Msn.com doesn't seem to have an archive of Vic and Laurel's articles from the early 2000s, but I was fortunate enough to have made copies of them. Now I'm curious to know how some of their stock picks and pans did over the intervening 10 years or so.

I decided to take a look at a January 2002 article, "Companies that speak softly carry big profits". The theme of it was that perhaps firms with mild-mannered, self-effacing CEOs might outperform boastful firms that say "We're Number 1!" Vic and Laurel were bullish on the "Modest 10" and bearish on the "Boastful 13". Their subsequent performance is given below.

8 out of 10 of the "Modest 10" firms saw positive total returns on their stocks between then and now, led by Electrolux (ELUX), with a 321% return. The average return was 67%. That's not too bad.

Of the "Boastful 13" firms, 10 of the 13 saw negative returns, including 3 that lost at least 90%. To repeat, 8 of 10 of the Modest 10 were winners; 10 of 13 of the Boastful 13 were losers. Nevertheless, in terms of average return, the Boastful 13 won out over the Modest 10. One of the Boastfuls, Priceline.com, gained 1,454%! That drove the average for the Boastful 13 up to 107%, beating the average for the Modest 10.

Priceline's indiscretion that put them in the Boastful 13 was to proclaim that "Priceline will reinvent the environmental DNA of global business..[and produce]..a totally different form of energy". (Did Shatner write that?) Vic and Laurel had sought companies that said "We're Number 1", but they reasoned that even though Priceline's pronouncement didn't match that exact wording, it was still fairly boastful, and I agree.

Here are the details:


























The fondness for writing being inherited from my mother, who wrote the Town & Country column for the Maine Sunday Telegram, a sense of condolence with reporting the death just four days ago of Dmitri is sped by having had the privilege of his company and conversation during his once seasonal sojourns in Palm Beach as the famed son of Vladimir Nabokov. (News , News ).

Dmitri possessed that gift of understanding art forms in a grandness of range beyond what most of us experience at constricted when not linear levels of existence. He was a master of craft be it racing offshore power boats or training his skills in literary criticism. The seminal steward of his father’s writings, he excelled in parallel lives from his career as an opera singer to competing with collectable examples of automotive precision.

Central to these passions as a gentleman – and consistent with classical notions a la Castiglione – were his celebrated, sometimes published observations in matters concerning love of women, song, and literature. Dmitri was, as in his operatic performances, I am told, demonstrative of the classical lover, exhibiting a hue and brilliance with both languages and the physicality of motion.

Mr. Nabokov also revealed a mercurial sense of utility. Most celebrated perhaps was his recent decision to publish (on my birthday of November 17, 2009) his father’s unfinished, final title, “The Original of Laura” – admittedly reported by the son as being against his father’s wishes. And here D and I shared the common divergence of both having disregarded parental counsel to pursue careers in law; to this day appears his 6’5” frame bent by affront of the notion recalled in our conversation how it would be no less, no more than purgatory to spend one’s life dealing with “other peoples’ problems” when we were quite enthralled with generating our own individual digressions so found and to be humored in daily life.

For the past several years, Dmitri had struggled with physical challenges; ones that often tested his mental capacities. Yet, as with his now final call to the curtain, Dmitri Nabokov remains a life’s talent that not only elevates his father’s legacy but will lean forward with immortal-like speed that persuasion of the human spirit shared amongst us all in remembrance of him.



 The meeting of the NYC Junto on Thursday March 1, 2012 will feature Alex Epstein, founder of the Center for Industrial Progress, talking about how to achieve the great potential for productivity improvements in energy production, manufacturing, mining, construction and transportation. All are invited: General Society Library, 20 West 44 St., between 5th and 6th Aves., NYC, 7:30pm.

Alex Epstein is an expert in energy and industrial policy. His writings on energy and energy policy have been published in The Wall Street Journal, Forbes, Investor’s Business Daily, and dozens of other prominent publications. He is a Principal blogger for MasterResource, the leading free-market energy blog. Mr. Epstein’s monthly podcast, “Power Hour,” features discussions with leading energy thinkers including author Robert Bryce (“Power Hungry”), climate scientist Dr. Richard Lindzen (MIT), and energy economist Michael Lynch (EnergySEER). Mr. Epstein’s writings on philosophy, business, and energy have been featured in 10 books, including, most recently, Why Businessmen Need Philosophy.

Mr. Epstein’s extensive media experience includes hundreds of radio and TV appearances. A seasoned public speaker, Mr. Epstein has spoken at dozens of universities, including Duke, Berkeley, UCLA, and Northwestern, as well as a diverse range of organizations, from The Federalist Society to the NAACP. Mr. Epstein receives rave reviews for his depth of knowledge, his ability to break down even the most complex issues, and his infectious passion for the power of energy to improve human life.

Mr. Epstein is an alumnus of Duke University, where he studied philosophy and computer science. Prior to founding the Center for Industrial Progress, he was a Fellow at the Ayn Rand Institute specializing in energy issues. His unique background in practical philosophy, combined with his years of energy research, enables him to provide a rare source of big-picture insight and clarity in today’s energy debate.



 Number 1 is never to get in over your head. Not having staying power will prevent you from reaping the benefits that occur on those small number of businesses you own that need just a little bit more before striking the gusher.

Number 2 is never under any circumstances accept an offer out of the clear blue sky for your share of the business that seemingly is good, but where the party offering you the buyout knows much more than you do. I have lost millions on many occasions by accepting a quick profit in a deal where it turned out if I waited a year or two or three, I would have realized a tremendous windfall.

Number 3 is not to mix romance with business. Romance should come out of business not business out of romance. The romantic aspect will cause a strain and make you look foolish too all your colleagues.

Number 4 is not to have 3 person partnerships as too many coalitions can form, and you will be involved in diplomacy rather than business.

Number 5 is to keep your business consistent with the idea that has the world in its grip. Give your customers what they want, and give returns and the customer is always right.

Number 6 is to be sure that you are aligned with the forces in Washington that control so much of life these days, and have so much in perks and profits to give to their cronies.

Number 7 is to associate yourself with good partners, and good friends, and good employees whose loyalty goes beyond the dollar or the clock. An ounce of loyalty and integrity is worth more than a pound of immediate profits. When the going gets tough, and it always does in business, you need to have the loyal ones. Certain groups and certain belief systems are aphoristic and proverbial for their disloyalty and tendency to deceit and they should be avoided.

Number 8 is to always remember that when dealing with a family business, the loyalty of the family members is to themselves but not to you. The worst short term frauds and cons, and some of the worst long term cons, I have been victimized in had a father and son working in concert to deceive you into giving them your chips.

Number 9 is to associate yourself with people that have a record of success in their family, previous career, or athletics. Those who tend to fail in one thing will bring you down in the other.

Number 10 is to work hard and keep good records so that you will learn from your mistakes and be able to jump in with full force on the good opportunities when they occur. Keep a reserve for such. I know there are many more. And some of mine aren't sharp enough. I tried to memorialize business tips that are directly applicable to markets, and number 2 for example can be quantified for very good reward to risk.

Which ones would you correct and how would you add to this list with market implication?

Russ Sears adds: 

11. Be aware of the competition, learn from them and have a strategy to compete. Perhaps the reason athletes do well is because they are aware of the competition and develop a niche or strategy to beat or compete with them. Likewise for successful family, there are few things more powerful and motivational than common goals and team-work within a clear framework for utilizing each individuals diverse unique talents and self interest. A successful family man has shown that he is capable of uniting such a competitive group.



 When, an expected reimbursement for profligate financial behavior to those going bankrupt is causing, a relief from tensions. Can this create wealth? Does it justify the dignity of human enterprise or perilously puts to a sad joke that every media outlet in the universe is singing of the dropping Manna from the skies. Why should the public be right in hoping that the loot will percolate down to it?

The most desperate bullish theses that one ever came across is that the bankrupts will not be allowed to go bankrupt and this somehow is good for everyone. Postponement of a reality check somehow will become a handle for tele-porting the world to well being and such other circuitous arguments are the mark of our times.

If today too, the last available losable dollar from the public's pocket that could take a bet does not, then when it will?



 Movies are now competing with other forms of entertainment. The video game industry has been bigger than the movie industry for quite a few years now. Movie theaters, Broadway, non-VOD TV, printed press… these are all on the way to obsolescence. Interestingly, the only thing from the past that is not getting superseded by newer alternative media is the radio. One can listen to the radio while doing something else, which is a great advantage.

My theory is that if something survives among my list of old entertainment vectors, it will be the radio. The idea is that people who drive cars end up listening to the radio. So there will always be some demand as long as people drive cars. I do not drive cars, but I take the cab, and cabs always have the radio on.

This is not really my personal idea, it is the result of a brainstorming session with my 22-year old trainees. The Oscar discussion on the dailyspec prompted me to organize an impromptu brainstorming session with my trainees. When it comes to the future, I trust the opinion of young people much more than 30+ years old farts.

Radio is yet difficult to replace when you are driving. All the other media can be dis-intermediated (movie theaters, Broadway, TV, dead-tree press). There is a need for content production, but not for a specific distribution vehicle (like a movie theater), or editorial effort (eg VOD and news aggregators get rid of the need for channel-imposed programs and editorial choices). Which is good news, because we are getting rid of the middlemen and of one of the means for sheeple thought-control.




It is the oddest coincidence that on one of the rare occasions that you write to the list I am in the midst of a discussion with another (new member- neophyte to investing/trading) about the use of your bands. He is new to technical analysis and likes the ideas behind your bands. I mentioned to him that you are on the SpecList and he was intrigued. My question for you is simply: What is the best reference for him to learn about using your bands? Is it your book? (stupid question I know — but perhaps you have discovered someone else's ideas that you particularly like).

John Bollinger responds: 

Hello Chris,

The best introduction is still my book, even though it does need updating as I have extended the BB body of knowledge substantially since then.

Odd that you should mention discovering someone else's ideas that I particularity like, as Ian Woodward has been an inspiration to me over the past couple of years. He has just turned 80 and is still going strong. I can think of many analysts half his age who haven't a quarter of his current creativity. His work with Bollinger Bands is very interesting.





 In the movie Nixon/Frost–I was channel surfing and stopped when the character of Swifty Lazar was on the screen. He was brokering a deal and trying to get the most he could for the Nixon interview from Frost. What a line.

Lazar: "You must call the man on a weekend or very late, in the middle of the night, that way you can find out where you stand. If he takes your call at a very late hour, or at an inconvenience then you know he is interested, you then know that you got him."

You see Frost push his sleeping honey aside and take the call despite her protestations.

Market implications here–somewhere.

From the New Yorker

Lazar picked up the menu, took off his glasses, removed a gold-rimmed monocle from his breast pocket, put it in place, and studied the menu, holding it an inch or two away from his nose. "I want breakfast," he said. "Scrambled eggs with smoked salmon." He turned to me and said, "I got a late start this morning." I wondered whether this was his way of apologizing for being late, but nothing in his manner suggested that it was. "I mixed up my pills," he explained. "I took my wake-up pill last night and my sleeping pill when I got up this morning." He turned toward the captain, who was hovering beside me. "He'll have a '21' Burger, medium," he said, dismissing him with a wave while I was still looking at my menu. Lazar, as I was to learn, hates people who can't make up their minds about what they want to eat (or anything else), and is very likely to order for them if they aren't quick enough to suit him.



It is rare to see the bonds and stocks at or close to several year highs together and everything else like gold is also there, with oil within a penny or two, nikkei close to 10000, and the grains only at 2 month highs. What a great time to have been bullish. The rising tide lifts all boats.



The trophy

The awarding of the trophy to The Artist shows how 100% of voters are tilted towards the "change man". The trophy had to go to the show that had the least attendance during the season to keep man small, and to show how the public is stupid, and how the arbiters in the academy are on a higher plane of significance, a higher aesthetic than you and I.

How long before they all get invited to the Oval, and how consistent with the idea that has the world in its grip, and how bearish for the long term market.

John Tierney, the President of the Old Speculator's Club, writes: 

Considering much of Hollywood's output, it's surprising The Artist didn't also capture Best Screen Play….

Victor Niederhoffer adds: 

That's funny, Mr. President. But The Academy Awards is in the main a profit making deal which must cost 1.5 million a picture to enter, considering the perks and costs. The 1.5 million for the lowest budget film, The Artist representing a 10% capital contribution has the higher return to that input and is show in to win if it shows how deficient and low brow the public is in its taste. How beautiful to give it to one without talking that went out of style 100 years ago to show how we need redistribution and a raising of the capital gains rate as a solution to our problems.

Vince Fulco writes:

I was discussing a similar matter with someone this weekend re: Gingrich's plan for $2.50 gas. While not focusing on any one political party, what is it about the US citizenry that keeps them accepting (broken) promise after (broken) promise? Thereby guaranteeing they'll stay small.

Pete Earle writes: 

I suspect that the GAP's ability, and willingness, to get snookered by political actors and parasitical systems time and time again is the dark side of what, turned over again, is an exceptional ability and willingness to imagine enterprises and undertakings which in many other places would be cast off as unrealistic, insurmountable, or unnecessary.

Essentially, I believe that productive/entrepreneurial optimism is yin to political optimism's yang.



The amusing dunking contest that was the all star game won 152-149 by the West shows the weaknesses of playing a loose game with no defense and spacing between the players. It reminds one of how the Knicks play under D'Antoni with total inability to defend because of the 7 second and shoot thing that D'Antoni demoralizes his team with.

It also leads one to speculate that similar spacing and high scoring leads to weakness in markets. The big jumps against one, the ability of the other sider to make runs against one. The high scoring against at an early stage. All these must be very bearish in markets and life.



The above plots three asset price bubbles (defined in hindsight as big price run-ups followed by big declines); in Nasdaq, Nikkei 225, and nominal Shiller Home Price Index.

All three were sampled on a monthly basis. Values were transformed by taking the log (to allow % change in value to scale), and further adjusting the log values so all three bubbles peaked at the same nominal value. Timescale is in month numbers, with all three aligned so their respective bubble peaks coincided in time.

The Nasdaq cuts off at the present, rebounding much better than Nikkei did after the same elapsed time after peak. Nasdaq also had a faster/steeper gain than Nikkei, and commensurately faster/steeper decline. Nominal house prices show less noise and a slower move - rather similar to Nikkei - might be expected with lower liquidity.

A story still unfolding.

My friend asked me the other day about how I said lower "noise" might be a result of lower liquidity? How do I figure?

Perhaps incorrectly: How does transaction price behavior change when average transaction time goes from seconds to months? In the case of financial instruments, large bid-ask and long time between transactions could increase volatility. OTOH volatility spikes usually correlate with volume spikes.

The smoothness of Shiller HPI may also be due to price anchoring; loans don't get funded unless the house appraises, and appraisals are mostly based on recent comparable sales.

It is also possible that HPI is more flexionistic and with less valid price discovery than Nasdaq or Nikkei. 



 Greece has been "sold"; should America be for sale?

A footnote to the Greece default/restructured bonds is a detach-able coupon that pays an amount based on future Greek GDP.

See this article for more details.

Interestingly, Professor Shiller recently proposed (in a recent Harvard Business Review article) that countries should replace their sovereign T-Bills with "shares" that represent earnings of their economies. Read this article. Should other countries go down this path, it will open a Pandora's box of unintended consequences, incentives and problems.But first things first. If the USA does an IPO, will it be a "hot" deal???

And, does it give new meaning to "selling America short…"

Rudolf Hauser writes:

This idea strikes me as very stupid. GDP is not a reliable measure containing many assumptions and imputations. Such an instrument would give governments a strong incentive to cheat and the GDP is an easy measure to manipulate if so desired. It is also a number that is constantly and often significantly revised. How would the instrument handle this. Would investors who were overpaid have to return some of those funds? Aside from more modest revaluations every year, major revisions in the methods of calculation are made every number of years along with benchmarks based on more extensive surveys which are not conducted every year. For how many decades would such adjustments have to be made? Any investor who trusted the honesty of such instruments should have his head examined.

Rocky Humbert writes: 

One notes the large and relatively liquid market for global inflation-linked bonds..which are also vulnerable to gov't tampering and revisions.

I agree that there are many consequential problems with selling what is essentially floating rate debt, with the coupon linked to GDP…too numerous to type on my blackberry…

However, I have total confidence in Wall Street's ability to underwrite, and Mr Market's ability to "value" these securities (just like they did with subprime CDO's based on arcane and idiotic models.)

Gary Rogan adds:

Some day there may even be a pan-european agreement that Greek GDP was actually negative and investors are required to compensate the Greek government for the privilege. If they can rule that a default is not a default but an agreement to pay less, anything is possible.

John Floyd writes: 

In fact there actually used to be. I do not think it exists any longer, a traded market in a few major econ. Indicators such as employment, CPI, and a few others I believe run by some of the banks ( DB and perhaps GS) in para mutual style betting. I don't believe the total payouts ever got very large though.

Rudolf Hauser responds: 

Unlike other economic indicators, the non-seasonally adjusted CPI figures are not subject to revisions. That is what makes them useable in legal contracts. It is true that adjustments for quality changes allow for some manipulation, but it pales in comparisons with the assumptions that are made in calculating GDP. The revision problem alone is enough to make it an undesirable instrument even if the government statisticians are perfectly honest and unbiased in their calculations.

Other traded indicators were in essence just bets on what the government statisticians would report on the next released indicator. That is different than an instrument that will have a life of many years or even many decades. A short term trader has no reason to give a damn about true fundamental values -only about what the price will be in the short term, which only depends in small part on fundamental values. That is not true of a long-term investor. As to the markets knowing how to properly price securities, if that was so you would not have so many major losses (or gains) in securities seen so often in history.



 Here's an interesting Schilling article that Real Estate has 20% down to go due to unlisted foreclosures, separation from investing/ownership, and 40% underwater with another 20% drop in price.

However, the real estate cycle is notoriously fast when it takes off, so trying to time it is hard to do.

