Second consecutive down quarter in SP500. Here are the 18 prior same instances (of UP-DN-DN-next, 1950-), which tests like most everything else lately (except short and hold):UDDQ



Old ShoesI was in Sunday School last week and the church door buzzer sounded. Door was unlocked, but the poor fellow at the door did not know this. I went to the door and found a distressed looking fellow, probably early 30s, shabbily dressed, wearing shoes that were barely on his feet. He carried a plastic bag that likely contained all he owned. His English was extra poor. He told me he needed a pair of shoes. The Salvation Army is not too far from our church and I gave him directions. Looking back I should have taken him there. I asked him if he was hungry and he nodded his head that he was. I gave him some cash, he thanked me and went off towards Sally.
Some will say they would never give anyone a ride anywhere, nor give a person like that money as he should get a job like the rest of us. I used to judge in that way, but don't anymore. I am far from perfect, but have compassion in my heart for those living on the streets. Yes, many suffer because we don't know who is legit and who is scamming. Sometimes you have to step out and take a chance and help someone in need. If I had the money I would establish a pantry/clothing center and a soup kitchen to address the visible increase of street people in my area. Some will call me crazy, that bothers me little. 

Ken Smith adds:

You were right to provide assistance. Not necessary to give a large sum, but give enough that your heart tells you it was right. In Seattle street bums are a nusiance and one never knows whether the money will go for booze or a sandwich. It's easy to get around this. Carry a pocket full of quarters or half-dollars, according to your means, and give to anyone who asks.

I was giving a dollar to a fellow with a territory adjacent to the entrance of a book store. I don't go to that store so often the dollar would break my bank.

Then a substitute was at the site, using the territory on the guy's day off. She and I talked about Toynbee and during the conversation the guy's name who owned the territory came up. Her face flushed red at the mention of it. She told me the fellow had treated her badly and more or less told her to stay off his territory. That was confirmed, as she had spoken to the staff in the store about it, asking them to intervene. Since then I have ignored the guy. Strange that a guy in sad circumstances would not have empathy. You'd think the circumstances would nurture sympathy for a fellow sufferer.



Obama had greater role on liberal survey By KENNETH P. VOGEL | 3/31/08

Late last year, in response to a Politico story about Obama’s answers to the original questionnaire, his aides said he “never saw or approved” the questionnaire… but a Politico examination determined that Obama was actually interviewed about the issues on the questionnaire… and it found that Obama — the day after sitting for the interview — filed an amended version of the questionnaire, which appears to contain Obama’s own handwritten notes added to one answer.

From Austin Powers:

[Returning Austin's personal property after reanimating him.]

Guard: One Swedish-made penis enlarger.
Austin: [to Vanessa] It's not mine.
Guard: One credit card receipt signed by Austin Powers.
Austin: I'm telling ya baby that's not mine.
Guard: One warranty card filled out by Austin Powers.
Austin: I'm telling ya baby that's not mine. Those things aren't my bag, baby.
Guard: One book, "Swedish-made Penis Enlargers And Me, And Those Are My Bag Baby," written by Austin Powers.



The New Orleans Katrina disaster was made worse for many victims by the ineptness of FEMA and premeditated 'foot dragging' in non-payments by insurer State F@rm. They intensifed the suffering. I know a couple personally who live in Petal, MS who had one heck of a time getting settled there with property damage and the same in Gulfport on a condo loss.  It seems to me today that insurance carriers want us to have the best policy known to man in place and pay top premiums, but don't ever turn in a claim for fear of being canceled for using that policy.

N.O. resident Gibbons Burke replies:

Other factors which 'intensified' the suffering after Katrina:

1) Drunk armed bands of looters and miscreants roaming the city shooting at one another, police, rescue workers and ambulance teams working to get boats in to evacuate patients from hospitals. The fact that 'mere anarchy' had been loosed upon that City delayed the response because would-be rescuers had to return to base to get flak jackets and ammunition. A friend who stayed for the storm said it was "like Mardi Gras with guns" - a big party scene. Another had to use lethal force against looters in our neighborhood, and came under fire while in an air boat on the way to rescue an infant from a flooded house in a neighborhood near ours. He turned two would-be looters into a rescue squad and got over 40 people stranded in flooded homes to evacuation points, including our 92-year old neighbor.

2) An indecisive governor Blanco who would not give the President specific authorization to go in with the military to help out. She was playing politics and not wanting to cede control of her state to the Feds.

3) A mayor of the City of New Orleans who was holed up in a Hyatt Hotel room overlooking the Superdome, afraid for his life to go down and provide leadership to his people. Contrast this with Mayor Schiro who was on the scene and very present during and after Hurricane Betsy in 1963.

4) A large proportion of the population displaced by flooding did not own their residence. They suffered no real estate loss, and so there was no basis to recompense them, other than providing housing allowances to stay in hotels and then finally trailers for the next couple of years.

5) A state with a reputation for corrupt practices meant that (in contrast to Mississippi) they had to do handstands (and had to hire an external contractor to handle the distribution of funds at $250mil. to get federal relief money. Contrast this with a functional state government in Mississippi where the federal relief money was obtained and distributed relatively quickly.

My personal experience with State Furm was they dealt with me quite well - fronted me a couple of grand cash two days after the storm; another neighbor down the street also was treated well by State F@rm. The one insurer whose name was consistently mentioned as being difficult to deal with was Allsgre@t.



Most Americans would quickly answer "Of course it is". But hold on; not so fast. My On Line Dictionary says:

debt |det noun • the state of owing money

…something, typically money, that is owed or due : "I paid off my debts"

The US Federal Debt is reported as [Ref:]:$ 9,383,418,000,000 as of last week. Truly a "princely sum". And why is it so high? Most would say it is obvious; it is because of past (and current) government deficit spending. So it seems clear to anyone that we are rapidly increasing our National Debt because we are spending more than we are collecting in taxes and from other sources (fines, import duties, etc.).

At the same time, inflation is hovering around 4.28% (that is as of a month ago, the more recent figure is 4.03%) [Ref: ]

Assuming inflation hovers at around that rate for the year, what effect will it have on us?

It will reduce the "street value" of all assets at about that rate, including the dividends we collect and that cash under your mattress.

But it will also reduce the "street value" of our debts, including our home mortgage and what we owe on our cars, etc.

And that applies equally to our humongous National Debt.

Applying the inflation rate predicted for 2008 (4.28%) to the debt ($ 9.383 trillion) says its street value will be reduced by: $ 401 billion

The US Federal Deficit for 2007 is reported as:  The U.S. federal budget deficit will fall for the third year running, totaling $158 billion in fiscal-year 2007" [Ref: ]

Thus the deficit is projected to be well under half the reduction in the street value of the debt, resulting in a net reduction in the real debt value of :

$401 – $158 or about $240 billion in current dollars.



No CountryWith moves in the first hour of trading on several occasions reaching half the yearly average move in prices, limit moves in the agricultural commodities happening almost one in two days, and volatility in stocks recently showing that a 2% daily change is average, the fifth biggest brokerage saved by just a hair from going under, and Fed infusions to preclude a market meltdown a la 1907 and 1929, it's apparent that the market is no longer for old men.

I've developed a few indicators of this. One being the 90 second, two point move down in Bunds on Friday ("in den Keller gerauscht"), down five points at the time for the week, shifting the decks for $6 billion in value from those with the stops, and the 14 days of 1% or more moves that we've been running each month in stocks, the daily moves in soybeans of limit up or down 10 of the last 20 days, the half-hour declines of 15 points in S&P at the end of the trading day and the frequent air pockets in all markets with 25% of margin moves in 30 minutes.

James Lackey recounts:

For the past month, for all the big up and down opens the total sum of only about 10 points. The problem isn't the open, its the the open to lunch. One day this month the S&P had a glorious comeback to close the day up 48 after a down 15 pointer, but that was a tough 28 point up open pullback to buy. An up open-12:00 had another big up day of 53, sell that big up open of 23 and you missed out. Often the down moves closed down for the day and the ups, up.

If you didn't catch the open or jump on an up open for the open-12:00 you missed many a move. Worse, buy a down open after down days and you get pinned to the mat. That is nothing new for March. How about a double dipsy doodle failure? Friday was miserable.

Janice Dorn writes in:

These movements may be related more to psychological state than to age. Those in their sixth and seventh decades know best when to be in and when to stay away. It looks like there are a lot of novice traders,  likely of every age, suffering from manic-depression, who are unable to hold positions for more than 10-30 minutes, and whose moods vascillate from sheer depression to euphoria in fairly rapid sequence. I don't know how to test this other than the types of mail I get every day from traders. They want "in on the action" in the "hot commodities" and don't have a clue what they are doing.

I got mail from someone the other day who had never traded real money and has to go to the back room of a store owned by his cousin to watch the markets since he does not have high speed connection at home. He told me that "some big firm" in the east wanted to hire him immediately and give him $2 million to trade. This was based on his paper trades that showed that he could make 0.4% a day scalping.

I think that we may also may be dealing with increasing emotionality and overconfidence among traders, for a number of different reasons, including instantaneous worldwide communication. Add to this the relentless and shameless promotion by futures and commodity trading services and firms, and one has a recipe for at least part of what often seems to be an incomprehensible, violent and volatile mess.

Usually when someone says "I've never seen anything like this before," it means he is losing. In the past months, it is becoming clear, in a number of commodity markets, that we really have never seen anything like this before.

Nigel Davies proposes a remedy:

Perhaps the more mature speculator should head for Mauritius where the stock exchange is open from 9am to 12.30pm. This leaves plenty of time for hot tea before the open and it finishes in time for lunch. And then one can have a nice game of checkers in the afternoon.

Alston Mabry comments:

J BardemThe scene that gets shown over and over is where the hit man goes into the gas station and tells the old man to call the flip of the coin. The hit man explains how the coin has been traveling all these years to come here at this moment for this decision. The old man, bewildered, asks, what am I gonna win or lose? Everything.

Which strikes me as an interesting metaphor for what many investors have experienced in the last year or so. That coin is all the things you didn't know about, that were coming your way: the mortgage derivatives, the borrowed money, the margin calls, the collapse in home prices, the volatility, the troubles at Bear. One day a guy walks in the door and says, "Call it."

Gregory van Kipnis adds:

My take on this provocative film is along similar lines, but without the comfort of an apparent opportunity for a decision. For me the "hit man" is pure evil that may come your way and give you the sense you have some control (chose heads or tails), or that the outcome is probabilistic (50/50), when in fact the outcome is predestined, it is all fate made to look like a game. Notice the line, which comes close to the end, when he appears in the wife's bedroom. When asked why he was there he says you were doomed when your husband didn't accept my offer to trade the money for your life. I got him, I got the money and now I getting you. Then he adds, 'this is all I can do for you.' He gives her the appearance of control with the offer of a coin flip. She refuses. The rest is left to your imagination.

James Sogi opines:

Big SurfTruth is, we have seen this before, the consecutive afternoon drops — right at the bottoms of July and August during 2002, before some big rises. Too few to be robust, but as precedent. But it seems the micro action is slowing down. Like Friday, quite odd. 2-3k on the bid and at the ask. I think the sides are starting to equilibrate. Ranges and gaps are dropping.

In the surf lineup, I'm the oldest guy out except for Makalwaena Bob at 72. I see lots of teens and 20s out. Fewer in their 30s and 40s. None after that. They're strong and careless about danger. They talk about silly kid things. I've seen many of them drop out of the surf lineup: weight, beer, kids, job, drugs, lack of interest, injury, arrests. Its good to still be out there after all these years. It's a different perspective. Its hard to stay in shape and strong and flexible. The speed is down. I try to be in the right spot at the right time. Wait for the nice sets. Avoid getting caught inside. I keep an eye on the horizon, the weather, the buoys, the tides, satellites and can be there when the waves and conditions are right. I like having nice equipment to fit the conditions. I see many parallels in the markets and trading.

Mr. Albert reports:

Here are a few recent qualitative observations from an equity day trader:

1) The speed of price changes is way up and the 'noise cloud' around price is much expanded.

2) The change is volatility from one day to the next is dramatic.

3) Stocks often trade very hard in one direction and then stay there without much of a reaction.

4) My 10 mbps line is compressed to ~1.5 mbps and pinging Yahoo times out for three iterations at the open.



Ken Smith's Mother When I was ten years old my mother was in a sanatorium for tuberculosis. She suffered terribly. No cure or palliative relief was available in 1939. Her lungs were devoured by tubercular bacteria, wholly tuberculated. Her Pentecostal ministers and friends visited regularly, prayed their supplications, knelt in worship beside her sick bed. When the grip of death was obvious a nurse came for me, at my bed in the same sanatorium, to bring me to my mother's room; only not into her room. I and my small brother, small sister, were brought to the outside window of her room, to look in and wave to my mother through the glass; no contact allowed, for fear of contagion.

Unexpectedly my mother sat bolt upright, a startling sight given her emaciation. She was not looking at we children, however. She was looking straight towards the end of her bed. Nurses inside with her reported later that my mother had spoken to a vision of Jesus at the end of her bed, Jesus standing there with arms open in a gesture of welcome, "Welcome home."

That was my experience of her expiry. My life was never the same again; I became a delinquent at eleven, a teen alcoholic, a thief, a gambler, a convict; a man without hope.

Jeff Watson adds:

All I can say is "Wow"! I'm trying to deal with the memories of seeing my lovely wife die in my arms, and it's been hard, harder than I could ever manage. They say these feelings will subside with time, but I don't know about that. I do know that since her death, my soul-searching has lead me to make sure I fullful some promises I made to her in her final hours. Like you, Ken, I don't think my life will ever be the same again.

James Smyth writes:

I am a physician, and as an intern I did my training at Memorial - Sloan Kettering Cancer Center in New York. An unfortunate part of that training is that I witnessed the death of several young cancer patients, including a few children. At the time, I was emotionally devestated by the the loss of those patients, but I understood that I couldn't truly understand the pain of those who had lost loved ones. Five years ago I lost my daughter after a struggle with a brain tumor that consumed most of her life. She was eight years old, and she was perfect in every way. In spite of her lot in life, she was optimistic, she made friends, she sang with the most beautiful soprano voice, and she never, ever wanted me to be sad. She thought that I was perfect, and I suppose that when I was around her, that I was. I'll never meet a person like her again in my life.



