stock he has purchased must at least be worth what he paid for it" (p.66).

"For practical purposes the occurrence of ripples and waves in the price movement is unpredictable. To attempt to trade on such movements is mere gambling with the odds against the trader by a considerable margin. It is astounding that thousands of otherwise intelligent persons persist in trying to make money in this way" (p.69).

Mr. Carret believed the longer-term fluctuations related to the business cycle were much easier to forecast than short-term movements. He believed a major cause of the business cycle was the "inability of the majority of mankind to maintain a regimen of hard work in the face of easy living conditions" (p. 71). He suggested that one could use economic indicators in a contrary fashion to forecast stock price movements. Statistics showing a weak economy were bullish; those showing a strong economy were bearish. He found blast furnace capacity utilization to have some value as a predictive indicator.

"Borrowed money is the lifeblood of speculation" (p. 101). Interest rates greatly influence the direction of stock prices. "A bull market undermines itself" (p. 119) as prosperity and increased borrowing for speculation drive up interest rates. One of Mr. Carret's specific methods might be difficult to replicate today. He suggested borrowing money when interest rates were low to buy stocks with higher dividend yields than the interest rate on the borrowed funds. A stock bought in this fashion would "carry itself" and have a high probability of moving higher. With today's much lower dividend yields, such stocks are probably difficult to find today.

Bernard BaruchA third important factor in forecasting the direction of stock prices is sentiment. By 1927, both economic indicators and interest rates warned of trouble ahead, and many Wall Street professionals turned bearish. However, public enthusiasm for stocks overwhelmed all other influences and carried prices rapidly higher. In 1929, with the Dow Jones Industrial Average 100% higher than in 1927, economist Paul Clay said that the bull market would continue as long as the public had money and courage to continue buying stocks. Mr. Clay wished for an "index of courage" to foretell the breaking point.

Mr. Carret said that a speculator should consider that he is a business manager of a fund and use business principles to manage the fund well. Mr. Carret's "twelve commandments for speculators" were:

(1) Never hold fewer than ten different securities covering five different fields of business.

(2) At least once in six months reappraise every security held.

(3) Keep at least half the total fund in income-producing securities.

(4) Consider yield the least important factor in analyzing any stock.

(5) Be quick to take losses, reluctant to take profits.

(6) Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available.

(7) Avoid "inside information" as you would the plague.

(8) Seek facts diligently, advice never.

(9) Ignore mechanical formulas [such as price-earnings ratios] for valuing securities.

(10) When stocks are high, money rates rising, business prosperous, at least half a given fund should be placed in short-term bonds.

(11) Borrow money sparingly and only when stocks are low, money rates low or falling, and business depressed.

(12) Set aside a moderate proportion of available funds for the purchase of long-term options on stocks of promising companies whenever available.



 Whenever I reread Paul Dickson's The Hidden Language of Baseball, I am struck by the many layers of the game of baseball, the hidden, inner, and scientific aspects of the game, that most fans are completely unaware of, that are comparable to the hidden, and inner aspects of markets that most of us sense but take account of not nearly enough in our play. I'll try to remedy that in part with some numbers relating to these hidden signals.

Let's start with the fact (all factoids in the hidden language of baseball are taken from Dickson) that in a typical baseball game thousands of signals are exchanged, from catcher to pitcher, catcher to fielder, coaches to baserunners, managers to coaches, and umpire to umpire (in the event that they need backup from an unruly player). Like signals in other fields, the repertoire of signals must be informative enough to cover all situations, but simple enough to understand. Also, they must be hidden from the opposing team that is attempting to steal your signals.

Signaling in baseball emerged from Civil War origins, from the use of signaling in war to describe the enemy positions and movements. Signaling in war reached a temporary plateau in 1855 when the British Board of Trade developed a set of 18 flags that could display 70,000 visual signals. In the Patrick O'Brian series, Jack Aubrey is a master of using these flags to deceive the enemy as to his nationality, his destination, and his intentions. He is also adept at stealing enemy signal books so that he can engage the enemy without forewarning.