Victor Niederhoffer comments: 

If, if, if. I've seen this reasoning on bonds from a million sources over the last 5 years. If bond yields go up, or go back, it would cause this destruction or that catastrophe. But people in the bond field know as much about the course of the yield curve as anything in the world, indeed they're much more versed than the stock market people. And it just takes a few Grosses or Soroses or DeRosas or dozens of others to set prices exactly where they should be taking account of all future contingencies. In short, the yield curves today provide an extremely accurate forecast of future fixed income yields. The experts, the DeRosas take account of the likely change from easing to tightening and when, and what a impact that will have on everything in their current forecasts. To predicate a trade on the idea that bond yields at 3% or 2% are ridiculously low is to go against the greatest experts in a field the world has ever known, et al.

George Zachar writes:

Unfortunately, the bond mavens today are forced to gauge not the real economic context of the forward curve, but the internal dialogues of Bernanke and Dudley. With the Fed manhandling the yield curve from tip to tip (and TIPS too), the price signaling attribute of the treasury market has vanished.

We are likely years away from private capital allocators fully resuming their role as impartial price setters for money. And there's a real risk the cronies will never be pried loose.

Ken Drees writes:

 I heard one of my mood of real estate indicators loud and clear the other day, ironically on the am radio. The banter back and forth was why renting is better than owning, even though the price may be higher to rent.

radio person a: Why should I tie myself down with a house, if I lose my job I can't move?

person b: Right, its easier to just rent and move.

The job environment needs to bottom and improve before housing can turn–Rocky's 2014 guess is as good as any for a bottom based on soaked up supply.

Fred Crossman writes: 

We are in an unprecedented period where the world central banks, instead of suggesting work and saving as a remedy to excessive debt, offer the effortless remedy of federal programs, massive printing, and more debt. Is it ironic, as we reach new market highs, that the biggest per cent mover today (not SHLD, which is up on worse than expected earnings but a shot at more creative financing) is a diet drug that eschews exercise and dieting but instead offers a pill for the same result?



 I take the view that most market predictions don't produce statistically sound results.

I believe market condition is a result of human behavior. Although many fundamental human behaviors are predictable with the advancement of behavioral sciences, the market involves more than the fundamental human behaviors. The key to it lies in the varying derivative perceptions of market participants.

Let's say the view "since condition A, then the market will rise" is the fundamental perception. A first derivative view, for instance, can be "since all believe the market rises due to condition A, it will fall". A second derivative can then be "since all believe the market falls due to (…), it will rise". And so on.

If the market participants all adhered to one of the principles above, then it would be very easy to predict the market. The thing is that is never the case. The big hands shift views along the derivatives all the time. That is what makes most predictions today unsound.

If we have a way (the big winners should have this talent) to predict which derivative view the big hands take, then the prediction would be more accurate. But then, if many could do that, the game changes again.

Before that happens, let me raise the question here on how one can develop that talent.

Steve Ellison writes: 

This is the principle of ever-changing cycles, as described by Bacon in Secrets of Professional Turf Betting and elaborated on in the Chair's books.

One of Bacon's approaches was to look for good horses that had lost in their most recent races. The memories of the recent losses caused the public to have negative opinions about those horses.

George Parkanyi writes: 

Market movements (which way, how far, and when) cannot be predicted by DEFINITION. The financial markets are a non-linear system. More than three non-correlated variables, and you cannot predict a specific price at a specific future point in time — a mathematical certainty.

However, like many natural cycles, markets exhibit a powerful tendency to revert to the mean. Now that mean moves around and will have its own wobble, but around it there is definitely a clear sinusoidal pattern — actually short and longer term patterns within patterns. Look at any index or commodity chart over an extended period of time. Individual securities will have the same tendency, but the longer term impact of low-probability outliers is more pronounced — your Microsofts or your Lehman Brothers'. The more narrow the influences — the greater the risk (one-trick pony, or bad management risk for example.) If you apply portfolio theory (diversification basically), the risk (and reward) of outliers is significantly diminished, and I believe you can develop successful strategies simply based on price and on the concept of reversion to the mean using indices, sectors, and commodities (anything always economically necessary to greater or lesser degree, that has an extremely low probability of going to zero. Even there it's not quite blow-up risk-free (asbestos didn't really work out.)

You can then more safely use leverage and modulate the range of returns with same. Reversion to the mean requires a large sample size, so you need many sources acting on the main influences on price (large underlying product markets, liquid financial markets), and time. The larger the sample size and the longer the time frame, the more reliable a reversion strategy should be.

The psychology of what Steve alluded above to is reflected in the aggregate behavior (influences on price) mentioned above. If you're going to go for the "bad horses" though, buy several in case one keels over and dies. Now if they all contract a contagious disease from each other…

George Coyle writes:

The 86th episode of Seinfeld was called "The Opposite" and involved George Costanza's experience in cycles.

The plot goes as follows (from wikipedia):

George returns from the beach and decides that every decision that he has ever made has been wrong, and that his life is the exact opposite of what it should be. George tells this to Jerry in Monk's Cafe, who convinces him that "if every instinct you have is wrong, then the opposite would have to be right". George then resolves to start doing the complete opposite of what he would do normally."Of course everything goes right for him from then on (until the end of the episode). While funny it brings up the interesting idea of the Costanza trade. Out sample seldom replicate in sample (probably due to ever changing cycles). How can one figure when to follow the trend of profitability and when to apply the Costanza trade to a perceived winner. 



I am unable to find the data, but I would like to hypothesize that, in keeping with Victor's idea or Max Keiser's, a large government employees number is indicative of bubble creation as the engine needs to be greased……and that the 12 months following, the largest % reduction in a year in government employees sees the least volatility for financial markets in the following 12 months.

This will have to be tested…



It is interesting to consider whether the levels of volume of the major markets are normally distributed. Related to this is the question of whether a spell of low volumes is predictive of a undue likelihood of a high volume in the future. The question is related to vix predictivity also, but volume may be useful.

One hypothesizes that volume must be shot upwards from time to time for the public to have an adequate chance to lose more than their fair share, so THEY can take their emoluments to live well and cover their overhead.

One notes that volume has been inordinately in the 1 to 2 million area with only 4 days of 2 million volume so far this year for SP futures, and they have not been clustered. What is the hazard curve for a 2 million volume day? Does the lack of high volume days this year relate to all the people who were gipped by the MF bankruptcy or does it merely reflect the normal tendency of scholarly chairs to preclude big declines in an election year so that the stuck out nails in the public will remain small?

Are such queries relating to volume useful?



 A total travesty at Disney World's Hall of Presidents as if Warren Buffett with his never having read a book were to have teamed up with Morgan Freeman to present a black panther view of American history with the presidency running from G.W to Andrew Jackson to Teddy Roosevelt to FDR to Obama with Lincoln thrown in. "All men are created equal" and "all men must be made small". One black person seen among 100,000 in attendance there, but to keep man small, the whole emphasis is on self sacrifice and smallness. Much use of decreasing marginal utility of increasing good at Disney and Universal and Jet Blue as they price everything to reduce consumers surplus to zero. Must be a trend among the consultants. At 9:00 on President's Day, there were approximately 10 people present for the Presidents Show at the Hall of Presidents and approximately 60,000 outside.

Pitt T. Maner III comments: 


Following are quotes from Wikipedia links that discuss the history and historian (and his father) behind current Disney HOP show. Thought you might find interesting. From the Hall of Presidents:

"The show was then completely renovated in 1993, after Bill Clinton was elected into office. The changes to the show, which in some form remain to this day, are credited to Eric Foner, a history professor at Columbia University. He was able to persuade various Disney executives, most notably then-Disney CEO Michael Eisner, that a new adaptation of the show was needed. Foner is responsible for completely rewriting and changing the script of the show in order to focus more on slavery and other ethical and civil related issues in the United States of America. He is also responsible for rewriting Lincoln's speech, which was originally nearly identical to that which Lincoln gave in the original version of "Great Moments with Mr. Lincoln."

From Eric Foner:

and on Dr Foner's background: Foner was born in New York City, the son of Liza (née Kraitz), a high school art teacher, and historian Jack D. Foner, who actively supported the Spanish Republic against fascism during the Spanish Civil War, the trade union movement, and the campaign for civil rights for African Americans. In 1981, Jack Foner received an apology from the New York City Board of Higher Education for an "egregious violation of academic freedom" in 1941 that had resulted in his blacklisting for thirty years.[6] Jon Wiener, professor of history at the University of California, Irvine, wrote that Eric Foner describes his father as his "first great teacher," and recalls how, "deprived of his livelihood while I was growing up, he supported our family as a freelance lecturer… . Listening to his lectures, I came to appreciate how present concerns can be illuminated by the study of the past—how the repression of the McCarthy era recalled the days of the Alien and Sedition Acts, the civil rights movement needed to be viewed in light of the great struggles of Black and White abolitionists, and in the brutal suppression of the Philippine insurrection at the turn of the century could be found the antecedents of American intervention in Vietnam. I also imbibed a way of thinking about the past in which visionaries and underdogs—Tom Paine, Wendell Phillips, Eugene V. Debs, and W. E. B. Du Bois—were as central to the historical drama as presidents and captains of industry, and how a commitment to social justice could infuse one's attitudes towards the past."[7]

Foner earned a B.A., summa cum laude, from Columbia University in 1963; a second B.A. from Oriel College, Oxford, as a Kellett Fellow in 1965; and a Ph.D. in 1969, under the tutelage of Richard Hofstadter at Columbia University.

Foner's father Jack:

During the period of blacklisting, Foner supported his family as an entertainer. A drummer and comedian, Foner worked with Paul Robeson and Harry Belafonte, and maintained a friendship with W. E. B. Du Bois, all of whom also suffered from that era's blacklisting. Although Foner did some freelance lecturing, he was barred from academia until Colby College hired him in the spring of 1969 to teach history.[3]



 When we analyze data and find some sort of correlation either positive or negative what have we really found. Have we found cause and effect?

The simple answer is no. Proving correlation cannot demonstrate causation. The fallacy that is at the core of this is that even when two variables are correlated one does not necessarily cause the other. The real underlying cause could be a third unobserved variable that is moving both of observed variables.

An example of this might be that we observe that the stock market and bond market move together over a period of time. That does not mean that one is causing the other. In reality they may both be caused by the Fed's Permanent Open Market Operations (POMO). If that is a variable we have not considered then we are oblivious if it is removed from the economic landscape one day.

All of this begs the question as to whether or not we should be trading on past correlations. Is it just a fool's errand? I think it is not, especially of the correlation is strong enough. But it does expose us to the risk that the hidden real cause will evaporate someday without our being aware of it. That is the risk of speculation. We must be ready to give up a system or anomaly that has worked in the past if it suddenly stops working for us.

Yishen Kuik writes: 

I am far from qualified to speak with any authority on statistics, and my training in mathematics was only as an undergraduate focusing on number theory.

My only claim as to why my opinion on this matters is that I have been operating a statistical trading book for some years and have not yet been swallowed up by the market.

I find that I can get most of the answers I need with fairly basic statistical tools, as long as I ask the right questions with them. I have also found that most advanced tools have to used with care. I want to be able to rely on the results I get with tests, and advanced tools tend to have specifications and nuances that I find troublesome to be familiar enough with that I can use the tool with confidence.

I am surprised at how confident many people, especially those in academia, are in the results they get from using very involved statistical techniques. Even when using very simple tools, I find that I have to think very carefully about the range of explanations for results and how vulnerable they are to various quirky aspects of the data. The Chair's point about how fat tails can be the result of aggregated gaussians or how arc sine can lead to unexpected distributions of highs and lows are good examples of this. In practical usage, I find that such unexpected results are quite commonplace. With complex tools, I am concerned that I may be blindsided by unexpected results from the interaction of data attributes with the details of the implementation that renders my ability to interpret the results correctly. The non-stationary nature of financial time series, the single history, the memory, the regime based volatility and many other aspects of markets tends to really screw up many statistical tools. It is too hard for me to look through the details of the advanced tools and think about how the perversity of financial time series might affect the results in complex tools before I can even contemplate using them with any confidence.

I find that to get the right answers, it is more important to sit down and think and come up with the right list of questions to ask, the answers to which in total should reveal the bigger answer you want to find. For causality and correlation, I doubt if there is a "just add numbers" tool that will give you a worthwhile result.

My algorithm for answering such a question would be to draw a warm bath and sit in it for a while. Then in about 2 or 3 days, usually in the early morning for me, a list of questions will come to me, the combination of answers to which will address the correlation/causation issue, and then later at my office I can construct the tests necessary to express those questions in a few hours. 



Do markets learn from each other?  For example, is the S&P market this year following a similar path to bonds last year, with every trepidatious move down being requited with a rise? Are such "learnings" graduated to the point of regularities. And is it a domino effect or a path of least resistance or consilience or convergent evolution or what have you? What do you think?  Can it be quantified? Should it be quantified?

Allen Gillespie answers:

Yes they do.  In the old days that could be because some pits closed before other pits, so you could have individuals walk between pits and trade both.  Today it would be the result of correlation trading desk and carry trades.  The correlations, however, do change depending on what the Street owns - it is simply a balance sheet effect. There is also the issue of relative levels v. absolute levels.  This is important because leveraged and professional traders may act on relative relationships more quickly and at higher price levels, where as, unleveraged traders need both an attractive relative and absolute relationships to act.  This is the problem with ZIRP.  Discount models become meaningless near zero i.r. as values become highly sensitive to small changes and price changes gain increasing amplitude.  It encourages leveraged carry trades regardless of the absolute levels sought by cash buyers. That's the issue now no? Inflation targeting is just the gold standard, and under the gold standard short term interest rates were highly volatile while long term ones were not because there was no long term inflation except for natural growth which caused periodic revaluations of the currency. So, the Fed views long bonds as the same as cash, however, this is because the Chairman does not believe that currency is supposed to serve the function of acting as a store of value.  If it cannot serve that function then it truly is worthless.  

So, stocks are following bonds because there's 600 bps of carry (relative to the Ten Year last August) or 800 bps of carry (relative to ZIRP) or 500 bps relative to corporates.  I call it the old bankers trade (3-6-3), borrow at 3, lend at 6, play golf at 3. Stocks then would give you an additional 280 bps on the 6. The issue now is 0,3,6 (borrow at 0, lend at three, get up at 6 because at $1360 on the S&P the earnings yield is 6.4 and this probably does not adequately reward investors in a world where the currency is worthless and where the value of a $1 perpetuity at 10 bps is $1000 and at 11 bps $909 and at a mere 15 bps back to the deal with the devil $666 that the S&P made in 2009.  Another way to consider it is to think you will get that 6.4 two thirds of the time or 4.25% which is still better than a bond, but is it adequate?  AA bonds have a 20 year cumulative default probability of 2.71% but an average loss severity of 36.5% or so at anything less than 2.3% they really have used your money for free for 20 years.  Didn't our president say something about spreading the wealth around? Well, using money for free would meet my definition of how to do it.  So, we are in the ABT market (anything but treasuries) since last August and I truly suspect current bond issues will someday be referred to as those Obamanations like the old not worth a Continental all made possible by Wall Street's deal with the devil at Fed.  The rub is the math works both ways.  

One way to quantify would be to take all market periods (say one year) and then run a correlation against the second market 1 year forward, with the hypothesis being that would be see consistently high correlation numbers.  Thus one would see not just the direction of the relationship but the consistency.



 Here is an amazing spectacle. Everyone knows that the house must win and the players, over time, must lose. And yet casinos flourish all over the world. Nor, contrary to the standard arbitrage argument for efficient markets, does the smart money, the house, end up with all the capital in the world while the dumb money, the players, go broke losing the capacity to sustain inefficiencies in the market. To the contrary (and contrary to one of Jarrow’s assumptions) there is a continuous source of wealth for the house to keep winning; the dumb money is constantly replenished.

From the fantastic article: "How Big is Almost?: or why the finance professoriate is clueless about managerial effectiveness"

Stefan Jovanovich quotes from the paper: 

"The paradoxical notion that uncertainty is absolute, that randomness is an objective quality, first and foremost of nature but by extension of social and economic life as well, has been rampant in our time. It was at the heart of the Copenhagen debate over the direction of quantum physics. It drove Keynesianism and Marxism and Smith’s replacement of the entrepreneur with that invisible—but oh so heavy—hand. It drove centuries of absurd debate over the relative importance of “capital” and “labor” as if they were objective fungible commodities with capabilities separable from the particular capitalists and laborers who wielded them."

"(t)here are men who consistently hit the bull’s eye at 300 yards and men who never hit it once. There are baseball players who hit .300 over a career and those who ride the bench. There are engineers with dozens of important patents to their name and those who never amount to much. There are farmers who prosper year in and year out and those for whom the weather is always bad. And generally we say the successful shooters and hitters and engineers and farmers are “good” at their jobs and the unsuccessful ones less good. We do not generally say (unless we are feeling envious), “Oh, they were just lucky,” or “they were breaking the rules.”

Can securities markets be so special among all markets, among all the arenas of our experience that in them alone diligence and skill and judgment and even raw talent do not correlate with good outcomes?"

"Randomness or “incomplete knowledge” is a subjective phenomenon. Different observers will have more or less knowledge and more or less uncertainty as a result. Moreover we can gain knowledge by dint of hard work, natural talent, and sometimes luck. We can be well prepared or poorly prepared to make a decision, discover special relativity, or buy a security. Even our best efforts to increase our knowledge may be insufficient. We may know a lot but not quite enough. We may fool ourselves about our positive expectation. There is no guarantee that our search for knowledge will bring us close enough for success. But neither is there any basis for a dogmatic ssumption of failure—or futility."

"We celebrate successful investors with other successful entrepreneurs as risk takers. This is true in the sense that the successful investor, like the entrepreneur, routinely makes judgments in the face of uncertainty. Nevertheless, the essential job of both investors and entrepreneurs is to reduce that uncertainty. Successful investors make money not by accepting risk as a given, as Modern Portfolio Theory tells us to do, but by increasing their ****

chance of making good decisions as compared to the less informed, less diligent, less talented. Admittedly how good investors, or entrepreneurs, do this is not entirely obvious. Edison helpfully told us it was 99% perspiration and 1% inspiration, but he was distinctly unhelpful in explaining how we might come by that crucial 1%. The progress from the objective uncertainty of a coin flip to sound judgment or even inspired creation is only partly a matter of quantifiable factors like more research or better math. Psychology or character or knack or what you will play an enormous role. Ultimately it does seem to matter not only what the investor or manager or entrepreneur."

