The following quote inspired several hypotheses from the indictment of capitalism in Adbusters:

"Many Japanese remember with a shudder Hiroaki Kushioka, the accountant turned whistle blower, forced to spend more than 30 years tending the weeds in the company parking lot after bringing a major price fixing scandal to light." Adbusters special paradigm shift issue, 2008.

The way one handles failure in the executive suite in the US is somewhat dissimilar. No increases in salary or bonuses are allowed.

What is the performance of companies based on their physical assets to financial assets ratio? What is the performance of the top 100 brands these days? How does the spirit of a country affect its markets? Are we now following Japan not only in market performance the next period but also in cultural trends like the worship of teen sex symbols? Are companies committed to preserving zero growth somehow destined to abysmal market performance like those that serve coffee et al that is produced by elites in underdeveloped countries? The studies of ratios of good will to normalized value might be very apropos now and would have to take into account the relation to concurrent and previous market moves. Will we finally abandon the flawed idea that sales growth is better than profit growth in reports of interim earnings? Chickens come home to roost eventually. How can this be quantified, and how does this relate to the recent fall and now recovery of the last remaining conglomerate who received 4.5 billion for a speculation that stock prices would not fall in 12 years? Who would have been so foolish as to give 4.5 billion which doubles in 12 years for a speculation that has say over the last 100 years only a 1 in 20 probability of paying off unless they got at least a 10 fold or 20 fold payoff on it?



This story about 150 beached pilot whales struck me as having curious parallels to the humanity's recent troubles. Clearly there was some form of group error and for the whales just a 20% survival rate after bail-out.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005



 I was driving on the motorway I-95 last Saturday, the day after Thanksgiving, to come back home from Washington DC after visiting some friends. There was traffic, but it was acceptable and with a kind of "stop and go pattern." Patterns change all the time, but my wife came up with the usual comment: "You are always on the wrong lane!". For an Italian driver this is quite an outrageous comment, I have to say. In these situations I normally do not change lanes often, I tend to stick to one lane. After all, the distribution of cars in the three lanes should be efficient with cars moving from one lane to the other until drivers see a benefit in changing. With my portfolio of stocks I tend to do the same. When I start chasing sectors and stocks, I do worse than following a buy and hold strategy. The timing is difficult, I end up overtrading and paying a lot of commissions. For some time I noticed that on the left lane there were more cars than on the other lanes because that lane was faster. However, when cars came to a stop, the left and center lanes were much better because they had less cars. You could see drivers shifting away from the left lane in that situation. As the traffic conditions improved, this pattern disappeared. My mind went to the markets and their ever changing nature. Those investors fast enough to notice a new pattern can benefit from the temporary market inefficiencies and I came to the conclusion that I could also ask my wife to help me manage my portfolio. Then, after almost two hours driving, I happened to see the same truck on the center lane that overtook me during the "stop and go" pattern. He remained very likely on the same lane all the time, while I was wasting time and energy.

Scott Brooks adds:

S BI've written about this before, but when I used to have to fight rush hour (I've completely arranged my life to avoid rush hour and I'm successful about 95% of the time), I noticed a few patterns.

Based on a a 8 - 12 lane highway (4 - 6 lanes in each direction), the best lane to be in was the second to last lane (the 3rd lane if there were 4 lanes or the 5th lane of there were 6 lanes.)

The right two lanes had to deal with traffic merging and exiting so they were slower. The furthest left lane was where most people went to "go fast" (as it is known as the "fast lane" or "passing lane"). However, it was my experience that so many people went for this lane, that it got crowded. It had spurts and burst, that were followed by busts.

So people in the "fast lane" would have periods where they got ahead and things went fast. When that happened people in the second to last lane would immediately jump into the left lane to take advantage of the current "trend" of moving fast. That would clear out the second to last lane and "off we'd go in that lane". People in the second to last lane would also be dropping into the right two lanes to exit. The further I drove, the less traffic would get (because as we moved away from the city centers to the outskirts, traffic merging in decreased and traffic exiting increased) and more and more people would exit.

The fast lane people would usually stay in that lane because they liked the big burst of speed that that lane would provide (at least that's my hypothesis) and would fear that they'd miss out on "the next big run" more than they feared getting stuck in motionless traffic.

My theory didn't hold up everyday. Sometimes the left lane would be faster. Sometimes a traffic jam or a "Sunday Driver" would screw things up. But at the margin, the second to last lane was the best lane to be in to make the best overall time when traveling in heavier traffic.



 I always enjoy reading James Montier, SocGen equity strategist. Here are a few highlights from his current research piece:

Conclusions – The Return of the Coffee Can Portfolio

The road to revulsion is throwing up some exceptionally attractive opportunities for investors.In many ways, perhaps we are being offered the investment opportunity of a lifetime in areas such as the corporate bond markets.

In aggregate, equity markets are cheap, perhaps not at their ultimate bottom but cheap nonetheless. For those focused on long-term returns, equities are pretty attractive as an asset class. From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy. The institutional imperative to perform on every time horizon hampers this ability in a particularly frustrating way. Investors are looking at the short term, and ignoring the long-term opportunities they are being offered.

As I was completing this note, a friend sent me a great speech by Jim Fullerton (former Chairman of Capital Group) written in 1974. It concluded with a quotation from Dean Witter speaking in May 1932 which I found apposite in the extreme. "Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished. In fact, does anyone think that today's prices will prevail once full confidence has been restored?"

This looks like a great time to start to fill up your coffee can. As if all this wasn't enough, Mr Market is offering you the opportunity to protect yourself from the ravages of inflation in an exceptionally cheap way. With all of these opportunities available I have never been more bullish! Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.



ChinaSaturday afternoon here in Wuhan, China during this Thanksgiving Day Weekend. Happy Thanksgiving… Home… Exactly right. Since I arrived in China on March 31, 2006, some of my Chinese friends criticize McDonald’s as it serves fast food, allegedly unhealthy compared to Chinese food. I often hear such a synchronous rancor that reverberates elsewhere throughout the US and in the world at large, yet such appears to me to eventually blend into a harmony of praise and critique… Two years and eight months out of country, I am thankful for the franchise… Victor reminded us of that Odyssean vestment by the Pilgrim farmers. Such is a tale that continues to unfold here in China. The old order, one of contract among equals (which excludes all but 5% of the population), gravitates toward retention via bureaucratic sprawl of government taxation and regulation overlaid with retained state ownership (or negative control) of primary industry sector concerns. Meanwhile, a new order takes form, primarily in China’s “little emperor” generation. They are not bound by contract. These young Chinese want more… more opportunity, more recognition, more of self. Then, alas, there is the farmer. My girlfriend’s family is made up of old farmers struggling in a little village some two hours north of the city. A few weeks past, she returned to our apartment quite sad. The old farmers are suffering. Commodities prices have rather irrationally, erratically depreciated – disproportionate a la the government’s allocation of pain favoring those who broker and buy over those whom have lived with it (sacrifice and contribution) for their culturally topsy-turvy lifetimes – to maintain harmony via CPI modulations.

I grew up on a farm in Falmouth, Maine. A dairy farm is still across the street. A Chicken farm once sat atop one hill of Hurricane Valley Road. A horse racing stables (trotters) commands much of the valley’s juxtaposed mountainside of fields and forest. Between, a river snakes and the Maine Turnpike runs. I remember watching NFO on PBS as a kid. The struggles of the American farmer are well known – and whose fate to corporate structuring appears memorialized. Still, as in your article, seems that the farmers are whom we should be thanking… they feed us. We also may be reminded by the farmers, regardless of nationality, of what Smith’s sightings of “the hand” actually derive from… That would be “process.” Growing food is a process just as life itself. Evolution of an agrarian society to an industrialized state is a process. There is spilt coffee along the way. Some are burned. Regress, the petitioning of grievances… Fairness… Yes, Fairness… with a capital “F” is the concordance for that munificence of which you both cite and that those of us whom are so blessed come to realize – often upon misplacement or being forgotten… For the speculator in any given market as much as for the farmer. I remember a quote: to be a discoverer, one must first become lost. On this day, one to share at home, I hope youall have the opportunity to pause and look back, glance forward, but most of all enjoy where you are at and what you have so far found, giving thanks to what we have as well as have yet to discover… All part of a process, one that the pilgrims endured, often with loss, seemingly so unfair. That said… I now walk to a newly constructed shopping mall (FDI financed, I suspect) for a cheeseburger (extra pickles, onions, and mustard), chicken nuggets, and a chocolate ice cream cone – at MacDonald’s in the courtyard, basement level, whereupon a plethora of newly opened, chic to suave restaurants “look down” from the fourth level.



 I've been thinking a lot about essentials lately and how many tasks and systems are made unnecessarily complicated by our attempts to guild the lily. My hypothesis is that strength and quality in any field or product come from doing the basics very well.

Numerous examples come to mind, for example the sophistication of many cars and computers (both hardware and software) may increase the odds of something's going wrong. Not to mention overloading the human they're expecting the machine to interface with.

Of course this is going to be sales driven; human buyers are actually attracted to fancy gadgets and capabilities. But by going this route they may be decreasing their efficiency.

This tendency to over complicate may be even more destructive in fields such as board games and speculation. The human mind is only capable of so much, so to fill it with distractions destroys its effectiveness. Many of my chess students have reported a deterioration of their results if they had other concerns or stressful trips prior to the games. And the 'chess act' itself can be rendered much more difficult by over complicating.

Lasker wrote about this saying that what was important was the 'method', stating that memory was too important too be stocked with trifles. Accordingly I've been trying to simplify my approach, reducing the need for information intensive studies or ideas that are too intricate.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005



 Here is a paper showing different buy/sell activity for stocks as a function of digit of price:

It contains a chart quite similar to the one above, which I made using data a real-estate agent shared on the local housing market over the past year, including listing price, sale price, days on market, and selling agent commission.

I tried to address a question related to choosing a listing price. Often when someone wants to sell something for $100, he might price it $99.95 or $98.50, etc., under the theory that people will think "ninety-something" instead of a hundred, and be more tempted to buy. The chart seems to show that people do this with house listing prices too.

To check this, I used the listing prices for homes ranging from $400,000-$999,999, and adjusted them such that the data was moot in the 100,000 column; they were all $9XX,XXX, and binned. For instance 495000 became 995000, 675000 = 975000, 825000=925000, etc. This way I could look at where people priced their homes in the ten-thousands column, regardless of the hundred thousands column (which was adjusted to 9).

Above is a dot-plot showing the frequency of prices in the various 10,000 bins. It is a "bimodal" distribution; people were more likely to price at or above 90,000 (in the ten thousands column), and near the 50,000 level. This confirms the effect alluded to earlier, because of the huge peak in the 90,000 area which dwarfs the 10,000 band. This and the peak around 50,000 bears a resemblance to what was found in stocks.

Adam Robinson writes:

Adam RDr. Zussman's reference on pricing reminds me of the notion of price points: discrete (rather than continuous) pricing "bands" that once "entered," a person is willing to go to the next higher band. (E.g., once a person is willing to pay more than $10 for an item, he's willing to pay $14 — so it would be foolish to ask for $12. Kind of like quantum levels for electrons.) If you examine random price offers, which are tested to death by direct marketers, they cluster around these price points.

Also, for some quirky reason, prices ending in a "7" draw much higher response than any other digit (not sure if this is true of other cultures).

For more on the psychology of pricing, and why we buy things (which might offer insights into why people buy stocks), here are some terrific sources:

Buyology, by Martin Lindstrom

Influence, by Robert Cialdini (Yes! is an offshoot with more applications in business world)

Why We Buy, by Paco Underhill (an almost anthropological take, more on retail environments)

The Strategy and Tactics of Pricing, by Thomas Nagle

Dr. Robinson is the author of The Rocket Review Revolution, NAL Trade, 2006



It was encouraging that there were even a couple cases with weekly returns >9% that were not in the 1930s.  Here they are along with following weeks:

Date                week    nxt week
06/22/31    0.182     0.008
08/01/32    0.162     0.008
06/20/38    0.142     0.058
07/25/32    0.130     0.162
03/15/33    0.128    -0.046
10/07/74    0.126    -0.005
10/27/08    0.114    -0.042
08/22/32    0.114     0.031
04/17/33    0.113     0.048
09/05/39    0.109     0.027
11/07/32    0.106    -0.075
07/11/32    0.103     0.049
08/16/82    0.103     0.016
09/19/32    0.102    -0.032
12/05/32    0.101    -0.017
02/15/32    0.094    -0.045
05/01/33    0.091     0.030

avg     0.010  sd    0.055    t    0.770



 From The London Times:

Richard Fortman: draughts master

Fortman: he took a keen interest in man v. computer draughts contests

Richard Fortman was the most prolific author in the history of draughts, as well as the game’s leading annotator since 1946, a world champion at postal play and a master player for 70 years. Bob Newell, the doyen of internet draughts editors, called him “the last of the legendary checkerists”.

Richard Lee Fortman, known as “RLF” to all enthusiasts, was born in Springfield, Illinois, in 1915. At the age of 15 he was introduced to draughts — called checkers in the US — by his father, a telegraph operator who used to play the game to keep himself awake during lengthy shifts.

For a year father beat son mercilessly, but once the teenager had acquired a book from the local library — Chess & Checkers, written by the chess master Edward Lasker — and studied it assiduously, the tables were turned for good. “Using dead men’s brains” was tantamount to cheating, according to Fortman Sr, and their playing sessions came to an abrupt halt.

At that time Springfield had a thriving chess and checkers club, and under the tutelage of Harland Richards, a state champion, Fortman made rapid strides. After coming third in his first Illinois state tournament, in 1933, he performed creditably in a practice session against Edwin Hunt, a world title contender, in 1934, and established his master status in 1938 by winning the Trans-Mississippi tournament.

Playing in all 26 Illinois state tournaments, he won six, the first in 1950 and the last in 1978, and invariably came in the top four. More significantly, he made creditable showings in the masters section of the 1948 and 1958 US national tournaments, and in 1973 and 1983 he was in serious contention for inclusion in the mighty US team that slaughtered the UK and Ireland contingent in the third and fourth international matches.

Despite these achievements, he was to find greater fame as a postal player. George Bass, a renowned exponent who regularly played as many as 500 games simultaneously, was the first to make Fortman aware of its esoteric charms, in 1934, and he quickly found it invaluable for developing his analytical powers and encouraging the exploration of original lines of attack and defence.

Disappointed by a 1-0-11 draws defeat in a match for the world postal championship with Alf Huggins in 1964, Fortman persisted, and in 1986 finally attained his goal. Demonstrating the tremendous scope of this branch of the game, in which players have 72 hours to formulate their replies and access to extensive libraries, in 1990 he heavily defeated Dennis Cayton, a most worthy challenger, 9-0 and 7 draws to retain the title.

Proving that success in one field does not invariably lead to success in another, he also defeated the world crossboard champion, Derek Oldbury, 5-3 and 16 draws in a series of postal matches played around this time.

Remarkably, it was as an annotator that he was to find his true niche. He made his first contribution to the literature in 1935, and followed it with a highly valued series of monthly articles in Wood’s Checker Player in 1938-39, he established himself at the forefront of this field with his annotations to the 11th American Checker Association tournament games in 1946.

He provided annotations for a host of national tournaments staged by the American Checker Federation, several world championships, at which he was often the referee, and many of the inter-district postal tournament booklets. In 1954, 1956 and 1958 he singlehandedly annotated the postal matches between the US and Great Britain, and in 1973, 1983 and 1995 he repeated the operation for the crossboard matches contested between the US and the UK and Ireland. He also made extensive contributions to all the leading magazines of the day, including Elam’s Checker Board, California Checker Chatter, Midwest Checkers, Keystone Checker Review, the 6th District Newsletter, The Square World and English Draughts Journal.

Developing a remarkable indexing system, he managed to attain the demanding standards expected of an annotator by Oldbury: “He must be combined historian, essayist, psychologist, philosopher and prophet — and it were well he could play draughts too.” Moreover, he blended all these talents with entertaining storytelling and a capacity for relevance.

A close friendship with the celebrated Dr Marion Tinsley, one of the leading mind-sport competitors of all time, had an integral part to play in Fortman’s life, and spanned the period from 1946 until Tinsley’s death in 1995. While Tinsley “mined gold nuggets” from Fortman’s vast collection of postal games and correspondence, he benefited enormously from their extended practice sessions. Soon after one particularly bruising encounter in 1981 he went on to win an important tournament in a breeze — “After Marion, anything’s easy,” he remarked.

Like many draughts players, Fortman had a more than passing interest in chess, playing at a competent level and acquiring a library of about 300 books, mainly dealing with the game’s history and great players. While granting the sister game complete respect, he was, however, quite willing to challenge any chess players who chose to pronounce inaccurately on draughts.

