First off, here is a definition of VLCC.

The price spread between front-month London Brent crude futures ($101.54) and front-month West Texas Intermediate crude futures ($86.5) is now a record $15/bbl (or about 17%)…. with Brent (Bloomberg symbol=COH1, IB Symbol=COIL) over WTI (Bloomberg symbol=CL1, IB symbol=CL). Brent is deliverable against the WTI contract at a $0.30 DISCOUNT!!

Spot month pricing can go anywhere since it takes a while to charter a ship and move it across the Atlantic. Suffice to say, it doesn't cost $15/bbl move a barrel of crude from Cushing to London. And since the USA is a net importer, it's only a matter of time before VLCC's get diverted from the USA market to the foreign markets. This spread is usually between $0 and $3 with WTI *over* Brent. (The relationship started breaking down long before the Egypt/Suez fears, and can be attributed to a combination of North Sea production problems and an inventory build in Cushing, Oklahoma.)

Savvy specs and commercials can look out the curve and see opportunities — for this spread to close — taking account of shipping rates, insurance, refinery utilization, etc. This bona fide arbitrage will eventually close. The only uncertainties are the path and duration of the mis-pricing.

Over at my blog, I've started filling old scotch whiskey bottles with WTI crude and flying them back to London– providing "liquidity" in this crazy market.

p.s. I've started putting the trade on in the back months. But I've got TONS of dry powder, and am not calling a bottom. And The Chair should note that this is NOT a trend-following trade. It's real arbitrage.



Chair suggested this 2007 article of his (with Mr. Downing) on Dailyspeculations on the Fed Model (not the FRB/US econometric model) may be of interest to some.

Steve Ellison writes: 

12 month forward earnings estimate now: 87.63
Index close today: 1320.88
Forward earnings yield: 6.63%

Alex Castaldo adds:

Ten year Treasury yield: 3.662%



 The divergence between 30 year rates at 4.78 % and the relevant EP ratio or the easier to track 30 year at 117 and stocks at 1220, which has moved 15 % in favor or stocks versus bonds continues to show a somewhat tainted euphoria and or divergence in the normal allocations between bonds and stocks, I think.

I was away in Chicago the last three days, and Steve Stigler is writing a book about the five main ideas of statistics. He points out that Galton is involved in only two of them: comparison using internal variability and regression. [The other three ideas are: Combining observations, the square root of N rule, testing and likelihood of an experiment]. Galton was recently ranked as sixth most referenced scientist of the last 100 years in scientific papers, with Darwin and Bertrand Russell ranked 2 and 1 respectively.



I hear again and again how profit margins for the S&P 500 are doing very well, thank you. I was wondering if there were any special variables affecting these profit margins. So, I pulled before-tax-income and total-income-tax data for a dozen S&P big caps in order to compare the tax rates being paid in the years 2006 through 2009, with the tax rate paid on 2010 income.


ticker / meantaxrate2006-2009 / taxrate2010 / diff

DIS   36.0%   34.9%   -1.1%
XOM   42.6%   40.7%   -1.9%
CSCO   22.8%   17.5%   -5.3%
JNJ   22.9%   22.1%   -0.7%
AAPL   30.7%   24.4%   -6.3%
IBM   27.4%   24.8%   -2.6%
KO   23.9%   22.8%   -1.1%
PM   25.8%   29.1%   +3.3%
INTC   26.8%   28.7%   +1.9%
VZ   23.8%   19.4%   -4.4%
GOOG   24.8%   21.2%   -3.6%
WMT   33.7%   32.4%   -1.4%

So, ten out of twelve of the companies had lower rates for 2010. The aggregate numbers are:

tax rate on aggregate 2006-2009 before-tax income: 32.8% tax rate on aggregate 2010 before-tax income: 29.4% diff: -3.4%

It does appear the government is trying to help out.



 The hairs on the back of my neck stand up every time I hear 'positive drift' because the stuff they're being measured against (currency) is also in a state of constant flux.

It's amazing what a shilling (now 5 new pence) was worth a couple of hundred years ago; factor in various technological revolutions and huge population growth over the time this 'drift' has been measured and I'm not sure you can reasonably extrapolate it forward.



One would have thought a single crony bank spending $15 billion a year in legal fees (as Vic has evocativey brought to our attention) would have spread a profitable umbrella over all of Big Law.

But no, here's the death of Howrey LLP, a 55 yr old, major Washington and international law firm:

As owner of an auto parts company, I recently spent several months months dealing with Howrey's threat, on behalf of their client BMW, to bring hell down upon us for daring to sell parts on the Internet under the name bmwpartsonly.com (with no confusion in the public mind, over a period of more than six years, that we were in fact Bavarian Motor Works). It is rare that bullies get their comeuppance so promptly and completely.



For engineers in France, there is always a claim for a "shortage of skilled workers" while at the same time we saw the skilled workers not finding work.

The reality is numbers are not given by an independent entity, but by already in place oligopolies, where they typically simply add the number of offers on websites to estimate the "shortage", with the same offers often being published in 10 places or more.

This allows the recruiting of less paid people from the south or east and maintains a welcome down pressure on salaries.

PS: I'm not discussing this strategy, every entity does what it can to survive in our overtaxed world, but it's just that I don't want to eat the "numbers" supporting a shortage too naively.



An interesting post of mine from last year:

"Using Prof. Shiller's monthly data of SP500 returns (including dividends and adjusted for inflation), below is a table of mean monthly return ("MMR") by decade, counting back 120 months from the end of Jan 2010 to Jan 1880 (non-overlapping monthly return by decade). Also shown is monthly stdev and T (comparing mean to zero).

10/14 decades had positive MMR, though only 3 were significantly greater than zero (T>2.0), and one significantly less. Note that all down-decades were followed by up-decades, and the decade with highest MMR (ending Jan 2000) was followed by the recent down decade."

