F GaltonIt's common to say things like today's decline was spurred by a growing concern that a rally of as much as 62% since March 9 had outpaced the prospects. This is like the other canard that the market is not buoyant since 60% of the stocks are down more than 20% from their 12 month high. Or 40% of companies reported earnings that were more than 30% below their previous peak.

Such statements are always true because the extreme is always higher or equal to the current level. With a random ensemble of stocks there will always be a good number that are not at the extreme by a substantial margin. Has to be, because of random numbers and retrospection.

Does such foolishness emerge in other areas, and are there any potentials for profits in such naive utterances?



ATCOne of the basic skills an air traffic controller learns is the art of projection. That is, determining in one's mind where aircraft will be at some time in the future. This is a necessary skill and requires some to time to grasp as one must deal with a multitude of different types of aircraft operating at different speeds, in different attitudes, with varying degrees of acceleration and deceleration and with different effects from wind. It is fairly simple for an experienced controller to see that two aircraft whose courses will cross may or may not be in conflict based on their current and anticipated speeds. But it takes a while for trainees to get it. They tend to focus on what they see now, not the way things will be. After one is able to see where the aircraft will be, one must learn to see them where one wants them to be. This is how plans take shape and solutions are discovered. One of the consequences of an ability to project and plan is a strengthening grasp of what we call "the picture". It is a need to keep the forest constantly in sight while navigating through the trees. Having "the picture" at all times is essential and during busy or complex periods instructors will constantly gauge a trainee's grasp of it. If this grasp begins to slip too much the instructor will take over and get things in order before giving the radio back to the trainee. In order to allow a trainee to grow, it is necessary to let him confront his limits and exceed them in a controlled way, with knowledge that the teacher is there to take over if things go awry. But he must be allowed to take things just a bit too far, and each subsequent exposure allows him to push a little farther. It is a very interesting thing confronting "the wall" in air traffic training, because this is exactly what it feels like. Overcoming the wall requires, literally, a mental push. A directed force of will to not "lose it" and just keep working. Forcing oneself to move forward one step at a time while the world seems to be going to hell in a handbasket is a difficult process and one must confront the wall several times before one learns how to push through it. But the reward is something like seeing the light. That is how we refer to it as well, we say about a trainee who is succeeding that "the light came on". It's a joy to see. The parallels to trading are manifest.



What must have been the attributes of some of the exceptional achievers who have undergone, survived and then thrived away from persecution? Was persecution just a common co-incidence or did it induce certain specific abilities in these achievers?

Extensions of this core query naturally arise as to what market behaviour is highly persecuting in its nature and how would it than affect the persecuted traders? One of the potential talents of a market at inducing persecuting behaviour is perhaps the density of gaps or a larger tendency for price jumps. Hang Seng China Enterprises Index (HSCI) comes to mind as perhaps one major contract that has more opening gaps than any other in the world. This imagination doesn't seem to be related to improving the abilities of traders by way of punishing them. So, what kind of market features tend to be extremely tough on its participants but still bring about the best out of them?

But most importantly, first to decipher the specific attributes of the persecuted that turned them into achievers.

George Parkanyi says:

I don't know much about persecution and the markets, other than most of us traders probably feel quite persecuted, among other things, when what seemed like a good idea at the time goes so horribly wrong. But my first guess as to why Hong Kong gaps a lot is time zone. The Asian markets, like others usually follow what goes on in New York. If you're down, oh for example 250 points here, odds are you're going to start the following day in Asia with a free haircut at the opening bell.

What kills me still is how the commentators on BNN act surprised when the Asian markets get drubbed after a bad day in New York or do well after a good one.



D KrallThe delightfully breathy Diana Krall is currently performing on her "Quiet Nights" album tour. We saw her perform last night at the Royal Albert Hall here in London.

En route to the venue, as we slid through the sparkling, fall evening lights of London, it occurred to me that jazz is a perfect musical accompaniment to speculate to — rich in subtleties, full of improvisation, balancing the emotional within the logical, frequently changing rhythms, timbre and metre — all those familiar elements are there. Last night, Ms. Krall repeatedly demonstrated her mastery of the form in a thoroughly authentic and slick two hour set.

I've seen a lot of artists and genres perform at the Royal Albert — everything from choristers, to the Proms to hip-hop star Jay Z. From those experiences, I've found the Royal Albert really shines when there is an impressive wall of noise emanating from the stage, so, in this case, I wasn't sure how the subtleties of jazz would work out. Would those little nuances be engulfed by the high ceilings? Would those critical rasps be lost to any others but those in the front row? As it turned out, I had nothing to fear.

Ms. Krall used the venue to great advantage, taking the audience from up-beat tracks like "I Love Being Here With You" and "Let's Fall in Love" to the deeply heartfelt "A Case of You" with equal facility. Indeed, in the case of the latter track, it was sung with such soulfulness I was left wondering how many tears Ms. Krall must have cried when she first heard it, or sat at the keys to make her own interpretation of it.

All this was complemented by the fact that she played with a small, intimate trio, rather than bringing along her usual Clayton/Hamilton backing orchestra. Each of the supporting artists was given ample opportunity to showcase his talent, and each made the most of the opportunity in front of an appreciative crowd.

The "Quiet Nights" album is meant as a love letter to Krall's husband, Elvis Costello, and her performance really reflected that intention. It was soulful at times, joyful at others and always intimate. This was heightened with lively anecdotes about her family, her influences, her children and her life, appropriately interspersed with each track. She is now touring throughout Europe and Australia and I would highly recommend attending to anyone who is a fan of the genre.

Y BrownWhile Diana Krall was outstanding, the highlight of the evening for me was YolanDa Brown, a young UK saxophonist. Ms. Brown played the warm up act, but really stole the show. Though a little bit nervous at first, her stage presence was brilliant and interactive — both with her supporting trio and the stiff UK audience. She launched into a performance of great virtuosity and individuality that was frequently mixed with vivid, scene-setting stories and personal comments on her interpretation and influences. Combined with our bottle of champagne, excellent stage mood-lighting and an intimate set list, we found ourselves very much under the spell of her efforts. Ms. Brown's performance was deliciously "off the shoulder", and I am sure her music inspired many in the audience to purchase her work for future romantic assignations.

The greatest compliment I might pay to Ms. Brown is that she made my wife and me feel like we were the only people in the room. In a packed Royal Albert Hall. She was that good. Get along if you can, but buy one of the albums irrespective. I certainly will enjoy listening to it during those late night, red-eye trading sessions where I needs to keep my cool.



In Vegas over the years I used to play a little roulette. Odd or even or red or black and you have a 50/50 chance of winning on your bet. Reminds a novice like me of the market yesterday and today. Yesterday I would have been a hero and today a heel if playing. No thanks!

Steve Ellison notes:

Because the 0 and 00 are neither red nor black, your chance of winning on either red or black is only 18/38=47%, in the U.S. at least. That's a 5%-plus vig, which is why I never play roulette. In craps, a pass line bet with double odds has only about 0.6% vig, but beware of the suckers' bets such as field and hardways that have more than 10% vig.

Allan Millhone replies:

Still looks like roulette stands a better chance with an average guy like me. Odds are in favor of the house. But with insider trading deals to me it appears the market is heavily weighted towards the Big Boys with the inside track.



BolognaJust back from a one-week trip to Bologna, a Northern Italian town know for its academia, hospitality, Etruscan ruins and extraordinary gastronomic offerings. We visited the same city three years ago as it is known for its non-touristy, 'the real deal' atmosphere. Consumer prices are startling. The buzz of the city feels the same, call it La Dolce Vita with a measured forward pace. Definitely no signs of the dire Spanish malaise nor the forecasted tough times expressed by the new German Finance Minister creeping in yet. However, even netting out the obvious €/USD changes and the 20% VAT on most products, the good life is becoming costly.

We ate at a number of places including white tablecloth restaurants, Mom & Pop Trattorias and the periodic hole in the wall frequented by the natives. From high end to low end, the food was extraordinary and not to be experienced anywhere else. As for the cost, a decent bottle of local Lambrusco or San Giovese wine will set you back 30-45€ while a modest plate of pasta as a first course is 12-18€ and a second course of protein is 22-30€. A plate of sweets will set you back 6-12€. Everything on the menu is 2-8€ up from when we visited last. Ya better start digesting before you do the inevitable conversion.

Due to an infernal scheduling change at British Airways, we were forced to switch from Heathrow to Gatwick for the legs of the trip and both of our drivers concurred with the nutty price levels on the continent. As they said, "So long as you're being paid in Euros, fine. Frankly we don't buy anything here in England either…When we need something we take vacation in the US and stock up."

Fortunately the handbag gods were looking the other direction when my wife entered a few luxe establishments but the boot gods got their mitts on her and we came home with a few new acquisitions. Still wondering why something as durable as a boot needs to be replaced every year?!?



Although DJIA under 10k print at close, it almost feels better than plus 10,000 due to the power of the move. Is this when the market con asks you trust him and invest that considerable sum? We made it through nasty ("not!") September and Old Crashy October — one more day to go. It seems like clear sailing ahead till Santa Claus rally and year end. Is this the con's projection of a wheelbarrow full of money — Mr. Drees, pick up a shovel and start loading up…



A M'honeI note oil up today 2.55 getting pump prices ready for holiday travelers. 3.00 gas will kill the holiday shopping retailers. Better enjoy the Dow's being up 200 today. I wonder what group of insiders is driving the Market Mistress? Gold is courting the Mistress as the Dollar trails. In my area the local economy is in the tank. I converse with other rental owners and all find slow rent payments and increased evictions. This afternoon I noted four storage garages being emptied onto trucks and trailers. Tomorrow is the 31st. I call the storage unit owner and was told those people were behind on their rental unit payments and were told to empty out their contents before the first. So did the Market move up today due to government stimulus or due to something legit?



A while back I pondered how some of the Beatles songs might have worked out differently had the lads been bitten by the trading bug. Would they have written:

All You Need is Cash

Don't Mark Me Down

When I Saw Her Shorting There

Day Trader

Hey Crude

Bet it, Lee

Dear Prudent (Man)

Penny Stock

Sgt Peppers Lonely Shorts Club Band

She's Leaving Home (Depot)

You've Got to Hide Your Dogs Away

I Am the Wall Street

Norwegian Wood (a good day on the Scandinavian bond desk)

Hello, Good Buy!

Maxwell's Silver Outlook

Backing the USSR

With a Little Help From My Friends (more recently the Galleon company song)

The Long Unwinding Debt

Get Black (popular with compliance departments)

Here Comes the Stun

RICO Raccoon

Can't Buy Me Bonds

Help! (works either way)

Broker You're a Rich Man

I've a Got a Feeling / Hurl (medley)

If It Fell

Sum Together (also known as The Settlement Song)

Act Naturally (also known as The Audit Song)

Things We Shed Today

Everybody's Got Something to Trade Except for Me and My Monkey

Helter (Tax) Shelter

When It's at Sixty-Four

We Can Work It Out (margin call set to music)

You Never Give Me Your Money (second, more urgent margin call set to music)

and finally …

Fool on the Till



Nurture ShockI was very positively surprised by the book NurtureShock — New Thinking About Children, by Po Bronson & Ashley Merryman. Without any other comparison they try much like the Chair to dismiss popular myths with sound science-based research. In ten chapters the authors go through topics such as Praise, Lying, Self-Control, Language Development and what the latest research tells us about these and how it contrast versus popular belief. I think the title is a bit of a misnomer, the content is not really that 'shocking' after all, nevertheless I can really recommend the book to any Spec with children or an interest in the topic.



VNNothing worked today. All statistical relations failed.

After a continuous decline, a huge further decline occurred.

The bonds and S&P had coupled together on the down side two days in a row, and then the bonds decoupled up sharply while stocks kept pulling down like a archetypical electric circuit.

CIT finance got its $5 billion loan conveniently announced at 1 pm, and it was only good for a 10 minute 1/2 % rally.

The Fed came in with $5 billion of agency POMOs to liquandize their clients but the market still managed to drop a nice 1/2 % in the afternoon, repeating for the third day in a row a strong morning and a terrible reappraisal in the afternoon.

Companies continued to beat their earnings forecast with 80% beating the star estimate, the highest in history, but instead of going up when they beat them as they did last quarter, this quarter almost all of them went down.

The techs decoupled from Intel, dropping 6% in the last two days.

The announcement of bullish forecasts for the stock market by the favored analysts did not stem the tide when released at the propitious moment.

The early moves set the fixed number boys the wrong way the rest of the day. The moves after Oct 27, typically extraordinarlily strong for the techs, were among the worst on record.

After shaping up on Oct 27 the way it has so many times in the past with devastating verisimilitude, instead of turning around the way it's supposed to, it had the worst decline in a month.

The S&P went down yet again after setting big minimum upon big minimum in the previous days, but did not deign to give vigesimal extrema.

The most similar days to today performed exactly the opposite of what happened today, thereby proving once again that statistical significance has nothing to do with predictivity. Yes. That's it. The only thing that worked was the principle of everchanging cycles. Whenever complacency sets in. Whenever it 's guaranteed that the market will rise — why, then the trainers tell the boys not to whip them to hard in the closing stretch.



My performance as a trader this year is my worst since 2000. The whole situation is making me work harder and discover new things. A Reader.

An amazing amount of energy has been withdrawn from the market, looking at how most major futures volumes have shrunk as measured by the Futures Industry Association with y/y numbers [click to enlarge] from the first half of the year.

A friend was joking that "hanging in there" used to have an entirely different meaning and the saying previously was used to indicate that a guy wasn't having a record year. Working on trading edges through the downturn has taken my knowledge of software, data and the marketplace up to the next level. When the market cranks up again, ooh la la…



 Under Von Neuman's Minimax theorem, a randomized mixed strategy in a two party zero sum game with two equilibrium points will improve the odds over using the preferred of the two strategies. The prime example is the soccer penalty kick. Examining the game matrix, kicking to the left to the kickers preferred side returns 38%, kicking to the right (the non preferred side) yields 72%, but a randomized 60/40 mix of the two will yield a 79% success rate. The rational reason is that it is harder for the opponent to discover the strategy. The optimum weights can be solved algebraically. Markets can be modeled as two party/ bull/bear zero sum game. The parties presumably know each other's strategies. Would it not behoove one to use some sort of randomized method to avoid having your own strategy used against you? Is this a reason to use a trailing stop for example?



I have recently been exposed to the wiles of many a con man. I wonder what revisiting the subject of the techniques of the big con could teach us about the current situation in the markets. I think of such things as leaving the victims fearful of claiming restitution at the end, and the imprimatur of the respected elder at the beginning. What is missing to the layman is the degree of complicity of the victim. What do you think?

