There's a kind of dance that the 20s do these days where they move forward with high kicks and movements first forward and backward "honey I need you" "no, go away, get a job". The kids tell me it's a Beyonce song: "All the Single Ladies" that has a chorus "if you want me, put a ring around it". It is so reminiscent of the market vis a vis 1300 the last week. First it goes down to 1302 than right back up to 1315. Then back down again and up. 5 times. Once it actually gets in the house at 1296 but no action there as it gets thrown out at 1030 to get a job, that's yesterday. Where its close at 1309 only to go back to 1302.5 before closing unchanged yesterday. I'm told it's called free style dance, a combination of rap and rhythm and blues where the man tries hard to get in but the women constantly gives him a little opening and then turns him out until he can show the car and house and job and gives up the ho.

This is to the point but there was a lot more coming forward and being pushed apart like magnetic poles in the ones I saw at Rand's wedding.

Tim Melvin comments: 

Sounds like the line dance we used to do to Paradise by the Dashboard Light at weddings and parties

Of course, as that song points out, often getting the "fill" you so ardently desire and work for is the worst thing that could ever happen.



After writing two pieces for DailySpec (Link1. Link2.) I've become a little bit obsessed with the topic of low beta vs high beta stocks.

I reported there and confirm here that:

1) high beta, high risk stocks tend to look bad in studies of their compound growth, i.e. what would happen if you kept 100% of your portfolio there, but that

2) they actually look fine in terms of their "excess return" or "alpha", which is the proper (according to the "Capital Asset Pricing Model") way to measure returns on a risk-adjusted basis

Here's the expression used for "alpha" or "excess return":

alpha = R - Rf - beta * ( Rspy - Rf) ,

where R is the % return of the stock, Rf the percent return over the same period of a "risk free" asset (read "T-bills"), and Rspy the return of the S&P 500 index ETF ticker SPY.

The universe used here is the 500 largest market cap US-domiciled stocks, trading on either NYSE or Nasdaq, selected at the start of each calendar year in the study. The list includes tickers that have since vanished one way or another, whether by bankruptcy, merger, or other event.

In order to characterize the dependence of forward alpha on trailing beta, I measure, for each month, the correlation (sometimes called the "information coefficient") between each stock's alpha/excess return and its trailing beta, measured over the trailing 250 trading days. The results are shown in the attached table. With measurements for a bit less than 500 stocks each month (I exclude stocks with share prices less than $5 and stocks without a trailing 250 trading day history), the statistical uncertainty in the measured correlation is approximately 500^(-1/2), or 4%. Data ranges from May, 2001 through December, 2011 — 128 months.

A word about signs and magnitudes: the table shows correlation between forward alpha and trailing beta, so a negative sign for a given month would indicate that low beta stocks had outperformed. Regarding magnitude, I'd say that the one would require a magnitude of at least something like 10% for the effect to be meaningful and "actionable".

The table shows that the average of the 128 monthly correlation measurements is -0.5%, with a t-score of -0.3. This is most definitely a null result. So over this period, high and low beta stocks did, on average, roughly what the capital asset pricing model / "efficient market" theory would predict.


—–Also attached is a plot of the cumulative sum of the monthly correlations. When the cumulative sum is decreasing (increasing), that means that low (high) beta stocks are outperforming. The plot snakes around but in the end doesn't go very far. Low beta stocks do very well over the ~2004-2005 window, but then give it all back and more from 2008-2009. (It may be surprising that high beta outperformed low beta over the very bearish 2008-09, but first, remember that we're talking about risk-adjusted "alpha" here, and second, during 08-09 saw 50-ish percent declines even among not-so-risky stocks.)

So I don't think that the enthusiasm for low-risk, low volatility equities, as seen in the popularity of ETFs like SPLV, is deserved. It makes more sense to buy the whole market, SPY, and be tax-efficient. If you want lower volatility, then just buy less of it.

















 Let's play a little game — it's called “Baron Rothschild” — who once said “I made my fortune by selling too early” (a comment also made by Bernard Baruch)… Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out “Baron Rothschild” and go to a defensive position, or you can gamble and get the entire market return the dealer shows next. The gain cards read, say, 15%, 20%, 25% and 30%. If you're defensive, you lag the market by 10% when the market return is a gain, but you get, say, 5% if the market return is a loss. There is one -20% loss card. Once it appears, the game ends and everyone counts their dough, compounded. It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out “Baron Rothschild” even before the first card is shown. For example,

20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%
15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%
20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%
5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%

You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out “Baron Rothschild” after year two. It just doesn't pay to risk the big loss. The point of this isn't that investors should always take a defensive stance — some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting even long periods of defensiveness. Because of the mathematics of compounding, large losses have a disproportionate effect on cumulative returns. Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses, which is why the recent bull market has not even put the market ahead of Treasury bills since 2000 or even 1998. So again, the point is that the avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon." With regard to present stock market conditions, it would take a correction of only about 10% in the S&P 500 to put the market behind Treasury bills for the most recent 3-year period. That's not an empty statistic given rich valuations, unusual bullishness, overbought conditions, rising yield trends, and a market long overdue for such a correction. Given the average return/risk profile those conditions have historically produced, it makes sense to call out "Baron Rothschild" even if we allow for the possibility of a further advance, in this particular instance, before the market inevitably corrects.

1) Let's assume that one's goal is to beat some passive index (it doesn't have to be stocks; it could be the Yen or Natgas) over an X month period. And let's further assume that one is willing to engage in "selling early." And lastly, let's assume that "selling early" is sometimes the "right" thing to do due to the essay above. As a statistical matter, what is the likely minimum value for X … that permits the speculator to beat his passive index?

2) Let's assume that one's goal is to beat a passive index (again, it doesn't have to be stocks) over an X month period. And let's further assume that one is willing to exit the market "early," but also "buy early." Obviously, if one exits, re-entering is a necessary thing to do. As a statistical matter, what is the likely minimum value for X … such that the speculator can beat his passive index?

3) As a purely statistical matter, which should be better/worse : Buying early and selling early? Or, buying late and selling late ? And, again, what is the minimum X month performance period where either strategy has a chance to beat the passive benchmark.

William Weaver writes:

1. Disposition Effect

2. Great essay and the observation of defensive over aggressive is very good but I can't agree with purely taking profits unless there is a reason to exit. Assuming sufficient liquidity, in my humble opinion, it might not be bad to tighten stops (volatility historically has fallen as equities rise - though high levels in the late 1990's - so stops based on standard deviation should tighten anyway) allowing one to lock in profits but continue to profit from any trend that develops or continues. This seems to be a prominent trait of the most successful traders I've met; allowing profits to run by controlling for risk instead of picking a top.

3. The saying "There is nothing wrong with taking small profits" is a great way to lose everything if you don't also control for losses. In this essay there is only an early exit for profits.

4. His analysis of the equity premium to Treasuries is very insightful but I will leave that to the list for independent testing.

5. Every trader is different and must play to their own personality. For me, when trading intraday (which I am new to and still not the biggest fan of but am coming along) I will take off part of a position when anything changes, and this helps manage risk (leads to a larger percentage of profitable days). But will wait for long term momentum to reverse before exiting the last half as this is where the majority of my monthly profits come from. This way I can be a wuss and still profit.

6. Read The Disposition Effect if you have not and are interested in any type of trading/speculation. (To add to things to do to become a successful speculator: know, understand and be able to identify behavioral biases both in your own trading, and in the market).

Leo Jia writes:

I don't fully understand Rocky's 3 questions at the end. Guess they are meant for some real speculations, rather than for the Baron Rothschild Game, right?

If so, then I take Will's approach as described in his Point 2, except that I don't exit on instant stops, but on closing prices of certain intervals (30 minutes for instance for position trades) if the means of the intervals trigger my stops. My feelings about instant stops are that 1) they tend to have more execution errors (due to price chasing), and 2) either they get triggered more often or I have to set them wider (meaning more losses). I don't have concrete results about this and would love to hear other opinions.

I can't see how the game closely resembles trading. From what I understand about it, there seem to be many more winning cards than losing ones. So a strategy of simply selling on random cards gives one an easy edge to beat the dealer (though not necessarily achieving the best result). Am I missing something there?

Steve Ellison adds:

Turning to writings from 100 years ago, a friend found this book in his attic in Montana and gave it to me: Fourteen Methods of Operating in the Stock Market.

The first article in this book was A Specialist in Panics, which has been discussed on the List before. This method is to buy when there is a panic.

There was another article by H.M.P. Eckhardt, "Plan for Taking Advantage of the Primary Movements". He advised buying during steep market declines, as the Specialist in Panics did, but also suggested selling if a rapid rise brought profits equal to the interest the investor could have earned over three or four years. Mr. Eckhardt surmised that, with his money already having earned its keep for at least three years, the investor would probably get a chance to put it back to work in less than three years when another panic occurred.

For these sorts of techniques, Rocky's X is the length of a business cycle, which is unknowable in advance, but would normally be at least 48 months.

Alston Mabry writes:

Let's say you start at January, 2004 (arbitrarily chosen start date, but not cherry-picked, i.e., not compared to other possible start dates), and you go to January 2012. You have $100 a month to invest. You can buy the SPY and/or hold cash. You have a total of 97 months and thus, $9700 to invest. If you buy the SPY every month (using adjusted monthly close), you wind up with:


But being a clever speculator and wanting to buy the dips, you come up with a plan: You will let your monthly cash accrue until SPY has a large drop as measured by the monthly adjclose-adjclose; each time the SPY has such a drop, you will put half your current cash into SPY at the monthly close. To decide how large the drop will be, you compute the standard deviation of the previous 12 monthly % changes, and then your buying trigger is a drop of a certain number of SDs. Your speculator friends like the plan, but disagree on the size of the drop, so each of you chooses a different number of SDs as a trigger: 0.5, 1, 1.5, 2, 2.5, 3, and the real doom-n-gloomer at 4.

The results, showing the size of the drop in SDs required to trigger a buy-in, the final value of the portfolio, and the average cash position during the entire period:

SD / final value / avg cash
0.5  $11,522.13    $543.03
1.0  $11,328.42    $737.77
1.5  $10,885.80  $1,351.02
2.0  $10,884.15  $2,083.36
2.5  $10,655.96  $2,711.34
3.0  $11,005.72  $3,704.12
4.0   $9,700.00  $4,900.00

You, of course, chose 0.5 SDs as your trigger and so come out with the biggest gain. But your friend who chose 3 SDs says that he *could* have used his larger cash position to invest in Treasuries and thus have beaten you. You say, "Coulda, woulda, shoulda."

Mr Gloom-n-Doom cheated and bought the TLT every month and wound up with $14,465.56.



 In an effort to prove or disprove Keynesian notions I looked at two data series since 1971 for predictive relationships, federal spending and GDP annual changes adjusted to 2005 dollars from CBO data. With lags of 1 to 5 years I found nothing of significance for federal spending affecting GDP 1 to 5 years ahead. For GDP predicting spending, I did find a slight positive relationship between GDP changes now and spending changes two years from now, rsq=.04. I think it fair to say marginal federal spending increases or decreases do not affect GDP much, now or 5 years from now, but the debate will rage on.

Gary Rogan writes: 

While I of course believe that Keynesianism is pure unadulterated nonsense and any attempts to create net wealth by the government are doomed to fail, the statement that 'if there had been an opportunity for profit, some clever merchant would have been making the stuff even without a government "investment". ' isn't easily provable.

Clearly two points need to be addressed. One is scale, and it's very relevant these days as the weird topic of "colonies on the moon" has become a hot issue in the Florida primary. Could it be that things so giant in scope that no real-world merchant, even a billionaire, would voluntarily attempt to do for the fear of a devastating loss may make a profit? Much as this topic has been discussed here, I encounter it all the time in my discussions elsewhere, as just yesterday I was reacting to a list of space program spinoffs.

Second is the strangely modern behavioral economics aspect of Keynesianism. Is it possible that when "fear grips the nation" merchants, along with everyone else, start behaving irrationally and their fear of loss overcomes their normally healthy interest of making a profit even when such profit-making opportunities are otherwise self-evident?

Stefan Jovanovich comments:

Er, no, Gary. The scale of current investment in the petroleum industry alone dwarfs the capital construction programs of the every government in the world. Nimitz class aircraft carriers cost roughly $4.5B each. The Ford class carriers that the Pentagon hopes to build will cost $8B each; right now they are building 2. The projected investment in oil sands in Canada alone for 2013 will exceed the entire budget for the Navy's 2 new carriers.

If there is an opportunity for profit, people with money will find it. Of course, that includes government contracting, as Adam Smith so ably reminded all of us. Keynes' theory of "animal spirits" was useful because it suggested that entrepreneurs themselves needed Keynesian economics, that - without the assurance of a government customer - no one would take the risk. That premise seems far less easily provable than mine. The many people on this List and throughout the world and throughout history who have literally made something from nothing seem to have a superabundance of energy and determination and guts and the necessary lunacy required to "make it new".

If there is a profit to be found in sending air breathing tailless monkeys into the void of space, Mr. Branson and his competitors will find it. What Speaker Gingrich is proposing is precisely what Keynes proposed, paying people in Florida to dig holes and fill them up again. Yet, somehow, he and not Governor Romney is the "true conservative". La Di Da.



 I am often asked what ten steps one should take to become a successful speculator.

I would start by reading the books of the 19th century speculators, 50 Years in Wall Street, The Reminiscences of a Stock Operator by Markman, and others.

Next I would read the papers of Alfred Cowles in the 1920s and try to compute similar statistics on runs and expectations for 5 or 10 markets.

Third I would get or write a program to pick out random dates from an array of prices, and see what regularities you find in it compared to picking out actual event or market based events.

Fourth, I would read Malkiel's book A Random Walk Down Wall Street and update his findings with the last 2 years of data.

Fifth, I would look at the work of Sam Eisenstadt of Value Line and see if you could replicate it in real life with updated results.

Sixth, I would start to keep daily prices, open, high, low, and close for 20 of so markets and individual stocks and go back a few years.

Seventh, I would go to a good business library and look at the old Investor Statistical Laboratory records of prices to see whether it gave you any insights.

Eighth, I would look for times when panic was in the air, and see if there were opportunities to bring out the canes on a systematic basis.

Ninth, I would apprentice myself to a good speculator and ask if I could be a helpful assistant without pay for a period.

Tenth, I would become adept at a field I knew and then try to apply some of the insights from that field into the market.

Eleventh, I would get a good book on Statistics like Snedecor or Anderson and be able to compute the usual measures of mean, variance, and regression in it.

Twelfth, I would read all the good financial papers on SSRN or Financial Analysts Journal to see what anomalies are still open.

Thirteenth, of course would be to read Bacon, Ben Green, and Atlas Shrugged.

I guess there are many other steps that should be taken that I have left out especially for the speculation in individual stocks. What additional steps would you recommend? Which of mine seem too narrow or specialized or wrong?

Rocky Humbert writes:

 All the activities mentioned are educational, however, notably missing is a precise definition of a "successful speculator." I think providing a clear, rigorous definition of both of these terms would be illuminating and a necessary first step — and the definition itself will reveal much truth.

Anatoly Veltman adds: 

I think with individual stocks: one would have to really understand the sector, the company's niche and be able to monitor inside activity for possible impropriety. Individual stocks can wipe out: Bear Stearns deflated from $60 to $2 in no time at all. In my opinion: there is no bullet-proof technical approach, applicable to an individual enterprise situation.

A widely-held index, currency cross or commodity is an entirely different arena. And where the instrument can freely move around the clock: there will be a lot of arbitrage opportunities arising out of the fact that a high percentage of participation is inefficient, limited in both the hours that they commit and the capital they commit between time-zone changes. Small inefficiencies can snowball into huge trends and turns; and given the leverage allowed in those markets - live or die financial opportunities are ever present. So technicals overpower fundamentals. So far so good.

Comes the tricky part: to adopt statistics to the fact of unprecedented centralized meddling and thievery around the very political tops. Some of the individual market decrees may be painfully random: after all, pols are just humans with their families, lovers, ills and foibles. No statistical precedent may duly incorporate such. Plus, I suspect most centralized economies of current decade may be guilty of dual-bookeeping. Those things may also blow up in more random fashion than many decades worth of statistics might dictate. Don't tell me that leveraged shorting and flexionic interventions existed even before the Great Depression. Today's globalization, money creation at a stroke of a keyboard key, abominable trends in income/education disparity and demographics, coupled with general new low in societal conscience and ethics - all combine to create a more volatile cocktail than historical market stats bear out. 2001 brought the first foreign act of war to the American soil in centuries. I know that chair and others were critical of any a money manager strategizing around such an event. But was it a fluke, or a clue: that a wrong trend in place for some time will invariably produce an unexpected event? Why can't an unprecedented event hit the world's financial domain? In the aftermath of DSK Sofitel set-up, some may begin imagining the coming bank headquarter bombing, banker shooting or other domestic terrorism. I for one envision a further off-beat scenario: that contrary to expectations, the current debt spiral will be stopped dead. Can you imagine next market moves without the printing press? Will you find statistical precedent of zooming from 2 trillion deficit to 14 trillion and suddenly stopping one day?

Craig Mee comments:

 Very generous post, thanks Victor…

I would add, in this day and age, learn tough typing and keyboard skills for execution and your way around a keyboard, so you don't wipe off a months profit in the heat of battle. I would also add, learn ways of speed reading and information absorption, though these two may be more "what to do before you start out". 

Gary Rogan writes: 

Anatoly, I don't think really understanding the sector and and the niche is all that useful unless one knows what's going on as well as the CEO of the company, which means that in general understanding quite a bit about the company isn't useful to anyone without access to enormous amount of information. It's the subtle, little, invisible things that often make all the difference. There are a lot of people who know a lot about pretty much any company, so to out-compete them based on knowledge is usually pretty hopeless. It is nevertheless sometimes possible to out-compete those with even better knowledge by sticking with longer horizons or by being a better processor of information, but it's rare.

That said, it has been shown repeatedly that some combination of buying stocks that are out of favor by some objective measure, possibly combined with some positive value-creation characteristics, such as return on invested capital, do result in market-beating return. Certainly, just about any equity can go to essentially zero, but that's what diversification is for.

Jeff Watson adds: 

 In the commodities markets it's essential to cultivate commercials who trade the same markets as you(especially in the grains.) One can glean much information from a commercial, information like who's buying. who's selling, who's bidding up the front month, who's spreading what, who's buying one commodity market and selling another, etc. When dealing with a commercial, be sure to not waste his time and have some valuable information to offer as a quid pro. Also, one necessary skill to develop is to determine how much of a particular commodity is for sale at any given time…. That skill takes a lot of experience to adequately gauge the market. Also, in addition to finding a good mentor, listen to your elders, the guys who have been successful speculators for decades, the guys who have seen and experienced it all. Avoid the clerks, brokers, backroom guys, analysts, touts, hoodoos etc. Learn to be cold blooded and be willing to take a hit, even if you think the market might turn around in the future. Learn to avoid hope, as hope will ultimately kill your bankroll. When engaged in speculation, find one on one games like sports, cards, chess, etc that pit you against another person. Play these games aggressively, and learn to find an edge. That edge might translate to the markets. Still, while being aggressive in the games, play a thinking man's game, play smart, and learn to play a strong defensive game……a respect for the defense will carry over to the way you approach the markets and defend your bankroll. Stay in good physical shape, get lots of exercise, eat well, avoid excesses.

Leo Jia comments:

Given that manipulation is still prevalent in some Asian markets, I would add that, for individual stocks in particular, one needs to  understand manipulators' tactics well and learn to survive and thrive under their toes.

Bruno Ombreux writes:

Just to support what Jeff said, you really have to define which market you are talking about. Because they are all different. On one hand you have stuff like S&P futures with robots trading by the nanosecond, in which algorithms and IT would be the main skill nowadays, I guess. On the other hand, you have more sedate markets with only a few big players. This article from zerohedge was really excellent. It describes the credit market, but some commodity markets are exactly the same. There the skill is more akin to high stake poker, figuring out each of your limited number of counterparts position, intentions and psychology.

Rocky Humbert adds:

I note that the Chair ignored my request to precisely define the term "successful speculator," perhaps because avoiding such rigorousness allows him to define success and speculation in a manner as to avoid acknowledging his own biases. I'd further suggest that his list of educational materials, although interesting and undoubtedly useful for all students of markets, seems biased towards an attempt to make people to be "like him."

If gold is up a gazillion percent over the past decade, and you're up 20%, are you a successful speculator?If the stock market is down 20% over a six month period, and you're down 2%, are you a successful speculator?If you have beaten the S&P by 20 basis points/year, ever year, for the past decade, without any meaningful drawdowns, are you a successful speculator?If you trade once every year or two, and every trade that you do makes some money, are you a successful speculator?

If you never trade, can you be a successful speculator?

If you dollar cost average, and are disciplined, are you a successful speculator?

If you compound at 50% per year for 10 years, and then lose everything in an afternoon, are you a successful speculator?

If you lose everything in an afternoon, and then learn from your mistake, and then compound at 50% for the next 10 years, are you a successful speculator?

If you compound at 6% per year for 10 years, and never have a meaningful drawdown, are you a successful speculator?

If the risk free rate is 6%, and you are making 12%, are you a more successful speculator then if the risk-free rate is 0% and you are making 6%?

If you think you are a successful speculator, can you really be a successful speculator?

If you think you are not a successful speculator, can you be a successful speculator?

Who are the most successful speculators of the past 100 years? Who are the least successful speculators of the past 100 years? 

An anonymous contributor adds:

 In conjunction with the chair's mention of valuable books and histories, I would append Fred Schwed's Where are the Customers' Yachts?.

While ostensibly written with a tongue-in-cheek hapless outsider view of 1920s and 1930s Wall Street, it has provided as many lessons and illustrations as anything by Henry Clews. In this case, I am reminded of the chapter in which Schwed wonders if such a thing as superior investment advice actually exists.

Pete Earle writes:

It is my opinion that the first thing that the would-be speculator should do, even before undertaking the courses of actions described by our Chair, is to open a small brokerage account and begin plunking around in small size, getting a feel for the market, the vagaries of execution quality, time delays, and the like. That may serve to either increase the appetite for such knowledge, or nip in the bud what could otherwise be a long and frustrating journey.

Kim Zussman adds: 

The obligatory Wikipedia* definition of speculation is investment with higher risk:

Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term Investment is one of degree of risk. It differs from gambling, which is based on random outcomes.

There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing

By this definition one must define risk and decide what comprises high and low risk — which may be simple in extreme cases but (as we have seen repeatedly) is not very straightforward in financial markets

*Chair is quoted in the link 

Alston Mabry writes in:

I'm successful when I achieve the goals I set for myself. And rather than a target in dollars or basis points or relative to any index or ex-post wish list, those goals may simply be to act with discipline in implementing a plan and then accepting the results, modifying the plan, etc.

Anatoly Veltman adds: 

And don't forget Ed Seykota: "Everyone gets out of the market what they want". I find that everyone gets out of life what they want.

Plenty a market participant is not in it to make money. Fantastic news for those who are!

Bruno Ombreux writes:

This will actually bring me back to the question of what is a successful speculator.

In my opinion success in life is defined in having enough to eat, a roof, friendships and a happy family (as an aside, after near-death experiences, people tend to report family first). You can forget stuff like being famous, leaving a legacy or being remembered in history books. If you are interested in these things, you have chosen the wrong business. Nobody remembers traders or businessmen after their death except close family and friends. People who make history are military and political leaders, great artists, writers…

So you are limited to food, roof, friends and family. Therefore my definition of a successful speculator is a speculator that has enough of these, so that he doesn't feel he needs to speculate. I repeat, "a successful speculator does not need to speculate."