Date     av 120   sd 120  T 120
2010.01 -0.003  0.042   -0.81
2000.01  0.010  0.031   3.62
1990.01  0.006  0.038   1.72
1980.01 -0.004  0.039  -1.01
1970.01  0.002  0.030   0.73
1960.01  0.009  0.029   3.37
1950.01 -0.001  0.040  -0.26
1940.01  0.001  0.087   0.07
1930.01  0.010  0.044   2.37
1920.01 -0.006  0.033  -2.06
1910.01  0.003  0.038   0.88
1900.01  0.001  0.033   0.42
1890.01  0.003  0.029   1.17
1880.01  0.004  0.031   1.37



I humbly admit, all day I've been beating myself up, mean to wife, because I was so wrong today.

I think, "honey if I lost all my money would you still love me?" "Yes, dear, I'd love you, but I wouldn't be with you any more"…

When your wife asks you how it went, I like Irving Redel's answer… "Honey, how did the market treat you today?" "Fair."

Tom Printon writes:

When I was beginning my career on floor Irving was winding his down.
Occasionally Irving appeared for an opening which meant something was
going to go down. The Blue Jay signaling other members of the forest?
Perhaps something on the predatory side?

Jeff Watson opines: 

 A man may be a fool and not know it, but not if he is married. [H.L. Mencken]

A man's women folk, whatever their outward show of respect for his merit and authority, always regard him secretly as an ass, and with something akin to pity. His most gaudy sayings and doings seldom deceive them; they see the actual man within, and know him for a shallow and pathetic fellow. In this fact, perhaps, lies one of the best proofs of feminine intelligence, or, as the common phrase makes it, feminine intuition. The mark of that so-called intuition is simply a sharp and accurate perception of reality, an habitual immunity to emotional enchantment, a relentless capacity for distinguishing clearly between the appearance and the substance. The appearance, in the normal family circle, is a hero, magnifico, a demigod. The substance is a poor mountebank.

[H.L. Mencken, "In Defense of Women"]

Stefan Jovanovich writes:

I can't find the reference so this may be apocryphal, but Einstein is rumored to have said that he and his wife had a perfect understanding. He would decide the important questions (such as whether or not his adopted country should raise its income tax rates) while his wife would deal with the trivialities (such as where they would live and what kind of car they would drive).

Russ Sears writes:

My wife of 23 years is very tolerant of these things, besides letting me say "yes dear, right away. You're right." I can add "I was wrong."



What is Different This Time?

 This chart illustrates one of the problems with the equities market of late. The [unnamed]  variable shown was a model of consistency up until September 2010, and then started behaving less reliably. The data represents actual transactions (all of them), but would be unknown to most practitioners. Thus it is not the case of a variable being followed by so many that it becomes second-guessed and thus unreliable.

For what it's worth, this is NOT one of our decision variables.

Bill Rafter is president of Mathinvestdecisions.Com, a quantitative investment firm.



 Oh daytrading…

In individual stocks: forget it ( "they" sniff all orders' volume info; plus exchanges and brokers favor "them")

In futures, there are still some pockets "they" neglect (as "they" avoid visibility in narrow markets– but do you want to get involved in narrow markets?)

Treasury trading has always been government-sponsored mafia's domain; and never so blatant as in current years.

In FX, you'll have to find a backward counter-party, that may not be constantly realizing own advantage– but one of those days the party will go the old-fashion way by simply running off with your deposit.



Blue cross Blue shield gets low marks. This company in W. Va health care recently let go over forty workers and out sourced those jobs to India. My wife had a friend who worked there 13 years and at 62 was one of those terminated.

I am confident this is very widespread. The talk of jobs being created etc is a ruse to try and fool the voters.

Obama care will stop employers from hiring. My friends son has two Chick Fil A restaurants and employs over 100. He said he will lay off many if this type of forced health care becomes reality.





 John W Henry, is trying to turn the fortunes of English Premiership team Liverpool, after being a success across the pond at the Red Sox. In a interview in The Guardian, he disclosed a few points in his battle which may be of assistance to us. First, an extract from his trading thinking:

I don't believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors. Prices, not investors, predict the future. Despite this, investors hope or believe that they can predict the future, or someone else can. A lot of them look to you to predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that's where our profits come from. I believe it's that simple.

John W. Henry

On his battle with Liverpool, and strategies for a premiership:

1. That, he said, will be Liverpool's two-pronged approach to rebuilding the squad, which will be financed only out of its income; he and his fellow investors in Fenway will not be pouring cash in.

2. Henry, however, said this did not mean they were not prepared to spend big fees on the right players, as the group has done when turning the Red Sox into a World Series-winning baseball team again.

3. "We intend to get younger, deeper and play positive football.

4. Adding two top players "We intend to get younger, ………Adding two top players [Carroll and Suárez] who have just turned 22 and 24 is a good first step.

5. "It's not a coincidence that the last two ownership groups could not get a new stadium built," he argued pointedly. "What they proposed or hoped for just didn't make any economic sense6. Our goal in Liverpool is to create the kind of stability that the Red Sox enjoy," he said. "We are committed to building for the long term."

OK what does all that mean with respect to trading.

1. Invest from within. Generate cash from within other ares of your business, then use this to improve revenue in your core model (and fit under regulation framework in doing so).

2. Rio trade is alive and well! Well, at least investing larger on a proven strategy where the rest of the business model can fit around it. In fact, this might be the only way to take you over the line with some kind of speed, without grinding it out, and losing to the vig.

3. Do not expect to play defense and win. You must trade positively and add to positions when you can in an effort to score the match winner.

4. Law of ever changing cycles. Get fresh new ideas and strategies. Add to the old tried and true with fresh blood, since this will be where your future lies.

5. Do your books. Money management. Don't over extend on risk.

6. Your after stability in trading and low volatility returns over the long term… not in beating the morning star monthly genius.

Jonathan Bower writes: 

I dunno, blowing GBP 35 million on an unproven and injured 22 year-old player with multiple arrests for assault, including his ex-girlfriend, (Carroll) makes much sense from a business or trading perspective.



 Proof that the market's purpose is to take from the weak and give to the strong (in part): the SPU having their lowest day of vol ever with a 2 point range, but so many opportunities to lose in other markets like fixed income with nice 1% usual range (so far), and of course wheat with 4% moves, and up limit to add pain to the weak.



