There should be a New Yorker cartoon with the gist sort of like the palindrome's trades selling 1000 contracts at the market and then calling up the reporters and saying, "this market seems like it has a very weak bid" or like Thor drinking from the Jotun's cup of mead and making very little progress in emptying it not knowing that the other end was connected to the Atlantic Ocean.

We used to have a very good cartoon about "why sell my company? Things are going very well". In the background was fire engulfing his plant and thunder and lighting and floods ready to engulf. Anyway, we need something like a old lion like the sage saying, "this market seems to be going down for no reason" and a man like the sage or scrooge rubbing his hand in glee in dollars as he siphons off all the profits and humbly speaks at a fund raiser for his favorite politician.

Russ Sears comments:

 Or a caption with diplomats/politicians saying "at least we had the sense to avoid a trading war." With money being stuffed into various industries hand behind each countries back.

First we are in a trade war of a different kind. The arguments that tariffs leads to a trading war is well known. 1. It leads to displacement. 2 it is a form of tax on the consumer. 3 It delays production moving to those countries that have a real economic advantage. 4. It leads to retaliation and escalation. 5. The friction can grind economic growth to a halt. But what is the flip side of a tariff, a government subsidy. A government subsidy is a double negative equivalent to a tariff. It is a double negative because: 1 it goes for the favored domestic companies. 2 Its a future tax to domestic tax payers rather than an immediate tax to the foreign importer. The solar company’s bankruptcy makes it clear that each of these arguments against tariffs is occurring in subsidies. Further, it shows how much more crippling this war is in an “idea” or technology economy rather than manufacturing economy because it can be started upfront, before the evolutionary process can naturally occur. How far would applying this lesson go towards restoring some sanity and halting the skid-marks to the current crisis many developed governments find themselves?

And second how fast would the local fog clear if this lesson was applied to the flexions Too Big to Fail companies?




 Reflections on the life of Carl Icahn and 9W Search: a SINGLE ANSWER TO MILLIONS OF FINANCIAL QUESTIONS (my latest venture).

Carl Icahn's “survival of the fittest and “greed is good” religion has fueled his 50 year+ rampage in the Wall Street jungle. His random attacks on peaceful, generally complacent, and then confused, corporate management (TWA, Clorox, Yahoo, Lion Gate et al) is the culmination of his life’s goal of victory over the corporate weak with no mercy to the fallen. His record of booting out any participants in his forays who thought they would share profits with Carl is pretty grim:

• an uncle (Elliot Scnall) who was the source of Carl’s money in his early career as corporate raider and extortionist

• Icahn company internal managers (plump Kingsley, Dr. Mark Rashefsky, overly ambitious Russell Glass, key operative Keith Meister;) all fools who expected to get paid what they were actually were worth to Carl

But Carl has an unusual witty side too. If you haven’t seen these two video you might be amazed by his story telling ability: “Texaco video" , "US Steel video

These videos present an aspect of his persona known to just a few friends (not counting his virtual dog). Carl’s view of friends: “if you want a friends, get a dog”. A new financial search engine from the founders of EDGAR Online, Inc, 9W returns the single correct answer (no scrolling like Google or clicking like Yahoo)

Go here, enter your email address, choose a password and see how 9W works.


What was the latest Pfizer employee termination cost? Employee termination costs

RESULT: $189,000,000
AS OF: 1/4/2005 - 7/3/2011

Another question: “Hewlett Packard’s CEO bio”

Fri Sep 23, 2011

About 27,400,000 results (0.10 seconds).



 Jamie Dimon on his last quarter earnings conference call said: "We maintained our fortress balance sheet, ending the second quarter with Tier 1 capital ratio of 10.1% JPM corporate debt rating: AA-/A"

Today's GM press release announcing a new labor contract read: "Importantly [the contract] preserves GM's fortress balance sheet."

GM corporate debt rating: B/BB-

If one only looks at the debt on the GM balance sheet, things look ok (about $10 Billion in LT Debt).

However this ignores the fact that GM has a $31 Billion (and growing) underfunded pension liability. Unlike most of the debt which was extinguished, this monster pension liability survived their bankruptcy reorganization.

Not all fortresses are created equal.



 It is always marvelous to consider how in 162 games played over 6 months time, the margin of victory can be so minute, and how often that it so.

Not only is it true in baseball, but in many sports, e.g., thousands of laps and tens of thousands of miles driven in 36 Nascar races run over 10 months, 21 stages and 1800km of the Tour de France run over 23 days, etc. And the slim margin of victory is evident in individual events as well, e.g., hundredths of a second in the 100m dash, or 10ths of a second after 500 miles of auto racing, a last second walk-off field 50-yard goal after 60 minutes of football, a tennis tournament coming down to deuce in the last game of the 5th set of week-long play, winning a 1.5 mile horse race by a nose, or sprinting the last few hundred yards of a 26 mile marathon to win by seconds.

So the Redsox and Rays, and Cards and Braves, respectively, find themselves with identical records after 161 games. Two of these teams are going to the playoffs with either a 0.6% or 0.3% margin of victory, depending upon today's wins/losses. Even the Brewers who are assured of a playoff spot have a margin of victory of only 6 games over 161, which amounts to 3%.

And, the NL batting title is going down to the wire with Ryan Braun of the Brewers and Jose Reyes of the Mets separated by hundredths of a percent after stepping up to the plate 600 times during the season.

All this reminds of how difficult it is, as the sample grows in size, to accrue sizeable percentage gains, even when one's winning percentage remains high. It reminds of driving a couple hundred miles on the freeway yesterday, then seeing the gas mileage drop by a percent after driving a few miles in town. It reminds of a past colleague explaining 93% of an observation with a few variables in the first data cut, then spending 6 months adding and subtracting other variables to improve that explanation by less than a percent.

It also reminds of John Wooden famously instructing his players how to properly put on their socks. He showed them how to roll the sock, place it over the toes, then how to tautly unroll it over the foot and up the ankle so that there were no wrinkles in the sock. His explanation was, to paraphrase, wrinkles cause blisters, blisters lose games, losing games loses championships.

It goes to show that the old saw "the race is won in the last few yards" is frequently very true, and with the margin of error, or victory, in many cases being so slim, how seemingly unimportant details and decisions we make can affect the outcome of events in our lives, even many days, months and years down the road.



 I've been reading the short book Speculation as a Fine Art and Thoughts on Life by Dickson Watts and it's making me think about pliability, the ability to change an opinion, and the power of revision. "He who observes," says Emerson, "and observes again is always formidable". (this reminds me of the chair, always observing, testing, measuring).

Never "double up",  that is, never completely and at once reverse a position. When you're long, for example, do not sell out and go as much short. It may succeed occasionally but it's hazardous. Because if the market reverses and one then flips back to long and this change is then wrong, complete demoralization ensues. This is timely as our markets are reversing wildly these days. It's interesting to note that it takes a trader 3 positions for mental destruction to take hold–long/short/long and that turns wrong, and it's over mentally. Average down works 80% of the time to get you back to even –20% of the time it will bust you bad though. This is the common strategy and should be avoided.

Averaging up, does not work 4 out of 5 times, with a 20% chance of a huge gain and should be employed. The key is to cut the trade when the market comes back to your average line– do not let the market line turn to a loss, 20% of the time you will encounter a large gain from a runaway up market. To me this is like fishing. You know that you may have to try a few different times before hooking a big one. If you mentally follow the program and cut before the market breaks below your average then you can mentally frame this as a process and not failure though.

Run quickly or not at all.

Hold or close part of the interest.

Finally, some words of wisdom/thoughts on life:

Break antagonism with a joke. Recognize a fault but don't dwell on it. In youth a man forges his chains that bind him in old age. All see; few observe, fewer still compare. People forget in the rush, remember in the hush. In his secret heart, every man thinks the universe is too harsh on him. Genius consists of seeing instantly the vital point. At twenty, and again at sixty a man thinks he knows it all. Patience is sustained courage. Wisdom is seeing many things and concentrating on one thing. Old young men are invariably wicked; young old men, universally good. It is always the "unlucky man" who believes in luck. (didn't someone recently exclaim that the economy ran into some bad luck?) Beware of the "unfortunate man"; flee from the enthusiastic man. Some men are so mellow that they are rotten. A tiresome man— a man with a theory. Against flattery women are on guard. Men can be flattered into doing almost anything. All men travel in circles. A few increase the diameter of the circle —–( a shout out to the good men and women of the list!)



One posits that dependency on the past is sacrosanct to all trading/ investing, and when past relationships break down there is always the question whether the current instance is a temporary state or regime change. (2008-09 contained many such, as well as a few more recent examples).

This reduces further to how well success in markets (life, etc) tightly correlate with intelligence, learning from study and experience, and discipline, and what happens to successful trend followers (which all living creatures are) when the trend dies and nature deals out an extinction. The quaint notion that fear is conserved in the genome for a reason.

Ralph Vince writes: 

As the Old Frenchman would have put it, stamping out his Gitane on the dashboard itself, "Adaptation…..The first rule of survival."

anonymous writes: 

Clearly, it would be best to know in advance if things that worked in the past stop working. But aside from a very very few circumstances (true arb is the only one that comes to mind, and even that relies on technology working), do traders ever have this knowledge? Instead, isn't money management of some sort used?

With respect, for example, enter a tiny amount, if it works, put on more, if it doesn't work, but the idea remains the same, take off some and wait for a truly outrageous spread to try again, if it never works, exit and take it off the screen or something etc.

Ralph Vince talks about not needing to predict movement to make money and I keep thinking about this.



 I am sitting here thinking about how when there is an attractive massage therapist at a poignant family occasion, she will invariably say to the chief poignancy, "I have a very special session for you so let us make an appointment". Or when you get the other something very especially nice and the other says, "You deserve a great reward for this. I'll be looking forward to seeing you tonight," I can just hear the market mistress saying to one of her guests yesterday: "Well, thanks much for coming today. I am going to dig into my bag of tricks and come up with something very special today. First, I am going to go up, up, and up, for the third day in a row. And then—ha. Just when all the weak shorts who were so steadfast that things were going to the dogs last week have given up—- then I'm going to take it down a fast 2 % and kill everyone sort of like I did last Thursday when I took it down 3% in the last half hour. And the beautiful fun part of it is that I'm going to wait until the last possible minute or two like 3:20 to do it. Abandon all hope, ye who dare to doubt me".

Vince Fulco writes: 

I like to call these "something for everyone days". The strength and conviction of the n-day move trend players disappears like flash paper.

Ken Drees adds:

And it did the trick just well enough below 121 SPY downtrend line to beat the profit takers and upturn the new shorters who were waiting to deploy at that level–so the technicians were thrown to the ground as well.

Well done–finishing the day in no man's land, mid range, everyone edgy. 



 The men's marathon record was broken this week end at the Berlin Marathon, pending ratification, by Patrick Makau with time of 2:03:38. Beating the old record Sept. 2008 record by Haile Gebrselassie by 21 seconds. The record has been broken with some regularity since the mid 1930s when the depression caused men to look for any way to make a living or bolster their reputation to get and keep a job.

It has occurred to me that the record tends to be broken when the economy is in long term trouble and when the young are having hard time finding opportunity elsewhere. The record broken by decade is as follows: 1930, 3; 1940, 1; 1950 6; 1960 9;1970 3; 1980, 5; 1990 2, 2000 4, 2010 1st last weekend. Marathoning is a tough way to make a living and the competition, at least in my time, has appeared to get stronger as the stock market tanks and gets weaker as it is about to take off. I missed my opportunity by not taking up serious marathoning in 1992 but waiting till 1996, 1992 was when I was at my peak and the competition was weakest.

Below is a comma delineated file with the month the record was broken, the % change in the Dow Index 12 months prior (counting month record broke), and the 12 month after % change in Dow index.

Here are some key statistics:

12 month prior avg. 3.22% stdev 13.64% count 34 negative count 15
12 month after avg 13.59% stdev 21.06% count 33 negative count 7

Student T test 2 different stdev one tail, 1.14%

It would appear that the marathon tends to be broke at the turning points in the Dow, however with a wider deviation than prior and the last 2 times this did not work. A similar result occur taking out all but the first occurrence when the record is broke within 12 months of the last time, except the student T test is higher due to fewer occurrences.

Month Record Broke,Prior 12 month % change in Dow,Next 12 month % change in Dow, New Record

12/1/1967,15.20%,12.48% 2:09:36
5/1/1969,4.29%,-22.53% 2:08:34
7/1/1970,-9.98%,30.37% 2:09:29
12/3/1973,-16.58%,-17.75% 2:09:12
2/1/1978,-20.75%,9.00% 2:09:06
4/1/1980,-4.43%,27.76% 2:09:01
12/1/1981,-9.23%,16.91% 2:08:18
10/1/1984,-1.45%,10.10% 2:08:05
4/1/1985,7.46%,43.56% 2:07:12
3/1/1988,-13.74%,9.02% 2:06:50
9/1/1998,-1.29%,43.64% 2:06:05
10/1/1999,24.88%,3.04% 2:05:42
4/1/2002,-7.35%,-23.18% 2:05:38
8/1/2003,8.68%,9.81% 2:04:55
8/1/2007,17.37%,-21.91% 2:04:26
8/1/2008,-13.58%,-19.39% 2:03:59
9/1/2011 -0.15%, ?, 2:03:38

Kim Zussman queries: 

Russ, in your opinion, will the 2 hour mark be broken in our lifetime (you and I are about the same age)?

The 12 records since 1980 have dropped in a roughly linear fashion, which if continued extrapolates to about 2035

Russ Sears replies:

If you would have asked me in the 90s about this, I would have said no way, they are beginning to form an asymptote. However, I believe sport science has made considerable progress in 2 areas critical to lowering this record below 2 hours. 

1. There is a much better understanding of the altitude effect has in endurance training and how to maximize this effect.

2. There are now much more creative ways to exercise more with less detrimental stress but maintaining the positive stress and exercise specifics. See zero gravity treadmills and water running treadmills for example.

And perhaps it simply is competition creates its own opportunity and it is clear to me we are in a new competitive era for distance running.

Hopefully it will continue for the rest of our lives. But not because the economy will continue to flounder. Especially for the young, ambitious and talented.

Larry Williams comments: 

The math is all a runner has to do is knock 8 seconds a mile of his/her pace. Much easier said than done, but it's a goal within reach. 2:00:00 will be broken in next 10 years is my forecast. Mostly because of what Russ said–better training habits and knowledge. With science, a runner with lots of personal angst will break through. Must have personal angst (see current frank shorter article in Runners World) to get through the pain. 



FFT (Fast Fourier Transform) constructs a “best cyclic approximation to the data” that can be constructed with N cycles. And you get to pick the N value. Better yet is that the output is a smoothed representation of the raw data without any lags. Wow, no lags! However, FFT assumes that the cyclic behavior is repetitive from the beginning of time to the end of time. That’s great for fitting data, but not generally reliable for forecasting markets. Also, every time you add or drop a datapoint, a subsequent cyclic approximation will have different values over the entire period.

Suggestion: FFT is fine for seasonally adjusting past macroeconomic data, but your expected value of using it for trading will be negative.



 Boeing 767 - introduced September 8, 1982 with United Airlines

Boeing 787 - introduced September 27, 2011 with ANA

Compared to the current class of mid-sized airliners, the 787 has:

10 percent lower operating costs
20 percent more fuel efficient
20 percent fewer emissions
30 percent lower airframe maintenance costs
40 percent greater range
60 percent smaller noise footprint

This 50% composite airframe will be a change comparable to the one that occurred with the replacement of steam locomotives by diesel electrics.

John de Regt Writes:

Stefan makes a great point. The 787 is as big a step forward as was the DC-3, which moved airframe construction from wood, canvas, and glue, to aluminum.

Stefan Jovanovich replies: 

 Thanks, John. The DC-1 — the first aluminum model — was introduced by Donald Douglas on June 22, 1933.

A Donald Douglas story:

In May 1939, after a year of final testing, Douglas delivered the prototype of the DC-4 to United Airlines. It met some but not all the specifications that the airlines had set for Douglas (the project was jointly funded, in part, by the 5 major US airlines at the time: UAL, EAL, TWA, PAA, and AA. Arthur Raymond (the designer for the DC-1 and DC-3) recalled, “We designed the first DC-4 by committee. Before this, we worked with one airline, like American or TWA. Five airlines were in on the DC-4 design, and everyone wanted something special on their version. The crowning blow came when they all said it had to fit in the DC-3 hangar. This meant we had to put five tails on it. We had to take the control surface area under engine out conditions, and spread it over the five tails (three above and two below) to squeeze it in the DC-3 hangar. That was its downfall. We had a terrible time working out the stability and getting it licensed. When we got it to the point of flying, it had gained so much weight (65,000 pounds) and was so ungainly that Doug junked the whole thing. He knew it was a lemon. Then we redesigned it the way we wanted it, with a single tail, not so heavy, and it was a success. We sold the original DC-4 prototype to Japan and it later crashed with some high ranking military officers aboard into Tokyo Bay. We like to think that helped hasten the conclusion of the war. We then called it the DC-4E for ‘Extinct.’”




Has anyone noticed the Baltic Dry Index as of late? Although well off its highs, it's come up well off its bottom on Feb 4 of 1043 and is at 1928 today. Has anyone done any statistical work on the BDI or found any correlations that might be interesting?

Lars Van Dort writes: 

I didn't, but I once referred to an article on dailyspec of someone who did (this was after the Baltic Dry Index caught the attention by falling 34 days in a row).

The link to the article mentioned there is now broken, but I got it back using the Internet Archive. Perhaps you will find it useful. Of course, it never replaces doing one's own work.

Baltic Dry Index as a Reliable Forward Indicator? Nonsense.

05/18/2009 by Research Reloaded

In finance, be cautious of anyone who uses historical correlation to back up their argument. In shipping, just flat out run from them. Shipping's notorious Baltic Dry Index, which is an index of spot rates for shipping dry bulk commodities such as coal and iron ore around the world, achieved death defying heights and then, well, death-causing lows, in the course of 2008, falling 90% from its peak, and attracted a lot of attention in the process both on the way up and down. The BDI meme is still alive, especially given a recent rally, and we have quite a few people claiming it as a quality indicator, or even the best indicator (sheesh) for the direction of stock markets or the world economy. Unfortunately, a lot of smart people misunderstand what the BDI represents.

