I have been doing some counting. This month we had very few down days, 4 to today and if the last day of the month is down [Ed.: as was the case] that will make 5. Looking at SP Futures last 12 years, ending 2009 (sorry, slight gap in the data to present) here is the distribution of number of down days starting with close of last day of the month and looking back 21 days including last day.

Number of down days


1     0
2     0
3     0
4     1
5     1
6     5
7     5
8     20
9     33
10    24
11    30
12    11
13    9
14    8

none above 14

The average down days per month is 9.9, but looking at the extremes…what happens one month out? Nothing earth shattering, but definitely not bearish after a bullish month and trend followers may continue to have their day. Of course much activity goes on within the month that this does not pick up.

Speaking of counting, my 2 year old likes to count. While at the beach one time she asked if we would count the waves, at night to count the stars. The wonder of children.




The help laughs behind their backs,
As the Mercedes, Lincoln and Catties.
First fill the handicap spots..
Until the whole lot is full
Of Gray and Bald headed Early-Birds.

They stroll, walk and hobble,
To the supper special for the day:

Desserts puffed with air
And weak artificial flavor
Vegetables steamed to oblivion;
With variety of syrupy fruits;
All with slabs of meat
Served with pomp and detached jazz

The waiters know them by name
And the story behind each one
A doctor, a lawyer, a professor or two

Little did they know,
The devil's trade they daily made
Those toiling years ago.

To miss the daily diligence of running, hiking or seeking:
The wild beauty of the bobcat,
Attacking the spotted doe.

They would be left with black velvet deer
And serene glowing trails on canvas.
As their arteries clogged 
As their blood turned to medicated sludge.

But then the conversation turns sadder
As they talk of greater minds, lovers or brothers;
Gone or in the home,
From dementia, strokes or fatty cancers.

The devil smiles as they say grace,
And thankfully say they are the lucky ones.

Rocky Humbert comments:

The studies which I've seen suggest that running 30 minutes a day will add 3.5 to 3.7 years to one's life. However, if one is awake only 16 hours/day, then that 30 minutes of running consumes 3% of one's life for an increase of life expectancy of approximately 4.7%. While this gives no value to the increase in general well-being from regular exercise, it's hardly grounds for the help to be laughing.

In contrast, a talented attorney can spend those 30 minutes billing at $1,200 per hour, and use the income to ensure access to a private room at the Cleveland Clinic for a quadruple bypass, valve replacement and experimental treatment for Type II Diabetes.

One wonders whether Jim Fixx has any regrets?

Kim Zussman adds:

 Which begs for a present-value calculation for doctors who run 30 minutes a day from $1200/hr lawyers.

Nigel Davies writes:

The time could be used to listen to talking books and the like. Plus it would be interesting to see if cycling on an exercise bike would produce similar results in which case one's options are much more varied (eg trading and cycling).

Of course the other thing they didn't measure is quality of life. Not much fun having a blonde on one's knee whilst struggling for breath and wondering if one will survive the experience.



The next talk at the N.Y.C. Junto at the Mechanics Institute, 20 West 44 th Street, will be on Thursday April 01 2010 at 7 15 pm. Ed Hudgins will be speaking on "Secularism, Psychology, and Objectivist Ethics." All are invited.



partial lunar eclipse in earth's penumbraThe penumbra is a partial shadow around an opaque body like the moon or market where only faint sight is possible. It was applied in a classic article by Taussig to the region around the intersection of supply and demand curves within which stocks fluctuate in a seemingly haphazard fashion. As anything Taussig wrote 100 years ago is infinitely superior to what passes for economic analysis of markets today, it is worth quoting in full on the concept of a penumbra. First described in stocks by Taussig in 1910 ish. For reference:

IS MARKET PRICE DETERMINATE? By Frank William Taussig. The Quarterly Journal of Economics 1921, vol XXXV

[ … ]

This does not mean that there are unlimited or quite unpredictable fluctuations. The underlying conditions of supply and demand are known for all the staples well enough to make possible a rough prognostication of the season's course of prices. It may be quite clear that potatoes will be higher than last year. But there will be a penumbra of uncertainty. Within this there will be ups and downs, many and perhaps wide fluctuations.

[ … ]

Now it is with regard to the fluctuations within the penumbra, the familiar ups and downs of the market, that we need to be cautious in stating any theory of market price. The daily or weekly or monthly "equilibrium" of supply and demand is a very ticklish matter. To return to the egg market, mentioned at the outset by way of illustration: demand and supply and price are not necessarily connected, for short periods, in the way commonly assumed. Suppose a well-known dealer cuts the price and puts eggs on the market at a lower figure; others follow his lead; the price will fall further; the lower price will quite possibly stimulate still others, not to make purchases, as is usually assumed, but on the contrary to make sales — until the edge of the penumbra is approached. Then indeed there will be a reaction, or at least a check. Eggs will not go down indefinitely. But within the penumbra there is no certainty about the effect of lowered price on supply or demand or on the further course of prices. Conceivably the course of events may be just the opposite of that just described. The well-known dealer who cuts his price may be confronted by another dealer equally well-known, who snaps his offers up and bids for more at the same figure. Then still others will follow his lead, country dealers will hold back, not force their supplies on the market, and eggs will go up until the other edge of the penumbra is approached. And so it is, I take it, in the wheat pit or at the cotton post. There is no telling what immediate response there will be to an offer of larger supply or to a decline in the day's or week's quotation. A heavy sale by a big operator and a lower price accepted by him may easily mean, not that more will be bought by others, but that buyers will be scared off and that price will fall still further. This is precisely what the big bear operator expects to bring about. Or the bear's maneuver may not succeed. Price may not fall further; it may rebound and rise.

To put the matter in more technical terms: the demand curve over "short periods" — which may be a matter of weeks or even months — is not necessarily inclined throughout in the same direction. It may be inclined positively.1 And similarly the supply curve, indicating what quantities are offered for sale at different prices, does not necessarily have that constant positive inclination which is usually assumed. In the course of the higgling of the market this in its turn may have a negative inclination.

The combats of bulls and bears, familiar phenomena of the market, are incomprehensible under the orthodox theory of market price. They can be understood only if we admit that within the penumbra there is no determined or determinable market price. A good observer has said that the successful speculator is not necessarily a man of wide statistical information or of much experience in the trade. But he must be a shrewd judge of human nature. As regards the fluctuations within the penumbra, there is much truth in the statement. The market may react in all sorts of ways to changes in offers and bids and going prices. The outcome depends on men's hopes and fears and guesses and momentary states of mind. The nervy man may make money by coolly watching his more sensitive fellows and playing on their frailties.

[ … ]

From a reference that I cited with approval in my 1964 thesis, and that Professor Zeckhauser has been looking for for 30 years, and kindly provided by Alston Mabry. The area beyond the penumbra is one that Taussig felt might have continued moves indicative of shifts in the demand curve and new equilibria.

I thought to test this starting with the pencil and paper at an elementary level. I considered the 10 best Nasdaq and 10 worst performing Nasdaq 100 stocks in the first quarter of a year. Next I looked at the subsequent performance of these two groups of 10 stocks in the subsequent 9 months. I repeated this process for each of the last four years. The results are interesting.

Year Best10 Worst10 Medn10 Comment

2006    11      6        3   sd = 40% non signif (ILMN = 50%)

2007    93     46       22   sd 200% FSLR up 500% 1 rnk both periods

2008   -28    -29      -38

2009    90    130       63   reversal of fortune


Year - Calendar Year

Best10 - Performance of best 10 stocks in next 9 months

Worst 10 - Performance of worst 10 stocks in next 9 months

Medn10 - Median performance of all stocks

The results indicate that in the bad year, the worst stocks did the best in the last three quarter, but in the good years, the best stocks in the first quarter continued to excel. The 10 best performing stocks this year are Baidu, Liberty, Wynn, Sears, Garmin, Illumina, Hologic, Ross Stores, NII Holdings, Mylan. The 10 worst performing stocks this year are nvidia, Linear Tech, Foster Wheeler , Google, Qualcomm, Expedia, Warner Chilcott, First Solar, FLIR , KLA Tencor . One would be interested in other first efforts to explore the penumbra concept of Professor Taussig.

Phil McDonnell performed his own study:

In 1921 Taussig argued that there exists a penumbra around the current price in a market. He based this on the argument that at any given time the supply in a market is relatively inelastic. There is only so much wheat and more cannot be grown until next year. There are only so many shares of stock and it would take a while for the company to issue more.

This suggests a simple strategy. One could keep an average of recent highs and lows and use that as a predicted high or low for the day. One would buy at the predicted low and exit at the close. One would sell at the high and exit at the close. The following study was done using SPY daily data. For this study the average was a 10.72 day with lag removed.


       Sell Hi     Buy Lo

avg   0.022%    0.040%

std    0.994%    1.255%

count 1290        1273 %

up     48.84%     51.61%

t-stat 0.79           1.13

Results are not significant.

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

Alston Mabry shares another Taussig work:

The Silver Situation in the United States F. W. Taussig 3rd ed, 1900

A discussion of the silver situation in the United States divides itself naturally into two parts. On the one hand, we have the purely economic aspects of the problem — the working of the silver legislation, its history, the results that have flowed from it in the past or may be expected in the future. On the other hand, we have the intricate and difficult questions of policy involved — the right and wrong of the legislation, the evils or benefits that have ensued and may be expected, the best course to be followed in view of all the emergencies of the situation; the treatment of the problem not only from the economic, but from the wider social and political point of view.



sugarI was considering recently when the best time is to buy weakness after a sustained selloff — read sugar. Usually it seems prudent to see a retest of a low after a bounce to then enter into the market. However just maybe volatility plays a part here. If volatility on the initial low is such that it is at an extreme (on what comparison?) then potentially a retest can be dismissed. Similarly with a low volatility low, then the chances of a retest maybe be significantly higher. Of course this must be tested.



 I found this to be a very interesting article:

We are all far less rational in our decision-making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless: they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.

"That's the financial world as Dan Ariely sees it. A professor of psychology and behavioral economics at Duke University, Dr. Ariely has wondered for years why people often don't act in their own best interest. In 2008 he wrote about his research in Predictably Irrational: The Hidden Forces That Shape Our Decisions, which he updated last year with observations on the financial crisis.

As a clinician in private practice for more than 30 years, I focus on irrationality, too — specifically, on helping individuals and couples explore irrationalities around money and move toward a more balanced state of mind that I call money harmony. After reading Ariely's thought-provoking book, I wanted to know what this enlightened researcher might have to say to advisors today…



A tailwindMy work indicates that most of the drop in commodity inputs, including PET and other plastics, has run its course on improving company margins. Now revenue gains have to increase greater than cost inputs, and I am finding little discussion on this. I would appreciate thoughts from readers of the site.

Vince Fulco comments:

A few of my fundamentally driven long-short buddies concur. As I recall during the 1989-1993 and 2001-2003 periods, the pauses in the move to Dow 36K came from the periodic realization that while margin recovery was the easy/quick part (slash and burn everything in sight), it was the top line growth that remained halting & lumpy and required the real heavy lifting. 



Canyonlands: the Maze districtThe back country trekker uses a chart, a compass, and GPS to find out where he is going and where he is. It seems simple, but it is not. Especially when visibility on the ground is limited by foliage, terrain or weather, it is difficult to know where you are or where you are going. Without tools, it is easy to get lost very quickly. Planning before the trip is paramount to determine elevations, bearings, and way points. Once on route, the back country traveler makes constant reference to the direction of travel, the altitude, the next way point, and the prior known locations, and distance to the goal.

It is easy to get lost in the forest or mountain even when standing or walking. It is easy to lose the trail or path, if there is one. It is impossible to walk in a straight line because of the terrain, foliage, and because mentally, the mind and the body play tricks during travel. A compass bearing will give the direction of travel, and a GPS will give fixes and distance, but will not give a context without reference to the larger chart of the area which has distant reference points.

Inherent in non motorized travel is the exhaustion factor of the trekker where hydration, supplies, energy, and injuries must be monitored. The trip unfolds into the unknown despite prior route planning. Hypothetical planned directions and routes give way to conditions on the ground as they play out such as weather conditions, changed terrain and ice, snow conditions, rocks, floods, fallen trees, slides, avalanches, exhaustion, wind, animals.

The applications to trading are easy to see, but difficult to apply even though the stakes are much lower. It's good to have a goal and a plan to get there. It's good to chart out the location, the route ahead of time, as well as contingencies. It's good to make regular references to navigation devices and charts. It's good to be flexible as well. It's good to monitor health, exhaustion factors. There are many decision heuristics that come into play that tend to lead even the best guides and experienced travelers astray. We've discussed some of these before here on the site in survival situations.

Pitt Maner writes:

Orienteering is a sport that might have useful "cross-training" effects for market participants. I have never tried orienteering, but one of my fondest college memories was walking for 8 hours across part of Teller Co., Colorado doing a mapping exercise using aerial photographs and a compass to field identify Cripple Creek vs. Pikes Peak granite. It does not appear like Hawaii has an organized orienteering club associated with the national group—so maybe an opportunity there for an enterprising fellow. Here is a useful manual on the sport.

Orienteering is also called the "thinking sport", because navigating through open country challenges the mind as well as the body. While running, the athletes consult the map and use a compass to decide in split seconds which route is best to get from one control point to the next.



Ben Stiller in GreenbergThe underwhelming "Greenberg", played by Ben Stiller, is Hollywood's latest glamorization of neurosis. Woody Allen, the pioneer in this genre, charmed up his leading men (himself) by laundering neurotic obsession through talent. "Shine" put light on a Jewish Australian music prodigy who is rescued from his illness by a high chinned maternalistic matron. Nerds who are crazy but smart, inexplicably winning the girl.Hollywood women veered from the winning Jewish neurotic toward the gentile variant. Jack Nickolson capitalized on his money as a talented writer with OCD in "As Good as it Gets". And the tolerant wife of the Beautiful Mind of John Nash (who in real life got busted for perversion in a Santa Monica beach public toilet).

Greenberg brings us to the untalented Jewish neurotic, who is pursued and conquered by a much younger, convincingly dumb and slightly bovine blonde, because she is lost, lonely, and in need of a pursuit. While driving in LA traffic, she mutters "Are you going to let me in?". Parallels between Israel and Hillary aside, perhaps we are witnessing the curtain on forgiveness of the American shtetl.

The viewing angles of Hollywood neurotics was done the same way Playboy analyzes things. A more honest treatment of women as objects is the new book, "T, T and A" by Tony Stamolis. One of the few tomes I could read in two hours (the only words were inked on the bare skin of gang bangees), Tony interposes nice images of California girls with those of "gut wrenching" Mexican fast food. I asked the author whether he sampled all the dishes, and for a family website the answer is omitted. (however one did suggest a new book for him).

Finally, a new genre is the Jewish* neurotic genius who lives with mom, refuses money all while solving the remaining math puzzles.

*To Russians he is Russian, though Jews in that country are not considered Russian



 Just a broken-down speculator, all down on his luck
He's been through the best of his P&L

On a long lonesome credit line and an old win x86
Crossed the market-makers before throwing his towel in the ring

He was all around speculator back in '99…from the top it's been a long way
Since the whiskey and women started winning his time
They rode him high and hard to the ground

But he remembers the thrill of being a winner in the days of his first Mad
Money shows
But there was something about winning that didn't last forever

Maybe tomorrow things will get better
if the margin clerk lets loose of his soul
he'll be the all around speculator again

So he rolls up a smoke and he sips his Old Crow
Wipes the whiskers that cover his chin
And he grins as he dreams of the old markets
Now he's the all around speculator again

And the original
Just a broken down cowboy all down on his luck
He's been through the best of his friends

On a long lonesome highway in an old pickup truck
Crossed Texas like a hot dusty wind

He was all around cowboy back in '49
from the top it's been a long way down
Since the whiskey and ladies started winning his time
They rode him high and hard to the ground

But he remembers the thrill of being a winner
back in the days of his first rodeo
But there was something about winning that didn't last forever
Maybe tomorrow things will get better
if the devil lets loose of his soul
he'll be the all around cowboy again

So he rolls up a smoke and he sips his Old Crow
Wipes the whiskers that cover his old chin
And he grins as he dreams of the old rodeos…
now he's the all around cowboy again



 The promise given was a necessity of the past: the word broken is a necessity of the present– Aparna

Two weeks ago, 700 residents of a small, affluent mountain community were stunned to learn that at least 90 million dollars they had entrusted to a pillar of their community was gone. The man who seemed to have it all-a sprawling mansion, the fanciest cars, the trophy girlfriend and the most reputable business in the state– declared personal and company bankruptcy. The town is reeling from this, TV cameras are going house to house and many say they were "completely wiped out and don't know what to do or where to go." They have fallen apart and are going to pieces.

Sparing you the details, the essence of this story is that there were too many secrets lies and false promises. The more secrets you have, the sicker you are. This applies to all aspects of personal and business life. The more secrets you keep about who you really are, what you are doing with your money (the last great taboo of our culture), the sicker you are.

This is nowhere more true than in trading. If you do not get right with yourself and those who believe you and believe in you, you are in sickness and stinking thinking. The most important way to begin falling apart without going to pieces is to tell the truth. If you are hiding your losses from a loved one, step up and tell that person. Don't pretend you are a winner when you are losing. Don't allow your pride to get in the way because pride (especially if built on a false and crumbling foundation) leads to misery, falling apart and, for some, going to pieces.

What happens when you go to pieces? Addictions, acting out behavior, depression, continued lying to self and others, and all manner of mental, physical and spiritual DIS-ease. It is only through telling the truth and being radically honest and taking personal responsibility that you find true freedom. This is exactly what happens every day in life and in the markets. There is so much hype, deception, misinformation and disinformation. You search desperately because you want to find the truth. But most of it is not the truth. The truth is often intolerable to bear. Denial, rationalization and the search for confirmation of your biases are much easier. No one wants to fail, but failure is a part of life. Failure is a part of trading and investing. Losing in the markets and life is often the beginning of winning. It's OK to fall apart without falling to pieces. It's necessary to get stopped out, to preserve capital, to embrace risk and take total personal responsibility for your thoughts and actions. Winners fall apart, but they quickly regroup. They don't crumble and hide in the corner or lie to others about how great they are.

It's freeing to admit that we are human beings, that we are fallible and we make mistakes. It's OK to make mistakes. It's not OK to lie about them and pretend they don't exist. In time, the truth will be revealed but at this moment, hundreds of suffering people have lost trust. Trust is a commodity in very short supply today, yet it is the bedrock of any relationship. People will not trust you if you lie to them. You will never learn to trust yourself if you continue to lie to yourself. It's a vicious cycle of denial and obfuscation that leads to self-destructive behavior and further self-sabotage.

There are many lessons for trading and living in this story. Here are a few ways to keep from going to pieces when it all falls apart:

Always tell the truth to yourself and those you love and who love you.

Trust, but validate and verify everything.

Don't trust anyone but yourself when it comes to your money.

If something seems too good to be true, it probably is.

Don't assume anyone has your back. Take full and total responsibility for your actions and don't sit around waiting for someone to bring you flowers or make money for you

Just because something has worked in the past, don't assume it will keep working. Linear thinking is complacent thinking and leads to a false sense of security and comfort.

