# The Enzyme Factor, from Rocky Humbert

Since the Chair mentioned Dr. Shinya three times in the past 24 hours, (as a humble omnivore) I fell compelled to point out that the counting here doesn't pass the "smell" test. Given the subject matter, failing the smell test is serious, indeed!

Chair wrote: "dr. shinya would also recommend based on his personal completion and examination of 400,000 colonoscopies with dietary data on each eliminating all dairy, and meat from diet…" He also pointed to the wiki link.

Wiki actually reports that Dr. Shinya has performed approximately 300,000 colonoscopies and, since his breakthrough in 1971, has performed a colonoscopies every 20 minutes.

Let's do the math:

1. Dr. Shinya is now 75 years old. He performs 3 procedures per hour for 8 hours per day (no lunch or rest), five days per week, 52 weeks per year. That's 24 procedures per day; 120 procedures per week; 6,240 procedures per year. This is improbable, but let's continue the arithmetic.

2. Let's assume that he has never taken a vacation; never gotten stuck in traffic; never played a round of golf; never taken a sick day; never given a speech; never done anything at all except perform colonoscopies FOR THIRTY-EIGHT YEARS. I feel sorry for his family, yet even so, that is "only" 237,120 procedures.

The only way one can get to 300,000+ procedures would be to assume that he is performing colonoscopies for 365/7/24….and if this is true, it raises even more serious concerns about his judgement.

I am skeptical about taking advice on ANY matter from a person who has spent the last 38 years looking into peoples' colons to the exclusion of every other activity. The saying goes, "To a hammer, everything looks like a nail." Dr. Shinya takes this aphorism to a deeper level.

From medical student forums online

"Hi theremy, chief resident said in private practice he'd be able to do 35-40 Gas/colons a day easy on a 9-5 list with an efficient OR setup. Has anyone seen this being done. He said when hes's done with his residency he could pull in 15-20Gs a day doing just gas colons. sounded a little outlandish.

thanx."

"A single person can do 30 -40 scopes per day. I am telling you…..a majority of scopes are screening scopes, and take 5 minutes……the next pt is in and you can easily do 5-7 cases per hour. I have seen this. It is a very busy day, and do not forget, like a surgeon, GI doctors do not scope every day. Usually only 1-2 days per week. 25-30 is very easy to do in a well functioning private practice. Get out in the real world, out of academia, and you will see this for yourselves..Breaking upwards of 40 scopes requires lots of committment and a very good functioning clinic….But 30 is easy for a good colonoscopist……"

"As an anesthetist, I am joining a private group this summer which covers a GI group. 30-40 colonoscopies is indeed very doable. More than a few groups I interviewed at were involved in this, as it is very lucrative for anesthesia as well the GI docs. These places are very efficient, and need to have a very good phase II recovery protocol in place. Some GI docs still sedate themselves, using an opioid plus a benzo. However, it takes time to titrate to effect safely, and recovery may be up to a few hours in older patients. The centers doing 30-40 cases per room per day uses an anesthesia staff, and use, for the most part propofol only. 50-100mg of propofol iv, is sufficient for most colonoscopies with no other meds given. A good colonoscopist is done in less than 10 minutes, often 5 from the time the scope goes in. The anesthesia bill is separate from the GI docs bill, so once the GI doc sees how efficient this is, how much happier the patients are, and mostly how much cash they are raking in, they love having anesthesia handle the seadtion. It can be a very nice way to offset non-insured patients and can boost an anesthesia practice's income tremendously. Typical reimbursement is 500-1100 in the greater NYC area."

It's "possible" and more likely he's the Henry Ford of the procedure. Hades, you can show up to one country, hit one hospital, and have thousands waiting for the scope. He was the innovator. But the mean seems to be about 775per year a week and 16 per week per Dr. who scopes 2 days a week…for profit. In the US of A.

So I see what you're saying– a local Dr group barely can do so. The only reason I believe it was in the Military you can line up 3,000 men and a few Docs and medics can perform assembly line of so many procedures in less than a full day– it's wild…and if youve ever seen a mash unit… a full blown surgery unit in the middle of the desert…then you know it can be done. Luckily I only needed stitches, but the level and the ability is amazing. Doctors are trained to work 24-36 hour shifts so pulling 5-12's and supervising a team…. Think "chief surgeon" not local private practice.

## Victor Niederhoffer writes:

To my credit the last time I visited with Dr. Shinya, I subjected him to a withering cross examination to verify the 400,000 colonoscopies he claims in his books. He gave me a enumeration, and then dismissed me with "I have to see patients. I can't waste my time with people who don't understand medicine." I have always found that the worse the bed side manner of a competent Dr., the better he is at curing. I believe this the case with Shinya.

## Rocky Humbert writes:

I have no personal knowledge of Dr. Shinya — but these sorts of claims are eerily similar to the sorts of results reported by Madoff.

Even Shinya's response to Vic's cross examination is reminiscent of Madoff's response to the SEC field investigators.

Consistent, remarkable, implausible performance/results that defy logic or reason … and which improbably persists for years…should cause one to raise one's antenna. This is true in every field of endeavor. (And I'm an optimist!)

## Nigel Davies writes:

I read Dr Shinya's 'Enzyme Factor' but found Dr. Servan-Schreiber's 'Anti-Cancer' much better and more thorough on many levels. As a clinical professor of psychiatry who was diagnosed with brain cancer, he undertook extensive investigations of cancer mechanisms and how food/lifestyle can prevent it developing. All of us have cancer cells in our bodies but this disease tends to develop in favourable 'terrain'.

Please note that I've not been diagnosed. But a quick look at the odds makes a convincing case to adopt certain measures in the interest of attempting an extended life span. This is very chess btw; Nimzovitsch, prophylaxis and forcing them to take carry you off to the netherworld kicking and screaming.

# Two Con Men Tales, from Pitt T. Maner III

Amazing how long it can take to bring them to the light of day and justice and people's willingness to give the benefit of the doubt.

The international con artist's tale of deception began 35,000 feet in the air, on a small plane shipping flowers to Miami International Airport.

He was found unconscious on the tarmac under the Arca Airlines plane. It was 80 degrees at 2:30 a.m. on June 4, 1993, but his olive skin was frostbitten and turning blue.

When immigration officials greeted him at Pan American Hospital, he said he was a 13-year-old orphan from Colombia who sneaked into the Arca Airline plane's wheel well. Name?

“Guillermo Rosales.''

That was the first lie.

Now he has matured into one of the world's notorious jewelry thieves, who has escaped prison and dizzied detectives in at least five countries using a slew of stolen identities: A budding doctor studying in Ireland. A Colombian diplomat's son. An English family man. A New York priest. A German prince. A wealthy Bahraini.

The thefts, though, were stunningly similar. In each, he pretended to be a guest at a five-star hotel. Then he'd sweet-talk a member of the staff into getting a room key and the password for a safe. Finally, he'd pocket everything — credit cards, jewelry, cash, passports. Police estimate his total bounty at close to \$1 million.

Story 2:

He seemed like Superman, able to guide jumbo jets through perilous skies and tiny tubes through blocked arteries. As a cardiologist and United Airlines captain, William Hamman taught doctors and pilots ways to keep hearts and planes from crashing.He shared millions in grants, had university and hospital posts, and bragged of work for prestigious medical groups. An Associated Press story featured him leading a teamwork training session at an American College of Cardiology convention last spring.

But it turns out Hamman isn't a cardiologist or even a doctor. The AP found he had no medical residency, fellowship, doctoral degree or the 15 years of clinical experience he claimed. He attended medical school for a few years but withdrew and didn't graduate

# From The Annals of Crony Capitalism, from Don Boudreaux

December 13, 2010 | 1 Comment

Now watch 'laissez faire' or 'market fundamentalism' take the rap:

12 December 2010

Editor, The New York Times
620 Eighth Avenue
New York, NY 10018

To the Editor:

You report that Goldman Sachs, JPMorgan Chase, and Morgan Stanley are using their influence over newly established derivatives clearinghouses to line their own pockets by suppressing competition ("A Secretive Banking Elite Rules Trading in Derivatives," Dec. 12). Now THAT'S a shocker!

Who would have dreamed that these politically connected Wall Street behemoths, after being bailed out with taxpayer money, would now be able to rig – for their own monopolistic advantages - the operation of the clearinghouses that our very own, democratically elected government engineered into existence in the wake of the 2008 financial meltdown? Surely you're correct to describe this surprising phenomenon as an "irony."

Sincerely,

Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

## Gary Rogan writes:

Besides the crony capitalism aspect solving the following concern:

"A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds."

with this result:

"They also share a common secret: The details of their meetings, even their identities, have been strictly confidential."

is indeed ironic.

On a related note I happen to be reading "Crisis Economics" by Nouriel Roubini and Stephen Mihm and they dedicate page 201 to the wonders of derivatives exchanges. With comments like "This idea makes perfect sense, as exchanges guarantee that derivatives will be cleared and settled in a straightforward, transparent fashion." and "In return, the clearinghouse would assume the burden of the contract in the event the counterparty failed. All this helps reduce the problem of counterperparty risk" and the rest of its statist analysis it proves one more time that one should never trust anyone who regularly goes to Davos.

# Funny Films, from Marion Dreyfus

YOGI BEAR 3D

Directed by Eric Brevig With Anna Faris, T.J. Miller,Tom Cavanagh, Nathan Corddry, Andrew Daly, Dean Knowsley

Though we personally know Tom Cavanagh (Ranger Smith), a handsome and dashing neighbor, this film is not so much for children fond of the beloved child icon as it serves to reinforce the annoyed suspicions of disgruntled adults. It features a lovably larcenous food-obsessed Yogi Bear (voiced by the amusingly gruff Dan Aykroyd, whom we have also met, a charming, gallant Canadian) and his short, faithful sidekick-wingman, er, wingbear, Boo Boo (Justin Timberlake).

