I found this article on how happiness and sadness are like infectious diseases very interesting.

Anton Johnson adds:

Correlated to feline population density?



 Americans have been able to sneak into Cuba from Mexico, but a lift of the travel ban might have some interesting economic effects. I have flown over Cuba on the way to Nicaragua and it is remarkable to see the apparent lack of development and the beautiful, pristine white sand beaches down there. Many Americans enjoyed the Cuba of the 50's and earlier but it is a bit of a dilemma now if one does not want to potentially help sustain continued corruption and dictatorship. But things might change quickly.

Earlier this month, senators of both political parties indicated they have sufficient votes to lift the American travel ban to Cuba. They said they plan to push legislation in the next few weeks to eliminate it.

President Barack Obama modified the travel restriction last year, allowing Cubans to visit their relatives in Cuba, but declined to rescind America’s decades-old embargo before the Caribbean nation ends its prosecution of political dissidents. Human rights have long been a sticking point in U.S.-Cuban relations.

Under existing law, American journalists and persons on humanitarian missions are permitted to travel to Cuba.

With little American presence there since the late 1950s, Cuba is considered a ripe market for U.S. hotel and service companies — a potentially profitable Caribbean playground.



 I'd like to thank whoever it was that first recommended David Aronson's wonderful book Evidence Based Technical Analysis. We are finding it so useful that we are buying a copy for every employee (only three of us so no windfall, David). This book is so solid and well-written that it should be a must-read for everyone doing anything with statistical inference. It has already led to some changes in our research process that should make our results more robust.By the way, reading this site is certainly increasing my bill at Amazon. Henry Clews' book is the first thing that I read after joining the list (wonderful!), and I just received Tufte's "Visual Display of Quantitative Evidence".

Russ Herrold writes:

You're welcome! I received a 'review copy' through David, courtesy from Wiley. The book is thought provoking, educational without being obnoxous or intrusive as it instructs, and well worth the read.

Ken Drees writes:

There was a book thread posted a few weeks or so back that will maybe be archived in a different place on the website for quick review of spec's best book recommendations. I too have picked up some great reads from here.



 Hello everyone,

Finished up a little job for an older widow lady. She makes a world class ham loaf. Took one again as part of my payment.

She paid the rest in cash and found she needed another fifty. She proceeded to her kitchen and opened her freezer door and extracted Mr. Grant.

That was surely cold cash she gave me!

Regards Alan



 The 30 year fixed rate is a multi decade low 4.57 percent. Yet no action has been spurred. I was told that the best time to buy a home is when interest rates are high (a relative notion) and sales are slow (recession = slow RE market). The idea is that since rates are high home prices are then at a low ebb since buyers must figure in stringent mortgage servicing costs into the home price purchase equation and the sellers have to price low in order to sell. The "how much home can you afford number" that a RE agent and the loan officer puts together would thus have the higher interest rate chunk limiting the price that seller could try for.

So if one can buy at low prices and near the top end of the interest rate cycle with a fixed rate 30yr, you could ride the refi train all the way down the line. Realistically its hard to do all of this since buying a home usually happens at certain times in your life –this notion of buying when rates are high and prices low is not one that is bandied about all that much. Probably because we have had steadily falling rates and creative RE finance for years on end.




Directed by Nimrod Antal

Having seen four B to A-plus summer coolers yesterday, we had hoped for more than just dependable A/C at the screening of PREDATORS, the latest in the Predator franchise universe.

Uh, no.

PREDATORS is fairly jejune, with a barely distinct script, illogical actions, lots of less attractive side characters falling prey to sudden, gruesome and stupid deaths, inexplicable plot twists that make no sense if you know squat about tracking and hunting, and of course the predictable protagonist sexual-tension meet-uncute killer duo survive all the no-biggie sturm und drang.

Laurence Fishburne (THE MATRIX triptych) appears dourly and misanthropically for a few minutes, only to be gone forever in a trice. But all the characters save Braga seem to hate the world and pretty much each other, though they are bound together in the strange landscape they now find themselves trying to conquer. Adrian Brody—(THE PIANIST) who has clearly been to the gym for intensive sessions over the past couple months—is the loner, Royce, who unwillingly leads a ragtag crew of hunted criminals and mercenaries (including the beauteous Alice Braga, who appeared in the Will Smith dystopia vehicle, I AM LEGEND, 2007). Topher Grace (SPIDER-MAN 2) appears to be a mistake in the bloodthirsty thick-necked crew of convicts (a scorpion-tattoo'ed Walter Goggins) and being stalked by monster rejects from you-name-it monster flicks (AVATAR comes to mind—both the looming trackless jungle and the multiple moons in the alien sky, as well as the weird horny rhino-hoppers snorting prickly death, and the "beloved" cloaked characters who appear to be now electronically gifted beyond their mere physical hideousness. They have new tactics, new weapons, new senses with which to stalk their prey. Weapons large and in charge, of every variety including an old and lethal samurai sword, play key roles in every frame.

The first PREDATORs (1987; 1994) offered up the thrill of an apparently enduring sci-fi invisibility-cloaked extra-terrestrial mandibled warrior wreaking havoc and mayhem in the treetops. Actual location where the proceedings were shot: Austin , Texas . And Hawaii . There’s the improbably urchin-faced beauty, the IDF sniper Isabelle, toting his machine gun (with a Brazilian accent despite her supposed MidEast provenance), the renegade who had been about to be electrocuted; the pock-faced black fighter from some ongoing drug gang enforcer, Cuchillo, Danny Trejo); a misplaced Yakuza in a silvery suit (Louis Ozawa Changchien); a Russian from Chechnya (Oleg Taktarov); a mostly quiet killer (Mahershalalhashbaz Ali) and the aforementioned spectacle-toting Edwin, the disgraced doctor, who alone among the dirty seven has no overt weapon or major firearm.

This is a frequent mash-up of late: A commando film that spins into sci-fi.They are in an alien planet somewhere, dropped without memory of their kidnapping from some space vehicle, parachuting into the creepy crawly alien Amazonian jungle. All the forests, greens and foliage were created, stapled, nailed and husbanded through the shoot using thousands of plants and logs, burnt cedars and tendrils.

Even I was distracted, a woman who is never bored. Too many aspects of the story might pass a 14-year-old’s muster–for whom, of course, the franchise has been created–but kept my head turning from side to side in disbelief. The Yakuza dude, very intense-looking, removes his shoes as soon as he finds himself in the foliage. Why would any sane bandit do that, faced with myriad insects and creatures and slicing roots, megafauna and biomass? Not a single meal is consumed in whatever length of time the movie transpires on what’s-it planet. Nor of course does anyone need to wash up or relieve himself. Fishburne’s cave is grungy, but offers strung-light electric illumination and something resembling a fridge.

The most exciting thing that happened was that when I stood up, during the credits, my new gauzy summer skirt floated serenely and without warning down atop my shoes. The lights were still down, so I swept it up and zipped the thing around my waist, with only one friend staring in astonishment at my unwonted display. Even my skirt tried to escape.



Big Mac

"If the Big Mac Index says that a currency is undervalued, it tends to appreciate," [Univ. of Florida Professor] Denslow said. Palm Beach Post.

I am not sure that Dr. Denslow has tested it but the Economist magazine appears to be the source of the idea. Pam Woodall, the Economist's Asia Economics Editor, evidently originated the Big Mac index . Others appear to have tried to refine it a bit. Perhaps the Big Mac index is a rough indicator useful as a starting point for more research.

The following UBS AG paper uses the index along with other consumer items but in the form of how many minutes of working time it takes to purchase the items. See page 11 of pdf.

And here is Burgernomics: A Big Mac Guide to Purchasing Power Parity [20 page PDF] from the St. Louis Fed and an online writeup from the Dallas Fed.



canarySome pretty awesome symmetry forming up this last month or so.

Chair commented before that the big down bars often seem to get mirrored by the big upside bars like today.

The other thing I've noticed is what a difference the next week makes. Last week the news stories were all end of the world, even trotting out Prechter. What a joke.