When one famous English chess writer suggested that losing a game of draughts did not involve the same sense of personal loss as losing a game of chess, Fortman was aghast. He pointed out that some of his losses were still painful 50 years on and, tongue somewhat in cheek, declared that he “played chess for fun and checkers for blood”.

At the first Computer Olympiad staged in London in 1989, Chinook, programmed by a team led by Jonathan Schaeffer, at the University of Alberta, arrived on the scene, and quickly gave notice of its great ability. It was evident to Fortman that the days of the analyst and postal player were numbered, but he was philosophical about it. Recognising that such programs were a vehicle for demonstrating the beauty and profundity of draughts to a completely new audience, and would guarantee its future as a game and intellectual art form, he took a keen interest in the short-lived man-machine contests, and accorded Chinook due credit for its achievements.

Interestingly, Fortman’s seminal opus, Basic Checkers, played a crucial role in the landmark match between Tinsley and Chinook, staged at the Park Lane Hotel in London in 1992. The seven books in this remarkable series marked Fortman out for immortality and won the praise of players of all standards. Naturally, it was not perfect, however, and a dubious variation found its way into Chinook’s opening database. Cue the opening victory for Tinsley in his crushing defeat of the silicon monster, and thunderous applause from the spectators.

As an interlocutor for the professional blindfold exhibitioners Newell Banks and William Ryan in the 1930s and 1940s, Fortman realised that any attempt to make a living at the game would be precarious at best. For him, it was a hobby, which he miraculously fitted in around his work — as a warehouse foreman for the Panhandle Eastern Pipeline Company in Illinois — and family commitments. He was essentially an amateur, requesting only expenses for his work; the beauty of the game was its own reward. “A good game of checkers is like a great building — every brick fits right into place and, when the architect has drawn his plans correctly, the finished product is something to admire and enjoy,” he said.

With the advent of the internet, Fortman’s voluminous letters gave way to e-mails, and in his last few years he confined his contests to cyberspace. Of master strength right up until his death, he was always a most dangerous opponent

and, more importantly, regarded by the entire fraternity as one of the all-time greats.

He is survived by Faye, his wife of 58 years, and their son and daughter.

Richard Fortman, draughts master, was born on February 8, 1915. He died on November 8, 2008, aged 93.

Victor Niederhoffer writes:

I was doing a hand study of what happens when a trade hasn't worked recently, and would be bullish or bearish, but this is contradicted by the exact similarity of today with the gestalt. In doing it, I read about Richard Fortman who just passed away at 93 and was the greatest annotator of the game, and postal champion. There was a reference to his great and ingenious filing system which enabled him to annotate all games perfectly. I realized that the hand study I was doing was very similar to the manuscript work that all good checker players did with various variations off trunk, and computer updates from Chinook from the good old days. No doubt that the exacting game of checkers is a very good training for market systemists.



Happy Thanksgiving to all our readers.

Our 2005 article "Give Thanks for Pilgrims… and McDonalds" can be found at MSN money.

Or see the 2006 version.



 My wife will be calling to me any minute to come join the family for a Thanksgiving Feast!

What a wonderful day it is. Sunny, bluebird skies, about 52 degrees.The day started off the usual way. I awoke at about 6:30 and laid in bed with my snuggle buddy, Hunter (aka Boosh). Yesterday he turned ten and wanted to have a "Daddy and Booshie Night" so we went down to the guest room and spent the night snuggling, and telling him stories about when he was "young." He always like to hear about when he was born and how long it took to get him to breath and how much it scared us. Of course, there are many other stories told, along with some back rubs and face stroking. We didn't last too long last night as we were both tired. Not sure who fell asleep first, but my boy fell asleep in my arms.
After a hearty breakfast of bacon, eggs, and biscuits that Gwen prepared for David and I, David and I left to go to the annual Thanksgiving morning Men's football game with the guys and missionaries from our church. David was quite excited as this was his first year to play.

Although it's "touch football", it's actually quite physical and competitive. Although a few of the younger guys get their dander up (especially when one of the old competitive guys gigs'em pretty good), the anger wears down quickly and the fun continues. This year we had enough players for 4 teams so we had two simultaneous games going, we got out of the morning pretty well intact. One of the missionaries got a broken nose, I got a cut on my right hand, and one of the older guys (48) got a slight concussion (on the last play of the game…unfortunately, I was the one to deliver that blow. It wasn't intentional, and he took it in good stride, but still, he hit his head pretty hard on the ground).

Afterwards, we all enjoyed Gatorade and Krispy Kreme Donuts that someone brought for all to enjoy.

The game ended not a moment too soon. I could feel my knees seizing up and my groin was telling me that I would be limping for a week.

David had to help his old Dad up the stairs when we got home, and as I've trained him so well to do, he mocked me all the way up calling me old man and a big "girlie man" (I couldn't have been prouder).

David played a great game. He broke up a bunch of passes and made several very good catches. One of the guys "touched" him so hard that he went flying. It was probably the "hit" (touch) of the game. The young man who administered the blow, then helped David up and turned to me and said, "That's for an elbow in eye two players earlier". I guess my children do pay for the sin's of the parents.

But David is anything but a weenie and he wasn't about to take it. Later in the game, David had the opportunity to "touch" this young man (it actually looked more like a tackle with a throw down, rollover and an elbow administered to face…..but that couldn't have been the case as this was just a friendly game of "touch football"……so I must have seen it wrong). David helped the young man out (who had a smile on his face….he was a good sport and knew he had it coming), and the rest of the players mocked him (he's 18 years old) for letting a skinny 14 year old toss him around.

Needless to say, there were some Daddy and Duece high fives!

When we got home, we finished setting up the house and Gwen, Abby and Lydia were putting the finishing touches on the feast.

As I've sat here and written this, all of my family has arrived and I can hear them asking, "where is Scott". So it's time to go out and make an appearance and lick the fruit salad spoon (it's my favorite and I go to extreme's to keep people from wanting to eat it).

What a wonderful a life we have living in this blessed capitalistic country!

Thanks to all on these lists who have added so much to my life. I am truly grateful to all of you!



 One must consider what the effects of moderation were during the times of Blue Laws and peer-imposed Sunday closings. In essence the process taught moderation and planning. Remember, before the days of 24-hour cable news there were professional sporting events that were nationally broadcast roughly once per week. This member, for one, appreciated such things more during those times. The planning element arose from the inaccessibility to certain consumable goods and services. Not to mention, dealing with real "free time."

Having spent a great deal of time in Latin America, with its numerous holidays and "service breaks," one can see how compulsory moderation can have negative results when applied to a relatively inefficient society where community planning is relatively nonexistent - i.e. Bolivia, Mexico, Brazil.



 We're making Beer Can BBQ Chicken for Thanksgiving dinner today. I've got the small roaster chicken soaking in a brine solution with a little soy sauce, pepper, and garlic added. I will fire up the Weber Grill in an hour or so, and allow the coals to get just right, which should take about 40 minutes. The chicken will come out of the brine solution, will be washed and dried, then rubbed with olive oil, salt, and pepper. My son will drink a half of a can of beer, and I will take the other half and place it upright inside the cavity of the chicken. I'll put the whole bird, can and all, upright on the grill using a chicken stand. It will take over an hour and a half on the grill to get it just right. The beer will boil inside the chicken's cavity, making it the tastiest, moistest chicken on the planet. 10-15 minutes or so before the bird is done, I'll start basting the chicken with BBQ sauce. I'm lazy today, and will use some sweet sauce from Slim's, in Arcadia. I like my BBQ chicken well layered with BBQ sauce, and I enjoy a little caramelization in my sweet sauce, so will probably baste the chicken 4 times. While the chicken is grilling, I'll have John cut up some whole potatoes which we'll deep fry twice. Once to get them blanched, and the second time to get them very crispy. We'll have some cole slaw that's made from a package of premix, that I'll add some mayo, salt and pepper, sugar, and balsamic vinegar too. I also plan on serving some kalamata olives as an appetizer, and store bought pumpkin pie for dessert. Although this method of making BBQ chicken is unique, the finished product speaks for itself.



 Marketeers have been herding or stampeding recently. The NYSE up volume/down volume has been over 10:1 and over 1 million on one side. The days have been "trendy." Fish school and gazelles stampede for safety when under attack. Predators have to stand back or just pick off strays. Seems to be an effective survival type tactic. A question might be: when does the stampede start, and what triggers it?

Vinh Tu writes:

Virtual birds form flocks, when each bird individually follows three rules:

1. Separation: steer to avoid crowding local flockmates.

Alignment: steer towards the average heading of local flockmates.

Cohesion: steer to move toward the average position of local flockmates.

Here's a nice demo.

I'm looking for other good demos, for other types of herding behaviour.

Similarly, traders can stampede and trend as each individually decides that there is a trend going on. An exogenous shock that triggers a buy signal for enough traders would be able to trigger the stampede.

Adi Schnytzer writes:

In Australian and other bookmaker horse betting markets, herding is triggered by inside trades (plunges) and takes the odds lower than they the horse's true winning probability. This creates arbitrage opportunities. I have not yet gotten round to tote-only markets like the US or HK, but know that things there are more complicated by the absence of tradable updating prices. In the stock market, I'm sure it's also insiders or big money that triggers the herding and I hope to get around to this next year. Meanwhile, see A. Schnytzer and A. Snir, "Herding in Imperfect Markets with Inside Traders", Journal of Gambling Business and Economics, Volume 2, No. 2, 2008, 1-16. (available upon email request).



DOW return from last Thursday's close to today's returned what two "normal" years in stocks would have: 15.5%. Note there were only 10 other rolling 4 day returns which were higher (1928-present):

Date               4d
08/08/32    0.274
03/15/33    0.208
10/09/31    0.208
03/16/33    0.198
02/16/32    0.185
11/19/29    0.178
04/24/33    0.176
08/10/32    0.164
06/24/31    0.161
03/17/33    0.156
11/26/08    0.155

Today was also 4 up in a row (DUUUU), the first since April 2008 (man
that was a short recession!).  The wait since last DUUUU was 155 days,
second longest in the series

Date              wait
04/13/38    196
11/26/08    155
06/06/32    146
08/09/02    135
12/27/94    113
11/25/57    113
10/01/81    110
09/21/34    107
11/06/01    104
07/21/31    104

And the recent DUUUU was the second largest gain:

Date                4d
08/08/32    0.274
11/26/08    0.155
07/25/32    0.137
10/15/02    0.133
06/23/38    0.127
06/01/70    0.125
08/01/32    0.120
10/14/74    0.118
10/20/31    0.117
10/30/87    0.111



Seems to me that the current meme is that governments can underwrite any amount of bad debt, and in the worst case sell more bonds, print money etc. As long as this is credible, the credit crisis can simply be transformed into government debt. But what if this were not true, would there be a tipping point?

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005



 It's not as though this wasn't obvious or to be expected, but the academic job market already looks like it is going to be brutal this year. I'm not sure why, but anecdotal evidence suggests that last year was pretty bad too. Several students finishing their PhDs in math here at Michigan went on the job market last year and failed to find jobs. One of them in particular was supposed to be very good and was working with one of the best people in his sub-field. What really shocked me is that my weightlifting partner did not find a job. He did his PhD at Harvard and was an NSF postdoc fellow here. He has published in Inventiones Mathematicae (a top tier journal just below the Annals of Mathematics in prestige). These people stuck around for another year and are going back on the job market this year. Most universities post their math positions on I noticed several institutions have withdrawn advertisements for positions. Talking to friends in financial math who are looking for industry jobs is even worse. No one I know has been successful in his search. Don't be surprised if the person serving your coffee at Starbucks is a mathematician.



I wrote this short piece for Minyanville. Also, take a look at very a interesting interview [26 minute video] with Jeremy Grantham, who heads GMO — a $100 billion shop. He is (cautiously) bullish on stocks for the first time since I can remember.

"You should buy Freeport McMoRan (FCX), Caterpillar (CAT), PACCAR (PCAR)." -that is what I hear from friends of mine, who are in the biz, all the time. They tell me how cheap these stocks are - 3, 6, 8 times earnings. "You are a value guy! How come you are not loading up on them?" they say.

Let me tell you when I'll buy "stuff" stocks (if ever do buy them because I've never really cared for the cyclicality of their business). It's when everyone stops telling me how cheap they are and that they are "buys."

These stocks are very similar to housing stocks two years ago: housing stocks were down 50% and looked cheap. Value managers bought just to see their stocks get cut in half again and again.

One needs to sub-normalize earnings in this environment for all stocks, but "stuff" stocks need to see their earnings to be "sub-sub-sub-sub normalized." I've said it before, but it is worth repeating: the global economy just started its journey of going into a recession; demand for "stuff" will drop off the cliff most likely to a lot greater degree than anyone imagines.

I hear from my friends in Russia that the construction business that was booming only in September is dead. Like deader than dead. It doesn't matter if projects were finished or not, investors took their money and ran. Russia may appear like a special case since its prosperity is directly linked to commodity prices, but the slowdown is happening in the rest of the developing world like China and India… and the list goes on.

Stuff stocks are likely to bottom when they'll look expensive - their "E's" will be low or negative. Also, consumers were not the only ones that over-consumed "stuff." Emerging markets over-consumed earthmovers, tractors and factories. They still have huge overcapacity at a time when the global economy is slowing down.



 After a day like this, I always think back over some board proverbs of Wiswell or Bisguier. After you've made a really bad move in haste and got yourself in an untenable position, they would say, "Now you're thinking." This favorite of Tom's also comes to mind, "Moves that disturb your position the least disturb your opponent the most." I believe a variant of this is, "Don't create holes in your position." Tom liked to create problems with the theme, "It's darkest before the end of the night."

Matt Johnson remarks:

True, but you know the night has passed only after the sun rises. So do you trade when you first see a glimmer of light, or do you trade when it’s dark?



 I must confess that I've been approaching the futures board from the Long side of late. I heed signs of climactic Bear sentiment:

1. Most stock indexes reached long-standing target of flat correction, having traded back from record -> 2002 lows. Most people, though, continued to use the same approaches as they've employed at significantly higher price levels (at 100% higher levels, bluntly speaking).

2. Certain prices are preposterous. Prompt gasoline traded below $1.00 down from $3.63 record July 11; four months move! Copper swung from $4.08 to $1.52! One must remember that, as opposed to individual stocks that have proven their theoretical potential of wiping out,  this simply can't happen to raw materials. Swiss Franc depreciated whopping 25% in same period, which is way too much; but raw materials by 62% !??

3. Despite 30-90 day T-bill rates at literal zero, people appear to have bought into the idea that yields may go negative. I took Central Banking from Lorie Tarshis (who studied under and later worked for Sir John Maynard Keynes himself). Lecturing in 15% prime rate environment, Lorie shared his experience of persistent negative T-bill auction yields that followed the 1929 crash. It sounded exotic, and people hardly believed my story over the years; but here and now, suddenly everyone believes this possibility! My sense is, given modern financial sophistication vs. early 30s,  why would it come to that this time around?

4. Even if the economy and corporate margins stagnate forever , why wouldn't dollar-denominated nominal prices of everything, including listed stocks, rise? There is obvious $-debasing going on; purchasing power of paper currency units will hit the skids…

5. Then, there are shorter time-frame sentiment observations. E.g. Monday's Open Interest in E-mini futures decreased 1% on rally (definition of short-covering); but big S&P Open Interest rose 3% during same day's advance! To me, institutional traders have started to accumulate Longs, while Small Traders are too busy just short-covering!

6. From its new decade's low, the S&P is beginning to rally through 38% retracements and aim at 50% ones. It's also beginning to only pull-back 38%. Of course, there will be more scares to come in many areas and shoes to drop, but I can hardly bring myself to approach the board from the Short side strategically.



 I agree with Vic that level of market probably (more than) reflects future difficulties in the economy.  But in case this not so, I have been unable to find good articles or explanations of worst-case scenarios, i.e.:

1. What would happen on the downside if credit crunch/market seize-up continues?

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all the changes built up since 1930s?

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars –not so much how it is repaid, which it never will be, but what gets gets closed out when resources are diverted in this way?

4. Also, downside of uncertainty of continued government measures, and of delaying or not letting markets clear, of keeping bankrupt companies in business, keeping housing and other asset prices from falling to a level that would cause money on the sidelines to come rushing in?

I have not seen good articles or opinions of smart economists or financial writers on the above — can anyone point me to some of these?  Or can any readers who have thought about give a quick opinion?

Kevin Depew responds:

1. what would happen on the downside if credit crunch/market seize-up continues?

