I found it very interesting that the women at the IMF all find it appropriate to wear pants only so as not to excite too much exuberance from their colleagues there, all of whom are PhD, presumably suffering from the Miseian frustration of knowing how the world should work but no one will listen to them.

How can this be generalized to other market situations and become useful for predictions.

For example, how does the dress code in companies affect market performance, as well as the age differential between CEO and wife?



 There is nothing more competitive then tech: the smartest people from around the whole world trying to destroy each other globally, huge rate of innovation guaranteeing quick obsolescence and a killer breakthrough-based knock out punch that can come at any minute, lots of unpredictable trends and fashions with the "coolness" factor often ruling the day, very little customer allegiance, and what's there often turning to vengeful disdain when the expectation are not fulfilled even by a little bit. Yet Rocky evidently disagrees that tech cash flows are fleeting.

Alston Mabry adds:

Technological Revolutions and Stock Prices Lubos Pastor University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER) Pietro Veronesi University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER) February 12, 2008


We develop a general equilibrium model in which stock prices of innovative firms exhibit "bubbles" during technological revolutions. In the model, the average productivity of a new technology is uncertain and subject to learning. During technological revolutions, the nature of this uncertainty changes from idiosyncratic to systematic. The resulting "bubbles" in stock prices are observable ex post but unpredictable ex ante, and they are most pronounced for technologies characterized by high uncertainty and fast adoption. We find empirical support for the model's predictions in 1830-1861 and 1992-2005 when the railroad and Internet technologies spread in the United States.



 What will the bottom look like for US housing?

Sale-hungry, real estate agents tout low interest rates as the best time to buy, and that of course would be today. But are we at "the" bottom? I say we are not. Here are some bottom recognition themes that I would expect to see if the economic contraction continues and the bailouts ultimately fail with high commodity prices persistent.

1. First time home buyers (young couples) will turn to consolidated renters-move in together and share an apartment. The average age of 1st time buyers will trend higher. First timers under a certain age may need a 30% dp and a co-signature.

2. Prevailing sentiment sentence: "You own a home, you are either rich, old, or crazy".

3. Why own a home, there are no tax deductions anymore?

4. Real estate agents will be scarce.

5. Most unsold homes consolidated under a government/bank/insurance entity, General Homes (GH)?

6. Large sections of most all major cities like Detroit will have huge inner city areas bulldozed clean of empty homes. People living in homes on streets that are scheduled to be wiped will be given an equal or greater value home in a different part of the city that is earmarked for urban homeowners.

7. Large corporations or entities will purchase huge city open acre zones to rebuild gated communities and downtown oasis business zones that will be the new coveted land. These areas will be far from the urban sections that house the remaining hangers on.

8. "Owning a home is an anchor. In this economy mobility is key."

9. In the event of natural disasters, like the recent tornado, that wiped a town in half. New act of God clauses will be written into insurance and fema guidelines to get those people who have been made homeless to not rebuild but to migrate to unsold homes nearby owned or not by GH. This will take homes off the supply list.

10. Imagine a terrible new Madrid quake-Diaspora of population will take large amounts of homes out of supply due to no rebuild rulings.

11. The cost of home maintenance and upkeep due to raw material pricing will make it even more difficult to build new homes or maintain existing ones, although labor will be lower in cost for these services due to high unemployment.

12. Saving up very large down-payments and/or paying for a home in cash will be in vogue.

13. Neighborhood demographics will be very important in determining where to live. Longevity of intact healthy home zones will be key to long term stable values and reselling ability. Questionable areas with unlived in homes, many elderly, poor schools will continue to decay.

14 Home with an empty lot next door will be more common. Empty lots may be turned into garden zones, for neighbors.

15. Farms make a comeback since the home's value may depend on its own earning potential. Urban farms are already springing up in some inner cities.

16. The decision to buy a home will be considered as one of the most important in one's life.

17. Corporations may decide to buy bundles of cheap homes near work locations to rent to employees. Offering living quarters as part of total compensation will ensure home upkeep, intact resale zones, and ultimately profit.

18. Your carbon footprint will be taxed based on your home's energy characteristics. This would lead to high efficient energy themes, smaller homes, and conservation of utilities. This will reflect disdain for older homes and lead to the reduction of older homes through teardowns. Increased EPA restrictions on remodeling are happening now.

19. Lowes or Home-Depot, Sears, one will be gone or combined.

20. You will have to pay a real estate agent a trip fee to be shown a home.

21. Expect further consolidation of real estate companies.

22. Home Builder bankruptcy filings will increase, expect a big name or two to go away.

23. Gated communities will become more the norm. Knowing your neighbors will be an important theme in terms of security and safety.

24. The starter home section of the market will devolve, breaking down into a more energy efficient, higher quality home. The move up home will become the new permanent home for most. The high-end homes for the wealthy will cost more, be taxed more and will not change much. As the middle class shrinks the homes will be more straddled-either higher end or junk/rent.

25. Condos, a double edged sword -great when filled and no vacancies, bad when values are down and vacancies must be shared as a burden to all association owners-will either thrive as high end high security safe zones or be bulldozed. The condo concept may merge with the home zoned concept. Fort thinking may surface where a condo buyer may want to pledge too not sell for x years-getting a place in the fort is what counts.

26. Homes far away from employment areas will suffer. Long commutes will be a large factor in a buyer's mind. Homes in solid employment zones may be coveted and handed down from generation to generation like apts. in NYC, or old plantations in the south.

27. The amount of crime relating to copper thieving and siding pulling will come down due to lack of hood home supply and or higher security of homes still intact.

28. Home security, already a growing sector will grow in terms of round the clock surveillance -google home watch, automated stun defense systems, etc. Castle doctrine shooting of intruders will increase.

29. Pet ownership will drop since less homes and more people renting which usually employ no-pet clauses. Large eating-machine pets and high vet bill pets will shrink. The McMansion has died and soon the black lab will be a memory. Animal hoarders will be prosecuted severely.

30. Remodeling for college return grads will be even more in vogue. Mother in law suite, will become elder child accommodations.

31. As more home based businesses increase watch for the home office deduction to vanish, to further tax the homeowner.

32. Double houses will take on a charm once again if near safe areas or employment zones. Owner occupies half and rents out the other. Security, tenant control and income stream makes this concept more appealing. Builders may build new double homes with upgraded features-this may be a budding area of green cutting edge trend for builders, a healthy niche.

33. Concept homes for divorced persons who need to stay in same home with kids will evolve.

34. Foreclosures start to dry up as the eventual end comes into view.

35. High interest rates return and cement the death of housing and the bottom will be in. Home ownership will be considered a luxury.

Sam Marx writes:

I live in FL, and 5 or 6 years ago we had 2 back to back hurricanes in my area and for the next 5 or 6 months, Waste Management trucks could be seen hauling away the debris, lots of branches, etc.

I know it sounds ghoulish, but investments in Waste Management type companies in the tornado belt area might be a good investment.

Pitt T. Maner III writes:

I remember a run-up in the price of a small powerline repair company (don't remember the name) that did work in the SE and maybe on some of the Carribean Islands after Wilma (?).

Powerline repair, telephone line and tower repair, etc. can come into play after big hurricanes particularly since the wind speed and forces are often higher as you move above land surface.

In West Palm Beach there was a rather dramatic example a few blocks away where heavy power line cables running in a north-south orientation started swinging and ballistically broke and cracked what looked like strong, rebar-encased concrete poles. Several very large electric support towers collapsed out in the Glades too.

After a big storm, there can also be a multi-month need for rental equipment to cut, clear, and load vegetation and debris and to rebuild structures.

It seems like it took 6 months to a year to clean up after Andrew.



I notice in my area at month's end lots of pick-ups loaded with belongings of people who are obviously moving.

I have a renter moving today because she can't pay her rent to me yet has money for cigarettes and wine coolers in her fridge!

She has three small children who I feel suffer through all of this.

Do people like her sway our economy or is she part of the fray and is lost in the shuffle?





 I found a delightful paper from the World Bank that shows that it's freedom that is the biggest determinant of a good economic outcome.

Of course the uplifting effects that freedom and voluntary exchange bring to the table is very obvious to many, but to hear it from the flexion's mouths is something very unusual.



 An interesting holideasonal is that there have been 13 big up opens on holidays since 1999, the last being July 6th, 2010, and 11 of these 13 were up a further nice amount, averaging 1.2 % by the close of the subsequent day. (the gig on average was up at that time in retrospect).

Sam Marx writes:

I have become interested in quantitative studies similar to holiday studies just mentioned, determining best trading days of the month,( last I heard it was last 2 days & first 3 days of the month ), predicting next day's move, repetitive run patterns, etc. etc.

I'm interested in finding any websites, articles, books, etc. that discuss these topics.

I remember Fosback and Merrill did some work on this type of trading many years ago (late '70s ) but I was mainly involved with options then, still am.

Back then I started a study of gap trading but did not follow through as making money trading options profitably on the exchange floor was just too easy and data were more difficult to obtain then (no internet). I could trade options profitably then without knowing anything about the underlying stock.

The Stock Market Almanac has some of these studies that I'm exploring , and their Table of Contents is my starting point. However , I've already found 2 of their studies that I believe are in error. However their 6-6 month strategy is interesting although I believe the so-called "Good" period is now starting earlier than Nov.1. The last "Good" period started on Sept. 1.

I've expanded my trading to include value stocks along with options, but I'd like to enlarge my trading to include more quantitative trading.

I welcome suggestions.

Victor Niederhoffer adds:

One is reminded of Beethoven's remark to Rossini when the latter came to pay a courtesy call to b, while Rossini was the greatest star in Europe and B was on the wane. "Stick to comic opera," B told him. The seasonals on a perspective basis are most non-predictive. But they look great in retrospect.



I have recently been considering the angle of ascent as a predictor of subsequent movements as part of a general consideration of the principles of conservation of momentum apliccability to markets. Here's one approach.

Consider all moves during a week of 10 to 20 full points i.e. 1% in s & p

.                  number of obs  move the next day     sd
.previous Wed
.to Friday
.up more than 10     44            -2                   13
.up btwn 5 and 10    27            -1                    9
.up btwn 1 and 5     14             0                    0
.-5 < sp <0          11            0                    12
.sp < -5              9           20                    22

There would seem to be some small evidence that for weekly moves during the 1st 10 years, given that the move during the week was between 1 and 2%, the algebraic speed of ascent in the last part was negatively correlated with the move the next day. The approach has many bifurcations and variations and might be interesting to the physicists in our audience.

Chris Tucker writes: 

Angles are important in aviation, we use quite a few. Pilots differentiate between angle of climb  and rate of climb. Best angle of climb will provide the most vertical gain over a specified distance, which is handy for clearing obstacles like trees off the end of a runway. Best rate of climb will gain the most altitude over a specified period of time. Not the same thing.

Angle of incidence, a fixed value, is the angle between the chord line of the wing and the longitudinal axis of the fuselage and is not to be confused with the all important angle of attack, the angle between the chord line of the wing and the airflow through which it is travelling. Lift generally increases with angle of attack to a maximum point, the critical angle of attack, after which it decreases because the laminar flow of air over the wing begins to separate from the surface of the wing creating a stall condition. (Nice illustration and mention of tennis and golf balls here.

A serious stall involves a complete loss of lift and often results in a spin and frequently ends in tragedy, as in the loss of Air France Flight 447  and the most recent fatal crash in the United States, Colgan Flight 3407.

The thing to consider in aircraft when looking for a superior rate of climb is high thrust to weight ratio and light wing loading. Pilots can cheat, however, by accelerating during level flight and trading this kinetic energy into a single burst of high speed climb. This is known as a zoom climb and I have suggested the use of this maneuver on occasion to convince pilots to penetrate a layer of severe turbulence if the layer is thin enough and there is smooth air above. It is critical to have current and accurate information about the turbulence before attempting something like this. The important thing about a zoom climb is that it is unsustainable and is bounded by the amount of available kinetic energy. Military fighter aircraft, with extremely high thrust to weight ratios need not be concerned with this as they are capable of sustained and extreme vertical speeds. But they burn an awful lot of fuel in the process.

(Sorry for all the links, when I start talking about flight I tend to get carried away….) 

Pitt T. Maner III writes: 

Played tennis one night many years ago under the lights with a commercial pilot from Nevada who had a naval aviation background and he described the difficulties of landing a jet on an aircraft carrier under low light conditions in fairly rough sea. What he described was having to concentrate, I think, on the pitch, roll and yawl and coordinate it with the similar movement of the carrier flight deck—lots of variables in a short time window and positional awareness. Very harrowing procedure in difficult conditions (it sounded nightmarish, and one for only the most experienced pilots) and he used the term "bought the farm" several times to describe pilots who had crashed in such circumstances.

What was interesting was a technique he described as powering up and down so as to maintain control and complete the landing. Too much power and he would overshoot and too little and he would stall out or not make the deck. It sounded like revving an engine. Short bursts of power on and power off.

Is that a technique that is taught or does that come from experience and feel?

By coincidence it is the 100th Anniversary of carrier landings. Even with the technological advances pilots must very skilled:

"On Nov. 14, 1910, Ely ignored storm clouds and took off in a spindly aircraft from the USS Birmingham, which sat in the waters of Hampton Roads. It was the first time an aircraft had ever lifted off from a ship.

A photograph freezes the moment in time that Ely became airborne. Yes, that would be him, dropping toward the water.

The flight came perilously close to failing. Ely dove toward the water to gain speed and pulled up, but not before his wheels and part of his propeller struck the water. The aircraft climbed into the air, rattling with damage. Steering with his shoulders — aircraft of that day were built by bicycle makers, and were steered by leaning — he managed to land on the beach at Willoughby Spit.

Then in January 1911, Ely closed the historical loop by landing on the deck of a ship. This time, the event was in San Francisco and the ship was the USS Pennsylvania.

Later that year, Navy brass became convinced to give these new-fangled flying machines a try, and put in the first order for aircraft. That makes 2011 the official 100th anniversary of naval aviation.

Many events are planned for next year, but the Navy will get a head start on the celebration come Friday, with a celebration and a display of older aircraft. Coolbaugh's replica is closer to the aircraft that Ely landed out in San Francisco in 1911, as opposed to the one that took off from Hampton Roads a few months earlier. Still, he had hoped to fly his aircraft off the deck of the USS George H.W. Bush as a tribute to Ely's first take-off."

Here is the wiki for Eugene Ely.

"It's a dangerous job" 

And an interesting video here.



 After 5 years or so, I finally got to the point of confidence in conducting basic quantitative studies. (Very basic…)

While reading again Philip's book "Optimal Portfolio Modeling", I got stuck in the following sentences:

"Professor Niederhoffer was just such a divergent thinker.

His help and guidance taught me to see things at their simplest. That is the essence of his approach. His enlightenment also helped me to learn how to avoid the numerous pitfalls that can arise in quantitative studies. *In fact, one of the things he taught me was what not to do on a quantitative study*."

I couldn't help to think what such advice would be…

And what the Specs thinks of what one should avoid while performing any counting studies.

Steve Ellison writes: 

Be very careful to consider only information that was known at the time. For example, when doing a study that uses the high price of the day, you cannot know that any price will be the high of the day until after the close. Similarly, you cannot act on the closing price or anything based on the closing price, such as a moving average, until the next day.

Beware of data mining bias. If you test the same set of data enough times, you will find some results that appear to have statistical significance, but occurred just by chance. For example, I analyzed the most favorable trading days of the year. There are an average of 252 trading days per year, so one would expect 12 days to have results with p<0.05 just by chance. You need to control for data mining bias either by setting a more stringent p threshold or testing out of sample. Any time you have considered multiple strategies and selected the one with the best results, you should assume that part of the good result was by luck and expect worse results going forward.

Statistical significance is not necessarily predictive. In an era of much quantitative analysis, a regularity may not last long. It has happened more often than I would expect by chance that I found a pattern that was bullish or bearish with statistical significance, and the out of sample results were statistically significant in the opposite direction.

Bruno Ombreux writes:

Data mining bias can be experienced in the most vivid manner with the new Google correlation engine. It can come up with some of the weirdest, actually impossible, correlations. Google correlation results are more illustrative and striking than any theoretical academic stuff about multiple comparisons.

Phil McDonnell writes:

An incomplete list of things NOT to do on a quantitative study:

1. Avoid retrospective data. Many fundamental data bases have retrospectively adjusted data. sometimes the data is adjusted years after the fact and could not possibly be known at the time.

2. Avoid retrospective price data. Many so called quants pat themselves in the back for 'correcting' their data after the fact. Any valid study must include the data as it was known at the time.

3. Avoid the part whole fallacy. There is more on this in the Chair and collab's book Practical Speculation.

4. Use non-parametric/robust statistics to avoid fat tail issues.

5. Simplify your studies to a very small number of variables.

6. Avoid looking at simultaneous relationships. They are descriptive and not tradeable. Instead concentrate on predictive relationships.

7. Avoid indexes, rather use prices that actually trade.

This list is only some of the pitfalls and traps to avoid in doing a proper quantitative study.

Newton Linchen writes:

It has happened more often than I would expect by chance that I found a pattern that was bullish or bearish with statistical significance, and the out of sample results were statistically significant in the opposite direction.

Isn't that annoying?

Doesn't it pushes us to the other side of the coin, of pure "tape reading", etc?



