Above chart is US federal deficit / GDP ratio, 1900-2010. The two prior peaks (1919=17, 1943=28) coincided with WWI and WWII respectively. Currently we are at the 10.64; 3rd highest in the 110 year series, and not declining yet.

The rational will argue the deficits financed the first and second efforts to forever free the world from tyranny. Recalling that financial markets are forward looking, that the options market forecast the 9/11 event [A. Poteshman: Unusual option market activity and the terrorist attacks of September 11, 2001, Journal of Business , 2006] among many other things , one wonders when flags may wave again?

Alex Castaldo adds:

Some cheerful reading from the Congressional Budget Office :

Further increases in federal debt relative to the nation’s output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels. […]

If the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output. […]

[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. [If this were to occur, to] restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.



Norbert Wiener: CyberneticsDid you see the scene in Karate Kid where he gets the fly with a chopstick? Have you ever tried to swat a fly? Not easy. Flies operate at a smaller time scale than we do. We probably look like the sun moving across the sky to them. But you can still swat them. First some fly psychology such as Big Stinky where they love to party, but its a one way ticket. Or Jolt racket that zaps them. But you still need psychology for the Jolt by waving your hand on one side, then coming up on the other side as they try to escape and you can Jolt them.

Some of the smaller time frames and tick trading by computer illustrate a similar phenomenon. They are operating in a different time zone, and humans are not fast enough to see or concentrate. Chris sent me an analysis of the level that the exchanges are gaming each other. But they still operate under fixed rules of the system, and the lines, and are programmed by programmers with psychology. Because of the fixed rules they cannot be effectively adaptive immediately. The big May crash was an example. Perhaps they are reading current conditions quickly, but there may well be certain conditions outside their realm of observation or adaptation, like the flies.

The advantage the slow and complex organism has over the fast and simple one is a greater range of survivable conditions.



a golden bubbleI traded a lot of gold 20 years ago. It was $350-400 Comex scalping paradise, where out of 30,000 total I managed to execute up to 3,000 in-and-out or 10% of futures total, on dull days. Maintaining an open arbline to gold pit - but being physically off the floor - allowed me more of a neutral perspective…

Fast-forward to summer 2010: gold effortlessly straddles $1250 record. I get a lot of Bullish mail, including people I haven't heard from in years: do I know best ways of securing bullion? Hmm… A dear colleague implores: "gold goes up when it's supposed to (declining dollar, market panic). Gold goes up when it's not supposed to (rising dollar, low inflation). That's textbook bubble behavior. There's no story on the table right now which might kill gold…why don't you stop fighting the bubble … and when this bubble bursts, there will be years of bear market rallies to sell!!!??" Explaining that I'm watching neutral from sidelines, I add: my original $1250 post was based more on my feeling THAT DAY that Bulls got WAY SLOPPY… I'll post if I see something interesting.

Immediately come consecutive daily rises into June 21, and I feel compelled to post my second heads-up of the year: "Are Gold Bulls getting sloppy again at over $1266?" What prompted me that morning was an unmistakable way the chart action was unfolding, complete with classic newsletter analysis of Sunday June 20, that I felt important to share (from Gold Scents, by Toby Connor).

And now for the query of the day: has over-90% Bullish consensus (of June 20) been broken?

Craig Mee writes: 

What is interesting is the fact that when gold snapped below 1240, and got given for more than 40 bucks, that in 9 subsequent trading days, it failed to get stuck into that days range in a meaning way. Volatility didn't seem overly massive in turns of ATR, at the high… therefore you would tend to think this move was something of a wash out, but Anatoly was dead on in that gold started failing to be bid on the growth story and that was a big divergence from the previous trading pattern. Where's it going? Who knows, but I'll just be trading the price. 

Jason Ruspini adds:

When one looks at gold as a % of global fx reserves or as a % of investable assets or monetary aggregates, it doesn't look like a bubble. Gold bears could have saved themselves some money if they had just gotten over the fact that yes it's relatively useless and negative carry– but that explains why gold does well. It does well when opportunity cost, real rates of return, are low. Yes, insofar as yields may "break out" in the next couple of days, gold will be less attractive. The next day some macro number may end that perception. I tend towards the idea that the long term bet on gold is a bet that real rates of return will be low relative to the 20th century. Granted, this is based on insufficiently tested ideas about demographics, globalization and technological rate of change.



 Recently I have posited that the market to an inordinate degree shows the main attributes in its daily moves of the most vivid sports game that has not been used. I would add to this that during each hour the market is likely to move to the rhythms and dynamics of the most likely classical music being played on a classical music station in home town, for example the former WQXR in New York, in full knowledge that these programs are often selected 2 months in advance, and noting that I was a subscriber to same when I was 12 years old.

I am adding to my list of mystical encampments and predictions that the fortunes of Apple and Lady Gaga will follow a similar arc in the future, and as soon as the Lady loses her luster, or a substantial base of her gay support, Apple will be ready to nose dive.

Do you feel that because of these ideas that I should resign my post as chair of Daily Spec which is designed to deflate bally hoo, or is this just a symptom of that predilection that old men such as the sage and the fake doc have to maintain their romantic aura?

Ken Drees writes:

Lebron James' Cavs win over the bulls to end that series correlates to the spy top (04/27/10). That was the zenith of his career in Cleveland. They were then going into Boston on a full tank of expectations. The last game (as a cav) in that series marked a secondary top 08/13/10–then the melodrama begins. His great choice to go to Miami did not mark the low but was the midpoint of the latest rally—he is losing his market moving mojo–his ability to focus the market energy . So now he has lost his core fan support like lady gaga at some point will lose her core fan base. No, I don't think the Chair is that off-kilter.

Popular culture icons somehow bleed into market consciousness.

Vince Fulco writes:

I've long thought that the culture has moved into a greater phase of bally hoo, perhaps a derivative of the Romans' 'Bread & Circuses'. We are now just starting to realize or are being forced to understand that flat incomes, poorly funded retirements and insufficient skills in the aggregate set against historically outsized obligations are a recipe for disaster. Fighting falsehoods would seem to be a necessity of survival and good investing for the long haul. Moreover, one has great opportunities to choose from post deflation.

Jim Lackey shares: 

Actually no. AAPL has talent and is'nt just a fad or a show. Not sayin' that the Lady doesn't have talent, but if and when I see her write and produce tunes for others and sing Jazz, then she will be an AAPL. But no! No I did buy AAPl in 2003 when Mr. Eyerman stood right here on list and said buy it now. Jobs is back, and Itunes is brilliant. It's been a ten bagger since, which is what got me to tell the father in law naaa na na no this Xmas as he was on visit to Music City and toyed with his new Iphone all week. He's a MD and a tech freak and he said, "you know what, I don't need a PC or internet at home anymore with this"

It's not CSCO when it was on the way to a trillion dollar market cap in year 2,000. It's post crash now. Also it's no shorted up fad stock, but yes it's a fashion device an ipod in all 3 colors for different outfits. If I had to guess its a DELL circa late 90's. It never crashed and burned until much later in the tech wreck. It just stopped going up and in these markets AAPL must trade 299.75 but not 300. ha. 

Craig Mee writes:

Just like Seinfeld had the bravery to sell the high and knock back the 10Mil for a tenth season, (one of a tiny minority who do) maybe the gagas and apples should too. To keep up the product development and create new bizarreness no doubt gets harder and harder with everyone hot on your tail. Im sure income changes, say for Seinfeld, from shows to marketing, but he has been smart enough to cut and run, and keep the value. A lesson for us all. 

Marlowe Cassetti writes:

The chair has touched on a point of interest that has bothered me. I don’t know about Lady Gaga, but Apple’s climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let’s look at the facts:

There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn’t produce stuff that the world needs just what they like to have, until something else strikes their fancy.

It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.

Thomas Miller writes:

 Sometimes one's instincts or gut feelings can't be counted or explained but you feel its true. Probably based on years of different observations made subconsciously. A trader may feel strongly a market is about to break without being able to explain exactly why, because subconsciously they have seen patterns many times before. Considering the source, I wouldn't immediately dismiss this as ballyhoo. Instead of resigning, further testing is called for.

Steve Ellison comments: 

Mr. Aronson noted in his book that it is no fun being a skeptic and that the scientific method leaves deep human yearnings unfulfilled. Facts are often tedious and dull, but stories are captivating, which is why people who have bought into a narrative continue believing it even when presented with strong counterfactuals. "Story stocks" have always been prominent in bull markets.


Marion Dreyfus writes:

A new study reveals that people are at their angriest on Thursdays. Thus, perhaps deals might better be made on Friday, when people are delightfully anticipating the weekend, or Monday, when they are somnolently reviewing the events of their past free-time indulgences.

interesting … We have been doing product development on a tool to gather data, and do reduction for self-introspection to find and permit prediction of cyclic true 'more productive' highs, and 'down in the dumps' lows.

Jim Wildman comments:

I've been thinking a lot about rhythms. I've noticed on the treadmill at the Y that people tend to fall into step with each other. Being on treadmills, this is easier since you can be running at different speeds, but the same step count. It creates an interesting effect when the treadmills are on a suspended 2nd story as it was at the last gym. I've wondered how many people it would take to collapse the floor.

This study seems to indicate that there are (at least tendencies towards) rhythms in 'group' emotions. What other rhythms are there and how do they affect me? How do they affect the markets?

Vincent Andres adds:

Here is a good paper on this topic of frequency coupling

Some more infor:

Steven Strogatz

Steven Strogatz's publications

A good book

TED video (look at the part on fireflies, near the 10th minute on metronomes (1st historical notice by Huygens), near the 13th minute and the bridge (not Tacoma … but not very far !)… in fact the whole video examples are interesting). 

Easan Katir writes:

In a year when Paul the Octopus correctly picked 7 consecutive wins, well-documented to the world, when the underwater plume in the Gulf of Mexican Oil matched the plume of gritty ash from Eyjafjallajokull, and the rig explosion coincided with the April market top, who can say anymore what is mystical and what isn't. Lead on, Chair! Lead on!

Craig Mee writes:

Looks like Schumacher should of stayed off the track, as HIS value, now may be plummeting: "For all his greatness, he never knows when to give up. He is a shadow of his former self," added hugely experienced former driver David Coulthard" Ouch!



 If the all seeing eye could talk about the follies of the public, surely he would be saying something about what fools these mortals are. On July 2, the market dropped to the terrible 1000 level at 1010 on news that the former colleague of the chronic bear from Barrons was bearish on technology because of fears of stimulus and today it went up to the 1110 level because he had turned more optimistic. Mention of the 39% return in 2009 would cause Falstaffian laughter and songs of mirth would break out above.

Almost as humorous is the fixed incomes moving to a 10 day low on news presumably translated from the Yiddish that the former student of the liberal MIT command economy people was tightening in Israel. In a jiffy, the fixed income reversed, and the idea that tightening is anti inflationary came back to the fore, amid fears that his students and colleagues emanating from the white shoe bank to central banks all around the world were ready to take guidance from him once again. Let us hope that his counterpart and admirer in the US does not once again pay him a visit of homage as his first stop as the economy can't stand any more stasis, any more tapping of the depleting wells that are the human actors responsible for all the wealth.

There was the usual backdrop of earnings reports, and increased guidance from Fed Ex and Utd Parcel. So far, the CEO's are doing a great job with the guidances as 83% of the companies that have reported so far according to Bloomberg have beaten guidances. Now that the earnings guidances have become easy targets, the public turns its attention to sales guidances which as previously noted here is meaningless relative to profits.
Much talk is made about institutions moving their equity holdings to 68% relative to bonds as if this reflected anything more than the 10 percentage point divergence in bonds and stocks that happened at the end of the month.

The all seeing eye notes such things as that the market is at a high near the end of the month and that is when traditionally the market likes to do a do-si-do. It notes that the European stocks have gone up 5 days in a row on allayed fears of stress test results. But it laughs out loud about what the assumptions behind these stress tests are, as reported by Marginal Revolution with such stress things as real estate only going up 2 % a year. Well that's okay for Brussels and the Potomac but for the rest? It also notes that the grains have plummeted to one month lows on rain, and a full moon, and wonders how this should be quantified.

All in all it's a happy day for the public, and the restaurants in New York should be busy. However, the all seeing eye will not be celebrating and will join the chronic bear who has caused so much misery for at least the next several days.



Steven StrogatzI've been thinking a lot about rhythms. I've noticed on the treadmill at the Y that people tend to fall into step with each other. Being on treadmills, this is easier since you can be running at different speeds, but the same step count. It creates an interesting effect when the treadmills are on a suspended 2nd story as it was at the last gym. I've wondered how many people it would take to collapse the floor.

This study seems to indicate that there are (at least tendencies towards) rhythms in 'group' emotions. What other rhythms are there and how do they affect me? How do they affect the markets?

Vincent Andres writes:

Here is a good paper on this topic of frequency coupling.


Steven Strogatz

a book on the subject .

and a TED video: (look at the part on fireflies, near the 10th minute on metronomes (1st historical notice by Huygens), near the 13th minute and the bridge (not Tacoma … but not very far!)… in fact the whole video examples are interesting).



Ray Irani Top Paid CEOToday's WSJ summarizes the decade's top 25 earners among CEOs. While there are many variables which affect CEO compensation, investors should note the troubling absence of any obvious relationship between long-term stock performance and CEO pay. For students of free enterprise and tax policy, there are many questions raised by these findings. Other studies involving the entire S&P 500 universe have shown similar conclusions.

Thought experiment: would the stock returns have been any different if the CEO compensation dropped a "0"? (i.e. $400 million -> 40 million)

comp million$

stk return






























Jim Lackey writes:

There are big list of tells we can use:

1. Dollar a year man. Quickly moves to slash burn and sell the company to no benefit of current holders. Look to the last job/ company he held and where the old management team is. That's where the assets are going.

2. X company man. GE six sigma. Look for them to run the company into the ground with focus on cost cuts firing the bottom 10% "creating shareholder value". Meanwhile their competitors are hiring all those fired with a contact or client book and quickly signing deals. Making money vs reducing costs.

There are many others and to "get the joke" one must watch "Charlie Wilson's War".



IsraelTo what extent does the scholarly market or Israel predict the US markets?

Marion Dreyfus comments:

Aside from the timing differential, 6 hours ahead of us, why might Israel even be thought to have any impact on our market, other again than the fact that many investors there are American and they might vote the same way we vote with their shekels and dollars.

(In Israel today there is still a strong feeling of suspicion over markets, since many many Israelis lost their sandals and shirts in a crash some years ago–a huge bubble that hurt many.)

Pitt T. Maner III writes:

It appears that 2 pharmaceutical companies, 2 financial firms, a fertilizer (potash) co., and a telecommunications co. weight about 50% of the TA-100 index. Teva Pharmaceuticals, the biggest stock, took a 6% loss today–otherwise the TA-100 would probably have been positive.

So the connection would seem possibly related to the TA-100 as an early indicator of US demand, possible relationships/sensitivity to currency exchange levels (stronger dollar as positive for drug sales), indicator of relative stability in the Mideast in advance of Monday opens (US oil supply region stability), and future demand for ag commodities–fertilizer sales in advance of planting.

Phil McDonnell writes:

At a lag of a few days the TA-100 'Granger predicts' the US market (SPY) with a statistically significant R squared of 6% (~25% correlation). Details are an exercise for the reader.


Oddly some academic papers indicate that the US and Israeli business cycles (using hierarchy analysis) are not nearly as correlated as the stock exchange indices.

It is odd too that Teva was up in 2009 at the time the US markets were down 20% and now Teva has had bad news surrounding competitor drugs and is down near a 52 week low as US markets hover around the 0% YTD mark.

Given the complexity of the correlation it must be the result of something entirely different!




zombiesThe seemingly resurgent interest in vampire ("Twilight", Yarborough's "Ste. Germain" series, the "Vampire Diaries", others) and zombie ("Pride and Prejudice and Zombies", "World War Z", etc.) fiction may point to the interest in both the overall notion and particular fixtures of an 'undead' class.

Whatever the causal relationship, the concept of entities that exist in an unliving-yet-undying state– often having to survive by parasitic or cannibalistic means– drearily lasting for years, decades, and centuries in an ambiguous condition, seems to me to reflect/hint at expectations of/connote acceptance of, a prolonged period of economic and thus social stagnation.

Gibbons Burke writes:

Fr. Robert Barron has some interesting insights [6 minute video]  about the recurrent vampire craze from a Catholic perspective.



 Jon Hamm, CEO of California Association of Highway Patrol Officers and amateur economist, called the debacle  (WSJ Blog: Calpers should have listed to this bubble predictor ) (albeit a bit early, his letter was dated February 4, 2003).

Corollaries to Doc's axiom (to paraphrase)– that everyone has a position even if they don't have a position:

1. It is one thing to have an opinion but another to act on it (especially shorting a massive run-up)

2. There is no such thing as an amateur investment manager. Even if one does not want to make decisions and delegates, the delegator, the amount delegated, and timing of funding/withdrawal must be chosen.

3. Professional asset managers do better than self-directors, except when they don't. No matter how bad you are, if you want to feel better about your results check out Barclay's (or other) Hedge Fund and CTA returns databases. (You will feel worse, however, about your management fees).

Not inconsistently, the pension-fund director recipient of the letter has been sued:

"Buenrostro was recently named as a defendant in a civil suit filed by California’s attorney general. It alleges that as Calpers chief executive he improperly accepted gifts and got a standing job offer from a middleman trying to secure investments from the fund. Through a lawyer he has denied wrongdoing. He didn’t comment about the letter."



From the Economist:

The other prediction [of the theory] is that as countries conquer disease, the intelligence of their citizens will rise. A rise in intelligence over the decades has already been noticed in rich countries. It is called the Flynn effect after James Flynn, who discovered it. Its cause, however, has been mysterious—until now. If Mr Eppig is right, the near-abolition of serious infections in these countries, by vaccination, clean water and proper sewerage, may explain much if not all of the Flynn effect.

When Dr Lynn and Dr Vanhanen originally published their IQ data, they used them to advance the theory that national differences in intelligence were the main reason for different levels of economic development. This study turns that reasoning on its head. It is lack of development, and the many health problems this brings, which explains the difference in levels of intelligence. No doubt, in a vicious circle, those differences help keep poor countries poor. But the new theory offers a way to break the circle. If further work by researchers supports the ideas of Mr Eppig and his colleagues, they will have done the world a good turn by providing policymakers with yet another reason why the elimination of disease should be one of the main aims of development, rather than a desirable afterthought.

The researchers predict that one type of health problem will increase with rising intelligence. Asthma and other allergies are thought by many experts to be rising in frequency because infantile immune systems, unchallenged by infection, are turning against the cells of the body they are supposed to protect. Some studies already suggest a correlation between a country’s allergy levels and its average IQ. Mr Eppig and his colleagues predict that future work will confirm this relationship.



 From the beginning of time the authorities– whether priests, rulers or popularly chosen officials– have claimed the authority to impose fees, fines, and taxes that force people to hand over their property. There is good evidence that arithmetic itself finds its origins in the need of the authorities to keep a tally of what people owed the state and what the revenuers had collected. Some clever person in the government in Pharoahland– let's call him the first Fed official– figured out that the easiest way to count the tally was to use a unit of the stuff the state wanted. That unit of account became what we commonly refer to as money. As Keynes puts it, "(m)oney proper in the full sense of the term can only exist in relation to a money of account." All the early money units of account were weight units for grain– the mina, the shekel, the lira, the pound. It did not take long for another clever person in the government– let's call him Fed2– to figure out that the state could accelerate its collections by creating physical representations of the units of account and then using them to "buy" the stuff the state wanted.

As long as the government was willing to accept the same physical representations of the units account– what we would call money– in payment of fees, fines and taxes, there would be no problem in having people accept money in exchange for stuff, provided that the money itself was not easily destroyed or counterfeited. The money could even be cheap to make - clay tablets and hazel wood sticks, for example.

As you might expect, it was not long before some other person in the government– known as Knuckles– decided that the domestic money supply could be the solution to giving the state and its favored citizens everything they wanted. Money could abolish scarcity itself; all the government had to do was make as many clay tablets and hazel wood sticks as it needed to buy whatever it wanted. Knuckles had the government start handing out clay tablets and hazel wood sticks in abundance. Unfortunately, paradise did not arrive as scheduled. The grain sellers realized that, since there was more money available, they could raise their prices. The government had made more money but it was not buying any more grain with it. In fact, it was buying less because some of the grain sellers realized that, if they held their stocks off the market and waited, they would be getting an even higher price.

The result was the first official monetary conference in history, now remembered as Hazel Woods. At the conference first Fed suggested that perhaps the government should be restrained in its production of new money, that it should not make more than 2 to 3% more clay tablets and hazel wood sticks each year. Fed2 suggested that the demand for money needed to be increased: if the government raised taxes, then the farmers and grain sellers would need more clay tablets and hazel wood sticks and they would make and sell more grain. Knuckles the Treasurer had a more direct solution: he and his minions would stop the grain sellers from raising their prices by throwing them in prison and confiscating their stocks.