Don't get greedy. Remember, bulls and bears make money-pigs get slaughtered.

Don't put all your eggs in one basket. Diversify whenever possible.

Everything you thought and dreamed for your future can be gone in the blink of an eye.

Hope is not a viable strategy for trading or investing in anything.

Stay really strong in body, mind and spirit because you never know when the tsunami is going to hit.

Prepare for the worst and expect the best. Have a backup plan. Have three backup plans.

When it all falls apart, you can and will survive if you don't fall to pieces.

If you once forfeit the confidence of your fellow citizens, you can never regain their respect and esteem. It is true that you may fool all of the people some of the time; you can even fool some of the people all of the time; but you can't fool all of the people all of the time–Abraham Lincoln



 I have been doing some light reading on the brain recently that describes behaviour as it pertains to marketing (Martin Lindstrom's Buyology). There is some interesting research on politics and brain behaviour in it (and let''s face politics nowadays is nothing more than marketing). I was very intrigued by how liberal and conservative brains behave in very specific ways and how people are just not capable of overriding their biases towards a certain way of thinking. The brains of conservatives and liberals function in a very different manner. When given the same stimuli, very different parts of the brain "fire up" and stimulate very different responses between the these two groups. Facts that do not support a liberal or conservative point of view can be heavily filtered, ignored or even used to justify/support their actual point of view. They (either liberal or conservative) are almost impervious to facts that fall that outside of their world view.

The same is true for religion and sports. We all have view on religion and see/hear/smell/touch things that bring about reactions based on our views. When a sports figure is viewed by people, different parts of their brain "fire up" based on whether they like or dislike that figure. Religious messages in marketing, unless directed at a specific religious group are guaranteed to turn off a good chunk of population while positively stimulating a different chunk.It seems that brand loyalty goes beyond a logo. It is a deep seated subconscious phenomena that applies not only to the cars we drive or the clothes we wear, it applies the religion and/or philosophy we believe, and the sports teams that we root for.

As I read more and more of this book, I am fascinated by how humans process the same information not only differently, but do most of it on an unconscious and involuntary level. It is very difficult to make changes to how we perceive the world because of the way our brains are programmed. It is very uncomfortable to consider another point of view when our brains work so desperately to find the fault in others point of view as opposed to the common ground.

These biases have trading applications. I have always been a boring stodgy investor. I've eschewed leverage and high risk. I've never swung for the fences and been happy with hitting singles and stealing a base now and then. But a couple of years ago, I stepped outside of my comfort zone and applied leverage to the investment strategy that had worked out so well for me two decades. The results were horrible. As I look back on that ill-fated foray, I wonder what was going on in my brain that I was unaware of, i.e. what subconscious filters were firing up in my head that prevented me from seeing the downside of the mistake that I was about to make…beyond the obvious one of leaving my arena of success. What makes me different from those that take on leverage so successfully? What makes it so hard for me to see a liberal point of view besides the fact that my brain can come up with thousands of reasons why they are wrong and thousands of examples of failure…and not one example of success…yet a liberal can not fathom how I can be so cold hearted. As nice as it would be to truly walk a mile in another man's moccasins to understand his point of view, it probably wouldn't do any good. We don't need to borrow his shoes, we need to borrow his brain. But since science hasn't figured out how to do that quite yet, you may want to read Buyology in the meantime.



 This time each year, a growing excitement envelops me as baseball season is ready to start. Every spring, I get transported back to my youth and a certain contentment washes over me. Baseball is such a good sport. While many say that baseball is past it's prime, and compare football, basketball, and NASCAR attendance figures, the naysayers just don't know. After all, they write poetry about baseball and one would be hard pressed to find any poetry written about those after-mentioned sports . Casey at the bat was the quintessential baseball poem as it included every human emotion wrapped up into a neat little package. There are many good trading lessons in "Casey at the Bat."

Casey at the Bat - The Original Poem

Ernest Thayer wrote the poem in May, 1888.

It was published in the San Fransisco Examiner on June 3, 1888 under the byline "Phin".



This is my old standby recipe for an easy BBQ sauce that can be knocked out in a couple of hours and is very easy to make. It is rather sweet, with a distinct kick, and goes very well on pulled pork, ribs, sliced pork, beef, chicken, turkey, and sausage. It makes an incredible BBQ spaghetti, and goes great in BBQ beans.

4 cups ketchup
2 cups dry white wine
2/3 cup honey
1/3 cup dark molasses
4 tablespoons cider vinegar
4 tablespoons lemon juice
2 tablespoons sugar
2 small onions diced very small
4 minced garlic cloves
1 teaspoon Coleman's dry mustard
1 teaspoon ground cumin
2 tablespoons Worcestershire sauce
Dash favorite hot sauce to taste
Salt and pepper to taste

Saute onion and garlic in pot until soft and translucent. Add all other ingredients and cook over low heat (stirring occasionally) until thick. Salt and pepper and hot sauce to taste. The finished sauce can be strained or used "as is."

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



For those of you who like baseball: go to Bob Newell's THE CHECKER MAVEN for an excellent photo of baseball great and checker player Mr. Christy Mathewson.

Stefan Jovanovich shares:

And here is The Checker Player and Mr. Cobb .



 I married into a family with extensive employment ties to AT&T. My mother-in-law, one brother-in-law, one of my wife's uncles as well as another aunt all made careers at ATT. The only thing they admired more than the payroll deduction stock- buying program was the medical coverage. I'm familiar with a number of companies that offer very comprehensive programs, but none compare with what Bell offered. Not only was coverage complete, but remained so into retirement; the employee costs were so minimal as to be non- existent.

It's a wonderful story so far. Nothing really changed when the government and the courts came along and created the Baby Bells. However, their medical coverage created what I have long termed the "Bell Babies." My wife and the children of other long-time Bell employees are among them. But first a little background:

My mother-in-law retired at 62 and passed away at 84– I cannot even estimate the number of (free) office visits she paid to various doctors in that 22 year period. I do know, though, that many of those visits were largely unnecessary. She easily averaged at least two office visits a month during all that time; and when she was seriously discomforted (as when she threw out her back) two visits a week were common– despite the doctor's advice that the visits really weren't necessary, that the healing period would take awhile. Her example, as well as that of her sister and her son (her brother was admirably averse to visiting the doctor even for free), created the Bell Babies. As infants, children, and teens those who had a parent covered by Bell became accustomed to seeing the doctor over the most trivial of aches and pains. This was fine while Mom's policy covered them. However, once they married (to someone not covered by the ATT policy), costs, sometime high ones, became involved. Despite the costs, old habits are hard to break– especially if the services provided have become to viewed as entitlements.

The coverage offered by my employer, although not as generous as ATT's) certainly was very good. When I retired and retained the policy (slightly modified), my monthly cost was a very affordable $347 a month. Seven years later when I qualified for Medicare it was $1200 a month with many modifications and co-pays. During that period many of us discovered just how expensive medical care really was.

But there were many, my spouse among them, whose initial reaction to any ache or pain was to make a doctor's appointment. Ironically, the "generous" coverage that our employers obtained for us (and which our current chief executive thinks is too expensive), has created a class of Medical Care Junkies– many of whom, including my wife, have learned (expensively) that doctoral abstinence is a good thing.

With that in mind, I believe that the newly dictated medical programs may well discourage a number of us from making frivolous office visits. However, it may also create a whole new class of customers who previously were, or feel they were, under-protected. And their numbers and impact could well be substantial.

If I've learned anything from these experiences it is that while I may find it difficult to pay medical costs under this new legislation, I can still afford dental and eye care. Under the various policies we've had, coverage for those specialties was very limited and very low. Practitioners in those fields had to deal with real people with real incomes, factor in real costs and price appropriately. I believe they've done a remarkable job. Where insurance didn't apply (or applied only marginally), costs remained bearable. But blanket medical coverage has proven to be poor economic policy– and it gets worse as government "helps."



 Here is an interesting paper by Swedish researchers Christer Gerdes and Patrik Gransmark on how male chess players are more likely to take risky moves, to their detriment.

Nigel Davies comments:

Long ago I realized that the best procedure against most risk averse females was to riskily snatch a hot pawn or damage their structure in a way that would force them to attack.

But the researchers do not appear to have a category for my behavior…

Needless to say I wouldn't do it against Judit.



The Ohia Tree Walking up hill is great exercise. Walking on the flat is not very aerobic and doesn't do the trick, but as the grade gets above 10 degrees it becomes good cardiovascular conditioning without any jarring or pulling on bones or tendons like running or other sports. You can easily walk for several hours and get a great feeling as you really warm up and get outside while burning the fat off surprisingly fast.

Above my house are three volcanoes 8,000 and 13000 or more high. There are11 of the 13 microclimates, rain forest, jungle, alpine, desert, fields. There are even glacial moraines from an ice field during glacial times. There are native birds, turkeys, hawks, pheasant, quail, chukkars, Franklins. There are wild pigs, sheep, cattle, even buffalo, goat, horses. As the altitude gets higher, the climate changes from warm tropical to subzero. Another fun part is orienteering with maps, compass, and GPS. It is rather easy to get lost in the jungles, or when enveloped in a cloud. A compass is indispensable to maintain the correct direction and to fix a position. Old topo charts reveal hidden or abandoned trails and paths.

In Hawaii much of the attention is fixed on the coastal areas which are subject to use pressures. Very few are up in the huge expanses up in the mountain areas. There are huge forest reserves with beautiful trees and vegetation. One day while hiking in the high forest enveloped in a cloud with no rain and high humidity an Ohia tree cupped leaves trapped the moist air and formed water droplets which fell to the ground to water the trees roots. The tree waters itself out of the thin air. Quite remarkable. Victor often speaks of trees so companies such as Google could be comparable to the Ohia tree as companies that take profits out of the thin air where nothing existed before and sustain themselves where none could before with an adaptive mechanism.



This is a good combination as shown by a recent visit to the von Mises bookstore in Auburn and Chuck's BBQ in Opelika, Alabama. And it wouldn't be right not to leave without a Nock-ian T-shirt.  My Rooseveltian grandfather would turn over in his grave.



 On April 12th, 2009 a Beech King Air 200, N55DW with one pilot and four passengers aboard departed Marco Island, FL for Jackson, MS. Shortly after takeoff a voice came on the Miami Center frequency and stated "I've gotta declare an emergency, my pilot's unconscious. I need help up here." and then "My pilot's deceased…I need help". The passenger, Doug White was sitting in the right seat to get a good view. His wife and two daughters were in the back. Luckily, Doug was a private pilot, but with low time (little experience) and no experience in a twin engine or turboprop aircraft of this complexity. The aircraft was in a 2000 ft. per minute climb as directed by the autopilot, but Doug was unsure of how to stop it.

Very quickly, air traffic controllers at Miami Center grabbed a fellow controller, Lisa Grimm, from another area who had some flight experience, brought her down to the sector and got her talking to Doug while the controller working the sector, Nate Henkels, intervened now and then to fire off instructions to the many aircraft he was also working. At the same time, controller Jessica Anays coordinated furiously with the surrounding sectors to get traffic rerouted out of and around their sector. Lisa succeeded in convincing Doug to disengage the auto-pilot and hand fly the King Air. "Alright" Doug said, "I disengaged it. I'm flyin' the airplane by hand." She calmed him down and together they managed to get him descending and turning and headed for Fort Meyers International Airport. "How you doin up there?" she querried. "oh, we're havin' a hoot" came the reply in Doug's thick southern drawl.

At Fort Meyers Approach Control, controller Brian Norton was on his way out the door to go home when his supervisor came running out to grab him and bring him back because of his pilot experience. Controller Dan Favino called a pilot friend of his in Danbury, CT, Kari Sorenson, who had experience in this type of aircraft and the two of them relayed instructions on configuring the King Air to Brian who passed them on to Doug. Doug succeeded in landing the aircraft safely and in an audibly shaken voice said "We're down buddy, thank you". Controller Carey Meadows then relayed instructions to Doug and assisted him in getting the engines shut down.

Doug left this event last easter and continued his aviation education and added a commercial IFR multi-engine rating to his pilots license. He was then seen several times flying the same aircraft (N559DW) back and forth to Haiti delivering aid after the earthquakes there. It was my incredible privilege to be present in Orlando this Tuesday when these controllers were honored by our union, the National Air Traffic Controllers Association (NATCA). The Archie League Medal of Safety Awards, named after Archie League, the first U.S. air traffic controller, are bestowed by NATCA upon controllers for service that results in saving lives from dangerous situations. At this years ceremony, these controllers recieved Archie Awards as well as a Presidents Award for service above and beyond the call of duty.

I strongly encourage people to watch the last video on this page titled "NATCA President's Award / Doug White Presentation "where pilot Doug White joins the controllers on stage and speaks movingly about his experience that day. Hearing him speak was truly inspiring, there were several hundred people in the room and not a dry eye in the house. He made us laugh and cry at the same time as he expounded upon the individual initiative and teamwork that crystallized in minutes and saved his life and those of his family. I have never been so proud in all my life. There is a condensed version of the incident itself as it unfolded on the same page two blocks up titled "Southern Region - Lisa Grimm (and etc.)" where you can hear the radio transmissions of Doug and the controllers with text of their conversations. The video players on this page are a little difficult to manipulate, but if you can grab the slider and forward the Presidents Award video to start at 6:00 or so you will begin at the best part.

photograph of a Beech King Air 200 Instrument Panel

audio only

YouTube video of RADAR overlay with full audio (38 minutes), the aircraft N559DW is the white block of data.



Painting by Rubens

The yogis say our true nature is joy.  When we're laughing and truly having fun, perhaps that's when we're most being ourselves - and not the product of something else. G.P.

It is easy to be jocular and personable when things are going well, but you get to see who you really are when things are going badly. The energy required to maintain interpersonal facade is redirected toward survival. The market is a very good mirror. And a very bad one.

Bill Rafter adds:

Who you really are is very much like a stock in Portfolio Theory. The good side is the rate of return, but most compare that with the additional information of the standard deviation of the returns.

Similarly a person should be measured along the same lines. The person who is happy go lucky most of the time but occasionally has bouts of violent anger is not as desirable a friend as one who is relatively constant but with lesser high points.

Each person responds differently to stimulus. And as with stocks it is the bad side that is most important. Someone who is in a funk for a long time has the risk of getting clinically depressed, with physiological damage to the synapses.

Ken Drees comments:

I always liked the saying that "not all great companies are great stocks". Forgot who coined that one–maybe from the Livermore books that I have read. Meaning that the stock of the good company may not act or behave well for speculation. In general, it is interesting how stocks are given human qualities by specs.

Alex Castaldo replies:

Forget about Livermore. The first to warn about confusing good companies and good stocks was the late Peter Bernstein in the Harvard Business Review in 1956.  The idea was followed up by many people, including Solt and Statman (1989) and most recently Richard Bernstein .  

Kim Zussman generalizes and extends:

Galton weighed in on this, with five big personality traits: Openness, Conscientiousness, Extroversion, Agreeableness, and Neuroticism (OCEAN) In modern times, add Yeswecannyness, Islamocapitalist, and Amelanotaxophile.



A startling divergence has occurred between bonds and stocks over the last four days with bonds down in price three points to within the lowest levels of the last few years and stocks at the opposite as always recently, near or at the pre Lehman September 2008 highs. The wisdom of a Lobagola and the Former Luminary, and the study of the work of Dimson and Lorie would be necessary to ascertain what this divergence portends.

In the old days the sight of Morse emerging from Trinity Church was enough to bull up Trolley or Union 10 points or more even after he had to scratch the backs of the members for lunch.



Raising Your Child to be a Champion in Athletics, Arts, and Academics
by Wayne Bryan and Woody Woodburn has many ideas about how to train that might be useful in markets and in life. They believe the main thing is to have fun. They suggest constant reinforcement with trophies, medals, and small goals. They recommend that you make the one thing you wish to excel at a passion, and that it be tempered with only one other passion. They schedule every second of every day, and never leave their kids alone in the house. They recommend playing with kids, and constant tournaments. They suggest going to events like high school and college games so that the kids can enjoy the feel of college and kids that are not that far removed from them. They suggest the importance of thanking all involved in any contest including the fellow competitors and the tournament organizers. Of course, they have taken their kids out of tournaments when they didn't behave as did Kramer and Borg. They of course totally ban all TV and computer games. They have a very successful program in tennis that they run, and their kids are the best doubles team of all time. (Both were national singles winners or close to it, and were called champ by their coach at Stanford). Do you feel that this has applicability to improving in our fields?

Pitt T. Maner III writes:

The Bryan TwinsThe Bryan twins were on 60 Minutes last Sunday.

Several things stood out in the interview. Lots of positives but some potential negatives. One of the brothers gave up a successful singles career in order to play doubles with his twin brother–always a possibility for future regret even though they are a great doubles team now. Other thing was the video game restriction–what they were denied in their youth they do now. So it would seem that too much discipline with children could lead them to rebel later in life in opposite directions.

There is always the survivorship argument that for all these successful kids there are a bunch of kids who become burned out on tennis, academics, and life in general. My guess is that one method fits all is not always going to work and parents would need to be very attentive to individual differences amongst their children. Too much praise (particularly if overdone and not genuine) and trophy hunting does not sound like a good thing either. Perhaps a need for balance is true for market participants also.

Rocky Humbert comments:

Waitzkin vs KasparovThe back cover of the book reads, "Byran has distilled his proven formula for success into a unique book that shows parents how to help their kids become champions in athletics, the arts, academics– and just about anything else they undertake."

A proven formula? I don't think so. (Or at least I hope not.) But early in the book the author's define "champion" in a broader way. They don't define it as being the best doubles tennis player of all time, graduating Harvard in two years, or having a ten-digit net worth.From the book: "The goal should be to raise a champion under a broader definition…. Being a champion means being fulfilled. Peace of mind and self-satisfaction."The authors continue, "There are endless definitions of a champion."And with that last sentence, I wholeheartedly agree. That recognition is applicable to every facet of our lives. 

T.K Marks:

In a recent working paper by Andrew Lo, "Is It Real, or Is It Randomized?: A Financial Turing Test", his colleagues and he conclude by vowing to consider in the future the null hypothesis of the video games are bad theory.

"…More generally, human intelligence is intertwined with pattern recognition and prediction (Hawkins, 2004), and financial pattern recognition is just one of many domains in which we excel. Our simple experimental framework suggests the possibility of developing human/computer interfaces that allow us to translate certain human abilities into other domains and functional specifications. For example, with the proper interface, it may be possible to translate the hand-eye coordination of highly skilled video-gamers to completely unrelated pattern-recognition and prediction problems such as weather forecasting or financial trading. We hope to explore such interfaces in future research…"

Regarding Professor Lo's financial variation on the Turing Test and proposed consideration of the pattern recognition abilities of video gamers, if a Bletchley Park were to have to happen today, the pattern developing and recognition talents of people who write and play at a very high level some of the more sophisticated versions of those games would undoubtedly be tapped into.

Alongside Alan Turing at Bletchley Park, in addition to the usual scientific suspects whose analytical skills were asked to break the German codes (e.g., mathematicians, logicians, physicists, etc.), they also had a host of Egyptologists, chess players, even a poet, anybody and everybody whose pattern recognition skill set would better lend itself to deconstructing a very complicated puzzle.