Tune in, Turn On, Drop Out– The Start Up Genome Project:

"Max and his partners interviewed and analyzed over 650 early-stage Internet startups. Today they released the first Startup Genome Report— a 67 page in-depth analysis on what makes early-stage Internet startups successful."



Six seismologists and a government official are being tried for manslaughter in the deaths of more than 300 people in the 2009 tremblor in L'Aquila, Italy. The city's public prosecutor says the scientists downplayed the possibility of a quake to an extent that townsfolk did not take precautions that could have saved their lives. A judge has just set the trial to begin on September 20. - News Item.

It seems to be an occupational hazard in that part of the world: 

"In 1795, Ascanio Filomarino devised a seismograph similar to the one Zhang had invented centuries before. It had a part that would stay stationary while the rest of the instrument would shake when an earthquake was occurring, and ring bells and set off a clock. Poor Ascanio was murdered on Mt Vesuvius by an angry mob that didn't like his work. They also burned his workshop and destroyed his seismograph."



One of the more useful skills one can have, at least if one is a researcher, is knowing how to program a computer to extract online data, e.g. stock market prices.

I personally use VB.NET, but I'm sure most programming languages have built-in functions that make the process quite easy.

I wrote "quite" easy, as in everyone can do it, assuming they know basic programming. An introductory book, or a little tutoring from an experienced programmer, should be sufficient.

Two line are all it takes to download a web page:

Dim wc As New System.Net.WebClient wc.DownloadFile("", "savedFile.txt")

The above lines tell the computer to save the webpage's source as a text file named "savedFile.txt" in the same directory as the VB.NET program.

Naturally, one wouldn't make a program just to download a single page. It's when one needs to download dozens or more pages that the programming approach pays off. If these pages are numbered (they often are), then all one needs to do is to loop through them, e.g:

For i = 0 to 1000 Dim wc As New System.Net.WebClient wc.DownloadFile("" & cstr(i), "savedFile-" & cstr(i) & ".txt") Next

With stock market data, one often needs to specify the tickers. Thankfully, this is easily overcome:

Dim tickerList() as String = {"ABC", "XYZ", "JPJ"} For i = 0 to tickerList.getUpperBound(0) Dim wc As New System.Net.WebClient wc.DownloadFile("" & tickerList(i), "savedFile-" & tickerList(i) & ".txt") Next

If neither of these approaches work, then the process is slightly more challenging. One needs to search for links within the downloaded source files. It's doable, but too complicated to include in this text.

Although it's very fast to write the code for downloading webpages, the actual execution is very slow. This varies a lot with the internet line and proximity to the remote server, but a rule of thumb is that one page takes one second to download (one should also consider waiting a a short while between each download). One hour, as you know, exists of 3,600 seconds. One day is 86,400, and one month is 2.6 million seconds.

Because of these time concerns, I almost always download all the raw source files to a hard drive, and I do not manipulate them. You never want to find out that there's a bug in the data extraction algorithm, and then having to do all the downloading again. Once the files are on the hard drive, one can easily read them and then save the relevant information into new files again. Reading a file takes something like a hundredth of second or less. The downside with this approach, is that raw data takes up tremendous amounts of space. But with affordable 1TB external usb-connected drives, this is not a problem.

Although reading files from the HD is many, many times faster than downloading them in the first place, working with data loaded to the memory (RAM, as variables in the program) is many, many times faster than reading and writing files. I therefore prefer to make one, only one, text file (CSV) with all the relevant data from the raw data, and every time the program starts up, this file is loaded. When the program finishes, the manipulated variables are then saved to a text file.

I know I only scratched the surface here, but I hope this short text will inspire other researchers to learn the skill of automated data downloading. Once fluent in instructing computers to do your dirty work, you have an extremely valuable slave at your disposal.

P.S. Some useful codes can be found here.

Work in progress!



 One wonders if in Europe politicians want to replace GDP as an indicator
because the old continent is clearly incapable of growing economically
(with unemployment problems and so forth) and they are not able to show
the public how well they perform. Or rather if it is true that in
developed countries efforts should go into other endeavors and that
growth does not mean better quality of life:

"The European Commission has held a series of conferences focusing on measuring sustainable development and the need to think Beyond GDP, and its statistics agency Eurostat has started to work on developing well-being indicators for the European Union."

"There is a huge distance between standard measures of important socioeconomic variables like growth, inflation, inequalities etc… and widespread perceptions. Our statistical apparatus, which may have served us well in a not-too-distant past, is in need of serious revisions."

"…governments should adopt new headline measures of sustainable well-being and progress that encapsulate this vision of national success. But that these new measures will only matter if they actually influence government policy."

"Creating new measures of progress will be a statistical and political challenge. But if we want to create a world that is happier, fairer and more sustainable then we really do urgently need to find a replacement for GDP."

Full article here.



 One has to wonder why this whole "college is a waste of time" meme has suddenly become so prevalent. Is it because so many people have trouble with college loans? Too many writers who have nothing more to say about O's birth certificate?

Thinking one can predict the future based on what one does in the present is a persistent human foible. For sure a lot of kids go to college who don't need to. But is this truly something new? Would anyone sensible make a decision based on what they read about this subject? Unfortunately some probably will.

It remains to be seen how employers of the future will react to resumes that state "I am really smart but I didn't go to college because I read online that it was BS; but I really am smart."

One of my kids is 1/2 way through college and the other is just entering this fall– and I don't spend any time at all thinking it's a waste of time or money; it's been a path to prosperity in my family where none of the previous generation had any education past high-school (if indeed they finished that at all).

On the other hand my wife and I went to CUNY at a time where the cost was $35/semester. That's not a typo.

But I still wonder what's behind the impetus to discredit higher education?

Ken Drees writes:

I get the vibe that the intent is more of a cost justification issue. You don't send a kid to college who gets middle of the road grades and majors in marketing anymore. The job market out of college is poor and will continue to be poor. College now will set you back serious money as a percentage of household income and there will be serious debt burdens on the student and parents upon graduation. You can't put the college payments on the credit card or the home equity loan anymore.

I believe that a college bound child needs serious career planning up front, which is tough to do since kids sometimes do not know what they want to do prior to going off to the higher education arena. Like the union bubble which is feeling the backlash from the debt riddled state pockets empty reality, colleges need to step back, cut back, stop the pay raises–else enrollment is going to crater and the pie shrinks.

Victor Niederhoffer comments:

 A college education will always serve as a signaling device to employers and partners and parents that one is capable of being admitted under highly competitive circumstances and then has the fortitude to stick with the program, and finish the requirements, and the moral fiber not to have been kicked out. The signaling will always be of value and the rate of return from college should stay relatively constant.

Russ Sears comments:

Very similar qualifications could be said about homeownerships, commitment to paying a mortgage and good citizenship of being a good neighbor. When a persons limit to leverage has no bearing to what they could reasonably expect… many with nothing to loss will gamble with somebody else's money. This of course creates a bubble in some areas where there will be large oversupply of X degrees. For instance everybody will think in 2022, "what were they thinking taking forensic science and $100 grand of loans?"

The problem is when you use the argument that is it "should" be worth it to argue that everybody has a "right" to upgrade there lives. Further when you grant this "right" to any 18 year old capable of getting a high school degree you are bound to get many that should not have been given this privilege without working a few years and tasting responsibility. I still believe orginially there was a segment of responsible people that were granted sub-prime loans. These people however, proved to be the exception to the rule when everybody was given this right.The difference may be that those youth that are the sharpest will see the "bubble" within these areas and avoid them.

Could we be looking at the class of 2011? on a resume and subconsciously think what a deadbeat?

James Goldcamp writes: 

 I agree with chair's analysis of the signaling value of education, but one also wonders at what cost. I would find it hard to believe the return on invested capital has not gone down with both greater real costs and general degree (volume) inflation over time. It occurs to me that a rigorous self study program with standardized tests against which one could be compared might provide some lesser but nonetheless valuable signaling vehicle at 1/20th the cost of the current college education. Interestingly, one hire we had years ago was more known for his perfect SAT than his multiple Ivy degrees.

Thomas Miller writes:

This anti college education and anti home ownership "debate", seem to reflect a negative attitude that is growing in this country. The theme seems to be "dont even bother to go to college or strive to own your own home. it's not "worth it." just give up and settle for less." Of course college education or home ownership is not for everyone, but those that propagate these defeatist platitudes, (especially the ones that do it on internet blogs read by a large audience), are doing a great disservice to young people. "just settle for less" is not the attitude that made this country great. A generation ago, many that chose not to pursue college could get a decent job with benefits and be fairly sure of being able to retire from that job. There are very few of those jobs available now. The gap between those with a college degree and those without will continue to widen.

Russ Sears comments:

 I believe those that are "anti" college are saying take more risks start a business instead.

And for those that it will not turn out for the better, it's not good government to guarantee the loan. More responsible decisions will be made if they have to compete for access to loans like anyone else.

Ralph Vince replies:

I cannot speak for others, but I am not advocating a "give up," or defeatist attitude here. I speak with those who have children of college age frequently, as well those who ARE of college age frequently too. One of these day, I'm going to stop speaking to people who don;t take my advice (most people are incapable of taking advice, we simply have to learn things the hard way, and usually more than once)

I hear an awful lot of talk from all of these people that a college education is necessary to enter the American job market, as though it were a ticket to the dance, a means to an end as it were.

(I should point out in full disclosure I do not have a college education. I am self taught. When I decided I should learn math, I started with algebra, geometry, trig, analytic geometry, calculus, topology…..eventually stochastic differential equations, which is used (with near exclusivity) to model prices with (a nice target for a math track for someone interested in the markets, but I find these methods model prices with a degree of reality akin to Oz modeling Kansas). When I wanted to learn literature, I started with Homer, then Virgil….through to the 1950s. Of course one cannot study everything and anything, you have to make selective, intelligent decisions (which is where talking with others comes in) and someone must WANT to dispal their ignorance (and this is the key attribute, the acknowledgement of our ignorance and a desire to overcome that — whether formally educated or not).

The last time anyone ever asked me about my educational background was probably when Reagan was running against Carter.

So when I look at what people are learning, and WHY they are learning it, I DO come away in MOST cases with a "Why bother with that?" attitude.

So once we acknowledge that there are two reasons for edication:
1. To dispel our ignorance, and ultimately, to study material we are passionate about, should have such good fortune, and
2. To make ourselves, personally, a marketable product (i.e. posses a marketable "trade," be it electrician, brain surgeon, or truck driving certificate)

people can make better decisions. Unless they are fortunate enough to be a trust fund kid, they need #2. A mere college degree does NOT provide that — this is a wives tale that floats about America wherein a lot of money is being wasted in its pursuit.

#1 is a luxury — one must have the good fortune of finding what fires their jets at a young age, aside from pornography, and find a way to pursue it. If they have the resources and time, college is the way to go. If not, anyone with a spark and a modicum of resourcefulness will find a way to pursue it.

I've spoken of this before. The number of persons from the 2000 census to the 2010 census is up 20%, the number of households, nowhere near that amount. Clearly, in the not-so-distant future, either much housing must be created or much work must be done to convert the "cul-de-sac development" McMansions into 2 and three household homes. What young person is a yeoman plumber out there, or plasterer? Not many, certainly not many over the past 10 years — but it is the fastest track to acquiring #2, above, for most.

And most need #2. Not everyone needs #1, and if they have that luxury, nothing will stop them from pursuing it. But the notion of borrowing a lot of money for a ticket to a dance based on some parent's misguided model of reality (Oz!) is something the educational institutions feed on, benefit by and play to.

Jim Lackey writes:

 College is the time to meet your mate, your equal. For the fortunate men, it's  the better half you spend life with.

In your college years, there is only so far you will go…. Either to fake it, to fit in/get ahead or rebel against, to get off easy and/or explore the adventures of danger. The gist is how you act when no one you know is looking. Sin may resurface later in life. For certain people, the hypocrisy of life will rear its ugly head. If a married couple knew each other during these years of growth and uncertainty it's near impossible to argue later the lack of full disclosure prior to marriage.

A grievance can always be resolved. A slight, an imaginary hurt, the lack of full disclosure–the "I thought I knew that person". That person will hate you til the day they die.

My guess that is how/why bitter divorces ruin families… vs the much higher than average success rate of current marriages from my anecdotal evidence of family, friends and cohorts that married some one they knew from school.

Jeff Sasmor writes:

Good article on "What's a Degree Worth" :

What Are You Going to Do With That?

For the first time, researchers analyze earnings based on 171 college majors

By Beckie Supiano

Tuition is rising, the job market is weak, and everyone seems to be debating the value of a college degree. But Anthony P. Carnevale thinks these arguments are missing an important point. Mr. Carnevale, director of the Georgetown University Center on Education and the Workforce, has argued that talking about the bachelor's degree in general doesn't make a whole lot of sense, because its financial payoff is heavily affected by what that degree is in and which college it is from.

Now, new data from the U.S. Census Bureau sheds light on one big piece of Mr. Carnevale's assertion: the importance of the undergraduate major. In 2009, the American Community Survey, the tool the bureau uses to collect annual estimates of population characteristics, included a new question asking respondents with a bachelor's degree to give their undergraduate major.

After combing through the data, Mr. Carnevale says, it's clear: "It does matter what you major in."

Laurence Glazier writes:

After the signalling provided by college qualifications, the deliberate undertaking of full-time employment may signal the willingness to allow creative fruit to wither on the vine. A shibboleth of perspective. So many wait for retirement (which may not come) to allow vent to such aspirations, but the law of the farm dictates regular irrigiation throughout a lifetime.

To this end there would be much benefit to all if full-time work became less the norm. The end of government subsidy of unsound housing loans would reduce the pressure on people to suppress their finest qualities.

The Harry Potter books emerged not in spite of the writer's modest circumstances, but aided by them.

David Hillman writes:

Very astute observations.

A laborer can be trained to dig a ditch to a certain depth. A monkey can be trained to dance to the organ grinder's tune. Even a plant can be 'trained' to grow in the desired fashion. But few of the former are, nor neither of the latter can be, trained to *think* and creatively problem solve.

One might speculate that emphasizing skills, specialization and technology in educational curricula and employment qualifications may be the culprits.

While a college education being increasingly available only to the affluent because of financial considerations is, indeed, an issue, perhaps another of our chief concerns should be that we are creating a nation of people who are trained, rather than educated.

Kim Zussman writes:

The "education ruins thinking" argument has value, but simply looking at dollars a college degree pays more than just HS diploma. BLS stats below shows increasing income with formal education: about $400/week more for college grads - which of course does not include harder to value assets like volume of learning, tutored critical thinking, facility of life-long learning, status, access to better mates, good memories, signalling, etc.

One would need about 10 years of the additional (median) college grad salary to pay for 4-year private degree (ignoring taxes). Would the degree be worth it if it took 20 years to pay off?

Unemployment rate     Education attained        Median weekly earnings
in 2010 (Percent)                     in 2010 (Dollars)

1.9%            Doctoral degree            $1,550
2.4            Professional degree         1,610
4.0            Master's degree             1,272
5.4            Bachelor's degree         1,038
7.0            Associate degree           767
9.2            Some college, no degree           712
10.3            High-school graduate           626
14.9            Less than a high school diploma       444

8.2                     All Workers                        782

Note: Data are 2010 annual averages for persons age 25 and over.

Earnings are for full-time wage and salary workers.

Source: Bureau of Labor Statistics, Current Population Survey

Rudolf Hauser writes:

The question of a rate of return on a college education is not that easy to measure. For one, it will vary greatly on the college attended both by cost and quality of education. It would also vary greatly by the course of study and how much a person actually learned as opposed to just getting by and having fun. Even taking account of these variables, it is not an easy question to answer. The math is a simple discounted present value calculation, but the inputs are something else. For one, the attributes of those attending college and those not attending will differ. Those with an interest in learning and working hard, more personal discipline and more ambitious are more likely to be attending college than those who are not. Those people are more likely to earn more than the group that does not go to college even if they had not gone to college. So while the value of the education is the difference in what they earn in the future compared to what they could have earned had they not gone to college, one cannot just assume the latter is what those without a college education currently earn. In addition what is actually earned will not be a single average or medium figure but will have a wide distribution around it based on good or bad fortune, who you know, and countless factors beyond one's control. Costs while being educated in addition to direct costs of tuition ,books include difference in living costs relative to what they would be had one not gone to college and opportunity costs of lost potential earnings from working rather than going to school. Then there is the question of how much of the difference is due to signaling as opposed to the value of what was learned and contacts made during school. That is real but could change if the marketplace found alternatives to such signaling. If lower education had more strict criteria for graduation and grades the signaling value of a college education might lessen as employers had more confidence in that and prior work experience. The cost of loans may also vary, so that how the education is financed will matter a great deal.

In addition to monetary economic measurement, there are other benefits that might be gained. Meeting a spouse has been mentioned by list members as one such benefit. Learning about many areas and learning how to learn, may enrich one's life as a person, contributing to the value one has to society and family and to one's personal richness of life and happiness. But if prospects do not turn out as one hoped, it can also lead to unhappiness. The question then is how much one wishes to pay for these other potential benefits or negatives (i.e., the probability of disappointment). Some areas of study such as general liberal arts, might be expected to have a higher risk of low or negative economic returns than more specialized fields, but specialization runs risks if those skills become of less use to society.