If the market were allowed to fail, there would be great devastation as many bankers and their friends, including the captains of the so-called "good industries," would go out of business. Then, chaos would ensue as enterpreneurial-minded men and women create untold ways to save and then re-direct capital to all manner of business ventures we can scarcely even imagine.

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all changes built up since 1930s?

"We live in a world of euphemism. Undertakers have become "morticians," press agents are now "public relations counsellors" and janitors have all been transformed into "superintendents…But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics." - Murray Rothbard (1969), "Economic Depressions: Their Cause and Cure"

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars (not so much how it is repaid, which it never will be, but what gets gets closed out when resources diverted in this way)?

"[T]he government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing." - Murray Rothbard, "Economic Depressions: Their Cause and Cure"

Rothbard wrote this stunning essay in 1969. Today, a mere 39-40 years later, we have succesfully ignored every paragraph, contravened every prescriptive statement and chosen the diametric opposite of every word he wrote.

Nigel Davies writes:

Chess players use the term 'unclear' for such situations, there's no precedent so who knows. So good articles will, by definition, be a contradiction in terms as there's no way to establish an opinion based on any kind of historical precedent. The case of Japan may be very misleading because they experienced a deep recession whilst doing business with a world which was booming (or at least bathing in temporary liquidity).

Of course things may be more understandable when one adjusts one's time scale. When, for example, did we last have three closes up?

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Laurel Kenner writes:

Mark Pittman, whom I'm glad to have helped hire at Bloomberg some 10 years ago, reported yesterday that the U.S. government has pledged $7.7 trillion to ease the credit crisis. The total U.S. debt just topped $10 trillion, and does not include most of the new pledges. Mr. Pittman has been way out in front of his media peers on this story.

My other favorite source is Amity Shlaes, a scholar who writes excellent columns for Bloomberg. This year, she published The Forgotten Man: A New History of the Great Depression, and it is quite illuminating as to how the New Deal affected the economy.



 1. Walking east across 56th Street from 9th to 6th Avenues the other day, at 5:15 pm, I noted 50 cars parked there, with drivers in the drivers seat waiting, slumbering… It wasn't an invasion of the body snatchers. Just people waiting for the 'no parking till 6 pm' to pass. They save 15 bucks for the night at the cost of an hour or so, valuing their time at less than $15 an hour. I wonder what the implicit price of time is in various cities now as a function of the recent diminution in wealth and loss of jobs.

Along the same lines, I recently received an offer from Icon which has a few hundred parking lots in NYC to park one's car on a monthly basis for $220 a month with "further discounts available" if you call. This might be a good way for the city and others to save money through obvious substitutions.

Fifteen dollars after tax translates to $22 or more pre-tax depending on the bracket. Moreover snoozing or reading have their own value, so the $15 could also be interpreted as the marginal difference in comfort between reading/napping in one's car versus doing the same in another environment. Nonetheless, the point remains: whether these people have anywhere better to be. Such Millhonian observations are enlightening and a reminder of the complexity of the economic system in which even the smallest actors are constantly performing economic calculations, the results of which feed into larger calculations.

I hope these people are reading some mentally enriching material, or at least taking power-naps or meditating, or somehow increasing their human capital, and that this is not complete deadweight loss.

2. At x pm every day, an announcement is made. The market moves to a level. The move is attributed to the announcement. The question is whether the move would have occurred regardless of the announcement. Also, whether the announcement was planned to make the move. For example, at 3:02 on 11/21, an announcement that the new Treasury Secretary was appointed occurred and the market moved up 6% in 59 minutes. Similarly at 3:10 last Friday, the announcement from the current Secretary that he believed everything was under control. The market set a new high and then dropped 6% in 50 minutes. We know that the news follows the price. Also, that the news is often now as "new" as we believe. The proverb comes to mind "the ____ will do what he can do." Also, the ephemeral nature of the news and those who know about it in advance. Is it fate or chance when such moves occur? And does the market do what it's going to do regardless? How would one approach this question and its tests and what insights can be drawn from such a traverse?

3. "The Game" between Harvard and Yale was won 10-0 with Yale limited to 90 yards. Yale previously had allowed just 95 points through 9 games. If the market can't be predicted, let us at least use the market to predict other things. Scores in baseball are always lower during bear markets. That's well known. Can we expect the same in basketball and such others as "What time is it, Mr. Fox?" and does the well documented predictive relation between low scores in baseball still continue to predict the market as previously enumerated in Practical Speculation?

4. Sometimes the kind of language used is a signal of vast underlying unearthed issues and problems. Times of crisis provide many nice examples of these and here a few which should be quantified and tested. In talking about his meeting with the former head of the investment bank who seamlessly moved to the chair of Treasury, the head of the now bankrupt investment bank said, "Our brand with the Treasury is very good." A Canadian central banker said about his meetings with senior bank executives, "If you were having a meeting with a central banker such as I and the conversation drifted to opera or the ski slopes at Davos or some such social setting, I think that's an issue." In discussing his tenure as consultant the former Treasury Secretary who seamlessly moved to consultant of the troubled bank, said  "When you have a risk book…, you can't earn more unless you risk more," and he according to others asked to "bulk up" the book. Others involved said that, "as long as you grow revenues you can grow bonuses," and apparently the risk manager and the risk taker in CDOs were once stranded together on a "boat on a lake that ran out of gas" on a fly fishing trip. (That's not exactly language but it recalls the similar incident of the server CEO who was stranded on a boat with his assistant during a survival exercise before the comparable plummet in his stock after they bought an interest in a company he owned for 1000 times revenues or so). In talking about the risk controls, a former president of the troubled bank said "our reputation with the public and the regulators must be an asset." These are paraphrases just to set the ball rolling, and I would be interested in other telltale uses of language that reveal deep truths below the surface.

Gregory van Kipnis replies:

You can not read too much into the fact that 60 cars are waiting for the "No Parking" period to expire so they could park overnight for free. I live in that neighborhood and such a sight has been seen every night for seven years. Perhaps if you knew if there was an increase in the number of cars that didn't get one of those spots you might have a hardship barometer.

Much more revealing, however, is that two weeks ago everyone who parked on the street got a flyer on his windshield, saying he could park for $211 per month, guaranteed for one year, at an undisclosed garage, just call (212) xxx-xxxx. That's a $150-200 per month saving over the prevailing monthly rate in the neighborhood, and was being offered by one of the leading garage chains. I took the deal and wound up in a better garage than the one I left.

It appears that in anticipation of reduced demand for parking and an increase in space capacity, one of the garage chains is trying to cannibalize as much business as possible from the other chain operators, and lock them in for a year with the low teaser rates. After a year they start jacking up the monthly rate by $25 a clip every few months. The assumption must be that the frictional costs of searching for a cheaper deal and adapting to a new location will be high enough to retain most of the new customers while they transition them up to full market rates.

I haven't see parking rate warfare since 9/11/01.

Kim Zussman ponders point 2:

One thing news-related market moves can do is reveal a hidden question or tension. The big jump on Geithner (along with the post-election slump) suggests there was worry about if/how BHO would address the crisis.

I wonder what would have happened had he tapped Volcker? Maybe the same.

Recall the big up open when they caught the other Hussein; then an all-day decline.

It seldom makes sense, which is one reason it's so frustrating to ask logic to predict. If the market were logical, the logical would be rich. If the market were a puzzle, the clever would be rich. If the market were a symphony, Mozart would not have died poor.

There are enough stars to make a thousand constellations, and by design enough movement in the market to keep people believing in a rhyme or reason.

Andrew Moe replies:

A MoeUnderneath the belly of the beast, we had options expiration on Friday, and it seemed that the 750 strike was running the table for much of the day, creating extreme gains for those on one side of the trade and extreme losses for their counter-parties. Just days before, these levels seemed unthinkable, so emotions were running high on both sides. At 3pm, the market seized upon the Geithner news to speed directly to the 800 strike, delivering comeuppance and salvation in one swift blow. I believe this move was in the can all afternoon as the mistress alternately teased and taunted before finally making a decision as to what news would carry the banner for the advance.



 The art market has decided to price itself more realistically at the December 3rd auction in Paris. It should be pointed out that the real major pieces that one would expect at an auction of this magnitude, in Paris, are strangely absent.

I wonder if the predicted estimate of prices at the gavel are a deliberate lowering of expectations, so the art media can then spin the auction a success whatever the low prices might amount to. Perhaps the art that's been left off the block is in strong hands, and what we're seeing is the art held by the weak hands. Perhaps the owners/investors of the best art are waiting for an inevitable upturn in the general art market conditions. Needless to say, if one wants to buy a second rate Picasso for collecting/investing, now might be a good time to buy. If one wants to buy a piece of art because one thinks it's beautiful and one loves it, anytime is good as long as the pocketbook is full.



What are the chances that within +-1%, we would see Dow 8,000, SPX 800, gold 800, all at Friday's close?



 A contractor told me proudly he was out of stocks since summer, because he bought a house. I suggested that house prices are currently correlated with stocks, and to the extent that most mortgages create leverage (ie, LTV 80% means if the house loses 20% you lose 100% - at least until Oh saves) the effect is amplified. Then I told him he needed an extraction, and he got mad and left.

Don't shoot the messenger?

Anyway he got me thinking about the definition of wealth. If you knew about a guy who made $100,000 per year, you might not be that impressed. Except if this happened in 1932 (that year comes up a lot now). 100K then was a lot of money, but not now. Maybe $100,000 will be respectable again soon.

Income is relative. Maybe net worth is too. Now everyone who owned stocks over the past year is worth less, and the same if you owned a house. Since most people own houses, and many own stocks, most got poorer. If you own a business it's probably worth less too.

But if you own stocks, a house, and a business, they still have worth relative to others - and ostensibly it is not zero (though the formerly low-risk concept of leverage has been revised). Now prices have to catch up, and lots of businesses don't yet understand that they need to cut prices.

It's amazing how powerfully emotion rules the mind. In 13 months the net worth of the world was about cut in half, and if you think about it, in reality how different is the world since then? Did an asteroid hit? Did Amadinejad invade Israel? No. People in many countries got carried away with house prices then got scared and stopped buying. Which pushed the leveraged upside down, foreclosures increased, counter-parties bellied up, and now everyone wants out.

Jeff Watson writes:

My son likes to watch a TV show on MTV known as Cribs when he's home from school. Cribs is a showcase of the big houses that rappers, pop stars, and others of that ilk like to buy and decorate when they get their big break. Generally, the houses have brand new furnishings and have been done in a very modern, minimalist, interchangeable styling. Part of the show is a tour of their garage, where multiple Hummers, Ferraris, Bentleys, and Escalades seem to be the cars of choice. They take you to their pool areas, which usually are very nice and expensive. All the houses have game rooms and private theaters, with state of the art equipment. My son was telling me how rich those guys must be to have all of those toys, and asked why we don't live like that. I pointed out the math to him, on an artist who has one or two hits under his belt, and grossed $10 million tops. Out of that $10 million, he has his agent and management fees taken right off the top, figure 25-35%. Then comes taxes which might be another 20%. Add the cost of a $5 million house, a million dollars worth of cars, another million in furnishings, then the salaries of their entourage, local taxes, utilities, and they're practically broke, or even have negative net worths. They are living for the now, on the expectation of their next deal, which may or may not appear. I pointed out to him that living really large on a shoestring isn't the way to exercise fiscal prudence. I also pointed that every performer whose house is showcased on Cribs has one striking similarity: a total absence of books anywhere in the houses, closets or even built in bookcases. I've never, ever seen a book in that show, and I've been forced to watch more than a few episodes. Evidently those performers never read, and one could postulate that reading is counterproductive as far as that type of success is concerned. In any case, my son learned a valuable lesson in thrift when I sat down and ran the numbers for him.

Vincent Andres adds:

Concerning the absence of books, it would be very nice if this observation were really specific to the houses showcased in such shows. I'm however afraid this observation is very general (and recursively, mainly because of many examples of this kind, the only cultural tap in so many houses is indeed just the TVs).

Entering a house is a bit like entering the owner's brains. Seeing no books, empty walls, … strange feeling. Intellectual faculties are outsourced, TV and the Jones are the spinal chord.



see graph.

The uncle follows up on December 2, 2008:

I think the relevant part of this chart is missing - the point of the chart was that on so many occasions (I think it was approx. 50% of the time) the stock market closed the year within 3 percent of the high, but only closed within 3% of the low one time (1914);

The data I wanted to post included a second chart of the closes from the high.

The editor notes:

the second chart was published on December 2.



I note the Market Mistress has settled in for the night at DJ 7552. With 1,000 homes destroyed in California of late and then remembering Galveston and New Orleans, I had a thought. It seems to me that over the long haul houses and cars (well, maybe not cars anymore — at least US built ones) used to fuel the economy in America. The US economy over time (next 4-6 years) will improve (note I did not say recover). As a builder/remodeler it appears to me that lumber/plywood stocks/futures would be a good bet for the long haul. However, I do not hold any of those stocks and this is only my 'gut' feeling.

Steve Ellison remarks:

I got a newsletter yesterday from a real estate agent in Reno, Nevada saying that 50% of recent sales in the area have been either short sales or foreclosures.

Mitchell Jones writes:

When you say "maybe not cars anymore, at least not U.S. built ones," your premise seems to be that the present difficulties of the U.S. auto industry provide us with information about underlying economic realities—to wit: they indicate that other countries are somehow intrinsically better suited for auto manufacturing than the U.S. (Even if that is not exactly what you had in mind, it is a premise which is often encountered nowadays. So bear with me).

My view, however, is that in a system of floating exchange rates calculations of comparative advantage tell us nothing about the underlying realities of goods production. In recent years the dollar index has fallen from the 120s down to around 70, then has risen back up to 89 or so (and presently has the potential, based on the ongoing enormous injections of liquidity, of falling close to zero in a hyperinflationary blowoff…). What, in such a context, can we infer about which countries are best suited to manufacture one thing as opposed to another?

The answer, to put it bluntly, is not a darn thing. We need a monetary unit that is firmly linked to reality, via convertibility to a precious metal such as gold or silver, in order for the underlying facts, the absolute advantages one nation intrinsically has over another, to manifest themselves in calculations of comparative advantage and, thus, to bring about a reality-based international allocation of capital. Without convertibility, what we get in the short run is malinvestment on a planetary scale, and in the long run what we get is a global financial conflagration.

That long run, for those who haven't noticed, is here right now.



 At some red kettles you will now find a credit card machine so you can charge your giving. This is innovative in our troubled economic times.






 It was the Big Three's mistake to agree to pay health care 20-30 years ago when that system was rigged. It was a bad bet. Labor costs are focused on because they are variable… but look at fixed costs. Toyota has made the most mistakes in the past five years, all combined. Look at Tundra in Texas at the exact top in 2006, and the new Alabama plant.  "Highlander, wait, $4 gas. Let's make Prius, wait, $2 gas. Let's not build anything."

There are too many cars produced at too good a quality globally for anyone to make profits without a subsidy. Toyota is subsidized by Japan and Alabama and Texas… Car prices in real dollars have fallen for a decade. New car tech and quality is simply amazing… I laugh my tail off as if some "pent up demand" will do it, when the "get the joke" people are about to realize all new cars now last 10 years + 150k miles EZ.

The financial and media morons who know nothing about cars, production and ruined Finance in this country are all calling for pre- packed BK for the Big Three. That is like stealing the NYSE. Gimme Jeep, Buick and Ford Trucks and I can build a Toyota-killer and pay the UAW all their dues. (Of course, I would have to revamp the dealer network but that's a state issue.)

Never in the history of Autos has a BK or restructuring weaker players into a new consortium (even with state concessions) worked… See Packard or Studebaker or AMC.

There is a good paper written in 1958 how America will never build a profitable small car. Honda has given it a go under the Model-T concept, you can get an Accord as long as you can only choose the color…

The most difficult restructuring has already taken place. It's called Visteon for F parts and Delphi for GM… all the rest of this talk is about a few guys running around feeding robots and about Health Care and Pensions.

David Higgs adds:

Slow down, you're going too fast. Who hasn't said the auto industry was headed for a three-way-crash? What was the story with the german VW Beetle — wasn't it designed due to financial issues there long ago, and hasn't it been one of the best get me from A to B cars ever? The sad thing about the autos is, like all other financial disasters we feel at the moment — greed under the hood.



 The second two talks that Ioannis Karatzas gave were considerably more technical. However, there were some interesting ideas. In a recent paper, he and collaborator Daniel Fernholz abandon the assumption that there are no arbitrage opportunities and attempt to construct a more descriptive theory of market behavior, without many of the tools commonly available in mathematical finance.