 London & Hong Kong Traders:

Open interest has fallen almost 30%, but gold has only dropped 6%. Normally if you are a short in a market and you start to have an asset correct because of significant liquidation, you will see a precipitous drop in price. Given the sheer volume of contracts that has been liquidated, we should have seen a massive correction in gold. Instead it has stayed incredibly strong.

More here.

Larry Williams writes:

Open interest rallies or declines must be put into perspective of who is causing the OI move, which group of traders…to just mention OI w.out background is not a full meal.

Rocky Humbert writes: 

I would add the following to Larry's comment — which is something that makes today's markets quite different from decades past — and which changes the character of OI and CFTC commitment of traders data.

In a futures market, the long positions must EQUAL the short positions. Hence it's a zero sum game. This is not true in the physical gold ETF!!!

For example, when a long liquidates his gold futures, the short is also liquidating his short position. And the open interest declines. Larry and Anatoly believe that there is predictive information in this.

However, in the gold etf, there is no genuine reduction in open interest. Instead, when an ETF long sells his gold ETF position, the gold leaves the ETF system — and the physical gold finds its way to another holder outside of the ETF system. Because gold is (mostly) not consumed by commercial end users, the gold remains in existence in perpetuity. In theory, in a futures market, if the open interest is zero (and remains at zero), the price of a commodity will not change. The price will just sit there. However, in the case of physical gold, the open interest can never be zero — since the physical bullion will continue to exist (whether inside or outside of the ETF system.) This means that gold (whether entering or leaving the ETF system) has a quasi-permanent open interest.

None of this is necessarily predictive of the gold price– however, it's important to understand that the CFTC data on gold futures open interest misses this nuance. 

Larry Williams: 

Great points, thanks for making them.

Who are the players in the ETFs? Relatively small specs, I assume.

And on gold consumption it is consumed, not like wheat, but the physical inventory is turned into rings and things so the inventory needs to be replaced my commercial users. Commercials do take delivery. 



I was asked by an investor friend if bashing was a real tactic. I didn't know for sure but I hunted for some info:

If it does exist, and in my mind in does to a degree, one main point would be the following:

Lesson 1: Remember, BASHERS NEVER Bash A BAD STOCK. Check the boards for stocks with no potential. They never have any Bashers. Bashers only go after stocks that are moving up or have excellent potential to do so. Bashers work to bring the price down to either increase their position at the expense of others or help a Short make their bones



 On October 12th, I suggested to the Site that Utility Stocks might be better investment than 5-year TIPS. The group's responses were wide-ranging and provocative. (I'm still trying to understand Tyler's answer.)

Here's an update (sort of):

5-year Note Yield then: 1.1% Now: 2.2% Cool!
5-year TIP Real Yield then: -0.5% Now: -0.1% Nice!
VPU (Vanguard Utility Fund) then: 67.19 Now: 68.3 plus .72 dividend Sweet!

So, translating this from the language of a Dairy Queen Commercial ("Cool, nice, sweet") to the language of a Serious Investment Professional ("Annual compounded internal rate of return"), I plugged the TIPS data into my Bloomberg. Alas, the Bloomberg returned: "Negative Yield, cannot calculate Prob. distribution!" Huh?

I've never had a problem dividing by zero before…? So, doing the arithmetic by hand, I reckon the TIPS have generated a nominal loss of 2.3% and the Utility stocks have generated a nominal gain of about 2.7%. Turning this into an "Annual Compounded Internal Rate of Return" is left as an exercise for the reader. I'll just say, "Sweet!"

Note: The most amazing thing is that even now, the 5 Year TIPS continues to have a negative real return!



An update on the results:

4.58	32.7	J***** Albert

0.86	8.21	Jack Tierny

0.69	7.06	Pitt Maner

0.58	6.34	Chris Tucker

0.57	6.33	William Weaver

0.49	5.78	Jan-Peter Janssen

0.39	5.1	Marlowe Cassetti

0.37	4.96	Bill Rafter

0.24	4.15	Sam Eisenstadt

0.24	4.14	Vince Fulco

0.24	4.1	Steve Ellisson

0.19	3.77	Anton Johnson

0.13	3.4	Laurel Kenner

0.11	3.24	Sushil Kedia

0.04	2.84	Scott Brooks

0.02	2.71	Gary Rogan

0.01	2.62	Pete Earle

-0.05	2.22	Kim Zussman

-0.07	2.07	Russ Sears

-0.1	1.9	Yanki Onen

-0.16	1.48	Michael Bonderer

-0.28	0.73	George Parkanyi

-0.28	0.73	Tim Melvin

-0.62	-1.5	Gordon Haave

-0.64	-1.66	Victor Niderhoffer

-0.65	-1.72	Dan Grossman

-0.87	-3.19	Paolo Pezzutti

-0.88	-3.26	Ken Drees

-0.89	-3.29	Mr. Krisrock

-0.94	-3.64	J. T. Holley

-0.98	-3.93	John Floyd

-1.02	-4.15	Jay Pasch

-1.32	-6.1	Matthew 

-14.93	-95.7	Phil McDonnell

Suppose each of these performances are the prior information of performance at end of 1 month (say one month), the underlying strategies are known to all participants.

With the respective performances so far, assuming each participant was given X amount of house money to begin the bets, what would with these priors now:

1) Each participant do further if one more X was given to them, if a) They could choose between betting any incremental amounts only on the existing strategy or holding the existing strategy. A wage earner faces this choice at each month end. Why? b) they are allowed to bet on any of the others' strategy including reducing exposure to the current strategy. Why?

2) What would the public do if these were say a closed set of the only bets available ? Why?

Note: this is not part of any process of the Investment Contest. Just the curiosities of one of the hungry minds. No comments is as fine as any detailed or brief comments. Please do not treat this as an opportunity to bet more as its not authorised by the Contest Sponsor and List owner.



 Heisenberg market principle:

If you are certain of what; you can't be of when

If you are certain of when; you can't be of how

If you are certain of how; you can't be of what



The next meeting of the Junto will be Thursday, February 3rd at the Mechanics Institute at 20 West 44th Street at 7pm. It will be our annual Ayn Rand celebration. All are welcome. 



 I was in the local "phone shop" today…and while the old mate was sorting out a few technical issues for me, a local Balinese lady peeled in the door, with USD in hand. Oh, I thought, "I didn't know this guy was a money changer too."