Paolo Pezzutti adds:

I simply think that a successful speculator is one who makes money trading. Among soccer players Messi, Ibrahimovic are considered very successful. They consistently score. They experience short periods without scoring. Similarly, traders should have an equity line which consistently prints new highs with low volatility and a short time between new highs. Like soccer players and other athletes it is their mental characteristics the main edge rather than knowledge of statistics. One can learn how to speculate but without talent cannot play the champions league of traders and will print an equity line with high drawdowns struggling losing too much when wrong and winning too little when right. Before dedicating time to find a statistical edge in markets one should assess his own talent and train psychologically. In this regard I like Dr Steenbarger work. In sports as in trading you very soon know yourself: your strengths and weakness. There is no mercy. You are exposed and naked. This is the greatness and cruelty of markets and competition. This is the area where one should really focus in my opinion.

Steve Ellison writes:

To elaborate a bit on Commander Pezzutti's definition, I would consider a successful speculator one who has outperformed a relevant benchmark for annual returns over a period of five years or more. Ideally, the outperformance should be statistically significant, but market returns can be so noisy that it might take much of a career to attain statistical significance.

Jeff Rollert writes:

I propose a successful speculator dies wealthy, with many friends. Wealth is not measured just in liquid terms.

Should a statistical method be preferred, I suggest he is the last speculator, with capital, from all the speculators of his college class.

In both cases, I suggest the Chair and Senator are deemed successful, each in their own way.

Leo Jia adds:

If I may wager my 2 cents here.

I would define a successful speculator as someone who has achieved a record that is substantially above the average record of all speculators in percentage terms during an extended period of time. The success here means more of a caliber that one has acquired which is manifested by the long-term record. Similarly regarded are the martial artists. One is considered successful when he has demonstrated the ability to beat substantially more than half of the people who practice martial arts, regardless of their styles, during an extended period of time. It doesn't mean that he should have encountered no failures during that time - everyone has failures. So, even if that successful one was beaten to death at one fight, he is still regarded as a successful martial artist because his past achievements are well revered.

With this view, I will try to answer Rocky's questions to illustrate.

Julian Rowberry writes:

An important step is to get some money. Preferably someone else's. [LOL ]



Here are 4 charts.

Chart 1 - Key trendline resistance on the monthly off the 2007 pre-recession high

Chart 2 - 12 Year Fib Phenomena… Counting backwards from this month (1), ~ major tops, including the double top formed by the 2000 high (144 months ago), & 2007 pre-recession high (55 weeks ago), along with the most recent swing high on May 2011 (8 weeks ago), all fall into a Fibonacci progression.

Chart 3 - Perfected 13 count on the TD Sequential.

Chart 4 - Not saying that it's January 2010 redux, but it is something to keep in mind especially when considering the other charts



 While in Korea many years ago the "slicky boys" were on the streets with wrist watches running from their wrist to their upper forearms.

I cannot believe all the watches hawkers are selling on TV.

I have several nice pocket and wrist watches —- and wear none of them.

My favorite is my father's 1940 curved face Bulova.

Do you have a favorite watch?

Robert Redford wears a leather strap Timex.





 In my experience the Next Big Thing (NBT) is often very obvious to everyone. It usually is not about being the first to market to achieve success. Rather it is often all about execution. Apple under Jobs has always executed well and that is their secret. Some examples I might cite would include Bowmar who delivered the first electronic calculator to the market. Where are they now? Instead HP has the high end and Texas Instruments and Casio split the rest.

Other obvious things include the PC, flat screen TV, smartphone, the Cloud, tablet computers etc. That coupon flipping idea is my son's company. That is his NBT idea. It is a synthesis of the current coupon rage and social networking. But ultimately it is execution that will determine who makes it in each of these areas.



The last time free stuff on the internet attracted so much capital was in 1995-6 when Excite, Lycos, Netscape, Yahoo et. al. went public. The last time information was "hot" was the mid-1960s when the New York Times and everyone else who put ink to paper had their IPOs. In retrospect, neither time was a profitable one for the people who held on to the stocks. The message of the media was very much buy short-term, sell long-term.



 When I was a Yale undergrad, I took a class called "Lessons of Japan." The course was a mixture of economics, policy and sociology, and the goal was to explain why Japan was so successful; how US industry should model itself after the Japanese; how the Commerce Department should be like MITI; and how the interconnected corporate holdings of Japanese companies ("Zaibatsu") were a key to lasting profitability and success. (There was also a mention of morning calisthenics for assembly line workers.)

It looks like Yale has updated its curriculum! From an interview with Steve Roach, former Morgan Stanley economist/permabear and now lecturer at Yale:

ROACH: … one of the great courses I'm teaching at Yale is called "The Lessons of Japan." You spend five weeks studying what happened in Japan and developing metrics to calibrate the excesses pre-bubble, the mistakes made post-bubble, and then we look at that template relative to other countries in the developed and developing world and there's a lot of striking similarities. Especially insofar as the U.S. and Europe let these bubbles and policy blunders distort the real side of their economy. It would be one thing if these were just financial or market-driven excesses. But they're not.

Read the full interview here. (By the way, I got an A in my class. It was a gut course.)

Dan Grossman writes: 

One of the great mysteries to me in recent years is why Japan is not doing better, its economy not growing faster.

I used to do quite a bit of work in Japan, and I was always impressed by the intelligence, hard work and cooperative dedication of Japanese businesspeople. Yes, maybe they screwed up somewhat from a government economic standpoint, but why should that be so important compared to all skills and expertise of major Japanese companies, and their position close to China where they can both take advantage of cheap Chinese manufacturing and serve as the gateway for many business interactions between China and the Western world.

Nor am I impressed by the conventional explanation that a part of the problem is Japan's failure to allow immigration, that its static population will doom it to know low growth and an aging population. I don't see that massive legal and illegal Hispanic immigration is so economically so advantageous for the US. And there are great advantages to Japan in maintaining its homogeneity and its happy, fairly classless interactions between all levels in Japanese society.

Actually I have heard from Japanese friends and visitors that life in Japan these days is quite good. The population is prosperous and happy, with far fewer problems than in the US and Western Europe.

I guess my puzzlement is why Japan has not been a better investment, why its stock market has not been performing better.



 Since December 19 2011, we've gone through a remarkable bullish period in the market. We had 19 out of 23 days up as of close yesterday. A good way to quantify these is with scans, a variant of runs except instead of x in a row in the same direction, it's x out of the recent y in the same direction. Like runs, scans could be quantified with magnitudes by multiplying the consecutive changes adjusted for mean together and normalizing by a goodmanesque number.

One notes that out of the last 3400 daily trading days from year end 1995 in S&P, such an event occurred just 5 times; all such happened in 2010, around the middle of March, March 12, March 16, March 22, March 23, and Nov 9 (note the failure of independence and thus the need for a real goodmanesque adjustment). One notes that 20 days later they all were up, an average of 3%. Rocky Humbert rules again.

It is interesting to note that there has never been a 19 or 23 down, but there were four, 17 of 23 down, all around Aug 8th, Aug 10, Aug 22, and one outlier 9/29/1999. Anyone who didn't take out the cane during those times, lost a quick 6%. It is interesting to reflect on this phenomenon and to see the "expert " for what he is.

A nice application of scan statistics is contained in Fast Spatial Scan .

A textbook on scans from Wiley is Balakrishnan, N. and Koutras, M. V. (2002): Runs and Scans with Applications.

Also, one notes that bonds have set some nice clusters, with 19 of 23 up occurring 3 times since 1996 being bullish.



 My friend recently wrote to my friend Art Shay asking what his secret is. This is what he wrote:

The secret is starting out with good DNA and poor immigrant parents who respected learning and believed that by working diligently, despite the handicaps of poverty, good looks and middling athletic skills, in this country you could amount to something.

In Russia at 23 my father was a political activist working with young Leon Trotsky. When he came to America, which had already suffered its Revolution, he became a tailor like all his 7 siblings who'd taken up the family trade. Although he hated uniforms, because of what they meant in Europe, my father encouraged me to become a Boy Scout and helped me win my 21 merit badges. I became a Life Scout, missing Eagle by being one bird short for the required Bird Study merit badge! (I could have used your help Josh!)

In the Depression I'd sometimes accompany my father looking for work in the needle trade, starting at one of the 8 story factory buildings, top floor, back door, and working our fruitless way down. He was out of work half the time and supported me and my 3 brothers and mom by fabricating dresses at home. He taught me to love reading and respect learning and sometimes played plangent Russian songs on the mandolin (singing the lyrics quietly– my favorite being" Nagyishcka"- the horse whip, which accented the sharp rhythms of the troika horses as they ran through the snow) to put 3 year old me to sleep.)

He took me to Central Park to watch the rich kids sail their boats. He taught me it was OK to sneak a feel of an Arctic sled on display behind "Don't Touch" sign and ropes, but make sure the guard was not looking. (In my career I would make dozens of secret pictures!).

When I enlisted in the Air Force Herman Shay wept, because military service often meant death and absence forever, but he had already taught me the meaning of America, and what a privilege it was to give back something of myself to it. I had a lucky war. I had but 9 months of college, but I educated myself. I've read hundreds and written about 60 books and countless articles. My writing idols are Nabokov, Hemingway, Algren and Chekhov.

I became a photographer when I realized I did not have the DNA spark to be a great writer. To come up to my own ideals. I compensated with the camera. Some of my pictures have been compared by tough critics, to works by Dostoevsky, Hemingway, Dickens, Melville. Algren and even Nabokov. This is flattering and great for the ego. But I don't buy it. One of my Chicago pictures, recently bought by a great university for their new library was sold to them by my gallery for an outlandish amount. My older daughter, who overcame typical teenage difficulties, was recently honored by the LA Bar Association for being a top intellectual property, trade mark and patent attorney in LA. When she was in law school she was the first student in US history to have a case in the US Supreme Court. She won her case with her professor (he had the license) reading her brief. She said, beforehand, knowing I had staked out the Mafia in a dozen cities for Time and Life: "If you come near the Supreme Court with a hidden camera the day I'm there, they'll arrest me for patricide…"

It also helps to have a brave, beautiful, intelligent rare book dealer of a wife for 67 years and counting.





Last September 30th, I was highly critical of a fellow spec (no need to name names) who, amidst the S&P downgrade, the ECRI recession call , and a volatile and nasty stock market swoon wrote: "None the less I moved a large part of my 401 K to cash, and the rest in safer stocks today, giving me more than half in cash. This is as conservative a position I have been at including the 2008-2009 period. " With 20:20 hindsight, we should note that this fellow sold the "exact low" — a statistically improbable feat … comparable only with buying the exact low in natgas last week. He never wrote to us about if/when he became less conservative. One presumes that he continues to justify his decision with some rationalization like: "The risks were just too great to ignore." Or "I couldn't take the pain." Or "My wife would never forgive me if I lost everything."

As I wrote at that time, I thought that there is always a risk of things getting worse, but that I was nibbling into weakness — because my disciplined analysis (which has worked for decades) gave the most probable 3-5 year return of high single digits…and that was sufficient grounds to be adding to exposure — not reducing exposure. I'm not giving away any trade secrets when I note that different asset classes behave differently, and my willingness to nibble at stocks during last summer's swoon is not inconsistent with my unwillingness to aggressively buy natural gas futures at its recent 10-year low prices. Now that Mr. Market has risen a cool 21% — and the Dow Jones is back to it's early 2008 levels, I would bless and compliment anyone who wrote that they were thinking about taking some chips off the table — in large measure because the most probable 3-5 year return in the S&P is back towards the low single digits…and there is considerably less palpable fear; there is little or no value in US fixed income; and European headlines are currently in abeyance. I have no clue whether the next 10% will be up or down — but if it's up (and occurs in the next month or two), I'll be taking some chips off the table too. Everyone makes mistakes. Only fools make the exact same mistake twice. Learn from your mistakes, and you'll be a better trader and a better person too.

A Repentant Man Who Did Not Use a Cane writes in: 

I will own this mistake. I have learned from it.

I have thought of that post often, and my macro call's results have been worse than you infer: Because of a new process for transfers, I did not complete the transaction on the 30th. I was not aware of it until Monday, I did not get my confirm and the transaction actually was completed at the close of the 4th.

The S&P was 1131.42, 1099.23 and 1123.95 respectively on those days.

Rather than tell how my account has performed since then let me tell what I believe I learned.

Early on in my history of on this list, I told my one exception to the cane rule:

"When there is a liquidity crisis all bets are off". This worked during the 08 meltdown. I suffered some pretty big hits, but there were more coming once the banks were begging for cash after Lehman. However, it did not work in September because there was no crisis. Being unleveraged I should have stuck closely to the rule, I incorrectly believed that I could have saved a lot of power by anticipating the crisis rather than getting out once it happened. Now, I still believe that if you are a leveraged trader, not going all in with a liquidity crisis forecasted is a prudent thing to do. You may miss a big gain, but your chances of blowing up has increased beyond what is predictable by the historical numbers. If you want to turn to the scientific method during these periods, it would appear that there is significant parallel to what can happen in the chaos of population growth. That is if one resource is depleted you must adapt rather than use the same old tricks.

Now the converse side of the liquidity crisis rule is once the creators of money flood the market with liquidity, then this is the time to pull out the canes again.

I will leave it the everyone to shred this or to educate me further…before the market does.

Gary Rogan writes: 

Rocky, the point about selling low seems pretty clear. Are you saying though that you have some evidence that when the expected return falls below low single digits one should "take some chips off the table"? Clearly both points are of the "is motherhood good? is apple pie good?" variety, especially the first one, but much as many people recommend buying low, a lot fewer recommend "going to cash" when the Fed model or whatever is pointing to low expected returns for their core portfolio, if that's what you are talking about. 



 Are you a number 3 batsman? We must all be at certain times, but you must know how to bat equally as prudently as an opener or last drop.

Like in trading, with Cricket and sports, you must know your role and be a good reader of what's unfolding and how to apply it, due to volatility and current risk reward opportunities.

Batting at No.3, the player must have a wide range of skills to be successful. He must have the defence of an opener, to come in when an early wicket is lost and nullify the new ball. Or he must come in at 1-100, and attack like it's a one-day match to keep the momentum of the game going his team's way.

The key word is 'momentum'. The player must have the skill to take the momentum away from the opposition bowlers and get it to swing his way. Or he might have to come in late and keep the momentum going as long as he can. All great No.3s had the skill to change the momentum of a match: Don Bradman, Viv Richards, Ponting, Rahul Dravid, Neil Harvey and Kumar Sangakkara.



 The NYPL digital collection has images of Audubon's last work the drawings are not Audubon's but those of his son, John.

Audubon's American wife Lucy deserves as much credit as her husband; without her extraordinary grit, Audubon would never have succeeded in the enterprise for which he is famous. His first venture — building and operating a steam-powered saw and grist mill on the Ohio at Henderson, Kentucky - was a "failure"; after 9 years the mill business collapsed - because demand for sawn lumber for housing and commercial construction had suddenly disappeared in what is now known as the Panic of 1819 - the first "slump" in our Republic's history.

Added to the failure was the misery of losing their daughter, Lucy, Audubon's being thrown into debtor's prison and then the loss of a second daughter - Rose.

Audubon came to America using a forged passport that his father, who was once a privateer, bought for him. The father bought the fake ID that allowed his son to leave France so that John James would not be conscripted into Napoleon's Army.



Downtown Freddie Brown, Bird, Reggie Miller, et al. would have kept shooting 3s, but would a layup have been the better decision?

Here we show, using the sequences of field goal attempts made by professional basketball players, that the outcome of even a single field goal attempt has a considerable effect on the rate of subsequent 3 point shot attempts, in line with standard models of reinforcement learning. However, this change in behavior is associated with negative correlations between the outcomes of successive field goal attempts. These results indicate that despite years of experience and high motivation, professional players overgeneralize from the outcomes of their most recent actions, which leads to decreased performance.

from "Reinforcement Learning in Professional Basketball"



 Congrats to [DailySpec contributor] Ralph Vince and Richard Wilkie on the launch of their Leverage Space-based index with Dow Jones. DJ is keeping the technical tradition of its founder Charles Dow alive in this innovative approach to asset investment and market index creation.


Gibbons Burke

Grey-eyed Athena sent them a favorable breeze, a fresh west wind, singing over the wine-dark sea.

-Homer, The Odyssey, II, l.420.

Dow Jones Indexes To Launch The Dow Jones LSP Position Sizing Equal Sector U.S. Large-Cap 50 Index

New Gauge is the First in Dow Jones LSP Position Sizing Indexes Series

Index Methodology is Based on LSP Partners' Proprietary Investment Strategy Created by Noted Risk-Management Expert and Author, Ralph Vince

NEW YORK (January 23, 2012) — Dow Jones Indexes, a leading global index provider, today announced the launch of the Dow Jones LSP Position Sizing Equal Sector U.S. Large-Cap 50 Index, the first in the new Dow Jones LSP Position Sizing Indexes series.

The index series utilizes a proprietary strategy created by the risk-management-research consulting firm, LSP Partners LLC, and its founder and CEO, Ralph Vince.

The Dow Jones LSP Position Sizing Equal Sector U.S. Large-Cap 50 Index is a quantitative-strategy gauge that takes a dynamic approach to measuring U.S. large-cap stocks by allocating index-component weights between an equity segment and a cash segment represented by Treasury Bills. The allocation between the two segments is determined based on a proprietary quantitative algorithm.

The proprietary algorithm is a rules-based application of the Leverage Space Portfolio, or LSP, strategy which seeks to maximize the probability of positive performance, rather than seeking to maximize performance, by employing a risk-control process focused on drawdown management.

"With Ralph Vince's proprietary investment strategy serving as its foundation, we believe the Dow Jones LSP Position Sizing Indexes family represents a novel and conservative approach to evaluating the equity marketplace," said Michael A. Petronella, President, Dow Jones Indexes. "By coupling an innovative strategy with a systematic, rules-based methodology, Dow Jones Indexes and LSP Partners have developed a series of indexes that seek to dynamically account for stock-price fluctuations which can be important during periods of market volatility."

Dow Jones Indexes has fully automated all elements of the LSP strategy into a quantitative algorithm, allowing for universal, systematic, and transparent application of the strategy to a universe of equity components of any size or composition. A detailed description of the index methodology is available here.

Today's index launch follows the April 2011 announcement by Dow Jones Indexes and LSP Partners in which the firms announced an agreement to develop and co-brand an index family to serve as the basis of both passive and active investment funds, including exchange-traded funds, mutual funds, and institutional accounts around the world.



In 1930s Chicago you kissed the ring of the boss. In North Korea you mourn with as much sincerity as you can muster. In 2010's in the US you go to Davos and sing the same songs as the SOTU address:

"Billionaires Occupy Davos as 0.01% Bemoan Income Inequality".



 On Telegraph Avenue in Berkeley is this town's incarnation of the storied Parisian bookseller, Shakespeare & Co. While walking past the shop last evening I saw in its windows a winsome quote.

It addressed the chemical underpinnings of the pleasing fragrance of erudition associated with old volumes:

Lignin, the stuff that prevents all trees from adopting the weeping habit, is a polymer made up of units that are closely related to vanillin. When made into paper and stored for years, it breaks down and smells good. Which is how divine providence has arranged for secondhand bookstores to smell like good-quality vanilla absolute, subliminally stoking a hunger for knowledge in all of us…

from the article "How to Smell Like a Used Book"

It seems that time-honored books have had more up their respective sleeves than meets the eye.



 I thought it my civic duty to do some counting this eve of the annual presidential address to congress. Who in fact is the best speaker of the century ( or at least 1930), not in terms of rhetoric, but in terms of moving the market up. I am using Dow industrial index since 1928 understanding there are substitution and other biases involved. Looking a week after the speech, here are the average percentage moves ranked by president.

Bush Sr  1.5%  n=4
Clinton 1.3%  n=8
FDR  1.2%  n=9
Reagan .7%  n=7
Truman .6%  n=7
Johnson .6%  n=6
Ford .6%  n=3
Bush Jr .2%  n=8
Kennedy (0.9%)  n=3
Eike (.6%)  n=8
Carter (1%)  n=4
Hoover(2%)  n=4
Nixon(2.3%)  n=4
Obama(2.5%)  n=3

all Reps (.20%)  n=38
all Dems .35%  n=40

There were a total of 78 speeches in the period. Here is an interesting link.

The Democrats appear to be more beguiling speakers at least to the markets' ear.

I would be glad to add Grant in honor of Stefan if someone will forward any market data from 1869 to 1876. I am sure U.S.G would bring up the Rep. average.



 Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power.

-P.J. O’rourke

It was rollover and I was standing close to the center of the bond pit so that I would have access to both the spread paper and 2nd month brokers, when D. X walked up to me. The bond market was experiencing a brief respite from it’s usual frenzied trading activity and Dx had taken the opportunity to come by and talk to me. He informed me that he was working with some large institutional traders in New York and overseas, and that they were going to be trading some size in the 30 year. He then asked me if I would like to fill their orders, or at least a portion of them. I explained to Dx that although I occasionally did brokerage, it was only as an accommodation to the floor brokers I stood next to, so that they would be able take a break or have lunch.

The majority of the time I functioned as a trader, and I wasn’t interested in being taken out of the market, to fill some orders. Besides, I didn’t know who these customers were. Dx went on to tell me that there was going to be a considerable amount of business, and that if I did a good job, I could have the deck. I respectfully declined his offer and Dx walked away. It wasn’t long before I saw Dx talking to another broker on the other side of the pit, and then another. Little did I know, that I had just made one of the smartest decisions of my life.

I had met Dx and his wife Lisa, who doubled as his clerk, in the lounge of my clearing firm. He was a very talkative and gregarious guy, but in a used-car-salesman kind of way. He was a perennial bust-out, kicked out of numerous clearing firms at both the Merc and the Board, but now had an account where I cleared my trades. There were a lot of *Dxs* that hung around the Merc and Board; ego-driven dreamers that chronically blew up their trading accounts, yet always found a way to get back in the game; hanging on a little while longer before justice was inevitably meted out. A lot of them would quietly disappear, while others would get jobs on the floor, evaporating into the milieu of floor clerks never to be seen or heard from again, yet always fantasizing about making it big one day.

Every trader did it; dreamed about the big trade; fantasized about taking a shot. Chicago’s traders had their own mythical way for making this dream come true, the O’hare spread. The idea was to put on an incredibly large position, get in a cab, and head for O’hare airport. If the trade was a winner, you either returned home or got on a plane to Hawaii — if the trade was loser, you bought a one way ticket to a country that did not have an extradition agreement with the U.S. We also had a saying, “If you are going to blow out, blow out big” If your debit was too small, your clearing firm would write off the loss, and then write you off. But in the CBOT's version of “too big to fail", if you hurt your clearing firm bad enough, they would arrange a way for you to generate the income necessary, to pay them back. Apparently, Dx had taken these fantasies to heart having already already planned to put on an O'hare spread, before he approached me in the pit that day. While I had refused his offer, he did manage to enlist 9 unwitting brokers to assist him and his partner, Tony C, in a scheme that would bring down one of the oldest clearing firms at the CBOT.