Nigel Davies:

The mix of chess players and mathematicians at Bletchley was interesting. Coincidentally I stumbled across this article today which differentiated the intelligence of mathematicians from that of chess players:

"Everybody was fairly impressed by this quick and crafty answer and the conversation moved on. The story illustrates something important about the nature of the chess mind– how good it is at short cuts (no pun intended) and tricky ways round things. Mathematicians are usually less devious in their thinking– it is important to find direct ways to prove things." If this is correct, which is the more valuable form of intelligence for markets? 

On another note, I would add that in our quest for 'love', 'approval' etc we can look for external approval within a particular sphere of excellence. Without reading the book (and I comment reluctantly without having done so) it looks to me like Wayne Bryan has found ways to link this ever more strongly to external performance. Is he to be congratulated for his efforts, as a parent?I am haunted by images of champions who go totally off the rails as they struggle with the ghosts of their childhood. In my own sphere I've met too many pushy parents making 'love' conditional on performance to join in the applause. Just this last week a kid in my chess class threw a wobbly and had a nose bleed when I enforced the touch move rule on him, costing him a rook. Needless to say his mum insists on him being the best at everything… 



 The Sage of Lawyers. Almost 1/10 as dishonest as Mr. Burger:

Lawyer asks judge to force rival to wear nicer shoes via Boing Boing by Cory Doctorow on 7/10/09

A lawyer in Florida filed a motion to force his rival to upgrade to newer shoes, on the grounds that his homely old hush puppies gave him an unfair advantage by projecting an air of unsophisticated honesty to the jury.

3. It is well known in the legal community that Michael Robb, Esquire, wears shoes with holes in the soles when he is in trial.

4. Upon reasonable belief, Plaintiff believes that Mr. Robb wears these shoes as a ruse to impress the jury and make them believe that Mr. Robb is humble and simple without sophistication. . . .

6. Part of this strategy is to present Mr. Robb and his client as modest individuals who are so frugal that Mr. Robb has to wear shoes with holes in the soles. Mr. Robb is known to stand at sidebar with one foot crossed casually beside the other so that the holes in his shoes are readily apparent to the jury . . . .

7. Then, during argument and throughout the case Mr. Robb throws out statements like "I'm just a simple lawyer" with the obvious suggestion that Plaintiff's counsel and the Plaintiff are not as sincere and down to earth as Mr. Robb.

8. Mr. Robb should be required to wear shoes without holes in the soles at trial to avoid the unfair prejudice suggested by this conduct.

Motion to Compel Defense Counsel To Wear Appropriate Shoes

Alan Millhone comments:

My mother's father was a real Scotsman. He worked for himself most of his life. Taught himself to play the piano and collected coins. He never threw anything away and wore his clothes till threadbare. Upon his death ( I was 16) we found on the stairway ledge to the basement a tall stack of cardboard cut outs that he made to fit his shoes.

The lawyer/shoe story brought an old memory I had long forgotten. Grandpa Mac was not out to ever impress anyone. Unlike the lawyer who was out to create a false impression of being somewhat destitute. 



parabolaAn interesting and scholarly article on basketball angles and spins in the Washington Post, kindly sent my way by Dan Grossman of Florida, indicates that physics calculations show that the angle with which a shot is thrown influences its accuracy. The gist is that the higher the arc, the greater then chances it will go through. Also, the higher the height the ball is launched from, the greater the margin of error on the shot, and the greater the success. Taking one thing with another, a launch angle of between 45 degrees and 55 degrees seems best.

Angles have played a big role in stock market technical analysis. The most influential angles are those derived from the work of W. D. Gann who believed that when price breaks through an angle of 30, 45 or 60 degrees from a previous low to previous high, a continuation in direction of the break through was possible. As to how to compute the previous low or high, where it should start, where it should end, and what the time scale should be — why, that's why there are 1.4 milion entries on the subject of Gann angles with most concluding that they have been superceded by more sophisticated tools in these days of modern computers.

Being one to believe that taking the pencil to paper might help to find regularities, I computed some subsequent prices moves for the last 15 years for daily, weekly, and monthly prices. I looked at the angle between the two last moves of an index. For monthly prices, I looked at the subsequent moves following the moves in the previous two months. For example I looked at the moves in January and February to predict March. For weekly moves, I looked at the two previous weeks to predict the third week. For exampe the first and second week of the month to predict the third. For daily moves, I looked at the previous two days to predict the third. For example, Monday and Tuesday to predict Wednesday. The angles formed could be computed by using trigometric identities to compute the adjacent angles and noting that the sum of the three angles is 180 degrees. Here are the results:               

subsequent period   prior     previous    expectations   number of obs

monthly                    +         +                       4                53

monthly                    +         -                      -4                 41

monthly                     -         +                      7                 40

monthly                     -          -                      -6                33                                                                                                              

weekly                      +         +                      -2               185

weekly                      +         -                       4                186

weekly                       -         +                      -3               189

weekly                       -         -                        1               147          

daily                        +         +                      -0.7             952

daily                        +         -                       -0.5             898

daily                        -         +                        0                904

daily                         -       -                          1    744                                                                                                          

The many regularities that this table reveals are a good start to find angles that are useful for success in shooting for profits in markets. 

Bill Rafter offers:

If there is some mystical or otherwise relationship of price to time, it would perforce need to dictate the scale of the price charts for any angles to describe that relationship. In earlier times graphs and charts were drawn in pencil on standard graph paper, such as 10 x 10 to the inch. If everyone kept the same charts in the same scale, an argument can be made (i.e. the self-fulfilling prophesy) for various angles, Gann or otherwise. However the person who used a scale not similar (in the geometric sense of the word) to the standard scale would have different points of intersection with respect to the same angles as the standard scale. Fast-forward to today and we find computers rescaling charts to fit on the visual page to the extent that no longer is there a standard scale. So at the very least, there can no longer be a self-fulfilling prophesy. Whether there is a price-time relationship, I do not know. But the next time I see Master Yoda I will ask him.

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

Jim Sogi writes:

 One of the problems is asymmetry. Contrary to symmetry theory, the markets are not symmetrical. It makes the Gann ideas or other symmetrical equations inaccurate. This includes normal distributions.

Sushil Kedia comments:

A few years ago Mr. Sogi had written a review of a book from a publisher in Australia providing co-ordinate geometry treatments of the Mathematics of the Divine Ratio. The Chair and Dr. Castaldo too have written about the applications of polar co-ordinates to transforming prices to study appropriately, thereon. Perhaps a number of ideas from that book could be applied to produce suitable transforms and then fitments to the effect of say treating the rate of drift as equivalent to an angle of zero or one would provide perhaps some worthy examinations of the other standard angles as 1/3rd or 2/3rds (pi/12 or pi/6) etc.

Jim Sogi replies:

Why is it that the last few weeks, the price followed an upper and lower line so well as moving mechanically upward? It has kind of broken that recently, but it seems more than random things the mind puts together like a taking patterns out of random dots. I've graphed random series and seen the so called trends, but they don't seem as linear. And it seems to continue for days and weeks.

On the subject of the negative time idea Rocky talked about earlier, and since it's spring now, a look at our Gregorian calendar shows the inaccuracies in the counting system. Assume as a mind experiment that the market operates on absolute time. Given an inaccurate Gregorian system, at times the measurement of absolute time might appear to jump or reverse at various adjustment points. See the wikipedia entry on Julian Day Calculation and on the accuracy of Gregorian Calendars.

Pitt T. Maner III writes:

John WoodenThe discussion on shooting angles in basketball reminded me of one of John Wooden's favorite ideas which is to use the backboard or "glass".

Within days of implementation of this new 'back' board, players found that they could gauge the angle and use this new tool to their advantage to make shots. The problem today is that players have either forgotten or never learned its full advantage. Arguably the most successful coach of his era and probably of all time, UCLA Hall of Fame Coach John Wooden was renowned for teaching his players to use the glass both in the post and especially off of fast break transition. Coach Wooden's teams won 9 straight NCAA Titles (10 in 11 years) a feat unparallel before or since in collegiate basketball. Coach Wooden believed that if his players practiced making 5-10 foot bank shots at the 45 degree angle off the break and could make them at a rate of about 75-80% these shots were nearly as good as getting a lay-up. For those young players that missed the opportunity to see the great UCLA teams they were almost always successful in transition. Probably the single greatest scoring performance ever in an NCAA Championship Game was by UCLA's Bill Walton’s 21 for 22 field goal shooting performance against Memphis in the 1973 title game. Bill Walton’s' patented move was the up and under using the glass.

I have found that it is possible to use the target square on the backboard to advantage when shooting free throws and banking shots in instead of trying to get a "swoosh" each time. Having a visual target behind the "bucket" seems to help.

Banking in shots, however, is probably best used (like Wooden suggests) when shooting from the sides in basketball. Wooden believed in playing percentages and when a basketball hits the backboard it has almost a "second" chance of going in as opposed to hitting the front or side of the rim or completely overshooting or undershooting the mark. I think the coach would have preferred a sure layup over a dunk any day—and how many times has one seen a sure dunk pop out when thrown down with too much force when a layup would have scored two.

Not quite sure what a market analogy would be for a backboard–perhaps some type of straddle where you can make money on the continuation of the angle in either direction?At any rate one of the fun aspects of the NCAA basketball tournament is getting a chance to see various styles of play and the leveraging of seemingly higher risk approaches. The Cornell–Kentucky game on Thursday night, for instance, if it stays close, could be an example of excellent, confident outside shooting and defense vs. more pure interior power, younger talent and athleticism (and good outside shooting too). But as they say, you can "live and die by the 3-pt. shot".



 Here's a great article on how a cure for scurvy was found in the 18th century and the knowledge was lost early in the 20th century with disastrous consequences.

One wonders if there are any parallels in the markets and if any necessary market knowledge is lost over the years.

Here is another descriptive account that is well worth the read.



 I do reckon I found a gem of a BBQ place and had to go all the way to Fairfield, CT to find it. A good friend, and fellow spec, took me there to prove the Northeast has BBQ that will stand on its own — and he was right. He was quite apprehensive in trying to score a good fix of BBQ, as I'm known for being very tough to please and rather discerning.

Walking into Wilson's (1850 Post Rd, Fairfield, CT) our senses were immediately assailed with the sounds of good music, the sight of tasty food, a funky atmosphere, and very helpful and cheerful employees. Before the food was even discussed and ordered, I had that sixth sense that told me that this would be good. We stepped up to the counter and each ordered a slab of St. Louis style ribs (dry rubbed), and several sides. My companion had sides of beans and slaw, and I had fries and slaw. Wilson's served a lagniappe of homemade cornbread with each order. They provided three different BBQ sauces, a Chipolte, a Carolina Vinegar, and a Sweet/hot sauce. I wasn't taken by any of the sauces, but my companion enjoyed the Chipolte sauce very much with his initial taste test. Our food came very quickly, and we dove in with gusto. The slabs were extremely meaty, tender, and juicy, no dryness at all. I didn't use any sauce, and really enjoyed my ribs as the bark was to die for, and made the meal 100% enjoyable. Anytime one doesn't need any sauce with his ribs means they hit three sevens and the proverbial jackpot paid off big. The sides were awesome, the fries being A+ in taste and quality. The slaw was rather drab, and I suspect the owners preferred to make a bland slaw as to not overpower the meat when used on the pulled meat sandwiches. Anyway, the slaw was a perfect counterbalance to the wonderful taste of the meat. I looked at the beans my companion ordered, and they looked and smelled delicious, being homemade with several different types of beans. The cornbread was especially notable, made from scratch, moist, and with the right amount of salt to give it that Southern zing. I was pleased that Wilson's offered sweet tea. Their sweet tea was the real deal, and would be home anywhere in the South. They offered unlimited refills, which this sweet tea deprived person took full advantage of. All in all, it was wonderful to eat at a BBQ place where it was obvious that the food was prepared with a lot of love, and the staff takes their BBQ seriously. Additionally, the blues cranked on the Jukebox instantly transported me to Greenville, MS — another place and another time.

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

Charles Pennington weighs in:

I heartily agreed with MOTU about Popeye's, but I dissent on Wilson's. I've been there a couple of times, most recently with my wife. We got indifferent service, prices about three times that of a good Southern place, and mediocre food. Also they won't even give you a fountain coke with ice — they'll only let you buy a 12 ounce can if you're nice. It's also small and has not very good seating. There is a place called Bobby Q's in Westport that is pretty good, and there are plenty of places in Manhattan that are fantastic, though expensive. Bottom line though is that whenever I head down South I'm bowled over by the quality, low prices, and plentitude of the 'cue. Most recently I enjoyed Shane's in Atlanta. It's a chain, but it's great.



I strongly recommend The Gamblers Book Shop for all things gambling related. This site grew out of the old Gamblers Book Club in Vegas that I loved so much. The range of literature is amazing.



Always play tennis with a proThe recent moves by central banks around the world to spend and add trillions of dollars to their balance sheet leads one to revisit the great coup when an investment firm speculated that a foreign currency was too high, took a short position against the currency, and was so powerful and correct that the central bank succumbed and devalued thereby leading to a 10 figure profit for the investment firm. I knew and spent considerable time in both business and personal activities with the head of that investment firm before he severed his connection with me, and thought that it might be apt to reconsider what I should have learned from him so that I and others might learn from his wisdom for the future.

1. Play sports every day, but not golf, and always use two cans of balls, and hire a pro as a doubles partner, so that you don't waste time chasing the balls around. There is a high opportunity cost to your time, and don't distract yourself with mundane activities like changing diapers or knowing where the refrigerator is, or make trivial investments that would distract you from the main chance.

2. Make your entire persona and investment approach consistent with the idea that has the world in its grip, i.e., the purpose of life is to do good for the needy. Like Lady Gaga, be the kind of person who should be a frequent visitor to the Oval.

3. Never marry a woman you wouldn't wish to divorce, i.e., never get into a position you couldn't get out of with ease, and think of this before you make the commitment. I would add that the selfish wife or selfish price or selfish dog should never marry a man that will leave her in oblivion if things don't work out. Imagine the great harm that the selfish dog did itself by killing a human. Now they're all likely to be rounded up.

4. Never trust anyone. And especially the more they talk about their honesty, the faster and more closely you should count your silver.

5. Foster above all relations with lenders so that you will have enough collateral and staying power at all times as the banks.

6. Be sure that you can play the float that unrealized liabilities provides.

7. Develop economical habits so that you can apply them in the business. Demand a discount on all transactions even if you are going to donate a million times that much to charity at the end.

8. Never waste your time with old ties and loyalties if they that don't have an immediate short term benefit, i.e, "what can you do for me tomorrow and today." Be careful you don't get roped into going to too many funerals and choose your acquaintances accordingly.

9. Never admit to having made a profit, but always emphasize your losses.

10. Surround yourself with big and powerful players so that your positions will be with the forces when you disseminate or implement them.

11. Have a loyal and very tight friend, preferably a retired accountant who vets all your deals with family and only invest in them pari passu with your friend if he invests in it on his own. Be sure that your lawyer is your best friend, and run everything by him at an early stage.

12. Always be humble and admit that your future looks bleak, that you yourself couldn't understand your own thesis, and surround yourself with people that you know are much smarter than yourself.

13. Stay away from attractive women aside from your wife as they can be too expensive and distracting, but feel free to admire them from a distance.

14. Develop a few flow hobbies like chess or music that can take your mind temporarily away from the business.

The most important lesson of all is that survival is the key. Never allow yourself to be expunged from the game or life. If something life-threatening is in the air, get out — whatever the cost.


Always hire a pro to second you when you are playing tennis or investing. The pro makes you look good and can always win his serve and two or three points on the return of serve. It's important not to make a fool of yourself when doing something you're not so good at, as people mistakenly think your abilities in one thing are related to your abilities in another. (People, including myself, have mistakenly made that mistake about me, thinking that because I was so good at hardball squash I might be almost as good at something else). Having a pro besides you for your investments in a field is something I first learned about when I met a friend of the head of the investment firm under consideration and he told me that he was in charge of his investments in Bora Bora or some such which had a population of 136, and I realized that similar pros were handling investments in every other country with population above 50 around the world. Since then I have been amazed at the quality of the pros that the head of the investment firm under consideration has hired or partnered with to lead him to victory.

Also, never wear an overcoat to a restaurant. When you're as rich as Gino or the aforementioned, the hat check people will hate you if you leave too little, and if you leave too much you'll ruin it for the other people who aren't that rich. The investor I refer to was a very economical tipper, and always said that he adhered to this abstemiousness because he didn't want to ruin it for others that couldn't afford it like him. This had the virtue of maintaining the economical habits so essential for business, as well as the benevolent affect on those less fortunate in the investment battle.

More important, what are the lessons that you have learned from persons almost as, equal to, or even more influential and helpful in your life than The Pal was in mine before he sagaciously severed his connections with me?

Tom Marks adds:

 To make it an even baker's dozen to the 12 of those original 10 while perhaps being more idealistically precise, any truly estimable sort would also have found a way to convey the following precept.

In matters of rooting for other people, and with everything else being genuinely equal, always have one's heart wager unabashedly on the underdog as determined by society and convention's Vegas. Maybe it's the temporal variation on Pascal's Wager, as the potential payoff joys dwarf the ante of possible disappoint. Besides, even if the sporting sort loses, which they oftentimes do, they still earned karma dividends simply by rooting for another in the first place. It's win/win. I take that shot every time. Why not, it's amazing how many loses of that type one can endure while still being spiritually solvent. 

Jim Sogi writes:

What I have learned is that it is the wave from within that swamps the canoe. All problems come from within. Most mistakenly blame external sources for their woes. This is called denial. The world is basically beautiful. We are all defective in some way. Learning how to accommodate these various intrinsic human, and particular peculiarities is the road to self realization. It's a long hard trail. 

An anonymous commenter adds:

1. Invest in stuff you do not understand. The Complexity Premium will carry you for awhile, see Enron and Alphabet Soup of securitization for proof. In the mean time people will think you are really smart and that is why you out perform in the short term.

2. Never let someone go over your long term results. Focus on what you just bought in any analysis or comparison.

4. Blow up only when the economy stinks, that way you have a good excuse. Many decent years followed by one excusable bad year. The opposite of course can apply to hedge fund guys. Only have one spectacular year, and everybody will think you out smarted the optimist.

5. If someone models your risks and says it is too high, call the models garbage. After all nobody could model the stuff you bought.

6. Buy everything complex from your friend you played on the same intramural team in college. After all he has a McMansion and would never hurt a friend. He has great contacts, and loves being the middle man and controlling what you and your boss sees. Besides he will then take you to all the greatest golf courses when you are in town.

7. Call being in front of the herd, "herd following" and "group thinking". But bottom selling and top ticking is simply an irrational market and bad economy. If you are in front and something goes wrong, you simply look stupid. But if you get caught at the tail, nobody could have seen it coming, because everybody was doing the same thing.

8. Always be quick with a joke, but make sure it is at somebody Else's expense, not your own.

9. The better people are, the more you need to dig to find their weakness. Once it is found, make sure to define them by this problem.