As she put 5 sheets of USD1 on the counter, I lent forward to look at the rate he was putting in the calculator…8400 IDR..lovely! 600 for his back pocket with spot trading at 9000 and no risk. Even though I was not involved in that transaction, I walked out feeling like I'd been cheated and in desperate need of a bit or a lot of that action (on size).



 One notes that decay of net worth as a function of marriage # doesn't make a dollar of $10M until spouse 25.

Rocky Humbert writes: 

Being an optimist, I note that there is a questionable assumption in Kim's chart that is relevant to the markets:

It presumes that each and every spouse has a diminutive effect on wealth. I see no a priori reason why all spouses should have a diminutive effect on post-divorce wealth. In fact, if one marries (and divorces) an infinite number of spouses, one should also benefit from some number of positive divorce settlements. This must be true, since it's a zero sum game (net of legal fees), and if you managed to marry EVERY woman at least once, there's an asymptotic function approaching the original wealth of all parties (less legal fees).

The market analogy/problem: what is the asymptotic P&L if you buy an infinite number of out of the money puts and calls — versus selling an infinite number of the exact same out of the money puts and calls? Theoretically, (net of transaction costs), it should be a zero sum game with an uncertain path. But it's the path that really matters….

Phil McDonnell writes: 

In one sense the options are a zero sum game. That is when we consider that every option that wins is pretty much paid by an option that loses. As usual we ignore taxes and vig which would turn it into a negative sum game.

But the net sim is only part of the question. It is also possible for the buyers of options to mostly lose. Suppose we buy both a put and a call struck at 50 when the stock is at 50. Both will lose time value which they initially held when bought. At expiration all time value will be gone and they will trade point for point with the difference of the stock from 50.

The reverse is true for sellers they will tend to capture time value.




 Trading is hard with small kids around. I remember when I was trading copper. I'm long, and my actress daughter gets a bloody nose (of course she dramatizes it, she's a born actress). I forget the trade in copper, stop the bleeding….and….go back to see a 45,000 loss in copper. It would have been cheaper to med-evac her to the hospital.

Victor Niederhoffer reminisces:

Twenty five years ago I lost half my wealth between the first and second games of a racquetball game with Reuben Gonzales.

Craig Mee writes:

Shocking…It reminds me of a local interest rate trader, heavily
short, who went for a "quick" haircut, next door to the exchange in
Sydney…. BOOM. Reserve bank unexpected rate move …house wiped out. 

An anonymous contributor writes: 

Speaking of rapid destruction of wealth:

They [ed.: i.e. the French] had then learned how easy it is to issue it; how
difficult it is to check its over issue; how seductively it leads to the
absorption of the means of the workingmen and men of small fortunes;
how heavily it falls on all those living on fixed incomes, salaries or
wages; how securely it creates on the ruins of the prosperity of all men
of meager means a class of debauched speculators, the most injurious
class that a nation can harbor,—more injurious, indeed, than
professional criminals whom the law recognizes and can throttle; how it
stimulates overproduction at first and leaves every industry flaccid
afterward; how it breaks down thrift and develops political and social
immorality. All this France had been thoroughly taught by experience.

Everything was enormously inflated in price except the wages of labor.
As manufacturers had closed, wages had fallen, until all that kept them
up seemed to be the fact that so many laborers were drafted off into the
army. From this state of things came grievous wrong and gross fraud.

*- Andrew Dickson White, “Fiat Money Inflation in France”, How it Came, What it Brought and How it Ended*



 Editorial comments: I wonder how many up Januarys have been followed by "a new or continuing bear market, a 10% correction or a flat year"–the probability of one of those events occurring in any year seems high. Note that those events are cited to partially excuse the wrong forecasts of 2009 and 2010. I assume the accuracy ratios are calculated using the usual wrong method of comparing the change in January to the change in the whole year, including January.

As January Goes, so Goes the Year, Jeffrey A, Hirsch, Editor

Devised by Stock Trader's Almanac founder Yale Hirsch in 1972, the January Barometer predicts that stock market performance during the month of January sets the direction for the entire year. In fact, every down January for the S&P 500 since 1950 has been followed by a new or continuing bear market, a 10% correction or a flat year.

Despite major errors the last two years, this indicator still boasts an 88.5% accuracy ratio. Even including the seven flat-year errors, where the S&P closed the year in the opposite direction of January, but was up or down less than 5% for the year, the JB still delivers a
77.0% accuracy ratio.

We don't know of many indicators with such a strong track record Of the last three down Januarys: 2008 was followed by a continuing bear market and a down year; 2009 was also followed by a continuing bear and an 18.1% S&P decline from January to the March low, but an up year; and 2010 was followed by a 16% correction from April to July and an up year.

Last week's uprising in Egypt shuttered economic activity in that country, jolted worldwide stock markets and heightened Mideast tensions. But despite the rumor of 1 million protesters gathering tomorrow in Egypt, calm has returned to Wall Street on the last trading day of January, registering the first positive January for the S&P 500 in three years.

Prior to the Egyptian civil unrest, on the wave of $600 billion in additional quantitative easing, the rally gathered momentum in December that has carried over into January. Both our Santa Claus Rally and First Five Days Early Warning System delivered solid gains. Despite Friday's selloff on the news of clashes in Egypt the losses were not catastrophic and the market has held on to January's gains.

Even without the trouble on the Suez Canal a market correction was brewing. Unless the situation spirals out of control in Egypt and other Mideast hotspots, the often typical late-January/February break will give way to a continuation of the rally we projected in our 2011 Annual Forecast last month to Dow 13,000-14,000 in the first half of
2011. We expect any break to be about 5% and bounce off the 50-day moving averages of about 1,245 on the S&P, 2,640 on NASDAQ and 11500 for the Dow. Our forecast remains on track and after some pause in February we expect the market to flirt with the 2007 highs before succumbing to another seasonal soft patch in the May-October period.


Victor Niederhoffer writes:

One can always make a fortune by speculating based on patterns that worked 11 to 20 years ago as opposed to the last 10 years. See hallmarks of pseudo science in edspec, and Martin Gardner's Fads and Fallacies in the Name of Science.