ColonelI attended YUM's (KFC parent) investor presentation six months ago, they spent 55 minutes out of an hour talking about their China growth strategy. it seems that with the exception of Chipotle and Qdoba, that fast food growth story will be coming from outside of the US. KFC, since it serves chicken — the universal all-religions-unite meat — should do well overseas. I hope its stock will get knoced down with the rest of the market on the fears of the US recession, it may provide a great opportunity to pick a truly global fast food chain.

David Lamb adds:

Down here in Panama there is the Multiplaza, an upscale shopping mall with a large food court. On any given day when I walk into this food court I'll see two very large lines. One is for Lenos and the other is for KFC. The Panamanians absolutely love KFC.

Steve Leslie extends:

Geographically speaking, look at what is going on in Asia and the Americas. Colombia is actually reforming itself from a banana republic steeped in corruption and drug warlords towards democracy and capitalism. Vietnam is evolving from a primal war-torn country to progressivism. Even isolated communist North Korea seems to want to partake in the benefits of free market capitalism. I heard during a most recent trip to the U.S. many members of the Cuba national soccer team asked for asylum. Bi-lingualism is a very sought after commodity. English/Spanish and English/Chinese are in great demand. The best thing a parent or grandparent can do for children is direct them toward a second language esp. at a very young age. All studies indicate that the earlier a child learns a language the faster he will grasp it and the longer he will retain it.



Categorizing market action can be done in several different ways. A simple dimension is associated with concepts such as range and volatility. Another dimension is related to directionality. Using the various combinations you can build a bi-dimensional matrix of market behavior. (I am not sure whether they are the only two dimensions to take into account. You could have multi-dimensional environments more complex to categorize and study.) Considering a bi-dimensional matrix, market conditions are:

1. volatile - directional

2. non-volatile - non-directional

3. volatile - non-directional

4. non volatile - directional

The problem is how to efficiently and with limited lag identify the state the marketplace is currently in. An appropriate trading system would be chosen accordingly. In a non-volatile directional environment you could be quite profitable implementing a trend following system, which would not suffer so much from false signals. In a volatile non-directional environment you could implement a contrarian system which would profit from the high number of false breakouts. And so forth.

Many indicators can be used to define the areas, although borders/lines of contact between areas remain a problem together with the lag you would face during transition phases from one environment to the next. Overall, however, gray areas and lag could impact significantly on your performance.

Building a family of robust systems to cover the whole spectrum of situations is one solution to the problem. For example, you could have a system working well in low volatility conditions (directional or non directional) together with a system working well in high directional situations (volatile or non-volatile) and a system optimized to work in volatile non-directional environments. Combinations of systems could obviously be very different depending on systems' characteristics. Generally speaking, lag would not be an issue because as soon as market conditions change one of the system would overperform others. Definitions of market conditions through various indicators would be simplified as well as optimization of parameters which would lead otherwise to overoptimization. Robustness of systems during sub-optimal phases for their performance is the key to profitability.

Systems not fully satisfactory when traded alone could become interesting when traded in parallel with other systems as the equity lines would be smoother and risk would be reduced although at the expense of the overall profitability.



21I worked the East Coast blackjack circuit back in the 90s from Atlantic City through the Bahamas and Mississippi, not on the level of the MIT team profiled in the new film "21"  but I had full comps — RFB, show tickets and air. Mostly on the weekends. I did it for the comps and the travel. I read the books, Ed Thorp's Beat the Dealer, and Stanford Wong's Professional Blackjack. My bible became Million Dollar Blackjack by Ken Uston, perhaps the greatest blackjack player ever. Back then the game was beatable and you could still get single and double deck games in Mississippi. Played at the highest level and flawlessly and if the rules were fair — dealer stands on any 17 and player can double down on any two cards — the player had a 1.5% advantage over the house. Believe me, played alone it is a lonely grind. Uston perfected the counting strategy to three levels and organized teams working through the 70s and early 80s. Ultimately, he was barred virtually everywhere, and the teams were very hard to keep together. It has been nearly 10 years since I seriously played blackjack. I am not sure the game can be beaten today.



EggsIt's Spring and Easter and the free range chickens are all laying eggs in our yard. They lay their eggs right in the garden next to the garden gate. Each day I take the eggs, but leave one or two. You see, the chickens can't count. They don't realize their eggs are gone, but they have this uneasy feeling that something may not be quite right. So they lay more eggs. Each day we get fresh eggs to eat.

This shows the importance of counting. Even simple counts give one an advantage in the markets and avoids having to lay eggs every day to feed the counters. It avoids that odd feeling of unease that something is not right in the markets.

Chickens also lack courage and judgment. These are valuable attributes for a trader. From whence do these attributes arise? From heredity? From knowledge? From experience? From preparation? Simple counting is a good start. But it alone is not enough. One has to look around at the weather, at people, at the earth and look inwards as well.



I recently began playing with Evernote, an application for capturing and organizing information featured in Wired recently:

Evernote wants to be a database for every bit of knowledge in your life. It takes all of the digital data you collect throughout your day, both the important and the inconsequential, and stores them in a centrally-located library that's accessible in an instant whenever you need it. The software, which runs on multiple platforms and exists as a web service, collects whatever you throw at it — photos, web clippings, hand-written notes — and indexes everything for you. The result is that your life instantly becomes annotated and searchable. You can tag items and add comments to remind yourself why you saved something. Evernote can even search text and handwriting within photos, thanks to some awesome text recognition capabilities.

It's currently in limited Beta release; if anyone would like an invite, just shoot me an note:Dylan D



Jim Lorie

(Photo above: the late Professor James H. Lorie (1922-2005). An obituary appeared on this web site in August 2005.)

My experience with "false gestures" reached its climax at its inception as I accompanied Jim Lorie when he showed prospective University of Chicago professors to the Hyde Park neighborhood. He'd stop at The Unique Deli and conspicuously leave the keys in the car. The prospect would say "I thought it would be very dangerous here" and Jim would say "it's so safe here that I don't even have to worry about the car."

A highlight of my observation of false gestures came when I saw a distinguished Objectivist scholar, always dressed in formal suit and tie, stoop to play with a child at a lecture he gave where all the questions had to be submitted in writing in advance and I couldn't even ask him about the identical twins. The gesture was so false, so contrived, he was so obviously uncomfortable with kids that it was a laugh.

A third experience was watching a Japanese movie where the blond American proprietress of a Japanese wine shop spoke in Japanese to all the Japanese customers. It was so hilarious, so out of whack, that you understood immediately why Japanese think that any American who tries to speak their language, no matter how good his accent and grammar, is an utter charlatan.

A recent experience came when I asked an attorney whether it is good to look at the jury when testifying or look directly at the questioner. He said " the juries hate it when you look at them because they know you're treating them like sheep" and they really don't believe you're that much more sagacious and truthful and a man of the people than they.

I wonder what the significance of false gestures in the market is. It's almost a Googlewhack with just nine out of context, unrelated conjunctions of "stock market" and "false gestures." The move on Monday that's reversed on Tuesday comes to mind, or the move from 2:30 to 3:00, like today, up 1% on the Bear Stearns increase rumour immediately followed by down 2% on the Oracle shortfall of 1/3 of 1% on revenues. Yes, but the real ones are part of the "I'm the greatest" bag. They come when companies fudge the real reasons for their shortfall of earnings or insiders fudge their real reason for selling out – "it was just estate and family matters."

The whole subject calls for quantification and further examples in all fields related to investments.

Jeff Watson adds:

False gestures are the mother of all deceptions. From political campaigns to fire and brimstone preachers, all use false gestures to achieve their ends. The wheat market players have been known to use false gestures in the form of buying up three or four whole trainloads of wheat well before the futures market opening. When the cash board shows a smaller than expected amount of cash wheat coming to market, it can cause the futures market to move up, mostly retail driven. A savvy purchaser of the small cash position can sell a lot of wheat in the futures market at a higher price and also resell the cash position at a premium. Sometimes it works, sometimes it doesn't.

John White writes:

 On many occasions the market has been referred to as “the market mistress.” I find this to be an apt moniker because she shares many qualities with women. She’s complex, mysterious, seductive, and just when you think you’ve got her figured out, she surprises you. With that in mind I thought some observations from last night’s carousing with a friend (in celebration of a birthday) might shed some light.

One only need sit in a singles bar for an hour or two to observe hundreds of false gestures. Looking back on the mating rituals from an anthropological standpoint, it seems to me that the market (women) falls for, then identifies, and finally renders obsolete false gestures. Pick up lines are useless. Sending a drink across the bar is passé. “Do you come here often?” usually elicits a mocking laugh. Fortunately for market participants (men) there seems to be an unending supply of original false gestures due to everchanging cycles. Pick up lines are now a contest to see who can come up with the most outrageous and are obviously a joke. I have sent a drink across the bar, but it was a glass of water. The response was a playful tossing of ice back across the bar and a subsequent invitation for a conversation. When it comes to these false gestures, the key to success seems to be originality and timing. An original and unexpected false gesture can move the market drastically.

My final observation is that even the successful false gesture is merely a crutch. If there is no substance to back it up, the market reverses. It is useful for getting a date (trading), but not for getting a girlfriend/wife (investing).

Steve Leslie explains:

The classic false gesture in poker is the check-raise. Example: you are in a hold-em game and the flop hits your hand and you get a set. You are the first to act. Rather than bet the hand you check. An aggressive player behind you, who might have the top pair comes out swinging and forces the action by putting in a sizable bet. Now you come back at him, and reraise. Properly constructed and carried off, it is the most powerful and profitable play. I find that the player who has been reraised usually knows at this point that he is beat but just can't get away from the hand, and calls the reraise and you take down the pot.

Mike Humbert replies:

Whenever I listen to someone telling me how easy something like this is, e.g., winning at poker, picking winning stocks, etc., this scene from "Get Shorty" always comes to mind. BO CATLETT is Delroy Lindo; CHILI is John Travolta.

BO CATLETT: You know what I'm thinkin'? (leans forward) You wanna make the girl older. I don't like the ending. We could do that, you and me, sit down and write the script over where it needs it.

Chili fips through the movie script a moment . . .

CHILI: You know how to write one of these?

BO CATLETT: There's nothin' to know. You have an idea, you write down what you wanna say. Then you get somebody to add in the commas and sh*t where they belong, if you aren't positive yourself. Maybe fix up the spelling where you have some tricky words… although I've seen scripts where I know words weren't spelled right and there was hardly any commas in it at all. So I don't think it's too important. Anyway, you come to the last page you write in 'Fade out' and that's the end, you're done.

CHILI: That's all there is to it, huh?

BO CATLETT: That's all.

Chili sits forward, stabs out his cigarette, exhales into Bo Catlett's face . . .

CHILI: Then what the f*ck do I need you for?

Eric Blumenschein writes:

False gestures in speculation are not the same as in poker. In poker, you can see the card holders. The equivalent in trading would be six traders sitting in a circle at their screens and you six are the only traders of that particular instrument. Now imagine watching the other five and your screen. Watching price break a new low and looking around to see if anyone is squirming or sweating while others are looking back at you. In trading you don't see the other card holders. It is more like trying to play poker in a dark room around a huge table with only a match to see your hand and the flop is the Fed. So how do you play the game now? The commitment of traders model alone is not enough. I could go bankrupt waiting for them to break the trend. I can't see the game they are in? Are they hedging another kind of trade? What table are they at? What is the flop they are looking for: Housing Starts, Industrial Production, inverted yield curve? Does that make their hand? Now imagine in poker the dealer lays down six different flops to play and after each bet he may or may not make changes in a few cards in the different flops. Would you call that game poker?



KeysJust caught a clip on the nightly news out Oakland, CA way that many people renting homes are finding that the property owners have not paid their mortgages and now they are told they have to move. One example is that the bank offers the renter $2,500 to move out at once and turn in his keys. Other banks send out letters telling the renter that the bank now owns the home and rent is now $10,000 per month! I question the legality of that action, but most renters cannot afford good legal counsel, get scared and move. The banks for the most part will not deal with the renter in any way.

Russ Herrold explains:

An old and well known landlord's trick: In a kinder and gentler day, one could usually strike a deal with a delinquent tenant that if he was out by sundown on a Saturday, you would not adversely report him to the local rental credit reporting agency, and there were a couple cases of beer with his name on them down at the 'beer dock.' Stupid banks in Calif had to drive the prices up for everyone else..

George Parkanyi muses:

This seems counter-productive. If I just inherited a property that had a cash-flow, I'd be grateful for the cash-flow. If I repossessed from the residents, maybe I'd look for a renter to create cash-flow while I figured out what to do with the property. Are there not property management companies that do this sort of thing for a living? Might someone not want to start a rental business by taking distressed properties off panicky banks' hands and finding suitable tenants — and then sell the properties off later at a handsome profit when the real-estate market finally turns?

Alan Millhone replies:

George comments about taking over distressed property and find a renter to stay here till the housing storm subsides. To do this one must have liquidity and then gird one's loins for the downturn in the housing sector. For how long? That is the magic question.

I noted last night along our main drag a new tenant moving into a former Allstate Insurance office that closed due to lack of business. The new occupant has hastily painted notices on the windows that a tattoo parlour is soon to be there! On our Kroger's lot is a new strip mall of five connected buildings. Three have been vacant since they were built over a year ago and the two that are there are 'cash till payday' lenders.

There are many empty rental units around Belpre and one fellow I know dropped his rent in order to fill one unit. He built them new a couple of years ago and the mortgage is killing him as he had one unit vacant for over seven months.