Deception in the use of signs is key. The typical third base coach uses a set of decoys to hide his signs, an indicator sign to tell the recipient when the signs begin for real, and hot signs like the movement of a cap that are actually the ones to follow. At the same time, many other players and coaches are pretending to signal so that the opposing side can't tell who's signaling. The signals often change with the positions of the opposing team on base, the score, the player who is receiving them, as well as the stage of the game. "Sometimes is looks like five guys trying to bring a jet onto an aircraft carrier. Some are signs. Some are decoys, and its fascinating to sit there and watch the stuff flying all over the place."

A constant problem in signaling in baseball and markets is the case of the traded player. The Phillies and the Pirates in the 1890s had developed telegraphs with hidden wires under the ground to communicate, as well as telescopes and hidden slots in the scoreboard to signal against opposing teams. But when one of their own was traded, they both agreed that at least against the other team, they would use the signals, and the players involved in the transmission were prominently seated on the bench as hostages.

The analogy to what happens when one of the major brokerages develops an elaborate system of signaling what their recommendations or positioning or latest word from the Federals or the Centrals is, and how they can keep this set of signals secret when one of their own retires or leaves the firm, is clear.

I have always felt that the idea that there is a plunge protection team is invalid because the traded retired officials when they enter the revolving door into Wall Street or write their book would spill the beans. The baseball players have so many signals and they are changing them so often that that they are able to overcome this problem or as above, the quid prop quo, not to steal from each other, but how is this handled on Wall Street? One protection of course is the ethical and legal storm that would be realized when the information was divulged.

I have previously tried to shed some light on this subject by looking at the hidden signals of markets. Is there a movement in one market in one time, that is the key to what's going to happen. Is it volume that tells the story, or the lead of some Central Bank like New Zealand or Malaysia that flashes the hot signal. I have always believe that the movements of Israel have predetermined what's going to happen in the US. However, the time differential, and the necessities of taking account of the Fischer effect, (delayed pricing, etc.), would make a study of that network, path, or feedback system, a complex undertaking. The best that I was able to get after a preliminary study of that subject was a response from an erudite reader as to the likely explanation ("They read our mail").

Similarly I have felt that the open to close in the Nikkei predicts the movements in the US open to close, but a careful regression analysis of the subject over the past several years, finds that the amount of variation explained is very small.

All this signaling must be differentiated from the forward looking purpose of all markets, where they are trying to move prices over time . Also, the function of markets, the bond and stock vigilantes in foretelling to the authorities what the likely outcome of any attempts to get off the straight and narrow, or neglect the unintended consequences of their actions. Witness for example, the recent action of the stock market after FOMC meetings where it was unhappy with the vigilance of the Fed's awareness of the housing crisis, or the reaction of the bond market in the last two days, down a few points, to the illusory price controls on mortgage rates.

I decided to study the subject directly. Why not take the major economic announcements and see to what extent the news was leaked in the preceding half-hour. Of course, most announcements have a mere disruptive effect on the market participants, unleashing the weak from their positions so that the strong can take them over, as well they should since there are so many seasonal adjustments, and ephemeral, already discounted, and unique factors in each announcement that it couldn't possibly have anything to do with the price of eggs. But there generally is a reaction, and if one knew one or two of these reactions for sure, it would be fat city.

With the many avenues for "leaks" of these signals, I thought it would be worthwhile to see how many of the signals were not captured by interested others in advance

As a start I took the four major announcements in the market since 1999 and looked at the moves in the preceding half hour versus the moves subsequently as follows,

.                       Market moves before and after major announcements.