On a personal level, I do not believe it make sense to send a kid to college unless they are actually going to work hard to learn. If not, it might be best for them to work for a time and see how difficult life can be without a college education. Often they may then go to college and actually make the most of it rather than going at a younger age and goofing off.

I might also add that education need not be in the classroom. The time spent learning on one's own is also education. One need not attend college to learn. It might not have much signaling value but it certainly helps in many areas. The cost is the value of the time spent either in terms of the value of one's leisure or economic opportunity cost.
The ability to learn might be enhanced by a formal education. One of the things I would advise a person attending college to learn is how different disciplines think. The way a lawyer thinks about problems, the way a scientist does, the way a creative writer thinks , the way an economist thinks differ and are specialized in some ways that takes a time to learn. The first course in microeconomics is difficult for many students, for example. The more ways of thinking one understands, the broader ones ways of understanding the world, understanding other people and in solving problems. Some of the great innovations come from taking of advantages in knowing something about other areas of learning that provide insights into the problems in your area of interest.

David Hillman writes:

Ok, then, I meant the focus to be on the point of training versus education. If it requires more updated or timeless references than those to the 20th Century, so be it, and I beg pardon.

(1) Backhoe operators are *trained* to operate them, but there are many instances of heavy equipment being stuck because the operator failed to *think* about the application.

(2) Musicians can be *trained* to play an instrument, but without a proper foundation, i.e., *education* in music theory, history, etc., while the music may be technically correct, it is often dry and mechanical, uninspired and with an 'off-the-shelf' feel.

(3) An air traffic controller can be *trained* to direct aircraft, but when an emergency arises, he/she must *think* of how to resolve it, not unlike,

(4) A 9-1-1 operator being *trained* to follow protocol, but when that protocol does not apply, hopefully, that individual may be capable of *thinking* of a way to prevent loss of life.

And, what of entrepreneurs like you and me? How can one be *trained* to brainstorm an idea out of thin air, then take it from the drawing board to reality? But, one can certainly be educated broadly enough to think creatively, make connections, take calculated risks and solve problems. Even in strategic planning, one can follow a plan, but the successful execution of it requires feedback from the real world and adjustment, which requires the ability to think, not just the ability to follow an SOP manual.

Clearly, a liberal arts education is not for everyone and the rise of tech schools and alternative forms of education and training should be applauded. For those who require training, the more well-trained they are, the better off will be all of us who depend upon their services. But, one should not necessarily depend upon them to do anything other than the job for which they've been trained, nor to be able to *think* creatively when faced with a situation or event for which they have not been trained. Trained mechanics may depend upon a diagnostic computer and trained line cooks upon a recipe, whereas a great mechanic might 'feel' a rough idle and a great chef might improvise a dish. The latter two have the ability to think and create, some of which is natural, but a good deal of which may also come from an education.

Nor is a college education always the right thing for someone at any given time. There are plenty of examples of individuals who failed to perform well in college as a recent high school grad, but did stellar work 'going back to school', my own being one of them.

Some eschew those who are 'too educated' as being 'troublesome' precisely because they can think. However, if I knew nothing of one's natural intelligence, and had to choose, I'd probably go with the educated over the trained.

That said, neither education nor training has much to do with 'smarts.' For that, you either are, or you are not. Some of the dumbest guys I've known have had PhD's, but so have some of the smartest. Likewise, some of the least educated have been the smartest and most capable, but there have been many that are dumb as a box of rocks.

As someone once told me, "it's better to healthy and rich, than to be sick and poor." I'm kinda thinking it might also be better in the long run to be smart and educated, than to be dumb and trained.

Stefan Jovanovich writes:

David is right. If there is any fault to his argument, it would lie in his optimism about the capacities of higher education. But, then, my cynicism about schooling comes from having literally grown up in the business and from being a 2nd generation academic bum. (There are not many fathers and sons who share the distinction of having gone to graduate school in English literature solely because they had no better idea of what to do and the GI Bill would pay for it.) School, like most things, is what you make of it. My difficulty is that "education" is now what "national defense" was in the 50s and beyond; an open-ended appeal for more money that is always justified in the name of some higher good that is incapable of being questioned.

Jeff Rollert writes:

I concur with Ralph, and if you believe in the concept of singularity, then a repetitive answer method is most likely to be replaced by a machine.

For me, I believe that standard problems will have standard solutions already applied to them before I'm even aware of the problem. So if one were to find employees who where good at sensing/finding the "unknown-unknowns" then they would have to have a non-standardized approach - in other words a non-academic approach.

Lastly, in a logic sense, how can something be a "value" but still be "expensive"? Aren't these mutually exclusive?

Tim Melvin writes: 

We have dealt with both sides of the college issue here in the past few years. My daughter on her quest to be the world only libertarian teacher had no choice. To teach you must have three degrees and credentials. She has on semester left and has pulled a 4.0 throughout. She may have learned some basic teaching techniques she did not know but the general education element was lost on one who reads like her. When I look at the top 10 majors in US colleges I have a hard time seeing what we are producing except middle managers. Teaching and nursing are the only to that offer a truce vocational choice. I would love to have had four years to study literature, but I question the employment value of the degree itself. The top tier schools may be different but is seems to me that our universities are teaching fixed values and information, not how to think. How to think has to be either installed by your parents or learned on your own. I cannot see where this can possibly be worth the cost today. Perhaps Colonel Depew can add a though on this but I think teaching the young to read the Great Books Curriculum would go farther than the current middle management factory that are most schools today.

I never went to college. Truth be told I dropped out of high school at the enthusiastic recommendation of the local authorities. What education I have I obtained from between two covers in the style of Louis L'Amour– I suggest that book as a manual on learning to think by the way. I read constantly when I was a kid. My mother was wise enough to let us read anything we wanted regardless of content. If there was something we didn't understand she made us find the source material to explain it..and this was back in the day when Encyclopedia Britannica was still the source of knowledge not the internet. I have continued to read ravenously all my life. I read anything and everything. I have found that even fiction often contains lessons for life and can be a source of knowledge. As an example, I read two or three of Robert Parker's excellent Spenser series. Great detective books, but read a few and you will learn two or three good quick dinner recipes, several literary quotes worthy of further research and how to win a fight. Many of us on the list have followed the chair's lead and studied the great lessons of Monte Walsh, Don Quixote and Patrick O' Brian. Randy Wayne Whites Doc Ford novels often contain insights into the biology of floridian waterways and the everglades. Knowledge is everywhere if you know how to think. I fear today's world of standardized testing and assembly line universities may not be teaching that valuable skill.

Think about this. The two greatest innovators and business men of the past thirty years both dropped out of college. Some schools may be worth the price tag. I suspect most are not.

My son on the other eschewed school in favor of making a few bucks. He discovered he had a real talent for and love of business. Within six months or so of going to work at Boater's Worlds he was managing one of the top producing stores in the company…at the age of 20. We talked about school and he told me flat out "I can't see the value of spending the money. I have two MBAs working for me now because they can't find jobs that pay enough, and my part time staff includes a phd in English." He moved on when the Ritz family folded the chain. His former district manager brought him over to his new company and he is moving up the rank there. He just undersands the art of working hard and making money. He may need a few accounting classes some day but four years at some state university would have been a waste of time and money.

We need more thinkers who have a passion for knowledge and more curious explorers and fewer managers and chair holders. That's on us as parents as much as the schoools. If our children go onto college make sure they know how to think and the univerisity allows them to do so.

Stefan Jovanovich writes:

Dropping out can be useful even for scholars. Peter Green (the #1 biographer of Alexander the Great) did it.

So did Eddy's favorite professor who didn't teach art history.

Eddy's most treasured legacy from 4 years at Cal was giving Professor Jacobson the recording of her version of the Super Mario tune. He had heard her play it on the UC Carillon and wanted it for the ring tone on his phone.

Dan Grossman writes: 

Found this interesting blog post by Steve Sailer proving the value of higher education:

 A column on a new Gallup Poll asking "Just your best guess, what percentage of Americans today are gay or lesbian?"

"The mean guess was a ridiculous 24.6%. Only 4% said less than 5%, which is probably the best guess.

Polling companies seldom ask questions on which people can make obvious fools of themselves, since those can raise questions about the value of opinion polls.

Looking at the demographic crosstabs, it's evident that low intelligence people were most likely to wildly overestimate the percentage of homosexuals: 53% of people making under $30,000 annually said that at least 25% of the population was gay, and 47% of those with no more than a high school education. 43% of Democrats versus 24% of Republicans got the question wildly wrong.

In general, people are terrible at estimating or remembering demographic statistics. A 2001 Gallup survey, right after the release of 2000 Census results, found that the average American estimated that 33% of the population was black and 29% were Hispanic. That adds up to 62%, but who's counting? Not most people.

In that 2001 survey, nonwhites estimated that 40% of the population was black and 35% was Hispanic (adding up to 75%). In contrast, people claiming postgraduate degrees estimated that 25% were black and 24% Hispanic (only about double the Census numbers), which proves the value of advanced education."



 Memorial Day is always a good time to reflect on changes in tempo and trend. A study of going against from 3 day holiday to 3 day holiday, like Memorial day to July 4, and July 4 to Labor Day, and Labor Day to Thanksgiving, and Thanksgiving to Christmas, would be in order. It could be handled like the approach of Kendal in rank correlation methods of m ranking of j scores.

e.g. 8 markets between three of those holidays. Or the results could be generalized to individual stocks.



One of the most common problems in trying to get the edge on markets is the situation where you have two or more different ways of approaching your views as to what's going to happen and you have to come up with a decision. For examples it's Friday, and the employment number is coming out. You know that up days before it are bullish. Yet at the same times fixed income was way down the previous day, and that's bearish. What do you do. Do you weigh based on likelihoods? Or just take the one with a lower probability of chance occurrence. Or do you put them all together? Or bootstrap them in some way? Here's a good article on the approaches that are used.



 An Australian student intern has possibly solved one of the riddles that have baffled astronomers and astrophysicists for decades. The scientists have been of the belief that approximately half of the mass of the universe cannot be detected, yet there is much evidence that it is there. The intern found the mass, which has been overlooked in the filaments of galaxies (Filaments appear to look like shoelaces through high resolution telescopes like the Hubble.)

Anyway, some claim that she solved the "Missing Mass Problem." If she has indeed stumbled across the solution to this problem, this is big.



 It would be interesting to see how many times, after a tight battle on the tennis court or otherwise, a break allows the champion to prevail. Maybe before the break a spot of hubris had caught up with him or he had to absorb the early energy of a young contender, but the break gave much needed clarity to the situation…much like trading…where after a tight tussle, maybe due to high volatility, a break would move things to more normal trading conditions.



The attached chart plots crosses of major SP500 levels of 1000,1100,1200,1300 from 6/97-present. Each colored vertical band represents a daily cross from below or above for each level.

Colors for each cross:





The middle section 2002-06 shows lengthening oscillations with 1000,1100, and 1200, but shorter shaking with 1300. From 10/09-8/10 1100 yellow was popular again - as it was in 03-04, 01-02, and 1998.



 This is a very interesting article with applications to our field.

On Chomsky and the Two Cultures of Statistical Learning:

"Prof Noam Chomsky derided researchers in machine learning who use purely statistical methods to produce behavior that mimics something in the world, but who don't try to understand the meaning of that behavior. Chomsky compared such researchers to scientists who might study the dance made by a bee returning to the hive, and who could produce a statistically based simulation of such a dance without attempting to understand why the bee behaved that way. 'That's a notion of [scientific] success that's very novel. I don't know of anything like it in the history of science,' said Chomsky."

"… while it may seem crass and anti-intellectual to consider a financial measure of success, it is worth noting that the intellectual offspring of [Claude] Shannon's theory create several trillion dollars of revenue each year, while the offspring of Chomsky's theories generate well under a billion."



 The Bulls looked almost as clueless and bereft as the Knicks during the last minutes of their last two playoff losses. How does a team manage to lose a game by 3 that they were ahead by 12 in, with less than 2 minutes to go…?

A canal, a plan, Dallas.

Kevin Depew writes:

I'll have to look at the stats tomorrow, but my impression is that after all games in this series Bulls had a lead in the game for a large percentage of time in all games.

Pitt T. Maner III writes:

Perhaps more experienced professionals know how to pace themselves better over a series and within a game and always leave a bit of "dry powder" for when it is needed most. It might be interesting to review at what times key players were rested. To be able to play tough defense and shoot 3s at the end of a game indicates "fresh legs".

Let the youngsters go out fast, run and expend energy and compress the game outcome to the last quarter:

"Including the regular season, the Chicago Bullswere 53-0 when leading by double-digits in the fourth quarter. So, with only 3:14 remaining in Game 5, and the Bulls leading by 12 points a win appeared all but certain.

The Miami Heathad other plans though, finishing the game on an 18-3 run to advance to the NBA Finals for the second time in franchise history.

According to 10,000 simulations done by, the Heat had just a 1 percent chance of winning the game with 3:14 remaining."

Full article here.



 Looking for some stats to put on the table for Basketball I found this analysis of actual to predicted wins in hockey.

Ties occur more than predicted. It does not appear the method is adjust to consider the power play at the end raise the chance that a tie occurs than the poisson distribution would. That is more goals are scored at the end of a 1 point difference game than throughout the rest of the game.

Other low scoring games like baseball do not follow the poisson distribution. In Baseball for example the time is unknown and each team takes same number of chances to reach a base. The more on base you have the more chances you have to score. (the past events effect your chance of scoring.

After reading this blog, the question I asked was how would you best simulate a model of a basketball game. I suspect those that control the ball and control the pace, (the time) the best win more than the teams have a good night shooting, because the law of large numbers smooths out the out come.

What is the W/L stats for those teams that steal the ball first?

Phil McDonnell writes:

We have discussed the arc sine distribution here before. It is that U shaped distribution where the major probability of occurrence is in the tails. But it can apply to the question of how often the first team to score wins as well. The idea is that a surprisingly large proportion of the time in a random walk the walk will go positive or negative and never look back The arc sine distribution comes into play in looking at how many times you will cross a given level (including the zero level).

The idea would be to look at the first team to score as creating a point differential of +n. Then the arc sine predicts that a surprisingly many games will turn out with the point differential never going below zero.



Here's an interesting paper. A recently released study in the Journal of Business and Politics showed that the investments of the members in the House of Representatives outperformed the average by 55 basis points per month or 6% annually. The Democratic sub-sample of lawmakers beat the market by 73 basis points per month, or 9 percent annually, versus 18 basis points per month, or 2 percent annually, for the Republican sample.



 The problem I have had with the former advertising manager's methodology is that it is not clear to me that any studies show that value outperforms growth, and I am not convinced he used prospective files for his studies, even though the rumor is that the Columbia students he hired to do his research did so, and the results in his books are completely random, as well as the wide diffusion of his seemingly random and regime based studies.

Allen Gillespie writes:

The misapplication comes by using P/B to declare stocks growth or value. The best growth stocks have little in way of book but much (non-book) goodwill (though not always booked goodwill) associated with the product or brand. In fact, some of the best growth stocks show this interesting pattern (high sales and earnings growth) while the value competitor shows on Altman Z-Score screens (think SNDK/EK, NFLX/BBI). One grows by eating the other (monopoly rents) and rebirth. How many stores did Walmart eat? If one looks at the pure style indices (RPG and RPV etfs) v. the old Russell two way classification (IWF and IWD) one will find the excess returns above cash for the growth and value risk premiums are equal and greater than the traditional growth and value classification (where there is a value bias). This makes sense, as the pure style indices are more concentrated into those stocks that actually exhibit the growth/value factors. Particularly regarding growth, imagine the age distribution of a population, it will have more adults than children because more are grown than growing. If you sliced it in half you will have one set with some growth, but highly diluted. This also presents an index problem as by definition young companies are likely not to be included in the indices initially and will be underweighted even when they are. None of this, of course, is to deny that there aren't cycles where the relative spreads between the combinations don't over or under shoot the trend.

Industries, of course, can regenerate by cannabilizing themselves at times (I am watching closely) the combination of high fuel prices and cars– the fuel efficient fleet will ultimately eat the existing stock leading to a long number of years of above average growth into a downsized industry. This is the value players dream situation as the stocks will be priced on the history with the future ahead. 100 years ago horsepower add horses, even on the tracks unfortunately.

Rocky Humbert writes:

(With SAT test season approaching, I humbly request that fellow specs weigh-in with the current usage in my paragraph 2 below. Should the correct form of to-be be "is" or "are"? [….a portfolio of stocks which *is* trading…] If we cannot reach consensus on the proper rules of English usage, there's no hope for other conciliations.) 

A problem with the problem is the definition of "value" versus "growth." S&P's methodology is to put stocks with low p-e's (or p/b's) into the value category, and stocks with high p-e's into the growth category. The approach is self-referential, and although convenient, it's arbitrary and silly.

Yet, if one takes the S&P approach ad absurdem, The Chair cannot quarrel with the proposition that a portfolio of financially strong stocks which is trading at 5x earnings (and which is paying out 100% of earnings as dividends) will eventually outperform a portfolio of stocks which are trading at 1,0000000000x earnings. The asymptotic nature of compounding and the laws of economics ensure that this will be eventually true. Once The Chair accepts the irrefutable truth of this observation, the discussion becomes much more nuanced — leading to an analysis of what conditions lead to Value outperforming Growth or visa versa.

Lastly, one must note that, in general, the volatility of stock prices is greater than the volatility of the underlying business performance. This is the essence of "taking out the canes" — and one wonders whether value investing is a second cousin of Mr. Clewes?