Scott Brooks responds :

High level cons: Con men seem to prey on issues that the Victim has, at least, a peripheral knowledge of or experience in. This allows a con to speak to the Victim and use words and situations that the Victim can relate too.

The key to this is it allows the Con to mix in just enough truth to get the Victim to agree with the con on some points, thus showing that Victim that the Con knows what he is talking about, as well as add an air of expertise to the Con's resume. The "truth" that Con mixes in are the "white swans" that the Mark so desperately wants to see.

This is a Con's ultimate fantasy, because the Mark will then do most of the work to build up the Con's resume in his own mind as the Mark see's a world swirling in white swans and purposefully ignores the black swans.

The con shows some small and perfectly plausible area/idea that has not yet been exploited (the exploitation point or EP). If the Con can build up Mark's confidence in him by supporting the exploitation point with some sort of 3rd party reliable material, then the Mark will further build up the Con's "Cred's" in his own mind. Even if the 3rd party material is only tangentially related, it will be viewed as more white swans by the Mark.

The Con will then play up the profit potential of the EP and get the Mark very excited. When he plays it up, he has to be careful not play it up too much……..his figures have to be appealing, but can not sound, "too good to be true". If the Con is smart, he will then "play down" the profit potential that he just built up to show that he's not some "pie in the sky"over seller and that he has a reasonable outlook on the profit potential….i.e. "Now, I know those numbers are exciting, but let's look at the downside….." He then shows what appears to be a reasonable low end profit potential.

The Con will then spring the trap…..and spring it with a sense of urgency.The con will usually request a reasonable amount of money that the Mark won't have any trouble accessing and can quickly write a check for….BUT…..the money will be needed within a short period of time…usually right there on the spot. If the Mark balks, the Con will back off and let the Mark tell him when he can have the money available. Lets say the Mark says that he can get the money to the Con on Wednesday. The Con will usually make a reasonable request and say, "I can only hold out until Tuesday. So can I get it on Tuesday instead of Wednesday"

The Con will then usually say something like, "Okay, great, let's do it on Tuesday. Now the banks don't post any deposits after noon for that day, so I need to make deposit before noon on Tuesday.Can I come by at 10 am on Tuesday?" The Con will then usually treat the Mark to lunch to pick his brain about the Mark's idea's about how to move this forward and solicit any advice the Mark can give, based on his extensive knowledge of (whatever the Mark has extensive knowledge of) and how it might apply to the EP (which the Mark has a peripheral knowledge of). More meetings will be scheduled to go over "details" between now and the day the check is to be picked up so the Mark will feel involved and and excited about the opportunity. At these meetings, the Con will play to Mark's ego and let the Mark brag to the Con that he has lots of money…and the Con will then drop very subtle hints that more money may be needed in the future. By now, the Mark feels very good about the Con and feels that they are closely bonded due to this "insider secret" that they both share. The Mark will want to enhance this feeling of closeness as it is the "white swan" in their relationship and allows the Mark to ignore the "black swans" that he needs to be seeking that are sometimes screaming but often whispering,"you're being conned". When the Con picks up the check on Tuesday morning, he arrives a little early, gets the check and has a refresher "rah, rah" meeting with the Mark and gets the Mark even more excited…..the Con will usually have some"extra" good news about the EP that has just come to his attention and it will likely involve some sort of 3rd party expert saying something that is related (usually in a very tangential manner) to the EP that the Con displaying the Mark on.

The Con will then return as many times as he can to get more and more money from the Mark, always playing to the emotions of the Mark. Even if the Mark begins to have doubts, he'll not want to waste all the money he's put into the EP so the Con will be able to get money from the Mark even after the doubts begin (the mind of the Mark says "I know I'm $200k into this thing,so investing another $20k is not that big of a deal if we can pull this off.Heck all good things take time and are little harder than we initially expect"). This goes on until the Con can't get anymore. There are many more steps and an infinite number of variations on the"Con/Mark" relationship. But many of those relationships contain most of the factors that I've listed above. 

Bill Rafter comments :

Bill RafterIf one were to tell “others” (i.e. not in our immediate circle of market watchers) that the market was pulling a con on us, they would think us more than a little paranoid. However if the market is the digested knowledge (and emotions) of its collected population, then thinking of it as sentient is not too absurd. Once we have accepted that, however, it’s a fine line between what comes after and paranoia. What is the first concern of a sentient being? Self-preservation. Now for a market to keep itself alive, it can never allow any one participant to gain such an advantage that the participant wins all the money. Should the latter happen, the market would be destroyed. Thus the market’s future existence depends on its not letting anyone get an insurmountable advantage. Consequently, there can never be a “Holy Grail” or flawless indicator. Perfection in trading can only be defined in statistical rather than absolute terms. Once you realize that you find it easier to live with your mistakes.

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

Alston Mabry comments :

In considering the elements of a con one is inevitably drawn to the rich genre of American Movies, which for the most part have glorified the con man. David Mamet gets a lot out of the con. See:

1 House of Games

2 Homicide

3 Heist

4 The Spanish Prisoner

5 Spartan

6 Redbelt



ScoutsJust got back today from our annual fall area Scout Camp, this time at the Foley Mountain Conservation Area on the Rideau Lakes.


And things turn out better. The forecast was cold, and rain. Last year was all rain, all the time. I felt sick on Friday and, without being able to find a replacement leader to cover our 2-adult minimum, was about to cancel the camp. But I decided to medicate my way through whatever was coming over me and just press on. We got a little wet on Friday, but the weather dried up Saturday afternoon for the outbound hike, and we have lovely sunshine on Sunday for the inbound. And it turns out all I ended up getting was a cold, and I managed fine.


On the outbound hike on Saturday, one kid in particular forged ahead if the rest of us by himself. It struck me that he was not doing this out of competitiveness, but sheer curiosity. He just wanted to see, almost urgently, what lay ahead. On Sunday morning, one of the kids came to me and gave me a plastic bag to throw in with the rest of the garbage. The contents looked very unfamiliar, and for a split second I thought it was vomit. I asked him what it was. He said it was his pillow. The day before he had been foraging around in the milkweed and had asked me for a plastic bag. I thought nothing of it at the time and gave him one. Well, this is what he did with it. And it was not a bad pillow at that. For the final lunch, to get us out quickly I just boiled water at the base camp to give the kids a quick single-serving of ready-made noodle soups. All the utensils were already packed, and no-one wanted to dig into their packs for them, though a few finally did. When some of the kids asked me how are we going to eat the soup, I bent down, picked up a twig, snapped it in two, grinned, and said "Chop-sticks!" And began to eat my soup. Well the kids all thought that was great and entertaining and continued with whatever they were doing, except one, who called out "Look Scouter George, I'm using chop-sticks!" It was the same boy as the pillow-maker and our uber-hiker. Some people, even at a very young age, just make you sit up and take notice.

Oh yes, another improvisation, this time by my co-leader. Morning breakfast was oatmeal, the hot drink (to get warm), a big vat of hot chocolate. I was about to start boiling water for the oatmeal as well, when he said "Why not just use the hot chocolate in the oatmeal?" Why not indeed? "Hey kid, come here, try this." He loved it, and so did the rest. Another innovation of the 63rd Ottawa (which immediately virally mutated when one of the kids also added some of the leaders' left over coffee to this new successful combination).


Hiking outbound, the call came in. Troops, the road to the far camp has been washed out (remember the previous day's rain), and we can't get your gear to the far camp site. It looks like you'll have to return. We discussed it with the other two troops hiking with us over our lunch break at the 3.5km point, and decided to leave our packs and go see the "Act of G_d" (I did build it up somewhat) anyway. We finished our lunch first, and off we went, just our troop. It was a lot further than originally advertised by the organizers (they had misread the map), but 3km later we arrived, and sure enough, a flooded stream was pouring over the road with foot-deep water. We then started back, and passed the other troops still on their way out. After a few quick quips to keep up their morale, such "makes Niagara Falls look like a big waterfall", we continued back, and they on. Well, by the time we were almost back to where our packs were in the woods just off the road, we learned from the organizers driving by that the water had dropped and the 36th had somehow crossed the stream. The far camp was on again! But, in fairness, as the kids had already hiked the total distance they were supposed to, we drove them and their stuff to the campsite - a farmer's field. But for a moment, they had the experience of what can happen when the things you take for granted fail.


We all had to be ferried to the far camp in two runs because of numbers. So while lying around by the side of the road, to both fill the time (and actually assess the damage), I announced "Right men, foot check - shoes and socks off on the double!" This surprised them a little, but stirred all sorts of conversation and laughter as I went from one foot to the next, bandaging whatever blister needed to be bandaged, and even loudly pondering an amputation or two. Although the repairs went a little further than expected when we noticed that one of the boys had been sitting in a major pile of (fresh) animal droppings the whole time. That required using up quite a few antiseptic wet-wipes before we were truly car-worthy.


We set up and took down camp twice this weekend, and hiked 20km - a good portion with full packs. Most of our Scouts were first-years, who normally just stay at the base camp for this particular event and don't do the hike part. Would they do it again? "Y-E-E-E-S!"


I ended up with a splinter in my index finger, which became increasingly annoying. With a pin from the sewing kit I was able to break the skin, and then with the miniature tweezers cleverly embedded in this particular flavour of knife, I was able to pull out the splinter. I cannot tell you the number of time a Swiss army knife has solved one of life's many little problems.


When we do a camp, we collect the registration fees from the parents, and then use the cash to pay for supplies and the site fees to the organizers (for the bigger multi-troop camps). This is all very efficient. The payments are settled, the crests and ribbons as may apply for the participating troops distributed to the troops and then to the youth, and at camp's end, the books closed. No lingering obligations. For there is always the next camp. Where you have an event-based, or a commodity transactions, it made me think about how useful it is to just settle everything then and there - cash - so you can move in with no further overhang. Compare that to credit-default swaps, 10-year warranties, 30-year bonds, and unfunded pensions and government programs. How much unnecessary complexity (that needs to be tracked and managed) have we, over time, brought upon ourselves?



[Warren Buffet] would have done a lot better if he had sold [Washington Post, Procter & Gamble, Johnson & Johnson, Coca Cola…] when they became fully valued (or slightly overvalued). In most cases, that would have been a decade ago. Vitaliy Katsenelson.

Mr. Buffett retains his shares of Coke for the same reason Mr. Gates retains his shares of Microsoft. Berkshire-Hathaway's taxable gains on any sale of that position would be so large that the stocks would have to fall by 60% for the net, after-tax return from a sale and repurchase at the lower price to exceed the return from Buy and Hold, even with the relatively poor performance. Mr. Buffett remains the sharpest knife in the drawer as far as the tax code is concerned; that is why he, like Scrooge McDuck, will literally take it with him when he goes.



If one resource is critical for a species' survival (such as is sometimes the case in predator/prey relationships) there is a simple formula that often pertains to this closed loop situation.

If survival depends on a consistently regenerative resource (say in a small geographic area, such as a limited hunting area, and a singular source) this formula can be appropriate.

It is a recursive formula for the population size over time:

M X(t) ( 1 - X(t) ) = X(t+1)

This can be thought of as the inter-generational relationship when resource regeneration is consistently limited for each generation and there is a constant fertility rate.

M would be the multiplier, or fertility per generation.

X = Max maturity %, this would be the percentage of the current generation's use of the maximum resource.

The factor ( 1 - X(t)) or (1 - Max maturity % ) limits the next generation ability to survive due to overuse of the critical resource. In an extreme case if the prior generation ever completely used the critical resource (X= 100%), so that resource could not replenish, the next generation would be driven to extinction.

What I find intriguing about this formula is the 5 phases and the shifts between phases. And the final outcome depends on "M".

For a random X example, start with X(0)= 30%

if M is less than 1, not enough fertility to replenish, clearly the population will soon be driven to extinction.

if M greater than 1 but less than 2 there are two types asymptotic curves. One with a decline, the second with an incline.

The shift occurs at M = 1.429 = 1/ (1 - 0.30) when the result is a horizontal straight line = 30%.

The next shift is between M = 2 to 3.

Near 2 it results in a couple of high low alternations above and below the eventual asymptotic line.

As M approaches 3 the results are more alternation before the settling on the asymptote.

M a little more than 3 however, you start seeing a simple "fractal" pattern alternating up and down above and below an asymptotic line.

After about 3.5 but before 4 the up down fractal patterns become more complex with more iterations before repeating the cycle.

After 4 but before 4.76 or 1 / ( 30% X70%) rather than patterns it breaks out into chaos. Not just any chaos, but the chaos particular to chaos theory. The resulting range bouncing from near 100% to near 0% and the time of the bounces, while clearly deterministic, are impossible to determine by measurement of the initial "M". For example 4.0001 looks completely different from 4.00011 in terms of resulting peaks and valleys. (May I suggest that you set up a spreadsheet and graph the first 100 iterations with several "M" in each phase and shift.)

Like many simple formulas its application to the real world is somewhat limited. However, the formula is somewhat resilient to changes. Say the lack of the critical resource is not deadly to all the offspring, but a set percentage. that is: ( 1 - C% X(t)) the resulting patterns are similar, except X% can become greater than 100% in this case.

The formula's application does, therefore, appear to spring up in surprising diverse circumstances.

Of course, every business student knows the life cycle of a niche market can result in an asymptotic curve for sales levels.

For other phases, for example a reader wrote here a few years ago about how timber wolves and snow bunnies can turn into a consistent repeating cycle of wolves/bunnies prosperity. As the wolves prosper they drive the snow bunnies numbers down until few of the wolves can survive the winters. Then the bunnies prosper. This can result in very predictable populations of bunnies and timber wolves. Despite the myriad of other aspects that reflect survival chances for any one individual, such as disease, weather, etc. it boils down, for the wolves as a group, to one critical resource, snow bunnies.

For the bunnies however, it may require a more general formula. Where the larger the last generation was, the more wolves exist, the less likely their survival to reproduce is.

Similarly, pre 1960s when fertilizer use for farming became commercially viable a repeating pattern of up and down year to year wheat production was common in Oklahoma, with its poor soil. Here the critical resource was time for the soil to replenish. Now after many years of fertilizer use it appears that Oklahoma may again be reverting to this cycle due to harder to replenish lack of organic matter in the worked soils.

Finally, the more chaotic pattern may occur with gypsy moth caterpillars as they defoliate the trees leaves. See The Chaos of Population Growth [8 page MS Word document].