10. Never win at golf, but prove your expertise in the clubhouse by knowing your liquor. Be sure to always be in the "power" group when you play and drink.

11. Make sure you are friends with your bosses mistress…you never know when you will need to call in a favor and have someone fired.

12. Control the minutes of every investment meeting, nobody reads them anyway, but it is a great way to not have to do something you do not want to, but those in charge want you too.

OK, so this was a conglomeration of several poor guys I've known. 

Tom Marks adds:

One recalls that the stock market last topped out with Scott Browns'
 election. And this weekend may in fact mark the passage of Obamacare.

If the markets rally despite Obamacare, might this be an example of the "busted hypothesis" of which a certain famous speculator wrote?



John P.A IoannidisThis is a sad conclusion for scientific research:

Why Most Published Research Findings Are False


There is increasing concern that most current published research findings are false. The probability that a research claim is true may depend on study power and bias, the number of other studies on the same question, and, importantly, the ratio of true to no relationships among the relationships probed in each scientific field. In this framework, a research finding is less likely to be true when the studies conducted in a field are smaller; when effect sizes are smaller; when there is a greater number and lesser preselection of tested relationships; where there is greater flexibility in designs, definitions, outcomes, and analytical modes; when there is greater financial and other interest and prejudice; and when more teams are involved in a scientific field in chase of statistical significance. Simulations show that for most study designs and settings, it is more likely for a research claim to be false than true. Moreover, for many current scientific fields, claimed research findings may often be simply accurate measures of the prevailing bias. In this essay, I discuss the implications of these problems for the conduct and interpretation of research.

paper by John P. A. Ioannidis

Pitt Maner writes:

Dr. Ioannidis puts up good argument to criticisms of his paper, which is frequently downloaded. One wonders if you can extend his arguments to economic and business research — are there too many "paper mills" out there?

"Scientific investigation is the noblest pursuit. I think we can improve the respect of the public for researchers by showing how difficult success is. Confidence in the research enterprise is probably undermined primarily when we claim that discoveries are more certain than they really are, and then the public, scientists, and patients suffer the painful refutations."

His credentials appear acceptable, so he may be worth listening to.

Dr. Ioannidis continues to push for better use of and improvements in the use of statistics in medical studies. So on the face of it he appears to fill an important role in maintaining high standards for published medical research. Perhaps those in the profession can give a better assessment of Dr. Ioannidis' methods and the validity of his criticisms. Here is the overview of a paper titled Limits to forecasting in personalized medicine:

Biomedical research is generating massive amounts of information about potential prognostic factors for health and disease. However, few prognostic factors or systems are robustly validated, and still fewer have made a convincing difference in health outcomes or in prolonging life expectancy. For most diseases and outcomes, a considerable component of the prognostic variance remains unknown, and may remain so for the foreseeable future. I discuss here some of the main problems in medical forecasting that pose obstacles to personalized medicine. Their recognition may help identify solutions to improve personalized prognosis, or at least understand and cope with the component of the future that we cannot predict. Much prognostic research is stuck at generating "publishable units", without any interest in conclusively proving their worth, let alone moving them into real life applications. Information is reported selectively and reporting is deficient. The replication record of prognostic claims is poor. Even among replicated prognostic effects, few are convincingly shown to add much information besides what is already known through more simple, traditional measurements. There are few efforts to systematize prognostic knowledge. Most prognostic effects are subtle when traced to the molecular level, where most current research operates. Many researchers, clinicians, and the public are not appropriately educated to interpret prognostic information. We still have not even agreed on what the important health outcomes are that we want to predict and intervene for, and some subjectivity may be unavoidable. Finally, without concomitant effective, affordable, and non-harmful interventions, prognosis alone is of questionable value, and wrong prognosis or a wrong interpretation thereof can be harmful. The identification of these problems also suggests a roadmap on what could be done to amend them. Solutions include a systematic approach to the design, conduct, reporting, replication, and clinical translation of prognostic research; as well as the education of researchers, clinicians, and the general public. Finally, we need to recognize that perfect individualized health forecasting is not a realistic target in the foreseeable future, and we have to live with considerable residual uncertainty.



Terrance OdeanTerry Odean is a Professor of finance at Berkeley's Haas School of Business. He has done several papers on the profitability of small investors and day traders. They are listed on his web page. Here is one:

"Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors" with Brad Barber, /Journal of Finance, /Vol. LV, No. 2, April 2000, 773-806.



Can readers help me understand the meaning of backwardation vs contango in the past in the ES? Why is it negative now? Does it mean people think it's going to go down, or are the rates that low? I've studied, but don't really understood the formulas for computing the values of the future contracts or why there is a negative spread now when is was +4 points or higher spread in 2007 as the market topped on the rolls.

Nick White lends a hand:

Garden variety futures valuation is just a simple cost of carry model: the price of the underlying today adjusted for the cashflows you expect to pay/receive until expiry. The whole bundle is then appropriately adjusted via interest rates for time — effectively, the exact same as any other asset.

Intuitively, this is easy to understand if you think of how NPV — or a DCF model — works and then team it up with the laws of arbitrage. What is your asset worth today given what you will spend and receive for it over a given period, adjusted for interest rates? If your asset can be exactly replicated, is the price of that replication worth more or less than the original? If so — ceteris parabus — you can arb it.

The proviso to the above is that not everybody has the same interest rate in their model… your cost of funding may be very different to mine, which will be very different to GS's. I would argue that — care factor on Index Arb notwithstanding — one's ability and inclination to practice any form of index arb depends vitally on this cost of funding rather than some point spread in the rolls… and that in turn "depends" on whether the arb is long stock / short future or vice versa. Risk free rates are just a proxy.

So, if you cannot perform index arb… what is this info useful for? Knowing the fair value spread might give you a few ticks edge when placing an order because the future may already be a bit over/under extended vs the cash market. So, to provide an example, if you're buying, you may be better to place your order — per the Chair's admonition — a couple of ticks behind the BBO if the fut is over-extended vs the cash. Otherwise, you might want to lift the fut if the cash has moved and the future is lagging.

Very simplistic — but backwardation and contango are just natural progressions of these pricing models, adjusted for the vagaries of short-term supply and demand.

Steve Ellison comments:

 Philip L. Carret, in his 1931 book The Art of Speculation, considered it very bullish when stock dividend yields exceeded the margin interest rate. In such circumstances, he said, stocks "carried themselves", i.e., one could buy stocks on margin and pay the interest on the loan using dividends. Backwardation indicates that S&P 500 futures now carry themselves.

The S&P 500 futures began trading in 1982 and almost never traded in backwardation for the next 20 years. They went into backwardation in mid-2002 and stayed in backwardation for most of the next two years, advancing 53% during this time. They have been in backwardation continuously since October 17, 2008, advancing 25% during this time.

Russ Sears interjects:

 I have seen some option quotes on Enron, that had calls, same strike, different maturities (I believe it was Oct and Dec maturities) that apparently had some time arbitrage. Not sure they were actionable though. In 2000 I bought some deep deep out of the money long term custom interest rate options, that later became in the money, for my old company. The selling counterparty called in 2003 and begged us to sell them back, because they were very difficult to hedge. He told me they were so far out of the money that they sold them thinking they would never have to actually hedge them. I suspect in both cases the option seller, simply booked the premiums as 100% profit, so the theory really went out the door.

Quant Chicken writes in:

The personal impression I formed when I reviewed the empirical academic literature 4-5 years ago was that the forward is not an unbiased predictor (contrary to the theories of FX I had learned in school). The "forward premium puzzle" has been confirmed using so many different statistical tests (some quite esoteric) that I came to believe there is something to it.

I was getting interested in investing real money in this anomaly when I was dissuaded by wiser colleagues, who pointed out that this "carry trade" idea (borrow in low yielding currencies, invest in high yielding ones) was getting crowded, everyone was getting into it, DB started an ETF to allow public to participate (this was in 2006), etc. And statistically the evidence was not very strong. In retrospect I am glad my friends advised me to stay out of it.



 Last week I was in Sweden and I went to see my first Ice Hockey match (Frölunda HC vs. Djurgårdens IF, score 2 - 5 ).

Frölunda HC is 7th in the standings and Djurgårdens IF is 2nd in the Swedish Elitserien Regular Season. The game was very fast and it was difficult for me to understand schemes, tactics and strategies. What was obvious, however, was the superiority of the winning team, as they were ahead from the very beginning. They were also much better in managing the game, keeping control of the puck for most of the time. Also the players role was difficult to identify (except the goalkeepers) due to many and fast changes during the game. It was quite exciting at the beginning, as it was the first time I went to a game, but ended up being quite boring as it was obvious who was going to win.

It reminded me how the stock market appeared to me when I was a newbie (not that I am a master now). Daily movements seem very fast and random, like the actions in the game. The role of different shares in the market is also not obvious, e.g., defensive stocks vs. high volatility stocks. Trends and final result instead are quite different. In markets you identify long term trends only looking backwards. In the game the final result was quite easy to predict, given the superiority of the winning team. But only because the game has an end while the market is always ongoing…

Jay Pasch agrees:

Hockey is a consummate sports analogy for trading — fast moving, full of energy, full of fight and emotion, tremendous back and forth. Nearly every winning move, from skate to stick, is chock-full of deception. Try it, you'll see…

So does Tom Marks:

The dynamics of hockey do bear a resemblance to what happens in markets. To the undiscerning eye the players' movements seem ruled by randomness, with everybody in haphazard pursuit of the puck. But there are hidden patterns, as those player movements are largely the function of strategic schemes, both offensive and defensive, that are tactically superimposed on the location of the puck. They use very similar types of schemes in lacrosse.

Likewise in trading, not everybody is desperately chasing the price. Though, just like with the puck, it's advisable to have a good idea of where it is, lest one be ultimately caught out of position like a defenseman in hockey.



 The 4314 SPY daily returns 93-present were checked for mean and stdev:



4314 random daily returns were generated with normal distribution having the same mean and stdev as the actual series.  Both series were
ranked, then compared means of the top 5% of the real and simulated
returns (N=215):

Two-sample T for day ret vs SIM

                  N     Mean    StDev  SE Mean

day ret
 215  0.0290   0.0146  0.00099  T=2.49

SIM       215   0.0263   0.0050  0.00034

>> the real top 5% ("day ret") was indeed heavier than the
simulated top-tail.  Here is the comparison on the bottom 5% tail:

Two-sample T for day ret- vs SIM-

             N         Mean    StDev  SE Mean

day ret-
 215   -0.0293   0.0125  0.00086  T=-4.4

   215   -0.0252   0.0044  0.00030

The real bottom tail was even heavier than the top tail, compared to its normal counterpart. 
And here are the entire two series compared, showing that global means
and stdevs were the same:

Two-sample T for real day vs sim day

                 N    Mean   StDev  SE Mean

real day
  4316  0.0004  0.0125  0.00019  T=0.2

sim day  
4314  0.0003  0.0125  0.00019


Vixenophiles note that the volatility of the real tails was higher than the simulated/normal tails:

Test for Equal Variances: day ret, SIM

95% Bonferroni confidence intervals for standard deviations

             N        Lower      StDev      Upper

day ret
 215  0.0131569  0.0145864  0.0163495
   SIM  215  0.0045136  0.0050040  0.0056089

F-Test (normal distribution)
Test statistic = 8.50, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 24.26, p-value = 0.000

Begging the question whether tail obesity is related in some way to higher tail volatility.



 1. Exaggerate your origins as a deprived/abused child to mythic proportions. Your "specialness" makes you entitled to break the rules and abuse others without accountability.

2. Praise the performance of your assistants, but consistently downgrade the description of their actual contributions, e.g., if they expertly rewrote your entire book manuscript, thank them in the preface for "careful proofreading."

3. If you hire an expert consultant, don't give anything but good feedback until right before the project is completed. That way you can save that final payment!

4. Embarrass assistants by bringing up your private disagreements in public settings where effective rebuttal would be difficult for them. Especially if questionable practices are involved, this can force all the others present into colluding in an illusion of supportive unanimity. Repeat in other settings.

5. Make your own schedule inviolate. This will educate your staff and family that your needs always come first, even in their emergencies.

6. Speak to all who will listen in intimate detail about the proclivities and shortcomings of previous assistants, spouses, or significant others. This will teach people currently in these roles to anticipate similar treatment in their future.

7. Occasionally drop hints that you can ruin reputations on a whim. These hints should be subliminally perceptible to the target person, too subtle to be perceived by outsiders, and too ambiguous to be confronted directly.

8. Construct an overwhelmingly admirable public persona that makes up for your own personal reality. Do the opposite in private of what you espouse in public.

9. Tell small and big lies to stay in practice. That way, when those close to you find you out on a big one, perhaps the lie that leads to termination, they will doubt anything you have ever told them, whether you ever were who you presented yourself to be, and –- most importantly -– themselves.



crocusesSpring is near. The storm surf pattern is shifting from Northern Hemisphere to the Southern Hemisphere and New Zealand where 35 foot swells are forming as they shift into winter. Two decades or more ago there used to be big summer swells, but there have not been many big summer waves for decades. I wonder if this summer will be different as this winter was? Just more pondering on the long term cycles I am seeing change.

We've had a long long bull run. Prior bull runs have lasted years with only a few minor pullbacks. I wonder if the change of seasons will have much effect on the markets. Dr. Phil points out it's hard to test. Last March the market turned. I wonder if it had anything to do with the change of seasons. Plants notice it and the gardens change their growing patterns. There are many big things to consider.



I look at my trades over the past couple of weeks and feel like I'm the master of the universe. It's not long after I feel that way I'm soon humbled. I suspect many feel that way after 10+ up days in a row. Complacency in your trading will breed mediocrity. The temptation is to follow the trend. Sometimes we can fall victim to inertia. Be wary of it.



 I haven't read The Big Short, but after seeing the Lewis interview on 60 Minutes it's clear to me the book is quite illogical and contradictory. Somehow that makes it like Gladwell's, the book that the media loves, and will doubtless be the most popular. See the good paragraph posted below from an amateur Amazon reviewer.

As the Chair will testify about the nature and culture of AIG, the most ludicrous claim of all is that innocent, naive AIG was forced or tricked into writing $20 billion of credit default swaps by Goldman Sachs.

What are these points Lewis wanted to make? I suppose the major tension of the book is the teeter-tottering between the greed/evil genius of the major Wall Street firms (on one hand), and then the utter stupidity and incompetence of Wall Street (on the other). It is a difficult balance to strike, and one reason it is difficult is because, well, one can not have it both ways. Lewis can not claim, as he astonishingly and explicitly does, that Goldman Sachs made AIG write credit default swaps on the subprime mortgage industry, guaranteeing AIG's demise and Goldman Sachs flourishing, but then on the other hand claim that the firms had no idea what they were doing, and were completely shell-shocked by what happened to their CDO's (the collateralized debt obligation instruments which served as the toxic assets you hear so much about). This inconsistency permeates the book, and tonight on 60 Minutes I heard Lewis repeat what his major thesis is: Wall Street did not know what they were doing. This is the correct thesis. But it is wholly imcompatible with the obscene Goldman Sachs conspiracy movement that has taken over the Oliver Stone mainframe of our society. Even a Michael Lewis fan like myself was taken aback by the audacity of this oft-repeated contradiction.

Kim Zussman comments:

The better story is not the book but the author. Lewis, a Princeton/LSE grad, had a first career as a successful bond salesman at Solomon. He left finance to become a more successful author, colorizing Wall St villains and others.

"Be the house"

Nick White comments:

I know Mr. Lewis isn't terribly popular 'round here (though I enjoy his writing a great deal - pinch of salt or otherwise)…but I think Kim nailed it when he observed, "be the house". Full marks to Lewis for parlaying his edge. What's more, he's hardly ever been bashful about his motivations or disposition in the industry.

By his own admission, (see excerpt from business week interview below) he seeks to illustrate the issues through characters he (and us) can grab hold of. Sure, it sensationalises the story a bit - but it makes the complexity of all this a bit easier for those who aren't familiar with all the personalities, actors, products and institutions. The only way vast swathes of the non-professional population will understand this mess is through exaggeration, analogy and over-simplification. Hell, even most of those within the industry will probably only understand it this way.

He's also been great in giving credit to people who did the real homework and who have the nitty gritty facts and figures on this crisis– girls like Anna Katherine Barnett from Harvard (see this article and link to her paper there). Maybe it's just me defending the old school tie, but I've been long Mike Lewis for many years and will continue to be. Of course, I've never met him, so I simply take him at face value as an author. Others here may know him from a different angle. To me, he's an interesting and engaging social commentator and, like the rest of us here, can only put his pants on one leg at a time– none of us are perfect.

I, for one, am really looking forward to reading his book. Will surely be better than Paulson's and a nice perspective change from Andrew Ross Sorkin's.

Interview Excerpt

SCHATZKER: You note early on in the book that John Paulson made more money than anyone had ever made so quickly on Wall Street. So why not make him more a part of this story?

LEWIS: I spent time with him. And he was very friendly. I could have made him part of the story very easily. But I had a purpose for this story. And the purpose was I wanted to explain to the reader what on earth had happened. And to do that, it helped that the characters themselves had to learn about these markets, that they didn't understand these markets to begin with.

So the reader could learn with them.

John Paulson happened to be oddly positioned inside the financial markets in that he was one of the few people who made his living shorting bonds and looking for bonds to short. His motives were, to me, less interesting. He's much more a purely economic animal. And so he didn't have a great distance to travel to get to the trade. And in addition I'm writing a story. And the story is driven by these characters. And it's got to be true. I can't make it up. I don't want to exaggerate what this thing means to a character.

The people who I was interested in were the people who had laid it all on the line, where they started out thinking, "A nice little trade," and they'd end up, essentially, that if this didn't work out, their careers were over. And Paulson had very cleverly but, from the character, the logical point of view, less interestingly structured his financial life so that he was going to win either way.

When he went to investors and said, "Give me your money so I can short the subprime mortgage bond market," he didn't say this is a bet we want to make because we're all going to get rich. He said your whole portfolio is premised on this not happening, this catastrophe not happening. Give me a tiny bit of your money and put it in this as an insurance policy. And if it works out, it will be a hedge. And if it doesn't work out, the rest of your portfolio is fine.

So there wasn't a lot at stake there. He made a lot of money when it worked out. But he wasn't set up to be in a lot of trouble if it failed. And I was particularly interested in the people who were set up to be in a lot of trouble if it failed.



 On Wednesday the surf report called for 20 foot waves so I headed out to my favorite big wave spot. I ended up surfing way out on the north point where I hadn't surfed for nearly a decade because it hadn't broken out there for years like that. Weather and waves are cyclical though there are rather random local or short term permutations. I'm wondering whether market prices are similar to weather and have decade long cycles or more. Ice ages have century and millennium long cycles. Sunspots have 11 year cycles (prime again). If so, what are the differences or similarities in the long term market cycles. Always looking at the same 10-15 year data will not reveal these longer term cycles. .



VIX Doesn’t Work as Signal for U.S. Stock Returns, Birinyi Says

March 17 (Bloomberg) — Investors looking for clues about the U.S. stock market should probably ignore the Chicago Board Options Exchange Volatility Index, according to a study of the VIX by Birinyi Associates Inc.

