In the bargaining process one side has the advantage. At some point that advantage switches to the other side, often, but not always, on consummation of the deal. Take a simple market purchase in which bargaining for price is involved. The customer in most sales has the advantage at the beginning since he has the money and the seller needs to sell a product with limited shelf life along with a number of other sellers of similar products. The buyer can negotiate a lower price during the typical three rounds of back and forth. The original offer or bid will set a range that slowly narrows until a deal is reached. The buyer has an advantage of being able to set the range, the initial offer, and he has the money. Once the money changes hands the seller instantly has the advantage, as the goods may not have been what they appeared. In money changing, sleights of hand can often make a deal less than it seemed. In legal matters, at times the first offer has the disadvantage. Now in a real estate market, buyers have the advantage.

In looking at the electronic markets, it is clear that one side has an advantage at times. The timing of this is important. In a dropping market, (define that as you may), bids clearly have the advantage. They have the money, they can submit lower bids. Their advantage lasts until the bottom tick or until the buy fills. The buyer then is at a short term disadvantage until the bottom tick at which point advantage goes to buyer holding in a rising market. At some point after the market turns, the buyers want in, and start competing with each other and raising bids. The buyer holding in as rising market has the best advantage to a point, i.e top tick. The seller, holding wanted goods, has the advantage and can keep raising the offers. As soon as the seller has sold his goods his advantage ends, unless he got top tick. If the seller waits too long and the bid disappears, his advantage disappears as well. The short seller has even less advantage since he owes his creditor as well.

Jeff Watson writes:

In the old days of open outcry, one could easily manipulate the bids and offers by goosing the market. If a buy order came into the market, (and one could detect whether it was a buy or sell order by looking at the movement of the broker's eyes) one could start bidding up a quarter in front of the broker, and perhaps get him to raise his bid where you could in turn sell it to him. One could do the same thing on the sell side. Although this was an effective method for extracting a little extra cash out of the market, it was fraught with danger, since you could easily get speared and end up being long or short a few contracts that you didn't want. Getting speared happened every day and was just the cost of doing business.

Newton Linchen replies:

I was reading the history of the Bovespa (brazilian main stock exchange), and I read that there was a guy who used to hit the market with a big buy or sell order and then hide in the toilet in order to not get filled! (He used to "mess up" this way until he was caught). Your description of reading the eyes of the broker in order to know whether it was a buy or sell order reminds me the tales of the Samurais, where they stood one in front of the other reading each other's breath. The strike always used to come when the opponent was finishing his exhale — the moment he was weaker.



 Nobody asked me but between the sponsor, the advisers that hold the main positions that they are advising about, the borrowers holding out their wounds begging for more, the insiders on sabbatical at the mint, the former academic consultants, the lecturers at the strictly business Wall Street retreats, and the algorithms ahead of you, the surfer is correct that it's the same old game as when one traded with the floor with "locals only" ahead of you, and the reports vetted a priori.












The vigilantes have put the transgressor in a trepidatious position. It will be interesting to see what efforts his colleagues and he will make to escape from this woeful situation before high noon, situation that could make the economy teeter and bring housing back to a standstill to say nothing of discredit to the other rangers.



 Trading is toil.

Victor mentioned once: "I never have fun trading. It is too serious".

Trading is toil, especially because it's already hard work in the first place to find a model, a "setup", a strategy that actually works, but then you must adapt it, which is the very hardest part. Once you have a "love" (something that makes your trading profitable), whether it is a strategy, model, parameter, or setup, it becomes very painful to watch your love fade and die.

I know we shouldn't personalize trading, but the fact is we (or I) develop an emotional relationship to our precious tools — every time I come across something worthwhile, after much toil, I feel so glad. I feel a sense of work well done. It's a very pleasant feeling. And I cannot refrain from emotional pain when a market relationship I was profitably trading becomes weaker and eventually non-existent.

To adapt,  one must have the emotional strength to, after much toil, model a strategy, and say to yourself: "you may have no value in the future."

Trading is strange, because it demands skills one would probably not wish to nurture if it wasn't necessary.

Trading is a stoic school.

George Parkanyi adds:

The shorter the time frame, the more frenetic, temporal, and tiring will be any form of discretionary trading. And the greater the need to predict, the greater the effort required as well. You can economize your efforts by researching and planning interim position trades or even multi-year trades, and then letting the positions play out while you comfortably research others. You can also economize by trading statistically –- researching an edge and then mechanically following the methodology you use to exploit it (this is more like a business). Or ultimately you can eliminate the need to predict altogether. You can simply use a passive re-allocation strategy or some kind of averaging approach and let the market sort things out over time.

The sense of toil comes from the feeling of the need to be right, either emotionally and/or financially -– and the market unfortunately is completely insensitive –- nay, gleefully contrary some would say, to that. You will be wrong many times, more so the more active you are, and will have to come to terms with it.

The markets supply a tremendous amount of energy in their own right. If you think of the market as an opponent, as in judo, think about how to use the market’s own strength against it, and to conserve your own.

Newton Linchen replies:

 Great point. I actually practice Aikido, which is a martial art similar to Judo, but with more emphasis on letting the opponent defeat himself.

I'd rather not think of the markets as someone, or as an opponent, since I would have to picture "him" 100 feet high and with enormous muscles. (It would certainly come after me in my nightmares!)

I prefer to think of the market as a force of nature, such as water, fire, or whatever. You can develop a safe approach to it, and make it the heart of a nice hot tub or bath, or get drowned or burned.

And to put together a bath tub is toil, at least for me!



 I very much enjoyed the movie The Astronaut Farmer. I highly recommend it. I am working on a "Space Travel Economics" course and look forward to promoting this movie along with The Right Stuff and some others.

Also, I put up a post on my blog with some recommended summer reading for students.



Buy SellI have been giving some thought to the adage "cut your losses and let your profits run." It has always rung hollow to me. Maybe I am missing something, but it seems retrospective and such decisions can only be made after the fact and not prospectively. It ignores all those unrealized profits and losses that often reverse over the course of a trade. All those winners that were supposed to run that turn into losers and all those losers that we are told to cut, that turn into winners. To argue the other side, I suppose one could just set a stop loss exit on all trades and no stop on the upside. This would reduce risk and profits, as one would expect, no great pearl of wisdom. I believe the adage should be reworded to "allow your winners to become losers, but don't allow your losers to become winners," or "realize your losses and make less money." Very catchy.



 Was the Vasa was the greatest warship of her time? By the time Samuel Pepys (great gossip, even greater Gilbert & Sullivan head of the Queen's Navy) became Secretary, the Stuart Navy was successfully challenging the Dutch and the French and offering its protection the Swedish merchant marine ships in their trade in the West Indies.

In his Miscellany Pepys lists the following classes of ship:

Rate          Name        Length     Beam     Draft    Tons  Men  Guns
First          Sovereign      127         46         19     1141  600  100
Second      Fairfax          116         34         17     745    260  52
Third         Worcester      112         32         16     661   180  46
Fourth       Ruby             105         31         15     556   150  40
Fifth          Nightingale      88         25         12     300   90   24
Sixth         Greyhound       60         20        10     120    80  18

A comparison of the Sovereign with the Vasa is dispiriting. The Vasa was roughly the same size - 1200 tons; but it was nearly twice as long - 230 ft. - and its beam was 8 ft narrower (38 ft.). That is a length to beam ratio of 6 to 1.

That was asking for trouble. The rough rule of thumb since people first started sailing and capsizing boats is that a monohull should be three times as long as she is broad. This should not have been news to the Vasa's architects. The Mary Rose (built 90 years before the Vasa) had a ratio of 3 to 1.

There is a reason for the Vasa's builders to have wanted it to be so long. There is even an explanation of why they thought they could build to such an extreme ratio. The longer a boat is, the less beam she needs proportionately. A boat's resistance to being overturned varies as the fourth power of her waterline length, the heeling moment of the wind pressure on the sails or the waves and swells against the hull in an engine powered ship varies as a cube of her length. Length is desirable in itself because the maximum speed of a vessel is - roughly - 1.2 times the square root of its length at the water level.

The Vasa's builders were trying to achieve the same results that American naval architects produced with the Iowa class battleships — the last ones ever built by the U.S. and the last battleships to operate on the high seas. The Iowas had to fit through the Panama canal and be able to keep up with the carriers (which were much lighter and, therefore, faster for the same propulsive power). As a result, they had an extreme beam to length ratio (8 to 1).

Then, why did Iowas survive typhoons while the Vasa sank literally in port? The answer is that the added stability of length can be horribly offset by increases in height. The Vasa had a height of 172 ft. - 75% of its length. For the Iowas to have had the same proportion, their hulls would have had to be 500 ft. high! Adding another 3+ ft. and a great deal more ballast kept the Vasa's sister ship from sinking in the Baltic, but it could never have survived the North Sea. Even using the 3.5 to 1 length-to-beam ratio that the smaller rated ships in Pepys' fleet (the Worcester, for example) would have required the Vasa and its sister to have beams of at least 65 ft; and, in the age of sail, there was no way for them to reduce its height to the dimensions of the Iowas.

The analogy with financial engineering is certainly appropriate. Somewhere in Stockholm in 1630 there must have been some bright young men who looked at the extraordinary success of the ancient Viking long ship designs thought "leverage can only lead to greater glory." But, the little matter of the Viking long boat's limited sail height seems to have be ignored. There are no surviving rigs for the long ships, but the best estimate for a 30 meter boat is that it had a mast height of 12 meters or roughly 40% of its length.

Phil McDonnell writes:

 I visited the Vasa Museum. It is a fascinating story of the greatest warship of her time that heeled over and sank within minutes of first setting sail in moderate conditions. In many ways it is the story of man's attempts to master engineering, be it naval or financial. The ship was only raised in the last century with modern engineering and is over 90% preserved due to salinity conditions in the Baltic. The interesting sequel to the Vasa disaster is that her sister ship which was completed two years later was only one meter wider but had significantly improved ballast engineering. The redesigned ship actively served Sweden in the war against the King's cousin, the King of Poland. Highly recommended tour.

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

Paolo Pezzutti comments:

 Maybe the ship was top-heavy.  If the ballast, for example, is not enough, the metacentric height (distance between the center of gravity and the metacenter) is too low, the ship would be unstable.  
From the thesaurus:

"metacenter - (shipbuilding) the point of intersection between two vertical lines, one line through the center of buoyancy of the hull of a ship in equilibrium and the other line through the center of buoyancy of the hull when the ship is inclined to one side; the distance of this intersection above the center of gravity is an indication of the stability of the ship".
(The center of buoyancy is the line of action of the resultant of all buoyant forces of the immersed portion of the ship).
(The center of gravity is a function of the distribution of the weights on board the ship and the ships itself).

There could have been different problems. An initial instability because of low metacentric height. Shifting of weights on board the ship may have altered the center of gravity. Or both.

Is how to calculate the metacentric height of a market a silly question?



 The two guys who put the Upper West Side Street Fair from 72nd to 79th, on the downtown lanes of Broadway, are Ray and Mort. NLN, as they say in the penal biz… no last names. But they put on these things, and it's a fun show: Free. Just walk along and drink it all in.

About a dozen booths per block. Cost of a 10-foot-long frontage on the road, where approximately 40,000 people cross by on a good day, is $185, if you reserve the space two or more months beforehand. For one-month reservation, it's $210; last-minute yellers get a cram-in for $260.

Today was a good day. Sunny, hot, no rain.

There are the regulars, the T-shirts and the tie-dyed dresses, this year with some fetching hanky-point hems in three colors and a bit of gold dazzle. There are the plant guys, born and bred in Brooklyn, with palms and orchids and geraniums on display, along with elegant ceramic or celadon 6" vases.

There are all the foodies: The corn on cob people, the tortillas, the Thai food dumpling dips, the corn tortillas mixed with cheddar-grill melt folks. The long, skinny balloons in an array of colors, twisted to fit onto a child's head, and extend 3 feet into the West Side sky atop her head.

And there are the sock counters, always a good buy. The Indian and Paki rug merchants. And the 'special price' NY Times booth, with freebie tote bags in graduated sizes if you get the weekly or the weekend delivery. He had one other guy there today, which means they split the 8+ hours; not a great signal, when the Spanish and Thai franchises have the same space, and they're running their flip-flops out with serving people. The sweet potato fritters, the icy lemonade with lime rinds, for a single. The nut sellers. The dried fruit sellers.

The high-end products are languishing. The costly bags and the handmade silk or chiffon blouses. The bottle 'gowns' in satin, from China, that are gorgeous, but serve few practical goals aside from gifting someone for a supper invitation. The table runners in damask and silk.

How are the vendors doing? According to the Israeli with off-price 'name-brand' cosmetics, business is off 25% this year, ITE ('in this economy'). The Times guy and the balloon-twist people shrug-business is no better than last year. Which means it's worse, but they don't want to give themselves the evil eye. The homemade rug fellow picked a fight, looked up at the skies, and refused to give any figures, pleading "Rain in a minute, gotta pack up." But the orchid guy and his attractive Gen. Y daughter lifted their shoulders, and did a little Tevya mini-hora, "Thank Heaven-we are doing BETTER!" he smiled and explained both humbly and with joy. "Hate to brag, 'cause I know a lot of these guys aren't doin' so well…but…" Among the few benefiting from the 'stimulated' economy.

In this economy.

No matter what the market is doing, people want comfort food, comfort items, a lovely plant, a cuddly pet. A friend.



Mike and CusThe athlete or team that learns to work within the framework of its personality or underlying character is the one that will experience the likeliest chance of success.

Tony Dungy and Peyton Manning were the first team in the history of the NFL to win 12 games in six straight seasons. Dungy is one of the most phlegmatic and calm coaches and Peyton Manning is one of the most intellectual practitioners of his position. Together they were a magical fit.

Tom Landry and Roger Staubach were another great team. John Madden along with Ken Stabler and the loose cannons on the Oakland Raiders were also terrific. Marvelous Marvin Hagler had the Petronelli Brothers to look after him. He was a cold calculating, efficient master of the "sweet science" . They were great businessmen and trainers.

Muhammad Ali had Dr. Ferdie Pacheco, Bundini Brown and Angelo Dundee in his corner during fights. All characters in their own way. Mike Tyson had Cus D'Amato. He was the father Tyson never had, who also trained Floyd Patterson, another youth in search of a father figure. Cus brought Bill Cayton and Jim Jacobs as manager and Kevin Rooney as trainer. Tyson became the youngest heavyweight champion and quite possibly the most lethal. When he lost Cus, Don King took over, it was the end of his meteoric rise.

Ivan Lendl and Tony Roche were a great fit both technically and methodically. Bjorn Borg and Lennart Bergelin were another. They both had even tempers and demeanors. The free-spirited Williams sisters have their father Richard, a renowned character, in the stands, cheering them on. John McEnroe, on the other hand, was largely of his own creation. His New York attitude and epithet-filled insults, his "Mac attacks," were legend. His talent and success were undeniable.

Tiger Woods is quite similar to Jack Nicklaus in course management and demeanor. They were always under control — icemen on the golf course. They prowl and hang around like a nuisance until the other players start to crack and then they close the deal. Phil Mickelson, on the other hand, is more of a risk-taker and has stated that his idol growing up was Arnold Palmer, another guy who took chances.

For the speculator, businessman, or anyone to find success in his chosen field, it is critical he understand who he is first as a person and surround himself with others who can work within that specific framework. He must incorporate the strategy that best uses his specific skills and work tirelessly to perfect those skills. Finally, he must unleash it in the public forum which will drive him over the top of the mountain and toward great reward.



MosquitoThe mosquitoes in Hawaii are gnarly, fast, smart. They hide behind your leg where you can't see them. They hide in the dark under my desk. They circle smelling the blood. They love fresh meat from the mainland. They're fast compared to the bombers in Alaska. They've wiped out most of the native birds.