Another fellow I know torn down an older house on one of his properties and built a two story , two bath, two bedroom, double garage, duplex and grossly overbuilt the entire project, sparing no expense. He needs $800 plus utilities per side for rent. Now his construction loan had turned into a monthly payment with nothing coming in and he is hurting. When he was building I asked him what he thought he would have in the new duplex? He replied $100,000. I then replied for what part of the complex? He later told me he had overbuilt and had over $150,000 in the units.

My point? Rental property is good in good times and okay in bad times if you have little going out in a monthly payment, taxes, insurance to the bank. Now is a tremendous time to pick up cheap property, IF you can tough it out till the economy improves.



1040Many had some good returns last year and will be paying the piper on tax day. Many of those same have not had such good returns this year and will be digging deep to pay those taxes from last year. Vic and Laurel have commented in the past on the consequences to the market in general around tax day. I wonder how such stats stack up on a down first quarter after an up year.

Alan Millhone replies:

I had pondered that point. Traders needing cash on tax day might dip into their securities accounts for dollars they need to pay Uncle Sam. Might be a good time to carefully watch the market for some good buys. My late father used to take any deduction that might fall into the gray area. His thought was, take the deduction, and if questioned, pay the money/penalty. That way you had the use of that money to make more with.



Bull DurhamThe 1988 film Bull Durham, a favorite of mine, is simple yet highly entertaining, combining a series of twists and turns weaving comedy, passion, pathos into a finely crafted work.

Veteran minor-league catcher Crash Davis is assigned to the Class A Durham Bulls to handle the team's star rookie, wild pitcher "Nuke" LaLoosh. Team groupie Annie Savoy romances both players, creating a comic triangle.Kevin Costner plays Crash Davis, an aging career minor league catcher whose claim to fame is that he played in "The Show" for a few weeks and he is on pace to hit the most home runs in the minor leagues.Tim Robbins plays Ebbie Calvin "Nuke" Laloosh a Louisiana yokel who derives his nickname from the fact that he has a million dollar arm but is completely wild and unpredictable. He also has much to learn in an out of the game of baseball. Davis' job is to ensure that "Nuke" gets the training he needs so he gets to make it to the major leagues.Susan Sarandon plays Annie Savoy. Annie is groupie for the team who selects one player at the beginning of the season that she will remain attached to. She is a fan of Edith Piaf and teaches English at a local community college. For this season, she has selected "Nuke".

There is a memorable scene when Annie confronts Crash in his room complaining of the fact that as a result of "Nukes" learning process and Crash's mentoring, it is completely disrupting their love life.

She storms into Crash's home hysterically and during the height of the exchange quotes a passage from one of William Blakes most famous books, The Marriage of Heaven and Hell. From out of nowhere she blurts out " the road of excess leads to the palace of wisdom! William Blake!" Crash "William Blake?" Annie "William Blake!"

For some reason, this stands out in my mind and in many ways gives us an insight into the world of Annie and Crash at the same time. It also reveals ultimately where Annie's love truly lies.

I encourage everyone who is a fan of the game to watch Bull Durham and the series on WGN. I promise you will not be disappointed.



Obama comes at a time of dispair and disillusion and offers hope. There are two formulas for politics,

1. Hate+Fear =Power
2. Hope+Benefits =Votes

Obama is working both of these, the first more subtly, but he understands the dynamics. The ghost of Gene Burdick is alive and well.

Craig Bowles adds:

There are similarities to JFK. Young, good looking guy coming in after housing had a demographics boom that pushed it up right through the recession. Hope the rest of the story doesn't follow the same line.

Steve Leslie offers:

The most recent Gallup polls support this as Obama has opened up a 10 point edge over the Junior Senator from New York. All of this from a candidate who was not even on the political radar screen even nine months ago. Comparing and contrasting their policies, there is very little difference between the two.

Therefore there is something else going on here. It is almost like playing the game of Clue. Was it Professor Plum in the kitchen with the hammer or Miss Scarlett in the anteroom with the gun?

Obama may just be a more likable person or perceived as such. We can only offer conjecture as to this.

He could be seen as more trustworthy. He does not claim to have invented the Internet, been a decorated war hero, or named after a famous mountain climber who landed in war torn Bosnia like Rambo under intense fire.

He may be the repudiation of 20 years of a direct stranglehold of the Executive Branch of the Government by two families. Perhaps the American people feel that a new path should now be taken over traditional politics and now is the time.

It could be that his speeches include hope and opportunity and strike a chord with those who feel that they have been disenfranchised for too long and that their voices will be heard through him.

In all likelihood, it is a melange of the aforementioned. Whatever the reasons, he is very much a frontrunner and he stands a very real likelihood of winning his party’s support and backing at the convention in Denver in August.



Nigel 1975For a chessplayer it's part of the job to consider that the opponent will try to test you with the most unpleasant possible line of play. But I suspect there's a problem here for countists in that the main thrust of the thinking is in what happens in a 'typical' case.

Nevertheless we have to consider what the plan is when the market does exactly what you fear the most. Is there a plan?

Perhaps the most pernicious scenario is the margin call that acts effectively as a stop loss. Let's call them margin stops. If considered during tests, margin stops would render a lot of the systems useless in the first place. Might as well be betting on the ponies.

Bruno Ombreux asks:

Isn't it easier to aim for 10% a year, which is achievable with far less risk, and far less work? I mean, at 10% a year for 20 years, one would probably rank high among the top 1% of market participants. And it is incredible what 10% a year can achieve compounded over 20 years if one keep living expenses reasonable in the meantime.

What matters is the end game, isn't it?



PhilWhat's a good working definition of standard error?

Suppose you had a regression model:

SPY = .30 * FXY - .0015

where SPY is the percent change in SPY and FXY is percent change yesterday in FXY (yen ETF). Then you backtest your model on the last 100 days of data. Each day you get a prediction and you already know the actual. The difference between the predicted and actual is called the residual or error. Take the standard deviation of all the errors — that is your standard error.

The interpretation of standard error is straightforward as well. If we make all the usual assumptions about normal distribution etc., then the standard error is a plus or minus confidence band around our prediction. Today FXY is up 1.20%, so our prediction from the model would be for SPY to be up tomorrow by .21%. This is an actual fitted model with a standard error of 1.4%.

So we can think of the prediction as the center or mean of our distribution of prices tomorrow. The standard error is the variability around that mean. Assuming normally distributed errors we would expect two thirds of our observations to fall within one standard deviation of the prediction. One sixth would be greater than prediction plus one standard error and one sixth would be less than predicted minus one standard error. In the same manner 95% should lie within two standard errors of the prediction.



PolaroidPolaroid's announcement last month that they will stop making film is a timely reminder that the world moves on and that those who want to survive must move with it. All that's left now is the usual bit of nostalgic kicking and screaming.

This reminds me of one of the habits of International Master Bob Wade, OBE, who is still playing tournament chess in his late 80s. He makes a point of not keeping trophies, saying it would make him live in the past.

Sam Marx reminisces:

I formerly worked at Polaroid in '56-58 as an engineer in the polarizing film department. (Had no relation with the camera or instant film divisions). We were making the lenses for sunglasses and polarizing material for the government.

Polaroid was then located in two buildings exclusively in Cambridge across the street from MIT. Actually you had to walk across the MIT grounds to get to Polaroid's administrative building on Main St. This was before the move to Route 128.

It was a very progressive company guided by the inventor businessman Edwin Land. He developed the method to produce polarizing film in wide strips while still in college, Harvard, and then dropped out with his professor (George Wheelwright) to start the company. In the mid '40s he invented instant film and the Polaroid Land Camera.

Kodak damaged Polaroid's business by coming out with their instant camera which the court decided a number of years later was based on Polaroid's patents and had to pay Polaroid, but the damage was done.

Recent digital photography really put a virtual commercial end to the Polaroid instant film process and by then the Polaroid's driving force, founder Land was dead.

I remember in Dec. 1956 at the Polaroid Christmas Assembly when Edwin Land made the following announcement," All the major problems to develop color film have been overcome and it is now only a matter of time before we have it commercially". After checking with a friend from NY who was high up in the chemical research division, I went out and bought 200 sh. at 40 OTC. It dropped to 30, I sold 100 sh. in panic in what I now recognize as a selling climax, but kept the other 100 sh. I believe in '59 it was trading for 110. I sold the 100 shares a few years later.

By the way, Polaroid color film did not come out commercially until 1963, six years after Land's Christmas announcement.

As a small note, Edwin Land drove a black 1956 Ford Convertible with a continental tire kit on the back which I thought was pretty racy for the head of a large corporation in the '50s.



Motor HomeLunched today with a couple that owns an extra nice motor home. In the past they have made several nice trips in it. Today they commented that they have a upcoming trip to their son's home in Jacksonville, FL and will take the car instead. The motor home has a one hundred gallon tank and diesel fuel to fill it is $4.17 per gallon! They indicated they will use the motor home 'some' this Summer for 'shorter' trips. I am sure the motor home industry is hurting as a result of fuel costs.

Bill Rafter remarks:

I tried to short some WGO (Winnebago) recently and could not borrow the stock.

Ken Smith writes:

Motor homes are a common approach to living on the cheap. Not too cheap, though. One can own the vehicle but must rent space in a trailer park, pay for hookups to water, sewer, electricity, phone. KOA provides free wireless Internet, has beautiful grounds, swimming pool, small store on premises with dry food stocks.

A sizable population has always lived in trailer parks; KOA is not representative of such housing. I would stay at KOA for extended periods of time; could live there nicely for total living expense of $1000 a month. But I am not a bachelor — can't make this decision autocratically.

Can live on California Coast, near Smith River, Crescent City, beautiful setting. Just give up high living, settle down to quiet, simple life style. Ride around the area on your bicycle. Fish on the river, surf on the ocean.



PhilMost of us spend our whole lives trying to predict the direction of the market. Usually the results are, at best, only moderately successful. Market direction is the most difficult to predict, but as has been discussed here volatility is sometimes easier to predict because there is demonstrably more serial correlation.

Assuming we had both a direction and change in volatility model how would it be used? One way is to look at the cases. They are:

direction volatility

up        up

up        down

down     up

down     down

We could use simple option strategies depending on our outlook for volatility. When vol is expected to rise we would want to be long options. When vol is expected to fall we would want to sell options.

The choice of the option then is controlled by our expected directional outlook. The following table covers the cases:

direction volatility strategy

up         up         Buy call

up        down      Sell Put

down     up         Buy Put

down    down     Sell Call

It is worth noting, in passing, that direction and vol are generally negatively correlated. This implies that the cases up/up and down/down are relatively rare. The other two cases will occur more often.

Perhaps others can suggest different strategies within this framework.

Steve Bal responds:

I would suggest that volatility and direction are both a matter of time. One is obviously a matter of timing the market (as there may not be another time for a top/bottom) and volatility is a matter of time - time that it takes to revert to the mean.

A different strategy may be playing the time frame of volatility. In this exercise on would try to time the daily volatility within the context of weekly/monthly volatility of time.

In this scenario if your daily timing of volatility is wrong there is the possibility that time may be on your side over the longer term. I would never suggest relying on hope (of the longer term) but to reduce/hedge positions if volatility is not on your side.



CrabsI learned about this for the first time this weekend: If crabs are trapped in a bucket, they'll drag back any of their number that tries to escape so that they all share the same fate.

Stefan Jovanovich adds:

In describing his early days as a scuffler and then a scuffling actor, Michael Caine used the same expression. Among his fellow poor — friends, family and neighbors — "Whenever anyone tried to get a leg up, people would reach their hands — not to help push but to pull him back down. It was like crabs in a barrel."



I'm not an American citizen, but I go to the Chinatowns in Manhattan and Flushing, Queens often enough to know some of the stories of those communities.

It always amazes me to see the American Dream in action there — men and women from mainland China who can't speak English and live six to a room doing very menial work, but scrimping and saving to send their kids to Stuyvesant and then to the Ivy League.

The only connections these kids have are uncles who cook take-out on Mott St or drive the $15 bus to Boston.

The number of Asian Wall Street professionals who go back to Chinatown on weekends to visit their parents is a testament the American system of meritocratic reward to striving and hard work is intact and alive.



MoneyballLast week I heard Michael Lewis talk about his book Moneyball, so I read it. The overall story is clearly that conventional wisdom is often proven wrong when you put the numbers to the test, but there are several underlying stories that I thought were equally important to a trader.

One is the story of Billy Beane, the A's coach. He himself was a top prospect who had all the right "tools" according to the scouts, but the way Lewis tells it, was too afraid of failure, too afraid to look stupid. This happens often to batters, even the best. Apparently going against the conventional wisdom applied only to the recruiting and the game not the mental aspect.

A second story, was how his anger managment, or lack of anger management, made fear into a death spiral. Michael, when asked what Billy thought of revealing his secrets, said he was more worried what his Mother would think. That he made him sound like he always used four-letter words, than that any of the others managers would read the book.

Their great winning record but lack a of World Series title or appearance, suggests that even in baseball, perhaps the most individual of team sports, anger and its cousin fear, made me ask myself had he ever applied the scientific method to his motivational coaching techniques. Count the tirades and count the players' response in the game. A good coach knows the way to improve is to focus on what you need to do right, not the last mistake.

The third, was how Billy recused many a seeming misfit, resucing many a poor boy whose future upon graduating after giving studies half his attention was otherwise very bleak.

The fourth is an intro to the writings of Bill James of Baseball Abstract, and the establishment's reaction to a counter. James's obsession with baseball stats, his ability to think for himself and his writing created a large following and an industry.



Wiswell ProblemOne of Tom Wiswell's very favorite proverbs was "Take care of the draws, and the wins will take care of themselves." Tom was undefeated world checker champion for 25 years before retiring undefeated.

Russ Sears adds:

You don't beat the best at the beginning, you beat them at the end. You've got to have a kick at the end. The runner capable of relaxing the most will be capable of accelerating the most. The art is knowing which type of kick will make your opposition crumble, the long hard kick or the short burst to the finish line. In other words, know when to apply leverage, and don't overapply leverage or you will be left behind when the real opportunity presents itself. The art is knowing when the real opportunities present themselves, but it's most likely when everybody else is tightening up and panicking.