The bell rang at 7:20 AM on a Thursday morning and Tony, who had strategically placed himself in the Bond options pit, was buying up every at-the-money put he could get his hands on. Meanwhile, Dx was putting in huge sell orders in the bonds to the 9 brokers whose help he had enlisted earlier. Tom B was on the other side of the bulk of these orders, and when the options traders started to lay off the puts they sold to Tony, with short hedges in the bond futures, panic ensued and the market had nowhere to go but down. Dx then entered the pit himself and began to sell more bonds. In the Bond options pit, the put options were going through the roof, and Tony was beginning to take profits on his long put position.

This all took place before 7:30 AM, when an economic release came out which was negative for bond prices. In a stroke of incredible luck, the market broke even more and Tony covered the balance of his position for about a 1.5 million profit, while Dx was now short about 12,000 bond futures, and up about 5MM on his open position. The feedback loop of selling they had created was working perfectly.

Dx had been dismissed long ago from my clearing firm, and along with Tony C, was now clearing Stern & Co., a family run business that was founded by Lee B. Stern. Lee had made his fortune trading grains, and owned the Chicago Sting soccer franchise, a piece of the White Sox, and was one of the most respected members of CBOT. Lee rarely came onto the floor anymore, but when he did make an appearance in one of the grain pits, his actions were highly scrutinized by other traders, as a possible clue to where the market was headed.

Bad news travels fast in the futures industry and virally fast on the floor, so it did not take long for word of Dx’s and C’s involvement in the "bond panic," to reach Stern’s office. Lee’s son and a few of the firm’s employees rushed to the floor and quickly enlisted the help of the security guards. Dx had lost his count and was standing outside of the pit when they grabbed him, while they physically pulled C out of the Bond options pit. After witnessing this melee, traders in both pits began to piece together what had happened. Tom Baldwin, who had been unsuccessfully taking the opposite side of Dx’s orders, realized the sell-off had been artificially induced, and that traders would have to cover their shorts. He quickly took advantage of the situation and began to bid up the price of bonds. Bond futures and bond options prices reversed on a dime and snapped back with a vengeance.

Meanwhile, Stern’s employees, who had wrestled the trading cards out of Tony and Dx’s hands, were frantically trying to get a handle on what was now, Stern's position. In addition to the trades that Tony and Dx had made, were the fills of the 9 floor brokers, which had to be collected and aggregated in order to get an accurate count. It took them 2 hours before they could figure out the position, and what had been a $5MM winner, had turned into an $8.5MM loser by the time the position was liquidated. Had they been able to figure out Dx’s position quicker, and not tipped off floor to what was going down, Stern could have escaped with anywhere from a small loss to a small gain. Instead, Stern had to make good for Dx’s $8.5MM loss, and as a result, lost it’s clearing status after 25 years in business, and had to lay off 20 employees.

Tony C tried to collect on his $1.5MM profit on his options position, but received a 42 month prison sentence instead. The proceeds from his trades were awarded to Stern to help offset his losses, while Stern went after the 9 filling brokers for the balance. Dx hopped in a cab to the airport and got on a plane to his parents home in Canada, completing the other leg of the O’hare spread. He was eventually extradited and sentenced to 42 months for *his *efforts. Dx came very close to pulling off his insane plan, but he let his ego and his greed get the best of him. Had he executed his plan on a smaller scale, in a more restrained manner, he might not have aroused the suspicion of his clearing firm. He had the market right where he wanted it, and had he not lost his count and tipped his hand, he might have been able to cover his position while it was still a huge winner. Whether they would have let him keep his profits is highly dubious, because Dx’s sole legacy from his lunatic scheme, is the eponymously named rule, that allows clearing firms to seize the profits of any trader that attempts to take a shot at them.

Victor Niederhoffer comments:

A generalization and quantification of Mr. Philipp's great story would show why when there is a big swing down and it recovers, it has a long way to go on the upside. All this must be quantified and the reverse as the story probably captures a basic element of human nature.



 She was the producer and did the hard work of financing this with two high price stars and bringing it into the can getting almost unanimous positive reviews almost opposite to the media bias. One is very proud of her.



 When I traded on the floor, superstition gave rise to very ritualistic behavior among traders. A bad day suffered, meant that certain abstract actions and physical items would be avoided if perceived to have caused bad luck. Conversely, if a trader had a good day, he would look to repeat the events that led up to his good fortune.

Not enough time to shave, and then a profitable day? Good chance, you were now growing a beard! Often times, boxers failed to be discarded in the laundry hamper in a timely manner, and most assuredly, ties were never changed after a good day in the pit. Pens were saved and reused, along with the repetition of parking spot, route to the building, and ingress into the pit; as long as your propitious streak persisted.

This perverse protocol even extended to the members bathroom. Inside this veritable sanctuary, every member had their lucky stall, having mentally claimed “squatters rights” after spending time there prior to a particularly profitable day. Conversely, losing stalls were avoided like a trip to OIA.

What are your trading superstitions or idiosyncratic behaviors?

Scott Brooks shares:

Anyone who thinks shaving or not shaving has never watched hockey playoffs…..a bunch of unshaven guys wearing one of two different uniforms, all skating around. One wins, one losses, and both have itchy scratchy beards that played no role in their success.

However, routines, based on logic and reason, can have a huge impact on outcome.

I have routines for hunting that I've used for years that I know work. From the time I get up to the time I am situated in my tree stand, I follow a routine. A routine that minimizes scent and the chances that deer will know I've moved into the area are followed religiously.

Reading my reports, news articles checking the spec list and communicating with other traders are all a part of the routine that I follow every day.

But the most important thing that I do when it comes to trading is this: If I have an up day, I don't change underwear, shower or brush my teeth as long as the winning streak continues, because I don't want the good luck to rub off…..but yeah, I know that's pretty obvious as I'm sure everyone else does the same thing…..right?

Jeff Watson writes: 

I remember knowing a very nasty wheat trader who was very superstitious and wore the same unwashed blue trading jacket for about 4 years straight. The thing was so dirty it stood up on it's own and smelled like a combination of sweat, nicotine, and BO. Although he ascribed many powers to the jacket, he was very careless with it and would leave it hanging on a coat hook after market hours. One night after the close, after about 5 hours at our local watering hole, a couple of us partners in crime went back to our clearing firm's office, in a prankster-ish mood and sufficiently lit, and hid his jacket at the back of a closet. The next morning, before the open he came in and couldn't find the jacket and went absolutely nuts. He was inconsolable, irrational, and out of control….and this was before the open. After the open, he went on tilt, made a hundred mistakes, and ended up losing a ton of money, all in one day.

The trading jacket, like any other talisman, had no power. What had the power was his faulty belief system and his delusions that he could not make money without the jacket. He was one of the most rational people I ever met and he thought a jacket had supernatural powers. He gave the jacket powers because of a couple of untested, unscientific, irrational, anecdotal observations.

Back to the story…..He lost money all week long and I felt very bad and ended up coming in early on Friday morning and put his jacket back up on the hook. He was very happy and thought his jacket would turn things around. Needless to say, he continued on his losing streak, bidding instead of offering, buying the spread instead of selling it, and making a million other costly mistakes. The jacket made no difference and it took him a couple of months and a few weeks off to right his head. Although it was a cruel joke, it wasn't the jacket that was keeping him from making mistakes and he ended up realizing that talismans are what they are….talismans. 

Gary Rogan writes:

These were cool stories, thanks for sharing Jeff! 



 After decades of following the "spray and pray" tactical doctrine, the U.S. ground forces have gone back to the country's revolutionary origins — i.e. shooting with deadly accuracy from behind cover. Roughly 1 out of every 10 American infantry are now trained and equipped as snipers; and all infantry are now trained to prefer accuracy over the volume of fire. What has caused this revolution? The answer is the new recruits' experience with shooting games that use computer graphics. The limited training offered by a few "Live fire" exercises is now being replaced by more time on simulators, which, according to Jim Dunnigan, "allow troops to fire a lot of virtual bullets in a realistic setting." The result has been a remarkable change in "the look (less random fire from U.S. troops) and feel (the U.S. troops appear more in control) of the battlefield. It's also easier to spot the enemy. He's usually the guy firing on automatic. The fellows firing one shot at a time are the Americans, and they are usually the last ones standing."



 England's great Ken Barrington knew how to bat in the subcontinent. He used to say you had to book in for bed and breakfast, which means when you get in, stay in and make the opposition bowl you out. It is not rocket science)

I interpret this in my own life as "don't take risks and over trade in a low volatility environment, just protect your position, and let the slow momentum move you into slow but sustainable profit."

In Tennis, McEnroe in the Aussie Open once said something whose meaning I find similar, "you don't necessary have to change your shot because your opponents there…..don't second guess yourself."

Has anyone else found any sports and markets lessons of late? 



 Daniel Cloud is the author of a masterful new book The Lily; Evolution, Play, and the Power of a Free Society. Here is a short piece he submitted for Daily Spec explaining in brief some of the main ideas contained in his book: 

You sometimes hear people say that things would be better if only America were more like China, because without all this democracy and freedom, they can really get things done over there, can really commit to solar power, or nuclear fission, or budgetary discipline, or whatever the person thinks we need more of. Are they right? Historically, absolutely not. Freedom works. People are always saying that kind of thing - Stalin is the future, Louis XIV is just the sort of powerful monarch we should have here in England, the Spartans aren't soft like we Athenians, etc., etc., on and on. In the last four centuries, however, there are very few cases of an illiberal society permanently defeating or outcompeting a liberal one. But why?

Conventional wisdom assumes that it's competition in the market for explicit, rational ideas and plans of action that gives liberal societies their advantage. We must be free because we always are in a position to know what should be done, and just need the liberty to do it. Watching democracy in action, however, soon reveals that many of the plans actually proposed seem to be useless or even counterproductive, that the system in aggregate displays intransitive, inconsistent preferences, and that the people who lead democracies often seem remarkably unimpressive. It's precisely these features that made many Athenians or Florentines doubt that a free society was really a viable option. In their times and places, they were, as it turned out, right. What is it that makes the modern free society, in the last four hundred years, so much more successful? To answer this question correctly, we have to step back a bit, and look at the problem from thirty thousand feet.

There are only two possible explanations for any system that seems to behave in a way that's somehow optimal or effective. Either that optimal behavior was rationally planned by someone, or else it evolved through trial and error and competition. If the amount and quality of explicit rational planning we see doesn't adequately explain the degree of effectiveness observed in the behavior we see, some process akin to natural selection is the only available explanation. Does the modern free society work better than the unfree one because it's somehow a better arena for the evolutionary optimization of some set of teachable practices, or whole institutions?

In fact, in a human society, we should be able to tell, by inspection, which sort of process is responsible for some particular instance of optimal behavior. Optimal behavior that's the result of rational planning should be based on "knowledge" in the conventional sense of the word, true beliefs that come with some justification, or proof, that include an account of how the belief was arrived at and why it should be presumed to be true. They should be persuasive. On the other hand, highly effective behavior that is the result of some social analog of natural selection should be based on beliefs, probably true but possibly even false ones, or even mere dispositions to behave a certain way, for which the believer can provide no plausible justification, no warrant, that don't come wrapped in any convenient logos, but which nevertheless just happen to be exactly the right thing for the person to believe, from a practical point of view. They should be unpersuasive, at least without the help of a lot of deliberate clarification and anthem-writing, because the person didn't get the belief by being persuaded of it in debate, he got it as a result of it having worked out well, in practice, for him and the people he learned it from.

But this is simply a paraphrase of Plato's description of civic virtue, from Meno, as "mere true belief". The really virtuous citizen, Socrates informs us, often seems to know exactly what he must do, though he generally couldn't quite tell you why, or make his beliefs convincing in debate, which is very puzzling. Among economists, it's a long-standing folk-mystery (which never quite makes it into their formal professional discourse) that firms and households behave in ways that appear undeniably optimal, and yet if you go talk to the people involved, they couldn't explain why that way of doing things is optimal in a million years, and have all sorts of surprising and implausible explanations for their own behavior. There is actually quite a lot of this sort of evidence of a long history of social or cultural evolution, once you know to look for it, quite a few common-sense beliefs or attitudes, even within particular professions, that are probably very useful but not obviously justified.

The reason this all strikes us as paradoxical is that we've collectively failed to make a crucial distinction. Knowledge, in general, comes in two very different flavors, declarative knowledge (knowing that Neil Armstrong was the first man on the moon) and performative knowledge (knowing how to throw a baseball, write a contract, trade bonds, or solve a topology problem.) It's particularly easy to imagine some analog of natural selection happening to privately owned firms (conceived of as balls of money with people attached to them by contracts, which are fit or unfit depending on whether they have baby money the people associated with them can make new firms with.) The sort of knowledge this evolutionary process seems to produce is not, or not exclusively, declarative beliefs about facts that come with persuasive justifications. What the firm needs to prosper and grow is performative knowledge, knowledge of how to get things done, and whatever declarative knowledge is needed to support that. A lot of the "institutional culture", at any given institution, always consists of that sort of thing.

Skills and institutional cultures seem like the sorts of things that could evolve even as our public accounts of them don't. Modernity is, above all, rapid technological change, and perhaps the only efficient way of coping with rapid technological change and the radical Knightian uncertainty it continually creates is by creating a freely co-evolving population of firms and individual skill-sets, a system that isn't rigged in anyone's favor by people foolish enough to think they know what's going to happen next.

Why does any of this matter, who cares precisely how freedom produces optimality, if it does? To understand the difference between rational choice and natural or social selection, as mechanisms, it's useful to think about the difference between a computational simulation of airflows around some airplane design, and the tests we can perform, on the same design, using a model in a wind tunnel.

Simulation is cheap, and easy, and we can change anything we like. The problem with it is that its power is limited by the complexity of the problem we need to solve. If the problem gets very complicated, simulation becomes impossible, because you would have to write too many lines of code. (Often, when you run into a really bad simulation problem, you find that the lifetime of the universe wouldn't be long enough to write it all.) On the other hand, the wind tunnel is expensive, and wasteful, and cumbersome - but it just doesn't care at all how complicated the problem is, it isn't a thought or a simulation, it's part of the real natural universe, so it spits out a correct answer without any delay or hesitation, no matter what. We still don't know why that's the answer, but we can be sure that it is. The wind behaves just exactly the way it would behave, as it went around the model, as it goes around the model, because the real world is actually just like itself in every possible way. The wind tunnel is, effectively, what computer scientists call an 'oracle' for solving what philosophers call 'decision problems' (does the model work as expected, or not?) in no time at all.

 Natural selection is the same sort of thing as the wind tunnel, two vines or two prides of lions or two corporations in a real, un-simulated struggle to the death, and it too, is utterly indifferent to the complexity of the problems it is asked to solve. A contest between two complex modern states and a contest between two relatively simple bacteria or two saplings in a clearing can be resolved in the same amount of time, by the Judge of Battles, with exactly the same amount of work. (None.)

So, in general, there are these two very different sorts of optimization process operating in nature. One of them happens in brains, is cheap, is fast, and can conserve solutions to problems that only come up occasionally or locally. The problem with it is that it's limited in power, and gets less and less useful as the problem that needs dealing with gets more and more complicated. The other sort of optimization process doesn't only or primarily happen in brains - it also optimizes flu viruses, and falcons. It's expensive, it's slow, it's wasteful, and it only can conserve solutions to problems that come up repeatedly - but it isn't limited in power, in anything like the same way, it just doesn't care how complicated the problem it's been asked to solve is.

If it's the second kind of optimization process that is responsible for some of the optimality we see in human societies, as it is for all of the optimality observed in human cells (which we also don't fully understand, even though they're much simpler than a whole society of humans each made of trillions of cells) then there's nothing mysterious at all about the fact that societies built around free and fair arenas of limited evolutionary struggle should outperform ones built around attempts to substitute human judgment for this more wasteful but far more powerful mechanism. Perhaps people are, rationally, only able to accomplish just about as much as the economists themselves can - solving static, equilibrium optimization problems - and everything else only gets sorted out correctly if it's left for Nature to decide.

In planned economies, static problems must routinely get solved in ways that only make dynamic ones worse, and there's no obvious Darwinian corrective mechanism to put things back on track. (No real analogs of bankruptcy, or electoral defeat.) To the extent that the unfree society must rely on punishments to elicit the same sort of effort people would put in spontaneously if they thought of themselves as owners, it also suppresses the sort of variation in behavior any such process of social evolution would need as raw material. Nobody wants to be shot for trying some new way of doing things, some playful modification of an existing skill-set, or institutional culture, that doesn't end up working. Stalin was very successful at eradicating that sort of boldness. The problem is that unless people actually are constantly trying out exactly that sort of thing, in large and small ways, there's no source of variation in the population of skill-sets, and no way at all for the society to spontaneously percolate up to the highest point in its adaptive landscape. Thus you end up with the sort of enormous gap in even simple human skills, like the skill of cooking edible food for large numbers of people, that existed between the Soviet Union and the United States during the cold war, and that still must divide Korea today. (Nobody remembers Soviet cuisine now, the Kvass machines, the gristly, horrible "kutlet" smeared with some poisonous orange sauce, which only the really lucky people got…)

Narcissism trumps experience whenever we imagine that we can solve the sorts problems markets and elections exist to solve, because the reason we actually have markets and elections in the first place is that some of the problems we need to solve, in a modern society, are ones not soluble within the cognitive limitations that afflict us as individual humans. There's a kind of observation bias that constantly tempts us to make this mistake; we can see our own thoughts clearly, but our own customs are mostly invisible to us, so we tend to attribute to our cleverness whatever benefits we get from them. Glibness will only help us make fools of ourselves in these cases, because the mere truths that are most important to know and remember are precisely the ones that aren't readily explicable, or immediately persuasive in debate. In fact, what we all should have learned, from the great Communist experiment, is that there's really nothing worse for people than trying to live in the way that seems most reasonable to them on first hearing it described. That, actually, tends to end very badly, that tends to end with you standing in an endless line for a small piece of rotten meat, and very careful of what you say to the other people standing in line with you. (That's if you're lucky; the really bad outcomes are much worse.)

We need to be free, among other reasons, because we need to accomplish things, to have a cutting-edge modern society at all, that exceed our innate capabilities, in ways that defy our expectations. We do that by letting our institutions and skills and ways of speaking evolve freely, and building our whole society around the sort of fairness and respect for individual autonomy that's needed to make that possible. The leaders don't have to be impressive, for the system to work better than an unfree one, because the people at lower levels are, they're very skilled in an amazingly vast number of different skills, and that's what's crucial, that's what really drives the outperformance, the wild variety and vast depth of constantly evolving skills and institutions.

 It's a testament to human intelligence that we were capable of creating and managing a system that can do things impossible for human intelligence. Attempting to operate the system manually is, in fact, not advised; it routinely results in catastrophe, and in principle it shouldn't be possible. Sometimes you can get away with it for a few decades, when conditions are extremely favorable, for example when you start from a very low level of economic development with a very high level of literacy, but it isn't a good place you're ultimately heading towards, even then.

China only seems like an attractive alternative if you don't really know what's going on there; if you do, you know that what they're building isn't a real thing, it's a mere prelude, a temporary fantasy about beating the free world with one hand tied behind their backs, though that's been tried many times and really never succeeds in the long run. The problem is that the oracle of selection is necessarily cryptic, otherwise it would be redundant, so it requires some resolve to really submit ourselves completely to its judgments, and if you just don't have the right anthems, yet, that's difficult to do. (Even Deng Xiaoping couldn't quite make himself believe that the West is where it is because it's what it is.) In fact, we don't need to be more like them - they need to be even more like us, though everyone is now too polite, or too intimidated, to remind them of that. Not only does freedom work, but to sustain a really competitive form of modernity over the long run, nothing else will.

(Readers who found this interesting might also be interested in the more complete version of the argument contained in the author's new book, The Lily; Evolution, Play, and the Power of a Free Society, available from Amazon.)



 I had some difficulty finding a concise definition of the DeMark Sequential indicator. From an article written by Mr. Burke in the 1990s and other sources, I constructed a test, but there are variations in calculation and execution, and there are rumors that Mr. DeMark adds proprietary logic.

1) The method A setup for a buy (sell) occurs when there are 9 consecutive bars with closing prices lower (higher) than 4 bars earlier, and the high (low) of either the 8th or 9th bar is higher (lower) than the low (high) price of a bar at least 3 bars earlier in the sequence.

When setup is complete, begin the countdown. Count any bar in which the close is lower (higher) than the close 2 bars earlier. This time, the counted bars do not need to be consecutive.

If the price goes above (drops below) the highest high (lowest low) of the bars in the setup sequence, the setup and countdown are canceled.

If a new setup occurs in the same direction, the countdown resets to zero.

If a new setup occurs in the opposite direction, begin a new countdown and cancel the previous setup and countdown.

If the count of bars that close lower (higher) than 2 bars before reaches 13, and the 13th counted bar closes lower (higher) than the 8th counted bar, it is a buy (sell) signal. It was not clear to me what should happen if the count reached 13, but the 13th bar did not close lower (higher) than the 8th. I decided to cancel the setup and countdown in that case.

2) The test Using the above rules, I tested daily bars of the S&P 500 futures from 1982 to 1989. I checked the net change over various periods following the buy and sell signals. Results of buy signals:

Change next
Date                          12 days 18 days 28 days 42 days 63 days
                    1/3/1984    2.0%    0.3%   -5.2%   -3.8%   -4.8%
                   3/22/1984   -0.9%    0.8%    2.1%   -2.8%   -3.1%
                   7/20/1984    9.5%    9.2%   11.5%   11.1%   12.5%
                  10/20/1987   18.1%   14.5%    7.3%   14.6%   12.2%
                   12/4/1987   11.4%    9.1%   11.2%   11.9%   18.6%

Average                          8.0%    6.8%    5.4%    6.2%    7.1%
Median                           9.5%    9.1%    7.3%   11.1%   12.2%
Average of all periods in sample 0.5%    0.8%    1.3%    1.9%    2.9%

Results of sell signals:

                             Change next
Date                          12 days 18 days 28 days 42 days 63 days
                  10/12/1982   -0.1%    6.8%    1.6%    3.7%    9.9%
                   4/20/1983    4.6%    2.5%    1.2%    6.1%    5.9%
                   6/17/1983   -1.0%   -2.5%   -3.4%   -3.4%   -2.4%
                   7/11/1985   -2.3%   -3.2%   -2.5%   -4.1%   -6.6%
                   3/11/1987    1.9%    4.2%    1.1%   -0.2%    1.9%
                   1/29/1988    1.1%    2.3%    2.3%    0.0%    1.0%
                   3/14/1989   -0.4%    0.4%    4.1%    5.7%    8.4%
                   5/12/1989    1.7%    3.8%    2.2%    4.0%    8.1%

Average                          0.7%    1.8%    0.8%    1.5%    3.3%
Median                           0.5%    2.4%    1.4%    1.8%    3.9%
Average of all periods in sample 0.5%    0.8%    1.3%    1.9%    2.9%

There were only 5 buy signals in 8 years, but they worked out very well, including a buy signal on the day after the 1987 crash. The record of the sell signals was decidedly mixed. The best that can be said is that the 28-day net change was lower than average after a sell signal, although still positive. I decided 28 days was the optimal holding period and considered only 28-day net changes after later signals.