Tim Melvin writes:

Let's use Walter Schloss's definition and see if any testers with better databases and math skills than I can compute the results.

True value investing as practiced by Graham, Schloss, Kahn, Whitman et al looks something like this:

price below tangible book value

debt to equity ration below .3

profitable or at least breakeven

closer to lows for the year than highs

a minimum of 10% insider ownership

Using pe or relative value is NOT value investing as best and originally define.



 I apologize in advance for [an article that starts with] a quote from Sage, but…

Five Magic Formula Stocks For The Next Year:

Ontario-based Research in Motion ($23 billion market cap) is the creator of the BlackBerry smartphone and its operating system. It's been producing tremendous growth in recent years, but has been losing some market share to Google's Android smartphones and the iPhone recently, which has spooked many investors. My Greenblatt-based model thinks that's made it a bargain. With an earnings yield of 22.2% and a return on capital of 66.6%, it's the 11th-highest-ranked stock in the market, according to this model.

James Goldcamp writes: 

Interestingly when I run the screener on their own site (the strategy's author not Forbes) I don't get RIMM, but a host of other tech stalwarts like CSCO, MSFT, AMAT, HPQ, and DELL are returned in the screen of the 50 highest rated by the magic formula.



 So if there is no NFL, where does the entertainment dollar get spent? Or does it even matter? Are any of the possible destinations for the consumer dollar of the correct size to be seriously impacted by the NFL dollars?

I.e, if 100% of the NFL entertainment dollar goes to NASCAR, does that matter to NASCAR related businesses? (actually, that would about double NASCAR's revenue). Not sure if the seasons overlap, just what came to mind.

Ken Drees writes:

No NFL season impacts economy greatly:

Dave Gibson wishes he had such a safety net. Gibson is sales director for a Holiday Inn located one block from Reliant Stadium in Houston. Here is how heavily his hotel's bottom line is tied to the NFL: The food and drink tab on a typical weekend is $2,000; it's close to $12,000 on a weekend when the Texans are home. There's also a bump in occupancy. All 238 rooms were rented for both preseason games last year and they sold out for a Monday night game 1 months in advance, which never happens, he said.



 We just had a tornado pass within a few hundred yards of my office.

I watched it out the back window until it got within a few hundred yards of the office then I ran out of the office to safety of the stairway. Unfortunately, my 17 employees ran into the south stairway…which was on the same side of the building that the tornado was on… I had to run down there scream at them all to get to the middle stairway. Of course, my step mother, Patti, was down there, too. Patti has Muscular Dystrophy and can't do stairs. So I had to throw her on my back, carry her up two flights of stairs, run 100 yards down the hall with her on my back, then carry her down the middle stairway, and finally drop her off in that vestibule.

No one was hurt…but my back is gonna be sore tonight!

All in all, it was quite exhilarating!



This is a very interesting contest amongst the top basketball statisticians, and there are links at the bottom of the page to several of these experts' websites. Some sites I believe have been mentioned here before:

In the NBA, quantitative analysis has achieved certain landmarks. The analytical-minded are close to the centers of power on an increasing number of teams. The annual stat geek conference is nearly a must-attend for power brokers and has even spawned imitators.

But there is only one goofy contest in which real-deal analysts publicly compete against my mom. Since its 2007 founding, the contest has featured some of the best in the business, as evidenced by the fact that they keep getting hired away by NBA teams.



 I was looking for the proper word for "rules of thumb" in my post that bounced off the lieutenant's post about sleeping in the nude, (which I believe is a cardinal offense on board a Royal Ship, as it might lead to a capital offense). I knew the right word was not "rule of thumb," and I thought it close to an old "saw" about it being healthy.

As always Galton came to mind, and I came up with the right world. The old "Shift". As in "Shifts and contrivances in tropical countries" from The Art of Travel, always worth reading as one of the greatest displays of ingenuity in print anywhere.

Also, a good antidote to the idiots that write about Galton and call him deficient in intelligence because he believed in individual differences. Terman measured Galton's IQ at about 200 from a retrospective analysis.



 What % of NBA games these days are won by the team that puts in the first point, and can this be generalized to markets?

Jeff Watson writes: 

My grandfather used to tell me that a fist fight among boys was usually won by the kid who got in (not threw) the first punch. As an aside, I wonder if markets are susceptible to rhetorical sucker punches? 

Russ Sears writes:

In distance racing it is the opposite. You do not want to be out front at the start. This is especially true at High School races and at the big road races. Too much adrenalin spent at the beginning will waste it. The amount of aggression used at the start, may vary from sport to sport. But might I suggest that one on one sports or team against teams are different than sports like running or poker and trading where it is not just about beating the guy closest too you. You don't want to crush your opponent but use them or propel you to the front.

 On the other hand you must be watching for signs they can hold the pace. Exhaustion can be contagious if the pacer slows, all follow. Plus you must have confidence in your plan and stick to it. Do you beat all with a kick or do you win with a blistering last mile?

Having thousands chasing you can be a rush, but it is also very draining to wear the target on your back. You take the wind hardest without any wind blocks and you are also wasting mental energy setting the pace.

What I think all the comments below suggest is there are really 2 questions you need to ask yourself…How aggressive do you want to be at the start? And the second one is how intimidating should you be?

As Scott implies below, thugs will nip at you until they know you are or are not armed. But to answer these 2 questions in most civilized matter, you have to know yourself; be confident in your capabilities and and equally realistic about your limitations.

In racing, poker and trading, patience is the key. Be aggressive when you truly have the edge. Believe in yourself enough to wait for that edge.

What may be more fruitful questions are: what are the signs that the opponent has started too fast? And what are the signs that they are exhausted? 

A Mr. T.C responds: 

I spent years running, and I choose to disagree a bit. I don't know what type of resume is required, but I did manage two state championships and posted a 4:12 mile time in college.

Going out first doesn't always mean having to go out fast. Runners settle in as soon as someone takes the lead, whether it be track or cross country. If you can use just a quick burst at the beginning to get the lead, you can then set the pace you need in order to win. If it buries others, then great, but if you not, then you know what you have in terms of a kick when it comes to the finish because you set the pace.

Losing stinks, but there is nothing worse than losing and still having something left in the tank. That can happen if you let someone else set the pace, and you can't outkick them. Why? Because they set a pace knowing they could still have a strong finish. Yes, there are rabbits, but they are pretty easy to ferret out. They sprint out too far, too far, plus in any race you should have a pretty good idea of who your competition is not just who are the participants are. The wind is a factor, but only when the wind is actually a factor. Giving yourself some distance gives those behind you no benefit. They will hit the same wind. The idea of having to chase someone down can be tiring, and mentally it can crush you if you catch them, then they pull away.

The real key is any race with hills. A leader can really stretch a lead on the hills. It is where races are won and lost. I can tell you from experience, you do not want to be chasing on a hill nor do you want someone else to set your pace on a hill. If you have the discipline then being in front means you do not have to catch anyone else, and you merely only have to run the race. The same race you've trained for day in and day out. The same race you've run in your head so many times.

When I was good (and believe me when I say I am not good anymore), there was a span of 12 races that I did not lose (it was the 800m for those that care). In that time, I did not even trail a single lap. My first loss came when I altered strategy and ran with the pack. Through a combination of injury and mental roadblocks, I didn't win again after that…until the 4:12 road mile in which I never trailed. It is rarely about adrenalin. It is about preparation, planning, and running your race. And no, for some, it isn't from the front, but for others, they become almost unbeatable if you give them even an inch.

Russ Sears responds:

 Yes, there definitely are times to be the front runner. If you are better than everyone in the field and know it, taking the lead, pushing the pace is the way to go. Winning 8 races in a row shows that you had out grown your competition which does happen in high school and college. But as you imply, if a rabbit sprints to the lead let them go. The goal is not to win the first 100 meter, but the race.

A 4:12 mile would never have happened without preparation, planning and running your race, but also a personal record also never happens without digging deeper and find something extra within yourself at the end. As a 2:58 1200 meter runner, but only a 4:05 miler; I did not have a kick. So I understand that often you do not want to leave it down to the last 100 meter and you beat them when you can. But having to lead from start to finish sets yourself up for mental roadblocks in tough races.

Finally, I must disagree somewhat about the hills. If you are clearly better than your competition then the hills may further show this. But if your competition is equal or slightly better than you, extra resistance of the hills prevent you from putting too much distance between you.

On my hill workouts, I would practice relaxing at the punishing pace up a hill. In a race I would let my equal push trying to get away but near the top when the heart rates are at the highest, I take the lead. After the peak I then tried to stretch the lead on the level or down hill parts.

As a high school coach, kids would often think that we did hill work so we could beat the competition on the hills. So they would try to demolish the competition on the hills. But I would tell them it was to withstand the hills, and learn to relax while still giving the most effort, so that you can beat them when they are hurting the most. It is like buying the dips or taking out the cane.

Sam Marx writes:

4:05 is very impressive.

The greatest mile race I ever saw was Roger Bannister defeating John Landy at the Empire Games in the early 50s. For those of you unfamiliar with these names, etc., Bannister, of England, was the first one to run the mile in under 4 minutes, a major athletic feat at the time. John Landy, an Australian, broke Bannister's record shortly thereafter.

The two greatest milers in the world, both of English background, by a strange quirk of scheduling would then shortly meet thereafter and compete at the Empire Games.

In their race, Landy had the lead on the 4th lap going around the turn and looked over his left shoulder for Bannister. As Landy was looking, Bannister darted past him on the right took the lead for the last 100 yds and won.

It was the first time two men ran the mile in the same race in under 4 minutes or the first time anyone ran the mile in under 4 minutes and lost.

Maybe the film clip is on the net. An exciting race to watch and historic.

Russ Sears adds:

The distance runners are posting some incredible times. Granted the Boston marathon was wind aided point to point course, but simply amazing.

Thimes remained flat and perhaps a bit slower from 1985-1994 then times started dropping again.

Some of it is in the new training methods, some is due to the coaching available to most that show a promise, some is due to more ways to make a living while still coming up the ranks, and some may be due to the drugs available, but I suspect many of the best are clean, and those that aren't add motivation.

Jay Pasch writes:

Jeff, quite the interesting post as my father coached the same thing, and being small in stature, that it's not the size of the dog in the fight but the fight in the dog, and to work in tight, inside, where you have the advantage.

Scott Brooks writes:

Having grown up in a "rough" neighborhood and in light of the fact that I've been stabbed 3 times, I have always found that the best course of action was to avoid the fight at almost any cost.

I learned early on in life that there are "guys" out there who don't see the world the way 99% of the people do. They don't feel pain or fear like like 99% of the world. They are capable of a level of brutality and violence that is, quite simply, mind boggling. The way they fight and the things they are willing to do to their opponent in a fight is truly scary. They win fights because they are willing to go to a level of violence that 99% of the people in the world are not willing to escalate too.

My brother and three of uncles were "those guys". I witnessed them do things in fights that was truly stunning. My uncles grew up in one of the worst toughest neighborhoods in St. Louis. They were, hands down, the toughest guys in that neighborhood….no one was a close second to them. Two of these uncles were only a 2 - 5 years older than me.

 I remember one time when I was around 12 years old, I was over at my grandmothers house visiting. I was playing down the street from her house when these 4 guys came up to me and started to "accost" me. They surrounded me, started shoving me around and telling me to give them my money, and that they were going to beat the $#!% out of me. Basically, I think they picked on me because they didn't recognize me (they left the rest of the guys I was playing with alone….all of whom were from the neighborhood). One of the thugs asked me what I was doing in their neighborhood and I told them I was visiting my grandma. They kept picking on me. I was really scared and my mind was racing as they were starting "the process" of beating me up. It was then that a possible way out of this situation occurred to me. I asked the guys if they knew my uncles. They, of course, didn't care about knowing my uncles. So I said, you don't know my uncles, Mark and Kerry?

The next moment became frozen in time. You could have heard a pin drop. They immediately stopped shoving me around and all they stood perfectly still, first staring at me with a shocked look on their face, then their eyes began to dart from side to side looking at each other with the same stunned look on their face.

They immediately began to back peddle. They became my best friends and let me know that they were just joking around and were just messing with me. They said they were good friends with Mark and Kerry and that there was no reason to tell either of them. The "fear" in their eyes and their body language was as visible as lava pouring out of an erupting volcano. The mere mention of the names "Mark and Kerry" was like flipping on a light switch in a dark room. These guys who were just getting ready to steal my money and beat me up, who quickly became my friends, were now really anxious to leave the area as quickly as possible.

What happened next was really interesting.

When I saw my uncle Mark later in the day, I told him what had happened. He asked me to describe the guys who tried to mug me. Mark knew exactly who the guys were. Mark told me to stay at the house and he left. He returned some time later with bloody knuckles. He said he took care of the problem and that no one in the neighborhood would ever bother me again.

He was right. I was never bothered again. I saw those guys a few times after that. They not only never bothered me, they were semi-pleasant, while at the same time trying to get away from me as quickly as possible.

Between the level of violence that my uncles, my brother were capable of administering, I have decided that avoiding a fight is always the best policy….why take a chance on running into someone like my brother or uncles.

And anyway, even if you get into a fight and whip the other guys butt, if lands one good punch, you'll be laying in bed for the next week saying to yourself, "yeah, I won that fight, but man oh man, does my broken nose really hurt".

Call me a wuss if you want, but know this: I've been in more fights than most and had my butt WHUPPED by numerous people……and I never enjoyed any of them. I'll take "avoid" over fight any day of the week.

Sam Marx writes:

I grew up in the Weequahic section of Newark NJ, in the '40's (popularized in Phillip Roth's books).

We didn't fight we sued.

Steve Ellison writes:

I find it nearly impossible to literally score the first point in the market because of the bid-ask spread. If I hit the ask, chances are the next transaction will hit the bid. If I have a limit order to buy, it will not be filled unless the price is going lower. The best I can hope for is the analogy Mr. Sogi once made to a football play: the quarterback always has to retreat a few steps from the line of scrimmage to start the play. Similarly, the strategy on a hockey face-off is to draw the puck back to the defensemen so they can establish puck control and start a play.

Vince Fulco writes:

I often dream of being in the inner circle particularly under the scenarios of a nice outsized move off the O/N lows before the cash session. Then cash opens, declines all of 1/2 pt quickly, stops on a dime then zooms higher doubling the overall move.

Steve Ellison writes:

There are interesting parallels to the three choices for commerce posited by William J. Bernstein in his book A Splendid Exchange: trade, raid, or protect.



  There is a hairy rule of thumb that sleeping in the buff is healthier for you than not. It relates I believe to the actual tested idea that sleeping with open windows is much healthier and gives much less respiratory disease than sleeping with closed windows as Asian women are all too prone to do, especially those living in air conditioned countries like Singapore. And it should be tested whether their respiratory diseases are much more common than they should be to their decreased longevity. We should ask Keeley what his tests on this show, or Louis L' Amour's study of wildlife.

As for its relation to markets, one comes back to the idea of playing canasta against 5 men named Doc. Impossible to win when markets are inactive as flexions must take their overhead out. Thus one must deal with the Asians, and the hotter the country, the greater the dishonesty I believe.

Jeff Watson writes:

Florida's a pretty hot place and I refuse to do business with any brokers or money people in this state because of the general lack of honesty. Something about the sun, surf, and sand that attracts people of questionable character. 

Kim Zussman writes:

Corruption looks to be (inversely) related to latitude, with the obvious glaring exception of The Motherland.

Gary Rogan writes:

Speaking of hot dishonest Asian countries, I coincidentally just came across this story about the black market in Indonesia in RIM playbooks and other things.

John Floyd writes:

There is a somewhat new science that recommends "compression clothing" and I have been experimenting with it for both sleeping and exercise. I have found some merit to use.

In terms of fresh air as I recall the studies I have read indicate the high levels of air pollutants that accumulate inside a building, within in air ducts, etc. I always sleep with windows open regardless of the temperature outside and also use a hospital grade air purifier.

In Japanese there is a saying "Renma" meaning always polishing and improving. I think we can look at air circulation and blood circulation in the same way. Same is true for trading and the more we foment new ideas and ways to improve hopefully the better we become and avoid staleness.

Having lived in the Caribbean for several years and experienced months of absence from the heat while in New England winters I can tell you the adjust to the heat without air conditioning does take at least a day. But I found within a day I was fully adjusted. I think it becomes more difficult if you switch back and forth from A/C to non A/C in a hot climate. Again the trading link here may be one of consistency and allowing for adjustment processes that may be bring one out of their comfort zone.

In terms of the various prevalence of crime, corruption, work ethic, etc. across regions that I think is for one to do some research and analysis that would include Charles Murray's findings, geopolitical history, and personal experiences to reach their own conclusions.

Of course one would need to draw upon a sufficient sample size to determine for example whether those in Korea, Japan, Hong Kong or the Caribbean, etc. have a certain characteristics.




Regrettably for the many traders out there that watch such things the 100sma is intersecting directly with the 1308.50 gap.

Victor Niederhoffer writes: 

As those of us who strive in the futile effort scratch out a living by taking advantage of microscopic moves know, the market had a terrible excursion down overnight to the dreaded 1300 level stopping at 1302.5, and then gracefully as grandpa martin would say, climbing back to 1313, —– what does it all mean is a excursion down just above the round number, a danger sign, or a sign of strength.