 I took closing prices for the 30 DJIA constituents for each day in January 2011 (20 days) and tested 1st and 2nd digits of closing prices for Benford's Law compliance, which is to say I separately compared the 1st and 2nd digit actual distributions vs. Benford-predicted frequencies of 1st and 2nd digits for Chi-Square significance (p=0.05).

On each trading day of January 2011, the actual distribution of the first digit of the combined 30 Dow constituents was NS different than predicted by BL.

On January 5, 6, and 13, the actual distribution of the second digit of the combined 30 Dow constituents was significantly different than predicted by BL.

Ran the following simple linear regressions:

1. p-value of 1st digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day DIA return;

y = -0.0021x + 0.0018
R² = 0.0014

2. p-value of 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day DIA return;

y = -0.0049x + 0.0019
R² = 0.0471

3. sum of p-values of 1st and 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day DIA return;

y = -0.0033x + 0.0035
R² = 0.0336  

4. sum of p-values of 1st and 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day QQQQ return;

y = -0.0041x + 0.004
R² = 0.0144

5. sum of p-values of 1st and 2nd digit BL chi-square (actual vs. expected, 30 DJIA constituents) vs. next day SPY return.

y = -0.003x + 0.0028
R² = 0.0163

Not much to see here, thus far.

A mildly interesting aside is that on the three dates in which the distribution of 2nd digits was significantly different than predicted by BL, the number of which there appeared a superfluity was the same, 4; there appeared three times as many as predicted on Jan 5th and 6th, twice as many on the 13th.

As for those underrepresented in the actual distribution of 2nd digits, on Jan 5th and 6th the 2's disappeared. On Jan 13th (an "unlucky" day, at least superstitiously), no 7s (a "lucky" number, again superstitiously) appeared.



 The Bangkok tourist industry is thriving, tenfold from when I was there on a darker day. Cambodia is emerging, the people are gentle, prices are low and everyone is unwordly. Entrepreneurs have a chance to jump in at the ground level. Laos is the S.E. Asia refugee capital, it's interesting & crass, where there are only the Hmong– tough, honest little bastards who helped Joe (as they called me) in the Vietnam War.

The land is spectacular, a jungle covered rocky mountains. Vietnam is odd to me, the people are capable to switch in a blink from totally inner to outer directed, or back. One second I was dealing w/ a crowd of Rambos & the next an anthill. It was the most difficult country to travel in– I could have had a chicken and then a boy saved or die in my arms in the same day from a car accident, yet tradition has it that I could have been locked away for murder. So I didn't cross that road, and don't invest there.

I visited Art Tyde in the Philippines who thrives surrounded by beautiful, smart women w/ good jobs traveling the world re: computers. He suggests Manila for ex-pats, however it's as smoggy as L.A. stacked on Tijuana. Brunei is a model train set owned by some rich kid, and is nearly abandoned of citizens. A fish jumped out of a bucket at a market onto my foot, the most exciting thing except I was the sole passenger on a 2 hour bus across the nation to leave on a ferry.

 Borneo is the utopia authors have tried to describe for centuries. Seekers come for an ideally functioning island society… til the sun goes down. The Jekylls turn Hydes as Muslim loudspeakers dot every few km along the streets, rivers and paths to make the chants inescapable, males chain smoke to a frenzy and practice polygamy, and the kids watch cartoons on tv.

Sulwesi Island, touched by Danish architecture & the Chinese who believed death is the most important part of the life cycle, is whacked out, except for the massages. I won't invest another day and I'll take tomorrow's 6am $100 flight to Sumatra.



 Raven minds are capable of all manner of sophisticated ploys and deceptions and signaling at a distance over time.

Here is a link to a 2010 film about the man who has spent quite some time amongst ravens and who has researched and written about their keen intelligence.

"AN UNCOMMON CURIOSITY: at home & in nature with BERND HEINRICH" follows Bernd Heinrich, one of the world's most insightful and original biologists, over the course of a year as he reflects on his past and shares his ideas about nature, science, art, beauty, and writing. Heinrich has been both a Guggenheim Fellow and a Harvard Fellow, and has been awarded two honorary doctorates. Considered by many to be today's finest naturalist author, Heinrich has written 18 books on various aspects of the natural world and published numerous scholarly papers, professional book reviews, book chapters, and articles for magazines and newspapers as diverse as the New York Times, Outside and Runners World. In addition to his scholarly work he is a world-class ultramarathoner currently holding a U.S. 100-mile track record.

Dylan Distasio adds: 

this isn’t happiness."

Although I have not had the pleasure of seeing this film (I didn't realize it was out there, thank you, Pitt!), I would also highly recommend his books, especially Mind of the Raven, since we are on the subject of birds. Raven's are arguably one of the smartest of all birds, and are able to solve puzzles that even many mammals would have trouble with.

I especially enjoyed his other book Winter World, about the ingenuity of animal survival about how various creatures make it through a tough, lean winter.

Totally unrelated, but on the subject of Scott's favorite nuisances, I saw a coyote walking on the snowy tracks of my Metro North train station earlier this week here in Connecticut. The air was cold and still and the moon and what I assume was Venus were up in the pre-dawn sky. The coyote was skulking nervously southwards down the opposite tracks. He stopped to stare at me for a few moments before resuming his nervous journey. I've also seen a beautiful red fox in the warmer months hanging around our birdfeeder looking for a quick meal. Quite a menagerie here in suburbia.



In case nobody has seen this, it's certainly worth a look. 80 year old Victor Korchnoi defeats 18 year old rising superstar Fabiano Caruana. It gives hope to us all…



 Today would be Ayn Rand's 106th birthday. A fitting excerpt from Atlas Shrugged via John Galt is in order:

The symbol of all relationships among [rational] men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit—his love, his friendship, his esteem—except in payment and in trade for human virtues, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the traders and held them in contempt, while honoring the beggars and the looters, have known the secret motive of their sneers: a trader is the entity they dread—a man of justice.

We owe Ayn a debt of gratitude.

J.T Holley adds:

 Capitalism demands the best of every man – his rationality – and rewards him accordingly. It leaves every man free to choose the work he likes, to specialize in it, to trade his product for the products of others, and to go as far on the road of achievement as his ability and ambition will carry him.