The conference ended with a proper compromise: all 3 approaches would be tried.

There was only one problem that remained. Pharoahland still needed things that it could not produce, and the merchants who dealt in those commodities were clever enough to stay offshore out of the reach of Knuckles' minions. Even worse, those "foreign" merchants refused to accept clay tablets and hazel wood sticks as payment.

Some things never change.



Are the S&P returns different for different days of the week? According to a vast published literature on the Day of The Week Effect, the answer is yes. (And the worst return is generally on Monday, according to French (1980)).

To make money from such a regularity, one could determine the best/worst weekdays to invest during a certain period, then try to take advantage of that during the next period. The results then determine what days to bet on during the following period, and so forth.

In my statistical study here, every non-overlapping 100 trading day interval in SPY was checked for return, by day of week, back two or three bull markets ago 5/03. Here are the T-scores (test for significance vs zero) for each of the weekdays over time:

Values outside the range (-1.96,1.96) indicate that a statistically significant anomaly (at 5% level) has been detected in the given period for the given weekday.

Alex Castaldo adds:

Mr. Bonferroni would be pleased that out of 95 reported coefficients there are 5 that are statistically significant: 2.03 (Mon), 2.85 (Wed), 2.76 (Tue), 3.25 (Wed again), and 3.36 (Mon again).



Clever HansThere is the famous story about the horse that could do basic math, but was really picking up on the subtle clues of the professor that "thought" him when to stop stomping the hoof. I suspect this was what Paul [The Octopus] was doing also.

However, intuition comes with experience. Intuition can be counted, to help figure out how you "knew" or if it pure personal biases and random.

Marlowe Cassetti comments:

Isn't that what they refer to as self confirmation bias? I know someone who showed me how using Stochastic Oscillator (a BS misnomer) of several time spans one can make great profits trading options. When I point out some glaring exceptions that he conveniently overlooked, he counters that no indicator is perfect. Believing is seeing, but don't quit your day job.



©Daily Speculations 2010

The "YTD Ahead/Behind" is calculated by assigning each market a base index value of 100 as of 12/31/2009, then multiplying this base index value by the respective % change for the year (ex. +20% YTD would produce an index value of 120). Afterwards, the average of each league is calculated and subtracted from the individual current index levels to produce the amount ahead/behind.

"% up last 10" is the percentage of the last 10 sessions that were >0. For example, if 5/10 sessions were >0 this would register as 50%.

"Streak" is the consecutive number of wins/losses on a net change basis as of the most recent date. For example, W4 would mean a particular market was up the last 4 sessions. L2 would mean 2 down sessions in a row, etc.

FX league is calculated expressing USD per foreign currency.  This is done to normalize quotation methods across the currencies.  All are expressed such that a move higher (aka % change >0) is an appreciation of the foreign currency and a depreciation of the USD.  A % move <0 would be a USD gain at the expense of the foreign currency. 



Hard to believe that it has been almost 30 years since "The Road Warrior" movie (Mad Max 2), a classic of the dystopian genre and coinciding with DJIA 800 ranges. The show The Colony, starting next Tuesday the 27th, on the Discovery Channel has a bit of that Mad Max/Andromeda Strain post-apocalyptic feel.

I just hope the poor geology professor with no practical skills makes a good showing and can at least find some water–coming from Arizona State.  She probably knows a bit of geohydrology. Did not see Season One, but this looks entertaining:

What would you do in the wake of a global catastrophe? Even if you survived it, could you survive the aftermath?

Season Two of THE COLONY introduces viewers to a new group of volunteers with differing backgrounds, skills and personalities, to bear witness to how these colonists will survive and rebuild in a world without electricity, running water, government or outside communication. Over the course of 10 episodes, the colonists - who include a construction foreman, teacher, carpenter and auto mechanic - must work to utilize and strengthen their exploration, technology and survival skills in ways they've never had to before.

Ralph Vince comments:

This, culturally, is AMAZING to me. A few weeks back I had an extended discussion with a group of very bright guys all in their early 20s — a candid discussion about their perceptions. A few very revealing things:

1. They are all very upbeat, economically, on a personal level. They feel they are smart and educated and will do fine even though they expect things to dissolve, they believe their formal education is their life preserver.

2. They all hate the boomers and consider them the "entitlements" generation — they regard the ones who were mostly their parents, the ones they refer to as "The greatest generation" as deserving of entitlements, but the boomers NOT entitled. Very interesting — I couldn't get to the logic of this other than we, the boomers, "screwed everything up, did nothing as a generation, and have a grotesque (to them) sense of entitlement to us".

3. They all, universally, expect things to decay, eventually, one way or another, into this MadMax anarchist future. When I would press them on this one, with things such as "Well you were saturated with these types of images growing up of the future, can't you foresee a less dark one, a more optimistic one?" They all universally agreed that "There is no other way the future can work out." Fascinating. Absolutely fascinating. With housing now more affordable than it ever was to any of the boomers — with borrowing at interest rate levels never before seen (and long rates banging around 4% !!!) and a protracted, decade-long-already contraction, the thought of a major up move over the next 15-20 years was something they could not possibly conceive of.

Vince Fulco writes:

Would note the release of the movie "Book of Eli" on DVD recently follows this post apocalyptic meme. Also has a fairly strong underlying theme of Pogo's "we've seen the enemy and he is us."

Pitt T. Maner III responds:

When will the post-Boomers give up on the end of "The Road " ideas and swing towards the "On the Road " themes again? Cyclicity. 

James Lackey comments:

One posits (as Mr. Vic did with movies and baseball) stock returns or better said premiums ratios are higher during futuristic movie and tv times.. see 60's twilight zone and late 90's everything was deep space futuristic.. then post crash it was all cop shows and today perhaps its true on the mad max which came in when the rust belt was dying post 70's Opec deals.

One does not say that its different this time. In my day Generation X was deemed stupid, spoiled and lazy.. It was a cultural and economic shift and we didn't know what to do, but the second we figured it out everyone I know ""just did it" hence the Nike slogan "just do it".

It's good to see the young beat up the old on the net, but quite respectful in person. I have a great deal of respect for my Son's buddies and all the BMX kids we train. Their only problem is over specialization and the quote above shows that in their belief their credentials will be their savior.

I do not agree they despise the boomers… I'd rather think we like to think or say that as Gen X ers for a revenge trade.. No Gen X er believed for a minute SSI [Social Security] would work out so for the Gen YZ kids to even think about it at all is a big joke..Ive never heard about it once…matter of fact if any Old BMX racers bring up the 3 sins of talking about Work Marriage or Politics at the track the kids ride off… the older adult pros age 18-24 say it flat out and crack me up "I can't handle this drama, I am gonna go talk to the girls" These kids today are "awesome". 

Ken Drees comments:

TV has recently been and still now is based on these themes "biggest loser" "bachelor" "dancing with the stars" "angry biker building show" "rock star real life" "idol" "top model" "fashion designer contest show" '"hell's kitchen" "next iron chef" "tattoo shop people" "dangerous fishing boat" "man in the wild" etc—a lot of contests, makeup, high energy, tears, people being eliminated, emotive overkill, action with real life injuries. All of this started with "survivor"–which is pretty much over–except they have a Spanish version of it on the Latin channel that I just flipped over yesterday so that trend must be in the last hurrah phase.

 But these themes are lottery like–taking a chance to make it to the top–be the one who can outlast the competition and the make it all the way. So maybe that consciousness seeps into markets–can we survive another day, the odds are against us but I feel the magic. A big cross section of age groups are relating to these shows—I personally got hooked on Hell's Kitchen–something about the angry language that I try to keep under control and watching that blond haired man just let his anger spew at those inept cooks. Then you get into the finalists and start rooting for a favorite —like horse racing.

Survival in a post 401k smashed world, surviving unemployment, etc.

 Kim Zussman comments:

1. They are all very upbeat, economically, on a personal level. They feel they are smart and educated and will do fine even though they expect things to dissolve, they believe their formal education is their life preserver.

2. They all hate the boomers and consider them the "entitlements" generation — they regard the ones who were mostly their parents, the ones they refer to as "The greatest generation" as deserving of entitlements, but the boomers NOT entitles. Very interesting — I couldn;t get to the logic of this other than we, the boomers, "screwed everything up, did nothing as a generation, and have a grotesque (to them) sense of entitlement to us.

Ralph please send our apologies for screwing things up for them. Ask them not to see "Avenue q", because exactly as Mr.s Rogers and Henson told them - and it is statistically remarkable - they really are all gifted, special, and specially equipped to make this a better world.

Sorry too about our house that you've been eyeing; its 20% upside down because of those college loans, and the one for your first car. At least there won't be any estate tax on it. And remember to hang that Ivy diploma proudly in the latrine - you never know when it might come in handy.

If you decide to get more education - forget about cloud quantum computing gene sequences. Go get your CPA, with emphasis on forensic accounting, and take some classes on retrieval of deleted emails, cash-tracing, and banking in the Bahamas. Also get certified to sell the plastics of the future - insurance.

Big shame about that 401 account. We were, as always, worried about you when they went below 700 and we sold everything. The good news is we got back in at 1200, so please work hard so your earnings propel it to the 12,000 you deserve.

About that screw-up: We were taught something like 2008-2009 was more unlikely than an asteroid collision. However now that the problem has been corrected, you have nothing to fear. Please tell your boss to deduct the maximum for your retirement account, auto-deposited in one of the index ETF's on the first of each month. Add to it on the taxable side too. More is better - buy as much as you can while you're young. Find a good ETF that will go up. If it don't go up, don't buy it.

Sorry about our health. We've been doing cardio for decades, so we're not going to MI like Opa or stroke like Oma. And we floss every day, so there won't be any need for chemo. But we did think to get long-term care insurance, and though you're mad hope you will pick nice nurses for us, and bring a case of Ensure now and then.

Alan Brice Corwin writes:

I've also recently had discussions with a large group of twenty-somethings, but I came away with a different impression. This may be a sampling or a context problem. They may have been less candid towards my generation because they were looking for money for their projects

The main difference in my encounter is that most of these people had boomers for parents. While most of our parents were in their early twenties when we (boomers) were born, their parents were often in their thirties and forties when they were born. There were a few with younger parents, but not very many. (We refer to our parents as the greatest generation because they beat the Nazis and the depression, but who are they referring to and why?)

In fact, I noticed a lot of sympathy for their boomer parents. Several of them noted that their parents had worked hard all of their lives and had expected to retire soon, but are now looking at having to work into their seventies or eighties. There was a general feeling that they would not allow this to happen to them. They would take care of their retirement needs while they were still young.

The main resentment that I encountered was that I was able to get my education for free. They don't think social security will be there for them, but they were young enough so that wasn't really a concern. The idea that someone could go to college for ten years and have money in the bank at the end of it was simply mind-boggling to them. People with full scholarships all the way through told me they had forty grand in debt after school.

I also detected less regard for their formal education among the group I talked to The pretty much all had college degrees, but they regarded their life preserver as their skills at seeing what was needed and building something to meet that need. Several told me that their college education was only good for getting a crappy job for a big corporation, and they had no interest in that.

One point of similarity I noticed is the sense of impending decay. One young man told me that he thought we would see a thousand bridges fail in the US in the next ten years, and that no one would step forward to maintain them. He said he saw no inkling of the common sense of purpose that must have existed when the roads were built. He further pointed out that the infrastructure needs were far greater today because there are now so many more people, but China and Dubai seem to be the only places where they are actively working to build a modern infrastructure. He said we have a 1900 model railroad system and a 1950 highway system (I didn't point out that the interstate highways weren't built until the late fifties and early sixties).

There was a sense that they would never have the life their grandparents had. This same young man said that his grandfather went to work for a company right out of college, worked for them for thirty five years without a layoff, and had been retired and playing golf on a generous pension for thirty years. His grandfather had bought his house for less than ten thousand dollars, and three years ago he could have sold the lot the house was on for nearly a million dollars (not any more).

Another thing I noticed was that almost everyone they idolized in business was a boomer. As you might expect with a group that was more iPhone app developers than anything else, Steve Jobs was far and away the person most admired. Eric Schmidt of Google was another favorite, but ranking way behind Jobs.

Marlowe Cassetti writes:

Wouldn't it be great if they were to make a new reality program based upon the Turtle Traders experiment. All the intrigues of students from diverse backgrounds competing. Ah, the high drama. I bet some of us Specs might be so inclined to view a few episodes. Am I right?

Lars van Dort comments:

Actually the BBC had a program called 'Million Dollar Traders' last year:

"Eight ordinary people are given a million dollars, a fortnight of intensive training and two months to run their own hedge fund. Can they make a killing?

The experiment reveals the inner workings of a City trading floor. The money is supplied by hedge fund manager Lex van Dam: he wants to see if ordinary people can beat the professionals, and he expects a return on his investment too. Yet no-one foresees the financial crisis that lies ahead.

The traders were selected in spring 2008, before the US credit crisis gathered pace. The successful candidates were chosen, trained and dispatched to their specially created trading room in the heart of the Square Mile. Among them are an environmentalist, a soldier, a boxing promoter, an entrepreneur, a retired IT consultant, a vet, a student and a shopkeeper.

The eight novice city traders struggle to ride the storm as stock markets around the world go haywire. Some of them take big risks, and others lose their nerve in spectacular fashion."
Episode 1:
Episode 2:
Episode 3:

I quite enjoyed it.




 Bill Miller writes in his latest commentary, "US large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was 1 year old then, but did not have then sufficient sentience or capital to invest."

As a thought experiment, I looked at the Dow Jones 30 stocks in this way, and found that the conclusions are impressive, even if you make the extraordinary conservative assumption that there is ZERO earnings growth over the next ten years. (Remember that during the financial crisis, corporate bonds were getting hammered too, so one could not have done this analysis in 2008.)

The choice is: (1) Buy an equal-weighted basket of the 10-year debt of blue chips or (2) Buy an equal-weighted basket of the stocks of the blue chips. And hold for ten years.

Analysis of choice #1 (bonds): The average return is 3.9%. If you own this for ten years, this is your best case and assumes no defaults, leveraged buyouts, or other credit events.

Analysis of choice #2 (stocks): The current average dividend yield is 2.9% per year on the stocks. The current average earnings yield is 6.3%. So if you own the stock basket and there is no earnings growth and no dividend growth, and the economy is Japanese-like, with intermittent recessions and growth, you will still earn roughly 2.9% + 6.3% = 9.2% per year for the next ten years. (Which is remarkably close to the long-term average return for stocks.) This assumes no bankruptcies and assumes a terminal p/e which is unchanged. But it also ignores the possibility that the economy could do much much better (or much worse).

Some might quarrel that I'm double counting … when I include the dividends. So ok, let's forget about the dividends. Then, the stock basket's earnings yield is 6.3% and the bond basket yield is still 3.9%, so it's a pickup of 240 basis points per year for the risk/reward of owning stocks. Or, put another way, over a 10 year period, 10 x 2.4 = 24% … which means that the earnings yield could decline by more than 20% over the next decade and you'd still be better off in the stock market.

None of this is making me rush out to buy stocks tomorrow morning with my ample cash reserves. But for an investor in corporate bonds, this is an important result. Admittedly if stocks keep declining, it will become more pronounced, however, at some point, we'll see corporations issuing new debt and using their cash to repurchase shares … and that's what will keep this arbitrage in line.

Column1 = stock ticker
Column2 = dividend yield
Column3 = earnings yield. That is, earnings/price for the trailing 12 months.
Column4 = that company's yield-to-maturity on its 10year corp bullet bond.
Column5 = earnings yield minus bond yield.
[There is a bit of fudging because Intel has no debt, so I arbitrarily gave it a 3.2%. And I extrapolated some companies who had debt maturing in 8 years or 12 years.] Data source: Bloomberg Dividend     Earnings     10 Yr Corp     Earnings YLD Yield     Yield     Yield     minus 10 Yr Bond Yld
AA UN Equity             1.1     -5.6     5.7     -11.3
AXP UN Equity           1.7     3.7     4.5     -0.9
BA UN Equity             2.7     3.5     3.3     0.2
BAC UN Equity           0.3     2.5     5.8     -3.3
CAT UN Equity           2.6     3.8     3.9     -0.1
CSCO UW Equity        0.0     5.6     3.6     2.0
CVX UN Equity           4.0     7.4     4.5     2.9
DD UN Equity            4.5     6.0     3.6     2.4
DIS UN Equity           1.1     6.7     3.2     3.5
GE UN Equity            2.7     8.2     4.9     3.3
HD UN Equity           3.4     5.9     3.2     2.7
HPQ UN Equity         0.7     8.1     3.2     4.9
IBM UN Equity          2.1     7.6     4.0     3.7
INTC UW Equity       3.0     6.0     3.2     2.8

JNJ UN Equity         3.8     7.2     3.7     3.5
JPM UN Equity        0.5     6.5     5.1     1.4
KFT UN Equity        4.0     7.5     4.3     3.2
KO UN Equity         3.3     5.4     3.3     2.1
MCD UN Equity       3.1     6.4     4.2     2.2
MMM UN Equity      2.6     5.7     3.2     2.4
MRK UN Equity       4.3     8.8     3.4     5.4
MSFT UW Equity     2.1     7.3     3.0     4.3
PFE UN Equity        5.0     11.1     3.1     8.0
PG UN Equity         3.2     7.2     3.4     3.8
T UN Equity           6.7     7.6     4.5     3.1
TRV UN Equity        2.9     12.6     4.2     8.4
UTX UN Equity       2.5     6.6     3.5     3.1
VZ UN Equity         7.2     7.2     4.8     2.4
WMT UN Equity      2.4     6.9     3.7     3.2
XOM UN Equity      3.0     5.9     4.1     1.8

Equal Wgt Avg      2.9     6.3     3.9     2.4

Ed.: Article pictured available here: The Stock Pickers Defeat, WSJ, Dec 2008



1. Intraday momentum and breakouts on lower time frames have returned. They were more common before 10 years ago, but then died out for years. Breakout patterns were common and short term trend pullbacks were touted by the TA crowd at the turn of the century. Now, if I was a bot programmer looking for the current action, I would look again at these old patterns. The converse way of looking at it at a higher time would be a wide range.

The counter argument is that random price with drift, even under normal sample will produce many apparent trends, but are non predictable. However, a normal random sample with drift will produce more trend like structures. Here the simple rule moves to formation of complex structures. Wolfram in A New Kind of Science, posited that simple iterative rules will produce complex structures who underlying rule cannot be determined. Further, that such simple rules will result in symmetrical structures such as leaves, hands, bodies, symmetrical along one axis. Sample a distribution with fatter tails, add drift, and more structures should appear. The search for significant regularities using normal assumptions might be augmented with a search for basic simple rules whose application will reveal repetitive structures as a basic function. A random sample with drift is an example of a simple iterative rule that creates complex patterns with symmetry.

A long enough random series will produce a million identical digits in a row. An infinite random series will produce our entire history of natural existence and physical law. If existence is in fact random, the search for patterns would be nothing more than astrology.



Buy Real estate in DCOne notes that 25 years ago I knew the p/e and industry and market value of every NYSE company and most of the Amex, and now I know hardly any, a function of the changing guard, structure and dynamism of business. But the ones that I still know, the ones that did not turn over, are to a very high degree concentrated in the ones where a large % of their business was to the central authorities, and to a lesser degree the tech sector. Companies like Ametek, IBM, Raytheon, and the drug companies still exist. I believe this a function of my theory that the one guaranteed thing in our economy is that real estate in Brussels and Washington will grow ever scarcer and more valuable. The stress tests that E C is now applying to all their banks shows how bad ideas spread and central planning expands into every gap and crevice.

Rocky Humbert writes:

Cramer said something last night worth highlighting– which fits with the part of The Chair's observation

He (with chagrin) acknowledged that for most investors, owning the XLF (bank stock ETF) is now probably superior to owning individual bank stocks. He showed that the market has not been differentiating sufficiently between JPM and BAC and other bank stocks — and despite the wild gyrations and higher volatility of each of his favorite banks– they "end up in the same place as the XLF." To mis-quote him, "the XLF seems to be the same as the underlying banks but with a much smoother ride."

Part of Cramer's schtick is that "home-gamers" can pick stocks profitably — and beat the indices — if they do their homework (such as The Chair's knowledge from 25 years ago.) Last night's capitulation was a refreshing admission — that the equity markets have become commoditized — and knowledge of individual companies has become much less relevant for speculative participants with short-term views.