Hard to test this without refining the data so far that it becomes statistically meaningless. But it's an interesting question that could be generalized in many different directions. 

Jay Pasch writes:

It is beneficial to have learned here the undesirable nature of stops and to sleep in the buff.

Jeff Rollert replies: 

That was not the visual I needed before my second cup of coffee…

Jim Sogi writes:

A couple of sidenotes…

Just around the close, certain brokerages changed the margin requirements certainly wiping out a number of players and causing some of the airdrops in the night as certain large positions liquidated. Secondly, it would be necessary to examine not only 24 hour data, but look to see which countries were manipulating the markets while NYers slept. The idea here is that the overnight markets or foreign interventions are becoming more and more important. Note the existing unfilled gaps that the day markets have not been able to fill for a while now. The same condition existing a few weeks ago in reverse as well. The night session is not a thin as it used to be. Still if you could, why not move things around at the margin for your own gain. 



 My martial arts is most unsatisfactory. Louis L'amour who was almost unbeaten as a heavyweight always said, the time to win a fight is at the first blow. That is always when you can escape or win. And the Sacketts always followed this in winning their battles against their evil enemies– the Higgins.

I followed this rule unknowingly in rackets. Always followed the motto "the first blow is half the battle." Desperately tried to get out to an early lead. Then once having achieved it, I would pretend the adversary was ahead by the same 5 zip score that I was ahead so I would try harder and never give up.

I believe the basketball books will take a 55 or 60% bet that the team that scores the first basket will win. Of course there is the part - whole fallacy in this, even more than in the totally worthless January baromoter that hasn't worked since it was discovered.

Many would be flexions apply this idea to the market, and their activities are most amusing to behold.



 I remember myself as an over-worked youth, coached to death by the Soviet-era sports establishment. My classmates were summoned to agri-camps to gather potatoes in fields all summer long, while I was spared that draft on a special committee decree: to gather the likes of Gary Kasparov and myself every summer to a moderate Black Sea resort - where we were forced to discover new chess and checker ideas all day long, in-between coveted swimming breaks. Daytime brainstorming would spill into nighttime discoveries. Like a composer jumping straight from his bed to his workstation before he forever loses the chef-d'œuvre he dreamed up, we would share the novelties that came to mind overnight - over breakfast oats!

To this day, visions often hit me overnight: now, more to do with various chart developments. Root of this process may be random - and sometimes one can't be sure about the trigger. This time I know: it was our own John Tierney's note "Prices for commodities should no longer be expected to revert to "historical means.", which made perfect sense to me at first read… Until my mind was pinched overnight: this week's steady upward march in Gold, while everything seemed to be lining up neutral-to-bearish… Where did I see that exact daily chart pattern before? Bingo: the SP little march up toward its secondary top by October 5, 1987… But wait: that short-squeeze reversed on a dime, to nearly halve the price of stocks inside the two historic weeks that followed!

Caveat emptor: "chart-analogue analysis" is so multi-flawed. Different contracts, different leverage, different margins, different environment, different politics, different news, different seasons, different correlations, different dynamics: even I myself think this discovery is totally irrelevant. Does speculator psychology change, nonetheless? How many will run out and buy penny July puts (make it Silver for greater speculation) after Memorial Day? Barely a week after Goldman's upgrade of commodities!



 Jackson Hewitt, symbol=JHTX, the nation's 2nd largest tax preparer filed for Chapter 11 Bankruptcy this morning. In the press release announcing their bankruptcy, Philip Sanford, President & CEO wrote: "….The Jackson Hewitt brand is greatly strengthened by the actions we are taking today, and we can confidently begin our preparations for the 2012 tax season and beyond…"

Might I offer a bit of unsolicited advice for Jackson Hewitt's CEO:

Filing for bankruptcy is NOT a brand-enhancing event — and especially not for a tax-preparation company. Accordingly, I'd suggest that he cancel the upcoming TV advertising campaign which uses the slogan: "File your taxes with Jackson Hewitt, and we'll show you how to go bankrupt….We're the Experts!"

(A better approach towards enhancing the brand might have been to cut the SG&A over the past several years.)



Listening to CNBC I discovered that my substantial cash hoard existed not out of sound judgement, but was a residual effect of the beating the market has taken twice over the last decade. Once I, and others like me, shook this fear the market would skyrocket. Although I still hold substantial amounts of cash, the "others" jumped in and have powered the market higher. Same CNBC individuals now classified this development as the result of "the dumb money" moving in and, hence, a good time to "take something off the table." Dumb when you're in and dumb when you're out– can't win.

I've been reading and hearing much of the "economic miracles" of India and China. Definitely the countries to be invested in for the next century. Both countries feature tons of human capital boasting high academic achievement in important areas (engineering, mining, electronics, high tech). The work force will be kept busy for many, many years as demand for infrastructure, living quarters, and agricultural development surges. Best investment idea: baby girls. Unless much is done to correct the artificially skewed birth rates in each country, the forecasted miracles could well be still-born. Lots of money, a great job, a great home, and much admiration are great. But the essential element is missing and woe unto him who denies it.

U.S. residential real estate will never come back to its one-time prominence. And it's not strictly a matter of over supply due to improvident building and financing. The great middle class, prosperity's sin qua non, is on its death bed and won't be resurrected. Great jobs at great pay for the blue collar class are gone and won't return. "We think and they sweat" is a cute idea but not enough individuals think to support a burgeoning economy. There are plenty who sweat but at wages that dim any hope of a return to multi-TVs, multi-cars, multi-6-packs, and multi-vacations at the shore.

Prices for commodities should no longer be expected to revert to "historical means." Gold and silver are especially attractive to Indians and Chinese who view both with a reverence that stands prudence on its ear. Similarly, the essential food commodities are now the target of increasingly affluent countries which previously had little capital and little desire to possess them. Inhabitants of those countries who still can't afford them (as well as their familiar staples) are now taking to the streets - governments will be forced to find ways to appropriate them.

Current events in the Middle East are being characterized by the media as an "Arab Spring" and the world cheers. Same thing when the Soviet Union broke up. Also when Castro came to power in Cuba. Ghandi in India. Members of the Tea Party: fascists.

Have come across a couple of sources recently (Eric Hoffer and Bill Bonner) who point out that little changed industrially or economically in the world between 1800 B.C. and 1800 A.D. (oops, a PC blunder). Both hypothesize that someone like Aristotle would have felt equally comfortable in either time frame. The years 1800 to 2100 are an anomaly. Both then go on to surmise that we are due for another extended period of turtle-like advances. Sounds like punctuated equilibrium (that should undo the PC blunder).



 Nicholas Biddle was known as the Golden Calf in the 1830s because of the bent knees, the subservient worship, and hat doffing that accompanied his every utterance and activity, in allusion to the false bowing to that beast in Exodus while Moses was preoccupied.

Who is the comparable Golden Calf in the financial world today, and will his fate be similar?

Indeed, are there golden calves in other fields that deserve to be treated with less reverence?

How can this be distinguished from the "Useful Idiot" or "Your Own Man" or "the Fifth Columnist", and can a scalogram of such be created?

Yes, inquiring minds want to know, and let us not refrain from starting our typology in the corn belt if the boots fit.

Pitt T. Maner III writes:

Might not Dr. Spock have fallen into one of the categories? Some ideas of his were right and some wrong with long and short term implications to the health of a generation.



 The UAE has the 6th world's largest reserves. It is a federation of 7
absolute monarchies of about 5 millions of which less than 20% are UAE
nationals, while the majority of the population are expatriates. It
appears they feel pretty vulnerable and the instability domino may not
be over in the region

"The United Arab Emirates (UAE) has hired the founder of the controversial US security company Blackwater, to set up a paramilitary force made up of foreign mercenaries in Abu Dhabi.

Blackwater founder Erik Prince is to set up an 800-member battalion of foreign troops. Documents obtained by The New York Times (NYT) on Sunday showed the crown prince of Abu Dhabi being behind the $529m deal."

Victor Niederhoffer adds:

In response to our Paolo's heads up on mid east activities, it reminds me of the time my father and his partner– the best team of cops ever, with Miltie being the toughest and my father the smartest, they always got their men and gang– went into a pool room to check on a robbery in my house.

Miltie rushed in drew his gun and made every pool hustler stand up against the wall. "Put up your hands and don't say a word."

A hustler leaned over to my uncle next to him and mumbled "F cken cops". Miltie said, "What did you say, I heard that you son of a gun."

The hustler said, "yeah, so what, that guy (Howie) asked me who you were." 



 Having recently read Humberto Fontova's book Exposing the Real Che Guevara: And the Useful Idiots Who Idolize Him, a State Department-approved "purposeful" trip to Cuba doesn't quite have the same appeal as it once did.

Fontova's impassioned book covers the many lives lost to Castro's regime and the destruction of the formerly robust Cuban economy at the hands of the Communists. Fontova contends that Che was the "godfather of modern terrorism"– perhaps a bit of a stretch– but he does present in his book some interesting comparisons between Che's and Al Qaeda's aims and ambitions.

At any rate, American citizens may soon have a chance to go to Cuba if they so desire.

Some will argue that such cultural interactions will foster change. Others believe that the tourist money will be directed to the coffers of the Communist leaders to prop up a failing totalitarian state and ultimately extend the misery of the populace.

From the Miami Herald:

HAVANA — The forbidden fruit of American travel is once again within reach. New rules issued by the Obama administration will allow Americans wide access to communist-led Cuba, already a mecca for tourists from other nations.Within months or even weeks, thousands of people from Seattle to Sarasota could be shaking their hips in tropical nightclubs and sampling the famous stogies, without having to sneak in through a third country and risk the Treasury Department's wrath.

Full article here.



 My research today started with Our Mysterious Panics by Charles Coleman, 1931. There is recounted the story of Jay Cooke. He was entertaining President Grant when he received word that "his wall street house, had announced its suspension on September 18, 1873." Mad panic carrying the entire financial world followed. Western Union lost 10 points in 10 minutes. Brokers tore their hair off and ran off mad.

The Commodore refused to help: "I am a friend of the iron road, but building railroads from nowhere to nowhere at public expense, is not a legitimate undertaking." The exchange was closed for a week. About this raged mad confusion. Rock Island was breaking in terrific fashion. Pacific Mail tumbled and Central and Wabash were being tossed from hand to hand. Their paper went to protest. Pale faced brokers, impotent slaves to the dominant catastrophe rushed out upon the floor. Our friend Henry Clews suspended.

But after the downfall—— Recovery. (canes). It may yet to be proved that "the riches of nations can be measured by the violence of the crises they endure" (a self fulfilling prophecy).

 Years after the derangement of 73 had spent themselves, an old man, whose long hair, side whiskers and beard flowed silvery white to the collar of his old fashioned cape coat, was to be seen wandering through Wall Street. He seemed bewildered. He was looking up some half remembered trail. He dropped into the offices of the Union. He was at once admitted to the private offices of Sidney Dillon, the President.

There sat next to him Jay Gould. "How are you Mr. Cooke?". The railway chief reminded him of a long forgotten incident. "I was in trouble then, and you staked me. I shall always remember that, Mr. Cooke. What do you say shall be done?"

Cooke unrolled his maps and presented his care to invest in some silver mines in Utah. In order to develop it, it was necessary to construct 176 miles of railway. "With us three men," observed Cooke as he gathered his documents, "is there the least occasion for a written agreement?" "No," was Gould's abrupt response. "We will take the remaining half interest and supply you with the money."

Cooke's silver mine proved of exceptional value. He sold his interest later for nearly a million dollars. The sum enabled him to regain possession of his old home in the Chelten Hills, Ogontz, from which his creditors had driven him.



It would be interesting to make a systematic study of all the negative guidances given by companies, classified by the extent of the move. The moves in individual stocks related to these guidances have to be as ephemeral as those in relation to the random monthly announcements that make the public contribute so much more than they have to. The problem is that studies of 10 years ago, show that these guidances and reductions in earnings estimates were negative. And the funds don't wish to be caught holding such a reduced estimate company as it makes them look bad.

Ultimately the value of companies is determined by… wishes he knew, but it has to be the time and p/e that will attach to it when it shows normal future growth relative to the economy. At that time it will have a market p/e. As to the impact of a lowered guidance, of what consequence does that have, unless you believe that in this day and age, the guidance signals something, as if they can't keep the analysts happy from taking things out of the silo, or selling a little something a bit earlier, perhaps they have a deep seated problem. But as to whether you make it this quarter of next quarter as Hewlett and other unmentionable companies have said they are going to do, what could be the total absurd ridiculous non-recurring significance of this.

Along those lines, one notes that the earnings estimates of the S&P for the next year are being rasied again and the e/p of the market is 6% or so versus the 10 year rate of 3.1. Such a divergence, and its increase in the last two or 4 weeks has to be very bullish The information concerning the keys thrown on the table by the owner of the paper to the corn belt faker that one of our own has kindly disseminated to me gives force to my theories of the pernicious influence of the character of a chief executive who would turn on his right hand man.



As I learn more I am tightening up my conditions for buying options, to the extent that the level of IV is precluding nearly all my potential trades (perhaps others are homing in on the same options, or perhaps volatility is generally high at the moment).

Therefore I am considering switching to vertical spreads, where the pros and cons of low/high implied volatility should cancel each other out. Do the options experts here think IV can effectively be ignored (within reason) if one uses the spreads instead of the single options?

I've seen a lot of charts today, but been unable to set foot in any of them, and hope to ameliorate this situation tomorrow.



 Bacon said:

DON'T look at anybody else's selections of prices or handicaps before making your own selections and prices. That is a rule with no exceptions.

If you look at some other prices or selections first, the line you will come up with will be a sort of scrambling of his line and your line. Almost invariably, it will combine the weakest features of both. You'll have the mistakes and trite opinions of his line and yours. But the possible 'bright work' and getting-away-from-the-public part of his figures and yours, will be discarded.

A recent study provides evidence of the wisdom of Bacon's advice:


"When people can learn what others think, the wisdom of crowds may veer towards ignorance.

In a new study of crowd wisdom — the statistical phenomenon by which individual biases cancel each other out, distilling hundreds or thousands of individual guesses into uncannily accurate average answers — researchers told test participants about their peers' guesses. As a result, their group insight went awry. …"



 It was a lay-up of a day when the popular business channel had the market's leading short seller on as a special guest to their morning hours yesterday….talking about his book and filled with bearish themes now that he knows he is dead in the water. This is about as bullish a set up I have seen in the market since sometime back in summer of '09. SPX 1500 here we come. I haven't seen this much fear and buying of protection since my high school graduation trip to Cancun….



 My friend is a doctor. He was complaining to me the other day about a patient who asked for the discount, even though she was late and cancelled appointments.

On the discount, I wanted to point out that there is nothing immoral or unethical with asking. I was interested in the significant number of friends who say they give discounts, including the 20% discount for cash (which when I was a patient would be very happy to avail myself of if I knew of it). I'm sure everyone has asked for a discount on occasion in buying some product or service.

Further, you have to admire the bravery of the patient asking for a discount. I myself would be afraid to ask it of a physician because of fear the physician would somehow take it out on me in the medical treatment. To him and other docs outraged about the discount request, I say you don't have to grant it, but ethically you should assure the patient (especially after what the MA reported to her) that you harbor no hard feelings and it will not affect your medical care of her.




Thanks for showing a young boy and his dad how much fun night games could be. And thanks also for showing him how to carry oneself with humility.

See you later,


The iconic Twin, known as much for his humble demeanor as his prodigious home runs, died Tuesday morning at his Scottsdale, Ariz., home at the age of 74 after a nearly five-month battle with esophageal cancer. When Harmon Killebrew's bulging forearms snapped his bat through the strike zone and made full contact, there was nothing else like it in baseball. His home runs were towering blasts that provided Minnesotans with their introduction to major league baseball.

full article here.

The solemnity of the occasion brings back other valuable memories of growing up with the Twins, like sitting on relief-pitcher Mudcat Grant's knee for a picture at home plate, or having a baseball autographed by Tony Oliva.

One of the most memorable occasions was when my Dad took me to Duff's Bar in Minneapolis to meet Billy Martin after a day game- after handing him a piece of paper for his autograph he crumpled up the paper, threw it on the floor, sat me on his knee then opened a box of baseballs which he autographed for me. I never did think he was such a bad guy. Solemn days are good for recollection, and the counting of gifts…



 Myron Roderick was fun loving with no backhand, and at 5'5, the last man in the world I'd cross. I ran late onto the Orange Outdoor Nationals court as he served, and returned for sideout. He picked me up over his head into a airplane spin laughing and so was only a few feet off the ground. He tackled Dave Messer in Dr. Bud's living room thinking he was Don Craig and rubbed his ear in the rug to say howdy. At the '80 Houston stop he greeted Randy Stafford by picking him up by the heels and dangling him over the court backwall before they descended to play. 

I knew, feared and respected three-time national wrestling champ Roderick before I picked up my first racquet and beat him. He was the youngest college wrestling coach in history and moreover won the first of many nat'l championships for Oklahoma State that year. Roderick was the single wrestler my MSU coach Grady Penninger, also a multi-national champ and paddles/racquet player, commented, 'that's one tough character'. MSU wrestling was second in the nation that year and when Oklahoma State came to Lansing, Mich. There was electricity in the first-ever jammed fieldhouse. I saw Penninger shake his head, look at his wristwatch, bang both, and asked him after Okla State defeated MSU, "coach what happened with the watch?". He replied, "I hardly want to say but everytime Roderick and his team come to town I get so wound up that my watch stops."