While I will leave it to the reader to ponder how this pertains to the markets in everyday use, let me suggest: with the boomers' government entitlements beginning to kick in and an unprecedented push to maintain the status quo with housing and financial companies surely this has long term application to the economy.

Phil McDonnell adds:

The recursive formula which Mr. Sears cited is also a second degree polynomial which has a long history. It can be re-written as:

M * ( - x^2 + x + 0 )

revealing its 2nd order nature.

It also was once proposed by John von Neumann as a way of generating pseudo random numbers on a computer using M between 4 and 4.76. Another name for this formula is the logistic map. Wikipedia has an interesting article on this which includes a dynamic graph of its behavior for various levels of M.

For what it is worth in a study of various simple transformations of return today to return tomorrow the logistic map showed the strongest relationship.

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



In his WSJ article this weekend, Prof. Boudreaux argues that insider trading shouldn't be illegal, as price-movement from such trading transmits better information about company value to the public. Presumably this also extends to legalizing burglary, as burglars perform valuable tests on home penetrability of use to homeowners not yet foreclosed on.

Relatedly, one thought the currently unfolding grand experiment in US socialism would have been considered bad for free-markets and the securities used to capitalize on them. Current and planned government control, confiscation, and regulation appears to be the biggest since the New Deal (bigger not adjusting for inflation). To put a little lip-gloss on this porcine, here is comparison between SP500 (via tradeable SPY, including dividends) weekly returns under Democrat and Republican presidencies since 1993 (Clinton + Obama so far, vs GWBush):

Two-sample T for DEM WK vs REP WK

.         N     Mean   StDev  SE Mean

DEM WK  457   0.0036  0.0228   0.0011  T=2.41 P=0.016

REP WK  415  -0.0005  0.0265   0.0013

Michael Moore would pop a suspender to learn that not only do stocks do better under recent Democrats, but ALL the positive returns since inception of SPY (Jan 1993) occurred under Clinton and Obama. Note, as is often the case, this happened with less volatility:

Test for Equal Variances: DEM WK, REP WK

95% Bonferroni confidence intervals for standard deviations

.          N      Lower  StDev   Upper

DEM WK   457  0.0212  0.022  0.024

REP WK   415  0.0246  0.026  0.028

F-Test (normal distribution)

Test statistic = 0.74, p-value = 0.002

How can this be? Shouldn't high taxes, government spending, socialized medicine, pay controls, huge deficits, and trading restrictions reduce profits and stock returns?

Then on this morning's run, the Homer Simpson (DUH) moment hit in the form of a question: Who does better as government deepens its grip on the means to production, and un-levels the playing field? Not the public - at least not mom and pop 401K. The smart people do better. The ones with the brains and resources to find loopholes in a byzantine regulatory and tax environment. Wall Street firms. Hedge funds. Large banks able to package off bad bets to taxpayers.

OK if that doesn't Liberate you, listen to this while thinking about who gets to pay for political bubble remediation:

Phil Collins: Another Day in Paradise

Springsteen/REM: Man on the moon

Alston Mabry replies:

I always thought it would be interesting to make insider trading legal, within a framework that included real-time reporting of trades made by those registered as "insiders". (And perhaps any employee of a company would be considered an insider.) Then the information contained in the trades would at least get transmitted to the markets quickly and overtly. You could extend it so this system would apply to any trades made by insiders in their industry.

Laurel Kenner notes:

The Loeb Award has been the most prestigious in financial journalism since it began in 1957. It's ironic that the founder's methods are now against the law…

Gerald Loeb, co-founder of E.F. Hutton, created the award to encourage methods that "inform and protect" individual investors. He himself relied almost exclusively on working his contacts for information. He would then publish the information for his clients. It's all there in his book, "The Battle for Investment Survival."

My goodness, how else are you supposed to get tradeable information? Are we all supposed to wait with our hands out for handouts? I guess that is the socialist model: handouts and no work.

Gordon Haave objects:

Legalize insider trading? Sure, in theory — but in reality nobody is going to play in a game where he feels his opponent has an edge on him. All you have to do to see how this works is to look at a place like Mexico [& many other emerging markets], where insider trading is rampant and blatant. The average person doesn't play.

Gregory Rehmke writes:

Some years ago Virginia Postrel argued that "insider trading" rules should be left to companies and to the various exchanges to decide. Exchanges will want to reassure investors and would fine members who broke the rules. I also think it is interesting that we only hear when "insider trades" make money. Such information is usually imperfect, so many trades based on this information lose.



B RafterMuch technical analysis has to do with linear calculations where the next day’s value is the result of calculating an extension of the former values: moving or exponential averages, moving linear trends, moving standard deviations. There has been so much of this that many suspect not much more juice remains in the fruit. But once you have exhausted the linear, what remains is the non-linear.

One variation of the non-linear is vector analysis, in which market movements are condensed into vectors without regard to a fixed time. Point-and-Figure analysis also “destroys” time, but acquires the constraints of blocks of price movement, and a lot of rules to go with them. Vector analysis just looks at pure movement from beginning point to one extreme, then the other extreme, and finally to the current value. If this analysis is done on end-of-day data, it has the beauty of turning the information presented as a bar into that of a flow chart. That is, end-of-day information can be transformed into intra-day data, but the process can also be used to “cut-to-the-chase” over longer time horizons. Let me illustrate.

On the left you see a stylized version of price behavior. The time period is not important, but for the purpose of illustration, let us assume that it represents the price activity within one day. The price opens, then moves to one extreme (here the high), then to the other extreme (the low), then finally to the close. These movements can be simplified by the vectors on the right. The last reported price is the arbiter as to who won and who lost. The assumption is that volume is distributed equally over the activity. The illustration also shows the calculation for the sum of the vectors, which very elegantly comes out to three times the close minus two times the midrange plus one times the open.

The sum of the vectors calculation can certainly be done on a one-day-at-a-time basis, but much more value can be gleaned if we examine it over more relevant time periods. That naturally then begs the question of which period is relevant, perhaps the most important question in this kind of work. Market followers have all sorts of favorite N values, like 50 and 200 days. However I propose that one look over the period when the positions were acquired (or when the bets were made if you prefer). Now we do not know exactly when every position was acquired, but a good estimate for the so-called “hot money” or options positions is how long it took to ramp up to the current level of open interest. This “lookback period” can be obtained by dividing the open interest level by one-half of the volume.

Let us assume that you have calculated your lookback period and it is 42 days. Then simply calculate your vectors based on the starting price 42 days ago and the movement to the high and low prices from then to the present. Each day your lookback period and extreme prices may change, and thus your sum of the vectors will change. The vector sum will move around quite a bit but a true picture will emerge if it is smoothed such as with a moving average, exponential smoother, moving trend (moving linear regression) or moving parabolic regression over the same lookback period. They all do the job and some are better than others. Here is a chart of the recent behavior of the sum of the vectors (exponentially smoothed) and the implications to trading SPX. It’s an easy way to determine when to duck.

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



President Obama has just declared the H1N1 virus a National Emergency [in the United States]. Dr. Janice Dorn

I must say, during the Australian winter, there was a huge fuss about swine flu…the popular media were all over it and screaming alarm due to its rapid spread. Now I'm in the northern hemisphere and watching the pop media up here do the same thing.

In Sydney at least, the reality was that so many people ended up getting it without consequence that it just faded off everyone's radar. In fact, at one point, many of the health services said, "If you have flu symptoms, you probably do have swine flu and just treat as usual". Some schools were shut down for a short period but, to my recollection, there were no serious, adverse consequences of this virus in the general public. However, having said that, pregnant women definitely seemed to be more adversely affected and there were some deaths amongst the aged (but whether they might have died even if they'd caught garden-variety flu is up for speculation).

People in my office had swine flu, friends had swine flu, a couple of extended family members had it - but no one of average health and constitution was more sick than if they'd had regular flu.

I'm not a doctor, nor do I wish to be flip about all this so, of course, I defer to those with the expertise and have seen / done the appropriate research. I mention this just to give some anecdotal "evidence" / hope that we're not all doomed. Furthermore, I've seen this virus do its thing through a major population centre and people weren't dropping like flies.

Additional Reading

I was very interested to read the Surveillance Report [20 page pdf] from the Australian Gov't health service regarding the national experience of swine flu to the present day…

I found there to be numerous helpful observations within. I highly commend reading of the full report and draw particular attention to the statistical tables and charts beginning p. 10 et seq.

My thanks to Dr. Dorn for keeping us abreast of developments as they occur. I would also be interested to hear of how the Australian figures compare to US observations (esp. re susceptibility of indigenous population) as things progress.

Also, worth reading is the Q&A about H1N1 Flu at the CDC based on  NEJM data.



Recently I made two trips to Medina, Ohio to watch current 3-Move Restriction Checker Champion Alexander Moiseyev of Dublin, Ohio duke it out over a 40 game match with Ronald " Suki" King of Barbados. Match ended in a tie of 4-4-32 drawn games. Steve Holliday of Ohio was match referee and Steve brought along some Checker items that I purchased. On the last evening of the match he had a large box full of Checker books. I ended up buying the lot and have been going over each book. I found one of interest authored by Julius D' Orio in 1922 and titled "Mysteries of Dama ". In his introduction his last paragraph caught my attention.

He wrote, " Being true to life let it be your guide in adopting a business course along sound principles, and remember, when a gain is made without balance it reacts. "



J SogiNow that statistical quant is being denigrated on the Street, I am seeing these old TA John Magee patterns that haven't worked for years appearing. Like broadening top. Anyone else?

One of the weaknesses of statistics is the problem of changing cycles, and the appearance of hidden or unknown variables in a data series. Though it is prospective looking, it still uses historical data. The other issue is the role of randomness where very very long runs can appear, even in random series.

Bruno Ombreux defends statistics:

I don't think statistics are weak, but the present environment is unique. For decades, we enjoyed a relatively stable environment and a capitalistic system. This has changed. All bets are off.

The problem is that the type of environment we are in, for instance consumer deleveraging while the Fed is money printing, has not happened very often. There are some similar situations in the 1950s, and some in the 1930s. That's not a lot. Therefore we can't even condition on the environment, because we don't have enough data for such environment.

I had come to rely on statistics. For the past few months, nothing has been working for me. I am not having a good year. Actually, this is my worst year since 1999 (compared to the index) and since 2002 (in absolute terms).



An article in Technology Review highlights research into the tissues connecting neurons in the brain and their effect on intelligence. If the market is smarter than any of its participants, what can a trader observe about its information paths?

"But what if the key to intelligence is neither an individual area of the brain nor its total volume but the network over which information is transmitted and integrated? In 2007, [Rex Jung, a neuroscientist at the Mind Research Network in Albuquerque, NM,] and Richard Haier, now professor emeritus of psychology at the University of California, Irvine, developed the first comprehensive theory drawn from neuroimaging of how the brain gives rise to intelligence. Gathering information from 37 published papers that had used imaging to study intelligence, they mapped out the brain areas that had been pinpointed in at least a third of the studies to sketch a network of regions spanning the frontal and parietal lobes.

The network consists of about 10 nodes, or clusters of cells, that had been linked to attention, working memory, and facial recognition, among other cognitive functions. Applying existing theories of how information flows in the brain, Jung and Haier hypothesized that neural signals travel from nodes near the back of the brain, where sensory data is collected and synthesized, to those in the frontal lobes, which are responsible for decision making and planning. The connections between these nodes, they argued, are just as critical as the nodes themselves. 'If the nodes of a network aren't communicating effectively and efficiently, then the network won't function efficiently,' says Jung."

"Some of the newest theories of intelligence suggest that the crucial factor may be how efficiently information moves around the brain, rather than just how quickly. In a recent study led by Martijn P. van den Heuvel, a neuroscientist at University Medical Center Utrecht, in the Netherlands, researchers defined efficiency as the number of links it takes to get from one node to another–both in specific brain areas and all over the brain. Just as a direct flight from Paris to Chicago would be considered more efficient than one with a layover in London, a direct link between two parts of the brain would be more efficient than an indirect route."



J SogiBruce Bueno de Mesquita's book Predictioneer's Game was my first comprehensible book on the subject and definitely piqued my interest in game theory. He is a political scientist using quantitative rational choice models. He quantifies in a relative way the actor's bargaining power, motivation, position, and in later models, a stochastic factor. The most important step is to ask the right questions and frame the issue to quantify. Relative values are given to the variables, and they can easily be combined to show, at one level, the likely outcomes. Perhaps not so obviously, one's bargaining power and position, and motivation, when combined,give some relative indication of the likely outcome of that parties negotiation or actions. He has developed a computer model which does the calculations and give predictions. Deconstructing the computer model, which he does not disclose how to do, requires some further background research for which he give some clues in the notes. The model is based on the Nash equilibrium which oversimplified is demonstrated in the tragedy of the commons and the prisoner's dilemma. The basic idea is that people will act in their own self interest resulting in an equilibrium lower than optimal for the actors, but which results when each actors acts with his own self interest foremost.

There are recent algos which model this and which allow one to iteratively compute the game tree likely outcomes and equilibrium at each step between parties. If I'm not mistaken, the basic algos use basic math. For the stochastic element, bootstrapping techniques seem to be used to derive a derived mean. With two or three parties, one can keep these in mind and intuitively figure it, but with multiple parties and multiple issues, the combinations are factorial in number and can't be tracked without computer spreadsheets.

Taking a game theorist's look at the current economic situation, one can see that Geithner's and Bernanke's true self interest is preservation of their public image and place in history as the one's who prevented the depression, rather than the one's who allowed it. With that as their self interest, one can see that they will spend all the money, and more, and keep rates lower long than needed, regardless of the out come down he road. They will both be gone later, so they don't care if the next administration/generation is broke, as long as their reputations in history are good. We saw the same thing with Greenspan. The is the example of self interest acting above the common good. This is one of the structural weaknesses in the current constitutional system, with short tenures.

I see no reason market fluctuations couldn't be framed in the game theory model as well. The market actors can be quantified, as can their motivations. Chair often does this in a qualitative manner, but it could be quantified under game theory in a scientific manner.

The next book on the subject I'm going to read, which appears in the notes, is The Art of Strategy: A Game Theorist's Guide to Success in Business and Life by Avinash K. Dixit and Barry J. Nalebuff.



VNSeeing Bye Bye Birdie and how Birdie is portrayed as a hard working salt of the earth person when he's looking for supper among the fans reminds one of the challenger [in the story] by Ring Lardner and of the diffidence with which various parties paint their woes and point their fingers at people who, like Mellon and Insull in the 1930s, while completely innocent and indeed exemplary, served to deflect attention from the self dealings of the accusers, the palliatives, red herrings, and Galtonesque dissemblers who always left their real cache in a high tree, while leaving a moite buried beneath the trampling feet of their oxen.

