Jungle Ball Python[Ed.'s note: this post contains some vivid descriptions of snakes that may disturb some readers]. My son, John has a pet python. He's a jungle ball python, about 4' long. The python does not do very much, except to wait on his log, in his tank, for a meal. His moves are infrequent and very deliberate. He does not waste a single joule of energy, and just waits patiently for food day and night, week after week, month after month.. Snakes and alligators don't require a lot of food, and can wait for 5 months or more for a meal. They don't exercise, play, show personality, get crazy, or cause any trouble. They just wait for their next meal, single minded, hard wired in their next task..

The snake exhibits several signals when he is hungry, and can be seen after he sheds or evacuates, for example. When he is hungry, I feed him live rats. Although the snake is a master at camouflage and deception, he knows when a rat is being introduced to his tank. Snakes generally have poor eyesight, but can detect the presence of a rat through smell and vibrations. The rat goes into the tank, and the snake sits there sizing up his prey. It can go for 30 minutes to an hour and a half, while the snake watches the rat, waiting. He slowly puts his body in position, moving and flexing his coils quietly, maybe taking 30 minutes for a set up. He will sit perfectly still, while the unaware rat walks all over the tank, sometimes over the rat and,….the rat doesn't have a clue of the dangers. The snake finally senses his best opportunity, strikes at the rat, bites him on the back of the neck, and wraps his body around the rat suffocating him quickly. The rat squirms and quivers while the snake constricts a little more on each exhale of the rat. The snake is so quick, you can hear a swoosh when he attacks, much like the swoosh you'd hear in old Bruce Lee films when they were fighting.

The python, having dispatched his prey, lets him go and positions him for the swallow. When he's ready, he disjoints his jaw and puts it over the rat's nose, and uses his body to push the rat into his mouth, wiggling his neck to allow the rat to be swallowed. It takes about 15 minutes, but that big rat, 40 times the size of the python's head, is swallowed and the snake goes to the corner to hide and slowly digest his meal. I like the way the snake always strikes the rat in the same exact place, with quick dispatch. He makes a split second decision with his pea sized brain and wins. Trading can be like that, requiring split second decisions, and hard lethal strikes.

 The snake has a ritual for eating his prey, and manages to eat without wasting energy, getting hurt, or alerting his prey. Many trades require you to sit patiently for weeks or months for the proper set up, positioning yourself then swooping down on the prey just like the snake does. Snakes have many admirable qualities that traders should study and emulate. These traits include patience, economy of motion, concentration, surprise, and a quick but lethal offensive. No matter that the rat has a brain that is the same size as the snakes's, and is probably much more intelligent, he always loses to the python, every time. The snake is hard wired for the attack, has infinite patience, and will dispatch his prey quickly……all qualities successful traders should strive to practice and learn.

Pitt T. Maner III responds:

These guys are in the news down here in South Florida. Too bad there have been some irresponsible owners.

"Reptile retailers, brace yourselves: the federal government wants to ban the import of some large and seemingly popular snakes. Responding to growing concern over the spread of Burmese pythons in the Everglades, the federal Fish and Wildlife Service proposed Wednesday to ban both the import and interstate transport of the python and eight other snake species, all large constrictors."

A possible 10 to 100 thousand burmese pythons in the Everglades is amazing — they are bit too good at what they do.

My cousin is a big time, amateur "herper" and I remember going with him up to Orlando about 15 years ago to a national convention held there and it was quite impressive to see the reptiles on display and the captive breed ones for sale — water dragons, White's tree frogs, skinks, all sorts of snakes, etc. Very educational. One of the things I remember was a lecture about trying to catch a very large snake that escaped in a multi-room facility — the idea was to set the trap along a wall as the snake would tend to cling to walls as it moved from place to place. Big, non-venomous snakes though can still give some nasty bites.

Here is a summary of South Florida's non-indegenous species, the local vets get a lot of dogs who have tried to lick the Bufo toads.

Marion Dreyfus reminisces:

I remember living among unexpected boas and two-step and three-step crates in Thailand. I came home one night to find a 6-footer in my living room, as we lived near a thriving klong. The maid Sumpohn slew it with a shovel before it bit me. We called her Richard [the Lion-hearted] for a while. Up-country, I stepped gingerly on the roads near fields of produce, as much longer than 6-footers would slink out and slither on the hot bake of the dusty roads. And in Cambodia, I was foolish enough to wear a snakeskin dress in Ankhor Wat, and was actually chased by some outraged untethered serpents not happy with my attire. I changed my dress subsequently, and rode elephants, tall off the ground rather than encounter the ground-bound cold-blooded fauna.

Once, though, I overnighted at a friend's farm in Connecticut, and woke with a serpent cosied up next to my prone body. His pet had eluded the glass cage, somehow, and sought random visiting warmth. It was not the best wake-up notice I have ever experienced.



The partnership between Ostrich and ZebraThe reaction to recent events where something devoutly to be wished actually happened and sadness and disappointment and revulsion occurs is part of a general syndrome related to the dissipation of the sex cells. Time and time again, a company reports good earnings above expectations and a terrible decline ensues. Time and time, an important link in the totality is confirmed a la Bernanke today, and the market drops an immediate 1%. Time and time, a bill that everbody wants, like the stimulus bill, or the Massachusetts election results, occurs, and the market drops an immediate 1% the way it did last Tuesday. What is the reason for this? Is it a variant of 'buy the rumor, sell the news', or is it insiders selling on the news? Or is it related to the general apathy that results when the discharge has occurred? Can it be predicted, and acted upon?

A friend writes in that the ensenble of comovements between bonds and stocks posted on our web site always reminds him of Leo Goodman's classic article "Movements and Comovements between M Dependent Time Series" that Doc Castaldo has kindly sent hundreds of copies out to far sighted researchers in previous glory days. It is good to honor and create a visual model and real life exampe of such important dependcies. And perhaps this will be a prelude to providing statistics on this site that will be at least as informative by half as the average sports statistics contained in such fine publications as The Post or Sporting News under "Stat City". The desire to provide a league standings tabulation is keen.

I am reading several books on animal partnerships and the partnership between the ostrich, which has good eyes, and the zebra, which has good hearing, reminds me of the partnership between many markets. One or the other, whether it's silver or the omniscient one, are there to alert to possible danger. One feels the pain of the CEOs who were at a dinner at the Oval last Wednesday, and learned about the Volcker plan only at 9 pm that night an hour after the dinner and just 12 hours before the 6% decline started. "That's not squash," as my friend from New Zealand used to say when I mixed in a volley or two. Heard at the Olympic Club at 10 pm: "You might want to play an all court game tomorrow, mate."

Of course there is a higher purpose to the recent decline of 6%. First the move must shake out all the weak longs who were buying it based on their hopes for the January baromoter. Next, it has to set all the public behind the form so that they will sell out in disgust at the three-month lows. Finally, it must engender a Dow below 10000 to create the kind of newspaper headlines and fear that will shake out the remaining weak longs before a rally occurs.

Paolo Pezzutti comments:

After you have finished your succulent second plate of spaghetti "all'amatriciana" and you are offered one more, can you eat it? After a long uptrend when earnings have beaten repeatedly expectations for a year, can you really expect more surprises? Some take profits, others go short. It seems that the news release is the trigger to execute actions that were long planned.

I found on CXOAG this post that addresses the issues raised: Earnings Surprises and Future Stock Market Returns. The post reports about the study Aggregate Market Reaction to Earnings Announcements.

The authors investigate the relationship between earnings announcement surprises and market returns on the days surrounding earnings news. The analysis identifies a negative relation between earnings news and market return that persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news. There may be a considerable degree of inefficiency in the market’s processing of aggregate earnings information. Consistent with this interpretation they find that Treasury bond rates and implied future inflation expectations respond directly to earnings news.

George Parkanyi writes:

Definitely, the same type of news after a few months loses its power to move the market (true for both the down side and the up). At a certain point you stop listening, you’re on auto-pilot. Markets respond to surprises –- the something new, the something different, or the something possible. This is very much a human characteristic.

A related example was the Internet bubble. Everyone was buying the companies that had no earnings – because while they had no earnings the potential for earnings was unlimited. As soon as companies started to report any kind of a profit, they were crushed. For now someone had put a limitation on all that “potential”. I was highly amused at the time how earnings for an Internet company was the kiss of death.

Kim Zussman writes:

If it were as simple as "up on good news", Galleon and others trading on inside information would immediately overtake the solar system –like a hadron-collider black hole. This evidences supernatural laws which prevent even cheating determinists from commandeering supreme mating rights.

Years ago at a Stephen Hawking lecture on time travel, he "discussed" (the lecture spun from his laptop) various paradoxes produced if one could go back in time. For example, if you killed your parents in the past how could you have been born in the future to go back to kill them? One theory was that when you pulled the trigger, the bullet would "diffract"; somehow splitting before hitting it's target — in compliance with rules keeping the universe in logical order. (whose logic?)

Another theory was parallel universes — one in which your parents died, another they lived and you were allowed to develop.

The questioners were kind to Stephen, because of his illness, but after the show he sat helpless in his wheel-chair in a van outside with the dome light shining on his contorted face like an involuntary spot light. A crowd hovered outside to see the great man, like at the zoo.

On a different note, Pfizer's run-up to the Massachusetts Miracle is typical. Removal of near-certain health care reform and promised payoff by pharma met with big decline. Would you have sold knowing the election results before hand? The upside is that if you can be at peace with the way market treats your logic, you will understand how to be a ladies man.

Duncan Coker writes:

 I would like to pick up on Messr Parkanyi's comment regarding "the markets respond to surprises, something new, somthing different or the something possible…this is a human characteristic." I agree. Related to this, I attended a showing of the film Poliwood last night where the director Barry Levinson was there for a Q and A session. It is a documentary about the triangle of media, celebrity and politics and how the lines between reality and theater, entertainment and substance, are becoming more and more blurred. Politicians become celebrities and celebrities become politicians. Media fosters celebrity and celebrity feeds the media. Politicians need the media for promotion and the media needs them for content. One of the ways to get high ratings in news television is to present conflict in a dialogue. That is why guests are always at the extremes of a position. It allows for more yelling, arguing and better entertainment for the viewers. Polarization is more interesting television. Informed and moderate discussions is just boring to watch.

I wonder if this carries over into the market. Stagnant markets are boring, wild swings make for better entertainment. Also, who benefits from wilder markets, financial media has something to write about, brokers and exchanges have more commissions and fees, money managers can justify their services. It allows politicians something to regulate, gives floor trades movement to scalp, hedge funds can fire up the algorithms. The causality works in both directions as well. Last week the politicians spiced up the boring upward move of the past 2 weeks. When a fund is rumored to be weak or going under another spike. The media does all it can to create excitement and volatility around the market. When traders over-trade and the line between entertainment and substance can get blurred. Also, like the television example, conflict is more interesting. In the case of the bulls and bears it is most interesting at the extremes, so the market follow this type of cycle.

Ken Drees adds:

This fits here with financial television as of late. The big question or overall theme being is this just another dip for the market or something more? Hopefully capturing viewers by keeping this nail biting question front and center–having two view points and the ensuing debates roll on out.

Off the bottom it was "is this a sucker's rally or a setup for another drop?"; now its "is this just a little dip and the start of a sideways consolidation, or the start of a substantial 5 -10 % correction?"

It seems like these times of opposing question of market direction after extreme linear moves should be watched closely for reversal. I find it interesting that the choice not talked about much off the march low was this: Or is this the start of a nice 50% multi month rally from oversold conditions not witnessed since 2001?

Today the choice missing would be this: Or is this the start of a 50 to 70% drop, retracing most of the gains of 2009?

TV — usually it's what they don't say or its the opposite of what they scream into your face — making great TV but bad advice.



drought in hawaiiEl Nino has brought drought to Hawaii. It rained once in four months. The last few days have brought a welcome rain. Many of the plants are already brown, and the rain is not enough to revive the shriveled branches and leaves. It will take new shoots of growth to replace the vegetation. I see this as an analogy to our economy. Some irrigation is not enough to revive dead industries and businesses. One rain is not enough to support the new shoots, especially where the new shoots sprouted with the one rain, or irrigation, and then it stops. The shoots wither. Further next year's drop is diminished as there is no rain to set the coffee flowers for the next crop.

The drought has caused fire. We've studied fires here before, and concluded they can be healthy in nature. However, managed fire prevention, while stopping the natural breakouts of small fire allows lots of weeds to grow, so when the fire does go out of control, it becomes much larger, much worse and threatens the entire forest and human areas. Again good analogies for the economy. When the week businesses are not allowed to fail naturally and get propped up, when economic difficulty does strike, it threatens the entire economy as chains of businesses go up in flames.



Shane DorianShane Dorian held a surf contest for the local kids as a public service. His friends are world famous surfers 8 time world champion Kelly Slater, Rob Machado, Fred Pattacia and come to sign autographs and pose with the kids. They put on a surfing demonstration. Kelly and Rob were using really really short 5' boards. This is something new. Kelly is always thinking of new things to do surfing, new moves. It's why he's 8 time world champion.

It's similar to music. Mile Davis always was on the cutting bleeding edge of jazz. He was the only one from the 50's bebop scene to survive and thrive in the new age. He always was playing something new. He didn't rehearse. He told his players, don't play what you played in practice. Here's the riff. He said music was in the moment. You had to improvise, and make the moment happen. Most people use what worked before because its comfortable, because they got approval, because they made money with it. But it all died away… all of it.

It's the same with the market. The market is always throwing something new at us every single day. It's always changing. There is no rehearsal for the market. It's in the moment. Trying to reuse the same hackneyed trades that world a decade ago won't cut it. Sure they may be statistically significant, but the world, systems, change. Got to live in the moment. Otherwise you're going to fall the way the old jazz of the old jazz musicians. It's not going to thrive. You have to have new stuff all the time. Sure it's scary.



Mel Gibson in the Edge of DarknessThomas Craven’s story–chasing down his daughter, Emma Craven’s (played by newcomer Bojana Novacovic), killers–was a highly popular 6-part series in the UK in 1985: It’s 15th on the British Film institute’s Top 100 TV list. It has been updated a lot to take note of domestic and international tensions, the aura of secrecy over weapons manufacture and control, terrorism, secret government installations, nefarious black ops, and Gibson as angry avenger on the learning curve of a daughter he evidently hardly knew. It is a thriller set at the intersection of big business and oceanic politicking.

Mel Gibson is no longer the beautiful, mentally slow lad of TIM (Australia, 1979): He’s been away from the silver screen for seven lean years, getting arrested on DWIs and directing some mean-spirited agit-prop religious indictments and the like. As a colleague remarked, He hasn’t aged all that well. We no longer swoon at his visage, and maybe that means we concentrate more on the scripts. His return consists of a dollop of the gripping Liam Neeson thriller, TAKEN (2008) aka a vigilante-pursuing the murderers of his daughter under the misapprehension that her bullet was meant for him, cynical corporate skullduggery a la Russell Crowe in THE INSIDER (1999), plus a rad or two of Merrill Streep and Cher in SILKWOOD (1983). And a dash of the LETHAL WEAPON franchise (1987-1098) whacko residuum.

The four don’t quite intersect. Widowed Boston homicide vet Craven (Gibson) finds the bloody trail of his daughter's murderers leads to a hush-hush defense-industry combine, Northmoor, where she was an intern, supposedly. During the brief few minutes where she is still talking, she neither convinces that she’s an MITnuclear physicist, nor the firebrand integrity-beseiged fighter we are led to see as the plot unspools. We fix on the truly scary, unexplained character of Ray Winstone (who appears in the 44-INCH CHEST ughie indie) playing a mercenary (or magic messenger) we don’t know how to classify, Jedburgh. We see Danny Huston’s Bennett, head of Northmoor, and something immediately snaps into place if you are at all movie-sophisticated: Baddie alert! While a solid character actor, oleaginous Huston never appears as the good guy, so casting him is a menu-card for predictable later evil…. And sure enough.

In Martin Campbell's reworking of the hot British miniseries, Craven’s take-no-prisoners flinty, blind-siding sock ‘em-ups and Danny Huston's serpentine mystery sandwich don’t particularly marry well, some of the unstitched elements being Winstone's pop-up messianic Judgment man. Also not jibing is Emma’s oddly vicious boyfriend and his nasty proclivity to attack visitors related to his now-dead gal-pal. Why would a gorgeous, talented, PhD physicist go for such a creepy unhinged nutjob? How can every meeting Craven has with every friend of his daughter be surveilled, no matter how far out in nowhereland? We never actually see or hear why the film is titled EDGE OF DARKNESS—guess it was somewhere in the TV series, but they forgot to put it back into the update.

And why would a character as insanely intrepid as Gibson’s (and his daughter) be named “craven,” anyway? A jejune linguistic joke?

The infra-dig sarcasm between Huston and Denis O'Hare (as a gummint co-conspirator) is pleasantly arch, and the cast enjoys their twirling-mustaches oily bought men, whether Boston Brahmin statesman or guilty-from-the-gut killer.

Though derivative, it does offer more meat for the lions than many a studio flick, with the lined, gravelly steeliness of its careworn star not ineffective, and not unmatched to a chronicle of a policeman parent with nothing to lose, who apparently cathects for his anxious, angry, sleepless, spoiling-for-a-broiling audience.



Greek Temple at AgrigentoGreek and Portuguese bonds are in a nasty spiral. Very little seems to be working in terms of convincing the markets to mop up some paper. Greece 3.7 2015 is now trading 86-86.5, yielding approx 6.6 pct and some long term Portugal bonds are down a point or so since yesterday. I don't think Europe is in any way capable of rescuing Greece, or anybody else for the matter; the virus will soon spread to Italy, as it suffers from the samle chronic high debt to gdp ratios as the afore mentioned countries. Thus the trade of the day could be long Bunds short Btps.

Jeff Rollert writes:

Would it be unreasonable to compare the inability of any country to act as the world's military police, and in a similar sense, one country being the worlds bank?

Seems like the ECB built a wing on their house with wood full of termites.

I've always enjoyed the science fiction writers observation that the world will never unite until there is a non-Earth threat. Perhaps that includes monetary unions.

Alston Mabry writes:

It used to be so simple: The Greeks would have a crisis, the drachma would fall, and the Neuro's would swarm down for sun and fun and economic stimulation. The Greeks then took the extra money and started another story on the house because they knew that keeping the cash was not a good long-term investment. You'd see half-finished buildings everywhere, bristling with rebar — just the local version of a savings account with a currency hedge.

Bruno Ombreux adds:

Have you been to Athens recently? That's exactly what they have. Half-finished houses. They don't even bother covering the concrete. I was told that it was for tax reasons. As long as the house is unfinished, there are no real-estate taxes. So they don't finish their houses. This is very creative.

Jim Sogi replies:

Same thing in Peru.

William Weaver comments:

I didn't attend either event, but I remember in 2003 when Athens hosted the FISA Junior World Rowing Championships and then in 2004 Olympic Games someone made a comment about how clean everything was. It wasn't until about a week into Jr Worlds that someone finally noticed the grass on the sides of the highway between the athlete village and the rowing venue wasn't grass, but a green tarp covering heaps of trash.

The state of the art rowing venue is to my knowledge abandoned today. It was also only finished one week prior to Jr Worlds, and no one thought to anticipate the mid-August winds that sweep the city. The winds created such waves that the Men's eights heats had to jump ship and swim their boats between 500m and 1000m to cross the finish. Finals were reduced from 2000m to 1000m. The Games were lucky and didn't have this problem.

But what about selecting cities in order to build athletic facilities that will help the community in years to come? I wonder if there is been any research regarding future price performance of munis issued to build venues for Olympic Games. Most venues go unused after the event.

Henry Gifford adds:

Another reason for the rebar sticking out the tops of buildings in some places is that they expect to build the building taller later, when money is available, but without a mechanism for collecting on debts there is little money available for lending, thus things tend to be paid for in cash, and built gradually. Here, with loans available, that strategy doesn't pay as well as borrowing the money to build a property to it's "best" economic use, as the cash flow is much worse on a partially built-on property - same land taxes, same land cost, lower return, higher hassle/permit costs for repeated small construction jobs.



the banker from monopoly[Editor's Note: TBTF = Too Big To Fail]. My friend Rocky Humbert posed the question: ‘If 1000 mini-AIG's and mini-Fannies are all imploding, why is that less of a catastrophic event than a single mega-AIG? Arguably, it's a more serious systemic risk…as the possible chain-reaction will be like the whack-a-mole game at the video arcade.’

His statement presupposes that 1000 separate actuarial teams would ignore or miscalculate risks inherent to derivatives. The assortment of risk management methods and individual company’s investigations initiated because of pricing disparities among competitors will illuminate many risk pricing issues that went unnoticed in the past. Notwithstanding past widespread risk pricing blunders, it is likely that risk management performed by 1000 separate competitive entities will lower overall systemic risk.

Rocky Humbert begs to differ:

I respectfully disagree with your premise for these reasons:

Thousands of supposedly independent and uncorrelated investors BOUGHT the housing related derivatives over the past several years; and all their models presupposed the same generalized assumption - that housing prices wouldn't decline nationally. This demonstrates beyond any doubt that a systemic event is systemic exactly because of a widely held belief. Any time large groups of people share the same belief, it becomes a systemic risk. How can you ignore the exception that proves the rule?

The wave of bank failures in the early 1930's was spread across the country in small and medium sized banks too. Similarly, the RTC which spent billions cleaning up the S&L failures of the late 1980's. Who was the TBTF institution in the 1930's ?

The equity quant debacle in the summer of 2007 demonstrated that most of these independent minds were using similar models. This was not a systemic risk event — but it demonstrates the illusion of independence among participants…both hedge funds and broker-dealers.

There are many many illustrations of similar phenomenon in the natural world — feedback loops, harmonic amplifiers, etc etc.

George Parkanyi adds:

Banks should be allowed to grow as big as they want, but not allowed to be counter-parties to each other where their own capital is involved. And certainly no borrowing from each other or insuring each other. (They are supposed to be competitors after all). That way, they would be transacting with each other only on clients` behalf (e.g. letters of credit, wire transfers, cheque clearing etc.). They should be able to take deposits, borrow from the Treasury with the transparency associated with that, and they should be allowed to trade their own capital on 3rd-party exchanges (again, not directly with each other). And of course they could form syndicates to spread risk when financing 3rd parties. This way their business, and sphere of exposure would be limited to the business they do with their clients and their proprietary trading through exchanges that have well-established margin rules and centralized, neutral clearing mechanisms. There would be relatively little linkage to allow a chain reaction to occur. (There would be some through lending to the same clients. One guy calling in a loan at a bad time could cause problems for the others. But this would just have to be risk-managed - you can`t take the risk out of everything).