 Danielle Chiesi who had "intimate relations" with 3 of the prosecution witnesses is an archetype that deserves drilling and generalization– one hopefully will not be remiss on this front from the coasts to Midwest.

Her activities are part of the general tendency for older executives to wish to retire to a life of romance rather then making money. Such a tendency leads to all sorts of unintended consquences including the heightened tendency of older CEO's to be takeover targets, and the reduced premiums that their stocks acheive when they are bought out. It is reminiscent of the general tendency of older people of substance to be vulnerable to delegating work to their trusted subordinates and turning them on an instant when it will hurt their romantic life in the future.

The general utility of cane buying is illustrated by the moves in the stock market the last 25 fearful days of Friday the 13th, and on the even more fearful day of the open market meetings when the average moves of the market on these terrible days, 123 observations in all, is 0.4%.

Since the upside down man has issued his bearish call for bonds, they have very quietly risen 5 percentage points. They are now in a situation where when the economy is strong, buyers appear for bonds on the grounds that the accompanying strong commodity prices will weaken the economy, (how could the economy be strong with oil above 100?), and they go up when the economy is weak on the grounds that the Fed will not reduce its balance sheet or take back money from the cronies.

The influence of romance on markets is a field that needs to be studied in much greater detail. The performance of companies should be stuided classified by the age of their CEO and their marital status, and the frequency of their past divorces. Always to be kept in mind is the Sorosian adage that you should never cement bonds with a partner that you wouldn't wish to divorce.

My general point is that old CEO's delegate all their dirty work to their trusted subordinates and then turn on them when the paint hits the wall, and then call up the chief enforcement officer the same day to exonerate themselves. This is part of the more general point that the older CEO's are all too interested in sex a la the golf player at the silo company and let the business slip as they take care of their romantic proclivities, and I still say that any young attractive reporter is not safe in the corn belt.

Rocky Humbert responds: 

Perhaps you should therefore limit your investments to the following 15 Fortune 500 companies: Sara Lee, Yahoo, Wellpoint, Xerox, Sunoco, Western Union, Reynolds American, Avon, Dupont, TJX, Pepsi, Kraft, Rite Aid, BJ's Warehouse, and ADM. The commonality of these large enterprises vis a vis your observation is left as an exercise for the reader.

(This is neither an endorsement nor a rebuttal of your theory.) 

Anatoly Veltman writes:

Is it at all odd: Bunds and T-Notes are rising at seemingly equal pace, while the FX rate is fluctuating significantly? I understand that arbitrage is impossible 10 years out. Still, this may be a tip toward a simple explanation: that investment money is passively (and massively) reaching for miniscule nominal yield improvement, without a care to speculate on other variables.



Does the incessant parade of illegal/insider trading, government manipulations, etc, of smart Ivy grads evidence the difficulty of getting rich in markets, or simply that dishonesty and greed is pervasive at all intelligence levels?

Gary Rogan writes:

It's probably evidence of both, but also of the illusion that highly successful people often seem to have of being invulnerable to normal negative forces, such as being punished for attacking hotel maids or being revealed for having a secret "love child" while running for the Governorship of California, or having an easily identifiable affair while running for the presidency. 

Bill Rafter writes: 

Don't the B Schools all have required ethics classes? Come to think of it, doesn't the industry regulators also require ethics classics?

Rocky Humbert writes: 

The United States has an incarceration rate of 743/100,000 population.

The New York City's financial industry employees 344,700 employees.

If the pro-rata incarceration rate for Wall Streeters were at the national average, there would be 2,561 Wall Streeters in the Big House right now. Or, with 35,400 employees, 263 of these people would be Goldman Sachs employees.

Since neither of these facts are true, the inescapable conclusion is that Wall Streeters are either more lawful than the national average (or they have better defense lawyers).




 Is the Singaporean enthusiasm for the death penalty just hard-nosed economics– it's cheaper to bump them off than keep them in jail? Hardly, the Singaporeans also have a very high imprisonment rate – 388 per 100,000 population according to current British Home Office figures. Australia's imprisonment rate is 115 per 100,000, Britain's is 141, the highest in the European Union. The USA has not only the world's largest prison population (now more than two million) but also the highest imprisonment rate (701 per 100,000). Russia comes second at 606.

The US imprisonment rate is so high it probably skews US unemployment figures, making them look better than they really are. Singapore leaves them all in the dust. The squeaky clean city state is not just secretive about its execution figures it's positively vague. When Prime Minister Goh Chok Tong was asked by the BBC in September 2003 why he didn't know the precise number of people executed (his guess was 70 or 80 when the actual figure that year was closer to 10) he replied that he had "more important things to worry about."

Yishen Kuik writes:

Singapore executes you for owning firearms, murder and drug trafficking, in that order of frequency. Drug trafficking is most of it (70%?), mostly couriers and dealers. We are not in the business of storing drug dealers, we are in the business of burying them so they dare not hawk their wares. Other nations make this a cause celebre because Singapore routinely executes their citizens (about 1/3 of all executions), especially the Australians. They never make the same fuss when Singapore executes Singaporeans (the remaining 2/3 of the time).

What they don't realize is that once upon a time, when Singapore was governed by the British, it was a free port with meager tax revenues. To pay for municipal administration, the colonial government promoted and taxed opium. 50 % of govt revenues was from opium before WW2.

As a result Singapore was a giant opium den with huge numbers of addicts. Having been there, there is an institutional memory among the older generation of the ruinous effect of drug addiction, and hence support to apply capital punishment to drug dealing.




 May I suggest that there are 2 different types of Least Resistance…One being the structural supported, hard wired form such as rivers, streams and the other being more chaotic in nature. say a dew drop forming and slowly going down the window or the jet streams that bring the tornadoes and thunderstorms. Or perhaps the currents and cross currents in a river. These paths are much harder to predict than to describe in hindsight what happened.

It would further seem to me that if the markets do follow paths of least resistance that this is similar to the concept of drifts and trends. The long term drift is therefore more like structural patterns to the weather. The daily forecast is much harder to pinpoint. It may simply have one data point that tips the scale.

A few stats from the S&P concerning highs and lows, I looked at the 5 day rank of the Friday closes since Jan 2000. 1 being a 5 day high of the previous 4 day closes, and 5 being likewise a low.

Here is how it stacked up.

Rank   Count   percentage
 1          172    30.1
 2            88    15.4
 3            70    12.3
 4           101    17.7
 5           127    24.5

Using the other days of the week you find a very similar U shaped frequency distribution. There does appear to be a "trend" to the top or the bottom.

Gary Rogan writes:

I was just listening to Tim Pawlenty, and when asked about why the debt limit needs to be kept where it is he used the path of least resistance argument (which I have never heard before, but maybe now I'm more attuned). He said that politicians are like water and will follow the path of least resistance down, so the only way to combat this tendency is to create an obstacle in their path, making it the path of least resistance to not increase the debt.



Things people love to hate have been on a tear this month. Bonds have rallied daily– and right on cue since everyone and their grandmother came out with compelling list of reasons for US Treasuries to become… worthless. The underlying currency - so heavily Xeroxed and collated - rallied even bigger, having everybody (but the Japanese) busy short-covering day and night! Will this craziness pause? Of course; nothing lasts forever. So what best trade is to get ready for?

I'm outside of "Gold Bug" camp. This camp is currently patient, looking to "accumulate physical at bargain prices". I say they better wait for a long time: like triple-digit gold and $15 silver. Gold train simply over-exerted with that careless $1577 pop, and will need to unload a lot of late passengers (read funds)… Silver is in far worse situation, because its poor-man's gold. And poor men tend to get poorer…

So the trade I want going into summer is to buy Treasuries and the US Dollar on a pullback! And to short any rally in commodities and equities. Will I get my wish? Patience is a virtue.

Who is on the other side? Those getting ready to short Bonds and Dollar. Those getting ready to buy near-term bottom in commodities and equities. Hey, it will be fun if we all make money! The only question is: who'll catch a bigger move?



 Jeremy Grantham is a well-known "bubble-burster"– who has spent decades studying popular delusions and the madness of crowds– with a mean-reversion mindsight. It's therefore shocking that he has declared the multi-year commodity market rally to be in a "paradigm shift" (as opposed to an asset class due for mean reversion.) Admittedly, the timing of this April essay couldn't have been worse….

Without offering any opinion on his arguments, Specs may find the essay interesting– and especially Specs who cut their teeth over the past 100 years with a doctrine that real commodity prices must decline over time.

Ken Drees adds:

Generally, when you hear "paradigm shift" or "this time it's different, it's under bubble froth conditions" or "well on the path of", Grantham is fleshing out the conditions and making the bull case even though we have had a temporary bubble top in 08. This research seems pretty straight forward and understandable based on current conditions.

I wonder what the path of least resist is for oil– seems like most people already stopped crying about 4 dollar gas.



While reading PoliticalCalculations I ran into a good pie chart of just who exactly holds the national debt as of Sep 30, 2010.

(for details click above linked article)






George Parkanyi writes:

A nice way to fund all the pensions (including military) and social security is boatloads of low interest bearing, depreciating IOU’s that are on an ass-wipe trajectory…

You know, it was just about the time that the senate in Rome thanked the veterans who managed to cut their way out of the Cannae slaughter by exiling them to Sicily, that the Roman army started looking to its generals to take care of them. The republic became, well, inconvenient, when these generals started becoming emperors. Just sayin’ …

Stefan Jovanovich corrects:

There were no "veterans" at Cannae; the Roman armies were still largely citizen-militias modeled on the Greek (not the later Macedonian) phalanx. The analogy with current U.S. military pensions is a complete anachronism; the Roman Army did not start paying pensions until the latter part of the 2nd century C.E. I know Hans Delbruck makes the argument that the military reforms after Cannae (appointing a commander-in-chief rather than continuing to alternate command between the pro-consuls) somehow led to the decline of the republican form of government; but that is not supported by the facts. After all, Scipio Africanus declined to accept appointment as perpetual consul; he and his professional army, unlike later "popular" ones, did not march on Rome. The idea that the Roman army started "looking to its generals to take care of them" after Cannae is also a considerable stretch. Citizen soldiers had expected to be paid money from the spoils of conquest since the first days of the Republic. Citizenship was valuable because it allowed you to join the militia and get part of the loot; that was the reason that you find no discussions of conscription in the history of the Republic or even the later Empire, when enlistment allowed you to become a citizen and receive your part of the spoils (as it still does today in the American military.) Soldiers had always expected to be rewarded by Senate and its pro-consols; war was business for Roman citizens just as it was for the French who flocked to join the Revolutionary army and the sailors of Nelson's Navy. The decline of the Republic came from the Senate's persistent refusal to extend the franchise of citizenship to those outside Italy; having gained an Empire, the Roman elites wanted to deny the vote to anyone not from a founding family. That left an opportunity for Cinna, Sulla and Caesar to claim "citizen's justice" for the disenfranchised. One of the nastier aspects of the sentimentality of Adams and Jefferson for the Roman Republic is that they both feared the example of the Empire in extending the rewards of citizenship to the great unwashed.

George Parkanyi writes:

That’ll teach me to mention anything historical with Stefan around. That’s it, I’m cancelling my subscription to Discovery Channel …

It was a crude analogy, more about pissing off your own military through neglect/disrespect and the eventual consequences than the details of how they were/are compensated. 

Stefan Jovanovich writes:

 Please take comparison to the professional Roman army to heart, George. We are at the point where the Romans were after Cannae, not in the declining days of the late Empire. The American military is not going to be cheated out its pensions precisely because the franchise has been extended and "entitlements" for soldiers, sailors, marines and air folk are now more politically sacred than they have been at any time in the country's history, except for the Union Army pensions after the Civil War. There is also very little real discontent among the current serving military; reenlistment rates are now so high that the Navy is having to pay bonuses to get people to leave the service early!!!!

P.S. One of the legacies of the earlier time when military pensions were sacrosanct is this:

The National Building Museum

IMNSHO it has the most beautiful workmanship of any building in Washington D.C. It was designed by Montgomery Cunningham Meigs , the engineer for the Capitol Dome, and the Quartermaster of the Union armies and the Southern Unionist who despised Lee so much that he single-handedly turned the Lee-Custis home into Arlington National Cemetery.

Here is an interesting article about the reach of the Roman professional army

I've been donig some more thinking on this subject. 

 For the United States, Korea and Viet-Nam were Cannae; they may have been necessary wars against unavoidable enemies, but they were fought as the Romans initially fought against Carthage - with the extravagant waste that always accompanies the structure of a "citizen" army. The lesson the Romans learned and I would think Americans have learned is "never again". When cannon fodder is cheap, both democracies and dictatorships will allow their generals to use attrition as a strategy. Whatever its faults, that has hardly been the U.S. military strategy over the past 2 decades; the investment in battlefield medicine alone dwarfs everything done in the previous dozen wars. Wars are never worth the cost, but some are less wholly stupid than others.

The wars of the last 2 decades have left the country with no conscription, a capable professional military, and a sense of caution about further military adventures but no fear of conflict. Our known and likely enemies - Russia, China, Iran, the believers in permanent Jihad - have severely limited capabilities; yet the necessary continuing expenses of the military, including R&D and veterans pension and health care costs, are likely to be 5-6% of GDP, at most - half what they were in the 50s and 60s when everything was so wonderful.

By comparison, the Israelis have spent and will have to continue to spend 8% or more of GDP merely to preserve a strategic situation that is a hundred times more perilous than our own. If we are to look for the spending of "deep-bench assets", the search will have to begin with Johnson and Nixon and their domestic wars against poverty and the Federal subsidies to health and education spending. Those have consumed the bulk of the country's assets, not the spending on munitions and professional soldiers.

Check this out:

Fiscal     U.S. Military
Year       spending as
               percent of GDP

1940       1.7
1941       5.6
1942       17.8
1943       37.0
1944       37.8
1945       37.5
1946       19.2
1947       5.5
1948       3.5
1949       4.8
1950       5.0
1951       7.4
1952       13.2
1953       14.2
1954       13.1
1955       10.8
1956       10.0
1957       10.1
1958       10.2
1959       10.0
1960       9.3
1961       9.4
1962       9.2
1963       8.9
1964       8.5
1965       7.4
1966       7.7
1967       8.8
1968       9.4
1969       8.7
1970       8.1
1971       7.3
1972       6.7
1973       5.8
1974       5.5
1975       5.5
1976       5.2
1977       4.9
1978       4.7
1979       4.6
1980       4.9
1981       5.1
1982       5.7
1983       6.1
1984       5.9
1985       6.1
1986       6.2
1987       6.1
1988       5.8
1989       5.6
1990       5.2
1991       4.6
1992       4.8
1993       4.4
1994       4.0
1995       3.7
1996       3.5
1997       3.3
1998       3.1
1999       3.0
2000       3.0
2001       3.0
2002       3.4
2003       3.7
2004       3.9
2005       4.0
2006       4.0
2007       4.0
2008       4.3
2009       4.7



 Here is an interesting article on the age of chief executives versus chances of acquisition. It shows that older CEO's are more likely to accept deals and also lower premiums. It's part and parcel of my investigation of how romantic urges of older CEO's often lead to hurtful results for stockholders from the Midwest to the coaches.

Rocky Humbert writes:

Interesting paper. But if I understand their methodology, they note that the chances of a bid is about 5.5% for geezers over 65, and under 4% for the younger CEO's. But their study seemingly only looked at the CEO's of companies that received takeover bids. They didn't look at companies which did NOT receive takeover bids. Hence, the subset that they analyzed has an obvious bias…. and it's possible that the stock of a company w/ an old geezer CEO of a company (which doesn't get a bid) has generated better long term performance than the stock of a company with a younger CEO. Surely there must be a paper out there which regresses CEO age versus stock price performance (over time). Doctor Z — have you seen such a study?

Victor Niederhoffer writes:

How could they come up with the chances of a bid without the total sample? Even an academic other than Sornette or the derivatives expert wouldn't make that mistake.

Rocky Humbert replies:

I didn't read the paper cover to cover, but section 3.1.2. and 3.1.2 defines their sample. Their study ONLY used the SDC US Merger and Acquisition Database….and CEO's who fell into that database.

The results are still interesting– but they would be much more interesting if they had looked at the bigger question. 

Kim Zussman adds:

Here are some somewhat relevant papers from SSRN:

This paper examines the influence of CEO career horizon on the future performance of firms. Specifically, we argue that CEOs with shorter career horizons (as measured by their age) will adopt risk-averse strategies that will, on average, adversely influence future firm performance. Further, we argue that at relatively high levels of CEO ownership control, this relationship is exacerbated. Using a sample of US-based firms from the S&P 500, we find that future financial and market performance are significantly lower for firms with older CEOs but only when those CEOs have strong ownership positions. We conclude by discussing the implications of CEO career horizons in the content of various levels of CEO ownership power.

The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction.

While individually age and tenure are only weakly correlated with the stock price reaction to a sudden death, the reaction is strongly positive (5 to 7%) if (1) the executive's tenure exceeds ten years and (2) abnormal stock returns over the last three years are negative. In a number of cases, part of the reason for the positive stock reaction to sudden executive deaths is apparently because in the stockholders' view, an obstacle to a takeover has been removed.