I submit that some part of this stock commoditization is due to government interference with the natural market process– i.e. it's much more difficult to pick "winners" and "losers" when government decides the winners and losers. But I'm optimistic that eventually this too shall pass– and a day shall come when knowing company fundamentals will again be relevant. But that day isn't July 21, 2010…

Nick White reminisces: 

I remember– all of ~10-15 years ago now– as a teenager first getting into the market, it was Cramer's early TSCM columns that attracted me to the game. The way he would kick off at ungodly hours. That he'd read trade magazines AS WELL as all the newspapers and business mags (that was alpha for sure in those days, but seems so pedestrian now in the age of blogs, social networking etc etc!). He was a man possessed, driven beyond anything to win by doing more, better, faster than anyone else. I thought it would be so great to be like that, knowing every company– who the CEO was, what their P/E's were, ROE's etc etc.The Chair has the same drive, just from a different approach and millions also recognize him for it.

Yet, it is not a death knell that such things are less important than they were…One of the most important lessons I've received from the crumbs of the Chair's intellectual table was to go and learn and re-read texts on evolution and competition. And one of the core tenets of evolution bearing on present discussion is that the environment decides whether a mutation is advantageous, not the organism's "skill", per se. Relating this to the present, 25 years ago, the market environment was totally different. It favoured one particular group; people who could be bothered going to a library or ordering quarterlies and annuals and dusting off Lotus to do their own spreadsheet modelling. Late 90's it was tech. Four years ago it was leveraged finance. Today it's an infrastructure and programming game -but this too shall pass.

To me, there is one aspect of the market that will never, ever change - the market only persistently rewards knowing better information sooner than someone else. Right now, we see it in HFT and ridiculously hyper-complex quant strategies. In the past, it was fundamental knowledge. In future, only the Lord knows from where the edge will come - but the edge will always be superior information.The best part is that hard work - properly directed at gleaning the information that is rewarded in the current environment (along with self and market awareness) - will always win. Maybe that means learning programming in one set of conditions; maybe it means learning anti-trust law under other conditions. Maybe it means doing a CFA in yet another. Sooner or later, whatever mutation we've had to our benefit will disappear as the conditions change. Our edge will be commoditized, our pl's will begin drying up and we will have to start learning things anew in line with the new environment. But we can adapt.

That's power– and an amazingly powerful tonic against throwing one's copy of "Triumph" (twice in two days!) in the trash and swearing off derivatives.

These days, I don't feel bad about not knowing the minutiae of hundreds of company off the top of my head. Rather I'm happy to acknowledge that it's just not as necessary right now. Better to try and take advantage of my current little niche for all it's worth. One day I'll get steamrolled and will need you all to help encourage me to get up and try again.

Chins up, lads. We'll all improve ourselves to greater things.

Kim Zussman writes:

Why attempt to pick individual stocks when:

1. Good results are luck, since for each stock with cap > 100,000 there are 1000 analysts swarming each item of the balance sheet

2. If hedge funds pay "ladies" like Ms Chiesi for information, how rare is legal alpha?

3. ETF is diversified, so at least for unleveraged versions the lower limit > 0

4. ETFFing *should* over-correlate component stocks, creating
opportunities for ladies as in #2

5. One option is to short stocks with mortal leaders, such as AAPL, BRKA, LDYGAGA, and go long an equal portion of their respective ETF's. Paired life-insurance.

Vince Fulco adds:

For the everyman, agree with all your points. Friends in the HF world are putting up strong long term returns by a complete 'boots on the ground' approach. I won't mention the industry group but they attend every conference, do every meet-and-greet they can with mgmt, know the companies financials intimately and can discern the nuances, body language and subtleties of mgmts' messages as they roll out strategic plans. And trade every part of the capital structure. Keeps them one step ahead of the beancounters in Bangalore. A start-up long-short fund here in town doing the same with second and third tier companies which have lost analyst coverage.

Jim Lackey writes: 

Yes for the banks but would he/you say to buy all the handset makers or AAPL as no one wants to hold the entire NDX when AAPl is already 20++. I do see moves in retail where things are a bit slower. Some times you can catch the pairs guys buying TGT selling SHLD or what ever is working that day. Not that its useful as the SPX can and will go 1% in 2ea 10 minute bars to ruin your afternoons.

One wild thing I noticed was ESRX when it was over 100 pre split. One day during lunch I was bid 100.01 then raised to .06 computer re-raised. So I said Okay I'll play and we drove the stock 100.01 bid to offered at 100.29 and back and not a single share traded. Bids offers quotes went all mad money. So I thought here must have been a big bid 100 bucks for 100k shares or what ever site unseen dark pools. Turns out no. HFT reports say guys get paid or some weird incentives to quote. I am not sure if it's true or what the point is seems silly.

Day traders are frustrated with what we call stock trades offered-@ new high, computers auto low offer and the inverse, new low, hft high bids. If a stock is at new lows and flashes on new low screens its immediately bids 1-2cents higher for 100shares on a computer. Same with new highs. What we are frustrated is every trader in the world is trained to not do that. If you're buying you want to buy the lows if your selling you want the highs and if you kill the flow or mo the guys on your desk would give you a punch in the arm. But HFT has all the money. They must be doing it right.

But all these low offers and high bids are for no size, like when some one steals your debit card they charge you 1 dollar to see if it works then sell it on internet so the bankers told me yesterday. I used it at the wrong gas station Sat. 



 I hypothesize that the Scandinavian morality of the top cultural things these days, ( the things E hates and diatribes about), ie " the kids are all right", "cage aux folles", and "The Girl with the Dragon Tattoo", the two top grossing mainstream movies, books, and shows, is guaranteed to occur in our kind of economy where the stimuluses and jobs are confined to the organized workers, and greater efficiency for green service buildings.

Bill Rafter writes:

It all very nicely fits into the bread and circuses program.

And one would expect that the entertainment part would get increasingly outlandish– like a bubble.

Q: Are there any examples of entertainment bubbles. The Flapper age? 

Ken Drees write:

I read that explosions in men's fashions were key to tops–a la the 20's– how about dental fashion in the late 90's (grills) and those spinner hub caps on the escalades. 

Pitt T. Maner III writes:

A dystopian vision, not based in reality, that sells well in a gloom and doom environment. Perhaps a thin reed counter indicator:

"With the U.S. release this week of the final installment of Stieg Larsson's Millennium trilogy, the English-speaking world is again given a chance to indulge in a view of Scandinavia that is entirely dystopian. In Larsson's Sweden, the police are useless where they are not corrupt; the countryside is full of violent drug dealers; the rich are utterly unprincipled. It sounds like Mexico in the snow. This is no longer a clean, well-lighted place for Volvo owners. What went wrong? "

The tax cut argument, Swedish-style. 

More on Andrew Brown and his book, "Fishing in Utopia" and Swedish lessons learned:  

"Fishing in Utopia is a lament for a lost Eden. But it is more than that. Essentially it is a story of modern rootlessness and the search for something to believe in. The fact that that something turns out, absurdly, to be fishing only makes it more tragic."   



GaltonOne is surprised to hear such positive talk about the poseur wild man who fired the collab and me for mentioning the word (one looks around three times) Galton. Wild, and following him is unprofitable according to published tests. Did not make above average returns in his hedge fund. Predictions don't work. Prone to pass on exonerating information about skin still in the game and losses thereon from deep sources in bank for which he worked. As far as one can see knows nothing about what works and what doesn't, and never tested a thing in his life.  Promotes with silly, sensible sounding words which have the unfortunate effect of making the public drop more. One must be alert to the stellar performance of his recommendations in the days preceding the show. Tends to be bearish when stocks go down, and bullish when they go up except when it will make news. Seems to have a good back up man to feed him info behind him. To his credit, however, apparently his other half is exactly the opposite, very sober and correct in her calls. Would suggest a reality show program as a substitute where they both give benefit of their insights, and back and forth. Gets the public in fever pitch when they should be the opposite, dour and skeptical and contrary. One wonders if one couldn't make money by buying all the stocks he says to short that get a public selling as the information content is apparently random (a condition which is all too common in myself and others).

Jim Lackey writes: 

Actually he has calmed down and one can't say he gives the public bad advice, as Mr Wiz changed my opinion three years ago when he said all he said was buy "best of breed" so I started reading his mumbo and you can't possibly go against. He makes 5,000 predictions a week. So yeah, still the same. Impossible to falsify, and yeah, I get your joke.

Alston Mabry writes: 

But Seein' BC is just trying to keep their ratings up! It's just business, nothing personal. As Don Emilio Barzini said in The Godfather: "He must let us draw the water from the well. Certainly, he can present a bill for such services. After all, we are not Communists."

Nigel Davies writes: 

I am surprised at the call for his dismissal. Given that markets are a minus sum game then liquidity producing suckers are desperately needed.



The perpetual edge comes from understanding the human condition.



author Steve House of Beyond the MountainBeyond the Mountain by Steve House is about committed alpine style climbing of difficult mountains. He is willing to die to accomplish his goals. His goal is not just to climb the mountain but to do it in speed and style. The pain, both physical and mental, he endures is comparable to the struggle of the speculator and the will power and control to accomplish the lofty heights. He describes his struggle, his sacrifice, the failures. The accomplishments are self explanatory, but the commitment needed cuts deep. What sacrifices and failures are the price of success? We all have this difficult choice to make and the stakes are our lives.

Many of his failures actually allowed his survival. There is a point to turn back, and in a confused state the decision is difficult.

This is one of the best and deepest of recent books I have read.

Craig Mee comments:

Thanks James.

It is interesting, that particularly in the younger days, tunnel vision creeps in, and the longer and deeper that this continues for, usually due to failure, the more personal risk you're willing to sacrifice, and the deeper the tunnel.

As daylight emerges, you start to realise there is very little need to hold your breath and throw the dice with the huge downside you allowed for in the darkest days.



 My family has decided we're doing a triathlon in September, so they're making me do stuff to get ready for it.

Well, tonight on my 16 mile bike ride (the most I've ridden a bike in 30+ years), I saw something that made me think of Mr. Sears:

I saw a juggling jogger! He was jogging and juggling sticks at the same time!

As luck would have it, he and and both got stopped at the same traffic light so I compelled to inquire about…..well you know…

He informed me that he loved to jog, but never felt like his arms got a good workout. So he started juggling while jogging. He says not only does he get a great workout from jogging, but his arms are also now getting a great workout too!

I figured this meant one of two things:

1. This gentleman has come up with a great new training technique, or

2. The end is near, because (and I'll have to check my scriptures to confirm this), I believe that juggling joggers are one of the 7 signs of the Coming Apocalypse.



Enron balance sheetI'd suggest that companies can play games with almost any metric for a few quarters– and companies try to present their results in a manner which fits the current favored meme. For a while, Wall Street was enamored of EBITDA and not paying taxes– and companies responded to this fixation with leverage and buybacks at the expense of their balance sheets. And no one cared about earnings. Comcast was a poster child for this. Then, Wall Street became enamored of growth rates and margins, and companies fired workers, and sold businesses and restructured continuously– taking "one time charges" which wiped out the profitably of multiple years in one fell swoop (and Wall Street rejoiced). Other companies engaged in "slow-motion" leveraged buy-outs– showing no organic growth, but showing steady earnings growth, and Wall Street said Hallelujah. (IBM was a poster child for this.) For a while, the fad was "click throughs" for internet companies with no earnings and no revenues! And the list of fads and fancies goes on and on.

I agree with The Chair that sales as a sole metric is meaningless, however, I disagree with him on ease-of-manipulation– I actually think it's quite difficult to manipulate sales over a multi-quarter period because it doesn't hit the balance sheet. (For example, it only took a couple of quarters of "channel-stuffing" to cut down Chainsaw Al Dunlap at Sunbeam…) Whereas goodwill, depreciation, merger reserves, one time charges, etc are much more prone to manipulation– which can be buried on the balance sheet and disappear for years and years. For example, the really big cons (Enron, Worldcom, Cendant, Healthsouth) all had warning signs on their balance sheets– more so than on their income statements.

I try (often unsuccessfully) to be an investor who owns the "company" (as distinct from renting the stock), and I try to look past the shenanigans that management play to meet/beat the quarterly performance. I keep things simple. I want to see a decent return on capital over the cycle; a strong balance sheet; reasonably consistent profit margins; and serious investment in innovation and human capital; and aggressive interactions with competitors, regulators and taxing authorities. But I also want to see some revenue growth too. Because (absent deflation), without sales growth, it's impossible to have long-term profit growth– unless a more sinister game is being played.

Niederhoffer comments:

Might one say that Mr. Humbert's post is one of the most sapient things I've ever seen about markets, and that it should be required reading for every business student and investor. It is appropriate to be bested by a deep thing of this nature.

Rocky's post about changing styles in reaction to earnings and the coevolution of companies to give investors what they want would be a good subject for a very useful book, and would make Mr. Bacon take a turn around the turf with Clocker Lawton in the morning workouts.



sales of iphone 4Of all the canards, snares, delusions, and misinformation about markets designed to put the investor on the wrong foot, to increase the flow and likelihood of resources from those at the bottom of the web to the top, surely one of the most destructive is the idea that sales are more important than earnings, an idea that seems to have the market in its grip. The reaction of IBM to an increase in earnings above estimate of 8% and sales below estimate by 6%, with the stock dropping 5% is just one horse from that dump heap.

Same thing happened to General Silo when it announced great earnings but sales declined. Must make all these proud CEO's shake their heads in disbelief when they tell their boards that they can't believe that the stock is down when they're doing so well, and their every sale is at a profit and they are only selling profitable products rather than just selling anything they can to get cash.

Indeed, the first item reported now from the traditional income statement announcement is the sales number versus the corresponding quarter, and the surprise factor of sales. Compilations of companies that beat the bogey for sales are now almost as numerous and useless as those for earnings.

Sales are the easiest thing in the world to manipulate. From economics, the buyers have a demand curve for a product, with alternate uses and utilities for it. The marginal utility of each additional unit decreases. At a low price, they will use it and buy it for many uses. For example, the traditional explanation in Heyne where water is used for plants and baths at low prices but only for drinking at a high price.

From a practical standpoint, every business person knows a million ways to increase sales at the expense of profits. you can sell to bad credit risks. You can dump inventory at close to cost. You can offer discounts for bulk orders or pre orders. You can reduce the price and ask your customers to store it for a rainy day or some other use. You can sell to a wholesaler or distributer instead of the ultimate customer, especially for a price. You can justs turn over your product to your customers with a "I'll take 5% on this. Just enough to keep me going". Or you can produce a higher quality product with better terms and tell the customers what a bargain they're getting by taking it out of your hide. Or you can buy a division or company to expand sales, or work off your inventory to change the number.

Indeed there's no item in the expense or revenue side of the income statement that can't be manipulated to increase sales. From a value standpoint, the stockholders desire an increase in wealth, not an increase in sales. What gives them wealth is earnings, not sales.

Okay, where do all these crazy reactions to sales come from? There must be some academic study, doubtless done with retrospective data that shows that sales provides information. And some earnings aggregator sellers must have shown that sales is a important signal with data from one of the retrospective data files that are so misleading and cause so much havoc. Or perhaps there was one period with a turning point where style investing based on sales had some information value.

Of course, companies are very smart, and it's so much easier to manipulate sales than earnings because you don't have to have the complicity of the accountants or move one item on the balance sheet to never never land to change sales. So even if sales were once of reasonable signaling value, now they will be changed in cycles in the typical Baconian way, and of course the public will be behind the form even more than usual.

But in the interim, what a fantastic opportunity to take advantage of this ridiculous malarkey and the reactions of stocks thereto.

The funny thing is what must go on before the release of the income statements these days. The insider and the outside flexions for the big companies must keep the earnings in the hip for a few weeks on a need to know basis only with smug satisfaction that they have beat the guidances they gave out to the analysts and the favored institutions and that they have pulled the wool over the eyes of the accountants to a reasonable degree to pull the earnings into the right territory. Then the horrible realization must come that they forgot to run a sale of buy that division before the quarter occurred and the sales numbers actually show something below the bogey must arise, and their smug satisfaction turns to the agonizing thought that even though business is great, they're going to have to do a lot of explaining to the board as to why the stock is down. 

Paolo Pezzutti comments:

There are also other ways to try and increase sales and earnings at all costs. Apple is in my view the last example of a company which is struggling to keep up growth prospects at all costs. And the bigger the company becomes the more difficult it is. The problem of the antenna of the iPhone indicates that they did not give enough time to their engineers to test and make sure technically it was all fine…because of the hurry to come out with something new as soon as possible. Eventually, however, this approach to customers might painful. Hopefully they understood. 

Ken Drees asks:

Do consumers get conditioned over time that products need fixes and patches and it's just the way it works in tech– so no problem–send me a carrying case and a patch and we love Apple just the same?

Plus, Apple prices their new stuff way high on debut and people can't get enough of it and then they lower prices to get sales goosed–which pisses off the early buyers yet they seem to forgive next time around.

Also, what is your general opinion on dividends? In my market lifetime, dividends were always poo-poohed and shunned as a way to lose capital. Friends in business always reinforced that concept the putting money back into the company was more prudent. However in my father's lifetime dividends were an important investment consideration and if the dividend was solid or not, or if it grew each year and thereby showed business health. High dividend taxation rates affect investor sentiment about holding div paying stocks. The repeal of tax cuts in Jan will hike div tax rates. I wonder how retired people structure their investments to throw off income these days–bonds don't pay much, energy patch only real div sector that comes to mind.

You can't fake a dividend. 

Rocky Humbert comments:

Ken: You are correct in all of your statements about dividends. However, while you cannot "fake" a dividend, you can "cut" a dividend.
The interaction between dividends and taxes, dividends and management stock options, dividends and corporate cash balances/reinvestment are well understood. Also understood is that fact that a substantial portion of total market returns can be attributed to REINVESTED dividends.

Notwithstanding this, whether you cut a pizza into 8 slices or 7 slices doesn't change the size of the pizza. However, if you have eight friends over for dinner, serving 8 slices makes you look like a good host. Whereas serving 7 slices makes you look like a miser. This illustrates nicely the investor preference for dividends from time-to-time. If you don't ever have friends over for dinner, it shouldn't matter….

One thing that is poorly appreciated– and which I encourage you to consider– is the relationship between dividends and the "duration" (to use bond parlance) of an investors' stock portfolio. Here's an example: If you buy the 7-1/4% treasury bond of May 2016 at a price of 129, the duration is 4.9 and the convexity is 0.29. Whereas if you buy the 2.625% of April 2016 at a price of 103, the duration is 5.32 and the convexity is 0.32. So, the lower coupon bond has more duration and convexity even though it's a slightly shorter maturity date and has essentially the same Yield-to-Maturity. I'm sure the quants out there will find fault with this analogy, but I believe there's a similar effect in stock portfolios.

Jim Lackey comments:

No they are not Mr. Vic.. mid quarter updates– TXN or IBM or any of them– say all good, and why stocks gap so much is insider selling and we all know it. It's not all that bad as they raise the full year outlooks and TXN book TI bill ratios fall as a certain handset maker is on the ropes. But the joke is now vs 99 they can contract out manufacturing and ramp up and down production so fast all the old school book to bills or updates are well, perhaps useless. But a few still have their own factories, and if they buy new fabs from Klac LRCX or Nvls… I don't know how it's bearish in the time frame your looking at, but AMAT is all in Solar and that reminds me of used car sales, and one guy on the internet who went to a solar show and he said it reminded him of used car salesman and I thought good! Perhaps some sales will get done.  

Stefan Jovanovich comments:

Samuel Butler scandalized his readers by suggesting that the banking system of Britain had replaced the C of E as the national church. I think he would have been bemused to find that the language of finance has now become completely theological, that wisdom takes expression in the form of discussions about "decent" returns on capital, etc. I know Butler would have laughed out loud at the discovery that in the 3rd millennium mankind had reached the point where money itself could only be discussed in terms of its moral meanings and the words "sinister" and "deflation" could seem perfectly compatible usage in a single sentence.

From Mr. Butler's pen:

"MANKIND has ever been ready to discuss matters in the inverse ratio of their importance, so that the more closely a question is felt to touch the hearts of all of us, the more incumbent it is considered upon prudent people to profess that it does not exist, to frown it down, to tell it to hold its tongue, to maintain that it has long been finally settled, so that there is now no question concerning it."

" I do not mind lying, but I hate inaccuracy."

"Life is the art of drawing sufficient conclusions from insufficient premises."

Those of us who do own companies - not just as thought experiments but as our accursed fate - truly envy Rocky his ability to find answers in the current MBA Book of Common Prayer; what we see on the street in California right now is that the only current action is being handled by the Lackeys and the few other over-traders who have never had the luxury of being able to ignore the current bid. Everything else is talk combined with (1) belief that the "cycle" will somehow continue as the Emperor peddles along on his imported energy-saving machine and (2) a desperate eagerness to get to the next meeting with the representatives of the official church.



A Red acid mordant From xxx at 13:45:17: you are rather mordant today

From Vic at 13:46:02: i didn't know it spelled with "a".

From xxx at 13:49:37: M O R D A N T

American Heritage® Dictionary adj. Bitingly sarcastic: mordant satire. Incisive and trenchant: an inquisitor's mordant questioning. Bitingly painful. Serving to fix colors in dyeing. n. A reagent, such as tannic acid, that fixes dyes to cells.