Full article linked above.



 I used to collect data of the number of muggings in NYC prior to the holidays in an attempt to forecast retail sales numbers. I no longer do that because I can at best get the data weekly, and it's not good for predicting stocks in the short term, and any announced number, I have more recently found, is a crap shoot statistically.

That said, this NYT article reminded me of that research, and I wonder if there is a connection between crime and the overall health of the economy, ceteris paribus, that can give us a real time glimpse at what's going on… I always thought this data could help with jobs numbers but only have data for one city doesn't really cut it.



 Uh oh: "Share Traders More Reckless Than Psychopaths, Study Shows".

Jim Lackey writes:

Wait, is it a trader, a stock broker, or a banker. The article sources all 3 and they are very different men. The differences are the same as butcher, baker, and candlestick maker… yet perhaps there is some irony. Traders are honest as can be about their trades, losses, lucky breaks and fair dealing with their cohorts, but on the other hand we all carry a copy of Rand in the right hand and hit the buy bailout button with the left hand as we know the markets are in the short term set up to bail out the bakers and candlestick makers… ummm, yeah, I realize we are the butchers. 



 Funny thing, did you know Domino Pizza's subsidiary in India is called Jubilant Foodworks. It's listed. It does about 1/6th the revenues and profits of the original US based Dominos. Yet the market cap of Indian Dominos is more than the US Dominos!

What does this say? Scarcity of stock? Cornered position in a few strong hands? Does the many times larger P/E of Indian Dominos than the parent imply in any way that Indians will provide greater growth to Dominos than Americans?

I would say, the story unfolds as the price does, and all logical/fundamental explanations are determined by the colour of the pit.



If HFTs [High Frequency Traders] are making the big bucks in those markets, then we should be jumping on the bandwagon and taking advantage of that non-level playing field. Anything for an edge, and we all quest for the elusive edge, the overlay, and the HFT boys have won this round….for now. I admire those who can use technology to beat the market with better data, better systems, better and faster execution etc. This is just a culmination of the quest for a distinct edge first publicly demonstrated by N.M.Rothschild when he used courier pigeons to relay news faster than the competition.



Here's a little tool to give you real time results on how the corn crop is coming in. Very useful.



"Never let a crisis go to waste." That political statement can have implications for those of us who speculate. Specifically, we can learn from what has recently happened, and by knowing history can hopefully avoid repeating those lessons.

I noticed just today that the option volume attributed to market makers ("MMs") was particularly high relative to that of firms and customers. That is quite logical, as emotional demand in options is usually offset by the MMs providing liquidity. That of course is the function of MMs, for which they are usually rewarded. But has that been the case historically, and if so, can it teach something?

I looked at the volume of market makers relative to their counterparties in two ways; first with the MMs buying and second with the MMs selling. Then I took the differences of those two calculations and smoothed it. More on the smoothing after you see the results:

Here you see SPX shaded to reflect the smoothed balance of MM liquidity. If SPX is blue, the MMs are providing liquidity to put buyers as of the previous day, and if orange, the MMs are providing liquidity to call buyers as of the previous day. These are of course generalizations, as I really do not know who is doing what, but simply following the logic of the positions. Of course it isn't perfect. If you are expecting certainty, you would be better off in another field.

The smoothing period is extremely interesting. These transactions by the MMs usually last 24 hours or less. But their counterparties do take positions and try to hold them. On average options positions by customers and firms last slightly less than a month, although they are frequently rolled-over. Thus the chart represents on-balance accumulated demand by options traders for liquidity. So what would you suspect to be the best smoothing period?

Wrong! It happens that the period used in the chart was a whopping six months. That fooled me also. That is, the data used in the smoothing is as "old" as six months. Of course, that is a static period; the best smoothing period will always turn out to be adaptive. But this works for illustration.

At this point the work is merely anecdotal; there is no statistical significance worth speaking about. But I present it here as something for further study.



Interesting points making the rounds that many asset managers like to keep their ratio of bonds to stocks at a constant percentage. With the 10% increase in bonds and 10% loss in stocks, that could add to a 20 % + increase in stocks assuming bonds unchanged to get back to even. That could put some wind at the back one would think as would the differential between the two rates of return. One would think that the bond interest rate in addition to its other virtues now signals what it thinks the growth of the economy is going to be since inflation generally goes up according to the quantity theory about the same amount as growth. Thus, the fed's signaling of bond yields also forecasted growth.

The declines in the last days of the week brought many unpleasant memories of Oct 19th, 1987, and a relative emailed me to tell me it was reminiscent during the trading fray. One wishes one had paid more attention to that similarity with 1987 and wasn't on such a high horse about the absurdity of similarities dating back 100 years, as well as the cotton trader's knowing that 1987 was going to be the same as 1929 because the monthly moves looked similarly to him.

Such reasoning if widely accepted no matter how absurd can create the seeds of a meme.



 While we eschew politics on this list, I must say that the 4 biggest declines of last 25 years all seem to be politically based to me. The one in 1987 caused by Baker talking the dollar down, the one in 2008 caused by bailout, + and - the one a month ago by back and forth about not reducing the deficit.

The one this week to me, caused mainly by seeing the leopard has not changed his spots. The idea of class warfare, the middle class against the upper class is antithetic to prosperity. It creates envy. Reduces revenues. Reduces jobs. And creates a general feeling of "what can the other guy do for me or what does he want from me". There was a delayed reaction to it over the weekend. A big down open that was reversed in part. Then 2 more huge one and free fall. The beaten favorite is relevant.



 One has always wondered why the banks according to their regulators are being prohibited from investing in this and that thing, derivatives, mortgages, stocks et al, but never have I seen a mandate that they don't invest in sovereign debt of the solid as a rock countries such as those they invested in as did Rome after the Trojan war. Could it be that instead of being prohibited from such investments, the opposite is true, and that is why whenever a country is about to go bust, the banks are in danger of falling. Could it be that they are that foolish as to always hold the short straw?

Gary Rogan writes:

Based on multiple occurrences of coming close to the short end of the stick but somehow being saved by the US or the IMF it has not been a bad strategy. How many times has it happened in Latin America? The IMF resolved the early 80's crisis and Brady bonds were used in '89. So it wasn't just crazy people who would loan to Latin America that is guaranteed to blow up sooner or later. There was clearly an implicit understanding that French and German banks would be bailed out from their losses to the various PI**GS, and the way everyone behaved towards Iceland and Ireland, this was clearly expected that they would be the slaves to the big brothers, and the banks would be helped to be made whole by the taxpayers of the less-important countries, and when the bigger countries are involved the big brother taxpayers would have to chip in.

To the banks this was the frog in the boiled pot situation, except in stages: you warm the pot up a little bit, and then some savior helps you jump out, so you learn that the pot is safe. Then the frog jumps back in, and the pot is warmed up a little more, and the savior helps again, and so on. But now he can't help, but who cares? The old bank CEO's are enjoying margaritas some place where they used to lend to or even nicer and safer, or are dead, so on the average this was worth is to the banking flexion leaders. 

Bill Rafter writes:

Several of the 15th and 16th Century Florentine banks including that of the Medicis had problems with their sovereign loans. Despite problems the banks continued to lend for political/military reasons.

George Parkanyi writes:

Banks are large institutions and, like large institutions at the senior levels, don't pay attention to detail beyond a certain point. (I see that in government a lot for example.) Behind every major transaction is some mid-to-senior manager trying to close a deal, land a big client, or in the aggregate hit some number to make a bonus or whatever. I would think that to win a sovereign account would be a big deal, so of course you would trade or perhaps make a market in a client's debt in that situation. Smart sovereign clients, because of their size, can easily play one bank off against another depending on how hungry and competitive the players are at each. Sure institutions have systems, but ultimately deals are made by people, and the culture in investment banking is typically to do whatever it takes to make the deal, even if it means being "creative" and circumventing part or all of your controls, not digging too deeply in case you find something that might compromise the deal, and/or simply treating widely-accepted assumptions as fact (AAA credit, too big to fail etc…). There are many paths to these untenable outcomes, and they are all rooted in human nature. Nicholas Leeson never set out to bankrupt Barings, he started out by just trying to keep a big client happy.

Gary Rogan adds:

Still, moral hazard is what makes all of this possible (having some implicit savior). You don't see Procter and Gamble negotiating a deal with Walmart or some little dictatorship where they will sell them detergent at what winds up being a big loss, and least not very often. The suppliers who are foolish enough to do that disappear without anyone hearing about them, other than in some CNBC special about Walmart. Socialism in any form will ultimately destroy itself: when people have a right (or the idea that they have a right) to other people's resources, eventually they will consume/destroy enough of them to sink everyone involved.

Stefan Jovanovich writes:

The Bardi and the Peruzzi had two enormous technical advantages. Their staffs had fully mastered the science of double-entry book keeping and taken Pacioli 's discovery (probably lifted from the Byzantines) and improved it to the point that they could easily do present value discounting. This was a very big deal at a time when Italian banks were under the same prohibitions that banks in the Muslim world still operate under - charging interest was a sin. Their skill in double-entry was complimented by their shrewdness in dealing with the intricacies of canon law. The Bardi and Peruzzi were the first to figure out that they could get round the problem of usury by issuing loans at a discount and balancing their books by showing the difference between the cash paid out and the loan amount as a gift from the borrower. In a Christian world gifts were perfectly acceptable and (I love this part) the ability to receive them a proof of worthiness. Most of the discounting was not on loans but on relatively short-term bills of exchange. Many of them were remittances to the Papacy. You can see this in the list of the Bardi branches in 1300 - Barcelona, Seville, Majorca, Paris, Avignon, Nice, Marseilles, London, Bruges, Constantinople, Rhodes, Cyprus and Jerusalem. What is supposed to have killed both banks was, as Bill notes, their difficulty with sovereign debt. But it was only one sovereign - Edward III of England. According to the Peruzzis, Edward borrowed 600,000 gold florins from them and another 900,000 from the Bardi and then, in 1345, told them he would not be able to pay on the agreed upon schedule. The Italians had no choice but to agree to a workout, and they ended up taking much of their eventual repayment in wool rather than specie. The problem for them was that the combination of the Black Death and the exhaustion of the German silver mines had produced a monetary deflation that made the repayments worth far less than the nominal loan amounts. But, it is risky to take even this story at face value. The author of the Wikipedia article on the Hundred Years War (where Edward pissed away all the money) has his doubts. He writes that "the Peruzzis' records show that they never had that much capital to lend Edward III….. Further, at the same time Florence was going through a period of internal disputes and the third largest financial company, the Acciaiuoli , also went bankrupt, and they did not lend any money to Edward. What loans Edward III did default on are likely only to have contributed to the financial problems in Florence, not caused them."

What is not in dispute is that it took another half century for banking in Florence to revive on even a regional scale, and in scale and international reach, the Pazzi and Medici were secondary players compared to their 13th and early 14th century predecessors. The Medici are famous because of their adventures in Italian politics, their family stories and their art patronage; but, in terms of finance, it would be like comparing the current House of Baring with the one active during the Napoleonic Wars.



 This is an article about a chronic problem I have noticed in most not-for-profit orgs. When we trade we create nothing but liquidity, no matter what you think of yourself, we are just vultures, exploiting many inefficiencies in the financial markets. Instead of curing diseases or engineering new products or even creating a work of art, we just trade. Call it what you want, but at the end of the day, if your mathematical formula didn't make a trade you didn't make anything. But in our free time however, some of us donate large amounts of money or seed interesting projects that most of the time are intellectually interesting, but hardly ever profitable. You work very hard for your money so I think you should demand from those companies that your money is spent wisely and not in a wasteful manner. I think Dell was one of the first guys  and Mike Milken before him, who successfully asked and got results for his money.

Stefan Jovanovich comments: 

Arthur's premise - "when we trade we create nothing but liquidity" - is certainly accurate; but his conclusion is shocking. Markets are the only successful means human beings have developed to define their state of knowledge about the fundamental fact of existence for all life on the planet - scarcity. Medical research, engineering and dramatic production (my favorite "art") are all wonderful gifts; but none of them can exist without the seemingly useless activity of the people who define prices. (If you have any serious doubt about that, examine the art, engineering and science being produced right now in Zimbabwe and North Korea.)

The difficulty with non-profit and for-profit salaries in organizations is that they are not set by any open bid-ask market; instead, they are the product of politics. That they tend towards being corrupt and ugly should hardly be surprising. The proposed solution - "demand that your money is spent wisely" - is the same fantasy of "reform" that keeps money flowing for "rehab" and has people believing that sick organizations can somehow be saved. It is no accident that the best example of sustained corporate benevolence - HP - is now turning to the solution of hiring a purely political "name".

Gary Rogan writes:

Well the bigger beautiful things are invariably created either involuntarily (the Colosseum built mainly by recently captured slaves, the original St. Petersburg which was built by serfs with a short life expectancy), through donations, like say the Vatican, most of the cathedrals and churches of Europe, or taxes and exploitation of peasant labor for money, like most of the other attractions in the old world. I wouldn't call the funds supplied by the Soviets and especially North Koreans "donations" though. It's also hard to say the grandeur of the results is a justification for subjecting people to the "donation process", in fact I would say just the opposite based on general moral principles and the net migration vectors involving the Soviet Union, Eastern Europe, and (when there is an opportunity) North Korea.

Stefan Jovanovich writes:

My dad was choleric by nature, but he did a good job of restraining his temper in business. The only time I ever saw him entirely lose it in public was when someone asked at a shareholders meeting why his company was not doing as good a job as ETS - the non-profit monopolist that literally owns the college and graduate school application testing market. His reply was: "If you allow me to run at a loss so I have no nasty profits and tax liabilities and persuade colleges and graduate schools that there should be competition in the test market, it will not be a problem. Until then, we have no hope of competing with those saints of American education in Princeton."

Kim Zussman adds: 

For want of a bailout Lehman was lost.
For want of Lehman the market was lost.
For want of the market the economy was lost.
For want of the economy the election was lost.
For want of the election the kingdom was lost.
And all for the want of a bail

Ken Drees adds:

For want of another backdoor USA bailout Germany is pissed..
For want of a German handout the PIIGS are pissed.
For want of more austerity Germany stays pissed.
For want of continued power all the politicos are pissed.
For want of a viable solution the markets are pissed.
And all for the lack of a Euro Debt Bond

Alston Mabry adds:

What if the €uro experiment, instead of introducing the new currency, had simply been the proposition that all EU countries issue their sovereign bonds denominated in DMarks? Wouldn't it have been clear immediately that certain problems with such a scheme were unavoidable? And isn't that essentially where we are now?



 The Science of Fear By Daniel Gardner is a good book to read to put fears in perspectives. The book is recommended by Tyler Cowen and Paul Slovic who pioneered many of the real life studies in risk assessment that are the foundation of behavioral economics anomalies. Gardner is a liberal who believes that the world is getting better and risks are overly emphasized. His heroes are FDR and JFK and he is an ardent anti Bush who believes that we shouldn't be worried about terrorism because other risks like life style and car driving are infinitely more terrifying. He makes the common point that we have two sides of our brain, the feeling side, and the rational side. The feeling side is based on rules of thumb and tends to make the wrong decisions because they were useful in the stone age, but are no longer helpful today when risks are transmitted by the media and cyberspace to gain readership and sell product. He gives many examples of why we shouldn't worry about vivid events that are recent in our memory and provides a nice summary of the scientific literature that goes way beyond the contrived stuff of Kahneman and Twersky et al that is very helpful for the present day. It is a book I recommend.



 I'm skeptical of the eurobond idea because I don't think it addresses what to me is the underlying problem. The problem is not, for instance, "Greek debt". Rather, the issue is who owns the Greek debt, i.e., the banks. The problem is not whether the Greek government (or the Portugese or the Irish) is insolvent and should default — of course they are and should — but rather what the knock-on effects will be.

The Germans should put up a big chunk of money, and get others (France) to contribute what they can, and then do a Bernanke and announce a schedule by which they will purchase over time €X of PIIGS bonds from the eurobanks. They could drain the problem paper from the financial system, with some haircut for the bondholders, after which they could restructure that debt as they pleased, meanwhile putting some downward pressure on rates, but also allowing the market to continue to discipline profligate governments.

Germany gained the most from the €Mark, in one sense, so they are now in a position of paying off the problems created. I think the ECB sees US-style QE as poison, and that's why the ECB is not allowed to be the buyer of bad bonds (even though they have been, in fact, doing it under the radar to keep the banks from folding). So, put the money into the EFSF, buy the bonds back directly in the marketplace, and then restructure them as needed, while redesigning the "system". Moral hazard, for sure, because some players will think it's okay to lend to the PIIGS again because the bad bonds will be bought back -hence the need for some kind of haircut, enough of one to send the message that, "whenever we have to buy bonds back, the bondholders will take some kind of hit, so don't count of this as anything but a money-losing strategy". You've cleaned out the bulk of the Greek (or Portuguese, etc) balance sheet, and then they are left to the bond markets and must adjust their fiscal reality. And lenders know to be skeptical, but the eurobanks are on better footing. Then the Greeks get to decide whether they want to become more like the Germans, or whether they want to go "back to the drak".



Once upon a time there was a western economy that had minimal government and built up its middle class. This middle class then did good things, like work. Then came big government and political correctness and lots of handouts. The big government needed to get employed on big money, so they kept the punters happy, big and small, and kept delivering to those who did no work, but hey, it won votes and indirectly money was reinvested and taxes were payed by those who made a buck out of it.

Then leverage kicked off, and for a dollar you could invest 10 and drive prices through the roof, since then interest rates went down as that bubble popped to create the next leveraged bubble. China then kicked in with cheap labour manufacturing, and you could have 10 pairs of timberlands, and 20 jet skis.

Then as jobs disappeared and governments sensed 2 minute noodles for themselves, they invested the punters own money in a fully soaked consumer's market , and as a result they failed to buy. Banks, because of the tight spreads, failed to lend growth, then went 0 and stayed there for years and years.

I suppose the question is, has any country in history been involved in this sort of leveraged economy and overheated housing market, with an over ripe middle class, and come back and won the day…quickly? Or do we work out what emerging market has the working tenacity and inner strength, to build from here?