Announcement         up moves     average move       down moves  average move

Type                 half hour      next hour         half hour        next hour

.                      before         after             before            after

Unemployment         n=59           0.7              n=33                0.6

PPI                  n=49         - 0.6              n=41               -0.5

CPI                  n=49           0.4              n=45                0.0

FOMC                 n=39           0.7              n=28               -0.9

Since the standard deviation of the moves in the subsequent hour is of the order of 7 points, about 1/2 %, theses moves of less than 1 point, hardly the bid asked spread, in all cases less than 1 standard error away from expectation indicate that there is no systematic tendency for the signals of major economic announcements to be acted upon in a systematic and market altering impact before and after the announcement.

This is a preliminary study with many gaps, but it captures the gist of a fruitful line of inquiry, I believe, and I'd be interested in your augmentative ideas.

Phil McDonnell adds:

Baseball has sometimes been described as an individual sport and not a team sport. Certainly the batter stands at the plate all alone. Sometimes he is the hero with a single swing of the bat. Sometimes he is the goat, bested by a final deceptive pitch. However the idea that baseball is an individual sport is a misperception that ignores the large number of subtle signals that are communicated back and forth to allow the team to act in a coordinated fashion.

For example the batter looks down the line to the third base coach before every pitch. If there is no one on the third base coach usually will only give a 'take' signal or 'swing away' sign. Often a team will employ a conscious strategy to take the first few pitches until one of them is a strike. Sometimes this is motivated by an effort to tire out the starting pitcher. This strategy is more often employed if the starter is a particularly strong pitcher or if the bull pen is known to be weak.

Statistically speaking it is well known that a batter has a higher probability of getting a hit on later pitches than if he swings at the first one. Thus a take strategy forces the batter to see more pitches. He can get a better idea of the pitcher's release point, fastball speed and ball movement. It all starts with a simple take sign.

Most people are aware that the catcher and pitcher have signs. But few realize that at higher levels of baseball these signs are passed on to the fielders as well. Depending on the situation the pitcher may want to throw a pitch that increases the chances of a double play or a fly ball. If a runner is on first base with less than 2 outs, the pitcher would very much like a hard hit ground ball to the left side of the infield. He needs the grounder to be hard hit because it will get to his fielder faster saving valuable split seconds. The fractions of a second saved can make the difference between a double play and only one out. One of the best pitches for this is a sinker or two seam fastball.

The science behind this is that if the pitcher throws the ball along the axis where the ball has two seams it will create less rotational drag. The other way to throw a fastball is along the four seam axis where four seams are rotated at the face of the ball. One can see this by looking at the seams on a baseball or even a tennis ball which has the same seam pattern. The four seam ball will tend to rise (relatively) because of the added rotational 'lift' from the increased seam surface. In contrast the two seam fastball will seem to sink. If thrown low in the strike zone the two seam fastball is an excellent double play ball. This information is usually communicated to the fielders so they can position themselves for the hoped for double play ball.

To be sure the pitcher is throwing at a significant downward angle from a mound which is one to two feet high. Most pitchers release the ball from a raised arm. If the ball is targeted for low in the strike zone it must drop about 6 or 7 feet over the distance of about 60 feet. During that time gravity is also at work. Therefore we can safely say that pitches arrive at the plate at a significant downward angle. But the rising four seam fastball does get some lift from the spin. This lift causes it to veer upward from its projected downward path. But in the end a rising fastball is still traveling at a downward angle.

In particular the second baseman and short stop will have their own secondary communication regarding who will cover second base in the event of a steal. If they anticipate a ball to be hit to the left side of the infield (toward the shortstop) then the second baseman will cover and the short stop will back up the play. Factors they consider are whether the batter is a lefty or righty, whether the pitch is fast or slow and whether the pitch will be on the inside or outside of the strike zone.

Another use of signals is when the pitcher is throwing a 'soft' pitch. This could be a curve or a change up. In either case the batter would be expected to swing a bit early on the pitch. If he is right handed he will tend to hit more toward left field than usual. The fielders are signaled in advance that this pitch is coming. However they do not physically move in that direction before the pitch, so as not to tip off the opposing team. Instead outfielders use the information to decide which foot to use on their initial drop step as the batter swings.

