There's an interesting WSJ article on recent Russian parliamentary election (subscription required for now though):

Data analysis shows higher % voting for the "United Russia" party in districts with round numbers of voter turnout (ie, 70%, 75%, 80%, etc) as well as for districts with unusually high turnout (>=98%). Strongly suggests ballot stuffing, manufactured counts, etc.

Evidently vaunted Russian mathematicians are not part of the current apparatchik.



In my area in the past year I have seen an increase of people holding signs that they are homeless and begging for money. I note more couples doing the same and note more women begging at intersections etc. Also note more men on foot with back packs that look "bummy" traveling through town. Most without gloves. I have given out several pairs now that it is colder in Southern Ohio.



Phil McDonnell writes: 

Every four years the number of highly visible 'homeless' people rises significantly in sync with the presidential election year. The number of real homeless people or residents of drug houses does not really change much but at this time certain unions and re-election committees hire low cost people to man the highly visible street intersections. In my area I have seen them change shifts at even hour intervals. When the replacement approaches about a half block away the one on the corner sees them and puts his or her sign down and casually walks in their direction and does not acknowledge the replacement in any way–as they pass–on the sidewalk. The replacement then picks up the hard luck sign and begins their shift.



Walter P. Fuller bought 40 acres in what is now Pinellas Park, Florida for $45.27 in 1920; less than four years later, he resold it for $40,000. Nine months later, in 1924, the land was resold again for $60,000. The next change of title was in 1933 when the property was sold at auction for $450 - to discharge the county's tax lien. Like Bernard Baruch, Fuller became a millionaire by selling too soon.



 It is amazing that this divisive "fair share" and "honesty" drivel emanates from someone who extracted the majority of his fortune from the financial markets. Reeling from the lost decade, his motive is to affect a future where after-tax comparisons will be more favorable to his passive brethren. From the John Bogle interview:

Q: What do you think about the ongoing discussion over tax fairness?

A: I believe the rich should pay more, but that's not a good platform for tax policy. What has gone wrong is that we've failed to recognize the difference between earned income and unearned income. Is it really fair for gamblers on Wall Street to pay a 15 percent rate when they make a winning investment, and an honest working person - a bricklayer for example - may pay an equal or higher tax on their wages than a gambler? That's absolute absurdity.



 At the first, long take of the film, as it opens, we stare at the naked chest of Michael Fassbender, the person whose grim life of privilege and addiction we are forced to endure for several hours. The unsmiling protagonist stays so still, for so long, that we begin to look for signs that he is still in life. Is he breathing? Will he eventually blink?

The too-long take is repeated in scenes that are of his sister, played by a gamey Carey Mulligan—a part that decisively removes her from the ingénue of "An Education" (2009)—and scenes that involve a mulligatawny of sexual couplings of protagonist with the paid and unpaid; with duos; alone; in stalls, at home, in public/private spaces, even at work. The overlong takes do not serve for much other than to remind us of what Peggy Noonan inveighs against in the Wall Street Journal in mid-December about the pervasive "flatness" of "movie depictions of our sexuality." My escort joked that men seemed to be leaving to go to the restroom far more often than for other films; but the sex was squalid, painful, not in the least joyous. Unsexy, in the end. Death is not defied by these matings, but somehow beckoned by their dullness and decayed solipsism. Embarrassing, for the most part. (It was probably prostate, not projection, that shook these men from their seats.)

In a current, curiously shadowy NYC, Brandon's carefully compartmentalized private life, which gives him unfettered indulgence for his addiction, is suddenly invaded and compromised when his sad, ungovernable sibling, Cissy, arrives for an unannounced drop-in and stay-over. Their odd familial interaction raises a few eyebrows.

Not one line of humor in the film. Not a minute of erotic enjoyment, for all the naked real estate and fleshly writhing. It reminds one of the Dustin Hoffman/Jon Voight dark-street, bankrupt-old New York icky icon, "Midnight Cowboy" (1969) for pre-Giuliani no-tourist Manhattan griminess. Or of the bleak ice-cold vision of Christian Bale's gloved metrosexual automaton, mid-Gordon Gekko financial scrimshaw, a feral murderer in the unwholesome, relentless "American Psycho" (2000).

In the linear and episodic unspooling of the obsessive captive of sexual encounters, SHAME does not feature much dialogue. Under the entire film is a dirge-like melancholic musical frieze that serves instead of missing dialogue. As much as there is a dearth of talk for the most part, save for bursts of unconnected fits and sibling spats, the scenes are cool, blue, icy surfaces: unfaceted silhouettes and vistas of Manhattan from different vantage-points than those Woody Allen devotees are accustomed to, the glistening City postcards of cinematographer Gordon Willis. Not here.

Brandon's apartment, in the low 30s, Midtown West, is scrupulously neat and featureless, as opposed to his squint-eyed undiscriminating prowl for new sexual partners for do 'em/forget 'em pairings. His wordless exchanges leave no aftertaste, like cheap wine, gasps and gulps that get no revisiting by the affectless addict. His life is clean to the outward glance. He appears to be a decent man, not skeevy as our mind's eye would predict, despite his panther-like visits to late-night dungeons, lonely subways and clubby brothels. His workmates have no idea what he does, where he goes, or with whom, when away from his desk. Events and world news have no purchase here. He is absorbed in his next barren assignation or, more likely, non-nutritive rut.

Brandon's compulsiveness is so blatant for anyone with half an eye that it is only his male comradeship at some unnamed but upper-middle job that convince us that men are not looking to ID each other's foibles. They don't wonder about his liaisons or solitary entertainments. But women are drawn. He flirts with the faintest flicker of a come-hither intensity. Moments later, they are silently heaving—again, for scenes with too much unclothed flesh, too much writhing.

The extended graphic orchestration of grimaces and groaning proves nothing, teaches us nothing more than we already know. McQueen could easily have chopped half an hour sure to have its NC-17 (was X) rating plastered on its official public window, the way restaurants proudly post their A ratings. Scenes without dialog run too long, making sure we get the poke-poke of this emotional battle. But the resonance is not epic. We all battle some sort of addiction, perhaps, though ours are probably less dangerous and time-consuming. And probably less lifeless. The film seems an orphanage for our lust.

Fassbender is a lock for an Oscar nom, and his face and body, while not memorable for the most part, are handsome and indeed attractive. Especially nude. A woman being pushed out of the theatre by her granddaughter, a wheelchair commuter looking to be in her 90s, was delighted to be asked her opinion of the film. Her 30-something granddaughter quickly interpolated she had been "bored" by it. (Yes. It is no Brad Bird "Impossible" action adventure.) Grandma, grinning broadly, slyly exulted, "He was gorgeous! I'm going to see this in 3D!"

Whatever would make a woman of 30 take her swee'pea elder to such a deeply unhumorous, profoundly graphic film with such a title, even were she unacquainted with the unrelieved, tawdry subject matter?

And in the end, the director plays games with the viewer, which may or may not make you even more antsy and uncomfortable than you've been throughout. Not quite a holiday movie. What is saddest is that this is the film everyone will continue to talk up, a daring Euro-approx that is pretending to a soul it does not evince. A 12-stepper would take the heart out of the thing. But then the film would have no excuse for making us squirm with discomfort.

Not a date movie. Even with Grandma's excited post-mount-'em.



 [Editor’s Note: Every year at Dailyspec we post the story of "Stubby Pringle's Christmas" by Jack Schaefer. It is a wonderful, heartwarming story. Hope you enjoy it and Happy Holidays.]

High on the mountainside by the little line cabin in the crisp clean dusk of evening Stubby Pringle swings into saddle. He has shape of bear in the dimness, bundled thick against cold. Double stocks crowd scarred boots. Leather chaps with hair out cover patched corduroy pants. Fleece-lined jacket with wear of winters on it bulges body and heavy gloves blunt fingers. Two gay red bandannas folded together fatten throat under chin. Battered hat is pulled down to sit on ears and in side pocket of jacket are rabbit-skin earmuffs he can put to use if he needs them.

Stubby Pringle swings up into saddle. He looks out and down over worlds of snow and ice and tree and rock. He spreads arms wide and they embrace whole ranges of hills. He stretches tall and hat brushes stars in sky. He is Stubby Pringle, cowhand of the Triple X, and this is his night to howl. He is Stubby Pringle, son of the wild jackass, and he is heading for the Christmas dance at the schoolhouse in the valley. 

[For the entire text of the story, please follow this link or this link].



 1. There is a critical point in the market, a critical decision that the market gods weigh on a scale like Zeus with his balance scale deciding whether Achilles or Hector will win, that determines the market fate, and it is key and should be the focus of all news stories and market considerations but never is.

Never trust anyone but your family and best friend because everyone is disloyal in a pinch. Peleus was left for dead by his father in law after killing his brother in law to become ruler and this led to the Trojan war. Caesar trusted his best friends but they turned on him when an opportunity for power, money, and romance reared its ugly head.

3. Deception is key. The most successful Greek was the Deceiver Odysseus, and he tricked everyone he dealt with as the market tries to trick you with Odyssean power.

4. The goal is always to come home. Odysseus went home, as does the market. The only loyal ones were the wife and son and the best servant. The market retraces and comes home to break even an inordinate number of times.

5. Never mix romance with business or the market. The Trojan was was started by Paris intervening in romance and being swept off his feet by Aphrodite, and Achilles killed tens of thousands and prolonged the war by 10 years when Menelaus stole his mistress.

6. Don't try to walk with the Gods. Peleus married a half God and married her the last time the Gods and mortals mingled at a celebration and it caused him to be the most distressful of men. Trying to emulate Soros or the other greats is the seed of destruction.

7. Okay, give me the rest. And correct and tighten the above. I'm out of my depth but wanted to get the gist across.

Ken Drees comments:

 Like using a mirror against Medusa, one must plan against the adversary and sometimes use their expected attacks to beat them. Like shielding oneself from the siren song, one must be totally prepared, seek council before the journey (the trade) about what dangers are expected.

Also, it seems every entity in mythology had a weak spot. It's probably best to note these weaknesses in your thinking and in your emotions, not how can I beat the market, but how can the market beat me today?

Bill Rafter writes:

The greatest two rules:

(1) nothing to excess and (2) know yourself.

Pete Earle writes:

One lesson from mythology which resonates with me is the oracles/prophets/predictors almost always forecast correctly, but rarely in an obvious or immediately relevant way. The predictions made are usually realized, but not before taking extremely circuitous, and usually counterintuitive ways to reach fulfillment.

In my experience, predictions regarding the direction of equities or commodities inferred from option markets so often prove accurate…but only after traveling in the most wrong, most unanticipated ways.

Alston Mabry responds: 

 Pete, I think of that as "shaking the tree", i.e., we're gonna get there, but we're gonna shake out as many weak hands as we can along the way.

Peter Earle replies: 

Absolutely. Stop-running and the like as the "gods" way of seeing who's "worthy"; who can withstand the flood, the fire, the sturm und drang.

Jim Lackey writes: 

In 2008 I learned from Ryan Carlson– Sisyphus. There is a little useless book Wit and Wisdom from Wallstreet. So many of the quotes are the exact opposite from 3 pages ago… yet for a day they are seemingly sage advice. Worse for the long term. It's all good advice, yet in the mean time we must eat, and in the long term we all end up dust in the wind.

Traders lament when we miss profits. We are miserable when we lose. If we are not careful we are never happy. I have the habit of having to work myself up into a fury to win a race, pass a test or trade. My wife calls it "business mode" everyone else calls it being a jerk. Finally this year I have the ability to take a loss and this week miss a glorious rally and profit… yet at 4:20 PM its over. I am done pushing the boulder back up the hill for the day. I will return at 1:30am or by 7am, all but two business days a year. It can be torture if you do not like to trade, but if you love it…

Here is a quote from my kids music, "This is Our Science" by Astronautalis: "Our work is never done/ We are Sisyphus".

p.s I notice that if I don't like the rap beats I miss quite a bit of new poetry. I hear my teenagers say random lines and say what! That is amazing. Then I hear the song and say no wonder I never heard that line before. Damn drum machines.

Jack Tierney adds: 

Recently I've been reading up on complexity, system dynamics, and the unpredictable consequences that occur when tinkering with non-linear systems. The markets seems subject to all and, if I'm even remotely correct in interpreting the literature, there's only one certainty: expecting linear consequences (e.g, provide banks with more liquidity, bringing about an increase in business borrowing, resulting in a resurgent economy) is rarely, if ever, realized.

Instead, the unseen effects on unimagined factors, almost always derails the logic train. A source I've referred to on occasion is "Cassandra's legacy." Appropriately enough, the custodian of that site provides an interesting historical allegory, in the form of Goth Princess/Roman Empress, Galla Placidia, and her part in the demise of the Roman Empire. It's a very lengthy read and, unless history like this interests you, tough going. So, a few highlights:

"Managing any large structure is difficult and we tend to do it badly; a whole empire may be an especially difficult case. To do it well, we would need to use a method what I mentioned before: system dynamics; which is a way to describe systems and the relation of the various elements that compose them.

"…every time that the Romans fought the Barbarians, they could win or lose, but each battle made the Empire a little poorer and a little weaker. The empire was using resources that could not be replaced; non-renewable resources, as we would say today….the solution was not more troops but less troops. It was not more imperial bureaucracy but less imperial bureaucracy, not more taxes but less taxes.

"In the end, the solution was right there and it was simple: it was Middle Ages. Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages.

"What Placidia could do as an Empress was, mainly, to enact laws….It seems that Placidia was acting according to her style; ease the unavoidable, don't fight it….Placidia forbade the coloni, the peasants bound to the land, to enlist in the army. That deprived the army of one of its sources of manpower and we may imagine that it greatly weakened it. Another law enacted by Placidia, allowed the great landowners to tax their subjects themselves. This deprived the Imperial Court of its main source of revenues."

Stefan Jovanovich comments:

As much as King George's scribbler Edmund Gibbon despised Christianity, he had the Middle Ages even more because its bureaucracies were the worst of all — local and mean and stupid.

Professor Bard should revise his history. What he wrote here — "Middle ages meant getting rid of the suffocating imperial bureaucracy; it meant transforming the expensive legions into local militias; have people paying taxes locally, in short transforming the centralized empire into a decentralized constellation of small states. Without the terrible expenses of the Imperial court and of the Imperial bureaucracy, these small states had a chance to rebuild their economy and start a new phase of prosperity, as indeed it happened during the Middle Ages." - is nonsense.

The Roman Empire's tax collections were always "local"; that is why Roman politicians were willing to pay such enormous bribes to be appointed provincial governors. The legions were also "local"; the Empire's expansion came from granting "foreigners" - i.e. the people we would today call Spaniards, French and Syrians - the privileges of citizenship, which meant they were also qualified to serve in the local legions. This was equally true under the Republic; "crossing the Rubicon" would not persist as a bad metaphor if Rome's soldiery had been centralized.

As for economics, whatever the "terrible expenses of the imperial court", they were nothing compared to the ravages of coin clipping. The solidus of the Eastern Empire maintained an unchanged weight and measure for 4+ centuries - a record that is likely never to be broken. (It exceeds the span of sound money for the British Empire and the United States of America put together.) After Princess Placida's day coinage, under the wonderful decentralization of the Middle Ages, effectively disappeared.