Why is it that a lot of big buying seems to occur at the highs?

As for pilot fish, seems like a big out of place vol bar is a good canary. (Sorry to mix metaphors.)

Nick White comments:

One would note that the sword in Asia has certainly not been sleeping since Friday…Therefore I would argue that such a rise as we saw in the S&P today is simply the US playing catch up with the Asian move from the holiday weekend.

I would also contend that there's a bit of relative catch up yet hanging in the stars.

Sushil Kedia writes:

How would a counter convert the concept of symmetry in prices over any time frames to testable hypotheses? I confess, I continue to have weaknesses in converting ideas to testable hypotheses. So, I will be learning from those who will share.

Pardon kindly if this next question diverts the thread to any other: How do folks like me sharpen our imagination to focus on converting vivid thinking to be able to arrive at testable hypotheses?




30 Great Visualization Resources in 30 Days via Juice Analytics: Agile Analytics on 7/6/10

A lot of the applications that Juice creates are designed to make information more accessible to people who wouldn't consider themselves to be data experts. They realize the value in the data that they have, and in many cases they have some sort of analytics solution in place, but they know they're not getting as much value from their data as they should.

One of the hurdles we frequently come up against is that people who aren't actively participating in the visualization discussion don't know what's possible. All they've ever seen, in many cases, are the confusing dashboards, charts, and graphs that are all too prevalent from the vendors in our space. You know the ones: a thick layer of technology slathered with some gloss and wiggle, between two slices of "do it yourself".

In many cases, we find ourselves closing this gap by referring to some of the best examples of work out there. As we were thinking about this, the idea to provide a simple walk through of these examples came into being. The result: a 30 day calendar chocked full of some of the best samples of skills enhancing examples we could find.
Each day is a bite sized chunk and takes only a few minutes to watch, read, do, or play. Some of the days are comprised of Juice content, but most days are from other sources that we've found useful.

You can download it to use yourself, or to share with your friends who need to expand their info-viz horizons. Either way, we think it'll get your creative juices flowing.



The Treaty of ParisThe rules for American wars are painfully simple. They work politically and practically when the American people believe that

1. the country is responding to a direct attack,

2. the citizens, not the government decide who will do the fighting and

3. Americans have actual allies who are willing to fight and die for their own liberties.

Two of the three conditions need to be satisfied; otherwise, the war is a loser.

Since the truth is always the first casualty in war, the facts can be manipulated. (To this day most of the people who lived through WWII think the Army's high level bombers sank the Japanese carriers at Midway; that was what the Chicago Tribune and other newspapers reported.) But the lies can only last so long; if two of conditions (1), (2) and (3) are not, in fact, true, then the American people will catch on fairly soon– usually within 1 Presidential election cycle– and they will not continue to support the fight.

In the Revolutionary War, all three conditions were true: the colonists regarded the British occupation of Boston to be a vicious attack, the American Army was staffed entirely by volunteers, and people from throughout Europe (von Steuben, Lafayette being the most famous) who came to fight with the new Americans. The War of 1812 was a muddle. The New Englanders saw no direct attack nor did they see America's former allies coming to our aid. Even though they were themselves at war with the British, the French (and the Spanish and Dutch, who were both under Napoleon's thumb) had no interest in helping us and were, in fact, waiting for us to fail. (Napoleon agreed to the Louisiana purchase precisely because he expected to be able to retake the Mississippi territory after he dispensed with the British.) But, for the people on the frontier– from Ohio to Alabama to Louisiana, the War of 1812 looked very different; the British had failed to live up to the Treaty of Paris and were continuing to use their Indian allies to dominate the fur trade and prevent Americans from moving over the Alleghenies; and the French and Spanish colonists (as opposed to their European governments) shared the Americans' fears of and anger towards the Indians.

So, the War of 1812 in the North and on the seas was a complete bust; the people who later became Canadians won all the battles, the French in Quebec failed– once again=- to rise up and join the American invaders, and Jefferson's gift to Madison– the coastal Navy– was such a pitiful failure that the Brits were able to sail into Chesapeake Bay and burn Washington. In the South, on the other hand, the war was a triumph; all three conditions were met. As a result, the United States gained control of Florida and Jefferson's magnificent purchase and found its second military hero President - Andrew Jackson.



 The action in the S&P 500 since the unemployment report brings to mind Ben Franklin's quip, "When all is said and done, a lot more is said than done." Conversely, a few months ago, there was very little back and forth, just a slow, steady upward grind.

I calculated a measure of market efficiency by dividing the absolute value of the daily price change by the "minimum path" that has been discussed here before. The equation for minimum path if today's net change was negative is: (absolute value of (today's high - yesterday's close)) + (today's high - today's low) + (today's close - today's low)

If today's net change was not negative, minimum path is: (absolute value of (yesterday's close - today's low)) + (today's high - today's low) + (today's high - today's close)

For example, today's efficiency was 16%. The absolute value of the net change was 9.9 points, and the minimum path was 60.5 points.

From 2004 to 2007, 10% of all trading days had an efficiency of 69% or more. At the other extreme, 10% of trading days had an efficiency of less than 5%. Results on the day following a very efficient or very inefficient day appear consistent with randomness.



Stocks are roughly flat over the past 13 years, albeit with considerable volatility. A similar pattern occurred in the 1963-82 period. The attached chart compares log DOW monthly closes for two periods: 5/63-4/82, and 5/97-6/10 (dates on the X-axis are all from the older period).

Comparison suggests the 63-82 period was characterized by smaller peak/valley amplitude and more frequent swings (advances/declines) than the recent period, which (so far) had larger and longer regimes.

Does a more "accommodative" FED lead to bigger bubbles, and if so, what happens with perma-accommodation vis-a-vis Japan?



I don't mean to be uncharitable to mathematicians because I would be in deep trouble without them, but I think this article does indicate why you have to take anything a mathematician says with a grain of salt. That is, the main concern they have is often solely whether or not they get the math right. The main concern should always be whether the math provides an accurate description of the situation. I can't judge the quality of Predhter's math, but I don't think we will see DOW 1000 even if we see a nuclear attack. Where are the parallels with the South Sea Islands bubble other than a few numbers chosen somewhat arbitrarily?

Rocky Humbert writes:

The Dow Jones Industrial Average hit a high of 380 on 8/30/1929 and a low of 41 on 7/8/32. That's a decline of roughly 90%, and it occurred both before the advent of nuclear weapons and less than 80 years ago. (Note that this period also included a 30+% decline in money supply and nominal GDP.)

So, Prechter's prediction– whether right or wrong– has recent precedent, and cannot be summarily dismissed.

Yet, if I were going to make an outlandish prediction for the purposes of garnering attention and selling newsletter subscriptions, it's that the S&P will decline by 60%, rally by 75%, decline by about 60% and rally by about 75% repeatedly over the next few years; and only subscribers of my newsletter will be able to nail the exact lows and highs. Unfortunately, a confiscatory capital gains tax rate will mean that my readers will have the exact same after-tax return as owners of T-bills.

Nick White writes:

I'm not the sharpest knife in the drawer by any means, but I just don't understand TA at all. Why would markets by necessity have to conform to some kind of relatively arbitrary pattern that someone has divined - especially when we well know that randomly generated time series have trends and patterns that can be discerned? It just seems like induction gone manic. All this stuff on fractals, waves, sequences, trends etc…it just seems like wishful thinking to me. There's no hard reason for any instrument to make its next step BECAUSE it's conforming to some silly sequence…there are block orders, agents, funds, indices and a million competing viewpoints that all bear on an instrument. I'm happy to be educated, should someone wish to explain it to me in a scientific vein, but I can't help but believe there are much more evident - though tough to quantify - elements that bear on the day to day movements of securities.