In markets there are often deceptive rallies and declines just before a pending news announcement. One pattern is that there may be a sudden disruptive move just before the release of a Fed announcement. The idea is to create the impression that someone leaked the decision just at the last minute before the announcement. Usually this can only be effected by a large trading desk that can act in concert within a few minutes. When they start the move by say, buying in unison, a few minutes later naive traders pile on thinking they have picked off another trading team's signals. Meanwhile the original trading desk dumps their stock for a quick profit at the expense of the traders who have fallen for the decoy signals.

David Whitesel wonders:

When you state there is no systematic tendency for the signals of major economic announcements to be acted upon in a market-altering, impactful way before and after the announcement, I thought: why should there be? You chose the specific indicators, so I ask: why would the market show a monolithic response to this particular set? The market is the sum of its parts. Why wouldn't any signal from this class chosen apply to only a class of trade specialists or range of products which are dependent upon the gross participation of speculators? Whereas, stock specific news is routinely faded, which should be characterized as entirely systemic.



Victor NiederhofferVictor Niederhoffer, the world squash king, and I, the national paddleball champ, first locked eyes at the 1973 St. Louis national racquetball tournament. He had jetted first class and I had ridden a bicycle from San Diego. He, in one black and a white sneaker, and I, in one red and a blue one, stepped back and then gave no quarter. The speculator and hobo over the next twenty-five years converged on a sports, business and intellectual relationship that flew to a head in the New Yorker's October 15, 2007 profile, The Blow-Up Artist: Can Victor Niederhoffer Survive Another Market Crisis?

I wrote Niederhoffer that this profile is a mistitled masterpiece, and he is the quintessential Manhattan financier and court speculator. He replied that I am a survivor in a desert hole and thanks for popping out. What happened in the quarter-century between our sneakers summit and the present abodes? From that St. Louis meeting, Victor, the son of a kindergarten teacher and New York cop, returned to New York to speculate and win hundreds of squash and racquetball tournaments. I bicycled to Michigan for a ten year pro racquetball career while wining five national paddleball titles. I taught both sports across the country, frequently hoboing freight trains or wheeling the Interstates in a '74 Chevy van with a 7' stuffed rabbit named Fillmore Hare riding shotgun. I scoured the nation between clinics for intellects to improve my own, and Fillmore waved them down coast-to-coast with an invisible fishline on one arm.

PaddleThrough the 1970s and '80s, we often laid over in the Big Apple with Niederhoffer, where at each stroke of midnight we would pad the sidewalks in our old shoes to the Manhattan Squash Club to clash rackets in pure or hybrid games using racquetball, paddleball or squash or tennis rackets, bleach bottles, wads of $100 bills, or what have you, with miscellaneous balls. These were my hardest fought challenges, witnessed only by a drunk janitor over the decades who will testify that the matches were split even. As Victor prospered into the 1990s in commodities and merger acquisitions, I grew eccentric and branched around the globe. He climbed to the America's #1 speculator for three straight years, and I peak adventured in 100 countries with as many near deaths. He made or lost a million dollars daily, and I learned or forgot a thousand survival tips. 'Where does that put us?' Fillmore Hare seemed to smirk, and we were on the road again.

On one stopover, we co-hypothesized that a sports champion brings to business the vital skills of organization, strategy, drive, hunger for profit, and honesty for success. To test it, Vic hired me for diverse business ventures throughout the USA, Europe and Southeast Asia. I sought cancer cures, invested in a Hollywood movie, dethroned a spiritualist advisor to Wall Street when she couldn't bend my fork during a séance, and bid and bought thousands of items at myriad book, painting, and antique auctions. But my most thrilling project was as 'The Millionaire', to seed global capitalism, that ended in my getting stabbed in Venezuela. A golden summer ensued, the best of my life, after I limped back to the USA from that swing through Africa and South America. I recall landing one night bedraggled and penniless on Victor's marble doorstep deep in the Connecticut woods. The huge oak door creaked open, and he stood framed like a specter. 'I've been running from danger for eighteen months from hippos, rhinos, gators, a gorillas, thugs, lions, snowstorms, and rip tides in pursuit of intelligence, just like the good old days,' I rasped. He tapped my hat and invited, 'Stay as long as you like. I have work to do.'