Stefan Jovanovich replies:

The short answer is "yes". With the end of the War of 1812 the United States entered into a transportation boom. The Erie Canal was surveyed and completed, and cities erupted like mushrooms along all the major waterways. The shipping cost for a ton of freight from Buffalo to New York City dropped 90% and express passenger service reduced the time of travel from the Great Lakes to the Atlantic from months to 4 days. (Look up James Sogi's posts on this subject from a few years ago for a detailed explanation.) That was the buildup of the first "middle class" in American history - if you define middle class as people who have enough money savings to afford the snobberies of consumption that Veblen hated so much. The boom lasted as long as the one from 1990 to our present troubles. It had its Tech bubble and crash (the Panic of 1819) but that did not end the leveraging up of middle class balance sheets. If you exclude the 2 largest asset classes - land and slaves - from any calculations of national wealth and look only at the money economy (excluding the subsistence farmers who still made up 80% of the population and had literally no money savings), the government was as big or bigger than it is now, when everyone except the homeless, deals not only in cash but also in credit. Trade with China booms, but the balance of payments remained completely in the Chinese favor, even with the British efforts to substitute opium for sliver as a medium of exchange.

Then we have the end, with Jackson, Biddle and the nationwide collapse of the property market, both specie and credit growth go well below zero as the Carolina mint runs out of ore, and, just as Craig describes, and the banking system becomes a mummy. Enterprise continues but the middle class can no longer afford its luxuries, and Mr. Astor is shrewd enough to abandon furs and take out his cane to buy all the dirt in Manhattan that will become brownstones within another generation.



The attached is a plot of log SPX vs contemporaneous yield curve (10Y-2Y), monthly 1976-August 2011. Dates are not shown, but the plot is a continuous (albeit mathematically not one-to-one) and shows various regimes between log SPX and 10Y-2Y.

The series starts in 1976 at the red dot near the bottom. Stocks (vertical axis) made little headway while 10Y-2Y varied above and below zero, making a series low about -2 in 1980. From the early 1980's to 1990's, stocks moved sharply upward, with 10Y-2Y varying between slightly negative and +1.5. From 1990 to 1992 (~Iraq I), stocks moved up while 10Y-2Y widened. From 1992-94, stocks went up while 10Y-2Y narrowed. From 1994-2000, stocks rose strongly while 10Y-2Y remained in a tight range (activist FED?), and 10Y-2Y went negative when stocks peaked in 2000. From 2000 - 2011 (green dot), 10Y-2Y varied considerably from -0.4 to +2.8 while log SPX was range-bound with considerable variation.

The recent picture - range-bound stocks with varying yield curve - resembles the late 1970's, and the overall pattern suggests no consistent relationship between stock levels and 10Y-2Y.

Steve Ellison writes: 

Attached is a regression graph of 1981-2010 S&P 500 annual returns vs. the difference between the 10-year yield and 3-month yield at the beginning of the year. N0, t=1.06, p=0.30, Rsq=0.04

The results I posted earlier that showed significance were the second year's S&P 500 returns regressed against the 10-year/3-month yield differential. That result seems suspicious–why should year-old data be more predictive than current data? 2011 so far is not going according to form.

George Zachar adds: 

Because between Volcker's rise and Lehman's fall, the main way the curve steepened was when the Fed lowered rates in the front end, stimulating the economy and stocks, months down the road.



This is a chart of ratio GLD/SLV (gold and silver ETFs, daily, from SLV inception 2006 to last Friday).

The big move down (=relative SLV up) began with the inception of QE2 in Aug 2010, and stopped around the recent top in stocks April 2011.

Just for fun: listen to "Silver and Gold" on youtube.



 The movie Moneyball is in theatres. This article by a leading sports economist looks back on the impact that Moneyball the book has had since publication in 2004.

It features an application of the point that I've often seen made by the Chair, that once an anomaly gets published it disappears:

We thought there was a decent chance that we could refute the economic claims in Moneyball, in particular that players with high OBP were under-priced in the labor market. Any card-carrying economist knows this is inconsistent with equilibrium in a well-functioning, competitive labor market, and were not baseball teams intensely competitive? But instead, Jahn and I found that high OBP players did come cheap, relative to the contribution of their skill to winning baseball games. Intriguingly however, we found that the "OBP discount" vanished in 2004, the year that Moneyball was published.

It makes one question the decision of the Oakland A's to cooperate with the book. Although it may have been a matter of time for the other teams to catch up anyway, it seems that sometimes vanity can be costly.

Stefan Jovanovich writes: 

I live in the SF Bay Area and am a thorough baseball addict. When I should have been attending law classes at Berkeley in the 70s, I was loitering at the Oakland Coliseum watching Dick Williams and Alvin Dark (one of the truly obscure great figures in the history of baseball) manage the A's to their championships.

Moneyball is complete hype. The theories of value - OBP, for example - are sound but hardly original. They are the substance of what Dark and Leo Durocher (another great figure) and Casey Stengel (the greatest of them all) knew from experience and observation. What Billy Beane missed (but none of those managers would have) is that the real "Moneyball" is putting the customers' butts in the seats. While Beane has been practicing his genius, the A's have become a chronically weak franchise (it remains in as poor financial condition as the Seattle Mariners and Kansas City Royals and, until this year, Pittsburgh Pirates). At the same time, across the Bay, the Giants went from being literally bankrupt (they were going to be sold and moved to North Carolina) to becoming the owners of the best stadium in the country (privately financed, no less) and the 5th most valuable franchise. How? They signed Barry Bonds. If Yankee Stadium is the House that Ruth (and then Reggie Jackson) built, AT&T Park is the stadium that Bonds built.

Phil McDonnell writes:

I agree with Stefan that one very rational reason to pay up for a Bonds or Willie Mays was that a home run is a lot more exciting than watching a guy walk. Home runs sell tickets and that is ultimately good business. On the other hand managers restricted to a below average budget can improve performance better by adhering to Moneyball principles.

Another often used strategy of small market teams is to bring along recruits, especially young rookie pitchers. Seattle uses that strategy. They are little more than a farm team for the Yankees. Any time they get a young rookie pitcher that shows any promise he is immediately sold off to a big market team, with the Yankees being the most likely buyer. A big part of their business model is to collect millions from the Yankees for selling off their low priced talent.




 From the "The Perils of Pragmamorphism":

Anthropomorphism is the attribution of human characteristics to inanimate objects, that is giving inanimate objects the shape of humans. Pragmamorphism is attributing to humans the properties of inanimate things. It is naïve materialism. Newton's Laws for matter, Maxwell's equations for light, Quantum Mechanics and Relativity for electrons - these theories are facts. They describe how the world works. You can discover them, but you can't ask why they are true. As Goethe once wrote, The ultimate goal would be: to grasp that everything in the realm of fact is already theory. Models are different. Models are metaphors or analogies. Calling the brain an electronic computer is a model. Calling a computer an electronic brain is a model too. These are analogies, based on similarity, not identity. Models tell you only what something is more or less like. Theories tell you what something actually is. In economics one can make only models. The Efficient Market Model that has gone so badly awry compares stock prices to smoke diffusing through a room, and models them with the physics of diffusion. But those are flawed analogies, not theory or fact. The similarity of physics and finance lies more in their mathematical language, their syntax rather than their semantics. There is no grand unified theory of everything in finance. The world is not a model. Modern economists' mathematical models are poor metaphors that are obviously and vastly inadequate. (Their)papers read like Euclid, with axioms and theorems; (but) their faux rigor is inversely proportional to their minimal efficacy. No model yet invented can tell you whether anything at all will go up or down tomorrow. The invisible worm at the heart of economics has been its dark secret love of inappropriate scientific elegance and scientism. Markets and prices are generated by human behavior. The greatest conceptual danger in modeling human behavior is idolatry, which is a kind of pragmamorphism, imagining that someone can write down a theory that encapsulates human behavior and relieves you of the difficulty of constant thinking. A model may be entrancing but no matter how hard you try, you will not be able to breathe true life into it. To confuse a limited flawed model with a theory is to embrace a future disaster driven by the belief that humans obey mathematical rules.

What should be added is the fact that human perception is itself dependent on the pattern recognition that only works by analogy. So, for better or worse, we are stuck with our mental models. Where economics goes against commerce itself is that it strives for complexity instead of simplicity. That makes sense if you are determined to never be clear enough in your ideas to risk their being falsified by experiment and experience. But it is a lousy way to run a railroad except, of course, if you choose the mass transit/high speed rail model where perpetual subsidies are guaranteed.



Thumbs-up, the inverse of professor Robert Shiller's cyclically adjusted price-to-earnings ratio — or CAPE — was greater than the yield on a long-term Treasury. When Buffett wasn't crazy about stocks, the opposite was true.

Steve Ellison writes: 

Using the 12-month forward top-down earnings estimate for the S&P 500 of 93.75 published by Standard & Poors, the E/P for the S&P 500 is8.25%, 4.5 times as high as the 10-year Treasury bond yield.

Jordan Neuman comments:

Historically large stocks have an 11% ROE. The S&P's book value of 594 implies about $65 in earnings. Discount by the Baa rate of 5.2%, not the treasury yield, and you get 1250. With the S&P at 1136, the discount in this measure appears to be the widest since 1974.

Most of this list's valuation parameters are positive but I still can't stop the bleeding.



If yields on all treasuries of all durations are going to zero forever and ever, it seems possible that a bubble could develop in the Falkenstein-ish safety stocks, the Proctor and Gambles, the Pepsis, the Philip Morrises–anything that has a 2-3 percent dividend yield that's expected to grow slowly with minimal risk and minimal connection to the economy.

Kim Zussman writes: 

Relatedly, what exactly is a risk-free asset?



 I flew out of Logan Airport in Boston yesterday — for the very last time. I had an Air Tran flight out of there — the very last time with that too.

Arriving early at Gate C 40, I watch in disbelief at what I think is a mouse attempting to get into an elderly woman's bag on the floor. Shoo-ing it away, thinking it an anomaly, I watch a man seated a few feet away from me stomping his foot to frighten away yet another mouse. And then I realize — the place is swarming with them.

I get up to move, and as I do, I notice food — pizza and popcorn, soda pop and half-eaten sandwiches, littering the entire place. Two Africans (who either could not or feigned being unable to speak English) sitting facing me as I start to throw all this crap out (it is EVERYWHERE in these gates — the carpet, sticky, filth mess, having long ago passed the point of being salvageable through cleaning). I ask my spectators, since they work there, if they could assist me. Of course, they are too busy watching TV. Now a large, redheaded one approaches, looking as though he may be looking for a fight (he has come to the right place).

I'm looking for Air Tran people — not the workfare idiots of Boston who exist on the backs of the working men and women and the travelling public. I find a couple of Air Tran guys, checking someone onto a flight at gate 42, who are literally begging me "Please call the health department!" The entire airport is rodent-infested.

More Downs-syndrome adults approach me from TSA — not that they are there to help, they think I'm causing a raucous. I hope to, but my fellow Americans are too deflated and defeated to fight back anymore, sitting in their rodent-infestation.

Finally, an Air Tran suprevisor, along with the Africans, and TSA — 8-10 people in all, circle around me. I'm livid,

"Food is being sold in the hall here — but the place is rodent infested — your own employees admit to this. There are restaurants here, why have they not been shut down?"

"We can't do anything about it, it's Mass Tran that has to do something."

"You can't put rat poison out? If I had this problem in my home it would be over before I went to bed tonight."

"Yes, but it has to be Mass Tran that fixes it."

I call Mass Tran and tell them. They say they will "make a note of it."

I've been in third world shithole airports all over the planet. Logan is the worst I have ever seen. If there are mice in the numbers I saw them, there are mice on the Air Tran planes as well — has to be.

You may feel that mice aren't a problem — but if you ran a restaurant and had them (and there are those at the airport, and Mass Tran and the health department there turns the other way) you wouldn't be open. Rodent infestations have killed 1/2-2/3 of the European population in 2 years, and having Cystic Fibrosis, and realizing the genetic advantage to rodent-born plague that carriers of CF posses, it isn't lost on me that this avaoidable pestilence bears disease, and I look upon those who tolerate it as I would my fellow man who doesn't bathe.

You people may be willing to tolerate Boston Logan. If I come back there, it's to turn the place to ashes. Air Tran, you fail. I will not fly on your mice-infested planes.You tolerate Boston Logan — you are and have been aware of the problem, yet you do nothing.



 The Government's $535 million loan guarantee to solar company Solyndra on a hurry-up schedule to comport with highly publicized visits by Biden and Obama, followed by Solyndra's bankruptcy and taxpayer loss of the entire amount guaranteed, has prompted considerable criticism in the media and Congress.

The Solyndra case was able to garner such public outrage because political contributions by the company's backers were so clearly on the record, the Government's due diligence was obviously put secondary to the Administration's self-promotion schedule, and Solyndra's quick bankruptcy revealed the Government's incompetence in choosing which "green jobs" company to support with taxpayer dollars. But the true lesson of this sad case is that the Government's SBA (Small Business Administration) and Green Jobs programs are virtually always incompetent and politically motivated.

It is extremely difficult for private venture capitalists to analyze and decide which early-stage companies are likely to succeed. And private venture capitalists possess great expertise, and have the extreme incentive and personal discipline that the money they are risking is their own and that of their investors. The Government on the other hand has practically no expertise in such complex and subtle analysis, and lacks personal discipline in that the money being risked belongs to no one in particular. Or worse, wasting the money is considered a positive because it is part of a "stimulus program", or is necessary to "help small business which, as we all know, generates most of the jobs." Further, lacking true expertise and personal financial discipline, the Government will inevitably be influenced by political considerations.
The upshot is that virtually every Government SBA and Green Jobs guarantee or grant will be some version of a scam, either from the standpoint of incompetence or outright fraud, resulting in loss to the taxpayers of the great majority of the tens of billions of dollars allocated to these programs by the President and Congress. But in most cases it will take several years for the recipient company's difficulties to become clear, and by then no one will notice.

Equally detrimental (although much more difficult to notice or understand), subsidies to these economically undeserving companies distort the market and are significantly damaging to other businesses who are more competent and seek to play by the normal rules of capitalism. This happens is various direct and indirect ways. A subsidized company like Solyndra drives up the price of expert labor and specialized raw materials, to the detriment of non-subsidized competitors. Subsidized Solyndra will also tend to charge prices that do not cover its true costs, again hurting honest competitors.

And more subtly, the enterprise prices and ownership of businesses themselves will be distorted.Without the Obama Administration subsidy, Solyndra would have been in trouble in early 2009.The owners would probably have been forced to try to sell out at a distress price. If the company had any value at all, it could have been purchased by more competent management at perhaps ten cents on the dollar, and that management may have had a good chance to make an economic success of Solyndra, to the far greater benefit of its employees, suppliers and customers.

I can testify this is not just theoretical. For many years I have been in the business of trying to acquire and run small companies in a variety of industries. I cannot tell you how many times, when I analyzed and made what I considered a fair market bid to purchase a company, I was told that my bid was too low, that the broker for the seller was arranging for another buyer to obtain an SBA loan to purchase the company at a higher price. Such a buyer, who typically would not have the personal net worth to buy the company, was in effect getting a free option: Either he would be successful with the company and pay off the SBA loan. Or he would be unsuccessful and be relieved of the loan through bankruptcy. And in the meantime he could draw a salary and expenses from the company and live quite well.



 The FT (via Bloomberg) is reporting that industrial giant Siemens withdrew 500 million Euros from a French bank and put it on deposit with the ECB. The story says that they now have between 4 billion and 6 billion euros on one-week deposit at the ECB. (They were able to do this because they have a "banking license.")

Putting aside the obvious troubling implications, this story raises interesting theoretical questions regarding the conduct of monetary policy, and practical questions regarding the role of commercial banks in a dysfunctional financial system. Macroeconomics final exam question: What is the monetary effect of funds being withdrawn from commercial banks and placed on deposit with a Central Bank, while the same Central Bank simultaneously provides unlimited liquidity to the commercial banks to finance those very withdrawals?

The image of a hamster on a treadmill comes to mind. Here's the link.

Rudolf Hauser replies:

 This is an interesting question. The first question is the impact on the money supply. If Siemens were actually a bank and its deposit at the ECB represented bank funds, they would be excess reserves. The commercial bank would get a corresponding amount of reserves because of an ECB loan. If the commercial bank lends out the money or invests it, it would result in a corresponding increase in deposits held by others. In that case money would be unchanged. But if the commercial bank having raised the funds by selling assets or reducing outstanding loans decides to keep those ECB loans as excess reserves, money as measured would be reduced. But while Siemens may have a banking license, in practice I assume those of liquidity reserves of an industrial company to be used for its own purposes.

The idea behind money measurement is to view balances in the hands of those who might be influenced to make purchases of goods, services or securities with those funds, namely consumers and businesses other than banks. So while the Siemens deposit might not be counted in the traditional M1 type definition, for practical analytical purposes, it probably should be counted. In that case, if the commercial bank does not keep the reserves it gets from the ECB but relends or reinvests them, de facto if not de jure money supply would be increased. In that case the reserves Siemens keeps at the ECB would practically be the same as if it kept those balances unused at a commercial bank.

Whether the commercial bank is better or worse off depends on what it has to pay for its funds- the amount charged by the ECB versus that it effectively paid Siemens for those same funds. Whether the commercial bank is less worthy as a risk depends on its assets not whether the liability is to the ECB or to Siemens. In a way it was greater when it was to Siemens as Siemens could withdraw those funds forcing the bankt to sell assets at distressed prices whereas the ECB has no reason to do that as long as it still guarantees the commercial bank. If the commercial bank liquidated not so great assets to accommodate the withdrawal and keeps the funds from the ECB as excess reserves, it is actually safer than before.