The bears and rangers exchange volleys and jibes in Jellystone Park, where a bad man, the man-who-would-be-governor, Mayor Brown (Andrew Daley) and his unctuous chief of staff (Nate Corddry) try to sell the hapless and underperforming park to agri interests for mucho dinero to bail out their bankruptcy, though the principals are shocked at such a terrible and unwarranted act of perfidy. The film, lensed in New Zealand (though the car licenses all read Montana), features a peculiar though not unacceptable mix of cartoonlike human-sized man-made 'animals' alongside the winsome humans. Nefarious politicians scheme to sell the park. Rangers Smith and Jones (T.J. Miller), love interest swee' pea Rachel the filmmaker and forest polymath (Anna Faris) and picnic-basket-craving Yogi and sidekick all desperately fight to ward off the clear-cut disaster that awaits their beloved park if it is sold off.

The majority of the 90 minutes teaches unethical and seamy values, only latterly wrapped up in OK and per-the-rules because the filmmakers know it ain't cool to let bad guys and bad messages win out in children's films. After all is wrapped up, it's not clear whether kids will go off siding with the contraption-happy pie-stealing Yogi, or with golden-hearted forest ranger Smith, tongue-tied when confronted with a pretty woman, but decency running through his every stalwart sinew.

How Do You Know

Directed by James L. Brooks

With Reese Witherspoon, Paul Rudd, Owen Wilson, Jack Nicholson, Andrew Wilson, Kathryn Hahn, Dean Norris, Shelley Conn, Brian O'Halloran, Mark Linn-Baker, Tara Subkoff

Is there a cuter presence than Reese Witherspoon in all the movie world? Owen Wilson, a dastardly serial polygamist sport figure, here, is also cute and impossible to dislike, even as a hopelessly Clintonesque cad, as he is here. Paul Rudd, adorable too, as he has been in everything from CLUELESS to the annoying THE 40-YEAR-OLD VIRGIN, is impossible not to like, too–though Brooks gives you no reason to dislike him, as a schlemiel who has little luck but deserves a better fate, and father, than the one he gets here. Dad Jack Nicholson, also adorable, is alas not at all an admirable dishonorable mogul who would rather sell his son down the jail-route river than get himself in Dutch with the Feds. These four do a zesty and nimble pas de quatre worthy of the Rockettes; loads of laugh lines and fresh takes on this Shakespearian switch-up of dosie-do's and many dosie don'ts. HDYK is not a heavy-carb holiday dessert two hours in the Odeon.

TANGLED

Directed by Nathan Greno and Byron Howard

According to the Hollywood Reporter, animated movies have had a tremendous impact on the 2010 box office. Four of the year's top 10 grossers—TOY STORY 3, DESPICABLE ME, SHREK FOREVER AFTER and HOW TO TRAIN YOUR DRAGON– are animated, and then there's TANGLED, which topped the Thanksgiving weekend's chart, and continues strong, while big-ticket vehicles for such as Depp and Jolie falter in the middling teens. MEGAMINDS, another animated feature along the lines of reformed bad-boy protagonists happily-ever-aftering, recalls DESPICABLE ME in a number of aspects, but its script and concept are both fresh and fully engrossing to both adults and (most) children. TANGLED features brilliant colorations, vivid story—a retelling and modernization of Rapunzel—it is an enthralling and charming entertainment, featuring an evil 'mother,' a strong heroine who is not afraid to use her wits as well as her hair, and a smoldering though often-jerky roué on a spirited steed who almost steals the show. For those who unaccountably missed the first through fourth grades, the long-haired Princess Rapunzel has spent her entire life locked in a tower, here because she confers eternal youth on her abductor parent. When she falls in love with a passing rapscallion she risks the trauma of the downstairs outside world for the first time to re-locate this cocky and oblivious brigand. Many witty passages, and risible enjoyment for all.

LE PETIT NICHOLAS

Sweeter and gentler than all the American snark above, however, is the adorable live tale of a young French fellow of some 6 or 7 years. The young hero has a carefree existence, parents who doter on him, a great cache of copains with whom he enjoys enormous mischief and lark. All he desperately wants is that nothing change. Learning that Tom Thumb's parents abandoned him in the woods, and imagining his mother pregnant (he has only sketchy notions of what pregnancy constitutes, from lads equally ignorant), beatific Nicholas, in a panic, schemes hilariously with his mischievous school chums—rich, sleepy, favored, spoilt, daft—to get rid of the brother who has not only not been born yet, he has yet to be conceived. Laughter rolls from the moment the film opens, and the Paris of some 30 years ago unrolls in constant hilarity and delicate amusement. What a delight: No CGI. No stuntmen. No heavy-handed erotic nuances. Just imaginative and frolicsome writing, marvelous direction, unexpected dénouements and extraordinary ensemble performances from tiny tykes and established comic talents cherished in France. Moreover, we remember the pedagogy of the past here, as visions of how education in Parisian arrondissements differs so markedly from its partner parallels in the United States. The film is a magnum flute of the best champagne after a satisfying repast in a four-star French inn.

In French, English subtitles.

# Put Call Ratio Going Berzerk, from Steve Ellison

The traditional explanation of a high put-call ratio was panic by the uninformed public. With the S&P 500 at a two-year high today, that scenario seems quite unlikely. Using another method to evaluate the little guys, the non-reportable positions in last week's COT report were net long 3.4% of the S&P 500 open interest (weighted average of bigs and e-minis). The non-reportable net long position has ranged from 0.9% to 5.2% in the past year.

IMHO, the relationship between the ratio of leveraged-long instruments to leveraged-short instruments on the one hand, and the market on the other, went through a regime change this summer after the Flash Crash. To paraphrase Wally Shawn in The Princess Bride: "I don't think that means what I thought it meant."

## William Weaver writes:

To pose another question to the list: What types of events can cause a regime change in a financial instrument?

To stick with equities, I use consumer spending data to define high vol and low vol regimes as I have found these fundamentals precede market action (not survey data).

Of my three business partners, two who have created models that best my own and use only price, volume, and open interest data.

Composition of OI? i.e. Commitment of Traders? Larry any thoughts on how a strategy may only work with one demographic instead of using the demographic as a signal itself? Maybe ICI data with fund holdings?

Sentiment data?

There was a company a few years back that suggested lookback periods consisted of all the data where a detrended version of price stayed within a standardized range, thus the last spike was the end of the prior regime. The flash crash could be a part of this.

Regulatory/mechanical changes: fractional to decimal, up-tick rule, naked short rules, no short rules, required reserves, etc.

So this gives us a few starting points: fundamentals, price/volume/OI related observations, demographic of a market, regulatory/mechanical, sentiment data and major dislocations in price (I believe this should be separated from the price category).

## David Aronson replies:

Will,

With regard to your question. We have recently added a type of modeling that searches simultaneously for an indictor to define distinct regimes (2 or 3) and then linear models that are optimal in each regime (distinct range of the regime indicator). I have not done much with it yet but we were motivated to add this tool because of the phenomena that you talk about in your post.

# SPX to House Price Ratio, from Kim Zussman

December 11, 2010 | 2 Comments

Thanks to rallying stocks (and no thanks to housing), net worth of Americans is approaching pre-crisis levels.

Using Prof. Shiller's housing price data, constructed a ratio of SP500 to house price index 1950-August 2010 (attached). His data is annual through 2006, and (approximately) quarterly after that, as seen in the attached chart.

The ratio of SP500 to housing hit a many year bottom ca 1981, then rose phenomenally to the peak of the tech bubble in 2000. The ratio crashed after that; bottoming around early 2003, and since then has remained fairly stable except for a drop in early 2009.

Recent government efforts to reflate assets appears to have been more successful with stocks than house prices. This may continue as QE2 has not been having the desired effect, and mortgage rates shot up from many-year lows recently.

Should QE fail to reflate the real estate market, there is a risk of further decline in house prices, more loan delinquency and foreclosures - a kind of positive feedback loop. To avoid this (and keep people happy– the same ones who are unhappy with the recent tax deal), the government could force lenders to write off mortgage principal on distressed properties– moving losses from mortgagees and the real estate market to lenders, and of course upper income taxpayers in future years.

Attached is a chart of the gold price divided by the Case-Shiller nominal housing price index.

# The Art of Survival, from Jim Sogi

98.6 Degrees: The Art of Keeping your Ass Alive , Cody Lundin is the best survival book.

The key to survival is to manage fear, keep warm and hydrated.

The key to survival is mental. Survival at its basic requires maintaining core temperatures and hydration. Fear has grave physiological effects on circulation, metabolic processes, judgment, and attitude. Fear can kill. Failure of judgment due to fear, panic, anxiety, causes bad errors of judgment that lead to death. Fear destroys fine motor coordination. Many outdoor deaths are due to simple hypothermia. Food is not the problem as most can live for days without food. Most survival scenarios last only three days. Water and core temperature are key. Physiologically loss of 2% of weight in water reduces judgment by 25%. Basic preparation requires adequate clothing and water, not just for the day hike, but for unexpected adverse weather and duration. Lundin discusses the physiological aspects to prove his points. Preparation should be basic, clothes, water, fire.

Applying survival lessons to markets is worthwhile as trading is a performance endeavor. The physiological aspects must be considered in addition to the statistical, the macro and qualitative. Sleep, fear, mental aspects and even hydration are key. 3/4 of you are chronically dehydrated. Dehydration is often confused with hunger and fatigue.

The second excellent book is First Aid, A Pocket Guide by Christopher Van Tilberg. It is a basic rundown of back country first aid procedures in a checklist form of the major injuries and treatments.

## Rocky Humbert writes:

Try trading without electricity, telephone, and even Windows/XP/Linux!

The "modern" "self-reliant" speculator is as dependent upon the Lineman climbing the telephone pole as he is to the Chinese factory worker who assembled the replacement step-down transformer which failed due to the weather; as he is to the FedEx driver who spent the night delivering the replacement part.

Our complex and specialized society is dependent upon the countless people who all get up each morning and do their jobs creating a sum that is greater than the parts.

A modern speculator cannot function without water anymore than he can function without the vast and dynamic human and capital infrastructure that is modern society.

As the saying goes, "for want of a horseshoe nail, the kingdom was lost."