 Looking at interest rate futures and considering that trends appeared a lot more prevalent in the 90s and that as a direct result of the world markets becoming more and more intertwined, (and no doubt with rates getting squeezed closer to zero this doesn't help)– the noise and the vig play an ever increasing part.

It appears simple markets out on their own, unbiased, uninfluenced by the majors, are where the drive through meals are. Not sitting down at the hustle and bustle of a downtown cafe, which is akin to trading treasuries. Alright for the scalpers who enjoy the noise, but for us who just want good service and good food, and to be out the door, there are probably easier places to eat.




Executive Producer: James Cameron
Director: Alister Grierson

James Cameron produced several of the century's top earners after his blockbuster ALIENS (1986) and its sequels. He made TITANIC (1997), then, AVATAR (2009), both of whose earnings were, well, titanic.

He's done icky creatures in outer space, massive ship wreckage and breakage, then 10-foot-tall blue tree-people. He did a terrific documentary on the Titanic in 2005. What could harness his delight but an underwater spelunking cartographic expedition?

SANCTUM, which brought our hands to our eyes more than once during the excursion in uncharted glub-glub territory, is an underwater cave-diving team in Papua New Guinea. As this action-adventure would have it, you've seen two dozen of these hairy 120-minute terrors, though never this total immersion (as it were) in depths heretofore confined to sightless sea creatures. The attractive group, which brings to mind one of Agatha Christie's best loved works (And then There Were None), experiences heart-threatening crises during an expedition to the unexplored and 'least accessible cave system in the world.' Why? Because. . .it's never been done.

We were a 'perfect' audience: We are an adopted member of the Azmat tribe in Papua New Guinea, so had actually been where the establishing-shot land sequences occurred. Principal photography, underwater, we learn from the credits, was Australia, but that does not subtract from the excruciating testosteronic nature of this film. The cast are, every one, unknown Aussie actors, saving Cameron & co. millions on what clearly was an exhaustingly expensive project to film. Though they are to us unknown, the on-camera guys and women were as rugged and fit as anything you've seen since CONAN.

In addition to being scared IQ-less of water, a result of drowning when we were a preteen, we were treated to long minutes of another secret fear: Getting stuck in tiny slit apertures while spelunking. Except they undergo this in blackness, underwater, mind. While shlepping enormous backpacks of whatnot—food (though no one ate once except some Gorp by a really dumb and selfish guy), supplies, ropes, cameras, extra lights, electronic gear we don't pretend to recognize. So you have machismo to the ultimate max: Rapelling (our favorite) thousands of feet. Climbing down sheer rock-faces. Diving into the unknown. Cave-finning against expiring oxygen tanks. Underwater. Spelunking in a maze that has never been explored. All underwater.

Cyclones above; doubting Thomases, below. Girlfriends who don't know squat about diving or exploring. Father-son squabbles. Smoldering resentments. Expendable cast members. Agita and competition between gristle-and-bone mountains of one sort or another. Manliness. Muscles. Extraordinary bravery, pitched against ineradicable risks and stubborn refusals to face reality. Real leadership shining through the endless unknowns, even with the latest gadgetry.

Universal doesn't hand out press notes, so one can only guess at the millions this set the moguls back. The camera work is outstanding, even if the script does not give SOCIAL CONTRACT or its sequel scribes anything to fret about next year. And as much running around the world as we have done, most people will never, ever be able to rival the feats of stamina and gymnastics all hands bring to this enterprise. Quite the escape for date night.

It's 'way better than leapin' jumpin' AVATAR–and blessedly apolitical. As the women outside stood gabbing excitedly with their escorts, the word that came popping to mind and ear repeatedly was intense. We'd go with that: SANCTUM is about as intense an entertainment experience as you're likely to pay for on a Saturday evening.



The Grandmaster has opened my eyes to the wonder of the Guardian. Also from them is an article that I would dub the Phallic Subliminal Suggestion effect: "Mobile Phone Masts Birth Rate".



 An interesting quote from Judge Vinson's ruling:

"It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place."

"If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain for it would be difficult to perceive any limitation on federal power [Lopez, supra, 514 U.S. at 564], and we would have a Constitution in name only. Surely this is not what the Founding Fathers could have intended. See id. at 592 (quoting Hamilton at the New York Convention that there would be just cause to reject the Constitution if it would allow the federal government to penetrate the recesses of domestic life, and control, in all respects, the private conduct of individuals)"

The whole ruling is fascinating.



 Someone sent me an interesting essay about the significant bird-based omens in Homer's "The Iliad" the other day.

Mysteriously modern omens are still tweeted



 Ian Fletcher seems to be a newly formed star in the protectionist firmament. That facts speaks volumes about the quality of protectionist arguments– and about the audience for such arguments.



1 February 2011

Editor, The Huffington Post
Dear Editor:

Ian Fletcher's column on U.S. manufacturing is a stew of misunderstandings, non sequiturs, half-truths, and false presumptions ("Manufacturing in Decline; Establishment in Denial," Feb. 1). For example, about the fact that U.S. manufacturing output remains the highest among all countries in the world today, Mr. Fletcher - after expressing surprise that anyone bothers even to mention this fact - dismissively says "This statistic proves nothing about improvement or decline."

America's continuing high manufacturing output deserves to be mentioned simply because so very many people today– such as prominent anti-trade pundit Harold Meyerson– ceaselessly and ominously repeat the falsehood that "Americans no longer make things."

As for the "statistic prov[ing] nothing about improvement or decline," a scholar so well versed with the data as is Mr. Fletcher surely must know that, measured in inflation-adjusted dollars, U.S. manufacturing output in 2009 was about ten percent higher than it was in 2000, 47 percent higher than in 1990, 83 percent higher than in 1980, and 120 percent higher than in 1970.*

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

* Percentages are calculated from this blog post.



If the first day of month/Fosback anomaly were dissipating, over time one would expect over time the last day of month to increase (bought earlier and earlier) and first day decrease (buying moved to LDOM).