When will this orgy of absurdity cease where this or that analyst lowers the estimates for one company for one quarter and it brings an immediate 1 trillion dollar decline in wealth along with the 1% decline in the market. One sparrow does not make a spring nor does one analyst's ideas announced propitiously create a raison d'etre.

On 2009/10/21 the euro:dollar set a nice round of 1.50 while oil set a nice round of 80, copper crossed $3.00 and beans crossed $10 a bushel and Berkshire stood solid as a stone wall at exactly 100000. Like the defeated North at the beginning of the Civil War, the S&P tried to break 1100 getting within one point of it twice in the last week, only to thrown back to the Potomac on both occasions.



AmazonYesterday I hiked a jungle path along the Rio Amazon that broadened every thirty minutes at villages of 10-30 thatched huts and every couple hours at a stream where I sat on a bank to hail a passing canoe with a cheer. Occasionally a barefoot Indian came toting the ubiquitous 30'' machete and 20-kilo sack of yucca, bananas, nuts or fruit from his farm an hour's walk from a pueblo, smiled and passed, and I spoke to a dozen when I was a bit bewildered by the land. By late afternoon, I realized an image of a network of trails leaving the Rio Amazon into the interior jungle for days or weeks interconnecting thousands more villages, and derived a model for the early settlement of this planet.

In the beginning man settled along the great waterways in clusters. As the rivers were fished out, land farmed up, and game trails yielded less, the bolder families struck out one day's walk from their village to start a new settlement with fresh land, more fish and plentiful game. In a couple generations that area would dry up, the more slothful who could eke out a life remained, and the pioneers ventured yon… until the land became a network of game trails with villages about a day's march apart. The further you venture on these trails, I know from earlier hikes, the more rugged the gene pools, fewer the clothes, and the natives are surprised but genial.

A soft pad and shadow caused my snort on the path, and a Grandma pulled aside with a grin and offered to be my guide. We continued for an hour until the track touched the Amazon bank where the 36-kilo lady with a machete stopped, squinted upriver and jigged. 'The annual ship! ' she called up and down the trail though no one was there.

We dangled our feet on a stump 20' above the mighty Amazon and in ten minutes a handsome 130' double-deck black ship with white trim and multiple antennae, as if by fate, did one full circle to ferret a dock and it's shallow draught allowed it to pull to our feet! Two-foot tall white letters Amazon Hope filled our vision, a little brown man jumped out, swam to shore, and 6'' thick anchor lines were flung and clove hitched around two trees. A 1'wide plank splashed ten feet short of shore.

Grandma and I slipped hand-in-hand down the muddy bank, waded, and boarded first. By eye, ear and jungle divine, news in minutes of the godsend trembled along the network and the first of a hundred natives found the knoll behind us. I caught a baby from shore, and the hand of a senorita to wade thigh-deep water to the plank, and up. A green-frocked lady with apple cheeks led us up a dozen spiral steps as I reflected that the best equipment in any hospital is a warm welcome. It was a medical ship!

On the second deck we faced an amphitheater of bleachers before a wooden desk on the most shipshape craft on the Amazon, despite our muddy, dripping bare feet. Two eager Peruvian doctors in red Bermudas and white pressed shirts with shinny, caring faces breezed in and opened wide at the gringo. So I rose and announced, 'I'm not sick but my ten children are', fatherly spreading my hands over the heads of the nearest infants, and promptly sat down. The docs hurrahed, and all laughed. The nurse handed out forms and pens — Peru has the world's most reaching primary education and virtually everyone is literate except very deep in the jungle — for names, ages and medical complaints. Grandma is 65 and gets headaches working under the hot sun.

The nurse shuffled forms as a doctor rose to murmur, 'I want to tell you about intestinal parasites…' and soon erupted, 'Everyone has them, they will kill you, but here is the cure!' and he thrust high two red tablets . I accepted my free worm pills and was told to swallow even if I didn't have worms, but secreted them to fume that the floating medicine show had opened with a snake oil salesman act to grab the minds, strike fear and offer salvation to primitives who believe in animal spirits and have pathogens as pets. Yet I sat riveted for a rare glimpse of what happens when Third World disease meets First World medicine in the examination room.

Quick as a bucket brigade, the patients — now swollen to fifty — sorted into groups of ten and filed down spiral stairs to the yellow painted ship bowel to seat along a long bench from which I clearly viewed four open doors of the doctors ‘consulting rooms, a sonogram closet, tiny operating theater (local anesthesia), small lab, phone booth pharmacy, and fully equipped dentist office where a six-foot lassie raised a loaded needle to stare at my diastema I guess.

The staff was pure Scottish except the two Peruvian doctors, and the hospital was spic-and-span. The procedure was snappy, and half the bench emptied, as I sat put. A medical history begins with the doctor prompting the patient to chronologically relate the symptoms so he can make a diagnosis and write a prescription often before the patient stops talking a minute later. This is good medicine though as a veterinarian I took a little longer to muzzle some patients. Each exam took five minutes, the patients filed to other rooms, and the rest of the bench including Grandma emptied for the free doctor's offices.

Another group of ten descended the stairs, and to make room I walked three steps to milk the stout pharmacist. In 2001 Scotland donated the Amazon Hope, an ex-Royal Navy ship 'RMAS Milford', to cross the ocean via USA (to pick up volunteers) to the river Amazon to carry out medical trips using American, UK and Peruvian medical professionals to provide gratis services to jungle riverside pueblos. Each team of 6-8 is delivered by speedboat from Iquitos, works afloat ten days, and four on holiday before returning home. This crackerjack Scottish staff of two doctors, dentist, nurse, pharmacist and lab technician has paid their own way during annual leave from practices. It's their ninth day of sunrise-to-sunset work, yet they're keen at the task.

The breakdown of medical cases includes 30% dental with fillings and tooth extraction, 40% pediatrics, 20% geriatrics, and 10% catchall including a man sitting next to me with a fish spine in his red swollen foot. The majority of cases are intestinal parasites and scabies. Rare emergencies are speedboated to Iquitos or Pucallpa. The ship stops twice daily along the Amazon wherever she can dock with 100-200 patients seen at each, and a clinician goes ashore to the nearest schoolhouse to teach hygiene and family planning, The Hope has no base and provides health service to about 100,000 indigenous people where I've been walking for three weeks.

The people welcome the visit like the Starship Enterprise. The rub is these patients are pictures of health, the children golden aglow and the seniors move with oympian grace. Nearly everyone boarded for the show and coddle — who can blame them in this insect inferno — and free meds to stockpile if a disease hits before the annual ship revolution. I am the best bet for the most ill aboard and feel pretty fair for sore feet and a thousand chigger bites. The past three days on the trail were sluggish, and yesterday I shivered, put a cup to my forehead instead of mouth, and defecated in my baseball cap. When the pharmacist heard this she slipped seven Chloroquine in my pack should the symptoms manifest of what I suspect is malaria, and those grains will kick hades out of the Plasmodium, one strike for medicine.

Grandma and I exited the plank now extended by a log to straddle the shore. I laced my shoes and she confided high blood pressure and had been told to limit salt intake and prescribed aspirin. One doctor makes the work of another, so I countered that she maintain salt, wear a hat, jump in the brook, drink, and get the grandkids off their butts to the farm.

We strolled the jungle where the report, 'The ship has arrived!' shook the grapevine and dozens scurried the paths to make the docking as if it were Pizarro. I winked and introduced Grandma to Hippocrates, saying, 'Walking is the best medicine'. Beneath a ten-story tree she begged my worm pills for her husband, and peeled off to the interior for a pueblo called Santana, leaving me a bit lost. But there is no medicine like hope, and no tonic so powerful as an open track into the jungle.



A VeltmanThis two-day, near Davos-quality Forum finally drew curtains late Friday. A rare opportunity, indeed, to pick brains of such present-day luminaries as Geithner, Summers, S*r*s, Ross, Scholes, Niederauer, et al; here are a few vivid highlights (and surprises!) of the gathering.

As a Dailyspec reader I was profoundly stricken by Wall Street, DC, CT and MA dignitaries' complete oblivion in regard to this web site's leading dogma: that strategies that did not work last year … will prove odds-on favorites this year! Just hear a few of the VIP's assertions:

1. The opener from Wilbur L. Ross: the problem lies in over-reliance of today's financial industry on quantitative methods, promising that tomorrow is likely to follow patterns borne out  yesterday. The crash occurs precisely when tomorrow is nothing like anything seen yesterday!

2. On future dependability of capital markets (of all things!): survey placed China tops, followed by India, Canada, Australia. Off the bottom, survey featured Russia, UK, Japan and the US capital markets!

3. Economic expectations are largely unchanged going forward (that's following 6-month median doubling of stock indexes in markets world-wide!)

4. The most outrageous Oxford-style Debate upset, all by itself worth the $3,500 venue ticket: the NAY-sayer duo Richard Bookstaber/Jeremy Grantham reversed the pre-debate 20/80 lag into a post-debate 80/20 victory over financial PRO-innovation duo Robert Reynolds/Myron Scholes! Phillip Coggan presided.

5. Stephen Roach's belching critique of the Fed and call for White House's intervention fell on deaf ear of Lawrence Summers, who reparteed: gosh, Steven, everyone is really confused as to where you really stand!

6. George S*r*s dubbed "short US Dollar" an over-crowded trade. Palindrome briefly touched on "inverted square root" recovery theory.

7. Timothy Ryan's debate produced an interesting argument in defense of Goldman Sachs compensation pattern: just like Walmart purchases its inventory at certain prices in China or wherever they decide - so does GS (who provides financial services) pays for its brain inventory whatever they deem necessary to win customer business and ultimately sustain profitability!

8. Harvard's Niall Ferguson thoroughly warned on China's reserve diversification plan: yes, it's very much away from the dollar - but no, it is in no way toward any other currency on the planet. Rather, China will concentrate on hoarding industrial commodities - and no paper currencies whatsoever.

9. Roger Altman assured that there is no currency in the world that will be ready to assume the Dollar's role in near decades, for simple practical reasons. He then excused himself (having to leave his seat at the overtime panel). Coincidentally, Jeremy Grantham stumbled-in from back-stage, fell into Altman's chair and gave Columbia's Jeffrey Sachs quite a history course, as to why China and Japan will never get in bed together - as opposed to Sachs' argument that Germany and France eventually did. Moderator Matthew Bishop jokingly invited "any random audience member" to feel free and grab a seat at the stage!

10. Other lighter notes included Larry Summers' advice, that all of history's bubbles and crashes were the easiest events to forecast: just never stop calling them! In his Harvard years, they "attempted to arrive at second/third best solutions - and ended up with fifth/sixth best." He just hoped that the White House doesn't end end up with thirteenth/fourteenth best… After all, per John Micklethwait's introduction: "It's better to be imperfectly right than exactly wrong!"

11. Myron Scholes had to do plenty of explaining: All higher achievements in civil engineering led to safety improvements - why did new highs in financial engineering result in increased risk?

12. Philip Coggan's debate introduction: what creates higher fees flow is information abridgment, distance from execution facility, cheat-execution, i.e. license to steal - arguably enjoyed by financial industry equally in the past, present and, alas, the future.

13. Yale's Robert Shiller noted: if modern-day and upon-coming financial instruments were less arcane, then how would you be able to charge ever higher fees?

14. Elizabeth Warren agreed: many a financial institution pride themselves of questionable innovation heights: if checks were to bounce - then they will bounce in the order of maximized over-draft fees!

15. Richard Edelman pointed out: "It wasn't just time per se - that brought hi-tech industry and its products back to their current supreme status - in the after-math of 2002-2003 annihilation. It was innovation and cutting-edge achievements."

16. Devin Wenig's over-riding concern was: during an overnight inter-continental transfer - who owns (defaulting) assets?

17. Brilliant working session moderator Zanny Minton Beddows had to defuse another explosive query: "1980's S&L crisis misdeeds resulted in nearly 3000 convictions - and the latest banking debacle produced 2 jail terms to-date??"

Well, near the Conference's tired end, it appeared to me that everyone seemed to agree with Winston Churchill: "Democracy is the worst form of government, except all those other forms that have been tried from time to time…"



Father / SonJohn,

I just wanted to take this time to wish you a happy 21st birthday. It's hard to believe that you are 21 years old, and it's harder to believe that I made it this long. I would like to congratulate you for making your life so complete, and I'm very proud of your accomplishments. You've come a long way from the little beach rat you started out to be. All of your life, your mom and I made a very conscious effort to teach you the difference between right and wrong, as that is the measure of a complete man. We diligently taught you how to think on your feet, and how to think on your own terms. You embraced our high standards, then decided to exceed our wildest dreams and expectations.

Ever since you were a little boy, you had an insatiable curiosity about words, logic, languages, numbers, and music. You saved us a lot of time by teaching yourself to read, learning how to count, and add and subtract all by yourself. Your basic intelligence provided us with a pedestal, a foundation, a sound base in which to help guide your progress. We were rather laissez faire in our approach to teaching you, but you obviously soaked up knowledge like a sponge. Teaching you was a joy for both your mom and me. I especially enjoyed teaching you, and showing you the mad experiments I would concoct for your amusement and learning.. Our little experiments drove mom crazy, but then again we sure had fun.

I like to remember our rather spirited dinner table conversations you participated in since you were two years old. We always included you in every topic and discussion, and your very patient mom offered to clearly explain everything you didn't understand. Your mom and I didn't always agree on subjects, and we allowed you to jump into the fray, developing and formulating your own opinion. We respected your opinions as long as they were well thought out and intellectually sound, and corrected you when you had flaws in your thought process. If you remember, we always had the best dinner table discussions, and somehow the kids in the neighborhood all wanted to be at our house around dinnertime to participate and hang around. You know it wasn't the cooking that brought them over, but the love and respect we all showed one another. Your mom and I made a conscious effort to make out house a "Cool" house, where all the kids would want to hang out. I must confess that we weren't entirely altruistic, but we did that to keep an eye on you and your friends. Remember how Teddy and Alan stopped coming over. Your mom and I made a decision that those boys were going to get in trouble, and that you shouldn't associate with them. It turned out that we were both right, as both of them ended up in jail, and are common criminals.

I remember when you were a kid, I'd drive you nuts asking questions and creating hypothetical situations for you to analyze. Later on when you were a Middle 5th, you finally realized that all those questions were to enable you to develop your mind and thinking process. I might have used the Socratic Method on steroids(as you put it), but it taught you how to think and apply rigorous analytical skills to problems.