In this paper we examine the cross-sectional determinants of idiosyncratic volatility of biotech IPO firms. We extend current research in two directions. First, we test whether CEO stock options impact on idiosyncratic volatility. Second, we test new hypotheses that relate some easily identifiable managerial characteristics to idiosyncratic volatility. We find that the CEO stock options, resource dependence capabilities, and the age of board members help predict idiosyncratic volatility

A dailyspec classic: 

This paper shows that the time of year of a person's birth is an important factor in the likelihood they become a CEO, and conditional on becoming a CEO, on the performance of the firms they manage. Based on a sample of 321 CEOs of S&P 500 companies from 1992 to 2006 we find that (1) the number of CEOs born in the summer is disproportionately small, and (2) firms with CEOs born in the summer have higher market valuation than firms headed by non-summer-born CEOs. Furthermore, an investment strategy that bought firms with CEOs born in the summer and sold firms with CEOs born in other seasons would have earned an abnormal return of 8.32 percent per year during the sample period. Our evidence is consistent with the so-called "relative-age effect" due to school admissions grouping together children with age differences up to one year, with summer-born children being younger than their non-summer-born classmates. The relative-age effect has been demonstrated in numerous sporting and other contexts to last to adulthood and to favor older children within a school grade. Those younger children who nevertheless succeed by overcoming their disadvantage have to be particularly capable within their cohort. Together, the advantage enjoyed by older children and the particularly high capability of successful young children explain the statistically and economically significant findings. 

And just a few more: 

Regardless of retention , shareholders of acquired firms whose CEO is at retirement age receive lower premiums than shareholders of acquired firms with younger CEOs. This lower premium seems to be explained by the apparent reduced acquisition value of firms led by retirement age CEOs rather than by the target CEO conflict of interest.

Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how career concerns affect the real investment decisions of younger and older CEOs. In contrast to prior research which has examined some specialized labor markets, we find that younger CEOs undertake more active, bolder investment activities, consistent with an attempt on their part to signal confidence and superior abilities. They are more likely to enter new lines of business, as well as exit other existing businesses. They prefer growth through acquisitions, while older CEOs prefer to build new plants. This busier investment style of the younger CEOs appears to be relatively successful since younger CEOs are associated with higher plant-level efficiency compared to older CEOs. 



 "The utmost that can be expected from any system promulgated by him is that it may be splendid and affecting, that it may suggest sublime and pleasing images. His scheme of philosophy is a mere day dream a poetical creation, like the Domdaniel Carn, the Swerga, or Padalon, and indeed it bears no inconsiderable resemblance to those gorgeous visions. Like them, it is grotesque and extravagant, and perpetually violates even that conventional probability which is essential to the effect of works of art ".

Macaulay, Thomas Babington, Lord, from "Southey's Colloquies on Society".

Stefan Jovanovich adds an additional quote: 

"It scarcely ever happens that any private man or body of men will invest property in a canal, a tunnel, or a bridge, but from an expectation that the outlay will be profitable to them. No work of this sort can be profitable to private speculators, unless the public be willing to pay for the use of it. The public will not pay of their own accord for what yields no profit or convenience to them. There is thus a direct and obvious connexion between the motive which induces individuals to undertake such a work, and the utility of the work.

Can we find any such connexion in the case of a public work executed by a government? If it is useful, are the individuals who rule the country richer? if it is useless, are they poorer? A public man may be solicitous for his credit. But is not he likely to gain more credit by an useless display of ostentatious architecture in a great town than by the best road or the best canal in some remote province? The fame of public works is a much less certain test of their utility than the amount of toll collected at them. In a corrupt age, there will be direct embezzlement. In the purest age, there will be abundance of jobbing. Never were the statesmen of any country more sensitive to public opinion, and more spotless in pecuniary transactions, than those who have of late governed England. Yet we have only to look at the buildings recently erected in London for a proof of our rule. In a bad age, the fate of the public is to be robbed outright. In a good age, it is merely to have the dearest and the worst of everything.


The duties of government would be, as Mr. Southey says that they are, paternal, if a government were necessarily as much superior in wisdom to a people as the most foolish father, for a time, is to the most intelligent child, and if a government loved a people as fathers generally love their children. But there is no reason to believe that a government will have either the paternal warmth of affection or the paternal superiority of intellect. Mr. Southey might as well say that the duties of the shoemaker are paternal, and that it is an usurpation in any man not of the craft to say that his shoes are bad and to insist on having better. The division of labour would be no blessing, if those by whom a thing is done were to pay no attention to the opinion of those for whom it is done. The shoemaker, in the Relapse, tells Lord Foppington that his lordship is mistaken in supposing that his shoe pinches. 'It does not pinch; it cannot pinch; I know my business; and I never made a better shoe.' This is the way in which Mr. Southey would have a government treat a people who usurp the privilege of thinking. Nay, the shoemaker of Vanbrugh has the advantage in the comparison. He contented himself with regulating his customer's shoes, about which he had peculiar means of information, and did not presume to dictate about the coat and hat. But Mr. Southey would have the rulers of a country prescribe opinions to the people, not only about politics, but about matters concerning which a government has no peculiar sources of information, and concerning which any man in the streets may know as much and think as justly as the King, namely religion and morals.

Men are never so likely to settle a question rightly as when they discuss it freely. A government can interfere in discussion only by making it less free than it would otherwise be. Men are most likely to form just opinions when they have no other wish than to know the truth, and are exempt from all influence, either of hope or fear. Government, as government, can bring nothing but the influence of hopes and fears to support its doctrines. It carries on controversy, not with reasons, but with threats and bribes. If it employs reasons, it does so, not in virtue of any powers which belong to it as a government. Thus, instead of a contest between argument and argument, we have a contest between argument and force. Instead of a contest in which truth, from the natural constitution of the human mind, has a decided advantage over falsehood, we have a contest in which truth can be victorious only by accident."



 I read this interesting thought today:

"You hear a rustle in the grass. Is it the wind or a dangerous predator?

If you guess that it's a dangerous predator but it's just the wind, you've made a mistake—believing that something is real when it's not (a "false positive," as cognitive scientists call it)—but a rather harmless one. On the other hand, if you guess that the rustle in the grass is the wind but it turns out to be a hungry lion, your mistake is more serious: The lion was real but you thought it wasn't (a "false negative"). In this case, you're lunch, and you won't get the chance to be more cautious next time."

If today a similarly evolved lady expressed a great deal of anxiety over the possibility the world would end in 2012, bet her $1000 ($1T, etc) it wouldn't, because:

1. If you are right she pays
2. If you are wrong, you don't have to.



 Several interesting aspects of this flexionic story ("Bin Laden Was 'Pulling the Levers' of Al-Qaeda")  to me are:

1. The emphasis by Mr. Bin Laden on trying to do deeds around the 10th anniversary of the event, thereby giving force to Gann's theory that recurring events tend to fall on significant anniversaries.

2. The emphasis on the interrogation techniques used and the denial that any of them were valuable.

3. The absence of any inside scoop on the economics of Mr. Bin Laden's operation, e.g. his well known pride in masterminding the September 11th destruction with just a few hundred thousand dollars of expenditures with an output input ratio greater than some of the best op amps.

4. The emphasis on the investigation of those who found out about it.

5. The admission that none of the operations were ready to go. Shortly before 9/11 , I was offered an amazing number of great bids on S and P puts, and I am convinced that the other side had taken their mink coats in the US out of storage so as to be ready for a quick exit. A friend told me the week before that a bloodbath on the scale of 10 17 87 was felt to be imminent.

Anatoly Veltman writes:

I had no inside knowledge; I wish I had– and would've saved my best friend's life.

Oil charts were as telling as the week prior to Saddam's entry into Kuwait in 1990. Into September 2001, oil chart looked Bearish, projecting an imminent and deep dive below $25.00 support…except for one tiny obstacle: oil market was holding like a rock, in a chart position where it was not supposed. All shorting was being stubbornly absorbed, and one could feel the underlying bid's determination. It felt like a classic "buy the Rumor". And then came the Fact; and the long-awaited market re-open. Oil gapping up to literally "one minute of glory above $30.00". The relentless aggressive daily selling immediately commences and takes WTI straight down to the original technical projection below $20.00!




 One is always amazed at the ephemeral announcements that move markets. Today there was a New York man report. That represents 1 /1000 of the economy and is seasonally adjusted beyond recognition. It dropped the market a 1/10 of a %.

For individual stocks, a recall of a 1000 units of a product that represents 1/10000% of sales of a company is newsworthy enough to drop it 1/4 %. I guess these announcements are necessary to add just one more % a day or so to what the public gives to the banks that make money every day on their trading.



 The previous Indians manager Eric Wedge who always was criticized for too many pitching changes came back for the first time to Jacob's Field as the mariner's skipper in the opening game of a three game series. His pitcher (fister) dominated the tribe for the most part going 8 strong innings. With a 4 - 2 lead in the ninth, he pulls the pitcher and goes to his closer a right hander. The Indians get a rally going, a man gets driven in and its 4-3, man on third base, first and second base open and Hafner comes to the plate– the left handed slugger of previous years who has been slowly rehabbing for the last two years, and this year seems to be showing some healing promise. The Indians lead the league in ninth inning walk off wins. Hafner is hitting 333 at the plate after striking out looking last at bat. He drills an 0-1 sinker over the center field wall for a walk off two run homer. The biggest walk up crowd all season goes wild, and they linger in the stands waiting for fireworks– the party is on!

Wedge had his old memory of the rehabbing hitter who had seen better days– it was the closer or nothing else but the matchup favored Hafner. First base was open, and they could have given a free pass and pitch to the next batter and get better odds on field outs. Now the ailing Mariner's take another body blow to start a series and will have to fight even harder today. When the closer came on the announcers were happy saying– at least Fister was out and maybe the tribe will have a chance to come back. Indians best record so far. City starting to catch tribe fever again.

DF, dean foods hitting a new 52 week high last friday seemed similar. An older strong company being rehabbed– Tepper involved, and the GS upgrade was the pitch down the middle that was easily crushed.



 Here is an invaluable chart listing the average cash price of the commodity received by the producers, and it's broken down into different areas. While it already tells us much of what we know, it is a very good illustration of the very broad based price increase over the past year and a half. While most people look solely at the futures prices, it is equally as important to study what the farmer gets paid, for without a firm knowledge of the trends of the cash prices, one is missing half of the equation.



Our local comedian (aka Eddy's Mom) announced over coffee this morning her new formulation for the H-H Index. It is, she says, best calculated as the length of the hypotenuse of the triangle that the DOJ is going to ram up the ( one looks around 3 times)– of anyone who even contemplates increasing their "market power".

For a more conventional definition, see Wikipedia.

According to the latest budget, the direct annual cost of having people sit at desks and calculate how much economic sin is to be allowed is $189 million; as in all things regulatory, the indirect costs are incalculable and, therefore, irrelevant.



 Train drivers know that if you accelerate out of the turn and do not stop at the scheduled stations for paying customers , in the end you don't make any money.

It seems the U.S. stock market has that problem… (For example, recently, silver and the EURO is beginning too..)

In the last quarter of 98 as well as the 2nd and 3rd quarters of 2010, the SP500 thought it could pay for its upkeep while disregarding who was going to pay for the wear and tear, and when the only passenger turned off the music, all of a sudden you could hear the car start to rattle and the brakes fail. Then it's just a matter of whether the driver has enough experience at the wheel, and enough instruments working on the dashboard, to pull the chariot up to a safe stop (which is usually in direct proportion to how fast he was going) or go banging from guard rail to guard rail.



Here is a study comparing VIX levels of 8 trading days prior to (and sometimes including) September 11's to 8 trading days following September 11's, 2002-2010. First comparing the mean pre-911's to post 911's for all study years:

Two-sample T for pre 911 vs post 911

              N   Mean  StDev  SE Mean
pre 911    72  21.45   7.39     0.87  T=-0.2
post 911  72  21.70   8.64      1.0

No difference in mean VIX between 8 days prior to and following 911 dates. Here is the same comparison by year, with the T-score for difference between pre911 and post911:

2010     2.7
2009     3.1
2008    -6.9
2007     1.9
2006     4.1
2005     1.5
2004     0.8
2003     1.1
2002    -1.7

The omniscient market (and even more omniscient options market) was not concerned about repeat terror attacks in the 4 years following 9/11/01. In 2008 financial markets were probably more worried about self-inflicted damage. However pre-911 was significantly higher than post-911 in 2006 - the 5th anniversary of the attack; which fits with public information that other attacks were considered on notable anniversary dates. Evidently Osama also hoped for commemoration on 9/11/11, and it remains to be seen whether there will be a run on insurance under his new tenure as fish food.



 Here's an amazing little animated graph showing all the predictions of sunspot activity in real time. Note how the the projections keep getting smaller and smaller.

A good article to point you in the right direction concerning sunspots and solar radiation is here.

Correlating wheat prices with sunspot numbers is not new, Herschel did it in 1801-1805 when he took the wheat price data from Adam Smith's "Wealth of Nations," and plotted it against the number of sunspots.

Here's an excellent paper describing the price of wool and wheat in early England. The charts are an invaluable source of data and are priceless.

Much work needs to be done on correlating the number of sunspots and or solar flux vs grain prices and the predictability of grain prices vs sunspots should be examined. Also, the lead times should be exhaustively studied.

Personally, I think that the sunspot numbers provide the mother-lode of a meal for a lifetime.

Victor Niederhoffer writes:

This work must be supplemented by the related work of Harol Thayer Davis in the economic analysis of time series circa 1926 on the same subject and the follow up work of the Cowles Commission in their early days. 



I highly recommend the book Against the Stream: Critical Essays on Economics by Gunnar Myrdal.

Almost all of it is intellectually reprehensible, but the frankness of the views and the plain speak with which a nobel laureate holds forth (and he is amazingly funny) is worth investing some time in.



A very easy trading system is proposed by the author of this article Louis Woodhill:

Because oil always returns to its average value of 0.0735 ounces of gold per barrel, there is an opportunity for arbitrage. The federal government has 726.6 million barrels of oil (worth about $74 billion today) and about 261 million ounces of gold (worth about $373 billion today). When oil/gold price ratio is significantly (say, 10%) above its long-term average of 0.0735, the government should sell oil and use the proceeds to buy gold. When the oil/gold price ratio is significantly (again, say, 10%) below 0.0735, it should do the reverse. Right now, with the oil/gold price ratio at 0.0715, it should be doing neither.

Who knows if he has tested it?



It is interesting to note that of the last 25 Friday the 13 ths stock market moves since 1996, (a random cutoff) 60% were up and the average move during the day was 0.4 % with a non-significant t of 1.4. I believe this is a general manifestation of the microscopic utility of cane buying as well as its macroscopic counterpart which you are all caned on.



Probability distributions have a surprising number of inter-connections . A dashed line in the chart below indicates an approximate (limit) relationship between two distribution families. A solid line indicates an exact relationship: special case, sum, or transformation.

Click on a distribution for the parameterization of that distribution. Click on an arrow for details on the relationship represented by the arrow. Other diagrams on this site:

Conjugate prior relationships Modes of convergence Gamma and related function identities Special function diagram Bessel function relationships

Follow @ProbFact on Twitter to get one probability fact per day, such as the relationships on this diagram.

Read more on this topic here.



If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

-Hayek, Nobel Prize lecture




The Winners of the least effort contest were jointly in a tie. Mr. Gary Rogan and Mr. Steve Ellison. I will split the prize between them. The creative and physical ideas of Mr. Rogan were very excellent and best of all, but there was no testing. Mr. Ellison gave a great test, and a complete answer, but Rogan can't be denied his place either. vic

I'll give a prize of 1000 to the person or locus of his choice that comes up with the best way to test the principle of least action or a related principle of least effort.

It's in honor of my grandfather. Whenever I'd ask him which way he thought the market would go he'd say, "I think the path of least resistance is down" starting with Dow 200 in 1950. We need some more quantification around here.

You might consider max to min or a path through a second market back to home. Or round to round? Or amount of volume above or blow. Or angle of ascent versus angle of descent. Or time to a past goal versus the future? Or some mirror image or least absolute deviation stuff?

Sushil Kedia writes:

With utmost humility and clearly no cultivated sense of any derision for the Fourth Estate, I would submit that since it is the public that is always flogged and moves last, the opinions of all media writers, tv anchors are the catalysts, the penultimate leg of the opinion curve. A test of the opinions of the fourth estate on the markets would provide the most ineffective wall of support or so called resistances. Fading the statistically calculated opinion meter (if one can devise one such a 'la an IBES earnings estimate a media estimate of market opinion) and go against it consistently over a number of trades, one is bound to come out a winner. Can I test it? Yes its a testable proposition, subject to accumulation of data.

Alston Mabry writes:

The following graph (attached and linked) is not an answer but an exploration of the "least effort" idea. It shows, for SPY daily since August last year, the graph of two quantities:

1. The point change for the SPY over the previous ten trading days.

2. The rolling 10-day sum of the High-Low-previous-Close spread, i.e., "max(previous Close, High) minus min(previous Close, Low)". This spread is a convenient measure of volatility.

Notice how these quantities move in tight ranges for extended periods. These tight ranges are some measure of "least effort", i.e., the market getting from point A to point B in an efficient fashion. As one would expect, the series gyrate when the market takes a temporary downturn. Also note how when one of the quantities swings above or below it's mean or "axis", it seems to need to swing back the other way to rebalance the system.