Chris Cooper responds:

I live part-time in Indonesia (Bali) now, and can't say that I have found the mosquitoes to be much of a problem. Granted, where I live in the hills it is better than in the lowlands. I sometimes will spray repellant on my skin around sunset. I used to use mosquito netting over the bed, but now find it is unnecessary as long as you keep the door closed around sunset. I would be much happier if my neighbor would do something about the standing water in his rice fields, but really it's not bad at all. It's also very pleasant to sit in the open-air living room as it is getting dark and watch the local bats fly around the room looking for mosquito morsels.

Another tactic is to stay near my partner, who seems much more attractive to the bugs than I am. I don't have to be entirely unattractive to mosquitoes, I just have to be less attractive than he is.



Sony played this mind-blowing video on the progression of information technology at their executive conference this year. I find this exponential explosion intriguing from an investment prospective. This certainly points to a shift in the center of gravity away from the USA. Maybe this is what Jimmy Rogers has been trying to tell us. Time will tell.



Bloomberg GrabA chart of bonds showing this lowest since November and yields going up is not auguring very well for housing as credit rationing and high interest rates in a declining job market are twin killers.

George Parkanyi writes:

I've lived that chart. I fortuitously put on a double-short Treasuries ETF position on the last day of 2008. The position has been bypassed by my re-allocation signals because it's been kind of a tortoise, so it has slowly evolved into a nicely profitable trade. However, in the last 2 days it jumped sharply to new highs. I believe there has been a tectonic shift in psychology that now puts currencies (particularly USD) and government issued debt on the defensive - due to the downgrade of the UK government. Telling was the sharp drop in Treasuries on the same day as a big drop in stocks. What, no flight-to-kwality?

Just the IDEA of the paper of a major western power suffering a downgrade - the notion that it can happen at all - has started something new in the currency, debt, and inflation-hedge markets. This now gets very interesting.



L JThe end of playoff games were like the market end. Down 10 points in last minutes in stock on Friday. The Cavs beat Orlando by one with a last second three-point shot by Lebron. It was one of the historic moments. "A second is a long time for me. For others, it's very short." said Lebron. The last second of the day, very long for those on wrong side. Last second of last day of 2008. Very long. "I was punch drunk. I was stuck," said teammate Williams who passed him the ball. How many times do we look at screen at end of day with disbelief. That price has to change. It didn't happen. It wasn't fair." That walk. The refs made a great call," said Lebron about a call against him with a minute left that would have iced the game. My goodness. Uncle Howie. Loved to argue with the refs before the game. "You miserable so and so. If you give me one more bad call during the game, because you're a jealous non-entity, I'll give you the beating of your life under the boardwalk after the game. " But Artie would say, "Now, Sam, I'm afraid your judicious decisions under pressure are often not as applauded as they should be. Might we take you out for some Moo Goo Gai Pan after the game?" Who's going to get the better calls? Lebron or Howie?

George Parkanyi adds:

This happened to me last year as well — or was it the year before? I never watch basketball and I happened to change channels and caught the end of a Cavaliers-Pistons (I think it was) game which went into double overtime and was won by the Cavaliers. It was fantastic action which even I as a non-basketball fan found spell-binding, and the announcers were excitedly going on how this would go down in history as one of the great classics.

Last night the Blackhawks-Detroit hockey game went into overtime but I had to pick up my son Tom at the end of his high-school dance. When I got home, the game was over, so I switched over the sports channel to check the highlights for who won. Guess what, it was the Cavaliers-Orlando game, and I got to see live two of the most amazing shots in basketball — the one by the Orlando guy who ran the clock down to one second and then made a beautiful two-point jump shot to ostensibly seal the game, and then the amazing three-point buzzer-beater by Lebron James. The clock was at .2 seconds when he left the floor to make his shot. (Although I can't figure out how one second was enough time for a pass from the sideline, the catch, and then the jump. When do they start the clock?)

Funny though, for some reason I don't seem to magically step into oil-goes-from-$50-to-$150 trades… this one doesn't seem to translate to the markets.

Corban Bates replies:

In basketball, the clock starts when a player in-bounds touches the ball. Therefore, the clock didn't start last night until Lebron touched it. One second on the clock is plenty of time to get a good shot off. In fact, the rules state that there must only be 0.3 on the clock to catch and shoot the ball (anything less than .3 is physically impossible and must only be tipped in). This came into play last year when my team, West Point, beat rival VMI at VMI. We were up one with 0.2 left and they had the ball out of bounds under their basketball. All five of us were guarding the paint knowing they could only, by rule, tip the ball in. Apparently they were not aware of the rule as one of their players called for the ball at the three-point line, caught it, and fired up a three. It went in, the crowd went wild, and they all ran around the court celebrating their victory. The looks on their faces when it was announced that we won were priceless…



 THE NORMAN CONQUESTS Round and Round the Garden

A play by Alan Ayckbourn

Directed by Matthew Warchus.

The audience at this Old Vic production is swollen with the reedily mature as well as the well-heeled and sporadic younger theatrical aficionado.

No wonder.

"The Norman Conquests" was penned in 1973, but is still comfortingly timely. Round and Round the Garden, one part of three cyclical plays, loops in and out of the foibles of men and women in affairs de coeur or if-only! affairs. ITE (In This Economy, a current handy initialization going the rounds with which any financial guy worth his Sell-order should be acquainted), this good-natured and superbly acted romp is catnip to the down in the mouth or financially troubled. Better than a stretch on the chiropractor's table. Or an inhalation of ozone. This is a blueprint for a laff-factory, to be safely enjoyed by the entire demographic of theatre-goers.

Ayckbourn has been in the play biz since 1959, pouring out an astounding 69 comedies (revues, one-acts, children's plays, adaptations, Grey Plays) in that half-100–trumping all but a very very few playwrights. Even the world's reigning playwright laureate, Tom Stoppard, has put out only 24 acknowledged knockouts. (Stoppard's younger than Ayckbourn, however.)

In this romp, one of a triple cycle that may be seen in any order–Round and Round the Garden; Living Together; Table Manners–you get charmingly quirky and beyond-witty performers hopping and cavorting onstage, in-the-round style, as are all Circle In the Square productions. The gifted Ayckbourn–a Brit whose mid-career play, which went on to score phenomenal success and became an equally sensational comic movie we were invited to angel, but dumbly! incomprehensively! opted not to–forces you to laugh even if you come in dour and depressed.

Six amazing British actors under the standout direction of Matthew Warchus, amuse, command the amusing garden stage, titillate and delight for two hours. There's not an eyedropper's worth of the world outside, the roller coaster in the markets, the wars asea, the brutal price of Haagen-Dazs. Love, infatuation, cement-headed swains, and the foibles of marriage to difficult spouses conk you with willing suspension of disbelief and immersion in silly. It is expert acting, delirious scripting, spot-on comic-lode direction.

And for the (wise and timely) investor, since you are a shoo-in to attend the other two once you are beguiled and tickled by this one, it is a fiscal bonanza. The plays go on in a round robin of performances, so you can see them all in a day or so, or stagger them for three days of literate, aerating hilarity.

Every viewer will probably grab two more tickets to glom the entire cycle of Old Vic surprises, goofy interactions and whompin' lies.

Table Manners: Events of the weekend as seen from the dining room. Living Together: Events of the weekend as seen from the sitting room. Round and Round the Garden: Events of the weekend as seen from the garden.



 "Then why doesn't everybody go to the markets and beat the game to a frazzle playing Seattle Phil's method if the brain work part is so easy? Yes, the brainwork part is easy. It's the patience and guts part that sticks 'em!

There are no mechanical rules to go by. You simply have to have Phil's patience to wait for high Sharpe situations and Phil's guts to play them."

from: Secrets of Professional Turf Betting, slightly altered in honour of "Seattle Phil" McDonnell, whom I had the great pleasure to spend some time with, discussing markets and methods when he was in Stockholm a few weeks ago. I also attended his speech at the Scandinavian Technical Analyst Federation, where he discussed the findings of his 2008 book Optimal Portfolio Modeling. A great speech, and I would say that when it comes to Phil, the brainwork is not so easy, as he has such a deep understanding of the markets workings as well an ability to mathematically and statistically model the markets for practical trading use, that is probably equaled by very few. Incidentally, he is also trained by the very best in that arena!

This site is such a great meeting place, and I smile every time that I see someone traveling to a faraway place on the globe, mentioning it on the site beforehand and almost always there is a spec meet-up to grab a bite and discuss markets with an old friend from the site.

Truly, we are very fortunate to be part of this.



 Heading to my roof job out 7th Street in Parkersburg, I noticed a lot more individuals on foot. I noted one older man walking this afternoon with a large golf type umbrella covering him from the 86 degree afternoon. On that street I noted a Kia dealer offering 5,000.00 for anything you drive in towards a 2009 Spectra or Sportage. This dealer already has 2010 cars on his lot! The housing market concerns me as well as the US auto market, and I wonder about both when the dust settles? Note gold was strong today and pushing towards 1,000.00 again. I have some rental units still vacant as people cannot get the deposit together. When the stimulus money subsides I wonder what will be left — other than a staggering national debt?



The market feels, looks, trades and counts like political discourse these days. Everyone either bullish or real bearish. Not much middle ground. Like a bathtub swashing its whole contents from side to side. S&P cut through 900 in the middle of the night like nothing.



 The 19th century expansion of trade with America and India (thanks to the British Navy dominance and the imperialist policies of that century) caused the growth of population in cities, the increase of demand of labor and, therefore, wages. High wages associated to the availability of low cost energy (coal) were the main driver of the industrial revolution in Great Britain according to some studies. Basically, the demand for technology was meant to substitute capital and energy for labor. High wages contributed also to increase skills and education. In other parts of Europe and of the world energy costs were higher and labor cheaper making the use of new technology not economical when in Great Britain it already was.

The move from the Industrial Age to the Information Age changed relative values of labor and capital. The value of labor has remained high, but the value of intellectual labor has greatly increased. Western nations (and especially the US) have experienced initially an advantage in exploiting the transition to this age because of the higher level of education relative to other countries. An important characteristic is that less capital is necessary to enter markets in order to develop information related products and distribute them. The Information Age has lowered previously high cost barriers to entry. Geographic barriers as well have been lowered. One can now participate in this sector of the economy from anywhere.

The Information Age has affected the sources of wealth, but it has also altered the balance of economic power. As emerging nations improve their education and skills level, they are able to better compete with traditionally advanced and mature nations because entry barriers to markets are lower. Moreover, these countries have the advantage of low wages. This combination is explosive in the long term.

Not only western countries are moving to emerging countries ever more important parts of the manufacturing sector, but they are moving the higher value added activities typical of the Information Age. Emerging (are they really still "emerging"?) countries are entering these markets with their own companies. At the same time, we see the big innovators and winners of the nineties become gradually mature and slow down their rate of growth (MSFT, YHOO and so forth).

Many believe that renewable energy is the answer. I personally believe this is very important, but it will not provide the solution: solar panels will be made in China! As we will live in the Information Age for some time in the future, we may not see any actually disruptive innovation that will give back to the US the huge technological competitive advantage the country had in the past decades. And it is not a given that the US or Europe will be the leaders in the next innovation era. What will be the drivers? Education and skills again, I think, because, with time, the cost advantage of emerging countries will decrease. The proposed US budget includes $147.6 billion for research and development. After four years of decline in spending on basic and applied research the 2009 spending and the 2010 budget proposal represent a turnaround in federal research investments. This is big money, but I am not sure it is a panacea. May be we should also let the free entrepreneurial spirits at work providing only a sound market and property rights framework as incentives.



P McDTo understand the serial correlation in a time series it is helpful to look at a simple random walk model such as:

p(t) = p(t-1) + u

where p(t) is the price level at time t and u is a random variable, the net change for the time period.

Suppose the price started at 100 years ago. Then the current price level will be the sum of all the previous daily changes plus the original 100. Over time the dispersion of the sum of these random changes will increase with the square root of elapsed time. This growing dispersion can be interpreted as a trend by one reading a chart even for a truly random price series.

As far as real markets go, we know that the daily serial correlations between changes is small and generally has tended to be negative in recent years. But it is also true that the variance of the market movement is serially correlated. In other words volatility persists. So we wind up with a slightly more complicated model where the u's in the above formula have a wandering variability.

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

Jim Sogi comments:

Phil has written often that price levels are serially correlated. This is a characteristic of a time series. Why is this? For some mechanical or structural reason levels are limited in the amount of their change over a given time. In markets in general, the market forces and competition of bid and ask tend to compress prices. In Globex, the 1/4 point tick and the depth prevents large jumps or moves in between trades. I posit that this is one of the basic market forces, and can be used to the trader's advantage. Globex itself as a market making mechanism has incentive to dampen wild price swings. Market makers, and stat arb traders have incentives to prevent wild price swings and big trends.

The second main force in markets is the force that overcomes the gravity, so to speak, of the serial correlation, and overcomes the structural dampening mechanisms inherent in a time series. This is described in part as volatility, or also as trending. This is the force that moves the market away from any given price. What is this force? It might be market imbalance of supply and demand much larger than the inside depth or of one day or week's trade volume as we saw this year and last. It could be underlying financial movements, changes in investor perceptions that outweigh the tendency of correlation. It might be government risk. This appears to be the balance of force between mean reversion and trending.

Another aspect of trending is the appearance of trends in a random time sequence as an artifact of the correlation and the increase or variation in volatility. This calls into question the fundamental nature of the force or explanation of the market forces as an explanation for trends.

These two forces might be quantified, and a metric used to define a trend. The serial correlation appears to be the basis for mean reversion trading for which trending is an anathema. Some trading methods utilize trending but it is problematic defining a trend. One of the problems is the existence of trends as an artifact of random time series and how to distinguish such artifacts from a fundamental move, in advance. The answer will also change with cycles.

The worst thing for a range trader is for a break out. The worst thing for a trend follower is a range. A single big move can wipe the reverter, and multiple range entries can ruin the trend follower before he catches the train. The correlation continues during a trend and results in the channel phenomenon, so this can be used to the traders advantage both contra and following.



SPS&P crossed 900 on 25 days on the way down. And it took detours to 800 as well in the process. It's been only seven days so far on this side of the river.



I noted the steady rise in gas prices in my area (+20 cents) when I fueled up this morning. I'm wondering if there is a formula out there that shows the effect of (stimulus) to (oil speculators) = (higher pump prices) and the effect on the (market)? Is the steady rise in petrol devised by the government to force the implementation of their more fuel efficient vehicles plan? $3.00 a gallon regular will be great this summer to force many to stay home and further drag down the travel industry, etc. Likely this will be a good summer to spiff up the gas grill and do some serious bar-b-q in one's back yard.

At what oil price per barrel will Mr. Pickens make his return to TV?

James Lackey writes:

If it wasn't for oil speculators you'd be driving a hybrid and paying 15-20% more for you car for the past decade. Oh wait… that's the new mandate. Don't worry, with all the govie rules we will let the Chinese have all the cheap coal and cheaper than hybrid deep sea oils.

Wait, there is more! If you have four friends, you're taking two cars. The hybrid to make 36MPG fleet wide average will never seat five comfortably at 3250 pounds. Or you'll pay a huge premium for the few big cars and small trucks that will be built. It's quite an average and all the car guys are behind it since they can produce an average fleet at gasp… a profit… just wait until the car industry is profitable, OM goodness cars will cost a fortune. Good luck getting parts for old models.



 I had a very interesting conversation with a reader about an article I wrote about China. He argued that there is something very important and intangible economists cannot measure — the will of people. That will becomes even stronger when the country’s past is ridden with political and economic misery. Think of Germany and Japan after World War II, their economies were in shambles but human capital and ingenuity played a lot larger role in their recovery than the traditional capital. In other words economic models at the time would have predicted that those economies would not recover as fast and as well as they did, as they would not have accounted for human factor, the raw (and very selfish) drive to succeed.

The reader was making the argument that because of its poverty-stricken past, like Germany and Japan did after WW2, the Chinese people’s ingenuity will put their economy on a tremendous growth trajectory. I thought it was a very interesting observation, though I never really made an argument that China is going to fail and go back to pre 80s or 90s era. My argument was that all good things need time to rest, that is why economies have normal cyclicality (periods of expansion are followed by recessions). Chinese growth was very high for a very long time, it needs a good rest which it doesn’t get because its government is afraid of civil unrest and thus is spending money at a very fast pace.