Over the next five months of 1996, with a book in one hand and a paddle in the other and a computer screen before my eyes during timeouts, I regained balance. The manor library was featured as 'New England's best', and I knew every title from buying and stocking the shelves in earlier times. There I started writing an adventure autobiography that moved to a basement stairwell for privacy. The busy house sports facilities included outdoor paddleball, racquetball and tennis, volleyball, swimming pool, miles of hiking trails, plus an indoor squash court, small weight room, and a quarter-mile of hallways and stairs on three levels to jog.

There were extreme racquet fests. Niederhoffer is of the odd breed of player who looks always like he stumbles exactly into position, and continually appears to be losing until the match is over. Though he never played indoor paddleball, my favorite sport, he is by my historic tally the third ranked player, such is his overall prowess. It began at age three when his dad threw him with a racquet into a swimming pool and, as it was empty, Vic to this day is a poor swimmer but the four walls and sloped floor rolled the ball in the deep end back to him again and again.

Victor's fortes are mine: Strategy, concentration and execution. There is no room for mental error. Court sports are filled with cold-blooded brawlers and thinkers. The former rise to state champs but can't climb through the hour glass of concentration to a national level because they slip on mental errors. These are what Ben Franklin called errata, deviations from shot selection due to psyching out or fatigue. The cerebral player's plan of limiting mental errors is much about delayed gratification that the probability of shot selection will eventually win match point. It's a ball-buster to play Niederhoffer, who makes on average one mental error per day. He is the unchanging control and his opponent the variable, so the outcome of the experiment depends on how well you stack up. I concentrated so hard in some of these sports contests that afterward I might sink into a library cushion chair next to a wooden Indian pointing overhead and get lost in time.

PorcellianMy host was also exacting if unrelenting up in the trading room. That summer he never asked the series of interns — chipper Ivy League grads with Econ degrees and varsity letters — to match his intense trading hours, but some tried. Three fell pasted to the floor by their own efforts. As the ambulance driver grew more familiar with the route from house to hospital, Vic magnanimously picked up the tabs. One day, I buckled down to equal his circadian rhythm for one week of work and racquets, work and rackets, with sporadic catnaps. Three days later I attained an insight of impending psychosis, and backed off.

I lack Victor's passion for money as a measure of success, except as a means of getting what I want or where I want to go in the world. I get a sensory thrill out of numbers, juggling them, and first plunged into the technical analysis of stock movements during veterinary school where, for six month's an associate and I formed a partnership to advise a handful of investors, lectured to colleges on technical analysis, and made one memorable trip to the Big Board in New York about a year before meeting Niederhoffer.

Victor believes that over short periods — hours or days — rare but predictable patterns can be exploited. He reads printouts from a computer bank spanning our lives like classical music to anticipate a bag, or a crash to sell short. Some summer nights, with the only light burning in the trading room, I would get a fax in the basement as I typed about cannibals, or hear a whisper over my shoulder, 'Come upstairs for a trade.' We scaled three flights to the white trading room jammed with screens, phones and books where the instant he shouted 'Order!' I called it in. Seconds, minutes or hours later, if the great quantifier was right, I returned to the basement to write and he to the bathroom announcing, 'It's time to perform log rhythms until the next window of opportunity.'