A small fable to illustrate my gripe, if I may: On t0, our hero, TA diviner (Mr. TA to you), sees some particularly juicy long setup appear in some retail stock (XYZ Retail)…. a real once in a lifetime thing according to his system…and yet, contemporaneously, we have Fund Manager (FM) - a standup guy with 12 years experience since his time at Wharton and HBS, but who's getting a bit bored with the industry and is going through a messy divorce. All is not lost though, as FM is, this very day, having lunch with a very attractive broker from Goldmorgan Sachsley (Ms. Lovely). At age 25 with two years broking experience and an art history major from Princeton (no offense), our lovely explains - over a very nice wagyu beef sirloin (grade 9) accompanied with a suitably expensive bottle of Pauillac to lubricate discussion - that she no longer likes XYZ. Indeed, she goes on to say, she and her friends don't like shopping there anymore; the hemlines are far too long this season and this is New York City, after all. Being very excited at this tidbit - and in an attempt to procure further lunches with said broker - FM decides to unload his 22.45% holding of the company right into the tiny buy orders of Mr. TA. TA man keeps buying on dips, but FM keeps unloading - after all, those broker rankings are tough to ascend and, besides, it's a good excuse to ring the lovely broker.

Now, a few days later, FM's mate - FM2 -knows FM "has the pulse of the industry" and asks him why XYZ Retail is down 5% this week when it was looking so good. FM2 mentions to FM that he's thinking of buying. Of course, as we noted, FM is a stand up guy and soberly reveals - just quietly, of course - his very grave concerns to FM2 about XYZ's prospects this quarter. His extensive, proprietary research has indicated that same store sales are looking grim. FM2, having never really had an original idea in his life (and having lucked his way into this gig through his uncle anyway), predictably keeps to his usual form and decides now is as good a time as any to short XYZ. He feels guilty for a moment, but then reminds himself that he is well behind for the year and could use an easy layup; those school fees certainly aren't getting any cheaper and the sting of his wife's expression on bonus day last year drives the chip ever deeper into his already strip-mined shoulder. As soon as he's placed his order, he does the ring-around to his other portfolio manager friends - giving out the warning of FM but without any of the stand-up disclaimers. XYZ falls further.

And so it goes for a few days…until Mr. TA - having resigned himself to a nice 18.47% loss on his promising setup (before margin) - finally sells his holding…. to a very smart, young, junior PM (Ms. Goodvalue) from a massive, arabic family office (actually, Goodvalue was a classmate of the lovely broker, though a different major. They'd been on the same varsity sports teams at Princeton, so they would acknowledge each other at parties in the City, but the lovely broker would always be slightly condescending to Goodvalue, while Goodvalue would assuage her subsequent insecurities (lovely *was* taller, after all) by telling herself that her honours degree was worth far more in the longrun than lovely's uber designer wardrobe and predictable future cosmetic augmentations). Goodvalue knows the company inside out, has done all her homework and cannot believe the discount that XYZ is currently trading at. She'd been waiting for a good opportunity to pick up XYZ and would have even begun buying some last week, if she hadn't been on vacation with her fiancee. In fact, she was only barely able to constrain her anger at both him and herself at the end of the vacation due to the missed opportunity. Now, she can't believe her luck. Goodvalue has years for this one to come good. She buys cautiously, with very deep pockets.

Meanwhile, Mr. TA has finished unloading his position. He chalks this one up to bad luck - after all, it looked too good to be true, and he should have known better than grabbing at such an ostentatious opportunity. He'll get it back next time; he always does. He's even considering going short now, the trend looks to have convincingly turned. He decides to short it on the open tomorrow.

The very next day, at 4:30pm the CEO of XYZ discloses a large purchase for his own account, as well as a contemporaneous buy-back; citing the extraordinary opportunity created by the last few days' indiscriminate selling.

Here ends the fable.

I part with this; there was a story in the news yesterday about a woman in Texas who just won the lottery for the fourth time…three of those times with tickets bought from the same store. Can't wait to buy her book and subscribe to her newsletter….she must know something.

Anatoly Veltman writes:

1. Markets have changed significantly since open-outcry execution was replaced by electronic, and algorithmic floodgates opened. Whoever claims that nothing changed, because human psychology has not changed (fear and greed, etc) - is clearly out of bounds instantly, as humans no longer place/cancel majority of orders.

2. Even pre-electronic era, Technical Analysis (TA) was hard to define. Most participation has always been technically driven, whether such was realized and admitted, or wasn't.

3. Clearly, there are no tools that create profits by themselves - or they'd become so widely replicated that they would stop being profitable. TA tools are useful only to those participants, who understand them in depth. Then you may know/feel when to use them and how to use them.

4. TA tools have always been suspect vis-a-vis individual stocks, especially those that are not extremely widely held, or of not extremely high market cap.

5. I'll now risk more controversial remark: the most important basis for history repeating itself has arguably been shattered in recent years. The moment the free-market system died - so did TA, largely.

Notwithstanding all of the above, I believe that opportunities can still be found - especially in the most over-extended, craziest market situations. It is precisely there - that the algorithms may be shut down, and individual experience and discretion may take over. At the proverbial "back to basics" time!


Bruno Ombreux writes:

How coincidental!

I have just started reading "Bayesian Forecasting and Dynamic Models" from Harrison and White. I quote from Chapter 1: "A Time Series model is generally a confession of ignorance".

It hit home because I had already formulated it myself, when I was 16 years old and was first taught the bell curve: "a probability model is an admission of ignorance".

It is really easy to get drawn into complicated models and the maths, easily forgetting that the reason why we are using models is because we don't have a clue about the real world to start with. The fact that the model is probabilistic instead of deterministic means that we are even more clueless than clueless. We are the epitome of cluelessness.

I'll take a real life example from trading crack spreads.

Crack spreads are a proxy for refining margins. If you own refineries, really, you don't need a statistical model. To start with, you know your real refining margins, not the proxy. Let's say the cracks are going down, way down. As you own the refies you'll know when you start shutting down units, curtailing supply then pushing margins back up with a delay. No need to resort to statistical models, you have quasi deterministic knowledge of when to buy the proxy. That works if you are a refiner. Guess why trading houses like Dreyfus or Vitol bought refineries in the 1990s?

Now let's imagine you are a sophisticated, I insist, sophisticated, hedge fund trader. You don't have a clue about the physical world, but obviously, from the behavior I described above, crack spreads are mean reverting. You can do your statistical study and figure out the spread is 4 sigma away from mean. You buy it. You are at a lower level in the food chain, because the refiner gets first dibs. He is Lion King, your are a hyena in her pack. He'll know before you, because he is the one who will *cause* the mean reversion. And more importantly, he'll know when not to buy a 4 sigma because it will move to 5. You used statistics because you are clueless. But you can still make money, there are leftovers. Don't be too quick to dismiss price patterns, mate.

Let's move to the third level in the food chain. These are the people, wholesale and retail, that are not even using statistics, but stuff like non-scientific TA, eg Elliot Wave or various indicators, or naive fundamental analysis, by naive I mean without the data available to a refiner, and with poor logic, that is 99% of research provided by banks. These guys don't stand a chance really. They get third dibs and that means there is really no food left on the table for them. They are the food on which lions and hyenas prey. They are the noise traders of academic fame.

Rocky Humbert writes:

Mr. Bruno's wisdom misses one key point: The refinery business has been, over long periods of time, a lousy business. If you catch the cycle right, you might make a few bucks, but over the entire cycle, domestic refining has provided a lousy return on equity, as well as exposing the company to counterparty risks, environmental and other liabilities etc. etc.. Refining is not quite as bad as airlines, but it's bad.

One can therefore surmise that integrated oil companies which remain in the refining business do so for strategic reasons — and their other business subsidize their refining businesses. If one accepts this proposition — that refiners behave in non-profit-maximizing fashion, economic theory dictates that there are actually profitable opportunities for speculators, despite Bruno's evident derision for market participants who are lower on the food chain. The most recent memorable example of this was the June 2009 crack spread which traded at a negative value in the fall of 2008, and which was a textbook illustration of how speculators can profit at the expense of refiners

See this.

[The Chair may recall that he and I corresponded about the evident mis-pricing at that time.]