Misery alone is not enough. Japan and Germany recovered and blossomed because those were capitalistic societies, in fact their success is a triumph of capitalism. China is toying with communism (socialism) and capitalism at the same time. Unfortunately, at the time of crisis if a choice is given government will chose the path of lower resistance – the communism (socialism). (Just think of what our government is doing today.) Although the harder, the right, and more painful (at least in the short run) choice is creative destruction — capitalism.

Russia is a good example, the same Japan/Germany after WW2 argument could have been made about Russia in early 1990s. It had a very educated population, which saw plenty of misery. For a while Russia was going the right direction, but the crisis of the late 1990s shifted the country back from democracy and capitalism toward a more command and control economy. This conversation made me realize that Chinese success in the future, past the short run, will depend on the market system it chooses. Capitalism will let the human ingenuity fester where communism just going to crash it.

In investing it is important to think unconventionally, to consider not obvious risks but the ones that are hiding around the corner. For many investors it is a foregone conclusion that China will consume more stuff (energy, materials, industrial goods) in the future, thus many argue that one should buy what China needs – the stuff. But this investment thesis will only workout if China sticks with capitalism, if the current crisis will not push it towards the road of the least resistance - the communism. Thus let me issue this warning: If I were to follow the “buy what China needs” investment I’d watch political developments over next couple of years in China very closely.



 Arnold Schwarzenegger spoke at my son's graduation ceremony at USC. Despite criticisms of how he governs California, he is a great speaker. His secrets of success:

1. Do what you love and want to do, not what others tell you to do.
2. Ignore the naysayers.
3. Work your butt off.
4. Don't be afraid to fail.
5. Break the rules.
6. Give back.

He loved bodybuilding, but when his mother saw the pictures of the half naked men she brought in the doctor and cried. They said: be a policeman. Bodybuilding will get you nowhere. Mohammad Ali didn't even start counting situps until the pain started. Give it all you have. There will be setbacks. All traders know this. Everyone said no one would appreciate Arnold's accent or huge build in movies.















The "old buck," as my dad called himself when writing to me as he got older (yes, I had a daddy also), wants on your third birthday to give you a little something you can hold onto and be helped by as you get older.

1) Let me start by saying and listing where you are now. You are a happy and healthy boy. You have a magnetic personality that makes almost anyone who sees you love you at first sight. You love to fix things and see how things work, you love to do music in all forms — conducting, dancing, listening, and playing the violin and piano. You love to play with computers, banks, trains, baseball games, and cameras. You love to go on bike rides and adventures with your mom and dad. You love to hear stories and ask questions about what's happening and why, to be a chef, and a plumber, and to see how machines work, especially big systems like car washes and construction sites. Yes, you love to drive cars. Yesterday, two days before your third birthday you said — exact quote — "Hey, I'm not ready to leave. Would it be possible for me to do a little driving before I leave?" After you drive you like to say "Did you enjoy my driving today?" Yes, Mom and I believe that you should drive a car and play with fire when you're a kid (under parental supervision) because that's how you learn what good and bad things can happen.

You are a very sensitive boy but resilient also. When there is a story where someone is hurt like the Three Pigs where their house is blown down, or any song that has the least bit of sadness in it, you get up and say "I don't like that song" and walk out. Life regrettably has much sadness in it, as well as happiness, and I hope you will be able to overcome your sensitivity to the bad so that you can enjoy the good. There is good hope on that front as you like to run and climb much, and you do fall often and get knocked around like all kids but you are very good at getting right up and going at it again.

You have an immense vocabulary and use big words of a six year old like competition, interesting, fortunate, imagination, adventure, "in that case." [sample]. You love to ask what words mean, and you enjoy it when we take out the dictionary to discuss them. I first realized you have a immense vocabulary when you were one and we passed an outdoor restaurant with people sitting outside in the sun under cover and you said "umbrella." You love to rhyme words. One of your typical rhymes is "computer rhymes with commuter." You like to say things like "the train switched from the outside track to the inside track," or "I am ready for my next customer. Here's a menu. Would you like some Dover sole or shrimp? Thank you very much." When you were 2 1/2 you were cheffing [playing the role of a Chef] and your mom said "Is that water too hot?" and you said "let's test it." And just the other day when we were standing at the pool ledge at the Four Seasons talking about the pipes you said  "the more you flush the toilet, the higher the water in the pool gets?" or "It's cold outside, the wind is blowing. It's not raining. I don't see any drops on our window." You love to ask the meaning of words you don't know and you listen attentively when we get out the big dictionary to see how the words are used and what they mean.

You love good food, and since you were two days old you have regularly joined mom and dad at restaurants. Your favorite foods are fish, broccoli and spinach, and hot dogs. Your favorite restaurants are the Four Seasons and the Harvard Club, and you told me yesterday typically "I love to go into the kitchen here and see how all the big machines work." Loren and James and Hellman love to take you inside to see the way things work.

We play tennis every day and you can hit a running forehand most of the time with a small or big racket with one hand. You play the piano and violin every day,and you have perfect pitch and you know the notes especially A and D. One of your favorite things is to go to science museums. We've been to seven different ones, about 50 times in all, your favorites being the elevator museum in Dartmouth, New Hampshire. You like to go to shows and you've been to Broadway shows — South Pacific twice, Show Boat, Damn Yankees, Music Man, Hello Dolly, Sorcerer, and numerous kid musicals. You know from the first notes which is which when we play it on the CD. You are getting good at speaking in a whisper at concerts, and we've taken you to numerous Christmas carols, operas, orchestral events — your favorite being the Park Avenue Symphony where you are "David's assistant." It is unfortunate that your father has to use all his powers to get the other people there to appreciate that a kid should enjoy a show also, even if he says two or three sentences an act.

We like to go on adventures on our bikes, often stopping off at H and H, Cones, and Bleecker Pizza on our way from daddy to mommy. Your favorite vacations were at Disney, where you liked the Dumbo and Snow White rides and loved the playgrounds and the pictures with Belle and Mickey, and Florida, where you went fishing and played in the sand, and Maine where we went to Sturbridge Village to see all the mills, and you rowed a kayak, "a palindrome," and jumped in a quarry. You have several very good friends, Ava and Emma, Armaan, Oshay. You love to go to the park and play with machines, climbing, and music there. And you love to do creative things with your extended family especially finding pictures of interesting things on Google, and rhyming, and craft things. You have been very "fortunate" as you would say to have nannies who are like older sisters and friends and nurses and teachers to you in Lorna and Tashi.

2) In a previous letter, when you were born, I told you about the importance of music, and games, and money, and competition. Let me add a few things that will stand you in good stead.

The first one is from a game — checkers. Tom Wiswell was the world checkers champion for 25 years. He wrote 20 books. He was a great man, and I took lessons from him every week for 20 years. I hope that you will take lessons from greats over your life. Already you are taking lessons in dancing from Yuval who is the world champion at swing dancing, and Mara in violin who is a world class string player, having performed in Show Boat, one of your favorite shows, and me in squash, where I was the best, and Mommy, who won numerous contests on the piano. It's good to learn from mentors like that because they have learned the keys to success, and they have the track record to prove that what they do is best. In any case, Tom wrote a lot of proverbs for me that tied together the lessons he learned from checkers and life. His favorite proverb was "In checkers and life you need a strong base of operations." The base of operations is a line that connects all your forces, all the things you can do and all the equipment you have to do it with. Usually that base of operations is used to get something good, like play a good piece, or start a great business, or win an important event, or even defeat your enemy as your namesake Jack Aubrey always did. In your case, your base includes your love and abilities at music, sports, and machines, your homes in New York and Conn., your father and mother who would do anything for you and will always be there in life and after to support you, your extended family especially your six half-sisters and Susan and Mommie's very good friend, my brother "Uncle" Roy, (who at three years old was uncle to Galt and Katie, as you are uncle to Finn and Grover and Magnolia), your godfather Dan, and friends like Ava and Emma's parents John and Roseanna, and your very good friend and mentor Ming, and your "uncle" and good friend and teacher, Alex. You are fortunate to have so many who will take care of you and guide you through the many ups and down and highways and byways of life. The more you build that base of operations before reaching for the stars the better you'll be.

My father always liked to say "listen and learn" and that's part of it. You need to be prepared, to learn a lot and practice a lot before you can expect to reach great goals. Practice is the only way to get good at something. Herbert Simon, the man who most people refer to for learning about the science of people, found that you need to do something about 300,000 times before you are 10 years old to really get good at it. And that's just a start. One of the great things about music is that the way you learn there, by doing scales, and sitting down with your instrument each day to play pieces by yourself, is the key to practicing in any field. (I would add here that I am famous for using the music stuff to become great at squash and I was the only one who practiced squash by playing against myself for half an hour a day while everyone else just played games.) It will teach you how to practice in other things. You should find good teachers and listen to them very closely. I had teachers like Jack Barnaby, the greatest squash coach, and Tom, and Yuval, who were world champs, and Jim Lorie, who was the best at seeing the big picture in money things, and started the whole scientific study of prices with his base of operations for parts of businesses you buy and sell called stocks. I also when I grew up had a mentor in counting, Steve Stigler, who knows how to always keep the big picture in mind while counting right, and from Robert Schrade, who taught me piano, who is a father like Bach to one of the greatest music families. I love everything about his music and friendship and one of my favorite memories is how he and I traveled all over the world giving concerts about music and speculation. I hope you will get as much pleasure out of doing music with friends as your mom and I did and it is one of the happiest things in life.

Nothing is good unless you are healthy and I have been very fortunate in meeting two great mentors who have kept me healthy, David Brooks, who's like a combo of your two namesakes Aubrey and Darwin, and Raymond Chang, who's the only one that will tell and really can show you how to live five years longer if you are really sick with something eating you up. (Also, in a funny way, you wouldn't have been born without him.) Most of all I was mentored by my father, a man who knew everything about everything, and who knew and taught the right form in everything in life. He was the kind of person you'll meet in life who everybody who met him loved him like a brother. And one of the last things he said to me was "Vickie, I've always been there for you whenever you asked for anything." I can only hope that you will be able to say that about me some day, and I will try to live up to it as will your mother and many of the others mentioned above. Always remember that. Don't be afraid to ask them for help. I hope you will seek out such greats to learn from. You should know that I have taken about 2,000 lessons in various racket sports, and I have learned and improved from each of them. It is interesting for me to reflect here that when I was growing up, my father or mother came to each of my lessons, and all my tournaments, and that made me feel very strong and happy. Plus it made sure that I went to the lessons on time, and that I saw the importance of it, and they were there to make sure I practiced the right way. Other things about the base of operations to know are that you have to work hard and prepare well if you are going to achieve your goals. And it is best to have more than one way to get what you want. Jack Aubrey always liked to say that if you had a small base of operations, the enemy always knew where you were going to have to start and end. And in life, things are always changing. And even if you don't have an enemy ready to attack, you have to be able to adjust when the situation changes.

You will learn also that you are what you eat. What comes out of you can be no better than what went into you. You were very lucky to have good things sent into you with your cells from your parents and your living conditions. But what goes into you also is what you eat. You must eat things like fish, fruit,vegetables and nuts if you wish to be able to get what you want over the long term. Fortunately you love all these. That will give you the strength and the long life that is necessary for happiness and prosperity. I am afraid that you have developed a taste for hot dogs and salami already. You will have to curb that.

A Maze: You like to do mazes, finding the best way for Thomas to get back home, or for the turtles to get to the ocean. Life is like a maze also. You have to choose which path to take. And you have to get around things that block you to get there. Okay, the most important thing is to make sure that the path you choose has good outcomes at the end of it. The best way to do this is to surround yourself with good people. Always choose friends that good things happen to. Always put yourself in parts of the maze where the forks lead to good things . That means good places like the best colleges and good people like the champions, and good food especially the broccoli and spinach and brown rice like the ones they serve at the restaurants that Mom and Dad take you to. It means having good equipment in whatever you do. A good instrument like the Grotrian that mommy has, a good racket to play tennis with, a good house to keep you safe and healthy. There is an opposite side of this. Stay away from bad things and bad people. Don't hang around with people who are always getting into trouble. They're called hoodoos in our book, and even though it's not their fault bad things always seem to happen to those around. They say that the Rothschilds, a very rich and wise family always stayed away from hoodoos and you should too. Most of the things that happen to you in life are going to be because of the places you're in, and the friends you have. So be sure that you put yourself on the royal road to success by traveling with the benevolent people and things and not the hoodoos. Great People. You are lucky to have some great people around you. Many of your mentors and family are great at various things. Your mother is a great writer and musician. Your father is a great racket person and sometime very successful speculator. Your teachers are great in their fields and we will be sure to make sure that your other teachers are just as good. Many of your sisters are already very eminent in their fields, especially Galt at writing and producing movies, and Katie in connecting groups of people. Of course, you're going to seek out great people. One way to do this to add to what your parents put you in touch with is to say to some great people that you will work for them and do things for them for free, just so that you can be in that aura. Another way to do this is to read books about the lives of great people.

One set of books about two great people is very close to home. You were named after Jack Aubrey and Charles Darwin and they are the heroes of Patrick O Brian's book the Master and Commander Series. Between Aubrey, who knew more about the sea and boats and fighting than anyone, and Darwin, who always loved to study the way living things work, especially plants and animals, and who loved music, and language and food, and the things they both loved, music and women, you could learn a life time of lessons in do's and also the don'ts especially with regard to money in Aubrey's case. And perhaps most important is the love they had for each other. It's the most beautiful friendship ever, and I only hope that you can have friendships like A and D did, and that you will seek them out I like to read good biographies of people who are telling things as if it's the last thing they'll ever say after they have lived great lives themselves. When they're at that stage they don't hold back on the important things. Two books in this category come from the same college, Carnegie Mellon: Herbert Simon's Models of My Life and Randy Pausch's "The Last Lecture". You learn things from them like setting great goals for yourself, always asking for things you want, working with friends to accomplish things, working hard as a key to success, not worrying about small things. The best story of a life I've ever read is Galton's Memories of my Life. Here is a man, who your sister Galt was named after, who did more things to advance science than almost anyone. He discovered how to count the relations between two things called regression and correlation, and he discovered why we have big storms, and how to find criminals through their fingerprints. He was a great traveler, and geographer, and most of all he loved to count things. Counting as you know is a key to success. He also wrote very vivid things about the many fields like medicine, and study of man, and how to cut things and measure things in every field. You will be well advised to know that while he was living he was considered the most loved and respected man of his age with everyone who knew him like my father, loving him. One reason for knowing this is that even though he is known as the founder of more good fields of science than anyone like psychometrics, anthropometrics, regression and correlation, weather maps, eugenics, et. al., like many great men, he is reviled by people who are frightened by greatness- people who believe that all people are equal in abilities and outcomes and that good luck in your cells and work habits and choices in the maze of life isn't the cause of the high and the low among people. Two autobiographies recommended by my mentor Stigler are Benjamin  Franklin's and Simon Newcomb's. Both of these men of science are very wise and tried many things before deciding on the things that will put them on the rite path. Recommendations like these from Stigler and your other fine mentors above and the new ones you will wisely choose are always to be placed close to your heart and bookshelf.

I also think it important and beautiful to read Albert Jay Nock's Memoirs of a Superfluous Man because it will teach you the idea of being your own man, and why its so beautiful to cultivate yourself like your own garden, and not to force anyone to do things that you think would be in their interests even if they don't. That's the idea that made America great and is behind what they call the constitution that gave everyone the base of operations for the great country we live in, and made everyone work so hard in his own way to better himself.

I guess that will be all for now. I should end by saying what my father said to me. "Be good, and be happy." Do know that every time I say good bye to you, I cry a little. I will try to be a good model for you, and to provide a good base of operations for you so that you can travel the road to greatness in life. And I will write again with other things that will help to put you on the royal path.