Something like this would compartmentalize risk without having to treat institutions differently simply because of their size. Thoughts?



 Because the market sells down on a positive result in my mind doesn't equate to frustration or a negative emotion. I feel that it's only direction — emotionless. With that said, we watch fin tv, talk to people, read whatever and there is a mood to the market inwhich we are connected to. So the GNP number tomorrow is going to be good and above expectations. So the market should go up feeling that the worst is over for the recession, but wait — that means rates may go up now, or that O needs to quit the jobs bill now or that this is the news so it gets sold and thats what everyone is doing so its time to buy — an insanity of circular knots — like marveling at how big the creature's teeth are as he bites you across the torso.

Justin Mamis said it was called the "price news drug effect" where everyone fits the market into the news and news into the market — and if it didn't fit to a logic then your mind worried and got stuck in some dumbstruck sidecar being pulled along. His point was get off the need to equate the market with news.

What I think is interesting is who does (a collective group) the initial buying or selling? Is it some squad of dark minds, or is it a flock of birds moving as a single unit, or a school of fish turning at once under the connected forces of group travel — direction? I think more the latter.

Victor Niederhoffer adds:

Perhaps this musical will give insight into the relief of frustration hypothesis.



Dubai towersNovember 27, 2009, the Dubai crisis hit dropping markets from a high of 1111.25 to 1067, and as I recall a bit lower that night. Greece debt crisis going on and market approaches the 1067 level again tonight.

It's my theory that context is important. A ball has different statistical importance with a 3-2 count than at 1-1. The bottom tick means something different than the top tick. While it sounds trivial in this example, qualitative analysis should be combined with quantitative analysis. Running or swimming x in x at 25 is different than at 55. Time, season, context is important.




otzi the icemanOtzi has no heirs [see Surprising Results Of Complete Mitochondrial Genome Of 5,000-Year-Old Mummy ] is not strictly proven, although they are right in a statistical sense. They can't say anything about Otzi, but they are right about the population he is issued from.

This combination of genetics and statistics gives me the opportunity to express my most complete admiration for R. A. Fisher.

Now that I dug a bit into the foundations of Statistics, I have come to realize that Fisher is one of the great geniuses of the 20th Century. Greater than Einstein in my opinion.

I don't understand why he is not more famous. Take for example, The Conditionality Principle. Fisher had the intuition and Birnbaum formalized it.

This thing is a moment of pure concentrated genius and joy.

I don't know anything else like that in science. In the sense that it is incredibly practical and down-to-earth while being at the same time very foundational and philosophical.



Gold S&P consilience. 1140 to 1080.



 Algorithmic trading developed impressively during the past years. Up to 60% of trading in equity markets is computer-driven. Some say that the increasing dominance of algorithmic trading could cause "tiny price changes to snowball, rolling down the hill at exponentially increasing speed". There is the possibility for a crash to happen also because too many funds are trading in the same style. What is the human control on these machines? How long will it take before a mistake is recognized as such? Is there a way to prevent "algos gone wild"? Can regulation help or would it make it worse? In practice, there is a risk of systemic imbalance. On the other side there are those who believe that high frequency traders deliver a service: liquidity and their systems are the most efficient way to match buyers and sellers.

In the paper "Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market", Alain Chaboud Benjamin Chiquoine Erik Hjalmarsson Clara Vega find that:

- algorithmic trades tend to be correlated, suggesting that the algorithmic strategies used in the market are not as diverse as those used by non-algorithmic traders

- there is no evident causal relationship between algorithmic trading and increased exchange rate volatility

- even though some algorithmic traders appear to restrict their activity in the minute following macroeconomic data releases, algorithmic traders increase their provision of liquidity over the hour following each release

- non-algorithmic order flow accounts for a larger share of the variance in exchange rate returns than does
algorithmic order flow

- there is evidence that supports the recent literature that proposes to depart from the prevalent assumption that liquidity providers in limit order books are passive.

Among the most recent developments in algorithmic trading, some algorithms now automatically read and interpret economic data releases, generating trading orders before economists have begun to read the first line. They allow trading to take place automatically in response to market data and news, deciding when and how much to trade. There are services that allow to react more quickly to breaking news events, providing a quantifiable measure of qualitative information present in news articles. The result is that computers can place orders more strategically than humans.

In the paper, it emerges that there is no positive correlation between algorithmic trading and the level of volatility. The evidence points towards a negative relationship, suggesting that the presence of algorithmic trading reduces volatility. Computer trading provides liquidity in period of stress (after the release of news). From the data analysed, the growth of algorithmic trading has not caused lower market quality.

George Parkanyi writes:

I don't see them being a problem unless everyone is automatically increasing trade size and leverage with the trend. The associated risk-management is fairly sophisticated. That they would do this in a highly-correlated, invisible way is highly unlikely. And high-frequency trading is by definition short-term, so there is constant buying and selling in the market. A lot of these strategies may not hold a position overnight. Markets that are up a lot or down a lot as one-way sure-bet trades are pretty highly publicized. You'll eventually get a sudden reversal, and a lot of haircuts, but these overextensions most savvy players can see coming (though you don't know where or when the turn is going to happen). Wouldn't worry about it - enjoy the liquidity.



SurpriseOne rule I picked up early on from Tudor Jones's philosophy: in trending market, surprise (defined as “big one-day change in price”) follows trend! Based partly on this rule, within an hour of the record-size gap-down in SP futures on Oct. 19 of 1987, Tudor doubled-up on its Short position! (My understanding of the day’s progression: S*r*s interests, in contrast, were Long coming in; and then were on offer, as the day wore on). S&P futures broke below 300.00 in the preceding week and plunged in the course of that Black Monday as low as 190.00!

Black Monday’s open was an example of open game, where futures have never before been known to drop almost 20% straight-line in two weeks, and then be offered limit-down at Chicago’s open. I, for one, never bid that day: who had an answer if any of totally unbelievable bargains changing hands on record volume were worth bidding?! That’s open game – when all valuation tools are locked out, and only support of consequence is the bell. But next day, bouncing of off 181.00 low print on almost non-existent volume, and spreads widening to the point that no transactions were taking place at all — that was an entirely different story…

Same again played out 10 years later, on October 27 of 1997. Gap-down open again (luckily, I came in 100% short), followed by a faint rally attempt, where I doubled-up with my broker’s permission for “intraday play”. Futures proceeded to plunge on heavy volume, triggering momentary circuit-breakers. Eventually, my floor broker said: “Listen, you picked the high so why don’t you just figure out the low and leave me your order, I just can’t hang any more.” I muttered “There will not be a low today”, and I hung up… He calls what seemed to be an hour later: “You were right: they’re shutting us down for the day; we’re not re-opening from this limit-down…” That’s when a closed market was an example of open game, where no support could again be calculated. And again on the contrary, a limit-offered level of next day’s futures open proved to be a brand new game — where many (including me) covered and then feverishly chased offers in attempt to reverse — to no avail, the game already closed…



Edward LorenzDimensionality of Market Trading: Open (State-Input-Output)/Closed (State-Input-State)

Query, Comments, and the Issue

What is the equivalent of an open versus a closed game in market trading, and under what conditions is each better or worse?

Upon reading the comments, one may conclude that there is significant variation in the interpretation of the meanings of open and closed relative game theory applications to market trading. Ball and bat indicates baseball or cricket. The Black Monday events related to futures distinguishes valuation tools and calculation of market support. A two-dimensional answer also may encompass both (option spreads and directional futures) issuances and (high/low volatility) market conditions. Fees then VIX, cash balance, and price-volume-spread applications may be linear processes.

My presupposition here is that Victor’s query originates from his recent recommendation of Nigel Davies' book on chess. As the ecology of chess may function as a multi-dimensional system (e.g., 3d chess), and as open (1 e4 e5) and closed (1 d4 d5) moves operate as tactical or game strategies, we may address the query by researching the issue:

If market trading functions as a multi-dimensional system, how may open and closed strategies operate for optimal performance?

Excerpts — A Survey of Research on Open/Closed Concepts

Consider the following excerpts from research on open and closed concepts. Note that the direction of this research leads to theory of chaos and logistic mapping.

Ecology (definition): The branch of sociology that is concerned with studying the relationships between human groups and their physical and social environments: also called human ecology.

Note that both games and markets are human constructs constituting physical/social environments that function as rules-based systems.

Systems and states (terms): A system is a combination of interacting elements that performs a function not possible with any of the individual elements. In a dynamic system, outputs depend on present and past values of inputs and must define the concept of a state.

The state of a system makes the system’s history irrelevant. The state of the system contains all of the information needed to calculate responses to present and future inputs without reference to the past history of inputs and outputs; present inputs and the sequence of future inputs allow computation of all future states (and outputs). Some dynamic systems are modeled best with state equations while others are modeled best with state machines.

Dimensionality of dynamical systems: Discrete chaotic systems, such as the logistic map, can exhibit strange attractors whatever their dimensionality. However, the Poincaré-Bendixson theorem shows that a strange attractor can only arise in a continuous dynamical system (specified by differential equations) if it has three or more dimensions. Linear systems are never chaotic; for a dynamical system to display chaotic behavior it has to be nonlinear.

Open/Closed Principle: The term Open/Closed Principle is that once completed, the implementation of a class could only be modified to correct errors. New or changed features would require that a different class be created; that class could reuse coding from the original class through inheritance. The derived subclass might or might not have the same interface as the original class.

Implementation can be reused through inheritance but interface specifications need not be. The existing implementation is closed to modifications, and new implementations need not implement the existing interface.

Polymorphic Open/Closed Principle advocates inheritance from abstract base classes. Interface specifications can be reused through inheritance but not implementation.

The existing interface is closed to modifications and new implementations must, at a minimum, implement that interface. Thus, the Principle became popularly redefined to refer to the use of abstracted interfaces, where the implementations can be changed and multiple implementations could be created and polymorphically substituted for each other.

The concept of an “open system” was formalized within the framework of thermodynamics. This concept was expanded upon with the advent of information theory and subsequently systems theory.

In the social sciences, an open system process exchanges material, energy, people, capital and information with its environment. In the natural sciences, an open system is one whose border is permeable to both energy and mass. By contrast in physics, a closed system is permeable to energy but not to matter.

Open systems have a number of consequences. A closed system contains limited energies. Open system assumes that supplies of energy cannot be depleted from a surrounding environment, being infinite for the purposes of study. For instance, the radiant energy system receives its energy from solar radiation, which may be considered inexhaustible.

A closed system is a system in a state isolated from its surrounding environment. An idealized system is where closure is perfect, yet no system can be completely closed (only varying degrees of closure).

In thermodynamics, a closed system can exchange heat and work (aka energy) but not matter with its surroundings. In contrast, an open system can exchange all of heat, work and matter.

Note that Victor and Laurel analogize market exchanges with energy related to thermodynamics (see Chapter 13 in Practical Speculation and Page 32 of my current book project, Theory of Quantitative Relativity for Program Trading and Portfolio Management Systems Architecture).

Syllable: A syllable is a unit of organization for a sequence of speech sounds and is typically made up of a syllable nucleus (most often a vowel) with optional initial and final margins (typically, consonants). Syllables are often considered the phonological “building blocks” of words. The general structure of a syllable consists of the following segments:

Onset (obligatory in some languages, optional or even restricted in others) Rime Nucleus (obligatory in all languages) Coda (optional in some languages, highly restricted or prohibited in others)

In some theories of phonology, these syllable structures are displayed as tree diagrams (similar to the trees found in some types of syntax). The syllable nucleus is typically a sonorant, usually making a vowel sound, in the form of a monophthong, diphthong, or triphthong, but sometimes sonorant consonants like [l] or [r].

The syllable onset is the sound or sounds occurring before the nucleus, and the syllable coda (literally ‘tail’) is the sound or sounds that follow the nucleus. The term rime covers the nucleus plus coda.

Generally, every syllable requires a nucleus. Onsets are extremely common, and some languages require all syllables to have an onset. (That is, a CVC syllable like cat is possible, but a VC syllable such as at is not.) A coda-less syllable of the form V, CV, CCV, etc. is called an open syllable (or free syllable), while a syllable that has a coda (VC, CVC, CVCC, etc.) is called a closed syllable (or checked syllable). Note that they have nothing to do with open and close vowels.

Dynamical system (concept): The dynamical system concept is a mathematical formalization for any fixed “rule” that describes the time dependence of a point’s position in its ambient space. Examples include the mathematical models that describe the swinging of a clock pendulum, the flow of water in a pipe, and the number of fish each spring in a lake.

At any given time a dynamical system has a state given by a set of real numbers (a vector) which can be represented by a point in an appropriate state space (a geometrical manifold). Small changes in the state of the system correspond to small changes in the numbers.

The evolution rule of the dynamical system is a fixed rule that describes what future states follow from the current state. The rule is deterministic: for a given time interval only one future state follows from the current state.

The concept of a dynamical system has its origins in Newtonian mechanics. The evolution rule gives the state of the system only a short time into the future based on a relation that is either a differential equation, difference equation, or other time scale.

To determine the state for all future times requires iterating the relation many times – each advancing time a small step. The iteration procedure is referred to as solving the system or integrating the system. Once the system can be solved, given an initial point it is possible to determine all its future points, a collection known as a trajectory or orbit.

Numerical methods implemented on electronic computing machines have simplified the task of determining the orbits of a dynamical system. For simple dynamical systems, knowing the trajectory is often sufficient, but most dynamical systems are too complicated to be understood in terms of individual trajectories. The difficulties arise because:

Trajectories may be periodic and wander through different states of a system, so applications often require enumerating these classes or maintaining the system within one class. Classifying all possible trajectories has led to the qualitative study of dynamical systems, that is, properties that do not change under coordinate changes. Linear dynamical systems and systems that have two numbers describing a state are examples of dynamical systems where the possible classes of orbits are understood.

The behavior of trajectories as a function of a parameter may be what is needed for an application. As a parameter is varied, the dynamical systems may have bifurcation points where the qualitative behavior of the dynamical system changes. For example, it may go from having only periodic motions to apparently erratic behavior, as in the transition to turbulence of a fluid.

The trajectories of the system may appear erratic, as if random. In these cases it may be necessary to compute averages using one very long trajectory or many different trajectories. The averages are well defined for ergodic systems and a more detailed understanding has been worked out for hyperbolic systems. Understanding the probabilistic aspects of dynamical systems has helped establish the foundations of statistical mechanics and of chaos.

Dynamical system (definition): A dynamical system is a manifold M called the phase (or state) space endowed with a family of smooth evolution functions that for any element of the time, map a point of the phase space back into the phase space. The notion of smoothness changes with applications and the type of manifold.

Differential equations can be used to define the evolution rule: an equation that arises from the modeling of mechanical systems with complicated constraints. Many of the concepts in dynamical systems can be extended to infinite-dimensional manifolds—those that are locally Banach spaces—in which case the differential equations are partial differential equations.

Linear dynamical systems: Linear dynamical systems can be solved in terms of simple functions and the behavior of all orbits classified. In a linear system the phase space is the N-dimensional Euclidean space, so any point in phase space can be represented by a vector with N numbers.

Flows: For a flow, the vector field is a linear function of the position in the phase space with A a matrix, b a vector of numbers and x the position vector. The solution to this system can be found by using the superposition principle (linearity).

The distance between two different initial conditions in the case A ? 0 will change exponentially in most cases by either converging exponentially fast towards a point or diverging exponentially fast. Linear systems display sensitive dependence on initial conditions in the case of divergence.

Maps: A discrete-time, affine dynamical system has the form with A a matrix and b a vector. In the new coordinate system, the origin is a fixed point of the map and the solutions are of the linear system. The solutions for the map are no longer curves, but points that hop in the phase space. The orbits are organized in curves, or fibers, which are collections of points that map into themselves under the action of the map. There are also many other discrete dynamical systems.

Local dynamics: The qualitative properties of dynamical systems do not change under a smooth change of coordinates (this is sometimes taken as a definition of qualitative). A singular point of the vector field (a point where v(x) = 0) will remain a singular point under smooth transformations; a periodic orbit is a loop in phase space and smooth deformations of the phase space cannot alter it being a loop.

It is in the neighborhood of singular points and periodic orbits that the structure of a phase space of a dynamical system can be well understood. In the qualitative study of dynamical systems, the approach is to show that there is a change of coordinates (usually unspecified, but computable) that makes the dynamical system as simple as possible.

Rectification: A flow in most small patches of the phase space can be made very simple. If y is a point where the vector field v(y) ? 0, then there is a change of coordinates for a region around y where the vector field becomes a series of parallel vectors of the same magnitude. This is known as the rectification theorem.

The rectification theorem says that away from singular points the dynamics of a point in a small patch is a straight line. The patch can sometimes be enlarged by stitching several patches together, and when this works out in the whole phase space M the dynamical system is integrable. In most cases the patch cannot be extended to the entire phase space.

Bifurcation theory: When the evolution map (or the vector field it is derived from) depends on a parameter, the structure of the phase space will also depend on this parameter. Small changes may produce no qualitative changes in the phase space until a special value is reached. At this point the phase space changes qualitatively and the dynamical system is said to have gone through a bifurcation.

Bifurcation theory considers a structure in phase space (typically a fixed point, a periodic orbit, or an invariant torus) and studies its behavior as a function of the parameter. At the bifurcation point the structure may change its stability, split into new structures, or merge with other structures. By using Taylor series approximations of the maps and an understanding of the differences that may be eliminated by a change of coordinates, it is possible to catalog the bifurcations of dynamical systems.

Ergodic systems: In many dynamical systems it is possible to choose the coordinates of the system so that the volume (really a ?-dimensional volume) in phase space is invariant. This happens for mechanical systems derived from Newton’s laws as long as the coordinates are the position and the momentum and the volume is measured in units of (position) × (momentum).

The ergodic hypothesis turned out not to be the essential property needed for the development of statistical mechanics and a series of other ergodic-like properties were introduced to capture the relevant aspects of physical systems. Koopman approached the study of ergodic systems by the use of functional analysis.

Nonlinear dynamical systems and chaos: Simple nonlinear dynamical systems and even piecewise linear systems can exhibit a completely unpredictable behavior, which might seem to be random – within completely deterministic systems. This seemingly unpredictable behavior has been called chaos.

Hyperbolic systems are precisely defined dynamical systems that exhibit the properties ascribed to chaotic systems. In hyperbolic systems the tangent space perpendicular to a trajectory can be well separated into two parts: one with the points that converge towards the orbit (the stable manifold) and another of the points that diverge from the orbit (the unstable manifold).

This branch of mathematics deals with the long-term qualitative behavior of dynamical systems. Here, the focus is not on finding precise solutions to the equations defining the dynamical system (which is often hopeless), but rather to answer questions, for example:

• Will the system settle down to a steady state in the long term?
• If so, what are the possible attractors?
• Does the long-term behavior of the system depend on its initial condition?

Note that the chaotic behavior of complicated systems is not the issue.

Meteorology has been known for years to involve complicated—even chaotic—behavior. Chaos theory has been so surprising because chaos can be found within almost all trivial systems.

Chaos: Although there is no universally accepted mathematical definition of chaos, a commonly-used definition says that, for a dynamical system to be classified as chaotic, it must have the following properties:

a) it must be sensitive to initial conditions;
b) it must be topologically mixing, and;
c) its periodic orbits must be dense.

Sensitivity to initial conditions: Sensitivity to initial conditions means that each point in such a system is arbitrarily closely approximated by other points with significantly different future trajectories. Thus, an arbitrarily small perturbation of the current trajectory may lead to significantly different future behavior.

Sensitivity to initial conditions is popularly known as the “butterfly effect,” so called because of the title of a paper given by Edward Lorenz in 1972 entitled Predictability: Does the Flap of a Butterfly’s Wings in Brazil set off a Tornado in Texas?

The Lyapunov exponent characterizes the extent of the sensitivity to initial conditions. Quantitatively, two trajectories in phase space with initial separation diverge. The rate of separation can be different for different orientations of the initial separation vector. Thus, there is a whole spectrum of Lyapunov exponents — the number of them is equal to the number of dimensions of the phase space.

Topological mixing: Topological mixing (or topological transitivity) means that the system will evolve over time so that any given region or open set of its phase space will eventually overlap with any other given region. This mathematical concept of “mixing” corresponds to the standard intuition, and the mixing of colored dyes or fluids is an example of a chaotic system.

Topological mixing is often omitted from popular accounts of chaos, which equate chaos with sensitivity to initial conditions. However, sensitive dependence on initial conditions alone does not give chaos.

Density of periodic orbits: Density of periodic orbits means that every point in the space is approached arbitrarily closely by periodic orbits. Topologically mixing systems failing this condition may not display sensitivity to initial conditions, and hence may not be chaotic. For example, an irrational rotation of the circle is topologically transitive, but does not have dense periodic orbits, and hence does not have sensitive dependence on initial conditions.

Lorenz and butterflies: An early pioneer was Edward Lorenz whose interest in chaos came about accidentally through his work on weather prediction in 1961. Lorenz was using a simple digital computer to run his weather simulation. He wanted to see a sequence of data again and to save time he started the simulation in the middle of its course. He was able to do this by entering a printout of the data corresponding to conditions in the middle of his simulation, which he had calculated last time.

To his surprise the weather that the machine began to predict was completely different from the weather calculated before. Lorenz tracked this down to the computer printout. The computer worked with 6-digit precision, but the printout rounded variables off to a 3-digit number, so a value like 0.506127 was printed as 0.506. This difference is tiny and the consensus at the time would have been that it should have had practically no effect.

However Lorenz had discovered that small changes in initial conditions produced large changes in the long-term outcome. Lorenz’s discovery, which gave its name to Lorenz attractors, proved that meteorology could not reasonably predict weather beyond a weekly period (at most).

Mandelbrot and snowflakes: The year before, Benoît Mandelbrot found recurring patterns at every scale in data on cotton prices. Beforehand, he had studied information theory and concluded noise was patterned like a Cantor set: on any scale the proportion of noise-containing periods to error-free periods was a constant – thus errors were inevitable and must be planned for by incorporating redundancy.

Mandelbrot described to effects. The “Noah effect” in which sudden discontinuous changes can occur (e.g., in a stock’s prices after bad news), thus challenging normal distribution theory in statistics (aka Bell Curve). The “Joseph effect” is where persistence of a value can occur for a while yet suddenly change afterwards.