I don't quarrel with Bruno's comments regarding blindly following statistics. However, there are ample opportunities for speculators/investors to profit when intelligent fundamental analysis, risk management, and technical analysis are sensibly applied. The definition of "intelligent" and "sensible" are left as an exercise for the reader — but they have precious little to do with statistics.

Bruno replies: 

Refining is a lousy business. It is so lousy that many majors are trying to move away from it and have been selling or cocooning refineries. All the money is made upstream, in crude oil production.

This doesn't mean that the refining business is cross-subsidized. Integrated oil companies are split into business units with a clear separation between upstream (exploration and production), midstream (trading and transport) and downstream (refining and marketing). Beside these major subdivisions, you have further splits, for instance a business unit for marketing jet fuel to airlines, another one for selling bunker fuel to shipping companies, another one to operate a local gas station network…

The downstream refining business sucks. It is feast and famine. It has low profitability. But this doesn't mean that within this low profitability environment, it is not seeking to maximize profit or minimize losses.

I have worked as an oil trader for an oil major. So I have seen it from the inside. I can tell you I have never seen something as profit maximizing as a refinery. Low profits bring extreme profit seeking behavior. Fat profits on the contrary bring laziness. I am sure a company like MSFT is getting lazy with its crazy operating margins and piles of cash. A refinery is not.

We are also talking about the biggest companies in the world here, the oil majors. Don't think for a second that they don't fight tooth and nail for every little cent of profit.

Rocky Humbert writes:

I can accept the statement that "high profits attract new competitors," but given the choice between investing in the stock of Microsoft (12x p/e; 38% RoE) and VLO (17x p/e; -13% RoE), I'll let you buy Valero and I'll pick Microsoft. Or, I'll buy Coca Cola (15x p/e; 30% RoE) and you can buy TSO (infinite p/e; -5% RoE) if you prefer.

Or to paraphrase a famous speculator, "Nobody ever went broke making a profit."

Al Corwin adds;

I don't think the problem at Microsoft is laziness. I've worked with and around them for over twenty years, and the vast majority of people there still work fanatically hard.

My belief is that Microsoft has gotten to the stage where their own success gets in their way. If your project attacks the Windows/Office economic powerhouse, it will die in internal politics, or at the very least be put on the back burner. The Windows/Office group has trashed Web Office, cloud computing, and mobile phone development efforts again and again. The Windows group has quashed everything 3except the X-Box.

This is why Apple is different. Apple is trying to make the iPhone and the iPad the only computer most of their customers will ever need. If that trashes their Mac sales (which it hasn't, for sure), that's the cost of progress. The Mac group can contribute, but it is not allowed to get in the way.

Google also would love to make the mobile phone all the computer you would ever need, and other competitors have the same goal. They are there already for many young people, and they won't be long delivering something like that for us more old fashioned types. I've already seen a cell phone that had a projector screen and a plug-in keyboard as well as more horsepower than my main development machine had seven years ago.

There's a thousand other problems at Microsoft, but almost all are related to not wanting to trash their own business. They can't go seriously after the young developers because they make so much money off corporate development. These are hard problems to solve, but great problems to have. The challenge of making too much money to think straight would be nice for a change.

Bruno Ombreux writes:


The way I would generalize my statement would be:

"Enterprises with poor profitability are trying harder to maximize profits (or minimize losses), than companies with high profitability and good growth prospects."

The profit-seeking behavior of refiners was our subject of discussion. This is why I would limit my generalization to this point. And let's be clear, I am talking about professionally managed companies, like the refiners, not about Mom and Pop corner shops.

This profit-seeking behavior means they will try to maximize refining margins, and therefore affect the proxy: crack spreads.

This was the discussion. In fact, my generalization is irrelevant to the discussion, because all we need is refiners trying to maximize profits (or minimize losses), independently of highly profitable companies behavior.

Now, coming back to my generalization, which is interesting even if it is irrelevant to the discussion about crack spreads, I can only speak from personal experience. I worked in several big companies, in good times and bad times. It has always been the same. Always. When the times are good, we get build cushy offices, add layers of management, promote yes-men, multiply meetings, become political and arrogant. When the times are bad, we cut costs, get rid of the layers of management, replace the yes-men by obnoxious goal-driven achievers that were previously passed up for promotion, replace the meetings by kicks into various corporate asses to get them on the road doing actual things instead of sleeping in meetings, get rid of the politics and learn modesty.

Stefan Jovanovich writes:

The best way to achieve the state of grace that Bruno describes ("when times are bad, etc.") is to never let the retained earnings stay in the business. The seeming anomaly of 19th century finance (stocks had larger payouts than bonds) was based on this principle. So was the Mars family's attitude about office furnishings.

Rocky Humbert replies:

Bruno: If I were to paraphrase and generalize your statement, it would be:

"Enterprises with poor profitability and no growth prospects can recruit and retain smarter, harder-working and more effective employees and managers than companies with high profitability and good growth prospects."

I challenge you to provide any evidence of your supposition that employees and managers in "lousy" industries are more effective than employees in "good" industries. I suspect that you will find exactly the opposite– that is, the GM parking lot empties a lot earlier than the Microsoft parking lot. 



 I am just finishing The Drunkards Walk by Leonard Mlodinow. I learned a few things. He gives a nice history of statistical thought highlighting that events are often more random than we might believe. It is always good to be critical of ones research.

There is an interesting chapter on conditional probability and how it is often misused by doctors and lawyers. For doctors by misinterpreting false positive or negative test results. Say one tests positive for X with 95 % confidence and an incidence rate of X disease of 1 per 100,000. Sounds bad, but in counting of those who test positive per 100,000 there will be 1 real case and 5000 false positives. So if you test positive there is a 99% chance you do not have the disease. In law there is a prosecutor fallacy. Here the prosecution presents a history of a spouse with domestic abuse in a murder trial to make their case. This is countered using deceptive statistics by the defense. The defense argues that only .04% go on to commit murder so this is very rare. Maybe true, but what the prosecutor should have said is that in cases where a spouse is subjected to domestic abuse and murderer, about 90% of the murders are committed by the domestic abuser.

There are examples from the investing industry showing how track records can be meaningless. In one example if there are a thousand investment managers over some 10 year period, the odds are over 75% that at least one will outperform the average every year over that period, by chance alone. Or the odds that good hitters in baseball might go on a streak and break hitting records by chance. The success of motion pictures is largely random, but credit or blame for a CEO is based on this. More likely is a reversion to the mean where the least successful studio over x years is the more likely to succeed in the future.

Towards the end of the book he discusses confirmation bias and how from a random series of numbers we often find patterns to confirm our pre conceived beliefs. I found this section very relevant to trading. Maybe a good way for me to avoid this is to assume my trading is completely random and look for evidence to the contrary. Or in a trading scenario to test the opposite of what you would expect as the Chair recently suggested. There are interesting studies showing a random series of X's and O's that seem to exhibit patterns.

The book is well written and full of other interesting examples like the Monty Hall example, and how a girls name can affect the odds of two girls in a family. The book also provides a laymen's history of some of the statistical pioneers like Pascal, Bayes, Bernoulli, Galton and others. Most important, I took away the importance of rigor and a critical eye toward my own statistical research and trading.



"Every ice cream cone will not be uneaten." Harvey Sellers, 1970, one of the finest gentlemen I ever met. Owner of Hi-Flier Kite company.



 A million events coalesced this week to put the market in a highly precipitous state with the expected standard deviation for Tuesday, based on pre holiday lows of 32 being a good twice the normal 15 for any day. Without minimizing the seriousness of a loss of 50 points in a week, perhaps 3 trillion or more in wealth, perhaps one can find some order beneath the random happenings.

First , some quantitative things. Big minima before holidays occurred only 6 times in last 15 years, one on Labor Day 2001, and one 10 calendar days later, two on July 3, 2002 and 2008, and two on Martin Luther King day 2005, and 2009. Changes to the close of -60, -60, 35, 14, -13, and -46 followed those days with a stand deviation of 32.The situation a week later was even more dour, although in an interesting anomaly so typical of markets, the standard deviation of the 5 day change is 28 versus the naive expectation of 70 from the one day change.