Easan Katir writes: 

This is the most articulate rebuttal of the random walk theory ever! Thank you for posting.

If the heat of debate contributes to global warming, then this long conversational thread alone may have raised the earth's temperature a degree or so.

Gary Rogan writes:

It still all comes down to how predictable and persistent someone's ability to outperform SOMETHING is. Whether or not the mathematics of price movements are distinguishable from brownian motion, which they clearly are, this whole never-ending argument is about whether outperformance is reliable enough to (insert your own criteria here, like "bet the house"). The world is a confusing place, for instance Victor seems to really like "Random walk down wall street" year clearly he does other things besides putting everything into some total world ETF. Even if someone has stellar history, how can you ever know that starting tomorrow they will be on a long losing streak that will either reverse all of their gains up to now or make them quit the game?




Nowhere (arguably) has the peer-review system been hijacked more by "the system" than in the area of global warming. As it became essentially impossible to obtain public funding for any research that had an explicit goal of disproving any specific aspect of it, and it became much easier to obtain research funding for any related (and sometimes unrelated) subject by citing its connection to global warming as at least a partial goal of the proposal, "the system" organized itself to defeat any spontaneous or privately-funded challenges by any means necessary.

Ironically, it is the Socialist-leaning Sinclair who captured the phenomenon perfectly in the following quote:

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

Ron Schoenberg writes: 

I'm a econometrician with forty years experience in fitting statistical models. You can google me. The last 22 years I've been involved with writing computer programs for fitting statistical models. I was recently introduced to your web site and I haven't posted anything yet.

But I'm forced to respond to this post.

It's true that the peer-review system can sometimes fail. A better example is the graduate student who proposed that our continents float on tectonic plates. It took years for tectonic plates to be accepted. Global warming however is not a good example. Plate tectonics, Relativity, the heliocentric solar system were paradigmatic. Global warming isn't. A better comparison of global warming is with cigarettes causing lung cancer. Scientists were producing increasingly alarming connections of cigarette smoking with lung cancer. The cigarette companies were freaked out because this hit their bottom line. They funded scientists to produce confusion about the results the scientists were finding. They succeeded in delaying the results from being accepted.

In the same way oil companies are threatened by global warming. The value of their companies depends critically on the oil in the ground they have control over. The implication of climate science is that this oil should be left in the ground. Their valuation shrinks to next to nothing. All they going to have left is plastic (Cf. The Graduate). So they hire scientists to confuse the issue just like the cigarette companies did. The conflict of interest you point out among scientists over public funding is dwarfed by the conflict of interest created by oil companies funding of scientists. I know statistical modeling. The issues about modeling global warming are not paradigmatic. They are not like tectonic plates. And I can assure you the climate scientists are doing it right.

The impact of global warming is happening as we speak. Drought is having an impact on agricultural commodities. This is going to get worse. You need to be paying attention. If you have children who are going to live through this, you need to be paying attention.

Stefan Jovanovich replies:

Global warming and cigarette smoking share a paradigm as political economy. In both cases the reformers end up being the best possible advocates for the people whose economic interests are being threatened. Cigarette smoking was known to have health issues a hundred years ago. The cigarette companies did not "freak out" over Federal regulation; they pushed for it. Those warning labels on the cigarette packages delayed for 20 years any successful class actions challenging the fact that the tobacco companies were selling a product that met all the tests of strict liability - i.e. it was unavoidably damaging to the users.

The global warming advocates are the best friends the international oil companies ever had. Why else would BP have spent millions talking about how green they were? The international oil companies don't own the oil in the ground; the world's oil reserves are owned by state-owned monopolies. What the international oil companies still own are the means of distribution so they have every reason to want to see the oil stay in the ground rather than be pumped and used; high volumes are not profitable for distributors in competitive markets, low volumes are because they create sufficient barriers to entry.

Let's try to be more specific. What is your particular theory of global warming, Ron? Is it man-made CO2 or - as some of the unpopular scientists are beginning to suggest - is it the particulate emissions from wood fires, burning of hydrocarbons (but more importantly, the grinding of rubber tires into tiny particles) that are having serious climate effects?

The problem with conventional global warming advocacy is that it shares all of the nasty habits of 19th century Darwinism (for which Darwin himself should not be blamed); it took only a few decades for Darwin's hypothesis to become the principle justification for the racialism that became the justification for segregation and apartheid and vicious colonialism.

It has taken less time for MMGW to become the justification for preventing the vast majority of the people in the world to have access to the inexpensive energy needed for clean drinking water and cooking fires that do not produce far more lung cancer and other diseases than tobacco smoking ever has.

The science should be open to all opinion; the presumption that a hierarchy of the anointed should be given the power to destroy open markets in the name of progress is a folly that does not bear repeating. We didn't get segregation because street car companies wanted it; we got it because science confirmed the opinion of the all the "good" people that the darkies had to be quarantined - for their own good.


Jaime Klein replies:

Ron proposes the conspiracy theory that oil companies have an interest in fomenting confusion regarding global warming. Maybe it is so, but I can't see why they should be. Global warming, should it occur, will not affect the value of underground oil reserves. Only a tiny fraction of the oil is consumed by heating (6% in the USA) and I dare say the same amount or more is used in air conditioning. My summer electricity bills (in Israel) are the triple of winter ones and we use the same system for heat and cool the palace.

Quote: "Of the 20 million barrels of oil consumed each day, 40 percent is used by passenger vehicles, 24 percent by industry, 12 percent by commercial and freight trucks, 7 percent by aircraft, and 6 percent in residential and commercial buildings."

Computer modellers need no incentive to create confusion. They are quite capable of doing it for free.

Gary Rogan responds: 

I'm not a global warming scientist nor someone who is collecting all relevant facts, so I make my conclusions based on the information I come across in my constant search for information. Let me explain how I reach my conclusions.

Earlier today I posted an article illustrated how Global Warming was used as a stepping stone for success by Margaret Thatcher years ago in a cynical (my interpretation) political ploy. This elevated an obscure theory to a politically and economically viable and important concept.

Years ago I observed how Al Gore and James Hansen made sure to introduce their ideas to Congress on what was expected to be the hottest day of the year, and how they also made sure that the windows were open. I've observed how a British Court determined that Al Gore's movie contained eleven material falsehood and the impact that had on using it as a teaching aid in the UK. This was never publicized to any degree in the US and I had to ask myself "Why?". I've seen Al Gore refuse to debate ANYONE on the merits and I also asked "Why?". I've seen Climategate and the length to which "Climate Scientists" would go to quash dissent. I've seen photos of drowning polar bears forged and the realities of their survival as a species "nuanced" in was beneficial to Global Warming proponents. I've heard HUNDREDS of people of good will (or so they appeared to me) question this theory. These were people who displayed uncommon sophistication and knowledge in areas I was more familiar with. The physics of the increase of one molecule of CO2 in 10,000 molecules of air making THAT much difference never made much sense to me, but that was more from imagining this one lonely molecule among 10,000 rather than any calculations, and of course CO2 isn't the only culprit (yet somehow the main target as oil companies seem like much more inviting targets than herds of cows). I've seen the importance of solar flares questioned, and I've seen all kinds of data about global warming stopping in 1998 or current high temperatures being on par with those in the late 30's and 40's. I have no idea really if the increase in droughts may not be caused by local agricultural practices given increasing world population and use of water and all the deforestation and soil erosion that's going on.

Last night I was listening to James Delingpole, a noted British author question this theory with great believability. When asked "How do you respond to someone who says we should not take any chances and shouldn't we spend whatever it takes in case Global Warming is indeed caused by human activity?" his answer was along the lines of "Can we be sure that aliens will not invade the Earth tomorrow? If not, let's spend billions to equip all airplanes and rockets with anti-alien laser weapons".

Let me just say this: the "theory" is being promoted as a hoax would be by a priori evil, dangerous people like Al Gore. Facts are being suppressed by the mainstream press and by the advocates of the theory. Third world hell holes demand all manner of reparations under the guise of being compensated for the damage done by Global Warming to them. It may very well be true, but if it walks like a hoax, quacks like a hoax, and all that, it probably is a hoax.

Mr. Krisrock writes:

It's preposterous that anyone thinks the same collectivists who are trying to run and control our economy through central planning could do the same thing to world weather.

It shows the outrageous arrogance of San Francisco modelers who think a model so large could work…it defies common sense and a response.

This guy is a dreamer, who takes his advice from the AZTECS who worshiped the sun god…that culture disappeared in case he didn't read the history book.

Sadly, the world can't add up its money to balance its debts despite all his silly models but to think there is NO POLITICAL AIM in global warming?

There is, it's all about a small group of power hungry idiots, no different than tyrants in another time, who create false idols …

The same people as him run the state of California…have run it into the ground financially…and refuse to admit their models don't work.

The smoking argument is bullshit…people will still die from something…but millions in Asia will die far happier than this idiot.

And I add this year we had the largest global harvest of RICE…so much for global warming bullshit…

T.K Marks writes:

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

As one who defines the notion of salary broadly, that Sinclair quote might be the most succinct and trenchant definition of realpolitik that I've ever read.

Charles Pennington writes: 

Climategate demonstrated "peer review" at its worst–faking data and conspiring to ostracize the naysayers. It was a lucky stroke that it was uncovered.

Stefan Jovanovich responds:

Ron: Please accept my sincere welcome to the List. As others will tell you, I am a professional pain in the ass; but I do mean well. What I was trying to convey about the cigarette companies is that their (largely successful) conspiracy was even worse than you alleged. The cigarette companies knew they were selling addiction long before any studies were done on lung cancer. The best cases against them were those that were based on the common law argument that the tobacco companies were knowingly selling a product that was per se harmful. Those cases only had to rely on the fact of addiction - which everyone conceded - and did not need to meet the much harder burden of proof that epidemiological correlation requires. The "reform" that produced the warning labels defeated all that litigation; the tobacco companies now had a safe harbor defense.

Allow me a few last comments before acknowledging the final call to Order from the Speaker of our Parliament.

(1) There is a rather significant difference between Copernicus' situation and that of the global warming skeptics. Copernicus was challenging the established church, which was the international authority on all matters spiritual and intellectual. Your part of the argument already has the international church aka the UN and the holy orders aka the publicly-funded universities on its side. The poor skeptics have to rely on their own money - as did Copernicus.

(2) Isaac Newton was never accused of heresy; on the contrary, he was the author of a number of religious tracts, among them The Chronology of Ancient Kingdoms Amended (1728) and Observations Upon the Prophecies of Daniel and the Apocalypse of St. John (1733). He was not even censured for his dabbling in alchemy even though reasonable minds might not consider that the best of hobby choices for someone appointed warden of the Royal Mint.

(3) Einstein first came to the U.S. in 1921 to raise funds for the planned Hebrew University of Jerusalem. He received the Barnard Medal and was treated like a rock star. After he won the Nobel Prize that same year, American universities fell over themselves competing to have him come join their faculty. Einstein preferred to return to Europe - which was his home; but he continued to visit the United States regularly throughout the 1920s without ever having any problem getting off the boat. Princeton finally persuaded him to accept a faculty position with them in 1932 on the condition that Einstein be allowed to return to Berlin each year for 5 months. What kept Einstein here in America were the Nazis. He left Berlin in December 1932 (the Nazis took power the following month) and never returned to Germany. Einstein became a U.S. citizen in 1940 but he retained dual Swiss citizenship. The only evidence of Einstein's having had any difficulty with visas or his citizenship application is in Fred Jerome's book - The Einstein File: J. Edgar Hoover's Secret War Against the World's Most Famous Scientist, by Fred Jerome. St. Martin's Press, 2002. 348 pages. ISBN 0-312-28856; and its only source is Einstein's FBI file, not State Department records.

NB: Those of us who have FBI files know from direct experience that the Feebies apply the vacuum cleaner theory of information - floor sweepings are given equal billing with birth certificates.

Peter Saint-Andre writes:

Over time I have come to see this phenomenon as controlled not by "the government" in some faceless way, but by individuals or classes of individuals who have used the levers of power (federal, state, county, city, etc.) to their own benefit. I have seen this in the city where I live: few things happen in city politics that do not benefit the real-estate developers, and certainly nothing happens that harms them. The same could likely be said for industries and policy areas that I have not studied as closely: defense, energy, finance, transportation, education, materials, you name it. There are people and companies who benefit, and who always emerge untouched. The rest of us are harmed and suffer, to a greater or lesser extent. Perhaps if one followed the money and influence to identify who precisely makes up the aristocracy of pull, one could indeed build a successful investment strategy. I don't think I have the stomach to do so.

And by the way, looking at things in this way makes me much more sympathetic to many self-styled "progressives" (while I think that their understanding of markets is quite incomplete, they too have a sense that the game is increasingly rigged).

Gary Rogan responds: 

It seems difficult to take advantage of observed cronyism while being on the outside. One should only look at trying to invest in solar panel manufacturers, or ethanol producers, or defense contractors (after a certain point). Sooner or later the government runs out of money, and you have to be very close to the action to figure out when the gig is up. The health insurers were quite an interesting story to observe: a very political group that took a huge hit with Obamacare only to recover very nicely. You really have to know who was involved in shaping the legislation, and if possible the real effect. My own solution was to own what Rocky likes to call "world class" companies that seem flexionic, but would persist past any "abandonment" stage, or in companies that have a flexionic component, but that's not dominant (such as a chemical manufacturer with a large biodiesel component). It would be interesting to study if any of Sage's flexionic investments could be taken advantage of after his intent has become public, at least he always knows these days that the company will be saved if push comes to shove. 

T.K Marks writes: 

Not all variables are created equal. Some are unknown; others, unknowable.

Absent insider knowledge, politics for general investment purposes is but a fiefdom of unknowable variables, where knowledge is lord.

But 'knowledge' in such a sense is illegal, or unethical, or both.

At least it's supposed to be.

So one is better off trying to quantify things played out on fields more intrinsically level than politics.



 I downloaded SPY weekly data from 1/2000. I calculated the open to close change in percentage terms for each week. Next I used the excel function (=WEEKNUM) to find the week number. 1/3/2012 was week 1, 1/30/12 was week 5 which makes this week 7.

I looked back to 1/2000 to see what happens in various weeks (forgive my simplistic counting Rocky, fwiw fundamentally I am wary of being long here). My N was 12 for any period not yet covered in 2012. Only 4/12 week 8s were up (66% down) with an average expectation of -0.80%.

Further only 2/12 week 9s were up (83% down) with an average expectation of -1%.

Market certainly doesn't seem interested in going down and the N is pretty small but probably worth considering.

Steve Ellison writes:

To avoid the problem of multiple comparisons, I would suggest running a simulation in which you randomly reshuffle the weekly changes and sort them into 52 groups. Repeat the random reshuffle 500 or 1000 times . Then tabulate the extremes (highest and lowest number of up weeks in ANY group) for each repetition. You can then sort the extreme results from each repetition and check what the top 2.5% or top 5% of the highest of 52 groups was in the simulation. If you find actual results that exceed these cutoffs, you may be onto something.

There are probably computer programs that will run such a simulation very elegantly; I just use the Excel RAND() function and copy and paste until I have 1000 repetitions




 This past week there was an item published about the drop in miles driven by the population. The point of the missive was to suggest that miles driven is a surrogate for economic activity, and that we should prepare for another recession because the miles driven showed a huge decline.

Part of the problem in analyzing the data is that mileage did not directly address the price of gasoline, and it is logical to assume that at a high price of gasoline, the public curtails some discretionary driving. So some of the drop in miles driven could be related to price. Another item could be the Cash for Clunkers program, which could offset the price rise to some extent as the newer cars generally get better mileage. The latter apparently did not happen to any large degree.

The chart presented with this link shows the allocation of household expenditures spent on gasoline (top panel) and the annual growth rate of those expenditures.

My conclusion: There is a drop in mileage driven, but I would not bet that it foretells further recession.

Mr. Krisrock comments: 

105 dollars in crude tonight as Obama and his communist central planners try to figure out the new narrative and who to blame this on…



 This interesting paper demonstrates an unexpected form of price clustering/anchoring; and by extension shows that laziness and convenience has a rational "util" value. It may also have relevance for specs who play the lottery (and pick their winning numbers).

The gist:

1) If you find someone's ATM card and their driver's license. There's a 1:16 chance that they used their birthday as their pin code.

2) If you find someone's ATM card, but not their driver's license, you should try 1234 as their pin (the most common code). However, you should not try 8439 since that is the least used pin code.

3) If you pursue the strategies described in #1 and #2, it is left as an exercise for the reader to determine the probability of subsequent incarceration.

The full paper is here.


We provide the fi rst published estimates of the difficulty of guessing a human-chosen 4-digit PIN. We begin with two large sets of 4-digit sequences chosen outside banking for online passwords and smart-phone unlock-codes. We use a regression model to identify a small number of dominant factors influencing user choice. Using this model and a survey of over 1,100 banking customers, we estimate the distribution of banking PINs as well as the frequency of security-relevant behavior such as sharing and reusing PINs. We found that guessing PINs based on the victims' birthday, which nearly all users carry documentation of, will enable a competent thief to gain use of an ATM card once for every 11/18 stolen wallets, depending on whether banks prohibit weak PINs such as 1234. The lesson for cardholders is to never use one's date of birth as a PIN. The lesson for card-issuing banks is to implement a denied PIN list, which several large banks still fail to do. However, blacklists can note effectively mitigate guessing given a known birth date, suggesting banks should move away from customer-chosen banking PINs in the long term.



 The question everybody asks but is not willing to answer is "why did nobody recognize Jeremy Lin's talent until it was obvious?"

Well a basketball counter did:

"Truck Driver’s Analysis Predicted Lin’s Potential as a Professional"

However, the obvious answer is prejudice. Not just racial prejudice, that would be too easy and would let the NBA, NCAA coaches and the media off too easy. These groups have learned to destroy racial stereotypes and marginalization.

There is a bigger prejudice that seems to be ignored. If you do not need others to help you but can lift yourself up by your own bootstraps, often those in the business to help, colleges, coaches, professors, and the media do not want to help you.