Peter Grieve comments: 

I'm mordant today? Actually I have been feeling quite dormant. Or maybe I'm mordant thinking about the looting of Britain's dormant accounts.

Rocky Humbert explains:

Mordent is a musical term, mordant is a chemical term.



Federer loses to NadalHere are a few tennis notes to myself, following up on a match that I lost 6-0, 6-0 on Friday. Hope springs eternal.

–Whatever the virtues and drawbacks of the backhand slice, I need to have one when I'm in a defensive situation. However, my slices too often end up being either high floaters or direct dispatches to the bottom of the net. In retrospect, I think I need to close up that racquet face. Federer's slice (video on subscription site www.tennisplayer.net) uses just an ever-so-slightly open face. Tonight I was practicing with a nerf tennis ball in the basement, and that does seem to improve things.

–I have ongoing indecision about whether to try to hit forehands with the Western/semi-Western grip or with a Continental, McEnroe style. The Continental grip seems so relaxed and smooth, with my body motion so in tune with the swing. (See McEnroe vid) My stroke with a western grip too often feels like a flail, and I sometimes frame it. I can't even get a good mental image of what the western forehand "should" feel like. The Continental shot, however, is difficult if the ball is high, and furthermore my coach tells me that it doesn't have as much on it. The Eastern grip is sort of in-between these two alternatives, so it should be a reasonable compromise, but for whatever reason, I tend to hit the ball way too high, and out, with it.

–Sweat! Despite using a sweatband, towels, and brand-name overgrip, my palms was profusely sweaty, which did nothing for my confidence. After the match I bought all the anti-sweat paraphernalia that I could find– the Prince Grip Plus Enhancer, a Gamma Tacky Towel, and a rosin bag. I don't yet have any data on whether these will help.

–The Serve. The serve was problematic. Oh heck, it was awful. The serve is the hardest shot of all. The crazy thing is that the ball is above your head, but you need to hit it with topspin. Often the textbooks say things that can't possibly be correct, such as "Hit the ball at the highest point of your racquet's arc." At the highest point in its arc, the racquet's vertical component of velocity is zero by definition, and so you'd never impart any topspin to the ball if you did that literally. Several times during my tennis life I got to the point of having a good or even very good serve, but if and when I ever stopped playing for even a few weeks I always lost it and had to totally, painfully rediscover it.

Nick White comments:

Two interesting points…it seems grip is foundational to everything. What's the starting grip in the market? Could we call it approach (ie, quant, fundamental, ta etc)

Second point: in the link for Winning Ugly, Google Books also recommends Michel Foucault– an interesting suggestion, though not as oblique as it first seems. I presume this association comes from the foundational premise that if one wishes to improve their game, one must first prove the ball actually exists.

The more frightening recommendation was "Marxism and Psychoanalysis". Either the algorithms need some serious tweaking or the programmers have a sense of humour.

Kevin Depew adds:

I believe your "market grip" is your capital relative to your ability to defend it; hence, the ghetto slang word "grip," what you're holding of value which Dr. Dre, for one, intends to take by "jacking little homies for they grip." But that's just one man's interpretation, obviously. 



Debrahlee Lorenzana, the woman fired for being too attractiveOne important aspect of beauty is symmetry. SPY daily closes (1993-present) were checked for local 21day minima, defined as the lowest close centered between 20 days into the future and into the past. Once located, calculated the mean daily drop for the 10-days before and the rising 10-days after each minimum, as a test for velocity of drop vs (respective) velocity of gain. For each respective minimum, used paired t-test to compare the mean after-min rise with mean pre-min decline (ie, changed sign for the mean drop to positive, as a means to compare the rate of drop to the rate of rise for each minimum. A better way would be to regress both sides to fit an OLS slope, or a non-linear function-fit, but no do).

Here is comparison of mean after-min rise with mean pre-min decline :

Paired T-Test and CI: up avg, |dn avg|

Paired T for up avg - |dn avg|

                 N      Mean     StDev   SE Mean
up avg       141  0.00395  0.00324  0.00027
|dn avg|      141  0.00346  0.00345  0.00029
Difference  141  0.00048  0.00343  0.00028  T=1.7, P=0.098

>>For all 21 day minima, subsequent up averages were greater (faster), though not quite significantly.

However as Tim recently proved, not all beauties are the same. Isolating on those which go down fast (mean daily drops worse than -0.5% per day) gave different results:

Paired T for up avg_1 - |dn avg|_1

            N       Mean     StDev   SE Mean
up avg_1    29   0.00585  0.00504  0.00093
|dn avg|_1  29   0.00874  0.00392  0.00073
Difference  29  -0.00289  0.00441  0.00082  T=-3.5

>>For fast declines, the subsequent rise was significantly slower.



There were two sins that would result in an immediate termination at the prop shops. One was holding a leveraged loser and not showing up for work–the O'Hare trade– you go to the airport and call the office to see if you're blown up or not. If so they boarded the plane.

Next was "but its a great company." If anyone ever said that about a stock they were caught long in they were fired faster than….Never since I have read about the markets on my tank in 91 desert battles have the "valuations" of certain stocks in the sector all kids love– tech– never have they been so "cheap."

Now don't get me wrong the 2002 strategy of buying INTC in the teens and selling it over 20 has worked. And no I am not talking the 4 months post LEH when the world was coming to an end. I mean now a normal non panic time vs any other time when the waters were no hurricane force winds. I have never heard so many traders say, "but it's a great company and it's so cheap"…and I respond get the joke or you're fired.



The LoBagola in the dollar appears to have run its course. Dollar Index Chart . T'was a doozy. From 82 to 88, back to 82. All of this to me means a bounce is due.



College Board presidentA certain former collaborator just taught me how to spell mordant. I always thought it mordent. And it reminded me that in the old days on the college boards the favorite synonyms were xantippe, harridan, virago. Now you never see those words. The one thing you know about the college boards is that all the politically correct answers to the reading questions are the right ones. Other people know a lot more and have written books about it, but we will not mention that as often the idea that you can game the market the same way you can "Pam" from college boards is a lot easier in theory than practice.

But what are the market questions that they throw at you where the politically correct answer is always correct, or where as the author says the ones that the average smart person would answer is wrong, especially near the end of the test. I would hypothesize that anything that doesn't relate to greater revenues for the service, much needed when 100% of jobs nowadays come therefrom, is correct. What else?

Rocky Humbert comments: 

Mordent is a musical term. Mordant is a chemical term.

From the SAT Exam: "I whistled a mordent while dipping my T-shirt in my

Kim Zussman comments: 

What is the SAT word for a game which alternates randomly between cynicism and polemicism?



Spencer GreenbergThe grandson of Hank Greenberg was on CNBC this morning to briefly discuss his machine learning-based hedge fund. He appeared to be a very serious young man (no smiling) and it was interesting to hear that his AI system selects stocks tohold for months and years not microseconds. Sort of counter to what is heard with about algo trading.

I believe Grandpa, however, thought that getting on base was more important than hitting home runs…his baseball career was unfortunately shortened by WWII. Here is how Spencer Greenberg, the slugger's grandson, would describe quant trading to a 5-yr old. (elevator routing a complex problem).

Maybe these "rebellious" youngsters just out of school or still in it will do fairly well in the current environment.

A provocative quote:

"It's pretty clear that humans aren't improving. But computers and algorithms are only getting faster and more robust." - Spencer Greenberg

More on the math-focused, brave new world "toddlers".

Victor Niederhoffer comments:

Yes. The son ruined my squash career with his terrible tennis follow through.

Pitt T. Maner III writes:

Sorry to bring up bad memories. The son seems to be a fairly successful value investor. A yellow pad and pencil sort of grind it out guy. Bad knees and connective tissues evidently from bygone days playing DT with Calvin Hill while studying English at Yale.

Here is a 2010 lecture (using high speed) shows him lecturing at Columbia.Glenn Greenberg of Brave Warrior Advisors, and formerly of Chieftain Capital Management, recently gave a lecture for Bruce Greenwald’s class at Columbia University. Highlights include:

* Asks two questions: 1) Is it a good business? and 2) Is it cheap?

* Marketing is a waste of time for money managers.
* Making an investment is just like making a bet.
* Has a 15% hurdle rate–as low as 13% if not many opportunities.
* Looks at returns in terms of free cash flow yields plus reasonable growth




Fourth Birthday Letter

"You brighten our days, you light up our life".

Let's start at the beginning. You were born 4 years ago in May, with great vigor, after overcoming many challenges, to your loving parents Laurel and Victor and an extended doting family of 6 sisters, Galt, Katie, Rand, Toria, Artie, and Kira and your step mother Susan, your uncle Roy, and your god parents, Ming and Dan, and your caretakers Lorna and Tashi, and mentors Doc, John and Jeff. We got you fresh air outside the hospital on your first day born, (tripping the hospital alarm system in the process), and good food at the Four Seasons and tennis at the town club, and music from Mommy on the piano, on your first day outside the hospital, and you have been proactively enjoying good things like that every day since that time.

I wrote you a letter when you were born emphasizing the importance of choosing the right path and friends in life, listening and learning, giving others the benefit of the doubt, taking care of small things, choosing the right incentives, counting to make sure that you know where you are, reading and surrounding yourself with good books, the importance of music and games, knowing how to handle money, and the value of competition, modeling yourself after heroes.

You have encapped most of those things so far, and amazed me by saying recently "the mouse with one hole is quickly taken" and "the little things you do get the job done". You love good books, music, and sports, machines, races, pretty people. You also said about the importance of eating good food "that's what attracts us to it " and you told me your favorite book is about the 12 heroic deeds of Hercules.

Perhaps you will reread those letters and the comments from the many friends that we have who augmented them with tips and guidance for you in the future.

Artie, my father always said that the happiest day in his life would come when I started to beat him in racket sports (a necessity along with music and books in our family). That day came to me, but I am not sure that you will ever have that pleasure since life is short, and I am still pretty good but at least you will have these letters and the knowledge that is Mom's and my most fervent wish for you to excel us in all things to look back upon. The key attribute you have as you enter your fifth year is that you radiate joy in all about you from the time you wake up to the time you go to sleep. Everyone you come in contact with loves you, from the doormen to the waiters, to the taxi drivers, to your teachers. You wake up singing songs like "those daring young men in their flying machines" and telling us that "the Large Hadron Collider at CERN has 27 kilometers of path", and you go to sleep saying that "you're thinking of silly things like all my friends have friends, and they have friends who have friends also". There's not one minute of the day, where you're not asking questions about how things work, what different words mean, why things are happening as they are, and why and what we're doing, along with your own explanations of the reason for each event you experience.

I am happy to say that somehow, you seem to already show interests and ability in all the things that are key to this family and that we have encouraged you to digest.

Your vocabulary is immense and you use word like "visible", "eventually", "finally", " theory", "familiar", "promising", "recommendation", "privacy" in everyday conversation. Here are some characteristic things you recently said "Let's not fly the kite. It might get lost. Let's just go for a scenic walk". "The three resistors make the fan go up in the air and that is how a street light works." "Practice is what makes you good at things". "I got hit by a rogue wave in S. Hampton but I don't have to worry about that on the Connecticut shore because the land is in the way". You said while we were swimming "You should board the board." Then you added, "that's a palindrome, isn't it?"

You are also good at languages and are beginning to master Chinese and you love to talk and hear Spanish.

You are a shrewd article, knowing how to solve problems and how to influence people. I was particularly impressed when you said to Susan, "do keep records of how much math I am doing now so you can tell Daddy so he'll let me watch the iron man video". Before going to sleep you recently said characteristically. "I'm thinking of something crazy. I was playing golf and then I started flying."

You are quite good at tennis, and can now hit a running backhand when you are incentivized by a banana split. You still have perfect pitch and love to sing all day, and now you have great rhythm also, and can play all the complicated rhythms of mommy's piano stuff on the drums. You've taken an interest in dancing, especially Irish dancing, and ice skating dancing, and love to imitate Michael Flatley and Apollo Ono.

You are good at the back stroke in swimming, and you can read most of the beginning Bob books. You love all machines including those used for building, cooking and sewing. You have incorporated the family's love of competition and are always ready to race anyone in anything and beat them at the finish. You also love to watch horse racing especially as the horses race to the finish. You amazed me recently when we went to the track by saying at the end as we met all the woebegones on the bus, "Daddy bet on the 4 horse in the second race, and it was in the lead but the 7 horse came up very fast at the end and we lost, but we won because daddy bet to place on second".

You love money and nothing gives you greater pleasure than selling lemonade. You dance up to all customers, give them a little kiss when they buy things, and then carefully count the revenues made in your cash register. You like to use credit card and understand what things cost and when you have to be careful about buying them. Sometimes you look at the screen of prices and say things like "oh no, what will make the prices stop going down."

You love going to concerts and have been to more live performances, ( and been escorted to the "front" ) than almost anyone. Your favorites are South Pacific which you've seen 5 times (I hope we can get you through the second act), The Music Man, My Fair Lady, and Annie. The little orchestra society has a few stars that you look for at their concert that make you love the music even more.

You are very good at counting and can add 9 to any number and know how to subtract. You recently gave a taxi driver 20 on a 17 fare and said "3 back" without prompting. You love to read maps, and can give a driver explicit instructions with all routes from West Street in Manhattan to Hillcrest in Weston.

Now that you know what's important in this family, and have already in your activities prepared the way, let's turn to some things for the future.

You will find that almost all the things you do in life come about because of the places and people that you visit and meet. Okay, you have to choose them wisely. Stay around good people who do good things that make you happy. But don't only think of short term happiness like Pinocchio did, but think about the things that will help you over the long run. The people you can always count on to lead you to good things, thinking only of your own welfare are your family and friends, the people mentioned above. You can always count on them, through thick and thin, and you must not expect to rely on others as the world spins on its axis and many a storm and uncertainty envelopes you. I had a friend once, a Palindrome.

Closely related to this is one of my most important things. Stay away from people that seem to have bad luck. People who always end up in trouble, or who seem to be in places where bad things happen to them and their companions, even if no fault of their own. I call these people hoodoos, and you will meet many of them among your friends and acquaintances who you should stay away from. As the dictionary says, "hoodoos are not confined to locomotives that are always involved in accidents through no fault of their own, but to boats, and planes also."

A good place to be is one where you can do the same thing over and over again without excessive danger. If you keep doing dangerous things, in life, play, romance or business, you'll find that eventually one of those dangerous things will cause disaster. I have made that mistake in my speculations, and life and I am afraid that you may be prone to this error also. Be careful. The best things are yet to come.

You have so many talents, so many good things ahead of you, and life is so beautiful that you should never take a chance, even if it's one in 10,000 that would cause you irreparable harm. I found this out too late in life to thoroughly incorporate and if I had, life would have been a lot easier for all of us. I know that your mother agrees with me on this, as we do on most things.

While you should stay away from Hoodoos, you should stay around heroes. I have come in contact with lots of heroes who do great things overcoming tremendous obstacles to do them in my day to day life as well as in books. Heroes I have known include Jack Barnaby, the greatest squash coach, Jim Lorie, the man who created the data base for all of finance, and most of all, your grandfather and my father Artie. He was like you. Everyone who knew him loved him and thought of him as a second father or second brother. He never did a bad thing in life and always tried to do good. He loved all of life, including not only the things above I said were so important, but writing, teaching, dancing, ice skating, games, checkers, sports of all kinds, parties, words, books, libraries, food, friends, music. His favorite expression was "this is living", which he was likely to say when eating a good tomato or watermelon. The picture of him we have showing his books, his violin, his tennis racket, football, checker board, type writer says it all. Most important of all was that he always knew and tried to do the right thing. He was a master of form and knew how to do anything just so.  His second favorite expression was "So what of it" which he liked to say whenever one of his kids was sad and depressed and worrying unduly about things. It's always good to let "the bygones be bygones" as no sense letting bad things hurt you in the past and future. And often what happens bad in past turns out to be good for the future. For example, a miserable boss helped to get Mommy fired from her job, even though she was excellent at it. But if she hadn't been fired, she and I wouldn't have met, and you wouldn't have been born.

Such an approach to life led Artie to often say "I'm the happiest man in the world". I believe Uncle Roy often says that, and I hope you can also. If there was one characteristic that marked Artie above others, and made him like a second father or older brother to almost everyone he met, it was that he was a "formist". He knew the right way of doing every thing.

Doing the right thing means doing things the proper way. Without wasting any motion, and effectively going from beginning to end. It means doing things properly regardless of whether you have to, but because it's part of your nature, and no one can take it or tell you what to do. It includes taking risk and overcoming obstacles to make your family better, protecting women, helping the weak, and being courageous when something important is at stake. It also means doing good things that will make you and others happy even when you don't have to do it. You are lucky these days in that you don't have to rely on heroes in your family and books only for guidance in doing the right thing. But you can look things up on the internet to see the right way of doing it. Thankfully you are already good at using google and wiki, and you should continue to look things up there as well as the dictionaries that you love when you want to know the right way.

I have two groups of people that have been very helpful in showing me the right things to do, the junta, and the spec list. Many of them are like family and you will be able to draw strength and nurturing from them in the future. They all agreed with me that it's important to surround yourself with good people and when I asked them for heroes besides Artie to model yourself after from books they came up with the following list. General Petraeus (smart, effective, loyal), Jack Aubrey (knew everything about his field, gusto, generous, well versed in deception, musician, big, competence), Cal Ripken (perseverance, expansive, excellence at game, sharing his love of game with others for profit), Thomas Jefferson (scholarly, omniscient, doing the right thing) Benjamin Franklin (practical, down to earth, self effacing, romantic, scientific), Morihei Ueshiba (self reliance, self defence, physical training, achieving your goals) coack K and Coach Wooden, and Coach Pete Newell, (dedication to teaching, completely knowledgeable) Bruce Lee (strategy, physical training), Richard Feynman (curiosity, ingenuity, happiness, loyalty), Michael Waltari (independence, resourceful, world as oyster), Ted Mack (not petty, serving as example, creative), Faraday (humble, able to popularize, neat, experimenting, dedicated), Thomas Edison (inventive, practical, seeing the big picture, diligent), Lord Rama (ideal son, husband, friend, and king), King Leonidas (for bravery, tenacity) Galton (ingenuity, generosity, diversity of interests, counting, visualization, diplomacy).

A boy, a man has many roles to play as he grows: to be a good son, a good husband, a good friend, a good brother, a good teacher, a good leader. Fortunately, the foundation, the qualities for dispatching those roles are rather simple. The heroes mentioned all seem to have that foundation. Strength, bigness, courage, diligence, organization, practical, knowledge, self awareness, sense of happiness, loyalty. You are fortunate to have been born with many abilities. If you try to weld the above qualities of success onto those abilities you are sure to lead a happy and productive life.

Some day you'll look back on these letters and realize that the lessons I tried to teach you come from the wisdom and good experiences of my parents and their parents before them, and that they can live forever in you, and yours.

Just one more thing. Tom Wiswell, the greatest American free style checker player, and my checker teacher for 20 years always said, "make sure you have a good foundation in Checkers and life." Try to fill in the holes before you start something. Have a strong base with checkers and resources supporting where you're coming from. Read the story of the three pigs and learn from it to use strong materials, for example strong people and products when starting a business. Dig deep and wide and strong at the beginning. Make sure there are strong posts of brick or concrete or metal all round to hold up what you're doing. And make sure there's lots of volume underneath to distribute your project over. The worst mistake you can make in business or life is to get in over your head. That mistake always starts with not building a proper foundation.

One more thing. Think big. Have great dreams. Try to make them come true. Don't worry about little things. As Galton says, "let the bygones be bygones". Or as Artie would say "so what of it" about little things that go wrong.

As the song goes, "the days grow short. I haven't time for a waiting game. These precious days dwindle down to a precious few, and these few precious days I'd spend with you." Hopefully the ideas, heroes, books, and love that make up this letter will help steer you on the path to a happy and productive life.

Love, dad

Kim Zussman comments:

I hope and believe you will live beyond the day when Aubrey beats you at tennis, and everything else. It is part of nature's plan.

Chris Tucker comments:

Spent the afternoon at the beach yesterday. There is something special about having your child run to you and reach for your hand, about holding your child's hands and helping them jump over the waves and squeal with delight, again and again. It makes all the other stuff just disappear.



Dear Vic,

Your son is ever so fortunate to have you as his father. You have provided him with much worthy advice in your letter.

One bit of advice that I see that is missing is how he will deal with his peers when he goes to school. It is clear that he is an extremely gifted and brilliant child. With all the effort you are making, he will enter school much more advanced than most of his peers. This could put much pressure on him to deal with a number of possible issues. One possible issue is boredom. At least you are able to pay for private schooling and to see to it that he is kept in situations that will prove stimulating for him, so he will probably be able to avoid that problem. To the extent he is kept in classes with others equally bright at a similar age another potential problem could be lessened. That problem is that he will stand out as being different and possibly having more mature values than his peers. A wise guidance counselor once pointed out to me that when someone is different he is either likely to be worshipped or ridiculed. Either could be a problem. Aubrey should realize that his excellence is a gift that he should be grateful for and nourish but that it does not him superior as a human being. That is something that relates to character, part of which requires treating others with respect and realizing that all may have something to contribute. You have already included that in your advice to him and he seems to be inclined in that direction. He should realize that if one is put in a leadership role by others one is there to serve and use that role wisely with responsibility. The more serious issue would be if he is instead subject to ridicule and pressures to conform. He should learn that he should always be true to his character and be willing to stand alone against the crowd if need be.