Speculation that equity returns will be positive after the volatility gauge decreases and negative when it climbs has little basis in fact, Birinyi said. "The VIX is alleged to be an indicative indicator and has become a staple of analysts and journalists alike," Laszlo Birinyi and analyst Kevin Pleines wrote in a report to clients.

The following is a table of the S&P 500's average gain or loss during periods after implied volatility climbed above or fell below the 50-day average: (since September 2003)

                      1 Month     2 Months     3 Months    6 Months

VIX 20% Below   0.09%       -0.49%        3.33%       5.84%

VIX 20% Above   1.25%        0.50%        0.95%      -4.51%

Source: Birinyi Associates

Larry Williams writes:

As I have always postulated, the VIX is just the Dow/S&P upside down. It's hard to predict A with A.

Jason Goepfert comments:

I'm not a VIX fanboy by any means, but that article was ridiculous. It only looked at returns since September 2003. And it only tested a strategy of crossing 20% above or below the 50-day average. Why 20%? Why the 50-day average? Why just since September 2003? Did they test anything else? Or is that the one they found that supports their (so far very correct) bullish view?

The ridiculous part is taking such a weak study and then proclaiming "the VIX doesn't work."

Allen Gillespie adds:

He doesn't have enough bins — bins of 5 show something different.

Kim Zussman writes:

  1. Volatility was extinguished by fiat liquidity
  2. The only double-dippers left are Jibao, Roubini, and Michael Moore
  3. Nothing to fear above moving averages

These two articles might shed more light on the above points #3 and #2.

Marlowe Cassetti responds:

I have always doubted the assertion that VIX is a measure of market fear and greed. Years ago I read Whaley's academic paper and I was not satisfied with the author's fear/greed connection. To me VIX is simply the volatility number you plug in to make the Black-Scholes option equation work.

Bud Conrad answers:

My detailed review of VIX concluded that the VIX followed stocks (inversely) a day later. It was not predictive. Longer term charts seemed to indicate opposite movements, but the data could not be used as expected.



Sherry LansingOn the merit of meritocracy from Leonard Mlodinow:

Gary Wendt, for example, was once thought of as one of the smartest businessmen in the country. Wendt parlayed his job at GE Capital under Jack Welch into a $45 million bonus when he was hired away to run the troubled finance company Conseco (nyse: CNOPRB - news - people ). Exuberant investors, betting on his past record, tripled the company's stock. But two years later Wendt abruptly resigned, Conseco went bankrupt and the stock was trading for pennies.

Sherry Lansing, who ran Paramount with great success for many years had a similar story. Under Lansing, Paramount won best picture awards and posted its two highest-grossing years ever. Then Lansing's reputation suddenly plunged–and she was dumped–after Paramount experienced, as Variety put it, "a long stretch of underperformance at the box office."

But Paramount's films for the following year were already in the pipeline when Lansing left the company, and based on her choices Paramount had its best summer in a decade. A Variety headline on the subject read, "Parting Gifts: Old Regime's Pics Fuel Paramount Rebound," but one can't help but think that, had Viacom (nyse: VIA - news - people ) had more patience, the headline might have read, "Banner year puts Paramount and Lansing's career back on track."

A more recent and equally famous example came last year: In Spring 2007, the stock of Merrill Lynch (nyse: MER - news - people ) was trading around $95 a share, its CEO E. Stanley O'Neal was celebrated as the risk-taking genius responsible, but in the fall of 2007 after the credit market collapsed Merrill Lynch stock fell to $59 a share, O'Neal was branded the risk-taking cowboy responsible–and was promptly fired. Were these highly able executives whose ability suddenly evaporated? Or did both their coronations and subsequent disgrace rest on the questionable assumption that past success is a reliable indicator of future performance?



I hope it hasn't been missed but the music and markets have gone from Complex improv/jazz to rock and roll (more rhythm and lack of melody) to pure primal dominated by beat tracks and poetry (rap) and that is where we are today– all strait forward rhythm beats and street cred rhymes, the blogger ghetto prose, day after day after day.



John CageWhile listening to John Cage, I realized that the orchestral score for the Cage 4'33" piece has the word "Tacet" written on each page — and there may be a market analogy here. The word "tacet" is Latin for "it is silent," and it is a classical musical term to indicate that an instrument does not play for a long period of time — typically an entire movement.

From wiki:

"It was common for early symphonies to leave out the brass or percussion in certain movements, especially slow (second) movements, and this is the instruction given in the parts for the player to wait until the end of the movement."

There's always a temptation to over-trade — but for a low frequency trader (such as I) the right trade is often doing nothing — and one can learn from the patience and precision of the timpani player in the Largo of Dvorak's New World Symphony . Tacets are an important part of the trading strategy quiver.

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



 Most of us view the probability of an event as being between zero and one. But this is a simplification. Negative probabilities exist in physics, and they "probably" exist in the markets.

Additionally, probabilities greater than 1 exist too. Probabilities which are less than zero or greater than one are called "extended probabilities."

This is the first paper that I've seen which builds a mathematical model of interest rate options for negative probabilities. Previous papers have dealt with "risk-neutral" and "psedo-probabilities." The authors also promise an upcoming paper that describes financial models for events with a probability. The paper makes good reading for those who enjoy dividing by zero, and taking the square root of a negative number.

For the less geeky, besides negative interest rates, can anyone think of some real world examples of negative probabilities? Or probabilities greater than one?Is "Hell freezing over" an extended probability?

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

Bruno Ombreux comments:

If it is less than 0 or more than 1, then by definition, it is not a probability. It is not even a measure. They could call them anything, for instance "tiger-striped ferrraris", but they should not call them "negative probabilities".

The reason for a semantic discipline requirement, is that this tongue-in-cheek article, is targeted at finance people. People in the finance industry are generally clueless and take this kind of joke at face value.

Right now, I am studying Bayesian statistics, where they make ample use of calculation hacks and gimmicks. For instance they use Dirac masses as probability densities (height is infinite, width is zero, and area 1 ). But they know exactly what they are doing and nobody is fooled by the vocabulary.

That's different when the public is the banks or HF unwashed masses. For these, a dog should be called a dog, a cat a cat…

Rocky Humbert responds:

While I have often have my tongue planted in cheek (as well as foot planted in mouth), that is actually not the case here.

Mr. Bruno's first sentence is entirely correct with respect to "classical" probability theory. However, he might consider the possibility that Extended Probability Theory is analogous to Einstein's Relativity Theory extending Classical Newtonian Physics. (i.e. there are practical applications of atomic physics in our mundane lives — one doesn't need to travel at the speed of light to see this.)

I'm not a mathematician (and I don't play one on TV either) but I'm told that negative probabilities have a long history for people thinking about the foundations of quantum theory. Feynman wrote about them and the concepts led to his initial work on quantum computing. (Basic quantum computers now exist.)

Additionally, in markets, I believe that "Dutch Books" may give rise to extended probabilities.

I can't quarrel that some folks in the finance industry are clueless. (C'est moi, Monsieur!) but I don't find Brownian Motion-based options pricing models entirely satisfying either… hence I try to keep an open mind.

Jon Longtin writes:

Negative refraction I would caution against mixing mathematics with physics. Math is an (actually the only) absolute science, who's existence is defined completely in terms of stated rules and relationships. It is, at the end of the day, a very large body of definitions.

Probability, in the mathematical sense, is the chance that a particular outcome will happen, with the assumption that that outcome can at least happen. If an event can never happen its probably is zero, and if it always happen it is one. *Mathematically* to speak of events outside of this context is meaningless.

Physics is, well, physics. The world is the way it is and it's our job to describe it to the best of our ability. A tool that does this remarkably well is mathematics. Often, though, as we learn more the physical models have to be revised, expanded, and reinterpreted, given new information and insights. When we look at our new and improved models through the lens of the old model, thought, strange things happen. This is true with relatively, quantum mechanics, and when they discovered that the sun went around the earth, to name a few.

There are, for example, new materials that are characterized as having a negative index of refraction, n (a measure of how strongly materials bend light, and is the reason a pencil looks bent when in a glass of water); classically vacuum has n = 1 and air is about 1.0001 or so, water = 1.33, with values less than 1 physically impossible. There are, however, new materials being developed that do not naturally exist in nature, but rather are engineered structures that give the illusion of having a negative index. The point is no physics are being violated here; only that the model needs to be revised, and fitting the new material into the old model will result in surprising and sometimes counterintuitive understanding.

It is sometimes tempting to introduce an extension to the old model, such as e.g., negative refractive index and negative probability, but the more rigorous approach is to redefine the physical model from the ground up to capture the new phenomenon in a rigorous way.

Jon Longtin, Ph.D, is Associate Professor and Undergraduate Program Director, Department of Mechanical Engineering, State University of New York at Stony Brook

Bruno Ombreux replies:

In the case of the negative probability article, they are quick to dismiss the obvious and parsimonious solution that everyone has been using, and replace it with some harebrained theory.

Negative interest rates are nothing new and not a problem. We have had plenty of trade-ables that have always been able to get negative, with active OTC option markets in them, eg crack spreads…

The simple solution is to use a normal law instead of log-normal, and if you are still not happy, to use the empirical distribution.

Tom Marks comments:

 There is a fine volume recently out by the wonderfully polymathic Clifford Pickover called The Math Book. "From Pythagoras to the 57th Dimension, 250 Milestones in the History of Mathematics.

Reading each of these 250 entries is like doing a set of 25 push-ups for one's mind. And not just the left side, as the methodology behind fractal artwork indicates.

On the subject of squares of a negative number of which Rocky wrote, Dr. Pickover touches on the formerly ridiculed notion of imaginary numbers, the contributions of Bombelli, et al., and writes:

An imaginary number is one whose square has a negative value. The great mathematician Gottfried Leibniz called imaginary numbers 'a wonderful flight of God's Spirit; they are almost an amphibian between being and not being.' Because the square of any real number is positive, for centuries many mathematicians declared it impossible for a negative number to have a square root. Although various mathematicians had inklings of imaginary numbers, the history of imaginary numbers started to blossom in sixteenth-century Europe. The Italian engineer Rafael Bombelli, well known during his time for draining swamps, is today famous for his Algebra, published in 1572, that introduced a notation for √-1, which would be a valid solution for the equation x² + 1 = 0. He wrote, 'It was a wild thought in the judgment of many.' Numerous mathematicians were hesitant to 'believe' in imaginary numbers, including Descartes, who actually introduced the term imaginary as a kind of insult."

Leonard Euler in the eighteenth century introduced the symbol i for √-1 — for the first letter of the Latin word imaginarius — and we still use Euler's symbol today. Key advances in modern physics would not have been possible without the use of imaginary numbers, which ave aided physicists in a vast range of computations, including efficient calculations involving alternating currents, relativity theory, signal processing, fluid dynamics, and quantum mechanics. Imaginary numbers even play a role in the production of gorgeous fractal artworks that show a wealth of detail with increasing magnifications."From string theory to quantum theory, the deeper one studies physics, the closer one moves to pure mathematics. Some might even say that mathematics 'runs' reality in the same way that Microsoft's operating system runs a computer. Schrödinger's wave equation — which describes basic reality and events in terms of wave functions and probabilities — may be thought of as the evanescent substrate on which we all exist, and it relies on imaginary numbers.

Here is Dr. Pickover's website (well worth a look).

Rocky Humbert replies:

With your reference to Dr. Pickover, you tied together many loose ends:

Mr. Maner alluded to the fact that there is a probability greater than one that "…vampires will invade the literary world and be a profitable genre." He referenced the epic drama: "Abraham Lincoln: Vampire Hunter " Low and behold, it was Dr. Pickover who invented vampire numbers– I would wager that this is the first time that negative probability, markets, Abraham Lincoln and vampires were all discussed in the same thread on Dailyspec. (The probability of this happening is comparable to the odds that the S&P will rise five more days in a row. I therefore conclude that this must be an omen, and I just bought ONE March S&P 116 call as a homage to negative probability and vampires.)

Sushil Kedia writes:

The oracle at delphiThe first and the simplest example of negative probability at work in the markets comes to my mind from the Chair's oft emphasis on deception in the markets.

Let me use an example:

A street conman's game very much prevalent in India, near the smaller train stations and ports, where the hustler holds a heavy bag of muslin with two hands and offers a wide peep inside for you to see a nicely mixed hoarde of coloured and natural peanuts. The odds offered are 3:1 for you to multiply your money if you lift up a coloured peanut. You rush in playing an unfair game apparently to your advantage. When you shove your hand in, the mouth of the bag is held much closer around your wrist than when you were inticed to take a game loaded in your favour.

You pull out the peanut and it is not coloured.

The trick deployed is that there is another bag within the bag containing only uncoloured peanuts.

In the awareness of the hustler, probability of the outcome is certain due to his ability at deception. In the awareness of the player the probability of the outcome is somewhere close to 50:50. In the awareness of an analyst like me who has burnt the hand that tried picking the coloured peanut many times 50/(50+50+100) or 0.25 assuming the hustler fails at closing out the bag with mixed peanuts forcing your hand into the hidden bag with only plain ones.

The difference in the probabilities known to the newbies and those who have burnt their hand and become analysts is the 0.75 gap which is really the negative probability on which the hustler is peddling his skill.

Replace the peanuts - plain and the mixed ones with earnings guidance and announcements and you realize the negative probability the masses face vis-a-vis the insiders assuming all else being equal.

Replace the peanuts - plain and the mixed ones with counted stats the pros are playing with and the bags of code (not only computational but simply deal flow informational) the glittering big firms can have.

So on and so forth.

With this perspective gaps in perception, information, imagination, awareness, model specification, ability to loot, peddle, hustle etc. etc. a concept of negative probability fits in well with comprehension. The Oracles of Delphi as explained in the Education of a Speculator played really on the negative probability the masses believe are non-existent and happy to live with such belief. Despair, disdain, pursuit of short-cuts, road to quick riches have all been built with bricks of negative probability.

The first and the simplest example of negative probability at work in the markets comes to my mind from the Chair's oft emphasis on deception in the markets.

Let me use an example:

A street conman's game very much prevalent in India, near the smaller train stations and ports, where the hustler holds a heavy bag of muslin with two hands and offers a wide peep inside for you to see a nicely mixed hoarde of coloured and natural peanuts. The odds offered are 3:1 for you to multiply your money if you lift up a coloured peanut. You rush in playing an unfair game apparently to your advantage. When you shove your hand in, the mouth of the bag is held much closer around your wrist than when you were inticed to take a game loaded in your favour.

You pull out the peanut and it is not coloured.

The trick deployed is that there is another bag within the bag containing only uncoloured peanuts.

In the awareness of the hustler, probability of the outcome is certain due to his ability at deception. In the awareness of the player the probability of the outcome is somewhere close to 50:50. In the awareness of an analyst like me who has burnt the hand that tried picking the coloured peanut many times 50/(50+50+100) or 0.25 assuming the hustler fails at closing out the bag with mixed peanuts forcing your hand into the hidden bag with only plain ones.

The difference in probabilities known to the newbies and the analysts is 0.5-0.25 = 0.25 the awareness advantage.

The difference in probabilities known to the analysts and the hustler is 1-0.25 = 0.75 the hustling advantage.

The difference in probabilities known to the hustler and the newbies is0.5-1.0 = -0.5 the ignorants negative probability

Awareness Advantage MINUS Ignorants negative probability = 0.25-(-0.5) = 0.75 = The Hustling Advantage or in other words, the negative probability is Awareness Advantage - Hustling Advantage.

Replace the peanuts - plain and the mixed ones with earnings guidance and announcements and you realize the negative probability the masses face vis-a-vis the insiders assuming all else being equal.

Replace the peanuts - plain and the mixed ones with counted stats the pros are playing with and the bags of code (not only computational but simply deal flow informational) the glittering big firms can have.

So on and so forth.

With this perspective gaps in perception, information, imagination, awareness, model specification, ability to loot, peddle, hustle etc. etc. a concept of negative probability fits in well with comprehension. The Oracles of Delphi as explained in the Education of a Speculator played really on the negative probability the masses believe are non-existent and happy to live with such belief. Despair, disdain, pursuit of short-cuts, road to quick riches have all been built with bricks of negative probability.

T.K Marks writes:

On the subject of meals, I see today a poignant portrait of the food chain. These photos from Colorado are spectacular.

"…The starling seems to be completely unaware it is on the lunch menu as the bald eagle makes it attack at high speed…" On some level we've all been starlings at one point or another.



 May I recommend the works of the following European/ Nordic Jazz trios…I've been exploring them of late and found them to be highly enjoyable. Very much recommended for late night trading, relaxing, or city gazing. A nice Bordeaux or good whiskey will complete the picture for those so inclined.

Each of these trios perform wonderfully abstract works; plenty of space for each tone and brush stroke to make its presence felt. The improvisational conversations peppered across each album are most enjoyable. I even very much enjoy ECM's cover art/ photography– and I have no art sensibilities whatsoever.

All of the below are on the ECM label, and are on iTunes etc.

- Tord Gustavsen Trio - Rec'd albums: Being There / Changing Places

- Marcin Wasilewski Trio - Rec'd albums: January / Trio.
- Tomasz Stanko Quartet (trumpet the addition here)- Rec'd albums: Lontano

As for the classics…in my opinion it will always be near impossible to beat the sheer, breathtaking optimism of a Beethoven Piano Concerto (1 and 5 esp, Brendel or Argerich at the keys), or the pure intellectual horsepower and delight of the Bach Cello Suites (Rostropovich) or his Well Tempered Clavier (Barenboim). Also tough to beat the depth of gloom and rage in Shostakovich's 10th (BPO w/ HvK conducting), or the magic tone colour of Rattle conducting the BPO's performance of Debussy's La Mer. Any expansions and recommendations on this theme would be much appreciated and enjoyed.

Rocky Humbert adds:

Don't overlook John Cage's 4'33" (1947). This
remarkable composition — although infinitely deep and complex –
requires no musical ability to perform perfectly. Sadly, it never made
the on-air playlist of the now-defunct WQXR radio.

I find the final crescendo and coda especially appealing. I couldn't sleep last night as the theme kept going through my head.

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

Tom Marks comments:

Regarding John Cage's 4'33", the thinking is that the "piece" can never be "played' the same way. The reason being that nothing takes place in a vacuum. That is, there will always be ambient sound about: The periodic shuffling of the audience's feet, the random if predictable clearing of somebody's throat, the fingering of programs, etc. What Cage intended was clearly more an ontological statement than it was a musical composition in the traditional sense, and for that effort it might not be entirely without merit.

The last time I thought about 4'33'' and the notion of relative nothingness was when I had occasion to consider something as seemingly disparate as disk space on a computer and how sometimes 0 = 0, and sometimes 0 ≠ 0.

So in keeping with Cage's thesis, how can nothing (i.e., 0) not necessarily not be nothing?

A little 5 minute experiment for those so inclined.

Go the the Windows Start Button, go to Accessories, and go the no frills text editor, Notepad. Open it up, type the following two lines in the body and save it to the desktop as Test 1:

Mary had a little lamb Its fleece was white as snow

Then do the same thing again, this time putting nothing at all in the body of the Notepad document and save that one as Test 2.