# Madoff in the Local News, from Pitt T. Maner III

Holder called Palm Beach "ground zero" for Madoff. Several mailings have arrived related to Madoff auctions– but who wants his stuff– like having a clown painting done by John Wayne Gacy. Bad luck.

I have not kept up with the case but the "Shiny Sheet" has tracked it locally.

Some money is being returned. One would think all of the truly honest, capable of doing it, would volunteer to return stolen money with interest.

# We Are All Conformists, from John Tierney, President of the Old Speculator’s Club

"The philosopher Hannah Arendt famously argued that the atrocities of the Holocaust were not caused by psychopaths but by ordinary people placed under extraordinary pressure to conform. Since then we have learned that the pressure need not be extraordinary at all. In fact, it may not be experienced as pressure, but as relief. Human beings are herd animals. We survive only in highly coordinated groups…The visible courageous individual is but the tip of a social iceberg. When you go against the group, you do it not on your own, but in the name–and with the backing–of another group. In other words, we can't avoid conformity."

From an Psychology Today article on conformity.

There's some interesting conjecture (some of it quantified) at the website indicated. Also interesting are the additional links provided to the tests done by Muzafer Sherif, Solomon Asch, and Stanley Milgram. Their "experiments", though limited in scope tend to support Arendt's contention that our "individual courage is a manifestation of group convictions and affiliations." Despite our most strenuous objections, we are all conformists– even those opposing the dominant conformist opinion, are conforming to a nascent opposition conformist view.

While I find the theory depressing, it could, if enough information were collected, sifted for relevancy, and interpreted correctly, provide real market insights. The studies seem to indicated that the dominant conformist meme will eventually be supplanted by another early stage body of thought which, regardless of merit, will dictate the next opinion-shaping, market-controlling mind set.

I believe a current topic, Bernie Madoff, provides a good example. He seems to be taking his place with Nixon and McCarthy as men who have committed an unforgivable sin against their brothers. However, why does he deserve this?

Certainly he bilked many out of billions– most of them quite wealthy, most of them reaching for that extra little bit of yield not available to those amongst the hoi-polloi. Yet it is this group that is most regularly fleeced by financial fraud and misrepresentation. But it not unusual for the few perpetrators who are caught to receive a mild wrist-slapping and, within, an acceptable period, re-entered into their former sphere.

What seems to be overlooked is that many of those fleeced by Madoff (e.g., Cage, Bacon, Sedgwick) have ample time and opportunity to re- establish their wealth, or a goodly portion of it. The poorer victims of the less publicized bilkings quite often have neither the time nor opportunity (nor the sympathy) needed to come back.

The once-upon-a-time conformist meme was: "Thou shalt not steal."

Its more modern incarnation seems to be: "Thou shalt not steal from the wealthy."

# The Importance of a Manuscript, from Alan Millhone

Bowling and the Market.

Every Saturday watch my two grandsons league bowl. They try to make a strike each time they are on the lanes much like the trader attempts a perfect trade on each trade execution. Bowlers do their best to stay out of the gutters as the trader attempts to avoid bad trades and stay on course. Overhead monitors keep score and also show how to pick up spares. The Dow etc also has overhead screens to track the Markets. The hand written stock trader manuscript serves a similar purpose of tracking prior errors.

Regards,

Alan

# Stat Question, from Phil McDonnell

Assume a random walk with no bias. If one puts a limit order at a price below the market where the trading vehicle has a 49% chance of being below after a certain period of time, what are the chances the limit order will be filled during that period of time assuming a normal distribution?

Hint: The solution involves the Reflection Principle. The answer is very simple.

## Steve Ellison writes:

The Reflection Principle is that the probability of touching a given price is twice the probability of the final price being below the given price at the end of the period. Thus the probability of the limit order being filled is theoretically 98% before considering the possibility of the order being too far down the order queue or too large to be completely filled.

For what price is there a 49% chance the final price will be lower in a random walk? One tick down?

## Phil McDonnell replies:

Steve Ellison has it right. The probability would roughly double to 98% of getting a fill on a limit order because of the Reflection Principle for the given problem.

It is good to note that the probability depends on both volatility of the trading vehicle and the amount of time it has to run. For example SPY has an annualized volatility of .1014. It closed today at 124.48. I show the probability of it being at or above 125 on the third Friday of February as 49%. So if I entered a limit order to sell at 125 and left it in until the third Friday in Feb then I should have about a 98% chance of getting filled.

In comparison the chance of a SPY fill at a limit of 125 by next Friday is only about 78% so time matters as well as price.

# Food for Thought, from Kim Zussman

"managed futures" or mismanaged
"hedge fund" not always
"mutual fund"  for whom?
"real estate" how quaint
"metals" and then some
"softs" unless down hard
"stocks" if the government says so
"bonds" till death do you part
"Federal Reserve" indeed
"inflation" of faux determinism
"deflation" after 60
"taxes"  and taxes

# Review of The Fighter, from Marion Dreyfus

THE FIGHTER

Directed by David O. Russell

A true story, give or take, THE FIGHTER is a look at the early years of boxer "Irish" Micky Ward and his brother, a well-regarded fighter, himself, who helped train him before going pro in the mid-1980s.

Mark Wahlberg (Micky) was recently showcased in a 60 Minutes segment showing his actual Mean Streets youth and adolescence; echoing his own beginnings, the film is a hard-scrabble slog through ring training and bloody center-ring battles, usually waiting for Micky's coked-out, priapic brother, Dicky Eklund, an outstanding, skinny-as-an-optic-fibre Christian Bale, and homing in on the shanty Irish clan headed by the spot-on Melissa Leo (Alice Ward), who changes so galactically from film to film that you can barely recognize her from one mousy or intransigent or impervious role to another. The believable and plucky Amy Adams, Micky's stolid girlfriend, is a college grad doing barmaid honors in the 'hood in the rough economic weather of the early 80s. As Charlene Fleming, she gets called every name in the book by Micky and Dicky's seven decidedly uncollegiate sisters for interfering in his abusive familial 'training' under the drug-addled Dicky and their indefatigable, if not-so-thoughtful manager, Alice. The clan call her simply Alice, rather than mom, because she is a hurricane-force gale wind, wiping out her husband's–and Micky's–objections to fights or fight-matches, arrangements, set-ups and gigs.

Wahlberg undergoes the punishment you expect. If you heard him speak of his early tribulations as a street tough and thief; here, his fights are gruesome, often against mismatched fighters, until they are not. He has no stunt double, by the way.

Director Russell captures the gritty living of this tier of outliers in the lower-middle-class battle for a toehold. The audience can feel the punches, almost needs a towel for the out-spritzed flopsweat from the onscreen fights. But as often as there are admirable moments in the neighborhood, living conditions, eating habits and even the unceremonial sexual hookups, viewers are more often scrunched in their seats emitting unwonted Oo, ugh, eek! in sympathy with the protagonist, who gets his share of knuckle-jabs to the eye-socket—much like that prior fight film, THE WRESTLER, where Mickey O'Rourke got hammered, torn up and ripped to near-shreds by his rent-a-rink-opponents.

FIGHTER may not be for everyone. Lest you think it's girly-girly delicacy, I very much liked TYSON, which became almost lyrical toward the end of that biopic, and enjoyed WRESTLER, too, because it showed a broader arc of the life and misery of O'Rourke's character, as well as his climb from the depths. I liked MILLION-DOLLAR BABY less, though that is probably because I did not buy lissome Hilary Swank as a prize-fighter (though she too rose from the ranks from trailer-park ramshackle).

This film is well-directed, well cast, and even better observed, but may not be the entertainment some seek for a respite from the wintry doldrums. It casts a chill, when the temperature does that before you sit down to watch.

# The Causes of the Civil War, from Stefan Jovanovich

December 10, 2010 | 2 Comments

What were the "causes" of the civil war? For the South, it was about slavery; for the North it was about Union and the Constitution. The assertion of the right of nullification and other "states rights" by South Carolina as early as 1820 was over the issue of slavery - specifically, whether the U.S. Constitution's prohibition of further slave imports could be ignored. Where Jeff is right is in saying that the doctrine of states' rights did not apply only to slavery. The New England states were the first to assert it because of their outrage over Jefferson's Embargo. Where Jeff is wrong is in what he writes about most Southerners having never "met a slave". There were slaves in every county in the South; they show up in the Census records. Even the strongest Union counties (eastern Tennessee, western Virginia) had slaves. The fact that most Southerners were too poor to own slaves did not mean that slaves and slavery were not a part of their daily experience. Slaves were the South's primary capital assets; their market value dwarfed the investment in machinery and transportation equipment. Anyone fortunate enough to make money would invest their savings in slaves; they were valuable and durable property (far more so than horses, for example) and as easily tradable as stocks and bonds today.

I can understand why so many people still want to turn the discussion to questions of states' rights and the awfulness of what Union armies did as they marched through Georgia and elsewhere. They are certainly right about the awfulness; you can still see its effects today if you have the eye to see them when you drive through the South. And, it would be so much nicer to believe that the posthumous rehabilitation of Abraham Lincoln (the man who has been Scott's single purpose explanation for all subsequent authoritarian abuse in American history). Even now you can hear people argue with a straight face that, but for Lincoln's assassination, there would have been a perfect reconciliation after Appomattox; it is the Birth of a Nation version of American history. (I heard this just this fall while visiting the national park there; one of the docents was explaining at length about how there was no real conflict between North and South once the war ended. I showed my usual tact in muttering in my not so little voice: "Yeah, right. And the British would have had no lingering animus towards the Germans after 1945 but for Hitler's refusal to surrender." as I left to wander the park on my own.)