In particular, some of the work involves measurements of the "internal volatility of the market," which appears as the "excess growth factor." They use certain functions to generate portfolios. Under certain circumstances, if there is sufficient internal volatility in the market, they show that the portfolio generated by the Gibbs entropy function generates an arbitrage opportunity relative to the market. You can find a survey paper here.

In the talk, Karatzas presented this as a young subject with much work left to do.



(Another study showing that the market hasn't been this bad since the depression*)

Assuming tomorrow closes about here, the current 15 week DJIA return of -35.6% only compares with 18 such from the depression, and one from 1987. Here are the 20 worst rolling 15 week returns:

Date             15 W
07/05/32    -0.471
06/20/32    -0.464
06/13/32    -0.448
05/31/32    -0.437
06/27/32    -0.437
12/07/31    -0.434
12/21/31    -0.409
06/06/32    -0.404
05/23/32    -0.396
12/14/31    -0.392
12/16/29    -0.386
11/22/37    -0.375
11/30/31    -0.374
07/11/32    -0.370
11/23/31    -0.365
11/15/37    -0.363
11/17/08    -0.356
11/11/29    -0.352
04/25/32    -0.349
11/30/87    -0.348

*It's hard to imagine anyone who bases investment decisions on history not getting killed here, or anyone using leverage living a normal life. It's also hard to imagine that the current recession is close to the depression, or that SP500 deserved to be cut in half in 13 months (it has).

The lame duck period does seem hopeless; maybe a good time for long-term investing in a rich equity risk premium.



 Much has been written on Daily Speculations about the correlation of music and markets. I've found quite a lot of literature comparing charts with the notes on a musical score. Vic and Laurel have written extensively about this, and quite a number of articles have appeared in Daily Speculations comparing music with markets and trading. I, myself happen to be blessed/cursed with perfect pitch. I was diagnosed with this affliction/talent at a very early age, and my parents always attributed it to the amount and variety of music we had around the house. Later on, I did some reading about it and found much so contradictory information regarding perfect pitch as to render it useless. The curse of it has been that I simply cannot listen to things like beginning orchestras, or bad karaoke singers, which are like fingers on a chalkboard to me. I find myself out of my comfort zone when listening to "less than perfect" pitch which appears quite frequently in day to day living…

I've noticed that perfect pitch also can help me stay out of a bad situation when I'm in the market, and all of the sudden where it's trading effortlessly in what could be compared to a C-Major scale, then it suddenly shifts to a to a C-sharp minor. Such shifts are often a good indicator of the ever changing cycles in the market, especially when a flat note appears out of the blue. It has been my observation that my perfect pitch has allowed me to keep from stepping on the many landmines that the mistress of the market spreads in our path, however this is anecdotal and cannot be proved… I would be interested if any psychologist has ever studied the prevalence of traders with perfect pitch (sometimes referred to as absolute pitch), and the effects of such. I would also be interested in any anecdotes from Vic and Laurel, or any readers of their experiences with perfect pitch. Perhaps I'm going up another blind alley, but this is a subject that should, or ought to be quantified. One blessing of perfect pitch is that I can tune any stringed instrument by ear, which amazes my friends.

Nigel Davies writes:

N DaviesStrong chess players are similarly pained when they see a move which isn't in keeping with the position. And coming from a musical family I've long been fascinated by the connection between music and chess, outstanding practitioners of both having been Mark Taimanov (GM and concert pianist), Lajos Portisch (GM and singer), Vassily Smyslov (GM and singer) and Andre Philidor (the leading player of his day and operatic composer).

One theory I have is that whilst music represents harmony within differentiated sound, chess has a similar kind of harmony within differentiated space. Is it too fanciful to believe that markets are similar in having a harmony within differentiated price? I don't think so, and it's interesting to speculate that many list members have an interest in all three disciplines precisely because of this similarity.

Jim Sogi adds:

The physics of many musical instruments do not allow them to be in consistent tune on the various octaves. For example, a guitar is not perfectly in tune along its neck and for open strings at the same time and requires some fiddling with the nut and bridge to get the notes to be consistent along the length of the neck. The Buzz Feiten tuning system is a corrective measure to address these issues. I submit that the mechanics of the market do not allow perfect tuning and harmony, and some discordance is inevitable.

Laurence Glazier writes:

Seeing the similarities between music and market is bound to be helpful, but is unlikely to be predictive. They remain two different fields. An analogy in music would be to take the first several chords of a Bach Chorale and try (without sight of them) to predict the next few chords. Or likewise to predict the next few moves of a great chess player. So while the Market may walk with a recognizable gait, that might be as far as it goes.

I'd also suggest that while it seems that the rules have broken down, it is just that things are playing out faster, Volatility nudges the metronome setting - but interference by government is stirring the pot. When writing music one may adjust the harmonic rhythm for dramatic effect, perhaps there is are equivalents in the market to changes in the durations of chords in a chorale, or to a series of measures on a dominant pedal.

Laurel Kenner writes:

I play a lot of chamber music, and learned recently that string players tune to A=441. Pianos are tuned to A=440. The strings tune to the higher frequency for more "presence."

The market abounds in such slippage, and sometimes it pays not to argue over a the odd quarter-point.

Jim Sogi adds:

J SogiOne more comment on this subject. Playing music, one never really hits a perfect pitch. There's no emotional content to it. That's why those funky Kmart keyboards sound so bad, they are in perfect pitch. A good singer, a guitar player, a violin player, all waver around the note with vibrato, or bend up to the note or bend down to the note, and move it around, stretch it, giving it much more powerful feeling of discomfort and resolution in a subtle manner.

Let's take today, Friday, in the market. A straight run up after the gap would not have had nearly the emotional impact the midday drops to new lows, the wavering about the bottoms, and the strong surprise finish. That's emotion.



I've never heard anyone correlate market success with perfect pitch, although the people I've known with the ability to identify pitches have all shown superior talent, intelligence, intuitive ability and imagination in music. My piano teacher regarded it as such importance that in my initial interview with him, he had me turn around and identify a note.

Some thoughts on the musical aspects:

1) The imperfection of pitch. Only if a melody is limited to a diatonic scale is it possible to attain perfect fourths and fifths — leaving out entirely the question of just what is a major third, etc. But we live in a musical world of chromaticism, and this means compromises. Natural philosophers such as Pythagoras, Da Vinci, Descartes and Galileo were absorbed by the problem of tuning, and debate raged over the proper proportions of pitch. The development keyboard instruments with 12 tones in the scale — e.g., harpsichord and piano — were a nodal point in musical science and philosophy. Bach arrived at the great compromise and celebrated with the great "Well-Tempered Clavier," two sets of preludes and fugues in each of the 12 major and minor keys. A fascinating philosophical history of musical science was given to me by the directors of the New York Chamber Music Society, and I highly recommend it: Stuart Isacoff's "Temperament: How Music Became a Battleground for the Great Minds of Western Civilization."

Because of the compromises of equal temperant, different keys carry different emotional connotations for musicials. Beethoven's compositions in C minor have a meaningful continuity. Brahms D minor concerto could simpy not be played in F minor, nor could the B-flat have been in C, even though it would have been physically possible for them to be played in those keys.

When I was studying music at the university, one of the musicology professors told me that he amused himself at home by transposing the preludes and fugues of the Well-Tempered Clavier into all 12 keys — a sort of idiot-savant feat both astonishingly difficult and astonishingly useless. But the skill can be useful accompanists for top singers can transpose at sight into any key.

And all this is not to mention the intentional, artistic pitch-bending and microtonal language of the master violinist with vibrato, the singer of blues or Cuban music, the artistry of a Mideastern stringed-instrument master like Keihan Kalhor.

2) Sensitivity to bad singing. While I love the hollow-reed sound of Japanese and Cuban singing — attaining the proper hoarseness is a part of the art –incompetence in singing is another matter. I have been to many operas and orchestral concerts with the Chair, and he will turn to me with a pained expression at the least hint of an indiscretion from a trumpet or French horn or a wobbly vibrato for a soprano. I'm often able to ignore such slippage if the rest of the playing is good — but I can't bear an out-of-tune tenor or baritone.

3) Timbre. Different instruments play pitches differently. A minor third, a major third… a world of difference on a violin, a horn, a piano. A master violinist can break your heart with vibrato.

4) Taking off from the question of pitch, the recent discussion of counterpoint in markets is a good scaffolding for a consideration of the harmonic developments of later music and its relation to markets. For example, a parallel-fifth step from A major to A flat major is integral to the structure of a certain harmonic progression in the scherzo of a Brahms trio I have been practicing. Sure, it breaks the rules… but the trading in the market breaks all the rules just about every day now! One might say counterpoint is two-dimensional, while harmonic progression and combinations of different timbre bring in the third and fourth dimensions, and the market is a subtle mistress.



Jeff Watson's post on perfect pitch is of immense importance and worthy of approach from many angles. The first that comes to mind is from the one thing I know about, the defunct game of hard ball squash. I played a guy from New Zealand, Rainer Ratinac, often and he would be impossible to beat unless you changed the game on him and hit a lot of short short shots mixed up with the normal comp of long. He'd always turn to me after such an exchange and say, "This isn't squash, mate." Then he'd capitulate at once.

Tom Wiswell would often play me or my former partner a game of checkers and when the position became helter skelter because neither of us knew book well, he'd say, "I'm in over my head here. I offer you a draw." Jules Leopold on the other hand would love it when he got in a position over the head and would never give you a draw. In fact, he had a few positions that he'd set up to say, whether you move first or last I bet I can win. The funny thing is that Jules could not win a world championship because he liked positions where both were in over their heads even though he was a much tougher adversary than Tom.

Mr. B, amid his many virtues, had one failing. He was always looking at tick data to find the ideal time to buy or sell within the day, one trade a day and the problem was that the market always sets you up on the wrong side with very micro movements so that it would exit you from the good positions by giving you the near certainty of a 5 minute profit at the expense of losing the 60 points that would have been yours had you not exited at just the optimal time, based on the tiki or tik stuffy. One must be careful that the movement from major to minor is not a la Mr. B, but is of a more lasting meal for a full day kind of thing. The pace of activity often signals a change from major to minor and the fixed income markets always seem to know the data first, except for the scholars.



 Kicking goals in Rugby Union and trading may have more in common then one may think. As the Australian chosen goal converted Matt Giteau said during the week, "rhythm and authority" are the two crucial attributes in rugby, and not changing your style every time something goes wrong, leads to a high percentage of success. With trading, being able to keep reloading and staying in the game, and having a well thought out "run up," and confidence (authority) staying high due to no rule breaking, i.e good risk reward trading, sets up the platform for success. No doubt lots of traders look for the edge in strategy and keep changing it too frequently, when the platform for success is right before there eyes.

Substituting trading for kicking/kick in the following quotes by Matt makes pretty good sense:

"I think kicking can get complicated at times. But it doesn't need to be. "

"I suppose if you do miss a kick, it's very easy very to fall into a trap and change something straight away."

The 26-year-old has landed 50 shots from 58 attempts in 2008, including 16 straight at one point, at a conversion rate of 86 per cent. "I feel as though I'm striking the ball better and more consistently. That's the biggest thing," Giteau said. "There's been times where I may have kicked well one week and the next week been a little bit inconsistent. "This year, in particular, I've been really pleased with how consistent I've been." Giteau said he hadn't altered his style this year and was merely practicing what former Wallabies kicking coach and good friend Ben Perkins had preached during his stint with the national team. "Rhythm and authority are the two things Ben taught me," he said. "Things don't change a real lot. I think kicking can get complicated at times. But it doesn't need to be. "It's just being consistent and trusting your run-up. I suppose if you do miss a kick, it's very easy very to fall into a trap and change something straight away. "But I think this year I've tried to focus on the same thing each kick and so far it's worked for me."




 The Math Department at the University of Michigan has held an annual lecture series called the Ziwet Lectures since 1936. Past speakers include von Neuman, Kac, Thurston, and about a half a dozen Fields medalists. This year, the speaker is I. Karatzas . He is giving a series of three lectures. Today he discussed Stochastic Portfolio Optimization (the next lectures will be on Volatility and Arbitrage respectively). He spent a lot of time introducing the subject, which was good for me. One assumes that there are n risky assets available, S_1, . . .,S_n, and they evolve according to the stochastic differential equation

where dW_i(t) is Brownian motion. X(t) is one's wealth at time t and p_i(t) is the percent of one's wealth invested in asset i at time t. Denote by p=(p_1,…,p_n) our portfolio. U(x) is a utility function, i.e., any increasing function that is concave down. Our goal is to maximize the expected value of utility at the time T. In other words, we let V(x)=sup{E[U(X(T)]} where the supremum is taken over all possible portfolios given that our initial wealth was X(0)=x. Apparently we are guaranteed existence of such a thing in general, but finding the optimal strategy is not very tractable, so as always, one starts with special cases.

If we assume that the utility function is U(x)=log(x) or U(x)=x^{a}/a for 0<a<1, then one can find a reasonable solution. However, the solution depends on having reliable values for sigma_{i,j}(t) for all times t as well as for the interest rate.

If one assumes that all coefficients involved are constant, then we can handle the problem of a general utility function. The solution is characterized by a partial differential equation called the Hamilton-Jacobi-Bellman (HJB ) equation. Because we have assumed U is concave down, we can apply the Legendre transform and linearize the partial differential equation. We can then solve the linearized equation.

Karatzas ended the talk with several open problems.

I am not sure whether this lends itself directly to practical application, but perhaps it inspires some more practical ideas.

Jeff Rollert asks:

Why would one assume the coefficients are constant?

Chris Hammond responds:

One answer is that over a reasonably short time horizon, they would be approximately constant. I think the same question could be asked of the Black-Scholes model. It is assumed that if S is the price of an asset, dS=S*r*dt+S*sigma*dW(t), where r is the expected return on the asset, sigma is its volatility, and W(t) is Brownian motion. More sophisticated models assume that the volatility is also a random variable that changes with time sigma=sigma(t). But it makes sense to start with the simpler, constant, case.

In some situations in math, it is insightful to assume very simple behavior to get a model case and view reality as some sort of perturbation of that.

I am not sure it is a good answer, but I'm trying to learn more about these things, so if I find a more satisfying answer, I'll let you know.



 It is interesting to watch the monkey rope that ties the Nikkei and the S&P together with almost exactly the same prices day after day, having moved in lockstep down from 1500 to 848 in S&P and 15000 to 8360 in Nikkei with a co-terminous correlation of 95%. Though separated widely in temper and geography, economy, and culture, they move to the beat of the same drum. And amazingly, the psychology within the day is almost as good to know as the predilections of the scholarly market people who react presumably after reading our mail.              

The lessons in the book The Wild Trees by Richard Preston about falling from above the red line of certain death of 50 feet should be taken by all market people. Of 16 such declines of 50 or more in last 20 years, half of them came in 2008, and the first such decline  since 9/11 came on 2/27/07 at an ending price of the then terrible 1451. The first of the 8 declines in 2008 came off 9/15 at a closing price of 1196. The lessons in surviving such declines that Preston relates in The Wild Trees, including quiet, counting, and counterbalance, are valuable for market people as apparently is the death warrant that such falls indicate in the forest and the market.

The inevitable outcome of the bailout is clearly seen in England where people beg for the government to approve payment for standard therapies for disease that are routinely denied based on cost benefit analyses of the expected number of extra days to live from the treatment versus the costs and benefits to the average man. The move by the white shoe firm to forgo their bonuses at the top, is a nice corollary to this ultimate outcome. Of the 468 of the 500 companies that reported, third quarter earnings 272 are up and 164 are down with a market cap weighted change of up 5.4%. The 384 non financial companies reported an average market cap weighted change of +25%. 260 out of 466 were positive surprises relative to expectations. Tell me why the market should be down 60% or so based on this performance and say, a predicted earnings change in aggregate of -20% to 20% for the next year et al.

Nigel Davies writes: 

The argument put forth is that the worldwide loss of wealth caused by the bursting of the housing bubble has yet to feed through to peoples' pockets, thus profits are still running through like a decapitated chicken. There seems to be some logic to this reasoning, especially when one considers the leverage used in the purchase of housing and the presumption that corporate profits have been funded by this fast disappearing paper wealth.

On the other hand one imagines that many older folks who took equity release at the top may be cracking open the champagne right now. And the difficulty in putting figures on all of this no doubt explains the manic depressive behavior of the mistress.



 It is interesting to contemplate the tangled bank of the market, clothed with many companies reporting negative earnings, Intel lowering its forecasted margins, and Walmart reporting declining sales, with the television and news services singing of the worst recession and the greatest decline ever, and various companies flitting about reporting layoffs and lowered demand, and banks and companies of all kinds begging for assistance from above, and to reflect that this elaborate web, these multifarious interactions, each so different but dependent on one another in so complex a manner have all been produced by the inevitable laws of competition among the players, with the strong surviving at the expense of the weak, and the market, like light, taking the path of least resistance.