An object whose irregularity is constant over different scales (”self-similarity”) is a fractal (for example, the Koch curve or “snowflake”, which is infinitely long yet encloses a finite space and has fractal dimension equal to circa 1.2619, the Menger sponge and the Sierpinski gasket). In 1975 Mandelbrot published The Fractal Geometry of Nature, which became a classic of chaos theory. Biological systems such as the branching of the circulatory and bronchial systems proved to fit a fractal model.

Distinguishing random from chaotic data: It can be difficult to tell from data whether a physical or other observed process is random or chaotic, because in practice no time series consists of pure ’signal.’ There will always be some form of corrupting noise, even if it is present as round-off or truncation error. Thus any real time series, even if mostly deterministic, will contain some randomness.

Statistical tests attempting to separate noise from the deterministic skeleton or inversely isolate the deterministic part risk failure. Things become worse when the deterministic component is a non-linear feedback system. In presence of interactions between nonlinear deterministic components and noise, the resulting nonlinear series can display dynamics that traditional tests for nonlinearity are sometimes not able to capture.

Logistic mapping: In the case of the logistic map, the quadratic difference equation (1) describing it may be thought of as a stretching-and-folding operation on the interval (0,1). This stretching-and-folding does not just produce a gradual divergence of the sequences of iterates, but an exponential divergence (see Lyapunov exponents) as evidenced also by the complexity and unpredictability of the chaotic logistic map.

In fact, exponential divergence of sequences of iterates explains the connection between chaos and unpredictability: a small error in the supposed initial state of the system will tend to correspond to a large error later in its evolution. Hence, predictions about future states become progressively (and exponentially) worse when there are even very small errors in our knowledge of the initial state..

It is often possible, however, to make precise and accurate statements about the likelihood of a future state in a chaotic system. If a (possibly chaotic) dynamical system has an attractor, then there exists a probability measure that gives the long-run proportion of time spent by the system in the various regions of the attractor.


Based on Quantitative Relativity, if market trading functions as a multi-dimensional system, distinguishing between market situation processing and market strategy operation for order execution may provide the optimal performance of systemic applications of open and closed strategies.

The Theory of Quantitative Relativity distinguishes between control rules (or proof planning anticipatory systems) for correlating that “nexus” of the matter observed as energy transformation and transference, constituting nonrandom sequencing of combination structures within electronic exchange markets of financial instruments.

In a dynamic system, outputs depend on present and past values of inputs and must define the concept of a state. Therefore, an open system would be indicated for state-input-output processing.

As the state of a system makes the system’s history irrelevant, some dynamic systems are modeled best with state equations while others are modeled best with state machines. Therefore, market situation processing indicates open systematics, whereas market strategy indicates closed systematics.

A strange attractor can only arise in a continuous dynamical system (specified by differential equations) if it has three or more dimensions. Linear systems are never chaotic; for a dynamical system to display chaotic behavior, it has to be nonlinear. In that market trading may be multi-dimensional, it can be chaotic; therefore, quantification of strange attractors requires open systematics for state-input-output processing.

The term Open/Closed Principle is that once completed, the implementation of a class could only be modified to correct errors. New or changed features would require that a different class be created. Therefore, to achieve a linear system for order execution, a closed system is required within a rules-based subsystem of a state machine that quantitatively defines each state.

The dynamical system concept is a mathematical formalization for any fixed “rule” that describes the time dependence of a point’s position in its ambient space, such as the flow of water in a pipe. Therefore, closed systematics for (rules-based) function integration is required to quantify space and time correlation of price action (as a form of energy).

As (a) a dynamical system has a state given by a set of real numbers (a vector) which can be represented by a point in an appropriate state space (a geometrical manifold), and (b) small changes in the state of the system correspond to small changes in the numbers, therefore, open systematics are indicated to quantify state transitioning (or state-input-state), whereas a closed system is required to define rules-based excitation for state transitioning.

Iteration to determine the state for all future times is solving the system or integrating the system. Once the system can be solved, given an initial point, it is possible to determine all its future points, a collection known as a trajectory or orbit. This system operates as the (state-input-output) processing of the market situation; therefore, based on Quantitative Relativity, the solving of the system indicates open systematics, whereas the collection as a trajectory requires a closed system to establish linear processing for nonrandom storage and recall – being pattern recognition and connection of intelligence.

Linear dynamical systems can be solved in terms of simple functions and the behavior of all orbits classified. In a linear system the phase space is the N-dimensional Euclidean space, so any point in phase space can be represented by a vector with N numbers. Therefore, as solutions for the map are no longer curves but points that hop in the phase space, a closed system is supported for binary processing of order execution protocol.

The qualitative properties of dynamical systems do not change under a smooth change of coordinates (this is sometimes taken as a definition of qualitative). Therefore, as the incongruency of averaging is minimized during market strategy processing, efficient operation of a closed system is viable for state transitioning.

If coordinates are the position and the momentum and the volume is measured in units of (position) × (momentum), phase space may be invariant. Therefore, as open systematics are required to quantify price action as energy coordinates of a market situation, a closed system may achieve state transitioning of patterns during unpredictable behavior, which might seem to be random – within completely deterministic systems (or being the chaos of market exchange behavior).

Hyperbolic systems are dynamical systems that exhibit properties of chaotic systems and may be separated into two parts: one with the points that converge towards the orbit (the stable manifold) and another of the points that diverge from the orbit (the unstable manifold). Chaotic behavior of complicated systems is not the issue but for defining rules-based applications of market trading; therefore, quantification of the stable manifold for convergence of market strategy supports closed systematics, whereas divergence of market situation requires open systematics to define and quantify state transitioning.

Sensitivity to initial conditions means that each point in such a system is arbitrarily closely approximated by other points with significantly different future trajectories; therefore, open systematics are indicated for market situation processing to both define and quantify state transitioning.

Topological mixing (or topological transitivity) means that the system will evolve over time so that any given region or open set of its phase space will eventually overlap with any other given region. Therefore, to effect binary processing of synchronous-oriented state transition functions, closed systematics are indicated.

Exponential divergence of sequences of iterates explains the connection between chaos and unpredictability: a small error in the supposed initial state of the system will tend to correspond to a large error later in its evolution. It is often possible, however, to make precise and accurate statements about the likelihood of a future state in a chaotic system.

Therefore, open and closed systematics are required to both define rules-based quantification and operate function integration for optimal performance of market trading programs.

Attribution: Please see wikipedia for research excerpted herein.



 Elephants are doing the Lobogola thing. Nice London Bridge shape too. Here's a conundrum. Chair has rightly said that it is hard to quantify geometric chart patterns. Part of the reason is decimals do not easily describe geometric patterns, or even fractions for that matter accurately. That is why Pythagoras' discoveries about geometry were such a great breakthrough. This is why sines co sines are used with success to describe and predict geometric patterns. What algo easily describes a bridge, a set of waves, a triangle? Yet the eye easily see it. How do you catch a ball, throw it back. Its a complex math problem, but a kid can do it.

I suppose you could quantify a Lobogola, or a bridge pattern. I'll leave it as an exercise for the reader. The patterns just happened to catch my eye, and frankly took my breath away with its ferocity. I believe the movement and vol is good though. Its better than when the government tells us what the price is supposed to be and it just sits there without motion. I saw some cool triangles, flags, waves, head and shoulders also. My hypothesis is that these things are coming back. Old time stuff is coming back. The 50's and 60's are echoing back.



Stuyvesant Town/Peter Cooper VillageWe have seen a massive transfer of private debt into the public arena during the past two years. Governments the world over have socialized huge blocks and market segments of previously held individual and corporate debt. Even the recent default by the borrowers on Stuyvesant Town / Peter Cooper Village will add enormous tabs to already bloated government deficits. High profile holders of the deal’s subordinated debt and equity include sovereign wealth funds and banks that are assumed to be backed by Uncle Sam and his overseas cousins. Of course, the taxpayer is always left holding the bag. The alternative (let the banks go bust) could have been worse and I guess and hope that we never will know. Markets are rightly worried that these policies will ultimately lead to hyperinflation or staggering devaluations of the major fiat currencies. What is missing from the recent discussion is that all this may be very good for government and high quality agency bonds! It is the other side of the hyperinflation / devaluation argument.

Governments the world over can and may raise taxes and cut spending. Team Obama has already proposed spending freezes to limit and ultimately reduce the deficit. Sure, it tough to put your faith and money behind any politician but we have already seen a massive tightening of policy. Proposed curbs on bank activity, bank restructuring and enforced sovereign fiscal discipline (e.g., in Greece) and higher taxes. Confiscated wealth may ultimately compress economic activity and lead to less red ink for government’s budgets. Sure it is a long shot but it is certainly one of many potential outcomes. The point is that the last two years were all about adding support and liquidity to financial sector. The next two may be about reversing that support. If that the is case, you want some bonds in the box.



"Sucker's rally" — I heard this term on financial TV and in print all the time in March, April, and May of '09. Then the term disappeared until this latest selloff last week. Now it's popping up in bear print — not so much TV yet.



On "progressive visionaries", by a fellow I know:

"[The author] went to college with these people, and for a brief time 40 years ago was one of them. He recalls their thinking. They have been striving to gain real political power for all these years, and in the process have carefully taken control of the unions, public education, most big city governments, and much of the underlying federal bureaucracy. The election of 2008 was the culmination of their lifetime of strenuous effort, and it awarded them the Presidency, insurmountable majorities in both houses of Congress, the prospect of soon controlling the U.S. Supreme Court, and one or two serviceable crises by which to justify hurried and drastic action.

This is the Golden Opportunity, the one they have been working towards all their lives. They will never, ever again have such an opportunity. If they let this slip away, all is lost, possibly for generations. But more than that, their lives will have been utterly wasted, their very identities shattered."

Alan Millhone comments:

The British Navy at the dinner table is best approach to politics.

Stefan Jovanovich returns:

The sagas about the British Navy during the Napoleonic Wars are wonderful; but the notion that there was an absence of the discussion of politics at the ward room table for reasons of civility alone is a part of the fiction that has no basis in fact. The very purpose of the British Navy was political; and the men in the Navy were unambiguously candid about what the politics should be — mercantilism, not free trade — and ruthlessly dismissive of anyone who did not agree with them.

Politics was not "discussed" precisely because the only political argument of the day was about whether trade should allowed to be "free" — i.e. restricted only by tariffs and not by gunpowder; and the British Navy was, for reasons of understandable self-interest, "agin it". It very much helped their cause that most of their political opponents were no more in favor of "open" trade than Napoleon was. Instead, like the people whom Dan described in his post, they were believers in a "rational" authority that would have made a Marxists proud.

Here is how Henry Dundas, Stephen Matarin's fictional father, and First Lord of Admiralty saw the purpose of the Royal Navy:

"…be the causes of the war what they may, the primary object ought to be, by what means we can most effectually increase those resources on which depend our naval superiority, and at the same time diminish or appropriate to ourselves those which might otherwise enable the enemy to contend with us in this respect… I consider offensive operations against the colonial possessions of our enemies as the first object to be attended to in almost every war in which Great Britain can be engaged."

One interesting aspect of this is the extent to which abolitionism in Britain was an extension of mercantilism and the slavery patrols off West Africa were, in fact, a jobs program for the Royal Navy whose cannons could no longer thunder and men could no longer plunder. James Stephen is known to our age as Wilberforce's brother-in-law and as an abolitionist; but, like Dundas, his prominence came primarily from his devout support of the idea that British commerce should always be the handmaiden of the British Navy. You can detect a whiff of that nostalgia for the good old days in what James Stephen wrote in 1802:

"To impoverish our enemies used, in our former contests with France and Spain, to be a sure effect of our hostilities; and its extent was always proportionate to that of its grand instrument, our superiority at sea. We distressed their trade, we intercepted the produce of their colonies, and thus exhausted their treasuries, by cutting off their chief sources of revenue, as the philosopher proposed to dry up the sea, by draining the rivers that fed it. By the same means, their expenditure was immensely increased, and wasted in defensive purposes. They were obliged to maintain fleets in distant parts of the world, and to furnish strong convoys or the protection of their intercourse with their colonies, both on the outward and homeward voyages. Again, the frequent capture of these convoys, while it enriched our seamen, and by the increase in important duties aided our revenue, obliged our enemies, at fresh expense, to repair their loss of ships; and when a convoy outward bound, was the subject of capture, compelled them either to dispatch duplicate supplies in the same season, at the risk of new disasters, or to leave their colonies in distress, and forfeit the benefit of their crops for the year. In short, their transmarine possessions became expensive encumbrances, rather than sources of revenue; and through the iteration of such losses, more than by our naval victories, or colonial conquests, the house of Bourbon was vanquished by the masters of the sea."

James Stephen, War in Disguise of the Frauds of Neutral Flags (London, 1805)



wheatThe commercials seem to be weighing in (or large speculators weighing out) on Chicago wheat. In tonight’s COT report, on a rolling 18 month basis, this market was at the greatest polarization of commercials vs specs where the commercials are taking the long side. Slightly above that is also natural gas.

I’m not saying wheat’s going up tomorrow, because COT data are too coarse for short-term trading, but it seems like a good price range within which to start a longer-term accumulation.

For all the specs that are dumping wheat right now, I’m trying to imagine the trading desk conversation – “Food? Who the heck’s going to buy that?”

Bud Conrad writes:

I usually like to trade in the same direction of the Non Commercials. That is because the speculators (Non C) are big enough to drive markets. So I would interpret your data differently from conventional wisdom as saying grain could be driven down more.

The fundamentals on all the grains were made worse in last weeks USDA WASDE report, and they are in adequate supply. Wheat is probably the worst.

I hold no positions.

George Parkanyi responds:

I still have a substantial gas position and with the trading in and out of a portion of it, it’s now a little profitable; nothing huge – still waiting for the “move”. My main argument though at the time, with gas under $3 and everyone saying that there were record amounts in storage, was that the energy from the gas still had economic value, and that storage means nothing for gas, because whether it’s in a tank or in the ground, it’s all storage. The stuff flows like water. The determinant for prices is what comes out of the spigot at the other end. To me, industrial usage being down was the bigger factor. But for gas right now, this is exactly the price range where you buy the dips (as long as you’re not uber-leveraged). I’m thinking the same thing for grains, though I know I’m early, and I know that wheat has spent a lot of time in the $3 to $4 range in the past and beans $5 - $8. But China is now the elephant in the room as far as commodities go, including agricultural products. If they can’t meet their 8% growth objective to mitigate their population and urban migration problems, they will probably have to import and subsidize a lot of food to keep the lid on things. There should be a steady demand for soybeans at least. Corn is now a dual-purpose crop (energy as well as food), so with planting shifts and volatile weather conditions that may affect other crop seasons, wheat will certainly have its day - sooner than later methinks unless we get a really nasty reprise of early last year in all the financial markets (not unlikely).

I’m not using much leverage, so when I talk about accumulating a position, I’m talking about months, with my sights on the longer-term eventual recovery.

Ken Drees asks:

Do you believe nat gas price can overcome demand destruction factors:

  1. Industrial production down
  2. Household demand down based on homes not being used / versus colder winter
  3. Commercial property down — less gas use there

Seems like more fundamentals are against nat gas.

I like long grains, if a cooler spring/summer happens-which seems possible due to the cooling trends, yields could come off. Cooler summer also impacts nat gas, less energy used for A/C.

George Parkanyi replies:

Even if it stays in this range or lower, its choppiness works for me. It’s had two decent rallies since last September and a couple of useful wiggles. Could be a tough summer, who knows?

Rocky Humbert adds:

Ken wrote: "Seems like more fundamentals are against nat gas."

Agreed. However, in the short-term there are substantial bottlenecks in the domestic Natgas market and a near-absence of elasticity of demand. Additionally, with natgas massively cheap to heating oil, natty could double with no substitution effect. This structural situation explains why natgas can and does spike 100%++ in a short period of time. If you are on the right side of one of these spikes (or declines), with even a small position, it pays for a multitude of mistakes. Conversely, if you are on the wrong side with even a modest size position, it can result in ruin. (It's analogous to spot electricity pricing during peak summer months…) Accuweather just forecasted a "top-ten" cold February — No forecast from me on where natgas will trade over the next 60 days, however!

Larry Williams writes:

Extreme short positions by the large specs (as now in wheat) most often lead to rallies. More important is the relationship between open interest, the Commercial net position and price levels where Commercials have supported/sold the contract. It is not just levels of COT buying selling that matter, as I see it. Open Interest is a critical component to understand who is doing what and the consequences.

Wheat is getting set up to rally.

Jeff Watson comments:

Unless the new crop comes in at less than 1.22 billion bushels of winter wheat in the US, with the current carryover, I wouldn't be too bullish on the futures. Cash wheat at the elevators and ports has been hammered as of late and looks pretty dismal. However, my prognostications as of late have been less than reliable.

George Parkanyi adds:

"It's not an extremely risky call 'getting set up to rally'"

Isn't that what I said when I started this thread? The risk-reward looks pretty good for wheat - not tomorrow morning maybe, but in the next few months. I know there's supposedly plenty of supply, but in the past I've noted that many a rally began when all the news was "We'll never dig out from under the stuff." And, uncannily, when specs are going crazy at one extreme or the other, the market tends to reverse against them at or not too long after those COT inflection points. I think it may have to do with the fact that specs need to get out as well as in, and are building up latent selling/buying liability against themselves as they all run to one side of the boat with the trend. If everyone's shorting a market, then they eventually have to buy back to get out or roll, and if everyone's long, they have to sell to cover. The hedgers don't care - they just take the other side, and may not have to cover at all if they are delivering or taking delivery (thereby not feeding the trend). They also have the advantage that if their hedge works (beyond just locking in the original price), they can always lift it when they see their risk now to be low in doing so, and if the market reverses again, can put the hedge on again and capture the delta to increase their profit. (So that's why you might have commercials lifting hedges after big declines and willingly buying as speculators sell. If they do it in size, it can set off the specs going the same way to cover and ignite sharp reversals).

Larry certainly does a lot more justice to these calls than I do. If not for his books, I couldn't even spell "COT" (Though I wouldn't use me for a testimonial or anything, Larry. I wasn't exactly one of your model students.

Anatoly Veltman writes:

Regrettably, George, (cause I love you bro) you are missing all points:

You quoted me out of context; I simply implied that this particular Larry's call lacked precision/resolve.

You complain about getting bashed re: your COT application — but problem is not in you or in bashers. At issue is application; your one-dimensional application of COT simply doesn't make the cut. You steadfastly believe what you've explained below — and it's not incorrect; it's just not sophisticated enough to trade on… COT application is multi-dimensional; one should view COT with great deal of skepticism vis-a-vis other tools, given COT latency, arbitrary week definition, poor categories' definition and other arcane factors, which 99% of people who "can spell COT" still fail to consider, including all who attempted to quantify COT and talked about their attempts (I'm prepared to make exception for those who might have succeeded, and kept their success secret).

George Parkanyi rebutts:

Now that you mention it, I guess I am a one-dimensional kind of guy. My strategies are keyed on price –- don’t really care about much else except maybe time (for rate of return). As long as a market fluctuates and is not 0-bound, there are strategies that can be put in place on price action alone. In theory, anyway. (Usually it’s when I try to put a rationale behind a direction or a position weighting that I get into trouble. The short ETFs I’ve held and added to since the summer have certainly overstayed their welcome.)

I still like wheat (and I’ll like it a whole lot better $2 lower.)



Looking at the S&P 500 Index monthly through 2000 to present, I separated the monthly maximums and minimums by “Large Moves Up” and “Large Moves Down”..

Each month I calculated the “Max Move Up”  =  (Max of Inter-day max for month – Open for month)/ Open for Month.


“Min Move Down”  =  (Minimum of Inter-day min for  month- Open for month)/ Open for Month.

And then sorted them by size.

The Highest 12 (90th Percentile) Max Moves Up the following stats:

    Concurrent Month


         All Positive
         Max+ 9.2%   3/00
         Min +0.28
         Avg. +6.9%

         1st biggest Max Move Up = 13.7%
         12th  Max Move Up = 6.6%

    Next Month’s Returns:

        10 of 12 Positive Next Month Return
         Max  +9.0%  3/09
         Min  -5.5%  8/00
         Avg: +2.5%

However, doing a little data mining it looks like this positive “trend” disappears if the Max Move Up is less than 6.5% the 13th highest move up . Under this Up range the next month returns start having some large down months. I will leave it to the reader to determine how much.

The Biggest 12 Min Moves Down has the following stats:

 Concurrent Month

         All Negative
         Max  -18.6%   10/08
         Min   -3.1%    4/00
         Avg.  -9.6%

         1st biggest Min Move Down = -28.0%  10/08
         12th  Min Move Down = -9.4%

(The 13th Min Move Down was -9.3% and overlapped the 2nd biggest move up occurring on 3/09 with a 9.0% next month return)

    Next Month’s Returns

         6 of 12 Positive Next Month Return
         Max  +8.3%  9/02
         Min  -18.6%  9/08
         Avg: -2.5%

So it appears that negative volatility can have positive next months, but they are overwhelmed by the much larger relative size of negative next months. Again doing some data mining it would appear that this negative signal continues until the negative -6.5% Min Move Down.. Again I will leave it to the reader to determine how much.

This suggest the strategy of simply getting out of the market and staying out when a Min Move Down is < - 6.50% and then getting back in when the all clear signal is given by the months Max Move Up > 6.5%.

Even with staying out in 04/09 since 03/09 first was both first < - 6.50 and then > 6.50 for the Move Down and Move up: This strategy would have placed you in the right position for the 4 major trends in 2003 up and in, 11/2007 to 04/2009 out and 5/09 to now in. Again I will leave it to the reader to count the gains of this strategy. But obviously this assumes the trends up or down will be long and steady one direction for it to work.



 I keep wanting to write a piece about politics, but then I sit back in my chair and sit on my hands, looking to write something better.

My early chess friend/teacher told me to sit on my hands and that would slow everything down, stop impulse moves–and yield better overall chess.

In markets, using chart points–waiting to enter or exit, sticking with the plan is usually best. However, in fast conditions if you are waiting for xyz to hit a round number, sometimes I just let it go at 991 for example–I mean why wait for those extra ticks like every other bloke? I could reload and shoot by the time they are still massing.