SPY daily 12/99-present used for regressions; FDOM vs date

Regression Analysis: FDOM versus Date

The regression equation is
FDOM = - 0.0016 + 0.000000 Date

Predictor        Coef        SE Coef      T      P
Constant     -0.00160     0.04447    -0.04  0.971
Date       0.00000012  0.00000115   0.11  0.915

S = 0.0157128   R-Sq = 0.0%   R-Sq(adj) = 0.0%

>>slope = flat (and NS); cannot conclude FDOM return is changing over time.


Regression Analysis: LDOM versus Date

The regression equation is
LDOM = 0.0522 - 0.000001 Date

Predictor         Coef       SE Coef      T      P
Constant       0.05219     0.02840   1.84  0.068
Date       -0.00000135  0.00000074  -1.84  0.069

S = 0.0100366   R-Sq = 2.5%   R-Sq(adj) = 1.8%

LDOM vs date negative slope (borderline significant) >> LDOM return declining over time; opposite of expected if buying moved from FDOM to LDOM



With garagantuan formulaic trading bots manned with thousands of smart processors and up to 100 billions in management etc. in multitudes, are there advance warning signals (predictive signals) of moves emanating from different markets of similar nature with lags of few hours to few days?

This struck me hard again as a thought, when on Saturday I was discussing with a trader with large exposure to Kospi2 Futures that unless this contract hit a territory below a certain number on Monday I would urge that shorts be closed there. He fumed asking why should they not continue to slide, what with the massive down-day in Americas on Friday. I maintained that I would ignore all other things at this time like one should at all points in time and focus only on the price action in that pit.

It turned out, both of us were wrong.

He related an action in America as the cause while Korea was giving indications of a rise ahead. Driving by looking at the rear view mirror?

My mistakes are two-fold:

1) Not only I should have been conscious that potentially all markets are generating signals with leads or lags and focusing only on that price pit that is opening earliest is not correct.
2) America rose and Korea did not. Ha ha. Ever changing cycles!

Now to the main business of this post, for the list that is focused on finding testable ideas and testing them:

Can one not look at assembling series of hourly or some such appropriate intra-day price data for many markets from across the globe and arrange to see as the Sun moves from the East to the West if by varying the weightages of each market with the movement of the heavens if a combined global market price equation will provide some kind of logit / probit models that can explain intertwined market behaviours ?



 Stopped off to see a buddy in a large trading room here…apparently no one can speak above a whisper. It seems a strange way of doing any trading…it is imperative that one learns to curse at himself (often and with gusto) to do well in this business.

Mr. Krisrock writes:

They use buttons…one beep ok, two beeps get the fades out of my way, three beeps with one following get me a single coffee, two beats two coffees…

Jeff Watson writes: 

Interesting about the character of many trading rooms. While they might play music as background, the players are generally as quiet as church mice, concentrating very hard. On the other hand, at my tiny room, because of my floor based background, anything goes. Rabelaisian jokes, potty humor, pranks, lots of noise, telephone calls, nothing bothers me and I encourage discussion, stories, jokes, etc. I guess it all depends on how one was brought up. Floor guys are just different, much more animated and aren't as cerebral as screen guys. Just because there is a lot of money involved doesn't mean that one can't have a sense of humor, or gallows humor;Plus, it might be better if one can trade with distraction, much like floor traders had to deal with,, but this should be tested.



This is a fascinating article with deep implications. Could politics represent an evolutionary struggle between different kinds of brains?



I don't think one becomes good at trading until we have been beaten so much that we no longer fear the beast…once you learn how to take any shot the market give you, success comes so much easier.

Jay Pasch replies:

There is wisdom in this post; it also emphasizes the importance of having enough skin in the game to experience its sensitivities especially when it comes to turning points– turning points start to hurt, they frustrate you, they wear you down, they rub you raw to a point where you think you can't take it anymore, to a point where you question your methods, why you trade for a living, to a point of throwing in the towel– it is then that the trader needs his perseverance the most and to stay awake.

Victor Niederhoffer asks:

What are the turning points and how can they be predicted? That's a good way of
trading I think. A turning point and run are pretty much the same with
proper definitions as a start.

Jim Sogi writes: 

There are enough niches and styles in markets that a person can find one in which his own weaknesses create the least problems.

Rocky Humbert writes: 

Craig wrote about Cyclone Yasi a few days ago. This is a monster storm, and may hit Queensland sugar (and other ag) production. It will be a couple of days before the markets "digest" the results.

Spot sugar is already in tight supply. If the Queensland crop is damaged, it could push up out-month sugar prices, and this might even feed into higher corn prices (i.e. corn syrup). Conversely, the ag markets are already extremely "hot," and we've not seen a bearish headline for ages.

Earlier this morning, the chair asked a most relevant question: "what are turning points and how can they be predicted?" The chair has also previously written that "reversals are more lucrative than trends." Over the past 12 months, sugar is up 65%, coffee is up 76%, cotton is up 125%. If reversals are indeed more lucrative than trends, I'd love to figure out when I should reverse these positions, since I keep wasting money on my hedges. Sadly, the only turning points that I ever see are with 20:20 hindsight.

Vince Fulco writes: 

There seems to be a prevailing reasoning in the trading world that "reversals" or "turning points" are something which must be predicted– while trading "trends" is something which is not predicted, but merely, reacted to. The latter, not requiring "prediction."

I think that prevailing reasoning is false. Being a trend follower still requires one to predict in the sense that he is predicting the trend will continue. Both approaches require prediction. (Similarly, a non-directional approach, a market-neutral approach, say, writing butterflies, is, by the same reasoning, requiring prediction in that one is predicting the market will stay sideways, or at least not go into a protracted trend).

So my question to the site is this: Is it possible therefore to trade and not predict?

Gibbons Burke comments: 

Method one: Book your profits in your mind, don't treat it as "house money" and decide right now, for each market, how much of your money you are willing to give back to the markets. Draw your line in the sand and let the market take you out at that point. If it takes you out and then goes back to make new highs, consider maybe getting back in.

Method two, which I prefer: take half of your positions off the table, cash in the chips and reward your self for being right. Let the rest ride with a stop set at the point determined by method one. If you keep being right, and start feeling like you want to reward yourself for being right again, take half off again. Keep raising your stop on the remaining positions to lock in your profits, and let the market take you out when it feels like doing so. And given the magnitude of the trends, the likelihood is that when it decides to take you out, it will keep going in lobogola fashion.