My colleague Doc Costaldo reports in a letter from Connecticut that the sum of the 5 minute absolute value changes from close to close yesterday was 328 points, and the sum of the 5 minute ranges in S&P futures from high to low was 546 points, fully 40% and 60% of the actual level of the index itself. The dispersal of the move in the micro periods, and the inexorable path that it took from below the round number of 900, and below the 8 year lows at 1pm to above at the close, always allowing those forms still crawling about to capture sustenance and survive for the next days action, perhaps without time to reproduce must leave us with a feeling of beauty and wonderment comparable to what Darwin himself saw on the Downe Bank.



 The game goes on…but it is never the same game with the same rules.

When the "game" at the game becomes discouraged, it goes upstairs/outside/underground and that type of transition is not usually pretty.

Jeff Watson writes:

Despite the change of rules, the game will still be played, and there will be winners and losers, so not much really changes. One must be able to adapt to the rules changes, just like a pitcher has to adapt to changing strike zones, or the height of the hill. As for the game at the game, that will probably disappear for awhile, only to reemerge in the future, morphed into another form, or even a repetition of the same old game. It's human nature that there will always be a game at a game, in one form or another. Old games never, ever die, and that's why one can go to any city and find Three Card Monte gangs still plying their trade.



 On his blog, Paul Kedrosky highlights this quote from the most recent issue of Barrons, suggesting that housing market bets extrapolating from the historical pattern changed the odds and motivated the pattern to break down:

…One of the great lessons [of investing] is beware of platitudes, such as "There has never been a national decline in home prices." If you believe that there has never been a national decline in home prices and that there never could be, then you bid home prices up to levels that don't allow for the risk of widespread losses, because you concluded it could never happen. Then the fact that they are at those new high prices introduces, in itself, the risk of a national home-price decline. So the actions of people relying on history change history, and that is what people lose track of…

Flashback: Cliff Asness applied a parallel notion to the stock market a decade ago:

…Imagine all stock prices went up 100x tomorrow with no change in fundamentals. Hopefully, we would all agree that paying about a 3000-4000 P/E for the S&P 500 right now would make a very poor long-term investment (wow, a P/E that even the author's of Dow 36,000 would not love). However, the historical average return on stocks would skyrocket once this 10,000% return was added. Obviously, in this case it would make little sense to use the historical average to forecast the long-term future. The historic average would be incredibly high, and the future would look incredibly poor. While far less extreme, the real-life situation today is analogous.

And Robert Bacon on horse betting: "…The principle of ever-changing trends works to force quick and drastic changes of results sequences when the public happens to get wise to a winning idea…"



 Like Bach's contrapuntal motion playing mirror images of a theme, the market seems to be playing rather striking mirrored images of price sequences over two day periods and around the round. Market, like music, seems to like a theme and a key. The intervals are larger now, say 100 points and the notes larger, say 12 points.

Some rules from Wikipedia on musical "rules" for composition follow below. I wonder if any might provide "rules" for the markets. Take the idea of consonance, as the market returns to its round this Friday afternoon. I have actually been studying the various modes in an effort to extend my guitar playing skills and have these ideas in mind. Intervals are very important. The same scale can be played at different levels. Surprise is often a pleasant mode of musical creativity.

(Following quoted from Wikipedia)

Students of species counterpoint usually practice writing counterpoint in all the modes except Locrian (Ionian, Dorian, Phrygian, Lydian, Mixolydian and Aeolian). The following rules apply to melodic writing in each species, for each part:

1. The final must be approached by step. If the final is approached from below, the leading tone must be raised, except in the case of the Phrygian mode. Thus, in the Dorian mode on D, a C# is necessary at the cadence. 2. Permitted melodic intervals are the perfect fourth, fifth, and octave, as well as the major and minor second, major and minor third, and ascending minor sixth. When the ascending minor sixth is used it must be immediately followed by motion downwards. 3. If writing two skips in the same direction—something which must be done only rarely—the second must be smaller than the first, and the interval between the first and the third note may not be dissonant. 4. If writing a skip in one direction, it is best to proceed after the skip with motion in the other direction. 5. The interval of a tritone in three notes is to be avoided (for example, an ascending melodic motion F - A - B natural), as is the interval of a seventh in three notes.

And, in all species, the following rules apply concerning the combination of the parts:

1. The counterpoint must begin and end on a perfect consonance.
2. Contrary motion should predominate.
3. Perfect consonances must be approached by oblique or contrary motion
4. Imperfect consonances may be approached by any type of motion
5. The interval of a tenth should not be exceeded between two
adjacent parts, unless by necessity. 6. Build from the bass, upward.

Finally, in species counterpoint it is important to remember that the interval of the perfect fourth is usually considered a dissonance.

Laurence Glazier replies:

How nice to find this post on Daily Spec, as I am spending two days per week in the studio applying these rules, an activity even more fascinating than trading.

Both pursuits relate strongly to human emotion.

I have come to the conclusion that principles like these are valid in the way other empirical observations are. There are ideological battles over it in which I am involuntarily part of the fray, ultimately the defense rests with the music.

These contrapuntal rules are describing two part counterpoint. It is worth playing through Bach's 371 Chorales, the rules play out over four parts, applied to each pair of voices 12, 13, 14, 23, 24, 34. If pawns are the soul of chess (Philidor, the composer/chess player), then chords are the soul of music.

Arnold Schoenberg goes into these principles in great detail in his book Theory of Harmony. A good read. Even he has difficulty rationalizing the effect of consecutive fifths (as a revealing footnote shows), a principle to be added to the Wikipedia rules. I used to think of those in terms of information theory (a succession of perfect fifths adds no new information), but the same is true of perfect thirds from fa and so, which sound OK.

Interestingly in jazz, whose genius has turned everything on its head, it can be nice to build the chords downwards from the top, in fourths.



 I thought yesterday there was more bad news than I had ever seen on the news service. But today is even better. Here are 16 of 16 headlines on my news provider, and one should do a content analysis for the negatives. F.M. reports loss - asks for 14 billion, Europe falls into first recession as crisis deepens, US futures decline, SUN Micro to cut as slump worsens. Nokia cuts sales outlook as demand dwindles. Pan. deputies bought C after plunge, Libor rises on concern slump to hurt banks. Reserve Fund leaves investors at odds over liquidation plan. Accenture uses 'good crisis' to help clients shrink in recession. 'Dumb people' image may cost Wagoner GM job in bailout. Leaders agree on little else as Bush prepares exit, Icelanders protest enormous distress and delay in rescue plan. Luxury homes in London fall 20 % as bankers hope for job, J.C. Penney profits tumble 52%. Retail sales decline the most ever. Bern. says markets still under "severe strain", Tinto postpones investor meetings to study impact of crisis.  And: Spain restricts bank bond guarantees.

I thought that with the Intel and Walmart news headlines yesterday, every long was liquidated and the market had to go up, as it always does when Intel announces something bearish with the father figure thing, but today takes the cake. I think it could take a day here though.



Our neighbor's son was lethargic during the scout camping trip this weekend, and since we had two doctors there, he got a quick exam. The whole family is tired, as they have a new daughter.

I got to watch the father, as the E/R doctor found a lump in the abdomen, and the cancer doctor called Children's Hospital and had him admitted stat. He is currently on the operating table to have a grapefruit size tumor removed from his liver. He's 11 years old.

This is a Dad's worst nightmare. He is also our scoutmaster. For the next four hours, please rub the rabbits foot, pray, or do whatever works for you. He's been on the table for an hour, and has about five hours of surgery left.

Many thanks in advance…



 Michael Pettis has an interesting observation about how Smoot-Hawley may return not in the form of import tariffs but in the form of export subsidies and devaluations.

While everyone watches fairly closely and with dread to see if the US re-enacts new versions of Smoot-Hawley by attempting to resolve declines in domestic demand via beggar-thy-neighbor trade polices, the real threat may come from somewhere else. Current-account-surplus countries may, just as they did in the 1930s, find themselves under immense pressure to support their export sectors. Already we are seeing this in China, and I suspect a lot of other Asian exporters are also casting at ways to boost their own export industries. One of the things the participants in the upcoming G20 meeting Washington should watch very closely is export subsidies and currency policies aimed at boosting exports. US imports must decline as a share of global demand, for reasons that have been widely discussed and widely accepted, and because of this, unlike in previous crises in the past two decades, the world won't all be able to export its way out of this crisis.



F & SOver and over again, we see the market moving in trepidatious concert with the father figure of the moment. It used to be the fake doc and then it was the scholarly economist chair, and now it's the former chair of the white shoe firm that maintains the Chinese wall with its former colleagues. On past occasions it's the Sage, and every now and then, a big executive like the head at Intel or the basketball player from Conn.

What's particularly damaging to the market is when these people bow. The spectacle of the Intel chief bowing and begging forgiveness I believe forever tarnished the aura of high p/e deservingness that his company with 59% profit margins might have deserved. The news that the former white shoe chair knelt in front of the chair of the Democratic party and begged her to pass the bail out bill was the death warrant for the market for a time. And now that he changed horses in midstream and gave up on buying mortgages directly, a position he had previously begged for, "based on a different set of circumstances" was the death knell for the market.

The trader has the Dostoiyefskian tendency to feel guilty about their activities from the time they were small. And they wish their father figure to be strong and not to kneel. When these figures regain the respect of their kids by being strong, maintaining the stiff upper lip, etc., we can expect a much better market. How would you quantify this and what other instances of kneeling as a bearish indicator have you seen?

Anatoly Veltman writes:

You mean like when Chancellor of the Exchequer raised discount rate 9/16/92 three times (from 3% to 7%), before rolling it back to 3% by the end of the same day… and recognized that ERM snake was in fact beheaded?

James Lackey replies:

The return of the dipsy doodle is a good start. The most damaging current meme is that the markets are at fault…  and market prices do not forecast. "Free markets need help and regulation from governments," The dog is chasing its tail. Government regulations are what cause markets to come up with crazy schemes to avoid the previous market patches, in Microsoft terms, a "hot fix."

A more direct answer is price discovery. Once we all figured out too many prices were rigged they panicked and traders bought as usual. Then when the father figures changed the rules to bailout their kin, we went on strike. No traders, no liquidity for the markets. Now the prices are caught in the crossfire of the Hatfield-McCoy feud. Do not blame the hired guns.

Art Cooper adds:

Obviously the market and economy respond positively to strong leadership, as this relates directly to human emotions (animal spirits) which are so essential a part of Main Street economics, finance and the financial markets. Hence, the Great Depression market responded positively to a strong leader who declared that "The only thing we have to fear is…fear itself," even though his economic policies were in fact counter-productive to recovery (see Jim Powell's "FDR's Folly").

Kim Zussman interjects:

The child is racked with disorienting insecurity when they first witness their parents own uncertainty, indecisiveness, and fear. Now the children are being dragged by their mother to a new daddy with undetermined rules of discipline, while being told that the last daddy was really an immoral fraud.

It's hard growing up, especially with a fickle mother.

James Lackey writes:

I listened to Santana's show tour warm-up in 2002 or so. Later that evening he was on an interview, local radio, and was describing his so called comeback. His rebirth was through collaboration with new young artists. His quote went something like, "I wanted my teenage kids to know dad can jam, and how the system works, sure they saw my old awards and shows from back in the day… but to a's now that counts." The gist was, the only reason he did the work was to prove a point to his children… boom… the return of a father figure.

J.T Holley writes:

Highly apropos, like all great literature, call me crazy if ya'll don't see it that way, this has been written in William Golding's Lord of the Flies.

Kids abandoned due to crash from adults.

Ralph pleads with Piggy about Simon's death: "You were outside, Outside the circle, Didn't you see what they did" (paraphrased).

Piggy before his murder: "Which is better? Law and rescue or hunting and breaking things?" (paraphrased). Then the rock falls.

Kids rescued from abandonment and panic/chaos when Ralph looks up at Naval Officer (adult).

I guess the big question right now and maybe one that Golding proposed is who is going to rescue the naval officer and his boat? In other words who saves the adults themselves?

Now substitute War, Atomic Bomb, Ralph, Jack, Simon, Piggy, Naval Officer, Naval Ship with traders, investors, banks, citizens, government, and politicians.

Kevin Eilian writes:

Before it became a quote dejour by Mac and others, R*bin's upper lip, bone straight poker face, "the economic fundamentals are strong,"– you believed it. He made sure he did, too, as his net worth was tied to white shoe IPO.

James Sogi says:

Demographics is the counting of the "father figure" issue. We saw the effect in the aging of Japan. Now we are seeing the aging of America. The rest of the world is quite young, averaging something like 15 years old… Many of our parents are sick, old or dying or died. There is a changing of the guard. The boomers are retiring. America is aging and gaining weight. Though America "the great white father" is kneeling or brought to its knees, the emerging world will rise in its place over time. I would watch this trend over the long term. The world is becoming multicultural. Witness, O witness, the non white majority in California.

Russ Sears adds:

I have been thinking for the last few weeks that all of this could have been avoided if the investment bankers had learned a few lessons on risk management from a mother of a smart, curious two year old or a teenage boy. You can't just tell them no and then ignore them once they've moved on and not still expect some experimention to happen. The alerrt mom always seems to have an instinct, before the father, when silence is a clue they are into something or when the truth has been stretched. How the mother always is prepared to contain while still delighting in their first taste of chocolate cake or discovery of girls and love. The good mom has the sense to help them limit these new found divine obsessions, before they ruin their mental and physical health.



 My lawn guy is losing his house due to foreclosure. He's quite bitter about being misled about mortgages and the real estate market, and blames the "Fat Cats" for setting this up to steal from the little guy. He refuses to take any responsibility for his actions, and says it's not his fault.

I went over to his house about 2 years ago and was surprised that a lawn guy could live in a beautiful 2400 sq. ft. house, with pool, in a premier gated community where the houses were going for $450K at the top. That same house is selling for ~$190K, if it can sell right now. I asked him if he used the services of a good real estate attorney to vet the deal and walk him through closing. He said that he didn't think he needed an attorney. He needs one now, as he's filing for bankruptcy.

As I value rational thought, I decided that the less said, the better, and didn't comment or make any judgments although I thought to myself how stupid he was. As for the personal bankruptcy, I find that unconscionable.

James Lackey writes:

It's nice of many to hold back judgment until after the fact. The only guy I know to do full disclosure and warn them good in Florida was my brother. One day he made a comment to me and to our friends at the BMX track in Feb of 2006 when another construction buddy was bragging about open land being bid up from 5k lots to 50k. It was where we rode our dirt-bikes…waaaay out there. By May I was gone to Nashville, and that was me, after being here arguing how good it was for everyone to be able to own a home from 2004 to '06, which is true, but as always, the get the joke is at what cost. Florida had many boom to busts and the lead movie in 1929 was the Marx brothers Coconuts making fun of land speculators in Florida. As for personal BK a bit of humility would be prudent. If anyone ever has a sick wife or child a couple million in medical bills and lost wages from taking care of family make it a certainty. But GM should build better cars to compete with others that have workers with national healthcare plans and more prudent savers.

Adam Robinson adds:

Adan RA question has arisen as to whether the typical little guy who bought a home was duped or blameful. This wasn't a case, in my opinion, of caveat emptor on a colossal scale.

Given the extent of the bubble, countless "little guys" were securing mortgages on properties they could not possibly have afforded in the past. Even if the lending institution had glossed over, if not misrepresented, the risks, as Alan points out, surely these new homeowners must have realized this change of affairs. Since there was no commensurate change in their own wealth or earning capacity, the sudden change in their fortunes could only be attributed not to their efforts, but rather an unexpectedly favorable turn of events — in short, good luck.

It is natural, of course, to be giddy perhaps to be the beneficiary of such great fortuity, but to expect that luck to persist, or to be without any actual or potential hidden costs — worse still, to resent it when their luck turns bad, or "the catch" in their boon to become painfully clear — suggests a level of credulity about the world, if not the physical universe, that can only be described as stupidity.

Adi Schnytzer replies:

Most people on earth are probably indeed stupid! Remember, in my family's past, I have this image of a man saying to his family in Eastern Europe in 1938 or so, "let's get out of here; I have visas and we have the money." No one wanted to know, and only he survived. No absence of innocent stupidity then or now. I'm of course not comparing the two situations in any other way. And then there are those funny surveys that ask people to name the President, Treasury Secretary, etc. and the results are incredible.