Another potential problem is not likely given what he is already like. That is the pressure he might feel under if living up to the high expectations you have for him are beyond that which he can accomplish or which he has fallen short of in some way. As you say, let bygones be bygones. We are all human and imperfect. We all make mistakes and at times perform foolishly. He should realize that he will always be loved and that while he might have to live with the consequences of his mistakes that you will not hold those against him in the future. Rather he should realize that you will appreciate his efforts to do his best and to overcome any shortcomings. If he has less interest or ability in some areas that seem to matter to you, he should realize that what you want for him is to do well and seek out that which interests him and is most fulfilling for him even if it differs from the activities that you value most.

With regard to the heroes, he should be aware that they often have failings also and that he should strive to emulate their worthy characteristics and avoid their shortcomings. For example, you list Thomas Jefferson who was also prone to personal indulgence and living beyond his means.

Speaking of heroes, of those whom I have known whom I might classify as those worthy of emulation, I would include Milton Friedman. His reliance of sound thinking based on evidence that he was willing to stand up for at a time when it was not popular is a most admirable. So is his patience as a teacher and his ability to get along with those of opposing views while trying to convince them of the correctness of his views with logic and evidence rather than personal attacks. He was a most decent human being who gained the respect of those who came into contact with him. He stood his ground without being arrogant.

Another person worthy of note is someone whom you may or may not know. I am referring to Prof. Lowell Harriss. Lowell was a professor of economics at Columbia University. I did not appreciate the man fully until I attended a memorial service for him earlier this year. He was a man of intellectual integrity who managed to get along well with those of differing points of view. He was very concerned about all his students as individuals and kept up relations with them after they graduated. He helped them get jobs and acceptance to other institutions. He corresponded with innumerable people, remembering birthdays, etc.. He had a great sense of humor and was famous for the cartoon collections he sent to his numerous friends and acquaintances. He was a great traveler even since his early college days, having gone through the world something like nine times. He was a great husband and father. His daughters noted that in traveling with him, it seemed that he knew people no matter where they went. He lived well into his nineties and until the last couple of years of his life he still traveled to conferences around the world. He never lost interest in intellectual issues, still attending conferences and meetings to the end. His intellectual interests were widespread. The mark of his accomplishment was the large attendance at the memorial and the warmth of feeling and appreciation of this wonderful man expressed by so many there. Such a person is a good role model for Aubrey just as your father is. It goes to show that one does not have to be famous or a person whose intellectual contributions are truly revolutionary to have lived a great live and achieved a character worthy of emulation. If he can accomplish that he will have a life he can look back on with pride.

A few years ago, my cousin once removed asked all the family and friends to write a letter of advice for her adolescent eldest daughter to compile into a collection to give her for a birthday present. It is for a later stage of life, but I have attached it nonetheless to add to Aubrey's collection of advice. Most of it is general and would apply to Aubrey, although a small part of it was specific to Gillian.

You are most fortunate to have such a gifted son. There is no reason you should not live into your nineties Vic and get to see Aubrey reach adulthood. I hope that will be the case both for your sake and Aubrey's.

Best wishes,




 Letter to my daughters on obtaining cent percent marks at Mathematics Term Examination, together:

Dear Muskaan & Khushboo,

Congratulations on achieving the highest possible score in your mathematics test. In the past too each of you has obtained a similar score but on different occasions.

I am all the more happy when I today receive your test reports and find that both of you have together achieved the highest possible, together while being in the VIIth standard and the Vth standard of your schooling, when you are 12 years and 9 years old respectively.

Concentration that helps in putting your best at whatever you are doing at a particular moment is clearly you have begun to exercise often. I want you to remember that when required you can practice the highest levels of concentrations necessary to get the best out of you. This score has been possible only with that.

Within a fixed period of time that an examination must be completed to think of nothing but the work at hand within a time bound manner is a mark of disciplined thinking and action. I encourage you to call upon this faculty as often as you are out to achieve anything, anywhere.

Mathematics is not just about numbers. Its an elegance of a state of mind and personality that transcends above the rhythms and cycles of perception and focuses on the completeness of relations, functions and theorems that describe specific constructs. Your ability today together, puts me at greater confidence that you will be achieving such poise and grace as often as you are required to excel at a particular situation.

The joys that can be achieved by solving a puzzle, a problem a challenge are ever present in any mathematical question that you attempt to solve. The prowess at mathematics should give you the opportunity to realize your ability at solving varieties of problems and puzzles that can be represented by symbols, signs and formulae. As you continue to grow as persons and as your repertoire of skills gets richer you should realize with ease that the most widely known scientist of our times, Albert Einstein, is known to have said that, “What can be counted may not matter in life and what matters in life may not be counted.” In stating such an idea he was never dismissive of the utility of counting but was emphasizing that the scientific approach, the path of reason, the pursuit of enquiry may not be limited by any one’s inability at converting thoughts to numbers, since before you can enumerate an idea or a thought you must grasp it to a depth that relationships of that idea to so many other ideas should be appearing very clear to you. Then an approach to quantification to test the consistency of the thoughts should get easier.

The bright glint that I noticed in the eyes of both of you as I met you with your reports tells me that achievement itself is a reward. The smiley that your teacher drew next to your marks is a memento of appreciation and acknowledgement. In life, there may be moments when appreciation for any achievement may not be as instantaneous and it may be a while before those around you will begin to appreciate of your work or contributions. I am sure you will remember the glint in your eyes today that you carry together and it shall be yours again and again in the future whenever you get the similar inner satisfaction of having done your best without having to wait for a smiley.

I must thank your teacher particularly, for such a nice and sweet gesture of saying so much to you in so few strokes of her pen. Brevity at any communication is elegant. So is the pursuit of any mathematical solution. Two different people can get the same answer, yet the one who achieves that with the minimum amount of reasoning and explaining has done a better job. Economy of movement is a hall mark of most achievers and in the elegantly written answer books that I see before me, clean hand-writing and simple solutions make me believe you are acquiring the correct attitude.

Objectivity that is feasible much more easily at Mathematics is not the sole reason for the higher probability of obtaining cent percent scores in this subject. There is a unique answer in Mathematics, most of the time. At other times if there is no single answer, there is a definite range or set of answers available most of the time. There are however, the irrational numbers, the indeterminate quantities, the undefined values (that often mistakenly are labeled as infinite) yet even in those outcomes it is uniquely possible to arrive at those conclusions. The abilities that you gather as good students of mathematics should help you acquire the wisdom to be able to cope up with the less deterministic situations that you would face in most other walks of your pursuits. The in-deterministic, non-deterministic and the undetermined are all to be studied with the help of the deterministic. That is what Isaac Newton, who perhaps was the best known scientist of the previous century, meant to say when he said, “standing on the shoulders of giants".

To be able to learn from others, to be intellectually humble in knowing and accepting you do not know something is the critical start necessary for beginning to know anything that you are going to know.

Lastly and as importantly as everything I have written to you in this letter, do remember always that numbers even if an invention of mankind as much any other language are perhaps most easily manifest everywhere in nature as compared to any other language known to man and thus likely your best medium for communicating the inner beauty that you carry.

Best wishes from a proud father that you both continue to achieve many encores,

With love,

Sushil Kedia



Bremerton, WALately been keeping my ear to the ground and have overhead workers at three businesses discussing among themselves about their hours being cut.

One place was a 7-Eleven and two restaurants.

I don't see things improving. consider me a skeptic.



Al Corwin writes:

I'm in Bremerton, WA, sixteen miles due west of Seattle. Bremerton is a Navy town, and it has always been somewhat immune from the ups and downs of the national economy. It usually does slightly better when the military is in use (like now), and slightly worse when the need for the military seems less acute. This time is different.

The town became flush in the past decade as the one-hour ferry ride to Seattle became a pleasant option to Seattle traffic. All of this was due to the boom in housing. When things started to fall apart, they fell apart more here than closer to the city because of the relative inconvenience. Despite getting an inordinately high number of stimulus projects here, the town is hurting like never before.

Fully a third of the storefronts in town are now empty. Two restaurants closed last week, one of which was a successful business for over thirty years. The only good news I see is that my friends who are contractors are getting enough work to get by now whereas a year ago they were all working on their golf game because business was non-existent.

Another friend runs a temp agency, and his business has turned up sharply over the last three months. That's usually a sign of recovery, but he says the demand shows no signs of being long-lasting, and so far, there has been very little attempt to turn temps into permanent employees.

The only new retail businesses in town are drugstores. Rite-Aid has built a new store and Walgreen has added two. I don't really understand this. It's not like we had a shortage of drugstores before, and this is only a town of forty thousand people. Something has to give.

In fact, I do notice new drugstores everywhere I go. What is up with this?



Israeli writer David GrossmanIf it as good as they say…

From Tyler Cowen at marginal revolution:

"David Grossman, the well-known Israeli writer, has a new book coming out this September, namely To the End of the Land (pre-order at that link). The basic plotline is of a mother who sets out on a wander through the Galilee, with a former lover, to avoid any news of her son's possible death on the front in Lebanon.Has any book received better blurbs? Nicole Krauss blurbs that Grossman "may be the most gifted writer I've ever read"; Paul Auster compares the book to Madame Bovary or Anna Karenina.

Here is a discussion of whether the blurbs for the book are overwrought. Yet it has received amazing reviews in Israel. It has won a German book prize. It was strongly recommended to me in two German bookstores, by sales clerks. Grossman himself seems to realize how good the book is.

Here is an interview with Grossman. I am on p.100 of about 700 pp., and while the book develops slowly, I am not ready to reject the extreme claims made on its behalf. I am sad when it comes time to put it down. Have any of you read it? Heard credible accounts of its quality?"

Stefan Jovanovich writes: 

Grossman has a wonderful phrase– "the acuteness of life" — to describe what it is like to live in a world where it is commonplace for parents to lose children. The more one reads about the Revolutionary War period in America the more one has a sense of how much those people had in common with Israelis. We now have the luxury of knowing how the story would turn out; the original Americans didn't. For a decade they got to watch children die every day while the war for independence and freedom ground on. There was one great difference: after 1788 at least we Americans had the reassurance that the French marines were off-shore waiting to land. Who, if anyone, is waiting to come to Israel's aid? Alas, Grossman himself still has the atheist illusion that somewhere over the rainbow rationality will triumph and the Palestinians will eventually tire of hate. Perhaps; but a more likely future is that nothing will change. Among my grandfather's many misfortunes were his in-laws. Their explanation for all the miseries of the world's history was that "the Yids did it". When I asked him why they thought that, his answer was: "they need that stupid excuse in order to be able to continue to live in misery with one another." They were and are not the only ones. 



Eric Schmidt of GoogleThis link takes you to a fairly long but fascinating article called Solitude and Leadership, a lecture given to a plebe class at West Point.

It's about what leadership is, and how to learn to think for yourself. It cautions the students about multitasking, and not taking the time to think about things and how they feel. Know thyself, he pleads, before you can make leadership decisions. Interesting comments about bureaucracies, too.

Found this by following Eric Schmidt, CEO Google, on Twitter. Excellent tweets, recommending various articles. A verified account.

AL Corwin writes:

What a great article! It rings true on every level in a way that is very rare. The piece itself is a great example of the kind of thought it seeks to advance.

My favorite part was about how multi-tasking gets in the way of being good at multi-tasking. I read a couple of years ago that tests show that people who are doing two things at once only perform forty percent as well on the best of the two tasks as they can do when they focus on a single task. This article shows that that problem is just the tip of the iceberg.

In particular, the author makes a compelling case that multi-tasking actually interferes with the thinking process. It's almost impossible to really think about more than one thing at a time, and it is particularly difficult to think in the company of others. Unless you can think your way to knowing what is right, you will never be in a position to stand up for what is right. Thinking is a solitary activity even when you do it with other people. I hadn't thought about it quite that way before.

I find myself wondering if there are several different kinds of multi-taskers. One type is really doing more than one thing at a time, and another is really doing one thing only. There may be other things going on in the second environment, but the person is totally focused on one activity and then another. I am not saying this well, but it seems like some people multi-task in a serial fashion and others are really operating on multiple channels.

To play the devil's advocate for multi-tasking, I would argue that some forms of expertise are in fact multi-tasking. The people that are good at these chores have lots of things that they do on a subconscious level. When anyone starts on these complex tasks, they need to pay attention to everything which is overwhelming. As they become pros, many chores and actions become automatic enough so that the expert may not even realize what they are doing.

So what is multi-tasking? Walking and chewing gum? Shooting a someone while flying a plane? Thinking about sex while trying to drive? Maybe the answer is that focus is good, but simple multi-tasking is okay. I find that my imagination roams the most when I go for a drive, but may not be the best for those along my route.




 You must see this movie.

People lament the decline of the print news media, the victim of computer culture. The trading floors of the exchanges have also had a sharp decline in the number of floor traders who populate the floor, as the trading business is being increasingly facilitated by computers. In 1992, there were 10,000 traders on the floors in Chicago, today there are only a few hundred and 95% of the volume is electronic. James Smith, the producer of "Floored," the movie, examines the life of past and present traders both off and on the floor. He discusses the culture, environment, wins, losses, personalities and future of traders, past and present. He pays close attention to the struggles the ex floor guys are having without the edge that the pit gave. He examines the character of the players involved, and lets them reminisce about their floor days. He compares and contrasts the differences between local traders and computer traders. He interviews ex floor traders trying to make it on the screen. He pays particular attention to the off floor lives of traders and gives them a free reign in telling their stories. The stories are great as everyone that was successful in the pit has a great story, and ego to boost. The movie has many great shots of the action in the pits a few years ago and today. Many of the floor traders don't realize that they're subjects of the forces of natural selection, just like any other creature in nature. One of the interviewees said that a big difference between watching the pit and watching a screen would be equivalent to watching an entire football game on TV or just watching the scoreboard. This, and many other observations bring clarity, and numerous trading lessons that might be useful to anyone interested in trading. Also interesting to note is the obvious lesson in humility that is learned by ex-denizens of the trading pits. "Floored" is 87 minutes long, and can be found in its entirety in 8 segments, here.

(I highly recommend this movie to anyone interested in trading, futures, trading floors, etc. It's a 150 year old way of life that's sadly disappearing very quickly.)

Incidentally, for what it's worth, there's still some floor action in the cattle and hog markets, which have resisted the encroachment of electronic trading to some degree. Also, many options are still primarily traded by open outcry.



Cascadia--independence movementWhat is the Purpose of a Country?

An article I read today about the possible breakup of Belgium caused me to think: What is the purpose today of a country? Especially a large country like the United States, as opposed to a smaller and perhaps more locally responsive country like, say, Switzerland or a Cascadia nation consisting of Oregon and Washington states.

Aside from some superficial cheerleading aspects (“We’re Number 1.” “We won the World Cup.”), I would list the following as the most important modern characteristics and purposes of a country:

1. A free-trade zone, to give the efficiencies of trade over a sizable market.

2. A powerful army, to be able to assert oneself in the world and boss around other countries.

3. The power of deciding who to let into the country.

4. The power to transfer wealth to politically influential interest groups from a large population of productive citizens.

Briefly analyzing the usefulness (as opposed to the popularity) of these main purposes:

1. A sizable free-trade zone is highly important economically. But in modern times a sizable free-trade zone is no longer identical with nationhood, the most prominent example being the European Union. Similarly, if Cascadia or New Hampshire were permitted to break off from the United States, such smaller country could still be a member of NAFTA. We thus can ignore this claimed purpose of a large country and concern ourselves only with the other three.

2. As to a powerful army allowing us to coerce others around the world and conduct wars even in remote and unexpected places like Iraq and Afghanistan, Spec Listers will differ but I myself think the Swiss model of a strong army basically to defend one’s borders is the better, less provocative, and less expensive (both in lives and treasure) way to go.

3. Deciding who to let into the country, i.e., immigration policy, is important because it affects the future composition of the country, perhaps even the country’s character and economic well-being. In dealing with this highly contentious issue, I suggest it may be more amenable to resolution if it could be dealt with on a lesser scale than the current national United States. For example, if certain regions of the U.S. were eager to welcome large numbers of immigrants from Mexico while Cascadia or New Hampshire were not, separation of Cascadia or New Hampshire into a separate country would, at least as a thought experiment, allow each smaller nation to adopt an immigration policy desired by its citizens. Americans strongly favoring immigration could remain in (or move to) those parts of the former U.S. with laws encouraging freer immigration, while Americans desiring less immigration could remain in (or move to) a Cascadia or New Hampshire with more restrictive immigration laws. In addition to providing these otherwise irreconcilable groups of citizens with the policy that each desires, we would also learn over time which immigration policy will prove more successful. Finally, even before such radical step as separation of a Cascadia or New Hampshire, our thought experiment may be instructive to us on the question of permitting a state like Arizona to follow a somewhat more rigorous policy of enforcing existing immigration laws than, say, California.

4. Perhaps most instructive of all is the final listed purpose of a modern large country: access to a very large group of productive citizens from whom wealth can be transferred to politically powerful interest groups. And by interest group, I certainly do not mean to limit the analysis to one or the other end of the political spectrum. Rather, I mean the entire range of interest groups with power to access and influence the political process, Wall Street, large corporations, labor unions, farmers, the AARP, minorities, etc. And as a small change compared to the financial rewards accruing to the interest groups, also benefiting are the government officials themselves, who tend to be rewarded more with power and acclaim than with cold cash. The key is the very large group of productive citizens from whom $700 billion can be taken for a TARP program to bail out large banks, $1 trillion for a stimulus package to fund every business, labor and government project every powerful Congressman can conceive of, etc., etc. It is the scale that makes it possible. The productive citizens of a more modestly sized, more directly responsive entity like Cascadia or New Hampshire would be far less likely to surrender 50% of their earnings (and acquiesce in their government’s borrowing more than the remaining 50%) to subsidize their politically influential and less productive neighbors. But in the United States, a country of 300 million with still a considerable tradition of individual economic effort and hard work, such fantastic sums can be skimmed off with comparatively minor protest.

Stefan Jovanovich opines: 

There is nothing in the history of American government to suggest that small = beautiful where offense to liberty is concerned. The actual experience of Americans has been that the freedom to light out to the territory has been the principal restraint on the desires of local oligarchies to impose their will on everyone else. (One should always remember that the first official act of the Harvard Overseers was to request that the Governor of the Bay Colony require everyone to attend Congregational church services on Sunday. As the number 1 supplier of ministers Harvard found God - for once - to be on its side.)

An arithmetic caution: The powerful army of the United States - something required under our Constitution - costs less than compulsory primary and secondary education - something nowhere mentioned in the same document - even though there is now considerable evidence that the military's own schools are now the principal source of practical education in the United States.

The immigration debate can be easily solved if the country will answer the larger question that keeps being evaded: what ownership rights in their own country do citizens have? The liberal/libertarian point of view pretends that citizenship as an inheritance or earned right has no property value, even though it clearly does (why else would ICE still be taking bribes?).

Discussions of secession should start by answering the question that states rights advocates have always wanted to leave aside: which debts and assets do the people leaving the Union want to take with them? The advocates of states rights under the Articles of Confederation wanted the liberty that the Revolution had won without paying their share of the debts that the war had incurred; I have no doubt that the patriots for Cascadia will demand the same sweet deal.

The Swiss Army thing really needs to be put to rest. Against actual invaders - the French being the most recent - the Swiss have shown the same record that all small countries do - initial resistance followed by capitulation. That is no argument in favor of having military bases in Turkey, but it is very much an argument against the fantasy that local militias are a guarantee of liberty. Where they have been, it is because they militia had the big battalions on their side. (The British were outnumbered 3 to 1 in their retreat from Lexington and Concord; in the siege of Boston they were outnumbered by the same margin.)

Americans don't surrender anything close to 50% of their earnings to the government; hell, the government is the largest source of their "earnings" (sic) right now. The current debate is over who gets the graft and how much. That is the most enduring truth of American history and - ironically - the source of the nation's salvation so far. Americans work the system until the system stops paying off; then they look for a new one that offers better odds.



Google androidI had the opportunity in the last week to mix with a number of young cell phone app developers. It was refreshing to mix with such a positive group after running into negativity almost everywhere else. These people of full of ideas, full of excitement, and full of hope. It helps that they are all young; none were over thirty. They are very entrepreneurial despite the fact that many of them carry huge debt from school.

Why are they so positive? They see the world as just being created, and they see themselves as having the necessary critical skills to help shape that world. They are coming up with new ideas every day because they are exchanging ideas and using their cell phones for everything you can imagine. And they are getting funded!