WatsonThere were profitable timeouts during the summer routine. Through Vic's good offices I met stellar people who contributed to my gathering data on intelligence. I lost in chess to US Open champ Art Bisguier who once beat Bobby Fischer, lost in checkers to seven-times world champ Tom Wiswell, lost at table tennis to US open champion Marty Reisman, lost a genetics argument to DNA co-discoverer Jim Watson, and was mauled in a philosophical chat with George Soros. At weekend gatherings called brainstorms in the upstairs music room, I frequently saturated early and descended my stairwell to type notes while the intellectuality raged above. Sometimes I heard a cry, 'Help, I'm lost!' and dashed to sketch a map back up to the party. That house was so enormous that the cook faxed Victor in the trading room to dinner and paged the two dogs, Ralph and Mia, by intercom. Two normal homes could fit into the attic, and a phone repairman proclaimed the circuit board to be as large as a city block's.

ButtThe summer stretched into a full year of paddles, parties and fleshing out (together with Niederhoffer) an award winning list of Low Life Indicators grounded on the belief that the wafts from the streets predict and sway the business decisions in skyscrapers. Economic pointers such as the length of discarded cigarette butts, price of prostitutes, freight trains length, billboard advertisements and classified ads won acclaim in Barron's, NY Times and CNN. Meanwhile, we continued to pass like ghosts in the darkened hallways, he to the piano, I to swim, or to the midnight courts for an hour of 'moth ball' in our mismatched shoes. One night he whispered fatefully, 'The biggest fish swim deepest.' That launched a fact finding trip that ten years later ushered in last month's New Yorker profile.

It was Fall, 1996 that I flew from JFK to the first of thirteen emerging markets including Egypt, Sri Lanka, India, Philippines, Korea, Turkey and Thailand. During the next two months, I visited their national stock exchanges, brokers, banks, and government dignitaries, and then typed and overnighted reports on the Low Life Indicators and conventional indices for potential investments before flying on to the next country. The Turkey report raked millions daily for weeks, but my final stop in Thailand sadly precipitated Niederhoffer's 'Black Day' of October 27, 1997. Victor is reported to have lost his entire $130 million portfolio in the Thai stock market crash.

Ironically, a week before this 'first fall', I had returned from the world swing, and stepped over the same marble doorstep that I'd entered a year before, and walked 500 miles on backwoods trails to the Canadian border. No portent of the fall spurred me; it was just time to delve into nature. Two years later, after also hiking the lengths of the Florida swamps, Colorado Rockies, Baja beaches, and Death Valley, I learned about the Thai disaster, and by this time Vic had recovered financially and won back the press. We met next in 2003, when I circled the nation as the Racquetball & Paddleball Legends historian that paused in New York. I grabbed a cab to the manor, clambered weathered stairs to the trading room, and surprised Victor anew by walking by where he traded to sit at a computer ten feet away. 'Hi, Vic. How are you?' I emailed. 'Stay as long as you like,' he wrote back, 'I'm busy.'

In 2004, he founded Daily Speculations, dedicated to 'The scientific method, free markets, deflating ballyhoo, creating value, and laughter,' and graciously included my mounting adventures. I had paddled a hand-hewn canoe through the Amazon to a Brazilian outpost where I was medevac'ed in a malaria coma by military copter to Iquitos, Peru.

No CountryOn recovering through the rainy season, I returned to the USA and bought ten desert acres at the trisection of California, Arizona and Mexico. Three years ago, I dug a hole and now I live beneath the scorching heat. My burrow is 10'x10'x10' into which I slid a camper shell and covered it with dirt. Ten steps down, the air cools forty degrees until the last, where I step over a sidewinder named Sir, to enter the lair. I sit in a captain's chair muttering incantations to Captain Nemo before a laptop computer juiced by topside solar panels, and surrounded by sagging shelves of the half-ton autobiography begun ten years ago in Connecticut. I look up and view my tunnel neighbors peering through a screen wall of 1/4'' mesh. I see lizards, snakes, tarantulas, mice, toads, and a Trader Rat named BandAid whose mother a year ago swapped my reading glasses for her newborn pup that I trained to retrieve gold coins in nearby ghost towns. I leave the animals and digs on monthly supply runs to Blythe, California, an hour and half away.