James Lackey chimes in:

Florida is pretty big…saying housing should do X when the state is in 2 climates and 2 different time zones is a tough call especially since the wealth is concentrated in 2 counties, one is Manhattan South and the other is the other side of the world to the North Side of Chicago, and one doubts there are any connections to Washington, DC and if your going to be a land holder you better be back by the full faith and political rigging of the Washington boys. I was a kid from the S side of Chicago but the only place I ever really liked was Boca Raton. Even though the West Coast are Chicago people…but in all of Florida it's hard to make friends in the business of stocks as every other guy you meet is running a scam.

PS. St. Joe is not the biggest land owner in Florida, not even #2. Think bigger.



The 94 point up move from 1pm to 4pm yesterday was the biggest magnitude 3 hour move of either sign, by a long shot, since the start of 2008 (and probably further back; I didn't check).

The second, third, fifth, and tenth biggest magnitude 3-hour moves were also up, not down moves. The biggest 3 hour down move was only 67 points, on October 9.

But these big up moves don't sit as prominently in our memories, and I hear no one rushing to say that markets rise faster than they fall!

Top 10 magnitude 3-hour moves in ES:

move        date              time (end of move)
73.75    10/28/2008      1600
94.25    11/132008       1600
72.75    9/18/2008         1550
-67.5    10/9/2008         1615
64.75    1/23/2008         1550
54.75    10/10/2008       1540
-52.75   10/15/2008       1610
-51       10/23/2008        1420
-50.25   9/29/2008         1530
49.5      10/13/2008       1615



"Slumdog Millionaire"

Directed by Danny Boyle Review: marion d s dreyfus

Starring Dev Patel, Freida Pinto, Madhur Mittal, Anil Kapoor, Irfan Khan

Primed to like it by a colleague last week, I was still caught by surprise by the energy of the "Slumdog" early scenes. The bite of poverty, and the aerial view of the vast Bombay sea of corrugated tin roofs with their endless mucky, interdependent, tangled lives. Begging for rupees yields to diverse plucky polarities in their different lives, eventually leading to nobility.

One recognizes the techniques employed by the armies of the midget mendicants in Nepal, India, Algeria, Morocco, Tunisia, Oceania, North Africa and similar venues where parents are scarce through no fault of their own. You mumble a blessing for the plenty surrounding us, our siblings, our children, our extended families.

The gritty humor and pragmatism shown in the brothers' young-mature existence, in parallel with the nearly surreal unspooling of the rough life they liver without self-consciousness–their rags were their only clothing; their barefoot state just as common; their beautiful mother's shocking and unwarranted death at the brutal beating of rampaging religious fanatics is atypical for a Western film–she is too young, too lovely, too careworn and too protective of her sons to die so brutally, with no commemoration other than her fleeing sons, Salim (Madhur Mittal) and Jamal. She is seen for a few moments, then forever gone. But everything about these young boys' lives is that old schoolyard worldview: unfair. The film utilizes the framing device of a program that is a simulacrum of the same program here, "Who Wants to Be a Millionaire," which still excites citizens of many countries where the concept of 'millionaire' still resonates. We enter the film as Jamal (Dev Patel) is going through his stepped paces as contestant, escalating the financial ladder. All of India is riven by his climb.

As the film showcased its load of emotional Bombay flashbacks as to how Jamal managed to correctly answer so many diverse questions in the run-up to the jackpot, he is in police custody as a suspect of cheating on the popular game show. I particularly appreciated the protagonist's solemn face and unbroken acting; he gave no hint that he was other than reliving the chaotic and miserable life of the harijan. He sweated out the answers based on his hard-scrabble life. Other actors are equally powerful, and Latika (Frieda Pinto) is beyond gorgeous as the childhood playmate he thought he had forever abandoned to begging or worse. The tough-cookie NYC reviewer audience, usually hard as week-old baguettes, sat enthralled by the hypnotic mix of scenery, charm, motion, dialogue and lushness with soft-focus flashbacks that spent out the minutes of this affecting narrative.

As the story harks back to memes of well-crafted literary fictions favored by Charles Dickens, it touched on some of the derring-do and tension of the "Bourne" trilogy, and the signature elegiac moments of many genre films. What swiftly turned the wonderment to broad beams of delight, however, was the wonderful credits featuring all hands at a Piccadilly Circus-like train depot, and what looks to be the entire population of Mumbai in ecstatic limb-flinging, knee-hoisting, syncopated Bollywood costume-and-motion extravaganzas so beloved on the repeating loops at any of the treacly Indian restaurants in the curry-and-poori alleys of your favorite big town. (In addition to seeing the vast sea of slum corrugated roofs of Mumbai, you get to see the Taj with Raj, too.)

The miraculous thing is, the precarious hand-to-mouth living of the young Jamal and Salim are caustically accurate today, with maybe more chai Wallah (tea-service servant) and computer thrown in than polishing of shoes and reedy singing to gullible tourists. This dingy-scrubbed two hours transports you back 50 years, and magics you, smiling radiantly, into the big shouldered, all-business Bombay today.

Little scatology, no sex, just a deeply felt, panoramic movie movie you can settle into and come out ready to discuss. A spicy tandoori chicken dish of a film: Some hot places, some vegetables, a surprising lumpo here or there, but a hypnotic experience after all's said and done. You feel delight for hours after you leave the theater, and the woes of the Dow are subsumed to the elations of "Slumdog."



checjersI started my career in counting stocks 53 years ago, by counting stocks below $1 and then at round numbers. To keep in practice, I am always prone to a hand study of this or that round number. I once found that stocks that break above $10 have fantastic future returns, but the study was marred by an inordinate predominance during the time when the weekly columnist was imprinted. I just looked at breaks below the round in the S&P index since year end. The market starts circa 1500 and ends at 900, a decline of 600, or three points a trading day. There were 23 breaks below the round number, averaging a decline on the day of the break of 32 points. Holding to the next round either + or - yields random results, as does holding for the next x days. However, there was an inordinate tendency to rise the next day.

Jeff Watson writes:

I've often heard comparisons of when the market "goes for the buck," or tries to hit a round number as a strong gravitational attraction.  Since gravity is only one of the four fundamental forces in the universe, I wonder how one could correlate market action with the characteristics of strong interaction force, electromagnetic force, and weak force. Although the aforementioned forces have similarities, they are very different in scope, strength, and range. Two of the forces, strong interaction and electromagnetic, can also have repulsive qualities.  Many numbers and price levels in the market have repulsive qualities also. Many years ago, I tried to apply and integrate different natural laws, mainly Newtonian derived, to the markets.  My quest for an oracle using physics was soundly rebuffed and I shifted my quest. I found better results using some kinetics applications (reaction rates), until the market cycle shifted and rendered it useless.

Victor Niederhoffer  adds:

I was inspired to do the hand study as the S&P broke below the round today at the close and then broke above in Japan trading hours. But really what did it was the always down to earth, checker like posts of Alan Millhone. I went to see the checker and chess table at Central Park with Aubrey Sunday, and there were two chess players, five degenerates and a Mah Jong player sitting at the twenty tables. New York must have one thousand tables with boards inscribed and I always check them out, hopeful that there will be a game. I was particularly hopeful on Arthur Avenue in Little Italy at the Italian park on 187th street and Arthur, as I read in a puff piece that your purses are always returned there and the old world traditions like checkers live on. But no, just sandwiches and cards there. There is something checker like in the moves below and above the round. A sort of third position like thing where you get  strength from rebuilding in the double corner. Or maybe it's like a Five Man Dyke, and the only way to break it is with a rather ephemeral pitch or else you're doomed. 

Jim Sogi responds:

I have been studying QED, a Strange Theory of Light and Matter by Richard Feynman, recommended by an erudite Spec. This is a truly wonderful book, and I will post some ideas shortly. In brief, Feynman uses a system of probability arrows based on time and direction to compute the total probabilities of the path dependency of light. Contrary to common sense, light does not necessarily travel in a straight short line, but may take more circuitous paths with reduced probabilities. A light came on on seeing this as a possible way to look at path dependencies of the market price.

Feynman explains the math in a simple manner analogous to computing mathematical multiplication problems such as 250*130 by putting pebbles in jars, say 130 pebbles into 250 jars, dumping them in a pile and counting them. This is something a 2.5 year old could do without having memorized the multiplication tables. The idea is that a 55 year old philosopher with little math can use Feynman arrows to compute probabilities of path dependencies accurately without 7 years of formal study. This is connected in an as yet undetermined way to the questions of are drops faster than rises, and the polar angles of price paths. Chair's questions often delve into the path dependencies of price in this case at the round. Surely at some point we will see 1000, 1100, and even 1200. The question is whether it will beat holding a bond, or if one will go bust before seeing the profit or whether other paths in the interim will give a greater profit. This is the importance of path dependency.



 Perhaps some good economic and trading sense might be found amongst such methodologies. At present our governments appear to want to hurl themselves in after the victim.

How to Escape From Quicksand

Step 1 Quicksand can be found in many parts of the United States, especially by riverbanks, in swampy areas or near the ocean. One area famous for quicksand is Morecambe Bay, England. People trapped there at low tide risk drowning when the water rolls back in. If you plan to walk in an area with potential quicksand it’s a good idea to carry a thick wooden pole with you, as tall as you are.

Step 2 As soon as you find yourself sinking in a pit of quicksand, lay the pole on the surface of the quicksand.

Step 3 Flop your back on top of the pole. It will take a minute or so that will seem a lot longer, but in short order you will stop sinking. If you are carrying heavy gear with you like a pack, if you haven’t stabilized, you might have to let it go. Work the pole around under you so that is rotates ninety degrees and supports your hips.

Step 4 Gradually start to extricate first one leg then the other.

Step 5 Slowly start to paddle to firm ground.

Step 6 If you happen to fall into quick sand before you’ve prepared by carrying a thick pole, don’t fret. The key is not to panic. Most quicksand pits are only a few feet deep. Although the mix varies, in most quicksand, your body will be more buoyant than it is in fresh water so it should float. In fact, the density of an average human body is about 62 pounds per cubic foot, which is less than quicksand's 125 pounds per cubic foot. Unless you are heavily laden you’ll probably sink no deeper than half way. However if you panic and start to flail your arms and feet you’ll only make the situation worse, because the more you agitate quicksand, the more it will liquefy and the faster you will sink.

Step 7 Instead, relax. Take slow deep breaths, arching your back and spreading out your arms and legs to increase your surface area. Let your body’s natural buoyancy bring you to the top. Then gradually and quite slowly work your way to solid ground.



 Right now we can all maybe take a lesson from Donald Trump's father Fred. During the depression, his father (who was a builder) told his subcontractors they can work for x dollars to build a building. They did the math and said, "we can barely survive on those prices - we won't make any profit at all!" He said "yes, that's true, but when the slowdown is over, you'll be the owner of a construction company". As Fred was well known as a man of his word, who paid his bills on time, you can figure out the rest of the story.

In the 1980s, when the NYC government had been trying for years to build a skating rink in Central Park, and failed again, and responded by appointing a comission to study the matter, Donald Trump told the newspapers he would build it for what they had budgeted, and have it ready by the winter, and pay any cost overruns out of pocket. In other words, he was sparring with the mayor on the front page of the tabloids in a city where his business depended on "favors" from the government (permits, etc.).

The mayor could hardly say no, so Trump told Anthony Gildeman, a recently hired employee who had been comissioner of housing in NYC (never mind), to go find out who is the best skating rink contractor around and "fly him in here." They listened to the guy (from Canada) explain what the city was doing wrong, and to his idea about how to get it done well and quickly. Trump almost gave Gildeman a heart attack by saying "Hire the guy," this without a year of requests for proposals, inquiries about contracts going to people who have donated to the right funds, etc.

The rink was done right, on time and I think under budget. The only glitch was the parks department planting a tree on opening day, which involved driving a large truck on a grassy hill after a few days of rain….

I think the story is mostly or all true the way I heard it, and if people are taken in by his image, and will pay extra for a condo with his name on it, or pay $3,000 for a handbag, I just love the USA.



It has been mentioned several times here that stocks (S&P 500 index) predict the economy six months in advance. What about interest rate spreads, do they look forward six months in advance?

To test both ideas I looked at stocks' six month prior return before a recession started as defined by NBER. I defined this as the predicted "start" of the recession. I also looked at the six month change in spreads of Moody's BBB index to 10 yr Treasurys. I used the last nine recessions (first one in 1954) and assumed we have begun the 10th one.

Further I defined the predicted middle of a recession as the period from start to six months before the recession ends. Not all recession have a middle as the 1980 recession lasted only six months.

Finally, I predicted the end as the period six months to the end of the recession.

My hypothesis: If the markets "predict" a recession to start six months prior, returns should be negative for stocks and the spread change should be positive (spreads increase). Likewise if the recession is to continue. And opposite if it is to end.

The table displays the results.

.             Predicted Predicted
.                 by           by          Overall
Predicting Spreads    Stocks        Count

Start         7             7              10

Middle       6             6              8

End           3             8              9

While most of the hypothesis seems solid, it would seem that  credit risk continues to increase even with the recession ending.

I will leave it to the reader to calculate the magnitude of the changes. It is tricky partially because the "start" of the current recession, if there is to be one as I assumed, is not yet defined; and the magnitude of change of prior 6 months greatly depends on the starting month, but not so its being negative.

But to whet the readers appetite, the starts totals changes are not too large in size. The middle is bigger and so are the ends.

And since the scale of the current spread increase and stock decrease is the largest of these, let me refute a meme. It appears that the prior 9 spread change magnitudes at the start had a negative correlation ( r ^2 near 50%) to length of the recession. Perhaps because if the spreads did not predict a recession the dead weight dragged down the economy, but if it did predict and raise competitive cost to borrow, the dead weight died quicker and better capital allocation speeded the recovery. Further, the stock magnitude correlation was near 0.

As noted both indicators are currently more pronounced than the prior 9, so clearly in some ways "this time it is different". But the implication would seem the opposite of the meme from the press. And as for the analysts, let's remember they had a vested interest in keeping the markets booming in the dot com days, as their left hand had a great thirst for leverage and risk then. Perhaps now, with their left hand deleveraging and shunning risk, they would like stocks to remain cheap till they can participate again.

James Sogi adds:

What is so amazing is the speed from which just a little over a year ago the markets were at an all time high and all seemed so rosey. Then so suddenly everything turned so sour in everyone's mind and the entire system seemed so at risk. A good example is the speed of the decline in Iceland. There certainly is a wall of worry in place. The last big bull run started with a bang, literally, even if it didn't shock and awe the Iraqis. Things looked pretty bad in March 2003, and the crash had wiped out many. One of the characteristics of the last bull run was the low volatility, and the steadiness of the rise, such that buying almost any drop was a winning strategy. Perhaps a retrospective thing to look at is when the market started to go up in relation to the end of the recession.

Sushil Kedia comments:

The Hindi movie superstar of yesteryears — Rajkumar — immortalized in the movie Waqt (meaning time) the line that translates to roughly, "Trees that refuse to bend lower will break down".

If the markets, economies and hoi polloi in general knew that there existed a large unresolved credit problem and still markets were being pushed higher and higher it could very well be that the last skeptic (read the permabear) was being cleaned out. Once achieving the minimum possible pessimism the time varying nature of variance then goes on to catch up (sic down) in a hurry. Trees (read: price structures) that weren't agreeable to bending lower in a timely fashion were then forced to be broken down with time.

Memetics, discussed and mentioned earlier, is about acknowledging that a meme shall prevail until it has got the largest possible number of believers. And so, while things are hurtling lower for now, it too could be that the inertia of observing minds will prevail on a pessimistic mood while prices (the new meme) would uncoil ahead of the perceived economic environment.



In the UK, Cambridge University's Clare College is standing up to be counted among the optimists. For the first time in its seven hundred year history the college is making a leveraged play on equities. Here's from this week's Economist :

'It has borrowed £15m ($24m) for 40 years at a real (after-inflation) yield of 1.09% and plans to invest the proceeds in equities. In effect, it has turned part of its portfolio into a hedge fund, using borrowed money to speculate on the stockmarket. At an inflation rate of 3%, it will have to repay around £75m in 2048. Will future dons be throwing themselves off the famous Clare bridge?'

It's good to see someone exploiting a few of the extreme pressures in the market:

- Panic selling of equities. No one knows where the bottom is, but I'd rather buy at these prices than at last year's prices.

- Excessive demand from pension funds for long dated inflation-linked bonds in the UK (or insufficient supply) has pushed down the yield to very low levels, resulting in a very cheap financing option for the college.