We Southerners have to deal with the same difficulty that the French have to face when they consider what so many of their ancestors did in Second World War: the fact that so many of them took the wrong side - morally. (Thank God none of us have to shoulder the burdens of what the Germans and Japanese have to deal with in their history from 1930 to 1945.) The French have to admit that a thousand times more of their parents and grandparents actively collaborated with the Nazis than fought in the Resistance. They also have to acknowledge that Vichy was not engaged in passive resistance; they chose to side with the Germans. (Until D-Day the largest number of American casualties from an amphibious landing in any theater of war had come at the hands of the French in the landings in the North Africa.) For us Southerners the difficult fact of history is that many, many white Southerners in 1860/1 (but not my ancestors) thought the states' rights doctrine was a specious rationalization for secession in the name of slaveholding. As many as 1/4th of them supported the Union, and they did so because they, like most Yankees, were willing to tolerate slavery where it already existed but they also knew that slavery was morally wrong and hoped and prayed that it would fade away.

When Condoleezza Rice's father went to register to vote and answer the poll questions in Birmingham in the 1940s and 1950s, the chairman of the Jefferson County Republican Party (a descendant of those same white Southerners) would accompany Dr. Rice to the courthouse and stand with him while he took the test and had it scored. This was a purely symbolic act since Dr. Rice was one of the few people, white or black, in Jefferson County who could successfully pass the examination; but it was a real legacy - nearly a century later - of the fact that most of the Scalawags who supported Reconstructions were white Southerners themselves, not Northern carpetbaggers.

### Dec

#### 10

December 10, 2010 | 3 Comments

The Collab points out that Ron Paul is taking over the Fed oversight panel and he promises it will not be a rubber stamp. "Skip to my loo" as Stubby would say and what consternation there must be at those marbled floors, and the executive dining halls. To say nothing of how bearish it is for the market if the flexions will not find it as easy to chip the first billions off the top of the find. (Pitt help me with the proper geological thing).

## Pitt T. Maner III replies:

A few geological metaphors and terms I think Chair is looking for…

Overburden provided by oversite members of the Party of the Elephants?

Marble is of course metamorphized limestone created by heat and pressure– an appropriate stone for the floors of the deliberaeors.

Styolites are those wonderful pressure solution features that make marble so attractive.

## Vince Fulco writes:

It would also seem a strange twist of fate that the Dems are verbally pushing back hard on the tax/unemployment deal Obama reluctantly agreed to. He may find himself more isolated than he ever imagined soon.

## Gary Rogan writes:

He knew that he would be isolated from the very beginning. The extra significance of how quickly he reached the deal and how quickly he changed his position from "no likelihood of a double-dip" to "we will get a double dip if we don't pass the measure" is that for the first time he provided an important tell that he cares more about reelection than ideology. He basically threw his base under the bus because the positives for his reelection outweighed the negatives in a very complex calculation.

Neither party (if you think we actually have two) shows any real effort to rein in deficits. But I agree that it won't go on indefinitely…

## Gary Rogan writes:

Well, clearly some portion of the population responded to the bewildering decay around them with some degree of cohesion. The two parties are not some static entities with permanent agendas, and that's why saying that Bush "your own man" creating multi-billion dollar deficits is proof positive that nothing will ever be done doesn't work. Politicians do respond to the mood of the country over time. Ron Paul will have now a platform to accuse gentle Ben of mortal sins, the same Paul Ryan who voted for the TARP and bailouts will channel Von Mises and Mitch McConnell will support the ban on earmarks because of the "important symbolism". This is a rich country with a lot of assets to sell if push comes to shove. Until recently I saw absolutely no path to stopping the madness in time, and it may be too late, but when Jon Stewart stars mocking Bernanke and Bam can talk about the connection between taxes and recessions, as opposed to stimulus and recessions, the future at least depends on whether the voters will continue to stay involved as opposed to being completely hopeless.

## Rocky Humbert writes:

Moving the conversation back to the markets, (which I justify as my reason for participating on SpecList), I note with interest, Mr. Rogan's comment: "Alan, I see a lot of the same things. I've seen them for two years. But I see some positive future results from the recent political changes. The tax deal was more notable for it's speed and cooperation at the top than anything else. Even with the rising rates I now like stable dividend payers and have acted accordingly in the last two days."

Mr. Rogan: I welcome you with open arms to the camp of us optimists. It is admirable when people publicly change their opinions when they believe the facts have changed. I believe Winston Churchill got it right when he said: "Americans can always be counted on to do the right thing …. after they have exhausted all other possibilities." (It just took you a little bit longer to realize this than did Winnie.)

In my humble opinion, however, stock markets are tricky beasts — and during the past two years, while you were cooking spam over sterno in your bomb shelter, the market capitalization of US equities increased by approximately \$8 Trillion — with a most notable inverse correlation between President Obama's popularity and US stock prices — this phenomenon climaxing with last month's election.

Given the extremely low levels of the President's current popularity plus Zeno's Paradox, a new convert to the cult of equity should pray that this anti-president correlation breaks down in the months ahead…resulting in a Clinton-esque p/e expansion. However, I do believe that your dismissiveness of the bond vigilantes seems imprudent, and I believe is a huge risk that only increased with the "quick" tax deal.

Lastly I want to go on record as wishing you all the best in your stock purchases, and look forward to chocolate, roses and champagne in your future posts as your portfolio optimism translates to your verbal optimism.

# Qantas Explosion– from the Cockpit, from Nick White

December 10, 2010 | 1 Comment

This is an absolutely brilliant interview that is full of insights for the market. The interviewee is one of the pilots aboard the Qantas Airbus A380 last month that had an extremely serious uncontained engine explosion shortly after take-off.

In the interview they cover - inter alia - such things as

- The importance of checklists
- Over-riding systematic considerations in favour of discretionary controls
- Keeping your head during a major catastrophe which constantly shifts its dynamics and has a lot of what we might call negative gamma…rapidly developing, interacting, non-linear issues that can rapidly move beyond your ability to keep up with them
- The importance of training and professionalism
- The importance of excess redundancy and robustness
- The importance of improvisation - and the ability to keep a clear enough head in a panic to ensure your creativity can be brought to bear on the problem.
- Power of teamwork.

Best part are the pictures of the cockpit showing the checklists and procedures they are working through.

As it turns out, this incident was very much more serious than the media ever picked up on. What an amazing story. I'm sure all will benefit greatly from reading this. For myself, I will be referring to this interview many times. A banquet for a lifetime.

Hope it benefits you all as much as it did me. Also hoping Mr. Tucker weighs in with some insights!

## Chris Tucker writes:

Thanks Nick, a nice summary of some of the lessons available from this.

I would add the importance of prioritizing. As Captain Evans points out in the interview, one of the golden rules of aviation is "Aviate, Navigate, Communicate - in that order". This is drilled into every pilots head from their first day of ground school. Keeping the aircraft in a stable flight path is the number one priority, dealing with malfunctions is secondary.

Another aspect of this incident is the importance of a thorough working knowledge of your systems. Today's airliners are complex systems in the extreme. It is fortunate that, according to the New York Times.

The pilot in command, Richard de Crespigny, spent the last two years researching the airplane and its engines for a book, according to Richard Woodward, a safety representative for the international pilots union and a Qantas pilot who says he has spoken to the crew of Flight 32. "His technical knowledge of the airplane is very deep," Mr. Woodward said.

Deep knowledge of your systems is what guides you when you need to decide what to pay attention to and what to disregard.

Another aspect of this incident which it shares with the Hudson River Miracle , in addition to having some of the most experienced pilots in the airline at the controls, is the preponderance of good fortune (after the initial really bad stroke of luck). To consider: It was daylight and the weather was amenable with clear skies. This is huge. Had it simply been raining, it is not clear that the aircraft would have been able to stop safely within the length of the available runway. The fact that the engine failure was not contained is disturbing. (see the Rolls-Royce Trent 900 engine in a blade off containment test at time 1:52 in this video )

An uncontained engine failure such as the one experienced by Qantas flight 32, although it caused tremendous damage, did not cause immediate catastrophic damage to the airframe or flight control systems. This is either a testament to the robustness of the aircraft or blind luck, probably a little of both. Things could have been much, much worse, as in the United 232 accident in Sioux City, Iowa.

In the end, Captain Evans remarks that it all comes down to common sense and airmanship. Flying is a job that inspires passion. I know very few pilots that are not totally in love with what they do; their dedication to their craft and willingness to never stop learning is a result of this and it is what keeps you and I safe when we entrust ourselves to their care.

# Letter to the Editor, from Donald Boudreaux

December 10, 2010 | 3 Comments

Quoting Confucius: "When words lose their meaning, people will lose their liberty":

9 December 2010
Editor, Los Angeles Times

Dear Editor:

You write that "Washington's compromise on estate taxes provides an unnecessary handout to a few thousand wealthy families" ("The state of estates," Dec. 9).

Whatever are the merits, or lack thereof, of a tax on estates, you are deceptively wrong to call a decision not to raise that tax a "handout." Because taxes are paid from resources created and earned by private citizens, resources that are not taxed are not "handed out" to the people who created or earned them; these people already rightfully own these resources.

It makes no more sense to describe government's (non-)act of not raising taxes as a "handout" than it does to describe my (non-)act of not stealing your purse as a "handout." Failure to understand this fact creates the mirage that government is the source and original owner of all wealth. Not only is such a notion of the state utterly false empirically, it is also - because it is a close cousin of the notion of the divine right of kings– the seed of tyranny.

Sincerely, Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

# Dangers of Behavioral Economics, from Gary Rogan

December 10, 2010 | 1 Comment

For a while now I have written about the rising dangers and misuse of behavioral economics. The author of this article agrees and goes a lot further.

The rise of behavioural thinking in economics and finance subordinates scientific measures of well-being, underestimates human potential, stymies the pursuit of rational debate and, ultimately, hampers progress writes Ben Hunt.

# A Structural Geology Course, from Pitt T. Maner III

A structural Geoology Course given by UF Professor Channel 28 years ago was quite a challenging one to pass. It's a good field to study and pursue though if you like to travel and hike in the Alps (where many classical exposures are present) and drink Gold and Kirschwasser in stuffed leather chairs by a warm fire.

Structural geology can involve complicated field detective work in order to reconstruct the time sequence of various stresses and strains placed on rocks in 3 dimensions. There are all sorts of notations…S1, S2, F1, F2 etc. to denote the first stress direction, the folding direction and on and on. Often fossils in the rock strata in question are looked at to determine what stresses have distorted their known original shape.