On the other hand after big declines in a week, of 5% or so, a event that regrettably has visited us on 1 in 20 weeks that last 10 years, the market is quite bullish with a standard deviation of 35 the next day and a more expected but gargantuan standard deviation of 60 for the following week.

One also notes a string of exactly 5 consecutive losses in the S & P, an event which has occurred on about 1 in 25 days, as compared to its expectation of 1 in 64 days. Fortuitously, the standard deviation the next day is a mere 18, and the expectation is zero.

The situation with the Nasdaq is similar on a weekly basis. With its 120 point decline for the week, the expectations are not much different from random. However, with 11 consecutive days without a rise, that's never happened before. The highest run of consecutive declines was 10 on October 12, 2000, when the adjusted Nasdaq was about twice the current level.

More interesting is the failure of the market to rise a reasonable level in 13 consecutive days, an event that is a true rarity only having transpired on 4 occasions before. That event has again led to an expectation of 0 to negative in the next following days.

Turning to the always fascinating changing web between stocks and bonds, one notes that while the stocks declined 5% this week, the bonds went up about 4 1/2 points from 123 1/2 to 128 1/2, with 5 consecutive rises to Thursday, July 1, close… One would expect contrary to the upside-down sponsor's constant refrain that would lead to some reallocation to the stocks. And indeed to a reasonable extent that is true, albeit the expectation is only 1/10 of its standard deviation going out 1 week in future.

The variability of all these things is so great relative to its expectation that even if the future moves were drawn from the same distributions as the past, nothing here would be of any great regularity.

Thus, we turn to the qualitative. Everyone from the President to the upside down sponsor was on TV talking about the significance of the employment number, all from their own corner of self interest. I like the emphasis now that is placed on private sector jobs, the 63000 increase, a number that is becoming so much less relevant as government jobs gradually become more numerous, more attractive, and crowd out the jobs in the private sector. Along those lines, everything came together with Barton Biggs reporting that he sold his technology holdings. The news came out rite at the close, putting it in the pitching in the pinch category. It was the one thing that determined the market move for the day as just before the market had been up a 1/2 % on the day and the news caused it to decline 1% in the last 10 minutes.

It was the perfect thing as Zeus sat there at 350 deciding which of the Goddeses to favor with his kind attentions over the weekend, with the balance of the market on his scale. And then came the perfect announcement. Biggs is bearish because the intervention and the stimuluses mite stop. And it's particularly newsworthy because he made money in 2009 by being bullish on the stimuluses as if being rite one year has anything to do with being rite the next year. But it's the idea that has the world in its grip. And it provided the perfect backdrop for more interventions coming in the future. And of course the reason that the market is down so much is exactly that the interventions have caused all incentives and all desires to make investments with the increase in service rates of 100 % coming up , totally vanish. Thus, the news followed the price, and led to what is guaranteed to happen, a call for more jobs, more jobs especially for those organized in special groups that can provide votes and funding — but most important of all, a clarion call for taking from the common man to provide a greater need for intervention by those of superior knowledge and tastes.

I believe one gets the picture.

Paolo Pezzutti comments:

I already see those who will benefit for a second round of stimulus counting the big money they will make when borrowing at 0%… A nice and unfair advantage is about to come again for those on the right side. Especially for those whose risk in this "trade" is practically zero! Few, damned and now (!) seems to be logic (although for some it will be another windfall of earnings and bonuses). Politically this is very much convenient and powerful lobbies may already be at work to support similar moves. Someone else will take care of the next generations. We will not be here anyway, so why worry. However, the greedy ones who think that the game will unfold the same way, at least for equities and currencies, this time might be wrong. Mainly because few governments will afford this kind of move. The US could still do it and China. Europe not for sure…Different variables are at play. I was not clever enough last year to understand the magnitude of the implications related to the huge injection of money in the system made by governments. However, my skepticism that this is the right way to solve a problem that is structural in nature increases.

Ken Drees writes:

One item left out of the soup, the China market had a big drop that was partially erased–this drop happened after the recent won float plus labor issues arising. Also hundred year floods are still raging in the southern provinces as well as growth estimates being revised downward. There are some big possible trend changes in place in China right now that are not being looked at for the most part by the west.

I spied some interesting fin tv that was a little bit different from the norm–a la the new paradigm–China catches a sniffle and USA catches a cold. This concept ignored by most financial media and blogs all week. China chart looks likes SPY only a bit tighter.

I think we should look east short term for possible dislocation in the west.



I think this article entitled "The fall and rise to riches of Edelsten and his young bride" is about as good as it gets. All the pertinent qualities we recently identified as belonging to the malignant hoodoo seem to show up in abundance. Enjoy a good laugh, and mark well,  my friends.

Nigel Davies comments:

Presumably there's a practical application in that if one identifies
companies built by hoodoos they are potential targets for shorting. At
the right time of course



sheep giving birthEvery 6 months the BLS performs an exercise in hindsight. It looks over its surveys from the prior half-year and adjusts its extrapolation of the total number of employed. Then it goes back to making birth-death adjustments based on its estimate of how many people were employed by new businesses and how many were laid off by businesses that had failed in the prior month. In January of this year the BLS removed nearly half a million jobs that it had added in 2nd half of 2009. It decided that its cumulative birth-death adjustments for August through December overestimated actual employment during the period by 427,000. Starting in February the BLS began adding jobs again; its birth-death adjustments for the first half-year of 2010 totaled 728,000. June's gain in private jobs - 83,000 - depended on one of those monthly adjustments; without it, the gain in June would have been a loss of 64,000 jobs. The unemployment rate for June improved through a similar sleight of hand. In May the BLS survey showed 14,973,000 Unemployed out of a total Labor Force of 154,393.000 Labor Force; that produced the UE Rate of 9.7% For June the numbers were 14,623,000 Unemployed out of a total Labor Force of 153,741,000 (UE Rate = 9.5%). But for the magical disappearance of roughly 650,000 people (where, one wonders, did they go?) the Unemployment Rate would have remained the same as it was in May.

Rudy Hauser comments:

The payroll series after those adjustments are made is a very accurate survey as it is based on payroll reports which all employers, even if you only employ one person, have to file at least quarterly. That full information is not available on a timely basis but is reflected when the numbers are revised to incorporate that information. Those reports are used to determine what employers have to pay for unemployment insurance and as such it is illegal not to file them as required. The immediate numbers are based on voluntary reporting to the BLS by firms. New firms are not likely to be included and it is not always known why a firm stops reporting, hence the need for the initial birth/death of firm adjustment.

The household survey on which the unemployment rate is based is just that- a survey of households. A decline in the labor force could just reflect the usual variation for any survey, even a large one such as the household survey or it could reflect an actual decline of people actively looking for work or some combination of the two.



 With what is looking like will be an all European World Cup Final, one wonders if during economic strife prowess of nations at competitive pursuits such as sports have some underlying reflections of the tide at the moment or the coming change of tides.

I am hoping that the readers of this site who have been avid sports fans or followers will perhaps provide a good stab on this two sided conjecture. Didn't feel like dismissing superfluously this potential occurrence to be just a spurious correlation. Those more experienced in tracking sporting prowess will judge it better, and I lack that historical perspective for sure.



Last week SPY dropped 5.2%. Going back to 1993, ranked weekly drops by % as follows:

1: 1-2%
2: 2-3%
3: 3-4%
4: 4-5%
5: 5-6% (like last week)
6: 6-7%
7: 7-or more % (7,7,7,8,8,10,10,19)

Then checked following week's return.

The chart compares variance of next week by prior week's 1-7 ranking; another version of "the wilder it gets the wilder it gets"

Using the same ranking system, this chart compares mean returns of weeks after down weeks ranked 1-7 to the mean returns after weeks declining between 1-19%.

The mean return is positive (NS, see below), but without a monotonic relationship with size of prior week's decline.