- Right now, everyone is panicking about where the market is going tomorrow, next week, next month, even a year from now. These guys have a forty year investment horizon. The risk premium can be a fraction of what it was in the past and they will still make a tidy profit. (although I did read an interesting comment that because it would be extremely expensive to insure this forty year trade with options, this suggests that investors who take such long views may not be being rewarded for their patience so much as they are being rewarded for the extra risk they are taking.)

- Relative to the size of the college's total endowment, the investment is apparently quite small. Also, despite press talk of turning in to a hedge fund, there is no mention of investing away from equities or going short. All in all, I congratulate them for taking a measured risk at an opportune time when both ends of the market (financing and investing) appear somewhat stretched.

It's a bet I'd happily take, if only I could get financing at inflation +1.09% for forty years!

A Cantabrigian from the other side of the pond adds:

I heard a few months ago, that Harvard and Stanford were hard hit by the decline. Well they might be, since they had a mish mosh of commodity based investments guaranteed to decline with the simonesque times. They just sent me a disguised fund raiser that implies the decline was much less than feared, a mere 30%.

Riz Din goes back in history:

Keynes seems to have been quite the risk taker, trading currencies on margin before switching to commodities and blowing up his personal account in 1929. His Independent Investment Company (an investment trust), set up in 1924 also failed miserably.

However,  his performance managing the King's College Cambridge's 'Chest' fund is highly impressive, and despite poor performance of the averages, Keynes did succeed in steering the Chest through the turbulent times of the Great Depression. Prof. Dimson has written a nice paper on the Chest's performance.

Keynes investment philosophy was far from static over the course of this period. He realised that his gains came from a handful of stocks and switched from a top-down, asset rotation approach to a concentrated buy and hold philosophy. The lesson is one of continuous learning, but I do wonder if Keynes was deceived by hindsight (i.e. perhaps you have to buy widely to be sure of catching the winners?), and believe the far more important factor in his success lie in his willingness to go against the consensus. At a time when British investment institutions' exposures to equities was extremely low, going from around 3% in 1920 to about 10% in 1937, Keynes went against the prevailing wisdom in no small measure; apart from seeking safety in government assets in the height of the panic, Dimson writes that 'by the mid-1930s he was investing heavily in US common stocks such that the Chest's total equity weighting never dropped below 50%.'

And where are we now? Take a look at this graphic of asset allocation of US university endowments with a minimum size of $1bn, it's taken from a recent research note from ML, although the data is from 2007.

Equity allocation is 47%, with a whopping 34.5% in alternative investments.



 This site is devoted to revealing lessons that will endure for a lifetime. One of the familiar themes that Daily Speculations has offered over the years has been Westerns.

1. L'Amour. One of the favorite writers discussed here is Louis L'Amour. In researching Mr. L'Amour's work, I have decided to list my favorite films that are based upon Louis L'Amour novels for those who would like to watch a movie inspired by Mr. L'Amour's work. They are in no particular order of personal preference.

Hondo Short story "The Gift of Cochise" 1953 John Wayne

The Shadow Riders 1982 Tom Selleck, Sam Elliot

The Quick and the Dead 1995 Gene Hackman, Sharon Stone, Leonardo DeCaprio

Conagher 1991 Sam Elliott, Katherine Ross

Crossfire Trail 2001 Tom Selleck,Virginia Madsen

2. My favorite Westerns in general

The Man Who Shot Liberty Valence


Open Range

Fort Apache

The Treasure of the Sierra Madre

High Noon


Butch Cassidy and the Sundance Kid

Tom Horn

The Magnificent Seven

3. My favorite Western Miniseries

The Sacketts

Lonesome Dove

4. My favorite Western Comedy

Support your local Sheriff

Kim Zussman insurges:

What about the Italian favorite “The Good, the Bad, and the Ugly”? (Also known on Wall St as “The Three Faces of Heave”).

Lots of market parables there, including the tug-of-war between fear and greed, continuously changing levels of deception, unhuman fearlessness, and a whole way of life based on fairy-dust.

OK not fairy-dust; gold.

Great fun with Eli Wallach and Clint Eastwood, ca 1966.



As you may be aware, shock and awe is a military doctrine based on the use of overwhelming power and "spectacular displays of force to paralyze an adversary's perception of the battlefield and destroy its will to fight". After the second consecutive day plunge in the markets with more than 10% lost, this was the feeling I had yesterday looking at the closing prices: shock and awe.  Your perception is paralyzed, you are not able to fully understand the context in which you are operating and therefore to make rational and informed decisions. Your will to fight is destroyed and you are simply brought to turn away your account statements in disgust.

Is this the result of a campaign built to shake weak hands (and minds)?   Most of us are vaccinated by many other bear markets and crashes, such as 1987 and 2001-2002.  Something really spectacular was needed this time to shake the resolve not to give away stocks at these ridiculous prices.  Well, "they" are doing it.  The public is shaken, hit by bad news on all sides and sudden panics in the markets. The public is selling at any price, stocks, mutual funds, bonds. The average investor cannot see the big picture, overwhelmed by negative information campaigns and catastrophic predictions.

It is difficult to resist, but I will try not to fall victim of this "shock and awe" campaign.  I will not put my stocks "for sale" at these levels.  On the contrary, I will buy new dips. Markets forces are already at work to adapt to the new situation, economies will find eventually a way to deal with the recession. It will be painful, but it will not be the end of the world and capitalism.  We will continue on the secular path of growth. On a different note, I hope that the governments' intervention to deal with dysfunctional markets and the collapse experienced in the past weeks will not kill the patient instead of curing it.   

Vincent Andres asks:

You wrote "the public is shaken". I'm wondering how much of the market is actually in "public" hands ?

If I compare what people (the public) save on their own willingly, and what the public must save in pension funds in mandatory way, I guess the public's direct participation in the markets is much lower than e.g. pension funds. So, I doubt public is now shaken, public has probably gotten out since already several weeks. Of course, this may vary from country to country.

Riz Din notes:

One public, on the other side of the world, seem to be buying with abandon as prices flirt with their lowest levels in a couple of decades. From Bloomberg .

'Nov. 7 (Bloomberg) — Japan's individual investors, armed with more than $7 trillion in cash, piled into shares trading at their cheapest valuations ever last month, even as the global credit crisis prompted overseas fund managers to sell out.'

I'm not sure about the choice of quotes in the article though:

'Individuals are the most clever out of any investor group, in my opinion'

'…they're not the kind of investors who get carried away with optimism and keep buying'



For this quantitative exercise, I compared the size and counts of up and down days (SPY cls-cls) from the Museum of Drift period (10/05-10/06) with the most recent period (10/07-10/08).

(Using a 2-sample T-test to compare means of up days with means of abs[down days]):

Note that in the former period the size of up and down days were identical, so this up market was due to 1.23 up days for every down day. In the recent interval (i.e. over the past year) the count of up to down days is 1:1, and the down days are down more than up are up (though not stat. significant).

So if you count on drift for change you need, before you would likely get it by waiting a few days. But now that we need even more change (to pay taxes), the longer you invested the more change you will need.

Alex Castaldo calls attention to the obvious:

Also interesting is that in the former period the typical move was about 0.5%, in the more recent period it has more than doubled  to 1.2% or 1.5% respectively.



 1. An interesting aspect of the recent rally is that we've had two back to back in a row smallest ranges of the previous 50 trading days. Also, the longest period without a x day max in the last 20 years or so. Neither is especially indicative of exultation to come. As if on cue, after 50 consecutive days of at least 20 points or more ranges averaging 60 points between high and low each day, we had the two smallest in a few months, just so that the opponent will always be on the wrong foot.

2. It is amazing how the market encapsulates everything. No news on the presidential outcomes in the last day had an impact on the market, as the prediction markets already had taken the incumbent party off the charts at 20 to 1. However, all the senate race outcomes which were close to 60-40 on the prediction market had an immediate 1/2% impact. I watched all the moves relating to the election closely with updated ticker prices on intrade, and the market is the most efficient thing in the world. At 9:00 pm, trade sports had it 99% for Obama, and then as every senatorial race probability changed, the market would move an immediate 0.5 with Japan moving 1%. Alfred J. Nock always said that mankind will always gravitate to the least amount of effort with a very small sigh, and the reaction of the Japanese market to it, with an immediate drop of 3% when the victory was formally declared at 11:08, and then a 4% rally in the last hour was their sigh. The revulsion gave way to exultation. One believes that the reaction of the market to the election is an example of some deep underlying principles of human behavior, especially relating to resilience, and anticipations always being worse than realization. Hope springs eternal, but one has not figured out a good way to quantify this. Some hypotheses from the readers would be provocative.



 I know I could not endure Charles Ellis's new seven hundred and fifty page book on the history of Goldman Sachs, and so was happy to read Malcolm Gladwell's latest piece in the New Yorker in which he writes about the life and times of Sidney Weinberg, an epitome of the rags to riches story, who literally went from the post room of Goldman Sachs to the boardroom.

The article is a reminder that coming from a position of adversity can bring certain advantages and while it offers nothing new by way of ideas, it is filled with colorful stories from a bygone era. Toward the end of the piece, we learn of the Goldman Sachs Trading Corporation, an investment trust that ballooned in size to half a billion dollar in assets only to get wiped out in the 1929 crash, when it's price went from $326 down to a mere $1.75. Goldman's relative robustness in the current crisis suggests they may have learned a thing or two from their past.



 "The pendulum swings back and forth. It is now time for liberals, and one day again it will be time for conservatives. Ability and effort is often regulated, it can frequently be restrained, but it will never be denied."

Beautifully put from Kim Zussman. Humanity stumbles forward not unlike the market drifting higher over the longer horizon, experiencing up shifts and down shifts along the way.



 Many were the portents of doom in the final weeks of John Major's administration in London. Much wailing was there, and gnashing of teeth. Far be it from me to allude to any augurs here, and nor do I imply any philosophical support of positive discrimination (for discrimination cannot be made graceful by a pretty adjective, no more than can "labour" or poor music be given stature by the prefix "new"), but after many years the Tower of London still stands, and despite cameras on every corner, our administration is, as it has always been, far too muddled to set up either a dictatorship, or do much of either good or harm.

The major issue which has come to light on either side of the Great Sea has been the obsession with property ownership. This has been treated as a shrine, a Golden Calf to whose wind all caution has been cast. I could not believe the risks the outgoing U.S. administration has taken in underwriting these failed bets, as should the strategy go wrong the only resourse is to print money, and we must remember that what has happened in Zimbabwe could happen anywhere. Property ownership should be considered with the risk assessment any of us traders would otherwise use, namely a small, limited proportion of our assets. To treat property ownership almost as a human right has greatly inflated its price. However, if property ownership is viewed as land ownership, we must consider what that means philosophically -as we are on this fair planet as but guests and cannot aspire to own any part of it (though we try to enhance it). This is similar to the even more universal belief that our fellow creatures are likewise there for our ownership, distribution, and an end which poses the question who is to be pitied more, the animals or us?

The most we can ever hope to own, and even this is not certain, is our capacity to think freely, and to follow our own personal agendas.



 Just took a pick up load of aluminum gutters and fascia cap we tore down from a recent garage add on. Aluminum brought only 20 cents a pound. Also took three bags of cans which brought 35 cents per pound. Recycling center I noted is closed Saturdays now and when I left, there were only two other customers on their lot.



Mexican FlagOne might guess that the top-rated countries in terms of economic freedom would have the best performing markets going forward. To test the idea I took a look at the returns of all the iShares MSCI country funds from 12/31/1997 through today to see if there was any correlation between those returns and the Heritage Foundation Index of Economic Freedom scores as of 1997.The data are given below: the country, the economic freedom score, and the value today of $1 invested 12/31/1997. There is a correlation (-16%), but it goes the wrong way. The biggest winners were the not-so-free countries Mexico and Malaysia; in fact, Mexico was both the least free of all and the best performer of all. The most free countries, Hong Kong and Singapore, were near the middle of the pack.

FUND                                      EconFreedom  $1 grew to:

ISHARES INC MSCI BELG INVEST     64.6               $0.66
ISHARES INC MSCI NETHR INVES    70.4                $0.68
ISHARES INC MSCI ITALY              58.1                $0.91
ISHARES INC MSCI UTD KINGD      76.4                $0.92
ISHARES INC MSCI JAPAN             70.3                $0.94
ISHARES INC MSCI GERMAN          67.5                $1.08
ISHARES INC MSCI FRANCE           59.1                $1.15
ISHARES INC MSCI SWITZERLD    78.6                 $1.19
ISHARES INC MSCI SWEDEN          63.3                $1.20
ISHARES INC MSCI HONG KONG    88.6                $1.36
ISHARES INC MSCI SPAIN             59.6               $1.43
ISHARES INC MSCI SINGAPORE     87.3               $1.48
ISHARES INC MSCI AUSTRIA INV    65.2              $1.62
ISHARES INC MSCI AUSTRALIA      75.5              $2.12
ISHARES INC MSCI MALAYSIA        66.8               $2.55
ISHARES INC MSCI MEX INVEST     57.1               $3.55



 In some market climates it may well be that an umbrella is a more suitable instrument than the cane. Some research into the matter uncovered the forgotten techniques of a Mrs. Sanderson:

Mrs. Sanderson, one of the finest swords women in England, is also an expert with other means of attack and defense. Provided with an ordinary umbrella, having the popular crook, she is quite capable of protecting herself against any onslaught, but not on old-fashioned lines. An umbrella has been referred to facetiously as a husband beater, but if merely used as an ordinary beater, it becomes useless for any practical purpose of protection. While on the other hand, if used in a scientific manner it becomes a deadly weapon in almost anyone’s hands.

The prowling bag-snatcher who infests the railway stations and busy thoroughfares, although he may secure the bag by snatching, can be promptly brought to book if his victim turns smartly, and as he runs away, catches his foot in the crook of the umbrella. Even if circumstances favour him, and he attacks a lady in a quite spot where no help is forthcoming, and the snatcher feels inclined to continue his struggle for for possession of the bag, a little knowledge will insure the ultimate defeat and retreat of the ruffian.



 Why waste time watching election returns when you could be improving yourself or spending time with your family? According to Claude Shannon's information theory, the information content of news is proportional to how unexpected the news is. Hence, Obama carrying California or McCain carrying Alabama would have near-zero information content because these events are already expected with near-certainty.

Using the Intrade state prediction markets, the five states with the highest degree of uncertainty in the Presidential election are:

Missouri:        Obama p=0.55  McCain p=0.45
Indiana:         Obama p=0.40  McCain p=0.60
North Carolina:  Obama p=0.67  McCain p=0.33
North Dakota:    Obama p=0.29  McCain p=0.71
Montana:         Obama p=0.28  McCain p=0.72

Hence, the results in these states will be highly newsworthy. However, their newsworthiness is likely to be limited to establishing Obama's exact margin of victory, since there are 26 states and the District of Columbia with a total of 338 electoral votes in which Obama's probability of victory is at least 0.75.

A McCain upset would be more newsworthy, since it would be unexpected. To win, McCain would not only have to win all of the above states, but also win 70 of the 100 electoral votes available in these seven states in which his probability of victory is between 0.10 and 0.25.

New Mexico (5):     McCain p=0.10
Virginia (13):      McCain p=0.10
Pennsylvania (21):  McCain p=0.11
Colorado (9):       McCain p=0.12
Nevada (5):         McCain p=0.14
Ohio (20):          McCain p=0.19
Florida (27):       McCain p=0.24

To narrow the focus even further, Virginia, Ohio, Pennsylvania, and most of Florida are in the Eastern time zone. If Obama wins at least two of those four states, it's over.

Nigel Davies writes:

Reminds me of the story about the Hungarian Grandmaster Lajos Portisch, who was at home studying chess as the Soviet tanks rolled into Budapest. I supposed he decided that there wasn't much he could do about the tanks.

Portisch would later become Hungary's top player and was for many years one of the top players in the world. He's the closest thing in Budapest to royalty.



 1. In the old days, one had to take account of the high and low of intra day prices because the range could be 4% and the market could change by 15% in a year. These days, the 5 minute prices often move 3 % and the hourly prices 7%. Again that is 25% of the yearly range, but this time within a 10 minute or hour interval. The idea that one can buy or sell within the day based on what happened yesterday or what you expect tomorrow is a terrible fallacy.

2. One of the biggest mistakes in markets is to worry about how much is for sale or demanded at specific prices. This is the source of the reason that the Teutonic - - - - -  savant who used flow of funds was always wrong about the interest rate moves the next year. Also, the idea that prediction markets can be manipulated by an interested large buyer or seller to their discredit is another speculative canard.

3. There has been a terrible increase in interest rates in the last week, and unless this is dissipated the market is not going to Lobagola and back as quickly as it would until fear and pessimism brings the expected future rate of inflation down to a level consistent with the recent and inevitable Julian Simonesque predicted decline that just occurred.