Which yields another idea–is it good to learn how to use tools/skills with both hands (ambi)? I was thinking of say archery or shooting for starters? In some sports its almost a given that you have to be equal with both sides.



skiiersI spent the weekend at Massanutten, located 2.5 hours west of Washington DC, with my family. We had a great time, and the girls were very excited to go skiing for the first time in their life. I decided to sign them up to the ski school program called Slopesliders. They got their buttons with their names on it, and started their first day of lessons. I am a very good skiier, but I wanted them to go the ski school. Why? Because instructors have the right method to teach and because my girls would never listen to me: "Stop it Dad, we always have to do what you say! Let us do it our way….". Instructors were very good, they were teaching about: "pizza wedge" and "french fries", increasing the difficulty step by step and visualizing concepts and ideas. They managed to build up the kids' confidence with their new tools (the skis) and themselves. After only two days it is amazing what these girls could do on the slopes (like any other kid anyway). They managed to replicate movements and develop their own style so quickly. (Actually pizza wedges reminded me, triangles and french fries sideways moves in the market, and the importance of visualizing patterns and trends). Finding good teachers is very important to give you the basics and tools on which you can then build your own style and approach.



(Caveat: easier said than done)

SPY monthly returns (1993-present, with div) were checked for a normalized proxy of intra-month range = (H-L)/C. The series was then ranked by range, along with corresponding monthly returns. These monthly returns were multiplied for the entire 17 year period, which gives a total return of 3.35 ($100 became $335). This was then repeated after successively skipping first the highest range month, then second, all the way to skipping the highest 100 range months. This allowed evaluation of the effect of being "out of market" on final compounded return - whether or not the high range months were up or down.

The graph below shows the effect. Cpd return is the green line, which rapidly increases by skipping (and investing in "cash" = multiplicative return of 1.00) the highest range several months, and continues to outperform B/H up to 100 months skipped. Range of skipped months is plotted in red; for scale on this graph multiplied X10 (eg, range of 0.34 shows as 3.4).

Here are the compound returns, successively skipping the top 20 range months, with dates:

Date             ret       H-L/C     CPD
10/01/08    0.83    0.34    3.35
11/03/08    0.93    0.29    4.01
07/01/02    0.92    0.24    4.31
09/04/01    0.92    0.21    4.68
03/02/09    1.08    0.20    5.10
02/02/09    0.89    0.19    4.70
08/03/98    0.86    0.18    5.27
09/02/08    0.91    0.17    6.14
01/02/09    0.92    0.17    6.77
10/01/98    1.08    0.17    7.38
03/01/01    0.94    0.17    6.83
10/01/02    1.08    0.16    7.23
10/01/97    0.98    0.15    6.68
01/02/08    0.94    0.15    6.85
09/03/02    0.90    0.15    7.29
08/01/02    1.01    0.15    8.14
04/02/01    1.09    0.14    8.09
03/01/00    1.10    0.14    7.45
04/03/00    0.96    0.14    6.79

In fitting with decline = volatility, only 6/20 biggest range months were up.

Steve Ellison writes:

Using Dr. Zussman's results as a starting point, since I am not very good at determining the monthly range before the month begins, I checked what would happen if one skipped the month after a month with a high range. SPY total return including dividends from the end of 1993 to the end of 2009 was 3.14, for an average monthly return of 1.0060. If one held cash in all months following a month in the top 10% of ranges to date, and held SPY in all other months, total return would have been 1.98, with 140 months in the market and 52 months out. Average monthly return would have been 1.0049.

Since the end of August 2007, however, the average monthly return following a month with a range in the top 10% of historical values has been 0.9707, while the average monthly return of other months has been 0.9992. Thus, substantially all the losses of the last two years occurred in months following months of very high ranges.


 Month ending   H-L/C   H-L/C Position Return

    9/30/2008    0.18    0.13     in     0.9058
   10/31/2008    0.35    0.13    out   0.8349
   11/28/2008    0.30    0.14    out   0.9303
   12/31/2008    0.12    0.14    out   1.0098
    1/30/2009    0.18    0.14     in     0.9179
    2/27/2009    0.19    0.14    out    0.8925
    3/31/2009    0.21    0.14    out    1.0833
    4/30/2009    0.12    0.14    out    1.0993
    5/29/2009    0.08    0.13     in     1.0585
    6/30/2009    0.08    0.13     in     0.9993
    7/31/2009    0.13    0.14     in     1.0746
    8/31/2009    0.06    0.14     in     1.0370
    9/30/2009    0.08    0.15     in     1.0354
   10/30/2009    0.08    0.14     in    0.9809
   11/30/2009    0.08    0.15     in    1.0615
   12/31/2009    0.04    0.16     in    1.0191

Rocky Humbert asks:

Is this study and its results more than a reflection that (historically) a higher VIX → lower return?

Bill Rafter comments:

VIX is simply one form of volatility. It is logical to assume that some of the other forms may lead VIX, and that those may be causative and have predictive value. If they have predictive value for VIX and VIX is coincidental with declining equities, then you have something on which to build.

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



 For a great Christmas movie, try The Lion in Winter. Probably best after the extended family has gone home. Katherine Hepburn and Peter O'Toole — all you might need. But the rest of the cast is so good, too. Just the exuberance and the machinations. The Great Man theory of history, packed tight in an old castle. If it's been a long time since you've seen it, it's worth watching again.

Dean Davis agrees:

I second this. The supporting cast includes Tim Dalton and Anthony Hopkins, too. All in all a fine film with some mature themes.



 Edwin LeFevre's works, while ostensibly all fiction, are based on the personalities and newsmakers of the Street at the turn of the last century, and are filled with nostalgia, as well as notions of "Le Plus Ca Change… Le Plus C'est La Meme Chose."

Easan Katir adds:

Those interested in father-son relations might enjoy Edwin LeFevre's "To the Last Penny" , an illustrated short story published in 1917, currently out of print.



Sandra Bullock from The Blind SideTHE BLIND SIDE

Directed/Written by John Lee Hancock Reviewed by Marion DS Dreyfus

Cast: Sandra Bullock, Tim McGraw, Quinton Aaron, Kathy Bates

Some people never see a normal, happy, intact family in the entire Follywood of Hollywood. Here we have a corrective that warms most people's hearts. Sandra Bullock and crew bring to astonishing life the true! tale of Michael Oher, a traumatized, abused and illiterate boy who became an All-American football star and first-round NFL draft pick with the remarkable, unstinting support of a feisty woman and her cooperative, loving family. One doesn't know which is nicer, the all-American family with a smart, sexy wife and loving, supportive husband, great kids who know how to study and behave properly, or the poignant tale of the emergence of this remarkable talent who overcomes so many social handicaps to triumph where that simply (you figure) does not happen in the real world most people inhabit. I know reviews like this give you cavities, maybe, but THE BLIND SIDE is enjoyable on many levels-script, story, acting, outcome. So if you don't cotton to really great endings, avoid INVICTUS, CRAZY HEART and this one. Bullock's been winning all sorts of awards for this, probably not so much for her usual adorableness and full-on no-BS performance as much as for the delight of seeing such movie-movies can still in this age of cynicism be made. Was everyone in the home office on the slopes when someone green-lighted this one? (Full Disclosure: Bullock herself produced.) Fun fact: Quinton Aaron trained with the Georgia Tech football team in the spring 2009 to ready for the role of Michael Oher. (Though he's a mammoth size, Aaron is a lot flabbier than the real Oher, rest assured.) marion d s dreyfus . . . 20©10



 I could not make the game tonight so I was looking to sell my tickets. It will be a sell-out crowd.

1) First, I got some inquiries from insiders (neighbors, friends, etc.) if I was going to use my tickets. I would never accept an offer above face from a friend due to social reasons, so fortunately I delayed and they made other plans.

Trader Lesson: Insiders always call early and expect a great bargain. In fact, the final difference was about a 1/3. If selling to an insider wait, if buying buy along with them. Just like when the market fell hard insiders bought with great abandon. After all, if you are on the board of the New York Fed it would be impolite not to buy Goldman when the shares were in the 70s from over 200. After all you are friends. Do not befriend your brokerage firm.

2) The opening offers were on average extreme. Bargain hunters.

Trader Lessons: Patience can pay. Follow the Senator's advice and look for an early extreme.

3) After a couple of hours prices settled into a tight range, with a couple of extremes, but these bids were false as they found other tickets.

Trader Lesson: Be quick and skeptical of those good offers — they are just running stops.

4) On average prices were lower the more convenient the geographic distance between buyer and seller. Watch out when too much foreign money piles into a market.

Trader Lesson: Look at markets using various base currencies.

5) Finally, on a rainy day, watch the game from the comfort of your own home as only the young need to stay up late when tip-off is 9pm and the game is on ESPN.



William PoundstoneThe Myth of Fair Value (and How to Take Advantage of It) is a new book by William Poundstone that looks to be interesting based on a perusal of Mr. Poundstone's blog and You Tube appearances.

An excerpt:

"Though a price is just a number, it can evoke a complex set of emotions—something now visible in brain scans. Depending on the context, the same price may be perceived as a bargain or a rip-off; or it may not matter at all. A few of the tricks are timeless, like shrinking packages and prices ending in the magic number 9. But price consultancy is more than the latest chapter in flat-world hucksterism. It draws on some of the most important and innovative recent work in psychology. In the mundane act of naming a price, we translate the desires of our hearts into the public language of numbers. That turns out to be a surprisingly tricky process."



IRVING FISHERHere is a great article: "Thoughts on the End Game" by John Mauldin

The brilliant U.S. economist Irving Fisher first highlighted the fact that an economy's debt level could have a deleterious impact on economic growth if it is, in fact, excessive. At $3.70 of debt for every dollar of GDP, U.S. debt is excessive (Chart 1). Fisher pointed out that the unwinding of debt levels results in prolonged economic distress, and we certainly agree. In 2009, the book This Time is Different - Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.



Statistics without TearsComing to you live from Borders, it seems Derek Rowntree — of 'Statistics Without Tears' fame also has a text, 'The Manager's Book of Checklists'.

It looks thorough. An interesting overlap given DailySpec's statistical bent and recent discussions of checklists.



lamb in the grassResponsibility for recent financial history is being projected on to the banks and investors, whereas in reality the issue is one of individual choice. Every person who is a party to a risky mortgage can say — this trade does not meet my criteria, I shall rent instead (and would that education enable every child to know how derivatives can give a safer alternative to owning the underlying outright).

Yet some Eliadean beliefs are so cherished anything will be done to protect them. Banks are not too big to fail unless governments decide they are. The concept of ownership of land is so much part of an underlying religious belief that people cannot see it as such, along with its cousin, a belief in ownership of animals.

Trading is an age old art, like music, and is as impervious to legislation (and the fashions of the day) as the laws of addition.



What is the equivalent of an open versus a closed game in market trading, and under what conditions is each better or worse?

Nigel Davies writes:

An open game is a volatile one in which the ball comes onto the bat very fast.

Laurence Glazier comments:

Perhaps it can be quantified by the amount of risk the trader is taking, as the greater number of possibilities in an open game steer the players closer to the cliff edge. But there the analogy finishes, as in chess the reward/risk is ultimately for the same prize, whereas in trading, more risk increases the stake.



It's an absolute stew of variables now. Safe harbour time — or more see/saw. Nine months of bull complacency have given birth to what?

I am watching GS stock price for direction of Obama bank bite. GS cutting back bonuses is like Grandma giving you the eye when she watches you grab three cookies. You give back one to be polite and take the other two, knowing you will be back for more later anyway.

Somehow the money must flow. We all must be allowed to take water from the well.



 A daily loss of 2%, erasing this year's gains, is nothing compared to the political and cultural shift that happened today.

The following is not meant to be romantic — simply a reflection of my feelings on today's news, nothing more.

Many readers of this site have been attracted to bank prop desks, "sponsored" hedge funds and merchant banking as career paths. Much of the attraction to these roles was because of the enormous entrepreneurial opportunities and intellectual satisfaction offered by such lines of work. I would say, for the right types of people, the net compensation was just a side benefit to the job satisfaction and freedom.

That the wholesale writeoff of a great economic engine has happened in the United States — of all places! — is truly sad and cause for great concern. What has happened to the nation that has posessed the birthright of capitalism and opportunity? Why has it now seen fit to discard one of the very engines that made it so powerful, respected and venerated? This is the nation that has produced, for better or worse, such (financial) cultural icons as Wall Street, Liar's Poker, the legend of Soros and the Sage, of our very own Chair — and now it has turned round to bite the hand that has so often fed its dreams. Such a move would have seemed unfathomable in 1985, 1995 or even 2005, yet here we are.

So a few thoughts and anecdotes:

1. PL is pure. There's no fudging performance. You are graded in the market every day by an unusually rigorous and ill-tempered teacher who never gives praise lightly. In trading, one cannot hide behind a sharp tie and a nice suit, cheap talk or family connections. It's entirely on one's own shoulders how one performs. Every day, every week, every year the bottom line is green or red and you own it. To discard and stigmatise such objectivity is a blight to reason itself.

2. I have had the privilege of working in some of these banks - the cultural and geographic diversity in the average internal hedge fund is deep, very often scholarly and high in camaraderie and positivity. The backgrounds are varied and are cause for many profitable interactions and learning. Many bank prop traders can come from the darkest, most depressing areas in the world and - with hard work and effort - transform both their own lives and the lives of those closest to them. Sure, there are the odd bad apples and obnoxious, attention seeking loudmouths - but what line of work doesn't possess such types?

3. Duly noted that there ought to be new, well thought through, sensible regulation; this should be of little concern if done properly. The best players want the most level playing field because they enjoy the challenge of playing within the rules and having security that everyone knows where they stand. Perhaps these new rules should focus on the leverage used by an institution as a whole rather than simply singling out particular activities. Was it really prop traders / internal hf's to blame for this crisis? Or were balance sheets leveraged 30-40x a more likely villain? Or, in the alternative, why not require higher professional standards and testing? Doctors and lawyers spend many, many years taking qualifying exams with very high vigs which encourage and ensure a largely compliant and responsible membership. Perhaps, if one handles client money, there ought to be far more extensive educational and testing requirements (perhaps having completed a professional qualification like the CFA first)? Not a solution, but at least helps to raise the professional standard and provide disincentive to those out for the quick buck.

4. Why not go after the media? Media - especially in the United States -is constantly selling people dreams that are near impossible for them to achieve given education, skills and income. Why not ban shows like MTV's Cribs that encourage poor economic behaviour? Why not ban any form of lifestyle TV programming? Why allow seductive ad campaigns? Is it more irresponsible to glorify and encourage conspicuous consumption, or to attempt to facilitate people's dreams (however foolish or unlikely) via the transference of risk? An open question for the reader to ponder.

5. Will taking speculative risk from banks and placing it in the hands of hedge funds or private investment vehicles alone really protect the world from financial calamity? Have we forgotten LTCM? What about counterparty risk? It's not so long ago that rafts of good hedge funds had to liquidate and pile in on the selling - not because their own performance was bad - but because the bad performance of others forced redemptions that sank them. 

6. Efficient use of capital. Much of the general public prefer to have the professionals do the thinking for them in complex matters - fair enough. If someone wants a (relatively) risk free return, they can have it for 3-5% a year….problem is that such a return is not particularly sexy or accelerative toward Ferrari ownership. The real problem is greed and overconfidence - a 25% return sure sounds good - but the concept of the variance required to achieve such returns is, at best, largely ignored. Banks and financial institutions are able to help facilitate financial goals by (theoretically) making good decisions with capital that is otherwise sitting dormant on their balance sheets.

7. Redundancy of capital, systems and process is key; not knee jerk reactions. More slack needs to be built in at all levels of the economy. People ought to save more. Risk takers ought to carefully consider their use of leverage and have more of a buffer. Risk methodologies need work. Shooting the messenger has never, to date, had much historical success in solving anything. All of the above would be nice, but I'm just old enough to appreciate that dreams are free. 

8. A conversation with a fellow spec this morning helped to crystallise in my mind that envy and resentment are not mutually exclusive. The evidence of such is all over today's news.

I thumbed through an old copy of Liar's Poker this morning. Maybe tonight I will watch "Wall Street". Sure, they're cheesy and it's silly. But it's like saying goodbye to someone I might not see again.



A picture from the Google vs. Ebay cricket matchWatching cricket (or the same could be applied to baseball for the Americans or football for the Europeans and Brits…and South Americans and…) I have often considered how structured and polished the performances are– clean batting, clean bowling and clean fielding.

When is a risk taker going to be coach? When will some one bring the advantages of risk and a polished team into play?

Indecision must bring opportunities.

Why couldn't a fielding team (that's getting flogged or maybe not flogged) start to miss EASY field returns, but have a back up plan–thereby allowing for the batting team to be lured into a second run and capitalise on the often poor communication between batters looking for a run out.

Many other ideas and ways of creating opportunities to take advantage of a situation could be put in play. It seems most areas are not being explored.

Markets certainly don't have those problems with a muliple of false break outs catching everyone on the hop, and whether we like it or not, keeping the game interesting.



Wes Anderson--director of Fantastic Mr. FoxAVATAR

Are you kidding? Who cares what I or anyone says? As a flick 12 years in the making, by the director of the budget-busting TITANIC, Jim Cameron made a $500 mm movie most everybody regards as must-see –-and you will see it even if we all unload a truckload of bovine manure over the darn 23rd century sci-fi thing.

It’s 3-D! It’s exactly what you and your darkness-loving chums hanker for on a holiday week with gravy and giblets still dense in your tummies. Heavy-duty futurism, slim animatronic females with substantial breastage! La la la. Be on the lookout for Cameron’s signature anti-American jabs, here in the form of American military stand-ins coming in for disrespect and unwarranted opprobrium.


Streep can read the Blimpy recipe guide to the dispossessed and you’d stick around for her to finish up. Steve Martin has that whole expectancy thing going, where you expect him to flop into the wild ‘n’ crazy guy. But he’s nerd central throughout, except where he slips up during one sequence and dances in his usual jackrabbit on speed wackiness. Alec Baldwin gamely bares more than this viewer cared to see, threatening to let some of us revisit our lunch. Last week’s lunch, to be more specific.

To be sure, there are funny bits and LOL sequences.

In the main, however, it’s a cynical and condescending bid for the Boomer bunch now heavily divorced, re-dating again, and impaled on the slippery scree of finding their footing anew among a dazzling array of electronics.

Meryl’s divorcee, however, is about as realistic as the current health monster in the House: She’s wildly popular, fantastically successful in her restaurant, money is no object (there’s a realistic note, huh?), close to her three adult kids, setting up to spend a bundle on a house addition to die for (though with all her kids out of the house and no mate underfoot, and a current kitchen gorgeous enough to hock both your liver and pancreas for—why? Why build a second house not onto but next to the first totally adequate and salivation-inducing first Calif-mansion?–and frantically attractive to her near-stalker ex, Alec, re-married to a rhymes-with-witch hottie of the statuesque school of no-way! As well as the near-perfect available man, her architect, Steve Martin’s understated swain: diffident, appreciative, longing for recommitment.

Sure: This is e-x-a-c-t-l-y the story of millions of 40-ish and 50-ish divorced women in California today, right? It’s Boomer envy. Like as not, there is possibly the plot point that people actually hunt for ‘easy viewing’—give the peeps the predictable pat answers. Be in other words predictable.

We found it too long by a half hour, indulgent, repetitive, annoying and unrealistic. OK, it’s supposed to be a fantasy? So what. It reads like a heartbreak-grad-school HEARTBURN (Nora Ephron’s more affecting, and more honest, dramedy of rocky marriage/successful divorce, starring the ever-steadfast Streep and the cheating Jack Nicholson in the naturalistic Mike Nichols episode of once-great marriage gone terribly Tiger Woods). Even the score evokes that earlier film. Scenes in COMPLICATED ring hollow and absurdly wrong, as when all three grownup offspring learn of the affair their divorced parents are having, and take to (one!) bed in childish retro petulance. Their mother owes them no apology or even explanation. Yet there it goes, as if she hadn’t learnt what being a liberated adult is all about. This is a small but irritating Dr. Spockian infusion into what one has the right to consider a modern story. It is not: It is Carrie and her girls, 15 years later, tossed salad with a few post-coital afterglows, and an anemic starter romance without evidence conducted with a near-catatonic Steve Martin.

FANTASTIC MR. FOX, story by the inimitable Roald Dahl, is Wes Anderson’s hilarious animated adaptation of the children’s fable of a wily fox outfoxing a local farmer with the able and arch amusing assistance of other barnyard creatures. Take the kids if you must—they’ll delight in its silliness, dazzling movement, color and animated imagination—but you will enjoy it far more than even they. A fun-filled delectable hour and a half for everyone.

PRECIOUS. It will probably sweep the awards shows. It has already swept up 29 noms, 3 Golden Globes, and numerous Best of the Year Top Tens. But this grim narrative of an overweight, illiterate Harlem teen unwillingly pregnant with her second child enrolled in an alternative school so her life might head in a better trajectory is tough and ugly slogging. It is probably one of the most under-lit films of the decade. But it offers a script that is scathing and blue with harrowing filth and invective against its protagonist, poor, obese Precious. Hailing from a novel by Sapphire, PUSH, this prize-capturing documentary-feel story is plain hard to sit through, despite staggering performances by the entire cast, especially stars Mo’Nique as a plug-awful jealous mother; Precious herself, played by newcomer Gabourey (Gabby) Sidibe; and tamped-down, de-glammed rock-star Mariah Carey, as a no-nonsense, sensitively played social worker; and luminous Paula Patton’s warmly beautiful guardian angel, Ms. Rain. Though you leave feeling virtuous for having eaten your broccoli-and-spinach of movies, it’s hardly going to send you out clicking your heels, Mr. Kelly.



 Here are some thoughts on deception in the stock market:

1. It is a known signal that when the broker gets an odd number of shares to buy or sell, it is the last part of the order. Why not start with the odd number instead?

2. So as not to signal panic, always cover the short going against you with a limit order, not a market order.

3. Don't always ask why xyz stock is up ( or down) just because the position is going against you.

4. When you meet the management of the stock you're short, play extra nice to charm them and commend them on all their accomplishments.

5. Pretend you do not know anything about the stock when speaking to the analyst. This way you will find out what he/she really knows about the company.

6. Emphasize your losses and hide your winnings when talking to people outside your firm.

7. When meeting your broker tell him or her that you haven't been active in his or her region lately but that you're about to enter it shortly. Then continue to use dma.

8. Call the analysts with the opposite recommendation of your position first to find out their story.



Logo of Ice cream storeThis is Mumbai's best ice-cream maker . No preservatives, all natural.