Stefan Jovanovich comments:

 "Out" is the key word. In fact, the First Bank of the United States lent most of its money "in" - to the Treasury - during its early years. By 1796 60% of the bank's loan balances were to the Treasury. The Treasury bailed itself out by selling its 20% interest in the bank to private investors and using the proceeds to pay off some of its debt. By 1802 the bank was entirely in private hands. All the histories of the First Bank discuss how successful it was in acting as a central bank - like the Bank of England - but its actual history was very different. The bank acted mostly as a broker, not a taker of deposits; and its activities never included being a lender of last resort. When William Duer got into trouble in 1792, the bank did nothing to reassure the markets or support Duer; his collapse produced the first numbered "Panic" in U.S. history - the Panic of 1792. Hamilton, as Treasury Secretary, did intervene in the markets but he did it to reassure the European investors in Treasury debt, not to "save" the economy. When Jefferson decided to take Napoleon's offer, the First Bank was in position to "fund" the purchase. Its only involvement was to be the U.S. correspondent for Barings and Hope & Co. who were the actual underwriters.

The mechanics of the deal are representative. In 1803 Francis Barings got the French to agree upon a price of FF80 million (the equivalent of US$15 million). FF20 million (US$3.75 million) would be paid by having the U.S. Treasury assume the French government debts owed to US citizens. The balance - FF60 million (S$11.25 million) - would be paid in U.S. Treasury bonds - the first every issued by the U.S. Federal government. The bonds had a 6% coupon with interest payable half yearly installments in Amsterdam, London or Paris, with an exchange rate of 4 shillings 6 pence (22.5p) to the dollar and were to be redeemed between 1819 and 1822. Barings and Hope & Co. agreed to buy the bonds for FF52 million - a 13.3 per cent discount - with payment to be made in installments of FF6m up front and 23 monthly installments each of FF2m. A year later Napoleon - who was always desperate for money - pressed for immediate payment. The full balance was paid off by Barings and Hope & Co. in April 1804 at the cost of an additional FF1.65m commission. Most of the actual money for the loan was raised by Barings and Hope & Co. in Holland; their contemporaries said that "Francis Barings owned the Dutch market."

It is doubtful that any real comparisons can be made with either the First or the Second Bank of the United States and modern central banks. The ECB and the Fed hold gold as part of their reserves, but, unlike the U.S. Banks, they have no obligation to pay it out. Their paper is legal tender simply because they say it is, not because it is payable in Coin. And that one fact makes all the difference no matter what the speed of modern money.




 This is a wonderful short piece to see about 100 year old best selling author Bel Kaufman, granddaughter of Sholem Aleichem. Will we have

an opportunity to give such an interview? I don't know, but we can certainly aspire to have one!

A beautiful woman in the best sense of the word.



 Obama invoked George Washington to defend his proposed tax hikes, and the references are to Washington's Farewell Address as President in 1796. The current President and his speech writers tactfully omitted what Washington said in the sentences preceding his insistence that Federal government collect taxes:

As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it, avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear.



 I haven't read the 2003 essay yet, but from scanning it, it seems like it has the part whole fallacy and retrospection in it. Fed funds go down (and short term interest rates go down) in conjunction with stock market big declines and the reverse. Would have to waste my time looking at this self serving hedonistic paper with its Marilyn Monroe syndrome of wishing to show like Doc Greenspan that he is still an academic, even with their half of all financial economists on their payroll in the thousands , but may waste my time doing it some day and giving it a good review.

Gary Rogan comments: 

The main discovery in Monetary Policy and The Stock Market   is that what they actually regulate is risk aversion. Assuming the discovery is correct, the surprising thing is (well not really, but it should be) that it doesn't give him any pause that he is supposedly playing with the psychological disposition of millions of people like, well, a maestro manipulating an orchestra or an inanimate instrument. His brazen recent behavior can be explained by the same level of concern for manipulating human beings as is usually displayed in behaviorist literature towards rats given electric shocks in the lab.

Victor Niederhoffer decides to review the paper:

 It is amazing to me that in a 10 second scan of the Bernanke paper, I was able to come to correct conclusions except on the Marilyn Monroe factor. This appears to be my main ability aside from hard rackets squash now defunct. I am very good at spotting fallacies and folderol in scientific papers in an instant. I have now read the paper dated 2003 that the current Fed Chair wrote on the effects of monetary policy. I was wrong to characterize it as a Marilyn Monroe syndrome as he was not the Chair at that time, and his research would seem like a legitimate project for a Governor. I would characterize it more as a prince waiting in the wings type of project with its many conclusions very favorable to the then prevailing Chair's views on asset bubbles and exuberance and the role of monetary policy. Sort of like a member of the family proving himself in some difficult task.

However, I was correct in my assessment that the paper suffers from the part whole fallacy. The stock market and interest rates move in the same direction. When the stock market goes down, the interest rates go down. The cause cant be determined as their both co-terminus. However, given that the interest rates are down, one already knows that the stock market is down. Thus, it's a part whole, descriptive type of thing that has no predictive or scientific value.

The second part of the article where they use a regression equation to estimate the parameters of a forecasting model, and then use the forecasting model to determine effects, has so much statistical variability relative to the amount explained as to not be worth even considering. The estimates are changing and variable and doubtless have no statistical significance. But of course, when stocks go down, vol goes up and this could readily be measured by the vix. But again, it's the stock market move that causes the vix move, not the interest rate move. Using Granger type things as to which comes first, and being a market practitioner who sees the interest rate lag over and over again. At the minimum, the idea that the risk premium goes up because of interest rate moves rather than the direct effect of the stock market moves is completely undetermined and ambiguous.

It is good to know that the current chair is so conversant with stock market moves and the effect of changes in announced policy on same. In the good old days, whenever the stock market took a big swoon, as in the French inside trading day move, you could always count on a discount rate reduction or some such. But now, that the rate has been reduced to oblivion, indirect measures that affect expectations for the stock market must be used and it's good to know that the Chair is conversant with all these nexus, but hopefully he will ask his colleagues in the micro markets field to do a little more careful and scientific teasing of the data so that he will not suffer from so many statistical and market fallacies in the future. 

Rocky Humbert replies: 


I agree with you that this isn't a great paper, however, I think your statement "the stock market and interest rates move in the same direction" is rather different from the paper's conclusion. A better summation might be "interest rates and risk premia move in the same direction" (since the authors emphasize that surprise movements in fed funds have inconsequential effects on expected earnings/dividends.") It seems that you are focusing on VIX — whereas the authors are NOT focusing on VIX; they do cite Campbell & Cochrane 1999 et al in observing that during recessions the macroeconomic environment is more volatile. Yet if your point is that the VIX correlates with an increased volatility in macroeconomic indicators, I would be interested in seeing some evidence (tested to your satisfaction) which demonstrates this relationship. I am unaware of such research.

Victor Niederhoffer replies:

The paper is all mixed up with the thing you said and what I tested. All they had to do was look at the change in interest rates after the announcement and then look at the predictive properties of that change on stock market subsequently. They would have found nothing. And if their results through 2003 showed anything it would have been vitiated by the last 8 years.

Victor Niederhoffer reflects further:

But of course the main problem is that the Fed’s action signals things. And when they now signal that they want a lower interest rate, the market mistakenly believes that they know something extra about the economy and it’s going to be weak, and that's bearish for stocks which of course is bearish for interest rates.

Thus the ever changing cycles insures that the effect will be opposite from what the former Governor found.

One doesn't expect someone from the august greens at Nassau to read Bacon on ever changing cycles but someone should apprise him of its gist. It explains why the actions these days are so opposite to what the Fed and their past, present and future colleagues would believe.

But of course the main problem is incentives. Inventives. Yes, that’s much more important than a historical study of what didn't work during the depression. The incentives were ruined there the same way that they are ruined today. At that time, the business people threw up their hands in hopeless resignation that they were going to be strangled by the interventions and regulations and negation of the American way. And now, the incentives are ruined by seeing all the bad investments of the clients and ( okay I want say it ) the ” Banks” being bought by the Fed so that they can replace the loans that would have been assets on their balance sheets by yet more purchases of government bonds.

The public senses the same way they sensed when the sisters played each other that something was wrong. That there is no such thing as a free lunch. That the money that is being used to lend to banks and others around the world has to come from somewhere. That there is going to have to be an evening when the piper must be paid. So they circle the wagons. And the businesses that aren't receiving the direct aid, those that are not in the loop, desperately search for a safe haven by retrenching and canceling their plans to hire. Of course the problem was described by Gogol or was it Max Nordau in the image of the man rowing on the lake knowing that the dusk was near, I think.



 Perhaps the Chair has not yet been apprised of (or, more likely, refuses to lower himself to comment on) Obama's new proposal to tax "millionaires" at a new and higher income tax rate, which Obama apparently plans to campaign on by terming it "the Buffett Rule" (cf "the Volcker Rule), based on the Sage's recent op ed piece to the effect that he should pay a higher tax rate to bring him up to the rate paid by his secretary.

In the course of attempting to explain to Elizabeth and other sensible but tax-unsophisticated family members why Buffet's op ed piece is fraudulent and self-serving, I have found the following the clearest and most effective explanation:

Buffett has a net worth of $70 billion. I have read that based on the fairly modest net capital gains he realizes each year (all he needs to live extremely well on) he pays income tax of about $7 million a year. Thus his yearly income tax represents about 1/10,000 (0.0001%) of his net worth.

The average young, single working stiff makes, say, $60,000 a year, and if he's lucky has a net worth of perhaps $20,000. He might pay almost $20,000 a year in income tax, which would mean his yearly income tax represents almost 100% of his net worth.

And let's take an older middle-class family with a hard-working husband and wife making a combined $250,000 a year, who have saved and purchased a house and have some other investments. If they have been highly successful in their house and other investments, they might have a net worth of perhaps a $1 million. If they pay approaching $100,000 in income taxes, this would mean that their yearly income tax represents almost 10% of their net worth.

To reprise each year's income tax payments at current rates:

Young working stiff, 100% of net worth.

Hardworking H& W with successful investments (well within Obama's "the wealthy"), 10% of net worth.

Buffett, 0.0001% of net worth.

So Buffett's unselfish proposal is: That the middle-class family paying 10% of their net worth each year pay significantly more. That perhaps even the young working stiff pay slightly more. And that Buffett himself pay a little more but since his relative income is so low, still close to 0.0001% of his net worth.

Yes, let Obama run his campaign by lauding Buffett for his unselfishness, and for Buffett's explaining tax fairness to the public in such clear and folksy way.

Phil McDonnell adds:

I agree with Dan that the Sage's comments on this are completely disingenuous. He will never get hit by the tax he proposes. He only makes a salary of $524k/yr because that is what he chooses to take. Rich people have a great deal of control over how they get their income. They can hide it in corporations that do not pay dividends. They can choose not to take capital gains in years with high taxes on such. Alternatively one can take capital losses as offsets. They can choose to pay themselves a dividend.

In Buffet's case the vast majority of his money will never be converted to capital gains because it will be donated to the Gates foundation to provide a nice future income for his kids and their kids. It will never see estate taxes either. The idea that the problem is all about the tax rate is a deceitful canard.



 It's very hard to throw a tennis game. And when the two daughters played against each other in Wimbledon everyone who knew the game had a strange feeling that something might be amiss. Agassi describes how hard it is to throw a game, and how he threw a game against Courier so he wouldn't have to lose fairly to Chang. The public can usually see through these things. I believe the self serving ballet between the Pres and the Sage will come back to haunt them as it has the imprimatur, the badges and emblems, as they say, of wrong doing and duplicity.

Anatoly Veltman writes:

Reminded me of a checker game I was ordered to throw in 1976. I was 15 and up and coming. My opponent held the most international titles in history. He was Iser Kuperman, in his 50's and a Soviet flexion in his own time. I was called into the mayor's office, and the Head Sports official showed me 800 roubles ($1000 US), which "was paid" by the flexion. Underage, I was told that the money will be held in trust for me, and ceremoniously placed into a safe. I scratched my head and went into the tournament hall to play the grand-maestro.

After about 4 hours, the crowd of on-lookers thinned out and I made a series of suicidal moves, allowing him an instant win. He missed; and then it dawned on me that I, in fact, will never see the money. So I proceeded with uncharacteristic insightful for me end-game and won on clock at the end of the sixth hour… The resulting wrath pushed my family back a number of years in queue for the new government-sponsored flat!

Reflecting on that game, I would have never bested the maestro, if he were not assured by the officials that I "was in his pocket". Which brings forth a suspicion that it may be easier to throw the game than be on the receiving end!!

Ken Drees writes:

This is interesting to me since the weight of "cheating" must have been on your opponent's mind moreso than yours in that he missed the easy gift. After deducing the double cross you then played unorthodoxly and he blew it on time since it wasn't supposed to be so difficult and that must have had him flummoxed. I believe that inside knowledge or cheating is a burden like a drug that slows you down–you may win a few but you are losing your mental edge piece by piece.

Like a liar has to remember all his lies, and all the wasted effort and inventory management takes away from other worthy actions. The truth needs no such constructs.

The market lately looks like a lie, built up on shaky constructs, hokey relief rallies, and endless promises of further easing support lifts.



If you have not read this, you should: "Letters from a Self Made Merchant Man to his Son"  by George Horace Lorimer.

Craig Mee writes:

I simply mention Stan in passing as an example of the fact that it isn’t so much knowing a whole lot, as knowing a little and how to use it that counts.

Oh, how I have learned this the hard way. As an old squadron commander told me in my 20s, “You get a whole lot more bees with honey than you do with vinegar, young man.” Great advice, and I am happy to say I am finally following it many years later.



 The book Executive Hobo by Bo Keeley is an excellent read that is half Louis L'Amour, half John Steinbeck on a tour of the greatness of every day United States. Every page has an adventure and an ingenious escape and solution to a chess problem of nature and authorities against the little man that Bo solves. It is beautiful to read about the scenery and to vicariously experience the rhythm of a hobo tour of the original transcontinental line from Davis to Denver. Specs figure prominently in the book with Omid having taken part in the ride, the Eris Society a destination (co-instigator of the junta), and food for the 4 executive hobos provided by—– guess. Laurel Kenner.

Highly recommended.



Theories propounded by market experts are sound but very few people profit by them because when once caught in the maelstrom of stock speculation, the average man becomes more or less mesmerized and at critical moments his conservatism, his resolutions, and his theories all take flight.

One doesn't agree that the theories of market experts are sound. Most of them relate to meals for a day, and selective memories of things that seem reasonable. They don't take account of ever changing cycles, and the fact that whatever worked 3 years ago, which is the average minimal time for a theory to hit a book and become popular, and reported by the services, is very likely to have an opposite effect at the current time.

People become mesmerized by overtrading against their ability to lose. When they lose too much, they get stopped out by their brokers or their partners. Holidays are particular times that people get stopped out of or mesmerized because they don't wish to ruin their holiday, wait for the extra day of risk, or their partners tell them such things as "are you going to ruin another July 4th by watching the market every second of the day, and worrying about paying the bills?". It's happened to me.

The real secrets of stock market success remain locked up in the bosoms of a few who are too busy to write, and too rich to feel the need of writing.

The secrets of stock market success are to have a good foundation, strong at the base with heavy capital supporting it. The banks can have stock market success because they are able to leverage themselves 100 to 1 and borrow at the funds rate, and be bailed out by their current, former, or future colleagues but most don't have that ability. Thus, the market is a series of highs and lows with the weak getting extricated by lack of a proper foundation at each gyration.

One of the worst things is to read about the best great things I did in trading as if the trades were recurring, they wouldn't be written about or if they aren't recurring then probably you should do the opposite the next time. Even if I had a method that worked, I couldn't reveal it because my partners and family would be upset with me. I don't have a method that works, although if so many of my former colleagues didn't borrow my methods of using statistical interrelations of multiple time series varying ever hour of the separate days, I believe that such a method might have had legs. There are doubtless other methods of making money in markets, but one finds that the edge that HFT boys with their better equipment and capital have on individual stocks precludes such methods for short term in individual stocks, and the long term purchase of stocks requires deep insights above and beyond the average that it is unrealistic to expect one person or group to sustain over different market times.

Many of the rich people I know are happy to be interviewed on television as they can talk their book and get people to follow them so they can increase the wave they started by talking to their colleagues and brokers after they put their position on. Also, to show that they are common people, supporters of the masses, in favor of redistribution, so that their natural adversaries at the legislatures and the service will realize he's a fellow traveler. The others who know how to make money are careful never to reveal a thing as information flows so quickly and it just takes a few big funds or traders to turn something profitable into oblivion.

The gyroscopic action of the prices recorded on the ticker tape produces a sort of mental intoxication which foreshortens the vision by involuntary submissiveness to momentary influences. It also produces in some minds an effect similar to that which one feels after standing for a considerable time intently watching water as it flows over Niagara Falls. Dozens of people have committed suicide and been dashed on the rocks below after so watching.

I am not familiar with the research that supports this tendency to suicide but I have experienced similar sensations. And there does appear to be some contagion in suicides. As prices go against one, I believe that the latent self hate of many people for their sins is manifested and they achieved their desire to go broke to atone for their sins. The tendency to suicide when watching a trend is something that would seem to have market implications as new contrarians are drawn in to be thrown into the abyss by going against the flood time after a certain mesmerizing flow. To be continued. Only on p.13 of my notes on book so far. 

Sam Marx writes: 

I agree with these observations and analysis.

There's one way that still works in getting rich and that is to buy cheap. W.E. Buffett still does it, and so does Trump.

Making a fortune by the statistical approach is much more difficult, however, if you're lucky enough to get in a new game, such as options in the '70's and '80's ,or 21 in the '60's math works fine.

Having been there, done that, I'm not as math oriented in my trading as I was before and I try to buy cheap.

I found Hagstrom's book on Buffett helpful when trying to buy cheap.

However, I have my eye on a relatively new game that I'm studying to see what can be done there statistically.

From a great psychologist Laurel and I serendipitously learned from:

Hi Vic,

Traders in Eurupe are much more focused on the European woes than the US traders. As a result, they've been much more bearish, would it not be for their conviction that a massive monetization of debt will ultimately save the day for bulls.

I absolutely love the notes you've taken. The idea of themes setting themselves over a period of time to be followed by their opposites is such an important one…HFT has seemingly speeded that process.

The Niagara suicide phenomenon is a tricky one. Is it a leap out of mesmerization or a leap out of guilt and atonement? My own observation, fwiw, is that something additional can be at work. Many traders tell me that they would rather lose on a move that they incorrectly anticipate than fail to participate in a move that goes their anticipated way. In other words, the pain of opportunity cost is greater than the pain of actual loss.

