TricoteuseListening to the mainstream media, with all of the hyperbole, could cause one to think that the sky is falling. Partisan bickering, grandstanding, and strong invective by our elected officials has spilled over to the already roiled markets, especially since we're so close to the election. More than a few of my mystic, non-thinking acquaintances have been advocating revolution, with Capitalism being replaced by a kinder, gentler Socialist system. Their true desire is to punish the evil greedy speculators, hold all the rascals accountable, who with the minority party have decided to ruin this great country. Their anger is palpable, and their ultimate dream is to become a tricoteuse. Theirs is only a dream, as sitting at the guillotine would require courage.

Misan Thrope is incredulous:

Didn't Lehman, Washington Mutual, Wachovia, AIG, Freddie, Fannie, Merrill Lynch and Bear Stearns just go down the tubes? Or is it a figment of the MSM's imagination? Might not [insert your favorite name here] get in trouble next if nothing is done?

Stefan Jovanovich explains:

The hyperbole is in the argument that but for the bailout payroll-checks will bounce. I did a Google search, and I could not find a news article about a single company that had been unable to make its payroll because the Federal government had failed to reflate the real estate asset-backed securities market. The connections between the "financial system" and the actual private business being done in the country may once have been real, but they are now largely a fiction. Small businesses that I know operate on a cash basis and don't need/aren't granted bank loans nowadays.

Eastsider concurs:

I think we're seeing a classic availability heuristic bias in the public analysis. The clients of DC looter-lawyers need the bailout, and engineer hysterical media coverage of the problems. The press is now just a firehose of bull____, drowning out all competing viewpoints.

It's a tired cliche to say we're racing toward the world Orwell and Rand forecast, but that analysis seems increasingly, depressingly, apt.

Laurel Kenner adds:

The American Enterprise Institute, W. Isaacs and  others fingered the so-called "Fair Value Accounting" rule as a post-Enron creation run amok, a major cause of the credit freeze.
Up until tonight, the SEC said no, the rule just reveals what lousy investments the firms had made. They just announced sensible modifications to the rule.
I can only wonder what can the SEC possibly say to the seven major U.S. firms that have fallen because of this rule? Sorry, we were a little too enthusiastic… too bad about you.
In any case, I'm sure the new Tricots will love this one.

It seems we are in agreement, when Clive Burlin intervenes:

Ms. Kenner, that you, of all people, would say  that! The whole issue of FASB Statement 157 is a total waste of time; from start to finish.

George Parkanyi ponders:

The news about Fair Value Accounting is interesting, especially to see to what extent it moves the log-jam in the credit system.

With foreign aid, sometimes you can have nasty unintended consequences. For example, when food aid is distributed for free for too long, local agriculture (and self-sufficiency) can crash because the farmers can’t compete with the free food.

In observing the behaviour of LIBOR lately, one wonders if institutions are simply waiting for the government (the patsy) to sell to at relatively inflated prices rather put in the effort to value the securities and try to trade with each other? Could the government’s presence actually be detrimental to a resolution?

An Anonymous Contributor Adds:  

While I am not an accountant, I believe both type of "Guidance" ("active market" and "distressed sales")  just raises the hierarchy of guiding to a higher level. (Could someone enlighten me if I am wrong). I believe FAS 157 pamphlets originally used both these cases as examples of when to use "intrinsic value" versus "market values". What is really new?

Because "active markets" and "distressed sales" are both judgement calls, rather than defined terms, good luck getting your auditor to sign off on them. They remember Arthur Andersen too well and seem sure that there are no penalties for being too strict on interpretation, but get busted for being too liberal.

SEC seem to be taking the stance that "some accounting mistakes were made, but not by me". So they are willing to sell their brother to save themselves. Perhaps as close to an admission of guilt as you can expect to get from a government regulator. 



Chair1. It was symmetric with the previous week where it opened limit up on the news. They had reached a compromise, and then it went limit down, indeed 100 down when they didn't reach an agreement. Amazing that the time horizon is so short. As soon as they voted the agreement down, it was clear that they'd come up with an agreement shortly. The stock market took care of that. "It's amazing how a 900 point drop in Dow can get their attention" with all the lobbyists involved, and the power increases, but yet the leverage of traders is so great that they automatically get exited from their positions on bad news even if it's going to be reversed the next day at the open.  

2. This crash and the Oct 19, 1987 both were symmetric in that the Secretary of the Treasury caused it. In the first one, Jim Baker said, "The Europeans have to strengthen the currencies." In this case, there was revulsion against a political plan to feather the nest of both parties. The bonds in both cases had their biggest up moves in history, but in 1987 they stayed up for the next week, and in this case they reversed the next day. Commodities had one of their worst days in history showing that all markets are interrelated and when wealth goes down, all spending is reduced.

3. This crash brought all markets to many year lows, and was the final revulsion, the final throwing the frog into hot water that cleared the decks as the move the next day, one of biggest in history, showed. The discount rate is always ready to be lowered when the market goes down by more than 4% in a day as it did on Jan 21, and in Aug 2007.

4. The European markets were down a few percent more than the US at the open, as were Japan and Israel, foretelling what was going to happen. 

Steve Leslie notes:

We tend to remember October '29 and October '87 — but since 1990 October has been the best month of the year on average for performance. November and December rank #2 and #3. Also, the Dow has been down four straight quarters — extremely rare.



K ZHave you seen the kid who throws a tantrum to manipulate his parents? When he gets what he wants, he quiets down and seems vaguely satisfied. When he doesn't win the game, he throws an even bigger tantrum.

It's not that he particularly wants his object of desire; rather, he is in a power struggle with the authorities and probes their limits. If his parents keep giving in, eventually he will conclude (unless he is religious) there are no higher authorities. He himself holds the power, and is frighteningly in charge of his own destiny in a world without order or structure.

Alex Castaldo queries:

Are you talking about the child or the market?

Vince Fulco adds:

On a related note, when some of the senators were stumping for the 'bailout/rescue/whatever' speech, I was reminded of the prior generation's remarks prior to meting out a spanking. "This is going to hurt me much more than it is going to hurt you." Many of us with 1st and 2nd generation immigrant parents know how that one really turned out!



OK7, from Anatoly Veltman

September 29, 2008 | 21 Comments

A VeltmanA real-life anecdote: About two years ago I get a call from an acquaintance, running R&D for multi-billion blackbox. They were to enter the Commodity arena and he wanted a suggestion on a data-source. I said CQG. In spring of 2007, I notice CQG symbols BOK7 (Soybean Oil), COK7 (Cocoa) and OK7 (Oats) moving together day-in day-out. You pull three daily charts — and you think you’re looking at one! It turned out, their Brains initiated a major buy program based on the similarity of the data symbols!



I see Vikram Pandit brought out the cane today and walked up to the Wachovia window to buy the debt in exchange for $1 per share of C stock. Other canologists such as Buffett and BAC did likewise last week. Mitsubishi came across the Pacific and picked up some MS. I saw Icahn on Fast Money itching to pull out his own cane. Perhaps he will be buying more Biogen. I myself find comfort in my position of MSFT, which announced an increase in their dividend and a share buyback program. They are in stout financial shape relative to other corporations.



ScottIn high school, I had scholarship feelers to play Div. II college football. I could run a 4.5 forty and high jump 6'8". I thought I was on top of the world. Then I got sick with a horrible case of mononucleosis and almost died. My playing days were over. At the time I was devastated.

Now my oldest son wants to play football. I will not let him. Why? Because as devastating as it was to get sick and have to give up football (the best I ever ran a 40 after that was in the high 4's, and I couldn't jump anything like I used too), as an adult I've come to view it as a blessing in disguise.

To this day, my knees, ankles and back ache to the point of being almost debillitating at times. I get headaches and my memory doesn't work as well as it used to. As a corollary to this, I also suffered several concussions while playing sports. I was knocked silly numerous times and was knocked out cold more than a handful of times.

Then today I see this article on MSN about the danger of concussions and wonder if there isn't a connection.

Looking back, I wish I had never played football. Yes, basketball pounded my joints and I'm sure baseball and track did their fair share of damage, but I don't think they cumulatively added up to the pounding I experienced playing football. Yet I love to watch the game to this day and look forward to playing at our annual Thanksgiving morning touch football game every year with the guys from church (of course, I can hardly walk for the next two or three days afterward).

The human body eventually wears down and doesn't recover from the constant beatings that we get in life, unlike the markets which will shake off the bad things that happen and eventually move forward. At least I hope so.

Anton Allostrat agrees:

My football career closely parallels Scott’s except I ended as a college sophomore with a complete knee reconstruction. Protecting a loved one from near-certain long-term physical damage, which is the likely outcome when humans repetitively and intentionally collide, is the responsible and caring parental responsibility. The key is to give the prospective athlete other choices, minimal-contact sports that have a much lower injury rate. When addressing this issue with my son, no matter how clear my descriptions of the long term consequences on the human body, I’m sure he couldn’t completely comprehend what it is like to feel the effects of cumulative injuries in a middle-aged body.

Matt Johnson replies:

With all due respect, I feel like you're taking your issues and dumping them on your son. Not letting someone do something, or not do something, is like holding onto a losing position because "the economics haven't changed." Go with it, don't fight it, support your son in his adventures and he'll love you for it.

Craig Bowles adds:

I agree with Matt. I still look back thankfully at the bonds made and pushing beyond the simple limits in many of our heads. The most important thing is to learn technique early. My father always called it putting a shoulder on somebody. Hitting with the head is crazy and nothing like the feeling of a good solid shoulder lick. Maybe you should make sure the coaches know how to coach blocking and tackling. I wouldn't want my kid playing for a lot of coaches. That would just ruin a kids confidence. My fifth-grade coach was the best one and fortunately taught the solid basics.

Mark Candon reminisces:

Flag FI played soccer in college, but later tore up my knee in 1980 playing of all things, flag football.What the heck was I doing playing flag football? Perhaps having the most fun I ever had in any sport. Violence is a beautiful thing when you are doing the hitting. I’ve always liked contact, and football gives it to you in spades. There’s nothing like it. Why do you think all these people play football?

Yeah, it’s years later and I should probably be getting a new knee, but the rest of my body has been in better shape since 1980 because I’ve had to work out to keep the knee strong. I wish it had never happened, but I never for a moment regarded it as a terrible thing.

In sports, you have the chance to be the master of that world between the lines. In football, it comes in that long instant after the snap of the ball. A savage, athletic, and beautiful moment. I loved it. Believe me, I’ve had moments in other sports, but football’s the ultimate for adrenaline. You’re playing defense, it’s fourth and inches, and you’re amped. You can’t wait for the snap, because you’re going to drive that guy opposite you into forever.

Steve Leslie reflects:

I am reminded of a short little story.

In the jungle, A gazelle wakes up in the morning and begins running. For the gazelle knows that if it does not start running then it will be eaten by the lion. The lion wakes up and starts running. The lion knows that if it does not start running, it will not catch the gazelle. The moral of the story is that whether you are a lion or a gazelle, if you want to survive the day, you had better hit the ground running.

Thomas Edison once said most of success in life is showing up for work every day.

Vince Lombardi said "The good L_rd gave you a body that can withstand nearly anything, it is your mind you have to convince."

Unfortunately, we do not have the luxury of creating our own rules. Many times the odds are stacked heavily against us. But remember in the end, life is one long statistical game eventually the breaks even out. It is a journey and not a destination therefore we never arrive. It is like the horizon, you never reach it.

Take cheer for we all feel the pain of life. You are not in this alone. Some times this provides small solace. But then again solace is sometimes all we have.

Reid Wientge writes:

My doctor in high school, Dr. Campbell, recommended not playing football. He was quiet and convincing. I had been to a different doctor numerous times for pain and swollen hands — I played both defensive end and fullback and so could not wrap my hands. You see, my doctor had served in Vietnam prior to private practice. I am certain that he could not bear to see young men injure, scar and permanently damage their bodies.

Doug Johnston offers:

I played football in HS and at a Div I college program. I do believe that your HS experience is more exception than rule. HS football is fun and gives a boy/teenager many valuable life lessons in an environment of teamwork and fun. Football in HS is not brutal. Let him be a kid and enjoy his decision. If he were to be offered an opportunity to play in college — run away! College football is a big business and the payout of a scholarship is not nearly fair value for the "student-athlete."



A Veltman1/ Gold: our suspicions, based on decline in Open Interest, proved right. The jump $780 -> $891 was entirely on Spec short-covering, while Commercials liquidated longs. This is not the hallmark of flight-to-safety circa '79-'80. On the other side of the coin, Silver commitments relatively improved: Commercials unexpectedly covered some shorts during the jump $10.52 -> $13.17, while Specs covered some longs. Open interest gains in Platinum Group Metals (PGM) proved not of bullish make-up: Commercials duly shorted the rally. Note: both PGMs already slid nearly 10% in three days since the report!

2/ Nov Crude $15 mark-up occured, as Large Spec short-covered Oct Crude! Small Specs went Net new Short into Novee rally — making us much friendlier! Moreover, bullish C.O.T. divergence is uncovered in RBOB: Commercials became 10% more Net Long in course of 10% price rally! NG commitments improved a bit further: Large Specs notched yet another Short Open Interest record, while sentiment is bordering dramatically over-sold!

