This spectacular photo of a super cell that spawned a tornado about a minute later that touched down in Broken Arrow, OK was taken last night with an iphone from beneath a car with no special lighting or effects. Photo by Brian Ring (He gave explicit permission to use this photo on Daily Spec as long as he is properly credited)

The well formed wall cloud is quite spectacular. The photo is indicative of the defining characteristic of super cell thunderstorms - a Mesocyclone or rotating vortex of upwardly flowing air which can be detected using algorithms in Doppler Weather Radar which search for a Hook Echo.

Unlike the devastating F5 tornado that struck Moore, OK last week, the tornado produced by this cell less than a minute after the picture was taken was only an F1 and caused very little damage.



 For the most part on this site, we discuss the big picture and large important markets. We discuss their stats, their trends and their probabilities.

By focusing only on these large markets (usually indexes and their derivatives) we can lose sight of the smaller markets and often we forget those markets even exist.

By focusing only the large, we not only miss out on "alternative" opportunities, we miss out excitement and ready made profits.

Therefore, I would like to point out to the list some alternative markets in baseball.

As I'm sure everyone on this knows, there are really only 3 teams in baseball. The Yankees, Red Sox and Orioles which trade in the AL East market. The Trinity of Baseball, if you will.

Now, most people who follow these team know that there are also at least two other teams in called the Devil Rays and Blue Jays. This is known because every once in a while, either the Yankees, Red Sox or Orioles has to play one of these teams. Of course, there are "lesser markets out there that occasionally pop up and as a result the only three teams that really exist have to go trade (errrr….I mean… in those markets as well.

Many of the anointed traders (fans) might be confused by these other markets, and not only not know anything about them, but may not even be sure they really exist. Because, they are in what Dr. Zaius refers to as "The Forbidden Zone", or as some of our anointed betters refer to it: Fly over country.

These alternative markets are commonly referred to as the AL West and the AL Central.

Now, I need you all to buckle up because I'm gonna tell you all something that will rock you at the core of your belief system. I'm gonna challenge your belief in the existence of the Trinity. For even beyond the rumors you hear of the AL Central and the AL West and the almost credible reports of citings you hear about teams existing in "The Forbidden Zone", I am going to tell you that even more than you can imagine is in the Forbidden Zone…..

You see, a little know alternative market actually does exist. It is called "The National League"….I know, I know, stay with me here. I hear your gasp and your cries of "HERESY, HERESY". But if you will stay with me, I will lead you closer to the truth.

You see, there is market out there right now that you can trade in that will bring you much pleasure. It is market based on teams that are built on fundamentals, coaching and training in the minors.

You see, not all teams are bought on the free agent market. Some teams have only a fraction of the budgets that the Trinity of Baseball has.

And these teams are doing quite well right now.

For instance, if you were to google "MLB NL Central", you would find that there are three teams that dominating. And the third best of those teams, as of yesterday, would be in FIRST PLACE in every other division in MLB.

One of those teams, a mid-market team, has a long storied history of success. A history of growing their talent internally on the farm, and making wise free agent acquisitions to lead the nucleus of home grown talent. They are so good at this, that they have won the second most championships in the history of the game, second only to the head of the Trinity, the Yankees.

And if one were to compare the money spent in reference to winning championships, the Yankees aren't even a close second to this team.

What team am I talking about?

Well, the St. Louis Cardinals, of course.

Now, I know that many of your may not know about this market, let alone have ever even bothered trading in it (or following it).

But this is a market that is worth following as there are many life and trading lessons associated with how this market works, how the team works and how they consistently build championships teams and teams that contend year after year after year.

Throw away your belief system realize that great teams are not spontaneously bought and magically appear over a few days. The late George Steinbrenner may put together championship teams in 7 Days, but there are a lot of teams out there, like the St. Louis Cardinals, that grow their teams over time….teams that evolve into Champions.

And that is your snarky lesson for the day.

One of those teams, a mid-market team, has a long storied history of success. A history of growing their talent internally on the farm, and making wise free agent acquisitions to lead the nucleus of home grown talent. They are so good at this, that they have won the second most championships in the history of the game, second only to the head of the Trinity, the Yankees.

And if one were to compare the money spent in reference to winning championships, the Yankess aren't even a close second to this team.

What team am I talking about?

Well, the St. Louis Cardinals, of course.

Now, I know that many of your may not know about this market, let alone have ever even bothered trading in it (or following it).

But this is a market that is worth following as there are many life and trading lessons associated with how this market works, how the team works and how they consistently build championships teams and teams that contend year after year after year.

Throw away your belief system realize that great teams are not spontaneosly bought and magically appear over a few days. The late George Steinbrenner may put together championship teams in 7 Days, but there are a lot of teams out there, like the St. Louis Cardinals, that grow their teams over time….teams that evolve into Champions.

And that is your snarky lesson for the day.

Jeff Watson adds:

Gibson, 1968, greatest season of pitching in baseball? What about 1968 when Denny McClain won 30 games? Who's done that since?



The Census released its 2011 non employer business statistics today.

The average annual intake before expenses ("receipts") for the people unable to hold down a job was $44K.

The bell in the curve has cracked.



Glass is pleased to announce that our co-founder Laurel Kenner has opened her new business purveying useful, beautiful, and safe glass products, many of her own design.

I have used many of these products and found them functional, attractive, and benevolent.



ES up overnight, as if many anticipating another up Tuesday…but then ES down Open-Close (ditto oil)…and for the real twist of the knife, T10yrs down almost a point, too…and not to mention gold trying to bullwhip the weak hands…ouch! 



 Anyone who appreciates the scientific study of finance will recognize the name of MFM Osborne as a pioneer, visionary, and creator of our field. He was the first to discover Brownian Motion in Stock Prices, the first to study technical analysis scientifically, the first to note the lognormal nature of prices, the first econophysicist, the creator of automated market making algorithms 50 years before they became common place, the creator of market microstructure, and the discoverer of clustering of prices among other things.