One-Sample T: nxt wk

Test of mu = 0 vs not = 0

Variable    N    Mean   StDev   SE Mean        95% CI                 T      P
nxt wk    242  0.0038  0.0340  0.00219  (-0.00051, 0.00811)  1.73  0.084



 Something significant is happening for sure as market forces came to the conclusion that gold had to be liquidated so fast and the Euro had to be bought so aggressively. Maybe I missed some important development in Europe, but the crisis is still there as it was a month ago. Spain and its debt situation is the next challenge this summer.

The coming slowdown (or it is already here?) will only make things more difficult for European countries. In a few months additional fiscal measures will be required to try and stabilise budgets. So why this rush to buy Euros? At the same time, gold was heavily sold like if all the printing of money in western countries was over. Actually as we go down toward another slow down more easing will be required (for those who are still in the conditions to do it) the printing machines will become hot. May be what we are seeing is just the result of deception and it is a good trading opportunity.



Djokovic servingDouble faulting is one of the most discouraging aspects of tennis. Watching Djokovic double fault the 2nd set away (and to end up losing the match) this morning during a tiebreaker against Berdych in the Wimbledon semifinal match shows that even the number 3 player in the world can feel pressure, fear and nerves on a critical point. Giving away points to an opponent after working hard is extremely aggravating and mentally difficult to overcome.

The tennis serve is very dependent on a good, consistent ball toss–it is so easy to get the wrist involved and throw the toss in all directions and to lower the head (anticipating the return of the serve) during the serve and serve into the net. It's almost better to serve long and try to add more spin than it is to dump a serve into the net. It is also important to think positive thoughts and not tighten up–that little voice in the head can easily lead you to a double fault.

Regular cues and ball bouncing rituals can be helpful.

It's shame though to lose a match due to choking or self-defeating behavior, and you don't see it that much amongst the top pros, but when it happens it is a hard thing to get out of the head. And more particularly when your nickname is "Joker" the press has an easy rhyming headline to use to remind you of your past failures.

Ralph Vince adds: 

McEnroe servingRE: it is also important to think positive thoughts and not tighten up.

This is SO absolutely true, and SO difficult to really define–that being loose, yet in a controlled pace without any real slack on the line. This is vital to performance in anything, be it tennis, fighting…or even thinking through problems. The Old Frenchman would say, "C'est toujours la meme chose," (It's always the same thing).

Think of anytime you've ever choked at anything– the aforementioned mental and physcial state was absent. Think of ANY fight you've ever been in. They always, ALWAYS tighten up, succumbing to fear and adrenaline.

I think pro athletes really understand this, and not just in the individual sports like tennis or golf, but even when these guys are shooting foul shots in basketball. Learning that mental groove is worth more than all the years one can spend in school I think. It's the kind of thing that one learns only by doing it, learned only through the prompting of pain and discomfort until it is found.

Learning things any other way is not really learning. 

Charles Pennington adds:

The serve has got to be the most non-intuitive and difficult-to-learn shot in tennis. Whenever I look at slow motion video showing the trajectory of the racquet, I am amazed that it's possible for a human to do it.

Here's a video of McEnroe serving, showing the fundamental steps–the weight shift, the toss, the swing of the racquet, and the line call argumentation.

Nigel Davies writes:

I wonder if the frequency of this kind of mistake may increase in proportion to a player's muscle mass. The 'nerves' might be a simple chemical equation.



 Some weeks ago I visited a friend in Berlin. We went to a few museums there and later spent some days in Budapest. She studies biology and skipped some lectures because of our activities. However there was one lecture she did not want to miss, and she invited me to join her. I was not really looking forward to this, but it turned out I was quite lucky. The lecture was about biological markets. It was most interesting and did not seem to require much previous knowledge.

It was given by Peter Hammerstein. I looked him up: he started his academic career in the field of game theory and studied under Reinhard Selten, who won the Nobel Prize together with John Nash. The term biological markets was proposed by Hammerstein & Noë in 1994 & 1995 papers. It refers to "all interactions between organisms in which one can recognize different classes of 'traders' that exchange commodities, such as goods (e.g. food, shelter, gametes) or services (e.g. warning calls, protection, pollination)."

The 'biological markets' approach uses game theory in order to model and explain behavior of organisms. Also behavior which seems at first sight altruistic can be explained.

For example, an animal may give a warning call to a group of the same species that a predator is approaching. This behavior is good for the group, but at the expense of the warning animal itself, as it has now less time to get away itself. This seems altruistic, but it is not. It was found that a warning call is more likely to be given when the relatedness between the warning animal and the rest of the group is higher. This is because closer related group members are more likely to carry the same genes as the warning animal. Therefore, the warning animal is doing nothing more than maximizing the chances of survival of his genes, one way or the other.

Further examples can be found on the site of Ronald Noë.

The most interesting applications to our markets and trading may be the found forms of 'foul play'. One example of the lecture was about 'helpers at the nest', which are sometimes able to trick the mother in thinking they delivered more food to the nest than they actually did. (Apparently, not only humans have cons).

I found the following book on this topic. I did not read it yet and therefore cannot recommend it, but based on the description and authors I believe it should be an interesting read providing examples of markets and trading in the animal kingdom. I will certainly add it to my list.



A good text to learn the study of changes in correlation is Pitfalls in Tests for Changes in Correlations.

Ralph Vince adds:

Maybe not related to what you are after, but the metric of correlation, however calculated (raw, rank, etc) is good for examining predictability in indicators and markets, along with lead/lag times.

But I strongly caution against using it as an input in relative allocations (what some call portfolio construction). When using it, people are holding it by the blade not the handle, and tend to not know it.



 Sitting on the plane yesterday on my arrival into Singapore, I was trying to work out why everyone stands with no where to go as they wait for the doors to open (happens all the time as everyone clearly knows). It occurred to me that cabin fever has probably got something to do with it–the need to escape. In comparing this phenomenon to the markets and cycles, maybe the same can be said, and maybe the reason for short coverers coming in, about a clear downtrend. Anxiety, the need for air, itchiness… all these things conspire to limit profits instead of sitting comfortably and waiting for larger gains.

Victor Niederhoffer writes:

Mr. Mee, this interesting idea has many hidden and untested assumptions in it, and I would think such a test would indicate a trade opposite from the one you seem to think would work.

George Parkanyi comments:

Holding a short position for the bigger move looks really obvious in retrospect when you look at any chart of a failed market. But markets, like all living things, do not like to die easily, and fight vigorously, at least until the latter stages when despondency sets in. Bear market rallies can be quite powerful. As you can tell from the ride from the top in this particular decline, the moves have been violent. Depending on where you enter, because of the volatility, profits– long or short– can vaporize right before your eyes. So you'll have to excuse the shorts for being a little paranoid. 

Craig Mee writes:

Sure George, no doubt that's why entry levels on moves are so important and most indicators lag so much that you come in too late. Most of these weak shorts are probably following the latter and their hands are forced with high volatility reactionary bounces, but for the ones positioned well … how many take their foot off the gas too early when they should be adding on the bounce, not liquidating, and what can help us, fundamentally or otherwise, establish this?

It was interesting that the high on the last bounce in equities was established during Asia and sold off during the U.S session. It appears the flight was landing in New York and everyone was up in the isle ready to run off the plane…what scared them so much that they ran and kept running? Maybe turbulence on the way, or they saw something scary in the mid flight sleep.

Jeff Sasmor writes:

money burning a hole in the pocketAnd you often see people lining up at the gate, even though they know they they can't board in the order of their line. They look annoyed as others board ahead of them. Personally I stay seated upon arrival till I can see some of the standees move. Drives everyone else in my family crazy though.

My dad used to call it "the money is burning a hole in your pocket" — the monkey urge to "do something". Explains to me why some days I have trouble sitting on my hands when my logical minds says no no no.

Bill Rafter writes:

For 13 years I commuted from my home in NJ to NYC, almost all of it by train. One thing that was always of interest is the way human traffic flowed down the staircases at Penn Station to the trains. Wind and water flow is almost always strongest in the middle of the stream. Not so with people. If you want to get to the train faster you are much better off by coming in from the periphery.