I remember when you were a little boy and showed zero interest in science. In fact, you hated science and math with a passion, Your mom was more concerned than I was, as I immediately figured out that you were wired differently. You got your penchant for the classics, arts, languages, and music from mom. Since she was preoccupied with her own artistic endeavors, I decided to take it upon myself and get you up to speed in those areas of your interest. Helping you learn, teaching you, was something that taught me as much as it taught you. Still, you did learn enough about math and science to get by, and I have no complaints there.

One of my greatest joys with you has been your affability, and genuine interest in making and keeping friends. You are one of the nicest, friendliest young men I have ever known, and have more friends than I can count. You are obviously doing something right, and again, I attribute your social skills, grace, and high culture to your mom. Still, it would serve you well in the future to only associate with people of the highest integrity. After all, the old cliche, "You are known by the friends you keep," certainly holds true. So far, you have done a reasonably good job in making and keeping friends. However, you need to not always think that every one of your friends will do the right thing, like that episode last summer. If you choose your friends wisely, life will be so much easier. One strong characteristic that you have that causes me admiration is your loyalty. Loyalty, combined with your word being your bond will get you far in life.

I urge you to keep up your interest in the arts and music. Your musical knowledge, theory, and general aptitude for music exceeds that of most music professors. Keep playing the bass, and keep recording your music with the equipment I bought you. I used to do a lot of that in college, but sadly, most has been lost because everything was on tape. You won't have those problems with digital. As for the art, someday, you will inherit a fine art collection. Remember that the art collection is not yours, but you are just its caretaker. Remember that final discussion your mom had with you about art belonging to the ages.

I hope that you keep up your surfing and golfing. I'm more concerned about the surfing as I'm rather selfish and intend on keeping you in the water when you're 50+. Surfing has been good to me and kept me sane. Plus, you are the best surf partner in the world. Think about it, all the thousands of waves we've shared all over the world….not too many father and sons can say that.

I know it's not PC, and we've had countless arguments about this, but one cannot discount the genetic component of your makeup and personality. Your excellence in classics and languages is not by mere accident. Your Uncle David was a classics scholar, as well as mom's dad and her grandfather was a man of letters. Your mom was a world class artist, and you are very proud of her work, and never fail to show your friends the videos, ads, watercolors, and illustrations she made. I sense your pride, and feel it myself. Getting back to genetics, when you finally decide to settle down and find a mate, please consider all the factors that will be in the mix. You need to find someone that will improve our line, just like your mother and I did by having you. Genetics are very important, and you can go to any pub and look at most of the habitues as an example of bad genetics. Have you ever noticed how the street people look different than the people at the club? It's all genetics, and intelligent and successful people breed with intelligent and successful people. The converse is true, just look at the underclass and the differences are readily apparent. You'd have to be blind to not see the difference. Remember when you were a little boy and I'd drive you through the bad part of town and you'd ask about the angry looking men hanging around and I'd tell you, "Those are the guys that didn't do their homework." I should have added the part about the genetics, but then again, you were only five and genetics was beyond your scope.. When you find a girl to settle down, take a hard look and consider if being with her will improve you or not. Always opt for the improvement. It's a common mistake for a man to fall to ruin, because the momentary pleasures of the flesh can cloud one's judgement. Don't allow that to happen. There are going to be a lot of women trying to snag you, as you're an outstanding catch. Don't allow the woman to choose you, choose her and make it a mutual thing. Use mom and me as an example of a loving couple, and live by that.

In two years, or ten, depending on how long you study, someday the real world of mundane things like getting a job, paying bills, and buying a house will be a priority. Remember to always think everything through and not do things on a whim. That sharp salesman is not your friend, despite his affable nature. People will try to look for an advantage, and some might take you for being an easy mark. My greatest regret is not instilling any street smarts in you, but that was an argument I lost with your mom. The easiest word to say is No. Your great grandfather drilled that piece of advice into me when I was just a little kid and it has served me well over the years. Speaking of your great grandfather, I would like for you to re-read his list from time to time. I have found that list to be a guiding principle in my life.

Finally, please realize that I will always be there for you. If I'm down to my last three cents, I will gladly give you two of them. Never be afraid to ask anything of me, and never be afraid to challenge me….but do realize that you better have all your ducks in a row if you challenge me. I know it's cliche, but a good way to look at life is to always do the right thing, even if someone isn't looking.

I've never told you this before, but your greatest characteristic that I admire is your strong desire to do things on your own and not ask for assistance. When you applied to prep school, you did it by yourself, filling out all the applications, lining up interviews. Same thing with college. You've really made things easy for me and I thank you for that. Not that I wouldn't be willing to help, but self reliance and individualism has been a hallmark of our family for generations.

Now that you're 21, you will be able to become a Mason if you so wish. Since you are a legacy, there will be no problems getting accepted into the oldest fraternity in the world. It will take a lot of hard work to become a Mason, but the rewards will so exceed the effort you put in to become one. I, personally would like to give you your Apron Lecture, and that will be the proudest moment of my life if you chose that path.

John, as you become an adult, I just want to reiterate on just how proud of you I am. Your mother would be equally as proud and I know she's looking down and smiling.. You have become the best of your generation in our family. I expect great things from you and know you will be up to the challenges life brings.

The main thing I want for you to do is be happy. Despite all my [misfortunes] over the past three years, I still have remained relatively happy. I might have my moments, but you know what I mean. Life has its ups and downs and you just have to roll with the punches, no matter what they throw at you. Our family is a resilient breed, and you, clearly are the best of breed.

One final piece of advice as you become an adult. The farms you inherited from your mom, although they're not the greatest, make sure you always keep them and never sell them. That is your real legacy.

Happy 21st.



Jeff Watson, surfer, speculator and art connoisseur, blogs as MasterOfTheUniverse.



The Blind Swordsman, Zatoichi by Takeshi Kitano (2003) is a modern remake of a samurai classic that the Grandmaster Nigel would love. Kitano, who also stars, did a wonderful job directing in a modern style. There are touching scenes, comic scenes, great fighting scenes with more realistic fighting sequences. There is a fun dance scene at the end. Its really a 21st century samurai movie. The swordsman is blind, but with sixth sense seems to know where his opponents are and can fight better than any. He tries to obtain his advantage by fighting at night or in the dark. From a market point of view, some reversion heavy models leave one feeling like a blind swordsman in perhaps the greatest bull market. Speed, like Zatoichi, and a sixth sense, or at least other data, seem helpful. The movie received international critical acclaim. There are some dark forces at work: revenge, greed, exploitation. Zatoichi takes care of them though.



To avoid the new flu virus it is advisable to use plastic cutlery and absolutely distrust any metal cutlery, especially when eating out. — Dr. Janice Dorn

If I might interject for a moment I suggest that eating with plastic cutlery at restaurants is likely to inhibit one's chances to mate. — GM Nigel Davies

All of which might provide grist for an exercise in natural selection, by way a classic model which simulates the population changes over the last few centuries of the peppered moths of Manchester, England.

The theory is that as the Industrial Revolution generated more and more pollution, the darker-colored peppered moths came to predominate over their lighter-colored counterparts because they were better genetically equipped to blend in against the increasingly soot-covered trees upon which they rested. Thus, the lighter-colored peppered moths were more visible targets to the birds that preyed on them.

Over the course of time, and pursuant to the classical principles of natural selection, this would obviously lead to predominant traits in the overall peppered moth population. Conversely, as pollution was rolled back in more environmentally conscious times, the trait pendulum swung back as the lighter-colored peppered moths would now have a more level playing field on which to survive.

One could download such a simulator from the kind folks at Northwestern and illustrate exactly how this phenomenon works. It's both very straight-forward and quite easy to use, and I've found it very empirically educational to anybody trying to better understand the ebb and flow of Darwinism.

So for our purposes here, we'll think of the h1n1 virus as the pollution, and for our disparately colored peppered moths, we'll borrow an Odd Couple from popular culture, Felix Unger and Oscar Madison. I think everyone would agree, that communicable virus or no communicable virus, the fastidious Felix would have no problem with bringing his own plastic cutlery to dinner at the Four Seasons. Whereas, the slovenly Oscar would sooner wipe his mouth with his necktie than yield to such a precautionary measure.

We'll suppose that Oscar represents the lighter-colored moths, and Felix, the darker. So by ratcheting up the pollution levels (h1n1) by using the Pollute-World button on the simulator, look over on the right to what happens to the Oscar/Felix stasis. Neuroses becomes a survival trait. Conversely, as the virus fades by way of the Clean-Up-World button, look what happens to Oscar's slob-by survival chances as the environment becomes incrementally more antiseptic. Equilibrium returns.



What would a weekend be without my noting that Mr. Dow crosses back and forth over magic 10000 gravitational level six times on Friday, as was guaranteed to happen.

Allan Millhone comments:

I note a different Isaac Newton effect as pump prices rise in the last ten days. I read in morning's paper an inside trader hedgie arrested. I feel as a sheer novice it is scoundrels like him who moved the Market to ten thousand and not a solid economy; as to foreclosures we have yet to see the true picture. This coming Winter will be a very cold one and demands will be made on natural gas and ole Reddy Kilowatt. People will use their cash for food and fuel and home utilities and holiday retailers will suffer.

Alston Mabry takes out pencil and paper:

The Dow first crossed 10,000 on 12 March, 1999. The first open above 10,000 was 19 March, and the first close above was 29 March.

Looking at all Dow days from 29 March, 1999, to present and calculating how far in points each close is to its nearest round thousand, produces the following stats:

Total days: 2657

Mean distance in Dow points from nearest round thousand: 265.46

Histogram (using 25 point bins):


0-25 112 4.22%
50 122 4.59%
75 104 3.91%
100 119 4.48%
125 132 4.97%
150 135 5.08%
175 105 3.95%
200 124 4.67%
225 144 5.42%
250 115 4.33%
275 126 4.74%
300 135 5.08%
325 140 5.27%
350 116 4.37%
375 131 4.93%
400 156 5.87%
425 168 6.32%
450 156 5.87%
475 157 5.91%
500 160 6.02%

Looking again at this histogram, one can total the bin %'s in different ways:

distfromround / %totaldays

.   0-250 45.6%
250-500 54.4%

.   0-125  22.2%
125-250  23.4%
250-375  24.4%
375-500  30.0%

We are honored to receive this communication from Prof. Charles Pennington:

Benford's Law gives expectation frequencies for the first digit of a numerical quantity that's thought to be uniformly distributed logorithmically over several orders of magnitude. The Dow has varied by about 2 orders of magnitude since 1928. Here's its distribution along with the Benford's Law prediction:

first digit / frequency of occurrence in daily Dow 30 prices /
expected frequency from Benford's Law

1 35.0% 30.1%
2 12.5% 17.6%
3 6.3% 12.5%
4 4.7% 9.7%
5 3.7% 7.9%
6 5.5% 6.7%
7 6.1% 5.8%
8 14.2% 5.1%
9 11.9% 4.6%

(There were 20,352 observations.)

So there are "too many" 1s, 8s, and 9s, and not enough 2s, 3s, 4s, and 5s. Because of the serial correlation in the daily prices, it's not obvious (to me) whether this is statistically significant, but over history the Dow has spent some extra time hanging around near the powers of 10.

Victor Niederhoffer bypasses Benford's Law in his evaluation:

Yes, it seems significant. There were 45% within 250 points and the standard error expectation was 25. So the deficiency of 130 is five standard errors from expectation.

Alston Mabry follows up:

I broke the Dow into non-overlapping 250-day segments and counted the number of times within each segment that the Dow had an 8- or 9- handle. Chart of the results (click on All Sizes [magnifying glass] to see large version).

Conclusion: the big skew is there from the mid 1960s into the early 1980s.



The Edifice Indicator - by Observation Deck Heights

Held record     Name and Location                Built    Height(m) Height (ft)  Notes
1889    1931    Eiffel Tower, Paris, France      1889     275       902
1931    1973    Empire State Building, NYC, USA  1931     369      1211
1973    1976    World Trade Center, NYC, USA     1973     420      1378
1976    2008    CN Tower, Toronto, Canada        1976     446.5    1398
2008    present Shanghai WrldFinCen, China       2008     474      1555
1. Two further observation decks 57 and 115 meters above ground.
2. A second observation deck is located on the 86th floor at 320 meters above ground.
3. Destroyed during the September 11, 2001 attacks
4. Two further observation decks 342 and 346 meters above ground.
5. Other observation decks are 423 and 439 meters above ground.

As Heidegger might have put it, "The Height of the Public Diminishes All Else"



Directed by Hans-Christian Schmid

STORM, from the passionate and disciplined Hans-Christian Schmid, is in Danish, German, English, Serbian and Bosnian. In any language, it is a must-see.

A gripping political thriller and an important documentation of the horrendous 1990s ethnic violence in Yugoslavia, Serbia and Bosnia.

The Hollywood Reporter lauds it with “Acting across the board is splendid,” but the superb acting is only a portion of the significance of this film, which grapples with a theme few filmmakers would be intrepid enough to approach.

The attractive Hannah Maynard (Kerry Fox, a standout here, last seen in the intense ANGEL AT MY TABLE, brilliant in everything she graces) is the put-upon prosecutor of the International Criminal Tribunal of the Hague. She is shunted into a trial that is already three years in against a former commander of the Yugoslavian National Army accused of deportation, later murder and brutal ethnic cleansing of Bosnian-Muslim civilians. Though he is acclaimed as a hero among his Serbian confreres, he is an unacknowledged monster among those whom he mistreated but who are yet alive…and dead silent about what they underwent during the violence that transfixed the global airwaves 15 years ago.

The key witness for the case unaccountably commits suicide, almost capsizing the entire case. Though her colleagues and overseers tell her to pack it in, Maynard refuses to yield in the face of what she knows to be a critical juncture in historical justice. Convinced she can unearth further witnesses and reliable facts, and despite ugly intimidation from unexpected sources wherever she travels, as well as cool words from her politically connected statesman-lover, Maynard determines there is extractable dirt under the surface in various sites in Sarajevo. She meets people distraught and silently furious, yet clearly still unable to dare come forward with their witness. The moiling angers of the past may seem smooth to the tourist, but to the citizens trying to make their way among dangerous powers still evidently entrenched and not shy about what they can do to the inconvenient, they are mute. Maynard works all her diplomatic skills and wiles to convince Mira (an extraordinary Anamaria Marinca, prize-winning Romanian actress winner of the Palme D’Or for 4 months, 3 Weeks, 2 Days), sister of the suicide, to testify.