I've had this very argument with a well known trend follower/leader on his Facebook page a couple of times. He keeps insisting that trend followers are superior to the other species of traders because they don't make predictions. But my contention is that trend followers are simply deluding themselves if they think they aren't making predictions.

They are predicting that when they get a trend following signal that the market will continue in their direction by a magnitude that is more than twice the size of the risk they are taking on. They predict that this will happen maybe 20% of the time, and that when they catch those big moves they will make up for all the psyche-destroying losses of which they predict their method will keep small.

It is a different sort of prediction, but it is nonetheless a prediction.



 For anyone interested in big natural events, check out this article: "Yasi could become category five monster ".

 At the moment it's eerily calm… very, very strange. I woke up this morning and there were no birds flying around, no sounds, absolutely nothing. It's like the wildlife knows there's something going on.

CAIRNS resident Carl Butcher is taking a stand against the might of oncoming Cyclone Yasi– he has vowed to keep tweeting through the terror of the storm.

Butcher, whose Twitter handle @cycloneupdate is fast gathering followers worldwide…

Victor Niederhoffer writes: 

There are many books by Henty, favorite author of Getty, that describe how frontiersmen could tell what was happening 30 miles away, especially massacres by Indians, by the bird and insect cover in their own settlements. There are numerous market implications of this. I'd be appreciative of other references to the wisdom of birds, and how the layman can improve his profitability based on observing birds.

Ken Drees writes:

Here's a great article about bird behavior prior to the Longbeach earthquake in 1933.



Almatarians of the world. Prepare to be befuddled like the rest of us.

Vince Fulco writes:

As Chair would often say, usually when he was closing a winning trade, "Haa!!" Reminds me of Omar Sharif shouting the same in Lawrence of Arabia when he was protesting blasphemy and falsehoods.

Victor Niederhoffer writes: 

On those all too rare occasions when one had a winning trade, one would hope that I was not exuberant enough to say "Ha" or anything like that but would maintain my dourness– except in the case where a flexion lost.

Rocky Humbert writes:

Here's another broken almatarian trade:

The "theory" from Mark Hulbert:

CHAPEL HILL, N.C. (MarketWatch)

— Attention, investors in small-cap stocks: January is your month to shine. In fact, small-cap strength is so concentrated in the first month of the year that you might as well not bother favoring the sector during the rest of the year. That, at least, is the inescapable conclusion to emerge from my analysis of the relative performance of large and small-cap stocks over the last eight decades. I based my analysis on the database maintained by finance professors Eugene Fama of the University of Chicago and Ken French of Dartmouth. Click here to see the database yourself. 

The "fact" Russell 2000 Small Cap Index YTD: -0.36% S&P 500 Index YTD: +2.1%

The "meal" interested readers of this site can investigate whether a reverse January Small Cap Effect is predictive of whether the small caps will outperform/underperform for the rest of the year.

(Disclosure: I am currently long the S&P500 and short the Russell2000 as a hedged structural position — but my position may change at any time.) 



It's funny how just like in building a building, any construction that takes off too rapidly without adequate care and time, usually crumbles, just like the markets and just like riots. Great work and great markets can be torn down in seconds. To gauge what constitutes an adequate time to construct and whether it is strong enough, one must also bring in how tall the building is, how many pillars it has…



 Farm Journal had a good article on the tightening wheat supplies.

Their contention that milling quality wheat is getting scarce (but not to 2007 levels) and the market reflects this, resulting by the ever expanding Chicago/Mgex wheat spread. The resulting scarcity of high protein milling wheat has caused all contracts of Minneapolis Wheat to trade at a premium to Chicago. A few months ago, Chicago Dec 2011 was trading at a 5 cent premium to Minneapolis, which was an anomaly as every other contract of Minneapolis wheat was at a premium, except Dec 2011. As Minneapolis wheat normally trades at a premium to Chicago (Quality trumps everything and transport and storage are basically a wash), Chicago trading at a premium to MGEX can mean a good trading opportunity, but one must be very careful. It can also mean ruin if the mistress of the market continues her irrational behavior as evidenced by the Dec 2007 debacle that bankrupted many traders caught on the wrong side. Right now, in the wheat market, the seven wild cards are the next crop (there is a wheat crop harvested somewhere on the planet every 3 months), China's demands, our other exports, what Russia will do, the dollar's value, and acreage yields, and numbers of acres planted.

(As a side note, the government's directives might result in a reduction of wheat acreage like 2007 in order to plant more corn for ethanol, but this is speculation and not fact as of yet) However, supplies of Chicago's lower protein wheat are not very tight as evidenced by the front month, March, trading at a 30 cent discount to May. If there was a tight supply, the front month would trade at a much higher price, possibly even a premium, to shake some wheat out of storage to accommodate immediate needs.

The milling wheat on the other hand is only trading at a 6 cent discount in the front month suggesting much tighter supplies. From a practical standpoint, I am noticing a substantial increase in the price of pasta at the grocery store, and fewer markdowns on a retail level.My milling contacts also are mentioning substantial price increases in the near future. Still, this upward drift of the entire wheat market is rather confusing as the fundamentals somewhat support the rise, but there's something else going on beyond the mere fundamentals. I'll leave it up to others above my pay grade to ascertain and explain the intricacies of the market.

Meanwhile, I will try to make it safely to port without any damage. My mea culpa here is that 8 months ago I was of the opinion that while there might be a slight upward drift in the wheat market, it would be orderly and negligable and I saw no real rally unlike other sagacious members of the list. I even reported this on Daily Speculations, on Jan 26th. Larry Williams was the hero of the day when he said, "Wheat is set up to rally." Kudos to Larry, and a hairshirt for me…. I was so wrong, but still providence was with me when I decided to not try to buck the ever rising market and keep my longs.. Thinking of all the times I have been completely wrong, (and I keep very exacting records) it's amazing that I have managed to stay afloat and am not working the overnight shift at the 7/11.

Larry Williams writes:

I hate to disagree with a trade journal, but my stuff is bearish on wheat at this time.

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