Love, Dad



At 3:15 PM PST today, Friday, May 15, 2009 my long time mentor and beloved friend, Edwin Shneidman, pioneer in the study, prevention and intervention of suicide and suicidal behavior died at age 91 as he would have wished, peacefully at home. To appreciate the magnitude of his being able to do that you need to read: Waiting for the End, Alone and Unafraid and if you want to read the story behind that story, you will want to read the Neiman Foundation for Journalism at Harvard interview with Tom Curwen.

Ed was the founder of The American Association of Suicidology and Professor of Thanatology at UCLA. He authored, co-authored or edited nineteen books on the topic.

I had the occasion to visit him - not as often as I should have -over the past several physically painful years of his life. I believe one of his greatest accomplishments is that he managed to meet all the ten "Criteria for a Good Death" that he set forth in an article with that title published in June, 2007 in Suicide and Life-Threatening Behavior published by The American Association of Suicidology.

1. Natural. There are four modes of death–natural, accident, suicide and homicide (NASH). Any survivor would prefer a loved one's death to be natural. No Suicide is a good death.
2. Mature. After age 70. Near the pinnacle of mental functioning but old enough to have experienced and savored life.
3. Expected. Neither sudden nor unexpected. Survivors-to-be do not like to be surprised. A good death should have about a weeks lead time.
4. Honorable. Filled with honorifics but not dwelling on past failures. Death begins an ongoing obituary, a memory in the minds of the survivors. The Latin phrase is: De mortuis nil nisi bonum (Of the dead [speak] nothing but good).
5. Prepared. A living trust, prepaid funeral arrangements. That the decedent had given thought and made arrangements for the necessary legalities surrounding death.
6. Accepted. "Willing the obligatory," that is, accepting the immutables of chance and nature and fate; not raging into the night; acceding to nature's unnegotiable demands.
7. Civilized. To have some of your loved ones physically present. That the dying scene be enlivened by fresh flowers, beautiful pictures, and cherished music.
8. Generative. To pass down the wisdom of the tribe to younger generations; to write; to have shared memories and histories; to act like a beneficent sage.
9. Rueful. To cherish the emotional state which is a bittersweet admixture of sadness, yearning, nostalgia, regret, appreciation, and thoughtfulness. To avoid depression, surrender, or collapse; to die with some projects left to be done; by example, to teach the paradigm that no life is completely complete.
10. Peaceable. That the dying scene be filled with amicability and love, that physical pain be controlled as much as competent medical care can provide. Each death an ennobling icon of the human race.

Ever the articulate humorous iconoclast, I think Ed would have eschewed the pomp and circumstance I ellaborated above and prefer that I had just said that he hoped he had simply followed the dictum of his mentor, Henry A. Murray: "A good death is dying so as to be as little a pain in the ass to your family as possible."

I will be forever grateful to Ed who early in my career had enough confidence in me to entrust some of the most suicidal patients from the UCLA in patient wards when they needed to be discharged, but were still suicidal. He did it with a simple phone call: "Hello Mark, this is Ed. I am sitting with a lovely young woman. She's in a lot of pain. You can help her. SEE her."

I also owe Ed a singular skill to help such people when he told me: "Mark, if you listen for hurt, fear and pain, it is always there. And when the other person feels you listening and feeling them, they will lower their guard, open their minds and hearts to you, allow you to enter and comfort them and if you're fortunate, will let you walk them out of hell."

And Ed, regarding being "as little a pain in the ass to your family possible"… I think you actually pulled that off.

Now it's time to thank you for how many millions of people your life work has helped to face death and to bid farewell to you Ed, using the same words you would use when I would leave your home during recent visits: "Goodbye, dear man."

Be at peace, I will miss you.

From the huffingtonpost



 The bid/ask spread is another one of those hurdles that speculators must jump over in the quest for profitable trades. The spread is the instantaneous inside market, reflecting current market conditions, but it also is a product of unbridled free market forces. The bid/ask spread is a profit engine, for those in the right place at the right time, make no doubt about that. Many of the great fortunes on Wall Street were the result of always being able to buy at the bid, and sell at the offer.

In earlier times, people would pay for the privilege of an exchange membership in order to capture this spread. It must have been a worthwhile investment, as exchange membership prices have gone up on average for the last century. Now, in these more democratic, electronic times, it is harder to collect the spread on an all day, everyday basis. Much more confusion at the bid/ask point of the market reigns in this digital age. The mistress of deception likes to have her way with this spread. In today's supposedly open electronic age, where tyros see transparency in the markets, the same ages-old bluffing, misdirection, feints, probes, and stabs rule the inside market, as always. The same deceptive games played in the open outcry market have seamlessly morphed into the electronic markets, but with much more ruthless efficiency. Big players can see the open book, get the little ducks all lined up in a row, then slaughter them mercilessly. The inside market, the bid/ask spread, is tough to trade from anywhere on the outside, especially if you're a small player. Limit orders attempt to avoid the bid/ask spread, but one is really not avoiding the spread with a limit order when you think about it. Market orders give the other side of the trade an instantaneous profit, or return on their investment. No matter what you do, you're going to bump up against the spread, as it's unavoidable.

The bid/ask spread can represent the minimum amount of risk a player is going to assume, or it can cause a maximum amount of pain, it's your choice. Liquidity seems to rule the day in the bid/ask spread, with the more liquid instruments having narrow spreads, and some illiquid instruments (like pink sheet stocks) having up to a 10% spread. The spread can still change in liquid instruments, depending on the free market forces, fear, greed, deception, or any other emotion in nature's handbasket.

Emotions come into play when you are trying to get a trade down and don't get filled because the bid/ask spread won't allow it. Emotions can cause you to chase a market while the bid/ask spread seductively dangles a carrot in front of you. Emotions can cause you to avoid a good trade because of a perceived increase in risk when the spread is wider and you don't want to pay the cost, or assume any extra risk. I like to keep an eye on the spread, as I find that it gives many, many valuable market indicators, especially in thin markets and after-hours. However, like commission, vig, slippage, and mistakes, I accept the bid/ask spread as part of the cost of doing business.

Legacy Daily comments:

Some of the volatility seems to be created to soak up more money from the participants in the form of the spread but even with this money printing-press the houses got slammed in the past year. With their collective voice, maybe they would say that is their cost of doing business but I am yet to fully comprehend the societal impact of a bid/ask spread between a 1% deposit and a 5% loan. 

Phil McDonnell writes:

The bid/ask spread, volatility and liquidity are very much related concepts. When the spread is wide there is usually greater volatility. When volatility is greater the spreads widen. It is difficult to say which causes the other, rather it is safer to reason that they are manifestations of the same underlying phenomenon. In both cases that phenomenon may be liquidity or lack thereof.

The bid/ask spread and volatility are directly observable. But underlying liquidity is a hidden variable which cannot be directly observed. The St. Louis Fed has done some limited research looking for the underlying cause of volatility. In that work they found that consumer liquidity was highly correlated with market volatility. That offers a strong hint that liquidity, spreads and volatility may all be manifestations of the same thing.

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

George Parkanyi responds:

The spread is a market price in its own right –- the price of liquidity, and also of laying off risk. If you want to establish a full position immediately, or liquidate one, you pay the price for that convenience. If your small orders can piggyback the action of the big lines in a liquid market, then you don’t have to pay very much at all. If you’re the only guy walking up to the table, it can be pretty-much take it or leave it when things are thin. Market makers maintain a position in the security indefinitely. They can wait you out. Your interest is typically transitory, and you often want to get in quickly to act on an idea, or get out and move on to something else. You don’t have as intimate a relationship with that market. So the bid-ask is in effect a service, for which you pay a price.

I’ve stopped trading certain ETFs because they are too thin. The spread on the thinner ones was sometimes 10%, and even when I was getting a signal I couldn't always execute. This was disruptive, so now I’ve spent some additional effort weeding out thin markets where the spread is too costly, or makes me miss signals that would otherwise be profitable if I were trading a similar, more liquid security.

I’ve thought about and played with spreads a lot, and believe that with adequate capital, you can effectively simulate being a market-maker yourself by maintaining a “virtual” bid-offer. You simply put in limit orders to buy and sell at certain increments. The profitability of your “market-making” depends on how wide you make your “spread”, and how volatile the security. Too wide the spread and you might not get enough action to warrant the risk, too narrow and you may pick up a whole lot of inventory going the wrong way that you don’t want. Looking at the profitability of the specialist system, I believe you can make good money with a strategy like this in a market in which you have a reasonable grasp of the dynamics, although you won’t have the visibility of other limit orders — you’ll have to do it statistically.



 Something very significant just happened on a tennis court in Madrid. Roger Federer beat Rafael Nadal in a masterly, choke-free performance, 6-4, 6-4, on red clay.

Federer victories over Nadal have customarily been a very bullish immediate short term indicator for the SPX and I suspect we will be up a lot this week.

My bearish views are on hold.



 Before 2005, it had seemed that Property and Casualty business was a cyclical business, boom to bust, from the long periods without a disaster and many start-up prospering… to a major disaster, which would knock out some companies, sometimes rather big ones, that happened to be at the wrong place at the wrong time. Some other P&C companies would also be crippled, but not go under.

After the disaster, rates would go up, as the regulatory pressure would be to keep P/C companies underwriting, and the claims would justify higher rates. There also would be a competitive hole left from P/C going under or companies scaling back, either in areas or in total.

But as time progressed without any major calamity, the pendulum would swing back in the other direction.

To understand this cycle further, it helps to consider the Law of Large Numbers and its opposite, diversification. In more normal times much of the P&C claims are small independent events, that is the Law of Large numbers apply. During these times the risk is diminished by underwriting more policies. As you get more policies, the claims experience becomes much smoother and predictable. Like flipping a coin for tails many times you will approach 50% head or tails.

However, if claims are highly correlated as with a wide scale disaster like a bad hurricane season, then the law of large numbers does not apply. Rather than smooth and highly predictable, the p&c companies have concentrated claims all at once. Not only are the number of claims correlated, but the size of the claims also. More policies from even a diverse pool means they can experience a surge of claims. But if there is any concentration, which often is the case, as agents specialize by areas and companies… then the claims can be ruinous.

As we all know the 2005 Hurricane season left huge claims for the insurers to pick-up. However, rather than many going under, 2005 had less P&C companies go into receivership than the long term average P&C companies go under. This can be attributed to lessons learned, more diversification was needed than was naturally occurring. As competitors would often capture high concentrations of the business in various areas.

Further, business in the coastal cities were seen for the risk that it was… highly profitable for many years with a large claim season wiping out many of those profitable years. So companies learned to limit how much exposure they would take. They also analyzed their business for concentration risks. They would trade through reinsurance , risks to various coastal areas. Stop loss reinsurance became a way to smooth out any one area concentration risks.

Yet, risks management can only go so far, if the P&C company does not have a diverse enough lines of business,

Securitization of mortgages was supposed to work the same way. But of course now its clear that it didn't. It has been said that securitization did nothing for the investors, but shuffled the cards around so that everybody could hold the least regulatory capital as possible. That is the sum of the parts of required capital were significantly less than holding individual mortgages separately. However, that is revisionist history, the pooling and the tranching was supposed to give less risk through the law of large numbers and more diversification.

Of course individual home prices have long been vulnerable to foreclosures. Your home price is highly correlated with your neighbor's and your city and area's. If your neighbor forecloses, your city or area has high vacant/foreclosed homes your price would of course be affected. However, spread this risks out across the USA and suddenly it becomes much more predictable… The law of large numbers applies, even in prior recessionary downturns, the risks was spread so the result were more predictable.

Yet, recessions are not like hurricanes, they are caused by mis-allocation of capital.

So the stage is set. The regulators says we've got this conquered. For a large portion of these securities are completely safe. Will only require a minute amount of capital for this portion we call "highly rated"…. In fact if you want to jump through some hoops to set them up right where you'r proving your monitoring the interest rate risks, we won't require any capital for these off balance sheet Structured Investment Vehicles (infamous SIV's).

But the markets disagreed, they gave a healthy spread even as they narrowed to 20-30 bps over treasuries… The ratio of the spread to required capital for these highly rated RMBS was great. Everyone loved their ROC (Return On Capital).

Like those calm P&C claim years, everybody seemed to be making money. The more numbers you added made predicting those risks smoother. Even the recession of 2000-01, those higher foreclosures were spread more evenly and without large surprise. It appeared the regulators were right, they had conquered the risks. Everybody was accelerating…

This of course caused the '30 times leverage' we heard about. Nobody, could get enough of these… hence driving the spread down down down. This made the regulators even happier as home ownership was up, up, up.

What the regulators missed was the First law of investing, if everybody is doing the same trade everybody is wrong. If everybody is booking extraordinary profits… nobody is as wealthy as they think.

That is hurricanes cause real damage of wealth, mis-allocating capital causes book losses. This is true even in a 12 trillion dollar boring mortgage bond markets; the markets can over allocate capital.

Further, its clear, that like the chaotic path of a hurricane, there are tipping points. Over build too much, in too many places and suddenly the well will run dry. Like the path of a hurricane, those tipping points may appear clear after the fact. But given a few more butterfly's or home-builders here or a few less there and who knows what path it might have taken as the areas waters warmed and cooled here and there.

You may have heard of RESTART, ( a fed program to get mortgage underwriting going again)… They can talk about transparency and more due diligence on the RMBS buyer's part. But whats not being said, how much credit support these mortgages will need. And for the buyer how much extra capital will be needed. These questions however can't even begin to be addressed until the current batch of RMBS are sufficiently run-off the books.

The stress test, however, gives us some idea of the new quality levels and level of capital to be required, but the regulators just can't raise the minimum numbers explicitly without feeding the panic.

In short bubbles and panics may be as chaotic as a hurricane, but are man made by over allocating capital. Because of this, their devastation will affect the whole area that has been overcapitalized, not just a region.

Therefore, the only answer, is to diversify more not just throughout the housing markets, but throughout the markets themselves.

George Parkanyi comments:

Your point about over allocation of capital to the same correlated trades and everyone thinking they are more profitable than they are can be illustrated by one of the funnier scenes from the Jim Carrey movie Bruce Almighty. Bruce, who now has God's powers and responsibilities, is trying to answer everyone's prayers, and becomes overwhelmed. Frustrated, he decides to clean up his backlog by granting everything asked for. The next day, it turns out that several million people have won the New York State lottery, which sets off rioting because the shared winnings end up being about $17 a person.



 Friedrich Hayek always said that he was a "Burkean Whig". Since England was always the place where he felt most at home, it is not surprising that he would have looked to late 18th century English politics for his model of liberty. But, he might have had greater success in finding successful advocates for his ideas about money and commerce if he had looked across the pond.

When the Constitutional Convention took up the question of legal tender, the initial draft carried over the language from the Articles of Confederation: "the legislature of the United States shall have the power to borrow money and emit bills of credit." Hayek's intellectual forefathers would have none of it. They gave the Congress the Power to "borrow Money on the Credit of the United States" and "To coin Money, regulate the Value thereof, and of foreign Coin" and "To Provide for the Punishment of counterfeiting the Securities and current coin of the United States".

This was a political argument that Hamilton had no trouble winning. The delegates took it as self-evident that "to emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor ever hereafter to be employed; being, in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." (Alexander Hamilton)

Washington, as always, had the final word on the subject: "We may become a great commercial and flourishing nation. But, if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy.

Easan Katir writes:

This past month I studied "Capital & Finance in the Age of the Renaissance" [translated] in 1928, to understand how the end game might work when governments spend beyond their means. In the 1500s kings and princes overspent to fight wars, and borrowed from the wealthy to pay the soldiers, who otherwise survived through loot and pillage. In the 2000s the governments overspent to fight wars (including war on terror, war on drugs, war on poverty) and borrowed from wealthy nations. During the Renaissance, the wiser creditors insisted on collateral for their loans governments, and thus eventually foreclosed on pledged Spanish copper and Tyrolean silver mines. Even with collateral, they had trouble collecting, and would frequently advance new loans in return for receiving partial payment on previous notes.Executive Summary: back then, in the short-term, the creditors did well (for about 50 years ), in the long term (200 yrs), it ended badly for the creditors when they slipped up and lent money to governments without collateral, which of course, defaulted.