"Dearth of provisions, too, increased by degrees, and the scarcity of good money was so great, from its being counterfeited, that, sometimes out of ten or more shillings, hardly a dozen pence would be received. The king himself was reported to have ordered the weight of the penny, as established in King Henry's time, to be reduced, because, having exhausted the vast treasures of his predecessor, he was unable to provide for the expense of so many soldiers. All things, then, became venal in England; and churches and abbeys were no longer secretly, but even publicly exposed to sale." - William of Malmsbury wrote this in 1140 AD - the period that Professor Bard praises so highly for its progress over the degeneracies of the Empire.

Hume deserves the last word on this and most other subjects that interested him.

"Mankind are so much the same, in all times and places, that history informs us of nothing new or strange in this particular. Its chief use is only to discover the constant and universal principles of human nature."

Easan Katir adds: 

The Greeks have fooled people since the Bronze Age. Instead of a horse, they now have Trojan bonds.

Steve Ellison comments: 

Jack, the Atlantic had an article about why projects that had successful pilots often failed when rolled out to the general population.

Why Pilot Projects Fail– Here are some excerpts:

Promising pilot projects often don't scale … Rolling something out across an existing system is substantially different from even a well run test, and often, it simply doesn't translate.
Sometimes the 'success' of the earlier project was simply a result of random chance …

Sometimes the success was due to what you might call a 'hidden parameter', something that researchers don't realize is affecting their test. Remember the New Coke debacle? …

Sometimes the success was due to the high quality, fully committed staff. …

Sometimes the program becomes unmanageable as it gets larger. You can think about all sorts of technical issues, where architectures that work for a few nodes completely break down when too many connections or users are added. …

Sometimes the results are survivor bias. This is an especially big problem with studying health care, and the poor. Health care, because compliance rates are quite low (by one estimate I heard, something like 3/4 of the blood pressure medication prescribed is not being taken 9 months in) and the poor, because their lives are chaotic and they tend to move around a lot … In the end, you've got a study of unusually compliant and stable people (who may be different in all sorts of ways) and oops! that's not what the general population looks like.



 Bill Gross recently penned an essay in the FT entitled "The Ugly Side of Ultra-Cheap Money". He makes some provocative (and questionable) generalizations regarding the effects of zero interest rates on the real economy, but:

1. He importantly ignores the important differences between zero nominal interest rates and zero real interest rates. (Due to deflation, Japan has run a tight monetary policy for years, and the Yen's multi-decade appreciation to 78/$ provides a reasonable proxy of the relative inflation rates between the USA and Japan.)

2. He fails to openly acknowledge that ultra-cheap money is terrible for his business. He laments people keeping dollars under their mattress (because it pays the same as money market funds). Yet, he doesn't mention that the current interest rates out to the 5 year result in his management fees being rather larger than the investor's yield to maturity.

I submit that there IS a pretty side of ultra-cheap money:

Mr. Market (and foreign owners of US debt) are giving a gift to the US Treasury that is truly remarkable. A Bill (the paper, not the Gross) yields 0% (negative ~3% trailing real yield) and the 5-year yields .9% (negative 1% real). Most of the US debt maturities are 5 years and under. And the Fed owns about 10% of the total debt…soaking up the outter maturities. This means, with $15T in debt, the REAL static debt burden is decreasing by about 600+ Billion per year. (Of course, when Mr. Market grows angry with the US Treasury, this pretty picture could viciously swing the other way as various pundits, including Taleb, Grant, Mauldin, etc are warning.)

Here's a chart that shows the US Debt Maturity.

Yes, Viriginia, there IS a Santa Claus. If you pull off the long white beard, you'll see Santa is actually the people who are buying US Government paper and holding cash. And we should all thank them as they come down the chimney.

Ken Drees writes:

Forget Santa, what about VIXen? He is laid out, 5 months cold. Is it another Christmas in July for the VIX?



 It's striking to me that not one of the 18 charts covering virtually every significant economic topic refers in the slightest to the massive legal and illegal immigration into the US over the last few decades, and how this could have correlated with chart topics such as working-age male unemployment, amount of toil to rent a house served by average school, medical care spending, etc, etc.

Stefan Jovanovich comments:

Thank you, Daniel. he decline in wealth for the "average" American since the collapse of the boom matches the slow, steady ruin that the 50% of the U.S. population who lived on farms endured after the end of the WW I boom. The migration to the industrial north of the white and black-skinned sharecroppers/small-hold farmers that is now celebrated as the precursor of the civil rights movement was an index of the desperation people felt. If people had really wanted to trade Tennessee for Chicago and Detroit, their children would not be moving back "home" as fast as they have in the past few decades. No one was talking about the depression of the 1920s on the radio any more than they are mentioning it on Twitter now; but it was occurring and continuing to grow in severity.



 I wonder if there is anything economic to be learned from this chart from Mark Perry's blog. The per-capita growth from 1810 to 1850 was more than 120% in 40 years. According to the wiki, by 1860, manufacturing (primarily limited to the Northeast) accounted for 30% of the nation's income, with cotton cloth production the leading industry. This indicates that some strong contrast/conflicts between the industrial northeast and the farming south existed.

Is it reasonable to believe that these economic conflicts were among the underlying causes for the eventual war?

Obviously the economic conflicts were the result of a fast and an uneven development. Perhaps it serves as a very valuable indicator for today.



The fundamental flaw in systems based on past fundamental data which are published in a book and now used as a stalking horse for investments from outsiders is that each time he comes out with a new book he has found better methods based on a moving window of retrospective data.

I'd also suggest that value-momentum is a widely known and disseminated alleged anomaly, and like many things that worked better before everyone knew about it, I suspect the strategy's prospects are not as good as the back tested history. Moreover, given the rate of compounding, if it works, then the many billions pursuing this already will have grown to a substantial part of (more than?) the total market capitalization of equity markets (to say nothing about any capitalization effect that would be nullified by large amounts of capital pursuing the same strategy in anything but large caps).



The Dec. 12 Barron's, page 32, lists some big cap stocks that have big cash holdings.

I list them in a table below, along with Value Line projections for 2012 earnings, and an "adjusted" P/E–the (price-cash)/earnings, which makes sense if you sort of assume that the cash earned nothing.

column labels:

ticker / cash per share / price / 2012 earnings from ValueLine / (price-cash)/earnings

msft   $7    $26   $2.80  7
csco   $8    $18   $1.45   7
goog   $129   $630   $40  12.5
orcl     $6     $29   $2.42    9.5
jnj     $11     $64   $5.25    10
pfe    $5      $21   $1.60    10
aapl     $87   $395  $32.50   9.5
cvx     $10    $103   $13.10  7
wlp     $53    $65(!)  $7.70   1.3
amgn     $19   $61  $5.50  7.5

As has been observed here before, stocks are pretty cheap these days.

Kim Zussman adds: 

On the subject of AMGN, one of my first posts on spec-list was "Amgen in P/E Stratosphere", ca 2004 or so. Though having no local insights about the stock, the then high P/E ratio was subsequently rectified in the denominator. (and has remained range-bound in Russian fashion since).

Presumably high-flying growth stocks either become value with dividends (also see MSFT) or debubblize (also see HOV, AMD, etc.



 Since the pit trading floors have mostly closed I have an excellent simulation for being able to think under pressure and react quickly in difficult conditions. That would be to care for a cranky and hungry two year old at 6 am, while reviewing and placing trades for the day, and subject to high decibel protestations of the aforementioned. By the time the market actually opens one has developed nerves of steal from the ordeal and ready for anything.

Craig Mee writes:

Good call, Duncan.

With the keen eye of the youngster and their intense gazing at the pretty colours of the charts, it may be worth asking the two year olds what their thoughts are.



If you use the NAR sales and inventory data in a model, you might want to pay attention to this  and this. This downward revision will also feed through to the Commerce Department data series… That is, the GDP component from home sales from 2007 to 2010 will be lowered. And people complain about the "quality" of Chinese data!



 Here are three good suggestions from The Essential John Wooden that are good for trading.

1. Start and end every practice at exactly the same time.

2. Expect failure. Assume every shot will be missed. Be ready for what comes, be it a tip in, rebound, fast break or something else.

3. Get the fundamentals right. Double tie all shoelaces. Make the uniforms fit perfectly and get in position for every rebound the perfection of little things usually determines if a job is well done.

Anatoly Veltman comments: 

This reminds your "Base of Operations" post last year. I commented that I beat out almost a million checker challengers in the old country by merely sitting straight down the precise middle of the checkerboard, which allowed me to quickly count as much as 30 moves ahead on 100-square board.



After looking at some Fama French data it would seem to me that Value tends to outperform in periods where the Fed's monetary policy is in disarray. [web site ]

The inflation of 1970-1984 seemed to play into the hands of W. Buffett, whose strategy could perhaps be best defined as buying companies that could raise the cost of goods to the public. Often he was right that there was much less competitive pressure for price than the company leaders had come to believe, perhaps a misperception that evolved through territorial battles that were basically over but still being fought in the minds of these executives.

Now we are in a period of deflation, where feds are trying to prop housing prices up, to save the TBTF banks. It would seem that in such a risk adverse environment, "value" would again out perform growth. But what is the "new value" proposition that will put value companies strategy ahead of their peers?

One thought is that it is high cash with strategy of maximizing high intangible assets (people/ideas).



"The Momentum Effect in stocks was discovered by Jegadeesh and Titman" - A finance pundit

How about some credit to Value Line which was using price momentum in its Ranking System all the way back in 1965, long before academia provided recognition? See Fischer Black's "Yes, Virginia, There is Hope - Tests of the Value Line Ranking System", which dates back to the early 1970s. I'm proud that I was there in the early days.

Sam Marx replies:

Mr. Eisenstadt,

I'm a Value Line Subscriber to its Stock Service and its Option/Convertible Service. They deserve credit for being early in using momentum and earning changes for stock prediction. Mark Hulbert still rates it highly. I understand W.E. Buffett recommends it for a data source.
However, I feel they have become somewhat stodgy lately and other services/newsletters have become very competitive offering data Value Line doesn't. MorningStar and Zacks for example.

I believe Value Line Stock services should expand its services to include earnings data, earnings surprises and stock's intrinsic value.
Their Option Service is loaded with information that I've found very useful. The man in charge, Dr. Larry Cavanagh, took over a simplistic service and made it truly professional. If you know how to use the data, it is the best buy in an option service. He also has done a fine job with the convertible service. I also commend you on your service and contributions in making the Value Line Stock Service the success it became.

Trivia question for you; Way back before Value Line started their convertible service/newsletter, when we both were young men, there was a trailblazer convertible bond newsletter. It was the only one I knew of or could find back then and I found it useful. Value Line went into competition with it and eventually put them out of business. I believe it was published in Long Island and as a hint the first letter of its name was "R".



 Here is some interesting research that has possible implications for other organisms.

1) The impact of hatcheries on salmon is so profound that in just one generation traits are selected that allow fish to survive and prosper in the hatchery environment, at the cost of their ability to thrive and reproduce in a wild environment.


Captive breeding programs are widely used for the conservation and restoration of threatened and endangered species. Nevertheless, captive-born individuals frequently have reduced fitness when reintroduced into the wild. The mechanism for these fitness declines has remained elusive, but hypotheses include environmental effects of captive rearing, inbreeding among close relatives, relaxed natural selection, and unintentional domestication selection (adaptation to captivity).

We used a multigenerational pedigree analysis to demonstrate that domestication selection can explain the precipitous decline in fitness observed in hatchery steelhead released into the Hood River in Oregon. After returning from the ocean, wild-born and first-generation hatchery fish were used as broodstock in the hatchery, and their offspring were released into the wild as smolts. First-generation hatchery fish had nearly double the lifetime reproductive success (measured as the number of returning adult offspring) when spawned in captivity compared with wild fish spawned under identical conditions, which is a clear demonstration of adaptation to captivity.

We also documented a tradeoff among the wild-born broodstock: Those with the greatest fitness in a captive environment produced offspring that performed the worst in the wild. Specifically, captive-born individuals with five (the median) or more returning siblings (i.e., offspring of successful broodstock) averaged 0.62 returning offspring in the wild, whereas captive-born individuals with less than five siblings averaged 2.05 returning offspring in the wild.

These results demonstrate that a single generation in captivity can result in a substantial response to selection on traits that are beneficial in captivity but severely maladaptive in the wild.



Here is the ratio of GLD/SLV (gold to silver ETFs), 2006-present.

The mean ratio over the past 5 years is 5.6. From July to October 2008 GLD/SLV spiked — possibly evidencing flight to safety (gold being safer than silver as silver oxidizes and you have to keep polishing it). The ratio gradually declined, then plummeted from August 2010 to April 2011. Over the past 8 months GLD/SLV rose to the current 5.4 - quite near the 5 year mean.

In hindsight, there was some good spread trading in silver and gold [link to music video].



Using Wiki data there does appear to be a reduction in % of world population killed in war over time.

The high and low death toll estimates were averaged for the dependent variable, and the mid-point year of the war period was used as the independent variable. Regressing mean estimated % of world population killed in war vs year:

The regression equation is

mean est % world pop killed = 9.94 - 0.00466 avg year

Predictor       Coef   SE Coef      T      P
Constant       9.938     2.693   3.69  0.001
avg year       -0.005     0.0016  -2.97  0.007

S = 3.26307   R-Sq = 29.6%   R-Sq(adj) = 26.2%

>>Significant; year explains 26% of the variance. However a plot suggests though war has become less deadly over time, it is more frequent.



 What do we regret as we lie on the proverbial bed awaiting the last gasp that marks our passing from this realm? It is a great question and one I have spent some time thinking and reading about over the years. How do we live our lives to minimize the regrets as we anticipate the end of our earthly experience? Is there some magic formula we can all use to make sure that we pass this live with as few regrets as possible?

A few years back I read an interview with a hospice worker on this very subject. In her many discussions with those about to pass through the door of life she found that most people regret the things they did not do far more than the things they may have done. Regardless of their crimes and misdeeds throughout their life their regrets were about not taking that trip, not kissing the girl, not chasing their dreams and not being who they wanted to be as they took their journey.

It is quite correct to point out that the whole wishing you spent more time with family and friends and other greeting card sentiments is probably a cliché of sorts. While there are not many headstones that say I wish I spent more time at work it is also true that very few of us actually pick our own epitaph. I am quite sure that many do pass those last hours wishing they had been better husbands, wife's and parents. I am also sure many spend their last hours wishing they had done more with their careers, their business and professional life. We are all different and as much as we live different lives we will have different regrets as we approach our individual deaths.

The real regrets come from the fact that far too many of us do indeed live lives of quiet desperation. We are born, go to school, get married, have a family, get divorced, work at jobs we hate, raise kids we don't understand, settle for less than we dreamed and do what we think we are supposed to do along the way. Our lives get shaped by television and pop culture and we drift along on a sea of conformity and apathy. I see it every day and I am sure the rest of you do as well. We all start out with dreams, hopes and desires and somewhere along the way let go of them to get along as best we can. I have yet to talk to a recent college or high school grad who told me they were going to get a job they hated, have a couple of kids who would stop talking to them in twenty years, spend thirty years drinking bud and watching Survivor reruns before dropping dead mowing the lawn in a house they hate while their ex-wife spends their hard earned retirement funds on a cruise to Cancun. I have however talked to a lot of folks my age whose life has played out exactly that way.