Buy signals since 1990:

 Change next
Date               28 days
     11/15/1991    6.0%
      11/7/1994   -1.2%
      3/19/2001    6.6%
      7/19/2002    8.6%
      5/10/2005    4.2%
      7/14/2006    4.5%
      3/17/2008    9.2%
      1/12/2009  -14.2%
      10/4/2011   13.3%

Average             4.1%
Median              6.0%
Average of
all 28-day periods  0.6%

Sell signals since 1990:

               Change next
Date              28 days
      8/23/1994   -0.9%
      6/19/1995    2.7%
      11/8/1995    3.0%
      9/16/1996    1.9%
      11/4/1996    2.6%
      2/18/1997   -8.3%
      7/31/1997   -4.5%
      3/18/1998   -0.6%
       1/7/1999   -3.1%
      4/23/1999   -4.4%
      11/7/2001    2.2%
       6/3/2003    3.3%
     11/28/2003    6.0%
      1/22/2004    0.6%
     12/29/2004   -1.2%
      9/14/2006    4.2%
       6/1/2007    0.1%
      4/29/2009    8.1%
      9/16/2009    0.3%
      12/8/2010    4.5%
       2/2/2011   -1.5%

Average             0.7%
Median              0.6%
Average of
all 28-day periods  0.6%

The results of buy signals have continued to be on average very good, although also very rare. The results after sell signals appear consistent with randomness.

Anatoly Veltman writes in: 

May I ask, why would 7- or alternatively 8- or alternatively 9- or alternatively 10- or alternatively 11- ….be my guest to go on forever… "work"?

Jordan Low comments: 

I understand where you are going, but your critique will apply to all of technical analysis, and not just DM. I am not a follower of DM, but I believe that technical analysis is based on psychology. At 80F, humans can only live 9 days without water — so there is some cognitive explanation why we are counting 9 days of frustration to capitulate those who traded counter-trend, before the real counter-trend arrives.

Anatoly Veltman writes:

Now, don't ever talk "all T/A". The reason previous volume areas tend to hold the price is because people tend to transact (again) at their former prices. I've always had a beef with time counters who have no accounting for price. The Chair rightfully refers to many as charlatans; but do I understand his page-sized color-coding scheme correctly: the Bond move +0'02 = Bond move +2'00? SP change of 0.50 gets same color as SP change of 15.00??

I bet you that a system that buys a 38%, a 50%, or a 62% retracement of preceding impulsive up-wave will produce better result than a system that buys exactly the "8th declining" 5-min bar, or 15-min bar, or 30-min bar, or 60-min bar or daily bar or weekly bar. Isn't the 8th 5-min bar getting you to where the 4th 10-min bar would get you? What's the magic of counting those bars?



 The first hat was the blue Policeman's hat worn by my father. I thought it made him look a giant and one dared not dispute his authority. I learned from him that the hat was a universal symbol of authority and respect. And that it was made of a sturdy felt that protected the head from falling objects, blows with a stick and even gun shots. The hat came in handy whenever I got into trouble in school. Artie would go into the principal's office with his hat on, and his holster, and ask the principal if he had read me my rights before disciplining me and extorting the confession from me. The funny thing is one of those encounters got me into Harvard. Although I was very good at tennis and college boards, Harvard accepted only a handful of Jews from all of Brooklyn in those days, and I didn't have the 100 average that thousands of other National Junior champions among applying Brooklynites had. But the principal was so incensed by my father's visit that he wrote on my application that Harvard should not admit me. The man who interviewed me had been exposed to a similar blackballing and was so incensed that he insisted as a big donor that they admit me.

 In those days, indeed throughout the history of our republic until 1950, everyone wore hats in the winter. But near the beach, at Sea Breeze Park on W. 4th street, where the checker tables were, it was customary to take the hat off when the temperature was above 80. There was one person however, who a crowd always stood behind, who never took his hat off even in the summer. I learned that it was Tom Wiswell, the world go as you please checker champion. I eventually took weekly checker lessons from him for 20 years. He wrote to me once, "I wore my hat, I won many tournaments, Wylie was the first checker teacher and I will the last. It's time for me to take my hat off.". At the age of 85 he suddenly lost his memory and I never saw him again. But I will always love him, and I will never take my hat off again, except when in the presence of a lady, or if I ever patronize a lady of the night for the first time, in his honor.

 My next encounter wiith hats came at the foot of my grandfather Martin, who was genius court interpreter that spoke 50 languages at least. After working as chief accountant for Irving Berlin's music firm, he became a highly successful speculator in stocks, channeling most of his trades through Bache and Company. Like some of his descendants however, he had one major failing. He liked to trade on 20 times leverage and when the depression came and many stocks fell 20% in one Black Friday, he lost everything. He was always studying the market thereafter and loved to buy the can't misses, true blues like Western Union and Radio and Trolley and Canal which were the blue chips of his day. He told me for my Bar Mitzvah that he would buy me 10 shares of any stock I liked under 10. I asked him what was the best for the long term, something that I could hold onto for growth and peace of mind until I went to college, and that was near 10. Hat Corporation of America he told me, people will never stop wearing hats. They make them in all varieties. There are thousands of uses. And they have a monopoly on all the machines that are necessary to make them. You can wear this one for ever and sleep well with it under the bed. "But Martin," I said, "I read that there were 110 hat manufacturers in 1900 and only 7 left today. Hats have been in a decline since 1900 because people don't want to be formal any more and they don't walk to work." "Never Mind," he said, "the time to buy a stock is when it's out of favor. They have a new method of manufacturing where they substitute a resin for the felt that totally automates what was once a hand made process." Hat as it was called never spent a day above 10 after I bought it and like Union and the others eventually receded to below 1 before being delisted and declaring belly up. 

Whether it was because of the car, or the many overhead vestibules, hats have continued their decline ever since. They received what the owner of the HCA called their death blow when Kennedy became president because he never liked wearing a hat. When Cavanaugh the owner told him he had ruined the hat business, Kennedy took to always holding a hat but never wearing it.

T.K Marks comments:

 At the end of each evening my father would gingerly place his hat in its box on the top shelf of half (quarter) of my parents' closet.

Infants should be handled so delicately.

It was a Homburg if my memory serves correct.

The thing would sleep there, upside-down in its comfy confines, till the next day's dawn came around.

Then both it and he would be off to catch the Long Island Rail Road so that they would both be an hour early for work.

Rudy Hauser comments: 

Given all the talk of hats, I should perhaps add my own comments since I have been wearing hats for many years. Back when I was young I did not wear hats. But after one snowy day which I encountered with a bare head, I decided to wear a hat in the winter. I choose a fur hat made with relatively inexpensive rabbit fur. Drafts from air conditioning in trains that aggravated an allergy induced sinus headache caused me to add hats for the remainder of the year. In the moderate temperature range of spring and autumn, I wore a derby hat I purchased at a very reasonable price at the South Street Seaport for a few decades. Unlike a true derby this was made of soft rather than hard felt. In recent years I have worn a better quality Homburg. In the summer I wear a Panama hat. It has the advantage of helping keep the head a bit cooler in the sun and protecting my face from sunburn.

As to the impact a hat has, back when I was an economist for a money management firm, I would go down to Washington on occasion with a small group arranged by an economist/political analyst consultant consisting of a small number of his institutional clients to visit with government officials. One member was a distinguished lady who was the political policy advisor of a major mutual fund complex. She had once remarked (not to me directkty) how my presence with my derby added a certain dignity to our group. One of the Panama style hats I wore was not a true Panama and was rather flexible, creating its own unique sharp from long wear. My boss and colleague had indicated that it was time to have it replaced. We had both attended a meeting of the Mont Pelerin being held in Cambridge as his guest. Chuck had made the remark in the earshot of a fine classical liberal of the British peerage, who remarked that the hat had character and should be retained. I often hear compliments on my hats on the street. This even applies to my very old and worn rabbit skin fur hat, whose black dye has faded and now is a shade of black and brown with little bits of the fur missing. My attitude is that it still keeps my head very warm, and should I be discarded just because I have lost hair and what I have left is turning gray? Since my response to the latter question is in the negative, I see no reason why I should treat the hat differently.

But the hat business has clearly suffered greatly. To my knowledge there were only two very good quality hat stores left in Manhattan, and the one on Madison Avenue in the 40's closed well over a decade ago leaving only one on Fifth Avenue around 30th Street. There is (or at least there was as I am not sure if it is still in business) a hat store downtown, but the selection of quality hats is not that great, although it did have many lesser quality hats. There is a cigar store on Lexington that has high quality hats, but its selection is very limited.

Sam Marx comments: 

With the government backing them (and Peter Lynch saying good things about them ), even FNM seemed indestructible.



 I am researching and reviewing my contact with hats over a not uneventful life. I am considering their value, their uses, their symbolic significance, the great people I know who have worn them, the hat corporation of America I bought as my first trade, the hat that Tom Wiswell always wore to prevent sunburn and cover up baldness, the hat that Shane wore that made him an icon, the hat that the accountant in Monte Walsh wore that Hat Hendersson just couldn't resist noting was just right for a pistol shot, the hat that I wear now to show my respect for those previous, the man I called Hats H.  because he always had a million different conflicts of interest while working for us. The importance of a hat outdoors in the West to shield from rain, sun, and the elements. Et al. What value do you see in hats these days? What anecdotes? They seem to have gone out of style because of the automobile. You don't need protection from the elements any more. Also they're hard to store. How do they relate to markets?

Alan Millhone writes:

Mr. Millhone

Dear Chair,

I remember well the hat Tom wore. The ball cap I wear has a board on it (see picture). The Market trader might wear such a hat to remind them to look ahead and make the right moves (trades).





Sam Marx writes: 

On the subject of "Hats". I am reminded of the aversion that John F. Kennedy had to hats and the picture that has stayed in my mind, since 1961, is of his carrying and not wearing his hat at his inauguration. I believe it was his attitude that caused the downswing in hat wearing in the U.S.

Tim Hesselsweet writes: 

 Seems like a good example of ever-changing cycles. The hat has been making a comeback for the last several years. Kate Middleton has become a popular figure and she frequently wears hats. Upscale department stores like Saks now carry a large selection of hats as well.

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

Look at this photo of mens hats at a Liberty Rally in Columbus Circle, 1918, and mens Hats at the Horse Races 1920s style, and 1950s Men with hats.

Scott Brooks writes: 

When I graduated high school, the guy who measured my head for my mortar board said, "Young man, I've been doing this for 35 years and you have the biggest head I've ever measured".

 As a result of my freakishly large cranium, hats rarely fit me. I wear one from time to time, but only out of necessity, and occasionally for functionality.

Necessity is when I need to keep my bald head from burning in the sun or freezing in the winter or dry in the rain. Never under estimate the insulating and protective qualities of hair.

Functionally is because I need a hat when I hunt to keep the sun out of my eyes when I'm scanning for game, peering through my scope to place the cross-hairs on the shoulder of my intended quarry, or placing the aiming pins of my bow in the middle of said quarries chest cavity.

I avoid hats otherwise as I can rarely get one big enough to fit. If I wear one too long, it gives me a headache. Therefore, when it comes to trading, if you see me placing a trade while wearing hat, fade my position as I'm likely making a losing trade because my mind is clouded by the hat that is squeezing my brain all to tightly.

Pete Earle writes: 

I wear a hat, and have for seven or eight years. When I began to wear one, I expected to be lightly razzed by friends; that not only didn't deter me, but never occurred. Instead I've received unexpected compliments, and over the last few years other have seen a higher frequency of hat wearers in Manhattan, Washington D.C., and even when I'm down in Auburn and Atlanta.

Christopher Tucker writes: 

The grandfather of my best friend from college was one of the kindest and most sensible men I have ever met. He was a traveling sales rep for the John B. Stetson company. The man always had the best (the absolute BEST) hats.

GAP Capital comments:

 Born and raised in Chicago, so "hats" remind me of only one person…Dorothy Tillman!!!

Anton Johnson writes: 

"By some accounts, Christopher Michael Langan is the smartest man in America……….he has a fifty-two-inch chest, twenty-two-inch biceps, a cranial circumference of twenty-five and a half inches–a colossal head, more than three standard deviations above the norm"

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

Here is Tommie Wiswell with his trademark hat tilted back.  Might also been used to keep
overhead light from his eyes while he focused on the many boards.














Russ Herrold writes: 

 I am traveling, and so cannot conveniently post, but I placed orders this week for a new Stetson, a couple of Fedora designs, and some other … I forget …and have in my car, for the conference I am at this weekend, easily 5 or so, which I use both for their protection of my head from the cold, and also so I can 'do some branding' work in the community the conference represents (I also have other 'branding' in my clothing, and appearance), such that people I deal with, who don't know me by sight, can recognize me anyway.

Marion Dreyfus adds: 

I think I am fairly well known as a hat person, and have been since I wore unusual chapeaux /to synagogue and school when 12 or 13.

Aside from style and stating an individualistic aspect, I think a hat harks back to a gentler, more mindful age, perhaps 100 years ago. It also keeps the head, inside of which are all these excellent ideas and scenes for a better tomorrow and a niftier evening today, comfy-cozy. Hats also show, oddly enough, respect. Hatless men in the 1970s were declaring their freedom from the mindfulness of suit and hat, and perhaps we are the poorer for having abandoned hats.

They also keep milliners in funds, and milliners I went to grad school with in the early 90s were aghast at the drop in hat-wearing citizens, alleviated only by temporary crazes or fads that fade as swiftly as they arise.

As a biker, for me, even mild days produce a breeze when one is on that leather seat, and a hat prevents sunstroke and sun in one's eyes as well as too much wind over one's head.

In the Orthodox world, wearing a hat connotes one is married, so it may be foolish of me to wear hats, because i communicate a status I do not currently entertain. But i do like the fashion and focus statement being made by wearing a lid, many of which, actually, i create myself.

Finally, one can maintain a superior air of mystery in a hat, which is impossible to the same degree in a hatless state.

Alan Millhone adds:

What really amazes me on hats are the clods at football games I attend who don't remove their head cover when the National Anthem is played.

Ken Drees muses:

 The baseball cap trend: rappers wearing the caps askew, wearing caps with logos of designers and companies, wearing caps for status/advertising, caps as gang signal, wearing caps in restaurants/indoors, wearing hoodies in lieu of caps, caps as fashion, caps on backwards, caps with brim curved just so, it all has to do with being cool. Lebron James wears Yankee cap to Indians games–it's all about me, fool.

Gary Phillips writes: 

"Wearing a cap backwards is a baseball fan tradition that started with Yankee fans. It wasn't because they liked Yogi Berra, either. The Yankees and Red Sox have a century-old rivalry. A group of young guy Yankee fans, around 1980, took the train up to Boston to catch a couple of games. Boston fans are loud and boo other teams. The young Yankee fans were seated in front of loud Bostonians. The New Yorkers didn't want to start an altercation, but made statement. Those guys turned their Yankee caps around backwards to show the Bostons that they were Yanks fans and proud of it."

Anton Johnson writes: 

On baseball's rally cap superstition:

"A rally cap is a baseball cap worn while inside-out and backwards or in another unconventional manner by players or fans, in order to will a team into a come-from-behind rally late in the game. The rally cap is primarily a baseball superstition."

And hockey's Hat-trick.

Victor Niederhoffer writes:

It would be nice if this worked in the market. But then the adversary could always tell if you were weak or strong, especialy if signals could be reflected from the hat. I was surprised to see that in all the uses for hats I have collected, including flopping the rump of your horse, and fanning a fire, and collecting water from a stream or the rain, I did not see many variants of using it as a signal to get a cab or alert a Native American that a interloper was near, or to collect bets, or to conceal a salt shaker. This latter is particularly effective in the west because to ask a man to remove his hat is akin to a date with boot hill. 

Gary Phillips adds: 

 Surely not a hat, barely a cap, let us not forget the kippah or yarmulke. The Talmud says that the purpose of wearing a kippah is to remind us God is the Higher Authority over us. He alone is Lord of Lords and King of Kings. When we pray and worship with our heads covered, we are saying that we are in total and complete submission to the will of God Almighty now and forever.

I was recently in the hunt for 2 of the crocheted variety for my 2 and 4 year olds to wear to school. My elder son demanded that the kippah be white with a blue Magen David. The synagogue gift shop was unable to fill our order, so I turned to a higher authority - E-bay. As J. Peterman would say, it is 6" in diameter — one size fits all. Handmade in Israel with a *very small* fine stitch. The yarmulkes are from Israel and are made by people who have made Aliyah; low income and handicap people, generating income to make a living.

I grew up and observant Jew until I had my first taste of bacon and blondes, and I never looked back. However, I now find myself lighting the candles, saying the hamotzi, and making Kiddish on Friday nights… Nice.

Jim Sogi writes: 

 A hat is essential in Hawaii to keep off the sun, rain and wind, to keep glare out of your eyes, and at night on the mountain for warmth when it gets cold. There are different hats for different situations. A baseball cap is good all around since it keeps the sun off your face, stores easily, can be worn in a car and is cheap and stays on in a brisk wind. A good brim hat is good to keep the sun and rain off the back and shoulders as well. A nylon hat is light and can be washed. A waterproof rain hat is good for extended rain, and a light nylon brim is good for hot sun. A small brim bucket with a strap is worn in the water while surfing to keep intense sun at bay for hours in the water, and to stay on in the surf. A knit or fleece watch cap is good for boating at night or sleeping in the cold. A helmet is good for sports to protect the skull from boards, rocks, trees and impact. The Original Buff is an adaptable piece that can be worn as a hat, scarf, or facemask. A balaclava is good for winter conditions and can be used as a hat, or face mask in windy conditions. I must have 20 or more hats.

As with all equipment, each type of hat is specialized for specific conditions, and there is not one that is good for all conditions. As with markets, its good to have specialized systems and rules for the differing conditions or cycles and no one rule is good in all conditions but must be tailored to match the expected conditions.

Rudy Hauser writes:

I do not wear a hat indoors with the exception of trains and planes or if there is no good place to put the hat. If there is a draft from air conditioning it helps to keep me from getting a headache. But more important is that unless I just want to hold my hat in my hands there is no good place to put it. I prefer to read, not hold a hat. I once made the mistake of putting a Panama hat in the overhead rack in a plane. The motion of the plane bounced it around enough to ruin it. That gives me little choice but to wear it. If I have a hat without a brim, such as my winter hat, I can a do take it off aside from trains which are not that warm.

Bill Rafter adds: 

 Glare, particularly from lensed overhead lights or high-hat floodlights can cause headaches and eyestrain. That can easily be counteracted by wearing a baseball cap or other large-brimmed hat indoors. I have kept one at my desk for decades.

For years I noticed that whenever I saw a certain actor & director, he was always wearing a hat, even indoors. Then I saw him entering a food emporium at a ski area and he removed his hat. I immediately understood why he always wore one — his particular baldness aged him at least 10 years. So his vanity choice was either a wig or a hat, and he chose the hat.

Hats indoors also provide a level of anonymity for those who do not want to be recognized in an airplane or robbing a bank.

My first "real" hat was a Homburg, which was required for one of my college jobs: pallbearer.



 One was sorry to miss the 100 to 86 5th straight loss of the Knicks to the Bucks today as one likes to see the arrogance of D'Antoni permeating its ugly effluence on the rest of the team with the system that doesn't work. It is sad that no one will say that when you have a poor wrist and ankle like Melo that it's fantastic to shoot 30% at all. But the arrogant D'Antoni making sardonic remarks must create total demoralization on his team and one wishes he would stop his television shows and posturing and let someone like Goodson or Williams get the team to play a system that's not guaranteed to lose. The tragedy of it is that most market systems have the same guru's with the same tragic flaws and the same impossibilities of ever winning. It's not the players it's the system.

Gary Phillips adds: 

“It’s possible to train people to perform to a certain level in chess, but if this training does not promote self- education and a philosophical attitude, then the trainees will be little more than performing seals.”

-Nigel Davies, Daily Speculations

T.K Marks writes: 

Isn't there an old axiom that within most any matter subject to inevitable variance that any system is better than no system at all?…Be that as it may, proper allowance should be made for the D'Antoni Disclaimer.

It's a game-changer.



 Yet another pattern widely disseminated falls to the dogs. The bank whose heads like to cash in without gains service and head the big beltway departments bordering the oval published a widely disseminated study showing that the 1 to close from year end 2008 to year end 2010 was a nice 0.1 % in the index. Which astute second hander noted carried through to futures with a nice t of 4.1 and 62% up. It is good to know that in 2011 the effect led to a -0.5% decline with a 42% up. Thus, Milton and Rose can rest easy again that there is no free lunch.



It would be interesting to expand the method of Maximum Parsimony used to create trees for species divergence in philogenetics and apply it to trees created to explain relations between markets.

Gary Rogan comments: 

Probably one of the most "busy" areas where trees of this sort are constructed is recreating the history of the humankind from both modern and now partially extractable ancient genomes. One of the biggest complications seems to be "admixture" which means hybridization with different branches withing the "human" definition and even beyond, making the trees not quite trees but multiply-crossing structures. The algorithms are getting more and more sophisticated and are finding "minimal distance" solutions to extremely complicated collections of samples. It seems that very soon this analysis will be done one the entire genomes from multiple populations (which is not the case now) leading to some ground-breaking discoveries.

This is an example of the type of interesting discoveries likely to happen (like admixture from pre-human and not-exactly-human species in some modern humans).



 Karen Kingston's book Clear Your Clutter with Feng Shui really helped me to clean out the clutter in my house and my life. Before, I lacked the skill to clear out much of the unnecessary clutter that obstructs the flow of energy. Too much stuff physically and psychologically gets in your way. It can accumulate dirt and dust. Worse, it affects your life, health and business. Truthfully, you don't need a lot of stuff that gets stored or saved for the wrong reasons.

She gives specific techniques for getting rid of clutter. Clothes are worn according to the Pareto principle: you wear 20% of your clothes 80% of the time. Put the clothes you wear on the left side of the rack…throw away the 20% on the right that you never wear.

Your office is important. Can you move around easily? Are you comfortable? Move out old files, old papers.

Examine your clutter individually. Ask yourself how you feel about it, does it give you a good feeling or bring back bad associations. I talked to a friend about this, and she told me a story about how she has been holding 10 boxes for an ex husband for ten years. She threw them all out the next day. They only brought back bad memories.

How about those old wood golf clubs covered in dust? Throw them out; their time is gone.

I feel much better now, more energy. I'd been meaning to do this for years. It took a lot of time. It opens up energy. I'm glad I did it.

You could probably get rid of 20% of the systems that don't work anymore as well.



 I consider it's highly likely that when all is said and down, inflammation and the immune system in general will be shown to be responsible for the vast majority of the "lifestyle" disease damage. The pathways are at least two-fold: immunity is a dangerous weapon, that turns on the host sometimes as a byproduct of turning on the invaders, kind of like chemotherapy and as an accident of evolution the brain uses (and responds) to much of the same signaling that the immune system does.

The specific pathway of [altered diet -> altered mouth/body chemistry -> changed environment for mouth bacteria as evidenced by the increased formation of plague -> persistent inflammation of the gums -> immune responses to inflammation in some way related to diabetes] doesn't seem that unlikely.

It's fortunate that the teeth are easily accessible. Inflammation in places that are hidden can't be easily altered by regular, repeated mechanical interventions.



 An interesting development:

"Huge Oil Rig Explores Cuban Waters"

A huge drilling rig arrived Thursday in the warm Gulf waters north of Havana, where it will sink an exploratory well deep into the seabed, launching Cuba's dreams of striking it rich with offshore oil.

The Scarabeo-9 platform was visible from Havana's sea wall far off on the hazy horizon as it chugged westward toward its final drill site about 30 miles (50 kilometers) from the capital, and 60 miles (90 kilometers) south of Key West.