The relevance of the film could not be stronger, as on 19 October, the trial date of the accused Radovan Karadzic is on the Hague calendar. The former Bosnian Serb leader stands accused of genocide, crimes against humanity, and violation of the law at the International Crimes Tribunal. His trial, in fact, is a fulcrum for world reaction and persecution of the Bosnian massacres—and demonstrates sharply the importance of pursuing these crimes via every means possible.

Perhaps by shining the light on such crimes, these terrible abuses and horror can be brought to heel, and possibly stemmed.



A book every speculator should read: The Farming Game by Bryan Jones, 1995.

Think Green Acres [an old U.S. television show] meets Louis L'Amour, Mark Twain, and Will Rogers. Full of wisdom and insight into the human condition in general and economics in particular.

Vincent Andres add:

A great today story: Buffalo for the Broken Heart, by Dan O'Brien, 2001.

This story resonates very strongly with my own views of life. There is a place in it for macroeconomics, microeconomics, entrepreneurial spirit, regulation (bad and good) and so many good (so many forgotten!) things. Understanding things on our own, and not through traditions, mythology or advertising. Understanding that errors, even if they are old, even if they are widely spread, even if they are deeply supported, are however errors. Thanks to Dan O'Brien for this deep story, thanks for his frankness.

Review by C.C.Bucholz

Amazon.com Review:

"Some 20 years ago, Dan O'Brien, intoxicated by the Black Hills region of South Dakota, purchased the Broken Heart Ranch and began running cattle on more than a thousand acres. Though the decision ultimately cost him his marriage and, at times, his peace of mind, he feels a connection to the land and the lifestyle that continues to justify the decision. When necessary, he has even worked as an endangered-species biologist or English teacher in order to support his ranching habit. His engaging book, Buffalo for the Broken Heart, details both the rebirth of his ranch as well as himself.

"Desperate to rediscover purpose" in his life and disillusioned with working like a serf for the bank while supporting cows–those lumbering, small-brained icons of the plains that O'Brien describes as "a sort of reverse beast of burden. I was carrying them!"–he made a snap decision one day in January 1998 to take in 13 orphaned buffalo calves from a fellow rancher. Later, after much soul searching and contemplation of both practical and emotional matters, he decided to jump headlong into buffalo ranching. He expected differences between the two animals, of course, but was pleasantly surprised by the buffalo's self-sufficiency. Since buffalo are native to the plains, they are much gentler on the land and are able to find most of their own food and water. Plus, their meat is healthier than beef (and delicious to boot), and buffalo do not need the heavy doses of antibiotics, steroids, and hormones that cattle require–a process O'Brien likens to "locking children in a room with ice cream and potato chips and treating the health problems that result with expensive medicine."

O'Brien is a splendid storyteller, and his narrative is a skillful weave of the history of the buffalo on the Great Plains, colorful portraits of fellow ranchers, descriptions of the plains' rugged beauty, and a clear-eyed account of the harsh realities of ranching in this unforgiving landscape." — Shawn Carkonen



Today's [2009/10/15] US news grabbing scene of the flying silver UFO balloon or upside down puffy ice-bag from the old movies flying on the winds of fate gave me pause to reflect on the stock market run from the March lows till now. The green shoots of helium gave the airship its gas. The "prank" –someone loosening the tethers, an insider, a market "brother" gave the ship its launch energy. Think relaxed accounting rules for banks and brokers for toxic derivatives; mark to whatever altitude you are comfortable with and an "OK" from the warmed air of political impetus and lift off is achieved.

The market craft gets going in the jet stream of the oversold thin air and it's out of our collective hands. The majority of the flight is of normal quality, no deviation of flight path-it's a one way air current. Must keep the craft in our focus at all times, for there is a young frail recovery on board. And if this craft crashes then it will be tragedy-unlike the one year anniversary of tragedy diverted by "Sully".

Do not approach the craft with critical attempts at rescue for fear of hurting the recovery "boy". Do not shoot at the craft's gas bag, don't do anything stupid. Chase after the craft on the ground with good money/hope and keep it in view "OJ style" at all times. God forbid the 3/8th inch plywood hatch would open and the fragile recovery would fall to its death in front of everyone on planet TV earth.

Channel surf, this is boring, I am making all my money back anyway being long this gentle ride. What?! It's over-it fell gently to earth and there is no recovery inside? Where is the recovery!? There is now a frantic search for the recovery.

The recovery was found to be a hoax-a prank. The recovery never left the foreclosed home and was never on board the airship. Unlike Sully, there was no pilot for this flight. Tomorrow's headline:

Parents of boy to be fined for filmed false flight fear and phony funds wasted. President Obama to give bravery award to boy for perseverance under duress.



VNStocks are at a several week maximum and bonds at a several week minimum as of the close today. This has happened with a rather amazing regularity on six occasions this year but not on the day before expiration in 2 1/2 years. How wonderful it is that hope spring eternal in the hearts of traders and man.

Everything that didn't work last year is working this year. And the Gannian adage that the best thing to do at the beginning of the year is to stand on your head and read the charts of last year, to be in the right framework for reversing goes. Of course, if you did that with leverage you would have been stopped out early on. But that's the whole point. Who would have had the fortitude to stay whole last year when buying the dips led to disaster and still be able to profit handsomely this year. What sagacity would have been required. Everything statistical that didn't work last year, worked in spades this year. But in a completely different locus with maximum after maximum and runs of up days upon up days, with nary an intervening decline of more than a gnat's eyelash in between.

It is interesting to reflect on how even in the heart of the tornado, the bankers knew enough never to "leave a trail" with their emails so that they would be able to deny any quid pro quo and harsh threats made on bicycles. Everything that my kind of people thought about markets that was wrong this year was right this year. I can hear Jim Lorie saying " the drift is up " and it's always best to buy and hold because if you sell , you have to know when to buy back and you miss the drift. I can hear him saying that he got a call from this or that Nobel winner from the faculty club in the middle of one of his board meetings in October 2008 or April 2009, demanding to know whether they should capitulate with their last 20% of their holdings and he told them not to panic.

The POMO adding 15 billion of reserves through direct purchases of treasuries, agencies or what have you every other day has had an amazingly consistent impact . However the expectations have not been that good in following it, because the form is always ready to change when the public gets onto it. And some of those rare but grievous declines have come amidst the orgy of liquidity created.

One wonders if there are direct payments allowed to economic advisers for speaking engagements the way they were available when one was formerly president of this or that institution or whether it's the usual Chinese Wall stuff like the bankers cry of "no trail".

Jeff Watson adds:

Being the self-admitted worst stock picker on the planet, I followed Henry Clews's advice during the panic, and the rest is history. As far as I can tell. In Chapter 2 of his book, Clews recounted the best, most certain way of making money in the markets. As a sidenote, I found a cane during that week of peril and, after many attempts, managed to throw it up on a high tree branch outside my house. That cane has stayed up there on the branch for months and months, and as long as it stays up, all is well. It's OK to be a little superstitious.

Jeff Watson, commodities speculator and art connoisseur, blogs as MasterOfTheUniverse.



"Frankly Speaking" from Frank Rosenthal.

Q: Why do you insist that a player can't beat the casinos? Is it the math or some other factor that draws you to that conclusion? I've spoken to several bright players who swear that you're wrong. Would you care to comment? Eddy Rocco. Elgin, IL.

A: It's a no brainer — and you can take it to the bank. Can a player get lucky and score? Absolutely, happens every day. However, as I've stated before, the casinos will grind you down, and eventually send you and the "bright players" that you referred to, all the way to Death Valley, on a one way trip! Case closed.

Frank Rosenthal had a pub in Boca down the street from our daytrading shop. He was fun. We watched Tyson lose his first fight and Mr. Frank was busy micromanaging the girls at the pub to "get those boys another beer."

None of us ever asked him the movie "Casino" questions… I guess that is why he talked to us at length about playing the sports book. 

In the movie there is a scene where Mr. Asia leaves with millions from the casino. So they do whatever it takes to get him back in.  They fake the plane being broken down, so Mr. Asia comes back and plays baccarat but at 10k a hand vs his usual 100k limit… and the gist is when he wins Mr. Asia isn't looking at it as winning 10k it's losing 90k.

Ace Rothstein [the name of the character modeled after Frank Rosenthal in the movie]: "In the casino, the cardinal rule is to keep them playing and to keep them coming back. The longer they play, the more they lose, and in the end, we get it all."



CEO Michael Dell said his Round Rock-based company is “rapidly developing” merger expertise and plans to make more deals similar to the $3.9 billion acquisition of Perot Systems — MSN Money news report

When I read this I was bothered by the phrase "rapidly developing merger expertise." Like somebody is trying to convince somebody else that "we have a new expertise," or essentially, a new business we are entering. The "merger" business. Which is harder to run on negative capital than the making-PCs business.

Victor Niederhoffer notes:

Dell discussing company acquisition strategy, pulling out all stops. When that's your big suit, you're in trouble. No shots left.

James Sogi writes from Hawaii:

Dell bought a hotel in Maui at the top of the market and it is bankrupt now. "[R]apidly developing expertise" or fooled by randomness?



White RibbonThe White Ribbon

Directed by Michael Haneke's [Austria]
In German, English subtitles.

Cast: Susanne Lothar, Ulrich Tukur, Burghart Klaubner, Michael Kranz, Marisa Growaldt, Josef Bierbichler, Leonie Benesch (Sony Classics)

Think Arthur Miller’s “The Crucible,” moved up a century or two, and set in Germany in the early 20th century. Or think Grace Metalious’es 1956 PEYTON PLACE, removed from Middle America and straitened into prim and constraining clothing. Even William Golding’s LORD OF THE FLIES comes to mind. The children here are not cherubs, but as guilty as are the adults.

The images evoked in this astringent, 2½ hour black/white study of deflected lives are of passions barely under control, people seething with unexpressed rage, unpalliated emotion, s_xuality inexpertly stuffed into societally correct gear and guises.

Director Haneke paints an iconic, if austere, masterpiece in violent villagers trying to cope with familial secrets, ugly liaisons, unholy alliances—while looking for all the world like a religious broach of impeccability. The roots of evil. Of fascism. Of religion owning nothing religious.

The town minister thinks he is fair, but he is brutal, unable to show love for his mistreated, heavily restrained children. The town doctor seems a model of probity, but is carrying on a brutally unloving s_xual dalliance with a widow with whom he shares less than nothing, insulting her whenever she asks for a crumb of affection or self-regard. Wives live in frank terror.

People are being hurt in a town with no apparent ‘reason’ for these ‘accidents.’ The doctor is felled while riding his steed of an afternoon. A child is taken into the nearby woods and flayed to within an inch of his young life. A town building is set afire in the darkness of deep night. The rich baron and his wife are not liked, though they employ half the town, and displeasing the baron, especially, spells economic disaster. Children are severely punished without the opportunity to explain or remark on the injustice of the offense they may not have committed. Wives try to flee cruel husbands, without much luck. Children with disabilities are tormented.

All told, it is probably much like our early childhoods, actually. Maybe others’ too.

The lack of color well suits the subject matter, the time just before the Archduke is assassinated, the world is holding its collective breath, and the vileness of the village under its starched aprons and canonical vestments is a caution for so many towns and villages of the past, and those yet to come.

In interview, the director knew very particularly his goal, and his aim was to point to a former time as a metaphor for the later times we all know perhaps too well. His effort is as shocking, but as powerful, as highly decorated German artist Anselm Kiefer’s huge, haunting sodden ‘artworks’ of earth, jagged metal, torn railroad ties and ground glass. They are art only to the extent that they evoke and point haunted fingers at his country for the havoc wreaked on the world in more than one World War.

Not a pretty picture. DER WEISSE BAND is rich with ironies and metaphors viewers cannot escape, even if they leave the theatre mid-film. Probably one of the more important films of the past decade, this director’s searing vision is in its way a cleansing blame, a scalding lesson.



HalloweenWe are not hearing much babble about what should or could happen in October from the popular financial media. Unlike September where we were "warned" up and down to be ready for horrors.

October has started quite similarly to September. Please see simple SPY chart.

So we have repetition without any warnings, but no real trumpets blowing (unless DJI breaks 10K). With the dollar down talk making headlines, I have heard some pundits tout that equities are tantamount to a play against a weak dollar — a la german hyperinflation coping strategy. I don't think that the average investor is long the stock market as an anti dollar play. But the passive investor who hung through the March lows now would be right and also unwittingly wise.



The economist and historian Ralph Davis estimates that the supply of sugar from the Caribbean into Britain rose from three or four thousand tons a year in the late fifteenth century to over two hundred thousand tons by the 1770s, or an increase of over fifty-fold. (The Rise of the Atlantic Economies, Cornell University Press, 1973, p. 251, 255).

Though sugar is coming off a solid hitout at the moment, and new lows have been seen, it may be one area that should be considered if booming emerging economies do not implode — though no doubt acreage, supply, weather and uses need to be considered.



In a recent post, The State of Short Term Mean-Reversion, Marketsci blog highlights how mean reversion strategies have not been working lately:

Do I think short-term MR will stage a comeback? Yes. I think the breakdown over the last few months is tied to the strong protracted rally, but that this slow grind up will come to an end and that short-term MR will again be the play du jour once we get to the other side.

I have experienced this deterioration in my systems (all contrarian of course).

Steve Ellison is more pessimistic:

I too lean toward the contrarian side, but am increasingly wondering whether that is just an irrational behavioral bias. If markets were efficient, there would be no mean reversion except by chance. Why should there be an advantage to mean reversion? Who is the dumb money that will buy high and sell low, now that the [daily rebalancing] ETFs are gone?



J SogiIn the Prisoner's Dilemma two persons are caught by police. They are interrogated separately. If they both remain silent, both get light sentences. If one rats on the other, he gets off, the other gets life. If they both rat, they both get heavy sentences. Game theory predicts in a quantitative manner they will both rat on each other. The markets present a similar situation.

Model the market with negative drift and two people. If both buy and hold, they retain some money but due to negative drift, it is eroded. If one sells before the other, the market will go down, he wins, the other loses. If both sell, both lose even more money. Though there are added variables, a differential equation from game theory can be used to quantify the process. According to Overcast and Tullock a repeated prisoner's dilemma game can be converted into a differential game by assuming that the players, instead of making decisions individually for each repetition of the prisoner's dilemma game, make decisions on the ratio of cooperative and noncooperative games that they wish to play over the next few moves, and that the actual plays are then determined using this ratio and a randomizing procedure.