Their largest selling flavour (Kesar Pista, i.e. Saffrons with Pistacchios) that must have been easily producing more than 50% of their sales was disbanded by the company. Only recently when my daughter was fuming as to why they should be stopping producing their best ice cream I realized that it must have been many years since we have been eating only this one flavour.

Perhaps they launched in 1994, just a year after I immigrated into Mumbai, that this city lapped up a small non descript store in the far off Juhu locality that was selling many different varieties of Natural ice-creams. The diversity was the USP that propelled an ice-cream company with a shoe string budget to push every other larger player out of the business.

For years, friends and relatives flying out back to their home towns have been having a Naturals thermocol box full of ice creams as a key luggage to far and wide places all over the nation.

This is a near shock. Kesar Pista is no longer going to be sold by Naturals. An enquiry at one of the nearer stores revealed that the owner of the business decided that this one flavour is killing away the sales of all other unique flavours they created. Yes, Kesar Pista is a favoured flavour for the Indian palette.

This sets one seriously wondering what a unique situation it must be where a company kills a 50% plus revenue producer as a business strategy to expand its business! There may be analogous situations with the financial markets. What does the self-perpetuating institution called the Stockmarket do when more than half of its total trading volumes get concentrated in a stock called Citibank?

What may be happening in those markets where a handful of stocks capitulate away more than half of the total market capitalisation? I would surmise such are ripe conditions for Ms. Market to build a new genre of darling stocks.



There are multiple methods of measuring investment risk. Several popular methods utilized by investment managers:

VAR (historic, variance-covariance, and Monte Carlo)

Sharpe Ratio

Modified Sharpe Ratio

Standard Deviation


Ulcer Index

Information Ratio

Intra-Portfolio Correlation


For investment capital attached to future outlays such as pension obligations and retirement account distributions, surely Shortfall should be included in the risk assessment tools mix. For those asset managers who are not tethered to an Index, Information Ratio is of little use and is clearly inferior at measuring absolute risk. Furthermore, for all but the most stoic of investment managers, Standard Deviation and Sharpe Ratio are deficient because they don’t differentiate pro-position and counter-position volatility.

Although each remaining method has strengths and drawbacks, all successfully measure risk. Maybe, a combination of methods throughout the investment decision-making process will permit a more comprehensive analysis of risk. Consider it ‘risk analysis diversification’, if you will.

One potential avenue could be to first figure out which individual strategies to deploy within a multiple strategy portfolio. This can be accomplished by using the relatively simple to compute and compare, and fittingly named, Ulcer Index (at least to those whose gastric ailment is not rooted by a H. pylori infection). Ulcer Index is apposite because its formula contains, instead of standard deviation as is used in Sharpe Ratio, the sum-of-root-mean-square of all periods’ percent-drawdown. Vital to maximizing precision is using long-term historic data. Importantly, data should include periods of extreme price excursion. If there is no long term data, generate a synthetic long term series, or if possible, select

a highly probable highly and positively correlated surrogate asset. Normalize the surrogate to the actual asset’s volatility over a comparable time period (compare periods after regular high volume has been maintained in a new issue). Next, Ulcer Index can be computed for each strategy’s returns over a uniform time period. Then, rank and check for correlation among strategies and choose accordingly.

Lastly, to engineer the desired overall portfolio risk/reward profile, optimize expected Intra-Portfolio Correlation and Modified Sharp Ratio. For accuracy, Modified Sharp Ratio’s (which incorporates VAR) inputs should be projections, partly extended from historic and if necessary synthetic data. Do expect to make regular revisions.

Of course, there are other combinations of methods to achieve risk analysis diversification benefits; this is but one example

Russ Sears writes:

The problem with these measures are they cannot measure the risks of cannibalizing the future for short term gains. The more a model is used, the clearer it is to all those involved how to tip the scales in their favor. Remember the chaos of the gyspy moth, overbreeding until the trees cannot regenerate leaves quick enough for the last generation.

Take VAR, its lack of liquidity measure, and do a cursory scan of the role it played in the overallocation to sub-prime, mortgages, real estate and structured credit or rating agencies, AIGFP, SIV's, banks and insurance companies required capital. Even those titans of business Havard and Yale fell for these gapping holes in measuring risks and performance. Soon everybody is overallocated to the same thing. Then suddenly everybody is surprised when the door is not big enough when the liquidity fire alarm is pulled.

For diversification of risks measures, I have had much more luck understanding the weakness of the model and trying to prevent myself or a company taking my advice from letting the weakness of the model predetermine my allocation or strategy. The genuis of Chaos Theory, in my estimation, is clearly understanding what a model does not and cannot measure. Then you won't expect it to measure all risks and are not alarmed by those that cannot see they stepped off the edge of a cliff. 

Anton Johnson responds:

Mr. Sears makes exceptional observations, and to extend on those, I would add that the endowment funds’ problems were exacerbated by inexcusable errors in basic portfolio management. By simply monitoring the portfolio and maintaining prudent volatility adjusted component size limits and intra-portfolio correlation level, much of the funds’ losses engendered by the managers’ usage of VAR, and their apparent ignorance of its shortcomings, would have been mitigated. Of course, the root cause of their problems was unfortunate asset selection and poor foresight; and that is an entirely different topic.



Gouverneur MorrisI am reading Theodore Roosevelt's biography of Gouverneur Morris; the book is proof, if one needed any, that Roosevelt was a true Renaissance man, even if his politics were almost as lunatic as Morgan feared.

Morris was not only the actual author of our Federal Constitution but also the greatest political observer among the Founding Fathers. At a time when Jefferson, Thomas Paine and others were celebrating the Revolution of 1789, Morris was deeply saddened by what he saw first-hand in Paris; and he urged President Washington to avoid favoring the Revolutionary government against the British.

But, if Morris thought the French Revolution was destined to failure and folly, he never lost his appreciation for France. Neither should we. It is footless for any of us, at this late date, to continue to take the Band of Brothers version of the Normandy campaign as an accurate military history. The Free French, along with the Poles and the Canadians (whose contributions are also conveniently forgotten) did more of the actual ground fighting in the Falaise Pocket than Americans did; and they paid a terrible price for it. General Leclerc , who understood and practiced tank warfare better than Patton did, was a brave enough man to understand that the Vietnamese wanted the same freedoms that Americans had fought for in their own revolution and that "anti-Communism" could not, by itself, be sufficient justification for the continuation of direct colonial rule. But for his untimely death (much like our own General Abrams' being struck down by cancer), it is likely that the Indo-Chinese wars would not have happened as they did.

P.S. It is also worth noting that the people of Normandy have never once complained about the thousands of civilians who were killed by largely indiscriminate high level bombing by the American Air Force before, during and after the D-Day landings. Instead, they thank us every year for what our soldiers, sailors and airmen did to liberate their country. Perhaps it is time we thanked them as well.

Chris Tucker writes:

Rallyn and I spent our honeymoon in France and loved every minute of it. Of that, a week in Provence, stayed in Gourdes and had delightful wines from a small local vineyard called La Canorgue in Bonnieux. Decided to go hunt them down, beautiful, beautiful drive, found them, sign on gate says "Back in ten minutes". We wait, proprietor arrives in a few, takes us into her little shop and is just lovely. We buy a bunch of bottles to take home and enjoy a splendid day roving around the countryside, visiting the market in Aix-en-Provence and the lavender at the Cistercian Abbey at Sénanque. Also Avignon, the Pont du Gard. Amazing, history fills every square inch, beautiful country, beautiful architecture, beautiful people that know how to enjoy life.

Flash forward a few years. We are at home watching "A Good Year" and slowly it dawns on me that I've been to the vineyard in the film. Château La Canorgue is the vineyard, just as I remembered it. Wonderful. The film isn't awful either, although the trading scenes in the beginning leave quite a bit to be desired. Crowe's character is a heavy hitter in London. Albert Finney is spectacular.



Bill James--SabermetricianAn interesting article by David Friedman on his blog — which is very worth reading, as is Steven Landsburg's blog –  talks about why relative income is important for utility mazimizers. He makes an evolutionary argument that for men competing for scarce woman resources, having a higher income in your class is more likely to get you a mate, especially in polyandrous societies.

It brings up the subject of team standings in major leagues. I always thought that major league standing of markets should be ranked like baseball teams — stocks, bonds, gold, oil, beans — and the team leaders and losers and their paths each week should be quantified the same way baseball standings are analyzed. I'm going to do something like this on Daily Spec and think it will be fun and dare I say it useful.

I am looking for a set of The Ticker magazine, especially 1907 and 1909 and all issues besides 1908, which I think is very useful to see how they handled the aftermath of 1907, which is so similar to our 2008. The quality of that magazine is amazingly good, in accord with Nock's dictum that as financial literacy improves, the lowest common denominator keeps getting lower and so does quality.

It is amazing to see that the auctions went so well, and I will be looking closely to see if the annual hunting season of Central Banks on Interest rates starts earlier than the traditional April date. Out of the depths comes a Hispanic from Florida, former Florida Majority Leader who combines the appeal of Jack Kemp, Arnold Schwarzenegger, and R.R. If I had any daughters interested in politics, I would suggest they go intern for him.

The Baseball Abstract by Bill James is beautiful and full of intriguing analysis that is directly applicable to markets. Amazingly the trend follower hired him to improve the baseball team's performance, but somehow it is clear that he hired him for the wrong field. If I am ever a rich man again, I would offer to hire him to set his sights on markets, and give him the data to let him go at it.

The reaction to the win in Massachusetts reminds me of the reaction when the Senate passed the first stimulus bill. Oh thank goodness, frustration, and uncertainty relieved, here we go down 10% in a second.



The Sage of OmahaThe Sage of Omaha has always been on record of never splitting shares, giving a multitude of reasons, (which I personally agree with). That's one reason BRK.A is so expensive. Now, BRK wants to split their B shares 50 for 1. That's hypocrisy. It also might be a tell, but my crystal ball is a little cloudy these days. Buffett purportedly wants to greatly expand the investor base. This whole thing smells like something out of the play book of Vanderbilt or Gould.

Stefan Jovanovich writes:

The comparison might be with Merrill Lynch in the 1950s. "Throughout the bull market of the postwar period and the 1950s, Merrill Lynch continued to be an innovator and a popularizer of financial information. The firm erected a permanent Investment Information Center in Grand Central Station, distributed educational brochures, ran ads with titles like "What Everybody Ought to Know About This Stock and Bond Business," and even sponsored investment seminars for women. These new ideas made Merrill Lynch the best-known investment firm of the day. Charles Merrill's reputation soared to such heights that shortly before his death in 1956 one Wall Street historian referred to him as "the first authentically great man produced by the financial markets in 50 years." Berkshire is being structured to become the stock that all "good" people should own and keep forever.

Kim Zussman shares:

Fanfare for the Common Man

Jeff Watson adds:

In the 1800s, consuls and other forms of gilts were considered safe investments that all "good" people should hold forever.



Obama's wedding picturesWhen Hillarycare finally died in the fall of 1994, the DRG (drug stock index) rallied about 70% over the subsequent twelve months with almost no corrections, with the first serious top occurring when Newt took back the House with Contract With America. By the time that happened, the DRG index had doubled from its pre-Hillarycare low.

Admittedly, it coincided with a bullish stock market, however, there are more than passing similarities between then and now, noting also that long-dated calls on XLV are very inexpensive. A double of the March 2008 low in XLV would take this healthcare ETF from $32 last to about $44 for another 33% upside from here.

I'm not making any predictions, but it's not difficult to imagine Pfizer's p/e going from 9x to 12x, so the upside is really there for the bullishly inclined with a longer term horizon.



Stephen SondheimI am reading Stephen Sondheim's biography, and I just noticed he composed the "Stavisky" movie music:

The core narrative of the film portrays the last months in the life of Serge Alexandre (Stavisky), from late 1933 to January 1934. We see glimpses of his operations as a "financial consultant", setting up a mysterious company to deal in international bonds…



Chuck BerryAlthough Chuck Berry could not be considered 'Soul', he surely influenced the genre. At 83, he still plays regular gigs and his guitar skills have not diminished. Normally, when a guitar player gets to an advanced age, he will do a few riffs and let the second lead carry the load. Berry plays his 90 minute concerts from start to finish without a second lead. He is the consummate showman, an individualist, and has never let his legal and personal problems get in the way of putting on a great show.

He's probably one of the best guitarists alive, especially since Chet Atkins is no longer with us. Jimi Hendrix, the Beatles, and Eric Clapton all cited Chuck Berry as a major influence on their work. Chris Spedding (a very underrated guitarist) paid special homage to Berry in his seminal Guitar Jamboree.

Besides being a great showman, Berry really entertains his audiences and mingles with the crowd, unlike the current crop of superstars like Sting and Bono. A Chuck Berry concert makes you feel like you really got your money's worth. Chuck was considered to be so good by his peers that he was in the first class of the Rock and Roll Hall of Fame. I've seen his concerts in every decade since the 1960s and have left every concert totally uplifted. He is the definition of a true showman, with as much presence as Elvis in his prime.



cherry blossomsThe new year is like a new meeting that begins with many fine horses coming in from all areas, and the public is at sea with their picks.

SPY came into the new year in sure and steady rally mode and at 3/2 odds, stumbled early in the new year's races, recovered to win a few and is now coming in last. Setting itself up for a future win? Public always loves SPY and can't seem to not say nice things at all times. Odds are still not long.

TLT came in on a losing streak one a race off the bat and continued losing ramping the odds to win, now at middle odds TLT is winning. The puiblic ignores TLT even though it's been making steady money lately.

GLD came in at mid odds one some short odds races, then one a big purse, came in dead last the next time out and is now at mid odds. The public doesn't trust GLD, much less know when to bet it.

USO came in the favorite, won a few at lows odds thanks to the heavy betting, and is now consistently losing. Definately out of favor and now at long odds.

EWJ came in at long odds and has been winning consistently, now at shorter odds and still winning there hasn't been a cover story yet and no one seems to care much. Look for that horse to wear the Japanese cherry blossoms this spring in a full cover garish victory circle photo shoot.



David Lee of NY KNicksHere are some market studies suggested by a recent Knicks game:

"They scored 30 points in the first quarter, before mustering only 38 points combined in the next two."

"No team led by more than eight points and the game featured nine lead change and 10 ties."

"The evening carried the characteristics of a typical Knicks defeat. Their offense sputtered. Their modest lead vanished."

"We got a lot of stops. Which is the way we love to win," Lee said.

One can imagine the locals at the high frequency robot controls saying something similar.

"The Knicks went to a zone defense in the second half and Iverson went scoreless in the fourh quarter," said NT Times reporter John Abrams, who should be one of us as he has the right mindset. The article contains a beatiful Stubby Pringlesque appreciation of David Lee: "We just didn't knock down some open looks, and they did a good job of putting a zone in, getting us out of rhythm," Iverson said.

I can imagine Duncan Coker telling a fellow angler that casting by the isolated stones was no good, and they were much smarter to fish by the parking lot, and not take any chances.



Nigel DaviesOnce in a blue moon, one comes across a seemingly specialized book that is beautiful and instructive in its own field but also is perfectly applicable for everything that important in your own turf. Such books as Horse Trading by Ben Green, The Secrets of Professional Turf Betting by Robert Bacon, and Zen and the Art of Motorcycle Maintenance by Robet Pirsig immediately spring to mind. The Rules of Winning Chess by Nigel Davies joins the pantheon of such books and is highly recommended to all traders, athletes, game players, parents, and kids.

The book is divided into five sections. Rules for improving yourself as a player, rules for preparing yourself for play, and rules for the opening, middle and end games. In each section, 10 or 15 lessons are given, a quote to put it in perspective appears, a discussion of how to apply the lesson follows, then the lesson is applied to real life examples taken from experiences and chess games played by the author and champions such as Capablanca, Lasker, Bronstein, Petrosian, Fischer and Karpov. Rules taken from the book with direct applicability to markets, and life follow.

1. Train with deadly seriousness.

2. Educate yourself.

3. Be vigilant.

4. Take away emotion.

5. Be your sternest critic.

6. Feel your way to a win.

7. Be Patient.

8. Don't be afraid to lose.

9. Know your strengths and weaknesses.

10. Lead a healthy life and diet.

11. Get good sleep.

12. Have a good breakfast.

13. Know your opponent's strengths and weaknesses.

14. Give no quarter.

15. Choose a favorable battle ground.

16. Play to win, and don't be content with a draw.

17. Master deception.

18. Know all the tools in your arsenal.

19. Clear your mind from distractions.

20. Don't talk during a game, but do walk before.

21. Play the type of game you are suited for.

22. Beware of doing the same thing often.

23. Attack the weakest points.

24. Don't be too eager to break the tension.

25. Centralize your forces.

26. Be wary of taking small gifts that distract you from the main chance.

27. Never say die.

28. Don't hurry.

29. Give yourself flexibility so that you can win in two ways.

Here are some of my favorite parts of the book along with a discussion of how they relate to markets. In discussing how important deception is, Davies divides deception into luring, goading, bluffing, mimicry, decoying, and changing tempo. I have read many academic treatises on deception that are much more erudite, talking about levels of indirection, stages of the foraging process, degrees of perception and misperception, benefits and costs, degrees of secrecy or uncertainty, but this practical approach developed out of the game board for practical use is highly useful and encompassing. The story he tells about Najdorf trying to get Stalberg drunk before a game by luring him to a nice lunch and yet finding that Stalberg despite all the drinks had him in a won game is right out of the annals of my uncle Howie. But the great twist is that Stalberg offered Najdorf the draw. "How could I beat a man who just bought me such an excellent lunch?"

The lures in the game of markets are so extensive they make the angler fish look like a neophyte. How about the lure of a big fat open or the lure of an investment in your firm with the only provision being that once I invest I will determine what you can get paid and what you may charge your customers. Mephistopheles lives. In the chapter on knowing your weapons well, one of my favorites, Davies makes the point that all the great champions were proficient at all games, and never overspecialized. All those who develop a niche must understand that their niche may become overpopulated, and the prey may not be as easy and other predators may come. "Not only does such wholesome food (knowledge of many different games) provide appropriate sustenance, but such opening will be valuable weapons in critical tournament situations."

In the chapter on not talking during the game, Davies makes the point that many businessmen don't like to take phone calls during the day. "It can take a while to refocus." I find this a crucial concomitant of success during the market day, and the only calls I take during the day are life-threatening ones from the family, and calls from my octogenarian friends, who can't understand how an old friend could be so busy at any time that he couldn't have time for them, and they're right. Old friends trump profits.

In the chapter on healthy body, Davies makes the point that the mind is part of the body and derives from the ensemble of all the organs. He then goes on to say that in many of the games lost by great players some aspect of their physical condition was responsible for the loss. A hilarious discussion of how he likes to play closed games against overweight opponents ensues. The stories about Mikhail Tal, who Davies thinks might have been the most gifted player in chess history, and how his dissipate life style did him in, are most indicative on this point.

My favorite quote in the book is by Bent Larsen: "This reminds me of a rule that I know very well because I made it up. When you are caught in an opening you don't know, play healthy developing moves." I like to believe that there is no situation from any game or any cultural event I can't think of a market analogy for. And I would say on this, that if the market is moving in a way that you have never seen before, just reduce your position when it moves in your favor, and wait patiently for another situation when you will be there.

My book is marked on every page with market lessons and things I should have done to improve my chess game. More important than all the lessons you will learn is that this is a beautiful book to enjoy and savor. Davies is a grandmaster writing about grandmasters. He's played with all the best, had many a sparring session with the great Bronstein himself, and has been a scholarly student of the wisdom that all the great champions of the last 200 years have captured. He rolls around with the reader, enjoys the follies and the greatness of the lessons that the champions have taught him and leaves the reader in an exhilarated state that such greatness exists and can be shared.

You can buy the book at Amazon, B&N, Borders, BAMM, Powell's or Waterstones.



 One is always amazed at how useful and insightful the customs of the British Navy are. It was equivalent to mutiny there when a captain proferred a dinner at his table to a junior officer and the junior officer declined (except when a matter of gallantry was involved). How often I've invited a junior officer to dinner and it was declined and a month later I found the junior officer had performed or was about to perform an activity punishable by death by the articles of war. What other nautical or martial customs can you think of that would truly be useful to incorporte in everyday life?

I am writing a review of Nigel Davies' new book. It's so good, it's unbelievable. He's distilled the wisdom of markets, martial arts, psychology and chess into a lesson for all of life and boards.

Pete Earle writes:

What better place to start than the naval tradition of keeping a (Captain's) log book, of course. Recording the events of the day, successes, failures, incidents and accidents in such a way that one — or their successor — can peruse them at will, and in so doing be better prepared for the future. I don't know a single serious, professional trader who doesn't do this, and the practice extends far beyond financial markets.

Tom Marks jokes:

Who amongst us hasn't at some point over the years sailed past a woman or two on whom they they'd love to apply a cajoling variant of this old British nautical custom.

George Parkanyi lends a hand:

Here's a useful summary of such Royal Navy customs and traditions.

Apparently one of the traditions for a warship entering a foreign port was to fire all their guns, shoot their wad as it were, to show that they were coming in unarmed. (I wonder if this analogy ports to dating?) Also, when two foreign warships met the custom was to sail at each other and fire off a broadside volley before coming abreast, basically for the same reason "Hi, how are you, I'm unarmed". But I'm wondering about those warships that had three rows of cannon. OK, you fire your first row "Hi, how are you? I'm good too", and then once broadside you empty the other two rows into the passing ship. Surely some sorry captain has the dubious distinction of having been the first to learn that lesson the hard way. "Oh, you didn't get the memo? We're at war."



 Although I love to collect fine art, especially Impressionists, I also am an avid collector of Surf Movie Posters. These posters were made during the 1950s-70s and some were real works of art. Since I like to check out eBay for the offerings, I have noticed a few things.

Normally, in that eBay category, there will be 30 posters offered, mostly $4.99 reprints of terrible movies like "Blue Crush" or "Surf's Up." Lately, I've noticed that there are 100-150 posters being offered and sold for amounts that haven't been seen since Mat Warshaw came out with his excellent coffee table book on surf movie posters titled Surf Movie Tonite! Surf Movie Poster Art. His book caused a pronounced bubble in the market for posters, and I stopped collecting until the bubble popped.