Spanish oil company Repsol RPF, which is leasing the rig for about a half-million dollars a day, said it expects to begin drilling within days to find out whether the reserves are as rich as predicted."



Over the past 24 months (through Dec 2011), checked SPY returns for options expiry Fridays ("0"), as well as the individual day's returns counting from 5 days prior to expiry to expiry +5. Here are daily (close-close) returns compared to zero:

One-Sample T: -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5

Test of mu = 0 vs not = 0

Var      N      Mean    StDev  SE Mean     95% CI             T
-5        24   0.00120  0.0111  0.0022  (-0.0034, 0.0058)   0.53
-4        24  -0.00106  0.0086  0.0017  (-0.0047, 0.0026)  -0.60
-3        24   0.00179  0.0108  0.0022  (-0.0027, 0.0063)   0.81
-2        24  -0.00075  0.0092  0.0018  (-0.0046, 0.0031)  -0.40
-1        24  -0.00201  0.0141  0.0028  (-0.0079, 0.0039)  -0.69
0         24  -0.00090  0.0099  0.0020  (-0.0050, 0.0032)  -0.45
1         24  -0.00089  0.0102  0.0020  (-0.0052, 0.0034)  -0.43
2         24   0.00064  0.0137  0.0028  (-0.0051, 0.0064)   0.23
3         24  -0.00087  0.0113  0.0023  (-0.0056, 0.0039)  -0.38
4         24   0.00120  0.0156  0.0031  (-0.0054, 0.0078)   0.38
5         24   0.00396  0.0099  0.0020  (-0.0002, 0.0081)   1.95

By chance alone you might expect 1/20 to test significantly; in this case 1/11 did: only day +5 approached (+0.4%, T=1.95)



A big M3 solar flare was ejected from the sun and is expected to hit the earth today at 22:00 Zulu. It is also expected to hit Mars. There is a possibility of a strong solar storm with excellent aurora viewings in the northern and southern regions. Radio propagation should also be crazy at this time.



 Inspired by Vic's grandfather's advice "people will never stop wearing hats", I wonder if perhaps shoes will lose favor with people. This seems to have occurred to me. I used to love shoes and bought many. Now since I work mostly from home, a pair of socks or sleepers are what I wear the most. Then since I mostly live in warm climates, sandals are what I wear the most for outdoors. The next is sport shoes for working out. Formal leather shoes, which I have a bundle of, are rarely worn. What is going to happen 50 years from now?

Victor Niederhoffer comments:

This will be very bad for China. There is not one manufacturer of shoes left in America. They're all in China an India now. When I worked in Wilkes Barre 50 years ago as tennis pro, there were at least 30 shoe manufactures in the Scranton Valley alone, all of whom where members of the club. Alas, Poor Yorick. 

Leo Jia replies: 

Hi Vic,

Yes, that would be very bad for China. But I tend to think that it would also not be easy for the world either.

Simply looking at the iPad shares in the world, we can see how big an exaggeration are China's GDP numbers from its real economic contributions/benefits. In the iPad case, China records the full $275 while its real contribution is only $10. I presume the shoes industry (and all others) would be similar only in varying degrees, with many American and European brands taking the big shares.

Look from the other way, China's economy is not as big as we think it is.



Jim Sogi writes:

 In Hawaii, everyone wears slippers and goes barefoot often. The feet get tough and the toes spread out in a more natural position which is wider. City feet get cramped in misshapen in the form of the latest fashion almost like Chinese foot binding. Native kids who have gone barefoot their whole lives have wide feet with space between their toes.

There is a new trend in running shoes towards a less structured shoe with a flexible sole that allows the foot to naturally flex during the running motion. Prior technology in running shoes put a large and rigid heel which forced a heel strike, which unintentionally caused greater impact on the knees. The flexible sole allows the foot arch to naturally flex and absorb the impact resulting in less impact to the knees and back. A popular shoe is the five toe design, similar to ancient Japanese toe socks. African runners run long distance barefoot.



 It is interesting to contemplate the tangled bank of the markets, clothed with the intricacies of the European attempts to keep their standing in the EC, with the siren song of the US stock market which crawled down to 1199 just a month ago, and has been reflected back to 1312 in less than a month, with just one or two down days intervening, while the bonds fly up and down above and below, and the metals and grains flit about through the Earth. Each of these markets so different from each other yet dependent upon each other in so complex a manner move in a fashion to relieve the weak from their funds and transfer it to those who feed upon their weakness. There is grandeur in this view of the markets, and the place of the bottom and top feeders in this ensemble. While this planet has gone circling on according to the fixed laws of gravity, which in no sense can be gainsayed vis a vis the markets themselves, with the S&P move from below the earthly pull of 1200 not to the heights of 1312. From so simple a beginning and with such modest principles, endless moves most beautiful and most wonderful have evolved to allow the strong to prosper and weak to die off.



 The destruction of Nat Gas continues and at these prices I am inclined to wonder if/when "value" players might enter the fray. Nat gas has been down 7 days running examining close to close prices. From 1/2000 to 12/2011 this has happened 22 times (out of 3008 days). The odds of it going up from yday's close to the close in 5 days are 50/50 but the magnitude of the losses offset those of the gains historically. Interesting that even after so many down days that history expects continued losses in the next few, and today's price is acting accordingly. If modeling this with a stop loss, positive expectations can be found but the frequency of winners decreases significantly from the 50/50 as the stop is often triggered in the following days. Aside from being a mean reverting method vs trending, this strikes me as something the turtles might have employed based on Curtis Faith's books. A system which takes a bunch of small losses and offsets the small losses with few large gains. To the statisticians on the list, what are the detrimental impacts of pursuing such a strategy?



The problem with most of the polling is that it is done nationally. I argue that my own opinion does not matter as I vote in New Jersey. Stefan's opinion in a poll also does not matter if he votes in California. Both California and New Jersey are blue states and the opinion of anyone polled in those states is a curiosity only. Oklahoma and Texas are solid red states and their voters' opinions are equally valueless. Those opinions would be of value if and only if they reflected a national mood, which is doubtful. Thus the only polls that would seemingly matter are those which concentrated on the swing states: Florida, Ohio, Iowa to name a few. I have only seen one such poll (about a month ago) which did exactly that.



 10. I want to hire a hot assistant, but my wife won't let me.

9. My neighbors think I'm a drug dealer.

8. Oprah retired.

7. The pizza delivery boy is becoming overly friendly.

6. I haven't shaved, gotten out of my pajamas, or left the house in a week.

5. Networking to me is talking to my 2 year old son.

4. My wife thinks I need to get a "real" job.

3. When I take a break, I throw in a load of wash.

2. All I hear is… "Since you're home all day anyway, can you just do this…?"

1. I feel like I live at the office… Wait, I do!

Jay Pasch responds:

 Top Ten Reasons I'm NOT Ready To Leave My Home Office

1. It's all about you and yours, the way it should be.
2. Better to suffer for one's self than for the white shoe.
3. My children are here.
4. The wife appreciates home-cooked meals when she gets home.
5.  The rent is cheaper

6. Friends are easier to find.

7. Foes are easier to shut off.

8. The commuting cost is zero dollars and zero cents

9. The couch is two feet away

10. Dogs aren't allowed in the corporate office



A very informative and interesting infographic of the anatomy of good web design



 Here is a great video introduction to Mart Laar, Estonia's first post-USSR prime minister– (the only book he'd ever read on economics was Milton Friedman's Free to Choose).

Here is another video titled "The Baltic Tiger: How Estonia Did It".

And some more information on Estonia.



 I was reminded today that when the U.S was downgraded in the summer U.S. bond yields went down. Despite the moves by European officials spreads continue to widen, etc. Furthermore, some of the starlets of the pageant like Ireland are now beginning to tire. While I think the movement in prices in Europe and the Euro are far from complete it is not too soon to consider the knock on effects and feedback mechanisms throughout other currency pairs globally. Consider the size of European GDP (along with the US and Japan at the very least below trend growth) and the impact on the world via trade, sentiment, growth, etc. The math is not dissimilar to the impact of mortgage equity withdrawal, housing, consumption as it impacted U.S. growth and through the U.S. the rest of the world.

Paolo Pezzutti writes:

Europe will drag the US into a recession. Unless markets accept further QEs from the fed, ECB and why not the Chinese. This because the only acceptable way for equity markets is ti go up in this situation? What is the limit to central banks balance sheets? If this solves the problem in the short term to politicians ans at the same time provides profits to corporates and keeps alive banks, it looks like the holy grail. Except that at some point someone has to pay the bill? But when?



 Market implications?

If the enemy is in range, so are you. -Infantry Journal

It is generally inadvisable to eject directly over the area you just bombed. -US.Air Force Manual

Whoever said the pen is mightier than the sword, obviously never encountered automatic weapons. - General MacArthur

You, you, and you … Panic. The rest of you, come with me. Infantry Sgt.

Tracers work both ways. -Army Ordnance Manual

Five second fuses last about three seconds. - Infantry Journal

The three most useless things in aviation are:Fuel in the bowser; Runway behind you; and Air above you. -Basic Flight Training Manual

Any ship can be a minesweeper. Once. - Naval Ops Manual

Never tell the Platoon Sergeant you have nothing to do. -Unknown Infantry Recruit -and if he asks who knows how to drive a Cadilac…….keep your mouth shut !

If you see a bomb technician running, try to keep up to him. - Infantry Journal

Yea, Though I Fly Through the Valley of the Shadow of Death, I Shall Fear No Evil. For I am at 50,000 Feet and Climbing. - Sign over SR71 Wing Ops

You've never been lost until you've been lost at Mach 3. -Paul F. Crickmore (SR71 test pilot)

The only time you have too much fuel is when you're on fire. -Unknown Author

If the wings are traveling faster than the fuselage it has to be a helicopter — and therefore, unsafe. -Fixed Wing Pilot

When one engine fails on a twin-engine airplane,you always have enough power left to get you to the scene of the crash. -Multi-Engine Training Manual

Without ammunition, the Air Force is just an expensive flying club. -Unknown Author

If you hear me yell; "Eject, Eject, Eject!", the last two will be echos. If you stop to ask "Why?", you'll be talking to yourself, because by then you'll be the pilot. -Pre-flight Briefing from a Canadian F104 Pilot

What is the similarity between air traffic controllers and pilots? If a pilot screws up, the pilot dies; but if ATC screws up, …. the pilot dies. -Sign over Control Tower Door

Never trade luck for skill. -Author Unknown

The three most common expressions (or famous last words)in military aviation are: "Did you feel that?'' "What's that noise?" and "Oh S…!" -Authors Unknown

Airspeed, altitude and brains. Two are always needed to successfully complete the flight. -Basic Flight Training Manual

Flying the airplane is more important than radioing your plightto a person on the ground incapable of understanding or doing anything about it. -Emergency Checklist

The Piper Cub is the safest airplane in the world; it can just barely kill you. - Attributed to Max Stanley (Northrop test pilot)

There is no reason to fly through a thunderstorm in peacetime. -Sign over Squadron Ops Desk at Davis-Montham AFB, AZ

You know that your landing gear is up and locked when it takes full power to taxi to the terminal. - Lead-in Fighter Training Manual

As the test pilot climbs out of the experimental aircraft, having torn off the wings and tail in the crash landing, the crash truck arrives.

The rescuer sees the bloodied pilot and asks,'What happened?' The pilot's reply: "I don't know, I just got here myself!".

Tom Blackwood replies:

 Market implications? How is this:

‘If the enemy is in range, so are you.’ -Infantry Journal

-When a ‘trend’ is obvious, there are few people left to join it, and there is probably more profit in going the other way.

‘It is generally inadvisable to eject directly over the area you just bombed.’ -US.Air Force Manual

-If you need to get out of a big position quickly, don’t let the dealer read you and preferably execute where they don’t know your exposure. You can net it off later.

‘Whoever said the pen is mightier than the sword, obviously never encountered automatic weapons.’ - General MacArthur

-Don’t think you can compete against the smartest minds using the best technology with a little trend line, moving average, and textbook cliche.

‘You, you, and you … Panic. The rest of you, come with me.’ - Infantry Sgt.

-Do not do what everyone else is fond of doing. Let them do it far away from you and profit from their mistakes.

‘Tracers work both ways.’ -Army Ordnance Manual

-This relates to prudent safeguards when putting on size, especially not leaving stops with brokers. Having a hard stop gets you out, but also gets you seen.

‘Five second fuses last about three seconds.’ - Infantry Journal

-Never try for the first or last eighth which are the two most expensive ticks in trading. (paraphrased)

‘Any ship can be a minesweeper. Once.’ - Naval Ops Manual

-Importance of position sizing. Not placing any career defining / ending trades in volatile conditions.

‘Never tell the Platoon Sergeant you have nothing to do.’ -Unknown Infantry Recruit

-and if he'd asks who knows how to drive a Cadilac…….keep your mouth shut ! Traders who always need action and do not understand that the odds do not always favour their participation will end up being given something unpleasant to do - tending to bad trades.

‘If you see a bomb technician running, try to keep up to him.’ - Infantry Journal

-When flight to quality / risk off, buy bonds.

‘Yea, Though I Fly Through the Valley of the Shadow of Death, I Shall Fear No Evil. For I am at 50,000 Feet and Climbing.’ - Sign over SR71 Wing Ops

-Once you intimately understand yourself, your abilities, and trust in your risk management there is nothing to fear from trading.

‘You’ve never been lost until you’ve been lost at Mach 3.’ -Paul F. Crickmore (SR71 test pilot)

-Have a plan for every eventuality and follow it. If something unexpected happens, get flat. If you have made a fat finger, don’t think about the loss or the exposure just get flat. If you’re on the wrong side of a flash crash, get flat now not 60 points lower.

Perhaps lessons for the trader rather than lessons about the market. The rest don’t seem to “fit” for me or I lack the creativity, so not going to force. Got the old brain doing something different though, thanks….



The continued outflow of money from mutual funds and other risk markets has resulted in ES liquidity being dominated by short time-frame players, i.e., large day traders and algos. They're demonstrating that they are not as quick, as in prior months, to flee the market at the first sign of trouble. This has been helping to make intra-day trading more counter-trend within concomitant smaller ranges (notwithstanding the slightly elevated range over the last two days).

We are still not seeing the large, concerted liquidity moves, with attendant price volatility and velocity, we had gotten used to in past months. Of course, it is way too early in the new year to panic, but the market may once again be morphing; this time to lower volume and thinner market conditions.

Not unlike, the effect the Volker Rule had on liquidity, the Fed’s recent announcement that it would substantially adopt the Basel III recommendations for bank regulations, may have caused many banks to re-think the scale and scope of their U.S.-based operations and, in some cases, to pull back from business and market-making. Ironically, monetary policymakers in virtually every corner of the globe are furiously pumping liquidity into the world’s economies increasing monetary liquidity, while the the markets appear to be losing transactional liquidity. Let's hope this phenomena is cyclical or secular at worst, and not structural.

That being said, the market appears to have returned to it’s old ways, in which the old adage is “don’t sell a dull market.” For now, breadth is good and the bullish trend is intact. February tends to be a trend continuation month and there has been some very positive relative strength coming out of the financial, materials, and industrial sectors, and European credit spreads have (hopefully) begun to narrow, along with already narrowing U.S credit spreads. Strength in the Treasuries continues to temper my bullish inclinations, however.

Frothy sentiment, intra-week seasonality and a 3 day weekend contributed to an early Friday 13th sell-off, only to see the bulls step up to the plate at the 1275.00-1270.00 high volume node/POC. If the market continues to hold these levels, weather opex next week,and close above the trendline formed by the May 2011 and July 2011 interim highs, the bulls should reassert in Feb.

Of note: Overnight trading has been responsible for much of the gains, which is common in a cyclical bull- what's uncommon is that this rally has not been supported by either the opening or closing hour–most unlike a cyclical bull.



The attached charts the ratio SPY/TLT 2002-present [The S&P ETF vs the US Treasury ETF]. The current ratio of about 1.06 is near the bottom of the post 08-09 crisis range, but still far from the bottom reached in March 2009.

Victor Niederhoffer writes: 

This illustrates the wisdom of the proverb "there is always a web between markets but the web is always changing". Conversely nothing exemplifies this proverb better than the shifting relation between fixed income and stocks.

Alston Mabry adds:

Just as an exploratory reminder to myself, attached is a chart showing the variations in 60-day correlations between two 1000-day series (of % changes) generated randomly but with an overall correlation of -0.3.  In other words the true correlation is -0.3 but we pretend we don't know that and measure the 60-day sampled correlation.

Ken Drees adds: 

Zussman's chart makes one think about potential energy–the buildup of potential change as one sector grows larger than the other.

Alston Mabry adds: 

And again, just to see what it looks like, here's the rolling 20-period correlation for the weekly % changes of Dr Z's SPY and TLT.

Finally, one last chart, combining the previous two ideas: the rolling 20-week correlation of SPY and TLT, graphed with the rolling 20-period correlation of two random series with the same overall correlation as SPY-TLT (-0.41).



 Does anyone recall the regulations back in the 70s on banks that forced them to offer things like toasters, blenders and coffee makers in order to attract new depositors? I believe deposit interest rates then were set by the government [Regulation Q] and the banks could only compete for deposits to lend by offering other incentives to savings depositors, like kitchen appliances. Today the situation is playing out on the lending side. The banks are awash with funds, but the Fed has forced the lending rates so low they will not cover the credit risk on mortgages or small business loans. Now the banks offer free (metaphoric) toasters to be left alone so they can just buy Treasuries.



 The 14th Annual Needham Global Growth Conference just concluded at the New York Palace Hotel. The crowd's favorite Keynote act Dr. Arthur Laffer has been followed at the closing luncheon by David Malpass, former adviser to the White House and a number of leading senators. This speaker's most eye-popping pie chart stressed the enormity of Europe's banking sector: 350% the asset size of the US Banks, and three times bigger in proportion to the ECB vs. US banking in proportion to FED. That didn't even include the UK and, I believe, the Swiss! Mr. Malpass's conclusions, while up-beat longer-term in respect to the frame of traditional economic and political cycle - did not seem to offer crystal clear current solutions.

So in the Q&A overtime, I had a couple of questions:

With this week's headlines of big pharma and Europe's automakers reversing their roles vis-a-vis bankers, while certainly eyeing preferential feedback on the other side of the recovery cycle - doesn't it emphasize the glaring incompetence of bankers over-all? Should bankers continue to enjoy their supreme reign within the modern society, or might have the old books been right forbidding most of the banking usery activities?

2. With yesterday's unprecedented German Treasury Auction results, where yields reached new lows on the wrong side of zero - is it plausible to anticipate a new perfect banking crime in the making? I mean: the only reason for T-bill's preposterous valuations is customer suspicion of banks' re-hypothecating their deposits. Likely no smoke without fire, the banks might use customer money to take an unprecedented net Short in the T-bill auction. To those skeptics: "But what would the banks do if the price continued yet higher!", may I remind the legend of the NYSE trader in the midst of the total Cuban Missile crisis panic. "Cover all my Shorts, and reverse them to Long!" But Sir, the rockets are about to fly?! "Thank you for the latest news, my boy! If you're right and I'm wrong - this trade will never clear!! Go on double margin"

Alas, co-founder George A. Needham had to remind the esteemed audience that he'd allowed one last question and not two - and with Mr. Malpass pleading for easier questions next time, the luncheon adjourned to applause! I'll have to catch up to Mr. Malpass elsewhere on conference circuit



 I'm thinking of giving 1,000:1 odds that the world won't end in 2012. If you send me $100 I will give you a certified voucher for $10,000 to be paid to the bearer on January 1, 2013. Stand by for further details.

Now that is a great investment. Anyone want to sponsor an infomercial?

Leo Jia writes:

The idea that the world will end in 2012 is not easily dismiss-able from human psyche. Whether it will happen or not is not the point. What is important is the course of event, or the path of time, leading to it. The collective human nature will make something big out of it (even though the "it" might be nothing). As an individual, we have all experienced worry. We know that while some worries may have merit, most simply come out of nothing and for nothing. I am sure this event will be something around which many different worries will be generated amount human beings. Those are what will move the things for this year.

I understand the "end of the world" is a concept not easily imaginable to most people. Many believers of the event could simply take it as some disaster that has a big harm to part of the world (the movie seems to be depicting this view). The likelihood for that should be substantially higher than the real "end of the world". In this sense, the number of believers (including the derivative ones) should be influentially large.



 This one is Eddy's fault. She wanted to know about the gold standard.

The authors of the Constitution had two concerns about money - first, they wanted the Federal government to be able to collect taxes to pay veterans' benefits and the cost of future wars; and, second, they wanted no one - the states, private individuals, the Federal government itself - to be able to deal in funny money. They thought they could solve both problems by giving the Federal government a monopoly on legal tender and then requiring Congress to limit the Money used in payment in the United States to Coin - i.e. precious metal. What is fraudulent about our present system is that the Federal government still has its legal tender monopoly but it no longer follows the rules laid out in the Constitution. Instead of using gold coin, the Federal government uses its own bank-created Credit as Money and requires all of us to accept it as the sole legal tender for all debts public and private.

The authors of the Constitution were so suspicious of what Congress might do that they did not even allow it to have a monopoly on Money. They required Congress to allow Foreign Coin to used as equivalents for the United States' own Coin. The authors of the Constitution knew from bitter experience that Congress was capable of being a fraud about money; country had seen the Continental Congress during the Revolution issue IOUs and then require people to take them in payment of the government's own debts. By allowing Foreign Coin to be Money, the authors of the Constitution were assuring that people could refuse to take any funny money that Congress tried to pass off in the future. This is why the Constitution has its specific provisions requiring Congress to "regulate" the Weight and Measure of both U.S. and Foreign Coin. "Regulate" does not mean "make up whatever rules we like" as it does now; it meant "make regular" - i.e. make equal.

Where the authors and the first Congresses made a mistake was in thinking that they could regulate more than 1 kind of precious metal as Money, that they could set by law the ratios of the prices of gold and silver and copper could be fixed, by law. They made this mistake because everyone in the world believed that Money had to have an official Price; it could not be left to the market to decide what Money was worth. (A few oddballs - the Frenchman Cantillon, the Englishman Gresham - knew better. They both observed that Money has to be unitary; otherwise, the smart people will always be swapping the cheaper metals for the more expensive ones.)

Even with this mistake of multi-metalism, the authors of the Constitution succeeded in achieving their aims for U.S. money. Congress was able to be extravagant - to start wars when they did not have the money to pay for them - without permanently destroying the value of the country's savings because no one could be forced to accept anything other than Coin as Money. If Money became short because people and/or the government had used too much credit, the people who had saved Money would find bargains. If people and/or the government became too cautious and hoarded Money, then the rewards for lending and granting Credit would go up. The interchange between Money and Credit would be the fundamental check and balance against future Congresses overreaching their financial authority. Under the Constitution Congress would be free to borrow on Credit like everyone else but it would only be allowed to coin Money or have Coin accepted as legal tender.