PebbleI'd love to know whether Joe Lewis played golf with Jimmy Cayne prior to taking his billion dollar stake in BSC. I think that with a shared interest like this the defences go down. Is it right to trust people that we instinctively like? Or is this the time for caution, certainly with regard to business matters?

Bill Humbert replies:

GM Davies asks a good question. I wonder if this has to do with the departure of happy times. The rising tide lifted all boats, but now those who cannot do are left with no support except their ability to deceive. I have encountered more smiling, pleasant backstabbers, liars, and hoodoos in the last three years than in all the rest of my life added together. I have successfully used the cockroach theorem for years with individuals, but find it highly predictive with regard to organizations as well, nowadays. Noticing one little oddity almost ensures worse, and soon. Get the facts. Follow the money and power flows to see what they are distorting in order to ensure gain for themselves or avoid threats to their pleasant and undeserved situation. Been pulling out books like "The Prince" and "The 48 Laws of Power." They read like a checklist some days.

Kim Zussman extends:

RoachSpeaking of cockroach effects:

1. Are there more big problems to come at financials?
1a. Is illiquidity of the banking system the only fear?
2. Are we in/headed into recession, and if this is all, wasn't it quick and painless?
3. How long/far will real estate decline?
4. Will central bank actions ameliorate or postpone?
5. Isn't a long-term bottom when no one even wants to discuss the stock market?
5a. And a negative wealth effect because investable capital is needed for consumption?
6. Is there a put in SP500 at -20% from October's high (cash 1250)?
7. Can bear rallies be distinguished from a major turning point?
7a. Can bear rallies be timed and bought without an irregularly declining P&L?
8. Are some markets not tradeable and how do you recognize them ex-ante?



DaHRiFDisasters and Heroic Rescues of Florida by E. Lynn Wright recounts the stories of 22 disasters in Florida starting with the Sinking of the Plate Fleet in 1710 and ending with wildfires in 1998 and a constellation of four hurricanes — Charlie, Francis , Ivan and Jeanne — in 2004. Florida is particularly prone to natural disasters because of its geographical position between the Gulf of Mexico and the Atlantic Ocean and its 12,000 miles of rivers and streams. However, the extent and prevalence of the disasters that have visited it seems to go over and above its geographic and geologic characteristics involving what seems to me a manifestation of the kind of character, promotion, and hopefulness that is engendered by warm weather, and extensive beachfront and recreational activity.

The author believes that a common characteristic of all these disasters is carelessness, ignorance, negligence, and greed. I would add that an aura of utopian thinking that nothing could go wrong as well as a lack of appreciation that the same disaster can strike twice,and a failure to appreciate that many seemingly improbably events are linked and that their conjunction is much more likely than normal multiplication of independent probabilities might suggest.

Take the Veterans Rescue Train Wipe Out of 1935 as an example, where 600 veterans imported to build a highway paralleling the Flagler East Coast Railway were drowned by a tidal wave hurricane in a rescue train. There was the utopian idea of creating work by building a public structure with inexperienced workers without local knowledge at the heart, faulty weather forecasts of a tropical disturbance that turned out to be 200 mile an hour winds, the event occurring on Labor Day, when the holiday caused hours of delay in gathering workers to get the train to the Ismeralda rescue site, usually reliable equipment that this time turned out to need repairs, a torn cable that held them to a standstill, a crane that got entangled with the train that took another hour away, and then finally a 20 foot tidal wave that did them in.

Many of the disasters seem to have signaled the beginning of real estate disasters shortly thereafter. For example the Great Citrus Freeze of 1895 came when central Florida and Daytona were in a boom stage with the orange crops adding revenues to the vacation homes and farms in the area. Developers Deland and Stetson were so sure of the boom that they guaranteed all the real estate buyers their money back. But a freeze came on Christmas Day in 1894 and ruined the citrus crops, and then when the growers relaxed, as they at least still had the trees and had lost only their income for the year. But two months later they were visited with an even worse freeze that destroyed all the fruits and seems to have cast a pall on the area. As the Tampa Time put it, "The Beauty is all gone from Florida. Everything is dead."

Similar declines in real estate followed the Capsize of the Prince Valdemar in 1926 in Miami, which seems to have had a direct causal link with the real estate bust in Florida in 1927 and then the stock market crash in 1929, and subsequent Depression. The chain of events is eerily similar to those playing out today, at least to the extent that the real estate bust caused the stock market crash. Perhaps the flooding of New Orleans will be seen as playing a similar role in the recent chain to that of the closing of the Miami Port caused by the Prince Valdemar.

The 22 disasters that are recounted in this book provides a good caution for all investors. Utopian visions have time and time again been dashed. Disasters that seem totally impossible occur with astonishing frequency.

Sam Marx explains:

HurricaneI lived through hurricanes Jeanne and Francis, that were 2-3 weeks apart and made landfall within eight miles of each other. This was a highly improbable event. The hurricanes were Category 2 when they passed over my house, but may have been a low Category 3 (130 mph) when they made landfall.

Because of the new building requirements of 1992, (Andrew was the motivator), the damage to my house was minor.  Most of the damage was to the trees. Records indicate that the last Category 3 in this area occurred over 50 years ago in Jupiter, 20 miles south and none ever recorded north of here in the last 90 years.

The heavy damage occurs on beachfront property, which Florida Governor Charlie Crist now wants to be paid for by all US taxpayers. I live 14 miles from the shore, and with the hurricane history of the area and the new building code I feel safe, but who knows. You take the great weather with the hurricanes.

The safest type of construction is a round house made of poured reinforced concrete with reinforced glass windows on raised ground. The roof is the most critical part of a house in a hurricane and it should be firmly secured to the reinforcing rods in the poured concrete.

Jeff Watson adds:

Sam makes some excellent points about the new building codes that are required in Florida. On my key, just south of Sarasota, there is strong evidence of the new codes that are being enacted. Builders are tearing down the existing homes and building new McMansions, employing much reinforced concrete, and adding elevation. From a visual perception, it is obvious that 200+ mph winds are factored into the designs. The new housing on this key is built on such a grand scale that it has changed the whole vibe of the place. Meanwhile, our 1926 cypress wood Conch House stands out as the lone reminder of what once was. Our cottage has survived many hurricanes, tropical storms, and fires without missing a beat. The designers did a good job on our cottage 80 years ago. The floors were built with a slight peak in the middle of the rooms, to allow storm surge water to run out of the house. Living at the beach, one must appreciate the grand forces of nature, the temporary aspect of existence, and man's insignificance in the whole scheme of things.

John Tierney marvels:

SurgeVic wrote "Disasters that seem totally impossible occur with astonishing frequency," and someone added "All of this drags down property values in storm prone areas of the USA."

Why is this surprising? By definition, a storm-prone area should have lower property values and higher insurance premia. Storms in areas that have been historically prone to them are neither unusual nor disastrous. "Disaster" is a term we apply to occurrences that result in the loss of human life and, increasingly, the loss of wealth. More properly, these are natural and inevitable phenomena — they are, if you will, part of an unbreakable cycle.The cycle may be ever-changing but it is certain that these periodic maladjustments will continue to occur. And those who are uninsured, under-insured, or who paid too dear a price will be hurt — again and again and again.

As it is in nature, so it is in the market. Bad times are inevitable and as fat tails occur with greater frequency than our probability tables would estimate, we must learn to expect the unexpected. We must also realize that government intervention cannot alter the unalterable. On the contrary, intrusive government in its paternalistic actions, encourages re-building where any building, except by those willing to assume all the risks, is inappropriate; and, in the markets, continued Federal action (reaction?), has encouraged the same groups and individuals to rebuild their castles on sandy soil.

Without this insurance, these occurrences would be just as unexpectedly frequent, but less harmful to the general population: the ultimate guarantors of poor fiscal policy. As Davy Crockett, a noted Tennessean, stated of his fellow  Congressmen: “Money with them is nothing but trash when it is to come out of the people. But it is the one great thing for which most of them are striving, and many of them sacrifice honor, integrity, and justice to obtain it.”

Steve Leslie writes:

HurricaneI moved to Florida 25 years ago and have lived in the same town since. I live on the Space Coast, equidistant between Jacksonville and Miami and 60 miles southeast of Orlando.When I first moved here, our city had swinging bridges that spanned the intracoastal waterway. They have long since been replaced with modern bridges. US1, a major thoroughfare, was two lanes and now is six lanes and cannot be expanded further. Most of the beachfront property has been developed and great restrictions have been imposed to slow down further building directly on the beach.

Commercialization on A1A is unmistakable and is beginning to look more like Daytona Beach than the sleepy town of Indialantic it once was. Beach erosion is a real problem and threatens property that has been around for decades. Laws have been passed to reduce lighting on the beach to avoid confusing loggerhead turtles who come ashore to lay their eggs.Wetlands have been exploited by real estate developers, and the challenge is to protect wildlife and retard the erosion of the Florida wetlands. The Florida panther, crocodile and alligator have been threatened species as are many other wildlife. Clams which used to thrive in the intracoastal have long since disappeared.

Probably the most profound real estate phenomenon in Brevard County is the largest manufactured home community in the state. Over 5,500 people who live in manufactured homes there. Many more manufactured home communities dot the county. This is a striking point considering the fact that Florida is particularly known for its hurricanes and unpredictable weather, especially lightning and tornadoes.

Florida is now the fourth-largest state in terms of population. Along with this come remarkable challenges. By all accounts, the trend will continue and populations will rise especially in the Latino community. Despite of what many think, not everyone in Florida is rich. There are vast pockets of poverty, especially in the Miami, Jacksonville and Tampa, that will continue to expand.

Yes, lessons have been learned, new building codes have been imposed, insurance laws tightened, yet it is like the horizon that one never reaches, it merely continues onward. There is a human cost to all thus that just can't be quantified. Yet I live here and this is my home and I will probably stay for some time. I hope I will adapt with the times and not become an anachronism.

Ken Smith extends:

LightningLightning strikes are another hazard in Florida. Discovery Channel once aired a story on a lightning belt in Florida. Government and university research people have placed structures in that belt to study lightning.

I am always excited by lightning storms, thunderstorms. I thought Florida would be ideal for living under them. Once my wife and I sat in our car — rubber wheels supporting us — on a lake in Glacier National Park, and watched a terrible, terrific, astounding display of lightning. Stayed until the little woman got nervous. I understand a vehicle should have a strap hanging from car frame to ground, although I have not researched this necessity.

The most spectacular storms I've witnessed were out in the deep ocean where only lone sailors are blessed with these visions. To see these lightning strikes accompanied by thunderous blasts of sound in the sky and 100 foot waves crashing into your home on the sea, these are ultimate experiences.

Dylan Distasio responds:

I've always loved lightning storms myself also. I remember watching a spectacular one when I was out in Arizona crackle across the wide open horizon.

Another time, I was actually caught in one while camping with my brother on a peak along the Appalachian Trail in Massachusetts, which while breathtaking, was also terrifying.

By the way, you should be fine in a car hit by lightning without a strap (or rubber tires for that matter). A car basically behaves as a Faraday cage where the charge is spread along the outer surface. I remember learning that in a physics class at some point, although I wouldn't want to test it out myself.



WomanNo one knows, really, what old age means until he gets there. Age is a disability. When I was a teen I wished to be 21. Little did I realize getting old was not desirable.

Next birthday I'll be 80 but as I look around I see I am in much better shape than most men my age. My wife is three years younger and she is in much better shape than most women her age. It's in our genes. You don't got good genes, you don't got longevity. Or you might have longevity and a crippled body, crippled mind. Genes gotta be perfect for all-around good fellow type at 80.

I was just at Starbucks, sitting in a corner watching people come and go. I observe. My sight got stuck on a lovely creature who could be 40 or could be 50. She walked in with a fellow in that age category, guy was neatly dressed in blue jeans, black car coat covering a dark blue sport coat; reasonably handsome fellow. This lady finally noticed my gaze and after the initial recognization she gave me the pleasure of looking towards me again, acknowledging my acknowledgment of her beauteous attraction.

So I don't feel so old now.



The City Heights district in San Diego has been a reliable indicator of the sanity (or lack thereof) in the SoCal real estate market. At the height of the boom in the 3rd quarter of 2006 a one bedroom one bath 668 sq. ft. apartment sold for $175,000 ($262 a square foot!). The same apartment was just listed by the bank owner for $74,900 ($112/sq. ft.). The current rental price for a one bedroom in City Heights is $700/month. That is what it would cost a 20% down 30-yr. fixed rate mortgaged home buyer for mortgage, taxes and insurance.



As my Zhan Zhuang teacher said, when I mentioned a different way of standing to what we do in class (Baron Ferson's Fearsome Stance), a little knowledge is a dangerous thing. Here I played 13.f4, ignorant of the fact that it is new whilst my more knowledgeable opponent knew that it was new. Accordingly he thought it must be bad, and in his efforts to refute it overlooked the backward knight move, 22.Ng3.