3/ CD and BP 4% rally didn't trigger Commercial selling; thus, we can expect more rally! Not as bullish in EU, SF, JY, AD.

4/ SP futures quarterly rollover showed plenty of Commercial short-covering, while Small Specs assumed new shorts — a recipe for a dramatic short-covering rally!

5/ Treasuries display dramatic Open Interest drop-off, a sign that little quality is perceived in traditional "flight-to-quality." Of note: the only willing shorts at the short-end remain Commercials; while Specs are bearish long-dated!



U S GrantWill the Treasury's plan be successful? The future "price" of MBS will be higher than any current estimate, but real estate lending will not resume until prices and the incomes of the borrowers become reasonable, even if the Treasury spends trillions. The single family home prices are coming close to the point of reasonable equilibrium now here in California, but I doubt they are anywhere close to that in the parts of the country where things were OK until this spring (NYC, for example).

What is fascinating to me as an outsider is that the question that Ulysses Grant successfully resolved by resumption of the unitary gold standard (1875) — the financial safety and assured purchasing power of savings — is not seen as of the key problem to be resolved. Everyone is worrying about the borrowers; but it is the savers who need to be reassured first. Some of my friends have wisely pointed out that the actual value of cash savings has been viciously eroded over the past few years by the rise in the price of everything from gasoline to boiled ham. If the Secretary of the Treasury were to announce a consumer TIPs plan, one that would guarantee consumer savings and demand deposits against institutional default and erosion of purchasing power, there would be a flood of deposits to banks that would be more than enough to save the banks.

What Grant understood was that the assurance that their money was as good as gold would allow individuals to "save and do better" and get on with their ordinary (sic) lives without having to pretend to be speculators. He was not a snob, but he knew, from a lifetime of family commercial experience, that most people were better at working than they were at trading and that the promise of liberty for American citizens had to include their right to have money that was permanently sound. What he also understood was that speculation involved the risk of catastrophic loss, and there must not be any government protections against that possibility. This is why he was able to accept the collapse of his fortune from the fraud of a partner with such equanimity; it was a risk he had already accepted when he made the bet. He would have been saddened but not surprised to see very rich people demand that bad credits be made good in the name of "the financial system"; that was what they had done throughout his tenure as President in demanding that the currency be expanded perpetually so that there was never a scarcity of credit.

If you are curious about the panic of 1873, you might look into the career of Bethel Henry Strousberg — a now-forgotten figure whose frauds were the ignition point for bringing down the credit house of cards, which was built, like the present one, on a fantasy of real asset prices' (in that case, railroads rather than houses) rising to the sky.

Kim Zussman sees a different analogy:

Recently here there have been discussions of what happened to Russians who bought property as the Tsarist empire collapsed c.a. 1917, and no doubt Putin's thugocracy is hoping the same for US.

Stefan Jovanovich replies:

W'steinThe biggest losers in that case were the French investors who had bought Russian railway bonds and government bonds during the pre-War boom. It had seemed to them a reasonable investment since Russia was the fastest-growing economy in the world in the decade leading up to 1914.

A side note: The philosopher Ludwig Wittgenstein's father Karl was considered an oddball for buying American rail bonds after the Panic of 1907 when "everyone knew" that America's best days were behind it. At that time his peers in Austria were buying German paper instead. Twenty plus years later his children were able to escape the Nazis by buying their way out of Austria using the proceeds from those same bonds which they had dutifully held to maturity. The German paper that so many of their friends had owned evaporated during the post-war currency hyperinflation.

Steve Leslie muses:

My experience as a financial advisor and broker for over 25 years tell me this about people and their reactionary practices. The next shoe to fall will be in October when retail investors get their monthly brokerage account reports and mutual funds statements and see how much money they have lost. Impulse will take over and they will issue across the board liquidations of mutual funds, annuities & etc. I just see so much pressure on the system in the short term technically that we are far from a resolution of this going forward.



At the White House meeting earlier yesterday, P@ulson, on his knees asked Pel0si not to allow the negotiations to blow up, according to a participant in the meeting.

There is so much money at stake for former partners and friends.  What would happen if they didn't do the deal? Exactly what happened when WaMu was picked apart.

Russ Humbert reports:

S N O N H MI recently visited the Sam Noble Oklahoma Natural History Museum in Noman, OK. They described a Buffalo hunt where the wolves and Native Americans would drive a herd of bison into a stampede. Keeping them moving in a  fluid, fast, well worn path, into a natural corral of cliffs, where the wolves and hunters had them trapped at the gate. The herd couldn't move. Those in the front saw sudden death in a bolt, those in the back had no room to move, or know another way to get out. They'd slaughter them all, with the women and children waiting at the top to butcher and skin them and turn their bones to instruments.

The Liquidity Trap: it's very fast and fluid moving with the herd, till suddenly it ain't.



I have looked at MasterOfTheUniverse, the site of Jeff Watson, one of our ace contributors. The name comes from Thomas Wolfe. It's a very vivacious and useful site with the daily vicissitudes, mainly successful, of a very sagacious trader, whose feet are always on the ground. A great gusto for life and a money making persona shine through its every sentence.



Dr PhilAll moving averages have to be based on a backward looking window of time. So a 10 day average is the average of the last 10 days and so on. But the center in time for that average is really about five days ago. To be more precise it is (n+1) / 2 days ago or 5.5 days ago.

So comparing two moving averages of different lengths is really comparing apples and oranges. If we compare a 10 day to a 30 day average, for example, then we are comparing the average of 5.5 days ago to 15.5 days. In other words they are not the same point in time. Mr. Glazier's enlightening 3D representation of moving averages of various lengths shows that the longer windows respond more slowly to ripples in price than do the shorter moving averages because of this lag effect.

Another feature visible in the chart is the apparently cyclical undulations. The problem with that is that it may simply be a manifestation of the Slutzky - Yule effect. Essentially Slutksy-Yule says that any series, when averaged, will show sinusoidal oscillations as a result of the averaging process. This is true even if the original series was composed of random numbers which could not possibly be sinusoidal in nature.

Another common pitfall when using moving averages is to think that all one has to do is to find the magic combination such as a 19, 27 and 79 day triple crossover with a minimum threshold of 1%. The problem with any such system is that there are an infinite number of these combinations. We quickly fall into the data mining trap where we will appear to find something even if it is merely a product of chance.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Yishen Kuik adds:

Another interesting point about moving averages is that the daily change in an N period moving average is caused by the difference between the values of the Nth day and the current day:

MA(t) = (1/N) * ( p(t) + p(t-1) + … + p(t-N+1) )

MA(t) - MA(t-1) = (1/N) * ( p(t) - p(t-N) )

So in cases where N is small, and where the p(t-N) value that fell out of the calculation is large, the moving average can experience sudden drops. This causes that cognitive dissonance when one sees a moving average fall even as the values are climbing between yesterday and today.This also provides the intuition to Slutzky Yule - for any given set of observations, there exists a cluster of points that has the highest average of all similar sized clusters, so while that cluster is passing through the calculation period of the moving average, there will be a peakedness, with two troughs surrounding it.

Alice Allen remarks:

While we’re talking about moving averages, a practical caution from my own experience with a popular commercial trading platform: If you are in a fast trading situation, monitoring a price graph with less than a 1-day display unit (e.g., 60-min, 30-min, 15-min), a line labeled “200-Day Moving Average Study” may not be the true 200-Day MA but perhaps the MA of the last 200 ticks. Under these circumstances, you may visually note that the price has crossed your MA line, but it will not necessarily be a true MA crossover as calculated by programs. Maybe this is obvious, but it took me a while to figure out and perhaps is unique to the platform I use.

Anatoly Veltman writes:

The best use of MAs that I know has nothing to do with crossovers. And it happens to be essential to one’s daily/weekly chart perspective. Extremely useful! I first saw it described by Stan Weinstein; then the periods and trading signals were optimized by a few proprietary shops. I believe it to be one of the better tools; if not for all markets, then at least for stocks.



1) "The Search for intelligence in our genes" by Carl Zimmer

"there must be hundreds—perhaps thousands—of genes that together produce the full range of gene-based variation in intelligence."   One of these genes may have been identified by R. Plomin; it accounts for 0.4 percent of the variation in the IQ scores. Research is revealing unanticipated complexity in the interplay between genes and environment.

2)A new book coming out next week from Nicole Rafter entitled, "The Criminal Brain: Understanding Biological Theories of Crime"  

"Enhanced with fascinating illustrations and written in lively prose, The Criminal Brain examines [current issues in criminology] in light of the history of ideas about the criminal brain. By tracing the birth and growth of enduring ideas in criminology, as well as by recognizing historical patterns in the interplay of politics and science, she offers ways to evaluate new theories of the criminal brain that may radically reshape ideas about the causes of criminal behavior."

3) "Why do we like to dance: And move to the beat?" by Columbia neurologist John Krakauer

"mirror neurons —cells found in the cortex, activate when a person is performing an action as well as watching someone else do it. Increasing evidence suggests that sensory experiences are also motor experiences. Music and dance may just be particularly pleasurable activators of these sensory and motor circuits. So, if you're watching someone dance, your brain's movement areas activate; unconsciously, you are planning and predicting how a dancer would move based on what you would do.  

4) A Switch to Turn Off Autism? by Susannah F. Locke

Scientists say they have pinpointed a gene in the brain that can calm nerve cells that become too jumpy, potentially paving the way for new therapies to treat autism and other neurological disorders.



 Aubrey (age 28 months) conducting the Park Avenue Symphony , All Saints Church, New York, September 25, 2008. Photograph by Roy G. Niederhoffer.





V NThe news about a bank that bought a big savings and loan in 2006 and now has 20 billion of losses on the assets bought, and whose stock is down 80% this year, brings out another qualitative point about human nature. "Why sell my company?" the NCZ ad ran. The answer was pictured in the next frame: "fire and lightning were about to strike".

There is always an avalanche of sellers in an industry right before it is ready to go down the tubes. The conglomerates always get stuck with these. And once they run out of accounting maneuvers, the piper must be paid, as in this case. Usually the sellers insist that the deal have no contingent liabilities or warranties. That the buyer conduct his due diligence, and then never come back at them. "It wouldn't be feasible, as we're a public company" or "the outside stockholders would never go for that potential hanging over their heads."

Buyers should beware when almost all firms in an industry are for sale. And it takes more than 10 minutes and a one-page contract, and the willingness of the seller to find a home where the buyer won't interfere, to protect yourself. Query: When will the chickens come to roost for those active in this area in the corn belt?



Albert Jay Nock was not given much to boasting. But he admitted he always got the economic movements correct. One imagines him believing now that certain reported numbers as of 8.30am today were "adjusted" down a percent or two to make the case for an "increase" in the Secretary of the Interior's bailiwick. I predict a Nockian compromise will be reached. And his saying now "Little shavers are out. Store job to be stocked full by end of day."



Kim ZHistorically, how many nationwide-housing bubbles have burst, with consumer debt/savings this high, within an extensively global interconnected economy (and markets), five weeks from election, from a problem blamed on Wall Street greed but designed to increase minority home-ownership, while at war in the Middle East, where credit markets are seizing up and the government wants to purchase the bad debt? And what if the markets don't stabilize long-term once a bail-out is approved?



 We had an electrical storm here in Fla., and the power surge knocked out my data, main computer and backup. I was without power for a couple of hours and had to use my generator. I can't crunch any numbers and and am using a laptop only for quotes and it's acting sketchy. I'm burning up the telephone and my cellphone getting trades down. Why, of all days, would mother nature send me back to 80's technology. It looks like it's going to be a long night(and longer day tomorrow), the coffee pot is full, and I'm playing Wagner really loud on my Klipsch speakers because it's very apropos. I'm sure my neighbors won't mind as every light on the street is on….which is a major worry indicator as far as I'm concerned.

I'm expecting my computer guy to be over here soon to get me whole, but he's got big customers and I'm at the lower end of his schedule.

In the mean time I am trying to analyze the impact of the drop in shipping costs, but I don't have adequate computer resources.  From memory, I haven't seen such a hit on the Baltic in years. I would think such a decline in shipping rates would have a positive impact on stock indexes, perhaps with a lag. Any suggestions would be welcome.



The thing to do would be to let the giants fail and just guarantee everyone's 401k, bank account, credit card debt and mortgages…

Laurence Glazier adds:

How about educating people about the true risks of buying property on loan, and explaining how it is only the assumption of government intervention to remove risk that supports a belief in this golden calf, the obeisance to which diverts many an artist from their element and muse.

And what happens to the giant firms of Wall Street is immaterial now. Trading is being democratized, moving from the ivory towers to empowered individuals, as computers did twenty years ago. One of those big waves.

Nigel Davies is sceptical:

GM NigelWhat if there is no solution, and that this whole business is merely evidence of a fatal flaw in humanity. As far as I can see EVERYONE could have acted differently at some point so as prevent this, but instead they drifted en mass along a line of short term apparent self-interest.

And what if the 'rescue plan' itself is of a similar ilk, putting off paying the piper because 'something' had to be done. After all, those making this decision couldn't possibly have their careers tarnished by a huge crisis in their time. Better to defer it to a future generation/generations, eh?