Looking through the current offerings, I see works by John Severson going for as much as $109-$299. Bruce Brown's posters are going for $129, and even the faux surf movie "Ride the Wild Surf" original is going for $1200. 2007-2008 was the year to buy these same posters, as they were 60% less then the current market prices. Some posters like Yuri Farrant's "Hot Lips and Inner Tubes" command prices of $3,000 if you can find a copy. I got mine in 1976 for $6.00 from an ad in Surfer Magazine. Any work of art or original surf poster by the late Rick Griffin costs as much as a painting from a gallery in Soho. Somehow, I suspect that the market in original surf movie posters is going up and might test the 1986 highs. Still, in this market, it is caveat emptor, as there are a lot of fakes out there.

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

Yishen Kuik observes:

There is clearly a lifetime cycle effect for the collectible asset class.

People in their 50s who are at a stage in life where the most successful of their cohort have enough money and time to indulge in the things that most captured their fancy in their formative years between 15-20 bid up the best collectibles in that class. It is likely that that is the peak average asset valuation of that collectible — the best items might continue to mark higher and higher prices, but any random assortment of quality pieces would slowly become less and less liquid, and speculative sellers would have to choose between the theta of warehousing & unknown time of execution in order to obtain bid improvement, or pay up for the illiquidity disposal fee.

The kind of comic books I read as a kid (X-men) have enjoyed a resurgence in popularity in the movies that I assume must have translated into higher prices, just as old arcade game boxes have enjoyed a revival re-entry into many bachelor pads. Star Wars figurines by Kenner are another example of items that have enjoyed resurgences in the past 10 years after a 20 year lacuna since their introduction.

What are the things that fascinate the young today, which if stored cheaply and properly, might yield good appreciation 20 years hence?

Russ Sears writes:

Surely any women painted by Renoir and any girls by Degas, deserves a place on the list of art that "makes life worth living forever." 



 Surf has been between consistently 15-25 feet and even higher on occasion for several weeks here with glassy perfect conditions. When it gets big, there are only a handful of guys out. Many don't have the right equipment. You need a big wave gun to handle the big drop and high speeds. I've been able to catch some of the biggest waves I've ever ridden. You really need to be in top shape. Old guys have some advantage (or maybe less disadvantage) in big waves where physical speed is not as important as experience and strength. Also, good surf equipment is expensive. A big wave gun might be close to a grand, but gets used only a few times a year. Some guys on standup boards are getting some big ones. It's a new way of catching waves, but they get really creamed if they get caught. The boards are not maneuverable enough to negotiate the twists and turns of the wave.

Watching all the waves made me want to ask others about data stream. One can measure the speed of one's Internet connections, but my sense in watching the ticks is that the data, or perhaps the executions themselves, are coming in waves and sets of waves. The price swings have certain wave characteristics, and none of the Prof's good studies on Fourier models will convince me otherwise. For those of us further than 50 yards from the exchange and that might possibly have nothing better to do all night than watch the ticks. Out of curiosity do the data come in waves over the cable and fiber and air? Electricity surges, as I understand.

The question of the stream is of purely academic interest, but the entirely different question of execution waves might be a source of profit if understood. If Globex has an algorithm, and if the autobox executions are using algos as well, some sort of wave pattern is likely to result mathematically. This is not volume, but rather rate of execution, or bunching or clustering.

Sine waves, tides, surf, all by definition will pass through the 0 or unchanged. During this extended flat period despite the slow up drift, the zero or unchanged mark seems to have more fascination for the market than the scene of the crime. The question and hypothesis is whether the deviation on either side of unchanged might be measured or predicted and the probabilities thereof.

Mr. Albert shares:

I believe that the data waves have to do with execution programs that may be keying off the same feeds or slicing big orders into smaller orders. It seems like executions are less and less continuous even for very thick stocks.



free hand chalkboard drawing of a perfect circleA recurring topic on this list is the study of market anomalies surrounding round numbers. Perhaps this idea can be extended to interesting ticker symbols. In the US ticker symbols are formed from letters and thus whether a symbol is 'round' or interesting is largely a subjective matter.

However in Hong Kong the symbols are numbers. So could there be an attraction to round numbered easy to remember symbols? A simple way to look at this is to take all the even hundred symbols and compare them to the Hang Seng index. The following study looked at 0100, 0200, … through 0900 but some symbols were not associated with a stock. Performance for the last twelve months was as follows:

Hang Seng +51.27%

Stocks with Round symbols

Avg. +172.61%
Std 108.77
t-stat 3.89
n 6

Kim zussman comments:

Round is Feng Shui, and Feng Shui is lucky.

Easan Katir writes:

It seems all too common that a number, whether a price, or an account value, approaches or touches a round number, then retreats slightly. Pure chance would suggest it would be over the round number or under equally, but it seems to be slightly under more often. Is this just my wishful thinking, or is there some corollary to Benford's Law?



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 Checklists have been shown to reduce errors, improve accuracy, and increase profits in many fields. Most recently, a study in the New England Journal by Atul Gawande shows that use of a 19 point check by surgeons could reduce deaths by 30% and save billions. Such simple things as knowing all the names of your colleagues and being sure that an adequate supply of blood and respiratory equipment is available are useful.

When it was suggested to me that a checklist for my own trading might be useful, I originally had the same reaction as the doctors. "I've flown with the eagles, climbed the highest mountain, captured the mountain lion, been a member of all the exchanges, played 12,000 refereed matches, went to Harvard." But then I read the reaction of the Drs. "I'm from Harvard. I don't need such a list. But if I was operated on, I'd like such a list."

Here's a list I came up with for the forgotten man, the hundreds of thousands of traders in stocks, futures and options.

Before the Trade

1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?

2. When does your market close, especially on holidays?

3. Do you have all the equipment you'll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?

4. Did you write down your trade and check it to see for example that you didn't enter 400 contracts instead of the four that you meant to trade?

5. Why did you get into the trade?

6. Did you do a workout?

7. Was it statistically significant taking into account multiple comparisons and lookbacks?

8. Is there a prospective relation between statistical significance and predictivity?

9. Did you consider everchanging cycles?

10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker?

11. If a trade is based on information, was the information known to others before you?

12. Was there enough time for the market to adjust to that information?

13. What's your entry and exit point?

14. Are you going to use market, limit or stop orders?

15. If you don't get a fill how far will you go? And what is your quantity if you get filled on all your limits?

16. How much vig will you be paying if you use market or limit orders and how does that affect the workouts you did knowing that if you use stops you are likely to get the worst price of the day and all your workouts will be worthless because they didn't take into account the changing price action when you use stops, to say nothing of everchanging cycles?

17. Are you sure your equipment is as good and as fast as the big firms that take out 100 million a day with equipment that takes into account the difference between being 100 yards away from an exchange and the time it takes the speed of light to reach you?

18. Are you going to exit at a time or based on a goal? And did you take into account what Jack Aubrey always did which is to have an escape route in case all else fails?

19. What important announcements are scheduled? and how does this affect when and what kind of order to use? For example, a limit before employment is likely to be down a percent or two in a second. Or else you won't get filled and you'll be chasing it all day.

20. Did you test how to change your size and types of orders based on announcements?

21. What's the money management on this trade?

22. Are you in over your head?

23. Did you consider the changing margin requirements when the market gets testy or the rules committee with a position against you increases the margins against you?

24. How will a decline in price affect your margin and did you take into account what will happen when you get stopped out because of margin?

25. What will happen if you need some money for living expense or family matters during the trade? Or if you have to buy a house or lend money to a friend?

During and After the Trade

1. What's your game plan if it goes against you and threatens your survival?

2. Will you be able to get out? Did you take that into account in your workout?

3. More typically, what will you do if it goes way against you and then meanders back to give you a breakeven? Or if it immediately goes for you or aginst you?

4. Would you be willing to take a ½% profit if you get it in the first 10 minutes?

5. Did you test whether taking small opportunistic profits turns a winning system into a bad one?

6. How will unexpected cardinal events affect you like the "regrettably," or the pre-annnouncement of something you expected for the next open? And what happens if you're trading an individual stock and the market goes up or down a few percent during the day, or what's the impact of a related move in oil or interest rates?

7. Are you sure that you have to monitor the trade during the day? If you're using stops, then you probably don't have to but then your position size would have to be reduced so much that your chances of a reasonable profit taking account of vig are close to zero. If you're using 10% of your capital on a trade, they you'll have to monitor it for survival. But, but, but. Are you sure you won't be called away by phone calls, or the others?

8. Are you at equilibrium in your personal life? You're not as talented as Tiger Woods, and you probably won't be able to handle distressed calls for money or leaks on the home front. Are you sure that if you're losing you won't get hit on the head with a 7-iron, or berated until you have to give up at the worst possible time?

9. After the trade did you learn anything from the trade?

10. Are you organized sufficiently to have a record of all your trades for your accounting and learning?

11. Should you modify your existing systems based on it?

12. How does recency and frequency and value affect your future?

13. Did you fit your after activities to your mojo?

14. If you made a good profit, did you take some capital out of the fray for a rainy day?

15. Have you learned to say "fair" whenevever anyone asks you how you're doing and are you sure that you don't spend a fortune after a good trade, and dissipate your profits with non-economic activities?

16. Is there a better use for your time than monitoring the ticks or the market every minute of the day if you do, and if you don't, do those who do so and have much faster and better equipment than you have an insurmountable advantage against you?

Well, specs, that's what I come up with off the top. How would you improve or augment it?

Nick White comments:

If a position begins moving against beyond what was anticipated in the workout can one, through either contacts or acquired counting skills, figure out as fast as possible why the move against is occurring? With that information, can one then discern whether or not such a move needs to be heeded, faded, or left alone?

What legitimate information sources can one leverage to better understand a particular trade? A buddy who is a floor trader, a mentor, a high ranking friend of a friend in a central bank?

Are one's current skills commensurate with one's trading goals and ideas? Perhaps, more importantly, are one's trading skills of the same league and caliber as those one is competing gainst in a particular market? If not, surely best to wait and keep capital safe until one is sure of one's edge. This strongly accords with Chair's admonition to never get in over one's head, and to not spend inordinate amounts of time watching each tick when that time could be more profitably invested in training and developing new and existing skills — counting, programming, etc.

Make the strongest effort possible to find out whether the tail wags the dog in a particular instrument that you're trading. If it turns out that it does, does it happen with significance at a particular time, such as expiry? Or after a particular event? Can it be exploited after costs or is it better to fade it after the fact?

If one asks these questions and takes note of them in the essential lab notebook that ought to be at one's fingertips during all trading and researching activities, have those questions subsequently been answered by oneself? I have found this to be the most fertile soil for developing new insights and ideas. If you observe it, note it and question it — hypothesize about it and answer it.

Alston Mabry comments:

Here's one: Don't fool/confuse/tire yourself by making your execution more precise than your analysis. If your target is 2% within the next five trading days, then chasing two bps on the entry isn't going to make or break the trade.

Easan Katir adds:

  1. If you trade odd hours, get enough sleep and appropriate caffeine dosage.
  2. One well-known S&P pit trader advised two bowel movements in the morning before setting foot on the floor.
  3. Start the day with a centering routine — affirmations and goals. Remind oneself of one's larger purpose.
  4. List important times and dates on an online calendar with appropriate alerts: government numbers, earnings, ex-dividend dates.
  5. Rehearse successful behaviors and outcomes. And disaster recovery.
  6. Minimize other life stressors: long commutes, family arguments, risky vices, debt.
  7. Test backup equipment and systems regularly. I test my diesel backup power generator weekly.

Victor Niederhoffer responds:

I would add a small point. Trading foreign markets always seems much more difficult than domestic ones. For one, you never know what the important announcements are. For two, you get killed on the spread on your foreign exchange prices. For three, it seems to be 100 times more time-consuming to get into the queue than even the 1/100 of a second that's enough to give the domestic high frequency traders an insurmountable edge on you. For four, you have to go without sleep for at least one night, and then on the second night when you can't stay up the required 48 hours without sleep the move you expected and closed out is sure to happen.

Alan Millhone writes:

Checker master Tom Wiswell said to always keep the draw (escape) in sight.

Scott Brooks adds:

I have to disagree with Easan on the caffeine. I know there are many people that have to have their morning cup(s) of coffee to get their day going, and without it, don't feel/function right.

I do not want to go through life being so dependent on something that I have to have it to make myself feel right, let alone function right. I know this will be anathema to most (everyone?) that reads this, but I have to say it.

When I removed the caffeine addiction from my life (and don't fool yourself, it is an addiction…..if you have to have it everyday and then quit it, you will go through withdrawals……it is an addiction), my life changed so much for the better. I can think clearly. I can process information more quickly, and I can see solutions with greater clarity.

And your sleep will improve immensely. I suffered from severe insomnia for years. Kicking caffeine out of my life has lead to my being able to fall asleep, usually within minutes and being able to get up earlier and feel more refreshed!

You will find a level of "mental processing" that you never thought possible when you replace coffee and caffeine with purified water (I drink around a gallon a day) and a glass or two day of the organic juice of your choice.

But be prepared, you will likely have around two weeks of headaches when you go through caffeine withdrawals (you know, from the caffeine that you're not addicted too).

Nick White agrees:

Ditching caffeine is a good move. Best to save it for when may really need it on an overnight (or two) session. As mentioned in the past, Dr. Shinya is fervently anti-caffeine. Like many others, I found Dr. Shinya's principles promoted many positive health benefits for my wife and me.

On that note, i find that the Shinya nutritional principles — when moderated by the ideas behind the paleo diet — are a real winner; the increased "good" protein from the Paleo program does much to mitigate weight gain from increased carbohydrate consumption when kicking off on the Shinya program. There is a Paleo program for those involved in elite endurance sports.

George Parkanyi writes:

On any project or major activity, the first question I ask is how much time I have. That frames everything that is to come.

The very next thing is to build a contact list with names, phone numbers (backup phone numbers) and email addresses (and account numbers and passwords). This is also true in Scouts, where we need to have that information at our fingertips for safety reasons — in fact for every camp we have to draft an emergency plan — police, hospitals, parents, primary first aid responsibilities, etc. In a trading operation this is critical. If you have key support resources who have to act on your behalf at a moment's notice, then they need to be available, you need to able to access them, and if not, there must be a ready backup contact and plan B, even C. Chair's point about having a pen available can even be a critical detail — what if, in the heat of battle, you have to write down, say, a wire transfer number? In my case, reading glasses would be another.

Kim Zussman comments:

As a periodontal surgeon, I have found it much easier to stay composed and rational during difficult surgery than unruly trades. Chair's excellent list hints at why, in the form of the question "how do you know?".

Surgical complications follow rules of biology, and mistakes usually come when overlooking something or miscalculating the compounded risk of several factors. One can and should practice with a large margin of safety, which in almost every case is easy to determine. Biology is almost immutable, but markets morph wildly in real-time. It is very difficult to stick with a position if you are honest about your cluelessness and unwilling to go down with the ship. When the trade goes bad:

1. What was your hypothesis? How many others had your idea too? Or the opposite one? Are they right? What do they know that you don't? What is the source of your confidence that you can out-smart (or out-run) the million-mind-march?

2. Did you test properly beforehand? Did you miss something; a signal from another market, a subtle backdrop to your traded market? What is the chance this time is different, and should this doubt change your mental stop?

3. How heavily is your market being manipulated? By government? Big banks? Goldman's trading desk? Does persistent manipulation / insider trading change your hypothesis or render hypothesis formation useless?

4. How do you know whether the move is merely noise of your correct hypothesis, or part of a regime change you have not noticed?

5. Deep and abiding doubt is essential to science, but how do you incorporate doubt into market prediction when most of the movement is random?

6. Does the non-linear, mostly random reward system of trading corrupt your judgment (sleep, personal life, etc)? Do some people lead a happy, well-rested life with long periods of gut-wrenching loss alternating with gain, and are you one of them?

7. What unalterable beliefs are necessary to trade successfully? If you hold them, are you sure they are the right ones? Should some beliefs be discarded as a result of a changing world? Are there new ones you should know, and are you confident you will see them when they develop?

Steve Ellison adds:

Margin of safety is a key concept in many fields. While skiing, I put on the brakes a bit earlier than I absolutely must so that if I miss my footing or hit a patch of ice, I have another chance to avoid the hazard (e.g., other skier, tree, out of control speed). Graham and Dodd wrote about margin of safety in investing. Rather than buy a stock that is below book value, a value investor might wait for an opportunity to buy a stock below 80% of book value.

If I ski 10 times a year, even on the same mountain I am likely to encounter 10 different sets of conditions — temperature, wind, length of time since last snowfall, etc. One day last year, the fog was so thick I could not see the trees on either side of the trail. Some conditions dictate caution; others are more forgiving and allow me to be more aggressive. A warmup run is an excellent way to get a feel for conditions.

Nigel Davies proposes:

Checklists are very good whilst learning, but I believe that one should ultimately aspire to be able to do without them because everything has been internalised. In my own field I tend to believe that conscious thought of any kind can be a distraction, which is why I don't like the old Blumenfeld Rule (a checklist used before playing a move).

Ken Drees writes:

I just did an experiment with my son with one of his Christmas presents, an electronic learning kit. We have learned so far the basics of how electricity works. Resistors (series and parallel), Capacitors, etc. Each lesson has a page explaining the experiment, a schematic, a drawing of the circuit in relationship to how water moves through pipes — the water analogy for electrical flow resonates with my son. And each experiment has an electronic "wiring checklist'.

The checklist comes in handy since its easy to forget a connection, misrun a wire, or leave an extra connection from a previous experiment in the lab circuit.

I associate checklists with "must have"–high accuracy functions. Like programming, wiring, piloting, fixing a car, cooking –its all routine, but items can be omitted, done wrong and can be forgotten due to human error. The checklist is a tool, an aide that removes ego from the scenario. Used in trading it helps set the trade up, helps initiate or close the trade, and removes emotion from what needs to be done automatically. A checklist in the grey area of a trade like the middle game in chess, or an operation where the patient is being worked on really doesn't help much–you need to make gut-inferred decisions, unless your trade is so automated that you remove yourself from the trade entirely and rely upon a program.

Using trading checklists help bring focus and energy towards the trading exercise. Using checklists of some sort during the "live–life of its own phase of the trade" must be explored further. Maybe there are ways to check off your decisions, check your options, use your skills with the pressure of time taken into consideration–during this live phase.

But when your hand is on a hot stove, trade going wrong, does one need to look at a post-it-note do determine if one should remove hand from stovetop?

FYI: a 9 year old boy is understanding electricity –public school may teach a child these ideas in 7th grade. I am amazed at what can be taught to children that most think is way over their heads.

Alan Millhone adds his two cents:

I will add my two cents. Some years ago I bought an International dump truck and it has air brakes. My late father and myself drove it for use in our construction projects. Because it has air brakes you need your class B driver's license to be legal. We drove it several years without the proper license. Finally my father got the book and studied and took the written part for class B. After he took that part he gave me the book and I studied and took the test and passed. Quite a book to study.

Now the second part was an over the road test with the instructor in the truck with each of us. He said he had never given a back to back test to a father and son. Dad and myself had to back the truck then drive to the right close as we could to an orange cone– without touching the cone. Then each of us had to do a 50 point check list of our truck that we earned (I still remember the list ) and still check my truck before taking it onto the road. So checklists are valuable in many applications ranging from dump trucks to the Market.

On a side note, dad and I rode to the test center in our dump truck without the proper license. The instructor said he was not going to ask how we got there.

David Brooks comments:

All very good ideas. I wish there were some good way to test Atul's theory historically. Why? Because I am convinced that poorer outcomes in the last decade come from fragmentation of the system - shift work, decreased work-hours by house staff, the high volume being forced through the system and de-professionalation of nurses.

Alas, we can't measure the past, but I am convinced that the hospital I started in (The Peter Bent Brigham of the early to mid 70's) was a safer, more humane place with better (allowing for technological changes) outcomes.

All the same, the reason we have embraced checklists a la airlines has to do more with the aeronautical outcomes than medical outcomes. The amount of information that a pilot has to process is order of magnitudes more than what a surgeon has to process. Furthermore, when a pilot fails completely 300 lives are lost, and when a surgeon completely fails, 1 life is lost. The former is far more dramatic, of course.

It's nice to know the anesthesiologist's and scrub tech's name, but it's hard to believe that that is going to affect the outcome of a significant number of operations.

That said, I have the greatest admiration for Atul. He sits a short distance from me, and I am proud to have had even a small role in training him. He is a remarkable young man and we will being hearing from him for many years to come.

Newton Linchen comments:

Once I took an airplane pilot course, and I was amazed how everything was done with checklists. Actually, the first time I heard the word 'checklist' was there. (Even here in Brazil they keep all the terminology in English, for standard procedure). I realized how checklists can keep you out of trouble and save your life. In markets, perhaps a great deal of losses could be avoided if I followed my own trading checklists.

Russ Sears writes:

Checklists can be very useful in an emergency. I have found that a simple checklist was valuable in a race. When the going gets tough it is easy to panic. The list It went something like this 1. relax 2. pump the arms smoothly 3. breath in normal rhythm (One hard puff out, relax in). It is easy to panic on the edge of your limits. These 3 things are the first signs that you are starting to panicking, subconsciously without knowing it.

Runner, use checklist often as part of their diary. Each day you check your weight, evaluate your nights sleep and your overall mental state. You check your diet and fluid intake .

Before a race you follow your pre-race checklist from what to pack, to when and what to eat, and when and how you should be warming-up and stretching.

Then after the race you check how well you followed the plan, where the plan worked and where if failed.

Finally at the end of the year you check the philosophical underpinnings of your training. Your goals, why you are doing it all, what are the cost that you are willing pay and what is the best path to get there.

So checklist have there place, but you need to 1. put them in the right point of time in the process, 2. not let them lose their relevance and meaning . 3. keep them simple at critical points, simple enough that they are potent.

Easan Katir adds:

Thinking about checklists, and watching the Haiti disaster coverage, made me think about a checklist for emergencies. Then thought about a list of the various types of emergencies one might encounter, big and small. What came to mind:






home invasion


mistaken id

false accusation






missing person


currency replacement/devaluation

market crash

partner deceit


power outage




i suppose each needs its own checklist, though some may overlap. What did I miss?

Scott Brooks adds:

The best checklist you can have is to either be a great leader or be around a great leader.

It's been my experience that average and ordinary people need checklists (which they rarely if ever have or use…which is one of the reasons why they are average and ordinary), but smart people with leadership skills don't need a checklist when it comes time for a disaster.

Most disasters/problems rarely follow a fixed pattern. It takes a leader who is capable of thinking on his/her feet who can stand up, take charge and direct people as to what they need to do.