What the authors of the Constitution could not imagine is that future Congresses would allow the Federal government to use its own bank-created Credit as Money. That would have seemed to them against all common sense. Everyone in the country had known, from direct experience, that allowing Credit to become Money produced ruin. Savings became worthless, people abandoned work for speculation, and enterprise was destroyed. If the government's Credit was required to be accepted as legal tender, then everyone could go to the government to get their free Money. "Cash" would have no meaning because people could never be required to pay up in Coin. The authors of the Constitution knew that Credit was wonderful stuff. It was easier to use than specie and was flexible; people's ability to promise to pay was not limited by the coins in their pockets. But there had to a limit to how much people could promise and borrow, and that limit was Money; and Money had to be actual stuff that people could demand when they did not want paper, when they doubted that other people's Credit was good. Almost all of the time people would use Credit for trade; they would buy and sell things using Notes because it was the better way to do business. But, in the background of everyone's mind there still had to be the understanding that people could decline further exchange of credit and demand actual payment instead. With Credit there was always going to be the risk that one was getting a devious, suspect instrument of exchange. If people were free, they would trade; and, in trading, they would be certain to deal in all kinds of promises - some of which will be completely ludicrous. These rules would apply equally to the government and to private business. The Constitutional gold standard would not prevent people or Congress itself from committing fraud and folly; but it would assure that they were punished and not rewarded if Money was the stuff that was impossible to counterfeit and impossible to multiply with the stroke of a pen or the turn of a printing press (or, today, the click of a keyboard).

We now live in a very different world of Money and Credit. Foreign Coin is no longer a check and balance on Congress' monopoly authority over legal tender; every government in the world now uses its own IOUs as Money. That leaves only the Constitutional gold standard as a restraint on the government and people's ability to expand Credit without limit. The country has been here before. During and after the Civil War, the Federal government's IOUs - its Greenbacks - were made legal tender, by law. Many people thought this was fine and wanted Congress to keep printing Greenbacks to pay for rebuilding the country after the war. What Ulysses Grant understood was that if Congress kept spending Money as it had during the war, it would turn the country into a nation of monetary alcoholics. The demand for Credit would never be restrained. Almost single-handedly Grant forced the Congress to commit itself to restoring the gold standard, to promising to redeem all paper money in gold Coin. Many people were horrified by the idea; the New York Times (surprise!) predicted that there would be complete panic. Speculators tried to buy up all the country's gold. But, on the actual day when the Federal government resumed the convertibility of all U.S. Bank Notes into gold coin, the world did not rush to the Treasury to swap its paper for specie. The monetary day of judgment failed to appear and was, in fact, a big yawn. The very act of committing the U.S. to restoration of the Gold Standard had sufficiently re-established the credit of the U.S. government that people were content to continue to deal in the credit notes as if they were as good as gold - which they were.

The same result would happen today if Congress adopted a new Specie Act. I know this is a fantasy; but imagine that Congress enacted and the President signed a Specie Act that legisltated that, after January 1, 2013, U.S. Money would be a Liberty Coin of a fixed Weight and Measure of gold and all government Credit Notes - the paper currency called Federal Reserve Notes printed by the U.S. Treasury - would be convertible into Liberty Coin at the value set by the market . The market would instantly value our current Greenbacks at their worth would be in gold. A dollar whose fluctuating value would be fixed by the market's dealings would not, by itself, save the credit of the United States; but it would instantly end the further abuse of that credit by the Congress and the Federal Reserve. That might, by itself, be enough.

 A promise to pay can, as the original J. P. Morgan said, only be valued by the character of the borrower. As long as Money itself is solid, people can accept the risks of Credit as the price of its convenience and opportunity for gain. The very argument used against the gold standard - its inflexibility - is true; when one is well established, the price of gold itself becomes monotonously steady. It is the price of Credit that fluctuates. After President Grant's demand for resumption was enacted into law, the infamous Gold Room closed; and stock and bond markets and bank clearings in the United States exploded with a boom that was so real that it produced enough wealth that the country could, for the first time in its history, afford broad "higher" education.

It will not surprise you and it would not have surprised the authors of the Constitution that the first thing the new generation of professors and well-educated (sic) students did was decide that the archaic system of the gold standard had to be improved. The result was the funding of two World Wars and other systematic tortures that the world is still living under in the name of Progress.

Leo Jia comments:

 Thanks Stefan. Here are my thoughts on what you wrote.

From economic point of view, the functions of money are: 1) medium of exchange, 2) unit of account, and 3) store of value.

The biggest problem with fiat money (as we experienced) is its obvious inability to store value. On the other hand, commodity money is hard to transport. Recognizing these, many are inclined to accepting some kind of representative money, such as the gold standard.

It is understandable that people put more trust in things such as gold for a better store of value than in fiat money, simply because they are more real and can't be created from thin-air. This might be very true in simple or primitive economies. But is there any false reasoning here for modern economies? It is true that they can not be as easily created, but this in no way could necessarily lead to a conclusion of their better ability to store value or perform other money functions. My observations are as follows.

1) Any real thing (such as gold) changes value vis-a-vis other real things as economy develops through time. This is determined by the varying needs of human activities. In this sense, a lumber producer for instance may have good reasons not to trust gold to reserve his value of work (as gold could get cheaper while lumber gets dearer during some period of time).

2) The economic developments, following technological advancements or wars for instance, come in steps, which at many times are interruptions to old developments. After each step of development, the values of many thingsare largely re-adjusts. With the automobile invented for instance, the horse wagons lost substantial value. On the other hand, with a large gold mine discovered, gold's value vs. other things dive.

3) In the case of a step-up of the economy (due to an important technology break through, for instance), the requirement for capital jumps up. If the money is based on some real thing (such as gold), the money supply seriously lags in a way to hinder the economy development. Gold's supply has its own course of development. Except for a few large discoveries in history, gold's supply has been largely a gradually growing process, and this contrasts the nature of economic development, which often jumps, particularly in the modern age.

4) In the case of gold being a money base, the real question is why people would always treasure gold. Could the attitude change? From the nature that gold is of little real use, this is very likely somewhere down the road. All it needs is one country's abandoning the gold standard to wreck the whole world's economy. Before that happens, is people's pursuit of gold quite similar to a fool's game, where everyone owning gold is just hoping to sell it to a bigger fool?

In the modern world, when we have various developments in fast gears, we don't really have a money that meets the functions we want. It is very unfortunate. Perhaps the desire to have a store of value in something is generally a fallacy. Sure, the modern finance provides some possibilities for that desire, but modern finance is not for everybody.

Question: is it feasible to form a money based on some financially structured instruments?

Stefan Jovanovich replies: 

Leo, Thanks for the reply. I don't think you can support the notion that Money is a primary "medium of exchange" any more; it is, for the limited population of drug dealers and others wanting to hide their wealth from "the law", but the volume of credit transactions so completely dwarfs cash dealings now that I am afraid the standard textbook definition of money has to be retired from our discussions, even if it will always remain the correct answer for an Econ 1 class. The "store of value" notion has always been a canard. The notion of "value" itself is one of those Platonic ideas that it is impossible to abolish, precisely because it is never defined well enough to be tested or disproven. It is part of the equally bizarre idea of Capital - the notion that certain stuff and paper (in our age, digital entries) represent a "store of value". Once you accept the circularity of these terms, you never find the exit door into what people are actually doing. (Yes, yes I know about marginal utility, etc. but all of those wonderful theories can be reduced to something the money changers sitting outside the Temple knew - price is always a matter of quantity and time.)

Having endured the interminable sermons of their era (and decided, like Washington, that God existed outside of church as well as in), the authors of the Constitution were well acquainted with the theological approach to discussions about the economy. But, being practical men of business (even the lawyers among them were traders), they knew enough of the world to know that commerce would always rest on the foundation of credit. When counter-parties began to worry, "the economy" was in trouble, no matter how much gold was in the vault. They also knew that Money - specie - would always be the measure of the fundamental economic fact of life - scarcity. They counted on the fact that Money is always in short supply to be the principal limitation on the size of government itself. As the Founders knew, money is the spoil sport - the stuff that is unalterably real and cannot be talked into existence. Americans used to know this instinctively. There is the classic remark of t he real estate speculator in San Diego in the 1880s who got caught long and telegraphed to his partner back East: "Lost $100,000; still worse, $800 was in cash".

What the Founders and a majority of Americans in the 19th century did not think was that the government could somehow protect people from the vagaries of the market itself. They certainly did not think that gold - i.e. Money - could do that. The claims made for gold by the Paulistas - Don Ron made it again last night in the Republican primary debate in South Carolina - are specious. Gold is not a "store of value" and it has never protected people from the fluctuation of prices. As you noted, gold's exchange value fluctuates dramatically even under a Constitutional gold standard. Gold as Money is no more immune to market variation than Credit; both are subject to the vagaries of trade. What Gold as Money is not subject to are the manipulations of the government as ruled by faction. When George Washington warned against "faction", he was not cautioning people about political parties; he was cautioning them about the ability of people to use the government's monopoly au thority over legal tender to create credit in their particular favor. All gold offers is the assurance to the holder of Money that he/she has only one financial risk - the fluctuations of the market - and that he/she is safe from the cheats of government action in the name of the common good.

P.S. Your history about gold mining needs revision. The great discoveries - California in the 1840s, South Africa and Alaska in the 1890s - did not see "gold's value vs. other things dive"; on the contrary, the gold discoveries led to credit booms that saw general prices rise and specie become inexplicably tight. The Panic of 1907 arose because the London insurance companies were unable to pay their American claims from the San Francisco Fire; gold - within a decade of the greatest discovery in history - became so incredibly short that JP Morgan - for the first time in its history - agreed to join the New York Clearing House so that the banks would stop pulling each other down to ruin by acting like lobsters trying to climb over each other out of a barrel.

P.P.S. The notion of a Monetary base is beyond my capacity to argue with. If you accept the illusion that IOUs are Money, that the entries on the ledgers at the Federal Reserve and the Notes printed by the U.S. Treasury are somehow more "high-powered" than other forms of Credit, then the Ptolemaic system of modern academic economics seems to work fine - until, of course, it doesn't. The modern world has no problems with its system of Credit; its difficulties are with the absurd notion that the Unit of Account can be multiplied at will by central banks in the name of stability.

The questions of money and credit were not intellectual novelties for the founders or their contemporaries. They were - literally - the common coin of civil discourse. Hume's Essays - which were in the library of everyone who attended the Constitutional Convention - raised the issue directly:

"It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburthening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to impower a statesman to draw bills, in this manner, upon posterity. What then shall we say to the new paradox, that public incumbrances, are, of themselves, advantageous, independent of the necessity of contracting them; and that any state, even though it were not pressed by a foreign enemy, could not possibly have embraced a wiser expedient for promoting commerce and riches, than to create funds, and debts, and taxes, without limitation? Reasonings, such as these, might naturally have passed for trials of wit among rhetoricians, like the panegyrics on folly and a fever, on BUSIRIS and NERO, had we not seen such absurd maxims patronized by great ministers,(Robert Walpole) and by a whole party among us (the Whigs)."

Peter Saint-Andre comments:

 And hence there runs, from the first essays of reflective contemplation of a social phenomena down to our own times, an uninterrupted chain of disquisitions upon the nature and specific qualities of money in its relation to all that constitutes traffic. Philosophers, jurists, and historians, as well as economists, and even naturalists and mathematicians, have dealt with this notable problem, and there is no civilized people that has not furnished its quota to the abundant literature thereon. What is the nature of those little disks or documents, which in themselves seem to serve no useful purpose, and which nevertheless, in contradiction to the rest of experience, pass from one hand to another in exchange for the most useful commodities, nay, for which every one is so eagerly bent on surrendering his wares? Is money an organic member in the world of commodities, or is it an economic anomaly? Are we to refer its commercial currency and its value in trade to the same causes conditioning those of other goods, or are they the distinct product of convention and authority?

From On the Origin of Money by Carl Menger

Stefan Jovanovich writes: 

 Menger was the leading figure in the Austrian "Währungs-Enquete-Commission, the Monetary Commission called to deal with the problem of the Austrian currency. (Hayek: "Towards the end of the 'eighties the perennial Austrian currency problem had assumed a form where a drastic final reform seemed to become both possible and necessary. In 1878 and 1879 the fall of the price of silver had first brought the depreciated paper currency back to its silver parity and soon afterwards made it necessary to discontinue the free coinage of silver; since then the Austrian paper money had gradually appreciated in terms of silver and fluctuated in terms of gold. The situation during that period — in many respects one of the most interesting in monetary history — was more and more regarded as unsatisfactory, and as the financial position of Austria seemed for the first time for a long period strong enough to promise a period of stability, the Government was generally expected to take matters in hand. Moreover, the treaty concluded with Hungary in 1887 actually provided that a commission should immediately be appointed to discuss the preparatory measures necessary to make the resumption of specie payments possible. After considerable delay, due to the usual political difficulties between the two parts of the dual monarchy, the commission, or rather commissions, one for Austria and one for Hungary, were appointed and met in March 1892, in Vienna and Budapest respectively.)

According to Hayek, "Menger agreed with practically all the members of the commission that the adoption of the Gold Standard was the only practical course." What the Commission did not do was adopt the approach taken by the Americans a decades earlier. Instead of simply setting the weight and measure for Austrian Coin at an equivalence to the British pound - the reference point for all international transactions, the Commission debated "the practical problems of the exact parity to be chosen and the moment of time to be selected for the transition". That, by itself, did no great harm; but it established the principle - now universal - that the state, not the market, would be the ultimate arbiter of the content of Money. It is foolish of me to expect them to have done otherwise. Even though (or perhaps because) Menger was the author of utility theory, his political economy had an unshakeable belief in "essences", in the notion that political economy could be reduced to laws of motion, just like physics. The result was the Franco-Germanic idea of the "universal bank" - the Creditanstalt that would literally "manage" the economy and do away with the need for those messy people - the brokers and the dealers in stock - and their volatile exchanges.

For Menger there could be no difference between "the disks (and) documents" because all money was a creation of the state's authority. The American idea that you could bring bullion to the Mint and demand that they reduce it to legal tender - for free - was anathema.



 Leo Jia's "Thoughts on Investing " for the apocalypse has got me thinking.

This is like tossing out a brick to get a jade gem (拋磚引玉/抛砖引玉, Pāo zhuān yǐn yù)

"Bait someone by making him believe he gains something or just make him react to it ("toss out a brick") and obtain something valuable from him in return ("get a jade gem")."

This proverb is based on a story involving two famous poets of the Tang Dynasty. There was a great poet named Zhao Gu (趙嘏) and another lesser poet by the name of Chang Jian (常建). While Chang Jian was traveling in Suzhou, he heard news that Zhao Gu would be visiting a temple in the area. Chang Jian wished to learn from the master poet, so he devised a plan and went to the temple in advance, then wrote a poem on the temple walls with only two of the four lines completed, hoping Zhao Gu would see it and finish the poem. Zhao Gu acted as Chang Jian foresaw, and from this story came the proverb.

Apologies, I have no precious jade or gem to offer. But note that what you note about how some consumption will see large increases in both price and volume, including entertainment, pleasure, food-drinks, tourism, transportation, luxurism, exoticism, etc, is already happening in quite a few places around the world, especially in some parts of Asia as recipients of 'hot money' inflows or at least, as perceived relative safe havens. And in a perverse sort of way, I actually welcome your expectation of a depressing trend. This should apply to real-estate, arts, antiques, many commodities, and the overall stock markets., especially here in my little city (Spore).

Hopefully, a puncturing of the ballooned-up wealth effect here can rein in the luxury consumption which is currently very blatantly on display here. Too many Porsches, Maseratis and even 'boy-racer' GTRs roaring around the neighbourhood at unearthly hours. Just last night, a long line of candy-coloured Gallardos were blocking the entire front street. I shudder to think if this "consumption will continue to see large increase in volume."

One may interpret the 'recursive' words above as a little tongue-in-cheek illustration of the non-linearity of the utility function in action.



 How is this behavior any different from an inconvenient truth applied to the financial arena: "Treasury Statements Omit Projected TARP Losses, GAO Says".

Victor Niederhoffer comments: 

Might this be called the decoy or the perfect lie where you tell a little something about what you did wrong so as to omit the big thing? Galton reported that it was always necessary to cache some very invaluable loot at your hiding place while caching the real loot in the overhead branches of some impenetrable tree. Perhaps someone will recall the name of that impenetrable tree so it can be compared to the decoy. How much have they loaned to the banks e.g. and what is the opportunity cost of that?



 O'bama, Sage and Index Man should be proud. Relentless repetition of their divisive and hypocritical "rich and under-taxed evil capitalist" message has disseminated to the masses. A 2011 survey by the self-claimed nonpartisan Pew Research Center, found that 66%, which is an a remarkable increase of 19% since 2009, of respondents believe there is a strong or very strong conflict between the rich and poor, with the largest percentage gains among whites.


Divisions within American society, conflicts between rich and poor now rank ahead of three other potential sources of group tension—between immigrants and the native born; between blacks and whites; and between young and old. Back in 2009, more survey respondents said there were strong conflicts between immigrants and the native born than said the same about the rich and the poor.



 Hello everyone

Just left my local 7-Eleven and the fellow ahead of me paid the cashier with a 2.00 bill and a clad Ike dollar coin. The cashier looked shocked and had not seen them in transactions.

I assured her both were legal tender. After she put the bill in her drawer I said aren't you going to mark it with your special pen? She retrieved it and marked it and smiled at me and said happy now?

Up till now I had not seen these coins or currency presented for payment at places I frequent.Is what I witnessed a sign of a growing economy or an isolated incident or a sign of things getting worse for many folks?

The man bought a sandwich and a drink with the coin and the bill.





 Just did some searches and found 6 apocalypse theories for Dec. 21, 2012.

Though they can be judged by many as BS theories, they are not trivial ones, and should have many believers.

A search on Amazon for 2012 yields these popular books.

There are also some analysis from the scientific side regarding likely potential disasters that could happen at any time, including the strengthening solar storms, the earth's weakening magnetic field, the super volcanoes both under the sea and on land, etc. All this strengthens people's belief about the incoming apocalypse.Depressed feelings from world economies will also exacerbate for the belief. Further on that, people's herding instinct will tremendously increase the number of believers.

What is more important is how people think others believe in it, and more, how people think others think others believe in it, and so on. My feeling is that these derivative expectations will be very strong. The two sides (believers and non-believers) will become polarized as we move on in the year, with the believers dominating as we come closer to the date.

Is it reasonable to expect the following for this year and beyond from all this?

1) Ordinary investment assets will have high volatility (due to large fights between believers and non-believers), resulting in a depressing trend (possibly a panicking one) for later part of the year (believers win). This should apply to real-estate, arts, antiques, many commodities, and the overall stock markets.

2) Some consumption will see large increases in both price and volume, including entertainment, pleasure, food-drinks, tourism, transportation, luxurism, exoticism, etc.

3) Related equities and commodities will increase in value, but market will still remain downward biased. Most commodities will face backwardation.

4) Interest rates will likely go up, and banks may face liquidity problems.

5) If the world doesn't end as anticipated, world economy will likely have a big recovery in 2013 as a result of all the 2012 activities.

6) Prices will shoot to new highs starting at the end of 2012 for many assets.

Anyhow, with this stone cast, I beg for the real jade.



China is building 44% of the 50 skyscrapers to be completed worldwide in the next six years, increasing the number of skyscrapers in Chinese cities by over 50%.

Burj Khalifa, at 2,716 feet, should remain top dog for several years, but the Shanghai Tower, at 2,073 feet, and Wuhan's Greenland Center, at 1,988 feet, will take the world No. 2 and 3 spots in 2014 and 2015.


Leo Jia writes:

Not only the number, but the speed of building is also shocking. This story tells about a 30-story hotel being built in 15 days.



 Thinking: Fast and Slow By Daniel Kahneman

Reviewed by Russell Sears

This book is a excellent example of why a single scale rating is not sufficient. If I were to rate this book solely on the criteria of "Must Read" , I would have to give it a 10. But if you are to rate a book on its pleasure to read or even its completeness, this title would not be as high.

There are three reasons why I believe you "must" read a book. The first reason is to learn something new. The second reason is it will challenge you; it will either change the way you conduct business and your life, or it will help you understand why what you do is working and strengthen your commitment.  And the third reason is its influence on others. Even if it is wrong, or you do not believe it, it has already been influential or will change the world in which you live. Daniel Kahneman has changed the business world. This book would have to be given a 10 on all 3 of these criteria.

As an investment professional I have some expertise and experience with many of his topics. He gives much attention to biases, business analysis, other investment professionals' behavior. As an actuary, I also have experience with statistical analysis, research, the scientific method and regression analysis which are the "hero" of this book. I also have had many similar experiences as Daniel  Kahneman, so I know how people react when the "thinking" worlds collide. This book tell you the psychological processes that are occurring when things like "expertise" conflict with hard numbers. This is were I have learned much from this book. Both about myself and about why others do the things they do.

First Daniel Kahneman has a Nobel Prize. He has already had a tremendous influence on how people do things. He has brought new insight into economics. Many of the stories reflect how he helped people change their lives or business. Further, many of his stories are about other influential colleagues and his collaboration and conflicts with them. It tells tales from how to improve a military to how a checklist decreased infant mortality. It shows that understanding, the way we think, can be improved. Because our thinking has holes in it, that we are just discovering. It is not always optimal. It is clear that he has helped change the way the world conducts business.

This book will make you think: about thinking like you never have before, unless you are already at the edge of psychological "thinking" research. It tells of "fast thinking" which is largely instinct/intuition. It also tells of "slow thinking" which is more analysis. But psychologists are beginning to understand how these two "systems" interact. The interaction, the how and when each system relates was fascinating. Sometimes one system has complete control and other times the other does. However, often the control is regulated and switched between them. One system will ask the other to influence it to help make the decision. It would seem, the way I read the book, which system we  believe was in charge is often an illusion we wanted to believe. These ideas have revolutionized much of decision making.

While showing some admiration for how marvelous and powerful these systems can be, the book largely is about the ways these systems cause problems and errors. It should change the way you conduct business. It tells of common mistakes people have in thinking. It tells of shortcuts people take that do not work and of ways people over think when they should make things simpler and finally the way people, even scientists, fool themselves into believing things they should not. 

And even when it does not change your methods, it should enhance how you think about business in two ways. Either challenge you to solidify the reasons why you do the things the way you do, Or help you understand why what you are doing works. It often calls for numbers to be put on the table. That calls for you to use the scientific method to validate your methods and develop better methods, methods that can be validated. Once developed you can determine when these methods should be ignored. Often ignoring the model is much rarer than people would think. People like to tinker, throw in their opinion and add their "expertise". However, If your methods are scientifically based, rarely does this improve things. The exception he calls the "broken leg rule", that it is ok to ignore the numbers modeled if the candidate has a totally unexpected event. For example the model compares quarterbacks can be ignored if one quarterback has "broken his leg" the day before.

I have made a list of how this book has changed my way of thinking and how I will conduct business and make decisions.

I cannot stress enough how much I think leaders should read this book.

However, this book can be a difficult read. In the intro, Daniel Kahneman, says that most of the opposition to his book on thinking is because it highlights the biases in thinking, and does not give enough respect to how amazing thinking is. He implies that people have a bias against changing the status quo. People have built up businesses on these illusions and they do not want them to change. 

However, this book is hard to read and itself seems to over generalize and not always give the reader the scientific rigor he calls for from others. Being a Nobel prize winner, I would like to give him the benefit of the doubt, that much of these problems are to make the book convincing and readable to the lay person as well as the scientist. If you use regression analysis, much of the book will bore you, because it tries to simplify and explain it in words and stories how this method works. Likewise if you are not familiar and do not use these methods, it will probably be a difficult read.