Jeremy was smart, male, Asian, had a close supportive family, and was a person of strong faith and beliefs. He was going to make it, with or without basketball.

I believe much of the mystery of why people believe, what to an outsider appear to be crazy things, is explained by considering the Amish.

For the Amish, you either chose to believe and live like the community tells you to, or you are ostracized by your family and your community. While most modern Christians and Jews do not usually go to that negative extreme, it is still a statement of trust and a heavy reliance on your family and your family's community to be a person of faith.

They don't trust or rely on the establishment, the government and experts for answers. They believe in the individual rather than making the individual small to build the system up.

Perhaps nobody wanted to take a chance on him because it is obvious that he made himself… not some coach or some college minority scholarship program. Nor was it because he was casting his family aside to follow some enlightened professor's political agenda. The reason nobody saw Jeremy Lin was because nobody was going to get the credit for making him… except himself.

T.K Marks writes:

 Meanwhile, over there Milan way, the cognoscenti are apparently are asking the same of "Il Baffo" — The Mustache."

Previous to this Continental information I had always thought that he was just a guy that didn't coach a whole lot of defense. The John Wayne thing was lost on my Stateside ways.

Il Baffo…Now I've heard it all:

"If you are remaking a classic Western, say Stagecoach or The Wild Bunch, how do you NOT cast Mike D'Antoni as Sheriff? That 'stache!!!" — Miles C.

"It truly is majestic. (I like this old ode by Rob Peterson.) I would be proud as an American to watch D'Antoni draw pistols while on horseback in Cheyenne.

"However, you have to be careful not to start typecasting the Knicks coach as a pure Westerns guy, because then you're missing out on one of the best things about him: his international flava.

"D'Antoni remains a beloved hoops figure in Italy, where he played for most of the '80s and won four league titles, all while sporting the same duster (in cut, if not color) that remains today. Marc Berman wrote in the New York Post last season that D'Antoni is still referred to in Milan as "Il Baffo" — The Mustache. Or, says Google Translate, The Whisker, which I think we can all agree is superior. "Contento per Lin, ma sopratutto per il baffo … il tanto vituperato mike d'antoni," wrote one commenter, named Luigi, on an Italian basketball blog after the Knicks beat the Sacramento Kings last week. Translated roughly, that meant: "Happy for Lin, but especially for the much-maligned mustache … Mike D'Antoni."

On that, Luigi and I are speaking the same language…"



 Walter Schloss died yesterday a 95. he was one of the true great investors with compound returns of above 16% net of fees for an astounding 47%. He and his son Edward practiced true value investing buying book value bargains with little or no debt and holding until they worked. By all accounts a true gentleman, genius and humble man. I always tried to meet him when I was in the Tweedy Browne offices where he hung his hat but he was semi retired by the then and his desk in the corner was never occupied when I occasion to be in the old Vanderbilt Avenue offices.

Stefan Jovanovich writes:

He was a great supporter of Freedom House; it is largely because of his influence that they had the courage to publish Peter Braestrup's book –at a time when no one else in New York or Washington would touch it.



 Today is the Met's birthday. It opened in 1872 at 681 Fifth Avenue; according to Refdesk, the collection began with 1 stone sarcophagus and 174 paintings all of which belonged to John Taylor Johnston.

Johnston's father had been a merchant banker who raised his family in Greenwich Village and helped found New York University, where Johnston went to college (graduating in 1839) and law school (admitted to the bar in 1843).

Johnston was sensible enough to avoid courtrooms and go into business; he became the first President of the Central New Jersey railroad.

He was also the first person to bring marble to Fifth Avenue facades, building a mansion at 8 Fifth Avenue, where he died in March 1893, just in time to avoid the Panic.



 This is a funny essay about Jeremy Lin from actor Jesse Eisenberg:

When I was twelve years old, I decided it would be cool to wear all green to school—green sweatpants, green shirt, green socks, even green shoes! Sadly, the other kids in my class didn’t think it was such a great idea. I was taunted on the playground and called names like Green Bean, Kermit the Frog and Snot Body.

Bullies chased me through the gym hurling rocks and insults when a young Taiwanese-American boy stepped in between me and my attackers. It was little Jeremy Lin, who was four years younger but in my class because he skipped several years of elementary school. He chased the bullies away and shouted after them, “Pick on someone your own size!” Then, just to cheer me, Jeremy scooped up the rocks and slam dunked them into the basketball hoop. No one ever picked on me again.

It may sound extraordinary. But that was just Jeremy.

The story gets better from there.



The[r]e are cyclical divergences that often take time to play out. The purpose of taking a big picture, bottom-up approach is to provide a framework for thinking about the market and to keep it in the proper context.

In order to better understand price action, a trader needs to be cognizant of market structure, and what is currently driving price, i.e., large day-traders, algo driven HFTs, and most importantly, liquidity created by the Fed; not arbitrary lines, indicators, and moving averages.

This does not mean the trader should have an opinion of where the market is headed, rather than a forward looking view of the market , which allows the trader to be prepared for all contingencies. In turn, this forms the necessary prerequisite for timely execution and money management. […]

The Fed is adding liquidity by way of outright purchases of treasuries, on the 22,24,27,28, and the 29th of February, and is draining liquidity, by way of 2 relatively large ($16.0-17.5 BB) matched sales transactions , on the 21 and 23rd in addition to the 2,5,7 year auctions on 21-23rd. The result will be a net loss of liquidity. This does not mean the market will go up on days the Fed adds, nor does it mean the market will go down, on the days the Fed drains, however the probability for those results increases on those days.

The real question is; in a market driven by liquidity, what happens when you take that liquidity away?


Rocky Humbert comments:

Anonymous writes: "The real question is; in a market driven by liquidity, what happens when you take that liquidity away? "

I beg to differ. I believe the real question is: "What is the purpose or utility of your post?"

If you want to make a market call, go ahead.

I'll give you an example: "I am long the Nikkei. I am short the Yen." Word count: 10

I'll give you another example: "I am an idiot. Don't listen to me." Word count: 8

In contrast, you spent 532 words and said absolutely nothing. Except, that "the market will go up, until it doesn't." Word count:8

Conclusion: it's a good thing that I'm not your copy editor.



 SpecListers occasionally report on novel sightings of Benford's Law — both its utility and its futility.

The latest sighting is from a Journal of the Physics Society, where Mr. T.A. Mir at the Nuclear Research Laboratory, Astrophysical Sciences Division in Kashmir, India evidently had too much time (and yellow cake) on his hands, and set aside his quarks to ponder "The Leading Digit Distribution of the Worldwide Illicit Financial Flows." (sic)

The paper (which I didn't read because of poor grammar in the title) can be found here.

Not to be outdone by a physicist (an EXPERIMENTAL one, no less), I just ran the Benford's Law distribution on the monthly CPI data from both the USA and China for the last umpteen years.

Here's the distribution (using the leading digit to the right of the decimal point, since the digit to the left of the decimal is almost always zero hence I used my poetic license to move the decimal point one place to the right.):


0: 8%

1: 19%

2: 17%

3: 21%

4: 11%

5: 14%

6: 13%

7: 15%

8: 11%

9: 14%


0: 8%

1: 19%

2: 21%

3: 15%

4: 22%

5: 17%

6: 18%

7: 19%

8: 11%

9: 12% (Percents don't equal 100 due to rounding.)

As any self-respecting THEORETICAL physicist can tell you, the appropriate Benford distribution should be

1: 30.1%

2: 17.6%

3: 12.5%

4: 9.7%

5: 7.9%

6: 6.7%

7: 5.8%

8: 5.1%

9: 4.6%

Alas, Mr. Benford lived in the universe of Natural Numbers and not the more restrictive Whole Number world, (which is a mathematically imprecise way of saying that he ain't got no zeros.) So, I'll take some liberty and add all of the zeros to the ones (since that's allowed using the core principle known as "Close Enough For Government Work." ) But even after I do that, it's not Benford-esque. It's much closer to a uniform distribution. So — there you have it: In 10 minutes on a boring afternoon, based on the inspiration of an EXPERIMENTAL nuclear physicist on the other side of the world, I just proved that both the USA and the Chinese are lying about their respective CPI's. Only one question remains: Will ZEROHEDGE pick up this startling conclusion and run with it?



 I don't think Oppenheimer was a spy; the problem was that he knew people (and slept with many of them) who knew people who were. He had a genius' confidence in himself and he genuinely inspired confidence in others; General Graves always maintained that, without Oppenheimer, the bomb would never have been built. The difficulty was that Oppenheimer could never imagine that other people were not as trustworthy as he was.

Whether that lack of imagination justified his losing his security clearance seems to me largely irrelevant. By 1954 Oppenheimer's part in the world of insanely lethal weaponry had largely drawn to a close. "The bomb" was now nuclear and US bombers were airborne 24 hours a day with payloads 100,000 times more destructive than the firecracker explosion at Alamogordo that had prompted Oppenheimer to quote poetry. People had very good reasons to be "hysterical" in 1954; the world was literally on the verge of annihilation.

Debating the question of Oppenheimer's guilt or innocence is - to my mind - much like arguing about capitalism. It is to accept terms that leave the people who are permanently aggrieved about the United States and its history with the upper hand. No one with an ounce of common sense, let alone Oppenheimer's genius, could have doubted that the Russians under Stalin were addicted to a tyrannical ambition as monstrous as Hitler's or the Japanese Emperor's. The Hitler-Stalin Pact had made that unmistakably clear about the Russian communists; the willingness of American communists to rationalize and even praise so monstrous an alliance erased all doubt about where Communists' loyalties would always lie. Oppenheimer also had to know what was happening to Polish Jews in 1940, with the complete support of the Russians. There was no excuse for him to be so cavalier with his "hazy and vague" connections to the Communist Party; as an American and, more particularly, as someone of Jewish descent he had no business associating with anyone even vaguely connected to the Party of Revolution.

Growing up in NYC (every borough but Staten Island) in the 1950s, I always thought the question of Oppenheimer's "innocence" (and even more the Rosenbergs) and Alger Hiss) was a coded message that translated into the general suspicion by the Left that the goyim were out to get them. What is remarkable is how that not entirely unreasonable anxiety has stayed alive even as the Left is now duty bound to support everyone who wants to blow up Israel.

P.S. FWVVVLIW, Ethel Rosenberg was probably not guilty of the crime her husband committed; those of us who despise conspiracy laws (how can you possibly reconcile them with the first Amendment?) wish that the prosecutors had been wise enough to understand the difference between her loyalty to her husband and Julius' active espionage.



 I was playing Texas Hold'em Poker online yesterday. For about an hour, I had some very good wins. Then my wife came in from outside, and we had the Valentine's greetings. It was for less than half a minute. During this time, someone called all-in. When I discovered, the software followed the bet for me when my response was timed out. So I lost it all.

Things of this nature happen more often and more easily than we think. This is just another alarm for me to take the lesson seriously.

Jeff Watson writes: 

The real lesson here is to not play NL poker games. The risk of ruin in any NL game approaches 100%. Limit poker is much better for your longevity and bankroll….provided you are a good enough player to have an edge. If you don't have an edge, stay away from the game. This applies to any game, market, sport, or activity that is competitive in nature and has a win/lose outcome.

John Netto comments: 

Jeff, I have a different perspective in the limit vs. no-limit game discussion. As you hit on, much like trading, issues like bankroll, rake, skill of opponents, and ability to extract the greatest amount of expected value all play a roll. When discussing the risk of ruin in a No Limit game, it is important to qualify one game vs. a career. Limit hold'em can impede the ability to extract bankroll from weaker players who will egregiously overpay to chase draws or call after they have been beat. Over the life of a professional speculator, forsaking this volatility can come at a cost of giving up even greater alpha (we are trying to push the efficient frontier up and left, not down and right)…

In fact, playing no-limit tournament poker vs. no limit cash games is a different discussion all together, considering the variance as a professional tournament player vs cash game player (almost akin to being long gamma vs short gamma strategies in the market).

The reason why I am a professional sports bettor, former cash game no-limit poker player, and commodities trader is the ability to put myself into asymmetrical bets and judiciously control my bankroll. In fact, as unfortunate Leo's misfortune was, operational risk is a part of trading and poker. Many poker sites will give the option to check or uncheck the "call" button. There are benefits and drawbacks to both situations.

Sam Marx writes:

 Can you imagine the damage a Flash-Crash would do if it occurred on an Option Expiration Day.

The previous Flash-Crash caused damage but much of it was later straightened out. But on an Option Expiration Day the damage might be insoluble

Ralph Vince writes: 

On a similar note, given this creeping-up market of recent weeks, Prechter's prediction (which, I am not discounting one speck) I was thinking this morning how the 2008 crash closely correlated with Obama's imminent election (please, I am not arguing political idealogy here. I do not care one joy who is in charge of the Magic Kingdom and it means nothing to me at all).

Rather, given the landscape of the political backdrop here (and making the giant assumption that a large part of the drop of 08, planet-wide, was a consequence of Obama's imminent ascent) should I be en guarde for perhaps a replay of this into the Summer? Does anyone concur to a recent complacency regarding a rapid, precipitous drop similar (or worse) than '08 ?

Enjoy the etouffee,

Ralph Vince

Stefan Jovanovich adds: 

These Presidents did not lose reelection during a war, but they did choose not to run again: Polk (the Treaty of Guadalupe-Hidalgo was signed in February and the last troops left Mexico in August 1848 but Polk had already announced that he would not stand for reelection), Johnson (Lyndon, not Andrew) and Truman. Eddy's Mom has the 30 months and out rule; if a war lasts more than 30 months, the incumbent President is in trouble. It seems to apply. The military winners have been Jefferson (Franco-American naval war), Madison (1812), McKinley (Spanish-American), Eisenhower (Korea) - none of whom had a war last more than 2 years while they were in office. That leaves Lincoln (who only won because of the votes of the Union soldiers themselves), Roosevelt (by 1944 everyone in America knew it was Roosevelt's last term and the Republicans invented the Michael Dukakis of their history - Dewey) and Bush I (which I think has to be discarded because 3+ person races throw out all the rules - vide 1860 and 1912). The only winner who has clearly violated the 30-month rule was Bush II. My explanation for that anomaly is that the Democrats lost because John Kerry was still trying to prove to himself and the world that he really earned all those medals he put in for. (Of all the issues on which to base a challenge, why would anyone choose: Incumbent reservist draft dodger vs. fake war hero?)

That leaves Obama. I agree with Prechter in his thesis about social mood; the arrow of causation runs in the opposite direction. The markets will tell us the fate of the President. So, if Ralph is right, elephants will be dancing in the streets in November.




This is how to keep a market busy:

Google Trends: Greece bailout and also this.

Victor Niederhoffer comments:

There is optimism about Greece.



 The other day while sitting in the local coffee shop I came across a thin volume of poetry, laying lonely on a shelf. I began leafing through it, and was so taken by three of the efforts, I copied them down on a napkin.

Written by somebody named Joe Connor, they were love poems, each composed in a brief and uncomplicated fashion.

The first one, Love Poet, I liked because of the seashell metaphor. Verse is an underappreciated art form. Perhaps because, like seashells, at times there seems like there's so much of the stuff around we take for granted the individual charms. Having never been neither, one still gets the unmistakable impression that both poets and seashells can be lonely incarnations at times.

The second one, Bind Me, I liked because of the delightfully simple rhyming scheme: ABCB. In writing, technical technique can be somewhat obtrusive at time; in writing verse, it can be fatal. Simple is sublime.

Mr. Connor's third selection here, Good Bye, I also enjoyed. It's good. It's brutal to behold….but it's good. Love is a contact sport, sometimes you take a hit. Sounds like he must have taken one at some point.

Given the spirit and theme of the day hopefully somebody may enjoy these three poems I serendipitously came across as much as I did.

– Love Poet

To be a poet
Is to spend your life as a seashell
will hold close enough
to hear the beating of their own heart.

–  Bind Me

Bind me to your kisses
Tie me to your sighs,
Chain me to your passions,
Lock me to your eyes.

Let us live a thousand years
As close as lovers do,
Clinging to this flower of life,
Like orbs of mourning dew.

Then if in ten hundred years
Our embrace doth chance to break,
Yeah, …only for a single breath,
And then our arms remake.

– Good Bye

When you left me that note
Saying you were leaving,
Tucked so carefully in my sleeve
I almost died.
You would be back, you said
Perhaps, but not to wait

The caustic glue of love
Will hold me for some time
Yet an acid anger churns my every touch

It was you who said
I had my foot in too many worlds.
I would have preferred some anesthesia
Before the amputation.



 Okay I will say it. This whole Valentines thing is one whacked out holiday. In fact although am sure I will get in trouble for saying it, it is f*&^ing ridiculous. We take some obscure Catholic saint and turn this into a windfall for candy and greeting card companies. Bars and restaurants love the holiday as well as they are either serving the left over shit in the walk in as a high priced prix fixe dinner for lovers or serving drinks to singles who were fine yesterday but now incomplete because they haven’t found their Valentine yet. Of course we excel at making stupid holidays out of nothing don’t we? Take St Patrick’s day, again a minor saint, whose feast day is used to prove that all races, religions and ethnic groups can puke green beer and rail Irish whiskey just like a real Irishman. Cinco de Mayo is another great one where we all drink beer made in St Louis in a brewery owned by a European company to celebrate a minor victory by the Mexican Army. For gods sake they beat the French so its not like they even beat a real army. But we do excel at producing a holiday from minor stuff and turning it into a celebration of excess. But Valentines Day takes the idiotic stupid f*&*ing holiday crown.

It is not enough for all of us to take this day and force romance on our partners to the point where the search for the perfect card of gift becomes so stressful we don’t love anybody by the time its done. No, that is not enough. We take all this stress and pressure and shove it down our kids throats. My poor wife sat at the table last night stuffing treat bags and valentines cards into bags for her daughter to give to the 30 some kids in her class. We take this day and use it to teach our kids how not getting a card from some kid you wouldn’t say hello to yesterday can ruin your whole damn day. They give little cardboard love notes to other kids, many of whose last names they could not spell on a bet. Your entire social standing becomes related to what kind of cards and candy you give. Just to make sure its not exclusively painful to the kids they send us home notes to bake cookies and cupcakes for the absurd over the top unnecessary celebration of a day none of the poor kids even begins to understand.