And this doesn't have to be right all the time, he just needs to make decisions and get people moving and be willing to take responsibility and shrug of criticism of the naysayers…..while listening to them to extract the wisdom that might be contained in their "naying" (I think I have just made up a word).

A leader has to have insight and the ability to see several moves ahead. A leader has to be able to see correlations and connections between seemingly disparate pieces of information.

A leader has to then take this data and formulate a solution and then direct people to execute the solution….and if possible, get people to see the vision of the completed project so that they can begin to work towards that goal with minimal supervision.

But most importantly, a leader has to be willing to make a decision when it comes time to make a decision even when the solution is not apparent. A course of action that fails is better than inaction that is guaranteed to fail.



Snow in Tampa (South Florida) in 1977A hunting/fishing buddy of mine who lives near Homestead, Fl. (The only land south of him is the Keys) sent me a text saying they saw snow for the first time Saturday night. He didn't elaborate as to whether it was accumulated snow or whether it was flurries (I'm sure it was flurries), but snow that far south is unheard of.

He said they also had a lot of ice on Sunday night and Monday morning and that the farmers took a big hit.



Albert J. NockThe Crony system is alive and well in the various exchanges across the globe. When there is a huge difference between the closing price and the settlement price, that is evidence of cronyism in the pit committee. When they close trading floors without a vote from the membership, that is cronyism. When the exchanges' hired management acts as the enemy of the membership, a la Nock, that is cronyism. When the hired management favors certain commercial interests with a quid pro quo, that is cronyism. When elections are rigged and committees are stuffed, that is cronyism. When jobs are created for the simple reason of getting friends on the payroll, that is cronyism. When dissent is not tolerated and members are fined for speaking publicly, it's the backroom cronies pulling the strings. You could substitute government bureaucracy for exchange management, and there would be little difference. Nock's views apply equally to exchanges as well as the state.



What should be the temperature in a trading room? I've been doing a little reading into the effect of ambient temperature on cognition and performance. A cursory search on pubmed and google scholar show some evidence that increased heat may lead to loss of vigilance, alertness etc. I, myself, would prefer to trade / study / work / relax in a room that was 16 C than 30 C. An Australian Reader.

Temperature perception is not a simple matter of degrees. As heat is absorbed by air (for example, heat radiated by a furnace) and absent supplemental moisture, the relative humidity of the heated air is reduced. Since water vapor has a higher specific heat capacity than air, relative humidity has a pronounced influence on a person's perception of ambient temperature.

Alex Castaldo adds:

The temperature factor is a part of the hedge fund folklore. The divorcee in Greenwich believes in a cold trading room and that is why some staffers there wear wool jackets while trading. 



Canterbury downsContrarian investing is sometimes seen as “picking the losers.” As Kim puts it, don't pick what the consensus thinks is beauty because that's priced in. But it’s not really, it’s about seeing what others do not, or not seeing what others do.

When I was younger I went to the horse races often, and found it especially important to be a contrarian when placing bets on horses. Since the stock market is the biggest pari-mutuel pool in the world, there is a parallel. All the money gets tossed into one big pot, then after the track takes their cut (commissions, spread, vig) the rest is divided among the winners. The amount that’s divided depends on what is bet for or against the winners; the more or less bet, the lower or higher the payoff. That’s easy enough.

At the track, as in the market, the key is to spot pricing anomalies where the true odds are different from the odds on the tote board. The racing junkies were scouring the daily racing form to find the winner as if all those stats could mathematically estimate the behavior of an animal on any given day-the quant’s would go crazy at the track. But I used the form to estimate the 3 or 4 horses most likely to win, and then just followed the tote board calculating payoffs for various combinations. The key is finding that 3 to 1 horse going off at 7 to 1.

Some fun rules I learned from my old friend Greg at Canterbury Downs:

1. Never bet on a white horse. It may be a great horse on paper, but all the little old ladies bet on the white horses because they like to watch them run, and it’s the only one they can see. It destroys the true odds.

2. Never bet on a horse with a stupid name. Lot of people don’t read the form, or look at the tote board, they just throw their money on a whim as silly as the name. It destroys the true odds.

3. Never bet on the favorite, the favorite wins less than half the time. Lots of people like to just bet the favorite to proudly proclaim they are the winner, and it’s true the favorite wins more often than any of the rest of the field. But the true odds are skewed by those who bet simply because it’s the favorite and in reality over the long run you will have a greater payoff betting identical amounts on the second favorite.

4. Never do an exacta box with the favorite on top, wheel the field over the favorite since the favorite is just as likely to come in second as first, but the payoffs are larger. This worked for me once at Aksarben-a complete stranger I struck up a conversation with was doing an exact box on the top 3. I told him for the same price he could wheel the field over the favorite for a better payoff and sure enough on that race the favorite came in second to a long shot and he won hundreds where he would have had zero.

5. Never bet less than 2 to 1, in addition to the house edge, the breakage is an obscene level of vig (breakage is rounding DOWN the odds to the nearest tenth of a % doubled because it’s a $2 bet). That is, commissions and spread are proportionately larger on low value trades.

6. Never bet on a horse with a skinny jockey. Do you really think an extra 4 pounds on a 1,200 pound animal makes a big difference? Many at the track do, and skew the true odds from the heavier jockey’s, who, because they are heavier really have to know how to win.

7. Never bet on a horse with “new” blinkers or a “new” jockey. If the horse was a pig before, it’s still a pig just with a new rider and clothes.

8. Never bet just to bet. If you don’t see the favorable combination, there is always tomorrow. The tendency to not want to go home a loser at the end of the day is big leading to good money flowing to bad.

9. Never bet on a horse that takes a dump before the race. This really had no logic; we just thought it was really funny.



 One of the most daring attempts to go public, with most of its revenue coming from the sex business, can be found in the amended offering prospectus of Friendfinder Network, Inc (FFN), hopefully soon to listed on the NYSE.

Not since the abortive offering of the Mustang Ranch has the IPO market been honored by such an opportunity to speculate directly in this always fascinating subject. The kind of friends this "Network" helps you to find will probably provide with a more intimate relationships than most friends you can find on Facebook (as indicated by the pictorial representations of your future "Friendfinder" friends). This is not surprising since full name of the site, owned by FFN, is "Adult Friendfinder" and the "Adults" pictures on the site seem to have consistently minimalist dress requirements.

The other business of the "Network" is the remaining operations of the onetime Playboy challenger, Penthouse Magazine, who also favored "less-is-more" as its major theme. The convoluted details of how "Adult Friendfinder" and "Penthouse" got married makes interesting reading. So does the "Use of Proceeds" details; mainly who gets 37½% of the $200,000,000 the this enterprise hopes to raise from lust-loving speculators.

Here is the URL for the IPO form S-1A which, boo-hoo, the guys who put this deal together, have had to lower their proceeds of the offering from $400,000,000 to a mere $200,000,000.



Dorothy Gale from the Wizard of OZAt a recent sleep-over party, my teenage daughter and her friends selected a movie for after-dinner entertainment. The FIOS Movie-on-Demand catalogue had over 16,000 titles, (including new releases) yet the kids selected the old classic, The Wizard of Oz, which they had all viewed previously.

There was no debate, and the decision seemed reflexive; a cultural Rorschach test of sorts. Was their selection rational and utility-maximizing? Or was it an illustration of biases found in behavioral finance literature? What other interpretation(s) can be made about this unexpected choice?

An investor looking for a stock pick faces "only" about 6,000 possible choices. If one is not a quant (screening for factors) — doesn't a similar subconscious decision-making occur? Is this Peter Lynch's "buy what you know?" Or are investment choices irrationally influenced by cultural and/or subliminal factors and/or groupthink?

Keynes' Beauty Contest analogy notwithstanding, an overview of the construction of a stock-picker's Rorschach Test might be a useful first step in identifying one's own subliminal biases…

Tom Marks writes:

Rocky raises interesting questions, but a group of teenage girls selecting a movie is very different from

1. a group of teenage boys selecting a movie (in which the emphasis is likely to be less on consensus building, and more on establishing authority, status), or

2. a single teenage girl selecting a movie (in which she is not subject to the perils of groupthink), or

3. a single teenage girl selecting something where some serious stakes (i.e., risks) were involved (say, in the selecting of a prom dress, or to which college she wished to apply early-decision). 

Kim Zussman comments:

Keynes may have got it wrong for a change: stock picking should not be judging what the consensus thinks is beauty, because that is already priced. Stock picking is more like a prospective beauty contest between the teenage girls, and mimics what "seriously" dating boys should be doing — correctly predicting which one will be most beautiful (in all ways) as a grown woman.

Of course most boys that age are day-trading, and not looking at long-term investments. Whether heavily traded girls will ultimately be shown as value or growth is an exercise left to single readers. 



Alexander HamiltonI had invited a good acquaintance, Dick Sylla of NYU, to the Junto meeting this past week. Dick, who is an economist specializing in economic history, is working on a book on Alexander Hamilton focusing on his economic and financial contributions. I though his presence might elicit a more interesting discussion. But it turned out that he was unable to attend. He had asked me to comment on the meeting. I sent him the response below, and he then responded to what I had written. With his permission I am publishing it. (It appears below my e-mail contents to him and his initial e-mail to me.) Also linked is his published article on the financial crisis of 1792 and Hamilton's role in stabilizing the situation that he sent me and that readers will find interesting on both it account of the crisis and for a different view of Hamilton:

Dear Dick,

I am really sorry that you were not able to make it. We really could have used you there. Unfortunately there was no one there who really contested his views. There were a whole number of questions but very little in the way of defense of Hamilton. Aside from asking him how the world would have differed with regard to industrial development in the U.S. had Jefferson rather than Hamilton prevailed, I kept quiet because unfortunately my knowledge of the period and of Hamilton is too weak for me to have stood my ground. His response to my question was that for that Jefferson was not really against manufacturing or banks just on subsidies thereto. He noted that for the first decades of the Republic tariffs were low and Jefferson repaid much of the debt so that the results on industrial development would not really have differed. He claimed that the Bank of the U.S. was responsible for very high inflation in its first five years. I just have no idea what the facts are. I had thought our inflation problem came in the pre-Constitution days but would really have to go and look at the data. His suggestion was really that Hamilton introduced the concepts of the lack of limits on government power and the expansive view of the commerce clause–his overall view of the constitution — was what has allowed the government to expand its power in the past 150 years. Had I wanted to just be argumentative I might have been more direct in noting that his attack on Hamilton buying and owning slaves was hardly as anti-freedom as Jefferson favor of the Southern agrarian economy that depended on slave labor. Some question was raised as to how honest and or rich Hamilton really was, with Di Lorenzo noting that he believed that Hamilton buying up millions face value of government debt at a small fraction of its face value in the knowledge of plan to have the federal government pay it off in full allegedly for his brother-in-law in fact must have benefited Hamilton also. His dislike of the Supreme Court asserting the right to determine what the Constitution meant under Justice Marshall, whom he claims did so under Hamilton's influence ignores the fact that the other two branches are even more likely to decide based on the pressure of the democratic vote and it was that Court that initially resisted the efforts of FDR to expand the role of government and only relented under the pressure of president to pack the court to get his way or that it did not really use that right again for a long time after that initial critical precedent setting decision. But I did not believe much would be served by bringing up that point since it was not central to his arguments against Hamilton. He claims that Jefferson read "The Wealth of Nations" but doubts that Hamilton did or that he believed in the arguments of Adam Smith on the market. But as I recall Jefferson's plantations lost money over the years and he also died bankrupt making me doubt how astute Jefferson really was on economics– but unfortunately I do not really know the facts. He claims Hamilton was the one who favored the views of the Jacobites in France with regard to the public good, but I thought Jefferson never wavered in his support of the French Revolution and frankly do not know what view Hamilton held in this regard. It's time for me to do some reading on the early days of our republic.

Best wishes,


Dear Rudolf,

Thanks for this good account. I'm surprised there wasn't more contesting of his views–I guess he was preaching to the (libertarian) converted! His book argues that AH is responsible for almost everything he doesn't like about the US; he has an earlier book where he says almost the same thing about Lincoln–that one must have established the pattern! I suppose books such as these, when one stands back and says why were these written long after the subjects died of their wounds, are really in a sense tributes to how influential the two historical figures have been.

On some specifics, yes, there was some inflation in the early 1790s, mostly from 1793 to 1796. Since the BUS [Ed.: First Bank of the United States] started at the end of 1791, it is a weak candidate as a cause, and from the 1796 peak prices were fairly level, maybe a slight downtrend, to 1810, when the BUS continued. Consumer prices rose only 4.5% from 1790 to 1792, and then 38% from 1792 to 1796. Two better explanations, I think, are (1) that the outbreak of war between France and Britain in 1793 either disrupted trade/imports and raised prices or led to large increases in demand (and perhaps money/specie inflows) on the part of the belligerents for American products and shipping services (an old story told by economic historians), and (2) wheat was an important commodity and seems to have risen in price a lot in 1795 and 1796 because a pest called the Hessian fly did a lot of damage to wheat crops. We also know that foreigners were buying a lot of American securities (US debt and BUS stock in particular) in these years, leading me to wonder whether capital inflows pumped up prices, just as they do in emerging markets today. Anyway, the issue of the early 1790s inflation could use more research.

AH certainly did push for more federal power, but at a time when the gov't was brand new, weak, and very much needing to establish its authority and respectability. I and others consider this one of his and the Federalists' greatest achievements. Maybe that power was misused and abused later in history, but that can hardly be blamed on the 1790s generation. The alternative might have been British or French invasions, breaking up the country, or even a break up of the country without such invasions (as in 1861). We forget that these were real concerns at the time.

The evidence for Hamilton owning slaves is quite weak, although as an agent he may well have purchased or sold them for others. We know he detested slavery from his West Indies days and did throughout his life. The definitive Papers of AH (27 volumes with extensive notes) has just one letter from around 1781 or 1782 when he says he is sending someone, maybe John Jay, money "for the woman", which might have been a slave he bought to help out at home where his wife had just had a kid or two, but it might have been a rental as well. The editors of the papers say that one comment is the only evidence there is that AH might have owned a slave. A person such as Di Lorenzo has to make a big thing of this because of Jefferson's vulnerability on slavery–we know he owned 200 of them, and probably fathered a few!

There is no evidence that AH speculated in gov't debt before, during, or after his term at Treasury. He was determined to pay our debts honorably, and so it's likely that those who knew him and had confidence in him would speculate in the way Di L describes. But I think I can use information on securities prices (see our recent article "AH, Central Banker", showing some of our price evidence, used in the article for another purpose) that I've gathered to show that those prices fluctuated a lot from 1788 to 1792, and any speculator could easily have gotten burned by the fluctuations. We know that AH succeeded, but a person living in 1789, 1790, and 1791 could not be sure of that. This illustrates a major problem of historical interpretation.

Di L is right that AH was an early and strong proponent of judicial review (in Federalist 78), and that Marshall, his disciple, carried on in that tradition after AH was gone (or even before, since a key case, Marbury , was in 1803). Your misgivings about Di L on this are well taken–the Supreme Court often constrains presidents and Congress from doing unconstitutional things, even if a democratic majority favors them. Hamilton and Madison worried about the tyranny of the majority; they were not so fond of democracy, but were extremely fond of constitutional government.

Hamilton and all the other top guys certainly read Adam Smith. Hamilton's famous Report on Manufactures (1791) is in fact one of the earliest extended commentaries on Smith–he doesn't cite Smith specifically but says things like 'some writers contend….' after which he quotes Smith almost verbatim! And then agrees with some of Smith and disagrees with other parts of Smith.

It's altogether wrong to say AH favored the views of the Jacobins (not Jacobites) in France. That was Jefferson. Jefferson and his allies taunted Hamilton and the Federalists as "monarchists", and the latter responded by calling the former "Jacobins." You are right that TJ hardly ever wavered in his support of the French Revolution. AH saw it spelled trouble from the start (in a letter warning Lafayette to be careful not long after the storming of the Bastille), and he even predicted the bloodbath that was to occur in France shortly. Both France and Britain, much larger states and powers, caused a lot of trouble for the 4 million Americans living in the early 1790s.

Gordon Wood, a distinguished historian, has a new history of the years 1788-1815 just out, called Empire of Liberty . He cites some of my stuff, but I think he doesn't entirely understand Hamilton because of some of his own blinders (which are much smaller that Di Lorenzo's blinders). Maybe even better is The Age of Federalism , covering 1788-1800, by S. Elkins and E. McKitrick, published in the 1990s and now available in paperback. Both of these are 'big' books. So is Chernow's 2004 biography of Hamilton, also worth reading, although my favorite is still the one by Forrest McDonald (a conservative, but not a libertarian bloody-shirt-waver such as Di L).

Best, Dick



 S&P sets five consecutive big several week maxes in row. 150 billion of Treasuries auctioned next four days.

Beautiful posts on check lists. All of us talk a game so much better than play. Needs to be memorialized. I will do so.

As usual, the big move at beginning of year to set everyone off the wrong way. January barometer boys already got 1½ feet in water.

Playing Nate Robinson will lose as many games for Knicks as they did before as his play is like the mad trader who's always in market like Livermore or Marbury. Let us hope that Donnie Walsh reads Statistics on the Table by Steve Stigler. Ewing's game that set Knicks on terrible ineradicable decline similar to whose? The man who took a round the world cruise after predicting Dow 5000? Too bad they didn't have the figures on percent of offensive rebounds after his shots from 16 feet out. The offensive and defensive rebound stats for basketball teams similar to percent of reversals a la Cowles.

Lobster Chronicles by Linda Greenlaw is a very touching book and her stories of lobster people that died that she knew similar to traders I know who died, including one I know all too well.

A Hispanic might be the next president as all Hispanics have friends and one party gets only 20% of that vote now, because of e-like immigration stand.

Tom Marks writes:

I read that amongst the NBA cognoscenti there's a parlour game as to actually which teams Nate's showboating ways are being showcased for.

The irony is that if his schtick had metastasized on another team and then dangled as trade bait, the always myopic Knicks would be the first suckers to bite.



 From the angler's desk, a check list/prep list for a day on a river:


Is my equipment working, waders leak free, new laces on the boots, reel clean?

Did I bring a backup rod and reel in case I slip a break it when wading down stream?

What is the steam flow? 100-400 cfs is good, above 1000 and I can’t cross the river.

How is the weather? Partly overcast is perfect, but I can adjust. A lot of sun you can see the fish early but they will spook fast, so means longer casts and lighter tippet. Heavy wind means bringing a short faster casting rod.

What is the hatch for that day and when, do I have the right flies dry and wet? I need a new leader each day, right length and thickness.

Do I have my topographical map, especially if it is new water?

Do I have drinking water, a bite for lunch and some chewing tobacco for when the fishing is slow and to change the luck?

Near the river

How many cars did I see within five miles of my spot?

If I see a heavily fished area do I stop to see the action, pick up some clues on the fishing before moving on?

How does the river look — clarity, flow?

Are there any fish rising or lounging near the banks?

How should I rig up this morning, dry fly, nymphs, strike indicators or no? I always rig up away from the car as closing doors like to break rod tips.

Will I fish wading upstream, (preferred) or downstream? Where is my buddy fishing and which water will he cover before me?

On the river

Where are the seams, the riffles, and pools I want to fish?

How can I best approach?

I always test cast for a few minutes. How is the cast and rigging working? Is the line releasing the way I want?

Is the presentation right?

Where are the obstacles, rock and submerged logs that trip you while wading? Always look behind you when casting the first time. That is where you buddy will be standing or a bush to tangle your line.

How will I land a fish, where is the best spot, how can I get him to shore?


Practice your misinformation on what they were biting and where you were fishing to throw off fellow anglers. Anything with a Stony is good for location (e.g. Stony creek, brook, bend) For fictional flies added a “double” or “jumper” to normal selections. A double hairs ear, or wooly jumper fly. Also, work on your translations of fiction from other anglers, “a little slow” means not a fish all day. “Saw a few rising” means saw a couple of darting shadows. Of course, the fishing spots suspiciously not mentioned are the ones to go to. And write some stories both to record the day and for you own enjoyment.

Along these lines here is a book by a fishing friend of mine, due out in May. The title says it all: The Little Red Book of Fly Fishing.



Could there be a better industry to be in than the banks at present? With the yield curve its steepest in years, a bank can borrow from one branch of the government at close to zero via the discount window and lend to another branch of the government at 3.5% buying Treasuries, for a risk free 3% profit margin. Leverage that at a very conservative 10x (meaning 10% reserves, versus required 3%), and a risk fee 30% ROR. Plus a big chunk of the competition is out of business and your biggest client, the government again is churning out fees and commissions at a record pace via Treasury auctions and the like. Sounds like the best business model going.



 I watched for the third time this weekend one of my favorite documentaries (and admittedly a bit of an infomercial), Truth in 24, which tracks the run up to the 2008 24 hours of Le Mans from the perspective of the Audi racing team. Created by NFL Films in cooperation with Audi this has some of the best production quality I have ever seen in a sports documentary. I also had a chance to witness one of the Audi R10 turbo diesel cars in the same year at an ALMS (American Le Mans Series) race shortly after the events depicted in the film.

This film should strike many a chord with traders. It contains elements of planning and exhaustive preparation, slim margins of error, a highly technical and competitive landscape, gamesmanship, weather, hoodo-ism and the role of luck as characterized by Alan McNish, stamina and survival, improvisation, and hubris (one could write a prologue where the heroes suffer a reversal of fortune the following year). As in speculating the lead engineers must deal with a multitude of variables any of which can determine the final outcome and offers a case study in decision making under uncertainty.

For those who are interested, the documentary can be downloaded via iTunes for free.

Dr. Goldcamp is a managing partner of Rina Systems, a quantitative financial software vendor.



wheatFrom the 1980s up to 2005 there was a phenomenon in the wheat market that locals referred to as the "Noon Balloon." Four days out of five, the market would rally 2- 3 cents on big volume at the noon hour, then settle back after we sold into it and the buying stopped. It was so regular, that we'd start bidding up the market a few minutes before noon, hoping to get the buyers to pay even more.

Many a fortune was made on this anomaly and it was our personal ATM machine. The Noon Balloon curiously disappeared with the demise of REFCO, and was just one of those quirks that a sagacious person on the floor could exploit. Since so many people jumped on the Noon Balloon, the effects were exaggerated. Whenever I see an uptick in wheat at 1PM (12cst) I fondly think of the Noon Balloon.