From this perspective, the most painful scenario is one in which a river becomes Niagara and one is not riding the current. I've seen traders sell stretched markets to the downside, buy upside breakout after breakout, and refuse to exit trades moving violently against them simply because they could not bear to miss the move they think may happen.

At some point, it does have a quality of Japanese seppuku: out of honor they will stay with their failing positions and fall upon their financial swords. From that perspective, perhaps it is better to die with one's convictions than to have abandoned them and face the shame of missing their fruition.

Your idea of "foreshortened vision" as a result of mesmerization of watching the screen is absolutely true. I tell traders that we inevitably trade the time frame that we watch: it's a natural function of (often flawed) human pattern recognition. Trance states are poorly understood and appreciated, and I suspect much paradoxical trader behavior might be explained by the lapsing of critical, rational consciousness and the hypersuggestibility of the trance state–especially among daytraders. Hence the worthlessness of most psychological intervention with traders: one cannot solve problems while in a different state of consciousness from the ones in which the problems occur.

- A psychologist

Victor Niederhoffer writes:

- P.60, The Psychology of Spec:

It may here be explained that the mental attitude of a "sold out bull" toward a rising market is much the same as that of a bulldog chained in his kennel while a dog fight is going on outside. A speculator may stand by and view with unruffled complacency the most enormous profits of others in securities that he never owned, but if one of his own pet stocks continues to advance after he has sold out. It not only reflects the error of his judgment, but the remorse he suffers, in contemplating the additional sum he might have made dampens all the pleasure of reflecting upon the profit he actually did make. Reluctant to admit such a costly blunder in judgment, determined not to be surpassed by his fellow-traders, and fused with the victor of his recent exploit, when Union Pacific was selling about 215 the "sold out bull" put in an unlimited order to buy five thousand shares. When his broker on the floor of the exchanges began bidding for this amount of stock, the crowd instantly surmised that some big operator was being "squeezed on the short side, and before the purchase was completed the price had jumped to 229.

The sold out bull eventually died on the Bowery without benefit of friends or money to pay for the funeral.  "The lodge had to pay for the funeral" and my father might have had to carry him down from his Bowery walk-up to the morgue.

The whole subject of regret theory and contrafactual reasoning is so diffuse that it can explain any phenomenon and predict nothing. On one hand, it explains the tendency to take profits too fast as being a feature of regretting to lose what one has. On the other hand, it explains why people buy too high or sell too low from the standpoint of missing the big move. If such a phenomenon as "sold out bull" exists in real life, then it should lead to excessive moves when markets set a new high after many have sold out at lower prices. It would explain why support and resistance is always broker. Why when an area of great volume of trading at a price occurs, and then the price is exceeded, the bulls become more agitated and buy. I've seen papers that say that regret theory supports the notion that "support and resistance barriers should not be broken. A good study of the psychological literature is contained in this paper.



 Some interesting excerpts from the North Atlantic MNPSA (Airspace) Operations Manual, Chapter 13 - Guarding Against Complacency

13.1.3 It is therefore essential that crews do not take modern technology for granted. They should at all times, especially during periods of low workload, guard against complacency and over-confidence, by adhering rigidly to approved cockpit/flight deck procedures which have been formulated over many years, in order to help stop operational errors from being an inevitability.

and my personal favorite:

Always remember that something absurd may have happened in the last half-hour. There are often ways in which an overall awareness of directional progress can be maintained; the position of the sun or stars; disposition of contrails; islands or coast-lines which can be seen directly or by using radar; radio navaids, and so forth. This is obvious and basic, but some of the errors which have occurred could have been prevented if the crew had shown more of this type of awareness.



There is an interesting article on depression in Scientific American.  If this article is true, and depressed people are better at certain types of thinking (ruminating), could this could be harnessed to better one's trading? Personal experience says yes, but I'm curious about everyone else.



 Is it alluring to the average entertainment-thirsty movie-goer to hit the popcorn palaces for yet another ailment film? If you saw and found OUTBREAK (1995) involving, and I think it was, even without the credible talents of Rene Russo and Dustin Hoffman, or all the dozens of such films over the century of film fantasies that disgust, inform or titillate, CONTAGION is still worth a visit.

Sardine-packing in all the A-list actors you could wish for aside from Sir Lawrence Olivier and Orson Welles, perhaps, the film brings us to a renewed appreciation for how important constant hand-washing and hygienic mindsets are.

Though Gwyneth Paltrow (CONTAGION's first telegenic victim), Elliot Gould (a researcher who ignores CDC orders to destroy the pathogen samples in his lab for testing), the uninspiring Matt Damon (underused as the widower of frothy dead Gwyneth), Lawrence Fishbourne (CDC head), Kate Winslet (epidemiologist/researcher), the weird blogger played by Jude Law (with a distracting prosthetic tooth that throws viewers off every time he speaks) and Marion Cotillard (CDC disease investigator) and a quiverful of others are allup to snuff, the real protagonist in this investigatory thriller are the concepts of how fragile our sense of wellbeing is, given the ease of transmission of disease entities we know nothing of, as is the case with the mysterious MEV-1 followed here.

What the viewer gets an earful of is the workings of science and laboratories in the tracking, tagging and vaccine-producing process. When I was in the Peruvian jungle, and touching, using and appreciating the massive leafy pharmacopoeia of the natural 'drugs' profoundly abundant there, some trekkers with me kept hounding our barefoot shamin: "Why can't wecut all these bushes and use these healing properties right now?"

The shamin spoke precious little English, and my Quechua was rusty, so maybe he had no answer. But I knew why not already: It takes months of patient testing against myriads of substances to stabilize and replicate the properties needed to 'cure' or ameliorate diseases. Working with an unknown pathogen or virus, you have to isolate, refine, test, retest and do clinical studies on the entire ladder of phylogeny before you can dare test on humans.

Which is how it comes that Lilly and Pfizer make their money: They do the job, taking a Billion or two and a decade or more to bring a vaccine or tablet to market safely.

The "R-Noughts" and other statistical and scientific terms like "pathognomonic," "fomites," "paramyxovirus," "phylogenetic" and the like, all medical phrases—none neologisms–meant to impress the average theatre-goer (and they do) are instructive lessons in how we cannot demand instantaneous 'cures,' and the film cheats on having Gould's character identify the blowtorch virus 'way too quickly. But most in the audience won't notice. More culpable is the plot development that shows days going by matched with racing disease-afflicted areas of the world (essentially large blotches of people, planes and eating implements) is the resolution that comes mere months after the lethal initial exposures and deaths,. FEMA and the CDC are the real stars behind the curtain. The medical vaccine and pill process is arthritic. Were we privy to how the process serves to eliminate unnecessary dangers, it would reassure us, and we would be grateful, instead of making us as impatient as my companion in Sacsaywamman's wild fauna and flora in the sweltery Peruvian /selva/.

Coming so soon after the grocery hysteria engendered by Irene and Lee, however, the film has an added urgency. With the addition of the Red Alert of pre-9/11 potential terror plot, nebulous to amorphously defined (through no lack of police and FBI efforts, assuredly), CONTAGION provokes a panic that is not only real, it is downright pedagogical:

Two changes you will effect from the film: You will definitely stop touching your face as often as you heretofore have done. (The film is correct that we do indeed touch our faces hundreds of times a day, mostly unconsciously. Now you will get the startle response when you notice your hand is on your cheek or forehead.) And you will grab that loo door handle with a safety-buffer serviette next time you're in Grand Central Station, rather than breeze back to your bacterially teeming Zaro's mini-table and cutlery.



 Have you ever noticed how those who have done you the most wrong, or those who loathe you the most, when they come onto hard times will often come back to you asking for assistance. This often happens to me with former colleagues. I can't always differentiate between whether the colleagues are in such bad straights that they will go to their most unlikely and ill wanted savior, or whether they wish to take their worst enemy down with them once more before they finally go under. I believe it is a variant of rats deserting a sinking ship. The British Navy and I believe all navies have a standard order from their captain "every man for himself " when the ship is sinking. And there is doubtless maritime law about when it is legal to put the captain in chains, (albeit this is somewhat a different situation). I believe the idea has many market implications, especially when markets have gone to the nadir like last week, but more important is how to protect your life in such situations I think.

One finds that there are only 25 suicides a year at Niagara Falls these days, and The Golden Gate has much more, but one can't speculate as to whether the sight causes the suicides or whether people with suicide on their mind tend to go there to do the deed. As for market moves, they must cause many more such catastrophes but again whether the person seeks out the opportunity or the opportunity causes the action, or both, it would be hard to unravel and a quantitative study of the types of moves that induce same would be helpful for saving lives and profits. 

Russ Herrold writes:

I've had this happen a few times. I think the reason is that the former colleague or friend is sufficiently 'intimate' with the weak spot that their former friend had, and so can 'get past your guard' more easily.

Factor in some perverse pathological character trait, and they may even feel justifies in taking advantage of someone they feel has 'done them wrong' in the past. Indeed, it may be that there was an intent to deceive (conscious, or latent) from the onset of them approaching you, 'the mark'.

The best approach is to probably to buy the lunch, but to keep one's checkbook firmly locked up.

Polonius: (to his son)

Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.

Hamlet Act 1, scene 3, 75.77

and later


This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man. Farewell, my blessing season this in thee!

Laertes: Most humbly do I take my leave, my lord.

Hamlet Act 1, scene 3, 78.82

The thought expressed by Vic is that there should be some heightened sense of gratitude if one is dealing with a moral person and 'offering the hand up' and a hand-out. But Twain echoed the Bard on this topic as well:

If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man.

- Pudd'nhead Wilson

Steve Ellison writes:

 When my children were 5 and 3, we hiked across the Golden Gate Bridge. There had recently been a freak accident in which a small child had somehow fallen through the small gap between the bottom of the railing and the sidewalk to her death. There were plans to replace the railing with one that went all the way down to the sidewalk, but the work had not been done yet, so I was keeping a close eye to make sure the children did not go too close to the railing. While my attention was diverted in this direction, I was almost caught off guard when the 3-year-old climbed on top of the one-foot high barrier between the sidewalk and the speeding traffic.

T.K Marks writes:

I, too, have walked across that bridge on numerous occasions. I'd walk over to Sausalito and take the ferry back. A spectacular stroll. One is still struck mid-span by the ease at which a despondent person could reach their goal. The curiously low railings prompt one to macabre thoughts. Who was the civil engineer involved with this project, Derek Humphry?

Stefan Jovanovich answers:

 The answer is Charles A. Ellis. Joseph B. Strauss did everything he could to claim credit for it (Strauss was to architects and engineers what Douglas MacArthur was to the Army and Navy - even when he was wrong, he was right - just ask him). Ellis reworked Strauss' initial proposal for a cantilevered suspension bridge - which would have been the mating of the Forth bridge with a ropewalk - and produced the design one sees today. Ellis did almost all the actual work - the calculations required for the computation of stresses, the specifications, contracts and proposal forms - singlehandedly, working non-stop for 2 years. After Ellis completed the work but before the final designs were submitted to the Bridge District's Board for its review and final approval, Strauss fired Ellis. There was no mention of Ellis in any report by Strauss, including the final report upon the bridge's completion in 1938. Ellis was the equal of Louis Sullivan, and like Sullivan he spent half his working life in total obscurity, unable to get any further commissions. Moisseiff gets credit for the development of deflection theory; but, as events proved (see "original bridge" section of Tacoma Narrows bridge), Ellis was the person who fully understood the necessary relationship between span length and flexibility. He is literally the father of the modern suspension bridge and the engineering theory behind it.

Bill Rafter comments: 

There was a psychology professor that published a study showing that the vast majority of Golden Gate jumpers took the leap on the side facing the city (facing East) rather than the ocean (West) side. The article then attempted to theorize why this might be the case, and he concluded that it was an attempt by the jumper to say goodbye one last time. Nice thought, but it totally ignores the reality that it would be damned hard to jump on the ocean side as that pedestrian walkway is almost always closed.

It must be particularly interesting to be on the bridge when one of the big carriers goes under, as they have to time it with low tide to clear.



Last year at this time, I theorized that Utility Stocks "UTES" might be a better investment than TIPS (inflation-linked bonds). It's time for an update.

(Disclosure: I have a small investment position in utility stocks.)

Since 10/8/10 … when I posted the idea: TIP (tip etf): Total return (coupons reinvested): 7.75%VPU (vanguard UTE etf): 10.85%SPY (S&P etf): 5.72%AGG (Total bond market etf): 4.20%

Source: Bloomberg.

So as James Brown would say: "I feel good."

What's surprising to me is that UTES beat both the AGG and the SPY! I would be very surprised if the UTES continue to beat both the AGG and the SPY over the next 12 months, but I would not be surprised if they continue to beat the TIPS. Contrary opinions are always welcome. But my inclination is to continue to sit on my hands — because most of the time that's the right investment decision. AND it's cheaper than wearing mittens.

From that email exchange:

I thank the speclisters who kindly pointed out (offlist):

1) During the 1930's depression, utility stocks held their dividends… And people who paid their bills saw higher rates to compensate for the people who did not pay their bills.

2) The TIPS will return par at maturity — there is no similar guarantee for utility stocks.

3) Because TIPS are currently trading at a premium to par, outright deflation can be injurious to their returns.

4) Utilities are taxed as corporations — and are also subject to the risks of cap&trade etc. However, the state rate-setting boards may/may-not compensate for the increased costs of cap&trade with rate hikes.

The daily and weekly statistical correlations between utes and tips are quite poor. But as the attached chart shows, they do seem to move in the same directions.

Perhaps foolishly, I'm least worried about technological innovation — because the primary motivation for investing in a regulated utility is that they set rates based on a statutory ROE….



Canada, Mexico, S. Korea, USA, UK all have chart patterns that have held the August 11th lows and have zig-zagged sideways to up.

Many more "weaker" countries have broken those lows and are rallying, from lower levels: Italy, Belgium, Switzerland, Malaysia, Netherlands, Austria  , Spain, France, Singapore, Taiwan. I am referring to etfs like ewi, ewk, ewl etc.

So it's west vs the rest. So the question is–are the western lows going to hold and do western markets lead up or do they follow them down into another leg of bear? Is the Euro fix baked into the markets or not? QE seems a given, a Greek default is a given, a two tiered Euro is the only real answer, gold going to new higher highs is a given, then do all markets follow up after a shriek down on crocodile tears bad news (Greek out) ???

I mean everyone knows it's bad bad bad bad….

Jordan Low comments: 

Could Nikkei vs SPX in 1990 be a guide? Both fell until Sept 1990, and rallied from Sept 1990 - Mar 1991. Thereafter, decoupling occurred.



 This Ted talk from Misha GLenny "Hire the Hackers " iis a HUGELY important piece, if you are on the fence about watching it allow me to recommend that you do. Forget the title, the subject is much larger. Thank you Anatoly for bringing it up.


We are at the beginning of a mighty struggle for control of the internet. The web links everything and very soon it will mediate most human activity. Because the internet has fashioned a new and complicated environment for an old age dilemma that pits the demands of security with the desire for freedom.

And what do you know? Nobody else does talk to the hackers. They're completely anonymous as it were. So despite the fact that we are beginning to pour billions, hundreds of billions of dollars into cyber security for the most extraordinary technical solutions, no one wants to talk to these guys, the hackers, who are doing everything.

…where we have a surfeit of technology in the cyber security industry, we have a definite lack of, call me old fashioned, human intelligence.

see also Anonymous and this speech by Misha Glenny.



The new ECB plan may add liquidity to the system but I do not see how it can solve the sovereign debt problems, which are getting worse month after month. It seems, however, that Mr Market believes that the story may have a happy ending, which looks totally nonsense to me. In the meantime AAPL is once again near its highs regardless of negative economic data and the fast growth of Android.



 Those rogues can't be stamped out when they lose: "Rogue Trader At UBS Loses $2bn " .

Russ Sears writes: 

Could these problems with rogue traders at too big to fail institutions be the case of misinterpreting the example of leadership. Like the bribe taking cop's son getting busted for theft or the philandering preacher's boy getting the deacon's daughter pregnant. Corruption without some good protection is unforgivable!

Jim Lackey writes:

It's always a tech guy that can hack around the internal risk controls. It's easy to catch a trader in trouble if the managers actually talk to traders. The kid went on tilt and blew it up. Let me guess long the Dax hoping for a bailout. I always laugh at rogue or unauthorized. That is code for throw the new kid under the bus. Fact is no one was watching him.

When I was the new kid we had this happen. A tech guy wanted to be a trader. They gave him the usual line for trainees of 200 shares and no more than 5 positions. Weeks later he had 100,000 shares short of a type stock right as the launch in 99.

It was the final nail in coffins at that bucket shop. Lessons learned, but weeks earlier I protested the clearing firm change from S to P. I loved clearing thru S and by then it was G. I was promised much cheaper clearing costs and for a day trader , man was it much cheaper… Of course the get the joke lessons learned was the firm was undercapitalized which is not the big deal. They were not smart. You can tell if traders or risk managers are smart on how they exit bad trades. They were obviously not, so the S risk manager boots the firm.

(edited for color but this is the gist of how it goes down) The street is small… "watch out for those guys". p calls late at night..hey what's up with the 100k short 5 against you… Instead of doing the correct thing and saying oh that is fine its a hedge on options position and we will get that trade cross first thing tomorrow…. they said OM gauche! what that isnt ours! Oh yes it is! Oh My thats a 500k loss no trader has a limit higher than 100k loss in a day.. that is not possible! Oh yes it is and dont worry it will be 1.5 million by the open. (no disaster plan)

By the next AM I have friends calling from other firms asking who is the moron that told everyone that NY guy is caught short 100k lot and he's a 200 share trader.. I said I dunno they didnt call me or Id be long with you on this huge gap up as the broker covers all at the open at the market.

We all pulled out money and quit the next day. A week later the firm was up for sale. No one bought it. A month later they were gone. and if the banks didnt have a line to treasury and feds this is how all of these disasters would go down. It's much like the 19th century system.

Not to say that the bank today with their 2 billion in losses should go. Yet I have 5 stocks on my screen right now that under normal trading conditions would be gone 3 years ago.. and we would all be uh better off.

Now you know who sold the Dax under 5,000, 10% ago. lack 



 The ECB has announced a dollar-based liquidity operation to last through the end of this year so that European banks can access dollar liquidity that they have been shut-out of by the market.