 It's not that I hate romantics. I guess it's for my wife to judge at the end of the day if I am romantic or not but I like to think so. I come across as a cynic at times but I often take an overly romantic view of the world. I love sunsets, soft jazz and walks on the beach and all the other stuff that is thought of as romantic. I love the romantic moments of life, I just am not sure they should or can be scripted or scheduled. I am also aware that romance is one of those things that needs to be practiced and appreciated every day of your life or it doesn’t mean a hell of a lot. If your courtship of your spouse or significant other comes to down to one frenetic day of searching for the perfect combinations of mylar balloons and recycled greeting cards you have problems deeper than the special dinner at Mel's diner is going to fix.

Yes, romance is sailing ships and knights in shining armor. It is magical kisses under the moonlight. It's dinner on the beach at Casa Marina in a soft Caribbean breeze. Romance is shimmering moonlight on crashing waves and wishing upon a late night star. Romance is dawn in the keys at a little motel on the beach. It is candlelight and roses with Mozart softly in the background. It’s all those things and more.

But romance is far more than that. It is not stabbing your husband in his sleep when he snores. It is walking your wife’s dog although you are ambiguous on dogs in general and vehemently opposed to picking up steaming piles of shit first thing in the morning. It is taking your turn with the crying child in the middle of the night. It is letting your husband sleep in even though you have been up since six am and cant for the life of you understand how that lazy bastard can sleep until 9:30. It is making the coffee the night before so it is ready when your significant other gets up . Its Mac and cheese for dinner because there is a recital at the school and only half an hour to get ready. It’s not getting too mad when he stayed at the bar far longer than the game was on. It’s an oil change in your spouse’s car. It is loading the dishwasher. It's sharing the remote. Romance is all the moments of all the days you spend together living and enjoying life. It is all the little things we do and say each and every day to let our partners know they matter to us and we care about their day, their life, their thoughts and feelings. Romance can be magical moments frozen in time .It is also the everyday lived in the moment with each other. I do not need Hallmark to remind me to tell my wife I love her. I try to find some way every day to show her. That is romance.

Of course I participated in the day. I love my wife too much for her to have to spend the day explaining that her cynical mean ass husband doesn’t give a rats ass about Valentine’s day. I sent flowers and a teddy bear to her office. I was going to make a special dinner but true to her Texas roots she requested steaks on the grill. I will love our evening together. But I will love our evening together tomorrow when there is homework to get done and the dog is chasing the cat to hell and back, the dinner dishes need to get done, my daughter is cheating at words with friends again and I want to watch Finder but my bride is hooked on the Food network just as much. Moments are nice. Life is better.



Certain formerly good players of racquetball and squash after a victory often heard the crowd say, "what a tour of the court that was!". Such could be said of the market which ended just a point or two from the open and the previous close yet was able to inflict much damage on the adversary the public.



DJIA realized 20 day volatility using close-close daily returns of DJIA since 1928-present. I calculated every 20 trading days  the stdev of the prior 20 days return (non-overlapping). The current level of 0.004945 (about 1/2% per day, equivalent to 7.85% per year) is low but not that unusual in the series — ranking between the 14th and 15th percentile.

The attached graph of 20D stdev over the period shows many periods of persistent low volatility of much longer duration than the present.

But on the other hand perhaps painful memories are more durable than pleasant ones.



 Gordon Tullock's stint in China was crucial to his rent-seeking insight:

"See, you go into these cultures where people have produced just immense cultural achievements but are living in bitter poverty, and you discover very quickly they have a dominant government and the government is corrupt. Conventionally, economists have argued that a corrupt government doesn't really cost anything because the man who receives the bribe gains what the man who pays the bribe loses. Well, you can't really believe that if you're in China."

His book The Calculus of Consent [online version] is about to celebrate 50 years.

And Prof. Tullock is celebrating 90 today.



Here's a little more commentary on the issue of high vs. low beta stocks, to be appended to these links:




In those links I argued that the apparent under-performance of high beta stocks is illusory, and that the current popularity of low-volatility stock strategies is unjustified. High beta stocks have actually done fine over the past dozen years or so in terms of their appropriately risk-adjusted performance as measured by "alpha".

For a little more insight, I plot below the compound total return of $1 invested in the S&P 500 index ETF, ticker SPY, along with the return of $1 invested using a margin account, with a leverage of 2 to 1. The margin account position is re-adjusted to 2 to 1 at the end of each calendar month, and interest is charged to the account at the rate of the 3-month t-bill rate (which is significantly less than what a real investor would have to pay).

The 2-1 margin account is the true benchmark for a portfolio of beta=2 stocks, and we see that the 2-1 margin account did poorly over the full period, turning $1 into $0.96, with much undesirable sound and fury, while the unlevered SPY turned $1 into $1.36. Any real-world margin account would have to pay more than the t-bill rate — a reasonable guess is 2% more per year, which would have further degraded the leveraged account.

So if your high beta stocks seem to have done poorly over the past 12 years, much or all of that is due the market itself and their heavy exposure to it.

That could all be different over the next 12 years, and if you're the type who wants 2-1 exposure to the market, there's no evidence to suggest that an un-levered portfolio of beta=2 stocks is a bad way to get it.


















 Dear Chair,

I received this letter from my friend's Orthodox priest. I thought it might give you some light on the problems in Greece. 

Theophane, kali mera!

As much as it pains me to read the news and see the photos from Greece, one must remember a few things:

1. Have you ever thought why so many Greeks left and still leave the country?

2. Do you know how corrupt the Government and the public service was and still is?

3. Do you remember that those who demonstrated and vandalised yesterday were the ones who elected those politicians they now curse?

4. Do you remember that these same people accepted the money from the European Union and in fact hundreds of them sent false statistical data to the EU in order to get more money?

5. Do you know that after the death of historical communism Greece is the only country in the world with more than six communist political parties?

6. Remember one thing: Greeks are never wrong; it is always somebody elses's fault!!! So today it is the fault of the European Union, the French and the Germans. Before them it was the Americans' fault. Before it was the English. Before it was the Turks. NEVER , NEVER , NEVER THE GREEKS!!!

I can give you more information if you are interested. I tell you this: every Greek in the US, who knows a few things about me, asks me why I went to Australia. No one is asking me why I left Greece.

If you want to share this with other people feel free.

Have a blessed day,

Fr S M



 Are we at the point where the street needs volumes back to averages? What will the catalyst be; Israeli saber rattling, Iranian suicide boats, Spanish bank downgrades? Only the shadow knows…

Fred Crossman writes:

Hey Vince, I don't think war events are bearish. How about bad eurozone IP and German ZEW conditions numbers on Tuesday or bad eurozone and German GDP numbers on Wednesday to get the de-coupling crowd thinking again? (disclaimer: I have never been right).

Ken Drees writes:

Yes indeed! Bring a new headline to the fore, raise a signal, blow a horn–anything but the same old boredom.

There was a time when I would sit down and hash out 10, 20 or more "things or scenarios" that could happen to pitch markets off center. Even after thinking quite outside the box, in the box, and on the box–military, financial, political, mother nature, etc. I could never seem to guess right–the markets always had a new one, or a "dumb" one that I thought not an issue. Outside of mental exercise, boning up on geopolitics and such, the benefits of handicapping the unknown catalyst that will jolt the markets seems less important to me. The thing to realize is that something will happen, sit back and enjoy the surprise.

The market lulls us now into its lovely and comfortable bosom of low vol–sleep little specs, sleeeep–it's time to sit up straight, let the cool snowflakes rouse the poppy fragrance from one's nostrils and keep awake.

As now table banter has turned towards a new and safer market, easy returns, low priced protection, 8 weeks of this blissful gentle lifting and stretching will most likely be shattered by something "out of the blue". Apple at 500, facebook getting in while the getting is good–two talking poppies.

"Confidence is suspicion asleep".



 About five years ago, I lost my business partner and friend to a heart attack. I know it was caused by the stress of the markets. My Dad spoke to him hours before he passed away.

This weekend, I lost a friend to suicide. He was well versed in the markets and extremely bright…easily a match for my former partner. Again, I know the stress of trading and investing is big, but you have to make sure you can burn it off in a positive way. In his case, he couldn't handle the stress of investing and a failing marriage.

I have too many friends on Dailyspec, and frankly I do worry about you folks. Both these guys knew what was going on… they were neither stupid nor weak people.

Make sure to recall this is a game, and those you come home to at night are your real treasure. If you don't think of it as a game, you should leave the business immediately for the sake of those you love and who depend on you.


Jeff Rollert

Victor Niederhoffer writes:

I knew and admired the first person. He was larger than life, enjoying all aspects of it to the full, and appreciative of all his friends and family. He had a myriad of interests, and loved life in all its aspects. A man like Falstaff but good in all his facets. I miss him greatly and will always remember with gratitude the fine and large points he enriched in my life and others.



 1. It is remarkable to have a streak of 30 consecutive days go by in the SPU's without a move down of 1/2% or so broken like it was on Friday. The way it was broken with an up from open to close after a down open of 1%, yet down on the day is equally remarkable. It shows to me that the recent spate of 15 days with a vix below 20%, and volume below 2 million contracts is causing strains in the underpinning of the market, as there's not enough happening to cause the public to lose as much as it should to keep the wheels of commerce going (although less would seem to be required when the market goes up 15% without a single down day of consequence). It also shows the infinite creativity of the market. One notes also that this is the longest stretch of daily S&P moves without a decline of 0.5% going back at least 15 years.

2. How many times does the market mistress pull out of the hat "Greek Deal Falling Apart" one day and cause massive public selling and then the next– "Greece Parliament Approves Austerity Plan". It's happened about 10 times, and countless billions by the public has been lost. You'd think that the same old overreaction to bad news gambit would not work so many times in a row, but …. we're close to a 50, and I guess anything goes until we get there.

Gary Rogan writes:

I could never figure out why the market (as opposed to some of the participants) is interested in keeping the wheels of commerce turning. It the wheels are not turning, someone other than the public is losing more than their "fair share" to use O's favorite expression, but how does that translate into a market counter-reaction?

Vince Fulco writes:

I am waiting for the deliciously ironic day when our President points to ”the markets” as evidence his policies are working. I still haven't heard the Fed's announcement of their estimate of SP fair value as they like the market up, up, up and are releasing so many other targets. Let's call a spade a spade…



 My dear friends,

Just now Athens city in every corner have fire. Shops, banks, hotels, are burning. As about the stupid politicians they are in the parliament looking how they will offer the last pieces of our country to Merkel & Sarkozy. I am so sad as all the people. Also sad for Whitney Houston, because I liked her voice. Good afternoon to you, goodnight to me.



Scott Brooks shares:

I don't feel the least bit sorry for her. She did this to herself. I feel sorry for her innocent children and the innocent people in her life that will be so adversely effected by her reckless behavior and her inability to control her desires for the immediate satisfaction that "Dr. Feelgood" delivered. Her children have been given the worst possible example of how to be a responsible adult and as a result will be scarred lessened as human beings. Hopefully, they will escape the chains of bad parenting and the weakness of addiction that destroyed the life of their mother and turned their father into an abusive loser.

Hopefully they will find inner strength that all too few in their circumstances find and rise up from the ashes of lost childhood and become the best they can be.

Can they? I don't know. But let's hope they have inside of them burning desire to live….to survive…that Viktor Frankl wrote about in the first half of the book, Man's Search for Meaning.

I feel the same way about Greece. They did this to themselves. What I do feel sorry for are the innocent Greek people who are going to have their lives turned inside out by the insidious devil known as statism. Because of the reckless behavior of several generations of people indulged in the immediate satisfaction of political "Dr. Feelgood" (statism, living off the government teet), several generations of Ggreeks are going to have to suffer.

A whole generation of Greeks is about to riot….a generation that doesn't understand why there is no pellet delivered to them when they push the lever and, as a result, becomes angry and burns down their maze. They are a generation made weak and crippled by the "Dr. Feelgood" of statism.

It will take their children to begin to realize that the maze was simply a cage and the pellet was drug of statism. Some of them will escape and find freedom, but many (most?) of them will stay in the maze wailing at the machine to give them the pellet that they deserve…..but they'll know not why they deserve it……they'll only "feel" that it's owed them as they wail and chant and burn.

This is cancer of statism. The Dr. Feelgood of political philosophy.

In case the Dr. Feelgood analogy is lost on anyone, I give you Motley Crue and Dr. Feelgood.



 Here are some recommendations gleaned from hustling tickets to sporting events and concerts over the last 20+ years.

1. Know the general layout and sections of the stadium. Indoor stadiums often have 100, 200 and 300 levels. Baseball fields have their own nomenclature and concerts can have strange setups. Take a look at a seating chart before you go to get the lay of the land.

2. Know the approximate market value. A quick look at stubhub or the like will give you and idea of what to expect for each section.

3. Know where the scalpers are. Every stadium has it main points of entry and the scalpers try to go where the greatest foot traffic is without getting pinched. Street corners near off site parking lots are good. Areas with lots of t-shirt vendors also tend to have more scalpers.

4. Singles and pairs are the easiest to buy. 4 is another nice number but be prepared to split up larger groups.

5. For games with tailgates, that larger tailgates are a nice source of extra corporate tickets — these tend to be better seats and the sellers are often pricing for beer money instead of market value. If you fall into these, verify them but don't even bother to negotiate. Move straight to #11.

6. Inspect the tickets with a look of dismay "these are the best you have?" — but this is when its very important to verify game, section and seat numbers for EVERY ticket.

7. Question the price "you want how much?" … "ooohhhh" — often they will come down a bit right on the spot — this is also a good time to look around for other scalpers as if thinking about shopping elsewhere.

8. Offer the round number just below their price. If they quoted you per ticket, offer for the whole batch (ie, if quoted $55/ticket for two, offer $100for the pair). If they quoted the batch, offer per ticket.

9. If met with consternation (likely if you lowball), offer to work together to fatten that bankroll of his. "Help me out a little bit and I'll help you out a little bit."

10. Know that scalpers are hustlers. Go in with 3 eyes and 11 fingers. Look at the tickets again just after the exchange.

11. Treat it as a gentleman's game. Be polite, do your business, shake hands and enjoy for the game/event!



 Aubrey learned a good lesson today. I took him to buy ticket scalped to the Knicks/Lakers game at 5 pm yesterday. Game starting at 7 pm.  Our first con man insisted on the street that tickets were 400 a piece but we should be very careful because there were disreputable people selling tickets. When I told him I only had 400 bucks, he introduced us to one of his colleagues who pointed to the pizza joint north east and told us to wait there and he would see what he could do. He then came back and told us, "I have to tell you and repeat that these tickets are for the third upper level. Is that okay?". I appreciated his honesty and turned over the 400. When I looked at at he tickets when Aubrey said "let's go to our seats" I noticed that they were for a Bucks game that had transpired 2 weeks prior. I went to look for him on the corner but he and his accomplice had disappeared. I felt it was a great lesson for Aubrey that I wish I had learned from my dad many years before as it would have saved me tens of big. I believe the lesson has enormous market implications and I will test a few things in its honor.

What I liked most about the con was the attempt to show their honesty by pretending to be super scrupulous in telling me that they weren't giving me the best tickets. I guess this is like the broker who tells you that most customers lose. Or the market that tells you that you're selling below the previous high et al.

T.K Marks writes: 

 Many years ago I fell for a similar switching con, one perpetrated by a deft band of street entrepreneurs.

It happened at the end of the day as I made my way to the E train entrance in the World Trade Center. Amidst the rush hour bustle were two guys with two cartons from which they were purportedly selling phone answering machines for 10 bucks apiece, a bargain price at the time. Being familiar with the wily ways of the City I would ordinarily be somewhat circumspect about these type of retail circumstances, but my fears were allayed by the fact that the things were in official looking boxes, each sealed in shrink-wrapped plastic. But the thing that really sold me on the deal was the weight of the box — It clearly wasn't empty and in fact appeared to weigh almost exactly what a phone answering would.

So I bought the thing and got on the subway.

Upon reaching my apartment I got a knife, cut through the plastic wrapping, and opened the box.

Inside, gingerly swathed in a cushion of some Chinese newspaper, was a brick.

It wasn't even a new brick, it was an old brick.

 Rather than get furious with the situation I just sat there and smiled wanly, admittedly impressed with the creative lengths the "retailers' how gone to to pull this routine off. They had picked the right place, the right time of day, somehow came up with the real boxes, and then topped it all off with the plastic shrink-wrapping gimmick so that none of the customers could inspect the goods right on the spot. Balanchine couldn't have choreographed this ballet any better.

After proper reflection though, I learned a little lesson though. Given that the store price for these things at the time was about $60, I should have realized that at10 bucks, those street guys were selling the stuff too low.

One should always be wary about buying anything offered beneath the bid.

Russ Sears writes: 

Scalping tickets is legal in Indiana (at least it was when I lived there) and therefore apparently much safer and honest transactions more likely to occur. Sellers often sell in front of the police to insure honesty and safety for both sides. Family guys will routinely offer to sell a ticket for you if you cannot make it to a big game at Purdue or IU. Not sure if this has changed in Indianapolis due to the Final Four and Super Bowl.

Alston Mabry writes:

I would say that asking you the question whether upper-level seats are okay is not so much to demonstrate honesty as it is to control your attention. I think a critical part of any con is to control the mark's attention and direct it away from the incriminating part of the trick. As I understand it, this is how good magicians work, too.




The Chair has noted an unusual percentage of up days recently in the US stock market. In academic studies of simulated trading, this sort of price action occurs when a couple of participants are told the true value of a stock in advance. The uninformed participants trade randomly, and the informed participants' trading moves the price in the direction of true value. I don't think that is what is happening now–insiders have sold 2.5 times as many shares as they have bought in the past two months. The wave of money is coming from elsewhere.

In an attempt to quantify what is happening, I divided the last 1800 days of S&P 500 trading into 90 20-day periods. For each period I calculated the average daily percentage change and the standard deviation of the daily changes. I divided the average daily change by the standard deviation to get an estimate of how far the market was moving relative to volatility.