They might also know that he was an eminent physicist whose work on sound and electricity led to his discoveries in finance. Yet despite his renown, he is somewhat of an unsung hero having done his work mainly in the 1960s when our field was in its infancy and many of his contributions have languished in such journals as Econometrics, Operations Research and Journal of the American Statistical Association from that period.

I had the pleasure of knowing him fairly well during the 1960s when he did much of his work in finance. And indeed we collaborated on some papers, we had an extensive correspondence, and he served as one of the original directors of my firm Niederhoffer, Cross and Zeckhauser, Inc., the original name of the current firm of Manchester, Inc. I also had the pleasure of meeting and befriending one of his astronomical colleagues, Harold Weaver at the Univ of Cal, Berkeley, who audited my classes there, and we exchanged many a story about the astounding trajectory of Osborne's scientific career.

During the time I knew Osborne, I was aware that he was the most creative and competent eye in the world of finance, far surpassing in that respect all my teachers at the University of Chicago, of that period, many of whom are widely known, revered, and honored. And I always wondered, where did it all come from, how did a man of such genius arise, and how did his scientific work in physics, astronomy, entomology and oceanography lead to his contributions to finance.

Out of the clear blue sky, I recently found the book "Autobiographical Recollections of M.F Maury Osborne", transcribed by Melita Osborne Carter from a series of cassette recordings in 1987. Attached to the autobiography was a hand written note from MFM Osborne: "You have often asked about the path I took in life. Well here it is. And as you can see my upbringing and path was diametrically different from yours."

It is a pleasure, honor and duty to review this book, as I believe we can all learn from it. And a man of such great accomplishment should receive his due. The book reminds me of what Tom Sawyer would have been like if Tom had trained to be a scientist rather than a detective, and if he had been raised by genteel Southern Scientists rather than a house aunt. It's divided into 34 sections: Early Childhood, Mrs. John's School, Public School, Games and Other Activities, Kites and Model Airplanes, The effects of Personal experience, My House on Westoer Wenue, Summer Camp, Scouts High School, Eoodberry Forest, Mother's Influence, Incidents in Norfolk, University of Virginia Sophomore Year, With Hrdicka in the Aleutions, University of Virginia Other Activities, Mrs. Rose's Farm, American Student Union, Jail– Right and Wrong, University of Cal at Berkley, Lick Observatory, Student of Oppenheimer, Operations of the Naval Research Laboratory, Life in Forest Heights, Non-nrl Research Eddington Studies.

Maury was born on December 1916 and passed away in early 2003 at the age of 86. He has two daughters and two sons. During his life he published 47 scientific papers, received his PhD from the University of Maryland in biology in 1952, served as the Mayor of Forest Heights, and was a gadfly for all the physicists working in the fields of relativity, and all the early believers in the random walk theory.

Like most greats, his life was shaped by a combination of inheritance from eminent predecessors and a fortunate environment that enabled his inherited talents to prosper. He was the proud great grandson of Matthew Fontaine Maury, a famed astronomer, oceanographer and meteorologist who was known as the Pathfinder of the Seas and the Scientist of the Seas "because of his seminal work" The Physical Geography of the Seas, 1955. After great efforts to eradicate slavery in the South, as a proud resident of Virginia, Maury resigned his commission as Superintendent of the US Naval Observatory and joined the confederacy. 

 He then devoted a good deal of the remainder of his life to the commercial possibilities of discovering and extracting minerals in the South as a way of rebuilding the fortunes of Southerners. MFM Osborne was very proud of his heritage from Matthew Fontaine Maury and followed in many ways in the highways and byways of his grandfather's career.

It was always hilarious to read in the autobiography that despite MFM Osborne's positions in highly classified government research, he always refused to sign any loyalty oaths because he would have had to deny that he was descended from a grandfather who had sworn to overthrow the US government with the outbreak of the civil war.

Here comes the scientist, MFM Osborne. What was his life like? What were the major influences on him? The significant events? How did he reproduce and eat? To get a flavor for his ecology, let's consider several of the typical events described in his autobiography. Osborne never accepted anything without proof. When he found an error in some respected authorities work he liked to say something like, "Someone's going to eat crow, raw squawking and fully feathered, by the time I correct his errors." He applied the same approach to life situations. He noted many people being sent to jail. But why were they sent? The answer would teach him what a society regarded as right and wrong. "No one is surprised if people want for no other reason than to explore mountain tops or caves or jungles. Well, the same is true in society. There are segments of society that one layer does not know anything about or very little about, and you can explore it with the idea of learning about it or improving it." So Osborne decided to spend a few months of his summer vacation from the University of Virginia in jail. He went about it by hoboing across the country until he was picked up by a plain clothes sheriff in Vanceburg, Kentucky. The Jail was a pre-Civil War masonry cell with two rooms with a cage on the outside with masonry walls three feet thick with 30 people inside. What did he conclude from his months in jail? "These people were not bad so much as they were just amoral in just the same way as primitive societies… Looking back I can say it enlightened me as to what constitutes right and wrong. Very much depends on arbitrary standards which change with time." He applied these insights into his study of the Constitution, the Bible, and his scientific pursuits. "It contributed to my understandings of the limitations of truth and falsity — of right and wrong. My experiences in Vanceburg, Kentucky were consonant ultimately with what I learned in many other parts of my life, and in many other circumstances." He applied this learning to question and correct the conclusions of science in many fields, particularly astronomy where he concluded that the errors of measurement were so great that separate investigators were liable to come to completely different conclusions concerning such fundamental questions as the truth of Einstein's hypotheses about the movements of the planets and satellites during eclipses, to the world of finance where he concluded that the students of the random walk were completely on the wrong track because they didn't take account of the influence of the bid asked spread, and the relation between volume and price.