That may be the most amazing thing. They are getting funded by companies like Sony and Disney. Almost none of their investors are angel investors of the type I have depended for so many of my projects. These are mainly old white guys, and they don't understand what these kids are doing.

I am one of those guys and though I admire their work, I often don't quite get it even after multiple explanations. When I do get it, I can see that they have been thinking about a whole world of possibilities that are not even on my radar. It occurs to me that you can't make tools for a world you don't live in.

David Aronson talks about how being a leading edge expert can be a serious drawback when the leading edge moves on. When you find yourself in that position, you really need to reboot and start over. These young app developers tell me rebooting time is here.

By the way, bad news for Microsoft: none of these kids carried a Windows smart phone. Not one! In fact, those that realized that I had such a device looked at me like I was carrying a pooper scooper bag. The dominant choice was the iPhone, but there was a reasonable sprinkling of Google Android phones.

Alston Mabry writes:

Remember the phase we went through when adults would tell stories about how they couldn't figure out something on the computer, and then their twelve-year showed them how to do it? But usually the twelve-year-old explained the procedure from the POV of someone fluent in "computer", and so the adult had to get multiple repetitions before understanding bloomed.

A while back I was reading a piece by a thirtysomething, about how he was seeing the future being formed around him but had only just noticed what was going on. What he was seeing was this: His friends would take their old smartphones, disable the call features, load them with games and other apps, and then give them to their preschoolers as toys. It struck him that new generations are now growing up from a very young age with a smart device in their hands pretty much at all times. These cohorts will be fluent in "smart device" and will push the use far beyond what us monolingual types can imagine.

Chris Cooper writes:

Just as you would not expect the political leaning of Fortune 500 CEO's to match that of the rank and file, so should you not expect Silicon Valley entrepreneurs to align with the majority of voters in the region. In my experience, Valley entrepreneurs tend to be more libertarian than the average. And as a company gets larger, there is pressure from shareholders and other interested parties to support the establishment. Perhaps the Google founders support Obama in public, but in private I can assure you their views are much more libertarian.



ChinaMy nine-year-old son Jonah and I have been playing chess a few hours a day. I never thought I'd enjoy playing chess as much, but I do. In fact, over the past year I’ve probably played more chess than in my whole life. I win every game! When I win, I win. When I lose I win – seeing your son (your student) beat gives you an enormous satisfaction as a teacher. In fact, I never thought I'd enjoy losing so much. Jonah has this quality that I need to nurture in him – he never gives up. Even a game that is a clear loser for him, he plays till the end. What a great quality to have in life!

I am also enjoying seeing my four-year-old daughter Hannah grow up. We have yet to find an activity we both enjoy doing together (other than hugging to death), but we'll get there. She has almost learned how to ride a bike without training wheels; maybe we'll do cycling together. They’ve been going to a summer camp that is half a mile from my work and six miles from our house. A few times a week, while I tug Hannah in a bike-stroller, Jonah and I ride our bikes 30 minutes to the summer camp, through the park.

I envy my kids; they have the pleasure of spending time with their grandparents. My grandparents lived thousands of miles away from me – I saw them once a year for a few weeks and that was it. My wife's and my own parents live just a few miles from us. My father's house is a block away from my office; I stop by a few times a week for breakfast before I go to work.

My father gave Jonah a 50-state quarter collection for his birthday. Now, every day before Jonah goes to sleep, he and his grandfather spend half an hour on Skype learning about each state; and once they are done with a state, Jonah puts the coin at the proper place in the board. They also play a game of chess on Skype chat.

I gave a presentation last week at the Value Investment Seminar in Trani, Italy (here is a link to the PDF). I strongly suggest you visit their website in a few weeks, as it will have presentations and videos. It was a terrific event; I learned a lot.I spoke about China, Japan, and our favorite stock idea: eBay. I changed the title of the China presentation to “China, the Mother of all Grey Swans” (instead of “Black Swans”). A while back, when I shared this presentation with my readers, I was corrected: China is not a black swan, because a black swan is a rare, significant, and unpredictable event. However, the consequences of what is transpiring in China and Japan are for the most part predictable (especially if I am writing about it). We don't know when they will play out, but they are predictable.

Nassim Taleb, one of my favorite thinkers, who brought the black Swan to life in his books Fooled by Randomness and The Black Swan (I like both books, but Fooled by Randomness is my favorite, plus, it is by far an easier read than Black Swan), solved my dilemma with China by creating a new swan: "grey"– a rare, significant, but predictable event (though the timing is still unknown, or perfectly known only with the benefit of hindsight.)
I spent a few days at the seminar discussing and debating China with some very smart folks, who stirred up some random thoughts.

What really amazes me is how people who would not trust the US or European governments to do their laundry, have unconditional faith in Chinese government involvement in its very complex economy.

The Chinese government brainwashes its people the same way the Russians and Soviets brainwashed theirs: by controlling and censuring media. So I understand when Chinese people who live in China speak highly of their leaders – they are brainwashed (I have experienced this first-hand). However, I am amazed that the Chinese government has been able to brainwash people who reside outside of China.

No, an economy in large part controlled by the state is not superior to ours. Greater control over their economy allows the Chinese government to pull the economy out of recession a lot faster than in the democratic countries, but there is no free lunch. Their actions will just lead to greater excesses and imbalances down the road.

It seems that as Westerners we have an inferiority complex when it comes to Asian cultures. Chinese uniqueness is praised today the same way Japanese superiority was in the 1980s. I even remember reading Russian newspapers in Russia, in 1989, praising the Japanese work ethic and their unique culture and spouting predictions of the continuance of Japanese dominance. I can only imagine how the mainstream press in the US was caressing Japanese uniqueness in the late ’80s, especially as the Japanese were invading (buying) Times Square and the State of California.

What is very interesting about it is that today all those Japanese cultural advantages are looked upon as disadvantages. For instance, “saving face” did not allow Japan to deal sufficiently with failed companies; their economy was full of semi-dead, zombie companies, which did not allow the healthy ones to prosper. Their employment-for-life system that was praised to the heavens during the Japanese golden age is now killing productivity of the economy. I recently read that 12-17 million people in Japan are employed who should not be employed (for an economy of 120 million people, these are huge numbers). In other words 12-17 million Japanese show up for work every day and receive a paycheck, but add little or no value to their employers.

Back to China. Even if the Chinese are harder-working and more entrepreneurial than Americans and Europeans, that doesn't mean the laws of economics are somehow suspended in China – they are not. The Chinese economy was geared for high global growth, while now much lower growth is in the cards. The excesses created by 14% of GDP being “stimulated” into the economy through a fire hose have led to significant overcapacity. It will take time for these excesses to be dealt with, even in a country full of super-hard-working people.

A friend asked, “But what about Singapore; its government plays a significant role in the economy, and Singapore is thriving.” The clear answer: government can only succeed in running very small and relatively simple economies. Let me give you this example. I have a game on my iPad called Flight Controller – my kids love it. The point of the game is simple: you are an air-traffic controller and your job is to land planes. Planes come in three colors, red, yellow, and blue, and each plane has to be landed on the runway matching its color. The objective is not to have mid-air collisions. I can land ten planes no problem, twenty gets more difficult, and forty I cannot handle (Okay, I played the game a few times). The same is true for economies: the more complex the economy the more difficult it is to be centrally planned.

Government is not and never will be an efficient allocator of capital. It empowers bureaucrats, which in turn leads to corruption, which further misallocates capital. The size of the bribe or strength of the personal relationship decides the flows of capital instead of the invisible hand that funnels capital from low to high uses. (A side point: Singapore is one of the most uncorrupt countries in the world; this may explain in part the government’s success. China is not Singapore; it is infested with corruption).

I often hear that you have to go to China to understand it. But tourists who go to China don't see the real China, the same way that tourists who go to Moscow don't see the real Moscow. I was in Moscow a few years ago, and I was impressed by how clean and beautiful it looked; in fact it didn’t look much different from the center of Brussels. Of course, I was only in the center of the city, where you see fancy restaurants, gift shops, museums, theaters, etc.

I went to see my college friend who lives in the real Moscow – I saw a very different picture. The second you veer off the main road, it turns into pothole hell, and the streets are anything but clean. My friend lives in a nine-story apartment building that has not been painted in decades; paint is peeling both inside and outside. Interestingly, most of the sides of the buildings that face large streets in Moscow and in Murmansk (the city where I spent all my Russian life) are usually painted, but the sides that face small streets have not been painted in generations.

My friend – a lawyer – and his wife and kid have to live with his mother, as they cannot afford to live on their own. But you won't see this Russia if you are a tourist visiting Moscow. People who visit China even multiple times harbor an illusion that they understand it – they don’t. In fact they so overwhelmed by its grandness that they stop being rational in their analysis.

I keep thinking about the possible consequences of the Chinese overcapacity bubble pop. It is relatively easy to understand what will happen in Japan: deflation will quickly turn into hyperinflation as government is forced to print money to service its debt and social obligations. They'll announce and may even execute austerity measures, but those will be a decade or two too late. The Japanese yen will likely decline, though maybe not right away, as Japan owns a lot of US dollars and may be forced to sell them.

The Chinese situation is far more complex. China has tremendous overcapacity, but overcapacity is deflationary. It will drive prices for commodities down, and prices of Chinese-made goods will likely decline as well. Demand for industrial goods will collapse, pushing their prices down. But China will also have to deal with a lot of bad debt and will likely have to print money to do so – which is inflationary.

The popping of both the Chinese and Japanese bubble economies will lead to higher US, and likely global, interest rates.

Japan, as the title of my presentation suggests, is past the point of no return. Internal consumption of its debt will likely turn negative very soon. Its post office, which includes a postal savings system that was historically one of the largest buyers of government debt) announced recently that it will be a net seller this year. The situation is out of the Japanese government’s hands. It will probably not be able to intervene in the economy for much longer, so rates will rise and there will be little they will be able to do about it.

China is different from Japan. Its government is trying to slow down lending, but at the same time we have started seeing news of possibly another multi-hundred-billion-dollar stimulus over the next few months. The Chinese government’s actions are the wild card that will determine the duration and the magnitude of the bubble pop – the longer they intervene, the more dire the consequences will be.

Jim Lackey writes:

Why is it that the Soviets lasted some decades and you think China is going to self destruct after 1 decade? Are you guys serious? So the Olympic track builder comes to Nashvegas… we are building a new track and paved the berms. He told us about Beijing and the Olympics. He built the BMX track. So a dump truck so overloaded with hot pavement wheel stands up the hill– yes, front wheels off the ground…

A chopper comes in takes the bucket off the truck flys it to location 100 meters and set sit down. 50 some 50 Chinese kids come running out shovel hot pavement in a ballet and make a perfectly paved berm. He said it was wild to see. Mean while 4 of us did it on half the time with one sub load dump truck a rented bobcat with 1-10th the labor and guess what. In the USA the labor was free! We all volunteered to do it for the love of the game.



 Is it me, or is it easier to bluff and steal a pot when the pot is small and less is at stake? It seems like players are not quick to defend or contest when the stakes are "not worth it".

Can this be seen in markets? Do sellers dump near lows or not care to squeeze you when you are trying to trade through their midst when action has lost its edge? What are some examples where the markets let you steal a little–out of nothing more than fatigue or lack of interest?

George Coyle writes:

I think about this often but in a different way. Looking at the concept of the bluff from another perspective, the amount of capital a player has certainly influences play and outcomes in both poker and markets. The person at the table with the most chips can often “lean” on the other players without much risk. As an example, if the pot was say $25 then the person with $250 in risk capital will be exponentially more averse to attempting the bluff (or holding on to a questionable hand) than the person with $2500. In instances where you hold the majority of the chips the cost to see how things play out and/or wait for a potential reversal of fortune or increased probability of success with new cards coming out (or information/prices in markets) is worth it more often than not so long as the stakes don't get too high relative to your risk capital (unless you truly have a terrible hand then discipline is prudent). The blinds (commissions/spreads in markets) will eat away at the little guys in the meantime to the tune of a much greater % of holdings. Leads me to wonder if there are any studies to this effect showing the tipping point wherein an uneven distribution of holdings presents an inevitable conclusion in outcome (i.e. the big fish wins/the rich get richer) should the majority holder choose to play conservatively and never risk too much going “all-in” (and barring social revolution)? I would imagine Warren Buffett rarely gets margin calls and his “genius” at this point could just be by virtue of having the most chips and ultimate staying power (mindful that he did manage to get himself to his current position).

Similarly, I would imagine the player with the most chips wins hands s/he probably shouldn't (statistically speaking) by the same virtue. The film director Oliver Stone said, "Luck comes from persistence and talent. If you're talented your luck will eventually come." Perhaps this is the root cause of lots of modern success, a little well timed luck leading to a "lean" advantage which serves as a self-reinforcing phenomenon. In horse racing they use "claiming" races to account for this effect. These races have a fixed cost where the horse can be bought should anyone want to pay the cost. This keeps the $20k horses from consistently stomping the $4k horses (the owner of the $20k horse entering the $4k race would run the risk of having to lose $16k selling his horse at $4k). It would be interesting to see how markets would play out if a similarly tiered structure existed.

Scott Brooks adds:

Ken is right. When I played poker in the 80's (I played strictly 7 card stud back in the day), the size of the pot mattered. But at the same time, it also had to do with the pain associated with the final raise. Of course, the final raise wasn't the end all be all. It was the build up to the final raise……i.e. slowly suckering the guy in with a series of raises that were painful, but not so painful that he wouldn't make call the raise, or even raise the raise.

It was also helpful if earlier in the night you had the nut hand and suckered him into a sure loser hand (loser hand for him). It was key that when you suckered him into the sure loser that you not make the loss too painful. Save the pain for the big bluff to come later that night (or on another night….it might be weeks before you get cash on this set up).

One of the keys with this set up (I'm sure professional poker plays have a name for this set up, but I don't know what it's called) is that after you sucker him into calling your last raise, you show him your cards and tell him, "Fred, I'm sorry man, I stole it from you" (or some similar phrase). But it's very important that you show the cards in a humble manner, with a contrite look on your face, and say the words "Fred, I'm sorry man, I stole it from you", in the kindest most humble manner possible, looking almost ashamed. You are conveying to empathy to him.

But if you did all that right, later in the evening or even weeks later, you could sucker him into a big bluff. But you have to use this bluff wisely. You have to make sure that he's got a decent, but not great hand. You have to use your best judgment to determine that he has, at least a high straight but no more than a low full house. And you have to make sure that your hand is mystery to him, but that it doesn't appear to have the potential to be too big of a hand.

You have to slowly sucker him into matching raises or raising raises and suckering him in without him noticing the financial commitment he's made and how painful losing at this point would be. He needs to think that your bluffing again. You then hit him with a big raise, a raise large as to be painful……so painful that you can almost always see the fear on his face.

You can see the fear in his eyes as he realizes, "I've got a lot of money in this pot and losing this pot now would hurt, but I'd survive. But if I call his raise and lose, I'm gonna lose my house payment for this month".

At that point, you have them. The fear of losing this months house payment is too much and they usually fold out of fear.

You can then decide whether or not to show him your cards (since he didn't "pay to see them….i.e. he folded), either way, be gentle.

Later in the evening, make sure you're compassionate to him. For instance. If later on you have the "nut hand" and he wants to keep raising you (i.e. he thinks he can beat you), tell him, "Fred, I've got the nut hand". If you've done things right, Fred will know that you're being honest with him and fold. Show him your cards and let him know that you really did have the nut hand.

That way, Fred will have a good feeling about you (and feel less bad about his earlier losses) and will want to come back to the table, night after night after night so you can slowly bleed him of more and more capital.

That is how poker players bleed gamblers dry.

And that is why I quick playing poker. I couldn't stomach what I was doing. I loved the money, but not how I was making it. I couldn't look myself in the mirror.

If I win a trade or beat out a competing businessman I can feel good about that win. But I felt like a hustler win I took money from the "Freds" of the world.

Gains without integrity are hollow and empty….and if they're not, then you are a hollow and empty person. I was not that person. So I quit.




 In the 2010 Stock Trader's Almanac on pg. 52, there is an article entitled "Take Advantage of Down Friday/Down Monday Warning".

The gist of the article is that because of the importance of Friday and Monday as trading days a down Friday followed by a down Monday is Bearish.

It seems logical and they printed the data to "substantiate" this conclusion. Their table of data indicates the market is down anywhere from 18 to 54 days later.

I wanted some more immediate and more definite results that I might use, so I tested where is the market 5 days after a Down Friday/Down Monday for the years Feb. 1993 to July 2010 .To my surprise I found that on average the market is not down but up 5 days later and this occurred approximately 60% of the time.
I tested it further for 10, 15, 20, 25, 30, 35 days after a Down Friday/Down Monday.

With the exception of 25 days later, the market was up all those other days.

The market was slightly down on the 25th day but was up again, slightly 30 & 35 days later.

I have not broken up the test into smaller time segments to check the hypothesis further because I was truly disappointed.

Bruno Ombreux comments:

Just the numbers 18 and 54 are suspect. They smell of cherry-picking.

But there is an even bigger flaw. It is that it doesn't make any sense. One could forgive people not knowing about multiple hypothesis issues. They require education. But throwing away common sense as they do, is a different matter.

Why would something that happened today impact the market 18 to 54 days later? And not in between? When we all know that if there are dependencies they are very weak and vanishing with the passage of time?




 There is something about all the resolutions of tension that occurred at the end of week– the settlement of the flexionic self dealing for 1/100 of the benefits devolved from the flexions in charge, the news that the metals company down 80% from its high had beat earnings forecasts along with the 19th century dow standard with the silos also beating, the 10 year bond yields well below 3%. And the 30 year bond at a high, the reversing from peak to trough of bonds and stocks each week, the emphasis on lines other than earnings in the income statements, like expenses for Google and revenues for GE, the likely passage of the financial regulation book (certainly without the ability of the customer to take recourse beyond the exchange appointed arbiters or members themselves), the random numbers relating to consumer confidence which always follow the stock market move the previous month– that's sort of like the revulsion after romance that they say one experiences, or post partum depression that is deeply unsettling for the period before the service rates jump 100 % at the beginning of the next year, I think.



Unlevel parquet at the Boston GardenThere are, in fact, no level playing fields. Football pitches have a camber– like roads– to allow runoff; baseball diamonds all have mounds and bases; basketball arenas have dead spots in the floor (the Boston Garden's parquet being the most infamous) and variable lighting. All games are rigged, even by the rules themselves (our checker and chess masters can tell us how much of any advantage there is in going first).

That should hardly be shocking news. Nor should it be surprising that regulation is as fallible as parenting; umpires can be inconsistent, biased, corrupt and stupid. Rocky's presumption that the "wise sportsman" refuses to participate in rigged games does not include anyone who actually plays sports for a living. As the folks at NASCAR– American's favorite sport other than shooting– put it, "if you ain't cheatin', you ain't tryin'."

This may explain why Vic and Lack and others keep on. The Rule of Law can be a comforting abstraction, but what allows people to prosper in this and in any other society is the understanding that the lawyers make the rules for themselves; what keeps the game going is what Hayek called "our non-rational inheritance"– i.e. the sense of conduct that prompts individuals to continue to make a distinction between "cheatin'" and lying about the score.

Rocky Humbert retorts:

Football teams switch sides at half time and toss a fair coin to receive. Both teams pitch from the same mound. Basketball teams also switch sides at the half, and the knowledge of dead spots provides a home field advance which is eliminated over the course of the season when the home team goes on the road. Clearly there are moments that favor one side versus the other– but that is entirely different from systematic rigging. An analogy is when Democrats accuse the Republicans of being "more" corrupt. There is no dispute about the existence of corruption, however, over time, the corruption nets out– leaving the players without any lasting advantage. And that is why it's a level playing field over time.



 It is curious that in the last week or two we've seen the sudden redemption of long-held doers of bad/evil/wrong: "The Boss" by death, a flexion-laden firm by settlement, BP by capping the well, central bankers harvesting more power even as the economy crumbles in the shadow of their initiatives; a cosmic whitewashing seems afoot. Meanwhile, those who could long seem do no wrong: AAPL, a former community-organizing law professor *cum* agrarian politico, gold, LeBron James (at least in terms of public sentiment) etc. are facing reversals of fortune and downward revision of their overall estimation.

I will be looking to see if, among the handful of strategies I employ, those which have been underperforming revive while those which have thus far been adding value stumble.

David Wren-Hardin writes:

So you're saying I should take Tiger to win the Open?

Peter Earle responds:

Not at all; I would say, though, that Tiger's (self-inflicted, albeit with media and feminist help) extremely short-term transformation from cherished, model athlete to one-stop scourge of mankind is precisely the sort of inversion which seems to be occurring in cluster form over the last few days.

Also, [i]inconvenient[ly], the public perception of a particular ([n]oble) pseudo-climatologist.