This game helped me towards my first clear first in a long time. Clawing it back…

[Event "Bolton Open"]
[Site "?"]
[Date "2008.03.23"]
[Round "4"]
[White "Davies, N."]
[Black "Haslinger, S."]
[Result "1-0"]
[ECO "A07"]
[PlyCount "127"]
[EventDate "2008.03.23"]
[SourceDate "2008.03.23"]

1. Nf3 d5 2. g3 c6 3. Bg2 Nf6 4. b3 Bg4 5. Bb2 Nbd7 6. O-O e6 7. d3 Bd6 8. Nbd2 O-O 9. h3 Bh5 10. e4 e5 11. Qe1 Re8 12. Nh4 Nc5 13. f4 dxe4 14. dxe4 exf4 15. gxf4 Ncxe4 16. Nxe4 Nxe4 17. Bxe4 Bc5+ 18. Kh2 Bd4 19. Bxd4 Qxd4 20. Nf5 Qxe4 21. Qxe4 Rxe4 22. Ng3 Bg6 23. f5 Bxf5 24. Rxf5 Rd4 25. Raf1 f6 26. R5f2 Re8 27. Kg2 Rd5 28. c4 Rd3 29. Rf3 Red8 30. Rxd3 Rxd3 31. Rf3 Rd2+ 32. Rf2 Rd3 33. Ne4 Rd4 34. Nc5 b6 35. Na6 Kf7 36. Nb4 Rd6 37. Rc2 a5 38. c5 bxc5 39. Na6 c4 40. bxc4 Ke7 41. Nc5 Rd1 42. Re2+ Kf7 43. Nb3 a4 44. Rd2 Rb1 45. Nd4 c5 46. Ne2 Rb4 47. Rc2 a3 48. Kf3 Rb2 49. Rxb2 axb2 50. Nc3 h5 51. Ke3 g5 52. Kd3 h4 53. Kc2 f5 54. Ne2 g4 55. Ng1 Ke6 56. a4 Kd6 57. Kxb2 Kc6 58. a5 Kb7 59. Kb3 Ka7 60. Ka4 Ka6 61. hxg4 fxg4 62. Ne2 g3 63. Ng1 g2 64. Nh3 1-0



My grandfather was a mechanical genius. If it had a motor, he could fix it. My dad is pretty handy too. My grandfather had a thriving car repair business in his backyard. He actually made almost as much money working on the weekends in his backyard as he did at his full time job. About 35 years ago, they (Grandpa and Dad) decided to start Three B's Auto Repair, mistakenly thinking that I was going to be the third "B". I have taken more than one car engine completely apart in my life, changed more brakes than I care to remember, and fixed many dead batteries. And today I am completely lost under the hood of a car. The car repair and "mechanical inclination" gene seemed to have skipped a generation with me.



MSN Money - Investing

Jubak's Journal
Make sense of this crazy market
Any hint of trouble these days sends Wall Street into a new round of panic selling and a rush to pile up cash.

Fleckenstein: Catering to the bailout nation
Brush: WaMu skips customers, saves the execs
Markman: Why the Fed's rate cuts won't help you



Last year we had our ACF Checker Nationals at the 'Experience' at the Plaza Hotel and Casino in Las Vegas. We had a poor black fellow come from South Africa (due to fortunate sponsorship by Vic and Laurel) and enter and win the Masters. I took him to the Plaza "Lucky Seven." We ate there a couple of nights. Lubabalo commented one evening that he could not believe that if he walked by the buffet any hour of the night that the food was always there! He told me that if such a buffet were available in South Africa people would come and line up for miles and the food would be gone and that would be that with the buffet!



Today would have been Louis L'Amour's 100th birthday. I started reading his books on the advice of Vic and Laurel, and highly recommend them. The Sackett series is best, but Hondo is wonderful as well. There are many lessons for a lifetime in each book, so grab a couple from a bookstore or your local library and give them a read over the Easter weekend.



Interesting tidbit on Case Shiller home price index: what sizeable metro areas are not among the 20 cities?

Case Shiller

The west has eight of the 20 while NE and Rust Belt have seven if you add in DC, leaving five to cover the Mason Dixon states and Texas. Seems they need to add five cities to that index.

Also, Charlotte prices climbed year over year on today's report, but I would think there has not been much compression in Austin with only a 1.5% vacant home rate compared to national average of 2.8% according to US Census data (contrast this with >5% in areas of Florida).



CovelThe Complete Turtle Trader: The Legend, the Lessons, the Results: Michael W. Covel, Collins, 2007

Mr Covel needs no introduction to DailySpec readers — he's remarked at length about Chair on his site, and vice versa. A few asides: GM Davies (!) is quoted at length on pg 99 [with attribution to DailySpec]… On pg 102 there's a discussion of quasi-Turtle Lucy Wyatt, who years later found her way to Chair's trading room, and shared some colorful stories about the proclivities of the trend-following greats… The Turtle trading "philosophy" and rules are discussed at length [as they are on the web also]; hint: buy twenty-day highs…

A smattering of highlights (with minor elisions), to give the flavor:

p  17/ Dennis told Willis, "If you're buying wheat and it's strong and the beans are two lower and the wheat is five higher, why don't you sell the soybeans instead of selling the wheat you bought?" It was a very sophisticated insight. In fact, buying "strength" and selling "weakness" short still befuddles investors.

p  18/ Dennis's attributing his height and weight as the reason he was successful is not the full story. There was more to becoming a millionaire by 25 than being "six foot something" and three hundred pounds plus. Even with excess weight, his peers described him as having cat-quick reflexes on the trading floor.

p  27/ Dennis knew the Turtles were "dumb stumps" and that the only reason they bought into everything was because he had made $200m. If he said "On Monday, you will buy the S&P when it's up exactly 35 ticks no matter what," all the Turtles would have gone over a cliff to follow orders. One Turtle said that when a guy has made $200m and he says "You can walk on water," people are going to say "Okay, I can walk on water."

p  45/ To those who saw them up close, Dennis had the capacity to make an observation in an instant that would take someone else weeks of painstaking math to figure out. Even Eckhardt marveled at Dennis's knack to intuitively see "it."

p  48/ One Turtle gushed in awe that Dennis still had the "balls" to execute that trade "when they were dumb, deaf and broke": "They were going the wrong way and for Dennis to just totally cover and totally reverse was amazing."

p 102/ All one Turtle could remember about Lucy Wyatt was that she was always doing her nails. Mike Cavalo said that Wyatt had been Eckhardt's girlfriend.

p 102/ Everyone knew Mondale was Dennis's guy. Dennis started going around the table asking everyone who he was voting for. One by one they all said "Mondale." They were his guests, and he was one of the richest guys around. However, when it was Gordon's turn he said "Gary Hart." Gordon knew he had just upset the trading king of Chicago.

Rich Dennisp 126/ Keefer, who thought Dennis deserved a Nobel Prize for his real-world work in harnessing volatility in his trading models, lamented the allocations aspect of the program: "You've got somebody that's got an awesome trading system and he's following really rigidly good protocols about trend trading, and then he just literally blows it up on asset allocation."

p 129/ It was over. Dennis sent a fax telling the Turtles that the program had been scuttled. Dennis, who was managing money for clients, too, had two public funds with Michael Milken's Drexel Burnham Lambert. They closed down with big losses.

p 130/ Dennis himself simply declared he was retiring. He announced he would move full time into political causes. He wanted to take the wind out of what he thought were efforts to make "liberal" a dirty word.

p 131/ Lawsuits soon followed as former clients in the Drexel funds argued that Dennis had deviated from his own rules. Eventually, US District Judge Milton Pollack agreed to a settlement in which nearly 6,000 investors shared $2.5m and got half of Dennis's trading profits over the next three years. Under the settlement, Dennis and his firms did not admit any wrongdoing.

p 133/ In the book "Market Wizards," author Jack Schwager softened the blow to Dennis's tough times by entitling his chapter "A Legend Retires." Schwager's Dennis chapter became a cult classic.

p 150/ Dennis staged another remarkable comeback. It would take him through most of the 1990s. Many investors were gun-shy about another Dennis comeback. In an effort to allay client fears, he assured everyone that his infamous discretion, his inability to not personally interfere with his own rules, had been eliminated. He said the computer was his new friend.

p 151/ In some ways, Dennis was a technophobe in the middle of the Internet revolution. He always said he could not program.

p 151/ Within a few years, Dennis was out of the game again. On September 29, 2000, Dennis Trading Group ceased trading and liquidated customer accounts. Burt Kozloff, an investor in Dennis's current fund, laid out the painful truth: "Dennis Trading Group was -50% down in June."

p 152/ While it was no solace for Richard Dennis, the moment when clients pulled funds from him in the fall of 2000 was a bottom for trend-following traders. Dennis's clients had panicked at the bottom and paid dearly.

Michael Covel clarifies: 

I did not have the opportunity to speak with Lucy Wyatt for my book, but I have talked with her extensively since its release. "Quasi" seems an incorrect description. She was a Turtle.

Dean Parisian recounts:

X Shaped DeskI was a salesman at Drexel Burnham Lambert in the 1980s and had clients in those RJD funds. The prospectuses put together for the RJD partnerships are to this day, the absolute finest, nicest, best-crafted marketing pieces produced. If ever there was a glossy, colorful marketing brochure this was it! One thing I will take with me to my grave stands out. In one of the calls that Richard Dennis gave to the Drexel brokers as to why his funds were being hammered and shuttered, he said, "the markets were behaving irrationally." Memory tells me they were designed to liquidate at a 50% drawdown and it wasn't more than a few weeks later that the markets he traded the funds in had reversed and skyrocketed upward. Only the lawyers made out big but it was the most equitable general partner / limited partner arrangement we had ever seen. Just another reminder to any brokers pitching partnerships to never forget the old saying, "on day one of a partnership the generals have all the experience and limiteds have all the money, on day two the generals have all the money and the limiteds are left with the experience."

Jim Sogi offers:

Jim SogiThe Complete Turtle Trader by Michael W.Covel is an interesting tale of volatility in the trading and careers of Richard Dennis and his Turtle traders in the thin style of popular financial journalism. Vic and Laurel, Covel and the Turtle traders have had disagreements over the issue of trend following, however, I believe that there is more to the Turtle and Eckhart/Dennis systems than Covel discloses. He seems to have oversimplified the Turtle systems down to the two simple trendfollowing systems S1 and S2, systems that have been disclosed and sold years ago.

I discount those two specific breakout systems — they have not worked in the recent past on equity indices. See Linda Raschke's Turtle Soup pattern. Whether they worked in the mid 1980s I have not tested. Covel's failure to note the systems' failure in equity indices in the recent past and the implication that these systems might still be effective is very unfortunate for poor readers who might be mislead to lose more than they have any right to as a result.

There are more similarities between the Eckhardt/Dennis systems and Vic and Laurel's ideas than many who follow this dispute seem to understand. The similarities of Richard's and Vic's careers are more notable than their differences. Both came from modest backgrounds. Both undertook to give back to the community and to other traders. Both saw huge successes and notable drawdowns. I am struck by the launch to success enjoyed by those mentored by both Richard and Vic.

Richard Dennis used the scientific method, using empirical data and tests of hypothesis with computer models to create trading systems. Reading between the lines, it is apparent that the remaining successful Turtles use other systems and appropriate testing to create trades. Covel misses the significance of this most important point. The Turtles' money management alone might have proven a key element. Unless a system is profitable, money management merely postpones the eventual ruin. However the statistical analysis of money management is a necessary part of proper trading as our friend Dr. McDonnell shows in his excellent book

Steve Leslie writes: 

This encompasses so many things that have been discussed on this site for the years that I have been visiting it. My top ten list of what I learned from Mike Covel's book:

10) Those who are willing can be taught almost anything.
9) Great people want to help others achieve great success.
8) Success in business requires tremendous concentration. Outside distractions must be avoided.
7) Sometimes it is best to leave politics to politicians.
6) Everyone fails at some point in his life. The true winners rebuild after their failures.
5) To put on a trade when everything is going against you requires character and commitment.
4) Rules are rules. Stick to them.
3) Adapt with the times. Be willing to be malleable.
2) Always leave yourself outs. Never commit everything to one position or to one person.

And the number one lesson:

1) The market is bigger, stronger and badder than you. Always respect it for the beast it is.



Three peaks in VIX (all of them above 30) on 11/12, 01/22 and 03/17. It never went below 15 after end of July 2007.VIX



I went to grade school with a kid named Nimrod Hemphill. Now, I was told that Nimrod was a Bibilical name, but still, it was a mistake since Nimrod was something that we called other kids as insult as we didn't know it was a real name until Nimrod Hemphill showed up.
Then there was a girl named Adakki Gion (pronounces Uh Dock EE Gee ahn). I mean, what were her parents thinking?
Then there was the kid named Medgar Evans. In grade school none of us really knew who Medgar Evers was, but later on in life, I'm sure this kid had a pretty strong reputation to live up to up due to the "one letter difference" between their names.
Then in college there was a kid named Damian Sattan. Sattan was pronounced Suh Ton ("ton" rhymed with "don"). He was actually a very nice guy who seemed completely normal. His name was something that he'd gotten over and didn't think twice about.
As I've watched people give their kids really bad names, I wonder if they are dooming their kids to life bereft of success. Having grown up in a racially mixed neighborhood (50/50 white/black), I saw a lot of unfortunate names and have wondered what the effect of that name was on the kids as they become adults. It causes an extra hurdle for that person on the road to success.



1 You can't stand the sight of the screen and it gives you intestinal spasms
2 You are afraid of the open, close, and overnight
3 Friends keep telling you to get out
4 You are mean to the children (they took stats and you are average)
5 The children are afraid of Maria and Cramer
6 You can't remember feeling anything good about the market
7 You no longer enjoy anything about markets nor look forward to doing anything ever
8 The market opens and your heart sinks
9 You don't want to go out with friends or family because your results are too embarrassing
10 The market keeps making patterns that don't work until you pause trading
11 You're no longer proud of yourself, and can't recall a time when you were
12 Your jokes, which were originally amusing, are now cruel, abstract, and bipolar



A request to DailySpec readers, if you are willing to assist me. I just started to blog at Harvard Business Online. The number of comments my blogs generate will determine whether or not I will get my own blog. So if you're willing to check out my first post: "How to Deal With Anxious People" and to add a comment (good, bad or otherwise), I would appreciate it. Thanks!



I look at the commitments of traders data to get a quick reading of how extremely commercials and speculators are at polar opposites. The COT-Futures site ranks the relationship from 0 to 100 in relative terms — 0 is most net short in the past 18 months or so; 100 is the most net long. There is a $5 a month fee for this service. When commercials are 0-10, it's time to think about selling, because they sure are. When it's 90-100, be a buyer. Commitments data won't give you specific entry signals for short-term trades, but they put you in the right ball-park for the next significant move. It works well for the physical commodities. I haven't found them to be very meaningful for financials and currencies, because who the heck are commercials anyway in the stock market (and are they particularly bright?), and the real players in the currency markets use futures only for pocket-change.For weeks, gold, oil, sugar, and grains had all been on "tilt" at 0 (commercial selling and massive speculative buying), and the last couple of days is the result. Natural gas was sitting at a 100 reading (practically the only commodity that was) just before it made its recent big move up.