Somewhat the same happens in automobile traffic. A lane will be closed a click ahead and there will be signs to that effect. Many people immediately get out of the soon-to-be-closed lane, where the obvious choice is to remain in that lane as long as possible.

I am certain that both of these (the steps to the train and the closed auto lane) are the result of behavioral instincts, but so too is the market.

But my question for the list (particularly the international members) is if the human flow in different countries is different from that in the U.S. Is this behavioral tendency human or merely American?

Paolo Pezzutti replies;

 Bill, I would say that in Italy is pretty different and I find the pattern of traffic different in every country I visited. And I have visited many over the past 3 years. It seems that the culture of the peoples influences their behavior although on paper they have to follow rules on the road that are very much the same in the various countries across Europe and America at least. Similarly for markets, different cultures may give life to different types of herd behaviors. And I much believe it. In Italy, however, we tend to stay in the soon-to-be- closed lane as long as possible…

Did you have any doubt? I wonder what kind of herd behavior Italians would develop on the market and how this would be different from the Germans' way of managing the same situation for example.

Rudy Hauser writes:

herdlike behaviorMy experience on the LIRR at Penn and Jamaica stations in that a left flank approach works almost every time. When it comes to crowds most people seem to behave like a herd of sheep.

George Parkanyi adds:

Holding a short position for the bigger move looks really obvious in retrospect when you look at any chart of a failed market. But markets, like any living thing, do not like to die easily, and fight vigorously, at least until the latter stages when despondency sets in. Bear market rallies can be quite powerful. As you can tell from the ride from the top in this particular decline, the moves have been violent. Depending on where you enter, because of the volatility, profits - long or short - can vaporize right before your eyes. So you'll have to excuse the shorts for being a little paranoid.

Nick White writes:

Personally, off the plane, I just want to get to customs as soon as possible - and every little advantage in this quest helps. I think this is especially pronounced on the international flights I take, as they always tend to arrive at dawn - along with about 2 dozen other 747 / A380 flights full of punters. Nothing worse than sitting in that endless, spiraling queue at Heathrow. On this point, one of the best airport strategy expositions I've seen is the "Airport Security" scene in the brilliant George Clooney film, "Up in the Air".

I also fully agree with Paolo on the regional variations. I suppose, as everything, it depends on the incentive offered to "be first" - and whether such incentives weigh heavier from observance of social "rules of thumb" or conventions, versus a true, rational expectation and "doing what works".

Rocky– i HATE the tailgating thing. I always try to drive behind other cars with a good error margin relative to the speed of the traffic. Yet, in morning traffic, this safety margin ends up causing me deep and abiding road rage because opportunistic scum bags (*ahem*) keep plugging into my safety gap….this then makes me want to tailgate like crazy.

driving over the sydney harbour bridgeDriving over the Sydney Harbour Bridge in the morning presents some classic herding examples. There is one lane on the north-side approach toll gates that everyone considers "quickest". Yet, because so many people flock to this lane, one of the peripheral lanes often ends up being relatively traffic free and presents a much speedier option. This is probably a good analogy to the ever-changing cycles and market participants flocking to tired old relationship trades that may only be effectual because they believe it to be (I'm thinking Gold here) rather than any empirical reality behind the herd belief.

In the UK, you can count on people loving a queue and not trying to exploit the fast route. Trying to enter the tube doors from the periphery during rush-hour is usually a sure winner to come first in the seat-quest….however, it may earn you some opprobrium, too.

Universally though, I think in all instances we can count on the majority following convention and herding. The rest will be trying to game this instinct….sometimes successfully, other times getting slotted.

The markets are just an extension of regular life. The empirical, quant approach works in both, with the same limitations. I guess, ultimately, they are the same game of expectation - where those who best measure potential outcomes most likely end up with the shekels - or at least through the queue quickest!

Stefan Jovanovich comments:

The old (1970) NYC solution to Nick's dilemma in rush hour was to respond to any "challenge" — i.e. someone began pulling up on either side of your lane with the clear intention of cutting in– by acting like a cat with her food bowl. You simply lurched forward and closed up the space without showing any indication that you knew the other driver was there. Stupid indifference was a far more effective deterrent than any amount of threatening eye contact. (Of course, it helped to be driving a Checker Cab with fenders that already had multiple dents and scrapes. Even the Road Warriors behind the wheels of the Chevelle 454s owners didn't want to kiss metal with a road tank whose price at auction– less the medallion– would not have covered the cost of their engines.) 

Rocky Humbert writes:

Bill: A highway toll both model might also be one approach for understanding the Cabin Fever phenomenon. Traffic engineers have written extensively about the behavior of drivers as highways merge into toll booths.

One common observation is that drivers hate to have other cars cut-in in front of them, hence they tailgate — even if it's not productive and reduces the opportunity for more-productive lane switching. Might standing in the aisle be an airplane equivalent of tailgating?

Spann, et al: Lane changes and Close Following, UMAP Jrl (2005) [14 page pdf]

Personally, I stand in the aisle because it's a pleasure to stretch my legs and spine after sitting for hours in an uncomfortable airplane seat. Entirely rational.There's probably a cultural aspect too. While in Frankfurt, I was caught in a downpour and crossed a busy street against the light in a futile attempt to save my suit from ruin. Two residents started yelling at me in hostile German for this infraction. Perhaps I would be rotting in prison right now if I had jay-walked too! 

Tim Hewson writes:

 One thing I have read is people do most unusual things in aircraft emergencies, such as try to secure their belongings to take with them even though their lives may be in danger and the priority should be to get out pronto.
So irrationality in transport situations is not any more unusual then in market situations. And its also understandable. Going to a spec party a few years ago the plane I was on had to turn back an hour over the Atlantic as the hydraulics went and the cabin filled with smoke and people were screaming, etc. It's not a very nice experience. But I would recommend observing the air hostesses: if they appear calm it's probably ok for you to continue reading your newspaper. If you can't see them or they look panicked you might as well continue reading your newspaper because there is nothing you can do.

On the subject of crowd behavior on train stations: Escalator etiquette in most countries tends to match the rules of the road. So why do passengers on the London Underground stand on the right-hand side of escalators when the rules of the road dictate that we drive on the left?

Jim Wildman comments:

At one point I commuted 115 miles each way to work between Tyler, TX and Dallas on I20. Most of the time, traffic out in the country where there was little traffic traveled within 5 MPH of the speed limit. Once I got to more congested areas, there were more speeders. Of course the congestion meant speeding was thrilling, frustrating and ultimately useless. I assumed those speeding felt better at all the cars they were passing. Activity substituting for progress. 

Scott Brooks writes:

Speaking of panic on a plane….

I was flying on a Southwest Airlines flight back in 2001 when we hit the worst turbulence I had ever experienced (times 10). The plane was bucking, like a bull with unwanted rider on his back, the people that were unfortunate enough to be standing were tossed around like rag dolls. The stewardess barely made it back to her "stewardess seat".

People we screaming and crying in fear.

I was sitting in the front of the plane in one of those seats where the person in front of you is facing you (I think you only see that on LUV planes). The faces of the people in my row were ashen with fear. I looked around to do a mental calculation of the exits and noticed the stewardess. It was not a good sight. She was obviously terrified.

It was at that moment that I decided to do the unexpected. I raised my hands over my head, put a big smile on my face and started screaming, "Roller coaster, roller coaster, Wahoooo!", over and over again.

It took a few seconds for the people in my area to catch on, but when I yelled at them, "Come on, roller coaster with me, roller coaster, roller coaster", they began to join in.

I looked across the aisle at those people and started screaming the same thing, within a couple of seconds they were joining in. I told them to pass it back in the plane. We then yelled at the people behind and told them to pass it back. It was then I saw the stewardess. She was not only scared to death, but she was livid with anger towards me. She was screaming, "Stop it, stop it".