Rocky Humbert writes:

Those of us who follow the US$ money market fund holdings see that the big European banks have gotten shut out of the US$ funding market. While they already had effectively unlimited liquidity from the ECB in Euros, they needed a counterparty to swap those Euros into Dollars. No private counterparty was willing to do this in size, so the Fed and the ECB engaged in this swap. If the collateral that the European banks post to the ECB have declined in value when the swap comes off, the ECB will still have to make the Fed whole — and the only way to do that is to print more Euros, sell them, and buy Dollars. That's not bullish IMHO.

The only people who are stunned are overleveraged idiots whose positions blow up on a move than is less than 1 ATR. My currency view (which may be proven wrong) is predicated on fundamentals AND technicals. The fundamentals haven't changed. And the short-term technicals haven't either. (yet). Like I wrote before, check in with me in a few months.

Gary Rogan writes: 

They are trying to fix the whole world by monetary manipulation! We have a much more tightly coupled system, and it's bursting at the seams. You can of course stick with the optimism, and now that it's becoming clear BHO is unlikely to get reelected this may be the right course, but I believe we will get wherever we are going sooner if they somehow resolve the European mess once an for all, whatever current pain is involved instead of being so ingenious about pushing the can down the road.

Stefan Jovanovich writes: 

I agree with your diagnosis, Gary. But, the Congress and the President and the elites they usually represent have been doing monetary manipulation and other things to fix the world ever since the Republic was founded. I make no bets on BHO's re-election. Incumbent Presidents have a massive advantage; it takes extraordinary circumstances for them to be voted out of office. Without Ross Perot Bush I would have been re-elected; without the Iran hostage crisis and his attempt to become First School Teacher/Preacher of the nation even Carter would have had a better than even chance. (Look up the polls for September 1980, and you will see how likely it seemed that he would earn a second term.) I place my confidence in Hamilton's Curse/Treasure. Our first Secretary of the Treasury's theory was that the Federal government could succeed if we followed the British model and had a "City" interest that insisted the national Treasury not be raided so frequently that the currency would be trashed. That was true for much of the country's history; our greatest failures as a nation have come when the "City" interest became more interested in working the government (the cotton land boom, for example) than in securing safe returns for the money the Treasury already owed them. We now have a revival of that traditional "City" interest, not on Wall Street but on Main Street. The Baby Boomer present and prospective Social Security recipients represent the largest group of U.S. IOU holders ever assembled. Their interest will supersede all others, and the House of Representatives will vote that interest. How can we geezers lose when everyone agrees that you should not "scare" the seniors by suggesting their claims are anything less than secure?



 September 11, 2001

It really was a remarkable day. I remember stopping on the sidewalk on the way into work to just look at the sky, it was crystalline and incredibly blue. Beautiful. I stepped into my place of business, a large room about the size of a football field, very dark with the constant hum of electronics and various sections filled with radar scopes. I work at the New York Air Route Traffic Control Center, NYARTCC or New York Center as we say. I had no idea that this day would turn out to be the most terrible and memorable day of my career. I had been lucky so far, dodging bullets by not being on duty when Avianca 52 went down in Great Neck, Long Island or the explosion of TWA 800 or the suicide/mass murder of EgyptAir 990. But not today. The pilots were particularly chatty that day, constantly commenting on how nice the city looked, how clear it was. It was a CAVU day. Ceilings And Visibility Unlimited.

I was plugged in and working sector 55, a radar departure sector that encompasses airspace to the southwest of New York City from 14,000 feet to 28,000 feet and I was working quite a few JFK departures westbound, several NY Metro departures southwest-bound and some arrivals into DCA and BWI that had to be descended through the climbing departures. I was getting a bit busy and asked the controller working with me to "point out" an aircraft to the sector above us (sector 42) so I could climb the flight into his airspace and basically get him out of the way. My coworker called and then hung up, incredulous, saying sarcastically "He won't take the point out, he says he has a hijack". As the controller working the sector above us had a flair for drama we didn't take him seriously and I remarked "Get a real controller over there".

But it was true. American 11 had turned off its transponder and had turned south over the Hudson River toward New York. The transponder transmits a 4 digit code along with altitude and position information so our computers can track the flight and we can see its altitude and speed. Although the flight had turned off the transponder we still had a very solid "primary" (radar reflection) target visible on the scope. So we could still see what we believed was AAL11 heading south toward New York, but we had no idea what its altitude was.

At some point I remember calling Huntress, the Northeast Air Defense Sector to give the position of the target that we believed was AAL 11. "Where is he?" the military controller asked. "About ten miles west of LaGuardia, right over the Hudson, heading south, its a strong primary target". "I'm sorry, where? I don't see him". I gave up and hung up the line. The target was gone. We did not know then that AAL 11 had crashed into the World Trade Center. A few moments later some aircraft on my frequency that had just departed JFK asked me if I knew the south tower was on fire. There was a huge column of smoke they said. Later, after listening to the tapes, we discovered that one of the pilots on my frequency had said "Maybe its that American you guys are looking for" but I hadn't heard what he said. All we knew for sure was that he was no longer on the radar and that simply meant that he was very, very low. We assumed (for some reason) that they were flying low and down the coast and headed god knows where. Someone said that a small twin engine aircraft had hit the World Trade Center, but it never occurred to us that it could possibly have been American 11. No way. Not in your dreams bud.

As this was beginning, UAL175 checked on with the controller working sector 42 and told him that they had heard a suspicious transmission on the prior frequency in Boston Center's airspace. But all eyes were on the target that we believed was AAL11. As we focused on the target, trying to figure out what was going on, the facility chief entered the room with a phone in each ear and his deputy beside him. They stood behind sector 42 and talked quietly but I was too busy to hear any of their conversation. While everyone in the room was staring at this target tracking toward New York, I heard a voice behind me say "Hey, there's an intruder over Allentown" This meant that there was a target that we call a "Mode C Intruder" that the computer wasn't tracking. Then we noticed that the computer track for United 175 had separated from its target so we assumed the intruder was UAL175 and he was showing up as an intruder because someone on the flight deck had changed the transponder code to a code that the computer couldn't identify. The intruder climbed briefly from 36,000 feet or as we say Flight Level Three Six Zero (if I recall correctly) and then as it passed over Allentown, PA it began descending and turning left to the south.

Someone said "watch this guy" to me but I was already watching, I had entered the 3321 code that the aircraft was now squawking on its transponder into to make its target appear brighter on my scope. As the target continued turning and descending I became increasingly concerned about two aircraft that I had under my control, both heading southwest and climbing. If the intruder continued the left turn and descending at the same rate it looked like they would get very close. But it was impossible to tell which way to move the traffic to get them out of the way. If the intruder turned rather tightly than he would come north of my traffic, if the turn was wide he would come south of them. As it was he turned head on into both of them.

Before the intruder had finished the turn I had issued a traffic call to both of my climbing aircraft: "Delta 2315 and USAir 542, traffic, one o'clock, one five miles turning southeast and descending, we believe it is a hijack and we don't know his intentions" (please keep in mind that these are my recollections ten years after the event and I don't have transcripts of my tapes available, but the essence is exactly as it was that day). Still, I had no idea what the intruder was going to do. Would he continue turning? Continue descending? I had to assume yes to both of these questions and it began to look as if he was heading for New York City, but for what purpose? Was he an emergency we speculated? If so it must be a dire one. No pilot would turn off course or descend without informing us first. This was crazy. We were thinking hijack but just weren't sure. Delta 2315 was level now at FL 280 (28,000 feet) and USAir 542 was about five miles behind him and leveling off at FL 260. I called the traffic again, "Delta 2315 that traffic is now one o'clock, ten miles, turning opposite direction and descending rapidly. It looks like he will be directly in your face. Take any evasive action you deem necessary." "Roger" came the reply. I called the traffic to USAir 542 again and he asked me a question that I didn't hear correctly. I thought he said "Is that the guy at our one o'clock?" and I responded "affirmative", but we later determined that what he actually said was "Is that the Delta we are following at our one o'clock?" which was not the case, I wanted him to look for the intruder that was turning head on.

By now I was becoming extremely concerned. The tension in the room was palpable. Several people were staring in disbelief at my scope as the events began to unfold. When the intruder was about 7 miles from Delta 2315 and pointed directly at him and about 1,500 feet above him, I turned both aircraft, shooting off the clearances as quickly and as clearly as I could: "Delta 2315 turned left IMMEDIATELY heading two zero zero" The pilot responded with a "roger" that sounded just a bit too nonchalant for my current state. "USAir 542 turn left IMMEDIATELY heading two zero zero". The intruders target was now about five miles from Delta 2315 and closing at right around 1,000 miles per hour. I again called the traffic to the Delta and waited to see the turns. I watched in horror as the two aircraft converged at 28,000 feet. "GOD F#&KING DAMNIT" I shouted as I jumped out of my chair, screaming at the scope. Dead silence. I could hear people breathing across the room. Shit. This was it. It takes twelve seconds for the radar to update. That was the longest twelve seconds of my life. I was focused so intensely on the radar that I thought my eyes might pop out of their sockets. Finally the targets both appeared after having passed each other by about 2 miles. But at that time it seemed like you couldn't fit a sheet of paper between them.

"USAir 542 is responding to an R.A." said the USAir pilot as he began descending, responding to an onboard collision avoidance device called TCAS. Sh*t. "Christ I'm sorry about that sir, I really thought he was going to hit the Delta", I said apologizing to the USAir flight that had come almost as close as the Delta. As it turns out, we suspect that the hijackers aboard United 175 must have heard the TCAS alerts as well because they briefly stopped descending and actually climbed to about 28,300 feet, 300 feet above the Delta. But as soon as they passed they began descending again and rapidly. This is when USAir 542 began descending as well to avoid the conflict, but the turns I had given earlier ended up doing the job, but much, much too close for comfort.

By now I was a nervous wreck and we all watched United 175 descending toward New York City. We wondered, clutching to hope, if he really might be an emergency and not a hijack and was just trying to get the aircraft down on a runway, any runway. We wondered aloud if he was trying for Newark as he was pointed right at it. "Maybe he's shooting for the 4's at Newark??" (Newark has two runways called 4, a left and a right) "No", Jimmy B. said, "He's too high and too fast". We watched as the target clipped off the miles, twelve seconds a hit. (We call each subsequent target presentation a "hit"). He was descending at five thousand feet a minute. Then six. Then seven. Unbelievable. Things were beginning to feel surreal. This wasn't actually happening was it? Yes. "Maybe he's trying for runway 4 at LaGuardia?", someone said. "No", again from Jim. "This guy is going in" And we knew. They were going to crash the plane into the city. They were pointed right at lower Manhattan and we knew it. "Two more hits" said Jimmy. "One more" And then he was gone. We had just watched a commercial airliner deliberately crashed into New York City. It didn't take long for the tears to come. There was confusion, fear, wild emotion. But we still had work to do.

I vectored aircraft on course, climbed some, descended others, I don't remember really. I remember choking back tears as I issued instructions to several pilots and talked with some about what had just happened. At some point the supervisor asked me if I needed to get up. I nodded emphatically and was relieved by another controller.

As I walked out of the area and passed the watch desk I heard the Operational Manager in Charge screaming into the phone: "I don't give a shit what they do, just get them in the air NOW!!" Must be scrambling fighters I pondered, feeling distant and disconnected. I reached over his multiple CRT's and grabbed the cigarettes out of his shirt pocket. He never noticed.

The rest is history. The controllers in my area, area B, were sequestered with a priest and a psychologist in a conference room for a while, and someone would pop in occasionally with the latest news. "The south tower just collapsed" No f#$king way I thought. They kept popping in with more bad news, bomb threats, more hijackings. I couldn't take it and got up and walked out to smoke one cigarette after another. The controller sitting next to me had just lost his best friend who was working at Windows On the World. People were in tears, everyone was afraid and angry. Unbelievably angry.

At one point they gathered us up, the controllers from Area B and we made written statements and a recording. They brought this big old reel to reel recorder in and passed around a microphone asking us to give our version of what we saw. Four or five people had already spoken when they discovered it wasn't recording and we had to start over. Later, a Quality Assurance Manager destroyed this tape and there was a bit of conspiracy theory going on about it. But this is nonsense. The tape was destroyed because the manager knew it was counterproductive and embarrassing. Not embarrassing to the FAA, but to us personally. Many people were crying, several facts were stated incorrectly, it was just a mess. And they had all the data they could possibly need with the voice recordings of all the transmissions and all of the radar data. Not only was he within his rights to destroy the tape, it was actually in his job description. Was it right? I'll leave that to you to decide. But I can tell you from first hand experience that the contents of the tape that caused such a flap were totally innocuous.

So that is what I experienced on 9/11. I hope it gives some insight, it is definitely a harrowing tale. Below are some statements from my coworkers that I retrieved from the national archives. I was unable to locate mine on the website, although I have a hard copy of it myself. I would really liked to have been able to provide a transcript of my voice recordings from that day, but I was told I have to go through a Freedom of Information procedure and just didn't want to bother. More government red tape is all I need.

Several weeks (months? who knows) after the event I spoke with a reporter over the phone about that day and he wrote a story for the Hartford Courant. A few days after it was printed he called me again with a strange request. A reader had contacted him and wanted to speak with me, could he share my number with him? I said sure and the gentleman called. Apparently he had been a passenger aboard Delta 2315, a circuit court judge for either the U.S. or Connecticut, I don't remember. But he had called to thank me. "For what?" I asked. "For saving my life that day", "for doing your job" and we talked for hours. I think he saved my life that day.

This is dedicated to all those who lost their lives that day, especially the pilots, crew and passengers aboard American 11 and United 175.

Also, please note that much of the information on wikipedia about these two flights is incorrect, but only mildly so.

Christopher Tucker

September 9th, 2011



Where are people going to put their money if they get more jittery about debt? You’ve gotta have serious balls to be putting your money into a tiny slug of metal at $2000-$3000 a pop. You can’t eat the stuff or put it in your gas tank. Whereas good corporations have loads of human, financial, and infrastructure capital with which to create wealth and adjust to prevailing conditions.



 I read this interesting article lately that posed the question:

Is it possible that student loans are to some extent simply replacing unemployment insurance as a source of subsistence income? If so, we may be creating another asset bubble of sorts, with consequences much more dire to the debtors than anything we have seen before. Thanks to the “bankruptcy reforms” of 2005, those student loans cannot be “cleared” by bankruptcy, no matter how hopeless the situation. We may have simply created a new version of a Dickensian “debtors’ prison” that may ultimately imprison an entire generation of young borrowers."


The answer is yes. 

(Department of Education) The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools.

And keep in mind student loans are still expanding in this crisis. While every other sector of debt is contracting this is the only area growing. What is worse is that the earnings for recent college graduates doesn’t reflect the higher costs of college:

Since 2000, in real terms college costs are now up by 23% Since 2000, in real terms real pay for college graduates is down by 11%

The reason when we look back and see greater earnings for those who go to college is the reality that many never came out with so much debt. Decades of data are being used and applied to the current rip off and high cost model that has never been seen in the past. Plus, you had a tightly regulated market and for-profits were nearly unheard of.

Alston Mabry writes:

Also, as I understand it, the default rates, especially for for-profits, are understated, because the DOE only looks at default rates within a certain period after the student leaves the school (two years, I believe). And so the schools have programs to keep people out of default until they fall out of the counting period, after which they are on their own.

Jordan Neuman adds: 

It is like anything else, whether you want to call it a "bubble" or "ever-changing cycles." In the late-90s the argument for stocks was that they had never had a down 15-year period. By definition, then, no price was too high for stocks if held for the long-term. Of course taking the yield down to 1% was never part of stocks' history. The same goes for housing in the last decade. Housing prices only go up over time!

The reasons that college educated workers have done better historically is that the college degree served as a screening mechanism when fewer went to college. Now that everybody goes the screening is worth less to employers. But colleges are charging, and are abetted by Government policies, for the old promise. Just like health care and housing, government policies have distorted the pricing mechanism enough to wreck the whole system.



 I suspect that this video is a preview of something that will be the next great bull market, a bull market that will dwarf the dot com market, a bull market that will be representative of a society changing technology right out of a science fiction novel. This new technology will redefine, reinvigorate, and recreate the industrial revolution.

Ralph Vince writes:

This technology has been around a long time for prototying componentry. There is a particular file format (comprised of a tringualr mesh of 3 d vertices) which many CAD formats readily convert to OR can be converted into.

I think where the rubber meets the road on this is the ability, ultimately, to do away with the machining of parts, particularly out-of-service parts. Try getting parts to very old cars for instance. With a CAD drawing of such a part, the physical part — or, the physical components to the assembly of the part, could readily be recreated. I did a ton of work with this kind of stuff — what the video doesn't go into is that the drawing itself can have engineering rules embedded within it. It;s more fantastic really than the video shows!

Dylan Distasio writes:

I agree that this one will eventually be a game changer. Although what I'm about to link to is more of a hobbyist unit, it is still impressive in its abilities, especially for the price. I've seen demos of these firsthand, and they're pretty cool for a home user:

Shapeways is also doing some pretty cool stuff with this in the commercial space, and offers a lot of different materials.



 No doubt that the loss of Federer to Djokovic is one of the most agonizing that one can suffer. What an incredibly lucky shot Jok hit at 5 -40, 4-5. He had already given up. And was smiling at the fact of the loss. And then he just hit a desperation hail mary with no hope of it going it. Having given up. Then the next point he hit a very weak return that fed had made about 50 out of 55 times on an inside out forehand. And he hit the top of the net cord. The shot was a poor percentage shot. And he could have hit it anywhere outside in and made the point with no worry. Then to add insult to injury he finally got an ace in at 30-40 down the line that if he had just hit two points ago would have won the match. He has to be thinking, "how could I be so stupid".

How many times does this happen to one in the market. You buy them when they're down, and it goes down 3 stand deviations on you. Then you do the same thing the next day, and you take a 3 tick profit and it goes up 10 standard deviation. Beware of the switches. I have to say that Djok is a very poor sport. All that disgusting pelvic moves to get the crowd to stop hating him. The crowd can sense a bad sport the way they did with Connors and used to with Agassi before he tricked them into thinking he had changed his colors. The only salient thing I ever hear Mac say is that when he used to act like an idiot and go crazy it helped him at the beginning of his career but hurt him at the end.