The go to the Start Button again and use Windows Explorer to find the Notepad documents. Where they are listed it will indicate their respective sizes; 1 KB for Test 1 and 0 KB for Test 2.

(1 KB sounds like a lot of space for only two lines saved but storage on computers is done in blocks or clusters, leading to much unused space. 1 KB is the minimum size that Notepad can save something as recorded by Windows Explorer. Don't worry about that part, just the figure.)

Now while still in Explorer right click on Test 1 and scroll down to Properties, click on it and in the middle of the window that pops up will be two more figures, Size: 52 bytes (one byte for each of the characters, spaces between words, and 2 for the line change ) and Size on disk: 4 KB (the parameter of the cluster in which the NTFS will save something to disk. Don't worry about this part either. Again, just the figure.)

This all seems logical so far, as Explorer somehow showed us 3 different size figures for the same file, 1 KB, 4 bytes, and 4 KB, but all for clear and different reasons.

Then do the same for Test 2 — in which nothing at all was entered into the body of the document — and accordingly Explorer indicated that its size is 0. Right click on it, go down to Properties, and review the 2 additional figures: Size 0 bytes; Size on disk: 0 bytes.

After all, why not, there was nothing there so why should "nothing" take up any space. Accordingly, it was just demonstrated that the 3 different space figures for the blank Notepad file, Test 2, each indicated 0.

Now here's where Cage's 4'33'' rears its head.

It would logically follow to most, it certainly did initially to me, that other blank files similar to Notepad's Test 2 — that is, nothing at all in the body — but stored in other applications such as Word, Excel, or PowerPoint would also reflect those three 0,0,0 figures that Explorer showed us for Test 2. Would seem to make eminent sense.

But perhaps as Cage would argue about his silent music, context is sovereign if not everything. As such those three blank files would show the following varying sizes:

Word: Explorer: 24 KB Properties Size: 23.5 KB (24, 064 bytes) Size on disk: 24 KB (24,576 bytes)

Excel: Explorer: 14 KB Properties Size: 13.5 KB (13,824 bytes) Size on disk: 16 KB (16,384 bytes)

PowerPoint: Explorer: 8 KB Properties Size: 8 KB (8,192 bytes) Size on disk: 8 KB (8,192 bytes)

Regarding the seeming "nothingness" of a blank file, Notepad obviously has a different idea of a vacuum than the other three applications do. As those three do of each other.

The answer lies in the respective pedestals of already existing data on which the blank Word, Excel, and PowerPoint files lie. These are far more robust and intelligent programs than Notepad. Regarding their baseline file sizes, there is something almost Cartesian about it: The underlying program can think, therefore its blank file size is. At least is more than 0.

Likewise, perhaps Cage would argue the ontological point that it too would be impossible to separate a "performance" of his 4'33'' from the context of where it took place without leaving some sort of footprint. He just couldn't empirically quantify it.

That said, Cage's aesthetic and oeuvre are clearly not for everybody. Four a half-minutes of silent music make for a pretty thin gruel most would argue, but in fairness he wasn't absent of ideas. But the McLuhan notion of "the medium is the message" is one thing; the medium swamping the messsage, another altogether.



Music and the instrument are not against the musician, and the instrument doesn't change (the keyboard order, for instance, doesn't change), so one can, with effort and time, master one's instrument. The markets are against us. And they change. And I don't think we can ever master them.



 In the book Beyond Candlesticks by Nison, he identifies 8 or 10 record sessions as being an extended market in Japanese lore. Here we also have a case of a prime number that would negate any daily cycle system. He also discusses the use of 3 line break charts as a trend following system. This cycle this past year surely has been the revenge of the trend followers. Even the micro level has been very trendy intraday in an almost eerie way. I keep wondering what mechanisms are at work behind this big change in the way the markets are operating now. IF one had followed a trend system over the past couple years, it might have been successful. As he says, you really don't know and are blindly trailing a stop.



John SteinbeckJohn Steinbeck's East of Eden, which he considered his best novel and is autobiographical at age 43, has much wisdom about the market and life in it. I like the passages where he talks about fattening up the cow before the slaughter the way the father fattened him before having him inducted into the army after a beating by the Cain brother, and the part about his father missing Cain with a shot gun to get revenge thereby changing his life, which Steinbeck extends to say that every little thing you do like stepping on a twig affects everything else in your life, and also the part about 10 year cycles of rain in Salinas County which everyone forgets about selling out at the bottom or living high on the hog during the rain. Totally brilliant and O' Brian-esque albeit a little forced relative to O' Brian.

Kim Zussman adds:

Or when the father came up with the idea of packing lettuce in ice for shipment, only to receive news that the ice melted in the train and the lettuce spoiled anyway. Though he was financially ruined, he optimistically said

"One day someone will develop a way to ship refrigerated produce. It just won't be me."

Later the black sheep son made a fortune speculating on futures as war broke out in Europe. Thinking that repaying his father's debt would redeem him, he was disappointed when father regarded this as blood money which must be returned.

Stefan Jovanovich comments:

East of Eden is that rarest of all things– a great, great novel and movie both. As Kim knows, the father's own fortune came from his selective accountings for the monies collected by his Grand Army of the Republic veterans group (the American Legion, VFW and SEIU of its day which expanded the pension program for Union veterans–no Rebels– from the combat veterans to the children of the clerks who never left their desks). Steinbeck also adds the irony of the father, whose veteran constituents had all been volunteers, serving on the draft board and then finding his son's profits from selling to the British purchasing agent somehow tainted. 

Gregory van Kipnis adds:

But the greatest insight to me came from the discourse over the biblical debate about Cain and Abel. Was Cain fated to kill his brother "Thou shalt" or did he have choice: "Thou mayest." The search for a correct translation of the key Aramaic word 'timshel' led to the Chinese immigrant scholars. After much study they ultimately declared that 'timshel' meant that Cain had choice. 

Nigel Davies comments:

This is quite a widespread idea, but an alternative way of looking at this may be that the 'stepping on twigs' is relevant only in that it can reflect attitudes (personality traits) that affect broader and more vital issues. On its own it is irrelevant. 



John Wooden and Kareem As Lew AlcindorJohn Wooden is approaching 100. If you look up "class act" I'm sure you'll find his picture next to it.

This video
from "All Pro Dad" is Wooden's thoughts on loyalty, loving and dying.

Stefan Jovanovich comments:

Wooden is a remarkable man, but I would take Pete Newell over him any day. The underside of Wooden's success is not pretty. If you ever sat close enough to the UCLA bench to hear what Wooden said to the opposing players as they ran down the court, you could want to ask where in the pyramid of success is the part about the usefulness of viciousness. The difference between Newell and Wooden is that Newell spread his wisdom far and wide and never cared about the credit; Wooden, who did learn the L.A. way, always had his name above the credits. He deserved to have them there, but that does make him a saint any more than it makes John Wayne a war hero. It is the difference between Christy Mathewson and Ty Cobb. Mathewson saw where baseball was going and how the game could change; Cobb hated everything that came after him and despised its greatest natural player– Babe Ruth. Newell's Big Man camp permanently changed the game; Wooden's homilies are wonderful but those closest to him found their lives swallowed by his fame. Like Cobb, Wooden is truly a great man of his sport and a model of grit and determination and intelligence; but you need to lift up all the rocks before taking his full measure as a person. He deserves all the respect one can give a man, but it does no good to leave out the warts from the portrait. You can only get a full picture if you include Jerry Norman's part of the story.



 Genghis Khan when he set out on his 12th-century world tour, had a stable full of sons to choose from for his right hand. But he chose his 4 daughters to manage his burgeoning empire instead. The khan planted his girls north, south, east, and west of his inner-mongolian stronghold surrounding himself with intelligence, allegiance, and strength on his outer perimeter. Though they could neither read nor write, for the first time in human history the girls managed to unite the silk trading route under a single leadership, added postal dispatches, hostels, security, increasing the efficiency of trade along the route heretofore never before seen in history, bringing to fruition one of the greatest empires the world has ever seen.

In contrast to his daughters' intelligence, upon his death Genghis Khan finally selected for supreme leadership one of his sons– his first big act was to round up 4,000 Mongolian girls beginning at the age of 7 to have them raped in front of their families by his military, ushering in the beginning of the downfall of his father's hard work. The author of The Secret History of the Mongol Queens: How the Daughter of Genghis Khan Rescued His Empire holds the DeWitt Wallace Chair of Anthropology at Macalester college here in Minnesota and holds an honorary position at Chinggis Khaan University in Mongolia. In 2006, he was awarded the Order of the Polar Star, Mongolia's highest national honor.

There is much trading wisdom to be gleaned by both genders in this book– how an adversary beyond your peripheral vision can overtake you in a hurry, how an anonymous player can rise out of nowhere to lead the pack, how to employ the assets you have been given with maximum impact regardless of how big you think your opponent looks, or what the world 



Since we're back to school lately, went back and brushed up to check whether stock market volatility spike-decay follows an exponential-decay law, of the general form:

dV/dt = -L*V(t), where

dV/dt is change in volatility with change in time
-L is the "decay constant"  for V

This can be rearranged as dV/V(t) = -L*dt

And integrated:

ln(V) = -L + C  (c= integration constant)

Which is a linear equation that can be used to evaluate the decay constant (slope). Using DJIA daily closes 1929-2009, every (non-overlapping) 10-day period I calculated stdev for the prior 10D. Then I identified volatility peaks >=3%, finding these:

 date     max D10

10/20/08    0.059
09/25/01    0.030
10/29/97    0.030
10/28/87    0.089
09/11/39    0.031
10/30/29    0.074

For each spike, checked 10D stdev for 36 subsequent periods, and plotted ln(10D stdev) for each date. For the log-transformed six historical volatility spikes, used linear regressions to fit lines to the data: Independent variable = date. Dependent = ln(10D stdev). The first regression is for the recent spike ca 2008:

Regression Analysis: ln2008 versus date2008

The regression equation is ln2008 = 143 - 0.00369 date2008

Predictor            Coef       SE Coef      T      P
Constant            143.29      16.35   8.77  0.000
date2008   -0.0036902  0.0004087  -9.03  0.000

S = 0.369075   R-Sq = 70.6%   R-Sq(adj) = 69.7%

Note the slope (-0.0037) is highly significant, and negative; following
exponential decay (see plot above).  Here are the results for the other

Regression Analysis: ln2001 versus date2001

The regression equation is
ln2001 = - 30.0 + 0.000685 date2001

Predictor           Coef    SE Coef      T      P
Constant           -29.95      16.16  -1.85  0.072
date2001   0.0006853  0.0004319   1.59  0.122

S = 0.390306   R-Sq = 6.9%   R-Sq(adj) = 4.2%


Regression Analysis: ln1997 versus date1997

The regression equation is
ln1997 = - 14.6 + 0.000282 date1997

Predictor             Coef    SE Coef      T      P
Constant           -14.65      15.38  -0.95  0.348
date1997   0.0002819  0.0004274   0.66  0.514

S = 0.387066   R-Sq = 1.3%   R-Sq(adj) = 0.0%


Regression Analysis: ln1987 versus date1987

The regression equation is
ln1987 = 80.1 - 0.00262 date1987

Predictor            Coef    SE Coef      T      P
Constant            80.11      14.09   5.69  0.000
date1987   -0.0026168  0.0004357  -6.01  0.000

S = 0.392181   R-Sq = 51.5%   R-Sq(adj) = 50.1%


Regression Analysis: ln1939 versus date1939

The regression equation is
ln1939 = - 2.10 - 0.000184 date1939

Predictor        Coef    SE Coef      T      P
Constant            -2.101      9.765  -0.22  0.831
date1939   -0.0001840  0.0006618  -0.28  0.783

S = 0.602352   R-Sq = 0.2%   R-Sq(adj) = 0.0%


Regression Analysis: ln1929 versus date1929

The regression equation is
ln1929 = - 3.24 - 0.000074 date1929

Predictor        Coef    SE Coef      T      P
Constant            -3.237      6.889  -0.47  0.641
date1929   -0.0000739  0.0006175  -0.12  0.905

S = 0.562338   R-Sq = 0.0%   R-Sq(adj) = 0.0%

Of the six historically large volatility spikes, only 2008 and 1987 followed exponential decay. This doesn't seem to be a result of the size of the spike, as 1929 was bigger than 2008 and smaller than 1987. To the extent that volatility proxies fear, Is the current volatility decay in some way similar to 1987, and different from the others? Unlike 1987, 1929 spike was the beginning of a long period of economic turbulence. In 1997 the market was already volatile, and went on to become more so. 2001 featured 911, followed by further stock declines through early 2003. In 2008, the banking system teetered on the edge of what now looks to be a fake precipice - with the only real consequences being higher debt/gdp, less home ownership, and higher taxes.

Alex Forshaw comments:

I am clueless on the science of volatility (ie approaching it with any quantitative proficiency). as a market participant though, i have found that there are three kinds of volatility.

one is VIX volatility. this seems to be negatively correlated to liquidity of risk assets, which sounds obvious to the point of tautology as i'm typing it out, but ive been surprised how insensitive it is to other metrics i've though should matter, e.g., estimate revision momentum (for example: once a sector's estimate revisions are X standard deviations above the historical average, particularly as correlations have risen to recent highs in an upward trending market, shouldn't this matter? apparently animal spirits among option market makers is a lot more important.) and so on.

two is pnl volatility, which for me is very positively correlated to volatility of volatility (in either direction, but especially volatility that trends down for surprising lengths of time), much more so than volatility alone. as a firm we very carefully watch the PnL volatility of the 30 separate books of pairs, particularly during a rising market, as a sort of jerry rigged predictor of market volatility. when it gets to intolerable levels during a rising market that sometimes signals that a trend is about to reverse, although it's not consistent enough to be reliable as a frequent go-to indicator, I believe it did work well for the firm in several very critical situations (in 2007, 2008 and 2009) when other indicators were not working.

another is "long term volatility" which i think is best captured by the seasonally adjusted price of gold. e.g., "how big will the nuclear explosion be when the world's imbalances eventually, inevitably?! readjust". the VIX seems to totally ignore that.



 My nine year old son and I have been working through an electronics kit. He is catching on and taking an interest. Two weeks ago I went into the garage and flipped the main bank of lights for the workbench and nothing. The switch died. I decided to replace the switch and stopped — let's turn this into a lesson.

A day later I called my son into the garage and asked him to turn on the bench lights — "Dad, they don't work!" "Son, I want you to replace that switch, it's broken." At first his mouth opened to say something, then he started looking at the switch and the conduit coming down to the switch box. I gave him a screwdriver and the lesson started — off comes the plate and then — Stop! We now must turn off the power — you know from the electronics kit — the battery. I had him turn off the breakers to the entire garage. I asked him to plug in a tool near the switch and then to turn it on — "no power," he said. "Good, the power is off, it's safe to work on the switch."

It was fun to watch him struggle with the screws and the wires, helping him here and there. He replaced the switch with a new one, and then I had him use some electrical tape on one of the wires since it was too close to the metal box side. I tightened all the connections and showed him how to final tighten things without overdoing it; and then he put the switch plate back on."Crawl up there and put each breaker over now." He did each one properly and then jumped down. "Now try the switch." "It works!" A big smile!

I reiterated lessons from the electronics kit: the circuit, the battery (power source), the switch, etc. The big learning was that electricians need dependable and heavy duty flash lights because they are always working without power! He goes into the garage now and flips "his" switch. Sometimes he asks me how "his switch" is holding up. Moving from the lab to the real world — like trading, testing an idea with real money versus theory.

I am amazed at what kids can do! I opened the fireplace door the other day to put in a log — my son said "Dad, don't turn your back on a fire like that — keep one eye on it while you get the log." My jaw dropped — did I teach him that? if I did I couldn't remember! I was always leary of electricity as a child because my parents told me to stay away from it — it's dangerous. I decided to teach my son to respect and understand things like fire and electricity. I want my son and my daughters to understand not only higher education but also real life skills and challenges.

I can't tell you the number of times I should have included one of my kids in a chore or a lesson and didn't because of time or just being too tired. I employed some of Vic's smarts this year with my son. No TV, videos, or video games Monday through Friday, only on weekends (and that is limited — just to the point where I am not hated). Not only did he excel in reading, he is number one or tied for first in accelerated reading. Now he wants to own and collect books. This week he begged me for a book collection to buy scholastic book club through his school — I gave him the money and he wrote me a thank you note. I gave him a chore list today for payback, "no problem" he said.

TV and I would include any video/computer screen outside of school related is toxic to children (in general) and too many kids rot in front of these screens. My son asked me today what I thought about the future regarding books. I told him something I read here on the DailySpec — that bookstores may be out of business in the future and that books will be on hand held electronic devices. He said "Dad, that's bad — what happens if you drop the electronic reader and it breaks — you lose all the books. If you drop a book you can just pick it up and continue reading." "That's right," I said and we continued driving to his last basketball game for this season not saying much else as the rain backed up the depressing thought of books' going dinosaur. 



 I Am Love

Directed by Luca Guadagnino

Starring: Tilda Swinton, Flavio Parenti, Marisa Berenson, Edoardo Gabbriellini

Don't ask why a movie in Italian and Russian has an English title that so scratchily encapsulates the idea or trajectory of the story. Other people make those decisions, one guesses, not the director or producer.

As luscious in photographic sensuality as a film by Luchino Visconti, I Am Love is a voluptuous tale with many handsome and beautiful characters involved in the Recchi fabrica, factory, and the generations inheriting this most successful Milanese business from the grandfather who brought it to enormous profitability.

Central to the stories is the patron's daughter in law, played by an elegant, surpassingly controlled Tilda Swinton. If this does not win her the Oscar next year, and this film the Best Foreign Film, then somebody is smoking damaged weed.

Amid the swirling stories of thwarted young love gone astray for a same-sex chum, dutiful marriages exalted to thrumming orgiastic pleasure by illicit amour, sibling rivalries, decades-long family retainers who know their place but know every little intrigue going on in the fabulous marble mansion in Milano where most of the action takes place (along with a gorgeous rustic San Remo, and a business-like, austere London that is strangely devoid of irony or intrinsic emotion), gorgeous dowagers and clever performing-arts offspring, two things thread through this lush extravaganza of emotion and color:

First: A significant protagonist is a chef, and by the end of the film you will be drooling for the exotic and eye-filling Italian victuals. Second: Erotic fascination. Swinton has such an unbridled affair with her paramour that one feels embarrassed at not drawing the curtain. Significant nudity amid the foliage–and amusing scenic references to buzzing stilled birds and nectar-feeding bees.

Marisa Berenson, rarely seen in film but here used to excellent effect, is still lustrous and lovely. Swinton manages to be somehow ravishingly plain yet overridingly transformed into a beauty by her exaltation with love. She speaks a flawless Italian, and a pretty convincing Russian.

And then there is the stunning cinematography. Cunning angles of filming that most directors would scarcely attempt. And all that saliva-inducing oicho (a superb soup playing a key role in the story) served with utmost panache and plenitude. A delicious film in many ways we have come to savor because we see far too few of such consummate achievements.