But it was too late….like "The Wave" at the ball park, it took over the whole plane and pretty soon most of the people on the plane were "roller coaster-ing" with us.

I smiled at the screaming stewardess, and I think I mouthed the words (don't remember exactly), "it's ok". She calmed down and bit.
I then started yelling "roller coaster" to her and after a few seconds, she joined in.

Of course, eventually the turbulence subsided and slowly went away.

As it lessened, people started laughing and applauding. Personally, I felt something I had never felt before to this extent…….the exhilaration of the adrenaline rush associated with fear coupled with the joy and relief associated with the removal of the danger, all mixed together with the "shakes" associated with such fear. I felt the sweet and sour sauce of emotions….joy and fear at the same time!

The plane was abuzz with excitement and all forms of emotion!

A few minutes later the Captain even came over the loud speaker to explain what had just happened. I don't remember exactly what he said next, but he basically said something along the lines of never having had an entire group of passengers do the "roller coaster" before and he thanked the gentlemen in the front who had started the roller coaster. He then offered to go back to where the turbulence was so we could do it again.

His offer was met with a resounding, "NO!" and laughter.

I'm sure every passenger on that plane will remember that 5 or so minutes of that plane ride for the rest of their lives.

George Parkanyi replies:

Scott, great story, and an important leadership dynamic involved.

In a situation over which people have little control, particularly dangerous situations, there is huge psychological benefit in giving them something to do. It alleviates the helplessness and gives back some feeling of control that can be the difference between reason and panic. Throwing their hands up and chanting "roller coaster" in coordinated fashion gave them that something to do, and also provided comfort from a "we're in this together" sense of community.



Here is haaaalf year performance graph for all commodities



the metsA recent headline shouts about a car company that pays 2.3 billion extra in cash to an entity's health plan. They prepaid much and could have used cash. This story reminds me of one of the centimillionaires that passed through these gates, who bought a chain of what I considered woeful stores, but actually were not that woeful. Anyway, after he went public and made his first centi, he desperately wanted to get out of the stock. So whenever he could he would sell. But the problem was the analysts always said "why are you selling if you're so bullish?". He was very astute. So he always said, "the last thing I want to do is sell, but you guys are always saying how important it is for me to get some wide diffusion of ownership out there to gain liquidity. So I sacrifice myself and let a little go even against my wishes and immediate profit". (I liked the touch of the "you guys". Here a car company is prepaying an extra 2 to the entity that brought them to the knees as well as beggaring the city and all others that they are big in such as "why oh why did you leave Ohio". But to gild the lily for the analysts they don't use stock. But they use cash. And pay up and extra.

Along the same lines, it is loathsome to see a certain bank that sponsors a baseball team around here that has received about 10 times its market value in benefits and increases in wealth from the central authorities marketing themselves in such a hubristic and resilient form. They should keep a lower profile and be ever so much more humble, and do so much more to repay the common man who saved them from the belly.



Mario MendozaA nice bit about baseball and the market from wikipedia:

The *Mendoza Line* is an informal term used in baseball for the threshold of incompetent hitting. Even though Mario Mendoza's lifetime batting average is .215, the Mendoza Line is said to occur at .200, and when a position player's batting average falls below that level, the player is said to be below the Mendoza Line. It is often thought of as the offensive threshold below which a player's presence in Major League Baseball cannot be justified despite his defensive abilities. Pitchers are not held to the Mendoza Line standard, since their specialized work and infrequent batting excuses less competence in hitting.

The term is named for former shortstop Mario Mendoza, a flashy defensive player who struggled at the plate. Although Mendoza's batting average was .215 lifetime, he was known as a sub-.200 hitter whose average frequently fell into the .170 to .180 range during any particular year. That proved to be true in 1979 when Mendoza managed to finish the year with a meager .198 average. Baseball legend George Brettis believed to have coined the term early in that season when asked about his own batting average. Brett is said to have remarked "The first thing I look for in the Sunday papers is who is below the Mendoza line". Bruce Bochte and Tom Paciorek have also been credited as creators of the expression.

One explanation for the expression relates to the historical presentation of numerous batting averages in the Sunday newspapers. Not all batting averages were presented. The theory holds that Mario Mendoza was at the bottom of those that were published and players with lower batting averages did not appear. They were "below the Mendoza line".



 I wonder in the "civilized" world if it's possible to really own land. Land that cannot ever be taken away from you by the state. Land that is under an Allodial Title, and can't be confiscated, taxed, subject to easements, or condemned. If the state can take your property, then you really don't own that property.

Stefan Jovanovich writes:

The Fifth Amendment of the Federal Constitution is supposed to take care of the property rights problem that Jeff identified: "nor shall private property be taken for public use without just compensation". Note the use of the word "just"; the Constitution allows "reasonable" searches and seizures" (4th Amendment) because it presumes that anything searched or seized can be restored (this was in the world before drug raids).

But for "takings" the Constitution requires justice. But, this was in the age when lawyers understood the difference between war powers (which are the sole domain of the Commander in Chief after a formal Declaration of War by Congress) and executive responsibilities (under which the President is responsible for carrying out the determinations of Congress).

The whole idea of "police" powers is a modern invention that allows Zoning Authorities to pretend that they are engage in acts of war– which, come to think of it, they are.

One last snark: one of the delicious ironies of the decline and fall of publishing in America is that the victims– the NYT, in particular– are the very people who have undermined their very special Constitutional monopoly property rights. Wal-Mart has no special privileges; but the publishers do under Article I Section 8. ("securing for limited Times to Authors and Inventors the exclusive Right to their Respective Writings and Inventions). It took almost a century of support for the judicial fiction of a "living document" to hold sway, but the Sulzies managed it. They huffed and puffed and produced the Digital Millennium Copyright Act and, as Annie Hall once put it, "Oh, well, la-di-dah." At least, their real estate still appears to be worth something– unless, of course, there is further zoning change.



 The black cross.

The 50D moving average of SPY may soon cross below it's 200D MA. Looking for instances when this occurred, AND it was the first downward cross in at least 20 days, found 6 instances since 1993. The following 5D tests bearish, but 10D and 20D are flat:

Date                         5D      10D     20D
12/28/07        -0.042  -0.041  -0.077
10/01/98        -0.022   0.072   0.107
11/02/00        -0.019  -0.037  -0.073
04/29/94        -0.008  -0.013   0.017
08/25/04         0.002   0.012   0.003
07/25/06         0.004   0.006   0.027

avg                -0.014   0.000   0.001
stdev              0.017   0.042   0.069
n                          6         6         6
t                     -1.98     0.00     0.02



DJIA is down about 5% this year, Jan-June. Going back to 1928, for 1st half declines between -2% and -10%, here are the next month (July), 3-month, and 6-month return means:

                Jan-Jun   nxt 1mo   nxt 3mo   nxt 6mo
avg          -0.065     0.000     -0.040        -0.026
stdev         0.022      0.053     0.126         0.191
n                20          20          20            20
t                             -0.02      -1.42        -0.61

>>Nothing much; 3mo somewhat bearish.

Same check on 1st half declines worse than -10% tested bullish for Julys, and N. S. for 3 and 6 mo. 

The 3mo following down 1Q tests significantly less than all (non-overlapping) 3 mo periods, but 1-mo and 6-mo are not different. Which is a different question than is mkt up?

                         July           all mo
Mean                  0.000      0.005
Variance              0.003      0.003
Observations      20.000  974.000

Hypothesized Mean Difference    0.000
df      20.000
t Stat  -0.436
P(T<=t) one-tail     0.334

                     3 mo   all 3mo
Mean            -0.040  0.016
Variance        0.016   0.011
Observations    20.000  325.000
Hypothesized Mean Difference    0.000
df      21.000
t Stat  -1.949
P(T<=t) one-tail   0.032

                      6 mo        all 6mo
Mean             -0.026  0.032
Variance         0.036  0.020
Observations    20.000  163.000
Hypothesized Mean Difference    0.000
df      22.000
t Stat  -1.306
P(T<=t) one-tail        0.103

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