 How the hell does this happen to us? We start out full of fire and hope. I never met a lawyer who planned to spend his years getting his soul crushed as a mid-level associate or a doctor who planned to spend a few decades doing colonoscopies at the VA clinic. We all want to change the world, to get rich, to create great art and chase big dreams as we start of the path of adulthood. None of us start out to become what so many of us do.

Little boys dream of being the star center fielder and or the hot gloved third baseman with the big bat not the backup utility infielder. Little girls want to be the prima ballerina or the singing star with the big hair and bigger voice, not the back up chorus singer. We all have the big dreams and hopes as life begins. That of course is much of the problem. We cannot all be the star we hope to be. If that was true I would currently be managing the Orioles after a long career as the much loved replacement for Brooksie on third base. I am not. I love baseball but I am about as athletic as a door stop. Never mind a curve ball I couldn't hit a little league non fastball. Cant sing, cant dance and the only thing I can do with a paint brush is make a mess. I was never going to be a star ballplayer or artist no matter how much I dreamed.

This can be crushing. We get into the world and find out bills need to be paid, food costs money, bosses will work you into a nub of yourself without so much as a thank you or a f you. The world does not care about you or your dreams and no one was sitting around anxiously awaiting your arrival on the scene. You take a job to get by and next thing you know you are sitting in La-z- Boy bud in hand noticing that the only thing more absent than your hairline is your happiness. It is too easy to let live dictate you instead of you dictating life. You have to be vigilant to protect your passion and your dreams.

I can dream with regret of not being the hot handed third baseman and the world's greatest baseball manager or I can love the fact that I can be a fan and sit in the stands on a summer day with a cold beer and a scorecard. I can bitch and moan about not going to college and maybe going to work for Goldman Sachs or even better the New York Times or I can love the fact that I am a pretty good writer and decent manager of investments and have managed to build a life around those two facts. I can spend my days wishing this or that or I can love what my life is and the fact that I have chased my dreams and made pretty good headway towards achieving parts of them.

Often life is just not going to go the way we want and wish. This does not mean that life cannot still be magical and absent of regrets for the most part. Even if life has forced you into circumstances you never wanted and instead of being the accountant that saved the world you are an IRS auditor does not mean that all the things you love and desire about life are gone. IRS auditors can still listen to Beethoven, watch sunsets, fall in love (just not with my daughter please) and appreciate the beauty of life. Just because you are selling Fords instead of driving one to victory at Daytona does not mean that life is not capable of being a beautiful and wonderful experience. There are still books, knowledge, music, art, and other parts of life that can produce great passion and meaning.

 Life is precious and as far as we know we can only have one of them. We have to protect our passions and no matter what life deals out stay focused on what we love about living. We will all screw up along the way and it is probably not going to work exactly as hoped as we crossed the stage to pick out diploma. That does not mean we need to just lay down and accept what comes along the way and miss out on the adventure. So having kids kept you from going to Tibet and contemplating the navel of a Yak in search of the world's great answers. You can let that beat you back into the chair and take in Snookies latest adventures or appreciate and love the fact that you have the chance to mold the spirit of adventure, love of beauty and learning in your kids and share the adventures with them as they grow. So you are not Clarence Darrow and the superstar of the legal world but to those you help on a day to day basis you just might be.

The problem with many of us is letting fear dictate our actions, or more accurately our inactions. Just because we got divorced or had a bad relationship does not mean we should harden our hearts against the possibility of love in the future. Just because our Fried Liver Chips franchise idea failed does not mean we should never explore another opportunity. If your first novel is rejected you have joined than ranks of just about every author who ever lived and it's not a reason to set down the pen and turn on the TV. If you are not the star learn to appreciate and live the fact that most people never even make it to the chorus. Chase you dreams, your passion and enjoy where it takes you. Life will give you a lot of choices and paths along the way. I promise you life will give lots of chances to just quit. You will not be able to hit the curve ball. You voice will sound like amplified sandpaper scrubbed on cement. You will not promoted to department head. Someone you love will not love you back. It is not all going to go your way. It will be easy to quit. If you do you will spend those last days and hours thinking of all the things you did not do and struggling to remember who was the last one voted off the island.

 I think the key to no regrets is to embrace the romance and beauty of life and to chase your dreams and your passions. You may not get all you want but there is a good chance you will get the life you want. Read the book, turn up the music, kiss the girl, take the chance. You will win some, you will lose some. But the dream come true really is the journey and adventure of it all. Don't, as they say, sweat the small stuff because its all small stuff. If you want to spend more time with your family then do that. If you want to spend more time building your company, then that's how you should spend your time and energy. It is your life. Live it. Then perhaps you can be able to die without regretting the choices you made along the way



 As the serious readers of this site (Blackhawks, Penguins, Flyers– er, even Rangers fans) know, Atlanta had a hockey team named the Thrashers until this May of this year when they became the Winnipeg Jets. This is the second export of Southern ice culture to Canada. In May 1980 the Atlanta Flames became the Calgary Flames.

Admittedly, it is not certain that 2011 will equal 1980 as an opportune time to being accumulating U.S. equities; but the indicator has been flawless in calling tops. The Thrashers were given their franchise rights in 1997 and played their first game on October 2, 1999. The Flames received their franchise in November 1971 and began play in October 1972. What else does one need to know?



 I have heard that about 25 percent of the population are introverts, but as many as 60 percent of gifted children are introverts.

I don't find this strange. But our understanding about the brain is too minimal to explain for instance the intrinsic links between being an introvert and being gifted. In addition, the concept of being gifted is very vague– it perhaps simply means that he/she can perform something somewhat better than an ordinary human.

With all these unknowns, many wonders often appear to us.



 In my younger years, a popular game by the local crew in the neighborhood was knock and run, where you would knock on the front door of a neighbor, and then go hide in the bushes, while they searched around trying to find the culprit. Watching the AUS USD last night attack some "key" upside levels, reminded me of this pursuit.

Time and again the aussie rushed into knock on the door, only to get scared off by some lights, or wind rustling the branches and retreat back until finally it got close enough to make contact with the wooden door, knock, and run for the hills.

Makes me consider if a market's velocity into and then out of range highs gives a heads up as to whether a retracement will hold. No doubt you have to time it well, as you cant stay in the bushes all night awaiting the optimum "conditions".



 Lots of chatter yesterday about gold breaking through its 200-day moving average. Ron Griess says to consider the 300-day moving average instead. Has anyone done research on the benefits of using non-round-number moving averages, such as numbers slightly lower than 200 or 300?

Phil McDonnell writes:

I have tested them all from about 2 days to maybe 1000 days. Generally speaking there is little difference between two 'nearby' moving averages. If you think about it the 200 day has 190 terms in common with the 190 day average. Generally speaking they almost all work as long as the average is longer than about 100 days or so.

All such methods are weak at best. For example the 200 day yields about .04% per day if above the average. But adding a 50 day/200 day crossover reduces the yield to only .03%. In other words the so called golden cross does not really work.



 One particularly nasty feature regarding the housing market which I am surprised to have seen no writing on is the treatment of capital loss. Losses on primary residences can not be deducted from other capital gains. What you eat, so to speak, you must pay tax again on making that capital back. Using a 20% tax rate of say 6 trillion in lost housing capital, that is roughly $1.2 trillion that the public will have to pay in incremental tax. (true if housing rebounds the loss may not be realized or incurred. Also true that some of the capital loss may be transferred to the banks if owner walk on the loan) But thinking like a politician and using government finance should they not include this potential for windfall tax receipts over the next decade or so as new "revenue". And why not just bring it all forward to 2012 and solve the whole budget gap for next year.



 This may be elementary for some but I happened to watch a video from October's Defcon conference last night and a presenter made an extremely persuasive argument for two factor password authentication. Gmail gives it away for free and I have been using for 6 months without a hitch. Something for list members to seriously consider in their business practices. While its a little irreverent, as defcon folks can be, the security pro reminded listeners multiple times that the Chinese are developing some of the most powerful systems in the world and even 6-8 digit passwords are not safe.



 The best returns on investment will be in the U.S. over the next decade. That’s the word from Louis Gave of Gavekal Research, a research firm that provides consistently smart, independent macroeconomic analysis to Wall Street.

The three defining trends of the past decade – skyrocketing U.S. spending on guns and butter, the economic rise of China, and the single European currency – are all coming to a screeching halt. That’s why, says Hong Kong-based Gave, “all of the clients we’ve seen on this trip have been exhausted and grumpy.”

Looking forward, according to presentations by Gave and his colleagues at the University Club in New York City on Dec. 15, the picture brightens in the United States. Government spending, for the first time in decades, has slowed to zero growth. Private job creation has resumed growing. Increasing automation in manufacturing will encourage factories to be located once more in the United States, to minimize transport costs. To get dollars in the future, countries will need to sell not manufactured goods, but assets, and the dollar will strengthen accordingly.

In the self-admittedly Panglossian Gavekal analysis, fears of a 2008-style disaster emanating from a freeze in European banking or a bursting bubble in China are overblown.

Despite all the noisy headlines about European foot-dragging, the European Central Bank has in fact been much more active than the U.S. Federal Reserve in assuring that no Lehman-like event occurs in Europe. The ECB’s decision to provide unlimited liquidity to the banking system for the next three years is the key, rather than any announced deals between Sarkozy and Merkel. The world is already moving ahead. Central banks are preparing for an orderly breakup of the euro. The downside risks have largely been discounted (and no surprises on the upside are possible, given Northern Europe’s unwillingness to assume the collective liabilities that would necessarily accompany a US.-style fiscal union.) The bad news is that European consumer and government spending will decline massively, according to Charles Gave, the senior member of the father-son Gavekal team. The good news for the U.S. is that Europe’s decline will bring about lower commodities prices, a change as significant as resulted from the fall of the Berlin Wall.

As for China, Louis Gave predicts that China will be able to keep its economy growing strongly by moving beyond fixed lending rates and credit quotas to develop a true capital market. The first step was the establishment of the renminbi-denominated “Dim Sum” bond market in Hong Kong at the beginning of this year. The government’s goal was to establish the Chinese currency in Asia as the medium for trade, displacing the dollar – a step as significant as the rise of the Deutsche Mark in postwar Europe. (The French idea of curbing German power by creating the euro has turned out to be less than happy.) The Dim Sum market had a shaky start, as China’s trading partners had a limited appetite for Chinese government bonds and Chinese corporate bonds to hold in reserves. Lately, a parade of U.S. multinationals has been doing $500 million bond issues in Hong Kong with, one assumes, gracious notice taken by the Chinese government.

The bottom line, from the senior Gave: “Buy Schumpeter.”



 This paper from the New York Fed blaming the real estate crisis partially on the flippers (speculators) is actually a rather sensible paper that makes some obvious and more subtle points. Most interesting is they quantify the extent of speculative purchase activity during the bubble years in some creative ways.

They note:

1. Housing is both a consumption good and an investment/store-of-wealth. During the bubble years, the latter trumped the former and attracted speculative/investment interest. i.e. irrational exuberance.

Investment/Speculative buyer motivation can be based on (1) rental income; (2) buy and hold for long periods; (3) buy & flip. #3 grew to be a major factor near the zenith.

3. They demonstrate that 1/3 of ALL home purchases were 2nd buyers during the bubble years, AND, in the worst states (NV, AZ, FL etc), more than half of the purchasers were second home buyers and/or flippers and/or multiple lien holders.

They are quantifying what we already knew — that the seemingly endless demand for homes was coming from investment/speculative buyers. However, unlike during the internet bubble, these speculators walked away (as many had no-money-down) and they handed the keys to the banks…

It would be analagous to having a leveraged trading account with no initial margin….!

Stefan Jovanovich comments: 

And, no recourse. If the speculators were clever/dishonest enough to state on the disclosure forms that they were buying the properties as principal residences, here in California and Arizona and the other non-recourse states, their liability was limited to their option payment - er, their down payment (which could be as little as 3%). Here is the list of the non-recourse states:

Alaska (AK)
Arizona (AZ)
California (CA)
Connecticut (CT)
Idaho (ID)
Minnesota (MN)
North Carolina (NC)
North Dakota (ND)
Oregon (OR)
Texas (TX)
Utah (UT)
Washington State (WA)

The rumor is that the AGs have reached a settlement.

The settlement of $25B is not going to make much of a dent in the outstanding mortgage deficiencies that are recourse. Core Logic says that 10.7 million houses (22.1% of all residential properties with a mortgage) were in negative equity at the end of the third quarter of 2011 and an additional 2.4 million properties (5% of all mortgaged residences) had less than 5 percent equity. The negative-equity and near-negative equity mortgages accounted for 27.1 percent of all residential properties with a mortgage nationwide. But there is good news - Core Logic says the 27.1% is down .4% from the total in the 2nd quarter.

Also, the Federal Reserve's calculation of "owner equity as percentage of household real estate" was 38.6% as of Q3 this year; in 2005 it peaked at 60%. Approximately 1 out of 3 homes in the U.S. has no mortgage. I may need Big Al's help (as I did when calculating the current market price of the U.S. Treasury's gold reserve) but my handy calculator suggests that this leaves 40% of homes that are "conventional" - i.e. neither free and clear nor so leveraged that they have negative and near-negative equity. The bad news is that, after you subtract 33% from 38.6%, that means the average cushion for the conventionally-mortgaged homes is 5.6%/40% - 14%. Didn't someone say something about this being a solvency problem and not a liquidity problem?

Final random thinking:

According to the folks at Calculated Risk, there are now 4.1 million seriously delinquent loans (90 day and in-foreclosure). In a "normal" market there a 1 million seriously delinquent home loans. Recently, there was "good news" (sic) about the decline in the numbers of REO properties held by Fannie (in Q3 their REO inventory fell to 122,616 houses, a decline of 10% from the number at the end of Q2). That made it the 4th straight quarter in which Fannie's REO inventory declined. One small problem: this is the same period during which foreclosures ground to a halt because of the litigation over mortgage servicing (robosigning, etc.). While it is likely that some of the seriously delinquent loans will cure as part of the settlement (see below), many more will go into foreclosure; and Fannie's inventories will rise. 

Alston Mabry writes:

In Phoenix the RE bubble started in the valley and then moved up into the mountain towns 2-3 hours away, where people have summer homes to escape the heat. It was like a tide of money that rose up the mountainside. In August/September 2006, I was driving around and listening to NPR, when a report came on about the local RE market.

A woman who was a broker in the mountain towns said that business was absolutely booming…oh, except that last week there was nothing…strangest thing…but we're sure it will pick up again next week, after the kids are settled in school, etc etc.

An image popped into my mind: A flipper had an open house, but the only people who showed up were other flippers, and by that time they all knew each other. They looked at each other and said, "Holy sh*t…", and got in their cars and left, wondering how quickly they could unload their properties. It was over. And the tide rolled back down the mountain.



 Here's a link to my article about Bo Keeley "The Legend of Bo Keeley grows". They or I got the photo credits goofed up. Sorry. Story comes out in NYC, SF, LA, Seattle, Austin, TX, DC, Chicago, Shanghai, London. Welcome home.