BTW, at the chessboard such thinking is heavily influenced by an excess of caffeine, so I wasn't joking about the Dr Pepper/no sleep thing. People ALWAYS try to force matters when tired and on a caffeine high.

James Sogi ponders the situation:

It is out of our hands now. Rather than trading fundamentals or quant strategies we are left waiting to see what the politicians do and jerk around with that mess as this or that secretary or politician plays their stupid game while the world markets hang in the balance. This is the problem with too much power in too few hands.

Victor Niederhoffer replies:

Yes, but all that happened was in the numbers to start with and would have happened the same way regardless, as will the eventual aftermath.

Vincent Andres replies to Nigel Davies:

Maybe not a fatal flaw in humanity, but a fatal flaw in the part of humanity which has to deal with money ?

Human societies need a blood system. Money/stocks/derivatives/etc. is this blood. But money is such an extraordinary feature/tool/invention that people working too much with it and too close to it become always crazy.

Radioactivity, morphine, also are very powerful things, but some rules must be respected.



 The vilification of Wall Street is taking full force. It is the worst form of scapegoating, denial, and mistakes were made (but not by me). It is similar to the criticisms of the legal profession where the intransigence, unreasonableness, and greed of the litigants is blamed on the representatives who are doing the job set out for them in the system. The current crisis originated in the greed and failure to save by homeowners, their use of real estate borrowing for consumptive lifestyles. Their failure to save, their spendthrift ways are all being loaded on to the investment community who were doing their function within the system. Now emails are floating around fighting the bailout of billionaires on Wall Street. You are an easy scapegoat. No matter that the speculator helped provide the liquidity to create trillions in new wealth. No matter that the long held family home is valued at many multiples of it's purchase price. It is the most culpable real estate speculator and overextended consumer that now point the finger in the attempt to avoid their own errors, lack of judgment. With an election coming up, the politicians, the worst of all, are jumping on the BANDWAGON. The cycle is ending. The funny thing is that equities are barely down a 1/5 and they are throwing out the baby along with the bathwater. But it's good. We really don't need the big firms anymore with universal access and electronic execution. Truth is we really don't need big government either, but its turn comes next.

For the speculator, many new niches and many opportunity will arise. The government will be the ultimate slow mover. As they try to enter the market, as we have seen this last week, there are big waves kicked up. The least qualified populate government functions. Small and fast moving adaptors can thrive in such an environment. Seems that many big hedge funds are going down or weakening. The white shoe brokers are weak. The change will be good. It's just like evolution and climatic change. New species will arise. Many will perish unless they adapt. Even the data itself is reinventing itself with data over a year old being almost irrelevant. As Lack says, regulation will be a joke. Every rule will create a dozen loopholes to exploit that the slow moving professors never thought about. THEY can't control the markets. The big illusion is that government can cure the problems when in fact, THEY are the problem.

Kim Zussman replies:

K Zuss"Greed and failure to save by homeowners" is also what caused the markets to recover from the tech-bubble / 9-11 bear market. The FOMC could have chosen not to increase liquidity / ease rates in that environment — in which case there might have been a deeper/longer "my father's" recession.

Remember the wealth effect: as people's homes increased in value, they felt richer, borrowed more, spent more, and drove earnings up. And felt a lot of pressure to do so. How do you say no to the Mrs. when she complains about the many vacations the neighbors take, or their new boat?

One of my favorite symbols of this period was the web-ads showing ethnic-minority couples dancing on rooftops when their loan was approved. Hey, it's a free country.

Bruno Ombreux sees a silver lining:

Am I the only one thinking that this mess is actually very good news for small speculators?

Fewer investment banks, fewer hedge funds, higher cost of capital and more regulations mean less efficient markets, that is more edges. And at the same time less competition for those edges.

The golden age of speculation is coming.

Janice Dorn adds:

Power of You / Dr DornSome days ago, I sent a copy of my first book to Alan Millhone. The title of the book is: Personal Responsibility: The Power Of You.

We are living through an epidemic of failure/unwillingness to accept personal responsibility for our actions. The blame game is just that. No personal responsibility. Mistakes were made ( but not by me). When the locus of control shifts from inward to outward, there is nothing but whining, blaming, gnashing of teeth, bullying, etc.

The worst lies are the lies we tell ourselves.

Tim Melvin argues:

SlicerDon't confuse speculators with the banks and Wall Street. There is an enormous gulf between the two. The fact is the banks did create loans and loan structures that encouraged excessive borrowing. Merrill used to encourage homeowners to take out home equity loans and put the money in stocks. Homeowners did not create option ARMs or understand them. Banks created then and sold them. The public did not slice, dice and engineer toxic securities from their mortgages. Wall Street did that.

Does the public have culpability for their stupidity and greed? Of course they do and they are paying for it. Look at foreclosures. That can't be a pleasant experience. However, the Street has to take its share of blame for creating the speculative fires and then pouring gas on them.

Most "speculators" had nothing to do with the creation of this mess. They do not lend money or create securities. They trade. And most of us do it with our own money.

Jim Sogi replies:

While you are entirely correct, the public doesn't know or care of the difference, and blames you as much as Gold Man. Anything to deny personal responsibility.



DershowitzAlan Dershowitz figured out how the Ivy League maintained an anti-Semitic policy. They'd appoint a scholar to head each appointment committee, sometimes Dershowitz himself. Then when they chose a WASP as professor they'd say "scholar himself was head of the appointment committee." Same thing today. Politicians say they won't pass bill. They need safeguards, amendments. They explain why they are opposed. Stock market cracks. See, don't blame us. The whole thing would have crumbled unless we did somethin'. Albert Jay Nock would have loved it. Another example. Once I was made head of committee to determine amateur status in squash when I was still an amateur and threatening to turn pro.

Kick Ramma replies:

There are plenty of us Jews in the Ivy League. We've never had it so good. And it's only getting better. Alan is hardwired to complain. Those of us who know him — cut him slack. But outside the U.S — My G_d! Anti-Semitism is dripping thick. So, enough about all these phony baloney committees already. The WASPs are the ones sinking — have been for the last three decades.



A VeltmanCommitment of Traders (C.O.T.) report is always three days late; latest release 9/19 was as of 9/16 close. We had a few "events" 9/17-9/19, which didn't figure into the report Also, many futures contracts were expiring 9/19 — important caveat to mechanical users of positions data. Still, we tried and distilled a few hints…

1/ Stock Index C.O.T. were slightly Bearish: Commercials were adding Shorts on decline, while Small Specs bought near the lows — altogether indicative, that those were not likely final lows!

2/ Treasury futures lost Open Interest across the board, most pronounced was 30% loss in 2-year! While we don't have much of directional signal in Treasuries, my hunch is that players are trying to distance themselves from the Fed. Fed's competence and consistency has been questionable all year; now I'd venture say that even its credit-power has been undermined. If Fed can no longer pull punches, what's the use to even try forecasting its moves and speculating at short-end?

3/ Currency futures expirations more than halved Open Interest, leaving telling carcasses to behold: Commercial EU Longs 68k vs. 24k Shorts, BP 75k vs 12k, SF 22k vs 3k, AU 29 vs 10k! Those not appreciating these commitments near 78c AUD lows, please consider: near 98c AUD highs just 2 months earlier, Commercial commitments were Long 10k vs 70k Short!

4/ Metals Open Interest was the greatest surprise of 9/17-18 $777->$926 historic Gold jump, which awoke memories of 79'-80' flight to quality. The retest of $1000 appeared a given. Many began to verbally speculate on imminent move back to Gold Standard! But we see more talk than action: Gold Open Interest was supposed to baloon on 9/17-18 rally; instead it deflated by 2%! Silver's by 4% to new 2008 low, Copper's by 3% also to lows! Curiously, Platinum's and Palladium's did rise — Japanese prolifiration on dearer Yen?

5/ Energy futures lost Open Interest across the board, with Crude's hitting 2-year low! The biggest surprise was increased Commercial Short on collapse from $100->$90; while Small Specs covered Shorts! We were confident Long before we'd discoved all this; now we'll be itching to sell into rally



PosterOn top of Uncle Sam's unprecedentedly large bailout plan comes calls from top business executives for "comprehensive industrial policy" ("Ford, Dow execs to discuss national summit in '09," September 22).

Let's keep our heads. Despite the turmoil, Americans today remain incredibly wealthy. This fact is evidence that capitalism works very well even though it is never textbook perfect. Calling for a fundamental restructuring of an economy that produces such widespread prosperity is, at best, an irresponsible overreaction.

More likely, though, this call for industrial policy is a ploy by business executives to find shelter from the bracing winds of competition. By trying to plan the economic future, any such policy necessarily tramples innovation and consumer sovereignty. Anything at odds with the policy - such as an unforeseen new product, a creative new technique of production, or simply a change in consumers' tastes - must be squelched, for otherwise the policy falls apart. Many existing firms (especially large ones such as GM and Dow Chemical, who have the resources to influence government) will benefit from industrial policy - but only because such policy inverts the economy from one in which producers exist to satisfy consumers to one in which consumers (and taxpayers) exist to satisfy producers.

Such a policy will make most of us much, much poorer.



Possibly the greatest multi-day decline in fixed income (10 yr and 30 yr bonds) in the last 10 years, exceeded only by October 1998 on a three-day basis.

East Sider replies:

The calendar is heavy today:


Now that the atrophied dealer community is "set up" to buy the paper, it would not be at all surprising for someone to roll a tapebomb into the tent. It's a movie we've all seen many times.



I got an email from a friend that I don't agree with, but I could use some help responding to it. How would you respond?

In the context of our ongoing discussion of markets and government, I can't help but feel that the meltdown of the last week lends considerable weight to my position that in the face of the value-neutral tendencies of free market capitalism the participation of a well informed, active public sector is imperative. There is a flip side to the way markets liberate economic energies; markets can become self-devouring. I accuse libert@rian ideas; they have brought us in large measure to this pass, because they foster a basic contempt for governance, ("government is the problem") the hallmark of the Bush administration.

When Robert Rubin bailed out the Mexican government by offering 20 billion dollars backing for their currency, there were howls of protest and forecasts of disaster from conservative minded politicians. Bush's laissez-faire attitude has resulted in a truly incredible 1 trillion dollar (!) giveaway. A replay, but only worse, of the S&L debacle that followed in the wake of the great free marketeer Ronald Reagan.

My friends B*b & I**a have three kids. B*b lost his teaching job.

Thank goodness that Connecticut has a "socialist" health program for people earning less than a certain amount. In Mississippi no one would come to rescue them. It would be against the grand american principles of self-reliance (or rather no bail outs for the powerless).

I'm not saying that I disagree with Paulsen and Bernake. At this point they have no choice but to intervene. But to my way of thinking the mistaken belief that the government should stay out of the way, the markets will take care of everything if left to their own devices, has led to this desperate state of affairs. Ironically, it is about is about to result in the greatest growth in government power since FDR.

My concern is that unlike the New Deal that sought to put people to work and create an ethos that we are all in this thing together, the current program will be directed at easing the pain of those who reaped the most benefits in the good times.

Henry Gifford responds:

FDRIf the mortgage market was really a "free" market, and not regulated, anyone putting money in would know there is risk, and not look to be bailed out. With regulation comes the excuse that the system let someone down, thus the system should come to the rescue.

And, if the mortgage market was really a "free" market in the sense of not being backed by Freddie Mac, etc., the penalty of default would be on the lender only, who would have watched out for their own money, and stopped making loans long before the appearance of billboards advertising 110% loans.

If the mortgage market was really a "free" market, Consumer Reports, Ralph Nader, etc. would be competing to sell information on which banks are safest, including selling stickers banks could put on the front window. The level of corruption in these private rating systems would be kept low for the same reason Coca-Cola doesn't cut corners by selling dirty or diluted soda, and the only cost to the citizen/taxpayer would be paying Consumer Reports, etc., if they chose to do so to get information to improve their decisions.

Craig Bowles writes:

Murray Rothbard’s History of Economic Thought is on six tapes but I don’t think he ever wrote the planned book. He didn’t think too much of Thomas Sowell. The tapes talk about Austrian economic theory which is the basis for libertarian views. He says that intervention alters the business cycle and causes inflation during the slowdown. The worst part though is it disrupts the allocation for production, so you get overinvestment in some areas (houses) and underinvestment in others (oil) with the liquidity-driven inflationary booms. Really great tapes and very applicable to today.



V NWhen the financial world is looking like it's ending, it will turn around on a Thursday. Three of the eight ranges above 70 since 1996 came on a Thursday. Monday is too early to act. Tuesday's door openers are met with skepticism. Wednesday is relentless. And Thursday, the ratchet is taken out to expand power and buoy up the wealth.

The fixed income market will be much wiser than the stock market and will predict what is going to happen, as will Japan overnight.

Oil will take the opportunity to rise from below 100 to above 100 while none are looking so that the wealth can stay in the more fecund corners of the earth.

VIX is even more omniscient than silver or the scholars, as it increases on up days right before the crash. Then it will move above a 10 figure to get out all the remaining nakeds who were not already priced out of their positions with self-serving marks and then fall a fast 10 on its way to below 20 again. The most prescient thing about the crisis was said by Russ Sears (see post below), that the regulations requiring a market price and not a model price was the key ingredient in the crisis. Whenever you've got an inactive market, the danger of fictitious low bids and high offers can do you in. Perhaps even more prescient was the Collab who said it was all the former romantic NY governor's fault for taking the cool hand Herb out of picture.