It should be mentioned here that Osborne was a can do person. He was a boy scout and a fix it person. He built model airplanes, boats and kites while in his teens. "If you flew one of these airplanes at night and hung on it a thin wire in which there was a rubber band attached hanging down below the airplane, and the put a match to the rubber band, the rubber band would burn and melt and drop little flaming balls"— The unsympathetic police soon put a stop to that. "I told my children that I had taken a trash can and made a huge catapult out of old inner tubes and shot one of the smallest boys in the neighborhood in the trash can as a space capsule". He liked to hobo and hitchhike across America. He took a year off from school to work on a farm to improve his physical conditioning. He enjoyed pushing a wheelbarrow around, and hauling dirt and using a shovel. Eventually he used these skills to become the main hand on an archeological expedition with Professor Hrdlicka to explore the antiquity of man.

Time and again he used the knowledge he gained of how to get and improve his bearings to get out of life threatening experiences. On one of them however, hauling a car up to the observatory in Mr. Lick while he was studying at Berkeley, he managed to fall off a cliff and spent 1 month prostrate on his back in a hospital which time, he characteristically used to improve his knowledge of tensor calculus.

One of his typical chores there was to rake manure. He used his experiences there to come up with his solution to the problem of why the bee can fly or some insects can travel at 500 miles per hour, or how salmon can swim upstream 500 miles without eating. His conclusion: "Salmon are more efficient than the most efficient rigid body boat that humans can devise because they seek out and gain energy from the varying velocities of water that they navigate." When he performed archeological work, he had no compunction of diving 50 feet under water without deep sea equipment to recover a rake.

Another example of the Osborne way came when he was made mayor of Forest Heights. It was the first city outside of the city limits of Virginia. Anyone who moved tended to allow their dogs to run free. The dogs ran in packs and terrorized all the people of Forest Heights. Osborne concluded the solution was to have a dog day where every stray dog not on a leash that day would be shot. He became world infamous for that solution and received many a threat that he would be killed if he implemented it.

The path and conclusions of many of his scientific discoveries in astronomy, biology, entomology, finance, physics, optics, sound and especially Eddington's theory of relativity are detailed in the autobiography. His schooling at the University of Virginia, Berkeley, and Harvard provides a great window on the process of scientific education and discovery during the first half of the 20th century. His work at the Naval Research Laboratory provides insights into how large research institutions work, and the ins and outs of the bureaucratic process. His experiences with Oppenheimer, Feynman, and other great geniuses of physics and astronomy as well as the hum drum day to day of the kind of instruction provide a great foundation for the way science was carried out in practice rather than theory.

In view of the importance of Osborne's contributions to the world of finance and science, and the intrinsic interest of his autobiographical notes, I would be pleased to send a copy of his recollections to anyone sending me a self addressed envelope which you can send to Manchester at 101 Merritt 7 Corporate Park, 6th floor, Norwalk, CT, 06581.



Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).



 An article in the Guardian raises a few hackles and starts a debate about how and where science is best done. Meanwhile the theory draws interest.


…'In Weinstein's theory, called Geometric Unity, he proposes a 14-dimensional "observerse" that has our familiar four-dimensional space-time continuum embedded within it. The interaction between the two is something like the relationship between the people in the stands and those on the pitch at a football stadium - the spectators (limited to their four-dimensional space) can see and are affected by the action on the pitch (representing all 14 dimensions) but are somewhat removed from it and cannot detect every detail.'


'Whatever happens, says Frenkel, Weinstein is an example of how science might change in future. "I find it remarkable that Eric was able to come up with such beautiful and original ideas even though he has been out of academia for so long (doing wonderful things in other areas, such as economics and finance). In the past week we have learned about an outstanding result about prime numbers proved by a mathematician who had been virtually unknown, and now comes Eric's lecture at Oxford.'

2) and from de Sautoy's Op-Ed:

'Weinstein begins the paper in which he explains his proposal with a quote from Einstein: "What really interests me is whether God had any choice in the creation of the world." Weinstein's theory answers this in spades. Very little in the universe is arbitrary. The mathematics explains why it should work the way it does. If this isn't a description of how our universe works then frankly I'd prefer to move to the universe where it does!'

3) Jennifer Ouellette at Scientific American in defense of academic science:

…"This is what truly free and open scientific discussion of brave/bold new ideas looks like. The tradition is alive and well in that stuffy old academic establishment. I'll let Pontzen have the last word: At what point during this long and difficult process does it become legitimate to proclaim a breakthrough? It's a line in shifting sands, but that line has certainly been crossed. Du Sautoy – the University of Oxford's professor of the public understanding of science, no less – has short-circuited science's basic checks and balances. Yesterday's shenanigans were anything but scientific. Preach it."



 PJM capacity auctions for the post smokestack-era shows coal did not exit the market as many expected. Approximately 15,500 MWe more capacity show up than was needed (equivalent to 15 - 20 nuclear power plants). Of the 15,500 MW, 10,000 MW was coal.

In my opinion, this is huge. Power producers paid billions to upgrade their coal units to comply with EPA's new regulations effective 2015. Many of those units failed to clear the auction. Companies like Exelon gambled most these units would avoid the capex and exit the market. Companies like NRG Energy gambled ROI's on additional capex for older coal units would pay off. Both companies may have miscalculated, at least for 2016.

The aggregate loss in the PJM market is over $4 billion (when compared to the previous year). This loss is only for 2016. Subsequent years are unknown.

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

Germany already has one of the highest per capita carbon footprints in the EU, largely driven by its use of coal. Phasing out nuclear will increase coal use significantly. Germany is building new lignite stations without prospect of carbon capture and storage (CCS). These are the worst possible policies from a climate change perspective.

German policy, with a nuclear moratorium and a move to more coal but without mitigating CCS, seems short-sighted and parochial. It undermines the EU position on climate change issues, already weakened by the shortcomings of its flagship emissions trading scheme.

A good article about it.

Additionally, CBI is supposedly lined up to do a significant amount of work in constructing new gas-to-LNG plants - a major reason it has moved up substantially this year.



 By tradition, in the United States, Memorial Day has come to mean the start of summer. Swimming pools open, schoolchildren begin to think of school being out (and the interminable playing of Alice Cooper to drive home the point), and for some (like my daughter), it's prom season, graduation and for others, a walk down the aisle and up to the alter. On Sunday, the Indy 500 will take place. There are all manner of other activities associated with this weekend.