In the film "My Cousin Vinny", after displaying his wholly unexpected talent for eviscerating the testimony from each of the prosecutions witnesses, Vinny remarks "I'm done with this guy".  

Being "done" with a trade should not be confused with being done with a particular security. I find, however, that in my own trading when I finish a trade and move on, I have a tendency to wholly disregard the vehicle I was just trading and go looking for other fish to fry. This, of course, tends to be a mistake. I'm not sure what biases are at play here, it seems like some sort of completion bias. (The closest thing I could find to it is the Zeigarnik effect which states that people remember uncompleted or interrupted tasks better than completed tasks).

I find this phenomenon occurs in my trading regardless of whether my last trade was a winner or not.



Some high quality youtube of Fabrice Santoro vs Julien Benneteau. Benneteau won the match, but he had to win each point three or four times before Santoro would let go.

Santoro might like the new two-handled NaturalTennis racquet promoted by a pro doubles team, the Battistone brothers, who bought the patent for it.

Victor Niederhoffer remarks:

That tennis is among the most beautiful match of racket sports I've ever seen. Reminds me a bit of a fantasy match between Evonne Goolagong and Althea Gibson. Or Vic Herskowitz playing Martie Decatur in handball or Jeff Hunt in squash versus Sharif Khan. amazing that Santoro can hit so well considering he can't move well. And neither has much of a serve or overhead which must have been their undoing.

Murali Mys agrees:

Santoro is a magician. He wields the racquet like a wand. He will be missed — 2009 will be his last year on the ATP tour.

Matt Johnson adds:

Santoro… Amazing touch and feel, plus, he loves the sport. I dig watching him. Actually, a rerun of a 2005 Masters Doubles Championship was just on Tennis Channel. Great tennis; four guys at the net, ping, ping, ping, lob volley, wind sprint, lob, overhead smash for the point. Santoro was a gift to tennis, I hope he comes back in a year or two, heck he's only, what, 36?

Don Chu extends:

Another Magician of the Court was the Moroccan, Hicham Arazi. With his dexterity, body coordination and rubber wrists, his touch and feel has to be amongst the best of any era. He could do so many amazing things with that racquet, admittably some of which had little to do with the game of tennis. Alas, his lack of a robust mental game, temperament and a complete game, was too much to overcome even for a wizard with his kind of body-alchemy; many times the Magician was reduced to Court Jester.



I saw this excerpt from a forthcoming book today. The background of which reads like a Runyonesque tale with an delightful O. Henry ending:

"Hard times with a high roller"

"Ronald Probstein, an MIT academic who studied at Princeton and met Einstein, was raised by a compulsive gambler in Depression-era NYC, But, he reveals, his shady dad is the one who taught him about life — and math…"

The excerpt about the father, Sid Probstein.

The son, Ronald Probstein.

Mark Johnson writes:

It just so happened I was reading about this book yesterday and had many of the same thoughts. Many good lessons to be learned and interesting reading. The father, obviously very intelligent, never hit his stride, but his son did.

Stan Rowen opines:

I find the article about the son far more uplifting than the story of the dad. Why? He applied his math abilities to several important scientific domains that were of enormous long-term benefit to society. Unlike his dad, who had to hustle in marginal activities his whole life, and died broke. The nobility of math, science and engineering vs. the pathos of a cog in the seamy underworld.



I find these Nock quotations strangely up to date and can only wonder how Nock would feel today.

"Many no doubt remember the "new economics" hatched in the consulship of Mr Coolidge, whereby it was demonstrated beyond question that credit could be pyramided on credit indefinitely and all hands could become rich with no one doing any work. Then when this seductive theory blew up with loud report in 1929, we began to hear the economics of scarcity, the econ of plenty, notions about pump priming and disquisitions on the practicability about a nations spending it self rich."

"Ever since 1918 people everywhere have been thinking in terms of money, not in terms of commodities and in spite of the most spectacular evidence that this thinking is sheer insanity. The only time i was ever a millionaire was when I spent a few weeks in Germany in 1923."

"Money does not pay for anything, never has, never will. It is an economic axiom as old as the hills that goods and services can be paid for only with goods and services."

" No one is has seemed the least aware that everything which is paid for must be paid out of production, for that there is no other payment. Another strange notion pervading whole peoples is the state has money of it's own and no where is this absurdity more firmly fixed than in America. The state has no money. It produces nothing. Its existence is purely parasitic maintained by taxation."

"The sum of my observations was that during the last 20 years money has been largely diverted from its function as a mere convenience, a medium of exchange, a sort of claim check on production and has been slyly knaved into an instrument of political power."

"The inevitable consequences are easily foreseen; one not need to speak of them; but the politician, like the stockbroker, can not afford to take the long term point of view on anything."

[From Memoirs of a Superfluous Man, by Albert J. Nock].

Stefan Jovanovich draws the parallels further:

The leverage in the stock market came from the call loans; in our present crash the leverage came from the CDOs and MBSs. In both cases the source of the demand for the loans themselves was the imbalance in world trade, and the refusal of the country wanting to manipulate the exchange value of its currency (the U.S. then, now China) to let exchanges in monies flow as freely as trade in goods and services. However, for Nock to write in the 30s that "money has been largely diverted from its function as a mere convenience" is a breathtakingly willful distortion of American political economic history. The debates between the parties after the Civil War were about little else than the subject of "money"; why else would William Jennings Bryan have become the first political celebrity in our history simply for merging Christianity with the "money question"?

Jeff Watson adds:

Albert Jay Nock influenced me more than any philosopher, Ayn Rand included.. I have assembled a collection of downloads of some of his better works for your enjoyment.



14A friend who has moved multiple times in recent years was finally opening some long-packed boxes. His daughter found a little book titled Fourteen Methods of Operating in the Stock Market, published in 1918 by The Magazine of Wall Street. My friend thought I might be interested in the book.

The first chapter was "A Specialist in Panics," which the Chair brought to our attention two years ago. A quote by the panic specialist might be applicable now: "Among other things I had learned that insiders keep things looking very blue over a long period while they are quietly buying stocks."

There was a chapter by Richard D. Wyckoff on "The Breadth of the Market." The meaning of breadth was a bit different then; it meant how many stocks traded on a given day. Wyckoff posited that a price rise accompanied by a rising breadth was bullish as it meant money was flowing into a greater number of stocks.

Other chapters presented a variety of techniques that are clearly recognizable as early versions of strategies used today. In "Principles of Price Movements," Thomas F. Woodlock presented a pre-Elliott theory of waves: changes in the economy and interest rates drive the major bull and bear markets, but there are periodic "eddies" that take prices in the opposite direction of the "main current." In "Methods of Successful Traders," a Mr. G wrote, "The only thing that will carry [a trader] through is to know the trend at all times, and follow it."

An architect traded successfully using principles of architecture. "The stock being traded in must be treated as a 'force' applied on the axis or average for a 'bear' day and the force applied from under for a 'bull' day. The movement of previous three days, previous week and month is also necessary to determine distance covered in points, together with weight (volume) applied… I consider that the market can be calculated exactly as a person would calculate a wood joist. The joist will safely hold just so much, and its factor of safety when encroached upon is on the side towards danger, and when exceeded the joist will break; so will a stock in the stock market."

All in all, a fascinating book.



What I find puzzling about the behavioral economists is that they don't distinguish the effects of wrong thinking and the cause of this thinking. Of course once they have an example of mental bias, ambiguity or short cut, they can easily give an illustration of how this problem occurs in investing, but seldom do they get to the root cause of the cognitive problem, they just warn you to be aware of the issue.

Take over-confidence: obviously, with 30 times leverage common in the investment banks before the crisis, it was not just an issue for small-time novice traders.

Perhaps overconfidence is self-bias or bias toward your own genes. It is natural to assume when you win it was all well deserved based on talent and hard work, when you lose it was all bad luck.

The corresponding assumption for the investor is that when you win, you were right, not lucky. The market is behaving rationally. You got your facts straight, interpreted them correctly, and your knowledge was sufficiently all encompassing.

Likewise when you lose, the market is behaving irrationally, it is being driven by irrational fear or greed and/or is not focused on the important information that you possess. Or if you lose it was simply a case of bad luck, a random event that could not be expected or planned.

This may be the basis for K's saying, “the market can stay irrational longer than you can remain solvent.”. While this saying may keep you in the game longer, by allowing you to survive and limit your losses, it is only a slightly humbler game plan. It does not allow you to learn from your competitor. It does not teach you to change your game plan.

The hope that you are “right” leaves you to hit bad drawdowns more than you should. Like in a lovers' quarrel, you won't admit your share of the blame: you hope the goodness of your partner will only allow them to stray so far before they come to their senses. If you can’t admit a mistake, no matter how small those consistent mistakes may be, sooner or latter you will find yourself alone, wondering what you did that was so bad they would leave you. So admit your mistakes. Further, if you allow that your competitor may least have some different strength than you, you can learn to individualize and incorporate the best of their knowledge into your game. It will allow you to be a student, but stay loyal to your plan, not following whomever appears to be winning the most at the moment.

Always assuming you were right, and were focused in on the right things, not simply lucky or helped by the competitor’s weak spot, causes you stay in a winning trade or strategy too long. It causes you not to improve or move from your niche before it is too late.

While I loved to win races, I always enjoyed the win more if it was a close race against stiff competition. I would rather finish second or worse, out of the money, at a competitive race, than go to a small time local race, win by a mile, and collect a couple of dollar bills. If you respect your competitor, they teach you to run better, smarter, and harder.

Likewise, for several years, I would sign-up and train for a Fall marathon, each year only to come down sick, with a cold or worse right before the race. Then I would run with a cold (if mild), or not show up. It took me a while to realize that while my taper before the race left me rested and stronger, it also lowered my immune system. It was not bad luck, but too sharp a taper before the race that consistently got me sick.

It took me a while to learn this, but if you are going to do anything with ample scale  and worth mastering, all the hard work and talent is just a necessary condition to win, but it never sufficient to encompass everything. Perfection or at least competence in small matters may be guaranteed, but true success in the overall endeavor is never guaranteed.

The first step to growing after a victory or defeat is to praise your opponent.



October 10, 2009 | Leave a Comment

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I noticed the last couple of days when riding to work and back home again that no matter what the direction, I always had a head-wind when crossing the MacDonald-Cartier bridge over the Ottawa River. The curved bridge has quite a rise to the half-way point, and it takes much huffing and puffing when the contra-winds blow. Sometimes I have to gear all the way down to second gear from the normal fifth or sixth to fight my way up the rise, and even pedal not to lose speed down the other side. This is frustrating, and on these days I grumble and curse.

But when the winds are with me, as they have been in the past, each pedal stroke surges you forward, and over the rise you begin to fly like an eagle down the other side.

For a while now my trading account has faced a strong head-wind with little respite to rest weary legs. The drawdown is not large, but the grind feels relentless. And although the system is mostly passive, the lack of success feels like effort, weight, resistance. Thankfully lower gears (low leverage and spare cash) keep me moving and leave me with resources to make it over the rise. I persevere because I know the wind will change, and for a time the weight will be lifted, and I may even fly down the other side.



KahnemanEveryone who has thought about it knows that behavioral biases of Kahneman and Tversky et. al. are completely contrived and not really biases at all but rules of thumb people have developed to help them take the path of least resistance or save time or expense or make a buck fast. But what are some real weaknesses or tendencies that people have that affect their behavior that could be useful to know?

I am thinking for example about what they say about men — that 3/4 of the way through a lecture, 80% of the men are thinking about romance etc.

I find the tendency of partner discord around Valentines Day a real effect, or the tendency of people to get angry before they've eaten ([(this is due for example to the influence of parasites such as p. gondi on people who have cats — it affects only 25% of the population, although everyone I know gets afflicted by this tendency, also including the much reduced personages at this office, as I noticed at noon today)]).

Also, the tendency to be joyful at having one's losses turn to break-even, or worse yet, the tendency when a loss turns into a small profit, to be so joyful that one can't take a reasonable profit, or much better the tendency, all too rare, to be complacent when one has a good profit and it turns into a fair profit.

The tendency also, for time to pass so quickly when one is involved in a flow activity (all too rare) and for it to drag on endlessly when one is — well, I will not complete that.

What are the real psych weaknesses of behavior that people have that should be quantified, rather than the ones that win you a Nobel Prize for being p. c. and that you can run on college students for a buck?

Alston Mabry says:

There is what I like to refer to as the "one-way street" bias: Whatever I do that disadvantages someone else is perfectly justified given the circumstances; but when some else's actions disadvantage me, it is an outrage.

The most obvious use in public discourse is to determine who is long and who is short on any given issue.

James Sogi reports:

I am reading one of the most fascinating books ever on game theory. The underlying idea is that people all act in their self interest, such that it can, and has been quantified. Game theory offers a good alternative model to the statistical model and avoids the problems inherent in statistical analysis of jumps and changing cycles. It is called the The Predictioneer's Game: Using the Logic of Brazen Self-Interest to See and Shape the Future, by Bruce De Mesquita. The main thing is to identify the true issues, not necessarily what people say they are.

Nick White avers:

The instant thing that comes to mind — perhaps my own bias — is taking risk around bonus seasons; or, more specifically, the months prior when the books are being tallied for the year. Be hard to isolate the signal from the noise, but easy to test?

I am likely to be far more cautious taking a needless big swing at something when the year has been good and I know the final reckoning is just 'round the corner.

Also — reminiscent of the Gambler's Ruin discussion in EdSpec — might one not find that particularly bad years for the market exhibit increased risk taking and greater daily ranges as those who are behind the curve swing for the fences while the edge is against them, to have one last desperate shot at the title?

On a micro level, I have found that those expecting a child or entering into a serious new life commitment (marriage, mortgage, new moonlighting venture, death of a relative) definitely change their attitudes toward risk. There may be some seasonality present in those events that could be tested vs the market?



Moneyball, by Michael Lewis, is about the Oakland A's statistical approach to management . Though this author is not to everyone's linking around these parts, I found the book to have many good ideas and new approaches to data and the underlying statistics. It is an entertaining read, though I just read in the newspapers that the Oakland A's just had the longest losing streak in history so here is another example of randomness overcoming the data history or a changing cycle where all the other teams started using the same methods. There are many market ideas here.

Microtrends: The Small Forces Behind Tomorrow's Big Changes, by Mark Penn, is a book like Megatrends of a few decades ago about statistics from census and surveys about social and political trends. For example, there are more single women than men, 57-43, due to the gay male population.