The vigilantes elicited the response in everyone's interest for the time being, shoring up the former white-shoes and enabling massive increases in commands and regulations to be acceptable to everyone.



Why? from Russ Sears

September 20, 2008 | 2 Comments

FDR"Life is not fair" had always been my Mother's mantra whenever I would ask "Why?"

And that message rang true on her death of kidney cancer at 57 way before she was ready to go calmly.  She was teaching  special needs kids on a rural MO public school. She was still teaching in that small converted closet classroom the month before she died.

It also wasn't fair to see the light in my Father's eyes dim at her passing.  Before her diagnosis he was looking forward to semi-retirement working as a missionary and was learning Spanish to do this. Very quickly after her death, not only did the sparkle in his eyes dim, but in his mind also. No "Life is not fair." Many a "realist" will point out to you these bitter disappointments all individuals have as part of a full life.

But the "realist" won't stop to point out the beautiful delicate humming bird sipping nectar at the honeysuckle bush flashing his iridescent colors in the evenings setting sun.

For every bitter disappointment, there are many miraculous moments.  I can't  begin to explain "Why" I deserve any of them.  Except perhaps that I am a small piece of the over-all picture and what is so heavy an issue to me, becomes minuscule in the grand scheme of infinite time, space and life. The joy of living can't be given a concrete reason, nor guaranteed like death. What hits me hardest is within my narrow world, and what brings me joy is my inter-relationship to the infinite nature of the broader world.

However, accountants also have a mantra that everything must have a "fair value" …no matter that it references a small world, it must be "fair".

The first lesson you learn, in fixed income investing, that the books don't teach you is "it's a small world". The world of companies that actually regularly invest in MBS debt, especially the more illiquid debt, is rather limited.  Given the capital required, historically relatively small returns and specific expertise needed to wisely invest in MBS, there are not too many outfits equipped to handle them.

SOXWith Sarbanes Oxley, the auditors need a number to hang their hats on. If there is a sale, or if someone is willing to give a bid,  it matters not if the sale or bid is a desperation fire sale or the bid is an exploitation of a frozen small market for these securities… it counts as real. It matters not that it's a bid, not a real sale.  It matters not what any model might say, given even grossly conservative estimates… that your expected cash flows are much higher than this price,  you must value it at this Market Price. Though all these things may be true you can't prove it unless you are allowed to appeal to the broader world's realities. The pessimist wins, by default. But what brought the fixed income markets to a halt, was that for years the MBS market was closely tied to the "models" …if a reasonable models said it was worth $X you could always find a buyer near $X price. The pessimists now have however discredited the models, because the models gave too optimistic a price on the sub-prime …Alt A… California… Florida, etc. You can look at the data and show that unless the USA housing is sure to crash like the Depression era, there is a huge liquidity discount in many of these assets.  But the pessimist will simply say you can't prove you are right, so let's use the lower number. And your models and your cash will dry up like the dust bowls days.  Plus, it becomes a self-fulling prophecy,  as these companies value liquidity more and more, as these assets get marked down, creating less of a true market for these assets.  This lack of capital raises the cost of new mortgages as well, creating more and more foreclosures.

The Feds and SEC had pleaded in true regulators' fashion, to the accounting regulators and auditors to consider some models, give some guidelines on desperation sales and throw-away bids, to put a floor on these assets.  So the small world of investors' balance sheet can allow them to continue to invest in these asset classes.   But SOX tied the auditors and accounting regulators' hands.  They would rather under-estimate the true cash flow values by billions on thousands of assets than over estimate those values on a hand-full; the appeal to reason and the broader world must cease if at all possible.

PaulsonIt would seem to me that Paulson's actions imply that they will try to create this market, using models with reasonable estimates to create a floor for these assets.

Now I suspect that the idea is to give the taxpayers a good as deal as possible, but at the same time to bring a reasonable level of liquidity back to these markets.  Not sure how you blend these conflicting goals… but looking at the current situation they have considerable range to maneuver, as to what is a reasonable assumption to put in the models.

It remains to be seen what the consequences for this "floor" will be.  Will it attract too much capital, due to reduced risk, and perhaps bring on another bigger housing bubble?  Will there be run-away inflation throughout the USA with all this money coming in? Will it be that Paulson, with their new modeler FNM and Freddie, are too optimistic  or simply stupid, pay too much, and the taxpayers take a blood bath rather than make-out nicely?  Or will it have to be run so conservatively to protect taxpayers that it can't even work? We shall see.

And it still doesn't change the underlying confidence in the securitisation markets.  If it happened once it can happen again.  The private market for MBS long term will probably need to shrink, or continue to operate with a government supported floor.

[Secy. Paulson's Proposed Treasury Authority to Purchase Troubled Assets]

Russ Sears updates us:

Bernanke further strengthened the argument of model vs. market price in his testimony today.

But I must disagree with Mr. Mann's statement about "assuming a best case scenario". Even my primitive model analysis of several of these securities implies there is wide room between "market price" and even a reasonably severe scenario "to hold" price.



V NI wonder naively, with the news of the bailout: will there not be clamors with the $1 trillion of assets that are being bought by the government at above market values, to extract some bits of flesh from those who are bailed out? Peter Public is being robbed to pay Paul Financial Firm, so to speak. But will Peter not complain and get his ounces of flesh? And will that not tarnish the luster of the gains in financial institutions in due course?

This is a speculation about which I have no expertise and no recommendation over and above saying, as I have for 30 years, that when you get out of the market because it's a "bear market," you have to get back in some time to reap the drift, and I don't know anyone astute enough to overcome that drift while he's out.

Alex Forshaw adds:

It reminds me of the October 15, 2007 announcement, except that this time the "Super Siv" (or MLEC) is $1 trillion-plus in size (instead of $75-100bn), the regulations are all the more drastic, the government has thrown $1 trillion away to save Wall Street's richest socialists, and… yeah, that's pretty much it.

If one had actually stuck to one's capitalist convictions throughout all this, one might actually not even be very surprised at the enormity of Bernanke's and Paulson's failure.

Alan Millhone worries:

I wonder if that 'long spoon' cradles castor oil? You hear the term hard to swallow. To me this applies to the bailout as the Bureau of the Treasury is running the presses 24/7 with someone holding the oiling can to keep down the sparks from the printing presses and all that paper may over time become nothing more than shin plasters!

Nigel Davies writes:

GM NigelOn the long term drift: Can someone please show me the data for all these centuries in which stocks went up 1 million percent, or are we talking about just one, the 20th? The last 24 hours have admittedly seen some of the most desperate short covering from a heavily leaning market, but I don't think one should extrapolate too much from this.

About the bailout: Maybe these measures will "save the system," but there's a huge cost involved for Mr Taxpayer. And as Mr Taxpayer is also Mr Voter I wouldn't want to bet against his supporting some heavy handed regulation by those seeking office. Not to mention the fact that he's being hit real hard in the wallet region by this mess.

James Sogi comments:

J SogiThe problem with the rescue plan and the upcoming regulation is that the creators of the plan are filled with hubris. Why should these few men with limited experience and knowledge compared to the smartest people of the entire financial world be able to solve the problems that the entire financial world was unable to? Like central planners around the world, they will just create new problems and backlogs and inefficiencies that were so prevalent in the authoritarian and socialist countries.

The country is sliding into socialism, which is the extension of the moral hazard. Where there is no more risk, there will be little reward. On the television, the prevailing meme seems to be the bailout is for the benefit of the greedy Wall street moguls and is paid for by Joe Sixpack. In any case, it will create new opportunities as cycles change yet again. Today's S&P high from yesterday's low was the greatest up move. This is a signal of new cycles, just as much as February 28, 2007 was a signal to move into a high vol cycle. The definition of cycles resists quantitative testing, so the qualitative will have to suffice.

Alex Castaldo takes a turn to the left:

Why should these few men with limited experience and knowledge compared to the smartest people of the entire financial world be able to solve the problems that the entire financial world was unable to? — James Sogi.

Yes, but don't we also need to revise downward our estimate of how smart the so-called smartest people were? When the Warren Spector's, the Dick Fuld's, etc. etc. issue so much mortgage debt to people who now can't pay, that the entire financial system is put at risk, can we really continue to call them the smartest people?

Irrespective of that (…maybe I would have made the same error…), doesn't it make sense at this point to have the "smartest people" take a time out while the second-rate people in government (and I fully agree that they are second rate) try to patch up the problem so the game can resume again? Or do we just let the system blow up because the mistakes were made in good faith by the smartest people available at the time?

Don't tell me that markets are better than Soviet style central planning, Mr. Sogi, I already know that. Tell me what is to be done under these circumstances.

Someone told me today that the nationalisation of AIG is just like what happens in France and Argentina. I am sorry but again I have to disagree. The French government ran Air France for 40 years. The AIG measure is temporary; rather than a nationalisation in the Argentinian sense I would call it a controlled liquidation of AIG. Rather than be liquidated immediately (as was about to happen) they will do so gradually over two years; rather than receive subsidies from the Argentinian government they will have to pay LIBOR plus 8%, a punitive rate, etc. The differences are major. Let's not put all government interventions on the same plane.

Back to the "smartest people" issue. The analogy I see is the following: you have been operated on by the best available surgeon; unfortunately he made a mistake and left a clamp in your abdomen before sewing you up. It is midnight on a Saturday and the only available surgeon is a semi-retired practitioner of average skills. Would you agree to have him operate on you to save your life? It may well be that you would have not agreed to be operated on by this guy in the first place. But what do you do now?

[Disclosure: Alex is a depositor of Washington Mutual and owns Morgan Stanley stock].

James Sogi replies:

J SogiIt is the spoiled child syndrome. Each time the spoiled child is saved from his mistakes, errors, rudeness, tantrums – he is inadvertently being trained to make these mistakes again. Better to mete out a measured negative punishment, time out, a reprimand, or suffering the consequences of bad behavior. Soon the child learns. There are behavioral cycles, adaptive mechanisms inherent in nature and free markets. By tampering with these, we end up with worse and worse swings as the adjusters over-adjust. Better to let Dick Fuld, and the overborrowers, take the hit. The entire financial system will not fail. It will start up again the next day no matter what happens. It may look different. There may be different players, but it will be there.

Remember the bitter pills Volcker dealt out in the 1980s with 24% mortgage rates, 14- 17% bonds. I saw many people take the hit. But inflation was crushed, and we enjoyed 20 years of moderation and prosperity. That was worth the price. Those who make bad choices should not be bailed out. It will encourage wild swings. It's the Greenspan Put all over again. If people know there's no second chance, they won't take the risks. If they do, they should be entitled to their profit or the pain of failure. When you do it your way, there is no cleansing cycles, and the toxin remains. Like Japan. It's just hiding the problems and they'll resurface somewhere else. Better to kill it now.

Let the big banks, big brokerages go down. New ones will take their place, smaller, faster moving. The market will find a way.



This week's normalized range in SP500 was 6th highest of the 3000+ weeks since January 1950. Normalized range is defined as:

[(week high)-(week low)] / [(week high)+(week low)]/2

(the high minus the low over the midpoint between the high and low)

Here are the biggest ranges (in chronological order), and the respective dates:

[Ed.: this table was updated at 1pm September 20 to correct an error in the previous version.  Many thanks to a reader for pointing out the error].



This is similar to what happened to the H#nt brothers when they made money from buying silver and gold. Not only did they lose their gains,…

Nigel Davies adds:

It's difficult not to feel some sympathy for the shorts. The chess equivalent would be for the tournament director to take a look at your position and, on seeing your rooks poised to penetrate the opposing ranks, declare that for the next ten moves they could move only backwards.

Kim Zussman agrees:

Who wants to compete in games where the rules are unstable?

Victor Niederhoffer comments:

When the exchange rules on silver were suspended, the gold and silver markets ceased to exist for about eight years, especially in Chicago. I wonder if many people feel as Dr. Zussman does, and whether this will lead to a tremendous diminution of trading.

Sushil Kedia writes:

SushilA short position, in general, turns out to be a postponement of purchases. Even though they are intended to be opened with an objective of purchasing lower, it is just a potential demand in the future; since buying may happen lower or higher out of a short position.

With short sales not existent or not allowed afresh this one key source of periodic demand into the future is absent. Such markets tend to go down with way more ease than those markets that do have an existing short interest. A large subset of emotive responses that can be forced into buying the dips or the squeezes is non-existent.

Likewise, a ban on short sales rather than solving the problem of weak markets only postpones the inevitable weakness into states where there are only herds of long only hands turned into sellers and no motivated buyers to step into the dips.

This perhaps can be studied, if data can be obtained, by comparing the downside swings during periods when short selling was not available and since when it has.

Kevin Depew sees another historical parallel:

Arthur "Bull" Cutten some 70-odd years ago was trotted out before the grain futures commission where he was declared guilty on six counts of "price manipulation." Same type of villification of short sellers occurred then too. I wrote about this in June during the "oil speculator" hearings because I found his declaration after the trial quite apt. I don't wish to self promote my article, the gist of it is this:

Some 70-odd years ago, the Grain Futures Commission declared that Cutten was guilty on six of the price manipulation counts he was charged with and ordered him suspended from all U.S. grain exchanges for two years. After the verdict Cutten declared, "What's the use of trading? The market doesn't move."