 Eric Falkenstein is the author of an excellent book, Finding Alpha, and of a website.

One of his big insights is that in the real world the relation "return ~ risk" is often not obeyed. He cites many examples, but a representative example is that risky stocks (whether high beta, high volatility, high idiosyncratic volatility, or whatever) have not historically outperformed less risky stocks. I'm thinking that one possible explanation for this is that when you own risky stocks, you sort of get an implied put option "for free". The market makes you pay for that put option by giving you a lower return on the riskier stocks. Here's an example to make it clear:

Suppose investor A buys the whole market, with beta=1, and gets an average return of 10% with a standard deviation 25%. Investor B instead puts just 20% of his money into a diversified portfolio of high beta stocks, with an average beta of 5. He puts the rest of his money into a "risk-free" investment, and for simplicity, I will assume that the risk-free rate is 0%. What return should investor B expect on his stocks? Well, the conventional academic view is that his stocks should have an average return of 5 times that of the market, or 50%, with a standard deviation of 125%. Since B has only 20% of his money invested, his expected average portfolio return would then be 10%, with standard deviation 25%, the same as A.

The problem though is that B has a safer portfolio than A. B has a "floor" on his losses–he can lose at most 20% of his capital. He effectively has a put option that's 20% out of the money. How much is that worth? Well, to get a ballpark understanding, a put option on SPY, expiring 1 year out, 20% out of the money, is currently going for about 6% of the SPY share price. So in a fair world, maybe B's expected portfolio return shouldn't be 10%, but rather 4%, to reflect the idea that the market makes him cough up 6% to pay for the virtual put option that he owns.

If that's all true, then beta=5 stocks should have expected average returns of 20%, not 50%, and a standard deviation of 125%.

This is only a semi-quantitative explanation, but the point is that when you own higher beta stocks, you're implicitly getting an implied put protection relative to lower beta stocks. If the market is efficient and makes you pay for that put, then the returns of the high beta stocks would be reduced as compared to what you'd otherwise expect.

Disclaimer: For all I know, probably some academic has already thought through all this and demonstrated that it's incorrect and/or insignificant, and if that's so, then maybe someone can set me on the right path.

Stefan Jovanovich shares:

An earlier contribution from Eric Falkenstein– David Hakes' story about the risks of publication regarding the subject of risk:

When we submitted the paper to risk, uncertainty, and insurance journals, the referees responded that the results were self-evident. After some degree of frustration, my coauthor suggested that the problem with the paper might be that we had made the argument too easy to follow, and thus referees and editors were not sufficiently impressed. He said that he could make the paper more impressive by generalizing the model. While making the same point as the original paper, the new paper would be more mathematically elegant, and it would become absolutely impenetrable to most readers. The resulting paper had fifteen equations, two propositions and proofs, dozens of additional mathematical expressions, and a mathematical appendix containing nineteen equations and even more mathematical expressions. I personally could no longer understand the paper and I could not possibly present the paper alone. The paper was published in the first journal to which we submitted.

Lars van Dort writes:

I'm not sure I have much to contribute to the main question your post raises (why is the relation risk-return often not obeyed?), but I must say I was intrigued by your example. I felt it must be flawed, but it took me quite a while to see why.

Let's consider the investment in stocks of the portfolio of B, which has an average return of 50% and a standard deviation of 125%. The following could be one of the possible return distributions, from which these numbers are derived:


Average return = 50%
Standard deviation = (pretty close to..) 125%

We see that the worst possible result is -100%, more would not be possible for stocks anyway. Because B has invested 20% of his total portfolio in stocks and 80% risk-free against a 0% return, his worst possible total return is -20%.

We now have to decide what return distribution to assume for the portfolio of A (average return 10%, standard deviation 25%). There are two options.

Option 1:

We take the possible returns from above and divide them by 5:


Average return = 10%
Standard deviation = (pretty close to..) 25%

Or any other distribution with a worst possible return not lower than
-20%. In this case, the portfolios of A and B can both not lose more than 20%!

Option 2:

We do allow for a worst possible return for A of lower than -20%. However, in the equivalent distribution for B this would lead to a worst possible return for B's stocks of lower than -100% (because x5). This is not possible for stocks, but even if we imagine other assets that can take a negative value, this would have the consequence that B's total portfolio loss is no longer capped at -20%.

But what if we take a distribution for A with a worst possible return of lower than -20% AND a distribution for B's stock returns with a low of -100%. In this case (and here comes the point), for all the values to still add up to the mentioned average return and standard deviation, one or more of the other possible returns in the distribution of A would have to be higher, compared (x5) to B.

So, when one wants to argue that in this situation B's portfolio includes a put option because his losses are limited, along the same lines one would have to argue that A's portfolio includes a call option, because his possible returns are also relatively higher. Although I'm not sure how to prove this, it seems logical to assume these options need to have the same value.

The numbers of the example can be changed, but I believe a reply as above can always be given.

Tyler McClellan writes:

My quick thought is that this is not a good way to think of it.

The idea is to look at the marginal preferences of people with the same portfolio set.

In your example the relevance is not between the two portfolios you list but between what stocks the person with 80 percent in cash should chose for the remaining 20.

But I also suspect you are on to the correct way of getting insight about this, which is to show that the distribution of portfolio preferces is very correlated to specific holding within a category (for example maybe the person that owns risky stocks is highly likely never to own other stocks), such that a dynamic similar to what you describe does in fact happen. (best I can describe it is that the category of people to drive this relationship away by buying the now theoretically mispriced stocks is not big enough to overwhelm the people that continue to want volatile stocks and cash, or some other asset such as you suggest).

Rocky Humbert shares:

There are many ways to look at this; however using a high beta subset of the index has elements of a self-referential paradox and must be avoided.

One thing to recognize is that REAL and NOMINAL interest rates greatly influence the result. In an environment of very high real and nominal rates, and low stock market volatility, one can buy a five year zero coupon bond and use the discount to buy calls on the s+p with no principal risk. At the extreme, one could achieve full index replication with no principal risk, and I'd argue that this would be the perfect baseline for analyzing the issue.

We are honored to receive a message from Eric Falkenstein:

I appreciate Charles mentioning my name!

I think you can create such arbitrage only because the standard CAPM assumes lognormal returns, and for lognormal returns, only the first two moments (mean and standard dev) matter. So, parceling out put options is like saying there are different relations between how stdevs relate to max drawdown due to 'non-gaussian' transformations via leverage, distinctions that by definition are irrelevant within the framework of the canonical CAPM and its derivatives.

Many people, including Markowitz at the inception of the CAPM, have pointed out that returns may have important higher moments–skew, kurtosis, see here on my web site for references. Indeed, Fama did a lot of work on this in the 1960's (see my blog ),and his take-away was that these adjustments merely make second-order, intuitive changes to the base model–complications without much real add. However, downside skewness may be going thru a revival, as Cam[pbell] Harvey (editor of the JoF and mainstream finance archetype) actually  mentioned  in comment section of my blog that skewness preferences could explain a lot of these negative volatility-return empirical findings.

Alex Castaldo adds:

As they say in China "Speak of Cao Cao and Cao Cao arrives."



Charlie BrownIt's nice to see after 7 up days the ramp in to the close. Who knew the G's would be so newsy. GOOG down the usual after reports, but the GS settlement, and yeah, we couldn't figure out how in the world the SPU was up for the hard 8, but GS provided the newsiness. But in the end as usual, the last minute the down day is tiny by 415. But if we can't trade over 1099.25 just like the lows weeks ago of 1002 ish– if we do not get the opportunity to play the round number games….ugggg! Charlie Brown. To all my bookie friends…have a happy and healthy expiry.

Mr. Lackey clarifies later:

I did not wish to imply the last hour move was good or bad, or brag that I was not short. What I meant is it is nice to see the markets are fair and the firms that bought the 4x normal last minutes blocks of a million or so shares are now in the black some 4 million bucks. Perhaps the SEC can use their half a billion fee fine and new regulations and power of finreg to see if anyone had knowledge of the settlement as it's all a fair game. 

p.s. glad all that mumbo is now over with. 



 Greenspan Says Lawmakers Should Let All Bush's Tax Cuts Lapse

July 15 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan, whose endorsement of George W. Bush's 2001 tax cuts helped persuade Congress to pass them, said lawmakers should allow the cuts to expire at the end of the year.



There are many examples of historically profitable strategies which have LESS risk, if you define risk as volatility.  (Of course volatility is not risk if you could know there will be profits after period-X, and know what capitalization it takes to survive to X) Notably various above-moving-averages (see below from prior post):

SP500 daily (1951-p).  Using the rules buy at close if at today's close 50DMA>200DMA: sell at close if  at today's close 50DMA<200DMA (and stay long while 50DMA>200DMA).  Here is comparison of mean daily returns (in market =1, out of market =0):

Two-Sample T-Test and CI: ret, 50>200

Two-sample T for ret

50>200    N         Mean      StDev      SE Mean
0              4633    0.0000     0.0121    0.00018  T=-2.15
1             10301   0.00044   0.00832   0.000082

(all positive returns for the period contained in the rule)

And the returns while in-market are significantly less volatile:

Test for Equal Variances: ret versus 50>200

95% Bonferroni confidence intervals for standard deviations

50>200     N         Lower          StDev          Upper
   0            4633    0.0118321    0.0121078   0.0123962
   1           10301   0.0081929    0.0083209   0.0084528

F-Test (normal distribution)
Test statistic = 2.12, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 388.07, p-value = 0.000



On this day, with Mr. Humbert boarding a plane and Mr. Jovocroft Holmes not overly concerned with minutiae of frequency distributions, one points out an interesting anomaly in the frequency distribution of daily occurrence in S&P for the last 5 years.

©Manchester Trading 2010

The  distribution shown is an example of negative skew combined with platykurtosis. One has a number of other interesting facts about the hypotenuse up the sleeve during this brief moment also.




fall of the Berlin wallI think someone will continue professional participation in a game as long as one believes that money can be made. Now there was always cheating in chess tournaments via the throwing of games for prize money and/or title norms, but this didn't stop the better players making money, especially because tournaments had external sponsorship.

But what happened after the Berlin Wall came down is that the bus loads of former Soviets both flooded the market and simultaneously increased the amount of cheating. All but 'elite', non bus-loaded chess events lost their prestige (and thus their external sponsorship) and forced the early retirement of 'professionals' starting with the relatively unsuccessful and gradually working upwards.

Could such a phenomena happen with markets? Very possibly, as once the game starts to get rigged and randomized the weaker pros plus passing wannabes will get driven out, reducing liquidity and making it harder for those who are left to remain. They might not feel the effect at first but the game would become increasingly unplayable.

In this light some early protestations about rigging are sensible as they just might help stop the rot. The creaking gate tends to get oiled and all that.



winnings from a NL Poker gameStocks are much like no limit these days… you have one or two 10 minute bars to decide to go all in risk all or fold.

Vince Fulco writes: 

Phenomenal observation. It's a function of fake liquidity. You've got to pick your spots wider and expect the reactions to be more severe in both directions. I read somewhere the other day the theory that folks are pricing in too much tail risk. Is this what happens when an economy is built on sand?

Jeff Watson writes:

Interesting comparison of stocks with no limit poker. While the risk of ruin approaches 100% in NL poker, I wonder what the risk of ruin would be in the stock market, especially with short term trading. I suspect that it would be higher than one would expect, with the vig, mistakes, and just being wrong factored in. 

Jim Lackey writes:

No…anyone is capable of "not taking risk" and to see people brag about not losing is hilarious. No profits either, at least none to brag about vs. some indexing. To make real money you have to take real risk. Period. End of story. 

Rocky Humbert comments:

How return is related to risk is a subject worthy of extended discussion, and I don't have the time to launch that thread right now.

However, I want to note that Fama has backed away from his early work that pioneered the model that the two must go hand-in-hand.
I for one do not accept the proposition that one must take large risks to have large returns and this distinction is a key difference between gamblng and investing.

This is a fascinating subject… I hope others will contribute. I have a plane to catch.

Jeff Sasmor comments:

"To make real money you have to take real risk period end of story." Yes!

Isn't the ultimate metric whether or not you make money? If you are good at scalping the E-mini SP on a 5 min chart and make money doing that then IMO it trumps the issues of risk and vig. Personally and IMO, and I know that most here will disagree (except maybe Jim) scalping has the lowest risk albeit with more vig (vig is pretty cheap these days at $4/round trip for the Emini SP and since one Emini SP ~= 500 SPY it's much less vig than the ETF). I don't even factor commissions into my thinking anymore.

But longer time frames are more comfortable for most people - and yes the vig is proportionally less but one downside among many is that you're much more susceptible to your own emotions about getting out of a losing trade (or a winning one) - and that's an additional term in the vig equation.

With computers (Skynet) running the show these days you can get your "head handed to you" no matter what time frame you're using. They seem to love chaos and high volatility, sort of like the Shadows in the old TV show Babylon 5; or for real sci-fi nuts - the eddorians from the Lensman space opera series. Or for others: think of computerized Sith.



The professor's wifeOne wonders if anyone out there saw any activities that bore the badges and emblems of inappropriate behavior out there today so that one can maintain my side of the discourse with Mr. Humbert. One noted a strong weakness in the last minute. Could that be the interference with the advantages of the closing prices of JPM and GOOG announcements from the flexes? Or was it more likely yet another wife (or significant other) of a professor from an ivy league university just using her knowingness for her hedge fund as in the free market reform expenditures they conduited, monopolized and discharged their debts in court thereto? Any help you can give me in this continuing discussion so that I can hold my own with my friendly adversary who apparently sees the best in all his former bosses and their colleagues would be appreciated.

Rocky Humbert states his position:

I am not an adversary of The Chair (friendly or otherwise). I simply question why, if the game is as rigged as he suggests, does he continue to participate– especially when more than 70% of the daily volume is attributable to high-frequency computer-generated algorithmic activity– which by its very nature must be a zero sum game. 

Nigel Davies writes:

I think someone will continue professional participation in a game as long as one believes that money can be made. Now there was always cheating in chess tournaments via the throwing of games for prize money and/or title norms, but this didn't stop the better players making money, especially because tournaments had external sponsorship.

But what happened after the Berlin Wall came down is that the bus loads of former Soviets both flooded the market and simultaneously increased the amount of cheating. All but 'elite', non bus-loaded chess events lost their prestige (and thus their external sponsorship) and forced the early retirement of 'professionals' starting with the relatively unsuccessful and gradually working upwards.

Could such a phenomena happen with markets? Very possibly, as once the game starts to get rigged and randomised the weaker pros plus passing wannabes will get driven out, reducing liquidity and making it harder for those who are left to remain. They might not feel the effect at first but the game would become increasingly unplayable.

In this light some early protestations about rigging are sensible as they just might help stop the rot. The creaking gate tends to get oiled and all that.

Nick White responds:

Re: "why bother?"

For myself at least, I would argue that it's a bit like in football.

A running back tries to get through the line and the secondary to make the play and score….most of the time he will get flattened or maybe gain small yardage. Every now and then he'll get creamed, or worse, fumble it to concede a TD to the other side. But - the opportunity to score comes from trying to find that little crease in the D to break into daylight. And so it is with us.

To know where those creases may open up on a given play, the player needs to study the film, know the schemes, know the players they're up against and the tells those players give out ( I recently watched an "America's Game" NFL film about the Patriots; on the other side of the ball, one of the coaches remarked how much they were looking forward to defending against a particular OL because this linesman gave up, without fail, whether their play was going to be a run or a pass by the stance he took at the line: if he was in a two-point, i think it was for the run, and three-point stance for the pass.)

So, there it is….it can be a tough game to play against the ebb and flow of noise; no one doubts that. But the key seems to be (no matter your trading stripe) to put yourself in the best position to find a crease, know the circumstances under which they are likely to occur– and then nail it for all it's worth.

Rocky Humbert adds:

But extending the metaphor, The Chair seems to be suggesting that (1) the referee is corrupt; (2) the other team's blockers are carrying brass knuckles; (3) the clock runs faster when you have ball possession; and worst of all, the Professor's Wife paid off the laundry guy to not-wash-out the bleach from your jock strap. Shall we still play a game?

(It didn't end so well for Mathew Broderick.)

Nick White writes:

I'm no conspiracy theorist. Maybe there's collusion and coercement. Maybe there isn't. I'll never know. I console myself that if I stick to my plans, I hopefully won't have much reason to care. I can only play my game, and (like you, Chair and others) play it staunchly by the rules.

I'm just pragmatic about the potential for shenanigans where there is a competition and money is the prize. To build in some redundancy into my bold assertions I'll try and give some allowance for 1-3. Four is more problematic…that's just going to hurt.

With the current running of the Tour de France, I'm sure there is much we can learn about systematic cheating and cover-ups.

Bill Rafter adds:

The fix or edge was always so, and is so now, but the markets and players have changed.

Many moons ago when my partner and I were active commodities traders (before they were called futures) we made a lot of money in certain markets. Our favorite venues were eggs, cocoa, bean oil and meal. For some strange reason we had the ability to ascertain the fix, but only in those markets. What interested us what that the egg market was clearly a rigged game, but the bean products seemed to be the essence of fair markets. Also of interest was that we could not get any edge in other obviously fixed markets such as bellies (and a tip of the hat to a certain former and future flexions cattle broker and her signiflexiant other). In the case of eggs we had strong evidence that it was the delivery particulars, and delivery also seemed to have an effect on the other markets we could play favorably. Delivery is very much the bailiwick of those in the know.

Fast-forwarding to today's equity markets we suspect that HFT is having a strong effect. Overall share volume had dropped precipitously from the highs of several years ago. It has recently returned to a decent level. But how much of that recent volume increase/recovery is HFT? If it is, then some part of the activity beyond 1-minute bars (or 5-minute bars) is going to be inefficient. For HFT should make the market more efficient in the shortest run, but ignores the forest for the trees.

We ourselves like the presence of HFT as it tends to give us better executions. And we prefer that the giants (e.g. Giant Squid) play in that shortest time frame. Someone has to take over the specialist functions, and better it be the well-capitalized firms. But anyone trying to compete in that time slot is going to have a lot of competition. And should one of the giants discover an opportunity in which THEY had limited, if any, big player competition, watch out. That is, a giant with the room to run a table most certainly will. And if the giant has a dealer at every table, sooner or later one is going to present such an opportunity. That in theory could have happened under the specialist system, but the specialists were constrained from doing so. No such constraint is in place now. The bailiwick of those in the know at this time is the HFT universe. Expect to be taxed by the bailiff.



Baltic amberThis article rejects the Baltic Dry Index as a reliable forward indicator and says it has no predictive power with regard to the stock market. The author says to have done in-depth analysis of the BDIY during his time as shipping analyst at Citi.

Bottom line is that the index is influenced by so many factors other than demand that it is not the useful indicator it is often claimed to be in popular press.

As to why the index is currently falling, I'm not into shipping, but explanations I've read that make sense to me include:

1) Declining demand of China's steel sector. Steel is the biggest user of iron ore which accounts for a large part of in the index.

2) Rising supply of shipping capacity (meaning more actual ships).



Robert GroveRobert "Lefty" Grove became a 300-game winner by staying as consistent off the baseball field as on it.

His rules for success were simple: "Attend to business. Eat regularly, get at least eight hours' sleep — especially from 10 p.m. to 2 a.m., when sleep is soundest — and observe moderate habits. Don't 'know it all' — give the other fellow credit for a little knowledge."

His discipline paid off. Grove (1900-75) had the lowest league earned run average nine times, which remains a major league record. An advocate of physical fitness, he won four of his ERA titles when he was past 35 years old, winning 97 games in that period.

A winner of 20 or more games in seven straight years, Grove had a career major league won-loss record of 300-141 while pitching for the Philadelphia Athletics (1925-33) and Boston Red Sox (1934-41). His .680 winning percentage is the best among 300-game winners.

Grove was named the 1931 American League Most Valuable Player and was elected to the Hall of Fame in 1947. He was selected to Major League Baseball's All-Century team in 1999.

A pitcher can be successful past age 35 if "he takes care of himself and trains properly. He can't, however, wait until he's passed his prime to become serious about the business of staying in shape," Grove said in "Lefty Grove: American Original," by Jim Kaplan.

Grove maintained his effectiveness on the mound by sticking to a routine. "I've followed practically the same schedule during my 16 years in the majors. I'm active on the ballfield every day during the season. Except on the afternoon I'm pitching, I chase flies in the outfield before every game. And I throw on the sidelines every (day) except the day I pitch," he said.

Grove was born in Lonaconing, Md., and grew up watching his father and older brothers make their living in the coal mines. He didn't want that for himself.

Grove's Keys

- Amassed a 300-141 record.
- "See that chalk mark on the barn door? I measured off 60 feet … and at 6 o'clock every morning I hit the chalk mark 20 times before I quit. Then I tramp the hills hunting and cover about 20 miles a day."

So he worked at his passion: baseball. On the mound, he had a well-earned reputation for fierceness.