It would be like someone handing you a penny flattened on a railroad track and you trying to decide the amount and direction of the forces involved that caused the distortion of Lincoln's profile.

Some of the most unusual, colorful and esoteric vocabulary has been developed to describe various, geological structural features. A visual classification scheme has developed that tries to account for the probable orgins of landscape features.

I suppose various economic outcomes, somewhat predictable structural patterns and "landscapes" develop from known inputs and stresses (interest rates, monetary policies, currency rates, etc) over time even if more ephemeral than the geological ones.

But what to make of this wonderful example of "chocolate tablet boudinage". How would you determine the original competency of the rocks and then the stress field and timing of those forces that created it?

Structural geologists have sometimes used pizzas to explain the type of reasoning needed to unravel the sequence of events leading to deformation.

# Observations from the Field, from Alan Millhone

To a rube like myself I see a weak dollar. More mortgage problems. Continued unemployment. Inflation.

To me metals has to be good as a hedge. Bank CD's are a joke and will be for several years. Money market accounts the same dismal returns.

The average person has little to no faith in our government. We are engaged in two more Viet Nams where political correctness holds back our generals from winning.

These are just my own personal observations as a 62 year old small businessman from Southern Ohio. I love America but am badly disappointed in our leaders.

Regards,

Alan

# The Return of Bo, from Rip Mackenzie

December 10, 2010 | 1 Comment

Here is a nice piece on Keeley by Art Shay.

# Predicting the Future with 100% Accuracy, from Rocky Humbert

The always provocative Steve Landsburg (author of "The Big Questions") this morning highlights a math paper with a theorem that allows one to predict the future with 100% probability. It's titled "A Peculiar Connection Between the Axiom of Choice and Predicting the Future". I'll leave it to Dr. Phil and other greater minds to decipher the Greek. However, I suspect that this paper was published in 2008 may not be a coincidence!

# Vintage Ayn Rand on Youtube, from George Zachar

December 10, 2010 | 1 Comment

Hunting for a lead to the current Atlas Shrugged film, I came upon this vintage 2:39 youtuber of Ayn Rand on the Phil Donahue show, talking about Israel.

The best part of the video is Phil Donahue's suggesting that Ms. Rand is being ill-mannered in her description of the Arabs. Surely, the cultural gaps can be bridged if only people will sit down together and discuss the matter. It is very much like Lackey's gentleman, Robert E. Lee, discussing a gentleman's ability to forget. Lee's greatest admirers wanted the Unionists to forget that they had won the Civil War and everyone - North and South, East and West– to forget that minor cultural difference called slavery. If only those pesky Jews would stop remembering what those nice Arab people keep saying about them, everything would be just fine.

# A Product of Good Parenting, from David Hillman

This kid makes one proud to be a human being.

"Keith Fitzhugh chose operating trains over a shot at a Super Bowl. The free-agent safety turned down an offer to join the New York Jets to remain a conductor with Norfolk Southern Railroad and stay on track financially while helping support his parents in Atlanta.

Fitzhugh's father, Keith Sr., is disabled and unable to work, while his mother, Meltonia, has been struggling to make ends meet."

'tis the season…..

# Hobo is Back, from Victor Niederhoffer

Hobo is back. A good story he wrote was published by Swans Commentary here.

# Caroline Baum Talks Bernanke, shared by Gary Rogan

Caroline Baum on Bernanke's performance:

What's so troubling about the Sunday interview is that it wasn't Bernanke, the media-shy economist, talking. It was a politician attempting to bolster confidence in his constituents and support for his policies. That's not an ideal character trait for a central banker at a time when official interest rates, already close to zero, can only go up. The opposition from Congress to any rate increase will be intense, especially when the Fed will have to embark on its journey to normalize rates well before the unemployment rate falls to an acceptable level.

# Why Old Fogies Buy Treasury Notes, from Rocky Humbert

Let us not forget that the reason old fogies buy treasury notes is to receive a positive real return over their holding period, rather than engaging in some sort of fancy i'm-smarter-than-the-next-guy leveraged speculative antics.

Are these not-so-stupid antediluvians salivating to buy bonds after this shellacking– taking long positions off the hands of catch-the-falling-knife-regardless-of-value speculators?

The real yield on the 5 year TIP is now (drum roll please): 00.01%

As my mom used to say when she gave me my fifty cents allowance.

"Don't spend that basis point all at one time."

(P.S. My mom didn't know about moving average crossovers.)

# On Setbacks, Slumps, and Ever-Changing Markets, from Brett Steenbarger

December 8, 2010 | 1 Comment

Hi Vic,

I thought I'd pass along some lessons I've learned of late working with a variety of portfolio managers. Please feel free to share with Specs, should there be more than a daytime meal in the observations:

Maslow one commented that, when all you have is a hammer, you tend to treat everything as a nail. So it is with psychologists that involve themselves in markets. Lacking an understanding of actual speculative strategies and tactics–not to mention portfolio construction–they reduce performance problems to the lowest, psychological denominator. In so doing, they confuse cause and effect: they observe frustrated traders and assume that relieving frustration is the key to making money.

The professional speculator, unlike the retail daytrader, rarely falls into performance problems because of derelict discipline or runaway emotions. Rather, it is the very competence of the professional that leads to performance challenges. *It is when pros are most in sync with markets, identifying and profiting from themes and patterns, that they are most vulnerable to ever-changing patterns of direction, volatility, and correlation*. The confidence that permits healthy risk-taking under the best of speculative conditions inevitably gives way to confusion and frustration when skilled participants are no longer in sync with their markets.

The wise speculator utilizes this confusion and frustration as information: they often are early signs that something meaningful has shifted in the marketplace. The proper intervention in such circumstances is not to quell the frustration with psychological exercises. Rather, it is to extract the information from the situation and feed that forward into strategy and tactics. Very often, today's bad trade was a good trade in yesterday's regime: there is information in that.

It is when the confusion and frustration are taken personally, as threats, that setbacks are most likely to turn into slumps. If one stops looking for ever-changing market patterns, then the only other source of changed performance is oneself. The internal focus leads to altered trading behavior, much as a pitcher experiencing a control problem might start aiming the ball and altering his delivery. Such alterations begin vicious cycles of diminished performance and unhelpful adaptations.

Ironically, in embracing ever-changing patterns–and the inevitable responses to those as regimes shift–traders are most able to make helpful adaptations. It is when good trades turn out to be losing trades that speculators gain some of their most important information about markets.

B.S. Humbert

# Rabelais, from Jeff Watson

December 8, 2010 | 1 Comment

It has been of great pleasure to me whenever anyone accuses me of being Rabelaisian. While that accusation might be considered to be offensive to some, I take it with high praise. Here is a great source of quotes from Rabelais, not enough for a meal of a lifetime, but enough for a good snack.

# Letter to the Senator, from Don Boudreaux

What an embarrassment to me and my fellow New Orleanians.

Quoting Thomas Sowell: "Let's face it, politics is largely the art of deception, and political rhetoric is largely the art of misstating issues" :

7 December 2010

Sen. Mary Landrieu U.S. Senate Capitol Hill Washington, DC

Dear Sen. Landrieu:

Your negative reaction to the proposal not to raise taxes in January on upper-income Americans is– and I quote– "We're going to borrow \$46 billion from the poor, from the middle-class, from businesses of all sizes basically, to give a tax cut to families in America today that, despite the recession, are making over \$1 million. This is unprecedented."

*No. Because allowing people to keep more of their own money is not itself an expense, any borrowing Uncle Sam does as a result of reduced tax revenues is a consequence of your and your colleagues' refusal to cut spending by the amount of the revenue reduction.

Moreover (not that it matters as far as the principle is concerned), but how difficult can it be to cut \$46 billion in spending from a \$3.8 TRILLION budget? Is it really so difficult, so cruel, so illiberal to reduce federal-government spending by 1.2 percent?

Sincerely, Donald J. Boudreaux Professor of Economics George Mason University

# A Poem About my Gmail, from Kim Zussman

Stop at the market

And stock up on some swill

# What’s Wrong With Republican Messages, from Victor Niederhoffer

December 7, 2010 | 13 Comments

You would think that the republicans would be smart enough to have an answer to the meme going around that "bam insisted that unemployment cuts be extended as a trade off to allow the rich to keep their tax breaks". That message makes the democrats the heroes of 99% of the voters. Instead the message should be that "the repubs insisted that the current tax rate be continued for all as almost all the jobs are created by the firms and savings of those that make the big bucks. Further the incentive to get into those brackets is one of things that makes everyone work hard, and makes USA the land or opportunity. Further the idea of singling out one group to pay a much higher % of their income than others is the kind of thing that leads to a zero sum, hatred of one group against the other society that leads to the kind of thing that happened in Germany before they put all the Gypsies and Jews into the concentration camps."

Vic's polling needs adjustment. The poll questions on the tax rates have built-in skews: Question 1 - "Should taxes be raised during a recession?" gets a resounding No. Question 2 - "Should the rich receive a tax break?" gets the same answer. The only times in American political history that Republicans have suffered at the polls is when they "compromise" and allow tax rates to increase. ("Read my lips" is the most recent example, but Hoover is a better one; the 1932 landslide was primarily a function of Republicans staying home after Hoover raised taxes. The comparison with Germany is suspect. The Weimar hyperinflation and its Austrian cousin both came in societies where wages were fully-indexed. Imagine our golden state with nearly EVERYONE working for the DMV and getting automatic pay raises linked to the Fed's rate of monetizing the debt; that was Weimar and Schumpeter and Hayek's Austria. The Gypsies and many of the Jews were an easy target precisely because they were the people who had been excluded from the comfortable union arrangments and they adapted to the hyperinflation far better than the civil servants did. But, the greatest support for the Nazis came from the shopkeepers and small farmers who were ruined, who got literally squeezed out of business by their inability to match costs with selling prices in a world where the bill for dinner changed depending on when you ordered the meal.