The Heart of the World, by Ian Baker, is the documentary of a spiritual and arduous physical journey to the Tsangpo Gorge, Tibet, the deepest gorge in the world, and unmapped until recently. Wonderful book for those familiar and interested in Tibetan religion.

Eye Movement Desensitization and Reprocessing (EMDR): Basic Principles, Protocols, and Procedures, 2nd Edition, by Francine Shapiro is an interesting psychological/physical approach to treating PTSD. It's aimed at the professional psychologist, but accessible to the lay reader.

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, by Larry McDonald and Patrick Robinson, is a fast read by a bond trader at Lehman about the collapse and apparent errors by the leadership.

The Lost City of Z: A Tale of Deadly Obsession in the Amazon, by David Grann, is a fun read about the search in the Amazon for Eldorado, the lost city of gold, and the many who became lost in the jungles and their travails.



The type of price action we have seen makes me think of possible thoughts that the public could have had during the past months.

09 March - S&P 676. The typical private investor would say: "It's over. No way I will get my money back from this mess. I knew I had to sell… Moreover, I am losing so much that I do not want to risk anything more than I have already sunk into this black hole"

09 May - S&P 929. They would say: "Come on. It is only a rebound. It is going down again soon. I am not going to put money in here"

31 July - S&P 987. The public: "Unbelievable what I missed. May be this market has really turned around. The recession has a V shape and they will fix the economy… Well, I am even on some of the positions, I reduce my exposure and sell something"

5 October - S&P 1054. "Wow. Something is going on here! They have information we do not have. I am sure the market will continue like this until the Christmas rally. They will drive it higher. How stupid I was not to enter this market last March and to start selling during the summer. I should have known that things could not be so bad! It is true that the economy is recovering. I must buy now!".

Let's see a possible scenario after a few weeks:

Some time in November/December. S&P 900: "Oh no! I messed it up again…"

And by the way, the up gap of this morning [2009/10/05, S&P opened 1043 after closing 1036.40 last night] seems to urge investors and the public to jump on board a fast running train that will not give other opportunities. Do it now or you will have to pay much more to get in!

Good luck to the buyers.

Dr. Pezzutti is a quantitative analyst and speculator who blogs as Short-TermTrading.

Art Cooper comments:

In his book Mass Psychology, James Dines prints a graph annotated with the typical investor's changing thoughts as the price of his investment changes, very similar to those you gave.



B RafterAs previously mentioned, we track three monetary aggregates and their deviation from target (based on a historical fit).

The triptych presented here is the progression from the Base to MZM to M2 reflecting a decrease of Fed control and concomitant increase in shadow banking control.  (N.B. I have shortened the charts to get them on the same page.)  The progression also shows that the Base is extremely expansionary while M2 is actually restrictive.  That is, Money Supply as defined by M2 is restrictive in the current depression.  The liquidity provided by the Fed is not filtering out to the population at large but being used to rebuild bank balance sheets.

This scenario (assuming it persists) has implications for recovery and inflation.  That is (in our opinion) neither is likely to happen soon.  But you can draw your own conclusions.

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

Vince Fulco adds:

As a additional resource, this Fed paper delves quite clearly into why excess reserves are not necessarily inflationary both due to their composition and interest payment policies created specifically for the post-crisis period.

Why Are Banks Holding So Many Excess Reserves? [PDF, 380kb]
Todd Keister and James McAndrews
Federal Reserve Bank of New York Staff Reports, no. 380, July 2009



M o NA popular bureaucrat some odd weeks ago passed away at the age of 77. That reminded me of an observation I once read about long ago and never forgot. People tend to pass away from this earth on or near multiples of seven years. True statistic or not, I always compute "the seven" when I hear about someone's death age. It's a habit of mine.

So it goes that if one can make it past 49/50, you then have a strong chance of making it to the age of 56, and so forth. I pulled The Mystery of Numbers by Annemarie Schimmel from my bookshelf.

It's an interesting book that gives a comprehensive view of how numbers and number systems developed over the course of world history. It shows how religion (Jewish, Christian and Moslem) and culture contributed to similar understandings concerning numbers. It relates how luck (good and bad) can be cast upon certain numbers based on religious practices. The book brings together diverse historical references to each important number in a most readable way. It also integrates biology, nature and other systems to illustrate why certain numbers have meaning and significance. It's a nice enjoyable read, providing an eclectic mix of scholarship.

For example, regarding the number eleven, I paraphrase and summarize:

Number 11 is the Mute Number. Standing between 10 and 12, both round numbers that have significance, 11 was always interpreted in medieval exegesis ad malam partem, in a purely negative sense. 11 had no good part to it. The 16th century numerologist Petrus Bungus claimed "11 has no connection with divine things". The Muslim Brethren of Purity consider 11 as the first "mute" prime number beyond 10. 11 is found in Babylonian myth and in Greek mythology in similar negative fashion. Soccer has eleven players and the Germans call the penalty kick, Elfmeter (11 meters?). Psychologist Friedjung sees the 11 players in soccer and other games as an allusion to human imperfection. But, 11 could also mean bounty-even more that 10. And the German Rhineland carnival season begins on 11, 11 at precisely 11:11 am-to amuse our minds.

The number Seven is a large chapter in the book. One part relates to changes in a person every 7 years. "The Jewish philosopher Philo of Alexandria points out at seven years you get teeth. The next 7 puberty, at 21 youth sprouts a beard, the fourth heptad is the high point, the fifth is time for marriage. The sixth heptad is intellectual maturity, the seventh is for the soul to mature, the eighth perfects reason and intelligence, and at ninth passions are tamed." Backed by Psalm 90, Philo asserts that age 70 is best for death-as 3 score and ten is said to be man's lifespan.

MayanWhile the Mayan culture was quite advanced in counting, astronomy and date forecasting, some cultures did not develop significant counting systems. The un-advanced culture counter becomes confused after 9 or 10 items-not having words denoting 14 or 15, but this same person could look at a large herd and know precisely how many there are or if any were missing. How does this occur? Can I see large systems and remember their traits with a glance? I glance at my quote screen and quickly can tell if something is amiss.

Tom DeMark
's counting work influenced me early on. I made trades based on extended counts of stocks that were close to exhaustion trend count limits, as defined by Tom. Today with supra-hedge fund leverage, market moves are much faster, the counts seem compressed.

When is termination of trend? Stocks seem to have life force. Stocks seem to have a birth, youth, maturation, old age and death phases. Stocks have counts, like heartbeats or steps along a path. Base 10, base 6, base 3-I like to count things as they appear to me as rhythms.

But for now as we wait, and in terms of breathing here on earth, lets all keep pushing to and through our next "7". Push on and through to a new count and into a new heptad of perfecting oneself.

Laurence Glazier extends:

In the days of Gottlob Frege some of the vitality of mathematics was removed by the use of equivalence classes of convergent sequences of "random" numbers to define quantities which still have poetic names, like "transcendental", yet a flaw in that old argument, is that "random", by definition, can never be defined, and if one discounts those old constructions and uses instead a form of computability, then it is possible to create ever newer numbers. (There is obviously a political and ideological aspect to the notion that numbers — as with people — might be random.)

If we are talking of sevens, this is a number important to any musician, and it can go beyond music. George Gurdjieff's cosmology was based partly around this number, and as one who uses harmony to affect emotions, I take it seriously. It is a difficult cosmology as it is not Copernican, a paradigm virtually without possible dissent except among creationist communes.

In music, the fourth level has a natural tendency to fall back to the third, if there is insufficient energy to take it further in the octave. At eight it starts again. In chess a pawn is often stalled at the same point in its progress to a new life at the eighth rank, though of course it cannot fall back. And I was amused to notice recently, that were a space voyager intrepid enough to go beyond the fourth, red, planet of our System, the barrier of asteroids before the fifth, giant orb, might incline a retreat to Earth, the Third.

If trading, along with the natural psychological lessons which accompany it, were to imbue a more sensitive appreciation of numbers, that would more than suffice for me.

Phil McDonnell reminisces:

Tom DeMark’s counting work influenced me early on. I made trades based on extended counts of stocks that were close to exhaustion trend count limits, as defined by Tom. Today with supra-hedge fund leverage, market moves are much faster, the counts seem compressed.

DailySpec contributor Larry Williams collaborated with Tom DeMark on the early work on sequential counts. My sense of such things is that to the extent they work they have more to do with human psychology and less to do with any intrinsic mystical properties of numbers.

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



It is surprising to hear from the Daily Telegraph that business at traditional brasseries and bistros is in a freefall in France. Is it related to current economics, taxation of small business, red tape/licenses associated with owning small business , rent, convenience, demographic changes, Internet/advertising influences… what gives?

However, even if there were a last-minute u-turn at the Louvre, statistics suggest the battle of Le Big Macs has already been lost. France has become McDonald's biggest market in the world outside of the US, according to the chain. While business in traditional brasseries and bistros is in freefall, the fast food group opened 30 new outlets last year in France and welcomed 450 million customers, up 11 per cent on the previous year.

My recollection in 1984 in Sweden and Norway was that McDonald's used slightly different sauces on the Big Mac to appeal to local tastes but not sure if that is done these days and if regional tastes are considered.

Bruno Ombreux answers:

LippI don't have hard numbers, but every day I walk past tens of Parisian food outlets; here are my observations:

- What is specifically declining are brasseries and bistros in their use for the noon meal.

- Cafés and restaurants, when they are well run, are still thriving. The terraces and interiors of those in my section are always full.

- McDonald's has been a huge success, particularly with teenagers. That's nothing new; it has been going on for decades.

My tentative explanations:

- Changing workers' eating habits. Fewer long noon lunches, more take-away and fast food.

- Traditional brasseries/bistros are too old-fashioned. They don't look modern inside so don't appeal to younger people.

- Cost of operating a brasserie/bistro: mainly staff, but also rents in Paris.

- Take-away food was cheaper. It was taxed at 5.5% VAT whereas non-take away food was taxed at 19.6%. But that changed a couple months ago; now VAT is 5.5% for everybody.

To answer your second remark, regional tastes are considered. The food at a French McDonald's is different from the food at a US McDonald's. The meat is of much higher quality and there is a choice of salads. The guy who spearheaded local variation in France did it which so much success that he is now the head of McDonald's Europe.

Horatio Humbert asks:

A cut in VAT tax rate, that is interesting. What kind of "consumer's strike" do we need in the U.S. for a similar capitulation to occur?

Bruno Ombreux replies:

This is a bit complicated.

This idea of cutting VAT for restaurants predates the crisis. It was first tried unsuccessfully by Chirac. It was also a Sarkozy campaign promise.

But France can't cut VAT without an agreement from the EU. I am not sure why, but it must be because part of the VAT is funding the EU. At some point, we had a Polish veto [and a German one]. The Polish president didn't want France to cut VAT! Sarkozy must have threatened him with nuclear strikes and now France can decrease VAT.

I am plenty pleased. The cost of my morning coffee has gone down 12.5% (the café manager has kept part of the tax rebate for himself!)



Robert L. Bacon lives! As always. Look at how many respectable NFL teams have QBs who didn’t start much in college. Less chance for injury and longterm gains if you have the talent. Joe Flacco, Mark Sanchez, Eli Manning, et. al.

I could expand a little on it; this Sports Illustrated article from Peter King reflects on the subject better than I can. The form is moving.

“I count six passers 25 or younger — Ryan, Flacco, Sanchez, Stafford, Trent Edwards of Buffalo and Green Bay’s Aaron Rodgers — as players with exceedingly bright futures. Ten years ago, the only sure thing under 25 was Peyton Manning … and the draft class of 1999 (Tim Couch, Akili Smith, Donovan McNabb, Daunte Culpepper, Cade McNown, Shaun King) was on track to be awful, even with McNabb and Culpepper in it.

I can think of a few reasons. Colleges are a better incubator for pro quarterbacks today, in part because they’re playing more pro-style spread schemes (and the NFL is copying some college spread stuff too); the NFL is using more shotgun snaps too, and that allows young passers to see the field more clearly on passing downs. There’s also been a lot of cross-pollination between college and pro football recently.”



I had occasion to follow the college football games this weekend and analyze the results versus the betting spreads as of Friday evening. The results for 44 games (arbitrarily picked by someone else):

Total games: 44

Beat the spread: 18
Did not beat the spread: 25
No action (tie): 1

Calculate the "net spread", which is the line/spread plus or minus the actual score spread. For example, if Tulsa (line: -14) beats Rice (+14) by a score of 27-10, then the net spread is -14 plus 17 equals 3. That is, Tulsa beat the spread by 3.

For all 44 games, the net spread stats are:

mean: -2.23
sd: 13.12

Gotta figure if the mean net spread is less than a field goal, it's pretty tough to beat.



 There is nothing as bad as losing the money you had and nothing as good as making it back after you lost. Thus, on Wednesday [2009/09/30], the market rose 2% from low and you made it back. The contentment, the joy! And the almanaktarian's favorite day coming up, with a beaten favorite play to boot! But the cronies knew. Disaster. One lost what one had on Thursday [2009/10/01]. You see, we're in crisis mode. Unless the health bill is passed, those jobs will not come back; what we need is to prosecute Secretary Mellon or his modern counterpart the way the magnetic radio person did in the 1930s. On Friday, bonds at a one-year high, and the cronies took profits on the number. Someone has to pay. Let us hope that the seasonalists, almanaktarians, and followers of all stripes will fare better in another world where we will not meet them.

Ronald Weber suggests:

What if markets slowly begin to realize "hey, we have come out of the worst crisis in a 100 year with many scars but we are still on our feet," couldn't it justify a much higher valuation level (lower risk premium) for equity markets?

Paolo Pezzutti analyzes:

Wednesday shows how desperate bulls were to let the market regain the opening level. Their failure and frustration is quite evident during Thursday's action. On Friday they tried to close the down gap of the open, but they were much less aggressive. Maybe they are realizing that the market needs to move to much lower levels before attracting new buyers who are also now concerned with negative news and W, U, square roots shape recession scenarios… If this is true we should sell any rebound next week.

Faisal Danka predicts:

Its not over till it's over. The retail traders who have seen the minor dips since March and have jumped on to the July bandwagon (even if a bit late) would be seeing this as an opportunity to buy on dips. All lagging indicators as well as price is showing break of resistance trendlines and key levels. On the heels of bad to worse news, we still have not seen a correction in above 10% range. This is why I think, a hint of good news and we break above 10k on the Dow. Just when none of the retailer traders will expect, the commercial loan situation will come to fruition coupled with lack of topline growth, and the long-awaited bear run will start.


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