"The guy was a winner. He gave the maximum effort every time out. … His rages were never directed toward the players, but toward himself. He was a competitor," said Red Sox teammate Bill Werber.

"You never talked to him on the mound," said A's teammate Jimmy Dykes. "No matter if he was ahead by 10 runs or behind by one, he was just plain fierce during a game."


article by Michael Mink from investors.com



Lubabalo Kondlo on right, Alan Millhone center

[Photo: Center, Alan Millhone as referee. Left: free style world champion Ron " Suki " King of Barbados. Right: GM Lubabalo Kondlo of Port Elizabeth, South Africa. Match of twenty games played at Medina, Ohio.]

To: Alan Millhone 

Molo Mhlekazi

I'm Luyanda Ngwenda. I studied Internal Auditing at Nelson Mandela Metropolitan University and am unemployed. I'm passionate about changing people's lives for the better hence it was easy for me to help Lubabalo because I think the game of Draughts can be applied as a metaphor for life, i.e. one good move pushes one to a win, one bad move could push one to destruction, in reality and on the Draughts board. We live in a society with plethora of underdevelopment, poverty and disease. Draughts can be used as tool to fight these ills… and of course create more world champs like Lubabalo.

Hope I answered you, Sir!


Luyanda Ngwenda

Port Elizabeth, South Africa

[Ed.'s Note:  Molo Mhlekazi in Xhosa language is roughly equivalent to "Hello Sir!"]



A wigwamThe bonds auctions reminds one of the passage from Superfluous Man:

"I was at the wigwam. And a poor sinner was singing marching through Georgia. He could never get past the first stanza without lapsing into somnolence. His idea of political duty was the finest I have seen before or after".

They go up with such impunity before the auction. Then lapse into somnolence. "It was a bad auction… wait. There's buying. Hold all tickets".



How would one interpret a chart like this? In terms of numbers, a certain beginning harmony with DAX above 6200 and SPU lobogaling toward 1100 has been achieved with 6 up days in a row after 11 down in a row. How can chart swings be quantified to advantage and harmonies?

Pitt T. Maner III writes:

From February to April a nice Moldau from Smetena ever building in its 3-4 month cycle and then from May to July a bimonthly Waltz of highs and lows.

Now impresarios, big band leaders, conductors, choreographers, tenors, alto sopranos, glee club members, and assorted cheerleaders lining up in Fellini-esque fashion to lead the choir toward the November subscription drive.

See the song: "We're in the money".

Allen Gillespie comments:

Think of the circle of fifths. If 11 is too high an octave, then divide by 2, yields 5 1/2. And the point drop was nearly 1/2 of the Hz of middle C. 

Kenneth Sadofsky comments:

This video seems askance, but it shows a sumo wrestler and a monkey in a game of tug of war. It seems that most of the time isometric strength was used. Then the wrestler stood up, losing his leg strength and ended up on top of the see saw, here losing some contact with the ground and center of gravity compared to the monkey. Then the monkey fed the wrestler rope where the wrestler would fall down and come undone. This probably doesn't answer the question necessarily, but my mind wandered into this area. Of course the monkey could just be stronger , but they were equal for a few seconds.

Here is a biomechanics paper taken without permission that describes force, etc. I stumbled into it while doing a search. Probably not much for those that already know the material, and of negligible value to those like me. It did stir my curiosity.



Lone Norwegian wolfI've been pitching a Norwegian tech stock to my US clients recently without any success. I wrote down some lessons I learned in the process. Hopefully some of them are more than meals for a day:

1. These days, some of the most successful companies in the world are platform companies

2. Buy companies that you don't understand. Most likely others don't either and with some homework you can easily get an advantage over the average investor. This is my anti-Buffett rule of investing. Now, do you understand how x makes money? Do you have a grip of all parts of xx?

3. It doesnt matter if the share price is up six fold during the past 12 months, what matters is if the company got cheaper or not in the process. Did xx get cheaper or more expensive when xxx was up 6% yesterday?

4. Sometimes the news follows the price. This is particularly true in Norway. Did xxxx trade up just before the bid last year?

5. If management goes on a buying spree maybe you should too; especially if management has higher degrees than you have. Did xxxxx board go on a buying spree this spring?

6. PE 15 is not necessary expensive for a company growing 150 or 200% and has nok 5 in cash (pre split).

7. A company with no international investors is probably not crowded

8. If the biggest companies in the world wants to be your clients, the business model is probably strong

9. Growth will eventually slow is true for the best companies in the world and every investment I can think of. Is that your or other people's investment obstacle?

10. It doesnt pay to a be a lone wolf/contraian on the sell side, only on the buy side.



 It is  interesting that the flexions in Japan did not get the Intel earnings before hand and that no frequent conversations between current and former heads of banks, who were then secretaries of interior took place on the record as they did so frequently during the crisis of Sep and Oct 2008. 3 or 4 times a day.

Rocky Humbert writes:

I interpret The Chair's comment that either Intel leaks its earnings to the Japanese, or that the Nikkei has been a good predictor of Intel earnings since 2008. A very crude event study shows that this has not been the case for the past two years.

Below are the Intel earnings release date(s) since 2008. The first +/- is the market's reaction to the Intel earnings release. The second +/- is the net change of the Nikkei on the day of the Intel announcement. Due to time zone difference, the Nikkei closes about 10 hours before the Intel announcement.

In four of the eight instances, the Nikkei was not predictive, and based on this small and statistically insignificant sample size, this relationship was not tradeable. I would further suggest that any data which suggests otherwise can be attributed to chance — despite any statistical illusions to the contrary.

Looking at this from the perspective of an investor (as opposed to a speculator,) I purchased a small amount of Intel recently because (1) it remains a market-leader in its sector with limited competition and huge barriers to entry; (2) based on reasonable assumptions, its valuation became attractive again; (3) its yield was greater than the 10 year treasury, and it was a high probability that owning Intel with a reasonable time horizon would achieve a return in excess of the "riskless" ten-year treasury. With the move from 19 to 22, this may no longer be true.

Yet, with respect to The Chair's comment, it's logically impossible to disprove a conspiracy theory.
Earnings Date / Intel +/- / Nikkei Day Before +/-

7/13/10 + -

4/13/10 + -

1/14/10 - -

10/13/09 + holiday

7/14/09 + +

4/14/09 - -

1/15/09 + -

10/14/08 - +

7/15/08 - -



Jack PooleA former partner of my dad's, and a family friend, Jack Poole, recently passed away. He was chairman of 2010 olympics but far beyond that. He has an amazing story really. Below, a solid excerpt of motivation. The entire article is worth a read.

In the beginning, Daon built housing in resource towns from Prince Rupert to Port Alice. The story goes that Poole's company hired a young worker named Gordon Campbell as a general labourer on a housing project at Babine Lake. The one-day premier was paid $2.84 an hour for his first real job. Years later Campbell would be instrumental in choosing Poole as chairman of the Olympic operation, leading the two friends to joke that Jack Poole gave Gordon Campbell his first job and Gordon Campbell gave Jack Poole his last.

Daon eventually became a development empire with 900 employees, five offices in Canada and nine in the U.S. The company built tens of thousands of homes in both countries and acquired tens of thousands of rental apartments it converted to condominium ownership. It also developed several million square feet of office, retail and commercial space.

Read more: 

The spectacular rise and equally stunning fall of Daon is one of the most celebrated stories in Canadian business history. And there is nothing quite like hearing it told by the person who was at the centre of it. He could take the story on tour. In fact, in 1984 he gave a presentation in Toronto to the Urban Development Institute on what happened that those in attendance still talk about, so open and honest was Poole about the travails of the company and the personal impact it had on him.The abridged version goes something like this: Big development company borrows billions to build projects throughout North America. And then interest rates begin climbing to unforeseen levels. "We built the company on debt," says Poole. "We were extremely successful but had not factored into our plans the recession of 1982 and interest rates of 23 per cent. Business stopped. You couldn't sell anything and we owed $2.3 billion to 47 banks and couldn't pay the interest."
Poole was, understandably, a mess. His predicament was making him physically ill. The meetings with the banks were often loud and angry. "One meeting it was getting pretty rough and nasty," Poole recalls. "And at one point they're making it pretty clear; it's like, 'You know we're going to put you under on Monday, don't you?' And I remember saying, 'Look, I grew up in a little town in Saskatchewan. I didn't have electricity until I was 17. No running water. I came from nothing. And I can go back to that. I can. But if you want me to stay and work this thing through, I will. If you don't, I'm happy to leave. But don't threaten me.'"

After that, the whole mood in the room changed, Poole remembers. Any time things got hostile in subsequent meetings, Poole's lawyer, Ken Levanthol, would take him aside and say, "Tell them the 'no electricity' story again."



Tacoma narrows bridgeAs an engineer, it is indeed fascinating that even after all of this time, and with enormously sophisticated computer tools, there is still contention as to what caused the Tacoma Bridge to fail.

I don’t think this is a shortcoming of modern engineering; rather it underscores just how darned complicated these systems can be, how many ways in which they can interact with themselves, other structures, and the environment, and how difficult it can be to plan for every possible occurrence, while still keeping cost, schedule, and original design intent within reason.

Perhaps one of most interesting observations of all, however, about the Tacoma disaster, is one that never was: there has not subsequently been a bridge failure that spectacular since. Thus, even without computers, Wiki, massively online resources, or even a pocket calculator, the engineers of the day managed to figure out what not to do in subsequent bridge designs to avoid such failure in the future. That, to me, is incredibly impressive.

It would have been nice to corner one or two of those folks and get their thoughts on what they think happened.


Jon Longtin, Ph.D.

Associate Professor and Undergraduate Program Director

Department of Mechanical Engineering

SUNY Stony Brook

Stefan Jovanovich adds:

One of the rent-a-faculty members who was allowed to teach structures for a semester at the school of Architecture at Harvard in the early/mid-60s had been an ironworker in his youth. He showed us the footage of Galloping Gertie's spectacular collapse and then told us a story. He said that he had known two men who worked on the Tacoma Narrows, and they had both told him that the thing was going to be a lemon because the bridge deck "had too little steel in it". The point of the lecture, from our teacher's point of view, was that we future architects might want to solicit the opinions of the people who will actually build our perfectly imagined castles in air.

The Bronx-Whitestone Bridge in NY was cast from the same mold as the Tacoma Narrows. Its web site has a picture of the original bridge deck and the retrofit made at the Tacoma Narrows collapse when Warren Trusses were added. The Wikipedia web site for Othmar Ammann says that the trusses have been removed and replaced with fairings to solve "the wind problem". (Can the New Yorkers confirm whether or not this is true?)



Did indexing "work" when it was difficult/impossible to index (~ <1993) because it was difficult to index, and most were picking stocks, and index benchmarking was still nascent? If so, with the trend of massive indexing, closet indexing, and over-diversification, are we entering an era of renewable alpha for good stock pickers?



The recovery position for someone who has had a seizureThere is some very interesting work being done to uncover the causes of epilepsy.

A laymen wonders, given the prevalence of automated trading, if seizure-like "symptoms" can result from algorithmic programs that start to resonate or oscillate around triggered price levels. And if resonant behavior amongst the machines can be induced by crafty humans with proper tuning forks:

“Nothing has moved in the last 20 to 25 years,” said Wim van Drongelen, professor of neurology at the University of Chicago Medical Center. “There have been a lot of new anti-convulsant medications, but that one-third of patients who do not respond to medication has remained the same. My conclusion from that is that apparently all the new medications that have been developed address more or less the same type of epilepsy. In this context, epilepsy is comparable to cancer - there’s not just one type of cancer, and there’s not just one type of epilepsy, there are multiple types.”……………….."

The research team, led by Jennifer Dwyer, “injected” a small amount of current into their model and simply let it run. The neurons in their computerized cortex quickly fell into a pattern of oscillation that replicated what one would typically observe in an EEG recording. But the higher resolution afforded by the model allowed the team to figure out why networks of neurons fall into oscillation patterns. The answer was not a coordination of electrical spikes, as was theorized, but a more subtle fluctuation pattern of the cell’s electrical baseline: resonance."“

This gets at the idea that one of potential mechanisms that could start seizures could be resonance,” van Drongelen said. “Think of the Tacoma bridge, where resonance did lead to extreme large fluctuations and in the end the bridge was destroyed.”

Read more here.



curupiraHi Victor,

About a week ago, I met with a friend from Brazil, who told me about a character from Brazilian folklore called the Curupira, who seems to be the Brazilian form of the Hoodoo. Apparently his feet are turned backward so that those following him will go the wrong way, he usually rides a hedgehog, and a meeting with Curupira is a sign of terrible luck to come.



Ian clarifies:

Hi Patrick,

Actually the “curupira” is not a hoodoo like character. It is a Brazilian folklore character relating to the protection of the forest. Legend says he creates illusions so that hunters and violators get confused and lost, and his backward feet mean to confuse hunters going after him! Br,

Ian(from Rio de Janeiro)



 Here is a great blog post, entitled "Barbie Does Economics", about the recent paper by Kartik Athreya “Economics is Hard. Don’t let Bloggers Tell You Otherwise ”.

Ralph Vince comments:

Thanks for sharing this– what a fantastic blog, resonating with thoughts about the very kinds of things which have been sticking in my craw and gaping maw all weekend long.

I must admit too, any study into the Quantitative Finance world for me, has been sheer disappointment. I spent months studying many elements of this, stochastic calculus etc. All of it is fascinating to me from an academic standpoint– but, from a practical one, it just doesn't cut it. I've been around this a long time– long enough to know what works and what doesn't. Most importantly, from the time I could utter my first words, I's been steeped in the world of gambling, gamblers, traders and risk takers. I know the characters and their motives. One of the most distinguishing– and damning, for them, aspects…they don't.

Montier goes on…."The idea that what we need is more ‘worker bees’ gaining their PhD’s from conducting ‘angels on a pin head’ like work based on minor alterations to previous research makes me want to cry. Where were the warnings from the orthodox economics establishment ahead of the global financial crisis? Oh, that’s right there weren’t any.

Indeed many of those who warned of the problems ahead did so because they weren’t constrained by the kind of training that an economics PhD suffers. "

Marlowe Cassetti writes:

I recently read Montier's book The Little Book of Behavioural Investing and I found it very helpful in understanding the shortcomings of our mental processes and our actions as applied to the investing/trading. His book validates Pogo's declaration … "We have met the enemy and he is us"

Stefan Jovanovich writes:

The largest single bubble in the world right now is the education game– not because the world does not need more and more of it but because the mechanisms for providing knowledge have become a Ponzi scheme in which too many students in higher education are only learning how to become teachers. There simply are not, and never will be, enough teaching jobs to go round. It is quite literally a pyramid party.

Ralph Vince responds:

Stefan, you REALLY have my gears turning today as they haven't turned like this in a while. I agree on the bubble of the "education" game.

There are two ways you can learn something in life. Either you hear it, or, you live it. Hopefully, when you "live it," when you have direct experience, you learn from it — but not always. In fact, maybe not even the majority of the time.

The Old Frenchman used to say to me, "The only way people learn anything is by pain."

That may be true, and if not, it's likely pretty close. I suppose the definition of a "windfall" is to learn something by hearing it, being able to accept it, and not have to experience the pain firsthand as a means of learning something. I don;t know if it "sticks" well enough though if we merely hear it, and don't walk away with a bit of sting from it.



Don CoryellRIP Don Coryell, innovator and aerial conductor. 

Scott Brooks comments:

St. Louisan's suffered for years with the Big Red (the football Cardinals). But under Coryell, we had several years of great excitement! If only we'd had a better owner (Bill Bidwell) and a better draft department (George Boone), we might have done something.

Don Coryell, should be in the Hall of Fame for no other reason that he took a pathetic franchise, with a pathetic owner and a pathetic draftnik, and turned them into a team that contented.

Stefan Jovanovich adds:

More about DC:

He played quarterback and running back at Washington but was never good enough to start because his classmates happened to include Don Heinrich and Hugh McIlhenny. He was the university champion in the light heavyweight division; people who saw him fight said he was a copy of Jack Dempsey as a teenager, pure aggression for 3 minutes of every round.

Dan Fouts: "He was an atypical coach. A lot of football coaches believe it's my way or get on the highway-thing. But Don gave us as players a feeling of ownership of the offense, the plays. He took our ideas and tried them. He wasn't afraid to try things."

John Madden: ""It was the way he treated players. I think that was something that was missed. We tend to jump right to the coaching part, the offensive part, and the passing game. But his No. 1 thing was his handling of the team. He was a master of it. As an assistant, he treated you as an equal. Players were always the most important thing to him. I think he had more respect for his players and coaches than anyone I've ever known."

Like Pete Newell and John Wooden the man put literally everything he had into coaching. When someone asked him in 1992 if he was sorry he had retired, his answer was: " I don't miss coaching one bit. Not a lick. I miss the people, the coaches and those great players. Those great guys. But I gave it everything I had. I didn't want to die on the football field, and I might have if I had stayed around much longer. I was tired. No question, I was physically and mentally shot."

No one who knew him can remember his having ever been cruel or even petty.

Scott will get his wish; they will get round to voting him into the Hall of Fame now that he is safely dead. When they voted him down earlier this year, he told his daughter not to worry because they would get round to it some day. Committees always have an impeccable sense of timing.



VolkswagenAndrew Briggs: "State pension funds are underfunded by over $3 trillion; this is more than six times the $438 billion in underfunding the plans themselves report. Pension shortfalls far exceed explicit state debts." The humor starts when you get to the part about "actuarial assets".

Scott Brooks writes:

I have been accused of crying wolf for years on these lists about the problem of underfunded pension. This is a huge problem that isn't going to go away with actuarial slight of hand. There are so many straws being tossed on the metaphorical camels back that eventually there will come a day of reckoning. But this pension problem (think PBGC) and the big lie that is the Social Security Trust Fund aren't straws tossed on the camels back, they are Volkswagens.



Here is a great article on Behavioral Game Design from a Microsoft game designer. Since trading has essentially become a computer game…

Al Corwin comments: 

Fascinating analysis! Note that you can insert "customer" or "employee" wherever the article uses "player", and the insights are just as true and powerful.




the announcement At $25 million a year, plus a larger amount in endorsements, of course Lebron James chose Miami over New York, LA and Cleveland. Florida has no income tax. While those other states are among the highest tax states in the country.

Scott Brooks comments:

But that tax wouldn't make up the money he lost ($30 million) by signing with Miami over Cleveland.

J.T Holley writes:

The math is 12 million in difference for the length of his contract in State Taxes saved. That's over 35% saved in my book, better supporting cast, nice climate (Miami has never had a 100 degree weathered day recorded), So. Beach, he gets to finally be a man and leave home, and the insiders could've shorted MSG from let's say 21 to 19 leveraged? I'm just sayin'.

The King seems to be following the advice of his consultants rather well. In the Navy the ole' sayin' is "loose lips, sinks ships". I was quite surprised that MSG didn't spike more than it did and go a few more deviations to the upside. The tight lipped coverage and suspense was brilliant and had to be hard to keep up. This is especially amazing to me considering Wade and Bosh were also involved in the dealings ultimately in the decision.

There has to be a study of "high profile" free agents and "warm weathered" correlation to be done when it comes to money and choices. Does anyone know of a high profile athlete that choose a "cold weathered" city when the initial contract was up? Just sayin'?

David Wren-Hardin comments: 

Jody Rosen over at Slate had a short piece that I think nails it.

New York is no longer the hip place to be. For a young, minority millionaire, the post-racial (or allegedly post-racial) melting pot of Miami is the place to be. Everyone scratching their heads about tax breaks, endorsements, and culture is living twenty years in the past.



 We all have an interest in not suffering through another day like May 6. And without violating our rule of never disseminating anything that is a meal for a day, i.e. a recurring regularity, perhaps you will forgive me if I attempt to open a discussion of how a day like May 6 where the market was at a minimum to start, open down and then went up and then dropped 110 points or more, a nice 10% to wipe out point– how such could have been predicted.

Ralph Vince comments:

What cost? If someone has stop orders in (fear of loss or missing a move to the downside), there is cost. If someone was, say, buying on a limit, it was a boon. If someone got shaken out of a position (fear) because they couldn't ride it to 0, I posit they were in too heavily. They were clearly people who were trading with money they could not afford to lose. (In my book, that makes them losers before they even put on the trade!)

Jonathan Bower writes:

I saw many parallels to "that" day on Wednesday. I'm curious if you all enjoyed Wednesday too…

Larry Williams replies:

I have enjoyed my luck which is soon to fade I suspect.



Anna Chapman, Russian SpyWhat can we learn from the catch and release program of the current administration to spies caught. The statistics of catch and release give insights into the extent of rises after big declines. What % of them eventually go down for example after a 10 point decline followed by a 10 point rise? One finds 49% of them are up the next day. Would the ones that are subsequently captured tell us about the prevalance in the population as in bird releases? On a Nockian front, the catch release program shows our compassion and commonality with the former other side of the agrarian central activity.

keep looking »


Resources & Links