Springbok HerdAs animals grazing peacefully hear gun shots and start running without at first understanding the right direction to go, the herd begins to form.  The animals regroup and appear to move together, although their behavior is not coordinated.  Each animal moves, seeking safety for himself by staying closer to others.  Gun shots come now from the opposite side and the herd changes swiftly direction. Again. And again. They run as fast as they can. Many fall, hit by hunters, and others follow, stumbling against fallen animals.  Dust is everywhere, noise is loud.  The animals cannot see clearly where they go, their senses confused.  They are exhausted, many are wounded and fear is driving them away from the gun shots that arrive from different directions, continuing to make them run in any direction.  Unfortunately often the wrong one and right toward the hunters, and many die.  Suddenly there is silence, but the herd continue to run for some time, still grouped.  Then it starts to disperse.  Still scared, any noise can make the animals regroup and run again, although the hunters have ceased their chase and are not around any more.  The herd slows down now and it disperses again. The animals that survived start grazing again.



 Accustomed as we are to huge moves in the right direction before big announcements like those before the French bank inside trading activity, where there were two huge 25 point declines on Thursday and Friday, then a big decline in Japan before the official report of selling began, we should take into consideration how many people must be involved in such deals as the Fed's taking over AIG. Barclays for example said that they had 15 board meetings themselves about Lehman, and think of the executives that must be contacted to be CEO of the new company, the signoffs from the government officials, the lawyers who must perfect the agreement, the officials in all capacities, the press who are alerted to pending announcments and stories, the other potential buyers who must be given one last shot, the two rival candidates and officials to make sure they don't put foot in mouth or give blessing. The requests for aid from various parties that must be negotiated in the light of other shoes to drop. It's mind boggling. But the big difference is that in the past all these machinations and squalls served the purpose of relieving the weak from their positions so that the strong infrastructure could buy and pay for and support their overplus. But now there are no likely big buyers who have much money to profit from this weakness, as apparently one of the chief criticisms of the squash-playing, fist-fighting executive of the failed firm was that he bought his own stock on the way down. The dynamics have changed, and the 50 and 60 point ranges that we are seeing should not be meted against the usual.



A MillhoneIt has been a busy three weeks with Lubabalo Kondlo of Port Elizabeth, South Africa a guest in our home for a week then we traveled together to Medina,Ohio for the yearly Ohio State Checker Tournament (3- move restriction) . Lubabalo tied with Michael Homes for 3rd and 4th. place with Alexander Moiseyev (3 move World champion) and Ronald " Suki" King (reigning GAYP World Champion) tied for 1st. and 2nd. A couple of points separated these four GM players. Somehow I managed 7 points in the Master's division and managed a draw with Alex and Lubabalo. Not an easy feat for an average player as myself. We had entrants from Mexico, Barbados and South Africa and many US States represented in the A and B group of players.

The following week began a 24 game match for the " Free Style" World's Title (held by Tommie Wiswell of Brooklyn till his retirement). On Monday King and Kondlo signed the match contract and play began about 10:30 AM that day. Play each day was 9-1 and 2 till ? 4 games per day. I was chosen and honored to be match referee and watched the players to make sure they made their 24 moves each hour on their clock and I recorded the moves as did the players. 23 draws were played and on game 24 Kondlo could have played another easy draw but decided to reach out and play a line that goes into the Pioneer opening and lost. He had nothing to lose as 24 draws guaranteed the title for Mr. King.

Lubabalo and myself packed up and left for Belpre Saturday night after the film crew finished up their interviews. Yes a crew from Thinkmediastudios of Mayfield Heights were on hand for the Ohio Tourney and filmed players and did individual interviews and then stayed on for the match and were in the playing room set up for most of the week. They plan on making a documentary on the game and will travel to Barbados and South Africa to interview Ron and Lubabalo and show the contrast in the two players. Ron lives a good life in Barbados and Lubabalo comes from a disadvantaged setting.

Belpre BaptistWe got to Belpre Saturday night around 11 PM and unpacked the car and then got up the next morning and took my Mother to Church. It was Africa day at Church and we sang an African song and had the two missionaries my Church sponsors on speaker phone and Lubabalo really felt at home that day. After Church my Mother took us to lunch. We took her home and at 1:15 Pm we left for Cleveland and the 8:15 PM Browns Vs. Steeler's game. We stopped on our way up and picked up Ron King at the Roadway Inn in Medina and headed North. In Cleveland the match sponsors , Evergreen Uni invited the three of us to a 'tailgate party' . Ron nor Lubabalo had ever been to such an event prior to a game. In fact this is the first pro football game either has ever witnessed. After the tailgater Ron had a seat with two of the sponsors and Lubabalo went with me to our season ticket seats that my late Father begin buying over 20 years ago. Lubabalo had a great time at the game and could not believe the crowd. After the game we met Ron King outside of the stadium and left Cleveland at midnight. We dropped Ron off at his hotel and made our way back to Belpre by 4:30 AM (short night) for me.

Today I took Lubabalo back to Columbus Airport for his long flight home. Hope to find another sponsor for him next year for our yearly American Checker Federation National Tournament which will be GAYP ( Go-As-You-Please) which all of us remember growing up as make your first move as you wish. We had breakfast together this morning and he asked me to have a prayer for our food and for his flight. Vickie and myself really enjoyed having this brilliant 35 year old man in our home and hope to have him vist again sometime.



Phil McDSome people are hanging onto every little twitch of the Gallup during this political season. Inevitably this brings up the question of how accurate are polls. To be sure there is the statistical error say plus or minus 2% or whatever. However sometimes this masks a more fundamental uncertainty in the poll. Namely the underlying data may be inherently unstable or highly cyclical. This can render the supposed statistical error irrelevant because the inherent instability of the data dominates.

One of my favorite examples is of the Gallup Poll's Measure of Daily Mood. For example if the poll showed a reading of 60% last Friday and then it fell to 45% this Monday one might be tempted to conclude that the mood of the public was adversely effected by the financial turmoil over the weekend. Nothing could be further from the truth. The reality is that the Daily Mood is totally swamped by what day of the week it is. Every single week the mood swings from 45% to 60% without fail. It is governed by how close we are to the weekend and little more. See a visual of this on Gallup's web site.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008



CarouselOrdinarily when the football season starts, I wait all week for the Sunday games. It's my favorite sport at this point in my life for the reason that it entails only one day to follow. (Life's far too interesting to be be glued to TVs and newspapers all week obsessively following something as mundane — if addictive — as sports. But football is only one day, so I can get my fix with only a minimal time commitment.) The only problem is it takes place during my favorite months of the year and that has always caused more than a little cognitive dissonance. I hate to waste beautiful autumn afternoons inside. Yet, it's such compelling competition. A Faustian deal: Sacrifice the peace of nature for the violence of football. Made worse decisions.

So anyway yesterday I had planned to watch the games when my phone rang about 9 AM. It was my buddy, Jeff. Wonderful guy, accomplished marathoner and sailor. Told me that he had not felt entirely right on Thursday, so went to the doctor. Left the next day with a new friend, a stent in his heart.

So it goes.

Not easily one to be deterred, though, he and his young lad of a son, Mick, 4, were to set off for a daytrip from San Francisco to picturesque Santa Cruz, about 85 miles down the coast. His lovely wife, Cathy, staying home to do some paperwork, he kindly asked, Want'a go?

Took the inland route down Route 9 through the Redwoods. Twisting around the wooded turns, could smell them in the sweet air as we sped past.

Had never been to Santa Cruz before, and to the fellow uninitiated, highly recommend it. Pure postcard. A time gone by.

Had lunch on the wharf. Folks fishing off it, sea lions barking 'neath it. The rollercoaster and ferris wheel of the broadwalk as a backdrop. Pointed out to me and his son ("Don't tell your mother") the balcony of the apartment that he and a former girlfriend had shared some 30 years prior. Hard to beat for an impromptu afternoon.

After young Mick had his fill of rides and candy, we made our way back North. This time hard by the coast, Highway 1, 'twixt cliff and surf. Exhilarating.

What a wonderful daytrip. Recommend it to anyone visiting out San Francisco way.

Even should it be a football afternoon.

Steve Leslie barbecues:

Years back when my father was alive our ritual was to spend Sunday evening together. I would play and walk a round of golf in the afternoon, listening to the game on my Walkman. Then come 7 pm I would fire up the grill, turn on Prime Time on ESPN and start the cooking. The traditional fare would be beef. One Sunday it might be brats soaked in beer and mailed from my excellent friend in Wisconsin. Another, could be steak, sirlion, London broil or strip. We would have ribs, country style, baby back, pork, beef, you name it. I would prepare the ribs in the morning, steaming them for two hours to make them extra tender. I would add some liquid smoke to enhance the taste. Then I would slap on the specialty sauce and store them in the refrigerator for later use. Beans and corn-on-the-cob were the usual sides. A nice cocktail such as a Jack Daniels on the rocks, or a glass of merlot, accompanied the meal. We would eat while watching the show and would laugh and smile when Chris Berman did his "he could go all the way!" All the while, my faithful companion Stoli, a purebred cocker spaniel and named after the vodka, would stand by ready to chew on the rib afterward, provided it was beef. Pork ribs were off limits — too brittle and they damage the insides of a dog. Then we would turn on Fox TV to catch Martin, In Living Color and Roc Live. Shanaynay, Men on sports, Heavy D. — priceless moments. After all these years, the times I spent with Dad stand out as the highlight of my life. He has been gone for nearly a decade now. Stoli passed away two years ago. Now there is just me left and I no longer cook on Sunday evening. There is a void in my heart that will never be replaced. Perhaps that is as it should be. One thing is for certain. Our Sunday evening was more valuable to me than any football game before or after. And I would give plenty for one chance to go back and relive the moment with those two just one more time.



SardinesThe sardine run off the coast of South Africa is a hotly anticipated event by numerous legions of predators from the shark all the way down to the sea bird. As a defense mechanism, the sardines form large groups that swim rapidly in unison in large forms that are a never ending symphony of sizes and shapes to confuse predators.  Much like the flocking action of birds, this makes them look larger to prey and to confuse the prey with movement while protecting some of the core. The action by banks today resembles some of the sardine defense mechanisms. I wonder to what extent this may work, what other forms may be needed, and what pieces along the way will be stripped off by predators.

Drew Ferraro writes:

Market predators behave a bit differently than carnivorous predators found in the wild. Predators in the wild like an easy meal by pouncing upon the weak, the young and defenseless, and the old, unable to maintain a protective position in the herd. Market predators tear out the sound working organs, leaving the dying corpse for others to digest. This is evidenced by the current financial news. Barclays gets Lehman's North American banking and capital markets units for a Wall Street song.

NEW YORK (AP) — Lehman Brothers, which a year ago had a market capitalization of more than $33 billion, is now unloading its once-prized businesses for what passes as pocket change on Wall Street. Barclays PLC, the third-largest British bank, took advantage of Lehman Brothers Holdings Inc.'s bankruptcy reorganization Tuesday to reach a deal for Lehman's North American investment banking and trading operations for just $250 million.



KingsOne thing you learn from poker is that you can play the hand perfectly and still lose. There are never-ending ways to lose a hand of poker. All long term players realize that humble pie does not taste very good. To extrapolate from Dr. Keynes, The game can remain irrational far longer than you can remain solvent.

Bad beat story: I am short stacked in a cash game. Woman to my right puts in a small raise pre-flop. I call with wired 9-9. Flop comes 9 K 3. Woman puts in a small bet. I go over the top and go all in, hoping she has some sort of a hand and begging a call. She beats me into the pot and calls. I show her my three 9s and she shows me a pair of Kings to go with the one on the flop. Of course her hand holds up and wipes me out for the day. The odds have got to be a few in a thousand that this happens. But it happened to me. And at the worst point in time. Murphy's Law prevails again.

Ironically, I saw the same thing happen to Daniel Negreanu get knocked out of the World Series of Poker with an identical scenario. He rolled up a set on the flop only to have an opponent roll up a better set.

As Forrest Gump said "It Happens."



V NI never can read an O'Brian without learning something timeless or bursting out with laughter. While listening to Far Side of the World, I came across the hands getting very disturbed about the extirpations from the boobies which wore away the metal of the guns "and while the Dr. wasn't looking, they gave the boobies a good beating whenever they could."

Next comes two tortoises going down a thoroughly beaten track. Yes, a "beaten track." That's how trains got started. Originally the horses used beaten tracks, converted into rails and then with steam locomotives pulling.

Does the market go on a beaten track? More than a Lobogola migration back and forth on the elephant tracks. This must be tested, but do keep the tests to yourself.

James Sogi relates:

J SogiUSC trounced Ohio State this weekend 35-3. Coach Pete Carroll said of the win, "Over the years when we prepare this well, we're hard to beat. It doesn't matter who we play, We didn't do anything out of the ordinary." This surely applies to traders who prepare well, who have a number of appropriate strategies for the various market conditions — they are going to be hard to beat. The USC team has a great organization, and attracts top talent. Their coaches and facilities are tops. They have a supportive audience.