On top of K2It is interesting to speculate about what happens when the market is up 10 days in a row and then again at the open, since this has never happened before so one can't do it. This is a quandary for frequentists and perhaps mysteries of the Bacons, Dave and our readers could shed light, as I can't.

Alston Mabry writes:

I'm looking at SPY closes, only one peak higher than this, back in Sep 1995, 12 up days in a row. lt's like standing on K2 and being able to see Everest from there. But maybe I'm just tossing coins…

Bruno Ombreux comments:

I found a funny rule in Statistical Rules of Thumb, by Gerald van Belle, called the Rule of Threes: "Given no observed events in n trials, a 95% upper bound on the rate of occurrence is 3/n." There is one very simple demonstration based on the Poisson distribution.

Victor Niederhoffer comments:

The van Belle rule would say that in 1000 repetitions, it would be 19 to 1, that a decline would occur less than 300 occasions (i.e. a probability of 3/10), a truly precise but completely misleading answer in this case, especially when the underlying base estimate is 0.5. Sort of the way people talk about Microsoft's answer to a help question. However, in this case I predict a decline of 0.25, just to make the people waiting for a reversal crazy and even poorer.



Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man.

Fred Schwed Jr.



 Almost all the checker players in Brooklyn were named Scottie so they had to classify them as "big Scottie" and "little Scottie" and "skinny Scottie" et. al. I am reminded of this by the new physics professor's post. We'll have to call him the "acting professor" to distinguish him from "the speculator professor". His post brings back many pleasant memories of an experiment I performed last night for my son Aubrey.

First I rubbed a balloon with wool, giving it a negative charge. Then I rubbed the bottom circle on a wine glass with a silk tie giving the glass a positive charge. Then i brought them together, and they started moving towards each other with confusing chaotic attraction like an amorous man and beautiful woman both drunk on a plane. One would think that this has market applications when two closely connected markets, gold and oil for example, to throw out a red herring are in opposite directions. Do they converge like the examples given? I will have to ask Aubrey and the frequentists for an answer.



a penny beginning to meltWhy would people hold hard currency when they can get interest on it or melt it down? Why would governments continue to issue coins with metal content values higher than the denomination values? What is the theoretical probability of that? Yet it occurs in the real world where a penny has twice it value in copper and recent dimes are worth slightly more than their denomination.

The other interesting aspect of this is when numismatic value is increased by melt down events. An increase in scarcity of certain lower mintage dates that would be discovered only as collectors figure out that not so many coins from a certain date still exist.

From a paper by Drs. Espen Gaarder Haug and John Stevenson:

All physical monies with face values contain embedded options. By being aware of these options, more precise valuations of coins and paper money can be made. Some of the most commonly circulating coins in the USA (and also in the UK) have gone from having their embedded option deep-in-the-money to at-the-money, then to deep-out-of-the-money, and then returning to deep-in- the-money. The value of the optionality has been high. Because the central banks and commercial banks are selling such coins at a xed price, equal to the face value, the price and face value of such coins will only be the same when the option element is deep-in-the-money. When the option element moves towards at-the-money or out-of-the-money, arbitrage opportunities arise. Since governments are not adjusting the face values, they have to reduce the value of the coin for example, by stopping the circulation of such coins by other means or by taking legal action against the exporting and melting of coins.

Gene Gard replies:

a nickelI have thought about this a lot, and there is a little more to the interesting optionality of pennies and nickels…

Of course, the theoretical floor to a coin's value is max (face, metal value). In great inflationary times, the metal value will greatly exceed the face value of the coin. But here's the interesting part– if holding the coin in deflationary times, the face value increases, its purchasing power even as the metal value plummets in nominal terms.

Two implications– first, even though you don't get interest payments on your money, if you bought with the metal value "at the money" you are some earning real return in all cases unless the purchasing power of the dollar remains absolutely stagnant. Second, because of the previous point, you're not just getting a free call option on the metal value, you're really getting a free straddle– or in other words, a free "inflation vol call option." The worse inflation or deflation gets, the better off you are. And it's the same investment– no adjustment is required for inflation or deflation. Look back at what happened to TIPS breakevens toward the end of '08 beginning of '09 when the deflation bulls were winning!

Nickels are better than pennies from a storability perspective — nickels are 1 cent/gram and pennies are .4 cents per gram, though pennies are much more in the money right now according to I haven't decided if I'm buying a truckload of pennies or nickels at this point.



steel blast furnaceOne old school indicator from Phillip Carret– Blast furnace capacity. Is it of value if from other world economies? As of February 16, 2010 from Australia:

Port Kembla's two blast furnaces are expected to operate at 100 per cent capacity throughout 2010 to keep up with growing demand and help BlueScope Steel achieve a profit for the financial year. The significance of having the No 5 blast furnace back operating at full capacity was emphasised yesterday, when managing director and chief executive Paul O'Malley reported a net loss after tax of $28 million for the six months to December 31. With improvements in the steel market and the successful recomissioning of No 5, he forecasted a small net profit by the end of June on the back of improved export and domestic demand and increased steel prices.



school teacher by Norman RockwellMy daughter was telling me that her math teacher will not give extra credit for anything because she was sued by a single mom for giving her son a "B" and ruining her son's future. She had to spend her own money for a lawyer, but in the end the son/mom dropped the case when they lost credibility after her son was sent to prison for dealing before he graduated.

If you coached or volunteered for anything to do with many kids, there is always one parent that will be upset with you if their kid is not the "star" or leader of the group. So much for the days where whatever the teacher gave you, you could expect to get doubled at home.



In a shocking day, the range from high to low was 2.8 points [based on half-hourly sampling]. Perhaps the only day in the last 10 years, not a day removed from the holiday with such a low range. (Of the eight others, all were within a day of Labor Day, July 4th, President's Day, or Memorial Day et. al.). "Happy days," I can hear Stubby saying, "men and women and children, place your orders. It don't matter what you do, you lose when I take the other side."



Shiller and SiegelThere was an article in yesterday's WSJ updating the bear v. bull debate between grad-school buddies Jeremy Siegel and Robert Shiller .

Shiller, who correctly called the 2000 stock and 2006 home price bubbles, contends the current rally has taken (his version of) stock market P/E above its long-term average, and the on-life-support real estate market will continue to drag on corporate earnings. The concern is that for some time FED/government intervention has artificially buoyed stocks above their "natural P/E"; beginning with the 1998 Russian debt default (thank you Mr. Meriwether), Y2K, 911, tech bubble bursting, and the recent credit crisis. In spite of all this help, we just ended the worst decade for stocks since 1930.

Professor Siegel counters that Shiller's P/E method is flawed, and that a version of analyst earnings estimate suggests that earnings will increase now that the credit-crisis write-downs have been taken.

Another possible explanation for a new, higher P/E regime is the transformation of investor thinking: Stocks changed from the "sucker bets" of our parents and grand-parents to the main-stream, primary investment for retirement. This is a self-fulfilling prophesy: since people associate economic well-being with the market, governments now borrow heavily to buy puts (of course someone has to pay for these, hopefully only those making more than $250,000/yr).

There is no reason embedded in nature that stocks must center about a certain P/E. They could stay higher or lower for decades without reason. One of the weakest arguments in Siegel's "Stocks for the Long Run" relates to the question of who will buy stocks as baby-boomers retire. His answer was foreign investors in developing countries -who currently look to be pretty well stocked up on American securities.

Currently the heroes of liquidity-provision are the mavens of Wall Street, who now hold the P/E levers and remain beholden to a market too big to fail.

Stefan Jovanovich comments:

I share Kim's skepticism about Professor Siegel's end-game for American securities. There is no historical evidence for the proposition that wealthy people in developing countries want to put their savings into the common stocks of the already developed/relatively declining countries. The periphery does not send capital to the center. Europeans bought American securities in the 19th century and again after WW II, when the U.S. offered superior growth prospects; those were precisely the times when Americans kept their capital at home, except, of course, for buying trips for foreign baubles. (Every time I visit the Huntington Library I find myself wondering how much the sale of Gainsboroughs for the pound; perhaps the rich in Singapore will develop a taste for the Hudson River school). The only event that could drag capital from Asia to North America would be the political collapse of China; if that were to occur, the money would be flight capital, and that would hardly be enough to cash out 50 million IRAs and 401(k)s. If the United States is going to return to the path of financial progress, like Sebastian the crab we will have to do it ourselves. It is going to take a while.

On another note, I finally understand Keynesians. You guys literally don't think balance sheets matter; it's all about the flow. But what do you do when the pipes have sprung a permanent leak? Opening the sluice gates won't help because the little water left behind the dam has to be kept so no one will worry about a drought and the Valley farmers have already used up their allotments.I have no understanding of the world of 3rd party incomes and investments - the one where the students don't pay the teachers and the money to invest is always OPM. I have not lived there in 35 years; my last brief visit was 1 year as a salaried tax lawyer before the combination of the 1976 tax reform act and my unfortunate manner got me fired. Since then, all I have known is the world of incorporated wallets. Right now in Munchkin Land investment bargains exist; but they are there precisely because the income flows are diminished. The prices have come down because the people who own the businesses do not themselves have the cash to reinvest. They simply want out. And, many of the bargains are anything but because the businesses are simply failing.

That, combined with the likely further extension of confiscatory regulation, makes any current investment here in California very much of a dodgy proposition. The risk of loss seems much, much greater than the reward. If there is to be new investment, it will have to come because we greedheads think we can make money, not because we have a positive cash flow. Until we can see a prospect for profit at the prices for capital assets, the flows will go into the bank to wait. Those businesses that have access to bank and government credit may, indeed, be recovering; but few, if any, small businesses and non-government employee customers are. Their own income prospects are lousy, and their balance sheets are under water. Hayek would blame all this on the past nationalization of credit and money. (Cf. Good Money, Vol. I and II). That, and the prospect of having the government tax more of the flow is only encouraging people to look for ways to camouflage their wealth. Someone - it may have been Jim Farley but I can't find the precise source - said about Joseph Kennedy, Sr. that "he was the only guy I knew in 1932 who could buy something without having to sell something else." The Kennedy political tradition may be dead, but the bootlegger legacy is alive and growing.

Kim thought Siegel was being naïve in expecting that new capital to be invested in America from abroad to buy out the retiring geezers like me. I agree, but God only knows; perhaps Brazilians will acquire a taste for windfarms in Tornado Alley. What we do know is that growth in real wages is a pure function of increased investment. Workers who get to play with newer, more expensive machines make more money because things and services can be provided better, cheaper and faster. I don't like the term capitalism, but one should give Marx his due. He did understand what was at stake. The money and credit and assets held by competitive enterprises - what he would define as "das capital" - are the only chips in the game. If the capital stock is diminished, the holders of cash who are able to invest at 6 or 8 x present earnings will probably make money; but they will be doing it at a time when the workers will be making less - as they did in the decade after the 1982 bottom. (Marx would say it was BECAUSE the new investors were making more money; and even if he was wrong about the causality, he was right about the coincidence; workers' wages do not increase dramatically while capital stock is being rebuilt. They have to wait their turn.)

What we also know is that a world of lower stock prices is one in which profits have declined and the prospect for future earnings has grown less cheery. Those situations usually do present opportunities for future gain but only if someone has "das capital". Andrew Carnegie said that, if you have a choice between losing the factories and losing the people, you want to lose the factories because, with the people you can build a better factory. Being a 19th century primitive, Carnegie presumed that a prudent businessman always had a stash of money - what used to be known as a reserve - whose value was not subject to confiscation or abolition by the government. Carnegie also presumed that he and other prudent businessman would use the cash to pay the workers their wages while the new, better factory was getting up and running. What was different in the past was that there was a stock of private capital willing to speculate after a factory had burned down or the market had crashed.

The question that Kim raised– and for which there is still no apparent answer - is where will that real cash come from now? The diminished future can only be a Grand Bargain after private savings are restored. Until then, it is likely to be a Grand Fail with both the young and the old getting far less than they expect. "Other than that, Mrs. Lincoln, how did you like the play?" 

Phil McDonnell writes:

One important aspect of this discussion is to look at the required level of stock prices. To this end it is helpful to consider that there is a large store of wealth in the world which must be invested somewhere. Right now Real Estate is in the dog house so people are dis-investing in that area. But bonds and stocks are relatively close substitutes with comparable liquidity.

Thus the required yield on stocks is simply the reciprocal of the P/E ratio. To be competitive stocks must yield something comparable to and competitive with bonds. But bonds yields are remarkably low now largely through Fed intervention. So stock P/E ratios can go quite high and still remain competitive with the historically low yield of bonds.

Alston Mabry comments:

Perhaps Dr Siegel's thesis will be supported by a new paradigm that dispenses with the connection between "American" and "securities", i.e., is Coca-Cola really just an "American" stock? Or Exxon-Mobil? Or Microsoft? Or many smaller US-based companies whose business is actually global in scope? Or think about the large foreign companies that are a big part of daily trading volume here and also part of most/all retirement accounts. Increasingly, it may be that boomers are selling their holdings into a more and more homogeous global market.

from the WSJ article:

"They say they've been chewing over the issue during vacations together at the New Jersey shore."

One shudders to think of the reality-tv-show possibilities….

Rocky Humbert comments:

An alternative way to look at this issue is to consider whether one's ownership of equities is an investment based on an assessment of future earnings and dividends — or a speculation based on a greater-fool theory.

To quote Keynes: "Most of these [professional investors and speculators] are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the public. They are concerned, not with what an investment is really worth to a man who buys it "for keeps," but with what the market will value it at, under the influence of mass psychology, three months or a year hence." Source: Keynes "General Theory," Harcourt,Brace & World 1965 ed. pg 155

This quote is reminiscent to statements made by a certain gentleman from Omaha, whose company has now outperformed the S&P-500 for the past 1, 3, 5, 10, 20 years…

Stefan Jovanovich adds:

The gentleman from Omaha has an easy standard of comparison. If you apply the average tax rate of the S&P companies to Berkshire's past 20 years' earnings, the company's book value drops by roughly 1/3rd. Never mind being a specialist in a bull market; in my next life I want to come back as the owner of an insurance company who is on a first-name basis with the Secretary of the Treasury.

I hate to trash what was once part of Dad's backlist, but Keynes' presumption about what is in the minds of investors and speculators is the truth only because it is theory that has won the academic beauty contest. It has been the most fashionable theory going since neo-Marxism trumped all else (note the reference to "mass psychology"), but it no more likely to be the truth than any other guess about something that is unknown and unknowable.

"The man of system is apt to be very wise to his own conceit. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board." - Adam Smith

Tyler McClellan writes:

I don't understand the relevance of any of the above. There are complicated ways in which falling stock prices affect on economic growth and even more complicated steps through which this transmission affects corporate profits.

But surely other than these effects, we don't care about the price of the capital stock. We care about the return to the capital stock at the given price of transfer. If the profits don't decline, so what if the old transfer the assets to the young at 12x or 15x, excepting of course the old.

Considering the IRR of social security has gone from high 30s for the first generation to slightly negative in mine, I can assure you that we need not worry about the "misfortune of the old". Social security is a flippant example, but the fact is empirically undeniable, the current generation of old people have benefitted from the most massive transfer of wealth to them from the young the world has ever seen. The baby boomers will do materially better than breaking even at current projections (driven almost completely by medicare), and the next generation will do substantially worse.

Its astounding to me that we allow the "old" to impart their wisdom to the "young". Now of course the young will benefit in the non-taxed sectors. If no one in Westchester's children can afford their parents houses, then in aggregate the houses must go down in price. This is a benefit to the children, just as lower stock prices with the same future earnings are a benefit to the young.

I call this the Grand Bargain, either we eliminate the entitlements and the asset prices can stay high, or we pay the entitlements and the asset prices fall. I'm not sure which is preferable.

I am basically a doctrinaire Keynesian, although I'm not sure what analytic work such a concept does or does not perform.

I would simply say that the process you outlined in the below is actually quite different than where you began. You seem to argue on the one hand that the businesses wont reinvest because they don't have any cash flow and then in the second that they wont reinvest the surplus cash flow because they are not confident in future X, Y, or Z.

As you can see those are mutually incompatible facts. Keynes believed that because changing expectations of the future largely effect plans reliant on the far future (such as investment), that in times of panic one should create investment to make use of the excess demanded savings, specifically when the excess of demanded savings was sufficient to make lower interest rates incapable of increasing the demand to invest sufficiently to absorb this excess savings.

Expectations of the future are a source of current period aggregate demand. Changing expectations of the future where everyone wants to invest less than he wants to save (which by the way savings is a flow of income as you correctly identify further down in you argument), can only be accomplished by destroying enough income such that the savings is not actually produced. There cannot be more savings than investment. There is no way to store money, there is no flow of savings that is not spent. That is to say, all savings is spent, just some of it is spent on investment.

I suspect you agree with the above and simply doubt that the way to get people to demand greater investment is to do it for them, and that rather we should provide future tax clarity, lower regulation, jump through hoops… fine, and I don't particularly disagree, but you will see that the fundamental insight remains. With no demand to invest, we cannot fulfill the demand to save. Period, end of story.



The iowa riverWhat piques my interest these days:

1. Interesting price divergence: BO steadily rising, while S, SM, C, O, W all flirt with contract lows. I don't strictly favor positioning in advance of lows' test - as sell-stops rest there - but it certainly bears watching news and getting ready to jump in. Likely, following a wash-out on negative news; or should consolidation continue much longer, with no news.

2. Entirely different chart of Sugar, which just corrected 38% of its price(!) - not merely 38% of preceding Bullish wave - in a month! Extremely dynamic chart, with bullish potential for TRADERS (not INVESTORS, as in grains)

Pitt T. Maner III writes:

The state by state influence of the melting snow/rainfall dynamic is perhaps unknowable at this point but it would seem to be a potential variable in the equation. Farmers would have to consider these risks and use very advanced risk analysis one would think (on one level the prices might increase for the farmer–weighing negative vs. positive predictions). If the soils are too wet it evidently delays planting –lingering effects a factor too. A very complex interplay between Mother Nature and man:

So much snow has melted already that 17 river gauges throughout Iowa showed record-high stream flow for this calendar date on Tuesday.And of the 85 river gauges the U.S. Geological Survey operates on rivers statewide, another 48 showed stream flows above normal.



 Purveyors of the news for the past nine years know what constitutes a "green zone": Security from suicide bombers, infiltrators, craziness of an unvetted variety, and control over troublemakers of foreign and local variety, initially probably in Iraq (now metastasizing into other war theatres). The new Greengrass, who gave us the crackling good adventure-actioners in the BOURNE canon, has done it again. Greengrass' filmography includes The Bourne Ultimatum (2007) (Germany); United 93 (2006); The Bourne Supremacy (2004); and Bloody Sunday (2002), among others in a distinguished writing, directing and scripting career. The only problem is that this is so good, so fast, so all-around-diverting that it won't have the cachet of a brand new genre come next March Academy Awards night, since THE HURT LOCKER just swept the Oscars with six golden statuettes, and the Academy probably can't risk giving the prize win to a 'war film' two years in a row. Which is a damned shame. No bummed-out Babs Streisand scowling in the middle distance in '11.