Alex Castaldo comments:

Ehrenberg's book Capital and Finance in the Age of the Renaissance: A Study of the Fuggers and their Connections  was a favorite reading assignment from the late economic historian Ch. Kindleberger.  He even provided a capsule summary:

"This classic study of the Fugger bank in Augsburg in the 16th century focuses on war and money. Money is needed to buy soldiers, but with soldiers one can acquire money. The Fuggers were involved with Venice, Austria, the Holy Roman Empire, the financial markets of Lyons, Bruges and Antwerp, and through them, with the Spanish crown, which proved their undoing. The financial center of Europe was moving northward from Lucca, Florence and Venice (Genoa, a rival of the Fuggers for the Spanish treasure that was overdue in payment for loans when it reached Seville, hung on longer). The period was one of struggling capital markets. The mistake that brought down the Fuggers, and many a bank before and since, was lending too much to kings on inadequate security".

Stephen Jovanovich adds:

As much as I appreciate the patron saint of those of us in the finance bleachers for having the wit to say he studied economic history because he could not "hack the math" of plain economics, Professor Kindleberger did have his blind spots. He was, inevitably, a devoted member of the "where have all the flowers gone" Pete Seeger school of military history. The Fuggers were "involved in Venice" because they, like everyone else in Germany, went there to learn the new Italian science of double-entry bookkeeping. The soldiery that needed money - and ultimately bankrupted Philip II - were not the ones who discovered, collected and shipped the treasure of the Indies and the Americas to Spain; they paid for themselves a hundred times over. The military extravagances that doomed Philip II were the ones made not for profit but for faith - against the Dutch for their stubborn Protestantism and against the bastard Queen Elizabeth for her persistence in the Anglican heresy. The bit about "inadequate security" is actually funny; as Hayek kept reminding the members of the German history school and their Keynesian and Marxist successors, the state NEVER keeps its promises. It is the monopoly that is above all law and, as Philip II devoutly reminded all his petitioners, the sovereign's pledges can only be made good by God. 



 1. My 18 year old Lab regularly wakes up and barks at 5 am, and the coyotes are waiting right outside the door and howl in unison. One wonders if they are waiting for a meal or believing a friend is close. The market often is near death at 5 am and lurches in a spiral, with the Dax plummeting below the round.

2. The last hour on Friday often reminds me of the last two minutes of many basketball playoff games, especially those of the Celtics. The lead changes five times. There are violent moves with three-point shots and running of stops on both sides, and a complete recap of what has happened up to that time. Slow but steady wins the race.

3. The Dollar/Yen and the S&P do a very nice dance together and when you trade one you are really making a forecast of the other. Many times all the people who use the program I invented are waiting for a move to happen predicted by this or that market on this or that day or time, and out of the clear blue sky, someone like Dr. Greenspan will be speaking at a lunch, and will say something that makes the prediction come true. How did it know? And how if it didn't could you keep up with those who don't pay commissions and are always ahead of you on the bid or offer no matter how fast you are?

4. The many and increasing 100 million trading days that the "banks" are realizing these days presumably will help their kids get into certain Ivy League schools or at least get them a good letter of recommendation from former "bigs" there.

5. After a 35% rise, when the market drops 5%, the bearish commentators and the newspapers are not as hopeful of the big decline as they are after declines that follow terrible moves.

6. The Laffer Curve should be generalized to encompass the incentives that people have to buy and pay whenever any purveyor tries to siphon away their margin of benefit.

7. I can never read a Patrick O'Brian book without finding in every chapter insights into how by following the wisdom of Jack or Stephen, I could trade better.

8. I wrote a letter to a little boy telling him that having a strong and long base of operations is a key to success in life and I would be pleased to share it with those who might find it of interest in life or markets.

Alston Mabry writes:

My dogs and I have made a casual but first-hand study of coyote behavior (less casual, perhaps, for my dogs, especially Trevor who lost a dollar-sized chunk of fur and flesh to a coyote bite when he was about three). We call it a "hoot-up" when they howl as a group. In my experience, a hoot-up is a claim on territory. Coyotes coming back into the mountain park here just before dawn, after having spent the night scavenging and hunting cats and ducks in the suburbs, will stop at a familiar waypoint and do a hoot-up: "We're back. This is our territory." Several times, too, when I have been out with the dogs at 3am, and they have found and noisily chased a rabbit through the cactus, the coyotes came along twenty minutes later and did a hoot-up on the spot where we barked and whined, to claim it and try to scare us off. When you have a group of coyotes like that, they are a family, not a pack, with the parents and usually one or two cohorts of siblings not yet struck out on their own.

The end-of-day action reminds me sometimes of a football game, when there are six or eight minutes left in the 4th quarter, and the team that is behind starts throwing long passes and marching down the field. And I wonder, "Why didn't they play like this all game?" But similar to markets, they didn't play like that all game because of risk. When they get to the point where the game is on the line, then everything must be risked or else all is lost.

It's also interesting to throw the Nikkei-S&P correlation into the analysis. Is it time to go long the AUD again?

Is it that we watch the market turn and then interpret contemporaneous news as the cause? And when nothing much is happening, we ignore the news– if the market isn't reacting, then it can't be important. It's good that with both news and market data, there is an uninterrupted supply.

Paolo Pezzutti writes:

Two good friends interact and follow the same path in life. Some time one is leading, some time some the other takes the initiative. Overall they share the same values and enjoy spending time together. Suddenly, for some reason difficult to explain they part and go to different directions and not without pain. Similarly markets correlations emerge and increase to a point where you think there must be really very good reasons for them to work. Then you find out that it was all ephemeral and they were may be brought together inexplicably and randomly. With sadness you look at your friend and do not understand any more, it is simply a different person. And you hope things could go back to the good old days. Sometimes they do, but most of the times they don't.



 The Definitive Book of Body Language by Allan and Barbara Pease is a great book. It has clear and useful descriptions of body language signals from head to toe that will help you understand the intentions and views of people you are interacting with. Go buy!

The authors advise that this is not magic, and start early with three rules: 1) read gestures in clusters (no one signal tells all), 2) look for congruence (does speech agree with body language? if not, go with body language), 3) read gestures in context (crossed arms signal closed mind, but not if the person is just cold).

Useful business examples include: dominance via handshakes, types of fake smiles, closed mind signals, power gaze for intimidation, and the effects of seating arrangements at tables on meeting outcomes. Men are less innately skilled at reading body language, and the text includes a section on women's courtship signals.

Read chapter 19 first. It is a set of drawings designed to test you skill at reading body language. Then read the rest of the book and try chapter 19 again.



PreaknessDo horses and stocks have something in common? I note talk that Mine That Bird might like a muddy track to get that edge over the other horses running. Is the study of the racing tabloids like the study of stocks? Is the jockey viewed like the CEO of a company you see promise? Is horse betting like placing a bet on a stock to perform well? What can the market trader learn from what leads up to the actual race?

James Lackey comments:

Oh hell yeah. The poor track conditions give the lesser funded teams a chance to win. When it's easy for everyone to make a mistake, its easier to capitalize.

When conditions are perfect, the markets are in a beautiful, high pressure, low wind, sunny up day, only those with unlimited capital can outperform. Unless of course we juice it.

The markets today are seemingly much improved vs. the Katina flooded out race track from last season. Yet vs. most years, it's quite sloppy. A good chance of rain at any moment, and when the sun does shine the humidity is miserable, the track is sticky and its difficult to breathe. It is a perfect situation for the fast movers that can adapt quickly.

Yet, one must be very careful going for a victory. One false move, the hole closes, we must get off the horse quickly, or come up lame. Run an amateurish race, you can run the horse into the ground.



 Reading the lines and everything between the lines recently, I could hardly wait for a small break. It is almost the same feeling when one is waiting for a price to hit the target but only for a split second, coming very close but not hitting it for hours and then finally hitting the mark for that split second and then taking off. When my beautiful wife said that she went to an interesting place called the Restaurant Depot where she bought a "healthy" portion of baby back ribs, I could hardly wait. Using my sister-in-law's birthday as the perfect occasion, I put the ribs in the oven to parboil (the easiest way to make these things) at 225 for 4 hours (some call this cheating). This was the waiting time. After they were almost ready, I cleared the backs with a knife, and put them on the grill for another hour of slow cooking. The southern BBQ sauce made by my American mother came next. Five or six applications of the magic sauce on the magic ribs ready to fall off the bone and I was in the zone where politics, markets, money, NKVD disappear into the noise and the background. Who would have thought that an Armenian would come to enjoy the sweet taste of that special southern BBQ baby back ribs. That was a moment to be shared and to be remembered. Enjoying the meal with the family, I thought may God continue to bless this country and all its people.



date          sp       nasdaq

4 29      869       1378

4 30      870       1395

5 01      876       1398


5 04      903       1423

5 05      903       1427

5 06      917       1430

5 07      907       1395

5 08      925       1390


5 11      909       1397

5 12      907       1385

5 13      885       1344

5 14      887       1353

On May 8th S&P up 2% and Nas down 1/2%

and May 11 S&P down 2% and Nas up 1/2%

Many interesting queries related to this including generalizations and homeostases and consiliences that one leaves as exercises to scholars.

Also, a once in a million shot. A down 2% day on May 14th with an up very nice afternoon.

Also, the flirtations with the 900 level being bailed out by a "doctor".

Also, the bond vigilantes being in control with bonds and bunds at 2 month low on 5/08 only to be ridden out of town on a rail.

One may posit that there are many land sales going on in conjunction with offers that can't be refused.



EZ-Trader is a website that sells continuous one-hour binary options on forex, stocks and commodities. A cursory examination suggests that the payout is around 65% for winning trades (compared with casino payouts north of 90%) — or put another way, traders need a 61% winning ratio to just break even.

But watching their website leads to possibly more interesting results: It appears that they tweak their payout ratio from time-to-time — but the payout changes do not appear to be consistent with any obvious intraday volatility model (or with economic/fundamental data releases). They keep the payouts symmetric for puts and calls on the same instrument. And they seem to adjust the payouts for all stocks at the same time, regardless of volatility correlations.

Some quant-minded Daily Spec readers might want to study this further… for fun or profit.



 I don't trade many individual stocks, but I have one long-term holding, which is a sleepy consumer products company with a low beta. I saw it drop for no particular reason about 10% the last two days. Then this morning the news of a downgrade from buy to hold by an analyst. Guess a few people knew about it beforehand. Classic Wall Street. Only good news is, it should rally from here.

An Anonymous Commenter comments:

The secretary of the interior and his colleagues allowed the news of the land sales last month to leak before the number or anything? Makes you wish to turn yourself in a la Willie Sutton to the authorities after the Dodgers lost.




 Nobody asked me, but which recent Wimbledon champion had his role in default due to mother and daughter sanitized to win because of injury in a recent obit?

As usual the bond vigilantes are close to causing a double dip, and a well deserved one at that, in the economy.

The US long bond and German Bund now both at 120 1/3 move together like love and marriage despite their differences in everything, like the S&P and Nikkei now close to the magic 1000 but still flirting with the mid 900s.

Longwood Gardens has the most fun children's garden in the world and had lines of 50 cars waiting to get into their 1500 car parking lot.

There are entire blocks of seaport communities wherever I look vacant before the boom season of summer auguring badly for the state of recreation.

A store offers 10% off to those ripped off by Madoff and another one out of business offers prices reduced by 70% in line with the cold weather of February.

The discount stores continue to do very well with all the Bob Evans and Applebees I went to with big lines outside. Thus the price mechanism works well with high priced items showing much reduced demand and low priced items increasing in line with Walmart and McDonalds performing better than Tiffany's .

The price to weight ratio pioneered by Roger Longman is a better indicator of abnormal, exceptional business than return on equity. The correlation between the price to weight ratio and subsequent return is highly negative during recessions.

The economy would have been in much better shape right now without the interventions than with them. The evidence that bank failures were highly correlated with reductions in output is due mainly to the output's causing the failure rather than the bank failures' causing the output declines.

The fears of crony capitalism that Albert Jay Nock wrote about vis a vis the Secretary of the Interior's being the most important person in the government that everyone wanted to glad hand as he twirled around like a teetotum not being able to sing the last lines of Marching Through Georgia are so resonant with the crony capitalism that is so common in Russia, the old Germany, and places and times so much closer.

Alan Millhone writes in:

Speaking of one of favorite restaurants, I took my mother to the Parkersburg Route 50 Bob Evans today for the last time as it closed for good today at 4 PM. Very unusual for any Bob Evans to ever close as new ones open all the time in America. A good book is out about the life of Bob Evans who began as a short order cook at his roadside cafe in Gallipolis, Ohio years ago. He and his wife lived on a farm in Rio Grande, Ohio and he passed away not that long ago. He gave away much of his wealth to a variety of good causes. It was sad to see today one of his namesakes close. All the workers there knew our names and we knew theirs. We will miss going there.

Jim Sogi comments:

J SogiLook at some past excesses that in hindsight seem so obvious, but at the time seemed, well, kind of high. Real estate of course seemed kind of high, but it wasn't clear the effect of the fallout on credit and bonds. The dot com bubble of course seemed high, but the fall out was bad tho contained. The premature bailout caused the real estate boom. The high teen bond yield in the 80s was outlying. Looking around now, what seems, 'kind of high'? Government spending/debt is the obvious answer. Just as crashing real estate wasn't really comprehensible, government itself crashing isn't comprehensible to many. But look at the Palindrome, the Distinguished Prof, at Russia, at Iraq, at Sarajevo, Japan, Germany, all governments that fell rapidly in recent memory. It's not so farfetched. States and municipalities are stretched. The Feds are painting themselves into a corner. The boomers are getting old. I shudder to think of the downside. To protect yourself, you have to think of the downside. What if?

 Douglas Roberts Dimick comments:

Why Nobody Did…

All the time that Greenspan and clan where being hurrahed, I wondered about the Bob Evans and Big Mac folks.

It seemed he was fixated on the eminence of real estate and stock portfolio managers and their giants of ownership, allowing them to feast and fatten on the depositories of working people post Glass-Steagall.

Meanwhile, Greenspan’s so favored and their legions of bean counters and suits figured new ways to lean out related entitlements and private sector employee benefits.

This article’s taking to task the recent interventions appears well founded in that context of price to weight ratio. Though valid in ideal and policy, two-party, two-administration applications may be collectively recorded as the epitome of the saying that we use to spout out in the Army… “Good enough for government work.”

Therewith, the legalized corruption of the US federal (and some state) electoral processes came to roost.

The question to be answered now: as a society and as a voting electorate, have Americans become too blind (or perhaps jaded or merely reduced in common sense quotient) to see above those well manicured bank and financial hedges, now only pillared a la government bailouts when not political party sellouts?

Will we seek out those who now hide behind well-trimmed bush, so appropriately labeled “crony capitalists” as they are now seen, as the tide continues to ebb outward, to be not only financially and morally naked but quite two-faced about the role(s) of government in business and society?

The time to smell the roses is past. Time to spread their manure and plant our new, hopeful hybrid-seeds for individual and collective wealth generation.

Derrick Humbert writes:

When in the Atlanta area I strongly recommend Callaway Gardens, located 50 mi southwest of Atlanta and 60 miles from Auburn Al. It has so much to offer from PGA golf, to world class bass fishing to butterfly exhibit to herb garden seen on PBS to a Christmas display.

I visited it some years back and the view is absolutely breathtaking. I suggest if you plan on lodging you get a cabin for the week and a restaurant package as there are no real restaurants in the area. Plan ahead as cabin availability is severely limited for the summer.

Nearby is the winter home of FDR, who came for the warm springs to help with his polio.

Much to offer here and the place in not affiliated with the golf company Callaway.



 Efficient market proponents argue the market has no memory, that every day is independent of the previous, like each roll of the roulette ball. I believe the market does have a memory based on the cumulative memory all the current market participants. My memory seems to focus on all my losing trades which I can recall with intense detail. The '87 crash is probably in the market's memory since many now trading lived through that first-hand. Maybe the 1970s bear market is part of its memory, but I doubt the '29 crash or the 1930s or 1907 panics are in its memory. The last six months will be remembered by the market for a long time. This will add some risk premium for those who like to trade from the long side.