Ken Drees sends us a poem to honor Bo's welfare: 




Bo Left Us Dead

(Written after reflection on good news of Bo Keely's safety)

Finished Bo's book, just put it down,
Next thing I hear
Sad tragic news,
Keely's not to be found.
No, not in anytown,
Got himself killed this time 'roun.

Them Mex think he's undercover narc,
Down there, too tall and off white
He sticks out,
One too many rides in the dark.
DocBo, The speculator surmises,
Has run plum out of lucky devices.

No facebook, email or phone, G*d please help Bo,
Sadly, its over for him;
No more of his stories, and that grin.
Please bring him back whole.
But if he's truly dead Lord,
Least his soul's in your yard.

Praying is over, Bo left us dead,
No more tales, rails or boxes
To inspire, tranfix,
To dazzle our heads.
Keely has jumped one reefer too far,
Somber, even the bulls at roundhouse bar.

And then like rain that drought licks for,
Bo's Alive for sure. For sure!
Been in the desert, all this time,
Playing with spiders, rocks, and slime.
Those mental puts on Bo expired,
Luckily not the man, that a freight train sired.

So comes the end of this tiny tale
Let the celebration begin,
Dead, now alive, its all win-win.
February's, cruel winter's gale,
Will no doubt herald,
A cupid hearted Hobo, quite undead sans peril.



 Have you seen this article about the top 5 regrets of the dying? It is a must read. 

Gary Rogan writes: 

I really liked all of them, except based on everything that I know I disagree with the statement that "happiness is a choice". Irrational fears are not a choice, depression is not a choice, and neither is happiness.

Gibbons Burke writes: 

Well, happiness is dependent on one's attitude, and in many cases, you can choose, control or direct your attitude.

My theory is unhappiness and depression happen when reality does not live up to one's expectations of what life is "supposed" to be like. I think the key to happiness is letting go of those expectations. That action at least is within an individuals purview and control. There is an old Zen maxim: If you are not happy in the here and now, you never will be.

Russ Sears adds:

I think most irrational fears and depression stem from the unintended consequences of one's choices or often, the lack of decisions, such as little or no exercise. However, I believe many of these choices are made when we are children, and we do not fully understand the consequences. Many of these bad choices may be taught often though example by adults or sometimes it is just one's unproductive coping methods that are simply not countered with productive coping methods by the adults in their lives. I think some people are more prone to fall into these ruts, but most of these ruts are dug none the less.

Jim Sogi writes: 

The regrets are perhaps easily said on the deathbed but implementing these choices in life is very difficult. Many can not afford the luxury of such choices. When there is no financial security hard work is a necessity. Such regrets are not much different than daydreams such as, oh I wish I could live in Hawaii and surf everyday. The fact of the matter is that the grass always seems greener on the other side. Speak to the lifestyle guys in their old age. Will they say I wish I worked harder and had a career and made more meaning of life than being a ski bum or surf bum? 

Gary Rogan responds: 

What you say is true about the effects of exercise. But that's just one of many factors that are biochemical in nature. Pre-natal environment, genetics, and related chemical balances and imbalances are highly important in the subjective perception of the level of happiness. There are proteins in your brain that effect how the levels of happiness-inducing hormones and neurotransmitters are regulated and there is nothing you can do about it without a major medical intervention. Certainly some choices that people make affect their eventual subjective perceptions through the resultant stresses and satisfying achievements in their lives, so the choice part of it can clearly be argued. My main point was that by the time the person is an adult, their disposition is as good as inherited. They can vary the levels of subjective perception of happiness around that level through their actions, but they are still stuck with the range, mostly through no fault or choice of their own.

Since a few literally quotations on the subject have been posted, let me end with the quote from William Blake that was used before the chapter on the biological basis of personality I recently read:

Every Night & every Morn

Some to Misery are Born.

Every Morn & every Night

Some are Born to sweet Delight.

Ken Drees writes in: 

I believe that you must put effort towards a goal and that exercise in itself begets a reward that bends toward happiness. It's the journey, not the end result. You must cultivate to grow. A perfectly plowed field left untended grows weeds–the pull is down if nothing is done.

Russ Sears adds:

 It has been my experience with helping others put exercise into their lives that few teens and young adults have reached such a narrow range that they cannot achieve happiness in their lives. This would include people that have been abused and people that have a natural dispensation to anxiety. Their "range" increases often well beyond what we are currently capable of achieving with "major medical intervention". As we age however our capacity to exercise decreases. While the effects of exercise can still be remarkable; they too are limited by the accelerated decay due to unhappiness within an older body's capacity. Allowing time for our bodies is an art. Art that can bring the delights of youth back to the old and a understanding of the content happiness of a disciplined life to the young.

Peter Saint-Andre replies: 


Yes, hard work is often a necessity. But hard work does not prevent one from pursuing other priorities in parallel (writing, music, athletics, investing, whatever you're interested in). Very few people in America have absolutely no leisure time — in fact they have a lot more leisure time than our forebears, but they waste it on television and Facebook and other worthless activities.

Between working 100 hours a week (which few do) and being a ski bum (which few also do) there lies the vast majority of people. Too many of them have ample opportunity to bring forth some of the songs inside them, but instead they fritter their time away and thus end up leading lives of quiet desperation.

It does not need to be so.

Dan Grossman adds: 

Jim Sogi has a good point. The deathbed regret that one didn't spend more time with one's family is frequently an unrealistic cliche, similar to fired high level executives expressing the same sentimental goal.

The fact is that being good at family life is a talent not everyone has. And family life can be difficult, messy and not easy to make progress with. Which is perhaps one of the reasons more women these days prefer to have jobs rather than deal all day with family.

Being honest or at least more realistic on their deathbeds, some people should perhaps be saying "I wish I had spent more time building my company."

Rocky Humbert comments:

 I feel compelled to note that this discussion about deathbed regrets has been largely ego-centric (from the viewpoint of the bed's occupant) — rather than the perspective of those surrounding the deathbed. I've walked through many a cemetery, (including the storied Kensico Cemetery) and note the preponderance of epitaphs that read: "Loving Husband,"; "Devoted Father," ; "Devoted Mother," and the absence of any tombstones that read: "King of Banking" or "Money Talks: But Not From the Grave."

Notably, Ayn Rand's tombstone in Kensico is devoid of any comments — bearing just her year of birth and death. (She is, however, buried next to her husband.) 

In discussing this with my daughter (who recently acquired her driver's license/learning permit), I shared with her the ONLY memory of my high school driver's ed class. (The lesson was taught in the style of an epitaph.):

"Here lies the body of Otis Day.

He died defending his right of way.

He was right; dead right; as he drove along.

But now he's just as dead, as if he'd been wrong." 

Kim Zussman writes:

Is an approach of future regret-minimization equivalent to risk-aversion?

Workaholic dads have something to show for their life efforts that Mr. Moms don't, and vice-versa.

If so, perhaps the only free epithet is to diversify devotions — at the expense of reduced expectation of making a big mark on the world or your family.



 Between working 100 hours a week (which few do) and being a ski bum (which few also do) there lies the vast majority of people. Too many of them have ample opportunity to bring forth some of the songs inside them, but instead they fritter their time away and thus end up leading lives of quiet desperation.

It does not need to be so.

Chris Cooper writes:

I am lucky enough to do both. I spent a while as a ski bum when I was young. Later I did a stint of 6 years of 100-hour weeks. It paid off as I hoped, enabling me to be a ski bum again. Which I tried, and found that somewhere during that time I acquired some workaholic characteristics. So now I oscillate between taking it relatively easy, and working hard, and at the moment am working hard and wishing I could take it easy — but if I did, I would soon enough be restless again.



 93 day VIX minus spot settled at 4.76, the second highest reading since DEC07 (VXV inception). Expect mean reversion in VIX but the contango will kill VXX. Interesting that equities closed at recent lows at the same time which is a lot like the last sell-off when the term structure never inverted — like no one believed the selling or they had perfect foresight into a bounce… So vol is cheap but you get what you pay for. The prior times readings were above 4 they reverted below 4 within a week. Maybe the signal is to buy vol on a bounce in equities, but that still means fighting the contango headwind… as pointed out by two sources VIX has historically had the highest probability of making a yearly low in December (40% of years since 1990)… 14 and change might be out of reach, but it doesn't mean it can't try… seems like the political news machine has slowed recently, will that turn off into the close of the year?

No positions as of writing this and I will be sitting on my hands through the session.



 Director Brad Bird has had notable success with animated features that were as good as live action films competing for major "ten best" lists, including "The Iron Giant," "The Incredibles" (my favorite) and saucy/snappy vermin-cuisine-adventure "Ratatouille."

But this "Mission," fourth exemplar of the popular "MI" franchise, is a nonstop jump-onto-your-seatmate peopled actioner that brings in the very latest electronics gadgetry and fun-ciful man-toys that has you wondering when you can queue up to buy or even just play with the hologram doohickies, mesmerizing frog-gloves and anti-grav devices used by a buff Tom Cruise, who performs many of his own dare-deviltry stunts, the sensitive but buff Jeremy Renner ("Hurt Locker," 2009), the amusing, just-this-side-of-slapsticky Simon Pegg, and the stunning, hyperfit Paula Patton, whose beauty is almost a match for her martial arts, shooting skills and split-second timing.

As you've come to expect, astonishing efficiency in expediting the eye-defying escapes and chases, prison scenes and ballroom mise-en-scenes. Smart sass punctures the tensest moments, and there's even the odd meditative moments where Renner does his soft focus sharing, with the whole deal orchestrated with panache and unstoppable pacing guaranteed to pop those pockets of sleeping adrenalin inside your eyelids.

This is produced by Cruise, a 'Bad Robot' production, and the look is smooth, sleek, exceedingly high-end in terms of production values. And mega-millions.

Lest you think it's all blue-screen digital pyrotechnic whiz-bang, locales are real: uber dazzling Bucharest, Czechoslovakia, Russian prisons (lots of subtitling distinguish this mission) and the Kremlin, sites in Canada and the US as well as the glories of the supertall Burj Khalifa in Dubai, where much of the aerial dizzy-making and amazing physical rodomontade happens. It raises the bar, brings even the masterly Bond concept to a newer, higher stratum than ever. My companion became vertiginous from the Burj-y heights, which were real, not simulated, especially on the gargantuan IMAX screen. Cruise rappels down the world's tallest, slimmest stiletto tower, skittering down 130 flights or so with startling, lightning dispatch. Bad guys with bad complexions, precision bullet holes soon leaking measured ampoules of blood, and demonstrating negative human scruples interfere with nuclear codes, shiny lethal suitcases, missiles aimed at heavily populated areas, and print-machine contact lenses.but wait, why give away any more of the goodies, if it'll slow your visit to what one colleague called "unreal, crazy, but lots of fun, anyway"?

Cruise? Still got it. Director Bird? Definitely got it.

With "MI–Ghost Protocol" and the cheeky witfest of "Sherlock Holmes," both gob-smacking theatres for the diversion-famished end of year cineaste, "The Muppets" and suchlike (admirable but decidedly low-testosterone) cavity-creators won't be dominating the hot top ticket tramway for long.



 Some one was telling me they thought "shutting down Hillarycare gave us about 15 years of safety from the cancer that is big government intrusion into our lives. Repealing Obamacare could protect us for, possibly the rest of our lives."

Our medical colleagues may not believe that. Insurance companies picked up the ball that Bill/Hill dropped (the meme that health care is too expensive) and turned free enterprise medical care into civil service (for the insurance companies).

The insurance bloc is government too.



 The Bundesbank is now in the same position that the Federal Reserve/U.S. Treasury were in the 1920s. As Pater Tenebrarum notes:

The BuBa is making up for the gaping hole left by fleeing depositors and the lack of access to wholesale funding in the euro area periphery's banking systems. It is basically a stealth bailout of the periphery's banks. In principle this does not represent a problem, since most of the deposits have fled to Germany where they are now funding the German commercial banks.

To maintain how the administrative gold standard was in the 1920s, the Federal Reserve/U.S. Treasury (they were as collaborationist then as they are now) had to swallow European paper and sh*t gold. No one in the North Atlantic (except Americans and Canadians) could ask for gold in exchange for the paper issued by the central bank/Treasury, yet the central banks of all the countries were able to continue the fiction that international trade balances were being settled in gold at the pegged price of the administrative standard. No one in the non-German countries in euro-Europe can now ask for and get a commercial loan if they are not a government-sponsored enterprise already in debt, yet the paper currency issued by the Greek central bank remains legal tender in Stuttgart.

According to a study from the BIS:

the scale of the 2008-09 banking crisis, as measured by falls in international short-term indebtedness and total bank deposits, was smaller than that of 1931. However, central bank liquidity provision was larger in 2008-09 than in 1931, when it had been constrained in many countries by the gold standard. Liquidity shortages destroyed the international monetary system in 1931. By contrast, central bank liquidity could be, and was, provided much more freely in the flexible exchange rate environment of 2008-9. The amount of liquidity provided was 5 ½ - 7 ½ times as much as in 1931.

Kyle Bass says the European banks are 3 times as leveraged as those in the U.S. and have not recapitalized even as the U.S. banks have added nearly $1 trillion to their capital. According to S&P, total bank liabilities are €23 trillion for the eurozone and €8 trillion for the UK, Sweden, and Denmark.

What if Lehman/Bear Stearns and FNM/FRE were not the Credit Anstalt but merely the Rentenmark crisis– not 1931 but 1923/4?

And then, Mr. Bass reminds us, there is situation of Japan– something that actually is "different" this time.

p.s. And then there is China– as Mr. Hendry and Professor Mundell predicted.




 How I Raised Myself From Failure to Success in Selling by Frank Bettger, written in 1949, and endorsed by Dale Carnegie as the best book on selling, is a classic on how to improve your selling techniques. Bettger, a Philadelphian who died in 1981 at the age of 93, was first a baseball player, then a failure in insurance selling before he discovered the secrets of success. He then became the top insurance salesman for Fidelity Mutual for 10 years. He believed so much in insurance that he put his entire estate into life insurance and when he and the wife died in the 90's they were temporarily strapped until the proceeds came in.

In a typical gesture, they used the proceeds to start a philanthropic fund for indigent speakers. The path and techniques he used to become successful are covered in the book's 36 chapters, each of which describes a way of making the sale. There are summaries after every 3 or 4 chapters of the key points, and a few tour the forces about unique techniques that Bettger used to make fantastic sales. Many of the techniques were first written about by Benjamin Franklin and ample borrowing from Abraham Lincoln also livens the book. Here are some of the best techniques for selling that Bettger recommends:

The first rule is to be enthusiastic. Dale Carnegie believes this the most important rule. Bettger applied this to his baseball also, sliding into every base.

The second rule is to keep good records. Apparently IBM and GE, the best sales organizations of his day insisted that every salesman prepare in advance a list of all the people he was going to call on the next week. Bettger also kept records of the number of appointments and number of sales he made. And the commissions made per hour from first, second, and third meetings.

The third rule is to find out what the customer wants. Bettger's methods to find this out were silence, asking the question "why " all the time whenever an objection was made, and then asking a very important add on: "in addition to that, is there another problem?". This last is one of the keys to his success. But mainly the spirit of letting the customer tell what he really wanted by letting him tell his story. The query "Please tell me how you got started in business. And could I have the privilege of walking through your warehouse or factory" once the prospect got started telling his story was very important here. The sincere appreciation of his customers became a key add on here to close the sale.