Bill Rafter writes:

 This nicely illustrates how relative high volatility is bearish on future price action.

Jim Sogi writes:

The path of least resistance would be the night session. Low liquidity allows market mover to move market. Every one is asleep. Dr. S did a study some years ago. Updating shows total day sessions yielding 94 pt, but night session yielding 232 points. Don't sleep…stay up all night or move to Singapore. Recent action is in line with hypothesis.

Bill Rafter writes:

Haugen's "The Beast on Wall Street" (i.e. volatility) came to the conclusion that if you want less volatility in the markets, keep them closed more, to essentially force the liquidity into specified periods. That is, 24 hour markets promote volatility. Or a corollary was that a market is never volatile when it is closed. [this is from memory and I may also be regurgitating from a personal conversation with him]. An oft cited example is the period in the summer of 1968 when equities were closed on Wednesdays to enable the back offices to get up to date with their paperwork and deliveries. During that time the Tuesday close to Thursday opening was less volatile than expected (twice the daily overnight vol).

One could take this thought and stretch it to say that the periods of least resistance would be those without heavy participation. One could easily compare the normalized range (High/Low) of those periods versus the same of the well-participated periods.

Craig Mee writes: 

Hi Bill,

You would have to think that in 68 there was sufficient control of price and news dissemination. In these times of high speed everything, that this could create bottlenecks and add to the volatility. No doubt a bit of time to cool the heels i.e limit down and up for the day restrictions, is a reasonable action, even if it goes against "fair open and transparent markets" but unfortunate it seems little is these days.

Bill Rafter replies:

I should have been more specific about the research: take the current normalized range for those periods of high liquidity (when the NY markets are open) and compare that to the normalized range of the premarket and postmarket periods. Do it for disjoint periods (but all in recent history) so you don't have any autocorrelation. My belief is that you will find there is less volatility intra-period during the high liquidity times. While you are at that you can also check to see during which period you get greater mean-reversion versus new direction.

If that research were to show that (for example) you had greater intra-period volatility during the premarket and postmarket times, and that those times also evidenced greater mean-reversion, you could then conclude that those were the times of least resistance. That would answer Vic's question. Okay, now what? Well you could then support an argument that with high volatility and mean reversion you should run (or mimic running) a specialist book during those times. That's not something I myself am interested in doing as it would require additional staff, but those of you with that capacity should consider it, if you are not yet doing so.

Historical sidebar: '68 was a bubble period caused in part by strange margin rules that enabled those in the industry to carry large positions for no money. The activity created paper problems as the back offices were still making/requiring physical delivery of stock certificates. The exchanges closed trading on Wednesday to enable the back offices to have another workday to clear the backlog. The "shenanigan index" was high during that time.

Phil McDonnell writes:

Bill, you said "During that time the Tuesday close to Thursday opening was less volatile than expected (twice the daily overnight vol)."

For a two day period and standard deviation s then the two day standard deviation should be sqrt(2)s or 1.4 s. So the figure of twice the volatility would seem higher than expected.

Or am I missing something? 

Steve Ellison submits this study:

The traditional definition of resistance is a price level at which it is expected there will be a relatively large amount of stock for sale. 
Starting from this point, my idea was that liquidity providers create resistance to price movements. If a stock price moved up a dollar on volume of 10,000 shares, it would suggest more resistance than if the price moved up a dollar on volume of 5,000 shares.

To test this idea, I used 5-minute bars of one of my favorite stocks, CHSI. To better separate up movement from down movement, for each bar I calculated the 75th and 25th percentiles of 5-minute net changes during the past week. If the current bar was in the 75th percentile or above, I added the price change and volume to the up category. If the current bar was in the 25th percentile or below, I added the price change and volume to the down category.

Looking back 200 bars, I divided the total up volume by the total up price change to calculate resistance to upward movement. I divided total down volume by the total down price change to calculate resistance to downward movement. I divided the upward resistance by the downward resistance to identify the path of least resistance. If the quotient was greater than 1, the past of least resistance was presumed to be downward; if the quotient was less than 1, the path of least resistance was upward.

For example:

                           Previous 200 bars
   Date     Time     Up Points Volume  Down Points Volume Resistance

3/25/2011   15:50   53   6.49  99431    61  -7.38  149867     15311

   Down       Resistance     Actual
Resistance      Ratio      net change
     20310       0.754       -0.03

Unfortunately, the correlation of the resistance ratio to the actual
price change of the next bar was consistent with randomness.



 As I was just watching a "debate" on CNBC about whether the oil companies deserve their "tax breaks" and also hearing some of the outtakes from the "hearings" in Congress on the subject, it struck me that this is one of the worst examples of the fascist media being in cahoots with the fascist government.

Doing a little research on the mainstream press articles on removing the "tax breaks", one gets a striking realization that they never ever explain what those "tax breaks are". The CNBC "debate" itself was a farce that didn't deal with that explanation either from the moderator, who while seemingly being fair had another "cast member" periodically chiming in with derisive comments about removing "subsidies" and the "enormous profits" these companies enjoy. As best as I can determine, the "tax breaks" are nothing more than write-offs of various expenses. The vast majority of them are not any different than for any other manufacturers.

If one reads some of what has been written on this topic, it's hard not to realize that this is a giant conspiracy (or natural behavior of like-minded people) to demonize a certain group with catch phrases without explaining any facts other than the "outrageous profits" of that group.



 I went for a walk today in the Sumatra jungle and into a corn field where, standing next to a 10' plant with a tassel top that can double as a basketball hoop, I knew I was lost. The neighbor 9-feet plants were too spindly to climb and I didn't dream of scaling the giant to peek at the sun. A crunch of footsteps a few rows over startled my 'Help!', and the reply, 'Pick a young one, sweet.'

I anxiously recalled my Iowa hobo days at the Brit Convention where a 1942 photograph displayed the 26-feet National Tall Corn Contest winner from Des Moines.

I parted the stalks taking thumps on the head from corns for a dozen rows to nearly knock over an old Batak lady perched on a stool picking. She dropped lightly to the ground and handed me an ear to nibble and it was sweet, however robust like the Batak. After the first line she explained that the corn was sweetest this time of year; after the second she allowed that everyone else waits another two weeks for 20% size increase; and after the third line she cried, 'You hit the peak height because tomorrow the tassels will weep and bend!'

We grabbed more ears ears and an hour later walked out the corn field into the Sumatra sunshine.



Since last December, the aggregate open interest (OI) in WTI futures has gradually risen, and notably, it has continued to rise even after the violent reversal on 5/5/11. (The OI in RBOB, HO and Brent have very different complexions.)

Anatoly, I believe that you are student of OI. How would you interpret the continuing rise in Crude OI?

Anatoly Veltman responds: 

 My answer will shock you: you will not hear a solitary thing of what I've learned over 25 years of O.I. analysis applied to real-time markets! You might as well listen to a person who never heard the term O.I.

Firstly, you may get a hint of modern environment from this article.

I will go much further, but this is what I'm in agreement with: the make-up of participation has changed. From individual speculation to institutional. It used to be that shadow governments speculated via discrete funds, dealers and accounts amounting to billions. Well, as we all know: it is trillions of dollars of taxpayers' money that have recently found their way into investment domain, mostly via certain privileged bank and fund channels. The never-spoken-of process that used to be confined to Russia and its neighbors, the Middle East, Africa, Central America, etc - was finally enabled right here, within world's biggest economy…

So what you have right now: all this pool of money that never went to stimulate a retail consumer and onwards via multiplier effect. It went into investment funds instead: some invested in equities and some increasingly in commodities. Oil being the premier commodity, the jewel contract that you see rising to peak participation. Peak "oil contracts", not necessarily peak "oil"!

Futures O.I. make-up has lost its properties. Even in yesteryear, its analysis had to be multi-dimensional. I remember Larry saying that even the S&P's breakdowns may be meaningless, unless all indexes are aggregated into data. Well today even all futures thoroughly examined for their price action, overlaid onto O.I./C.O.T. data will yield distorted results - due to explosion in ETF arena. Those institutional players became so prolific today, that daily SLV volume dwarfed SPY!

And thus 2011 commodity speculation has become instantly dependent on slightest change in perception re: volume of new investment liquidity. All analysis of particular raw material supply and demand is so 2005! 

Paolo Pezzutti writes: 

Something began to change mid 2007 when certain relationships between some commodities (for instance gold) and SP futures started to develop. They are still working well now. But now that a small fish like me has found them it means that the party is almost over… What is the next theme?



The path of least resistance is the path of the loser.

-H. G. Wells

There are two distinct uses of the phrase "path of least resistance": the physical and the metaphoric. In the physical world it invariably involves conversion of potential energy to some other form of energy. The most common use is for water flowing downstream. Water will flow down the steepest gradient from one point to the next. Excluding second-order effects like turbulence and friction losses, there doesn't seem to be ANY resistance no matter how the water flows because by the time it reaches the bottom of a hill it will have converted exactly the same amount of potential energy to kinetic energy.

So why is this path called the path of least resistance? That's not clear, it's generally the shortest path as computed point by point because water isn't "smart" enough to bypass potential energy traps and flow upwards or sideways temporarily to gain overall. What it seems to signify is just the "natural" path which is a somewhat tautological definition. Water always does that and this seems noteworthy because water seems to possess some sort of intelligence to just do the obvious.

So here's the first clue: going down the path of least resistance is something so lacking in intellectual effort as to be obvious to an inanimate object. This is perhaps also noteworthy because while this would be completely obvious to a human being trying to analyze a well-diagrammed picture of a hill, it's not so clear when you are standing on the actual hill and you may get surprised if there is a flood or a mud slide of some sort. This provides the second clue: the path of least resistance is only obvious if you see the whole picture. There is a third clue from the downhill flowing water situation: if there is a lake (a potential energy trap) at the top of the hill, water will be perfectly content to just stay there and not follow any path of least resistance down. The clue is: there has to be the possibility of motion for the path of least resistance to show up.

The second most common example in the physical world involves electrical current flows in electrical circuits consisting of multiple branches, or something very similar from the world of water: flowing into multiple pipes at once. Here we often have actual resistance (or impedance for variable currents). In the world of DC currents this simply converts potential energy into heat. The actual action is again tautological: when a voltage source is presented with paths of multiple resistance to complete a circuit, wherever the currents will flow that's what has the least resistance. Of course if you know the resistance in advance than you could make it slightly less tautological by computing that the currents will distribute in the inverse proportion to the resistance when multiple branches are involved, and thus it could be claimed that the currents will flow down the path of least resistance. Of course it's not quite that because they flow everywhere, just less so down the more resistive paths. This provides the fourth clue: sometimes the path of least resistance isn't the only path, just the main one.

In the metaphoric sense, the path of least resistance generally applies to human behavior. You could just say that that's what people do when left to their own devices but that clearly doesn't illuminate anything at all and is often not even true as many people do not take that path. To borrow from the water flowing down hill analysis, there has to be a force of some sort involved to see this path, as let's say an attempt to change people's behavior. Let's imagine for a moment that you are in charge of a large company and you want to modify how your employees behave. You have to make sure that the path of least resistance is for your employees to follow your dictates or rely on unrelated incentives or punishments.

A trivial, but illustrative example would be to get your employees to use an electronic badge to get into the building. If your doors are open during business hours clearly nobody will use the badge because that's the path that requires the least effort. If you install an electronic lock that only opens when you insert a badge the path of least resistance will suddenly coincide with your desired behavior. This provides the fifth clue: to get a meaningful path of least resistance when people are involved you have to combine either force or motion with an identifiable obstacle.

When purely mental exercises are involved, the path of least resistance is even simpler but it involves an evolved behavior of trying to conserve energy. It so happens that higher-level thinking involves a lot of energy, much more so than following instinct or emotions. Thus the path of least resistance where thinking is involved is to minimize it. The role of instinct and emotions is to substitute for thinking in most situations but especially where either speed or danger are involved, because they work quicker. This provides the sixths clue: when strong emotions are involved the path of least resistance will be to quickly follow the emotions.

Let's summarize the clues:

-going down the path of least resistance is something so lacking in intellectual effort as to be obvious to an inanimate object
-the path of least resistance is only obvious if you see the whole picture
-there has to be the possibility of motion for the path of least resistance to show up
-sometimes the path of least resistance isn't the only path, just the main one
-to get a meaningful path of least resistance when people are involved you have to combine either force or motion with an identifiable obstacle
-when strong emotions are involved the path of least resistance will be to quickly follow the emotions

What does that have to do with stocks? In my opinion it only makes sense to talk about the path of least resistance when there is a lot of "energy" in the markets and a lot of emotion. To really predict what will happen you need to know a lot about a lot of the participants. The path of least resistance will not be the only path but the dominant one. People will overcome their initial resistance towards buying or selling due to either some event or the increase in energy. Whatever the path of least resistance is, it will be followed quickly and then the concept will stop being applicable. The path will always seem obvious in retrospect even if you didn't know the whole picture in advance.



 I keep wondering if AAPL will be the first $1T-market-cap company. It's hard to accept that number if you're an old fart with a set of mental reference points that do not encompass market caps that begin with "T".

Right now AAPL has ttm net income of about $20B, and sells for 16x that number. So at the same multiple, $1T in market cap would require roughly $65B in net income. Is it possible they could get there in the next 3-4 years? They may break $100B in revs in calendar 2012. They also have $65B in cash on the balance sheet right now. By 2015 that will be…$150B? $200B?

The first $100B market cap was a big deal, too, though I don't remember which company it was.

Tyler McClellan writes: 

The reason apple will never get close to a 1 trillion market cap is very intuitive.

At that level they would be the largest net lender to the U.S. economy other than Japan or China. What are the prospects of a company that lends all its profits to the U.S. at zero percent interest rates. 

In fact, I will go further and say that the cash on the balance sheet at Apple is exactly equal to the amount of savings that society wants to do and apple refuses to accommodate.

For all of you who think you understand economic theory very well. What company supplies net capital to the economy at ever increasing rates even as its own prospects continue to improve vis-a-vis the economy?

Apple is a great lender to you and me, who have no need and no want for these lent funds, in exactly the opposite proportion to the amount you and I want to save in apple given its huge scope of opportunities.

Apple positively refuses to allow people to save. They force people to dis-save.

And for those of you who think the impetus to competition makes up for this (i.e., inducement effect of high market cap). Microsoft makes more net cash flow than all of the venture capital in the united states.

Apple itself makes nearly as much in free cash flow as the entirety of venture spending (that's in all categories at all stages).

Jeff Rollert writes:

Aren't market caps just measures of human preferences? If so, then they are good measures for where you are, not where you will be, as much of this behavior mapping is coincident.

A trillion seems to trite these days. 

Alston Mabry writes:

I think size matters.  Here are some more stats for AAPL:

last two quarters' YOY rev growth: 70%, 82%
last two quarters' YOY earnings growth: 74%, 91%
annualized growth rate of net income since 2005: ~60%

PE based on most recent 4 quarters: 16.3
PE after backing out $65B in balance sheet cash from mkt cap: 13.2

Now, imagine you saw those growth rates for revs and earnings, and that PE ratio, in a company with a $1B market cap, a company that had relatively limited market penetration for most of its products. "Is that something you might be interested in?"

So why aren't we more interested? Because people think AAPL is too big already. But maybe we have entered a new era of an expanding global economy in which there will be many companies with trillion-dollar market caps. As a popular and much-quoted writer and self-styled philosopher called it: the "JK Rowling Effect".

At one point in January 2000, the top ten (or twenty…I can't remember) stocks in the Nasdaq 100 had a total market cap of $1.6T and aggregate net income of about $19B, for a PE of 83. AAPL's current ttm net income is $19.5B, it's market cap $320B.

Frame of reference…point of view…big round numbas….

Alston Mabry asks: 

So you're assuming that rates will still be zero in, say, 2016? Could be. But what if the whole curve is pushed up two or three hundred basis points by then?

Tyler McClellan writes: 

Their actions as representative will force the rates to be low.

If the worlds most rapidly growing large enterprise refuses to borrow funds at 70% internal growth rates and is more than happy to lend them at 0% interest rates, then what possible companies demand to invest more than their willingness to supply savings?

It's a big fake that no one is supposed to talk about, our best companies don't want any money no matter how fast they grow, and in fact the faster they grow the less money they want. But wait, that's great, you say, because it means they create value out of nothing, and that what economics is. And isn't it true that companies can have value only if the sum of their discounted cash flows are positive, so doesn't that mean were wealthier if all of our companies have really high net cash flows.

And of course the answer to the above is categorically no, but I don't suspect what I've written to make a bit of difference, so back to my little day solving equations. 

Rocky Humbert writes: 

Tyler: I'm not sure it's appropriate to generalize from AAPL to the entire economy. AAPL is sitting at the top of the technology food chain, and they are benefiting from the investments being made underneath them. It's surprising, but Apple is NOT investing in R&D in a meaningful way… and this demonstrates that they are much more of a marketing company (like Proctor&Gamble) than a technology company. Hence they will eventually need to either buy back stock or pay a dividend….

R&D as a Percent of Revenues:
AAPL: 2.7%
P&G: 2.5%

INTC: 15%
MSFT: 13.9%
GOOG: 13.0%
IBM: 6%
(Source: Bloomberg, FA IS page, trailing 12 months)

keep looking »


Resources & Links