# Slippage, from George Coyle

December 7, 2010 | 1 Comment

Does anyone have good thoughts or conventions on how to factor entry/exit slippage in futures markets? I am trying to find a general rule and google searches of academic papers result in not a lot and what I do find is a bit in excess for my needs.

My thought was to assign a rule such as when my entry/exit sizes combined total <0.50% of the average daily volume it would be safe to assume 1 tick worth of slippage per side. Ex. bid/ask 500/500.25 then assume sell/buy price at 499.75/500.50 (assuming a market that trades in 0.25 increments). Granted this would not happen in all instances but very likely not all fills would be at disadvantageous levels so the average slippage over time of this magnitude seemed fair. The scale could be increased as the percentage of average daily volume increased (i.e. <1.5% assume 2 ticks, <3% 3 ticks, etc.). A time of day factor might also be useful (i.e. pit vs electronic hours) as the liquidity is certainly better at peak trading times. Without very robust data this is difficult to test/determine so I wanted to see what the specs think.

It depends on the market and also on news of the day. Sometimes there's no slip at all other times it's massive so a decent trader would factor such things into his or her trading style; the problem is mechanical systems have trouble doing that which an individual can do.

## Phil McDonnell writes:

There is no slippage with limit orders. Either you get your price or do not trade. If your testing can make a decision based on previous time periods. Then a simulated limit order can be placed. If the low for the next period is below the limit then you got filled on a buy. If the high is above the limit then you know you got filled. The tricky case comes in where the limit is exactly equal to the respective extrema. In that case I would suggest two ways of testing.
1. Assume 50:50 chance of a fill, take them at random.
2. Assume no fills at the exact bottom tick or top tick.

I recommend doing both tests. The 50:50 is probably realistic, but the no fills scenario tells you if the system might depend heavily on getting these top and bottom tick trades.

## Larry Williams writes:

Phil's point is why I buy a small partial position on stop, then rest on a limit. This has helped my short term trading a great deal.

One should always be a gentleman here. How to trade is the easy part. How much to trade, when to trade and when to exit a trade are the difficult questions.

You can get partial fills, sub penny or fractional orders. Your limit is like a big round number for order sniffers HFT's other traders once made public. Everyone knows we should scale into positions.

When volatility is very low and liquidity is very high it's much easier to enter with out slippage.

The original mechanical question should be adjusted for volatility. I remember 2 times in year 2000 and again in the fall crash of 2008 where I used basically market orders with a price limit. Simply bidding through the current price to start + X ticks to start a scale or to end one. Back in those days the markets might rally 3% in an afternoon so you had to get some on.

Opens and closes are best to use at the market orders. However for the mechanics market at open or closes can be the best or the worst price of the day then your in either deep trouble all in on the high tick, a trend down or lucky you caught a trend day up.

The problem has been that since the markets have become more mechanical its the big up opens that continue to go up and the down opens that have gone straight down. These are order ladders and the moves are over by 10am. It was confusing to see the markets gap big and the entire day over by 10 or 11am. Now we are used to it…perhaps time for a change.

What is wild is to see the govie bond markets move a couple percent a day and the SNP move 1% and the ebbs and flows between stocks bonds and those indexing commodity etf's for investment over the next 100 years are guaranteed to lose.

## Chris Cooper writes:

I often have the problem called "adverse selection" with my limit orders, in forex or futures. This is not a problem with small orders, but when your order is larger, you may (frequently) see a partial fill, then the market turns around in your favor and you make a profit. But the profit is not as large as it would be if your order had been filled to completion. The times when your order is completely filled, the market has moved through your price point and past it, usually. You are sitting on a loss if marked to market, and that loss is for your entire size. In other words, you get the bad fills when you really want to be filled, and the good fills when you don't want them (in retrospect). It's a big problem for short term trading.

Similarly, in markets with a long order queue such as ES, by the time your order is filled the market has pretty much moved past you and you are sitting on a loss. Unless you can play games with pre-positioning your order in the queue, you will always see this slippage with limit orders.

## Jonathan Bower writes:

You "could" avoid posting your limit order for bots, hfts, etal especially if it is of consequence (size) by working it semi-"silently" in an attempt to not get "screwed". One of the earliest execution algorithms was the "iceberg" where a limit order could be placed in (user defined) pieces, once taken out another one will replace it until your order is filled. Of course this is easy for those who want to to sniff it out. More recently you can add variance to your lot size firing in somewhat random orders as part of an iceberg. Or you could set a timed order to release a limit order (or combination of orders) based on a print, bid, or ask with what/if OCO ammendments, etc etc etc.

The bottom line if you need to be and can be creative with order execution especially in illiquid markets. Of course being right about the trade idea is still the hardest part…

GLOBEX does not have liquidity that is as good as the forex interbank market, especially in the Asian hours. If you are trading smaller quantities, in New York hours, then futures are a better choice than forex.

If you are not getting filled when you should be, then your forex broker probably has what is called a "last look" provision in their system. This allows the liquidity providers a chance, say for 30 seconds, to decide not to fill your limit order. This has been an annoying problem for me in the past. The solution is to switch to a broker without this provision. It could also happen if your broker is not an ECN, and in that case you should find a new broker.

There were (and still are) some people in the pit who made an excellent living with just the ability to tell when the market is going from quarter bid to quarter sellers. That, in itself is a huge edge.

# Global Energy Use, from Tyler McClellan

Basic economic theory, Marxist, Hayekian, Ricardian, are all in agreement that rich countries should benefit from explosive growth in poorer countries even if they are becoming relatively poorer due to comparative advantage. And in that vein, all readers can rest assured that global energy use (of exclusively fossil fuels even) has been going up very evenly per capita even as the population has exploded.

## Stefan Jovanovich writes:

People trading freely with one another, within one country and across borders, benefit from comparative advantage; in a world of administered currencies there is no proof that "explosive growth" benefits anyone since it involves the fundamental mispricing of resources that Hayek found so dangerous. Global per capita energy consumption has grown, but its growth has been anything but "even". Energy consumption per capita was LOWER in 2000 than in 1990.

This reader remains assured that the vanity of unquestioned aggregation is the one vein whose reserves are never exhausted in the mines of economic theory.

# Incentives, from Nigel Davies

The accepted view of incentives is that carrot and stick dominate the human psyche.

But the book Drive (Daniel Pink) provides a cogent argument for their working only with boring repetitive tasks. More worrying is that they can even reduce the motivation to be creative by turning a passion into a means of subsistence.

If this is correct (and I think it is) the implications are very far reaching because it cuts across the way we have organized so many of our systems (economic, business, political).

Much food for thought.

# The Joy of Stats, from Alston Mabry

This is a nice video bit where Hans Rosling does his thing on a BBC 4 show called "The Joy of Stats": "Statistics come to life when Swedish academic superstar Hans Rosling graphically illustrates global development over the last 200 years."

Got to give credit to BBC 4 for doing a show called "The Joy of Stats". Rosling doing the same bit in expanded form in his TED talk in 2006.

Maybe we'll get the entire "Joy of Stats" here on PBS at some point.

# Quotes of the Day, from Jeff Watson

Here is a list of 22 quotes from Albert J. Nock that should provide inspiration for the reader.

# CPI adjusted DJIA update, from Kim Zussman

Retiring boomers (as well as non-retiring boomers) may one day be interested in selling stocks and consuming the proceeds. Buying power depends both on market price and current inflation. The attached is monthly closes of the DJIA (1928-oct2010), adjusted by monthly CPI (BLS data: "Consumer Price Index - All Urban Consumers" 19670).

Besides the lost decades of the great depression, there were other major moves in the CPI adjusted DOW. Over the low-inflation rising market of 1948-1965 (point "1" - "2"), there was an inflation-adjusted gain from 2.45 to 10: a four-fold increase in buying power. The flat/choppy market which followed (1965-1982, point "2" - "3") occurred during periods of high inflation, dragging the buying power of the DOW down from 10 to 2.9: a 3.4X reduction.

The biggest move occurred during the low inflation bull market of 1982-2000: DOW buying power rose from 2.9 to 22.8 - an almost 8-fold gain in buying power (and the reason Jeremy Siegel got famous).

Currently the CPI DOW is about 17: those holding since 2000 have seen their buying power drop about 25%.

Preservation of stock buying power over the next 20 years could entail a flat market with no inflation or a rising market with low inflation. A flat or down market with significant inflation, while possibly benefiting boomer's children (who could buy discounted stocks with inflated earnings), is not something boomers themselves want to entertain.

# A More Handsome Face for the Fed, from Anatoly Veltman

The current Fed's chairman, in my view, did much better than his predecessor in last night's "60 minutes" interview. This interview, though obviously well orchestrated, did project candor, clearness, lucidness. I haven't noticed a single slip-up, even when he had to touch on the most unpleasant and controversial subjects. Green-speak was always mired in smoke and mirrors– and always left listener completely puzzled and disassociated. Bernanke projects stark contrast– albeit Fed's task, as most policy making, may be doomed by definition…

## Vince Fulco writes:

I try to look at this from other angles, i.e. why would a "nice country boy from S.C." who understands the plight of his fellow citizens gun the hell out of asset markets with all the concomitant deleterious effects potentially setting us up for another mega boom/bust scenario? Could it be that the rot within the mortgage agencies and institutions (commercial banks both here and abroad) is so terribly bad regardless of what the accounting books say that he has no other choice? QE2 just seems way too blunt an instrument to be affecting employment decisions a few years out. I noticed the bad bank list hit a new high (or near high) over the weekend while the capital markets are whistling dixie. Two to three years into the last bank debacle, we were starting to see the light of recovery through RTC efforts but then again we weren't kicking anything down the road and addressing problems front and center.