But none of these activities relate to Memorial Day itself (except insofar as we can undertake these activities). As I look out my window and watch the cars coming out of Camp Pendleton onto i-5, it is hard not to be reminded about the meaning of this holiday, designated to remember those who "gave the last full measure of devotion" to ensure that we could continue to enjoy the freedoms provided by this nation. When I lived in the SF Bay area, we would go over to the national cemetery in San Bruno for the memorial service. Though there are national cemeteries in the San Diego area, we finally found one with such a service, and we will go there on Monday.

My grandfather used to tell my father that while, as an immigrant, he could not appreciate the liberties afforded by the United States as much as my father (born in the US) did, he could understand them better than my father could. He told my father that as someone who did not grow up enjoying those liberties, they were not inculcated into the engrams of his mind as they would be with my father's. Though I'm sure there may be those on this list who will take me to task for placing the issue in such terms, it nonetheless captures for me and my family the spirit of Memorial Day, not merely remembering the fallen, but also what they fell for. It matters.

As we have since my wife and I married back in 1989, we will play "Find the cost of freedom" on Monday evening. When our kids were born, they didn't understand why we put this song on the hifi (and then the CD player, and finally, iTunes). As they grew, they have come to understand the reasons. I can only hope that they impart that understanding to their children. I also hope that while many head off to the beaches or the backyards for BBQs and the like, they take a moment to remember. It matters.

Have a happy, safe, meaningful holiday–I am sure everyone will take a moment on Monday to remember.



I learned today there is an apparently relatively simple and practical option pricing formula for the case when the stock follows a (slightly extended) GARCH(1,1) process.

"Fast Analytic Option Valuation with GARCH" by Thomas Mazzoni, September 2008

I thought it might interest the option theorists on this site.



Relative to the Swedish Riots …

MFM Osborne reports in his biographical notes which I have the pleasure of reading, that it is much easier for an American to get published in a European Journal than an American one. His paper on the migratory behavior of salmon could not find a publisher in the US but it was gladly received in the Journal of Experimental Biology in England. Similarly for his seminal work on the flapping behavior of insects, and browning motion in stock prices. One believes it is part of a general tendency for the grass to be greener on the other side of the street. We are all taught to defer at once to those of discordant belief, especially if they believe in the idea that has the world in its grip, i.e. that the pursuit of happiness should be punished by death, or eschewed for a better world above. However, when we see it on the other side of the street, we are free to note it but have to cover it up and excuse it here, as in the confession of the three murders by the brothers before the bombing. 

Gibbons Burke writes: 

"But Jesus said to them: 'A prophet is not without honor, save in his own country, and in his own house.'" [Matthew 13:57]



 Modern cockroaches have been around since the early Cretaceous period (about 150 million years ago) so they obviously have something going for them. I know at the University of Florida entomology school students were known in the 80s to take Madagascar Hissing Cockroaches home to study and appreciate –  But more recently we have the following:


"For decades, people have been getting rid of cockroaches by setting out bait mixed with poison. But in the late 1980s, in an apartment test kitchen in Florida, something went very wrong.

A killer product stopped working. Cockroach populations there kept rising. Mystified researchers tested and discarded theory after theory until they finally hit on the explanation: In a remarkably rapid display of evolution at work, many of the cockroaches had lost their sweet tooth, rejecting the corn syrup meant to attract them."


Dylan Grice, an analyst formerly with Societe Generale, has written about cockroaches and discussed a simple portfolio strategy (which may be similar to others) named after them. But even he may have underestimated the evolutionary aspects of the roach "algorithm" (and its ability to avoid deadly baits).

'But what I like best about cockroaches isn't just their physical hardiness, it's the simple algorithm they use to survive. According to Richard Bookstaber, that algorithm is "singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that might signal an approaching predator." And that's it. Simple, suboptimal, but spectacularly robust…'

Craig Mee writes:

Very good point, Pitt. Defense. Defense above all else keeps you in the game. Floundering in volatility and leaving yourself exposed with no control is always a bad move. As in trading so in life.

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 I read Power Foods for the Brain by Barnard, MD (not sure how accredited he is) over the weekend

He basically lauds a vegan diet–fruits, vegetables, grains, and legumes only.

Points of interest:

1. He says amyloid plaques rise and fall circadian style. Plaques drain from the brain into the cerebrospinal fluid when sleeping, allowing the brain to cleanse itself and recover. When we don't sleep properly, by watching the late show, late snacks, getting up to check the markets, thinking during the night, etc, we are allowing the plaques to stay up and active, basically doing damage to our brain and memory cells.

2. He says people are getting too many minerals in their bloodstreams. Patients have more iron, zinc, and copper levels than non–memory impacted patients. People should be getting minerals from vegetables over supplements. Minerals are in many fortified food products like Total cereal, and too many minerals should be considered as leading to memory loss.

3. All tastes are acquired, except for breast milk, therefore you can reprogram your tastes from unhealthy food to healthier fare. 

4. Exercise, eating less to no meat and dairy, and engaging your mind in learning activities helps your brain and memory to stay intact longer.

 Overall not much new here, but a good book for reading by the pool.

An editor suggests:

I would suggest the book 80/10/10 by Dr. Doug Graham to anyone looking to improve their diet. It is a diet about eating fruits, vegetables, leafy greens, and a few nuts, avocados and fats. By following this for a week to a month (I was increasing fruits for about a month, but eating only fruits and greens for breakfast and lunch for about a week) I got rid of my cramps which had been getting worse for years. It was astounding. It is considered the be all and end all healthy diet book in vegan and raw food circles. 



Watching the game just now watched pitcher and catcher talking with their mouths covered ( carry over from bill belicheck lip reading )

Even when I am in trouble in a Checker game I try and remain calm and not give my opponent any signs I am on the ropes.

Market implications ?



It only took the bonds about 1/2 hour to conclude that continued expansion of the fed balance sheet and buying the bad assets of their colleagues and clients was inflationary.