Even now, with markets in turmoil it gives the short term guys opportunity, and even the long term guys well-priced buy in points. Even if it bounces down a hundred, it will bounce back up with a vengance. In any case, a good trader should be hard to beat, especially on his home turf, even against other top ranked teams in any market.

Tao of PokerIn Tao of Poker, by Larry Phillips, one of the top all time favorite trading books, up there with Bacon and with Niederhoffer & Kenner, there is a treasure of deep wisdom. At the core is the idea of playing right at all times. Even when things are down, continure to play the proper game. Don't blow out and turn a 20k loss into a 100k loss. He says don't get greedy on the wins, take what the game gives. He says when the cards are right, and the players are weak, press it. There are times when the market is turning or turned and you've got to pull a Nelson and go right at them. Hanging back leaves one behind, or, worse, vulnerable later to counterattack. He talks about the black holes of breath taking depth, with is scary to keep in mind. He says play for money, not for the thrill or the feelings which are associated with certain positions. As with all deep wisdom, it much easier said than done.

George Parkanyi muses:

There have been panics before in the US markets that looked as dire, or more dire, to the participants at the time than this. One difference now though is the interconnectedness of the global economy. To me things look a little like a nonlinear system that has been in a period of stability for a long time, starting to becoming chaotic. The feedback loops, both negative and positive, seem to be overcorrecting more and more wildly (recent commodity moves both up and down). If the global linkages start breaking, through the sheer force of these movements (e.g. credit market participants no longer want to trade because they don't know how to value assets), then you could potentially see a period of total financial collapse in terms of today's major world currencies. (The physical and human assets will still all be there and eventually re-monetized.)

Remember that famous video clip of the Tacoma Narrows Bridge collapse?

I'm not saying it will happen, but the normal money flows do seem to be decoupling in some markets, and where does that lead us?



V NThere were many milestones last week but none as important as the fall of December oil futures below 100 at 1345 GMT, a nice 45% decline in two months, and a LoBagola from below 100 on April 1 to 147 on July 11 and back to the 100 on September 12. This move overrode all the negatives about the financials, as it should have, and made all the retrospective talk about inflation worries seem like so much wishful thinking among doomsdayists.

How quickly the psychology of the stock market can change was revealed by the new five year lows on Thursday's open of 1218 and the close just one day later at 1258, above the magic 1250.

It is no accident that the market achieved three up days in a row, with Lehman going down 75% in the interim, because McCain surged to 51 from 48 on Intrade.

I have often remarked about one of the worst research hoaxes in history: "Good To Great" by Jim Collins. He picked 11 companies that had become great based on how their stocks performed. He discussed these companies at length and then noted that one of the characteristics of such great companies was that their stocks performed well.

He had Fannie Mae as one of the great companies picked in 2001. And certainly the 11 companies performed worse than random. The 11 companies included Fannie Mae and Circuit City both down some 90% during the seven years subsequent to the publication of the book.

Even if the characteristics that he found had not been artifacts of retrospection and were unusually associated with greatness ex post, that wouldn't mean that the characteristics are good. The ex ante expectation could still be bad. It's the same error that the Sornette boys and their followers make, concentrating on one small tail of the distribution and seeing what's associated with it, without looking at the rest of the distribution. It is reminiscent of newspaper articles that interview very old people and ask them "Why do you think you lived so long?"

Thanks to Steve Ellison and Russ Sears who have looked at the subsequent performance of the 11 companies highlighted and found the results random, but helped immeasurably by Nucor's almost 500% gain. The returns for the 11 great companies since 2001 are as follows:

Alston Mabry points out:

the S&P Equal Weight Index was up 76% from late 2002 to present. This index is a more approriate benchmark for the average percent return of the Good-to-Great stocks than is the cap-weighted S&P. There are no available data from Oct 2001, but the equal-weight return may be even higher from that point.



BatMy friend and stock market mentor Omar Sheriffe Vernon el Halawani loved cricket in addition to the stock market. We watched many a Wall Street Week together. I saw him through his last two years of cancer, and although he was disappointed that the treatments didn’t take hold, he never once complained about his lot, or his suffering. Yet this was a man who would rail against taxes all day and haggle over the price of a cup of coffee.

One of his dying wishes was to have his ashes spread on a cricket pitch in each of Canada, England, and Jamaica — the three places where he spent most of his life. His cousin and I did Canada, and I won’t say when or where because this is quite illegal, and the location is particularly high-profile — we put him in the wicket holes.

Sheriffe was a high school teacher for his whole career, but became a millionaire by buying a little real estate — but mostly from shrewdly trading stocks. He took his lumps early like the rest of us, but was a very quick study. He had a deep understanding of eonomics, and from that and sheer native intelligence, became a great stock picker. “George, the Canadian banks are a license to print money.” So he bought Bank of Montreal and held it for 20 years — split after split after split. His annual dividend income was well north of 20% on his original investment.

In his later years he also used to tell me “George, why bother to sell? Remember Peacock!” Peacock was a character in Edwin Lefebvre’s biography of Jesse Livermore’s “Reminiscences of a Stock Operator,” and when brokers would harangue him to take profits, he would apologetically whine “but it is a bull market and if I sold I would lose my position — then where would I be?”

Williams Tower / HoustonSo Sheriffe bought Corning at $2 in 2002, and Williams Companies for not much more, and watched them rise tenfold. He bought Transcanada Pipelines at $10 to watch it triple and re-instate its dividend, and so on. This man knew how to sit.

Tonight I scored my third goal and set up my second in four playoff soccer games. We won the final. I’ve been playing soccer in this league for over five years and have never once scored a goal. But because I played indoor last season, and also on Sundays throughout the year, I finally developed enough stamina and a little skill to run up and and down the field consistently and with confidence, and the past four games were my personal little breakout.

Immersion. Loving what you do. Doing it over and over again. This breeds success.



A Veltman

1/ Net Large Spec Short of over 170,000 NG futures; for every two Long fund positions there are 3+ Shorts now! Note: NatGas price nearly halved in just 2 months — talk about dedicated trendfollowing!
2/ Crude is now sporting Small Spec Net Short — Not a very bearish indicator; RBOB has had mostly Commercial Short — thus not prone to panicky cover on hurricane.
3/ Gold is not setting up for further liquidation, as Commercials have been buyers into decline; surprisingly, Silver is lacking same commitment — despite nearly halving its price in two months!
4/ Yen rally on crosses attracted duly Commercial selling; thus Yen is not likely to jump further!
5/ 30Y bond features aggressive Small Spec Short — prone to Short-cover; not much featured across all other Treasuries!
6/ Nasdaq Mini's drop was met with good Commercial bid; thus ENQ is better supported compared to other indexes.



Greg RehmkeI wrote earlier (April 1) to argue that the increase in oil prices over the last few years was providing a vast stimulation both to further oil exploration and development, and to expand effective (i.e. private sector) research and development of alternative energy and electric cars.

I asked then how far oil prices would fall as new energy supplies came on-stream and Americans purchased smaller cars and reduced their driving. Of course oil prices continued up since that April 1 post ("How Low Will Oil Prices Go? "). My frustration then was with the media's continued calls for government to intervene, and reporter's lack of understanding or appreciation of markets. New York Times reporters seem always surprised when automobile use declines in response to higher gas prices. And reporters usually claim oil prices have fallen only because world economies are in recession or teetering on the edge. (For many reporters, recession fears will end only when a democrat is again confidently pushing and pulling the levers of executive power.)

I was in error, in April, in assuming that consumers around the world were paying higher prices for oil, as they were in the US. If $3 and $4 a gallon oil was significantly reducing driving in the very rich US, it should have had a larger impact in poor countries. But of course governments in China, India, Indonesia, Russia and elsewhere have even less faith in markets. Price controls and subsidies there insulated their population from higher oil prices. Distorting or blocking price signals prevents recalculation of transportation resources. Transporters keep driving older inefficient (and heavily-polluting) vehicles instead of trading up to cleaner, higher mileage vehicles. Subsidized gas and heavy taxes on new cars are a source of air pollution in Cairo that is 10 to 100 times acceptable standards. Removing taxes on new cars and allowing fuel prices to rise would help clean the air at minimal net cost. (And if state governments in the US would suspend sales taxes on new and used cars, consumers at all income levels would quickly trade up to cleaner, more fuel-efficient cars.)

Without price signals, industries in poor countries can't tell which are creating wealth and which are actually reducing the value of inputs. To claim that industry and transportation in developing countries are too poor to adjust to higher prices is to ignore reality. People and governments in these countries are too poor to burn oil and dollars wastefully though gasoline subsidies. Market reforms and economic progress over the last ten years in India and China provide exactly the flexibility needed to adjust to higher oil prices. If Chinese bureaucrats had not been so fixated on stockpiling diesel for the Olympics, and keeping prices fixed to avoid protests while in the world spotlight, the recent oil and diesel run-up would not have been so severe.

Economic progress over the last ten years has been the fastest for the most people in the history of the world, thanks mostly to expanded economic freedom and investment in India and China. And what's past is prelude: the pace and scope of world economic progress will accelerate and expand over the next ten years. Technology has cleared the path, and international information and investment flows will widen it.

I have mentioned before Michael Cox’s metaphor of four men dropped in a jungle, but only one has a machete. Who gets out first? The surprise answer is that they all emerge at about the same time. The man with the machete clears the path, and the others, once they find it, sprint along to catch up. Everyday people in England, Western Europe, the U.S. and Japan, cleared the path with thousands of agricultural, banking, and industrial innovations over the last few centuries. And now everyday people in China, India and Eastern Europe are putting in long days both to deploy long-available world technologies in their once isolated lands, and to create valuable goods and services for businesses and consumers in already-wealthy countries.

This a good thing. Billions in India and China are earning money (and saving much of it) producing goods and services for others. Both parties in all voluntary trades benefit. Astonishingly, this progress is being achieved against hostile, incompetent, and corrupt governance impeding investors, workers, and entrepreneurs in China, India, Europe, and South American (and, of course, in the U.S.).

A recent Book Forum at the Cato Institute featured the 2008 book “India: The Emerging Giant.” Both the author, Arvind Panagariya, and Cato commentator Swaminathan Aiyar, emphasized that India’s progress was in the face of India’s trademark government corruption, incompetence, and deeply interventionist regulations. Both speakers emphasized the good news for developing countries in the information age: if India can achieve sustained 7, 8 and 9% economic growth with its current government, well, any other poor country can too. More good news: the recent Indian government shake-up may bring more market reforms and partial privatization of Indian electricity, airlines, and other state-owned enterprises.

India prospers through expanded international trade and investment only as it creates wealth for its trading and investment partners. This means wealth is also created on the other side of those trades in the United States, Europe, China, and Japan. Over the coming years hundreds of millions more in India, as in China, will train and work hard to provide goods and services to Americans and Europeans and will purchase high-quality goods and services produced in America and Europe. And trade doesn't just expand. It deepens and grows more complex. Call center and software consulting teams intertwine advanced and entry-level services across continents, for example, and evolve unexpected divisions of labor and comparative advantages.

Indian government universities graduate 30,000 Indian engineers each year, but private colleges in India are graduating 400,000 engineers a year and expanding rapidly. “From 1990 to 2003 the number of engineering colleges alone [in India] rose from 337 to more than 1,200 (of which almost 1,000 are in the private sector)” –WENR

Informal private schools are also expanding rapidly across India, providing inexpensive and high quality private education for poor children—by far the largest work force in the world (one of ever four new workers in the world over the coming years will be in India). James Tooley’s research found over 300 “informal” unregulated private schools in just one slum area in part of the Old City in Hyderabad.

My first draft of this essay was written on July 15, and the day's headlines claimed a “plunge” of oil prices to $139 a barrel. This seemed a joke. A real plunge would take oil below $100 a barrel, which is still way high. Decades of federal government regulations restricting oil exploration and drilling, restricting the building of new refineries and new coal-fired and nuclear energy, have long restricted energy supplies in the US. And governments around the world mismanage monopoly oil exploration and development.

Price controls keep gasoline subsidized in many countries, so price increases don’t slow demand. Governments eventually allow prices to rise slightly and then have widespread protests. Government interventions overseas have turned citizens there into energy cripples, dependent upon the state, just as interventions in retirement savings here has turned most Americans into financial cripples, dependent on bankrupt Social Security and Medicare.

Government mismanagement of production in Mexico, Nigeria, Iran, Iraq, Venezuela, Libya and Russia limit incentives to boost oil production. People respond to incentives, and if those in government and with monopoly oil companies don’t benefit from expanded exploration, drilling, and production, they will instead focus their attention on activities that provide tangible personal gains.

Speculating on oil, food, and other commodity prices on the side has been one particularly enriching activity enjoyed by government officials in China, India, Indonesia, Africa, and South America. Just as Congressmen and Fannie Mae executives have taken advantage of “special” loans and donations, so local government officials around the world have tried their hand speculating with the commodity purchases they control. Chinese officials put in charge of making sure their district has enough iron and copper ore, diesel fuel, and rice, have purchased extra quantities to warehouse against possible shortages (they say) and price increases (they hope). Teapot Dome scandals may be waiting to be uncovered around the world. If governments are responsible for providing rice to “their” people, you can count on eventual rice shortages, along with ongoing spoilage, theft, and corruption. (See “Rice Hoarding Pressures Supplies" from May WSJ).