Matt Damon does a tight, riveting, subtle turn as Chief Warrant Officer Roy Miller in Iraq in 2004, serving under maximal stress and constant turf battles against such peacock-aggrandizers as smarmy Pentagon wonk, Greg Kinnear, who (as Clark Poundstone) wants results at all costs, no matter their veracity. Brendan Gleeson, the magnificent Irish actor, turns in a pitch-perfect perf as the Sunni- and Shi'a-hound CIA detail man who wants the practical results that will produce lasting Iraqi peace and sanity, not fleeting WMD glory. The sole female figure is a revenant who, unlike brunette Judith Miller working for the NY Times, is here blonde (Amy Ryan, playing Lawrie Dayne) and working for the Wall Street Journal. Both newsies get info they perhaps too-easily swallow.

The plot, which is challenging to hear and see amid the blur of action and overlapping dialogue and split-hair edits and cross-cutting: Discovering covert but consistently faulty intel converts a solid U.S. Army Captain to go rogue as he hunts for Weapons of Mass Destruction in an unstable region. Miller thinks there's a stinkweed in DC misdirecting all his crew's efforts, wasting their time digging in ludicrous places and uncovering innocuous toilet factories planktoned in pigeon poo. Turf battles with home office, Kinnear and parachuted-in fake Iraqi puppet masters interfere with and clash with the maddening unknown of which locals can be trusted, which cannot. Mistakes result in families being wiped out-or US Armed Services personnel buying it. Filmed in Spain, morocco and the US, the film has the gritty feel LOCKER has, the narrow alleyways, the impassive faces of the ex-Saddam Army, all of whom turn in excellent portraits of proud, fearless, passionate (if nuanced-loyalty) soldiers.

Testosterone rises right out of your seat into your chest as Damon chases leads to what's what in WMD. It's not a blatant play for partisan hoorah! Either. One rides along in the Humvee or military transport with heart racing and knuckles clenched.

Green Zone
gets a bright green light from this seat.



High-frequency finance can revolutionize economics and finance by turning accepted assumptions on their head and offering novel solutions to today’s issues. This comes from an interesting article on the topic:

In high-frequency finance:

The first step involves the collecting and scrubbing of data.

The second step is to analyze the data and identify its statistical properties. Due to the masses of data points available for analysis (for many financial instruments one can collect more than 100,000 data points per day), identification of structures is straightforward– either there is a regularity or there is none.

The third step is to formalise observations of specific patterns and seek tentative explanations/ theories to explain them. Fractal theory suggests that we can search for explanations of the big crisis by moving to another time scale — the short term.

On a short-term time scale, we study how regime shifts occur and how human beings react. The large number of occurrences allows for meaningful analysis. We study all facets of a crisis– how traders behave prior to the crisis, how they react to the first onslaught, how they panic, when the going gets hard and finally, how their frame of reference which previously was a kind of anchor and gave them a degree of security breaks down and how later, when the shock has passed, the excitement dies down, there is the aftershock depression and then eventually how gradual recovery to a new state of normality begins. It is possible to build maps of how market participants build up positions and how asset bubbles develop over time.

High-frequency finance opens the way to develop "economic weather maps".

Just as in meteorology where the large scale models rely on the most detailed information of precipitation, air pressure and wind, the same is true for the economic weather map. The development of such a global economic weather map has barely started. The "scale of market quake" is a free service. It is a very interesting experiment. You can read the paper "The scale of market quakes".

I believe these are really exciting developments. More than 15 years ago it was expensive to find end-of-day data and I would update together with my dad the files of the stocks I was interested in using data from the newspaper. Today we have huge online databases available to the average trader. The computer I had at the time and the SW I could afford would allow me to do some technical analysis building indicators and that's it. Today I use Tradestation.  I can program and automate my indicators, studies and strategies. It is a huge advance for average traders like me. High frequency finance is now the new frontier and if you want to be profitable, there you can still find the sort of inefficiencies you need. However, it cannot be accessible to everybody. Once again, you need the data, the computers and the math/statistical expertise. It is getting more and more complex. Moreover, to trade on such a short time frame you need to have very very very low commissions that the average trader cannot obtain. Would you expect something different?

The question I have is whether there are inefficiencies in longer time frames that the big guys do not even bother to consider: the leftovers of their meal. At the 60 minute level or even the daily time frame. I had the privilege to talk with one of the best traders of Wall Street (he trades mainly the emini) about this issue and he believes that this is the only way to stay on the market for the average guy. There is a way to profitable in these time frames. It worked for him. Inefficiencies at micro structure level must be so important that the few big players in the business that can afford that type of game are making a lot of money. In fact, policymakers have started to look into it, but it is very sensitive and interests are huge. With time, competition will increase also in that area and it will become more difficult even for them. But for now, they make billions. As far as I am concerned, I feel like a little fish that lives under the rocks and comes at night out after the sharks have made their dinner and left something back, which was not worth for them wasting time. The search continues.

Paolo Pezzutti is the author of Trading The U.S. Markets, Harriman House, 2008

Sushi Kedia writes:

In the spirit of Daily Speculations, where observations of small fish swimming up predict coming quakes in Japan, investing ideas that can be hypothesized before testing by observing characteristics of oaks etc. etc, one keeps wondering what would qualify from market data points as the proverbial rats, birds and smaller creatures that behave distinctively before coming changes in weather, terrain, storms and big winds. Even if jokingly, when a friend reminded me few days ago that Finance is the art of moving money from hand to hand until it disappears and while I know that fractals make the same ideas appear at every scale making the big and the small equal in their eventual outcomes, one simplifies the notion of fractal finance to the simplest possible that it is the art of moving money from hand to hand across any size, until it disappears. That brings one to a more easily imaginable notion of visualizing the food chains in the markets at action looking at distinctive behaviours of the smaller creatures.

Is retail behavior a richer source of predicting large moves or is the professionals' action a better gauge? Or is it that both used together produce some finer ideas?Does the behaviour of small caps and micro caps provide some extra insights into the markets? Distinct expansion or contraction of range is one obvious thought stemming from Chair's latest post.

So many have been talking about a potential crash coming by, suddenly in the last week or so, one wonders which minnows and sparrows are they watching to get such "feelings".

Are there any distinctive behaviours in volume and open interest too that forebode a coming change in the winds? Has some master of the universe quietly assembled in some corner of this world the mythical all encompassing indicator that captures time, price, volume, open interest? The equivalent of the General Theory of Everything in the markets? How far are the scientists in the markets from the equivalent of an 11-Dimensional M Theory?

Even if this set of simple(ton) queries generates from the specs a list of ideas they have felt over their long years in the marts as precursors to large moves, it would be highly useful to compile them and explore what testable theses can come up from them, for Einstein did say and believe that an ideas should be simplified as much as possible, but not more.

Russ Sears comments:

It would appear to me, that on the anniversary of the turn-around in the markets, it would be wise to review what the Derivative Expert / leading fractal proponent and his teacher/mentor were saying last year at this time.

As I recall, his predictions were that doom was inevitable and that it was just the beginning. The future was clearly going to be worse than the Great Depression. His only hope was, he prayed, every night, and in the morning when he woke up, "he was wrong"…

His teacher was not as sure as him, but thought it was more likely than not, going to be more terrible than imaginable, also.

Yet, I do believe there is considerable turbulence and potential for chaos theory, to occur whenever people allocate resources…However, the markets are the best mechanism for catching those grossly misallocated resources and shuting down those chaotic loops of turbulence that man has devised. While the derivative expert still could be proven right in the long run. One must consider that there are some strong forces of learning from your mistakes built-into the system also. Non-the-less no matter how certain our demise may be, the rebound shows that care must still be taken thinking one way, up or down, is the only direction.

While I will disagree with the Derivative Expert, that the markets are built on a time fractal, a quick look at the human situation shows that herds, large and small, are no protection from irrational thinking. Dr. Dorn and I have been working on a paper, that I will be presenting on April 13 in Chicago at the Enterprise Risk Management Symposium that will discuss this further. It is not directly related to chaos theory or fractals. But one sentence to ponder concerning fractals to whet your appetite: "Individuals, businesses, industries and even whole economies, all, can become victims of mania and panic".
And I will have more to say on how this does more closely tie into fractals and chaos theory in other works, time and receptive audience permitting.

Jeff Rollert comments:

The last 12 months remind me more of the eye of a hurricane.



I used unemployment data to calculate the month-to-month change in unemployment:

"chg" = (this month UNRATE%) - (last month UNRATE%)

Partitioned into Dem and Rep presidencies, each compared to zero:

One-Sample T: D chg, R chg

Test of mu = 0 vs not = 0

Variable   N     Mean   StDev   SE Mean      95% CI             T      P
D chg     325  -0.0086  0.2276  0.0126  (-0.0334, 0.0162)  -0.68  0.496
R chg     420   0.0216  0.2063  0.0100  ( 0.0018, 0.0414)   2.15  0.032

Under "D", there was no significant change in month-to-month unemployment, but under "R" there was, on average, significant increase from month-to-month (of 0.02%).



Proboscis monkeysAn observation that I've made in the past and see developing is that when you see markets and sectors move up on on higher volume, the tendency is for momentum types to pick up more on pullbacks around 50 day moving average area. That seems to be pattern developing in high beta areas. That looks like the playbook being used by the momentum folk.

Anatoly Veltman comments:

The equivalent indicator in futures markets (as distinct from individual stock trading) is Open Interest. An underlying (I'm being careful not to use the language "a futures contract", which may be incorrectly coded by some as a single delivery month) that rises in price on increasing total O.I. — should also be bought, like in your example. It's of extreme importance for novice coders to understand: volume is largely meaningless in futures. O.I. replaces Volume, once you transition from Stocks arena to Futures.



The Santa Fe InstituteImitation is the sincerest of flattery– Charles Caleb Colton , Lacon, volume I, no. 183 (1780 - 1832)

There are many who seek to emulate the success of others through mimicry. A paper of possible interest from the Santa Fe Institute:


In this paper we shall apply a variant of this idea to modeling the competition for customers in financial markets. We show that portfolio managers with no private information or special investment skills can generate returns over an extended period of time that look just like the returns that would be generated by highly skilled managers; moreover, they can do so without any knowledge of how the skilled managers actually produce such returns.

B) and further extending the idea of emulation (are you are a "genius" as long as you make money?)

We identify truly skilled investors we call Geniuses. You automatically mirror their trades in the same proportion in a brokerage account we create for you. It's the world's first marketplace to find great investors to emulate.

kaChing is an investing talent marketplace where individual investors can get access to outstanding investing talent, and outstanding investing talent can earn a living. By embracing the Open Source philosophy that "information should be free" and "you should only be charged for convenience", kaChing brings radical transparency for the first time to the investing business. The result is a compelling alternative to actively managed mutual funds which is a radically better way to invest.



Robert Todd Lincoln by Matthew BradyThe ultimate hoo-doo is the fictional Schlep-rock from the Flintstones. But I came across an interesting tidbit of information that I think bumps Schlep-rock out of the top hoo-doo spot:

Abraham Lincoln's eldest son, Robert Todd Lincoln, was on the scene of three separate presidential assassinations. He was summoned to his father's side after his father was mortally wounded at Ford's Theatre in 1865. He was also in the train station where President Garfield was shot. And Robert was invited to an event by William McKinley and, at that occasion, McKinley was assassinated. Tragedy followed Robert wherever he went (From All-Pro Dad's daily email service)

What is it about people that seem to attract unfortune? I have known many people in my life that just can't seem to get it together. For some reason, "bad luck" and problems follow them wherever they go. Whether these hoodoo's are of great ability or average ability, or possess very little ability, they all seem to have one major overarching trait in common:

They have an uncanny ability to snatch defeat from the jaws of victory.

Having grown up in lower middle class semi-rough neighborhood, I saw this behavior all the time…and it was a lot more prelevent than one would think. Whether it was outright self destructive behavior (like Matt Damon's character in Good Will Hunting), or whether it was more subtle methods to ensure that they would never break through their self imposed glass ceiling, the behaviour was always there.

What is it about these people that just can't seem to get it together? Is it genetic?

Each of these hoodoo's seem to lack it – that intangible characteristic that is inherent in ever successful person, the characteristic of not seeing defeat as a stopping place, but as a learning experience. The characteristic of not being phased by no (as in, "No, I don't want your service"). The characteristic of seeing life as continuous journey, a constant progression – not a destination.

What is it that seperates these people? And, no, it's not a list of things like The Seven Habits of Highly Successful People. Most everyone knows what it takes to be successful, but they still sit on their butts and do nothing about it, or worse yet, do the opposite. What goes on in these people's minds?



 I just left my local lumber yard and found the following:

With oil soaring again, and my local pump prices on the rise and $3.50 regular predicted by Memorial Day, the following was quoted to me:

Framing Lumber:

2×6x10" UP 12%

2×4x10" UP 5%

2×10x12" UP 5%

2×8x10" UP


4'x8' sheets of plywood: 1/2" CDX (construction sheathing grade) MINUS 7%

5/8" CDX (construction sheathing grade) MINUS 4%


30 year dimensional grade ( 3 bundles equals 100 Sq. Ft. of coverage)

UP 7% and more increases expected…

With oil over 80 and likely to climb this will be terrible for the upcoming construction season. I have a large garage to build and pre-bought all materials before last Winter set into my area. Glad I did this. It's hard to figure prices for upcoming jobs due to upswings in materials. I can feel those dogs nipping at my heels!



Multi-year lows in stocks occurred twice in the last decade: Both in March, in 2003 and in 2009.

The attached chart shows log(SPY) daily closes for both the 2003 and 2009 bottoms, aligning the low days exactly (3/11/03 and 3/9/09). Both series look back 608 trading days before the bottom. Following 3/11/03, log(SPY) is shown to +900 days (10/4/06), and we are now beyond the 3/9/09 low by +250 days.

Plotting log(SPY) allows direct comparison of proportional returns (eg, %) going into and coming out of the abysses. What are the differences?

2009 decline was faster/deeper than 2003
2009 post-decline rise was faster than 2003
2003 is prime and 2009 is not

one is red the other yellow



 stray dog riding on the subway in RussiaIn a dynamic talk about the adaptions of the environment, Greg Rehmke alluded to the stray dogs of Moscow. What can market people learn from them?

1. The dogs ride the subway and serve as watchman. They adapted from pets to work dogs. If dogs can change so drastically in their function in a few years, so can markets. The idea of doing the same thing over and over again when conditions change becomes a losing proposition.

2. The dogs use deception to bark behind their victims and to pretend to be your best friend by laying their head on your lap. Deception is key in the market and dogs, caterpillars, and humans have a million deceits up their sleeve. Things are never what they seem.

3. Only 3% of the dogs survive. But they lead a very satisfactory life, riding first class on the subways etc. The stocks that have been beaten down the most and survive, and even start advancing, like the financials, are good buys.

4. The dogs have specialized niches in which they ply their trade. Watchdogs, robbers, night raiders. To survive, pick a niche and specialize in it.

 5. The dogs are very sensitive to human interaction. They can tell your feelings and smell your nervousness. They are good to have around in the trading room so that they can tell when you are about to go on tilt, or the commentators or you are particularly stressed and need a break.

6. The dogs have learned to coexist with humans. They are not too friendly or too hostile. Many markets that used to be antithetical to each other like bonds and stocks learn to harmonize and change their relation from friendly to coexistence like the dogs. But they don't bite the humans either. The relation between the regulators and the regulated in all fields is similar, and is to be striven for.

7. Put a beggar on horseback and she'll gallop. The model was once devoid of private property. But when the guard dog attacked her dog, she cut it up. The worst slave drivers were the freed slaves in human times. The worst people to have on the other side are your former fellows in arms.

8. As income rises, the demand for luxuries will increase. The Russians now love the 55,000 dogs that are left in place. Before they tried to cull them but as they became wealthier they were able to be more compassionate. Everywhere the desire to be friendly and compassionate increases with income.

9. One notes that now the dogs are becoming vicious. 70 bites a day, a few killings.

10. The dogs all have wedge shaped faces and are medium height. The move from a high to low and then the same high is very bullish, and the move from a low to a high and then the same low is bearish

11. You must beware of dogs that are down on their luck as they have nothing to lose by killing you. Never short a down of the market. 

12. Dogs learn and diffuse to geographically related areas with some polymorphic modification. The dogs in Hungary do not ride the subways but ride the buses. They pretend to be with a passenger and wait right by their seat until the passenger leaves and then they get off at their stop. The moves in China and Thailand (I look around three times) diffuse to neighboring countries and ultimately to Europe and the US.

What other things do readers see?

Pitt T. Maner III writes:

The need to interpret key indicators — even if a dog is friendly, let him smell you first and only offer the back side of your hand and have it ready to move if the dog gets snappy. I had a friend whose older dog was very cute looking and generally nice but he suffered from a type of epilepsy and would bite down unexpectedly.



pacquiao-boxer-of-the-yearThis is a market that's not close to expiry and starts taking on size, and the yours mine battle heats up. Watching the Aussie share price index recently where the daily battle is normally in a relatively controlled volume situation (maybe except into the last few days of expiry, where its been known to be smashed around with some big clips), it was most interesting to see that some obviously big players have a right ding dong battle. After the market hit fresh highs and was looking to retract, it was enthralling — just like ultimate fighting — to see both sides launch at each other with some big hits. Maybe running off time could be the answer, when volume comes in from one side and the boys take to it with earnest. Running a clock like a boxer's rounds may be worth considering for an option for entry on the side thats holding its nerve.

Today the market soaked it up and then some and shot to new highs on the day. It has been basically bid in the week since. No doubt there may be something worth counting in a huge move in relative clip size, time relative to tight range in the "reach" of the fight and returns, on the close, and 1, 3, 5 days subsequent. Like a boxer absorbing blows left right and centre after a flurry from the opposition and then coming out of the gate to wreck havoc, markets may play by the same rules.



The Dogs of Capitalism by Mitchell Jones follows the history of dogs, but in the process is one of the best books on the history of the legal system I've ever read.



locustsLocusts tend to swarm in prime number intervals. It reduces the years in which there might be an overlap with other niche competitors.

Following this idea, here is a thought experiment. Any yearly cycle system must peak or trough on a multiple, making a prime a non-peak or trough in any given cycle system. That in turn means under a cycle following analysis that we are between either a peak or a trough. Since we had a trough recently, that would leave that we have not hit the peak.

Ki Zussman notes:

Speaking of prime numbers, here are the DJIA annual returns for years which were prime numbers (1930-present):

Date           DOW prime
12/1/2003     0.253
12/1/1999     0.252
12/1/1997     0.226
12/1/1993     0.137
12/1/1987     0.023
12/3/1979     0.042
12/3/1973    -0.166
12/3/1951     0.144
12/1/1949     0.131
12/1/1933     0.637
12/1/1931    -0.527

One notes these years had higher mean returns than non-prime years, but the difference was insignificant:

Two-sample T for DOW prime vs DOW

                 N      Mean     StDev  SE Mean

DOW prime  11  0.105  0.288    0.087  T=0.52
DOW           70  0.058  0.181    0.022

The next prime year is 2011, followed by 2027



Here is a great post on the assertTrue() blog on lessons from Amazon's success. 

keep looking »


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