In September '07, I read in the biweekly rag that the high school needed substitute teachers, and moseyed into the district office to be hired on sight. What a shock, going from rodent to teacher! I got flush and took a motel room where each morning I ride a recumbent bicycle to the classrooms to enrich the kids with studies from beyond. The motel offers an exterminator Labrador dog named Jan who goes room to room snatching roaches and when stuffed plops on my bed to watch Animal Planet. A few weeks ago, I posted 'Do not spray roaches' on my door, only to awaken the next morning and find someone had written, 'Call Stanley at the New Yorker'.

A mystery sprang. Few in this oasis know of New York, much less the publication, and the Hindu manager speaks hardly a lick of English and could say no more, so I searched the Internet to determine that the New Yorker was doing a profile on my old shoe-mate Vic Niederhoffer. I sent out a shot in the dark email, 'Who wants another wonderful quote on you?' Vic answered, "The New Yorker wishes to know what insect drove you blind before the '96 Thai visit." He put me in touch with the fact checker, Scott Stanton, who called me during a snack break when I was surrounded by screaming school kids. 'It was a plant, not an insect, and that wasn't why the Niederhoffer empire collapsed,' I hollered. The fact finder was buoyant at having tracked down a man who lives in a hole two miles from the center target of the second largest bombing range in the world willing to take partial credit for the Blow-up Artist's first detonation. 'I was 20-20 vision by the time I hit Bangkok and stand by my recommendation, despite the outcome. That Thailand visit was the best bet as a mid-nineties emerging market.'

John CassidyStaton declared that Niederhoffer had just suffered a second detonation, and hung up. On October 15, 2007, the New Yorker published 'The Blow-Up Artist', a seven-page profile by John Cassidy that's available online. I don't read such, but when the National Paddleball Newsletter with a circulation of seventy-five asked me to write a follow-up about the speculator I had once claimed was the match of the hobo on court, I acquiesced. I was gratified to read of Niederhoffer's personal evolution in the four years since we met, and felt the honest story evoked Victor's eccentricities and individuality. It included, 'Toward the end of 1996, another profitable year for him, Niederhoffer decided that he wanted to invest in Southeast Asia, which was widely seen as a growing market. He dispatched an old friend, Steven (Bo) Keely, to the region. Keely, a veterinarian who spent six months of the year living in the California desert without a telephone or electric power, had trekked in dozens of countries. On one trip, while paddling down the Amazon, he had contracted malaria, briefly gone blind, and been comatose for a week. Keely believed that assessing a developing country's economic prospects involved not only meeting with the C.E.O.s of leading companies but studying the lengths of discarded cigarettes-the theory being that the wealthier people are, the longer their butts-and the state of the brothels. After a couple of months in Asia, he reported to Niederhoffer that the brothels in Bangkok had recently become much cleaner and safer, and that Thailand was an excellent place to invest. During the previous decade, the Thai economy had grown at an annual rate of almost ten per cent; its interest rates were among the lowest of any country in the region; and its stocks were cheap because they had fallen sharply earlier in the year.'

I continued to read that Niederhoffer had managed to retain some of his assets after his collapse. He mortgaged the Connecticut house, sold a collection of trophy and presentation silver and some of the rare books that I had stocked which enabled him to pay off his creditors. He reconsidered his investment approach and retooled his pattern-recognition software, and six months later started trading again. He shone, and in 2002 initiated Matador, an offshore hedge fund. In April, 2006, he attended a dinner at the St. Regis Hotel, where the hedge-fund industry awarded him the top manager in the commodity-fund category. However, then the second fall. In September, 2007, Niederhoffer was forced to close his flagship, Matador, when many contingencies converged to produce an unanticipated volatility that the company wasn't prepared for. Victor once said, 'America forgives you once, but not twice.' It was like making two mental errors in a lifetime, and now we shall see the steel he's made of. My story is of our lives, and everyone's, of seeking wealth by personal definition while respecting others' choices. Now we walk divergent paths on opposite sides of the country with parallel minds and the same damn shoes.