I have always like this quote from William Faulkner: “Memory believes before knowing remembers. Believes longer than recollects, longer than knowing even wonders.”

Like a lot of Faulkner, the meaning shifts every time you read it. It takes us a long time to understand our past.

Vince Fulco writes:

It is tough to imagine the older worker ants represented by the baby boomers gravitating back to equity markets after being burned so badly twice in a decade. Particularly since in this downleg, perceptions have grown that contractual obligations have weakened so dramatically. Thinking about the creditworthiness of long term disability and life insurers specifically. Perhaps some of the 'fool me once, shame on you…' mentality will creep in too.



A very nice article on businesspeople who wish to improve the world appears in the May 7, 2009 New York Times and is worth reading.

 Dan Costin responds:

Make sure you read the comments, too, they go through some of the more obvious counter-arguments to the more extreme positions in the article.



 Someone had said that, "We shall find out when the tide runs out who all have been swimming nude". Now, I want to believe that such wisdom was an advance warning of things to come.

Someone had also said that Derivatives area a weapon of Mass Destruction and I really treasure such pearls of wisdom that can come only from experience & foresight of the coming future.

Someone had also said that one would only buy those companies that were deep in the value and had a margin of safety. One just wishes, why don't experts stick to their expertise only and not experiment with swimming with the sharks in so many novel ways.

One also does not understand if timing never was of any importance, then how a large loss line item can be attributable to "terrible timing".

One also does not understand that if the large horde of cash is finding no good investment avenues and it is not being returned to the stockholders in the most tax efficient way (agreed dividends are a tax leak and hence one never should hope for them) of stock buybacks then that is a good indication of more to come. I see there is a possible argument that hordes of cash can keep one on the optimal risk reward trade-off curve and that a return of such a valuable thing as cash to the investors cannot be utilized by them in any better way including replication because they are not as great investors. But then less than great investors are continuing to hold larger exposure to the big stock.

Something is missing in my logic. I guess I like to think in circular arguments and can never understand the straightforward phenomenon that could explain all this.

Oh ok, it was also said by many that Cash is King. Then so be it. Long live the King.

George Parkanyi responds:

Well, the tide's back in and everyone is quickly swimming to shore to put their clothes back on. Anyway, not every nude swimmer draws the same attention. (I know, my sister-in-law inadvertently set up a family get-together at a "clothing optional" resort. Imagine our surprise, not to mention the kids'.)

Hydrogen bombs and anthrax are weapons of mass destruction. Derivatives are bets (perhaps weapons of mass embarrassment on occasion). Given a choice — I pick derivatives.

If experts stuck to their own expertise, they might not learn to look at things differently and add to their expertise (or, in the case of some, do everyone a favor and answer a new calling).

Timing? Sometimes a grand entrance ends in a face-plant. (terrible timing) People trip over stuff all the time. But they do get up, and the show does go on (then timing indeed does not matter).

If you buy back your own stock, you use up your cash, but if you later needed the cash, you need to go out for financing. In a credit crisis, if part B isn't what it used to be, then your buy-back may look a little foolish. Then there's opportunity cost - what if something you really liked suddenly goes for half-price, but you've used up all your cash buying back your own stock?

There is such a thing as "optimal risk reward trade-off curve"? Do they sell them on E-Bay?

Interesting. What would happen if you ever did get caught in a circular argument? How would you get out of it to think about something else?

Cash is useful. Elvis is King.



 Do High beta stocks tend to be leaders in various time frames of movements and do low beta stocks tend to be laggards?

Such a question carries the in-built flaw that the beta itself is not stable across time frames and hence may require a modification in studying the original question of studying it within say +/- 2 standard deviation ranges of any particular beta level.

Why such a query arose in my mind today is that the ratios of Price levels on various emerging market index futures (Korea, China, India etc.) vs the SP1 tend to reverse ahead of the SP1 at bottoms and tops on visual inspection across last 7 years or so that I inspected. Given the amplitudes or swings of movements across spans of movement ranging from days to weeks to many years is far higher in these markets (including the drift) compared to the SP1 for the last decade one has tended to make a comparison of such with SP1 as being higher beta with the beta of SP1 being 1.

An exercise in quantification of such a frame of thought across either these indices or constituents of any particular index itself vis-à-vis the index may have some utility.

One wonders aloud here, that if the situation is similar as the race between a tortoise and a hare where the hares run ahead, get pompous and lie down for rest while the tortoise does take the hares over (during beta changes) and another variant of the story not told where the hares run so quickly ahead that they genuinely are able to move only very slowly as they get closer to the finishing line while the tortoises continue to turn up at their own pace and the race to the other end of the course begins again similarly.

If one wanted to also think in terms of a third set of players, the snails running the race and never reaching any end of the race track wherein after the tortoise have reached the finishing line the hare and the tortoise start returning and the snail changes course finding them somewhere still in a new race. I would say the likes of C , AXP , BAC , JPM have been the hares, the likes of JNJ , PG , XOM have been the tortoises and the likes of MSFT have been the snails in the last big race.

I am certain that I can learn much, observing good ways of application of quantitative tools on such a theme if some of the proficient quantitative minds on the list do consider this an interesting thought to dissect it in such manner.

Phil McDonnell writes:

PhilAs usual Sushil has raised a deep and interesting question. For clarity one should start by defining two different terms. One is a leading indicator, by which is meant a stock that turns before the entire market turns. The second is the idea of a market leader. A market leader is one that out paces the market during its current move.

We recall that beta is derived from the following regression model:

(stock change) = b * (market change) + a

where b is beta and a is alpha.

From the foregoing definition of beta we can see that a high beta stock will necessarily be a market leader in the sense of moving farther and faster than the market during a given move. The alpha is really a measure of the performance independent of market risk. So in that sense alpha is really what the shrewd investor should seek.

To answer the question as to whether certain stocks turn before the bottom or turn before the top is somewhat different. For that we can look at lead lag relationships. For me the simplest way is to look at correlations at various lags. The chair recently mentioned the weakness in the Nasdaq index relative to the S&P and Dow. If we look at the movements of the QQQQ ETF 4 days ago we find that it is 23% correlated to the SPY ETF changes today. Thus the Q's act as a leading indicator. To be significant the correlation should be about 25% so its a little too weak to be considered academic proof.

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



PhilAAA rated bonds are the best corporate bonds available. BAA represent a somewhat riskier class of such bonds. So, using St. Louis Fed data monthly (series AAA and BAA) it might be instructive to look at the yield spread between the two bonds versus the monthly returns of the Dow Jones average. The yield spread was calculated as BAA - AAA yield from 1928 to the present. The spread is currently near historically high levels and thus seems especially relevant now. One way to think of the yield spread is as a measure of fear in the bond market or as a measure of the current availability of credit to riskier corporations.

The following correlations are for the yield spread lagged n months ago. Zero lag is the concurrent relationship. To be significant at the 5% level, two tailed with n =1000 the correlations should be above 6.2%.
Lag    correlation
12     0.054331609
11     0.060955747
10     0.05292927
9      0.039778526
8      0.035184767
7      0.01231181
6      0.000377968
5      0.004196862
4      0.008836528
3      0.027029827
2      0.043577867
1      0.030773782
0     -0.03036919

But what is interesting is that they are all positive at the various lags. In other words if there is a credit crunch indicated by a larger yield spread, then stocks subsequently go up. This is not what one would have expected.

Suppose one were able to obtain a newspaper for the yield spread over the next 12 months (in the future). Well the correlations between the Dow and the future yield spreads were as follows:

Lag   Correlation
1    -0.112798121
2    -0.126495119
3    -0.124710641
4    -0.096857777
5    -0.107535598
6    -0.112776958
7    -0.117648043
8    -0.10364356
9    -0.117856956
10    -0.134941986
11    -0.137242692
12    -0.148479036

They are all negative and statistically significant. Again not what was expected.

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

Charles Pennington asks:

Is this summary correct:

1) High (or rising?) yield spread predicts excess positive returns for stocks in the future, though not statistically significant and 2) Rising stocks predicts narrower than average yield spreads in the future?

If so, then why would you find item 2 to be "not what was expected"? I would have expected that rising stock prices would lead to lower yield spreads, as you observe.

Also, it sounds like you've used "levels" rather than "moves" for the yield spread. I would think that the yield spread is something that moves around on a fairly slow time scale, and that there would be a lot of serial correlation in its level from month to month. That would explain why the second set of 12 numbers are all about the same.

Phil McDonnell responds:

Your first and second points are correct.

It has long been held as common wisdom on Wall St. that yield spreads indicate credit conditions, and that widening spreads predict stock market problems. In this case stocks seem to predict yield spreads. As always you make a good point. I did use levels in the yield spread only, percent changes in the Dow. It is probably worth looking at the changes as well.

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

Bill Rafter adds:

This number was down to a -349 and has now risen to -259. Above -270 it took out the post-LEH, post-TARP periods, meaning that the credit problems associated with those events have been rendered old-news by recent behavior. It's nice corroborative information but not actionable, in my opinion.

More important than this is that the "dumb" money is still short, and still shorting the rally.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy



Ed.: As he drifts down the Amazon (the river, not the website) Mr. Keely has been sending us updates and pictures from time to time.  Here are some photos

Today I walked past the window of a hut where a parrot sat on the shoulder of a seamstress bobbing his head with the ancient machine. I entered to get a secret pocket sewn in my britches, took them off and walked around in shirt as she stitched. A daughter stepped out of Playboy magazine and offered a massage for $5 to augment double the daily salary as a motorcycle mechanic that transpired in the mother´s bedroom. I strode out to find ma had sewn the secret pocket for my new digital in the front instead of rear as ordered, so it was back to the bedroom for thirty minutes more. Here´s Roberto.

Roberto, the Seamstress and My Pants


Click for two others:

Petrified Jesuits in a Canoe

Masseuse awaits you




 There was a time when in my country the barber was quite a personality in villages. The social opportunities and contacts at the barber's or at the bar in the piazza were unique. The barber was a very precious source of information. There you would do your business, get useful information and news about people and things happened, find friendships and establish connections. Much of the talk was about people I must say, and I am afraid that they would not talk about stocks tips and hints because the financial market was not developed at the time. Moreover, it was a place where you could spend some time and relax reading a newspaper with someone taking care of you; it was a weekly routine to be shaved the way only a barber can do. Provided that it was sometimes dangerous… Remember those scenes in old movies where a gangster is shot dead in a barber's chair? By the way, Al Capone's father was a barber. It seems that much has changed today when we consider going to have a haircut a waste of time and money.



 The news pundits are flummoxed by the up market despite their dribble of bad news. They loved to say market down on "bad news" with the knowing nod that their news caused the market to go down. But now they look silly saying market way up day after day on our continuing dreary bad news dribble. Like the End Of Worldists, they can deny reality and say, "Oh, it's because the news is less bad, that it's going up." Doubtful.

Something else is at work.

However even the quants are having a tough go of it, even as data turn bearish, the market goes up, and keeps going up.

James Lackey writes:

I haven't seen a real number on the table here there or anywhere in so long I feel like a kid at a bucket shop buying on bad news because, "It goes up on bad news" but what are you gonna do. No one alive has seen what happened last year. We went from "it's like 1933" to 1973, now 2003 and we are "never pulling back again" "generational lows"… in the blogs in the only number I can find lately these things usually last just over 40 trading days… which is a good biblical number, after the 666 lows… and similar around the campfire handed down through the generation lessons. Question: what stocks are up the most? "Who cares? It's the junk and everything is up" Autos..? Are you kidding ? Well, the autos left standing of course.

Oh the love for Fiat and Ferrari, they are cool dudes. However Chrysler, Opel what else are they trying to take over for free? I love them, but I dunno who in the world is going to lend money to them to run their business. Perhaps the UAW can sign up some laid off Wall Street bankers or a venture capital man. ha.



 We have talked about skimping on advertising and insulting the customer by underhanded surprise charges here on DailySpec. Many companies also make mistakes in a downturn with their workforce. Since pay is generally a big expense, it often gets shortsighted management by the numbers.

Here are a few shortsighted mistakes I've seen.

1. Cut the workforce too far, to the point of poor customer service. This quickly loses many of your best customers, since their business is more highly sought after in a downturn.

2. Firing or alienating the wrong employees, i.e. the most productive ones. Many wiser companies use downturns to poach the best employees. This has many causes that often boil down to socialism maxim: not judging or ignoring merit is the fairest system. A few examples: across-the-board pay freezes, vote on firing or pay cuts for everyone, firing by seniority, firing by division, region or department without offering any of the best employees opportunity to move within the company.

3. Clinging to and rewarding the failed "risk takers." "Risk takers" in quotes because this is how they justify their high salaries, but often it only the company's money or reputation on the line.
a. I've seen many poor, unprofitable or highly risky products not pulled soon enough, because the salesmen love them. Of course they do, anybody can sell $1 for 95 cents. Many companies fall for the old line "we'll make it up in volume" during a downturn.
b. In desperation of downturn, offer the most competitive commissions, attracting the lowest level salesman/conman. Often these salesmen are not happy unless somebody's been tricked by their cleverness. They need a clear loser, while they are winners. The customer, of course, will be second, but the company is a distant third.
c. Perhaps more common in the investment world is the golden parachute, or heads I win tails you lose, such as AIG's infamous contracts. But I've seen more than one terrible portfolio manager negotiate a big raise and promotion after the fact for the trauma they have endured during a downturn.

4. Ostracize or publicly hang the prophets. Rather than reward the wise for sounding an alarm during the bubble, ruin their career for being right, while the powerful where wrong. The Old Testament is full of prophets despised and hated by the corrupt and evil rulers because they shined the light on their immorality. We have already read of the many risks managers ignored and demoted for trying to temper risks during the housing boom. But many will likewise more quietly be found to come up short for some trumped-up charge as the prophets are reminders of great mistakes made by those politically powerful.



SushilBollinger Bands provide so many utilities in figuring out different aspects of the market. I discovered one few years ago and find it pretty useful in getting the broad sense of the fear and greed state of the market. You can try it as follows:

((Next Expiry Futures - Current Expiry) / Current Expiry) X No. of contract rollovers in a year X 100 is the underlying variable you want to calculate and then throw around Bollinger Bands over its ongoing plot. I use the upper standard deviation at +2 and the lower one at -3 standard deviations.

This variable basically plots a cost of carry / yield equivalent of the futures contract differential on a rolling basis. The reason I do not use Current Expiry - Cash is that at expirations there would be huge noise as well as one would have to multiply the ratio by the No. of times the current contracts could rollover found by dividing 365 days by days left to expiry. A bit cumbersome. Also, Cash and futures comparison requires finding out dividend declarations, dates of ex-dividends for various index components. So the formula I have chosen is simpler, easier to build (you can use the CIX function on Bloomberg to build this for example in a minute).

As the reading gets closer to the upper standard deviation line it is a fair indication of the long risk taking capacity exhaustion in the current state & as it slips closer to the lower (deeper) standard deviation line it is the extreme of risk aversion. The %B indicator of Mr. Bollinger provides additional qualifier often. Whenever there is a divergence between the main indicator and %B that is the indicator makes a higher high or a lower low while %B did not it becomes an even securer reading. Trade entry decisions made with other tools thus come with a greater confidence as to whether one is trying venturing into a turning tide or into a running tide.

A perspective of observing the market through such a lens provides to my own psychology a more positive frame of mind. Someone who aspires to consistently be paid by the market can take the attitude of providing some utility and service to the market for which it should be compensated regularly. When the market is at +2 line indicating a state of avarice you supply to the stretched out demand and when the market is at the -3 line indicating a state of panic you demand courage. That way an attitude of being a consistent service provider looking for consistent rewards helps one overcome one's own emotions of fear and greed that cold otherwise arise much more easily with a sense of competition with the system. I find, for myself, that an attitude to serve the emotionally unintelligent is the reason for them to pay me consistently.