Rocky Humbert replies:

I respectfully disagree with the Chair's interpretation of Mr. Market's belief. I am sitting here watching the TIP market … and it's not inflation expectations that are rising, rather it's the REAL YIELD. (An economist would say the real yield is a function of the real growth rate, the risk premium for default, and competition with other investments…. so it's Mr. Market saying growth is ahead, not inflation.)

Inflation expectations as measured by the TIPS market continue to tick downwards, not upwards…

(Am waiting for George Z. or someone else to say that the TIPS market is a BS market signal because ….blah blah blah)

Please wake me up when the real yield on the 10yr tips goes positive. Looks like it's at least 3 or 4 points away.



Ten Moments Of Market History That Are Completely False

1. A posthumous memo distributed by Steve Jobs to Apple stating "focus only upon on a recap" was accidentally addressed to the R&D department rather than Finance.

2. Ben Bernanke carries a full beard because he and the boys went too far with a drunken jape involving an Illuminati tattoo.

3. Bunker Hunt later regretted a spot of Bazaar shopping whilst on holiday in Egypt when, upon his return, he left a housekeeping note to his secretary stating "ensure market silver is moved into corner."

4. Bernard Madoff was framed by exchange executives for running a legit fund that implemented an early version of a high frequency trading strategy.

5. Ben Graham originally began his career as an options market maker and wrote a less successful book around the concept of investing based on Marginal Safety.

6. Andrew Mellon - a culinary enthusiast - later regretted a diary mix-up in which he believed himself to be giving the quote "liquidate stock" to Wisconsin Soup & Broth Enthusiast.

7. Mark Carney is a Manchurian Candidate sent to the UK by the Quebecois secret service to settle colonial wrongdoings.

8. Warren Buffett had originally bought the Washington Post with the intention of introducing Page 3 girls but was vetoed by Katherine Graham.

9. The Denise Rich song "We Walked Away From A Love Affair" is an allegory about OPEC and the spot oil market.

10. The Paris Peace Accord was deliberately botched by Henry Kissinger because he was running a large short swap spread with his broker and saw another twenty points in bonds.



David, you are obviously much more knowledgeable about the game of baseball than I, so I'd like to ask your opinion on Gibson and Koufax.

How do you think they would have fared in today's modern game and how would they have been used by their teams?

David Lilienfeld writes:

Thank you, but I doubt the premise of your question is true. Gibson and Koufax would likely still anchor their respective teams, but neither would likely get more than 25, maybe 26 starts, tops. I doubt that their arms would have been as strong–they wouldn't have developed to be, they would also throw only 100-110 pitches/game (sorry, having seen the great Orioles pitching staff of the late 1960s/early 1970s, I'm a big believer in strong arms that throw complete games). Their control would continue to have been outstanding. The thing about both Gibson and Koufax is that they pitched enough innings and in enough games that when they got tired and they knew the bullpen staff was pitched out arm sore, they would suck it up and make a go of it. They would change their set-ups, mix-up pitches more and so on. But a pitcher can only be that mature if given the opportunity to play–and that's something verboten today. So while both of these folks would have excelled, I doubt they would have been the dominant forces that they were in their day.

Take a look at their records, or throw in Jim Palmer and Denny McLain too, if you want. They routinely pitched more than 270 innings–good seasons and bad. It wasn't until Koufax started throwing more than 220 or so innings that he came into his own. Heck, even in his last season, when his elbow had been so threaded by arthritis that he needed to soak it in ice for 2 hours after each game, he threw 27 complete games. I guess you could say that his career would have lasted longer if he hadn't pitched as much as he did–except that that's how he found his groove.

It's not as though this was something that characterized only the greats of the day. Jim Kaat started 42 games one season–and he played for more than two decades. Never mind that he won 280 games and was never elected to the HoF. Take a look at Steve Carlton. These guys were good, sure, but I think that, like Koufax, part of their greatness was that they were worked hard.

I'm sure there are those on this list who will say everything's fine with how pitching staffs are managed today, that I'm a dinosaur for taking such a risk with someone's arm to let them pitch so many innings, start so many games–that that experiences really isn't necessary for pitching excellence, never mind greatness along the likes of Koufax and Gibson. Much as I think the days of someone as competitive as Frank Robinson are passed, so too are the days of the dominant pitcher. Consider Jim Lonborg, who pitched more than 270 innings in his CYA year (1967). During the World Series, he pitched game 7 on two days rest. Two days! Would any manager even think of doing that today? I doubt. it. I could hear the players union rep going to court about it violating some contract clause. His wife might complain that he's being asked to do the impossible–3 days rest is pushing it as it is. Nope, the days of the strong pitcher are done.

Koufax and Gibson: we likely won't see their likes again anytime soon. Probably not in my lifetime, at least. And I doubt that if they came up today, they wouldn't be nearly as dominant, good as they might be. They would never be given the chance in the first place. It's almost five decades since Koufax retired, and people still talk about the devastating Koufax curve. The same is true of Gibson and his fastball. You need someone with the insights of a Branch Rickey to go back to the four man rotation that produced a Koufax, a Gibson. Do you see a Branch Rickey around? Me neither.

All of which may not be surprising. 100 pitches isn't very many, after all.

(Sorry for the long-winded answer, but pitch counts are a tender topic for me. I don't like coddled arms–just a sign of a pussy-wussy approach to managing the bull pen.)

Stefan Jovanovich comments:

Koufax and Gibson would most certainly be stars no but so would Bob Feller and Christy Mathewson (Tom Glavine as a right-hander). What has changed in baseball is that starters can't start at 80% and then work up to full capacity the way they did in the good old days. Matt Cain's innings pitched have matched the old timers but what he and other top-line starters have painfully discovered is that they now have to pitch the first and second innings with intensity. The technology revolution has allowed all hitters to diagnose their own swings and pitchers deliveries the way only a genius like Ted Williams once could do with only his own eyes. Felipe Alou sat down with his son Moises when the Giants got their first screen analyzer; his comment was "I never understood my own swing". The pitch count is stupid because it is a hopelessly crude metric. 75 pitches at Coors is a solid performance; at AT&T the same effort should produce 95-100. But no one now can go as long as pitchers once did; hitters aided by video study won't let them.