We can expect these public/private speculators to be wiped out as commodity prices crash on further fears that financial institutions and economies are faltering, and as new oil and natural gas supplies come to market. The silver lining in this financial cloud: governments faced with massive losses might be willing to strip government agencies of the power to play with commodity and finance fire. Maybe the U.S. government will give up backstopping home-loans as it faces absorbing a few trillion dollars in bad debts.

The great, great news is that people around the world will prosper, along with their financial institutions, as energy, food, and commodities move to more open markets directed by transparent and private firms. As governments get out of the way, supply-side and demand-side innovation and entrepreneurship will quickly boost production and drive commodity prices down, as free-markets have over the last few thousand years.



 Ron "Suki" King of Barbados retained his title as World Champion in GAYP (Go-As-You-Please) checkers today.  He defeated the challenger Lubabalo Kondlo of South Africa on the 24th and last game in the series, held in Medina, OH.  All previous games had ended in draws.  The referee was Alan Millhone. Our congratulations to the winner.

[In Go-As-You-Please Checkers, the players begin in the starting position shown, and can make any opening move. In Restricted Opening Checkers, the first three moves are drawn at random to generate the starting position, and the players continue from there].



V NThere are universal principles that apply to success in all endeavors. I took 10 for cricket by Micoach adapted from The Path to Athletic Power by Boyd Eply who apparently is a famous power coach.

1. Ground based activities. You play most games on the ground so your exercises should be on the ground. Yes, and the way to test a system is to apply it in the real world, not on paper. You must go back at least x years and see what it would have been like at that time.

2. Multiple joint activities. You use all the joints, in coordination. Squats do also, but a leg extension just requires the legs to move. You need to see how your tests and market activities work in the real world when you have multiple positions not just one at a time.

3. Three dimensional movements. Weights train you on three planes but the wire machines train on only two, "with the weights and pulleys taking the strain." In the world of markets, you are embedded in life. The family comes in. Food must be eaten. And sometimes you must leave the screen and take breaks. The announcements don't come when you expect them. Take this into account.

4. Train explosively. Speed comes from how quickly your muscles work. Work with sprints "and Pliometrics" not slow strength or sprints. Do vary your market positions according to the odds and expectations.

5. Progressive overload. Keep increasing the reps.

6. Periodisation. Take account of different time periods and days.

7. Split routine. Do weights on some days and flex on others giving your body a chance to recover. How about commodities at the end of the week and stocks in the beginning and grains over the weekend.

8. Hard easy system. Take it hard some times and easy other times or you'll burn out. Try skipping trading some days and spending time at the gardens.

9. Train specifically. Make it as close to real things as possible. No long runs unless you're a distance runner. Please don't paper trade only and do take account of margins and slippage and your broker front running you.

10. Interval training. Long periods of rest and then an explosion "just like you get when batting, bowling or fielding." The whole game hinges on what you do during seconds. Be prepared and never let down your guard. 

I'd be interested in how readers think the ideas of cricket and power training of Eply and Hinchliffe are related to or different from universal principles applicable to markets.

Martin Lindkvist replies:

Martin LTo gain power, muscle fibers need to be damaged which then leads to the cells repairing themselves, overcompensating, creating new growth and more power. Likewise, you cannot have profits without allowing for drawdowns.

Using many different exercises allows for the muscles to be trained from many angles creating more strength also in the power movements without overtraining in those few specific movements. Using many different/diversified signals/systems allows for more profit compared to overleveraging just a few main signals.

When you train with heavy weights, do use a spotter that can help you get the most of the exercise as well as making sure that you don't hurt yourself, or use a power rack. In markets when leveraged, consider utilising a risk manager for the same function, catastrophic stop loss, etc.

When you have had a while off, start out easy with lighter weights, or fewer contracts.



A VeltmanWe have the long-anticipated the halt to currency straight-line meltdown, playing out since the July 15, 2008 EUR record of 1.6040 (one-sixty-forty). Curiously, its last bull-wave commenced at the Nov 15, 2005 low of 1.1640 (one-sixteen-forty)! It's easy to figure out: the 50% retracement mark is 1.3840 — and such will likely contain the current unprecedented-in-velocity correction. Remarkably, Sterling touched down Thursday near 1.7450 = 50% of the entire 2001 -> 2008 run from 1.3682 to 2.1160!



Kondlo / KingMedina, OH, September 10, 2008 This week, the Midwestern city of Medina, Ohio hosts a decidedly international event: a 24-game match, played over the course of six days (Sept. 8-13), for the title of World Champion in GAYP (Go-As-You-Please) checkers.

Competing this year are Ron "Suki" King of Barbados, the champion since 1991, and challenger Lubabalo Kondlo of South Africa, who won the right to play by winning the 2007 US National Tournament as well as the 2007 GAYP Qualifier, sponsored by the World Checkers and Draughts Federation. Alan Millhone, president of the American Checker Federation, will referee the match.

Although Kondlo is a relative newcomer to the international tournament scene, due to political pressures and to the high cost of travel from his hometown of Port Elizabeth, South Africa, he has already proven his ability to perform well on the world stage. During the 2008 Ohio Checkers Tournament, held in Medina this past weekend, Kondlo tied for second place in a very strong field—among his seven competitors were two world champions and three other master or grandmaster players. King shared first place in the tournament with OH resident (and 3-Move World Champion) Alex Moiseyev, and is well-known both for his analytical skills and his ability to exert psychological pressure on his opponents.

As of Tuesday evening, the two grandmasters had played eight hard-fought draws. A tie match means that King retains his title, so players all over the world are watching closely to see if either player can find a weakness in the other's game, and score a win.



If one's model is saying that in the short term (next two quarters) the S&P is overvalued but over the next year it's undervalued, what does one do? Is it a matter of one's preference to trading over investing, or should one get long at the risk the market will realize the same thing and ignore the next two quarters of expectations? Although we like to say the market is a discounting mechanism, it seems very often to be discounting the very near future.



MojaveThese passages from the first few pages of L'Amour's Mojave Crossing pretty much sum up life so far:

There's more snares in a woman's long lashes than all the creek bottoms in Tennessee.

Even a good woman with her ways and notions, can create more trouble than a good man can shoot his way out of. And I had a notion that this here was no good woman.

Nobody ever claimed I was much of a businessman, least of all me. But if a body can buy cheap and sell high, he just naturally ain't never liable to starve.

Seems to me there's enough trouble in this world without borrowing more with careless words.



A CNN program, Deep Survival, comes to some conclusions about the people who survive serious accidents and disasters:

many of the disaster survivors he studied weren't the most skilled, the strongest or the most experienced in their group. Those who seemed best suited for survival — the strongest or most skilled — were often the first to die off in life-or-death struggles, he says. Experience and physical strength can lead to carelessness. The Rambo types, a Navy SEAL tells Gonzales, are often the first to go.

Steven Scoles adds:

I read Gonzales book "Deep Survival" a couple of years ago and found it full of intriguing stories like the one noted in the article. I would highly recomend it. I do fair bit of mountain hiking and river kayaking and it made me realize how my experience has made me complacent in those activites (e.g. more willing to go off on my own in unknown territory)… not unlike bull markets make people complacent about risk.

Gibbons Burke preaches:

Faith in a G_d who promises life everlasting to those who believe and follow Him gives the faithful believer a great deal of peace of mind in the face of dire circumstances.

Kim Zussman replies:

Kim ZWhat then is one to do when faced by (the all too frequent) dire circumstances in a world without objective evidence of supernatural benevolence? Do you become forced to take up formerly illogical beliefs, and with that admitting your weakness and defining your faith?

Many traders share the experience of putting on a well-reasoned position which turns around to crush you. During the decision to fold or not (or G_d forbid, Martingale), does your internal voice change from "T=3.2!" to "WTF do I really know?" and if it doesn't, how is this not faith which transcends scientific self-doubt?

Gibbons Burke persists:

Gib BurkeWe're speculating with regards to the true meal of a lifetime and beyond — or eternal barbeque, depending on your freedom to choose outcome you will. Seems perfectly on topic, no?

With apologies to Blaise Pascal for mangling his famous wager… the gaming odds for the prudent eternal investor favor belief, without even considering the utility of belief:

= A believer, if wrong, will never realize his error: he will be dead and to dust. Poof! His upside is limited to the benefits of that belief - peace, joy, happiness, fortitude, patience, courage, etc. (so-called fruits of the Holy Spirit) and perhaps the blessings of a life well lived, depending on the breaks.

= For the same reason, a non-believer, if right, will never realize any returns from his correct bet, so the upside on this option is capped at his expiration date (death). He, too, may have lived a seemingly good life, relatively uninhibited by the constraints of the believer's conscience and avoidance of sin.

Advantage: subjectively neither at this point.


+ A believer, if right, will enjoy the eternal and infinite upside alpha of his investment in belief: life everlasting in communion with God, who is Himself Truth, Beauty, Virtue and all good things - to behold him face to face, for eternity, as well as the benefits which accrue to a life lived on earth in faith - even perhaps suffering for that faith. What a small premium to pay, relative to the potential reward, no?

- The non-believer, if wrong, will bear the eternal and ultimate lock-limit drawdown, with no stop loss in place. A literal margin call from Hell. Separation from God the Father. He will know he was wrong - for ever, and ever, world without end.

So, to put this into option terms:

The risk profile for investing in the LEAP of faith — a 'call' option of belief in the Underlying Security — is unlimited upside if he's right; limited down side if he's wrong.

The 'naked put' option of the who doesn't believe in the value of the Underlying Security, is a limited upside if he's right; unlimited downside risk if he's wrong. He may end up with a debt he can never repay. (Paging Dr. Faustus…)

For all that is in the world, the lust of the flesh and the lust of the eyes and the pride of life, is not of the Father but is of the world. And the world passes away, and the lust of it, but he who does the will of God abides forever. [1 John 2:16-17]

Stefan Jovanovich  generalizes:

One of my favorite pulp fiction moments is in Joss Whedon's Serenity. The preacher, who like many godly men has had a great deal of experience with his own capacity for evil, is dying. Mal, the atheist hero, calls for medical help and tries to reassure the preacher that he will live to preach many more sermons to Mal's skeptical ears. The preacher is having none of it; with his dying breath he replies, "Don't matter what you believe. Just believe in something." I am afraid I share the preacher's hopelessly ecumenical notions of gospel. Belief in the magic of markets, chess, checkers, one's friends, something is the necessary precondition for humility and humility (not passivity) is the necessary precondition for wisdom. The survivors I have known do not necessarily believe in God but they do believe in "something" greater than themselves. They did their best and kept at it - all the while accepting that what happened to them was never entirely under their own control. Or, as the philosopher said after banging his thumb with the hammer, "it happens."

Nigel Davies tries to get back on subject:

GM Nigel DaviesThis got me thinking about how one should survive in chess and markets. I'm not sure these should be treated in quite the same way as both stakes and sample size are very different. In Gonzales's examples there is a sample of one person in a one-off situation, so luck will be at a premium. As such it may be difficult to separate this out from genuine skills.

In markets too there is a lot of luck.

Turning to chess one can find excellent advise on 'defending difficult positons' from both Lasker ('Lasker's Manual of Chess') and Keres ('The Art of the Middlegame'). Very briefly, Lasker suggests having no weakest point in one's position whilst Keres advises that one should make the opponent's win as hard as possible rather than focusing on counterattack. I think these are both very useful, but there is another dimension which I think is important.

The ability to keep one's position afloat when things go wrong is a function of the earlier disposition of one's forces. So players who proceed in an aggressive and taut style find it very difficult to change this disposition when things start to go wrong. Firstly their forces may be committed to attack, and secondly they may have compromised other parts of their position in a belief that the attack will win.

It's noteworthy that many of the greatest master's of defence (for example Lasker, Capablanca, Korchnoi, Karpov, Kramnik) haven't usually played for the maximum in the opening, looking instead for a certain harmony and balance in their positions. Their games have an unpretentious feel, very few weaknesses and balanced forces.

Chess masters are not noted for their humility but years of experience can teach them how to create balance intuitively. Will reading about it help? I don't think so. And it may even be damaging by providing false confidence or theories which haven't been tested by pain.



K ZussRemember February 27, 2007? That day's return (SPY, close-to-close) was almost -4% (supposedly catalyzed by a panic in China's stock market).

It has been 385 trading days since that day. Here are the statistics for daily returns for the 385 days since 2/27/2007, and the 385 days prior (excluding 2/27/2007 itself):

A down market since then (losing 2 basis points a day versus making 5 bp), as well as notable changes in skew and kurtosis. And standard deviation is almost twice as big. The 2/27/2007 move of -0.039 was 6.2 stdev from the mean of the prior 385 days, whereas it was only 3.4 stdev from the mean of the 385 days following.



V NThe action on the first day of the month of September was highly unusual, and apparently at that time the employment number had leaked so the moves after that first day were much more likely to happen than before. After such bad starts the rest of the week has a standard deviation of 30 and only 50% chance of rise.