Grasping at straws…

## Gary Rogan writes:

In my view, the number one purpose of government is to prevent younger/stronger warriors or anyone else from taking anything from anyone else by force or in fact using force for any purpose on unwilling participants. The second purpose of government is to arbitrate and enforce contracts. There are no other real purposes, but I consider it reasonable for people, in a democratic fashion to decide that the government needs to provide fire protection, etc., dispose of public property, and build roads, etc. It's also reasonable for people to decide to delegate these tasks to private enterprise. Things like secretly printing money to buy mortgage-backed securities from foreign banks and secretly printing money to save motorcycle companies are so outside of what I consider the purpose of government to be that saying it's either that or hide your women is a somewhat artificial polemic on the government vs. free markets.

Lying about not printing money on national TV is a consequence of a government-like entity trying to justify its involvement in a matter where it has no natural reason to be involved.

## Rocky Humbert rants:

There is nothing remotely interesting, stimulating, humorous or provocative about insulting the Chairman of the Federal Reserve.

However, I remain keenly interested in hearing one's macro economic analysis of QE, and how it affects asset prices.

# Why Does It Work? from Craig Mee

December 6, 2010 | 1 Comment

This article on a man made stream saving endangered fish reminds me of trading. In the last sentence, substitute "water flow, the habitat, the replicated diet, or a combination of these effects" for money flow, economic environment and intermarket relationships. Get the mood lighting right, lay the foundation, and only then pull the trigger:

"They have been trying for years but could never quite pulled it off. Now…… the endangered Macquarie perch are finally breeding again. The artificial stream was created in a pond slightly smaller than an olympic-sized swimming pool, with an excavated U-shape channel that uses paddle wheels and a diesel pump to create a flowing stream. Scientists also placed cricket-ball-sized cobbles in the bottom of the channel and simulated ripples in the shallows to re-create where they would usually lay their eggs.

''We put in all these habitat features that they normally associate with in the wild,'' Dr Gilligan said.

Dr Gilligan said he and his colleagues did not why the artificial stream worked. It could be the water flow, the habitat, the replicated diet, or a combination of these effects.

Craig Mee

# Local Commodity Report, from Duncan Coker

December 6, 2010 | 2 Comments

The lowly heating oil front month futures contract now at a year high at last weeks close. As earlier discussed will this mark a top in all dollar denominated markets. I am waiting to lock in on a price for my winter oil supply for my home. But I have a hedge of a large supply of wood in my back yard and potential for a wood burning stove. I also learned this weekend that as predicted by the Chair the specialization of labor much more efficient when it comes to cutting, splitting and moving fire woods. At \$95 a cord there is just no way I can compete. Though I had a fine afternoon splitting wood.

# Recorded Future, from Pitt T. Maner III

December 5, 2010 | 1 Comment

Recorded Future is a startup company with a method of organizing, analyzing, weighing, connecting and graphically displaying pronouncements made about future events that has been mentioned in Wired and MIT Tech Review. Looks like an advanced Google Trends program with aspects of data mining and prediction markets. Company plans to have a Webinar for traders on Tuesday, Dec 7th. May be of interest to some. How predictive it really is remains to be tested. Perhaps a small but potentially useful edge if not skewed by noise. Ahlberg evidently has a Swedish military background.

The session will feature an in-depth presentation of Recorded Future's temporal data and web service capabilities led by our Chief Analytic Officer, Dr. Bill Ladd, who will discuss how, using computational linguistics, we extract and temporally index events and entities from a wide variety of online media to identify historical, current and expected future occurrences as well as associated statistical metrics such as momentum and sentiment.

Ladd also has a blog. Recent post talks about buying on rumours before an "event" day occurs:

"We ran an event study to look at stock returns following high momentum high sentiment days for the S&P 500 over the last 21 months or so. And while we did see an increase in market adjusted returns after the event, we saw much more dramatic returns before the event."
and

"However the bulk of positive return associated with the event occurs before the event happens. Given the large jump on event day, its clear that the information isn't completely priced in before the event occurs. But someone was buying well before the events. Someone who had access to the rumor."

'A startup called Recorded Futurehas developed a tool that scrapes real-time data from the Internet to find hints of what will happen in the future. The company's search tool spits out results on a timeline that stretches into the future as well as the past.

The 18-month-old company gained attention earlier this year after receiving money from the venture capital arms of both Googleand the CIA. Now the company has offered a glimpse of how its technology works.

Conventional search engines like Google use links to rank and connect different Web pages. Recorded Future's software goes a level deeper by analyzing the content of pages to track the "invisible" connections between people, places, and events described online.

"That makes it possible for me to look for specific patterns, like product releases expected from Apple in the near future, or to identify when a company plans to invest or expand into India," says Christopher Ahlberg, founder of the Boston-based firm.

A search for information about drug company Merck, for example, generates a timeline showing not only recent news on earnings but also when various drug trials registered with the website clinicaltrials.gov will end in coming years. Another search revealed when various news outlets predict that Facebook will make its initial public offering.

That is done using a constantly updated index of what Ahlberg calls "streaming data," including news articles, filings with government regulators, Twitter updates, and transcripts from earnings calls or political and economic speeches. Recorded Future uses linguistic algorithms to identify specific types of events, such as product releases, mergers, or natural disasters, the date when those events will happen, and related entities such as people, companies, and countries. The tool can also track the sentiment of news coverage about companies, classifying it as either good or bad.

Recorded Future's customer base is currently "sub-100," says Ahlberg. It includes a mix of financial firms, government analysts, and media analysts, who pay a monthly fee to access the online tools. "Government analysts are interested in tracking people and places, while financial services may want to reveal events coming up around particular companies," says Ahlberg.

As well as providing a slick online interface to perform searches that spit out timelines showing the results (see video), Recorded Future offers free e-mail newslettersthat tip users off to predictions in specific areas. It also makes it possible for customers to write software that draws on the tool's data and analysis through application programming interfaces, or APIS.

In time, this may lead to the development of apps targeted at consumers, says Ahlberg. "If I'm about to buy an iPhone, I might want to know if I am going to look stupid because they'll launch a new one next week, or how long it usually takes for competitors to launch competing products after a new Apple launch." Financial analysts are already using the company's APIs to overlay or even integrate Recorded Future's data into their own models, he says.'

# A Master of Persuasion Reveals his Secret, shared by Vince Fulco

This review reads like Robert Cialdini's work:

A master of persuasion reveals his secret:

First, though, you need to outfit yourself with the basic knowledge, and Mr. Dutton's research suggests there are five key elements, which he wraps up in the acronym SPICE. (His use of quippy anecdotes to begin each chapter, and his instinct for neologisms - the book was published in the U.K. as Flipnosis - illustrate his own canny knack for persuasion.) SPICE stands for Simplicity (that is: don't complicate matters), Perceived self-interest (someone will only be persuaded if they believe what's on offer will benefit them), Incongruity (the tactic, which throws off the target, often takes the form of humour), Confidence, and Empathy. Most of these, of course, are incorporated in the best ads for products, services, and politicians. But they also form the basis of the come-ons of, say, used car salesmen, so Mr. Dutton positions his work as an antidote to unwanted appeals.

"I think the people who read the book will not only learn the tricks of the trade - how to persuade - but they'll also know what to look for when such persuasion is angled at them," he says. "With knowledge comes protection."

The fact that some need that protection more than others - some are more persuadable - has led to a frenzy of scientific research. Neuroscientists are busy trying to read the brain's responses to various persuasive stimuli: Indeed, a study published last month in the Journal of Cognitive Neuroscience suggested there is a network of regions in the brain that responds to the act of being persuaded by an argument.

# The Only Good Deal is One Where Everyone Wins, from David Hillman

When starting out in business 30-some years ago, a mentor, one of the top 2 or 3 salesmen I've known in my life, taught me a number of things that stuck. Among those high on the list were "pigs get fat, hogs get slaughtered" and "a good deal is one where everyone wins". I've come to understand, perhaps 'believe' or 'hold' are better words here, that the only good deal is one where everyone wins.

This can be a pretty unpopular view in this cut-throat, dog-eat-dog, zero-sum game world in which we live, and one has often been vilified and ridiculed for it, not to mention being conned a time or two. But, the latter can be precluded by tempering trust with reasonable skepticism, and having done a great deal of business on a more-or-less handshake basis, this lesson's served me well.

Here's some interesting scientific evidence…..not proof, mind you…..this adage may very well hold some water:

The neuroeconomist Paul Zak is driving west along Interstate 10 on a gorgeous Southern California morning. As we pass emerald hillsides, glowing from recent rains, and the snow-blanketed ridges of the San Gabriel Mountains, Zak talks about how standard economics neglects the biological mechanisms of trust that underlie myriad human interactions. "Why people cooperate - why people are altruistic - is a huge question," he says. "When you think about how much of the world works on a handshake or on holding a door open for somebody in an airport, all that kind of falls through the cracks in economics.

Zak and his collaborators at Claremont Graduate University have found that oxytocin, a hormone produced in the brain that promotes human bonding, plays a powerful role in shaping how generous people are. He calls it "the moral molecule." "It's a whole different model," Zak says. "It tells us why global commerce works– because there is a motivation to reciprocate."

# Ceuta and Melilla: A Silly Indulgence, from John Tierney, President of the Old Speculator’s Club

December 5, 2010 | 1 Comment

A stimulating excursion from the President. Vic.

## John Tierney writes:

I read an interesting article today regarding two small Moroccan enclaves, Ceuta and Melilla, over which the Spanish have retained control for years. Franco refused to cede control as the location is at the southern entrance to the Straits of Gibralter.

The Moroccan government wants Madrid out; Moroccans, even many of them Muslims, want Madrid to retain control.

In and of itself, the story isn't especially exciting or interesting. In 1960 few had ever heard of Quemoy and Matsu; the islands, about the only territory that Mao hadn't wrested from Chiang Kai-Shek, controlled the Taiwan Strait. However, in the Kennedy/Nxon debates of that year many claim it proved pivotal in the outcome of the election…and, hence, reshaped history (what would a President Nixon have done about the Bay of Pigs, the Berlin Wall?).

Going back a little further, few had ever heard of Archduke Ferdinand. Whether true or not, his assassination is widely attributed to the outbreak of the First World War.

Interestingly many of history's major upheavals were triggered by seemingly trivial events. Like the one additional grain of sand that brings down the whole pile. For a while I have kicked around the idea of a website with a name like "The Final Grain."