 The fourth rule is a variant of "make the customer feel that it would be very good to place the order now". Bettger did this often by setting up an appointment with a Dr. for one hour after his meeting. A variant of this was always to praise his competitors so as not to get involved in the objections that could arise.

The fifth rule is always to make appointments. That way the customer treats you as an important part of his day, and the salesman's part of this was to be prepared with exactly what the customer needed. Once he was at the meeting, Bettger always asked the question "why" whenever an objection was made so he could find out the main thing the customer wanted.

As an aside, it is good to hear Bettger quoting Pierpont Morgan favorably who he considered one of the shrewdest business men ever: "There are two reasons for a person to do something. The reason he gives you that sounds good. And the real reason." Bettger's use of the "in addition to that is there any other reason that you have for not giving the order now?" was very effective here.

The sixth rule is to be a good listener. And here he has a quote from Franklin from the autobiography which is filled with good ways of getting people to give you the order and give them and you what you want.

The seventh rule is to praise your competitors at all times and to get a haircut and shine the shoes every week. He suggests gaining the confidence of a haberdasher to help you look good. As part of his constant quest for enthusiasm he suggests smiling at everyone you meet.

The eight rule is to become the sincere friend of your customer, keeping records of the names of his family, and secretaries. He often told a young man that he felt that the young man was destined for greatness, and this tip of the hat often proved true, much to Bettger's successful sales when the young man became head of a big Steel Company of bank and gave Bettger all his insurance business.

The ninth rule is to sell in stages. Try to sell the appointment first then the product. After the appointment you can find out what the customer wants by the techniques above and then move into the close.

The tenth rules are variants of the attention, interest, desire, action for closing. He has an unusual way of getting the close. He prepares a contract in advance. Then he asks the prospect if the vital statistics are correct, and finally he asks him to sign where a big X is in the contract.

The eleventh rule is to use demonstrations, and to get your customers to make referrals for you. He prepares post cards with "I would like you to meet Bettger who did a great job for me" for all his customers.



 On a sunny and breezy day she brought me to visit a blacksmith's workshop in the countryside of Tuscany. It was like being on the run for some reason. Far from our responsibilities. Far from our daily routine. I was living a parenthesis that would be forgotten the next day.

The place was quiet and took us a hundred years back to the past. The workshop was located along the course of a creek. It would produce electric power through a rudimentary water mill. It was intriguing how it would exploit the energy of that flow. I discussed with her parallels between the ever changing shapes and speed of water and trading. Even if characteristics and parameters would rapidly and unpredictably change, nonetheless there was energy in there that was transformed and utilized. That power was used to build something that you could touch, use. Something that you could see and weigh. Not some obscure and confusing virtual service.

Here was this old guy in a little village in Tuscany who would make a living manufacturing handmade nails, knives, tools. At times when in a globalized market you can buy nails from companies in China, which manufacture 600 tons of low carbon common nails per month. She gave me as a gift one of his nails. It looked strong and hard. But it was bent. And crushed.

She handed it over to me and did not say a word. She was waiting to see my reaction. That was her way of communicating ideas and feelings. Through objects. It was a fascinating challenge. Someone clearly tried to hammer that nail into something and failed. When you drive a nail into something you have to hit it hard several times and be accurate. You have to be determined. I thought she was referring to my long quest to be a better trader and my stubbornness. Regardless of my inability to professionally structure my trading operations. Even the hardest and quality nails could end up bent. That nail was about failure. My failure. I was somehow disappointed. I always wanted to be encouraged in my effort. She noticed it. "That is not the right answer", she said. "Unrequited love is very painful. It is something irreversible. You can be tough and strong. But you end up like a bent nail. You can try to straighten it up, but you will never fully succeed. It's like having butterflies in your stomach forever…".

This happened a long time ago, but I still have that nail. It reminds me that we can be hammers or nails and there's not much we can do about it.

Jim Lackey comments: 

A post of greatness. Passion for the markets waxes and wanes over time and with results… but there is never anything more enjoyable or motivating to me as to read posts such as these. Thank you. lack 



 Hurricane predictors admit they can't predict hurricanes :

Two top U.S. hurricane forecasters, revered like rock stars in Deep South hurricane country, are quitting the practice because it doesn't work. William Gray and Phil Klotzbach say a look back shows their past 20 years of forecasts had no value.

The two scientists from Colorado State University will still discuss different probabilities as hurricane seasons approach — a much more cautious approach.

But the shift signals how far humans are, even with supercomputers, from truly knowing what our weather will do next. Gray, recently joined by Klotzbach, has been known for decades for an annual forecast of how many hurricanes can be expected each official hurricane season (which runs from June to November.) Southerners hang on his words, as even a mid-sized hurricane can cause billions in damage.

Last week, the pair dropped this announcement out of a clear, blue sky: 'We are discontinuing our early December quantitative hurricane forecast for the next year … Our early December Atlantic basin seasonal hurricane forecasts of the last 20 years have not shown real-time forecast skill even though the hindcast studies on which they were based had considerable skill.'"

Yet…they just released their latest prediction here, in which they write:

"t this extended range of lead time, we're better off kind of examining four different scenarios, and then trying to assign a probability to the likelihood that each of those would occur," says Klotzbach….

Or perhaps, they should consider becoming market strategists for a Wall Street Brokerage Firm, where their track record might be forgiven.

Gary Rogan adds:

Rush tied the ability to predict hurricanes and to predict global warming and its effects together in his show today. This persistent belief in man-made global warming and its deleterious effects continuous to fascinate me as an atypical "delusion and madness of crowds". Many people who had ardently supported the theory in the past now simply hate the topic, it seems boring to them. Yet they continue to persist in their beliefs that nothing much has happened to disprove the "consensus of science". Most delusions of this type peak and then die a horrible death, but this one is stuck in some sort of purgatory. Whenever this topic comes up, I invariably say that it's a hoax, as I have said for years, and just like a few years ago the reaction is usually disbelief that I can hold this opinion while so many countries are supposedly on board, but the reaction is much less energetic than it used to be.

Luckily Canada has just "irresponsibly" and "recklessly" withdawn from Kyoto .




 Investment clubs–a leading indicator?

"The number of investment clubs reached 60,000 before the bursting of the tech bubble. Now there are just about 5,500 still hanging on nationwide."

Atlanta's Patti Ghezzi was one of those investors who decided to pull the plug on her club. She had originally banded together with around 16 friends to form the "Bullmarket Broads" back in the late '90's. "It was so trendy back then," says the 42-year-old communications consultant. "I knew of some clubs that did nothing but make money for years. Nothing ever went down."

Fast forward 10 years, and the Bullmarket Broads had dwindled to six die-hards. Some members had moved, some had growing families and shrinking free time, and some were discouraged by the stock market's 'Lost Decade' and its multiple equity busts. "It got to be kind of comical," says Ghezzi."We'd buy a stock and it would go down, and then we'd sell and it would go up. We used to say, 'Let's get together for our monthly meeting and figure out how to lose more money.'" As a result, club members finally decided to call it a day in 2009. "In the late '90s, many of my friends were in investment clubs," says Ghezzi. "Now, no one I know is. We're in book clubs instead."




Mr. Pennington’s link to Morningstar’s analysis of RSP , the S&P 500 equal-weight ETF got me to thinking… Morningstar’s conclusion was that RSP’s returns are explained by mid-cap stock returns. Stated another way, the *performance of an equal-weight large cap portfolio is explained by mid-cap performance* (?!?!?). It seems rather cavalier to dismiss a huge swath of a large-cap index and say that those are really just mid-cap stocks. It’s been a while, but I certainly don’t remember any “premium” based on size for mid-cap stocks. So what is driving the recent outperformance? Is it possible that the converse is true? Perhaps mid-cap performance is really a proxy for equal-weight portfolios regardless of size. I hypothesize it has more to do with portfolio/index construction rather than uniqueness of size. So I need to find a way to measure a portfolio’s construction and figure out if size matters.

Since I was interested in examining how the portfolio/index is weighted I took a look at S&P 500 and the S&P MidCap 400. Since both are capitalization weighted they tend to be “top heavy” in that the largest capitalization stocks get more weight in the index and subsequently have a much bigger impact on performance. But just how top heavy are they?

*S&P 500*

*S&P MidCap 400*

Top 10 Holdings of Index



Ratio to Equal-Weight



The S&P 500 is almost 10x top heavy relative to an equal weight portfolio. This indicates that the S&P MidCap 400, while not an equal-weight portfolio, “looks” much more like one than the S&P 500 and this could explain, in-part, the similarity between mid-cap stock performance and large-cap equal weight performance. As an aside, I thought it would be interesting to see the evolution of “top-heaviness” in the S&P 500 since I have some historical data. Using quarterly constituent data from Q2 1995 -Q3 2010 of the components of the S&P 500 I computed the weight for each stock in the index based on their market capitalization relative to the total market capitalization of the index at the beginning of each quarter. I then computed the skewness.

Back to the question at hand; I wanted to determine if size is driving the performance difference between an equal-weight and a cap-weighted portfolio or if it was due to how the portfolio/index was constructed. I decided to calculate the weighted-average correlation within a portfolio to see if there was any relationship between how “well” it was constructed. I think of this as a crude measure of how “diversified” a portfolio is, with the implication that severely skewed weightings are sub-optimal and lead to higher correlation while equal-weights by nature are more “diversified” (in a naïve sense) and that’s what is driving performance. Since I needed to look “inside” a portfolio to compute this statistic I collected the daily 100 portfolios formed on size and value from the Ken French website (it was easy and free). Using the daily data I formed non-overlapping equal-weight decile portfolios for size with break points based on both value and equal-weighting over a 62 day period. Why? Well, it’s close-ish to a quarterly period and I had to use excel so it was semi-painless and it made the weighted-average correlation calculation easier. A more careful study would actually look “inside” each of the 100 portfolios themselves. I computed the log return and the weighted average correlation within the portfolio during these periods to create a time series beginning in 1963. I report the summary statistics for the 10 decile portfolios (“quarterly”) return series.

It turns out that all of the portfolios look about the same in that the portfolio weighted average correlation and returns are clustered and there is no meaningful relationship. The one exception is the equal weight small decile which shows superior return characteristics. So to re-cap: forming a portfolio on size leads to portfolios that all look similar from both a portfolio/index construction and return perspective. Since there is no meaningful difference in returns based on size, and as noted before, the characteristics of the portfolio/index construction are similar it at least provides two data points to start questioning Morningstar’s explanation of causality. It’s not a slam dunk, but it’s a start of what could be more rigorous analysis. But wait, since I had already gone to the trouble to test “size” I thought I’d take a peek at “value”.

Lo and behold. The deeper the value proposition the lower the portfolios weighted average correlation and the higher the returns. While it’s a small sample there is clearly a strong relationship between portfolio construction (as measured by this metric) and return, certainly stronger than I would have thought ex-ante. The portfolios formed on equal weight breaks also dominate the value breakpoint formed portfolios, another piece of evidence in support of the original question. Of course on reflection this result makes intuitive sense. Growth portfolios are primarily driven by the same factors, which are largely systemic and therefore more highly correlated, whereas value portfolios tend to have more idiosyncratic risk so they should have a lower weighted average correlation within the portfolio. It is sometime easy to forget that portfolio construction is just as important, if not more so, as security selection. So now my question becomes; do the returns from value-investing accrue because it’s “value” or because they are “better” built portfolios or is it some combination of the two? Which came first, the chicken or the egg?



 Regarding Bo Keeley, world traveler, frequent emailer to all his friends, occasional contributor to this site. We last heard from him going to Baja in mid October. Has anyone heard from him? He's had 81 lives already? Let us hope. Vic

Art Shay forwards this letter he sent to journalists who have written about Bo Keeley:

Steve Keeley, whom I knew and photographed as a racquetball luminary (and was his photo guru) and you wrote of as a financial-ill-advisor in connection with your Vic Niederhoffer story, has disappeared. He was on a Guatemala-Mexico-US trip intent on further describing the ease of flouting borders while hoboing. I had helped him place a few articles in They haven't heard from him since Oct. 9.

Keeley had been held up a dozen times on his 100 + rail peregrinations on 3 continents. He had his portable computer with him. (At "home" in his 10 foot dugout near the Cocoa Mountain Gunnery range, there exists a shelf , or shelves 30 feet long of his notebooks, a young biographer's prize.) I am, alas, 89. He had (self- or nearly self) published two books recently. One on hoboing, one on his Kures. He, as you know, was a graduate veterinarian and healer. He corrected my vision by raising my computer screen to force me to look up.)

Niederhoffer has joined the search. I thought you might have an idea or two on this sad situation.

As an old Life staff reporter and fairly well-known fotog (I did the furtive nude noted in your magazine in 2008 of my pal Nelson Algren's erstwhile lady friend, Simone de Beauvoir), I much admire your work.

Art Shay,

Deerfield, Illinois

Laurel Kenner writes on Tuesday December 12th:

News flash: Hobo Keeley is alive and well. Details to follow.

Bo Keeley himself responds to our message "How are you?":

I have been sifting sand at the digs for two months till touching civilization yesterday. all well. i built a gorilla snot swimming pool in anticipation of warmer weather from the 300 gallon tank used on the adjacent chocolate mt. bombing range for dust control. it took elbow work to get the biodegradable snot out . ate oats, soup and crackers, walked four hours daily w/ ten-lb. ankle weights, handled a tarantula and baby western diamondback, so everything is fine. my concerned brother filed a missing person's report w/ the local police ignorant that the unnamed desert roads demand a concocted address not on maps.



 I have recently found myself in a somewhat unfamiliar environment. I find myself being around people who live on the periphery of society to whom honesty and integrity are subjective whims, used only when they are of benefit to themselves.

I am continually amazed by the waste of intellect that I see around me everyday. Obviously smart people with a major character flaw that causes them to consistently fail or, at the very least, underachieve.

I watch as those around me, directly and indirectly, waste their potential because there is something inside of them that compels them to take the harder path. And let's be honest, it's harder to be a liar, a con man, a gossip, and a back stabber than it is be a man of good character who treats others they way they want to be treated.

I am amazed every day when obviously smart people make incredibly horribly stupid choices. Choices that may, in the moment, give short term satisfaction, but long term become an anchor around their neck dragging them further and further down. I find myself these days speaking to my kids more and more about the twin virtues of honesty and integrity and applying it to their lives. I also find myself speaking with them about protecting themselves against the less honorable people who infect our world.

One of my children wanted to know why people are dishonest and why they lie. The best I could do was explain to her what I've come to believe. The reason that liars lie is because they're liars. The reason that cheaters cheat, is because they're cheaters. The reason that thieves steal is because they're thieves. The reason that the scorpion stung the frog is really very simple: It's his nature.

We are going to watch this short video at our next family home evening. It not only discusses honesty, but it shows the courage needed to stand up to the dishonesty that surrounds us. I thought the group might enjoy it.

Russ Sears elaborates: 

Much of it has to do with their time frame and vision of sight and their view of other.s Lying is a way to maximize the short term gain. Lying also the best way to maximize your gain if everybody around you is expected to lie. However, honesty and reputation take time to build but maximize the long term "happiness".