OpenI spent the last year and a half opening up a business in Florida and I sold it this week to an individual who happened to be looking for the exact same venture. Thankfully, a savior, as the business was foundering and he was a bright star in an otherwise cloudy night.

I learned a great deal from my undertaking as it has been an extremely difficult and arduous journey. Anyone who has opened a business can appreciate the trials and travails. Unfortunately, there is no book entitled Opening and Running a Business for Dummies. I can honestly say that it is very similar to the old saw about owning a boat.

The happiest moment in a man's life is buying a boat and the second happiest moment is selling it.

I will list some points that are critical in understanding opening and then running a business.

Understand completely the business you are going to run. Do your homework not once, not twice, but continuously. Learn everything you possibly can about the business and do not rely exclusively on advice from outsiders. In short, be a complete expert in the critical aspects of the business. Do not expect transfer of knowledge to take place. Don't ever expect those on the outside to help you. They have their own problems.

Love the business you are opening. If you are not prepared to be 100% in love with it, it will not love you back. If you cannot laugh and enjoy the journey, it will soon consume and destroy you.

Understand the business as it relates to the economy and the target market you are looking to attract. For example, if it is in retail or entertainment be prepared for the changing tastes of the public. What will you be left with if the public leaves you? Or what will you have if not enough of the public embraces your business? Don't assume that just because you ate in a restaurant, you know how to own and run one. Underestimate, don't overestimate, your particular skills. You are not as smart as you think you are.

Do not overestimate how the public will view the business. In 99% of cases, you need the buying public far more than they need you.

Realize that competition will be fierce for the dollars you are seeking to maintain your business. If the model makes sense then accept the fact that someone else is either doing it or planning to do it. And they will do it in your backyard sooner or later. You will feel at times that a pack of wolves has descended upon you and are tearing at you from every conceivable angle.

Have an inner circle of advisers you can rely on.

I recommend an attorney and an accountant as business partners and someone with experience in banking and finance. Have a team in place and make sure that they are all committed to the success of the business. There is nothing more valuable than an attorney as a business partner. It is much less expensive to have an attorney as a partner than on retainer. Plus he will do the work for the business ahead of other work that he has to do. For this, there is no adequate substitute.

I remember a stockbroker who invested in opening a bank. His business partners were an attorney, a banker, a doctor, a builder/contractor, a real estate mogul, a politician, an accountant and some other well heeled investors.

There may be 50 ways to mess up a business. If you anticipate a tenth of them you are a genius.

Try to lay the foundation before, not after, you open your doors.

Be prepared to be married to the business for the complete tenure. Be very careful as to whom you marry, and remember, it is much easier to get married than it is to get divorced. And a lot less expensive.

You will be on call 24/7. If someone decides to get sick, not show up for work, or quit on you on Monday morning, guess what, you just assumed his/her workload. If the toilet backs up then you will suddenly become a plumber. Be ready to give up your hobbies.

You can never be too rich or too well capitalized. You can never have too much money burning a hole in your pocket.

You will underestimate how much money you will need to get started by a lot. And you will underestimate how much working capital you will need. In short, you will soon find that you have underestimated a lot. Be prepared for this brutal lesson. Cash — there is no substitute.

It will probably take much longer for a start-up to get up and running than you anticipated. Be prepared for this sad fact.

Be prepared to lose a lot of friends due to time constraints. As a corollary to this, be sure that you have a solid home foundation and an understanding family. You won't be able to attend all of your children's functions. You have only so much energy and all of it will be needed for the survival of the business. Plus you will need a place to go to de-stress. If you cannot go home then you will be forced to go somewhere else.

Watch your health. You might find yourself neglectful with respect to eating habits and exercise.

Murphy's Law will apply. And it will apply when you least need it to apply. Don't ever ask what else can go wrong because there is always something else.

Respect a business for what it is. Don't expect it to be all fun and games, if it were it would be called vacation and not work!

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