The 40 point S&P decline on Thursday was the fourth largest decline on a Thursday ever. By that time, the news was out, and the increase in unemployment was icing on the cake.

All this occured in conjunction with repeated highs in the fixed income prices around the world, and declines in the omniscient market in Israel below the round and Japan near three year lows of 12000 on the Nikkei.

To me, the key event was the raising of the Swedish discount rate during the night Thursday, causing an immediate 1% decline in all European equities. How come they weren't keyed in like the others to the forthcoming announcement?

The most hurtful piece of mass psychology was the naive notion about stocks having to go down because the P/E of 25 was the highest in 15 years, and that was bearish. Earnings are forecast next quarter to be the highest increase ever of 50% and you would think that people are taught to look at the future rather than the past for moves in markets.

There were many good economic numbers and bad economic numbers in the past week relative to expectations. What is it that caused the employment number to be the focus, other than the desire to paint the economy as weak before the election for obvious reasons of agrarianism? More important, why should a decline in employment at this stage be bearish for stock markets?

The one factor that made it seem so much like the end of the world was the the four day move down in S&P from the Thursday 8 28 close of 1298 to the Tuesday 9 04 close of 1236, a decline of 62 points was the second worst start of a week since the beginning of 2002, the only comparable being the four day move on 1 17 2008 before the French bank inside trading activity.

Michael Bonderer adds:

Perhaps equally important, maybe more so: Trichet's decision to increase the haircut on collateral to 12% from 2%.

Martin Lindqvist writes from Sweden:

The Riksbank declined being part of the liquidity pump that the Fed, ECB, SNB, et al, set up last year and continued with also this year. Maybe they are deliberately kept out of the loop now? However I think it has more to do with them having gotten lot of criticism for raising the last few times. Perhaps they just want to show who is in charge.

John De Palma adds:

With respect to the market obsession with the non-farm payrolls report (to the point of motivating a scene in the movie "25th Hour"), the sensitivity of interest rates to a one standard deviation surprise in payrolls is a few times higher than any other economic indicator. The rankings of market sensitivity to the indicators look like they follow a power law distribution, the distribution that characterizes movie/book popularities and other sociological phenomena. It's difficult to create a model of the economy that conforms to the dispersion of sensitivities. It's more plausible to appeal to a view of markets with focal points, attention biases, etc.

Henrik Andersson follows up on the Swedish developments:

It turns out the Swedish calculation of inflation was flawed leading up to the rate hike and the reported July number of 4.4% was in reality 4.1 percent (they thought shoes prices had increased 30% yoy…). Since the Swedish 'Riksbank' most likely was split in their decision it is widely suspected that with correct data we wouldn't have had a hike to 4.75%.



I have been reading

Psychology of the Stock Market

by G. C. Selden

Ticker Publishing, New York, 1912

Available online at Google Books

Here are some representative quotations:


[This book] is the result of years of study and experience as fellow at Columbia University, news writer, statistician, on the editorial staff of The Magazine of Wall Street, etc.

pp. 11-12

The psychological aspects of speculation may be considered from two points of view, equally important. One question is, What effect do varying mental attitudes of the public have upon the course of prices? How is the character of the market influenced by psychological conditions?

A second consideration is, How does the mental attitude of the individual trader affect his chances of success? To what extent, and how, can he overcome the obstacles placed in his pathway by his own hopes and fears, his timidities and his obstinacies?

pp. 27-28

...The point we fail to remember is that public opinion in a speculative market is measured in dollars, not population. One man controlling one million dollars has double the weight of five hundred men with one thousand dollars each. […]

This is why the great body of opinion appears to be bullish at the top and bearish at the bottom. The multitude of small traders must be, as a plain necessity, long when prices are at the top, and short or out of the market at the bottom. The very fact that they are long at the top shows that they have been supplied with stocks from some source.

Again, the man with one million dollars is a silent individual. The time when it was necessary for him to talk is past - his money now does the talking. But the one thousand men who have one thousand dollars each are conversational, fluent, verbose to the last degree; and among these smaller traders are the writers - the newspaper and news bureau men, the manufacturers of gossip for brokerage houses.

It will be observed that the above course of reasoning leads us to the conclusion that most of those who write and talk about the market are more likely to be wrong than right, at least as far as speculative fluctuations are concerned. This is not complimentary to the "moulders of public opinion," but most seasoned newspaper readers will agree that it is true.

It has often been remarked that the average man is an optimist regarding his own enterprises and a pessimist regarding those of others. Certainly this is true of the professional trader in stocks.

Jim Sogi comments:

Certainly the price action on Thursday and Friday's announcement that here is your pink slip and the end of Western Civilization is imminent put all that to the test.



Dan GrossmanCan someone give some explanation why Intrade indicates Obama 59% likely to win and McCain 41%, while the polls show them about even?

Are there any other web sites you find useful in predicting the election?

Alex Forshaw replies:

The polls don't show them as even. Additionally, the most credible polls (Gallup, Rasmussen, ABC/WP) are generally the ones which show Obama with the largest leads.

Real Clear Politics has a summary of some of the major polls.

Tom Marks and Jason Ruspini add:

There are two methods to predict the election.

The prediction markets such as Intrade and Iowa Election Markets (chart) are probably the best predictor.  As of 10pm EST today Intrade is giving 57% chance for Obama and 43% for McCain. Iowa is also 53 vs 47.

Another way is to look at polls. However, the polls generally cited by news organizations are national polls which on the surface is fundamentally flawed since it is the Electoral College Vote and not the Popular Vote that determines the election result.

What you must do is look at state polls and infer the Electoral Vote implied by these polls.  Fortunately there are some very nice web sites that do the work for you.  They automatically look up the results of the latest polls and apply statistical adjustments (such as weighting polls differently depending on accuracy and timeliness, or performing Monte Carlo simulations to incorporate the inherent inaccuracy of any poll) to come up with their forecast.

The three best Electoral Vote prediction sites based on state polls are:

Vanderbilt U. Economist A. Moro's Forecast

Sam Wang's Princeton Election Consortium (chart )

Five Thirty Eight

Reading about the methodologies these sites use can be interesting for those who are statistically oriented.  Most people probably only care about the result.  Currently Prof. Moro gives 314 votes for Obama. Prof. Wang gives him 311 while FiveThirtyEight gives 309 to Obama. (As every schoolboy knows it takes 270 electoral votes to win the election).

In summary, both methods of prediction currently favor Obama. The rough equality shown by some national polls is misleading.



zingermans roadhouseI tried out Zingerman's Roadhouse (2501 Jackson Rd., Ann Arbor, MI 48103) last weekend. It's a spin-off of Zingerman's Deli in Ann Arbor. It specializes in barbecue and "American food" in general. It's a small restaurant far from campus. There is a retro aluminum RV in front of the building that serves breakfast to go in the mornings. You can either sit inside or outside on a dimly lit patio. We sat on the patio. Everyone there was very friendly (our waitress didn't want to stop talking to us). I had a hard time choosing between the pit-smoked beef brisket and the Eastern North Carolina pulled pork. I went with the beef brisket. It was very good. It was extremely tender, falling apart. It wasn't really smoky at all. I'm not sure whether it was supposed to be or not. There wasn't very much barbecue sauce in it, but you can obviously get more barbecue sauce on the side. It was served with homemade somewhat-lumpy mashed potatoes with some skins in them and braised greens. The mashed potatoes are served without gravy, and they are good, but I had to add a lot of salt. They served the sides and appetizer in healthy portions, but I wouldn't say they were generous with the brisket, which I found somewhat surprising. They have a pretty large drink menu, offering an array of good beers, whiskey, and any sort of coffee drink you might want.

The background music was nice, ranging from folk to blues. It's worth noting that on Wednesday evenings they have live music, which is usually either folk, blues, or jazz. I haven't been there on a Wednesday night, so I can't speak for the quality of the music. If you're ever in Ann Arbor, the Blind Pig has a reputation for having good live music.



TurtlesFirst, let's differentiate between longevity between species, and longevity within a species.

I suspect that many species that are slow tend to develop special protection. Their slow speed allows them to channel their resources into long term survival, versus momentary escape or satisfying a fleeting hunger.

A few species that come to mind are turtles, snails, camels, armadillos, possums, koala bearsand sloths.

I would suggest that many companies seek this special protection from the government and regulations. Utilities, insurance companies, banks come to mind. Further, I would propose a test of such companies. Like the overweight couch potato that starts trying to pick-up speed late in life, carrying the excess baggage can be dangerous. In times of stress those protected companies that have grown faster than their peers are likely to suffer the most. They have put too much reliance on a system designed for conservation of energy. It has been my experience in investigating insurance companies that those that have expanded by an order of magnitude of 10 say in a generation of 20 years, often tend to two mistakes. Both cause overestimating their chances. They assume their sophistication puts them ahead of their new peers. Or, two, they assume their common sense got them this far, so no need to change their ways. Both end up as road-kill like the possum and armadillos that are no match for their new worst enemy the car.


Now longevity with-in a species, that is a different story. Taking stress you were designed for keeps the system alive. As for how the long distance running increases your longevity… I have developed many theories and postulates. Here are a few that I think science and my experience have backed-up.

1. Blood is critical — the fuel , the lubricant , the cooling system for all the organs. Its creative destruction increases with stress. It's easy for a runner to become (especially young women) anemic without proper diet due to this destruction of cells. But the stress on the heart muscle increases strength. Yes, it beats faster while exercising, but you only run 1 - 2 hours tops most days. So it will, after it's gotten stronger, beat slower for the remaining 23-22 hours. But it's not just in the heart. It takes about 10 years of running to develop your total vascular system. Hence, why 20 year old Kenyans who have run since grade school whip 20 year old western runners. This excess capacity means normal function with less work, not more. Hence accepting proper stress often leads to less total stress. Things like needing reading glasses, or even s&xual dysfunctions need not happen until much latter.

Runners2. We need a healthy immune system and an early indicator for illness. Often at the first sign of illness, I will go out for a run and try to maintain my schedule. The problem I often had with Fall marathons was the taper of my running coincided with colds and flu season's arrival. Also if something is wrong, often undetected, the stress of a race will bring it out. While such stress may make the symptoms and you miserable for awhile, it gets your attention that you need help. I have known several whose life was saved by such early detection of cancer because of a bad season running. A company which is open to criticism from the top down would indicate healthy stress.

3. Many people don't know how unhealthy they are. They are afraid of the truth, and finding the truth hurts. Most people would rather gradually lose functions than test their abilities. They would rather imagine that they are as good as they once were. Sure this can cause the sudden weekend warrior to die on the court. But much more likely is a slow decline till they find themselves in a nursing home. Many are content with the status quo, unwilling to try new things soon find themselves irrelevant. A program of running combats this tendency.

4. Also most people don't know when they are mentally off center. Stress has many in a tight grip. They find outlets, but often these mask the stress momentarily, rather than releasing it. The residual builds into depression or destructive aggression. A good long run, a big bowl of pasta, and a nap, puts things in perspective. A company lashing out at an analyst, or CEO disengaging would indicate no relief allowed. The opposite, leadership while still able to maintain a sense of humor would indicate proper perspective.

5. To achieve a good speed in a long race requires many systems to all work together well. There may be some self-selection happening. Those able to run and run well may already have eliminated the weakest. It is a young man's sport. Further those that have invested in maintaining their bodies in their youth, are most likely to value the abilities of a youthful body… eliminating known vices and careless risk. By analogy if youthful energy and creativity is rewarded in a company, I suspect, the company most likely will take care of its other risks. What I think all this means for stocks, is look for those stocks in times of economic stress that are sticking with their knitting… growth stocks that are still expanding, acquiring. Or highly regulated stocks that slowly grow, but are content to conserve energy for survival.



Any thoughts on the paper "The Two-Year Effect" by Graham Bornholt ?

This paper identifies a puzzling form of predictability in U.S. stock market portfolios. For the value weighted market index, those years that follow a low return two years earlier have an average return 11.6% higher than those years that follow a high return two years earlier. The difference in returns is economically and statistically significant.

Vic and Laurel reply:

Let us say it does not come as a complete surprise; the strong negative correlation between the current year return and the return two years back is mentioned in our book Practical Speculation on pages 210-211. See in particular Table 9.2 on Page 211,

We invite the submission of relevant analyses.

Kim Zussman follows up:

Using SP500 (w/o dividends) I checked Dec-Dec returns 1950-07 for years coming 2 years after down years (the year after the year after a down year). Comparing these with all yearly returns for the series showed them to be higher, but the difference is not statistically significant:

Phil McDonnell expresses skepticism:

One way to test for a two year negative correlation is to calculate a correlation coefficient with a lag of 24 months. For S&P adjusted [monthly] returns from 1950 to 2005 we get the following correlations at the various monthly lags from 18 months to 33 months:

Dr Phil autocorr table

Note that the correlation at 24 months is actually +1.55% which does not support the idea of a negative correlation at two years. However overall most of the monthly correlations are negative in the 18 month to 33 month range. Another indication of how weak any effect may be is that none of the correlations rise to the level of 5% significance. Given that there are 16 chances we might expect that at least one would be significant by chance alone.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Alex Castaldo replies:

I thought we were discussing yearly returns, not monthly. You lost me somewhere.


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