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

Victor Niederhoffer observes:

A published report relating to an irregularity supposedly found regarding afternoon movements has been disseminated by a very profitable brokerage. The subsequent comments relate to the layers of meaning and deception behind such reports. 

Jeff Watson comments:

Not all players have the same motives in the markets, Case in point, hedgers will sell no matter what the conditions might be. Certain commercials will play with spreads, defending them for no discernible reason. Many games are played in the delivery months, and with deliveries being re-delivered, and on and on. Commercials try to stack the pit committee, and play with the settlement price (which is not necessarily the last trading price), for their own gain. Despite the fact that trading has mostly gone electronic to improve market efficiency, a whole new series of land mines has been laid down, part of the law of unintended consequences.

Tom Marks writes:

The question of a published report with an intra day trading regularity arises from Victor and he suggests that something seemingly useful like that must have an ulterior motive. I demur. But what if they figure that the jaded such as ourselves have figured that out that nobody provides gratis which otherwise provides profits, so they in turn fade the faders. Especially when they have the wherewithal to cross-check against the order flows of whom was provided with that report in the first place. Artful deceptors rarely ply their craft one-layer thick. They like suggest texture and added dimensions. A trompe l'oeil effect that fools the eye. 

Nigel Davies adds:

The fact that the effect has been noticed and publicized seems likely to make it behave differently from the past. At least some traders will want to jump in ever earlier to exploit it, and then there will be those who fade them etc. But the last thing I'd expect to happen is an exact repetition of the past…

There's a good chess analogy to this in that the champions tend to set new opening trends but move on as soon as the crowd has noticed.

GM Davies is the author of The Rules Of Winning Chess, Everyman, 2009

Phil McDonnell writes:

To echo the Chair's observation I once reviewed a quantitative study of some market anomaly. It showed that some 700,000 (!) trades backtested would have been 80% profitable over a 10 year period. The authors were a well known TA writer and his researcher. Although the report had none of the usual tests of statistical significance that we might use here, still the sheer magnitude of the number of observations was compelling.

Nevertheless publication alerted the antenna and caused me to ask why. I redid the study on a smaller sample for the most recent year. In fact it lost money in the recent period. Hence the reason for publication — it no longer worked. But it enabled the authors to keep their names in the press.

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

Tom Marks responds:

Perhaps the real intent was to get the market so confused over this "anomaly", that no substantive moves would happen around 12:30, and those at GS could get a bite of lunch. Like the strategy we played with my 7th grade social studies teacher, simply mention Vietnam and you could ignore him and safely work on your math homework for the next hour.

Russ Sears writes:

When it comes to deception, there are different strains, some ultimately less problematic than others. Toward that end, the 7th grade social studies subterfuge may be as benign as it is precocious as it is brilliant as it is utilitarian. Everybody wins. The teacher gets to indulge his fixation, maybe even sharpen some pedagogical skills, while the kids learn how to best juggle academic time constraints by effectively calling some sort of curriculum timeout.

Sure, in terms of flawless honor, it's a little chipped, but so is the Venus de Milo. Doesn't make either any less a work of art.



Air Traffic control roomAs an air traffic controller and pilot it was only a matter of time before I chimed in here. Victor has, once again, brought up a veritable feast of food for thought here and I will be mulling over this post for some time to come.

Checklists are important in aviation for a few reasons. Task load is high in aviation and the most important role of a checklist is to ensure that a critical step is not skipped, forgotten, overlooked or done in the wrong sequence. High task load arises from the fact that aviation systems tend to be very, very complex and sequence of events is critical in and of itself so lists keep things in the right order. Lists take a complicated set of instructions and break them down into simple steps. Lists can build teamwork and improve execution. Some interesting tidbits. A & P's (Airframe and Powerplant Mechanics), the folks that keep aircraft flying, are required to inventory their toolkits prior to and after maintenance procedures to ensure that they haven't left any tools in the aircraft as this can have disasterous effects. I have heard anecdotally that some surgeries require the same procedure as, in the not so distant past, it was not terribly uncommon to discover that instruments had been left inside the patient.

It is important when formulating checklists to find a balance between not being too general and too minute. Steps that are too broad in scope increase the risk that critical steps may be omitted, these types of ideas are good for setting up strategy, not tactics. Lists that are too long or whose steps are phrased in too lengthy a manner tend to be glanced over and not given their due attention. This happens to be a problem with the checklists we use in air traffic control when releasing control of a sector to the controller relieving us. Good controllers know how to cover the important information with proper emphasis and how to roll up the "does not apply" stuff into a catch-all at the end of the briefing. It is important when working with others to know how to use emphasis to ensure that you have conveyed the criticality of the information you are delivering. The FAA is forever focusing on covering its legal rear end without working on discovering the meat, the nature of the truly important stuff. Although recent initiatives seem to be working toward a thoughtful approach toward these problems.

As a pilot and controller it was, again, only a matter of time before I began taking proven memes from my industry and applying them to trading. Many of the procedures that Chair outlines are strategic, like having workarounds ready for equipment failures, getting enough sleep, eating healthy, understanding your goals or defining your method. One may be well advised to have strategic checklists and tactical checklists and to realize that they may overlap a bit. In addition to my basic concept or framework, I have three trading checklists that I use tactically for entering, maintaining and exiting trades. Some of the steps I use include:

1. predefining my total risk.
2. ensuring that I am using one of the rules I have created that justify entering a trade. (Same for exits.) This is designed to keep my impulses in line.
3. creating a plan for the trade that includes money management, position sizing and some thoughts about how to exit. Thus my exit checklist has some flexibilities built in with other parts, like total risk, inviolable.
4. prior to execution, double checking that I have entered the correct instrument and expiration, and correct number of shares or contracts. A simple typo can be devastating.
5. making sure that I am familiar with the specifications and margin requirements of the instrument.
6. calculating the amount of profit or loss each point (or basis) rise or drop will cause and ensuring that my predefined risk limits trigger an exit, regardless of other rules. My theory here is that I can always re-enter the position if my original theory is reiterated or reinforced. I have listened carefully to Chair about the use of stops and must respectfully submit that when my position needs defending, my purposes tend to be best served by the clearness of head that arises from nullifying the position either partially or completely and reanalyzing at that point. I lack the sangfroid that comes with experience and know that this method works for me and I accept the costs associated with it. And this is, after all, my emergency escape route.
7. maintenance or surveillance of a trade can include rules for increasing position size to press my advantage in a trade or getting smaller to tactically retreat.
8. logging trades along with reasons in a journal, with technical specifics and a discussion of my thinking. Upon exit, I always include a sub heading titled LESSONS to spell out lessons learned. I place the ones I deem important in bold typeface so they pop out at me when skimming through the journal for my re-edification.

The use of checklists has given my trading a feeling of professionalism that it lacked in the past. I no longer feel that I am trading on the fly or for ill defined reasons. I have Chair and this auspicious body to thank for most of that.

Lastly, here is an interesting bit about checklists from Afterburner Inc. 



El Nino's conditions prevail with giant surf all winter — up to 50+ foot waves. It is also very very dry with little to no rain for weeks. These are common conditions in an El Nino year.



David LeeHere is an interesting story showing once again that in sports, the use of statistics is better than our own, albeit no analysis of variability, or subsequent paths.

Scott Brooks writes:

Lee is from a little town in MO, called Poplar Bluff. So being from MO, I have followed his career with a slightly more interest than usual.

I've always admired rebounding specialists. Without rebounding specialists, you don't have as many "Sport Center Top 10 Plays" spots for the likes of Kobe or LeBron.

But Lee lacks scoring ability in his aresenal. It is my opinion that the one thing he should work is the most devastating and nearly impossible to stop shot in the game of basketball:

The Fade Away Jumper.

I can not begin to describe how much a game changes when you have someone on the floor that can hit the fade away jumper…..and for clarity, I'm talking about having your back to the basket, driving said butt into the defender and then stepping away from the defender (while still away from the basket), planting your outside foot (the foot towards the top of the key) pivoting towards the baseline (less defenders down there) and shotting a high arching shot.

The only way to stop it is double team the man……….and that certainly opens up possibilities all over the court….especially when you consider the guy performing this shot should be a "working man" (a grinder…and non-razzle dazzle/non-star player).

Karl Malone built his career around that shot (yes, I know of the "Stockton to Malone pick and roll).

Michael Jordan extended his career by several years by developing one.

Kevin McHale, Larry Bird, and many others mastered that shot.

A "working man" (which is what Lee is…..which is what most any rebounding specialist is), can punch his own ticket to the "Hall of Fame" by simply developing that shot.

It ain't pretty. It won't make the highlight reel or the nightly Sport Center Top 10 Plays, but it is devastating simply because it is unstoppable.

George Parkanyi adds:

Michael Lewis's book "Moneyball" being case in point. Oakland A's manager did very well by finding (good) new players based on their college stats vs the anecdotal information baseball scouts were typically using observing college and even high school athletes. A number of the New York Yankee's current big stars are names that came through the A's this way. (I remember them from the book.)

Baseball I would think has more predictability than trading because there is not a great likelihood that a pitcher can substantially improve his "best-game" ability from one game to the next - there are limits on physical and mental ability, and more likely the variability will be to the downside (having a bad game). So a hitter that historically hits x% against this pitcher is statistically likely to have similar success in any given game. The pitcher's recent consistency might be the main variable the opposing manager would look for. Markets have many more macro and micro influences that could suddenly dramatically change the odds of any given current expectation that is based on historical data.

In trading, it's probably as important however to record all your trades and the outcomes, as are at-bats in baseball. If you have a current situation that is similar to something you did in the past, what did you do then, and what was the outcome? For example, did you bail on your system because you didn't "like" the looks of a particular signal - and then ended up outsmarting yourself by leaving a pile of money on the table? That could be a useful reminder to stick to your plan now.

Jim Sogi comments:

During football season there was a bit of work on whether it is more profitable to kick a field goal or run for the extra point. It's always a question when to take profits. I know there are expectations, but is there a way to improve on them? Is the higher percentage play with smaller return going to pan out better over time? How does the psychological affect the above?



Dan BuettnerI enjoyed this TED talk on longevity from Dan Buettner.

Jeff Watson writes:

I also enjoyed Buettner's talk very much. Although I find it difficult to accept the premise that doing X can add 4.7 or whatever years to your life, he does present many good ideas for living a full life. I am blessed with ancestors who have the longevity gene. My grandfather on my dad's side lived to 104 and my dad's mother was a spry 96 when she died. My mother's parents died at 98 and 97. All lived full, complete lives until the last months of their lives.

My 104 year old grandfather summed up his longevity by telling me that the reason he lived so long was because he spent at least five hours a day outside doing yard work. He never worried about diet, and drank 3- 4 highballs a night and smoked Pall Mall non filters from the age nine onwards. His diet consisted mainly of meat and potatoes, and he made sure that he went to the office everyday for a few hours until he was 102.5 years old. He was a reader, and he constantly wrote letters to the editor until he was well over a hundred. A chronic list-maker, he wrote me a blueprint for living a full life that I have done my best to follow. His wife, my grandmother, was healthy until the day she died of a choking accident while raiding the refrigerator after a Thanksgiving fest. She made holiday dinners for over 20 people every year until that fateful Thanksgiving. My mom's parents both smoked and drank, but ate a Mediterranean diet, which might have helped. They were also very active, well into their mid 90s. They were into intellectual development, and didn't exercise much except for yard work and cleaning. My father is 81 years old and is a 10 year lung cancer survivor. He also has a case of MS, but doesn't let that get in his way. He still golfs 18 holes at least five days a week, preferring not to use a cart but to walk. He fishes, maintains the outside of the house, and keeps it looking like a showplace. He still keeps his hand in several businesses, despite being retired. He has had many serious medical problems, but like the Energizer Bunny, "Keeps On Ticking." I suspect that he will give his dad a run for the money as far as longevity.

I'm 53 and still surf and skateboard and play many other sports. Despite my medical issues, I have no plans on giving up, and I certainly don't plan on ever retiring, despite the fact that I could quit tomorrow and live my life in comfort. All of this leads me to the conclusion that the best way to live to be 100 is to win the genetic lottery, stay active, and forget about getting old. Another common thread with my relatives is that they don't associate with other old people, preferring to be with younger people. Living in Florida, it is easy to get sucked into the Senior Citizen treadmill, and that is certain death.

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

George Parkanyi comments:

One thing that drives me nuts is people who do nothing but talk about the medications they are on. I hope I never become that unbearably boring. I empathize with people that are ill, and I get it, pretty much right away, but unless you’re suffering and in distress and need medical attention or comfort at that moment, obsessing over the things that are keeping you alive doesn’t leave much for the actual living, and nobody is really interested.

George Parkanyi, Canadian telecom entrepreneur and ETF trader, blogs at StockAdventures.



 The success of "Avatar", which cost a whopping $237 Million to produce, raises the question: are big-budget movies more "risky" for Hollywood studios? The answer(s) have many market analogies.

"THE NUMBERS" website is a treasure trove of studio budgets and gross revenues for thousands of movies.

My quick-and-dirty analysis reveals:

1) Movies with budgets over $200 million produce a mean gross return on investment of 70% — but the standard deviation is 90%. This is a materially lower return than the entire movie universe which includes lower budget films. One simplistically concludes that Hollywood would be better off producing more films with lower budgets. The seemingly random dispersion of results also suggests that Hollywood lacks significant predictive power of results. This is analogous to index funds' outperforming most active managers.

2) Certain studios are much better than others. In particular, Buena Vista has a noticable number of big losers. Twentieth-Century Fox has had a noticable number of winners. Warner Brothers might be analogous to the highly levered speculator with a large number of very big winners and very big losers.

3) A small number of unlikely films skew all of the results. "Paranormal Activity" cost $15,000 to produce, but grossed $141 million. "The Blair Witch Project" cost $35,000 but grossed $248 million. These films are like the penny stocks that your brother-in-law invested in — and boasts about endlessly. Whereas, you "conservatively" invested in Sony's "Stealth" and "Final Fantasy" and lost a cool $100 million on each.

Finally, the dispersion of results makes one wonder how much market research gets conducted before a company invests $230 million in a film? And whether this research produces any discernible difference.

Rocky Humbert, quantitative analyst, speculator and master chef, blogs as OneHonestMan.



David RosenbergAccording to David Rosenberg's reading of the Household Survey:

So many economic-sensitive sectors lost more jobs in December: construction (-53,000), durable goods manufacturing (-16,000), retail/wholesale (-28,000), transportation (-8,000), leisure/hospitality (-25,000), information services (-6,000) and real estate (-6,000). In other words, the segments of the employment pie that are sensitive to the business cycle actually cratered 142,000 last month, which flies in the face of the overwhelming view that this recession has really fully run its course.

The net 85,000 figure comes from allowing these losses of full-time jobs to be offset by part-time employment ("47,000 rise in 'temp help') and growth in the health/education sector (35,000). As Rosenberg notes, even with the government injection of "barbiturates", the rise in public sector jobs is below the 40,000 monthly pace that occurred during the last cyclical recovery.



 Trading hours upset the circadian rhythms of millions of people and we need to learn the side affects of sleep deprivation and how to deal with them.

Jim Sogi agrees:

When you don't sleep enough you get grumpy, uncoordinated, depressed, groggy. It's bad news.

Nigel Davies comments:

If trading does that to someone and he can't find a way around it — smaller position size, some kind of healthy stress relief — he should quit. It just isn't worth it.

Phil McDonnell explains:

A considerable amount of research has been performed into our nightly dream cycles. The typical cycle lasts about 90 minutes. So in six hours of sleep we get four completed cycles. In 7.5 hours we get fvie cycles, in nine hours we get get six. Note that eight hours does not give us an even number of cycles.

The importance of a full cycle was established a long time ago. When sleep researchers monitored test subjects and woke them at their deepest part of the dream cycle they were shown to be mentally impaired on simple cognitive tests. Awakened subjects could remember their dreams.

Subjects awakened after a full cycle performed much better on the same tests. The full cycle subjects could not remember their dreams.

Ideally sleep should be an even multiple of 90 minutes and one should awaken with no memory of the last dream. A corollary to this is that if one is awakened after, say, six hours and cannot remember a dream then it my be wise to get up. This is especially true if one feels refreshed and cannot stay in bed for another full hour and a half.

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



Colt McCoyIs the current situation in Bama / Texas useful for analysis of markets?

What happens when a critical leader gets taken out of the game? What's the correct analogy? Perhaps Apple's being found guilty of accounting fraud, or Goldman Sachs's having a rogue trader with a multibillion loss?

If there is a negative effect, does this occur more often to leaders who have proven extremely resillient in the past (just like McCoy going into today's game)?

What about the relative strength of the opposition against the lost leader's strengths? (McCoy leads a brilliant offense that was otherwise weak; whereas Bama's defense is strong and aggressive, exacerbating the subsequent mismatch). Certainly, if GS went down, one might not be foolish for thinking, given current market sentiment, that it would have more of a negative impact than, say, Johnson and Johnson's going down ?

Lots of good material there…

Also interesting to see Texas's intial disposition coming out of the gate, vs the sight on the field now.

Many Olympic level coaches are able to pick who will win a sporting event — any sport, not just their own — by reading the expressions of the competitors on the starting blocks. I am sure there are useful parallels. I'm reminded of the Chair's exhortation to know the basic effects from the game face of the market each day: Up Yesterday / Up Open, Down Yesterday / Up Open, Up Yesterday, Down Open, Down Yesterday, Down Open.



 One of the only times left today in our busy world for families to spend alone in close proximity with each other is in the car. Now that families eat out more and kids are being rushed from one practice to the other, traveling to school, games or activities.

My family also often take a 13 hour trp one way to Grandma's in the car. My kids and I spends more time together than I ever did as a youth with my Father including nightly meals.

But cars are not conducive to heavy discussions. While often my wife and I use this time to get caught back up to, what is happening in each others world; this generally has not been the case for the kids. Rather than bonding its time, it has either been a time to bicker or ignore each other for the girls (girls 11 and 16). Fighting, or stopping a fight,especially in a car while driving is probably one of the most distracting dangerous things you can do. We have a strict, no fighting in the car rule. I often say, "Unless it litterally is worth dying for…I do not want to hear it."Like many our family car is an SUV. It is now equipped with a plethora of mobile electronic devices that would make the early James Bond's car seem boring. Judging from the small screen DVD players, cell phone conversations, game boxes, and I-pod you see on the road, ignoring each other seem to be the alternative many families choose.
So in the past year I invented a game we call "the imagination game". The rules of the game, as we play it is every body has a chance to think of a topic they would like to hear the others imaginary story about. Then everybody listens to the story until it is finished. And then someone else's turn to either tell a story of the same topic or think up a new topic an asks someone else to go.

The girls love it. The oldest girl ups up and shares her feelings…something I think is pretty amazing for a 16 year old. And the youngest loves having the floor and chance to ham it up. It has probably changed my relationship with her the most. Because, like her Dad, she is a severe introvert. This allows her to express herself like an actor, or artist with a layer of protective detachment. But also because she now looks for chances to go to the hardware store or other trips just with me, so we can play.

I try to draw from my childhood daydreams and works of art for my topics. Some typical topics may be:If any book you read came to life what would it be? Which character would you be and which character would the rest of the family be?
If you could invent anything what would it do and how would it change the world?

If you dug a hole in the back yard and found something amazing what would it be and how did it get there?

If you could buy anything what would it be and what would you do with it?

What movie would you like to be real? What character would you like to be?


Jim Sogi adds:

JSI found one of the best times to talk with the kids (when they were kids) was while driving in the car. They had a long commute to school. When the other kids in the car pool were in the car, they chatted away, and I got to hear about everything going on. Its a good non-confrontational situation since you are not looking at them, so they don't feel on the the spot and tend to open up more. It was a good time to raise things away from the rest of the family as well. The gadgets in the car might tend to discourage this nice talk time.

Jeff Watson remarks:

MotuMy son and I always had an agreement that he could decorate his room anyway he wanted from kindergarten on. He had a rather eclectic style of decorating, and his room (in surf-rat style) still reflects who he really is, not the Classics Scholar he wants the world to see. We always had an agreement that I'd come into his room every day, ignore the putrid mess, and we could have any discussion and he would have total immunity for anything he divulged. I heard a lot of things, but as my word is my bond, never punished him for any transgressions he revealed. Ultimately, the real lesson he learned was that he could trust me, that I was on his side, and it's better to be a good citizen than an outlaw. Since we live at the beach, he's run into many eclectic characters, has had to grow up early, and has seen many things that might not be age-appropriate. I've always played the role of "Ward Cleaver," and have provided guidance without hovering, but encouraged him to make his own rational choices. The result of our laissez faire parenting is that my son will tell me anything, won't lie to me, and will make and listen to rational analysis. I'm willing to let him go off on tangents (with a rope in hand to bring him back to earth), and I provide a safety net, so he has security which will give him courage to spread his wings and fly. So far, so good, but he's 21 and as a parent I will still worry about him until he's 80.

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

Jim Lackey writes:

LackMr. Jim, we all talk to kids on the way home from school or best, after sports practice when they can think without emotion. Long drives are greater than 3 hours but less than 8 hours or 500 miles. Brutal drives are 8-13 and 14 and over hours is pure torture. My brother and I call it "seeing fireflys".

The imaginary game sounds cool. We have a million BMX/MX miles and the 500 mile 8 hour drives are good for books on tape.That Turkey day Thunder run to Fla to see family, 13 hours, my wife had fun with "Sundays at Tiffany".  I said OMGauche a romance novel Jenn? It was, weird… an imaginary friend comes back to romance her.

One trip the BMX kids groaned one AM when I plugged in a murder mystery. "What is this, a book? No!…Let's listen to music!" The next rest area/stop the kids ran back to the van to listen. One trip a book had 30 minutes to go and everyone wanted to hear the end of the book before race practice. I've also used "cliff notes" books on tape for those Victorian classics that I would never read. We are talking Pride and Prejudice here. Which reminds me, my 8 year old girl is on Dickens. Last night after dinner she mentioned England, living in London. Yet our discussion was cut short with that pesky tech…1$ redbox movie the TV and DVD player and Cloudy With A Chance Of Meatballs. Cute story. The kids read the book. Only thing I got out of it was, "See, she is playing dumb blonde" which is one of my pet peeves and I tell my girls to "please never play dumb blonde." Yet do practice your southern drawl and lay it on thick during negotiations. Which was another spec list meal for a lifetime we learned here. Wish I had the ability.

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