John Bollinger adds:

There is a little-used method of calculating a constant-maturity futures contract that constantly looks n days into the future that is sometimes called a perpetual contract. Comparing two of these perpetual contracts with differing look forward lengths, say 10 and 30, would be quite helpful for Sushil's type of analysis.



 Below are data for the various iShares country funds. Columns are country, ticker, economic freedom index (from Heritage Foundation), and percent return (dollar denominated) from the end of 2008 through May 4, 2009.

There are 24 funds available. The bottom 12 in terms of economic freedom returned an average of 17.6%, while the top 12 averaged 8.3%. So yes, the least free countries did best this time.

The biggest winner was Taiwan, up 47%, but near the median in terms of economic freedom. The least free country, Brazil, was up 42%, well above the 13% overall average return for the 24 countries. The biggest loser was Switzerland, down 8%, and near the top in terms of economic freedom.



 Everything you need to know about the market you can learn from shaving. Today I put on the shaving cream and reached in the cabinet for the razor. a new package of razors was there, and I fumbled around for a few minutes trying to open the package. The hands were so slippery I couldn't do it. I got close to the top and the side but no razor. A personage passed by and said "if you just would open the package up before wetting the hands, it would be so much more fruitful." So many things in life like that look so easy, start so well, but end in frustration from the well turned ankle to the most beautiful opening.



AliIn terms of the attention of Americans who own plasma TVs, baseball has gotten comparatively smaller when measured against football; but, then, football has gotten smaller when measured against NASCAR. But measured by world attention, baseball is far bigger than it was when NBC broadcast a single "Game of the Week". Korea, Japan, and Taiwan now have professional leagues with players who are most assuredly the equal of American ones; and the explosion in the quality and quantity of Latin American baseball is amazing. The College World Series has grown from an embarrassingly impoverished sideshow into a Big Deal that gets start-to-finish TV coverage of every game in the double-elimination tournament.

If you want to be sad about the real decline of a sport, try boxing. The Friday Night Fights used to be among the top five TV shows. Cities as small as Akron, Ohio used to have weekly fight cards, and the largest indoor arena in a town had been built for boxing, not basketball. Boxing was the #1 sport in the country for the first half of the 20th century; now it is nearly as extinct as vaudeville.



 In meteorology, with nowcasting you want to perform short term estimates and prediction of thunderstorms or other events. Typical questions you want to answer are: where is the storm now? Where will the storm be in 60 minutes? What is its path? Is it weakening or strengthening? Are there hazards associated to it (lightnings, flooding, etc)? The problem you want to solve is about spatial location and intensity. It is similar to what we want to know about price: will it be up or down in X hours? How many points? Predictions are performed using algorithms and extrapolating radar echos (based on movement) assuming no growth/decay, which is normally acceptable for 60 minutes forecasts. There are several methods to track objects and estimate motion in real time using filters (e.g. Kalman) and calculate trends. The longer the time considered for the prediction, the higher the uncertainty. Accuracy is strongly depending on the type of model you use. In the stock market, when you try to predict the price of an asset at a certain time in the future you take into account the information you have at the moment you do the forecast. This involves uncertainty, which is also function of the time horizon of your forecast. As time progresses, you are able to include new data and more information in your model to update and refine your forecast. With time, you have more data available and your forecast horizon decreases. As uncertainty decreases, you have a more accurate forecast, but also have lower margin profits. For example, at the close today you forecast the next day's close taking into account the data available up to that moment. As time progresses, you include in your model the overnight action, then the open, the morning action and so forth getting closer to the end of the trading session. Accuracy will depend on how your model smooths data and extrapolates movement.

How can we use this methodology? When you open your trade you expect a certain behavior as time progresses. Nowcasting can be used to check if the path (price) of your asset follows the expected pattern. You have a number of "what if", such as: what happens if it opens higher, what happens if it prints a spike to the upside and so forth. Each time you update your expectations and when the expected path deviates too much from your original forecast it is time to close your trade. Conversely, if, with more data, expectations are reinforced you keep your trade going. It is a matter of thresholds of course and accuracy of your model, that depends much also on the frequency of observations and amount of data available.



 When I was a kid, adults used to bore me to tears with their tedious diatribes about how hard things were. When they were growing up; what with walking 25 miles to school every morning. Uphill… Barefoot… both ways

Yadda, yadda, yadda

And I remember promising myself that when I grew up, there was no way in hell I was going to lay a bunch of garbage like that on kids about how hard I had it and how easy they've got it!

But now that I'm over the ripe old age of 40, I can't help but look around and notice the youth of today.

You've got it so easy! I mean, compared to my childhood, you live in a damn Utopia!

And I hate to say it but you kids today you don't know how good you've got it!

I mean, when I was a kid we didn't have the Internet. If we wanted to know something, We had to go to the damn library and look it up ourselves, in the card catalog!

There was no email! We had to actually write somebody a letter, with a pen! Then you had to walk all the way across the street and put it in the mailbox and it would take like a week to get there! Stamps were 10 cents!

Child Protective Services didn't care if our parents beat us. As a matter of fact, the parents of all my friends also had permission to kick our ass! Nowhere was safe!

There were no MP3s or Napsters! You wanted to steal music, you had to hitchhike to the damn record store and shoplift it yourself! Or you had to wait around all day to tape it off the radio and the DJ'd usually talk over the beginning and messed it all up!

There were no CD players! We had tape decks in our car. We'd play our favorite tape and eject it when finished and the tape would come undone, cause that's how we rolled, dig?

We didn't have fancy garbage like Call Waiting! If you were on the phone and somebody else called they got a busy signal, that's it!

And we didn't have fancy Caller ID either! When the phone rang, you had no idea who it was! It could be your school, your mom, your boss, your Bookie, your drug dealer, a collections agent, you just didn't know! You had to pick it up and take your chances, Mister!

We didn't have any fancy Sony Playstation video games with high-resolution 3D graphics! We had the Atari 2600, with games like Space Invaders and Asteroids. Your guy was a little square! You actually had to use your imagination!! And there were no multiple levels or screens, it was just one screen forever!

And you could never win. The game just kept getting harder and harder and faster and faster until you died! Just like life!

You had to use a little book called a TV Guide to find out what was on! You were screwed when it came to channel surfing! You had to get off your butt and walk over to the TV to change the channel! There was no Cartoon Network either! You could only get cartoons on Saturday Morning. Do you hear what I'm saying!?! We had to wait ALL WEEK for cartoons, you spoiled little rats!

And we didn't have microwaves, if we wanted to heat something up we had to use the stove… Imagine that!

That's exactly what I'm talking about! You kids today have got it too easy.

You're spoiled. You guys wouldn't have lasted five minutes back in 1980 or before!


The Over 40 Crowd

John Lamberg writes:

At least you had an Atari. When I was a kid, all I had to play with were model rockets (and I could go to the hobby store and buy Jetx fuse, not that silly battery powered electronic igniter), chemistry set, erector set, slot cars, CB radio, build your own shortwave radio from Heathkit, and I actually had to ride my bike to go fishing… Hey, that sounds like more fun than an Atari.



 On February 1st, Cassandra picks up the Wall Street Journal outside her door and discovers that it is the paper for March 1st, one month in the future. She does not know what to do with it, and no one believes her story, so she simply saves the paper. The next day, February 2nd, the paper dated March 2nd appears. This continues unabated. Come March 1st Cassandra checks the actual stock prices and sure enough they all match the prices in her originally-delivered paper. Likewise with all of the subsequent newspapers.

Soon Cassandra puts a PC to use and starts ranking stocks on their average 1-month growth rates based on this perfect knowledge. She then partitions her available capital into 21 tranches and each day purchases in equal values the 200 stocks of the Russell 3000 expected (actually "guaranteed") to do the best over the next 21 market days (1 calendar month). This partitioning eliminates any start-date bias. The returns she achieves are the best possible for a buy-and-hold strategy over that time frame. After all, it is the result of perfect look-ahead bias. Returns for this, the control group from 2001 through 2008, are a not-surprising 25.53 times her capital per year.

John B says, if you give a trader any system, no matter how good, in half an hour he will have modified it in an attempt to improve it. This is true even when perfect foresight is present, and Cassandra succumbs to her curiosity. You see, Cassandra is uncomfortable with the decision to buy-and-ignore. And she is correct to be uncomfortable. She has this constant stream of excellent information, albeit for later periods. It has to be worth something, according to information theory. And Cassandra's intuition is legendary.

Cassandra alters her trading in that she will now only hold her positions for 15 days instead of 21 days. She does this without knowing in advance what the prices will be 15 days after her purchases. When Cassie sells the portfolio on day 15, she will then purchase another 200 stocks based on their next 21-day forecast. Now of course, she is investing with sub-perfect knowledge, because she does not know the price of those stocks on day 15. She is using knowledge farther in the future to trade for a date shorter in the future. Intuitively it would seem unlikely that she could tinker her way to a better return than the perfect portfolio. But she can, and does so repeatedly. Strategy A beats Strategy B, where Strategy A consists of more-frequent forecasting and trading with sub-perfect knowledge, and Strategy B consists of less-frequent activity with perfect knowledge. The 15-day recast produces 39.52 times her capital per annum, about half-again better than the control.

Encouraged by the success of active investment management over a seemingly-unbeatable investment, Cassandra shortens up even more. She still forecasts 21 days ahead on the basis of the newspapers, but she only holds 10 days, or half the forecast period. This produces a whopping 138.53 times her capital per year. Recasting every 5 days produces 56.62 times her capital annually, less than 10 days, but greater than 15 days or the control period of 21 days.

Additionally, these experiences were not limited to monthly forecasting. Trying to further game the system, Cassandra subscribed to Investor's Business Daily, which arrived always a calendar quarter ahead. Her control group 63-day (quarterly) returns were 5 times capital each year. But reducing the holding period to 2 months increased it to 12 times, and reducing it to one month produced returns of 10 times. From 5 days out to the forecasted time in both the monthly and quarterly scenarios, the improvements were universal. Furthermore, extending the holding periods beyond the forecast period was universally worse. This is also true for different rate of return ranking processes. That is, it works identically whether one uses exact rates of change or regression rates of change.


There are two possible explanations for the increased profitability. The least obvious factor would be portfolio rebalancing of an entire portfolio every time new positions are taken. Indeed, rebalancing tremendously adds profitability and the more frequent the better. However in this study rebalancing was excluded for any unchanged holdings. In this study new positions would have had an equal value allocation, and existing positions were left alone to grow or decline in value, unchanged in size until liquidated. Thus with rebalancing absent, there can only be one explanation - that more frequent forecasting is more profitable, even better than some forms of perfect knowledge.

What About Risk?

Increasing profits without consideration of risk is foolhardy. It is worth noting as an aside that perfect knowledge does not always produce profits in every period. This is a long-only strategy in which Cassandra is purchasing the top-200 ranked stocks. There are some periods when virtually all stocks decline, or at least when the average return of the top-200 is negative. Thus we must consider the dark side of investing.

One of the distinct advantages of more frequent analysis and forecasting is that losses get cut earlier, providing damage control. Given the inclusion of risk into the equation, shortened time horizons become exceedingly obvious in the role of risk reduction. Recasting our 21-day forecast every 15 days produced an annual return of 39 times one's money, but at the risk of a 30 percent decline in capital. At 10 days the returns were 138 times, but with a 47 percent drawdown. At 5 days, the returns were 56 times, but the maximum drawdown was only 14 percent. Thus 5 days had a reward-to-risk ratio of 391, compared to 292 for 10 days and 127 for 15 days. The monotone progression makes the point. And it is confirmed in the quarterly data as well; the risk-adjusted rewards are improved by ever shorter forecasting periods.

What Are the Practical Applications?

Here we see a situation in which our investor has perfect future knowledge and yet she is absolutely advantaged by re-evaluating her decisions with increasing frequency. This is essentially a conflict of two mutually-exclusive ideas. On the one hand, perfect knowledge has to win, and indeed it will over that exact period. However it is also intuitive that more-frequent information would be beneficial, if one is willing to shorten the trading period. And here we have evidence of the latter's success over a perfectly-chosen portfolio. If active management can improve a portfolio chosen with perfect foresight, surely logic dictates its value on a sub-perfect portfolio. That would have to be proven, but any of those results would be dependent upon a particular investment or trading program. The beauty of this particular study is that it is program-independent. The clear lesson from this is that any financial advisor who tells you to buy an investment and ignore interim news or market action is repeating some time-honored advice that is clearly and profoundly wrong. The buy-and-ignore strategy only works if you or the advice provider is unable or unwilling to devote more time to your investment analysis. Clearly lack of perpetual investment diligence applies to many investors and advice providers, but the costs of that ignorance or intransigence are generally dismissed.

The purpose here is not to suggest a specific trading frequency, but only to suggest that the trading frequency should be a shorter number of days than the forecasting horizon. Over time there will certainly be sweet spots, and one should not assume those to be constant. Some traders will argue that they trade without making any forecasts. However, every trading decision is at least an implied forecast.

Technicians of course practice their craft with increasing analysis frequency, and they should gain comfort with these results. But some technicians also look at less frequent data, and this work should provoke caution in that regard.

Some fundamental analysts would argue that it is not possible to increase the frequency of analysis. Assuming the fundamental variable of Earnings (released quarterly), that would be true. However the Price/Earnings ratio is available daily, albeit based partly on a quarterly number. Greenblatt ("The Little Book That Beats the Market") uses only two ratios as inputs: Return on Capital and Earnings Yield, and produces daily recommendations. Likewise Haugen ("The Inefficient Stock Market") uses approximately 70 inputs (several of which are technical) very frequently despite the fact of some of their precursor variables are only available quarterly.

Furthermore, the rationale for frequent use of fundamental information is abetted by the blurring of the definitions as to what constitutes technical versus fundamental information. Something we have learned as a result of the recent market declines is that at least one of the major credit rating agencies (S & P) reevaluates its company ratings partly on the basis of a company's stock price performance. A big drop in the stock price might earn that company a downgraded rating. Thus daily priced-based activities (a technical factor) become part of the fundamentals of that stock.

What Prompted This Research?

With so many things to be studied, why spend time on such a seemingly esoteric idea? Well, it's not so esoteric. In our research we had attempted to look at longer time horizons, as we wanted to hold our positions longer. The investment community has sold its customers on the concept that more frequent analysis/increased trading must be bad for the investor. The government effectively limits more frequent trading for IRA accounts, although it is allowed for qualified pension plans. Consequently we started crippling our research to make it equal to "industry practice". Every time we did that we experienced declining results. That of course suggested that targeting separate time frames for forecasting and trading could be advantageous to any trading program.

Research Notes

To eliminate survivor bias our list of the Russell 3000 stocks from 2001 through 2008 consists of about 4200 stocks, the difference being those deceased, merged or otherwise eliminated. The constituents were obtained directly from Russell.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Jim Sogi comments:

Absolutely fascinating. The reduction of risk seems to be a main factor as the rate of variance goes down faster than the decline in profits. Is there a sweet spot for maximum risk/reward, or would it go down to the vig as the timeframe shortens? An exercise for the reader?

Charles Pennington comments:

I know it's problematic to use the word "obvious" in mathematics, but isn't this obvious? The un-updated predictions are partly about the past, not the future, and to that extent they don't help you as much as the updated predictions would.

Bill Rafter responds:

Bill RLots of things are obvious and still ignored. And sometimes seasoned professional traders do the exact opposite of what is obvious.

We learned quite a lot from that research and altered our trading process –with definite benefits. Specifically what we did was to have different time periods for our forecasts and trading, and that was not obvious to us at first.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

George Parkanyi writes:

I did a lot of research on re-balancing fixed names packaged into groups of six, trading on the relative price movement against each other over fixed time intervals. I settled on 4 months as "pretty good". The other major variable you need to consider besides the time frame is the volatility. The wider and faster the swings, the more you can compact your re-balancing time frame. The challenge is try to catch as many smaller interim fluctuations as possible but not to sell your winners too soon or to average down on your losers too soon when the stocks are in big moves.