However, I'm nowhere near worldly enough to even grasp a fraction of the potential locales or personalities that circumstance might place in the center of a world altering event.

However, postings from a multitude of intelligent, widely dispersed individuals with a multitude of different experiences, opinions, and contacts might create some interesting speculations on events that the conventional media would never think about twice.

Feel free to run with it…

# Weather Predictions and Markets, from Ken Drees

December 5, 2010 | 1 Comment

Amateur weatherman Harry Kershaw, 84, from Sale, correctly predicted that last winter would be similar to the 1979 Winter of Discontent. Now he believes the coming January could be as bad as in 1740, when the Thames froze in London and daytime temperatures failed to rise above -9C. He said: "Between August and October the weather seemed to be the same as 1986, which was followed by the coldest January since 1740.

"I believe the last three weeks of January and the first week of February next year could be the coldest we've had for 270 years."

Harry, who began forecasting as a merchant seaman, uses a system developed by the German army during the Second World War known as 'similarity forecasting'.

Seems like market TA backed up with data observation.

# Some More Education for a Speculator, from Sushil Kedia

December 3, 2010 | 1 Comment

What has been the history of any hedge funds that launched with the sole goal of focusing only on options as a trading and investment vehicle, other than of course the Long Term player and the pretty much re-incarnated again Imperial One? As a broad Fund class what is the history?

With or without that being available, what would the astute citizens of this list think are the challenges before anyone wanting to focus on such a strategy getting lured by the theoretical mispricing due to the "retail effect" in a not so old equity options market in a so called third world country? Some sort of a SWOT would help propel thoughts for sure, if you could care.

Other than the alinear payoffs and the "theoretically" infinite gains possible on calls and the theoretically "limited" downside on the puts which ignore comfortably the notions of widely changing leverage without undertaking any additional actions after the initial entry are there any specific risk return attributes that may help a larger investor diversify well in including such a Fund in its overall portfolio?

I know I have been dismissive, or at least sounding such, ab initio of any such advantages. But then, there are so many bright minds out here, that can prove me wrong in a jiffy. Waiting to be cut wide open and get some more education that may be appropriate for a speculator.

# Avalanches and Markets, from Jim Sogi

I've been really stoked on backcountry skiing this year. The danger is avalanches.

A tester digs snowpits to analyze the snow pack to find weak layers that might cause avalanches. The procedure is to dig a pit in the snow to the ground on the hill one intends to ski. This year there is already 12 feet fallen and 6 feet on the ground in the Sierra's. The tester pokes the snow with the fist, or fingers, and runs a card through it to feel for the densities, the layers, the crusts, and the loose snow looking for weaknesses. Then several columns are isolated with a snowsaw. The snow is tapped on top 30 times with increasing force from the wrist, elbow then shoulder. The tester looks to see if the snow columns shears off at any level in the snowpack. The number tap at which the snow shears is the first metric of the Compression Test giving a CT number. The depth of the various layers and at which the shears occurs is quantified. The fourth metric is the force with which the snow shears. Crumbly snow is Q3, but a clean shear that slides off easily with a few taps is Q1 and present clear avalanche danger. There is also an extended column test to test if the cracks propagate easily leading to widespread avalanche failures. The tester also reviews the weather patterns that created the snowpack and the subsequent temperatures and humidity and how it affects the snow pack. The quality of the various layers is qualified. Some problem snow is qualified as sugar, hoar frost, rime, windslab.

Curiously, this is similar to quantitative back testing and the market analyst has things to learn from the avalanche testers. By measuring the the actual condition of the recent snow pack as to both compression and energy, better predictions can be made. The mistake of quantitative testing is to use numbers over numerous years where the conditions may have been different. Use of the actual conditions in the current market "snowpack" would have good predictive properties for avalanches such as this morning's jobs number. An example of this is the trader's saw that gaps fill. Gaps are like a weak layer in the snow pack, and tend to back fill or even avalanche down. The thing about markets is that they can avalanche up as well as we saw earlier this week. It might be good practice to quantify or qualify the various market levels, the market conditions in which they occurred, the way in which subsequent event affected prior events and their "healing", the strength or weakness of various market levels, the length of time from various events, the theoretical or historical properties of the market, All in all, its fertile ground for testing ideas. At the least we should come up with some colorful names for market conditions in addition to gaps, consolidation, based on quantifiable conditions as opposed to chart patterns.

# Alan Greenspan Watches the 10 Year Note, from Laurence Glazier

December 3, 2010 | 1 Comment

Alan Greenspan is on CNBC at the moment. He says he watches the 10 year for an insight into what's happening (he was lamenting that the LIBOR gets too much CNBC screen space in comparison).

Therefore (I think this is a logical deduction) I ought to watch it too, but I have no idea why and wonder if someone could enlighten me.

I may, on occasion, be able to spot a pattern and create an options position judiciously, but so far in trading I feel I am a tactician and need to progress to strategy, for a better understanding of this art.

He also discloses he is, maybe, working on a book The Econometrics of Human Nature, which seems to be prompted by a whim, or more likely, a muse!

# Thought of the Day, from Gary Rogan

December 3, 2010 | 3 Comments

There is a sense of finality or poetic justice about Japan rejecting Kyoto. Part of of the collapse (hopefully) of the politically correct nightmare that has gripped the West, Japan included, for the longest time. You combine this delayed reaction to the Climategate and the financial collapse with the Fed self-expose and the WikiLeaks thing, plus the full weight of the "healthcare reform" coming into focus, and it seems like the self-destructive orgy of blaming the wrong people and subsidizing the wrong people while ripping off the designated real victims will either end or be modified in some major way.

# A Color 100 Times More Yellow Than Yellow, from Victor Niederhoffer

December 2, 2010 | 3 Comments

If there were any color 100 times more yellow than yellow, the color we put up for stocks up and bonds down, it would have to apply to the 5 percentage point move in stocks favor today. We will see if the deprivation in the fed model, and the common sense view that if interest rates on long bonds approach 5% it will put a whammoo on housing, and everything will spill over as it always does in a Hendry Georgian sense to ultimately crater the other financial and real sectors, is counterbalanced by the Milton Friedman view that adding high powered money is just what the Dr. orders to stop the recession.

# Powell’s Backing on START Nuclear Deal, from John Tierney

December 2, 2010 | 1 Comment

Distrust of Russia is not new. The belief that the cold war ended in '91 and that the Russian bear is now a docile, world loving nation with no international ambitions is new…and, I believe, mistaken.

We went from crawling under desks during mock air raids to worrying how we would spend the "peace dividend." Yet the country remains under individuals who comprised the leadership of the "defunct" KGB.

Today's Moscow Times quotes Putin as saying in a Larry King interview that : "I want to give some advice to our colleagues: Don't interfere with the sovereign choices of the Russian people."

Yet Russia feels no compunction about dictating ours. If we don't comply? Medvedev from yesterday and from the same article: …failure to develop a joint European missile shield with NATO could create an arms race in the next decade and force the Russian military to deploy new offensive weapons near the borders of the security bloc.

What would Sun Tzu do?

# The Sage Wishes to Maintain Estate Taxes, from Gary Rogan

December 1, 2010 | 3 Comments

Just like with "the Fed wants to accomplish this and that's why they are doing QE" there are many possible explanations for his behavior. In this case, he may very well care about his insurance business. Overall he may want to ingratiate himself to those who hold political power because that always brings benefits, or he may care about his "legacy", or he may care about keeping his company whole after his death, or he is being threatened with whatever for his misdeeds, or he likes Gates' approval, or he is a self-hating liberal feeling guilty for his success because he knows or thinks he "cheated". It's pathetic to watch him beg for higher taxes, but his motivation may be complex.

## Anonymous clarifies:

First, a history of his acquisitions of whole companies show that he loves buying them during a liquidity crisis for the company being acquired. This history of bottom feeding or capitalizing on others misfortunes seems to me to be the major reason for his lobbying for the estate tax.

General RE is one of the biggest reinsurance companies in the world.

While the actuarial reserves may not be as fuzzy in life as in P&C they definitely is some room to maneuver. Most (by number not size) life insurance do re insure the largest policies. Those purchased by estate taxes purposes are generally the largest life policies out there. An

While I do not have any idea what percent of the premium or profits the life reinsurance is for General Re, I would be shocked if this is not considerable amount. And while perhaps not a large percent of profits, I suspect the expected return on required capital and risk is sigficant Further, for the following reasons, this probably is large and tempting:

1. The reinsurance business gets regulatory arbitrage through regulatory body shopping, that a state domiciled company can not. This is leaves considerable room for reserves differences. As the "finite reinsurance" and AIG debacle shows. This can be complex and questionable worth outside getting around regulations.

2. Geico and his other insurance holdings seem designed to get around having to deal with a traditional insurance agent. Reinsurance is much more a pure insurance play without having to mess with "salesmen" Life insurance profits are driven largely by controlling the agents. (They do not call it agency risks for nothing). A traditional life insurance company on a life sale set up a asset that amortizes called "DAC" deferred acquisition cost, is basically a offset to the 1st year commission and expense. Commissions makes life business tricky to pin down when profits are actually made. But reinsurance is much more about controlling the risk of large numbers.

3.
Berkshire is known for touting his "life settlement insurance" or buying the opposite side. This is a natural hedge, with a negative correlation to life risk. A traditional life company must account for these reserves as individual products and add the totals. If it is set up correctly a re-insurer can set up some offset to the individual products reserves for the negative correlation.

## Gary Rogan responds:

An extremely informative post! The first paragraph is interesting in itself: capitalizing on the misfortune of others withing a moral framework is a perfectly moral, "good capitalist" thing to do. We should all hope that many people will decide to capitalize on the misfortune of those who need to sell their home because they can't pay in order for the real estate market to recover and for the country to prosper, and in fact for many others to become capable of paying their mortgage through re-financing. Creating misfortune through legislation is the worst of what passes for "capitalism" today and what's used by the demagogs to assault the moral underpinnings of capitalism.

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