Before the book got to this section however, many of his discoveries I found myself asking how solid was the evidence. For example when "system 2" (slow thinking) kicks in he states your heart rate WILL increase and pupils dilate. Simple enough, except are there exceptions to the rule, can people train themselves not to show this sign. Say perhaps a poker player. I do not know.

Many of the ideas on how these system process are stated as if they are clearly proven. While it would seem that the gray areas are not.

Further on some cases, when a few people's thinking do not show biases but most do the case of those that do is explored. While the case of those that reached the right conclusion is left as insignificant. For example a test were one person calls for help, and others have been put in isolation but perfectly capable of helping. Most do not help. Whereas if they knew nobody else was going to help they would have. Police have known this for a long time. No matter the statistics most people assume they would help if put into this situation. Social science students very familiar with statistics do not get this. Because their story of themselves disagree with the statistics. It is only after meeting these people in an interview and asked to predict if they would or would not help do they "get" what the statistics are saying. Only then do the students understand that it is difficult to predict what they would do in similar situation and catch the error when it happens. People like experiencing it for themselves is the conclusion. Not  via statistics. He implies only experience/ personal stories convince, statistics do not, often even amongst scientists. However, statistics do convince some people to change their minds, not just stories. As an actuary, often this is when money is on the line, statistics can change minds. Numbers have always spoken to me, a good statistical argument has brought much more conviction than 100 sermons (my Dad was a preacher). But it has often been a puzzle to me why this same conviction did not occur to others.

I am not arguing that my thinking does not need to be changed due to this research. I am however, left wondering how much better my thinking could be corrected if those people that did not display biases were studied. Is it really so simple as these are the people that have learned to modify their natural way of thinking. Or do these people think differently?

I would like to give a Nobel laureate the benefit of the doubt, so I figured that this was simply due to trying to convince even the non-scientist of the benefits of the scientific method. However what I found the most shocking error  was in his analysis of business world and investment professionals.

I would call this his repeated ignoring the "alpha" in regression statistics by focusing only on the correlation or the randomness of predictions. For example he tells the tale of visiting a investment firm which has 28 years of return on their professionals. The correlation from one year to the next turns out to have been near zero. His conclusion was that he had statistically proven that the professional had not added value and did not earn their bonuses. He had perhaps proven that their results still had random fluctuation and risks. However, he completely ignored did they add returns consistently, that is added alpha. For those that know nothing about linear regression, let me give an extreme example. Say return was 100% + a random variable  every year. The correlation between years is still near zero but the pro has increased your return every year

He may have done this calculation but not tell it because it did not fit the story at hand. The lesson he was trying to prove was experts opinion is no better than a random guess. But the correlation statistic did not prove this.

While perhaps there is some explanation for why he ignored this alpha but he also gave a similar view on CEO and their bonuses and salaries. He used Google founders being turned down in their early attempt to sale the company for a mere million as an example hindsight bias being luck. He told of tales of book and magazine articles of overperformance leading to guru status being signs of "reversion to the mean". While I would agree that such advice is largely to be ignored, much of their success that year is due to random luck, not superior wisdom to the other CEO's in the S&P 500. The next year they are not as likely to be as "lucky" and return to the average. Similarly for the Sports Illustrated magazine cover supposed "curse".

Even great players need some luck to be good enough to be on the magazine cover. It is not a curse, but reversion to the mean, they have no lock on luck. However, in both cases, they belong to a pretty elite group. The CEO's that run S&P covers and the major league baseball players. He did not argue that the ball player did not add value however. Yet, that is what was argued with the CEO's bonus. Despite the 100 year drift of public stock companies. I can only imagine how hard it is to "run" a modern S&P company and keep that drift in place.

A few great seasons are all we expect from an athlete. After all he will get older and be replaced by young better trained with all the accumulated wisdom wiser athletes. Likewise should we expect different from CEOs? Do both add value well beyond most people. I will let the statistic on the table decide.

For this less than scientific rigor and in parts boring writing I would have to say while a must read it is not always a joy to read and would give it a 5 or average on that scale. Great ideas, not always great execution.

After all applying his own logic on revision to the mean and performance to a Nobel laureate, and writing to the masses seems fair.



If you are a closed-minded, statistically rigorous, intellectual who cares about sounding smart at cocktail parties, stop reading this post right now!

If you are open-minded and worship at the Church of What Works, and furthermore believe that indicators are generally predictive before they become mainstream (and statistically meaningful), feel free to continue reading this post.

I've previously noted that the new ONN "risk on" and OFF "risk off" Fisher-Gartman Risk ETFs have lost money overall (despite the fact that they should move opposite to each other). Since inception on 11/30/11, ONN has returned 1.83% while OFF has returned -2.97%, which suggests that the "right" trade was to be net short both risk-off *and* risk-on. That is, it's been profitable to be a contrarian to the contrarians — which is another way of saying "my enemy's enemy is my friend."

Nonetheless, I think there could be utility to these two ETF's as a new (and totally objective) retail market sentiment indicator. If one plots the open interest (shares outstanding) of ONN versus the open interest (shares outstanding) of OFF, one can see a daily quantitative measure of retail risk-on/risk-off sentiment. Unlike the AAII surveys (and most sentiment measures), this involves real money — and so isn't prone to myriad polling biases.

Obviously the data history is extremely short, the ETF size is small, the baskets are constructed in suspect ways, the liquidity is limited, and it has the eponymous moniker of the "world renowned" Dennis Gartman. Yet if those issues really concern you, you didn't follow my instructions to stop reading this post at the end of the first sentence!

A number of specs have written to me that market participants already use the leveraged S&P long and short funds as sentiment indicator in a similar ways. I'd note that the S&P is only one part of the (world-renowned) Gartman risk-on/risk-off basket. W.R. Gartman also includes bonds, crude, copper, gold, silver, corn, etc.; so its behavior and information content may be quite different from the S&P etfs.



The main purpose is to generate revenues for the top feeders to cover their overhead at the expense of the bottom feeders, the small people, those who can be squeezed, those who pay high commissions. The slow moving people with fixed systems that Osborne liked to write about. After 4 small days like existed as of yesterday, it had only happened 6 times in last 10 years, and most of them around holidays. They all went up substantially next day or two like today.

To add misery to the equation just to make all the regularity people lean the wrong way, they gave us an up day yesterday and a 50 day max just to make sure everyone who could possibly be bearish was bearish. But of course then the real January effect should chip in with big rises in the first x days, succumbing to terrible declines by the end of the month, just so that more chips can be eaten and those sold out bulls will rue the days they tried to come in on the bandwagon.

The question in my mind is whether it will first go to 1300 before succumbing. Of course aside from the counting above, the latter is just speculation and meals for a lifetime.



 With all the charlatans hawking the January barometer, randomly stating that the first month is predictive of the last last 11, how come we have never heard of a first day barometer, or a first week barometer? I believe Galton would have written on this in Natural Faculty.

Update: Indeed there is a first week barometer and it's much less consistent with randomness than the first month barometer, and of course it's opposite.



I am guilty of knowing a little about ticketing — thanks to being married to a theater producer and having been partners with a man still known in certain precincts of west LA as "Mr. Ticket".

What Mr. Kahn says is true: "it used to take 3 days to make a price change within a ticketing system. …(T)eams can now change thousands of prices with a single click."

Dynamic ticket pricing is as much of a change for the sports business as the abolition of fixed exchange rates was for the brokerage business.

See Qcue and digonex



 Every modern President has had a ghost writer. Even the failed candidates (Mrs. Clinton, for example) have had some anonymous scribe laboring over his/her collection of press clippings, interview transcripts and other gleanings to produce a suitable memoir. Begin with Profiles in Courage and work forward. This may be unfair to the Bushes; I am certain Mrs. Bush I wrote the one about the dog.

No one becomes President any more without having the goal as a childhood ambition - either their own or their parents or both. Dwight Eisenhower is the last Chief Executive who arrived at the office without having dreamt of hearing Hail to the Chief while sucking his/her thumb.

The primary political skill required for becoming President is that you be able to raise the money; in that, President Obama is one of the masters and has been from an early age. He has played Hollywood (David Geffen, most of all) with a mastery that more than equals Joshua Bell; and he continues to be have the ability to not only generate pledges but also actually collect the checks and not have them bounce.

Obama's "outmaneuvering" of Mrs. Clinton was comparable to every other primary battle; he had more money, and he raised it by being as successful a leader of the trust fund children's crusade anyone in American history.

Blaming Mrs. Palin for McCain's defeat is like blaming Roosevelt for Pearl Harbor; it fits a contemptible narrative (it must be the bitch's fault) that relieves the actual commanders of their responsibility. Until McCain was fatally stupid enough to come to Washington and sit at the end of the table listening to Bush announce Paulson's "plan" (sic), he was leading in every poll; after that moment, he always trailed. At the moment of decision McCain showed himself to have as little moral courage as always; his "maverick" posture was simply vanity. When it mattered, it lacked the guts to stand apart. (The reason McCain was largely blackballed from the club of the Hanoi Hilton survivors is that he refused to accept the NVA offer of early release; his fellow captors wanted him to go back to Washington and tell people in the Pentagon how to win the war; McCain was afraid that he would look bad.)

Walter Mondale and Geraldine Ferraro lost 49 states; if McCain has carried as much of the white vote as Bush II in 2004, he would have been elected.

I think it is time for Vic to revive Admiral Nelson's rules. Otherwise, someone other than me is going to start throwing the rolls. (If they are as hard as the biscuits Harvard once served, someone may actually get hurt.)



 In Dec 2010, Daily Spec announced a contest for best investment ideas for 2011 at this link .  Several volunteered to judge the contest. And this seems necessary as there were many intricacies in judging. As a start to declare the winner, would those who feel they are in the running for the winner's prize, please alert me to their recommendations, the results, and why they feel they may be near the top. Thank you. Vic

Dan Grossman writes:

Vic, below is my contest-entry email, with the results indicated in italics. It should perhaps count in my entry's favor that my percentage gains were achieved without the use of derivatives or other form of leverage, and that they were very specific stock predictions, easy for anyone to implement and make money from.

As indicated, if I am lucky enough to win, I will donate my prize to a free market or libertarian nonprofit organization.

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least 5%. S&P wasn't down for the quarter but second part of prediction was accurate in that S&P fell 6.4% from Feb 18 to Mar 16.

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least [corrected in followup email to $16]. GENZ (50.93 at contest date) was acquired early in the year for a then-current value of $74, but including a contingent right which could still bring total value to $80. AMRN (8.20 at contest date) was not acquired, but soon traded above 16 for some two months.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year. HELE and DFG had a combined price at contest date of 58.58, and a combined price at year-end of 75.00, for a combined average gain of 28%.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.) MNTA was 14.97 at contest date and 17.39 at year-end, for a gain of 16.17%.

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,


Yanki Onen writes: 

Dear Vic,

Once again I would like to thank all of the contributors to the daily spec word press for sharing their insight and wisdom. It is a never ending journey. Below were my ideas but to be quite frank I don't know if they were eligible for the contest. But if they were results should be alright

1) Going long csco and long put lost $2,18
2) Sell contango buy backwardation trade for cotton buy selling spreads
made a lot of money but I don't know how to quantify that cause it is trading call 3) Leveraged ETFs suckers play. This strategy was right in the money and made quite a sum.

Our lively hood depends on what we make of the beloved mistress, if you get a long she is quite charming. Thanks for the challenge. Also would like to use this opportunity to wish you all a great prosperous new year.

Phil McDonnell writes: 

My trade on the Silver ETF SLV was closed out when the ETF hit its target price of 40 as stated in the original instruction (at the bottom). On April 11, 2011 the trade was exited with the following post to the list in reply to a suggestion from Big Al:

Yes, they are short puts. Yes, you are right. In my original contest entry I said close out the 'entire position' if and when slv hits 40. So I think I need to go with that. I don't think we were allowed to change our original entries beyond fixed original. instructions.

So taking the SLV at this morning's open when silver broke 40 it went out for .12. The net on the calendar spread was 2.50 less .12 is 2.38 credit. On a cash investment of .50 this is a return of 376%. After a dismal January the Phoenix rises from the ashes.

Originally I wrote:

If 40 is not reached then exit on 2/31/2011 at the close.

Correction it should have been: 12/30/2011 instead of the nonsensical

And here is my corrected submission:

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45. Sell Jan 2012 40 call at 1.80. Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 12/30/2011 at the close.

Brendan Dornan writes: 


Thank you very much for putting on the contest. The reason I started to write a blog is to document some picks, and hopefully build a reputation after a decade of being in isolation behind the screens. The contest enabled this goal. Thank you for the opportunity.

The contest entry updates earlier this year did not include my entries, probably because the access to quotes for the instruments added an extra degree of difficulty, so allow me:

1. Credit Default Swaps on:
· +99.44% : French Gov CDS
· +70.80% : German Gov CDS
· +99.88% : Italian Gov CDS :

2. Short the Euro + Far OTM put options near parity · +% : 1.3224 - 1.30469, not great: learned spot FX poor for tail event trades. 3. Long Put X-Warrants or CDS on any Hong Kong or Chinese Property Developer · +103.20% (20.64% X 5 for warrant use) Shanghai Property Index,

3a. or Credit Default Swaps Chinese 5 year Government Debt · +118.26%: China Gov CDS

Extra Credit: · + 214.25% : Short Copper:
o 4.4455-3.4695 NYMEX Copper HG
o ($111,375 - $86,725) = $24,650.00
· Short Iron Ore, Cement, similar declines (SWAPs would have done well) · + 52% : Short Japanese Industrials via CDS o Hugh Hendry's fund is up and can be a proxy · +32.96% peak, but plunged -60.80% below open : Cleveland Biosciences (CBLI) o Although unsuccessful, CBLI spiked higher amid the Japanese Nuclear Meltdown, serving its purpose as a hedge

Quotes :

Stanley Rowen writes: 

And the winners are…? I fortunately did not participate in last year's contest (my guesses turned out to be non-winners. But, I am indeed curious if there will be a major article posted to Daily Speculations dot Com with the winners? I'm looking forward to it.

Victor Niederhoffer comments: 

These entries from the contest for 2011 investments. These are the ones so far in the running. Would any like to add their selections to this list for judging.



 By far the most useful advice by Livermore in Reminiscences of a Stock Operator was to avoid tips like the plague. Similarly, Bacon warned:

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

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




I hope all is well with you and the family. I took an online course on writing autobiographies and thought you might enjoy the attached.

Happy new year.



"Never give a sucker an even break," uttered by W.C. Fields in the 1941 movie so entitled could well be the credo of the pool hustler. What does this have to do with me? Fleecing the less proficient at what is termed pocket billiards in some circles was a significant source of income for me from age 15 through college. It accorded me a much needed supplement to my meager allowance and/or the part time jobs that I held as a student.

At Brighton 5'th Street at the same level as the elevated subway train that runs along Brighton Beach Avenue, there existed a 2400 square foot den of iniquity that housed about a dozen pool tables. This sea of slate covered by green felt was not a billiard emporium by any means. In the mid 1950s, it was frequented by many of the neighborhood's young toughs and assorted characters like Mutt, Teddy the Twitch, Pittsburgh, the Guzzer, Sonny, Sam the Communist, Blackie, and Miguel. Sonny was a big muscular homosexual whom nobody messed with. Silver haired Sam was the best shooter in the pool room. Blackie a middle aged man was a close second as he ran rack after rack in straight pool, never taking off his hat. Miguel, a bookie who ran a cut poker game and was later shot to death after balking at sharing profits with the mafia was about as good as Blackie. Added to the mix were me and some of my school friends including Harvey Keitel, who later became a well known actor and Mark Reiner, a basketball star.

The pool room was a hustler's haven where we hung out after school until 1:00 A.M. closing when we weren't playing ball. Substituting time there for homework, our formal education may have been diminished but the street smarts we acquired were more than ample compensation. The proprietors were two diminutive men in their sixties, Izzie and Charlie, a pro boxer of some renown in the '20s. Despite their age and small stature they ruled their roost with an iron will. Roost was more than a figure of speech in this instance as there was a creaky stairway that led to the roof that housed Charlie's pigeon coop. He had preceded Mike Tyson in pugilistic affinity for our fine feathered friends by 4 decades.

The absolute power that Izzie and Charlie had over all of us was the specter of being barred from entry into this hallowed ground and being relegated to hanging out in less exalted venues. After learning the rudiments of the game, I gradually acquired a modicum of skill by observation, shared tips, and practice. Making a stable "bridge" with the non-shooting hand; keeping one's head down; and a smooth stroke were basic requisites. Learning where the object ball must be hit by the Q-ball to direct it into a pocket is essential. Although the ability to make difficult shots comes in handy, getting the Q-ball into position for an easy shot after making the preceding one is what distinguishes the more accomplished practitioners of the game.

"Position" is achieved using various methods. "Drawback" to make the Q-ball go back in the direction from whence it came after striking the object ball is accomplished by striking it low and snapping the wrist imparting back spin. "Follow-up" to make the Q-ball go forward is effected by striking the upper portion. Either of those techniques can be applied in conjunction with "English" to make the Q-ball go left or right after hitting a rail by striking it on the left or right side respectively. How hard the Q-ball is struck determines the distance it will traverse and its ultimate position..

Most games were played for money with the stakes ranging from "time", the 50 cent per hour charge for use of the table to many dollars. There were various handicaps given to supposedly level the playing field but after blowing my allowance a few times, I realized that you never play better players. They are not only better, they are more knowledgeable and better able to figure the "spot" that will still give them the edge.

Accomplished hustlers rarely play better than needed to win and frequently let the "fish" win for small amounts and reel him in when the stakes are raised. Another gambling precept was always put the money up with someone who can be trusted to pay off (the "house": Izzie or Charlie in most cases). This was especially important for me at 6' 1" and 150 pounds against many of my more burly adversaries.

I never became a great pool shooter but the level of proficiency was not nearly as important as applying these principles. The goal was always to have a "lockup" - a game where there is virtually no chance to lose. Another way of putting this is, "Never give a sucker an even break". As mentioned, hustling was a significant source of income for me during my school days. In actuality, outsmarting and outplaying my opponents was more important to me than the extra cash in my pocket. One of the greatest compliments I ever received was years later when I ran into a guy that I had known casually and he said, "I remember you. You used to make your living in the pool room".

P.S. In retrospect this sounds pretty crass but I didn't cheat anybody. Everybody was trying to get the edge. I was just more successful at it than most.



Richard Kostelanetz writes:

My friend Victor drafted this essay toward his autobiographical The Education of a Speculator (Wiley. 1996), only to obey his publisher’s command to reduce personal material, which he did, nonetheless leaving behind in his book a luminous opening chapter about growing up amid the handball courts in Coney Island, New York. Self-published in 1994, this essay inspired my own memoirs published here. Since Victor’s Harvard memoir is unavailable elsewhere, I'm pleased to reprint an excerpt of it, with his permission and my gratitude. I’ve omitted a few digressions in the original, while adding between brackets some clarifications. You can find the whole essay in my latest book.


Victor Niederhoffer

Copyright c 1993, 1994.

Education at Harvard has always favored the dilettante, coddled the "gentleman's C" scholar and allowed those who concentrated on extracurricular activities such as football, computer programming or musical theater to survive. During my undergraduate years (1960-1964), of the 1,500 freshmen entering each year only a handful wouldn't graduate. To earn a degree with honors was as easy as getting a mosquito bite at a nudist colony; more than half the class received this token, even in those days When you consider that at least half the student body at Harvard hardly attends more than half of their classes, and most of the others are so totally committed to their extra-curricular activities that they have no time for reading the assigned course work, let alone any outside readings, the graduation rate becomes an example of noblesse oblige.

I was one of those students who would have been hard-put to survive in any other college. I have always had a reluctance to attend large lectures. And most of the popular undergrad courses were given by eminent professors in halls like Sanders and Emerson where 500 to 1,000 were in attendance, if not wakefulness. The smells in a lecture hall turn me off. I can't breathe well with all that carbon dioxide circulating back into the air. Besides, I like the idea of feedback. The ideal form of education to me has always seemed to be sitting on a log with some erudite professor on one end and me on the other, talking about areas of common concern. In this day of copiers and desk-top publishing, there is no reason why lectures should be delivered in a no-feedback format. Notes could be prepared in advance and distributed to students. This would force the instructor to be concise and accurate, as the printed word

demands more presentational logic and rigor than does the spoken lecture. I have found that only at prestigious universities and cabals do the lecturers balk at providing written notes.

During the 2 or 3% of the time in my waking life I have truly been interested in becoming educated I have garnered 99% of my learning. I suspect I am typical in this regard. The challenge to the educator, then, is to motivate the student to desire to learn, and then to figure out how to provide the product when it is desired.

On a more mundane level, I have always found it difficult to stay awake at morning activities after a strenuous day of exercise. And my mornings were invariably taken up with a squash match, and then a rush to finish up my homework. Having not yet developed the art of blindfold checkers or chess play, only way I could stay awake in class was to buy an advance copy of the Suffolk Downs Racing Form and handicap the races. Many of the professors seemed to me to have been coerced into teaching the undergraduate courses because they were over the hill. Others seemed more interested in the handful of attractive [Rad]Cliffies in the class than in engaging in dialogues with shallow Harvard youth.

I subsequently learned how right I was in this regard, at least with respect to the University of Chicago, where I read rhapsodic letters of recommendation for Michelle S., my sweetheart during my time there, of the professors independently wrote about how they looked at her constantly while lecturing for a feel for how it was going, and how uplifting it was to receive her approval when they delivered a particularly apt précis, how they valued the feedback she provided with her smile, frown and other body language. I noted that they found her body language equally uplifting outside of the lecture halls. She told me that once she was having a departmental dinner with four professors and four students at a table at the Faculty Club, and that three of the professors independently passed her notes to meet them afterward for a continuation. Needless to say, she graduated summa cum laude, one of two of her class (1966) to do so. As I was to learn some years later [while teaching] at the University of California at Berkeley, this incident was merely one example of a tendency endemic to academia.

Even with the policy of noblesse oblige, my education at Harvard was in jeopardy. Professor Williams, who taught my Introduction to Logic course, one day caught me in the act: he suddenly stopped his lecture, walked to my seat and grabbed my Racing Form, loudly upbraiding me in front of 500 eager scholars for my rudeness in handicapping races while he was droning on about such fascinating subjects as the difference between probabilities based on relative frequencies and degree of belief, and the Popperian view of probability as a revised estimate of one's knowledge based on various hypothetical experiments.

Since that time, I have found only one satisfactory motivation of probability. This was by Richard Hamming, a professor at the U.S. Naval Postgraduate School. Strangely enough many 'experts on probability theory have worked at military installations, especially in England. Hamming's view is that where you have events in a sample space, such as tosses of a die, that are symmetric, or interchangeable, the probabilities must all be equal. So if you take the number of events possible in the space, the probability of each event must be one divided by the number of events. As Hamming remarks in a typical passage, "Although very likely you have been interpreting many of the results in terms of frequencies, probability is still a measure derived from the symmetry of the initial situation." (The Art of Probability, 1991).

His extensions are sufficient to resolve all the philosophical questions that were the meat and potatoes of Professor Williams' class.

But first, I had to get through my classes without unduly antagonizing my teachers, as my performance on exams would never be sufficient to undo any bad impressions made on the professor, nor would I have enough sex appeal to barter for a good grade.

My solution was one of my masterpieces. I noted that most of my teachers were graduate students obviously down and out in terms of money, but who were teaching for the prestige and potential career advancement. When I saw them, they always seemed to be grinding away at their own course work in an effort to reverse their bad fortunes by garnering a job. Even then, Eastern Illinois University favored [hiring] assistant professors who had put in a stint as an adjunct assistant professor at Harvard earlier in their careers.