In the 20 trading days ending February 10, 2012, the average daily net change of the S&P 500 emini contract was 0.19% with a standard deviation of 0.48%. The ratio of average change to standard deviation was 39%, the 7th highest ratio in the 90 20-day periods (and the 8th highest absolute value ratio). After 12 of the previous 14 instances in which the ratio was greater than 25%, the S&P 500 emini was up during the next 20 days, but one was followed by a steep decline, and the t score was less than 1.

20 days    Avg. daily   Std            Next 20 days
Ending     change (20)  dev     Ratio     change
 3/19/2010    0.2%      0.5%    50.2%      2.9%
12/31/2010    0.1%      0.3%    49.9%      2.3%
 6/13/2005    0.2%      0.5%    42.4%      1.5%
 4/6/2009    1.1%      2.7%    40.0%      8.8%
 12/1/2005    0.2%      0.5%    39.9%     -1.4%
 11/3/2010    0.2%      0.5%    39.0%      2.1%
 2/10/2012    0.2%      0.5%    38.9%
 10/6/2010    0.3%      0.8%    34.8%      3.6%
10/17/2006    0.2%      0.4%    34.6%      1.9%
 4/12/2007    0.2%      0.5%    34.6%      3.0%
 1/12/2012    0.3%      1.0%    29.5%      3.8%
 5/10/2007    0.1%      0.5%    28.8%      0.6%
 8/21/2006    0.1%      0.5%    28.7%      1.3%
 7/30/2009    0.3%      1.3%    25.7%      4.8%
 7/22/2011    0.2%      1.0%    25.3%    -16.2%

Rocky Humbert writes:

It's impossible to know the cause and effect; but if you move from vol=25 to vol=15, stocks SHOULD go up, ceteris paribus. And if we are about to shift from vol=15 to vol=25, p/e's should shrink.

Steve Ellison replies:

Dividing my 90 20-day periods into a 2×2 matrix, price change up or down and volatility low or high (defined as the standard deviation being above or below the median of the last 30+ 20-day periods), I found the following distribution:

Price up   30    30

down       6     24

              low   high


Price went up in 83% of low volatility periods and only 56% of high volatility periods.

Rocky Humbert replies:


Thank you as always for your numbers on the table! If I understand this correctly, it confirms my superficial hypothesis … and it's also part and parcel of how the GARCH etc people manage money. Mr. Rogan writes: "How can it be rational for people to react to some short-term decrease in volatility by bidding up prices, when they have no idea if that change will hold the next day?"

To Mr. Rogan: The risk of a position is not what it did yesterday. It's what it will do tomorrow. You are making the quaint assumption that it is less "risky" to buy after a price dump. That might be true after some period of time, but it's not true in the days or weeks after a sharp price drop. For investors who use VaR, they are willing to buy/own more of an asset that exhibits less price volatility REGARDLESS OF THE INTRINSIC VALUE of the asset. This is one of those things that got us into the financial crisis. But it is rational if you believe that the market generally gets the nominal pricing correct. I am not going to defend VaR, but neither am I going to call it systematically irrational. I dare say that if you were putting 50% of your net worth into a buy&hole stock, you'd feel more comfortable picking a stock that "only" moves +/- 15% per year versus a stock that moves +/- 90% per year.

From Wiki:

In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.[1]For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one day period if there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a "VaR break."[2] Thus, VaR is a piece of jargon favored in the financial world for a percentile of the predictive probability distribution for the size of a future financial loss.VaR has five main uses in finance: risk management, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well.[3]Important related ideas are economic capital, backtesting, stress testing, expected shortfall, and tail conditional expectation.[4]



 With deleveraging on the frontfoot, for investment for the next 10 years, it may pay to disown countries with a service sector that represents over 65% of GDP.

No doubt there are a few caveats, like the ease with which to transact, and the ability to sort the chaff from the wheat, and hose down beaureacy and red tape quickly, though in the west this may be a non existent situation, since those in power look to justify their positions further and keep adding red tape, increasing the socialist feel rather than reducing it as conditions get difficult.

The numbers of real risk takers in life appear minimal, though there are a lot of yes men. We therefore should not be concerned about investing in countries that have a name for inappropriate ways of doing business in the past since, at least, they will have improving business conditions and stronger rates, so we will may have to only fight it on one front, unlike the west where we will now fight it on two.

Countries like Indonesia where agr 15.3% Industry 47%, and services a minnow 37.6% with interest rates at 5.75% may be worth the consideration.

Too many hustlers on the street.

List of Countries by GDP Sector Compositio.

Anonymous comments:

The mix of low-service sector countries is very interesting.

The 13 below the global average are:

Saudi Arabia  35.7%
Indonesia   37.6%
Thailand  42.9%
China  43%
Iran    47.3%
UAE   47.6%
Colombia  52.7%
India   55.2%
Norway  57.8%
South Korea  58.2%
Russia  59.1%
Argentina  59.8%
Venezuela  61.1%

The merits of international investing are said to be many, but I doubt many strategists would want to place significant sums in regions of the world particularly susceptible to capital controls and confiscation.

With great risk, comes great…

Maybe Big Al and I can come up with a salable "Political Risk" ETF.



 Eleanor Lambert: Still Here, by John Tiffany

We've all grown up with the notion of PR, advertising and branding, because it seems like—as with coffee or aspirin—they've always been there.

But they haven't and weren't. John Tiffany's gorgeous remembrance of the /grande dame/ who began the true promotion and respect for indigenous American fine art fashion on total equal footing with the French or Italian modes, in ELEANOR LAMBERT: STILL HERE, is a privileged stroll through the fashion firsts of the past century, when Eleanor, alone among entrepreneurial thinkers about our new offerings, took industry firmly in hand and brought the world to heel with her amazing innovations. Starting with the underappreciated art world, she captivated the public, and made our galleries and artists world-famous. And world-rich. She cut the mold for all who followed—Ogilvy, B&B, Saatchi—where would they even be without Eleanor to trumpet the unprecedented innovative smarts of proud honor rolls tom-tom'ed by this hurricane of inventive newsmaking?

Tiffany had the amazing good fortune to work closely under Lambert's tutelage and aegis when she was well on into her fabulous career. He chronicles Lambert's snappy press releases of every fashion titan that came down the runway. He itemizes every Best Dressed recipient in a terrific treasury of names that goes beyond just giving us who was notable for what remarkable feat of consistent superlative dressing, when. The list parallels the rise of stars of almost every emergent US industry, probably the march of the century itself. Lambert started the list, now bequeathed to /Vanity Fair/. He makes us see that the country came of age, in a sense, with glittery promo travels to far-flung, never-considered fashion venues like Russia, Australia, Japan, and on and on—new turfs, all, for the old US "garmento" beat. Lambert began all of that. Here in solid but amusing (snarky, yes, to be sure!) chapters—with superb-quality pictures to bring it all home—how Black models in the knock-'em-dead Versailles fashion extravaganza of 1973 (no non-Whites had ever been used in major runway shows before Eleanor added them to the mix) proved a stunning Valhalla (from which, tee hee, the French never quite recovered as their first-and-foremost crown fell in shreds around them with America's fashion coronation). How President Johnson appointed her to the well-deserved National Council on the Arts. How she aided the founding of the great Museum of Modern Art, still turning heads.The first Council of Fashion Designers of America, CFDA, and the award that gave meritorious distinction to the unique contributions of our designers. This "empress of fashion"—her moniker to her many acolytes–colorized every industry she graced with her bright writ and vervy imagination and presence.

For lovers of the infra-dig, Tiffany gets into the tall weeds with cosmetic giants Coty, intra-industry feuds, World's Fair exhibits, snits and brouhahas. Droll yet devastating.It works as social history, as a kind of American love story, as an examination of several different kinds of historical narrative.

The author gifts us with this self-assured luscious book, gossipy bits about Lambert's fabled at-homes, her favorite recipes and A-list guests, hilarious anecdotes only someone in the office (and her 5^th Avenue aerie) could have told the reader—how Eleanor impatiently told the Queen Mum of England to put a cork in it (or the equivalent)—and the near-misses of the Black-and-White Capote party of the century. Her peppery ripostes make this exceptional read and terrific dessert-table treat consistent fun to peruse and browse.

Eleanor died at the ripe age of 100, in 2003, never slowing down. Neither does this baedeker of the industries she helped polish to shinier, healthier luster.

There are probably 8 million celebritology reads in the Naked City, if not more. This one, though, is what a devotee of art, advertising, American fashion, fun and fame cannot beat. Great read.



 Specs, in keeping with our interest in understanding what makes things tick and questioning the accepted protocols, this may be worthy:
Harold McGee's On Food and Cooking: The science and Lore of the Kitchen is a kitchen classic. Hailed by Time magazine as "a minor masterpiece" when it first appeared in 1984, On Food and Cooking is the bible to which food lovers and professional chefs worldwide turn for an understanding of where our foods come from, what exactly they're made of, and how cooking transforms them into something new and delicious. On Food and Cooking remains unmatched in the accuracy, clarity, and thoroughness of its explanations, and the intriguing way in which it blends science with the historical evolution of foods and cooking techniques. Recommended as one of the inspirations of Heston Blumenthal of The Fat Duck in Bray, UK. Michelin stars and awards– too many too count.



 Everything that can be done to prop up Obama via the economy will be done. As Rocky's favorite book and many others indicate his reelection depends on the growth rate in the next two quarters more than on anything else that's tangible. If it's starting to look like he is about to be reelected, the tone of the market will change in a quarter or so, partially due to the fact that there will be massive selling towards the end of the year as recent capital gains will become long term and will have to be taken before the next year tax increases, and of course the general obvious long-term effects of Obama on the economy. Nevertheless for the next two months it should be pretty good sailing considering the somewhat choppy and overextended market.



The dictionary defines complacency as “self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies” . I don’t believe it would take much arm bending to convince current market participants that the market may be a tad complacent. In fact, bullish sentiment has been on the rise and is now at its highest level in more than a year. According to the weekly survey from the American Association of Individual Investors (AAII), more than half of all investors polled are currently bullish (51.64%) -Bespoke Investment Group.

Some may argue that complacency is simply the by-product of the intermediate term extant up-trend coinciding with reduced volatility. This has been helping to make intra-day trading more counter-trend within smaller ranges. However, ex-Fed Governor Warsh, sees something more structural in nature, remarking, " Central bank transparency is good, but transparency that delineates future policy breeds market complacency. It threatens to undermine the wisdom of the crowds and the essential interchange with financial markets."

Having laid all their cards on the table, has the Fed removed all doubt; hence, all perceived risk from the markets, essentially eliminating the need for price discovery and any incentives to de-leverage? Traders are certainly demonstrating they are not as quick, as in prior months, to flee the market at the first sign of trouble, e.g., all of the news that circulated about Greece last week, attended by the miniscule range and lowest volume day of the year.

As Mike Aston pointed out, the Fed is supposed to listen to the market for guidance in it's policy decisions; not dictate to the market what it should do, and where it should go. In doing so, The Fed may have manged to both undermine and subordinate the markets. The result is a somnambulent melt-up in asset prices, QE ad inflatam nauseum.

Rocky Humbert writes:

On Bloomberg, it's AAIIBULL Index. I just ran the numbers very quickly. In the past 10 years, there have been 91 weeks when the AAII bull reading have been over 50%.Three weeks later, the average return on the S&P (not corrected for dividends) was +.1% (.065 without rounding). The Stdev of the returns was .00767Over the same period, the average return on the S&P for ALL weeks was -.20% and the stdev was 0.073 SO THE BACK OF THE ENVELOPE CONCLUSION IS THAT THIS IS not A RELIABLE BEAR SIGNAL. Warning: I did this very quickly.



Have you heard of Kaggle?

The Benchmark Bond Trade Price Challenge is a competition to predict the
next price that a US corporate bond might trade at. Contestants are
given information on the bond including current coupon, time to maturity
and a reference price computed by
Benchmark Solutions.  Details of the previous 10 trades are also provided.  

This would be a perfect contest for the specs to enter.

Pitt T. Maner III writes: 

A bit more about Kaggle and its contests and contestants.


One way to find them, Goldbloom believes, is to make Kaggle into the geek equivalent of the Ultimate Fighting Championship.Every contest has a scoreboard. Math and computer science whizzes from places like IBM (IBM) and the Massachusetts Institute of Technology tend to do well, but there are some atypical participants, including glaciologists, archeologists, and curious undergrads. Momchil Georgiev, for instance, is a senior software engineer at the National Oceanic and Atmospheric Administration. By day he verifies weather forecast data. At night he turns into “SirGuessalot” and goes up against more than 500 people trying predict what day of the week people will visit a supermarket and how much they’ll spend. (The sponsor is dunnhumby, an adviser to grocery chains like Tesco (TSCO:LN).) “To be honest, it’s gotten a little bit addictive,” says Georgiev.'


'By far the most lucrative prize on Kaggle is a $3 million reward offered by Heritage Provider Network to the person who can most accurately forecast which patients will be admitted to a hospital within the next year by looking at their past insurance claims data. More than 1,000 people have downloaded the anonymized data that covers four years of hospital visits, and they have until April 2013 to post answers.'


Opera Solutions at present leads the Kaggle "hospital problem" contest and its CEO Arnab Gupta, a chess player, is a proponent of "man plus machine". An average player plus a chess machine he claims would beat most grandmasters. The key for him is to extract the "signal" from massive amounts of data.

Given the promise of Big Data, Gupta ascribes to the idea expressed by the chief scientist at the Broad Institute that medicine in 2010 vs 2020 will be like chemistry before and after the periodic table.



 The question of the gold standard has come up, and there are the predictable responses that involved (1) not identifying what the authors of the Constitution and their 19th century successors meant by a gold standard and (2) confusing the question of a gold standard with the issues involved in fractional reserve banking. A question for the List: can anyone explain why Murray Rothbard and the Misesians are so adamantly prohibitionist about free banking - i.e. letting the bankers decide how much specie will back their dealings in credit? It still puzzles me, given the fact that the ideas of free banking (where the government is neither the guarantor nor the owner of any bank, let alone a central one) were an integral part of the Constitutional gold standard.

Here is a reprint of my latest anonymous commentary:

The Constitutional gold standard did not set the price of the dollar; it established the weight and measure of gold and silver and copper that would be in U.S. coin. In the Anglo-French-Spanish-Dutch world of trade in 1787 gold and silver were the reference standards for Foreign Coin; the authors of our Constitution wanted the same standards to apply to U.S. coin. The difficulty came in trying to set ratios between competing precious metals. Copper was never a problem because small denominations were always fiduciary currency - i.e. their stated value as legal tender was less than their monetary content. Small denominations were in such chronic shortage that private script was often used as a substitute for "half-dimes", etc. The more commercially astute members of the Convention and subsequent Congresses understood that bi-metallism was unworkable because Gresham's law would always drive the good money - i.e. the coins worth more than the legal tender amounts - into hiding. Gouverneur Morris, the shrewdest of all of them, wanted only gold to be the reference standard. He thought fractional reserve banking was the best way for the country to expand the availability of credit; but he opposed outright Hamilton's notion that the government itself should get into the banking business. Morris, as a merchant, understood what Hamilton, as a lawyer, never quite grasped: if the government can make its own bank drafts legal tender, then the Constitution's fundamental restraint on spending - the requirement that Money be Coin - will be nullified. A true Constitutional gold standard has only existed during one period in U.S. history - from the date of Grant's Resumption Act (1875) to the enactment of the Federal Reserve system (1912). It is only during that 37 year period that all the conditions of the Constitutional gold standard were met: (1) no States would coin Money or emit Bills of Credit (Art. I Sec. 10) and (2) all obligations of the U.S. Treasury, whether Notes, Bills or Bonds, were payable in gold, on demand, (3) the U.S. would, on demand, mint gold into coin and (4) only coin and convertible Bills of Credit of the U.S. were legal tender.

Resumption would not be difficult. It simply requires a President who has Grant and Morris's understanding of the importance of a Constitutional gold standard. The Treasury would have to limit further production of Federal Reserve Notes to replacement of worn/defaced bills, and the Congress would have to enact into law a date on which U.S. dollar currency, as legal tender, would be freely exchangeable into gold. What should NOT be done is to set the price; the market exists to do that. (Note: when the U.S. resumed the gold standard in 1875 the "price" of the dollar was already being set by the market in gold; the Resumption Act simply restored - with a slight adjustment - what had been the original weight and measure of U.S. coin.) Resumption would also have to follow the path set out by 1875; the Federal Reserve's greenbacks would be treated as being direct obligation of the U.S. Treasury but there would be no more "printing". The U.S. Treasury would guarantee the convertibility of the currency but the Bills of Credit of the Federal Reserve and its member banks - i.e. their checks - would receive not Federal guarantee. The banks, including the central one, would be free to succeed or fail on their own.

This may sound like a plan for the apocalypse. That was certainly what President Grant's critics and political opponents said after the Panic of 1873; they even blamed that collapse in speculation on Grant's insistence that the country return to the gold standard. Yet, when the day of Resumption came, there were no bank runs and no mass conversion of currency into coin. On the contrary, the dollar became - for the first time - an equivalent to the British pound in world markets. Requiring the U.S. government to honor its Constitutional obligations under Art. I Sec. 9 would be a dramatic change; the markets would finally have a direct mechanism for discounting the never-never promises of the Congress and the President - and the Treasury would lose the captive customer for its Credit - i.e. the Federal Reserve. But, one has to ask the simple question: would the Credit of the U.S. be greater under a system that restored the Constitutional check and balance of the gold standard or under a continuation of the present fiat greenback fictions?



When the market gets going in one direction like it has lately I usually get a bit frustrated. Not so much because I am losing (I have given up trying to pick tops and bottoms when there is anything beyond my opinion at stake) but more just because the market has such a propensity to go to extremes and it is hard to handicap extremes. Usually I swear off shorting and make general untested comments like “buying over the long haul is the only way to go” right before a big reversal.