On the other hand, the idea that you have to be quiet and respectful at a tennis match sort of like at a classical concert is loathsome. To have to wait 30 minutes to go in and out of a stadium so as not to upset the sensibilities of the players, to be removed from the stands for whistling. Why is tennis so much more sensitive than a basketball game where one is trying to sink a foul shot.

It's the colonies. There is a tendency to slavery in the humans inherited from the oxen as Galton said. And we love our royalty and the imperial trappings of worshiping the English who are our former rulers. The English way of sportsmanship I have seen enough of and their common law may be very good but their way of noblesse oblige in the sports coming from the time that the Lord was the only one who could play and the feudal serfs played lawn bowling only on Sunday carried over to the tennis circuit has many market implications about the tendency of humans to love slavery and worshipful of the lord. Fortuitously the custom of having the lord handle the romance apparently went out in the 14th century but not in tennis.

Ha. I'm finally writing about something I know about.

Peter Gardiner writes:

 It was agonizing. The hail Mary return was the percentage play for Djok, but Fed had another chance, and his inside out short forehand is his money shot. He has famously missed his forehand on many key points against Nadal too. Federer's inability to close out certain tight matches against certain opponents is the cost of his unflappability under the threat of loss, his Houdini-like escape abilities when up against it. But with his hand at the throat of a tough, fiery opponent, I have seen his grip weaken far too often to give up alcohol. Laver did not have this problem. Neither did Sampras. Neither, perhaps, had the tools, élan, and balletic mastery of Federer, but they would kill you cleanly if given a chance. Conners was the master at this.

As to the manifest presumption of the tennis establishment as to proper conduct, it has struggled against colored clothes, tie-breaks, hawkeye, and other changes like any entrenched monarchy. But it is encouraged in this by the people: they enjoy the theater, and by entering the precious, hushed grounds of the Lords manor, momentarily aping his effete ways, they are thereby allowed the use of the sorcerers stone: they leave behind their natural peasant lives, and draped in theater, are ennobled by the very act of watching a stylized pantomime of medieval battle.

Victor Niederhoffer wrote to friend and tennis pro Pedja to ask his opinion: 

What did u think of the final? 

Federer has a truly weak backhand with so much wrist it's completely uncontrollable. And I noticed that whenever Nadal or Federer sliced they lost the point against the bludgeon straight shots of the Slovakian. 

Pedja replies: 

Hi Vic,

The strokes are ugly but he managed to perfect them and the speed of his ball is incredible. I watched his practice in Belgrade a couple of months ago, and the speed that he has with the least amount of effort was stunning. He uses his whole body in every shot. When he is aggressive he is currently playing the best tennis. His fitness is incredible this year.

I am looking forward to Davis Cup, this Friday we are hosting Argentina in the semis here in Belgrade.



You guys are into counting and numbers - so here are a few in this excerpt from my blog post today. It partly speaks to the recent discussion here about stops.

The market coughed up another 32 points today, putting it about only 35 points above where it was in the lowest closing low in August (S&P 1119). Whereas the CAD-adjusted S&P500 is currently 3.6% higher than that low close, the portfolio is now 11.7% higher. That's an 8.1% gain on the benchmark in one month. That's an impressive demonstration of the internal dynamics of the reversal trading.

Now mind you the volatility over that month has been inordinately high, but even 2-3% a month (as it was tracking before the downslide) is very impressive outperformance. So far so good.The portfolio again lost ground in the past two days, but is still slightly positive in September at +.21%. It's way ahead of the benchmark at +3.87% in the first 7 trading days of September, and is 3.04% ahead of the benchmark as of the beginning of this year. A comeback is definitely under way -though not yet obvious in that the portfolio (which was not using the reversal trading prior to late May) is still down on the year by 5.35% from prior losses.
So this is the setup for BUYS for any of the vehicles being used:

DAY 1 The closing price is less than previous day's intra-day low, AND the position has so far built to less than four tranches (2% of the portfolio $ value); 4 tranches is the maximum position. DAY 2 Set a limit order to buy one tranche (2% of the portfolio $ value) one cent below DAY 1's intra-day low.

And the setup for SELLS is the inverse:

DAY 1 The closing price is greater than previous day's intra-day high, AND you have at least a one tranche position (can't sell something you don't have). DAY 2 Set a limit order to sell one tranche one cent above DAY 1's intra-day high.

This extension beyond the previous day's extreme serves to widen the average "spread" between buy and sell orders; sometimes you catch nice gaps. You keep buying and selling tranches of fixed markets in this fashion based on this simple setup. And you don't use stops - you're trusting that the world or financial system won't end overnight.

Where there are ETF long/short pairs, I buy and sell both sides of the market, but only use the short ETFs when the price is above the 50-day moving average. Short ETFs erode much more quickly than long leveraged ETFs (has to do with how they are re-balanced to match and multiply (double or triple) the move of the underlying market or index). I don't go short while I still have an open long position (I prefer to "run out" of long inventory), but I do start going long again if I still have an open short position. The strategy is biased to primarily trade the long side and only use shorts at higher extremes to mitigate the cost of short ETF erosion and losses during smooth, sweeping bull trends and/or sharp rallies.

Leveraged ETFs of course increase the "spread" by the leverage multiple (2 or 3 depending on which you are using), and therefore project greater profitability. The only downside to leveraged ETFs is that they erode over time if held, especially over periods of high volatility. They work well as long as you don't hang on to them for months. If you are relatively quickly in and out, the higher volatility will easily overcome the erosion factor.

The overall results are still preliminary, as I've only been using this for a little over two months, but so far it seems to be following back-test projections. Worst case scenario is a steep one-way drop; not so bad but likely an underperform is a long unbroken rise. This risk is mitigated with a portfolio approach. Not all markets are in sweeping trends, or maintain the same correlations at any given point in time. These offsets mitigate having everything going against the same way at once. Highest correlation is in panics. You can't avoid drawdowns (my deepest was 13.9% in August at the worst of the panic), but you can substantially mitigate them, as the first paragraph in the post above shows.

In my blog I document all trades and portfolio results/status, and discuss the reversal trading dynamic in relation to market activity on a day-to-day basis - kind of like a lab experiment. If interested send me a note and I'll pass on the URL. I'm finding the results interesting - some of you might too.





Optimal location has always commanded a premium in commerce. If you wish to set up an HFT franchise, it is no different than what McDonald's does in setting up a burger store, or what futures exchange members used to pay in order to stand in the pit and spit on one another. The stock exchanges have set up an electronic pit — populated with server racks with colorful CAT5 cables instead of garish and worn neckties and jackets — each with a cable to the main router which is cut to exactly the same physical distance as all the other servers in that pit. You gotta pay to play. It is as it has ever been. The benefits in market liquidity to have these efficient competitors duking it out to be JUST on the inside of the bid-ask spread has the effect of narrowing that spread, reducing the transaction costs, and ability to execute orders without budging the quote, and for this efficiency they are being well rewarded. I reckon it is to the Good. There will be abuses and corruptions, as ever, but these are part and parcel of the mistress's price.



Friday's move brings to mind several things.

The threat is worse than the execution.

Thursday and Friday this week were eerily similar to last week's.

There were 13 visits to new lows so far using 10 minute prices the Euro at a minimum on Thursday presaged the decline.

The European markets are down from 4.5 to 5%. Overnight Israel market which closed 1500 GMT on Thursday, September 15 was down only 1 % and did not presage the decline in US and Europe, but Japan did close near its low of the day and last 10 days. Canes on Friday do not work beyond a certain magnitude of decline in retrospect.

There were several timely announcements during the day at propitious times that acted as ephemeral fingers in the dike.

One can always tell that there has been a big decline in the market in New York by unobtrusive indicators such as quietude and lack of traffic, and of course restaurant traffic at high ends and the movement of high priced wines is much reduced.

It is terrible to see such a decline as it hurts everyone's wealth and it causes all sorts of wealth effects on consumption around the webs that connect us. One was with a flexion on Oct 19th, 1997 and he made the biggest fortune in bonds ever by anyone that day but he was totally dismayed and sorrowful: "I don't like to make money that way". His feelings were emotional as those described by one of our most astute and poignant operatives were and the loss of wealth and love and life are terrible to contemplate.

Anatoly Veltman writes: 

Memories awakened: what disturbed me the most that October 27th, 1997 was how the U.S. equity traders haven't positioned for it. The Hang Sang pattern was desperate to extreme, well in advance of the 27th — but S&P was still hanging inexplicably tough until the very day. I was careful not to go over 100% Short on statements, so that not to raise clearing house flags. For the life of me, I couldn't understand why U.S. players were not aggressively shorting. That morning, I doubled my intra-day Short — and Chicago finally caved in. I didn't even get a chance to pare back, as futures locked at second limit-down… And yes, I also felt uneasy in my own way about the speed/dimension of the decline. So after the limit-down re-open next day, I reversed to light Long. The mood improved so quickly, that I never got a chance to add any Longs — there were no offers. A genuine Bull was born literally overnight, out of total adversity.




Hope everything is well with you.

I've been tempted to sell that Mark Twain gold coin you gave us one Xmas. At current values, it could finance a round trip flight for Janis and I to Italy. But if it keeps up its current pace and housing values continue to crumble, we probably can buy a second house with the one coin in a couple of years.

I had an idea for you to explore. I doubt if it is "Daily Speculations" - worthy, but i wonder if it has some bearing on your trading theory of "ever changing cycles."

It's based on this game.

I call it RPS intelligence. if you can consistently beat the computer at that game, you might be a good candidate for making money in the stock market. The computer detects patterns in your play and bases it's choices on your previous play. Substitute stock market (or S$P futures trading floor) for computer and you have a good game based on your "ever changing cycles" theory. That is, if investors become too reliant on a trading strategy that what works in the past, the computer or market detects their pattern of play and beats them.

If someone has strong RPS intelligence, they might do well as a trader in the market.

Anyway, I hope you are doing well. We've been expanding our book business so fast that we have to hire a couple of people. Having to manage people is not my strong suit, but maybe Janis can keep employees happy.



Newton Linchen comments: 

I always enjoyed this game, although I was never good at it. So I took the challenge to play with the computer.

My best score so far is 46 x 36, with 33 ties. This is the 10th time I play in the past few days, and the other 9 times I was "cleaned" by the computer.

I don't know whether this relates to markets or not, but the thing is the computer "learns" your (mine) style and adapts to it. So in order to beat it, even with a small amount of winnings, it's de rigueur that one constantly monitors when the computer starts to win hands it didn't win in the previous throws.

Consider a tie: paper-paper. My first (and dumbest) strategy was to attack: next hand I would give a scissor. It responds well to attacks, in fact, it seems by default to expect that the player will attack. Therefore, I soon discovered that the dumbest strategy was to attack the computer's last hand. If it's hand was a rock, you couldn't win throwing a paper, and so on.

So, in the event of a tie, I changed my strategy to playing again and again the same hand (say, "paper"), and so the computer. It usually goes three ties until it takes the attack. But it would attack (change from "paper" to other) counter-attacking: he would throw rock (expecting you would have attacked with scissors). Therefore, the strategy of waiting for the computer to attack was a win.

But it learned this move too…

And afterwards in the event of a tie, if you played the same hand, it would start to attack using the direct approach: giving you a scissors.

And that was an example of the multiple learning processes the computer went through, beating me in the previous 9 times.

(It was starting to annoy me: was it reading my mind? : )

I tried the random approach, choosing paper, scissors or rock disregarding the last hand. Say, throwing paper-paper-scissors-rock not even taking in account what was the computer's last hand.

It worked. For a while… (It seems the computer was also good in dealing with this).

This last game, when I won in 108 throws, maintaining a +9 score during the entire play, I tried three different approaches:

First, trying to lose to myself: If my last hand was a paper, I would throw rock in the next hand (rock loses for paper). Bingo. It worked. Then again, and again, and again. Example: paper, rock, scissors, paper, rock…

When the computer started to adapt to it, I would play "losing" to it: if the computer's hand was scissors, my next hand was paper. And it also worked.

Also adapting to it, after a while, we would have a tie, or I would lose.

If I lost, I would choose at random the next play.

If we had a tie, I would alternatively: a) play the counter attack: tie = paper-paper, my next hand was rock. b) play the direct attack: chose scissors.

The only way I could manage to stay +9 over the computer during the game was alternating at random these three main strategies: losing-to-myself, losing-to-the-computer, choosing at random after a loss, and playing the two "tie" approach.

After a string of winning hands, I would change the strategy after one loss.

Then win or lose.

If winning, I would press that win keeping the strategy, until one loss. Then change again.

PS: The way I don't think this game relates to speculation is that we are trying to be the market, ever-changing, running away from the smart spec who is trying to figure us out.



 In relation to the Aussie Rocky, the snap backs on any bid in euro, early Asia Friday (USD offer) are insightful. Australia's leadership is lacking, and from what I can see, costs are going through the roof, and there will be D-Day. But with the elephant in the room, China, still trucking along, the bottom of the canyon, without a clear double dip in the U.S, is still some distance off. Not to say you would be long, with the propensity for a exploding dollar bid to pull it south, but on any Euro strength, this horse should canter:

Thanks to such trends, AMP's Oliver believes China will continue to record solid growth. ''I certainly do not see any imminent collapse,'' he says. ''Also, China is still well placed to stimulate their economy if the global economy starts to fall out of bed.

''They can cut interest rates and monetary policy. They can probably undertake another round of fiscal stimulus, albeit not on the same scale as they did last time.

''So, for Australia, China provides a pretty good buffer against the storms blowing in from Europe and the US. The Chinese authorities have shown themselves to be adept at managing monetary policy and managing their economy — far more adept than the Americans and Europeans have been.''



I can perform all the economic analysis in the world, and it won’t
convey the sheer apprehension I feel about China’s current situation
anywhere near as well as the following pictures…

The gold-encrusted hallways, marble foyers, and imposing granite
frontage are not from Versailles, or the Vatican, or even Caesar’s
Palace in Las Vegas.  They are from the newly completed corporate
headquarters of state-owned Harbin Pharmaceutical, in northeast China. 
No word on exactly how much the literally palatial offices cost to
construct, but the mind boggles. 

full article here.



 Hypothesis: Let's keep it simple.

Looking at the total population sizes of countries, and the ease at which you can organize and get out the broom when the recession hits. Trade: buy the currencies of countries with population less than 25 million, relative to their big brothers when times get tough… I'll leave it up to those with the necessary skills to optimize this a wee bit further which it undoubtedly needs (The Japanese yen was the only unwanted one at the party).

Zimmetro — Latin America is the best performing currency; the Paraguayan Guarani is up 15.90% on the USD this year.

We then have those strong Oceania currencies, the Australian Dollar, New Zealand Dollar and the Papua New Guinea Kina moving north 5.00%, 9.40% and 14.30% respectively matching the USD this year. The Singaporean Dollar and Japanese Yen both appreciated around 6.40-6.60%, against the USD this year. The South Korean Won gained 4.40%.

Europe's best performing currency, the Swiss Franc, rose 14.40% against the USD this year. Norway’s Krone also performed pretty well at 8.40% vs the USD this year. Africa’s best performing currency, the Mozambique New Metical is up 14.10% on the USD, while Mauritius Rupee 9.90%.

But the best performing currency who beats them all, is in Asia.


Myanmar. (Note the overall winner does have a pop of over 50mill), was a country undergoing some major political and structural reform, and goes to show , that this as a investment philosophy i.e structural shift is hard to beat.



 The fact is that the Arab Spring could as well ignite instability (rather than bring democracy) in the region, altering established relationships and the balance of power. Recent events in Turkey, Egypt and Syria and the growing challenges from Iran, all indicate a quickly deteriorating situation.

All this at a time when Europeans and the US are very busy with internal problems. Moreover, in Israel protests over the economy are increasing.

This is to say that the dynamics of this bear market in Israel could be mainly driven by specific local conditions, which in turn could add to and influence the already grim global scenarios.

T.K Marks writes:

Hopefully there is little correlation between the Israeli open and my beloved if woebegone Jets open against the Cowboys tonight. I'll be taking it in from the spirited street of Telegraph Ave. in Berkeley, so I'm holding your karma personally responsible if things if things go awry.




Here's more on risky vs non-risky (more precisely, high beta and low beta) stocks, following up on a previous post.

There is a very nice set of data on Eric Falkenstein's website The data gives monthly returns, going back to 1962, on stocks grouped according to beta. I've used that data along with data on market returns and interest rates from other sources.

I looked at two (overlapping) date ranges. The first is from 1993 to present. That range was chosen since it coincides with the lifespan of the S&P 500 etf SPY. The other range chosen was the past 10 years / 120 months, from 8/31/2001-8/31/2011.

The results of this study are summarized in the following table.

There is only one fairly anomalous finding–a Lake Woebegone effect–in that all beta groupings had positive alpha and out-performed SPY. That is interesting, but is nothing more nor less than an artifact of the fact that the S&P "equal weight" 500 index outperformed the standard "cap weighted" index over these periods.

If we compare within the different beta groupings, we find a great big null result, a result consistent with expectations of the "Capital Asset Pricing Model". Neither low, medium, nor high beta stocks excelled or under-performed the others in any statistically significant way. For the past 120 months, the average monthly alphas of the beta=0.5, 1.0, and 1.5 groupings were, respectively, 0.37%, 0.21%, and 0.40%, each with standard error of about 0.2%. That's a tie in statistical terms.

For the 1993-present period, the alphas were 0.27%, 0.06%, and -0.06%, giving the edge to the low beta (beta=0.5) stocks, but with standard errors in the readings that are comparable with the differences, so again it's a statistical tie.

Reiterating points that I made in a previous post, I think that the returns of risky stocks get a bad rap. First, it's not appropriate to use geometric average returns, which unfairly penalize volatile stocks. A real-world investor can re-balance his portfolio periodically if he feels his market exposure is too big or too small. Second, with risky stocks, you don't need to invest as much money to get the same market exposure, so risky stocks should be credited in some way for the interest on the money that you didn't need to invest. The Capital Asset Pricing Model term "alpha" takes care of these problems in an elegant and logical way.