Think of it in terms of the prisoners dilemma. If it's a one time thing the best option is to rat on your friend and give info to the police. However, if it is a reoccurring event the optimal choose is to stick together and hope they return the favor. That is unless your partners continually rat on you first, then you become the narc.

That is, honesty is the best policy in the long run only if you hang out with those that return the favor. Honest people will be able to cooperate, hence get much more done. But if you expect that those others are going to be lying to you, you should return in kind.

Think of negotiating with a car dealer. You don't tell him your wife must have that car. And he tells you 3 or 4 "best" offers. But once the contracts signed, honesty again is the best policy.



 1. Evolutionary Dynamics by Martin Nowak

Wherever information replicates, wherever there is life or culture, whether in the fields of stocks, language, viruses, cancers, HIV, infections, rumors, games, there is evolution. Evolutionary Dyamics is a masterful book, the kind that you will wish to read 5 or 10 times that gives you a foundation for studying the processes involved, and then applies it to all the fields. I can't recommend the book too highly.

It starts with a discussion of how simple models can lead to extraordinarily complex behavior. The discussion of finite difference equations and how the basic equation   X(t+1 ) = X(t)(1-X(t) * A can lead to all the paths that you have ever seen or imagined with time series in your life.

A discussion of the basic mathematics of how an error in replication, a mutation, can change the dynamics and lead to all sorts of ultimate outcomes from coexistence, to complete exclusion to survival of the first is also a point of departure for all topics covered.

Each chapter applies the basics to a new field. The fields covered include cancer, language, epidemics, viruses, HIV. The chapter starts with a discussion of a basic dynamic equation, how it relates to the foundation laid in previous relative to growth rates, carrying capacities, feedback effects, and equilibrias. Diagrams illustrate the main points. And summaries at the end of each chapter contain a nice review of all the main points.

 The book uses differential equations as the basic building block for illuminating all the applied fields covered. A knowledge of the basic solutions is helpful. However, the layman without that training can get the gist, and with a pencil and paper, and review of each chapter can find himself marveling about how much fuzzy thinking in the field is clarified by precise counting and tracing.

If there is one suggestion I have for the book, it would have been to use difference equations more than just once or twice to illustrate the topics covered rather than using the closed form mathematical solution. It also would have been nice to see how the computer friendly reader or researcher might have simulated the conclusions and principles reached. Applications to economics would also have been appreciated.

I can't recommend the book too highly. It's set in easy to read type. And it has a great discussion of the history and development of each field in it. I intend to read it over and over as a lynchpin for understanding modern biology, disease, and meme transmission. Darwin and Galton would both have expressed keen appreciation and amazement at the clarity which this superb book brings to the many areas that they studied.

2. The search for isomorphisms, propositions of the same structure valid in two or more disciplines, was part of systems analysis as developed by Kenneth Boulding as a way of unifying the sciences, natural and social.

-Nathan Keyfitz, in a biography of Kenneth Boulding.

What isomorphisms are useful for augmenting our knowledge and profits in markets?

Peter Grieve writes: 

 I think that unification is the highest scientific endeavor. For me, taking two things that look completely different on the surface and demonstrating an underlying unity is as good as it gets.

The highest example of this (for me) has to be when Einstein did it with space and time. He unified them into the concept of "interval" ( although they are not quite isomorphic since time has that minus sign). He also unified electric and magnetic fields to the same degree, and they appear very different on the surface.

Gary Rogan writes:

Until we answer how the physical laws "know" to work in every part of the Universe or at least a lot of it, we won't know anything but the symptoms of the cause. There is something very strange and basic about the structure of the Universe that keeps some aspects invariant.




The stolid, the officious, the rigid but orderly German Dax has gone to the big round number of 6000 three times today and saluted and gone bak. That seems very Teutonic to me, as does the predicted aftermath.



 I believe in nature. I believe in earth, sun, fire and water. I believe in the circle of life. When a tree loses its leaves, you think it's dead. But the tree is only resting. It's born again, in the spring. I believe in energy. Positive energy.

Paolo Di Canio

How could we monitor energy in markets? What are the leading indicators, what is in control positive or negative energy? (This may not mean it is connected with a bullish or bearish overtone). What happens when a market loses its soul? Does this affect the length of time until the leaves return, if they return at all?

Anatoly Veltman writes: 

Yes, there are plenty of reasons to believe that the free market has been totaled. It will take some sort of cathartic process to ever regain it.

1. It began with the machines taking over. Big picture has gradually been rendered irrelevant, as black boxes battle to take advantage of regulatory shortcomings– and manage to skim the zero-sum markets of billions inside of every reporting quarter!

2. Then came the cyclical peak in asset prices. By the end of 2007, helped by ridiculously easy credit, the bubble formed and popped.

3. The short-term pain proved so unbearable, that both sides of the isle caved in to the kneeling emissary - giving birth to centralized market and killing off free market spirit.

4. The centralized machinery gained speed, as flexionic power houses began to perfect leveraged self-dealing, smashing through all past records in the process. Billions became chump change. The machinery is hungry for trillions, and the far-from-independent Fed is happy to print them.

5. All those newly minted trillions get channeled to a few, resulting in unprecedented wealth disparity. Trillions get laundered on the periphery of the real economy, avoiding regular capitalist process and diminishing the multiplier effect. The entire demand curve shifts, further distancing the financial assets from real economy and the Main Street.

6. Every so often, the financial infrastructure figures blow up and expose total void of the system's integrity. Former exchange chairman is exposed as a Ponzi, and former governor is about to be exposed as expropriator of customer segregated accounts. That's all we needed at this point of the cycle…

George Parkanyi writes:

Even if these things are true, what benchmark are you comparing current markets to? At what point in time did they ever have true "integrity"? Over the ages markets have been manipulated by different parties who benefited disproportionately in different ways and to different degree. If no-one is willing to step up and define what wonderful era represented the true/ideal baseline market environment that worked for everyone, then I'm not interested in listening to the complaining. We are speculators - I posit that we need to deal with reality, not some kind of utopian fantasy. If markets are being manipulated, then understand the manipulation/environment without the hand-wringing and moralizing, and make the necessary trading/investing adjustments. No-one said speculation was supposed to be easy.

Anatoly Veltman responds: 

I'm curious, George. Can you cite modern market history precedent for any of these?

Rocky Humbert joins the conversation: 

There are countless examples of similar govt interventions. Everything from exchange controls to wage and price freezes to rationing to anti-trust exemptions to banning private ownership of gold to tariffs that undermine whole industries to regulatory edicts that accomplish the same to union regulations etc. Etc. Etc. Even Operation Twist is a rehashing of old policies; the practice of monetary policy , if anything, has become only more transparent in the past 20 years — but not necessarily wiser.

And of course, there's the occasional war with its wholesale expropriation of wealth, death and destruction.

History rhymes. Always has. Always will.

I look forward to the day when Anatoly writes constructively of something that actually works…instead of commenting endlessly about what doesn't, lamenting the good ole days…

Anatoly Veltman responds: 

I'm looking forward to that, too, Rocky, and thanks for straightening me out. However, has there been a precedent for robbing customer segregated accounts to such an extent that recovery is seen as unlikely, and yet prosecution is seen as unlikely as well?



 There's a big change coming in surfing during the spring of 2012. The Wavejet propulsion system is coming to your local surf break. This system is a pretty slick propulsion unit that can either be retrofitted into boards, or integrated into new boards. It uses state of the art electronics, has remarkable engineering, and is quite durable. The Wavejet purportedly will give 8-10 knots of speed paddling in calm waters for 40 minutes. The hardest part of surfing is the paddling, and the paddling can take it's toll. Eliminate the tough paddle, and one could have a more pleasurable time surfing, spending more time trying to catch waves, perfecting their riding skills while not too tired out. The downside of the system is that surfers will lose some of the exercise benefits a vigorous go out brings, surfers will get out of shape, surfers might try to surf in conditions that are above their skill level, and finally, this will allow non-surfing kooks to attempt (clog up) to surf breaks that are way beyond their non-existent skill levels. The Wavejet could be a development like the boogie board, which introduced wave riding to the masses. This could be good or bad depending on your perspective. Frankly, I think it will be a good thing as it will introduce the joys and stoke of riding a wave to the masses. The rest of my surfing buddies don't agree with me, but that's beside the point. Here's the Wavejet in action .



 Here's the long awaited black box transcript of what happened during the crash of Air France Flight 447. So many kinds of errors, combined with irrational thinking, false data, no data, and misconceptions caused this plane to splash. The parallels of the last few minutes of this flight are very similar to the thoughts and actions of that moment when a trader is digging his own grave. This transcript is worthy of much detailed analysis and discussion. I'm sure that the analysis of the transcript can better help speculators upgrade their worse case scenario plan.

Chris Tucker, air traffic controller at JFK, responds: 

 I have recently discussed this incident with a USAirways check captain. There are several problems– the first appears to be poor or insufficient training– partial panel operations are a part of the core instrument flight training curriculum– this is basic stuff. Figuring out which instrument or instruments that are unreliable is not that difficult. The other instruments combined can give a clear picture of the aircrafts situation. See a nice lesson plan in partial panel operations here.

 The second and most glaring problem to me is the disconnect between the two control sticks. Airbus uses a side mounted joy stick instead of a forward mounted control column with yoke. In most aircraft, the other pilot is always aware of the position of the control column because as the other pilot makes adjustments– his own column moves in synch– he can see it. So if the pilot in the left seat is pulling back on the yoke, the right seat pilot is aware of it and if this is the absolute wrong thing to do (as was the case here) he can bring his expertise to bear and help fix the problem. But that is not the case with the Airbus, and in this situation the pilot not flying was completely unaware that the pilot flying was holding the stick back.

The way this system is designed, in my opinion, is insane. The pilot not flying has little idea what the flying pilot is doing unless the flying pilot informs him– which should be mandatory in a situation like this.

It occurs to me that the even though all of the information necessary to fly the aircraft safely was right in front of them, that these two pilots became scared, very scared and stopped thinking properly. This is a big problem and it can only be addressed through training. Any pilot can tell you that when the aircraft stalls the immediate response is always to lower the nose and add power. Always. This is a part of training that should be done so thoroughly that it is imprinted on the student permanently.

So why did Bonin persist in holding back the stick? I find it difficult to believe that a pilot in a heavy, long haul international aircraft is so unfamiliar with his planes systems as to not understand the difference between operating in "normal law" - where the onboard computers will not allow the aircraft to stall– and "alternate law" where the computers will allow this. This is critical knowledge and I doubt their training regimen permits them to forget it– even if operation in "alternate law" has never occurred in the past. But something prevented them from believing that the aircraft was stalled– regardless of the blaring and continuous stall warnings.

I cannot say why this pilot behaved as he did, but I can say something that I say to all my trainees on the radar. "The best possible thing to do with the time available to you is to think". From this one premise you can elicit behaviors that will promote it. I like to wait until the trainee is very, very busy and say "stop talking– just stop for a few seconds and look at the situation and think about it. You have plenty of time to do what you need to do." It is my understanding that when you are talking you are not thinking– so we try to reduce the number of clearances, try to combine instructions, keep the chatter on the frequency down. Stopping and trying to think about the situation, even in the midst of chaos, is the best thing you can do to fix it. Why this didn't happen on that flight deck is beyond me. 



 Hieronymus of Rhodes in the second book of his scattered notes relates that in order to show how easy it is to grow rich. Thales, foreseeing that it would be a good season for olives, rented all the oil mills and thus amassed a fortune.

Are we supposed to take Bruno's word that no one ever made money speculating in commodities against the real life experience of one of the seven sages?

Kim Zussman writes: 

Investment and speculation are the same thing only differing in degree.



 Saw the Italian financial wizards Nouriel Roubini (heavily accented English; you recall I was at his home recently at one of his swanky if chilly parties on all three levels of his sleek triplex) and Roberto Souviano (in Italian–he is part of a growing Italian diaspora, called that, because of the hopelessness trained/brilliant young professionals have felt for the past decade in facing corruption and joblessness in their home country, and Berlesconi's absquatulation and replacement by Monti is apparently the best thing to occur for many decades–but it will take a long recovery to get back on their feet) at Stern/NYU School of Business last night for several hours–they have nothing good to say about Europe's massive troubles, which will exacerbate if Germany does not deliberately expand, per Roubini; what they say is a menu for our destructive future, too, since we are not far behind the EU in our fiscal precipice-leaning. They had no good news whatsoever–they just laughed when the last Question asked was "Any good news?"

 They both warn that even China will implode in a short few years if they do not manage their economy more judiciously. Expansion will not last. They have little cheer about the fiscal wellbeing of Spain, Italy, of course Greece, and ancillary bailout countries.

Souviano is here because his life is threatened every moment he is in Italy, and he has bodyguards around the clock against people who do not like his analyses of the corruption that permeates Italian business at every level, from Mafia to more subtle and unglitzy organizations that destroy initiative and fair trading practices. Roubini also is a self-isolate emigre from his home country for similar reasons. They feel much more at home here, able to articulate their messages and live without imminent 'accidents.'



Some Testing:

I calculated from 20090101 until today the maximum 30 minute rolling standard deviation in the SPX at 1600, divided by the standard deviation in minute iterations for the day. My goal was to determine if there is a difference between a day where the move was made through the entire day, or a day where the move was made in only 30 minutes or less.

I am not writing this as a topic of research that has been completed, but rather summarizing the first 5 minutes of research that I have done so far, merely defining a direction. If I were to invest from close to close the day after a reading greater than 1 (the greatest 30 minute stdv spike was larger than the stdv of the day), the equity curve grinds from 1000 to 1019… not too great.

Below 1 it moves to 1176. The SPX moved from 1000 to 1198 (indexed at 1000). There is no advantage from this alone, but I did not take into account only large range days or only small range days which could very well be an important factor, I did try smoothing the daily data using a very short term exponential average and that did not help. Lastly, I tried taking the range of the output over the prior 1 year. From 2010 until present readings above .25 grew to 1056, readings below .025 grew to 1035 and the benchmark fell to 971. This shows more promise. The readings (as might have been guessed) are clustered in the bottom of the range given a few upward outliers (and if I am correct, I should have taken the log of the function to more evenly distribute the data as the lower side is bounded by 0).

Next steps will be to isolate large range days and small range days and then apply the output. A second test I intend to run is using the standard deviation of the minute data around a non horizontal regression (around the least squares regression of the day)… finally I will examine the last half hour, hour and 90 minutes. Another way to look at this might be to divide the range in a certain period of the day by the range of the entire day.

Just starting (now 15 minutes in!), but this is how I create a tree for further testing.

Note: just realized "present" was set to 9/30/2011.



 I think that President Roosevelt's words resonate ("December 7, 1941, a day that will live in infamy") because the attack was undeclared and unprovoked - like 9/11. That makes the death of the sailors, marines and airmen somehow more poignant than "ordinary" (sic) dying in war. I cannot explain why, but I know that few veterans of WW II or Korea or Viet-Nam or our current Asian wars have asked to be buried with their missing comrades abroad, but almost every remaining survivor of Pearl Harbor seems to want to have their remains put there.