David Lilienfeld replies:

Respectfully, Cain doesn't have the innings pitched numbers of past cohorts. And I disagree on the "new" need for intensity. You don't pitch an ERA of 1.1 without that same intensity, and while analysis of one's swing is helpful, pitch selection is moreso. You could have an optimal swing, you still couldn't hit a Koufax curve. Palmer's slider wasn't quite so devastating, but if he was on his game, it didn't much matter how good a hitter you were, you weren't going to hit the ball.

The thinking these days seems to be that with all the money being paid to pitchers, no one wants to risk an injured arm from over use (!). Hence the five man rotation.

Maybe we're just going to have to agree to disagree.



Here is a deeply flawed article in Texas Monthly about BBQ, but the article contains an interesting (but somewhat inaccurate) map of BBQ across the South. The flaw is the essential conceit that Texans have by thinking their BBQ is the best in the world and every other BBQ is inferior. I've had some inedible BBQ in Texas and I have had some awesome BBQ in the North when Mr. Humbert was gracious enough to take me to a BBQ place in CT. That place was better than any Texas BBQ I ever had.



There is a market I am looking at to trade where supply is 100% controlled by a cartel and the same cartel can manipulate demand through marginal buying or selling, which they can store at zero cost for an unlimited period.  There are dealer firms that are approved by the cartel to buy at auction and resell in the secondary market.

There is an active futures market with electronic prices posted, but for the underlying cash market one has to pick up a phone and contact one of these dealers to get an accurate quote.

The cartel often hires its dealers to work for them directly and the opposite. These participants get relevant information in advance. The cartel wants the best prices available for the product it sells. However, at times they are willing to lose great amounts by bidding up prices to support the market.

The rhetorical question is, should I be trading this market?

Jeff Watson adds:

D. Humbert's query about trading an insider controlled market made me realize a very important rule that can be applied to trading. Never, ever play poker with someone who knows your hole card with 100% certainty.



When last I commented on CCL, it was once again in the Perils of Pauline mode, hoping that some Dudley Do-Right would appear and rescue it. As it turns out, CCL is hereby awarded the Tim Melvin Absolutely Horrific Luck Award after I came across this little item: Search Ends, Two Australians Lost . It's hard to promote a fun cruise and make some money when you can't keep the passengers on the ship. I was looking at Royal Caribbean, kept stumbling across Norwegian (which looks good if growth investing is your thing), and noticed that CCL can't get out of the way of its own two left feet. We'll see what problem surfaces next month, as it seems likely there will be something.



This chart of 10 Yr Treasuries reminds one of the very kind companionship that Mr. Pitt provided to Aubrey and myself up the lazy river in Disneyworld Orlando a year ago. One wonders whether there are any regularities in it. vic

Anatoly Veltman comments:

One may observe the consecutive higher lows throughout the multi-year uptrend. One concludes that any first lower low will serve to produce technical downtrend of significance; at that time get out. Easy money!

Jeff Watson adds:

I'll say it again, the mistress never gives away, "Easy Money," and there is no such thing as easy money for the non-Flexion.  One suspects that those who make "easy money" in the market have some kind of Faustian Bargain in effect. I have to fight  tooth and nail for every quarter cent.

John Netto says:

Jeff- start studying market positioning and how the market is structured before large Econ data releases and Fed announcements. Being aware of this will point out asymmetrical situations which tend to provide profits at a much higher  velocity.

Jeff replies:

John, thank you very much for the most enlightening market lesson I've had in 35 years of trading.

Vic Niederhoffer is skeptical:

One is content to eke out any profit let alone one at a higher velocity. When I can unravel the meaning of Mr. Netto's post, I mite be poised to become a wealthy man.

John Netto clarifies:

The Chairman has asked me to provide further detail on what specifically i'm referring to by putting oneself in trades where  the velocity of P and L can appreciate at a greater intensity based on identifying market asymmetries.  Take the most recent nonfarm payrolls number. During the beginning of the week we saw estimates around 150,000. The day before  we saw ADP miss … estimates were then lowered for the nonfarm payrolls number from 150,000 to 140,000 by the Street.

We saw a rally in the bond market and some weakness in equities with the S and P sitting around 1585. This was the first sign  of how the market was positioning for what was believed to be a weak jobs report.

The number beat consensus coming in at 165,000 and with the market surprised by the results and positioned the opposite way,  bonds sold dramatically and equities put in a gap up, go up day - with neither of those markets returning to the scene of the crime since. As a professional trader supporting myself from my trading P&L, understanding market positioning is one of the  big ways I generate P&L. The aforementioned example was particularly lucrative.



Robinhood Investment Corp. has named a top International Monetary Fund official its chief economist for emerging markets.

Lorenzo Giorgianni will join the $13 billion Connecticut hedge fund in October, the Financial Times reports. Giorgianni has served as deputy chief of the IMF's Strategy, Policy and Review Department, and will formally leave at the end of next month.

Giorgianni sought to head off concerns about his leap from a high-ranking public-sector post to a major hedge fund.

"I look forward to joining Robinhood and complementing my experience in policymaking by deepening my understanding of financial markets," he said. "I am following a protracted cooling-off period during which I have no access to confidential information and no involvement in any work that could give rise to a conflict of interest."

The explanation doesn't appear to appease everyone, with one former IMF official telling the FT, "It's terrible. A revolving door is fine, with an appropriate cooling-off period, but he should be [immediately] out of the building."

Giorgianni's cooling-off period began in March. He "is no longer involved in any work that could give rise to a conflict of interest before his departure. This is fully in line with the fund's ethics guidelines," an IMF spokeswoman said.



Woodson reminds me of the trader who holds a losing position 10 days in a row until it totally ruins him. He stays with Smith despite the fact that he's a loose cannon,loses the ball by relaxing on offense, goes 1 for 6 from floor continuing his usual shooting percentage,has Anthony giving up as he unbelievably notes Smiths bad play, gives a gratuitous technical foul, and generally tries to get his game back when the season is at a precipice. Yet Woodson stays with him regardless the way a trader holds a losing position until he goes broke. Its pathetic to see this stubbornness. The worst thing that happened to Knicks aside from the sullen Ewing resonance on the team and the three point holdover from Antoni is the lucky game winning shots that smith made at the beginning of the season. One remembers the winning shots he made, two, but he lost 10 or 20 games with the same shots later in the season.