At the moment, I'm fully invested in 26 fixed names in four groups: 6, 6, 6, and 8. All I am doing right now is that whenever any two within a group diverge relative to each other by 30% from a prior fixed point in time (the previous trade date), I sell 30% of the stronger one and recycle that cash into the weaker one. When there is such a trade I reset the reference point for all the stocks in the group to that day's closing/trade price, and then just wait for the next 30% divergence from that date. There is a significant long-term compounding effect in doing this, by the way. One of the stocks is a 2x leveraged short gold stocks ETF from about when gold was $800. Despite the run-up in the metal, the ETF position has delivered three buy signals near its lows, two sell signals on up moves after buys, and is now net-profitable despite being heavily under water for a while.

Why was I confident averaging down, as it were, against gold? The commitments numbers. I knew that sooner or later gold was going to take a big hit, even if it remains in a long-term bull market. If it drops enough to get the commercials buying again (and/or specs panicking out) then I'll simply switch to the matching long ETF and play that side until the commercials go heavily short again with respect to speculators. Doesn't have to be perfectly timed. In fact you may be wrong for a while, which can help you accumulate a bigger position with a lower cost basis. Since the gold ETF, I've added three other 2x ETFs in natural gas (long), crude oil (short), and grains (long). I'm cheating in the grains — according to commitments data I should be short, but they've come off a lot and that particular position at the moment is quite small. I'm happy to add to it if grains keep coming down. The volatility of these things is great for generating the trading spreads I look for. That's why I've integrated them into my stock portfolio. Watch the commitments as a trend-change guidepost.



 Another way to look at changes in volatility (increase/decrease in price swings per unit time) is to view it as having a typical overall move in price but with the time scale expanding and contracting. This might offer some additional insights, for example point and figure charts by ignoring time also ignore volatility. So if you test these they'll produce a quite different set of patterns which are essentially 'volatility blind.'

Sushil Kedia replies:

A filtration process such as Point & Figure is essentially based on defining one's tolerance for noise in the price series. The box size achieves that. Point & Figure is the only method in Technical Analysis to not plot the time axis. It is perhaps the only method of looking at prices which has a nature similar to the time/distance equivalence in Einsteinian physics. There perhaps is a case for finding a congruence in defining a unit of time for a particular security based on a certain standard movement in its price.

Bill Rafter explains:

Point & Figure purports to separate "signal" from "noise" and discard the latter. Every time you run data through a filter, you eliminate both some signal and some noise.  The short-term data that you assume to be all noise contain substantial signal.  Thus, it is illogical to assume that you will improve results by discarding information.  Further, and most-importantly, we applied Point & Figure filtering to all of our trading methodologies and the degradation of results was universal.

Phil McDonnell expands:

PhilThe Grand Master poses an interesting question and Mr. Kedia wisely suggested an analogy to Einstein's relativity theory. There is much to be learned from these ideas.

Suppose we have two assets which substitute for each other in investment portfolios. For example they might be stocks (s) and bonds (b). Given that there is only a constant supply of funds (m) available for these two investments we can posit that their combined value would be equal to:

m ~= ( s^2 + b^2 )^.5

The above is essentially the equation of a circle of radius m. One possible flaw is that the market for s may be much smaller than the market for b. Thus a given fixed disinvestment from b might move s by considerably more. Our model would therefore no longer be a circle. Without loss of generality we can assume the fixed quantity m to be 1 (100% of all the money). Then we have:

1 = ( s^2 / a^2 + b^2 / d^2 )^.5

where a and d are two constants of proportionality which relate to how quickly the two markets move. Thus each market now has its own ease of movement parameter in this new elliptical model.

One of the key properties of the theory of relativity is that as one approaches the speed of light both time and space are distorted. In particular the Lorentz transformation governs this process and is given by:

gamma = 1 / ( 1 - v^2 / c^2 ) ^ .5

where v is the velocity of the spaceship and c is the speed of light. This represents the transformation in the x direction which we shall assume is the direction of acceleration. Referring back to the elliptical model formula above we see that the one dimensional form looks remarkably similar to the denominator of the Lorentz transform (gamma).

Qualitatively such a model would be consistent with the Davies/Kedia conjectures. Time would slow down as the market moved faster. Magnitude in the price direction would dilate as well as a function of velocity.

Having a theoretical model of the market is all very nice but unless the market follows it then it is useless. To test this a study was done of the above stock to bond relationship using SPY and TLT ETFs. Fitting the parameters a and d to past data one finds that the constants were 200 and 100 respectively. Then the fitted model was compared to the actual past history of SPY and TLT and found to provide very good agreement. Perhaps we may look at these constants as the speed of financial information (light) in the stock and bond medium respectively.



Since 1950 there were only five years when SP500 index was down all of the first three months (we getting close to six).  The following Aprils didn't exactly produce golden showers (Though the last time, in 1982, did mark the beginning of the great bull run — after 16 flat years):



Every day, people weaned on a program done 30 years ago by me and my wife, and updated and improved many times since, and imitated on many occasions, have a series of breakfast club meetings, and extensions in a million directions to see how the day's events are stacking up against the past. Usually a few salient characteristics are given, and a hundred similar observations are digested. Today I could not resist a pre- breakfast club meeting, and found: literally no observations of any degree of similarity over the past 15 years.



From this morning's WSJ item "Stepping Up to the Fed's Window":

The Fed is lending $95 for every $100 in securities that dealers bring to it, regardless of the type of collateral. In other words, the Fed requires the same amount of additional collateral whether a dealer is borrowing against a Triple A-rated corporate bond or a Triple B-minus subprime-backed bond.

Yes, those are termites you hear, gnawing at the Fed's balance sheet…



Edwards & MageeWith today's big reversal off yesterday's big run, it looks like an expanding range, the worst of all possible worlds for most, especially the TA guys. I regret throwing out my Edwards and Magee as there was some work on expanding ranges, diamonds and the like which might be good to look at. It is hysteresis with everyone piling in on either the bid or ask each day. It's the situation with the thermostat either full on or full off with the temperature starting to swing wildly. All the other commodities are starting to slosh in the tub as well. The problem is we have monkeys at the controls, and the readings are being printed by monkeys as well making things difficult. It's like the red/black ball problem with the monkeys changing the balls in the tub, making it hard to compute stats with that kind of shenanigans going on. Looking back it seems so obvious but hard while it's happening to make the judgment and to predict when we are out in the fat tails of the distributions. Keeping it real simple seems to be the way to go. Gold is down hard, (just as I was about to try sell my hoard of course) along with what others have pointed out as reversals as well. With the MZM rocketing up its like driving a 400 HP hot rod out there in the market. The Bataille de la Ronde will be interesting tomorrow.



ShootistI remember John Wayne played J.B. Books in the movie "The Shootist." Ironically, the Duke played a role of a gunslinger dying of cancer. A boy in the movie had read all of J.B.'s legendary gunfights and commented to him how fast on the draw he musta been in his prime. J.B. answered to the young man that it wasn't a matter of how fast, "It's a matter of being willin'".

The funny thing is I feel that I'm more prepared to face the markets than ever before in my life. I realize those words in the movie also couldn't be more true, it doesn't matter how "quick to the draw" I am, it's a matter of bein' willin'! I wonder how many feel like me that their wills are being tested like never before?

I get the joke.

Steve Leslie adds:

This was the Duke's last movie, as he succumbed to cancer himself shortly thereafter. Ron Howard was the young reporter and the gunfighters who met him in the saloon for the final shootout were Richard Boone, who played Paladin of Have Gun will travel. His trademark was a chesspiece, the Knight, and it appeared on his calling card. Hugh O'Brien played Wyatt Earp in the 60s.This was also one of the rare movies that John Wayne actually died in. There were seven others:

The Cowboys (Killed by Bruce Dern)
The Alamo (Killed by Santa Anna's army)
The Sea Chase (Lost at sea)
Sands Of Iwo Jima (Killed by enemy sniper)
Wake of the Red Witch (Killed by giant squid)
Reap the Wild Wind (Drowned)

Special note: The Man Who Shot Liberty Valance, Jimmy Stewart, who played Rance Stoddard, visited his grave so we can assume that he died in the movie but not sure how.

All in all The Duke had starring roles in 142 movies. I'm a huge fan of the Duke.



Settlement prices 2008/03/19:

SP Futs

For at least a year out, futures contracts are now "carrying themselves", as Philip L. Carret described stocks whose dividend yields were higher than interest rates on loans.



There is something about the financial markets and Fed rate cuts that reminds me of starting a fire on the barbecue with damp, plain old charcoal briquettes.
You try stacking the year-old bricks all in a tight pyramid and then mix in a bit of lit newspaper. Then comes a splash of charcoal lighter fluid — whumph — big burst of flame. Then flame subsidence and just a hint of gray on the obstinate, charcoal edges. Time to grab the newspaper and start fanning the glowing embers — doggone it, it is just smoking now — no heat.
But wait, let's try hitting it again with some more fluid— crikey! — smoky, unappetizing hydrocarbon-rich odor — no flame this time. Re-light and hit it with fluid — whumph. Ah, fire again, the joy of grill pyromania. But fuel-free is supposed to be the ideal method — sans experimentation and fun.



TallyOne thing is for certain regarding the collapse of BSC: restricted stock and options compensation, which likely went from an aggregate net worth of a several hundreds of millions of dollars to the ripe and round figure of zero. The decay of this wealth is what no one is talking about and what will have substantial ramifications over the medium-longer term.
On a much more important note: we have arrived at the point of the free market lifecycle where profiteering might still remain private, yet losses are now becoming socialized. Also scary are the recent changes made by our Treasury regarding the rules and limits of credit/mortgage market dealing by participants. "You can only profit so much." Or, "this is no longer a free market."

Jim Sogi replies:

Decay of wealth? In fact over the past five years net wealth has gone up approx 48%. This despite the drop in the real estate market which constitutes a much smaller share of net wealth than equities. Also consider that the bulk of spending and wealth is concentrated in the top quintiles where income and wealth have gone up at an even faster pace. So the press and meme about decay of wealth is a red herring designed to part you with your money and transfer it to the top.



I am thinking about a trade. The Federal Reserve has driven short-term interest rates down. Investor fear of what's to come has pushed long-term (10yr) bond yields down as well. But Fed's actions are inflationary in the long run. Thus at some point inflation will pick up and this should drive long-term bonds lower. I cannot short stocks or bonds in my client portfolios thus I was thinking about buying either a mutual fund or an ETF that is shorts or has inverse position (through futures) of US Treasuries. My thinking is as follows if you assume a duration of 10 year bond is roughly 7 years, then my downside that the rates decline from 3.3% (an all time low) to 2.3% is about 7%. My total downside risk if rates go down to 0% is 23.1% (7% x 3.3). This is more of a mathematical downside, but not a real downside. The upside: depending on how much infaltion the Fed's actions create, inflation may run higher than we observed in the recent past, rates may rise to let's say 6%, let's make it 6.3% to keep the math simple. The upside is 21% (3 x 7%). Here I am ignoring a management fee that a fund company charges, but at the same time if, I understand this right, there is no cost of carry. The bottom line: if you assign probabilities of interest rates going down, doing nothing or going up, the expected return looks good.



Temps in Aspen are tracking ~10F below average for this time of year. I remember past lousy snow conditions hereabouts as the season wound down going into Spring, but I can see 6 foot drifts out my window now, and the locals all report best conditions ever. There's even talk of extending the season a couple of weeks through the end of April.

On a less cheerful note, the town does feel emptier than usual at spring break, and though retailers report good activity, traffic through realtors' offices appears to be down. Existing construction projects are continuing, and I heard of a new 18,000 sf house (not a typo) going up downvalley, with bids being let for plumbing, etc.



Chick fil AWatched the market soar today as the Fed cut rates by 3/4%. Now the news tonight is full of political commentary by the pundits. This country is in serious trouble and the press is engulfed in picking apart someone's speech that he made today. Be ready for real estate to plummet and for some big builders to fall this summer as the subprime mess further unfolds .
The economy should be what everyone is addressing as it is affecting all of us and our cost of living. Yes our next President will have some input on what direction the USA goes, but our weak dollar, fuel costs, food increases across the board (especially eggs, milk, bread) should be our biggest concern.
I know one company that is bullish on our local economy: Chick-fil-A. They have been in our local mall for 12 years and are currently demolishing a closed Ponderosa and will begin constructing a free standing all-brick unit, with inside playground and drive-thru, that will employ 60-90 workers. People have to eat. My best friend owns the mall unit and will own/manage this one as well and it will be closed on Sunday. Chick-fil-A is an interesting story — owned in total by one family.

Steve Leslie writes:

Chick-fil-A is a real American story. I liken it to Dave Thomas, the founder of Wendy's. Entrepreneurs should read Truett Cathy's autobiography as well as some of his other books. He is a devout Baptist philanthropist and just a wonderful man and a great American. My stepson worked as a camp counselor in Georgia for the Cathy foundation. I can't say enough as to what an inspiring figure and icon he is.

On the business front, I recently saw an interview with Dan Cathy, Truett's son, who now runs the organization and he mentioned not surprisingly that they are aggressively expanding into China and Asia. On a marketing note, I think this is pure genius — a cow holding a placard with their slogan "Eat Mo Chikin."

Dan Costin adds:

Went through South Carolina a couple of weeks ago, subsisted on Chick-fil-A and Maurice Bessinger's barbeque. Both manage to antagonize various portions of the population (Maurice likes to display literature about alternative interpretations of Civil War outcomes in his stores, and flies a big Confederate flag) but you just leave your own values at the door and go in to enjoy the good food. Not unlike visiting foreign countries with different belief systems.