Now Harvard has always been masterful at maintaining low salaries among their employees. One of their techniques was to refuse to hire any of their graduate students until they had taught at some other school for at least five years. This policy was already famous in those days for having lost Paul Samuelson, the famed Nobel Prize-winning mathematical economist who popularized Keynesian economics in his best-selling textbooks of the 1960s, and who can still be counted on to trot out his theory favoring greater government spending and higher taxes for the benefit of any sitting or would-be President. Samuelson's doctoral thesis, written at Harvard in 1955, was entitled "The Foundations of Mathematical Economics", in which he quantified the interaction of the multiplier and the accelerator in fomenting government's impact on total output. This study is still considered one of the classics in the field, but it wasn't sufficient to break the Harvard taboo against hiring its own.

But there was a quid pro quo for the graduate students. In exchange for low wages, and no chance for tenure, the grad students were graded on a very high curve. The average grade in most of the graduate courses, A-, was considered quite good in those days before grade inflation, egalitarian marking, and numerous pass/fail courses — all of which have made most grade-point averages as meaningful as the chants of the whirling Dervishes.

I quickly realized that if I confined myself to graduate courses as an undergraduate, that even if I consistently copped the worst grade in the class, I would still be likely to pull a B+. And this would more than compensate for my bad study habits.

I was so successful at this approach that when the time came for a final class ranking of all the economics majors at Harvard I came in second out of 150. My technique did not pass unnoticed. Any time an undergraduate of apparently limited intellectual accomplishment took on a curriculum of mainly graduate courses he or she was said to be "Niederhoffering the curriculum." .

Years later, I ran into Professor Wassily Leontief, founder of input-output economics, at a [George] Soros party. Soros loves to stock his foundations with distinguished, collectivist emigrés from Eastern Europe and Russia. Leontief was at that time serving on the boards of some of Soros' foundations. He had been my professor in 1962 in graduate-level Microeconomics 201, where I had received a B+, the worst grade in the class. The Professor's basic idea, that there are fixed technological relations between the output of an economy and the raw materials necessary to produce them, makes about as much sense as the Russian notion that there are some genius master-planners in Washington responsible for all the wonderful variety of goods on American supermarket shelves. Nevertheless, Leontief had one of the sharpest minds I have ever encountered. He remembered me, after 25 years, and said, "Here you are Niederhoffering the commodity markets by picking up the detritus of Soros' trades, just as you did in my classes." As I was surrounded by government officials, foundation mavens, administrators, philantropists and other liberal types — as is the norm at a Soros party (and indeed at most other New York parties I have attended) — I held my tongue and played the respectful guest.

* * *

The Harvard Club of New York each year collects a scholarship fund for needy students with outstanding academic records. Somehow my credentials and my experiences at my high school, where the principal was actively working to keep me out of college, struck a responsive chord in some of the members of the scholarship committee, and I consequently was a beneficiary. Some of them, apparently, had also once been blackballed, and instead of working against me, my principal's active lobbying actually helped me. My experience coaching at Kaplan and the resulting improvement in my board scores didn't hurt either.

Even with the scholarship, my parents were making a heroic sacrifice to keep me at school. The then staggering tuition and board of $3,500 per year represented 25% of their pre-tax income. The balance of $1,000 they gave me for out-of-pocket expenses added further to their debt. It seemed only fair that I should reduce the burden by getting a job.

My first job at Harvard was in the Student Post Office. My duties were to sort the mail and run the route, delivering and picking up mail at all departments on the north side of the campus. The pay was the munificent sum of$1.80 an hour. After a few days on the job, I graduated to full-time mail carrier. My boss, an elderly Irishman with white hair and a Boston accent, was from the old school. His shoes were polished to a gleaming luster and his tie choked his neck in a perfect knot. As I left for a delivery one day in typical Boston fall weather, freezing rain with winds in the 50 mph range, he gave me some sharp advice. "Keep your head on your shoulders and whatever you do, don't miss picking up the mail at the Watson Laboratory in Biology. Since that professor won that Nobel Prize, he's thinks he owns the world, and when the mail isn't picked up twice a day, he calls up to complain. Last time we missed him, I found myself apologizing to a vice president of the corporation. "

Yes, Mr. McCarthy."

I have never been too good at sense of direction, and now, in retrospect, I see I was not well-suited to a career in mail carrying. My ideal career would probably be as the women's squash coach at a large university or director of research at a flavoring laboratory. But I needed the money from that mail job badly. Perhaps I was distracted by the rain, the secretary, or my studies, but I did manage to forget to pick up at Watson's lab. My boss's dismissal of me was abrupt.

"You're fired. How they let incompetents like you into Harvard, I'll never know. You don't even have enough sense to get out of the rain and come inside to pick up at the one place I told you over and over again not to forget. Get the Hades out of here and never come back."

I was crestfallen. This was the final blow. No way was I going to ask my parents for more money. It looked like I would be going back to Brooklyn College after all. Life seemed hopeless, so I called my father up and gave him the bad news.

"Don't worry about it. This could be a blessing in disguise. Remember what happened to Winston Churchill, as a young man in the British Army, on his arrival in India. Eager to disembark from a small boat that was tossing on the waves, he grabbed an iron ring fastened to the pier just as the boat fell sharply, and dislocated his shoulder. This injury stayed with him the rest of his life, and plagued him in every physical activity he undertook from then on, from polo games, to speaking in Parliament, to war.

"But as he says in his book, My Early Life, the injury probably saved his life during the battle of Omdurman. He was the only one in his cavalry to be unable to swing his sabre; but knowing his shoulder might give out at any time, he had purchased one of the newly-invented Mauser automatic pistols, and had practiced with it assiduously in preparation for the campaign. In one cavalry charge, he saw most of his colleagues cut to pieces around him by the dervishes' scimitars in their fierce resistance. But his skill with the Mauser saved his life, and he wrote of the experience, that one never knows when some apparent misfortune might actuaJly save one from something much worse.

"So remember, what seems to be a tragedy might actually be a lifesaver"

(to be continued).

RIchard Kostelanetz Books on Amazon

Richard Kostelanetz eBooks on Kindle



Here is an interesting post on Event Processing Thinking by Opher Etzion, a road map for knowledge workers of the future…from an IBM CEP researcher.

The IFTF - Institute for the Future has published a report about future work skills for 2020. This report, summarized in the picture above, identifies six drivers of change in the universe:

1. Extreme longevity
2. Rise of smart machines and systems
3. Computational world
4. New media ecology
5. Superstructured organizations
6. Globally connected world

To cope with them, the study determines that ten skills will be needed:

1. Sense making
2. Social intelligence
3. Novel and adaptive thinking
4. Cross-cultural competency
5. Computational thinking
6. New media literacy
8. Design mindset
9. Cognitive load management
10. Virtual collaboration

Some of these terms are not self-explaining, so if you are interested in the details - read the article. It is interesting to see if the educational systems — from kindergarten until university level will change fast enough to cope with future competencies.



 Thinking about Kahneman's loss aversion theory (a loss has about two and a half times the impact of a gain of the same size), I feel that there might be a good reason for it.

A loss generates a fear, and a gain generates a joy in a person. The nature of fear in human is that it is recursive: a fear, a fear of the fear, a fear of the fear of the fear, and etc. Joy on the other hand doesn't seem to have this feature. So based on this thinking, fear has a growth effect which can be expressed in terms of the level of recursion n as (1 + 1/n)^n. We see that as n=5, (1 + 1/n)^n = 2.48832. So, if the joy from a gain is 1, the fear from a loss after 5 recursions is 2.48832, which is perhaps just what Kahneman determined through experiments.

Well, why only 5 recursions? That is exactly the question. If the above theory holds, then the theoretically correct number should be the mathematical constant e, which is (1 + 1/n)^n when n approaches to infinity, yielding 2.718281828459. The reason that 2.5 shows up through experiments might be because 1) it is just a rough approximation; 2) recursions in human brains don't really go to infinite levels, a level of 5-6 might be realistic.

Anyone cares to comment?

Kim Zussman writes: 

Is there not joy of joy?

If I make a bundle, I am happy. So is my wife, and her happiness makes me happy. And so on with children, friends, business associates, etc.

Another aspect is that you can spend profits any way you like, whereas losses you can't spend in any way.

Leo Jia responds: 

My basic understanding of psychology and neuroscience is this (hope someone could help clarify).

The fear is associated with a sub-conscious part of the brain, called amygdala, which takes precedence over the conscious brain in receiving an outside signal. Once this area determines a threat, it could first short-circuit the conscious brain and then sends commands to the body to fight, flight, or freeze. This is a process that could put a normal person under strict arrest. As to how it performs all this, I feel like to think that recursive fear processes (in computer's term) were generated so that it can be powerful enough to override most other bodily needs.

Joy doesn't have this mechanism. It is more of a full brain process involving the conscious brain. So its impact should understandably be limited and single-event, unless of course it is an overjoy.




 I've read some good pieces about why US Treasury prices should decline. However, this could be the WORST essay that I've read on the subject and it reflects badly on both the writer and those who forward it. This essay might not even meet the minimalist criteria to be a Zero Hedge post! Anatoly asks: "Where is the essay wrong?" I answer: "Where is the essay right?" Let's start with the statement: " As yield goes up, bond prices decline in a precisely proportional manner (and vice versa). "

1. I'm not going to waste everyone's time to explain that yields and prices do NOT move in a precisely proportional manner. (See "convexity" for an explanation.) But it's this sort of sloppiness in thought that renders the essay less than useless.

2. To characterize foreign central banks as "frantically" dumping treasuries is another example of misleading hyperbole. Frantically? Dumping? Please. (And even if this were true, where are the proceeds of those sales being invested? Silence is the answer.)

3. "When there is a sudden explosion of supply, the price buyers are willing to pay for that good plummets until enough new buyers enter the market to soak-up all of that excess supply". Yes, we've heard of supply and demand. But "Sudden explosion?" How about continued expansion? And he completely ignores the deleveraging in the private sector, as well as the persistent investor disinterest for other asset classes and a preferences for US sovereign paper.

4. "We have no visible buyers for U.S. Treasuries, yet seemingly infinite demand. More specifically, we have no visible sources of capital to even finance the purchase of all of those Treasuries". No visible buyers? Treasury reports the complexion of buyers after every auction. The Fed's balance sheet is relatively transparent about its holdings too.

5. He completely mischaracterizes and obviously misunderstands the recent announcement by Japan — (and conveniently ignores the fact that Japan's sovereign balance sheet and demographics are far worse than the USA at the moment.)

About the only point that I can find which is accurate in this puff piece is that the Fed's monetary policy is levitating the bond market. So long as the dollar has a bid, this can continue ad infinitum. I am not a bull on US Treasuries. Far from it. And I believe the Fed's current policy is reckless and misguided. But, this is not fraud, as they are being transparent about their methods and goals. Lastly, if you want to short the US Treasury market based on his worthless analysis — be my guest. But I'd guess Anatoly will have better success calling the bottom in natural gas!



By now you have probably read the Pulitzer prize winning Washington Post article about violinist Joshua Bell performing in the D.C subway.

You have to love the Posties; if they can find a way to diminish and demean their own subscribers, they go for it - because they know that their newspaper can only continue to be the font of wisdom as long as the civil servants believe they have to read it each morning.

Playing Bach in a subway station is like playing baseball indoors; all the skill in the world can't make it anything but a nuisance.

P.S. Bell's virtuosity is unchallengable; his musicianship, like Midori's, so dreadfully earnest that, of course, it gets an A+ from the Wurlitzers of record and requires an audience full of schoolies full of superior appreciation.

Kim Zussman writes: 

Aesthetics and taste are subjective and subject to presentation. Examples include statistical inconsistency in rating fine wine and celebrities out of context. When you meet so-called "knock out" actresses in person, more often the surprise is disappointment.

Russ Sears writes: 

I am in the middle of reading "Thinking Fast and Slow" by Daniel Kahneman. It tries to describe what psychologist "know" about how intuition (fast thinking) and analysis (slow thinking) work and work together. I will try to give a more complete report once I am finished with it.

However, briefly it mainly describes how thinking creates biases, while at the same time tries to show respect and analyze how amazing "thinking" is.

One of the biases: it is clear most people underestimate the persuasiveness of their surrounding to their effect on their mood, judgment and decision making with even subtle unperceived differences he calls "priming". Such things as a poster with big eyes in the room with a "honor box" for coffee greatly increases the amount put in the box. And a forced smile creates happier people much later.

In the intro- he implied that his main criticism has been the of focusing on the biases rather than the strengths of "thinking", However, so far my main criticism is his over generalizations, and insistence that these studies prove "we" (all of us) are victims of these biases. And so far the book seem to imply that only through analysis (by such studies) can these be recognized and "we" overcome them. Yet, I would suggest that many of the more successful and happy people's "edge" comes from intuitively having perceived many of these biases early on in their lives and having made adjustments to offset them…without perhaps knowing the "science" behind "why".

Such are the people that stopped for the music in the subway station. Even though primed to ignore it. Yet while he insist that "all" are victims of specific biases. Their is perhaps in total evidence that we all accept, the possibility of biases for the power of thinking. But it is natural for life to perceive that they are the superior different one in overcoming these biases. The violinist show many think they would stop and listen, but few actually do.

Even so, the book thinking fast and slow has given me much to think about, and I would recommend it to all.

Dan Grossman writes:

 As a former violinist, I had enjoyed the You Tube video and the seeming fact Bell would play incognito in the subway. But I hadn't realized it was a put-up job by the Washington Post.

It's like all those Kahneman and Tversky experiments everyone is so excited about to show there's no rational man that economics is based on, where students play games with small amounts of money given to them.Contrary to that famous fairness experiment, if the student in the real world were negotiating to divide $1 million dollars of real money and he had the choice of getting 10% ($100,000) or nothing, while the other player got 90%, he would take the $100,000.

Victor Niederhoffer adds:

One would add that when Bell plays, his body movements are very poetic and add immeasurably to the sense of music of the audience. Presumably because this was a set up job similar to what Prof Phil pointed out vis a vis the tag team of beggars and homeless brought in to keep man small, and the chair to his credit first brought to the attention of the list vis a vis The Port Authority in New York, which is always laden with the beggars and homeless to keep man small, a la Ayn Rand's essay on Victor Hugo's The Compafriros, the maimed in Spain raised to show how bad the lot of some people can be relative to the feudal existence of the masses, one can assume that Joshua did not make those body movements and twists and turns that lets the audience know he is really making music, so that it would be more likely that the Wash Post could prove the point that no one would notice. 31 bucks on the other hand seems pretty good considering the lack of charity in workers in the beltway who are living off the fruit of other peoples labor. 



 We perhaps have all heard about the following coin toss experiments on people. On each experiment, people have to choose either to play Game A or Game B.

Experiment 1): Game A: the player wins $1000 if head; wins $50 if tail. Game B: the player wins $500 regardless.

Experiment 2): Game A: the player loses $1000 if head; loses $50 if tail. Game B: the player loses $500 regardless.

With Experiment 1), people like to choose Game B.

With Experiment 2), people like to choose Game A.

While I understand this from psychological terms (humans have biases, are not rational etc.), I don't quite understand naturally or fundamentally about what really makes us do this. Hope someone can help explain.

An interesting thing I want to share here is the TED talk (July 2010) below shows that monkeys do in the same way.

Phil McDonnell writes: 

These sorts of thought experiments are played on student volunteers at college campuses. Students are notoriously impecunious. Assume a net worth of $300 or so and then calculate the log of the wealth ratio for each outcome. You will find that the most popular outcomes all follow the log utility function.

The mistake the experimenters make is to assume that $1000 is worth twice as much as $500 to a poor student. In fact it is worthless than twice as much. They assume a linear utility function when a non-linear log function is how humans really value things. 

Gary Rogan writes:

To understand why any of these biases work the way they do it's best to imagine hominids barely making it in terms of survival rather than even poor college students. There were long stretches where there were more than enough food or other resources, but there were also "funnels" where there were barely enough resources to make it through. We are all descended from the ones who made it through the "funnels". The ones who made the wrong bet left no survivors (or fewer as the case may be).

So if you've got just enough or almost enough to sustain yourself for the next few days but not after that, you realize that you need to do something soon or else you'll be history after those few days. You need to take a risk, but the weather is really bad, it's cold and stormy (or exceptionally hot, or whatever) and you can't venture out. To make matters worse though, a mildly menacing counterpart shows up and "asks" to share your meager resources. Losing half of what you have with great certainty may very well mean likely death, because you will probably be not in a position to "play" again after the weather gets better. If you calculate a 50/50% chance of winning the fight with your "friend" you will probably go for it, even if it means either a complete loss of your resources (and perhaps your life, but those are now equivalent anyway) or a mild injury.

And now a few days are gone, and your are out of resources anyway. The weather is a little better and you are now faced with walking towards a distant meadow where you are certain to find enough berries to sustain yourself for a few more days or pursuing a large but elusive prey (or trying to take something from a leopard resting in a tree with a fresh catch, or trying to fight it out with a different "friend" for his resources, but all of this uncertain), you go for the berries. You take a certain smaller gain vs. an uncertain larger one when getting enough resources means the difference between life and death.

As for how it comes about, we have neural networks in our brain specifically dedicated to evaluating rewards and costs. That's as proven of a fact as anything in neurobiology. Whatever biases worked based to get our distant (and not so distant) ancestors through the "funnels", that's pretty much what we have today.

Phll McDonnell adds:

I think one point that is overlooked in this discussion is that insurance companies do not prefer big bets. Instead they prefer to spread the risk and average out on many small bets. It is also the same reason that earthquake and hurricane insurance is so overpriced. They simply do not want highly correlated bets which increases the risk of serous capital impairment. If they write a lot of earthquake insurance in an area and the big one hits all policies come due at the same time.So they either ration the insurance by charging too much or they simply refuse to sell more than a certain number of policies in a given area.

In a way managing the insurance portfolio is a lot like managing a stock portfolio. You want to avoid bets with large possible negative outcomes and you want to avoid correlated bets. Rather you should take many smaller uncorrelated positions so no one position can wipe you out.

Leo Systrader comments: 

 Great points here. Many thanks for all the thoughts.

Question to Philip (maybe to everyone) about the non-linearity of human value. It is understandable, but I wonder if there is any scientific conclusion about it.

Let's see if we can use this theory to re-construct the experiment. Let's also assume the net worth of the players is $500. For simplicity, let's just try Experiment 1).

Experiment 1): Game A: the player wins $X if head; wins $Y if tail. Game B: the player wins $500 regardless.

We hope we can come up with an X value that is attractive enough for the players to choose Game A. Also we need to make sure that Game A does not have a significant favor of probability, so we choose Y in such a way that the expected value of Game A is not much more than that of Game B, which is $500. Apparently X will need to be much larger than 1000, so that means Y will have to be a negative number to balance out.

As the theory suggests, to make log(X) = 2 * log(500), X is about 25,000. Let's make the expected value be 600, we get Y to be -23800.

So then Game A becomes: the player wins $25000 if head; loses $23800 if tail.

Would that make people choose Game A? Not to me. Anything wrong in the above analysis?

On the other hand, we know that Kahneman has a theory saying something like "a person's magnitude of pain from losing amount D equals that of his joy from gaining amount 2.5*D".

So let's use this theory to reconstruct Game A.

Let's first decide for Y to be 300. Comparing with the 500 in Game B, the player considers a loss of 200 in Game A. So we need to make X a gain of 2.5 times 200 from 500, so we get X = 2.5*200 + 500 = 1000.

So now we have a new Game A: the player wins $1000 if head; wins $300 if tail.

I guess now it is very likely people would choose Game A over Game B. But we note that the expected value of Game A now is $650

If we make Y to be 50. It is a loss of 450 from Game B. So we make X =
2.5*450 + 500 = 1650.

Game A becomes: the player wins $1650 if head; wins $50 if tail.

Would they play it? Probably, right? In this case, the expected value is 837.5. 

Phil McDonnell responds:

Assume a starting net worth of 500.

Game A analysis: ln( (500+X) / 500 ) + ln( (500-Y) / 500 ) = expected utility.

Game B analysis: ln( (500 + 500 ) / 500 is the expected utility for both outcomes.

The thing is that we need to think in terms of wealth ration of the different outcomes. Take the natural logs of the wealth ratios. The wealth ratio is the wealth you start with before the bet divided by the wealth you end up with for the given outcome.

I took all the early propositions in the Kahneman and Tversky paper and calculated the logs of the expectations and found that in every case the participants were using log based utility function and were actually choosing quite rationally and correctly. It was the learned professors who were wrongly trying to analyze the problems using binomial probability analysis instead of utility theory.

In other ares of psychology there are various log based perceptions that have bee discovered. For example there is the concept of a just noticeable difference (jnd). For example you do not notice a sound is louder or softer until it changes by a certain amount governed by a log law. Same thing goes for brightness of light. One might add boiling live lobsters to that list.



 I have no basis for either believing or disbelieving that certain market participants had advance information and/or profited from 9/11. The literature is not compelling because while there was indeed some elevated put buying, there are other discrete examples of elevated put buying when nothing horrible happened. I will, however, point out the following irrefutable facts:

1. Post 9/11, AMR stock dropped from about 28.125 to about 20.00 per share when it re-opened on volume. A loss of about 30%…for a truly rare catastrophe.

2. Just a few weeks ago, on 9/30/2011, AMR stock dropped from 3.00 to 1.75. A loss of 42%. (Where are the academic papers about insider trading on this date?)

3. AMR's stock from the period of 9/17/02 to the present went from 20.00 to 0.40, a loss of 98%. This demonstrates once again that the really big money is made in being right about the underlying fundamentals of a company. And, it further illustrates Warren Buffett's saying that investors would, as a group, be better off if the Wright Brothers had crashed and burned at Kitty Hawk. The airline industry continues to produce an ever-growing lifetime net loss for investors; why people (other than index funds) ever own airline stocks (except as a short term speculation) remains a mystery to me.



 When will The Knicks realize that it's not the players but the system that causes them to be so bad. You can't throw the ball to the basket in 9 seconds and win a game in modern basketball. If it ever worked for D'Antoni it was due to a changed game when he employed it 10 years ago at Phoenix. I doubt that the powers that be will realize this as they seem to be the worst kind of shysters. Every ad that they have on the radio is out of the keep man small, and borders on fraud and angry at the rich kind of thing. "Are you being cheated on your mortgages?". It reminds me of all the Geico ads which are typical of the sage. Almost could have been written by him. Everything is small except Geico. A typical one: a son complains to his mother, "How come you don't have an 800 number so I can call you free. Get with it." "You don't have to berate your mother to save money. Just come to Geico." Now if that isn't the sage himself talking as are all their other ads. "Is the world round? Just save money at Geico et al". My point is that it's just like "all the brokers, all the middlemen are crooks and provide no service and are getting too much in fees. So I'll do it on the cheap."

Of course, the problem I have with the Knicks "it's not the players but the system" is the main problem with market plays. It's not the trades. It's the gains and losses relative to the range of the day, the vig, and the risk, and margin. It's the system not the regularities that 's wrong. 

When the Knicks had the head of the players union as their center with his sullen long ball game, a la Gallinari, the sullenness was contagious, and in addition to the system being bad, it was the center who can't get a job as a coach any more because people realize how his sullenness would ruin everything. So in that case it was the player as well as the system.

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