Some people have struggled long and hard to make the case that the United States "backed Japan into a corner" by establishing a trade embargo. What is always conveniently forgotten by the defenders of the Pearl Harbor attack is that the American embargo was put in place because the Japanese refused to end their atrocities against the Chinese. To many people in the United States a trade embargo was the very least that our country could do in support of the Chinese. People do very different kinds of stuff in wars, and what the Japanese Army did in China was as great an atrocity as the Nazi's murder of Jews, Slavs and other civilians.

The Japanese decision to attack the United States (and the German's completely inexplicable decision to declare war on the U.S. a week later) were both based on the same insane xenophobia that persuaded them that it really was OK to rape Nanking and build gas ovens for WW I German veterans whose grandmothers were Jewish - the notion that the mongrel Americans were hopelessly inferior as a matter of race. What is the great irony of the events that followed this day 70 years ago is that wisdom of the American Constitution's XV Amendment was finally put into practice. The hypocrisy of our country's having fought for 4 Freedoms in a segregated armed forces became too much even for a Missouri Democrat to bear.

 For further reading, see Executive Order 9981.

The one certainty about wars is that their results will be entirely unexpected.



Levitt and Dubner (of Freakonomics fame) have a new podcast up titled the "Folly of Prediction." Very flawed, but definitely an hour of entertainment value for the specs.



 Hello everyone,

I'm at my local lumber yard and a salesman for various materials is here and stated that on the first of next year all drywall manufacturers are increasing their prices 35 per cent!

That should really help new homes built and all remodeling… and all commercial jobs.



Rocky Humbert writes: 

Firstly, I'd like to thank Alan for bringing this to my attention. This sort of anecdote can have some important market significance. However, in order to analyze it, one needs to ask the following the questions:

1. What is the marginal cost to produce drywall? How does the current (and proposed) price compare to the marginal cost of production?

2. What is the price history of drywall? If the price has previously dropped steeply (due to the economy), then a 35% price hike (although eye popping) might be reasonable.

3. What are manufacturer and lumber yard inventory levels? Could the announcement of a 35% price hike be an attempt to front-load orders/purchases before year-end? … to clear out inventory?

4. At what % of utilization are drywall plants currently running? Has capacity left the system over the past few years? And if so, at what price will that mothballed capacity come back online?

I think an ambitious spec could call US Gypsum's investor relations office with these questions; get the answer; and have a better understanding of both the drywall market; the state of the housing market; and the state of the economy. I think there is also some risk that this 35% price hike could stick — not because the economy is healing, but because productive capacity has left the system ….and will not return until growth is considerably higher. This is the stagflationary outcome that some people fear….

The bottom line is — a few well placed questions and answers will turn Alan's anecdote from dinner party chatter to an economic/market insight.

Henry Gifford writes:

1. Energy is a significant part of the cost, as is shipping the materials and shipping the finished product.

2. I dunno the price history.

3. In urban areas, there is no significant inventory - the stuff just takes up way too much space. For jobs involving multiple apartments, or one large house, the lumber yard is not really a dealer, but more of a broker, as the boards are "drop shipped" from someone else to the job site, only the money goes through the local lumber yard. Maybe in Alan's neighborhood they can build up significant stock, though.

4. Someone in the business told me all plants generally run at full capacity all the time, including through downturns, because during a downturn they take their slowest plant and shut it down and revamp it with the newest electronics to become their fastest plant, restarting in time for the next boom. He said with a smile that they never worry, the timing is always reliable - boom and then bust. They haven't added any new plants in decades, they just speed up the old ones, like the paper industry has done to keep up with the "paperless" office.

There is really no substitute for gypsum board on the market - no boards means no new houses or other buildings.

The industry is now shifting to "paperless" gypsum boards - fiberglass instead of paper - because of increasing mold problems with paper-faced boards. Buildings are starting to get significantly insulated, which means walls have a cold side in the winter, and a cold side in the summer, and cold means damp, which can mean mold. Also, backup materials used to be masonry which absorbed a lot of water from leaks, then were wood, and are now metal, which absorbs zero, meaning a small leak gets to the paper and causes problems. Combine cold and no absorption/storage with no attention to stopping air leaks in construction, you build a recipe for disaster, not all just insurance or hysteria driven rumors. If anyone invented paper faced gypsum boards now, the lawyers would never let them sell it. I expect it to all be gone soon, the changeover will be "interesting" somehow.



Small cap stock out-performance explains at some or all of the equal-weighted SP500 out performing the cap-weighted version. The attached is the ratio of two tradeable ETF's: IWM (Russell 2000 stocks) and SPY (SP500 cap weighted), from May 2000 to present.

On a weekly-return basis, though IWM was was more than 2X higher than SPY they were not significantly different:

Two-Sample T-Test and CI: IWM week, SPY week

Two-sample T for IWM week vs SPY week

         N    Mean   StDev  SE Mean
IWM week  601  0.0016  0.0341   0.0014 T=0.6

SPY week  601  0.0006  0.0271   0.0011 

Though as expected IWM did have significantly higher volatility:

Test for Equal Variances: IWM week, SPY week

95% Bonferroni confidence intervals for standard deviations

      N      Lower      StDev      Upper

IWM week  601  0.0320  0.0341  0.0364
SPY week  601  0.0254  0.0271  0.0289

F-Test (normal distribution)
Test statistic = 1.58, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 24.34, p-value = 0.000



I belong to the final stage of the baby boom, being born in 1963. My generation is starting to pay the bill for decades of overspending and welfare supported by debt. We are getting older at a time when structural growth is over. The organization where I work in Italy, like many others, has been going from rationalizations, budget reductions and downsizing over the past 10 years. Hard to build a career in this environment. The only way to make money is for those clever enough to continue milking what is left of the government cow. As parties and technocrats continue to believe that raising taxes is the only solution to the crisis we have to expect long and tough times ahead. In the meanwhile I hear a lot of people willing to retire early.



(slightly modified by me).

Don't approach a goat from the front, a horse from the back, or a hoodoo from any side.



 There is no power like oratory. Caesar controlled men by exciting their fears, Cicero by . . . swaying their passions. The influence of the one perished; that of the other continues to this day.

-Henry Clay

The market calls out to us bearishly with forceful reasonings, which come arm and arm with losses or expected losses. The bull is the passion of gain and the hoisted mugs of winning together and a crowded din of likemindedness.




by Sailor Malan, famed South African World War II RAF fighter pilot

1. Wait until you see the whites of his eyes. Fire short bursts of one to two seconds only when your sights are definitely "ON".
2. Whilst shooting think of nothing else, brace the whole of your body: have both hands on the stick: concentrate on your ring sight.
3. Always keep a sharp lookout. "Keep your finger out".
4. Height gives you the initiative.
5. Always turn and face the attack.
6. Make your decisions promptly. It is better to act quickly even though your tactics are not the best.
7. Never fly straight and level for more than 30 seconds in the combat area.
8. When diving to attack always leave a proportion of your formation above to act as a top guard.
9. INITIATIVE, AGGRESSION, AIR DISCIPLINE, and TEAMWORK are words that MEAN something in Air Fighting.
10. Go in quickly - Punch hard - Get out!



 It is ridiculous for Americans to criticize the failures of other countries to adopt democracy as successfully as we have. Before we got started, we had a century of practice under the benign rule of a distant sovereign during what really was an Age of Reason. Even so, we had a ruinous civil war that continued to be fought for the next century over the issue of whether the 15th Amendment should actually be put into practice.

The Asian democracies — the Republic of Korea, Japan and Taiwan — all took half a century to establish genuine two-party democracies; yet somehow the Russians are to scorned because they have not gotten there in 20 years. When the democracy in South Viet-Nam had its stumbling beginnings, the American reaction was much the same - impatient scorn. It led to the first official murder of a foreign head of state.

As more than one person has noted, the result was a devastation of Southeast Asia that rivals anything Stalin accomplished. Had we had the confidence to leave well enough alone, millions of people would not have died; and John Kerry and many others would live in the obscurity that they surely deserve.

One of the less fortunate aspects of allowing the immigrants and their bright children (vide the Brzezinski family) to do all the talking is that the United States becomes the instrument for the settling of scores that have very little to do with American interests and very much to do with having American power used to settle private scores that go back to the old country.

P.S. If we are going to list the atrocities of the Soviet Empire, we should also include what shocked even the hardened veterans of the Wehrmacht - the Red Army's deliberate wasting of its own soldiers. Max Hastings has a wonderful and awful book out that you should read - his history of WW II - Inferno. In his interview on CSPAN you will find his comments on the fact that even in the last year of the war the Nazis were less brutal towards their own soldiers than were the Soviets - who were winning.



Last week SPX gained 7.4%. For prior big up weeks (gaining at least 3%) going back to 1950, what was the maximum drop over the prior 20 weeks? To check this, identified the largest decline from the highest weekly close of the prior 20 weeks to the week before the big up (>+3%).

Since 1950, there there were 191 weeks that gained at least 3%. Regressing their returns vs the maximal decline of the prior 20 weeks shows that the larger the prior drop the bigger the big up-week:

The regression equation is 3% wk = 0.0354 - 0.0970 pr-wk/max20

Predictor Coef SE Coef T P
Constant 0.0354 0.00142 24.93 0.000
pr-wk/max20 -0.0969 0.01119 -8.67 0.000

S = 0.0136929 R-Sq = 28.4% R-Sq(adj) = 28.1%

The recent +7.4% week was preceded by a maximal 20 week decline of -13.8%. The attached regression graph shows this point outlined -near the upper edge of the data cloud. Arguably last week was somewhat atypical, as most big up-weeks of similar magnitude were preceded by larger maximal declines during the prior 20 weeks.

Steve Ellison elaborates:

My theory is that most large short-term gains in the stock indices are driven by short covering panics and hence occur after price declines. When everybody thinks there is a bull market, there are few shorts. Further advances, if they occur, tend to be slow and steady.

I turned Dr. Zussman's query around and asked, "What is the expectation for a big weekly gain when the S&P 500 is down during the past 20 weeks, compared to when it is up in the last 20 weeks?"

I divided S&P 500 futures weekly changes since 1982 into two groups: those that occured after the net change of the previous 20 weeks was positive, and those that occurred after the net change of the previous 20 weeks was negative. The standard deviation of the one-week net change was 3.2% when the previous 20 weeks were negative and 2.0% when the previous 20 weeks were positive. The distribution of one-week net changes was:

.                                                               Percentile
.                      N         90th    80th      60th    Median     40th       20th
Last 20 weeks down      538     3.7%     2.2%     0.9%   0.4%    -0.3%    -2.0%
Last 20 weeks up        1000     2.4%     1.6%     0.6%   0.2%    -0.2%    -1.4%

Large weekly gains (those in the 80th percentile and above) were 40% to 50% larger when the past 20 weeks were down, but large weekly losses were also larger in magnitude by a similar amount.

As of Friday's close, the S&P 500 futures are down 5% from 20 weeks ago.



 I have noticed that Europe has an additional dimension compared to the States.

When you travel the USA, all you see is a 3-dimensionnal landscape. In the Old World, there is a fourth dimension that is the history behind the landscape.

In Europe, when you look at a street, a village or a hill, you do not see only a street, a village or a hill. You see 2000 years of history for this street, this village or this hill. There is always a little ruin nearby.

How can I say this? There is extra depth in the Old World. It makes everything more full and life richer.

Same thing when you are marrying true blue blood. You are not marrying merely one guy or one girl. You are marrying history, a line going back centuries. You are becoming part of that line. I am talking true blue blood. Not recent ones like the fake nobles made by Napoleon and the likes.

Maybe the best way to explain it to American people, is to explain it to the ones who are independently wealthy. So if you are wealthy, have you ever tried explaining to poorer people what it felt like to have enough money not to worry about the future? Did they understand you? Or did they just looked at you as if you were a freak? Same problem with explaining the Old World additional dimension.

Stefan Jovanovich responds: 

Dear Bruno,

1. The "Old World" of Europe is not nearly as ancient as the travel brochures like to pretend. The governments of all but the most recently admitted states in the American Federal Union have longer established histories (and older unchanged borders) than any of the nation-states in Europe.

2. The "ruins" in America are there and some of them are almost as old as the catacombs; but they are not on display because what Americans have always sold Europeans is the idea of the United States as this wild, unsettled country. You can find railway posters of the Union Pacific advertising the untamed country of Yosemite to potential German and English tourists when the Ahwahnee was offering 10-course meals. Europeans have always come to the U.S. to see the "new"; that is why they still like California - it always photographs like something just unwrapped for Christmas (the best time to take the picture because the smog is being blown away from the coasts) even though it now has an industrial history as old as the English Midlands was in the 1950s.

3. There is a great deal of blue blood here, but it has one fatal defect - there are no titles to identify the "line going back centuries". There had better not be; it is against our Constitution and, if you are going to claim ancestral superiority based on Plymouth Rock and Valley Forge, you can't at the same time be spending all your time bragging about being descended from European nobility. Those claims of ancient European lineage are the very ones being made by the people whose genealogy is - shall we say - questionable. That was just as true in the 19th century as it is now. The Astors and others who were eager to acquire British class did not have family histories that could trace back to the American Revolution, let alone the founding of the Massachusetts Bay Colony and New Amsterdam. Since there were enough people around like the Roosevelts, they had no choice but to go looking for an Anglo or Franco merger.

4. I can't speak for "poorer people" in the rest of the world, but I can assure Bruno that Americans have no difficulty imagining what it felt like to have enough money not to worry about the future. The turning point in John Kennedy's campaign for the Presidential nomination came in West Virginia. A coal miner asked Kennedy if he had ever had to work for a living. Instead of offering the standard nonsense (Daniel Patrick Moynihan's "I grew up in a poor family", John Edwards' "my Dad was a mill worker" (his father ran the factory), Warren Buffett's "I had a paper route", etc.), Kennedy had the balls to say "No, I never have." The miner's reply was "Good for you." That brought down the house and ended Hubert Humphrey's ridiculous attempt to portray himself as a man of the people.

Most of foreigners' difficulty in understanding America comes from another long-established fact about the United States: the recently-arrived (usually the scholarship children of the immigrants) do almost all the public talking about the country. The oldest tradition in America is to have the A-students lecture the rest of us and tell the world at large about how we are not living up to the traditions of the Republic. (Benjamin Franklin was doing it - and worrying about the Pennsylvania Dutch, er Deutsch when the Penn family was keeping quiet and making certain their land title was secure and paying Franklin to fix it.)

It takes at least one or two more generations for the newly-arrived Americans to discover what Richard Jennings, California blue-blood member of E Clampus Vitas and author of the revised California Corporations Code, once said to our law school class at Berkeley: "Remember someone in this University is going to drop out of school or leave with a "C" average and end up making more money than the rest of us combined." What he did not add was that, while that person might be the child of recent immigrants (see Steve Jobs), the odds were much greater that he would come from a family like that of Mr. Buffett's bridge partner - one old enough that the possibility that great great grandmother may have been one of the "seamstresses" who set up shop above the water table in Seattle can be safely ignored. What I would have added is that it is far more than an even money bet that the same family will be "progressive" enough to be in favor of raising the estate tax. Preventing the newly-arrived from doing what grandfather did to escape the ravages of the tax code is perhaps the most well-established of all the traditions of the better classes of 4-dimensional Americans.

Have a wonderful holiday.