I decided to test this phenomenon by looking at the close/open change in the SPY from 1/2000 to end of Jan 2012. I found the average result was -0.01%. Max was +8.43%, min -8.99%, st dev 1.16%. Of the 3039 days, 51.5% were up. I found this to be interesting because the distribution was fairly normal. This could all be a function of the central limit theorem (CLT) but regardless of reason, sort of renders my conclusion that it pays to only go long wrong. As an aside, it is interesting to consider the CLT as a trading device, I do not believe it can be proven wrong over enough observations and time—solvency remains the concern.

Anyway, I next examined the calendar years and found that there are biases within years. They are subtle but they exist. More evidence of the CLT causing the near zero expectation over the long haul. I drilled further (weekly/daily) and found more biases.

Looking at it this way, I would say that it pays to be both long and short, the distribution is approximately normal over the long haul and therefore there is no great bias to long vs. short. The frequency goes to the longs but the magnitude advantage of the shorts renders the longs neutralized. On shorter horizons the biases become more evident. If you can pick the sub periods correctly, you will outperform.

But stepping back, I look at it another way. If I go long every day I would be down very small. If I go short every day I would be up very small. If I go long and short my outcomes vary. If I hit every day correctly, I will drastically outperform. If I hit every day incorrectly, I will drastically underperform. Given the distribution is normal, the expected return of batting 50/50 with a long/short approach is about break even.

So while the simple math indicates I am equally benefited in being long or short, the reality is I have to be right. Therefore I believe it may make more sense to just be directionally biased. Over time the central limit theorem will bail me out. If I use counting or fundamentals or value or common sense or some combo of these I can likely find more opportune times to be in/out of my directional play, upping my chances of success with a CLT kicker. Adding a trailing stop would likely help. I could, in theory be directionally biased picking every single day wrong, but the odds of this generally seem less likely than getting chopped up being long/short. I have not quantified this however.


Rocky Humbert writes: 

Without commenting directly, there are two big things you didn't mention:1. Convexity. This is a fancy way of saying that, stock prices cannot go below zero. But they can rise infinitely. This may seem like a nonsense statement, but I raise it because you raised the central limit theorem. If the stock market is truly and completely random (and has no long term drift), if you play a monte carlo simulation long enough, the S&P will print at a price of 0.0000000001. It will also print at a price of X–>infinity. Hence, there is a clear mathematical benefit to being long versus being short, ceteris paribus…. because the sum of infinity and zero is a BIG positive number … 2. Cost of carry. Again, assuming that there is no drift, when the risk free rate is substantially below the dividend yield, there is a (perhaps illusory) bias to holding long positions. When the risk free rate is substantially above the dividend yield, there is a (perhaps illusory) bias to holding net short positions. And, unless you are always 100% long or 100% short, there is also the cash yield on uninvested cash. Perhaps some other specs have studied the market behavior when stocks have positive/negative carry — I haven't. However, it's generally accepted that a substantial portion of the return in stocks is attributable to dividend yield, so this should be considered. To repeat, I'm not directly responding to your question. I'm pointing out two considerations that you didn't mention.

Tim Melvin writes:

While not the worlds greatest math or stats guy I think your test period may be giving you information that becomes less true with time. The period you use has two major market crashes in less than decade giving more bias to the short side results than you might have gotten if you studied 1988 to 2000. if you believe the next twelve years will look like the last 12 in terms of market behavior and volatility then you study holds up well if it doesn't then perhaps not so much…

George Coyle responds: 

Interesting point Tim and Rocky. When I graduated college (2000ish) it was a forgone conclusion you could expect the stock market to return 8% or so a year, year in and year out (well over a horizon at least). The last 10 years have proven otherwise. Ever changing cycles. Would be interesting to study the impact of generally accepted academic market conventions and what happens in reality once they become doctrine. Hard parameters to concisely define though.



 I have been looking at the "for sale" and "for lease" signs in the local area in Bali, where a lot of the deals are found "locally", ie not represented by agents, but marketed by side of the road signage.

I have found that the more permanent looking the sign, the less of a bargain there is, or some other type of deception is being presented on following up.

So there appears to be some expertise in getting this quite right.

A sign that's strong enough to withstand the storms and the wind and the rain of the wet season, but still have that look of, "I've just whipped this sign up quickly, for a quick sale, as I need money fast, as I just blew too much on a cock fight, come in you'll get a bargain."

No doubt other areas in business, which have got a bit too much spit and polish, like a "too well" dressed salesmen, get you thinking "caution ahead".

It's a fine line which pays for the representative to get it exactly right.

Phil McDonnell writes: 

I remember reading an academic paper many years ago that showed that annual shareholder reports without frills were the best stocks to own. If the company was not wasting money on hype and glossy materials then the stock probably was not over valued and they were running a lean machine internally as well. On the other hand companies with the glossy annual reports probably already had their run and were living high on the hog. I do not have a reference but others may recall the paper.



 Not to be hostile or anything, but I have never had dealings with Chinese where they haven't cheated me. I am told that there is a Northern Chinese persona and a Southern Chinese persona, and that I believe in the South, everyone is dishonest with Westerners, and the more you have done business with such a one without a wrong being committed the more likely it is that it will happen the next time, a very strange kind of hazard rate by the way. I may be wrong about this, it cost me much of real time wrongness, many years ago which compounded, my goodness—I'd be a wealthy man— but I'd like to know if there's a kernel of truth to it. You, Mr. Jia seem like a very worthy and honest man, and nothing in this is personal, but the memory still stings, especially in these markets.

Yishen Kuik writes:

China today is often compared with America in the 19th century. What I find remarkable is how true this can be.
The Chinese in China will cut corners, bamboozle, harass, deceive and cheat you on par with any 19th century "wily yankee". They are energetic, entrepreneurial and as hungry as any red blooded capitalist can be.

The melanine milk poisoning scandal is often held up as the worst example of Chinese business men run amuck.

And it is an echo of New York City in 1858 where "swill milk" killed thousands.

The horrors of working conditions in Chinese sweatshops is an echo of Upton Sinclair's expose of the Chicago meat packers — which created such an uproar that Roosevelt sent a secret fact checking mission that largely corroborated Sinclair's novel.

If you have ever been on a boat or a plane in China and it is about to land, they will all surge towards the exit, pushing each other out of the way to save a few seconds on exiting. They are a nation that has industrialized late and are pushing and shoving to catch up.

Scott Brooks writes:

I believe Yishen is correct. China as a nation is where the US was back in the 1850's (of course, with modern technology and infrastructure mixed in). They are still transitioning from a 3rd to 2nd to 1st world country. If you stop and think about it, they are really all three mixed into one. To expect a country to act and behave like a mature adult when they are really more like an adolescent, raised by dysfunctional parents is simply not foolhardy.

It will take the Chinese several generations to move into full 1st world status, and several generations to after that to mature into a moral system that is akin to the US.

We all go through our growing pains, the key is recognizing where the other person, or country or trading partner is on the "national maturity continuum" and the relate to them accordingly.

However, it is also a mistake to underestimate or minimize someone or a group of people because you see them as "less sophisticated" than you. That's why there is such a divide in America between the coastal elite snobs and us backward country bumpkins out here in fly over country.

Jay Pasch writes:

One of my best friends had an IT business selling computer mainframes and services into overseas markets. He did fine everywhere he went until he wound up in China; he had the equipment shipped, put boots on the ground, bolted the mainframes together, bus & tag to the disk systems and tape drives, IPL'd the system and turned the project over to the Chinese with a perfectly turned-up MVS system complete with blinking cursor. To his dismay the Chinese all of a sudden wanted application support, which was not in the contract, nor part of the company's forte. The Chinese government detained the engineers for six months, holing them up in their hotel rooms, and withheld contract payment until the company was forced into bankruptcy after the big bank notes came due. That was a long time ago, but even today we can't get through a pitcher of beer without the inevitable cussing about dealing with the Chinese…

Rocky Humbert writes: 

My dealings with the Chinese are largely limited to my contact with the venerable General Tso. I should note that The General has treated me well over the years. However, one serious exception comes to mind: It was in a small, nondescript restaurant inaptly named, the Jasmine Rose, located on a hardly-traveled road in northwestern Massachusetts where my friend, who was seriously allergic to garlic, and I ordered dinner. We advised the waiter of his food sensitivity and were assured that our dishes would be prepared without any garlic. After my friend started to show preliminary signs of anaphylactic shock, we discovered some garlic in the dish and called over the manager. What amazed us was not that the kitchen had made a mistake (which happens), but rather that the manager when faced with irrefutable evidence simply kept repeating (in broken English), "NO GARLIC! NO GARLIC! NO GARLIC!" as if his protestations were proof that we were wrong and that he was right. It was a bizarre, but memorable experience, and left an indelible impression on my mind, and on my friend's medical chart.

More relevant to Specs is some below-the-radar-screen litigation currently underway against certain Chinese companies and their US underwriters. A lawyer friend, working on these cases has explained to me that vast numbers of listed Chinese companies are complete and total frauds — and that in fact, a variety of (private) Chinese firms exist solely for the purpose of providing seemingly-kosher accounting paper trails for the fraudulent Chinese companies– so legitimate US accountants will see their (completely bogus) payables, receivables and assets, and provide a clean bill of health. Every time I am tempted to buy a Chinese stock (or index), I think of this story and I stay away. It's not that US companies are immune to malfeasance (Worldcom, Enron, Adelphia, MF Global?), nor it is true that US companies don't massage their earnings (GE, etc.). But, rather, if you throw a dart at a list of US companies, the odds are good that you won't hit a complete fraud. It's my impression that the same cannot be said about Chinese companies, hence I will not invest there directly, but prefer to invest in world-class US companies that can complete their own on-the-ground due diligence in China. Lastly, the Chair has opined periodically on nature vs. nurture. At the risk of putting words into his mouth, he has usually come down on the side of nature. Without taking a position, I would suggest that corporate and personal behavior MIGHT BE more influenced by genetics than by culture. If this is so, certain countries and people will be inhospitable to passive investors for a very very very long time, while other countries and people will demonstrate very different characteristics. Again, I am NOT taking this position. I'm just putting it out there…



 Fatal Shark attacks reached a worldwide, 20-year high in 2011 (12 deaths, all ex-USA). Florida was down in the number of attacks (11 non-fatal).

The suggested relationship with tourism might raise a statistical eyebrow. Jaws as an economic indicator.

"It's a good news/bad news situation," Burgess said. "From the U.S. perspective, things have never been better, our attack and fatality rates continue to decline. But if it's a reflection of the downturn in the economy, it might suggest that other areas have made a real push to get into the tourism market."



 None of us here in Chaos Manor has been able to understand objectivism". Eddy's Mom, who can explain, in detail, the differences between Aristotle and Plato and reminds Eddy and me regularly about Wittgenstein and his tiger, thinks Ms. Rand should have spent a little more time working out the difficulties inherent in asking the universe to match our phenomenological desires. Eddy has never gotten more than 20 pages into any of the woman's novels; her taste in fiction runs much more to F. Scott Fitzgerald. And yet, all of us think the woman understood, even better than Orwell, what the 20th century and the present continuation of that age have been about.

"When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corrupting being rewarded and honesty becoming self-sacrifice - you may know that your society is doomed."



 In the past few years in China, I have experienced multiple times insufficient oil fill-ups at oil changes. That happened in different provinces at various so-called 4S dealerships of a premium foreign car brand. The oil was filled up only to the min on the measure. Every time this happened, I reported it to the manufacturer. It seems to be better in recent couple of years.

It shows that there is a general distrust of dealerships in the country. In recent years, many "good" dealerships offer to display customers' old parts on a shelf so customers can inspect them for themselves. They also would ask before the service confirmation whether the customer would like to take away their old parts. Many also offer large windows or even electronic displays in the waiting lounges in order for customers to see what the technicians are doing with their cars.



 Back in 1980, Esquire Magazine ran an article on O'Donnell's Laws of Cartoon Motion. I found those laws on the internet, and also found several other hilarious axioms that are of grave importance to an avid cartoon junkie like myself. Despite the fact that none of this is my work, and has been published on dozens of websites, I feel that this is a good laugh, and it's always good for trading to start the day off on a lite note. For what it's worth, the old Warner Brothers cartoons did the best job in bending the physical laws.

I. Any body suspended in space will remain in space until made aware of its situation. Daffy Duck steps off a cliff, expecting further pastureland. He loiters in midair, soliloquizing flippantly, until he chances to look down. At this point, the familiar principle of 32 feet per second per second takes over.

II. Any body in motion will tend to remain in motion until solid matter intervenes suddenly. Whether shot from a cannon or in hot pursuit on foot, cartoon characters are so absolute in their momentum that only a telephone pole or an outsize boulder retards their forward motion absolutely. Sir Isaac Newton called this sudden termination of motion the stooge's surcease.

III. Any body passing through solid matter will leave a perforation conforming to its perimeter. Also called the silhouette of passage, this phenomenon is the specialty of victims of directed-pressure explosions and of reckless cowards who are so eager to escape that they exit directly through the wall of a house, leaving a cookie-cutout-perfect hole. The threat of skunks or matrimony often catalyzes this reaction.

IV. The time required for an object to fall twenty stories is greater than or equal to the time it takes for whoever knocked it off the ledge to spiral down twenty flights to attempt to capture it unbroken. Such an object is inevitably priceless, the attempt to capture it inevitably unsuccessful.

V. All principles of gravity are negated by fear. Psychic forces are sufficient in most bodies for a shock to propel them directly away from the earth's surface. A spooky noise or an adversary's signature sound will induce motion upward, usually to the cradle of a chandelier, a treetop, or the crest of a flagpole. The feet of a character who is running or the wheels of a speeding auto need never touch the ground, especially when in flight.

VI. As speed increases, objects can be in several places at once. This is particularly true of tooth-and-claw fights, in which a character's head may be glimpsed emerging from the cloud of altercation at several places simultaneously. This effect is common as well among bodies that are spinning spinning or being throttled. A "wacky" character has the option of self-replication only at manic high speeds and may ricochet off walls to achieve the velocity required.

VII. Certain bodies can pass through solid walls painted to resemble tunnel entrances; others cannot. This trompe l'oeil inconsistency has baffled generations, but at least it is known that whoever paints an entrance on a wall's surface to trick an opponent will be unable to pursue him into this theoretical space. The painter is flattened against the wall when he attempts to follow into the painting. This is ultimately a problem of art, not of science.

VIII. Any violent rearrangement of feline matter is impermanent. Cartoon cats possess even more deaths than the traditional nine lives might comfortably afford. They can be decimated, spliced, splayed, accordion-pleated, spindled, or disassembled, but they cannot be destroyed. After a few moments of blinking self pity, they re-inflate, elongate, snap back, or solidify.

IX. For every vengeance there is an equal and opposite re-vengeance. This is the one law of animated cartoon motion that also applies to the physical world at large. For that reason, we need the relief of watching it happen to a duck instead.

X. Everything falls faster than an anvil. Examples too numerous to mention from the Roadrunner cartoons.

• If a tree falls on a character, it results in a partially elastic collision, repeatedly bouncing off their head until they are driven into the ground.

• It is possible for fire to spread by becoming temporarily animate.

• Any alligator, when punched, will fly up in the air returning to the ground as a nice set of matched luggage or perhaps as a nifty pair of boots.

• Objects launched into the air need not follow parabolic trajectories.

• Intelligence is inversely proportional to body size.

• Firearms are relatively ineffectual weapons (unless, of course, your intent is to blacken someones face, make it difficult for them to drink, and hold, water, or remove bills or feathers).

• Drawings are real as long as you're not aware they're drawings.

• A 'toon's GI-tract will always expand linearly in proportion to the object being swallowed regardless of the object's size.

• A vehicle's speed is limited only by the size of the numbers written on the speedometer.

• Pretending one is stepping on brakes is as good as having them.
• Holes are moveable



I was thinking about surging waves this morning. Fast sideways momentum into an elevated pitch, resulting in a crumbling peak and a crash. No doubt all speeds are relative to the outcome, though it must be tested.



A nice 3 point range [in s&p futures] from high to low on the half hourly prices yesterday [February-06-2012]. How could money be lost in required quantities [by the public] with such small volume and small swings. Perhaps the answer is that after big two year maximus, where your "banker" is providing liquidity in unprecedented amounts, you don't need to nickle and dime the public to cover your overhead the next day or two.



 Does the pressure of being in the lead make you take greater risks to maintain it, or do you feel like you have to prove yourself, and show everyone you're a well deserving winner, allowing hubris to rear its ugly face.

In Golf, Kyle Stanley bounced back from a bitter defeat to win the Phoenix Open on Sunday, erasing an eight-shot deficit to claim victory a week after his last-round collapse at Torrey Pines.

Alan Millhone replies: 

Hi Craig.

I have had the honor of being referee at several world title checker matches. The top Grand Masters when in the lead will be content and play for draws and thus force their opponent to take chances to get a win.

Leo Jia writes:

Being in a leading position is generally tough. First, the leader in a group doesn't automatically get enough motivation to advance. Secondly, he is in an unfair situation where the next win is generally considered a nonevent while a slip to the second position is considered a disaster.

In Chinese idioms, there are some that promote leading. Such as:

First argument occupies the mind; Act first to get the advantage; Voice up the strengths first to forestall the opponent; Be like a crane standing among chickens;

Then, there are many that are against leading:

Sticked-up head gets shot; A man dreads fame as a pig dreads being fat; Protruding rafters rot first; The outstanding tree gets destroyed by wind; The excellent craftsman gets most denies from all craftsmen;

Generally there are more negativity toward leading. Looking back to historic events, a crown prince (a leader of all princes) is perhaps the most dangerous position one can get. From similar reasoning, one key teaching of Confucius is the doctrine of the mean , which basically tells everyone not to stick his head out.

The relative advantage of the leader from the rest (the second and the third for instance) is also very interesting. Consider A, B and C to be the leading, the second, and the third parties respectively. The difference between B and C relative to the difference between A and C is a determining factor in relationships. If B is closer to C (than to A), then generally, B and C will form a union to fight A. Conversely, if B is closer to A, then A and C will very likely form a union to fight B. In either situation, C always has an illusion of being the most advantageous to form a union with A, which as a matter of fact is the most detrimental to itself as well as to B.