4. One of my most astute employees bought a company and brought it public and had a tremendous gain and desperately wanted to sell. He sold all he could and more, but the analysts would always say, "Why are you selling if the company is so great?" He had a good answer . "It's because you guys wanted me to provide liquidity and diffusion of ownership out there." I am reminded of this as the CEO's talk about how reluctant they are to put a cap on bonuses or raises. (We have to keep the talent.) They will as reluctantly agree to foregoing these bonuses as Brer Rabbit was reluctant to be thrown into the briar patch.

5. Has there ever been a time when the enterprise system has been in greater retreat than now, and how will prices adjust to this change in tempo and paradigm? One can always recall that during the French Revolution, the equities apparently went up the most after diamonds (one must check this).

6. Here are some books I am reading and recommend. Sam Wyly Entrepreneur to Billionaire. It applies the insights of football to making money and explains why so many football players achieve great success in business if they live long enough to get there. Leaves in Myth, Magic, and Medicine by Alice Vitale. It shows for the layman how the simple structure of leaves and blood are similar, and the unity and connectedness of all things, and provides a foundation for growth and life. Almost a Miracle by John Ferling. Finally shows how the British managed to lose a war they could have won so easily if Aubrey had been involved. The Enzyme Factor by Hiromi Shinya. No matter how many times I read this wholly unscientific book, I always come up with something worth testing that almost invariably turns out to be true, including his avoidance of dairy. Difference Equations by Paul Cull, Mary Flahive, and Robby Robson. I believe that difference equations are the best mathematics for market people to know. Prices are not continuous and they follow the last x ticks in a fully orderly difference equation.

The problem is that there are systems of simultaneous difference equations going on at all times and they are always changing. I have about a dozen books on difference equations, and I am always so hopeful when I start them, as each one has a different notation, and triple summations with very small differences in the top and bottom. Index numbers must be gleaned and put in the context of difficult to remember formulas for infinite series. This book however is the best one and it covers all the topics we usually read about in the modern math like chaos and rates of convergence, and periodicity in a fully accessible fashion. A very good discussion of many different approaches to the basic second order difference. The Fibonacci equation is nice as is their extension to graphing theory.

7. One of the hardest things that every kid goes through is to change teachers in tennis or music et al when they outgrow them. It happened often to me, and I still remember the trepidation I felt when I dared to change from Rubell to Nogrady when I was a tennis hopeful, or from L. Taylor to Mosteller when I was an undergraduate. This preparation however, like most things that kids go through is essential for success in life. There's nothing more important than giving up the old for the new and better in markets. Many turn now to those who believe in bear markets, and rising commodities, switching out of stocks when they look bad, and the underpricing of volatility as their current mentors. Who can blame them? They look good now. Even the weekly columnist who took over in 1966, who as far as I know has never written a bullish column, has finally been vindicated after 42 years. The problem is that one must always look forward and I have never found a qualitative analyst whose ideas were consistently good. They have their day, they attract billions from their followers, and then make their contribution to the market cycle, losing a net of billions in the process while still maintaining a high internal rate of return.

Russ Sears writes:

The beauty of the predictive markets is that very little explanation of your vote in $ is allowed, except the amount bet. But on stock markets, I would disagree, it is the natural tendency to follow a leader. This should be clear in the election season. But also clear should be the tendency to lead one down the wrong path. Further, madness of the crowd happens when the masses favorite analysis is confirmed by the leaders. Or the experts. It's incredible to see how much money was wasted on models and analyses whose purpose was to confirm decisions already made. This of course in now blamed on the modelers, not the decision makers. The greatest mistake is to believe your analysis must be right because the crowd is following it, for the moment.

Anatoly Veltman adds:

A VeltmanI understand what you're asserting. At the same time, there are subtle differences at times. For example, it has become known near Fri close: that Small Specs have Net Shorted the futures trade around the 825 S&P contract low. The S&P has been creeping up since, without material corrections that would allow them comfortable cover. This sure increases probability that they'll end up covering uncomfortably.

If, to the contrary, the Commitment of Traders (C.O.T.) report indicated Commercial shorting into the lows — then there would be less reason to be afraid of panicky cover to ensue. After all, hedgers are rarely forced to cover…



 A random look at S&P web site shows that the 10 year performance of big cap, mid cap and small caps are roughly as follows:

Big (500) 3% Mid (400) 10% Small(600) 10%

The big caps have significantly under performed the other sectors of the market. Even REIT's have had about a 12% return which seems surprising given the real estate market.

However the question that leaps to mind is why is there such a disparity between big caps and the broader market?

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



Intrade has data on betting odds for Obama and McCain: daily close-close change on betting price 1/08-present (eliminating weekends/holidays), used linear regression to compare change OB and change MC with (contemporaneous) change SPY:

Regression Analysis: chg SPY versus chg OB

The regression equation is
chg SPY = - 0.00151 - 0.0045 chg OB

Predictor       Coef     SE Coef      T      P
Constant   -0.001512  0.00164  -0.92  0.358
chg OB     -0.00449   0.01898  -0.24  0.813

S = 0.0236313   R-Sq = 0.0%   R-Sq(adj) = 0.0%

Regression Analysis: chg SPY versus chg MC

The regression equation is
chg SPY = - 0.00160 + 0.0064 chg MC

Predictor      Coef   SE Coef      T      P
Constant   -0.00159  0.00163  -0.98  0.329
chg MC      0.00639  0.02282   0.28  0.780

S = 0.0236300   R-Sq = 0.0%   R-Sq(adj) = 0.0%

None of the coefficients approach significance, but (as we well know) as Obama's odds went up YTD, stocks went down.

Repeated the regressions "at lag 1" (ie, today's change in SPY vs yesterday's in OB and MC):

Regression Analysis: L0 SPY versus L1 OB

The regression equation is
L0 SPY = - 0.00131 - 0.0228 L1 OB

Predictor       Coef   SE Coef      T      P
Constant   -0.00130  0.00164  -0.80  0.427
L1 OB       -0.02282  0.01897  -1.20  0.230

S = 0.0236091   R-Sq = 0.7%   R-Sq(adj) = 0.2%

Regression Analysis: L0 SPY versus L1 MC

The regression equation is L0 SPY = - 0.00161 + 0.0082 L1 MC

Predictor       Coef   SE Coef      T      P
Constant   -0.00160  0.00163  -0.98  0.327
L1 MC       0.00822   0.02293   0.36  0.720

S = 0.0236837   R-Sq = 0.1%   R-Sq(adj) = 0.0%

Again nothing significant, but the slope coefficient for SPY/OB is closer to significant (and negative) than SPY/MC (positive).

Conclusion? "Yes-we-can" sell because your once-preferential treatment of capital gains are going to the capital for at least 8 years…



 With governments of the world essentially guaranteeing most banks, why is there such a discrepancy between the yields of their bonds?

Riz Din writes:

I'm equally beat by this. Surely, no bank with a large government stake in it will be allowed to fail. Has such a thing ever happened before? Furthermore, even if such a possibility exists, why not simply buy in to the new class of bank bonds that comes with shiny government guarantees specifically written in to them [under the Brown plan ]. It looks like US banks may be holding back from issuing these new government-backed bonds until they get more clarity on the details, and an unintended consequence of the delay could be that it discourages buyers of existing bonds. But issuance of these bonds is already under way in the UK though, with Barclays and HBOS offerings already in the market (see FT link), and even these short-term bonds that piggy-back off the government's solid credit rating offer around 14-15% yield. Are we missing some pieces of the puzzle here - perhaps in the small print - or are these bonds simply extremely good value?

Nigel Davies responds:

Well, the Icelandic government was propping up Kaupthing Singer and Friedlander before they got screwed by our beloved leader when he used anti-terrorism laws to freeze the assets. Looks like I won't be playing chess there in the near future. And now, whenever I see government backed stuff being touted as '100% safe' the hairs on the back of my neck stand on end.

So is anyone for some Icelandic government high yielders? If not then my take on it would be to short some government backed debt whilst going long the debt of some of the institutions it's supporting. Which country? Probably the one we're stuck in right now.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005



 A not to be missed Haaretz news article detailing the letters of a Yiddish author and his experiences in the boom/bust periods of the Eastern Europe stock exchanges (ca 1890).

Riz Din responds:

Excellent stuff, Vince. This is a sad story of deluded ambition and greed, but it is smashingly told and packed to the brim with moments of hilarity, and at least this one is a fiction! Menakhem's wife is a truly wonderful creation. Her exchanges with Menakhem are packed with wit, scolding comments, and pleas for her husband to see good sense and come home. Alas, Menakhem's only concern is with the chase for riches.

You know things are going to end badly when Menakhem writes:

"….the word from Petersburg is, buy Transports for all you're worth! The whole world is holding them: Jews, housewives, doctors, teachers, servants, tradesmen - who doesn't have Transports? When two Jews meet, the first question is: 'How are Transports today?' Walk into a restaurant and the owner's wife asks: 'What's the latest on Transports?' Go buy a box of matches and the grocer has to know if Transports are up or down. In a word, there's money to be made here. Everyone is investing, growing, getting rich, and so am I."

A few lines from his wife:

"Shares, shmares! I'd rather own a rotten egg. No one ever made money by counting on his fingers."

"I wasn't raised in a home where we bought and sold air and God keep me from doing it now. From air you catch cold, my mother says. Who ever heard of a grown man playing in a market?"

A quick Google search for this legendary character brings up a few more pages of equally entertaining writing from the fictional Menakhem-Mendl, his wife still by his side. Here, Menakhem has quit trading and is looking to take up writing as a profession. Menakhem starts off writing a letter to an editor telling his story, of 'how I played the market in Odessa and Yehupetz, and how I sold my soul for fool's gold, Londons and stocks & bonds and every horse I could bet on, and how I went from rags to riches and back again, seventy-seven times a millionaire and seventy-eight a beggar.' His wife keeps calling him home and she is once more on the right side of the trade, for Menakhem's venture ends in tears and he soon writes, "I'm flat broke and in debt to my landlady.Not only have I run up a large food bill, I owe her for paper and ink."

Great entertaining reading for the weekend. The pdf of these letters is here. The pdf is wrongly presented in portrait instead of landscape so you may have to download it and then flip the view in your pdf reader.



 Yesterday, late in the afternoon I went fishing for snook, which is one of the best tasting game fish around. Real snook is not available commercially, nor found in restaurants or markets, and can only be served at home. Right in my neighborhood on the ICW is some of the best snook fishing in the world and that stretch of water is known appropriately as Snook Alley .

It was an outgoing tide, and using a DOA shrimp lure, I caught a nice 29" snook right on the dock of Pop's which is one of my favorite haunts in the neighborhood for a bit of libation. Interestingly enough, I was sitting at the outdoor bar with a couple of waterman buddies swapping lies about fishing, when we made a bet who could catch a snook the fastest off the dock. I ended up losing the bet, but my taste buds won in the end. Incidentally, the winner caught his snook with his first cast and it took me about 15 minutes to catch mine.

I brought the snook home still alive, scaled it, gutted it and did my best to remove as much of the skin as possible. I cut three diagonal slits across both of the sides of the fish and filled each slit with a piece of lemon, bay leaf, and garlic. I used a big tub and marinated the whole fish for about an hour with a mixture of olive oil, chopped ginger, soy sauce, white wine, balsamic vinegar, with a touch of salt and pepper. I fired up the Weber grill and put a non stick grill over the coals. When everything was ready, I grilled the fish for about 11 minutes on each side until done, brushing with rosemary infused olive oil frequently. Meanwhile, I grilled some artichokes, and some tomatoes on the side. I brushed the grilled snook with some olive oil, soy sauce, and seasoned it a little. The grilled artichoke and tomato, I combined into a little salad with a little Dijon mustard mayonnaise. I had a cucumber which I chopped up and added sour creme and a pinch of salt. Dessert was a cannoli from Publix, and the wine was a cheap B&G 2006 Cabernet. Eating the delicious meal in solitude with some Mahler playing in the background, I realized that some of the best things in life are the little unplanned surprises that come along.

Jim Sogi writes:

Ok, since we're swapping fishing tales, a couple weeks ago we went south around South Point to fish and surf. South Point is the southernmost point of the United States. Rounding the point at daybreak after running during the night, the water was rough, about 7 foot swell with 33 knot winds causing regular breakers that washed over the boat going up wind. There is a strong current and the waves run into an underwater ledge about 36 fathoms that cause the rough seas. Only the GPS and depthfinder would alert the modern boater to the underwater features, though the ancient seafarers knew this area well as a dangerous spot. Two hands holding tight to the boat prevented being thrown into the ceiling or washed away as seas covered the vessel. The boat could handle no problem, but the passengers can only take so much abuse. Kind of like a position in the markets this last few weeks.

Well, to make a long story short, we gave up and turned around. We knew the surf spot would be blown out so the expedition to the never before surfed spot had to wait. Even downwind it was tense as the boat surfed in large breakers and the helmsman had to maneuver around the breakers to avoid getting swamped or digging the bow in the hole in front of the breakers. Finally we made it around the point to the protected area below the cliffs and rested.

Running up the coast from there we trolled and caught a 30 pound Mahi mahi off a small point. Pulling into a small protected cove a few miles up the coast, the anchor set, I broke out the Poor Man's Mojito, (Sprite, Capt Morgan's rum and mint), the bag of frozen pasta with Italian sauce. My friend cut up the fish into filets. I dumped the pasta and fish filets into the pan, enjoyed my libation, and presto, dinner 5 minutes. If you've ever cooked in a rocking boat you'll appreciate the time saved. It was rather delicious if I do say so myself. The fish down there is healthy and clean as there is clean water and a lot of good nutrients, and no development and no people.



Using SP500 daily returns 1950-present, I calculated the returns for non-overlapping intervals of 1, 2, 4, 8, 16, 32, 64, 128, and 256 days. Then I ranked the returns for each interval into the 19 biggest gains and 19 biggest losses. Then I compared the absolute values of the 19 biggest gains and losses using paired t-test: which compared the single biggest gain with single biggest loss, next biggest to next biggest, etc. Here are the t-scores for ranked |biggest losses|-|biggest gains|, by interval:

1       -2.8
2       -1.8
4       -4.0
8       -3.4
16      -2.1
32       0.9
64       1.3
128      6.9
256     18.9

For non-overlapping intervals 16 days and shorter, losses are bigger than gains. However the pattern reverses as the interval gets longer, and for periods 128 days and longer, gains are bigger. Since the gains and losses are compared over the same intervals, this is a test of velocity (change/time), and supports the belief that over intervals shorter than a month drops are faster than gains.



 There was a lady in Sorrento wearing a pink dress at a party that night. She asked the man in front of her: "Do you think that someone who has been married to a woman for 25 years could decide to leave her for me?" She was beautiful. She was staring at him now. How could it ever be possible for someone to resist her? He saw his own life passing by. The relationship with his wife had become difficult, and his job was keeping him very busy but unhappy. In his mid forties, he was seeing his life progressing on a declining trend. He knew he had to do something about it. He answered the lady: "He is a lucky man, but it is not so easy. There are people who do not accept taking a loss," he continued. "You manage your life the same way you manage your portfolio of stocks."

The bear market had started a year earlier. At the time, it was difficult if not impossible to see what was coming. In the same way, at a certain point his relationship had started to get worse. When prices printed the first leg to the downside he hoped it was only a correction. But prices moved again down to lower lows month after month. He could see his losses accumulate and still he could not act. His relationship was exactly the same, low after low with some rebounds from time to time. The trend was clear, but he could not make a decision. Hope, fear, a sense of guilt, it was difficult to take responsibility for a failure.

He said: "People do not want to sell at a loss. They keep their positions hoping that things will improve. It is human nature. Eventually, when they are desperate and get their margin calls because markets capitulate, they finally liquidate and take huge losses. Similarly, most people will not close their relationship until there is really no other alternative and things have become unmanageable and nasty."

She asked: "So what is going to happen?"

"It depends what kind of guy he is. Ask the lucky man if he uses stop losses in the markets and you will know if he will leave his wife soon. If he does not, then you have to hope for extreme events to come that will overwhelm him and force him to decide." He could see the path he was personally following. He was hoping for her that the lucky man was different. "I wish you good luck. Let me know how it goes," he said and left. After six months, he was reading a newspaper at the airport in Washington D.C. when he recalled that conversation with that lady in Sorrento . Markets were plunging to multi-year lows in a wave of panic. He was at a critical point with his wife. He asked himself: "Can my relationship survive this phase? What has happened to the lucky man?" After all, when you have a sell-off a new trend will eventually emerge… He did not know at the time that he would meet her again.


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