 To what extent can the concept of epidemics be useful in considering the performance of individual stocks? The key variables being the number of infected, the chances that a person with a disease will have contact with the next, and the chances that once a contact occurs that the disease will be transmitted with its consequences, and the time to incubate once contact is made, and finally the chances of becoming immune once contacted. The comparable things would be a product that good or bad in the case of that notorious company that's caused such damage, the chance the good product will be noted and passed on by a customer, the chance that the product will be bought by the next customer, et al.

Alston Mabry writes:

Here is a nice brief explanation of epidemic waves.

Gary Rogan writes:

To be thought of as an epidemic, the company should have a ground-breaking new product and, preferably but not at all necessarily, itself be relatively new. It helps if the product appeals to young people, it also helps if there is a social aspect to the product, either in the form of communications, fashion, status. The vast majority of such companies are either in the technology or fashion business, with most of the rest in some sort of end-consumer business. Most companies don't seem to fit any of these descriptions. They grow or fail by finessing their business or strategy without any type of sudden dramatic growth.

Russ Sears writes:

It would appear to me that any attempt to consider how infections spread within the financial world should start with the investor, and their attempt to pick the strongest, shun and avoid the infected, and attempts to acquire herd immunity by grouping with those who appear to have a natural immunity. Any "epidemic" to an individual stock, sector of stocks, or even market often seems to be a meme caught by the investor, creating the sickness of fear, and damaging the stock.



 Here are 10 common patterns of faulty thinking adapted from Dr. David Burns, author of the classic Feeling Good and pioneer of Cognitive Behavioral Therapy:

All-or-Nothing Thinking: Failing to recognize that there may be some middle ground. Characterized by absolute terms like always, never, and forever.

: Taking an isolated case and assuming that all others are the same.

Mental Filter: Mentally singling out the bad events in one's life and overlooking the positive.

Disqualifying the Positive: Treating positive events like they don't really count.

Jumping to Conclusions
: Assuming the worst about a situation even though there is no evidence to back their conclusion.

Magnification and Minimization: Downplaying positive events while paying an inordinate amount of attention to negative ones.

Emotional Reasoning
: Allowing your emotions to govern what you think about a situation rather than objectively looking at the facts.

Should Statements
: Rigidly focusing on how you think things should be rather than finding strategies for dealing with how things are."

Labeling and Mislabeling
: Applying false and harsh labels to oneself and others.

: Blaming yourself for things that are out of your control.



 Good afternoon everyone,

Would anyone be able to suggest any alternatives to the US dollar that I would be able to put my money into? What currencies or commodities would be worth using to reduce the risk of dollar? I must admit I know very little about this particular subject. I'm not necessarily looking at this as an investment in which I'm trying to get rich, I'm just looking for something that will hold its value better than the US Dollar. As I put money aside for various things in life, I would hope there is something I could have that would be worth the same ten years from now as it would today. Any insights or suggested reading material would be appreciated.



Tyler McClellan comments: 

If you want to buy things in dollars in the future then you'll want to hold dollars.

Gary Rogan counters: 

That's like saying, "if you want to put gasoline in your car in the future you need to own gasoline today". Given the 90%++ loss of purchasing power of dollars in the last 100 years there just could be better alternatives than holding them today. If the point is that nobody knows what they are with any degree of certainty, that's a valid point. 

Anton Johnson writes: 

Inflation protected (at least to the extent of official figures) US series I savings bonds seem to be a decent savings vehicle, especially when they are accumulated over time. Unfortunately, there are minimum ownership periods and the maximum annual purchase is limited to 10K per person.

Craig Mee advises: 

Beware of selling the low, Corban, effectively adding size in a market that's been trending south for some time.

If Euro goes to the dump, and USD goes bid a la 2008-09, then that may be a nice way to offload USD then and say buy Aussie at 60c to the USD. (We do have stuff in the ground that helps, although with interest rates cuts just coming through, it appears some goodwill that was present at the start of the year is being priced out of the market against the USD).

Good luck. Oh…beware of the Fed, or in this case FEDS, to up end things at any time…. though if history only always repeats to the letter, it would make investing a wee bit more straight forward…

Alston Mabry writes: 

With a decent time horizon, you could put some money into corporate bonds and good divvy-paying stocks. That way you get the divs and also exposure to cap gains. just happen to be researching some recently, so here is a diversified group of sample tickers:


Leo Jia adds: 


This is an age of vast changes. For that reason, we can easily lose our vision into the future in terms of what will be more valuable. Even though there are many discussions around the topic, I can't decide easily if the US dollar will be more valueless than any other currencies in the future. Many argue that it will lose more value, but I tend to think that it perhaps will be more valuable than most other sound currencies, for the very simple reason that the US has a more fundamentally solid mechanism of being a most promising country. The very fact that the people with big money are not running away from the US demonstrates it.

There is the notion (as Gary Rogan pointed out) that the dollar has lost 90% of its purchasing power over the last 100 years. While I agree that there has been a devaluation process going on, I don't think the notion should really be understood literally. Many things around any purchase (including venue, environment, safety, transportation, etc) have vastly changed from 100 years ago. All these add legitimate values to the product and hence cost for the purchaser. One can argue that the egg he buys today is not that different from that his grandfather bought 100 years ago. Yes, sure, but things in a social economy can not be taken separately. Many things in it are vastly different from 100 years ago: farmers' lives, air-condition for the chickens, refrigeration along the transportation, etc.

As to what can hold value better for the future, I would like to have agricultural commodities (hope to hear other arguments). I buy into the view that because people in China and India (accounting for nearly 40% of the world population) are getting richer, they will be demanding more higher-scale food like meat which then will demand more amount of lower-scale produces like corn or wheat (I have been actually experiencing the above view personally for the last 10 years in China). Sadly, the production of these lower-scale produces can not be increased easily, so these prices must go up. In the long term, the pressure for the price rise due to the imbalance of demand and supply will be added to the legitimate price rise (as I seasoned in the last paragraph), resulting in much higher prices in dollar's term. One note to add is that the inherent volatilities associated with these commodities along the way should be carefully considered.

Additionally if I may add as an option to where to put your money, it should be into your life, your personal and business interests, and perhaps some interests of any community you are in. My feeling is that this might be more important than anything else.

Laurel Kenner writes: 

 There are no safe havens any more. People have been remarkably complacent about the obvious rigging and zombization of financial markets, the transfer of power to lawbreaking elite firms, the restrictions on capital movement out of the country, the baldfaced lies about the nonexistence of inflation, the steady fiscal confiscation of personal assets, The fact that we still can have a meal at pleasure and joke about our plight means nothing in terms of economic freedom. Unfortunately, the one point that holds true is that the foundation of individual liberty is economic liberty. We have merely slipped back into the iron pattern of historical kleptocracies. Maybe that is why there has been so little effective resistance. Those who protest are marginalized by the mainstream propaganda machines. Case in point: Did the Fed just bail out Europe without anyone blinking an eye, and what does that mean for the global future?The only advice that I have found to make sense at all lately is "Be flexible." We are playing against a relentless statist enemy. Some Specs recommend Australian and Canadian currencies. That's merely a play on commodities. I need not remind anyone here that in the past century, the U.S. government made it illegal to own gold, and that a few upward ratchets on certain margin requirements would kill the commodities market. I don't speak from lack of experience. We are all traders; we all like the freedom that brings; and our livelihoods are in jeopardy.

Good luck to us all. The world has changed, and continues to speed with reckless blindness toward a future that I doubt will turn out well.

Alston Mabry writes:

Here is a question that might elicit some interesting answer:

Let's say you have $X (USD) that you must commit for the next five years. Where would you put it? Leave it in dollars? (Though a 5-year Treasury would make the most sense for "cash" with a 5-year lockup.) Gold? Stocks? Some other currency? Norway bonds? And why?

I don't have a good answer to that yet.

Steve Ellison writes:

My starting point on this question would be that diversification, including international diversification, reduces risk. The US economy and the Eurozone have roughly equal GDPs. Japan and the UK are smaller but still quite significant. China is tied to the US dollar. Therefore, a diversified cash portfolio might be 40% US dollars, 40% euros, and 5% each of yen, pounds, Swiss francs, and gold (in recognition of gold's historical role as a form of currency). One could fine tune this allocation to include small percentages of currencies such as the real and Canadian dollar. I would think of this allocation as the equivalent of an index fund, before considering the insights of the many on this list that know more about currencies than I do.




Here is something interesting. This is the Small Business Survival Index for 2011

Rank State SBSI Scaled #

1 South Dakota 32.29 100%
2 Nevada 38.53 88%
3 Texas 39.08 87%
4 Wyoming 46.05 74%
5 South Carolina 47.05 72%
6 Alabama 48.77 68%
7 Ohio 49.54 67%
8 Florida 50.08 66%
9 Colorado 51.32 63%
10 Virginia 51.70 63%
11 Washington 52.31 62%
12 Mississippi 52.32 62%
13 North Dakota 53.30 60%
14 Utah 53.37 60%
15 Arizona 54.39 58%
16 Georgia 54.64 57%
17 Missouri 55.38 56%
18 Arkansas 56.16 54%
19 Oklahoma 57.08 52%
20 Indiana 57.75 51%
21 Alaska 58.80 49%
22 Kentucky 58.93 49%
23 Kansas 58.98 49%
24 Wisconsin 59.28 48%
25 Tennessee 59.98 47%
26 Louisiana 60.12  47%
27 Idaho 60.45  46%
28 New Mexico 60.58  46%
29 Michigan 61.48  44%
30 Montana 62.19  43%
31 Delaware 62.79  41%
32 West Virgina 63.49  40%
33 New Hampshire 63.57  40%
34 Oregon 65.18  37%
35 Pennsylvania 65.35  37%
36 Nebraska 66.42  34%
37 North Carolina 66.86  34%
38 Maryland 67.10  33%
39 Hawaii 70.89  26%
40 Illinois 72.08  24%
41 Iowa 72.53  23%
42 Massachusetts 73.98  20%
43 Minnesota 75.31  17%
44 Connecticut 75.59  17%
45 Maine 75.88  16%
46 California 76.36  15%
47 Rhode Island 77.25  14%
48 Vermont 78.29  12%
49 New Jersy 82.63  3%
50 New York 82.79  3%
51 Washington D.C. 84.35 0%

Gary Rogan writes:

At first glance the index seems oddly correlated with the party affiliation of the Governor. And the say they are all the same.



This is how Roger Craig won more in his first five games of Jeopardy than anyone else in the history of the show.



 On this day (December 1st) in 1842 on the training brig Somers, Philip Spencer, the son of the Secretary of War in the Tyler administration, was hanged, along with two other shipmates. The men were alleged to have initiated he only recorded attempt at mutiny in the history of the U.S. Navy.

The Somers incident led to the founding of the U.S. Naval Academy and to the most famous literary quarrel in American history up to that time. Washington Irving was a personal friend of the Somers' commander, Alexander Slidell MacKenzie, Sr. When the details of the incident were published in the papers, Irving applauded MacKenzie's decision to hang Spencer and the two other alleged mutineers. James Fennimore Cooper argued that MacKenzie had hanged Spencer solely to gain notariety from being the hangman of a fortunate son of a famous father. The quarrel only ended with MacKenzie's "mysterious" death while out riding in the Sleepy Hollow in Tarrytown, N.Y. where he and Irving lived.

MacKenzie's own son died in Taiwan in 1867 in what was the first of the U.S. Marines' "small wars" abroad.

MacKenzie, Jr.'s uncle was John Slidell, the Senator from Louisiana, who helped President Polk engineer the Mexican War, and managed to persuade the French to loan the Confederacy $15 million in gold against a promise of cotton deliveries - perhaps the most famous fail in the history of international commodity speculation up to that time.



 Vic's recent ideas on "Ten problems with nickel and diming" are similar to my recent thoughts on optimizing your giving. The psychology of gift giving suggest that gifts are given to strengthen relationships. Here are a few thoughts I have had recently on how to maximize the return on your gift giving this season:

First: Being generous is a signal that you value the other person and would like to know them better. For those wanting to signal romantic interest this season is an opportunity not to miss. I have thought that women have the harder time finding a partner, as the male simply needs look for a kind, patient generous open heart to be a good mother for his children. But the female looks for a balance between aggressive competitiveness and generosity. Signals that he is capable of both protection of self interest and signals of valuing close relationships. A man that understands the need to display both sides will be well ahead of the vast majority of his rivals. And the female that see the need for both will neither overvalue the myth of the need to "feminize" men nor undervalue their self esteem and fall for a "bad boy" that is abusive.

1. Those looking for partners should spread many small gifts around. As a shy, scrawny 16 year old perhaps my best move was to give several hand carved key chains to girls I was interested in… I still get complements from those girls when I run into them.

2. For those in a committed relationship. Remember that your gift is a signal of how you see the relationship as well as a re-commitment to it. Giving somethingthat the partner will use often is great for this. Buying something sentimental and of fine quality also gives you points.

3. Personal giving helps us understand the impulse to give. The secret to loyalty in many open source business, is the partnership instinct with the giver and the receiver of a service. Showing good examples of parental gifting between each parent is a great lesson for the kids of why and how to optimize the impulse to give.

If you want to get credit for doing anything, take a page out of the service industries mantra: Attitude is everything. Joyful, playfulness is a must in giving.

4. Wrapping is an important way to personalize and adding a personal note is a great way to show you care.

5. Try to give the gift in person if you can. Smile and add a personal comment after it is given. Don't neglect this. If many gifts are given at once, this can be in form of a side comment, note or even a phone call.

6. If gift cards are used or gifts are mailed for those far away, it is even more important not to forget to actually phone them. This is one time that texting is not an imposition. Checking on a gift is a great excuse to renew a friendship.

7. When giving a gift to a child, talking with their parents prior to buying it shows that you value their efforts and place in their child's life. Spending time with the child with the gift shows both that you care for them. Joyful, personal time together is almost always the highest gift to a child.

The gift of listening is also highly valued from the elderly and those no longer in your daily routine.

Charity no matter your beliefs, is a good way to expand your world and a chance to learn the lessons of those less fortunate than you. Some of those lessons are governmental injustices, some personal bad decisions and some are lessons of simply bad luck. These harsh life lessons are much better to learn from others than having to live them yourself.

9. A kid befriending an addict and seeing the sight of many addicts and self inflicted poor will erase the medias and movies romanticizing the dangers and life of a druggie and legends of victimhood.

10. Giving to a world wide organization can give you a reason to understand a culture and place beyond the ordinary path and travel.

11. Giving to children can establish a strong bond with the future. It is a nice way to see beyond your past.

12. Learning the diversity of the individual stories make clear the moral bankruptcy of a sterile governmental inforced "safety net" .



My question is how is it possible to make any decisions based on any historical sequence or series when some quasi-government worldwide cartel can do whatever they feel like doing at any moment, limited only by their imagination? It's bad enough that a flexionic conglomerate called "S&P", itself a part of a bigger conglomerate engaged in some multi-dimensional cat and mouse game with the US government, can decide to suddenly change it's methodology and downgrade a bunch of banks based that change, but then a bunch of globalists decides that this could be bad news so let's push the pendulum in the opposite direction as far as we can.

How does anyone rationalize making decisions based on the past? Is it because these types of events don't happen every day? Or are they averaged out over time?


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