A famous ancient novel based on real history called Romance of the Three Kingdoms depicts the above relationships very well. The story happened between 169 AD and 280 AD, when the three kingdoms within the current China's territory: Wei (A), Wu (B), and Shu (C) dealt and fought amazingly amongst themselves, with incessant conspiracies and strategies, all seeking to conquer the entire territory.

Here is the Wiki Page about the novel.  An online English version of the entire (long) novel apparently can be read here.



 This is an interesting article about how the Surfwear pioneer brand Quicksilver is working with Deakin University to improve their product technology. With phrases mentioned like:

"lines of nature"

"highly tuned piece of garment, that provides information back to the brain therefore giving you more control"

"tight fitting garment that provides you with feedback"

"for every action there is a equal and opposite reaction"

"slingshot back to normality"

it sounds like Quicksilver is learning a thing or two from nature for their own development.

How about a sweeping bottom hand turn…you may not want the mean reversion.

Either way, boardies are not like you knew them anymore…



 Xiaonian Xu, a professor of economics and finance at the China Europe International Business School in Shanghai, pointed to "the 1870s for a parallel to China's economy today: German unification under Otto von Bismarck. The "Iron Chancellor" advocated a strong bureaucracy and a private sector tightly linked to the government. That economic nationalism, Xu argued, laid the groundwork for World War I.

Read the article here if you wish.

Details, details. Bismarck did neither of the things attributed to him by Professor Xu. When he was removed from office by the Kaiser (Germany, like Britain, was a constitutional monarchy where the sovereign had the right to frown on the government provided by the legislature and ask that it provide a new one which the monarch had been busily politicking for) in 1890, the Berlin stock market had a larger equity market capitalization and more active trading than either London or New York. The "private sector" was free; and, like all private sectors, it didn't like free enterprise as much as it preferred government contracts. Bismarck was happy to practice balance of power diplomacy and saw Russia (not its rival Austria-Hungary) as Germany's natural ally. He was content to have the German Army be the preeminent ground force in Western Europe so that the French and the Austrians, with which Germany had just fought two expensive, if successful wars, would not be tempted to seek revenge; but he had no interest in seeing Germany challenge the British and French navies. That would be deliberately provocative. That left the Chancellor vulnerable to the demands of Blohm & Voss and everyone else involved in steel fabrication. Now that the railroads were built out, where would the orders come from if not for warships? Bismarck was not, in fact, an economic nationalist in the sense that Professor Xu means. He saw the self-interest of Germany as lying in its ability to export; his tariff policy protected the Prussian nobility from ruinous foreign competition in grain, but Germany was a far more open market for imports than Spain, Austria-Hungary, France or Britain in the 1880s when those countries were already busy establishing or expanding imperial preference.

But for the Kaiser's fatal decision to support Naval expansion and idiotic choice of an enemy (Austria-Hungary) over a friend (Russia) as an ally, WW I would never have happened.

It is hard to see the parallels with China, which is the dominant economic power in East Asia surrounded by wary much smaller trading partners who will be happy to look to the world's dominant naval/air power (the U.S.) for protection and support. If one wants to find parallels with European history, France in the late 17th and 18th centuries would be a much better comparison. The French had the largest economy and population and were the threat to their continental neighbors. The French did embark on a sustained campaign to challenge the British throughout the world in what can best be described as "armed trade", but it did not result in anything approaching a "world war" in terms of men and money spent. After a hundred years of fighting the French across all the oceans of the world, what provoked the British to mount the largest amphibious invasion in their history? Answer: the cheek of some smugglers in Boston.



 Do markets learn from each other? For example, is the S&P market this year, following a similar path to bonds last year, with every trepidatious move down being requited with a rise? Are such "learnings" graduated to the point of regularities. And is it a domino effect or a path of least resistance or consilience or convergent evolution or what have you? What do you think? Can it be quantified? Should it be quantified?

Gary Phillips writes: 

Price discovery has become as anachronistic a term as capital formation. The Fed is supposed to be listening to the market to give it guidance in it's policy decisions, not dictating to the market, what the market should do. If investors feel there are no surprises left, as the Fed is concerned, they will once again lever up, and inflate asset prices…QE1 - QE whatever. Rinse and repeat.

Bill Rafter adds: 

Here’s a related (perhaps derivative) question: Do stocks learn from each other?

Let’s say you take a list of ~6,000 stocks and look at them over a 10+ year period encompassing both up and down markets. And you come up with a trading plan that buys a stock if it exhibits pattern ‘A’ and sell it if it exhibits pattern ‘B’. It is not unreasonable to then have a universe of perhaps 150,000 transactions.

On the first pattern you pick you will find positive average results for certain stocks, while other stocks on average will be negative. Some of these winning stocks will knock the cover off the ball by having say 35 of 50 trades positive, and vice-versa.

Now let’s say you pick different patterns, and again you find a collection of stocks that outperform. You think this is going to be somewhat of a random process where some of the winning stocks from pattern A/B become losers when you try patterns C/D or Y/Z. And that does occur. But you also find that some stocks are consistent winners throughout the various patterns. And of course, some are repeat losers (perhaps hoo-do stocks).

That leads to further inquiry to find what constitutes winning qualities or hoo-do qualities. Note that this is not a study of profitable patterns since the behavior is exhibited across different patterns, some mutually exclusive like trend-following and mean-reversion. Nor is it a study of good management styles, as the same behavior is exhibited with ETFs, which typically have no management.

You then try to identify specific characteristics (or group membership) of the winners. You might think sectors, because the behavior also occurs in ETFs, but not all of the constituents of a winning ETF are consistent winners, and ETFs behave differently than their constituents. You trot through the various possibilities: volume, volatility, beta, name recognition, size, sales, earnings, debt, short interest, institutional holdings, etc.

Continuously you come back to the possibility that some stocks are simply winners and others hoo-dos, until you can prove otherwise. It turns out (tongue firmly in cheek) that this is a good thing to know.

Alex Castaldo writes: 

Probably I misunderstand or oversimplify the issue, but I think what is happening is like this.

Among stocks in your database there are some that have considerable price runups and declines, and others that have fewer such features. It is not exactly a question of volatility as conventionally defined, but it is somewhat related to it.

When you examine trading rules, selecting ones that are more successful with some stocks, you are necessarily picking up more stocks in the first category and fewer in the second.

There is a kind of oversampling at work that concentrates the successful population with stocks from the first category.

To take an absurd extreme to make things clear, if there is a stock that spent the entire data period at 10.00 (the ultimate quiet stock), then no method will make money from this stock, not trend-following, not mean-reversion, not seasonality, etc. This stock has zero chance of being among the 'winner' stocks, not because of its industry, or who is the CEO but simply because of the time-pattern of prices.




 My friend was saying the other day that it is very rare that any lawyer's or accountant's or architect's office would treat one the way an average doctor's office does. Their office procedures are the worst.

I told him, yes, but attorney and accountant's fees are not controlled by insurance company/ government monopoly. It well demonstrates the effect of central-control of business vs free market.

Locally a number of my medical colleagues have tried to become "concierge" practices, but are finding it difficult as patients can't accurately assess superiority of care and place a value on it.



 Whenever I try to finesse a trade, add layers, integrate, etc, I wind up losing, slipping, getting caught up in the extras and missing the big picture, the point of the trade in the first place. I bring this up in relation to the final TD by the Giants last night in which the running back squatted on the one yard line actually thinking about what to do.

He was in a momentary trance, do I score, should I sit here and get downed on the one and we can burn the clock? SCORE! How can they presume to know the success of future plays? They were behind, they do not have the luxury of finesse. They might have been down at the one, fumble or miss the field goal–and the announcers were oh so smug about the entire clock comeback strategy.

And what of the patriots supposedly letting the giants score? Banking it on the comeback drive, that entire endgame seemed flawed. Was the psychology such that the Pats figured they would be behind at the end, did they play into their own vision of the game's outcome?



[Ed.: some field research on this topic recently. Why did this tree grow the way it did? And what are the implications?]

A tree supported by a rock











Alice Allen writes in:

Years ago in the forest, a fledgling tree was noticed by hiking naturalists in the woods for its fortuitous position next to a large boulder that kept it from toppling when strong winds blew from the front. From all appearances, this was a lucky tree to have a neighbor with such gravitas willing to lend a shoulder to lean on early in its development. The tree, reaching toward the sky, would surely keep growing upright and strong!

Was it overconfidence that came with such an auspicious beginning that prevented the tree from sending its roots down under the boulder for stability and balance during stormy times? Or was it always fundamentally beyond the capabilities of any tree of that species to send roots down so far? Or maybe it was a combination of soil, weather, and location.

We do know that on one random cloudless, windless day, the tree collapsed across its supportive rock. To forest visitors, it looked sad and doomed. It would fail to become a perfect example of its prototype and would never pose for the shiny photo in the botany textbook.

But never rule out random redemption or random catastrophe, this time a positive miracle. Relieved of the pressure of supporting itself and aided in a more passive way by the hard, silent pillar below, the tree found the sun again and stretched heavenward back on its natural trajectory. Best of all, better than the textbook specimen, the tree became unique and memorable in its life.

So many trading strategies come to mind that can be discarded. Not ‘buy and hold…hold…hold.’ Not ‘never give up.’ Not ‘don’t accept outside help.’ Better I think to be reminded that when you accept help and assistance in the short term, you may also be accepting serious limitations you cannot forsee. Also miracles do happen, and not just to trees.



The attached plots the ratio of SP500 financial to utility sector (XLF/XLU) 1999-present.

Could the financial sector's one decade black eye be nearing an end with the recent reflection off a double bottom?



 While on a trip to Havana in the summer of 2002, I wandered onto the patio of the Hotel Nacional in search of the perfect Mojito, albeit ever vigilant for the perfect senorita, for which to share my refresca. Sitting at a table overlooking the Malecon, was then Governor Jesse Ventura and an armed bodyguard/ Minnesota State Trooper. I was unaware that he was visiting the island for trade talks on behalf of Midwestern farmers, so surprised by his presence, I loudly exclaimed, "Jesse Ventura !!! " "Who are you?", he returned. All I could think of was, "Nobody. Mind if I join you?" He of course, asked me why I was in Cuba, and what I did for a living. I informed I was floor trader, (and with tongue planted firmly in cheek) likened it to being a Navy Seal. This "subtle" segue led to a very long and interesting conversation that was essentially the highlight of my visit.

Later that evening, my cohorts and I, journeyed to La Lisa on the outskirts of Havana to the Makumba nightclub. The club was frequented by the Cuban "elite", and very few if any tourists ever made it there. Once again, sitting at a table was someone I did not expect to meet so serendipitously - Diego Maradona. He was in Cuba for treatment of his cocaine addiction, but nevertheless was in Makumba, famously drunk, partying with his entourage. It took all of about 5 minutes before I was shaking "the hand of God", smoking Robainas, and pounding Cuba Libres, with Diego and some of Cuba's finest mujeres.

The evening I spent celebrating with Maradona was the polar opposite of the afternoon I spent conversing with Governor Ventura. Here were 2 men ( at similar stages in their lives) in 2 very different situations, yet with more in common, than one could see, prima facie. Both of them were particularly outspoken men with a palpable passion for life and drive for success; one had perpetuated these qualities and had manged to maintain his discipline, while the other had lost control of it because of addiction, and slipped through the cracks.

Attitude, emotional control, discipline, and how to handle success and failure, were just as important as knowing how to mange risk, if you were going to be profitable trading on the floor. Ex- athletes, on almost every level, seemed to possess these qualities coming into the (trading) game; others had to acquire these skills. If these traits were non-existent in your personal life, the odds were this shortcoming, would transfer over to your professional life on the floor. Nevertheless, even when an emotionally prepared trader walked into the pit, he had to magnify these extant traits, and step-up his focus and drive.

Attitude, emotional control, discipline, and how to handle success and failure, were just as important as knowing how to mange risk, if you were going to be profitable trading on the floor. Ex- athletes, on almost every level, seemed to possess these qualities coming into the (trading) game; others had to acquire these skills. If these traits were non-existent in your personal life, the odds were it would transfer over to your professional life on the floor. Nevertheless, when a trader walked into the pit, he had to magnify these traits and step-up his focus and drive.

I had begun my career aspiring to become an astute, independent thinking trader, yet had somehow devolved into a momentum chasing, blue collar, bond gladiator. I had morphed into a predatory algorithm programmed to take advantage of my knowledge of, and access to, the customer order flow, and trade in front and all around it. This was in fact, the real and accurate description of a floor trader. Yet somehow, I felt lucky that I had been tenacious enough to secure and hold onto, a valuable piece of bond pit real estate for the viable duration of the contract.

Not that I was complaining mind you, because I was making an inordinate amount of “easy” money. But like any inhabitant of any welfare state, I had become content, and was not prepared for the inevitable move to screen based trading. I underestimated the disconnect between the floor and the screen and it wasn’t until I accepted the reality that I didn’t know anything about electronic trading, was I able to begin to learn how to trade again. Everything I knew as pit trader had to be eliminated from my mind as I began anew, tabula rasa.

The majority of successful floor traders could not transfer their human, pit based “skill set” onto a human-less, computer screen. Being honest with myself and letting go of what had previously worked for me, and had been responsible for my success in the past, was the most difficult part - but it was a start. It was the greatest psychological hurdle I had to overcome on the road back to becoming a successful trader. However, it was a necessary prerequisite if I wanted to provide myself with the best chance for success. In the final analysis, electronic trading has made me a smarter and better trader. No longer playing with the "house edge", it has forced me to relearn my craft, adapt, and re-invent myself. And, it is in the ways, in which we adapt to change, that ultimately defines our success.



 I ordered a few fruit trees today from an orchardist in California and had an interesting conversation with him. I wanted some special plums and noted that the guy also had quite a variety of pluot trees for sale. I have never eaten a plumcot, pluot or aprium and asked his opinion. For those who don't know what I am speaking of, a plumcot is a 50-50 cross between a plum and an apricot. If you then take that and cross it with a plum you get a pluot, which is 75% plum to 25% apricot. Should you have crossed the plumcot with an apricot, you get an aprium, the 75-25 split long the apricot. Think of it as a fruit tree version of pairs trading.

According to that professional orchardist, the pluots of many (most?) growers are really plums masquerading as pluots. California has imposed a tax on the sale of plum trees, but not on pluots. So, surprise, surprise, they're all pluots. The tax police are fighting back with DNA testing for pluots suspected of being plums, and the growers are legally challenging the authority of the state to do the DNA tests.

Oh, when will they ever learn?



 A new study reinforces what most of us know from birth: Men get more caring and considerate when faced with a "beautiful woman." They apparently belch and pass gas less often, don't scratch and bellyache about life, bathe and shave, give generously and often.

Reasons are not hard to adduce: Even primordial instinct responds to robust mate material, and in the short-term, even married males are wont to hypothesize the ROI –return on investment– if the recipient female becomes intrigued [bribed] enough to return the favor either horizontally or over time.

The same study also states that women faced with handsome or very handsome men 'manifest no changes' whatsoever.

But women are always on show, to a huge extent, whether they are with handsome men or not, whether alone or not. Given their druthers, most females won't hang around unshaven in their skivvies, beer in hand, burping and lighting matches to their gas exhausts. Women are always making an impression, since we are always at risk of being dismissed as dizzy, or broads or ho's, or simpletons who can't manage their finances or a misbehaving vehicle. Rap "singers'" greatest hits never think of or address women in any way other than as pieces of flesh to be gotten, subdued, used and usually abandoned. That's "cool."

So women all, as a rule, behave themselves better than men. Acting well, men can comport themselves decently enough, according to the data, except when confronted with hard-wired stimuli men are not educated to manage–beauty or erotic attractiveness. this factoid often renders men bitter at the supposed "advantages" women have over men. But this power impact occurs because it is engendered by the men themselves. Inoculated to beauty, men would behave as badly, or as well, as their parents' training and education trained them to do and be.

 Not discussed is the erosion of this giddy/giddyup behavior over time. Men affianced to such women, arm-candy deluxe, shall we say, will perhaps continue chivalrous and expected knightly efforts–but once they think they have conquered, their assiduity dims, and the goofy behavior of being around desirable objects of the oppo sex returns to its upright and usual position, a bit shaken, but fundamentally unstirred. that is why oxytocin unhinges women, and sex becomes a flaming cause, attaching her to the male who gave her the good feelings and unleashed the erotic fealty; whereas men can home in, score, and recede without a care. Women have no genetic benefit conferred from responding unduly to male attractiveness, since the species DNA determines she will be the chased, he the chaser. Parsimony in action.

The field is not an even one. The numerous fails must be addressed if such a study is to be credible.

And how much charming behavior does the confrontation evoke? Can it be quantified as one bourbon's worth? Or does it go into the triple digits? Do such modified behavioral stances alter one's professional work, or do they fall prey to silliness-reax, the meat and grist of such programs as /Two and a Half Men/?

This female would dispute the findings about women not responding much to male pulchritude: Mitt Romney's rise is often ascribed to how handsome he is, and Bubba's success was often ascribed to how much charm, charisma and "presidue" he demonstrated. (This author voted for him as a consequence of his seeming to be a man who fully enjoyed the company of women. Even from afar, he telegraphed that he would be fun to flirt with, or "flirt" with.) Israel's Bibi Netanyahu exerted a mesmerizing effect on women, enough so that he has been elected more than once.

A measure of extra energy, one thinks, is noted in a female's speech when she speaks with a man she gauges attractive, or very attractive. She doesn't lose her lunch, of course, but there is the extra back-straightening to make the female chest more prominent. There is the catchier repartee, the quicker /bon mot/ and comic divagation, demonstrating high intellect, in case the male is available, and the female is shopping. Women walk with more attention to their body in the presence of such men. The stiletto heel trend of the present is not unalloyed with capturing male attention, and it certainly does that, as the "leg chair" (females bracketing men in the middle, so women's high-heeled legs are what a viewer sees first on pull-away shots) of such programs as/The Five/ and /Red Eye/ demonstrate, and men's commentary, oral and written, reinforces.

Nothing like spending research dollars on the obvious, aye? Especially when it can mean easy interviewing of attractive bevies as baseline backup for obvious male response.

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