Craig Mee adds:

The cowboy really doesn't have a place in this day and age of professional sport or markets. Players are way too fit and every part of their game is looked at and tested to expose any edge the opposition can utilise. The question now is how on earth are things going to evolve in the next 10 years as the last 10? For sport or the markets … and is there a way to foresee this and be better for it, in knowledge or profit.



The regularities in fixed income seem much less numerous than the regularities in stocks. What is the cause of this?

First one market goes down much in one week, then another market goes down the next week. Is it random or predictable ? Last week it was gold.

Is there an all seeing eye that looks for ways to inspire mish and churning in markets that learns from recent outcomes and paths of scores in vivid sports events?

The growth in the belief in the value and inevitability of the world state has preceded the decline in gold.

The gold is down 7 days in a row and this has happened only 4 times since the new millennium. But it is unlike other markets except bonds. Why?

number of runs of 7 or more
in new millenium

market      up runs         down runs

bonds       9                 3
sp         40                 7
bunds      11                16
dax        21                10
nas        41                13
gold       18                 4
crude      14                18
euro(fx)   15                10
yen        15                10

The number of bonds you could buy with one spu (i.e the stock to bond ratio) and the amount of gold you could buy with one spu (i.e. the stock to gold ratio), are at 5 year highs. What does this portend? Are there any other ratios of moment and are they predictive?

Why have central banks which used to be in general antithetical to big stock market rises become so favorable to them, to the extent that many of them are buying equities themselves?

What is the frequency of scandals as a function of the duration before and after major elections?

What are the seasonal tendencies of the outbreak of wars as a function of weather?

The nikkei to spu ratio was once 60 and fell to 7 and is now 9.5. Does it show trends? ( one must check these numbers).

The vix is at 12.5, and all who have sold puts on stocks have made fortunes since 2008. How will this situation be rectified?

The euro at $1.28 is in the lower half of its 1.60 to 1.20 range since 2005. Is the Troika getting an itchy finger? And do they like to see the US wealth prospering at their expense?

And just one more: Is there a point in life and markets, where all resistance to pressure to succumb ceases as in Beauty and the Beast or a market rise of a certain % in the case of stocks or a decline of a certain % in the case of bonds? The danger of relying on a equilibrium ratio comes to mind with the ratio of stocks to bonds at a 6 year high.

Veteran trader Anatoly Veltman adds:

You cite the same poignant reason for the recent Gold demise as was the Palindrome's predictive opinion voiced way before April 2013. Of course, the clincher was the fact of the relative over-valuation of Gold as a currency on its way to $1921 peak in 2011.

When Gold is high, i.e. over the latest decades' boiling points of 500-800 USD - it trades as a currency on a cross against other majors. The USD is still a premiere reserve currency, and EUR and JPY represent the next largest economies. Note that against the JPY, Gold is still holding near the all-time record!  

Now, there would be some change in Gold's complexion if it traded under its current marginal production cost of $1100. We might see producers' moves to shut down, hedge, finance, etc. The world average production cost is estimated anywhere in $550-800 range, and those levels are simply unimaginable given the growing distrust of the world's population toward fiat money. It's not impossible, however, to have a spike down there one day: under a scenario that world Central Banks were to reach a consensus - and lighten up. Curiously, such consensus could only come about if your current concept of the sudden universally found "belief" were to fall on hard times. I'm sure this logic is somewhat counter-intuitive.

Yet, in the near-term, a lot of back and forth trading is guaranteed to happen. Just like the May 6th of 2010 stupendous one-day range in stocks has basically contained the price discovery that followed over the next months and months -so may Gold be mired in a range not far exceeding it's mid-April spike. Gold's done exactly that for a full month already; and with allowance for a few currency spikes, we are likely to see Gold at current  levels again by summer's end.



Gauss's book on least squaresSam Eisenstadt has mentioned that he likes to use a potpourri of overlapping, multicollinear monthly changes in the S&P to predict future price changes.

It would be a good thing to see what predictivity there is in regression models of monthly changes that extends and augments, one thinks.




Everything in the market is path dependent. You can have the best insights, the best trades, but if you do it this week versus next week the whole thing is different. Had I not done this or that when the adversaries were lined up against, I mite be flying and wealthy. Is there any doubt that if all these scandals had not been revealed a few months after the election, the outcome would have been different. Even the man who turned 10 thou into 50 million in his IRA could have won. vic



Isn't Flexionism part of human nature just like shouting from the rooftops to crave recognition when trade research and timing techniques pay off. People will always want to be the leading pack animal or drive the herd, under whatever or differing pretense . Does the way one speaks to his broker whether making money or not, under all market conditions tell the world really the type of person he intrisically is. Will we never be rid of the flexion, things are just more transparent now… and its just a itching parasite that begs to test us mentally…



Whenever a market I was long goes way against me and I sell at the market, (if one had a Xantippe for a wife - it would be her demanding one get out before the weekend — or else) , I have Tom Wiswell saying to me, " Now you're Thinking ". After he put me in a untenable position.

Now you're selling.

One believes that there will be many conservatives without romance this weekend. vic

Alex Castaldo adds:

I spoke to my mother today. Eighty four years old. "I read it in the paper a week ago that you shouldn't buy gold or bonds. They are going down".



To add to an already long list of differences between broadly who a speculator may be and who a gambler may be: the successful speculator generally leans onto the side of chance but an unsuccessful gambler is seeking chance to lean on his side.

Countless differences may exist and can be cited between who a speculator is and who a gambler is. When we cut it slightly finer, there are enough similarities between an amateur speculator and an amateur gambler. Same way, there are enough similarities between a professional speculator and a professional gambler.