Technical details:

–Monthly returns data are taken from Eric Falkenstein's site, specifically from the "beta=0.5", "beta=1.0" and "beta=1.5" portfolio data supplied here.

Eric writes: "The beta portfolios here target a forward looking beta. Using historical daily data, for the most recent period, but monthly for data prior to 1998, I create portfolios filled with stocks that have the betas closest to 0.5, 1.0, and 1.5."

–Monthly alphas are calculated as follows: alpha = (return - return_riskfree) - beta*(return_s&p - return_riskfree)

–For return_s&p I used the monthly total returns, taken from MarketQA, of the S&P ETF ticker SPY.

–For return_riskfree I used the 13-week treasury bill index (ticker ^IRX on Yahoo Finance) as measured at the start of each month.



This is a plot of log SP500 for the period 2/66-2/82, along with a time-shifted / log adjusted plot of log SP500 from 8/00-present. Both plots were aligned so they originate at what was then a local maximum, and show (not adjusted for dividends or inflation) what happened to stocks in ensuing years.

The first 10 years of these periods are similar as there is no "upward drift". During the recent 11 years stocks made three major highs and two major lows, whereas the similar (net/flat) period 66-77 had 4 major tops and 3 major bottoms. In addition to the recent period's less frequent periods, the peak/valley has been far less than the older interval.

Interesting also to consider other differences not shown on the chart, including results of US military action, inflation levels, bond yields, age of depression-era children, age of post-war baby boomers, evolution of the equity culture, widespread indexation, and globalization of economies and markets.

Stefan Jovanovich replies: 

Great stuff, Kim. My feeble model compares the present to the late 70s/early 80s. The difference is the world's Bond Markets, which are now the opposite of what they were during that period. Good credits are now as much overbought as they were oversold then. Gold's price is equally high because then people were hedging against cost-push inflation while now they are hedging against deliberate currency depreciation by the central banks. Back then the gold market was disappointed when further cost-push inflation failed to materialize after Reagan and Thatcher made it clear they were not going to give in to the unions. This time the fears of further currency depreciation will be disappointed as the electorates in the U.S., U.K. and Germany decide that they want the central banks to tear up their credit cards and drain the punch bowl. Gold will then have to compete with actual returns for CDs and other conventional savings. But, then, how can stock prices rise? The answer is that the cost of borrowed capital is now a negligible part of the overall expense of currently doing business and irrelevant to consumer demand. The promise of diminished regulatory and steady (i.e. no longer rising) commodity costs will offset the added costs of higher interest rates for businesses 10 or even 100 times over; and - miracle of miracles - there will be an increased consumer demand from the savers - i.e. the people living off the interest rates from CDs. This is, of course, exactly the opposite of the Fed's diagnosis that we need to somehow reduce lending rates further to "prime" the economic pump so the borrowers can go more cheaply in debt; but then, what would you expect from people who walk by Woodrow Wilson's statue every day without gagging.



The scientific method has two parts. There is theory, which requires knowledge and intuition to posit a cause and effect, and there is testing, collecting data to determine whether the observations refute the theory. If I understand your point correctly, empiricism is necessary but not sufficient. There should be a theory that is not entirely based on the observed data. As an imaginary example, “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” is better than “The S&P 500 was down on 19 of the past 30 Friday afternoons”.

Ralph Vince responds: 

Steve, yes, but the premise, the cause, needs to be proven. “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” needs to be proven as causal, not merely posited as a possible cause.

Frankie Chui writes:

Yes, I always end up asking myself “why does it not work anymore after it has worked for so long?” when the moment I trade it the system stops working. It has also happened to me quite often where I backtest a strategy, everything seems ok, trade it for 2-3weeks and that’s the end of that system. Therefore, I am now experimenting with optimizing parameters in systems more frequently, perhaps once every two weeks on a rolling basis. Optimize two weeks of data, trade it for a week, optimize the past 2 weeks again, trade it for another week. Of course the 2 week/1 week time frame may not be the best (I just randomly chose it), but has anyone ever done anything with this kind if approach? I’m curious to see if this will work for day trading. I am new in mechanical trading, but I’m very curious to know if optimizing data fast enough will allow a trading system to work better and longer (for day trading).

Jeff Watson writes: 

Frankie, you’re running up against Bacon’s ever changing cycles, which tend to render systems obsolete.

Phil McDonnell adds: 

There is an insidious danger when you use optimization. The optimizer will fit the system to the data too well. It will never perform as well out of sample as in sample. It becomes especially important to use tests of statistical significance when you do optimizations.

The optimizer can actually create a multiple comparison problem in some cases. For example if you tested, looking for seasonality and wanted to find which month was the best to buy it would create a multiple comparison bias and any test for significance would have to have a much higher threshold than if you just tested September.

One way to judge a system and evaluate whether it will continue to work is to plot out the equity curve. If your testing assumes an equal sized investment each time then the system can be plotted on an ordinary arithmetic scale. If you compound it should be plotted on a log scale. Either way the most desirable system would be a system that looks like a smooth line going monotonically up to the right as time passes. If it starts to roll over then it may be a system about to fail.

Paolo Pezzutti writes: 

The system should be quite robust. It should work pretty well with a sufficiently wide range of values of parameters. There should also be few parameters avoiding curve fitting.




 For all those Stargazers out there, there's a magnificent supernova in the "Pinwheel Galaxy" M101 (Ursa Major), and it's only 23 million light years away.





It's expected to peak out at a 10 magnitude and should be easily visible from a 4' telescope.



 Unemployment compensation, like Social Security, is an "entitlement" (sic) that people actually do pay for. The Unemployment Insurance trust funds have the same problem as Social Security: because benefits have been extended and eligibility widened, the fund collections from taxes have not kept up with the accrued benefits. But, that should hardly be Jonathan's responsibility any more than it should be mine as a Social Security recipient. One can argue whether or not we should have such government-mandated pooled risk and deferred annuity programs; but, as long as we have FICA and FUTA deductions from payrolls and self-employment earnings, Gary's characterization is not true - most of the money is not being taken from "some" "to give to others". That characterization is true, of course, for Pell grants, food stamps, employees of the EPA and most (but not all) of Medicare; but should avoid falling into the crude generalizations that Libertarians retail as part of their continuing quest to remain as irrelevant to American elections as the Prohibition Party.

P.S. One of the many ironies of the tax/benefits laws in the U.S. is that, if you are self-employed, you cannot, with very few exceptions, qualify for unemployment. However, if you create a C corporation and are artful about the ownership structure, you can pay yourself a salary and pay FUTA, have the owners fire you and qualify for unemployment. Under the current laws in California (not counting the President's proposed extension of unemployment benefits) that would be a payout of roughly $45K not otherwise available to us poor capitalists struggling to game the system.

Gary should reload; his objections to the present arrangements will be far more lethal if he points out that the system's perverse favoritisms force even the most independent and personally honest people to spend time figuring out how to play the game so they can get their "fair" (sic) share of money they are legally entitled to.



 1. An appreciative shout-out to the sympathetic specs who checked in with me during the recent hurricane. I'm happy to report that neither the family nor our two genetically optimized felines suffered any bodily harm. The experience, however, was a "refresher" course in fluid mechanics, and more specifically, the awesome power of Hydrostatic Pressure. Like many in the Northeast, we lost electricity for an extended period of time. Fortunately, my prescient wife (who oversaw the construction of her corporate headquarters a decade ago) designed her HQ building to not only maintain the utmost Feng Shui, but also survive a 1 megaton blast (and remain fully functional until the fallout cleared) — hence my business activities continued uninterrupted while sitting in one of her "work rooms." It was also fortunate that my wife spent the entire period traveling out-of-state, so she did not have the opportunity to remind me that I had vowed to install a 200A Transfer Switch and diesel generator at our home some years ago. She saved that reminder for her return. (Obscure pun for those who haven't mastered Chinese from reading fortune cookies): Feng Shui literally translates as "wind-water" in English.

I am SHOCKED, just SHOCKED that the highly intelligent members of this forum have mostly refrained from extensive discussion of the Swiss National Bank's peg decision. (Disclosure: I had no CHF position prior to the news as my Purchasing Power Parity rules prevented me from staying with that trend.) I submit that this has all of the elements that makes ever-changing cycles ever-changing. I also submit that, despite my complete antipathy towards the Chair's embracement of so-called Flexionism ("can you say Military-Industrial Complex?"), that the SNB's Hildebrand (a former Louis Bacon protege/employee) should get the Flexion Of The Week award. Leaving the economic discussion for the next bullet point, his play yesterday made Mr. Soros's Bank of England trade look like a piker. I reckon Hildebrand made about $25 Billion yesterday. Here's his flexionic bio.

3. As for the CHF peg, I think that this deserves some serious discussion and contemplation — as it may be (a) a game-changer for Europe; (b) a harbinger of the next step in Central Bank policies; (c) arguably a much bolder/riskier move than everything which we've seen from the Fed. Just imagine what you all would be saying if, instead of the Fed buying FNMA/FRE paper or various other securities backed by US-based real estate, the Fed committed to UNLIMITED purchases of Euro currency??

Here are some questions for you-all to think about:

a) What are the similarities and differences between the Swiss situation and the Japanese situation?

b) Will the peg hold? And if it does, will the Japanese try it? What about the Brazilians? If the peg doesn't hold, will the Swiss really buy "unlimited" amounts of Euros?

c) Are we on the cusp of a new Bretton Woods accord?

d) Should this news be bullish or bearish for gold? And why?

e) What does this mean for Switzerland's trading partners? If other countries adopt similar regime changes, what does this do to global trade? For stock markets?

f) This is the FIRST NEW CURRENCY PEG IN 30 YEARS! (The world had been going in the opposite direction — with China slowly moving towards a floating currency.) Is this a fluke? Or if the uber-righteous Swiss say it's ok to peg, why won't everyone else peg too? Is this perhaps a harbinger of exchange controls?

g) Must this be inflationary? If the Swiss print tons of cash to hold their currency below 120, they will be buying more Euros (and by relationship more Dollars) at prices that are still extreme based on PPP. Why should that cause inflation? The Swiss economy looks more like Japan than any other right now.

h) The Swiss stock market rose 4% yesterday (while other European markets plunged). Should one buy Swiss stocks now? (Even though the currency remains horribly overvalued.)

i) Switzerland is the world' oldest continuous Democracy; and is a direct Democracy. (Swiss referendums include the most mundane topics.) Excluding the non-Democracies, they are also in the top 10 GDP's in the world. Hence, is it appropriate to dismiss this as a footnote that is irrelevant to your "counting." Shouldn't one be asking whether this is a REALLY BIG DEAL? And whether something very important cyclical/structural changes are afoot. Did Switzerland just become part of the Euro zone??? (Note that there have been quite a few calls for Hillebrand's resignation. How does one say Ron Paul in Schweiss-Deutsch?)

4. As everyone knows, I have no clue where market prices will be next week or next month. However, my models (which have served me well over the years) now suggest that the most probable result is that we'll have a compounded high single digit return in the broad US stock market over the next 3-5 years — absent something that is exogenous. This isn't particularly exciting, until one considers what treasury bonds yield. Hence I am an occasional but persistent nibbler of stocks at these prices, torn between the realization that stocks could drop a lot more; and that my excess liquidity (i.e. cash) is losing value every day.

5. There's a famous old advertisement, "They Laughed When I Sat Down At The Piano … But When I Started to Play!". See l I use a slightly different version: "They Laughed When I Sat Down At The Piano … I didn't know someone had pulled the stool away!"This relates to my less-than-glorious exit in HPQ. For those who took the other side, congratulations: you made a couple of points as should happen more than 90% of the time. I will observe that it has now traded well through my exit price. So as Mr. Seykota is fond of saying: "Everyone gets what they want out of the markets." In my case, I got what I wanted out of the market, which was to be out of the market.



One found that these informed people understand how changing the basis will improve employment next year when Obama needs jobs the most…as he works his employment miracle. Check out this article "U.S. changes how it measures long-term unemployment".



 He is one of the flexionic sub-species of political flexions, nominally Republican, but rotten to core.

Guess who.

George Zachar replies: 

Sounds like the character known only as the Major in the dystopian books of Daniel Suarez.




 Here is a website showing an unusual method of using paper plates to teach folding angles and geometric structures. It conjures up images of origami, mineral crystallography, and viral shell architecture.

Given certain "pressure" and "temperature" regimes does the market take on a preferred "shape" to maintain stability/equilibrium?

The purpose of this site is to promote the importance of folding circles. The circle is the most experiential, comprehensive, hands-on, educational tool we have, and yet most people do not know this. Every child in school should be folding as often as they draw pictures of circles, and discuss the information that is generated in the folding. You cannot anticipate what the circle will generate from a drawing. Folding circles is accessible to any person that can fold a circle in half, regardless of age or grade level (see How To Fold section). Paper circles are inexpensive and readily available worldwide in the form of paper plates.



 In a survey of doctors on a website I follow, 80% of responding doctors answered no way would they allow their patients to email them.

This was the response I posted:

To the 80% of responding docs who say "No way": If you wonder why many patients develop major hostility to doctors' office procedures and to doctors themselves, and why the public is happy to stay silently on the sidelines while the government and insurance companies take over control of doctors' working lives, could it be that doctors (who for 100 years had control of their practices and refused to make them patient-friendly and efficient) have failed to enter into the 21st century? And regard it as perfectly acceptable to impose inefficiency, frustration and wasted time on patients by not letting them communicate with the doctor but requiring them to make an office appointment (probably 3 or 4 hours with travel to and fro, long office waits, etc) for every question or matter?

I see nothing wrong with a doc charging for email or telephone time. Those patients wishing to use email or telephone should be willing to pay the time charge, regardless of whether such charge is covered by insurance. But if our profession continues to lord it over patients by refusing to allow them what every other profession and all of modern life does, doctors will deserve what they get in the way of government and insurance oversight and regulation.

Charles Pennington writes: 

Chiming in, that is a pet peeve of mine. What other profession won't take email? Lawyers, dentists, accountants, etc. all communicate by email, of course. Doctors make it even worse by making you communicate with them only via a voice-mail maze that begins with "If you are a physician, press 1; otherwise, your call is very important to us so please remain on the line…"

Russ Herrold comments:

I'm with the doc's here.

When the tears are flowing, everyone says they are willing to pay, but without getting into the business of FIRST AND AT THE ONSET, having a Retainer Agreement, unilateral right to draw it down upon presentation of statement, Mandatory Arbitration clause, deposit for fees in the Trust Account, all one does is lay a background for a fee dispute complaint or malpractice counterclaim to a suit to collect those fees. It's not gonna happen as a general practice. The doc is caught between the rocks of patient desire for immediacy and convenience; the professional obligation 'not to miss' something that in hindsight seemed obvious; and the fact that insurer reimbursement for web and email oriented 'treatment' lag.

Having had poor service (breaches of patient confidentiality, outright prevarication by nursing staff, and failures of delivery of test results repeatedly and after specific instruction) in the care of a wound, all since May of this year, from the standpoint of the patient, I want there to be a formal paper trail (not email; not call center notes in some database, forgotten and closed; not some other ephemeral media) … a well drafted letter explaining the issue, a file CC, and a cc to the supervising agency (hospital system privacy officer, nursing board, 'authorized provider' certification entity), and an equally formal response (or in its absence, proper escalation on my part).

Unreasonable, I know, but progress is made on the backs of unreasonable people.

The same goes for lawyering. If a client cannot keep and will not pay for an office visit, or meeting at other venue of their choice, to permit the open-ended probing that proper representation requires, they won't be MY client very much longer, as I cannot properly represent them.

Alex Forshaw writes:

The fact stands that interacting with doctors is a pain in the ass from the second you enter the door. They do not face nearly enough competition. There is no bigger beneficiary of protectionism in the entire country. The lack of competition has meant they face no evolutionary pressure. I hate "socialized medicine" as much as anyone but US doctors are as much culprits in their own demise as the tort bar and all of doctors' other favorite bogeymen.

George Zachar adds: 

In my conversations with doctors, I've been told the potential legal and regulatory liabilities risked by patient email contact are vague and large, leading them to simply shun the practice.

Phil McDonnell writes: 

Regular email is not a secure medium. Privacy regs hamper a Doc's ability to use email. Most will call you on the phone and/or write a letter with results. That is why expensive software with encryption is required that often the smaller practices cannot afford.

Gordan Haave responds: 

Sure that's what they say. But it's BS. How is the fax or telephone somehow more secure than email?

If the issue is confidentiality, why is it that Lawyers will email you but not Doctors?

There is one other group that won't send emails: The IRS.

I am in the middle of a personal and business audit, and you can't email the IRS. It's very inefficient.

To me this is just further proof that Dr's collectively are not the saints they claim to be, but rather just a cartel that uses wildly inefficient systems to extract rent's from consumers.

Dan Grossman writes:

I am surprised that a few otherwise highly astute Speclisters so easily accept doctors' excuses for refusing to permit email. As a service to the medical profession and to our country (and in time for inclusion in the President's speech tonight as a new regulation under the Patient Protection and Affordable Care Act), I have drafted and present below a few simple groundrules that a doctor can require a patient to accept as a prerequisite for emailing him.

"A Patient wishing to email Doctor must indicate his acceptance of the following:

1. Complex or detailed matters require an office visit. This email is for minor procedural, scheduling and prescription renewal matters.

2. Doctor will attempt to look at reasonable numbers of emails as time permits but because of his busy schedule cannot commit to read or deal with every email. Any information Patient wishes to convey with certainty must be conveyed by other means.

3. Emails are not secure and should not include sensitive personal information. They will not necessarily be presevered or included in Patient's medical file or record.

4. Patient agrees to pay $20.00 for each ten minutes or part thereof Doctor spends reading or dealing with emails from Patient, regardless of whether the amount is reimbursable to Patient by his insurer. Medicare and Medicaid Patients unfortunately are not eligible to use this email since such programs do not permit email charges. (Doctor regrets this and asks that you please take up such inefficiency with the Government rather than with him.)"

With regard to 3, doctors or their office assistants can instead spend 15 minutes setting up free encryption, as others on the List have already pointed out.






I wonder if the top athletes of today would still be the top athletes of today if the rules of sport changed as often as they do in government? The amount of energy needed to adapt to changing rules seem to me would detract from perfecting around set rules.

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