The secret to my success is largely due to listening closely to those who are afraid of saying something stupid, but say it anyway, and avoiding those that feign certainty, say it brash and loud,  but are simply cheering on the crowd.  The person afraid that he may be saying something stupid, usually is thinking for himself and has thought things out and cares deeply.

My success with running started when a shy skinny runt of a kid walked onto a college track team without any high school experience, but did it anyway because he knew he had some talent. And had to beg the coach to even let me in practice, only after having a PE teacher vouch for me.

Most of my success in individual stock picking has come from my wife. When she talks about a stock to me I know she has thought about it and feels I am the expert. Hence she has a wonderful screen to weed out only those she is pretty sure are good bets.  If it wasn't for her I would probably stick solely with indexing.

A few of her calls, mostly after studying Value Line: Our first big winner, after studying was GGG in 1996. Next she begged me to ditch HP, now HPQ, after a three-bagger before Carlye came on board. A couple years ago she picked Deere.  She asked me to buy some prime Indiana corn farmland with her Dad — a double risk of feeling stupid.

When she says these things I have learned to pay particular attention.

I will leave unspoken the success I have enjoyed ignoring or shorting a "know it all."

Craig Bowles writes:

Economists such as Alan Greenspan are successful never making a stand, though. I used to work with one of those respected economists and he would never take a stand on anything. Worse, he seemed to get joy when another economist would take a stand and be wrong. He took it as confirmation that remaining neutral is the way to go.



Researcher: Basic Greenhouse Equations "Totally Wrong"
Michael Asher - March 6, 2008 11:02 AM

New derivation of equations governing the greenhouse effect reveals "runaway warming" impossible

How did modern researchers make such a mistake? They relied upon equations derived over 80 years ago, equations which left off one term from the final solution.

Miskolczi's story reads like a book. Looking at a series of differential equations for the greenhouse effect, he noticed the solution — originally done in 1922 by Arthur Milne, but still used by climate researchers today — ignored boundary conditions by assuming an "infinitely thick" atmosphere. Similar assumptions are common when solving differential equations; they simplify the calculations and often result in a result that still very closely matches reality. But not always.

So Miskolczi re-derived the solution, this time using the proper boundary conditions for an atmosphere that is not infinite. His result included a new term, which acts as a negative feedback to counter the positive forcing. At low levels, the new term means a small difference … but as greenhouse gases rise, the negative feedback predominates, forcing values back down.



Time for the trader psychology profile evaluation

1. Before, during, and after trades you are:

A. Anxious, miserable, regretful
B. Strapped, teetering, busted
C. Wined, rummed, beered
C. Aroused, orgasmic, disgusted

2. What do you think of when asked to define empathy?

A. "Everyone but me is wrong"
B. "I'm pithy"
C. Oskar Schindler's feeling towards cheap labor
D. Blue to the color-blind

3. Which of the following dreams do you recall?

A. You were the captain of the Titanic and you sank the iceberg with your six-shooter
B. You won the Scarlett Johannsen date on eBay and she fell in love with you.
C. Your self-doubt resulted in the permanent disappearance of your image in the mirror
D. Scientists discovered that Ptolemy was wrong because the big-bang vector run backward to the beginning of time has the locus of origin in your left frontal lobe

4. The role of the government in capital markets is:

A. To reduce standard deviation in evolution
B. To increase sexual deviation in government
C. To prod downer cows into the slaughterhouse

5. When you compare your results to others

A. Their successes are random accidents
B. Your successful accidents had clear purpose
C. Others are irrelevant because they all lie
D. You can't recall which account is the one you brag about

6. The boundary between causation and coincidence

A. Is impossible to determine
B. Is defined by your dura mater
C. Was defined at your alma mater, but you cut class
D. Your winners evidence causation, your losers are a coincidence

7. Rank the pain:

A. Short an up market
B. Long a down market
C. Missing a big movement
D. Having a big movement



The recent order flow and price action seems so lopsided from day to day with up volume or down volume totally dominating on one side or the other recently.

This is an example of herding. Today NYSE up volume is 121m and down vol is 76k. Look at the stem chart of the closes and notice how they bunch at the hi/lo of the day. Chair and Larry studied this before. This is additional evidence of the trending hypothesis mentioned before. This seems to be related in some unknown and as yet unstudied way to predict the big gaps.

The decimal point is 1 digit(s) to the left of the |

Random action would create more equal boxes.



BinocularsOne of the connections is viewing the market as a super scout, watching and measuring all events in other markets as an adjunct to how to play the current market game. As I have noted before, the super market scout, all seeing and sentient, noted what happened in the three final days of the insider trading decline at the big French bank, and noted a big down open on Monday, and a big down follow up, which was greeted by and was contemporaneous with two huge 5% opening Wednesday, and declines on Tue, and Wed Jan 22 and Jan 23 in the US each followed by an up 5%. This was finally completely recapitulated today, and it was like the Super Scout had seen an opportunity to unleash much capital from the slow moving and undercapitalized to support the infrastructure and then took it.

What other scouting tips does the Market Scout see as it scans the occurrences around the world and looks for opportunities?

Rodger Bastien adds:

The Super Market Scout reminds me of the great "bird dog" scouts I have known whose job is to identify amateur talent for Big League baseball clubs The truly great ones first and foremost look beyond the numbers of a player to figure out what is really going on with him. The sand lots are full of players who hit .400 but can't hit a curveball or whose bat speed won't allow him to turn on a pitch and drive it; pitchers who mow' em down at the Division II level whose fastball never touches 90; great college power hitters who hit 20 home runs with aluminum bats whose power will not translate with the less forgiving wooden bats used in the pros. On the other hand, the wild, hard-throwing lefty who walks ten a game or the raw-boned, 6'4" 240 pound first-baseman from North Dakota who crushes the ball but strikes out every other at bat are the treasures, whose upside is limitless and flaws are fixable. The Super Market Scout hopes that his competition focuses on the "noise"– the gyrations, the trumped up economic activity and bail-outs et al that all of the amateurs focus on. Like the Bird Dog Scout, he will quietly look beyond the numbers, where the true value lies.



DunceThe current financial "crisis" is somewhat surprising given that less than five months ago the market was at all-time highs. The only other times the market was down in a five month period 10% or 20% was toward the end of the big bear market of 2002. It is interesting to note how the pattern occurrence has shifted to the period more at the end of the 2002 bear market rather than the peak period of 2000 where many of the patterns had been showing up. It is not statistically significant by any means, but a good example of what I discussed under the idea of precedent or case-based reasoning. Overlapping occurrences show that 100 days out there is a good probability of a significant rise in the market after a five-month 20% drop.

Sometimes when I go out and around in public I look at people and think to myself, "Gee, they look kind of stupid." They probably think that about me too. Dr Goulston and Dr Dorn would rightly advise that compassion is better. They are right. But when I see what goes on in the market sometime I think to myself, "Gee, that is kind of a stupid thing to be doing." Like a 27 point gap down. These are opportunities that seem to occur with more frequency than one might think, given all the sharp operators out there. Sometimes its just a matter of sitting around waiting for such an opportunity. I do stupid things in the market too and berate myself over the stupidity, "What was I thinking." In the context of the evolutionary fray this is acceptable and expected as out in the wild. Tomorrow there surely will be some silly things going by both the Fed and the market. Hope I don't do something stupid.

Nigel Davies adds: 

There are helping professions (psychologist, doctor, clergyman) and predatory ones (chessplayer, trader, lawyer). Those with predatory professions shouldn't feel bad about seeing the worst and trying to exploit it. It's just part of our job in the rich tapestry of life.

Stephan Jovanovich replies:

GM Davies is too modest. The predations of the professionally helping can be the worst of all precisely because, far too often within the confines of their safe authority, there is no second opinion. Like the school teacher the professional helper almost always has the last and final word. Traders, chessplayers and lawyers have to battle it out. Without their examples of contest, we would have no idea of liberty.



I went a few times to the taping of the TV series “From the Top” with the best young classical talent from around the globe and would recommend anyone who happens to be around Carnegie Hall around the time of the taping attend. The tickets are free from Freetix.  

A few years back I went to one featuring Lang Lang  before he became famous. So you might catch the next Isaac Perlman! The shows are full of humor (“Your cell phone ringing will be punishable by death”) and chickens walking across stage, really emotional moments, like the grandfather from Korea who'd never seen his virtuoso grandson in concert. Suitable for kids from ages 10 and up.



EurosThe data in the commonly available time series for stock prices and most economic statistics are not adjusted for any fluctuations in the exchange rate of the U.S. dollar. The series for "real" economic measures do make valuation adjustments for inflation using the CPI and PPI, but even those "real" numbers are not adjusted for the dollar's changes in value. The nominal value of the S&P 500 suggests that we have yet to see the equity markets fully discount the carnage. However, when the S&P 500 Index is adjusted for changes in the dollar as measured by the Federal Reserve Major Currency Index, it is hard not to see the blood as already flowing. The dollar-exchange-value adjusted S&P 500 is now only 10% above its low at the end of the last bear market (3/3/03). The adjusted index is down 43.2% from the bubble high (8/30/00) and, even worse, it is off 27.3% from its 12-month high on May 29th of last year and down 19.15% over the last 3 months.



08:41 LEH Lehman Brothers: Wall Street rallies to aid Lehman

Daily Telegraph reports Wall Street's leading investment banks have rallied around the co after the Federal Reserve Bank of New York urged them to support the institution in order to try and preserve financial stability. It is understood the New York Fed contacted key executives at a number of leading banks, including GS, C and MS, to discuss Lehman's situation over the weekend. By yesterday morning, the banks' prime brokerage departments - which service hedge fund clients - were under strict instructions not to do or say anything in the market that could damage Lehman. It is believed that bankers were told not to solicit Lehman's clients for business or to give the impression the bank is uncreditworthy.

Recall Bear hubristically refused to help bail out LTCM during the storied meeting at the NY Fed. Small wonder the same NY Fed did not call around urging the Street not to solicit Bear's clients when it was mortally wounded.

I recall in the aftermath of LTCM, the dark mutterings about how revenge would be taken on Bear, and how memories are very very long.



A couple of non-equity market indicators at the close of today I think may be worthwhile to look at: Inflation — the 5 year, 5 year forward inflation breakeven fell 33bps to 2.32%. The high was on March 6 at 2.80%. Credit — opened wider but closed 5bps tighter on investment grade CDS, 10 year swap spreads down 9bps.  Commodities — after being up around 3% Gold closed unchanged, other barometers were down much more with the DJAIG down 4.5%. Currencies — opened weak and DXY closed down .28% from an initial move of down 1% plus depending on the pair, the dollar was noticeably stronger versus GBP, NZD, AUD.



ShamrockMy favorite grandfather used to visit us in New York each spring so he could take me to Jack Dempsey's on St. Paddy's day and then we could walk over to Fifth Avenue to inspect how well they had painted the median stripe green in honor of my birthday. By the time I was five I had figured out that the City of New York had a slightly larger constituency that it was honoring on March 17th; but it was too good a gag for either Granddad or me to want to give up. Reaching the age of 63 seems as much of a wonderment to me as it was to the toddler that there was a wonderful parade for his birthday. Granddad never saw 60, even though he was the oldest survivor of a crew of hundreds of Serbs who worked the Colorado and Arizona mines and then rode the rails to California to work on the Owens Valley aqueduct. If he were here, he would buy all of us a round of Guinness and tell his joke about the Irishman, Englishman and Scot and the fly and the glass of beer.



Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I'm now a poor boy
High-yielding casualty

Because I bought it high, watched it blow Rating high, value low Any
way the Fed goes Doesn't really matter to me, to me

Mama - just killed my fund
Quoted CDO's instead
Pulled the trigger, now it's dead
Mama - I had just begun
These CDO's have blown it all away

Mama - oooh
I still wanna buy
I sometimes wish I'd never left Goldman at all.

I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening me!
Super senior, super senior
Super senior CDO - magnifico

I'm long of subprime, nobody loves me
He's long of subprime CDO fantasy
Spare the margin call you monstrous PB!

Easy come easy go, will you let me go?
Peloton! No - we will not let you go - let him go Peloton! We will not
let you go - let him go Peloton! We will not let you go - let me go
Will not let you go - let me go (never) Never let you go - let me go
Never let me go - ooo



On January 22, 2008, after a plunge to the 1255 area while U.S. markets were closed for the Martin Luther King holiday, the (March) S&P 500 futures opened in the pit at 1262.0, which stood as the pit-traded low of the day. The close was 1309.0. Today's pit open of 1260.5 after an overnight plunge to 1255 is still the low, but appears in imminent danger of being taken out, despite a 26-point rally from the open.

Kim Zussman adds:

Soon we could have enough rallies off huge down opens to start wondering when the streak will end.  Like playing chicken when you don't know that the opponent might be suicidal.



GregI have been thinking a lot about hands, wrists, and markets over the last three weeks. The miracle flexibility and dexterity in human hands gave our distant ancestors unmatched power over the birds and beasts. Any that early humans could not reach to club could soon be speared, hooked, or hit with arrows.

Man's hands pushed his mind forward, as any and every natural object was lifted to our gaze, rotated, pondered, and then chipped, chopped, or shaped to something useful, or else discarded. The term "dexterity" originated in the 16th Century as a "mental adroitness." Do our minds direct our hands, or do our questing hands draw our minds forward?

Launching the industrial era were modern securities that allowed investors to lift, examine, and reach in to finance an endless array of early enterprises. Enterprises could be freed from the arbitrary control of single minds, who by accident or past achievement gained dominion over productive resources. Just as yesterday's costs are today sunk, so yesterday's management has value only in looking forward. The powerful — eventually weakened from pride, sloth, age, or just error — could be separated from suffering assets. Financial capital could flow to fund brilliant but poor or outcast entrepreneurs. And when successful businessmen lost their edge, management control could be quickly shifted to new leaders.

Marketable securities gave investors flexibility and liquidity to diversify and to shift their assets among productive enterprises smoothly without disrupting the enterprises themselves.