In my research I ran a large batch of tests keeping the time frame constant but varying the volatility range of the randomly seeded stock simulator I developed. I ran a whole bunch of tests using my simple re-allocation algorithm at different volatility bands within which I allowed my "stocks" to fluctuate. These tests generated an average annual compounding increment over buy-and-hold, that, as you might expect, increased with volatility.

What was encouraging, is that the outperformance generated by the simulated data used in the periodic reallocations matched testing I did on real stock data. Theory was confirmed by reality. You can seriously beat indexing (over the long run) with this type of active re-allocation methodology. The trick is to re-allocate individual securities (index components) against each other, not whole asset classes or indices, which are already smoothed out and much less volatile because they are, by definition, averages.

I've published the re-balancing methodology on my blog if anyone's interested — it's not a long read, and easy to digest, but too long for an email or single blog post. The links to the 3 segments are the first three in the blogroll column under the My Portfolio heading.



MasaOne always expects the Japanese to be very honest. It is well known that if you lose your wallet loaded with cash in Japan it will be returned to you a year later intact, and that the only place as safe as Japan is Arthur Avenue in the Bronx. The idea of even looking at a dinner tab to check its correctness is certainly inappropriate since 95% of the customers are Stuyvesant and Julliard blood brothers. So I was stunned when eating at Masa the other night where the price had recently been reduced from $500 to $400 to find the following item printed on the check as it was handed to me, and had to look at it closely since I am over 40 and don't wear glasses. "There is a service charge of 20% added to the check. But it is not a gratuity. It covers the administrative and operating expenses of the restaurant and is not shared with employees." What a way to end a beautiful dinner. Presumably other restaurants and other businesses have operating expenses also? And presumably when one is told there will be a 20% service charge, one would expect it to be a gratuity? There are all sorts of new ways for companies to survive the recession. Restaurants in New York are taking to adding a surcharge onto the bill if you wish or eat bread or drink water. But most businesspeople know that making a customer feel that he's been gipped is not a long run way to success. On the contrary, the customer should always feel he's getting more than his money's worth. I would be interested in other special shortsighted recession-beating forays that our specs have been exposed to.

Steve Ellison writes:

LuggageAirlines seem to go the extra mile to make customers feel gipped. On a recent trip, U.S. Airways charged me $25 to check one bag. As I was checking in for a redeye from L.A. to Boston, United Airlines offered to upgrade me to a seat with a few more inches of legroom for $25. When planning this trip I used a search engine that showed both the airlines' stated prices and the real prices after adding on surcharges and fees. In some cases the real price was nearly double the stated price.

Craig Mee comments:

Another twist on this is completely the opposite: 'pay what you think it's worth.'

The example I link to is in kiwi land, but I've heard exactly the same happening in London, and with the manager staying most of the time there in front, while their people look after them. If I ran the restaurant, I'd just make sure that the tables were as far away from the exit as possible, so anyone who tossed you five pence had the walk of shame to deal with it (i.e the opportunity for waiting staff to throw them that knowing look of "thanks for nothing").

Vince Fulco writes:

MonitorsMost recently while shopping for multi-monitor video cards from numerous manufacturers, critical cables for the interfaces were not included. They easily added 30% to the overall cost, and I assume the resulting markup is many times greater vs. if everything were included with the device itself.

There seems to be a not too subtle attempt at teaser prices even in more traditional venues. Southwest Airlines is a great example. New to Minneapolis, they're heavily advertising their summer fares to Chicago for $49 among other attractive deals. Not surprisingly, any 'deal' requires traveling at the worst possible times and multiple interim stops; sometimes as many as three or four. Not a way to start a relationship with newer customers and a disconnect from their message of being clear about the total prices vs. the other guys.

Another current example is a regional furniture company advertising all products at 77 cents on the dollar. What marketing psych service advertised the switch from the old N% off sale? It doesn't resonate well.

Marion Dreyfus adds:

TzooTake advantage of the numerous specials in travel now, especially pre-summer. TravelZoo offers a raft of deals that are good, though you are warned about taxes that can make a huge difference in the stated to real price. Also note that some fail to include key variables that change the price. Departure days can be irregular, inconvenient or uncomfortable, double occupancy at a hotel may be expected. You may be expected to rent a car.



 I am forever reminded of how and why the chess act itself is not a loaded game. Over dinner this evening I heard about how a much better player was denied selection for an England team in favor of a much better connected player with rich parents etc. Of course it's difficult to manipulate the selections in the face of cold hard evidence to the contrary (results and rating), but it's a sobering thought that this can happen just one small step away from the ultra-objective field of combat that is the chess board. So for the world at large I hold out very little hope that there will ever be any kind of fairness, though I can see the point in trying to defy these odds because of the potential rewards. For example, in markets.



 For the first time in history, the score was changed in Chicago's favor from 89-83 to 89-84. In the first quarter Ben Gordon scored a long jumper for two points. With 5:44 left in the game, it was changed to a three pointer. Where else but in Chicago does a home team get a reprieve like that? It's happened to me many times. I have a trade where there's a substantial profit. "They're taking that down. They missed that someone on the other side of the ring was bidding ahead of you." Usually it happened within the first five minutes after the event. But I've had it happen a few hours later. Sports imitates life.

Where else but in Chicago would the referees be seen coming out of the stadium with their others wearing Go Chicago shirts. Usually one expects the referees to be neutral. But most of all how could a series go to six overtimes in just seven games with four of the games going to overtime, with the margins of victory being 2, 3, 3, 2, 1, 10 and 21 points? This must be quantified in the markets with five small changes in the last seven. It wouldn't give the big boys much chance to have done much damage and created the booms and busts so necessary for the "public to do themselves in." Finally this series went in terms of wins for the first six games: c, b, b, c, b, c, Let's call it a rise for a Chicago win and a decline for Boston in keeping with the ecology of markets. Happened 57 times the last 10 years on daily S&P. And sure enough the expectation is for b's, the -1 to win with an expectation of -0.3% . Don't ask what happens on the second day of the month.



 Einstein purportedly said that compound interest was the most powerful force in the universe. I challenge his statement and offer the hypothesis that the vig is the most powerful force in the universe, exceeding that of even free market forces because it's always there. Exerting a constant force on every trade, transaction, purchase, sale, or any human activity of any kind, the vig is always first in line to get paid.

The vig is a powerful enough force that both winners and losers pay, without even realizing it in many cases. The vig has clever ways of hiding and disguising itself but is always there. From the widening and narrowing bid/ask spreads in the market, to the 35 to 1 (or even more insidious 35 for 1) payout on a single number on the roulette wheel, the vig constantly grinds out and extracts it's percentage on every trade or activity. Like the steady beat of a metronome, the vig is just extracted, extracted, and extracted some more.

The general public has little awareness of the vig, but the vig takes a huge toll from the unsuspecting public. All of the great deals offered the public generally have a higher vig, although even the professionals must pay it. Games with longer odds such as trifecta pools, keno, and lotteries charge high vig, while short games and trades usually have much lower vig. Games that advertise that they're commission free usually charge the highest vig of all, such as those bucket shop Forex places that are sprouting up like mushrooms all over the place. The vig allows the beautiful Vegas casinos to exist, Churchill Downs to run it's card, and allows the temple at Wall and Broad to continue it's operation day and night.

I contend that although the electronic trading is supposed to increase liquidity and eliminate the vig charged by the locals, thus benefiting the public, the opposite occurs. The apparent percentage takeout of the vig might be reduced, but the increase in the velocity of trading, with a smaller vig collected each round trip, more than makes up the difference, sort of a Laffer Curve applied to the vig.

One can easily see this by looking at the volume and revenues at places like the CME where volume has exploded and the market cap of those high temples of finance has gone into the stratosphere. Those beautiful buildings have been built by the pennies per transaction takeout from everyone, every trade, and it all adds up. The apparent reduction of vig has allowed the online poker sites to flourish with advertised low rakes versus the brick and mortar clubs. People think they're getting a great deal with such a low rake but don't realize that they're playing at a rate six times faster than in real life and probably paying out more vig than they would in Vegas, Atlantic City, or the numerous underground clubs I used to frequent in my misspent youth.

Although the vig is a constant fixed percentage in sports betting, in the markets it is ever changing. With the advent of the electronic markets, I have a certain difficulty these days in calculating the amount of vig I pay every trade, although I have a general idea. I have some pretty sophisticated math that's supposed to help me figure out the vig I pay, but even that's just an approximation When I was a local, I knew how much vig I collected down to the quarter cent depending on what type of trade I was accepting. I collected a certain amount of vig buying a spread, selling a spread, trading with little locals, and fading paper from the public. I offered discounts in vig for size, and would give up a quarter cent if I knew I could bag a big order. I also knew how much vig I would have to pay and the percentage that might change if I were desperate enough. Even though I collected vig every day, I also knew how precisely much vig I would have to fork over at the end of the day to play in the pit, because everybody has to pay tribute to someone. Since every player pays vig in trading, the money has a way of working it's way up, to some unknown repository somewhere. All of this paid tribute and upward movement of money feels like it has a part in a certain Francis Ford Coppola movie that was so popular in the 1970's.

Free market forces do affect vig, widening and narrowing the percentage, but while free market forces might disappear for awhile due to governmental regulations and laws, the vig will always be around. Vig shows up in many other clever disguises such as lower yields on fixed investments, taxes, assessments, points, fees, payoffs, and graft. Vig has to be calculated into every transaction, and must be figured into every apparent overlay one might spot.

My late, great, grandfather used to cite the old axiom that "There's two kinds of people in this world, those who pay interest and those who collect interest." While he was spot on with reciting that observation, he sadly neglected to tell me that everyone has to pay vig, a hard lesson that I had to learn for myself.

Steve Ellison writes:

A traditional recipe for business success: reduce the price of a product and thereby generate much greater demand and higher profits.



Here is a fascinating read on how to beat a 20% vig from Contingencies magazine. To whet your appetite:

"By the time he succumbed to pulmonary embolism in January 2008 at the age of 62 Woods and his pioneering partners in computerized horse betting had transformed the nature of the sport in one major world market and spawned and industry that is still lengthening its stride around the globe. According to his obituary in The Australian, Wood’s fortune was estimated at $670 million at the time of his death."

Michele Pezzutti comments:

Quoted from Contingencies magazine: “The only way to develop a consistent long-term winning system is to either have the unbelievable luck of making the right guesses on enough races or to know something the rest of the public doesn’t.”

One of the thing I liked most about this story is that the information is actually out there for everybody, there aren’t people who have a competitive advantage on information availability. Alan Woods has built a competitive advantage over the public starting from the same knowledge base, which was under everybody’s eyes but unseen by most.

But how sustainable is this? If I liked horse betting, I wouldn’t bet anymore after knowing that a lot of people have a competitive advantage over me. You could argue that this is true also for financial markets (maybe even worse, as information might not be really available to everybody). That’s correct, but a bet is a single shot– either you lose or win. In financial markets, duration of a bet is generally unlimited (provided that your capital allows it or a company does not go bankrupt) and positions can become profitable also after being potentially a loss. Moreover, if a company generates value, every investor will benefit from that.

Craig Mee writes:

I was speaking to a mate about this guy, his reply:

"It’s a sad story actually. I read about this bloke in last year or the year before Business Review Week Australia's Rich 200. He had sent a letter to the BRW asking for inclusion in the Rich 200. The BRW naturally thought it odd someone would want their wealth on display and also thought it odd they had never heard of the guy before. In his letter he professed to be worth about AUD700mio and said he could prove it with a list of assets all around the world. He said he was waiting to be in the top 10 before applying but unfortunately things were taking a turn for the worst as he had been diagnosed with cancer. He died six weeks after he sent the letter.

A guy who chased a dream and succeeded………regardless of the end…….he had a cracker life."



 The swine flu is a powerful media event, and I will be very surprised if its lethality surpasses the last influenza pandemics. The case-fatality ratio is very similar to the usual flu. It is the same virus (influenza), with a different spreading capability and is possibly less susceptible to the previous flu antibodies that we all carry (there´s the potential danger).

I work on a large managed-care company in Brazil, and have reviewed thoroughly the literature for our response team. The population at risk for complications (need for hospitalization, death) is the same that for the usual flu, small children (<2 y. o.), the elderly (>65 y. o.) and people with chronic heart and lung conditions.

We probably won´t see a pandemic like the Spanish flu of 1918-9, ever. People have better nutritional and hygienic conditions and modern medicine is much better prepared to deal with the complications. I don´t mean antivirals here, save your dollars/euros/… . The evidence on the efficacy of antiviral use on influenza is doubtful to say the least.

Some history for the medical literature fans, from the best medical book on infectious diseases Mandell´s Principles and Practice of Infectious Diseases:

Influenza virus has been causing recurrent epidemics of febrile respiratory disease every 1 to 3 years for at least the past 400 years. Although the disease is not associated with a characteristic manifestation such as rash, the high attack rate, the explosive nature of the epidemic, and the frequency of cough allow the identification of some past epidemics. For example, Sydenham’s account of an epidemic that occurred in 1679 is a clear description of influenza. Hirsch tabulated 299 outbreaks occurring at an average interval of 2.4 years between 1173 and 1875. As discussed later, severe epidemics of worldwide scope occur less often and are referred to as pandemics. The first recorded pandemic that clearly fits the description of influenza occurred in 1580, although others may have occurred earlier. Since then, 31 pandemics have been described. The greatest pandemic in recorded history occurred in 1918–1919 when, during three “waves” of influenza, 21 million deaths were recorded worldwide, among them 549,000 in the United States.

Nigel Davies adds:

I learned a lot about this virus over breakfast this morning — one of my chess team members is a doctor:

1) Although this is a new type of flu, there is little evidence to suggest it's any more deadly than any other kind of flu and in fact it seems rather average. The Mexican deaths have not been duplicated in cases outside of Mexico, which suggests that at some point the data is questionable. One possibility is that the victims may have also had tuberculosis but these questions don't seem to have been asked.

2) A face mask is of questionable value, firstly because this virus is now known not to travel via droplets of water in the breath. Secondly most of the commonly available masks just don't do the job, they're effective for about 30 minutes. A more effective defense is to wash your hands thoroughly, especially before eating.

The way the media have treated this thing is really amazing. I'm already free of television but I'm thinking about how to get free of news altogether. Unfortunately there are some headlines whenever I log into Yahoo to read my email.



 "The white shoe firm is buying!" — I thought I heard it when Aubrey and I went to Cones yesterday and no one was there. We were enjoying some banana ice cream (the best in the world despite what my eminent daughter says). Apparently one of the secrets is to use a mixture of 50% green bananas as well as to make it fresh within the last hour. All of the sudden a person looked in, and before we knew it, in about 30 seconds, 22 people came in to order ice cream.

There are five ice cream stores within a half block of Cones. It reminds me of the herdal response when the market gets even on the year. Even is too much a stopping point for most people. This must be quantified and tested in various scenarios, including the banana ice cream season of the spring, as opposed to the butter pecan season of the fall. Aubrey dropped two scoops of beautiful banana as he was trying to look at the machines (he scooped a few scoops out), and it broke the owner's heart and mine to see that beautiful stuff go to waste, the same way it hurts to see a price move in your direction, hit your limit and then hear those tragic words "locals only", or the even more sepulchral "white shoe selling" or worse yet "the algorithm boys located in Chicago taking advantage of their proximity vs. the speed of light were ahead of you". "But… but !".

Oscar D'Aloisio, co-owner of Cones, comments on spring ice cream trends:

I would say that the list of favorites is mostly consistent. The only pattern that changes in volume are the sorbets. During summertime they sell much more. I guess people want more refreshing food during hot weather.



 In a recent discussion with my father, an astrophysicist, I was trying to learn about the scientific discovery process or more precisely the mind of the researcher, the thinking, and the feelings that are a part of the journey. Later a friend, also an astrophysicist, suggested this list of fallacies.

It is interesting how the mind sometimes falls prey to fallacies and at other times creates them. It is also interesting how the market (or the various participants) sometimes build stories based on one or more of these. Even the numbers that stand for themselves sometimes play these games.

As a mental exercise, I thought it might be fun to try to determine which are particularly applicable on a given day.


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