But with the wondrous flexibility of our complex wrists and fingers comes fragility. Our knees and ankles are far less flexible joints, but can bear and launch into the air the full weight of our bodies, something I learned three weeks ago that our wrists cannot manage.

We have seen over the last few months an expected fragility in securities markets. As we search among possible causes, one seems to be a mixing of two very separate sets of games and players.

Over centuries and especially the last few decades, the securities market evolved ever more complex capabilities to deliver capital to productive enterprises. Booms and busts erupted from time to time, usually as governments changed rules, expanded money supplies, or defaulted on debts. But my thought is that though securities markets have long developed financial instruments to diversify investments in stocks and bonds, real estate-based securities were an innovation whose different nature was not fully appreciated.

Real estate assets and debts have turned out to be beasts not so easily tamed by securities and diversification. Maybe real estate play is somehow more of a brute-force game. The houses and office buildings are fashioned from the earth and there they stand for decades, their value dependent upon outside demand. The value in homes and buildings is a more inert thing, and a building will never astonish the world with a new microprocessor, search engine, jet engine, or miracle drug. Value can evaporate as fast or faster from productive enterprises, of course, and I don't suggest home mortgage debt is somehow bad while corporate debt is better. But a business is an ongoing creative enterprise that can reward investors in ways homes and office buildings cannot. All assets can as easily drop in value as rise, but not all assets though can give birth to new assets (Apple unexpectedly created iPods for example, and Microsoft created Xboxes).

So when government regulators severely limited the U.S. securities industry and sent IPOs overseas, U.S. firms vastly expanded securities derived from beastly real estate.

Securities from the somehow brute-force real estate industry flowed into the ultra-sophisticated world of modern investment and hedge funds. The mortgages (literally, from Old French: 'dead pledges') were dressed like financial securities but their nature was subtly different. They played a different game, and when push came to shove, fragile securities firms hit the wall.

So it was for me, three weeks ago this evening. I was invited to play an evening game in a 30-and-over basketball league. The opposing team wore basketball uniforms, but played rough. I scored well in the first half, but early in the second half set a screen and was pushed hard from behind. Then I was shoved again, as if I was being blocked, and was launched forward. I hit the wall hard and broke both wrists. I had surgery on both a week later. And since then I have had plenty of time to contemplate the fragility of hands, wrists, and markets.

To students attending our FEE and Economic Thinking Seminars I explain that though I am a very good basketball player, I was playing against a very good football player.



Tai ChiTai chi informs most everything I do.  profound physiological change can't help but change one's psychological, emotional, mental, and spiritual processes.  Changes are evolutionary, not revolutionary, experienced over years of training.

For me, trading is all about self management.  It helps of course to have an edge, but I still find much bigger challenge and opportunity in controlling self,   keeping emotion to a minimum, removing ego, greed, and fear, staying in the moment — the often used sporting phrase "staying within yourself" –  this is where trading crosses into the spiritual, where awareness and intention are combined in equal measure.

The genius of the human organism when one has entered that rare space, the "zone," is remarkable and I daresay exceeds the genius of most trading programs.  it is the same, albeit elusive zone, one pursues whilst engaged in martial contests,  presuming nothing — yet expecting everything.   One responds to what is and not what one hopes or fears.  A state of "excited calm."

In tai chi, "listening" skills are the Holy Grail — discerning the opponent's intention before it manifests in a fist.  Yin — "soft" — is the ultimate defensive power.  Moments of actual conflict should be few and short.  Self-defense starts long before physical contact.  "At the slightest move, I move first," a credo providing security on the streets, i.e., choosing the right train seat, the right road, the right time of day, the right word and in the market, particularly recognizing a move before the move.

While the victories are sweet, the real story is in the trades I haven't done, the moments of stillness, waiting, listening for just the right conditions.  Training and preparation are much more intensive than any actual contest, making the actual contest a low stress exercise.  My active trading is greatly dwarfed by my time studying, watching — listening.



Amid all the records of Friday, March 14, and the carnage, I noted the S&P futures range of 45 points in the first half hour from 1325 to 1280, and the range of 50 for the day, and wondered if this were a record. But I quickly ascertained that this was only the 25 th largest point-wise range since 1995 and that the biggest were:


The 25 biggest were clustered in 2000 with six that year, and none between 07 24 2002 and 02 27 2007; the latter date was in retrospect the start of the carnage, with S&P futures closing 10% above today at 1445, rollover-adjusted.



A man named Poon Lim holds the record for the longest survival at sea adrift.  Good story for a choppy market and keeping the faith after having fulfillment of hopes postponed.
From Wikipedia: "Poon Lim or Lim Poon (March 8, 1918 - January 4, 1991) was a Chinese sailor who survived 133 days alone in the South Atlantic." His raft was rescued by Brazilian fishermen on April 5, 1943.

An account of Lim's story was presented in Sole Survivor by Ruthanne Lum McCunn.   



 I am sure JP would be proud to see his legacy coming in to restore confidence — though I doubt the all-night meeting was as dramatic as lining up the Trusts in his library and passing around the subscription pad until it was full, back in '07. I am checking the wire for any gold shipments from London, maybe Tuesday. And the Curb rates still below triple digits last time I looked, so that's a help. Commodity corner still holding up fine, and I've seen no lines at the Knickerbocker. All in all an unchanged week.

James Sogi adds:

The mob should be satisfied with the sacrifice of the Governor and a major brokerage. Just as after Charles Barney went down, they had to stop the carnage somewhere. The Panic of 1907 by Robert F. Bruner and Sean D. Carr is a good recount. See especially page 133 on what happened Monday morning after the brokerage credit crisis was relieved.

Stefan Jovanovich replies:

"The mob"? The Governor was such a pathetic amateur as a criminal that he managed to trigger the most basic surveillance mechanism in the Federal banking system by repeatedly splitting cash transactions to keep them under the $10,000 limit so that they do not require reporting. If he'd had had the gumption to walk into the bank and ask for $50,000 all at once and filled out the form and put the cash in a safe deposit box, no one would have been the wiser.



Falling StarsI start by noting that about 10% of the S&P 500 have fallen this year at a rate of 80% or more for the year. I also note a surprising number of fallen stars, once $50+ stocks that just touched a bit below $20 as if that were the signal for accumulation. I note C, FNM, INTC, DELL, NVLS, and a number of lesser known. Many others are very close, such as General Motors and Pfizer. It's as if it were a signal for the analysts in these companies to issue a buy report once the margin buyers and weak longs have been extricated, and I have not overlooked this opportunity.





Adi Schnytzer concurs:

It's time the world learnt how data collection functions. These numbers are produced by turkeys who never ask whether their numbers make sense. And to think that markets respond to them!

Bill Rafter adds:

Lots of the data put out are also seasonally adjusted. One of my big peeves is that the data monkeys who work for the gummint do not know how to properly do the seasonally adjustment. As a result there are a lot of bad data out there. The real problem comes when the bad data are released, and everyone follows them. In other words, perception becomes reality. You (having the good data) have to follow the bad data also, at least until some time elapses and the whole thing gets corrected. So you have to watch against being too clever for your own good.

Jason Thompson reveals:

I've developed a localized index of inflation that is actually reflective of folks' consumption baskets. It includes taxes, insurance, education, and healthcare in more accurate weights. It has shown me how far off the CPI has been versus reality since at least 2002.  The spread has consistently grown! This local inflation measure focuses on prices in the Chicagoland area and so would be best compared with CPI-U. Further, the resolution is quarterly not monthly. The inflation measure for Q1 2008 will likely show an increase of 8.6% YoY.



I am a firm believer that games are won with great defense.

This afternoon, I took three of the boys who are going to play for my summer basketball team to watch the Missouri 3A Boys Basketball State Championship. I wanted these boys to see great defense in action. Maplewood Richmond Heights (MRH), the neighborhood I grew up in, was playing in the state championship game today Lutheran High School North.

This was a rare opportunity. On this team, they have one young man who is a genuine Blue Chip Division l recruit prospect…..quite literally one of the best players in the country. Another young man is a possible Division ll player based on his defensive prowess alone. The gentleman who coaches the team played for St. Louis University and I believe played pro ball overseas for a short while. A truly gifted player and an amazing coach…..or I should say, an "intense" coach. His style is 100% in your face. To say he rides the boys hard and will yell at them when they make a mistake is an understatement.

I was very excited about my boys getting a chance to see these two player and this coach in action.

The game started out very slow and, unfortunately, very lopsided. MRH which plays the most tenacious, vicious, aggressive defense I have ever seen at the high school level, had gotten to this game by forcing an average of 27 turnovers a game. That is a huge number of turnovers! MRH's defense had very few turnovers in the first half, and their offense (which was averaging nearly 60 points a game), was ice cold.

Halftime score: Lutheran North 32, MRH 16.

If someone were a betting man, I'm sure they'd have gladly put a large sum of money on Lutheran North to skate thru the rest of the game to win the state championship…..unless they'd seen MRH play in the past and knew what they were capable of.

To say the second half was unbelievable doesn't do it justice. It was like someone flipped the "on" switch for MRH. Did MRH change their game plan? Not that I could see. Did they panic and start to throw up 3's to get the score close? Not that I could see. They had a plan….. a system that had served them well and got them to this point, and they stuck with it.

The MRH boys were flying all over the court in the second half. They quickly cut North's lead from 16 to 8 in just a few minutes. The relentless pressure began to slowly wear down Luteran North as they turned the ball over to MRH on almost every trip down the court. North didn't even score for the first 6 minutes of the fist half, by then MRH had made it close enough that North realized that they were in a real game and fighting for their lives.

MRH continued with the relentless pressure, forced mistake after mistake. When North would score, MRH didn't push the ball up the court in a hurry. They took their time and worked the ball up the court and set up their plays…..and most importantly, they executed their plays!

They took their time and set pick after pick. When a North player would push or shove an elbow into their ribs, the MRH players would push back and return the favor of the elbow.

And then it happened. You could almost see North began to literally break down. Yes, North still had the lead, but they realized that MRH was chipping away at their lead faster than the clock was running down. North began to press harder and try harder….and their mistakes began to increase and amplify.

MRH fought back and tied the game with just over a minute left in the game. But North (who was not only an excellent team, but were excellently coached as well), answered by hitting a beautiful three-pointer.

Now, around a minute left in the game, MRH was down by three. MRH called time out and set up the play. MRH took their time, drove the ball down the court, carefully set up their play. If you blinked, you missed what happened next. MRH, who is lead by these two amazing guards, looked like they were setting up to run the clock down and shot the three to go for the tie. Then, all of a sudden, one of MRH's big men (who hadn't done much all game, rolled off a pick broke into an open area in the paint, caught a rifle of a pass, turned, cut to the hoop and laid it in!

Now, there's less than a minute to go and North has the ball and a 1 point lead. You'd think MRH was in a bad position, but you'd be wrong. MRH was in a great position. They were going for the win with "girl who brought them to the dance"……they were going for the win with their defense!!!!

North called a time out to set up their next move.

MRH set up their press. MRH's best player #2 had one job and one job only. Cover North's best player, #12. MRH's coach had such confidence in the rest of his teams defense, that he kept #2 on task. STOP # 12. By neuralizing #12, North to match up their other players against MRH's unbelievable defense.

It was no contest. North managed to break MRH's press, but MRH's defense stopped North and carefully brought the ball up the court with 24 seconds left in the game. MRH proceeded to play catch and run the clock down.

With 10 seconds left, they put the ball into the hands of their best player, #2 (as an aside, this kid is utterly amazing, a rare, rare talent). #2 is not only unbelievably fast, he is stunningly quick. He juked left, right, left and then put a move on the two men covering him and blew right between them, drove the lane, faked right, stepped left and elavated. He lifted the ball high, double pumped it, leaned into the North player (looking for the foul), reached his left out further left with the ball, skillfully flicked his wrist to kiss the ball off the backboard and into the basket!

The MRH players and crowd went berserk. MRH was now up by one point. MRH had trailed the entire game. The only lead they had the entire game came with four seconds left to play.

North called a timeout. The MRH crowd was going crazy. But the MRH coaches were all business and got the players ready for one last defensive stand.

North got the ball in and made it just across half court with less than one second left in the game and launched a desperation shot.

They missed!

Final score: MRH 56, Lutheran North 55.

The boys had a great time. I was very pleased that they got to see this game. It was actually more than I could have hoped for. I wanted them to see what it meant to play tenacious defense. I've told each of them that none of them have developed the offensive skills necessary to play at the high school level, but that that didn't matter. If they will simply do what I coach them to do, I will turn them into a defensive animal. Any high school coach will turn back flips to have a player who has the ability to play aggressive quality defense. Playing good defense is mindset coupled with lots of practice…..something 95% of boys at this level know nothing about. They all want the offensive glories.

As I've told them, you have 4 years to develop your offensive skill, but in the meantime, you can make the team, and likely start, by being the guy who is willing to dive into the scrum to grab the ball, or take a hard charge for an offensive foul (against the other team). As I've told each them, if you're willing to leave a little "red DNA" on the floor every game, you'll always have a place on the team. Translation: Coaches want players who are willing to bleed for them!

Not everyone has the athleticism necessary to be a great offensive player. But most any athlete with a little bit of ability and whole lot of heart can be a defensive specialist.

Too often in life, or investing, we find ourselves pushing hard to dig our ways out of trouble. We find that we're down 32 - 16 at half time just like Maplewood was, and we push harder and look for ways to make the big play to make up the difference as quickly as we can and work our ways out of trouble. So we abandon "the girl that brought us to the dance".

You may, from time to time, need to tweak your strategy. But if it works and it got you to the dance, you should continue with it. Of course, I believe that this only applies to defense. A good defense can make up for a marginal offense, but a great offense will have much more difficult time making up for a marginal defense.

Just like in todays game, investors need to make sure that they've got a great defense…..and also remember, that a defensive strategy will go thru a rough period from time to time (just Maplewood went thru today in the first half), but you don't bet against that which has worked and worked well.

MRH resoundingly proved that today. I hope my players got that message today. I know that I did!

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