To seek a generally acceptable set of common characteristics between successful gamblers and successful speculators, I often listen to "The Gambler " by Kenny Rogers [Youtube link].



Some back of the envelope numbers on S&P500  futures daily changes last 10years for your perusal:

Year       %up       Max       Min        SDev

2003      55%       28           -29         10

2004      57%       18           -21         8

2005      54%       21           -21         8

2006      53%       26           -25         8

2007      52%       44           -57         14

2008      50%       127         -100         27

2009      56%       54           -42         14

2010      58%       48           -41         12

2011      51%       59           -85         18

2012      51%       42           -35         12

2013      65%       25           -38         11

Alex Castaldo ponders:

The standard deviation for a binomial is the famous sqrt(N p q) and the standard deviation for a proportion is sqrt(p q / N).  Assume p=0.54 q=0.46 and N=252 days per year. Then sd= 3.1%. The proportions for 2003 through 2012 are within usual confidence intervals.

But for the year 2013 we have only N=95 trading days so far. In that case sd= 5.1%.  So the observed 65% is about 2.16 standard deviations above the expected.  Yes, it is statistically significant but not hugely so.





I just had a modern Finnigan happen to me. I got to sleep long a commodity that I had a profit on when I fell asleep but I left my limit orders to buy well below the current price in. I heard a computer ring tone 12 times waking me up. I am reluctant to get up because I know that means that I have a substantial loss and one limit order below after another must have been filled. But one must face the music. So I drag myself up, (I hadn't slept for two days as was long another commodity that refused to budge while I waited for the hoped for rally in it in vain.) So I get up finally, reluctantly, meanderingly, and walk outside my room. To my relieve I hear Toria shouting, "dad, I'm locked out, please let me in. Are you home?". The ring of the door bell is exactly like the ring of the computer. So with relief I make my way to the computer. Sure enough, the price has fallen to right above my limits and I have lost just as much as I would have if I had not mistakenly thoought the ring on the door bell was the ring on the computer. One hopes that I've made myself clear.



The round numba is never a penumbra. Today's example: Gold.



 One has to admit that Smith is the perfect exemplar of the regression fallacy with the luck being ephemeral and the skill a constant expectation. Whenever he plays and hits some lucky shots, the Knicks are sure to try to give it to him the next game and lose as the luck vanishes. What a terrible player he is, almost as bad as the other regression fallacy, Robinson, who at 4'10 likes to fight with all the bigs and is guaranteed to lose for Chicago. They should have special brands on people like that in Basketball and life so they could not cause continued damage. The forecaster who is hot is generally like that. The regression fallacy tintype should be distinguished from the useful idiot. People like Kaufman and "you know who" would be on this. I "got a little list".

Tyler Cowen writes:

I say Miami beats Memphis in six, which is OK for NBA ratings.

Smith simply isn't any good in the playoffs when others are playing real defense. The preferred model is that some individuals have zero or negative productivity in key situations.

Plus Jason Kidd woke up one morning and was 56 years old, all of a sudden.



Scott Brooks writes: 

Looking at this strictly from the "what is best for the NBA" perspective:

What the NBA wants is a NY/Miami and OKC/SA semi-final.

Then a Miami/OKC final…..although SA would be alright too as they have Duncan. However, OKC has just a bit more star power right now, so I give OKC the edge.

And with all due respect to NY…….. Even though NY has the more attractive population base, Miami just has too much star power (and a pretty good population base).

A Memphis/Indiana final would be a disaster….but the good news is that even if Indy can get past NY (which is very possible), they ain't getting past Miami.



 Two quality reference works I recommend reading for those interested in the substructure (hours & minutes) of price action (The books touch on the ultra high frequency microstructure also) are

1. Asset Price Dynamics, Volatility & Prediction by Stephen J. Taylor

2. Introduction to High Frequency Finance by Dacorogna, Gencay, Muller, Olsen & Pictet

At the time of their release both were somewhat controversial but the subsequent research findings have not destroyed the concepts put forth.What both books allow one to do is to take a framework for looking at markets - the so called 'stylised facts' and then start a series of tests around these theorems to see if prediction can come from description.

I have been applying derivative ideas that I have developed across the US futures markets for some time. A recent post on the site by Mr Zussman about overnight moves making up large proportions of total returns has made me revisit both the conditional heteroskedascity and time zone ideas raised by the authors.There are some morsels to be had by classifying overnight moves by both magnitude, geography and base country and applying the above.



 The bonds are down about 6 points in the last two weeks. Worse yet, those who bought at the auction a week ago, actually have a loss. There's a famous incident where a great cricketeer was up by 1 run, and then on the last pitch, he rolled the pitch to the batter instead of hurling it. The epithet "it's not cricket" is appropriate to the temporary loss that the flexions and colleagues at the bank have. One would imagine that the upside down man is persona non grata. But more important, who was the player that did the dastardly deed. One believes it was in the mid 70s the last time that the bonds discommoded the colleagues, but what was the team and the player?  

Can you top that? What is the most disgusting incident in the history of (the market) relative to Trevor Chappell rolling the ball you can recall in the market? Was it the mingling of funds without retribution by the Governor? Or the flash crash before the French Inside trading before Leeson announced? To me it was being blindsided by a high bid for bonds that I took from Michael Lewis's firm right before the flow of funds man announced his bullishness. What's yours? 

Update: A kind correspondent says it was Ian Chappell. Worse yet it was a game among the colonies, New Zealand vs. Australia. One can only analogize it to the IMF not being paid back first on account of a bad debt or a country in the EC defaulting on its debt. "It's not cricket". The rain in Brussels might preclude taking the mistress out for a fish dinner.  

Craig Mee writes: 


Ian would gasp at being associated with this (as well as most of the nation)… his equally talented brother Greg Captaino instructed the third brother Trevor to do the dastardly underarm deed to "prevent New Zealand scoring the sux they needed to tie"

wiki the "underarm bowling incident of 1981".

Anatoly Veltman writes: 

I'm afraid to say: buying a single lot of SP futures near October 16th, 1987 close. On that triple witching Friday, which followed the relentless two-week decline, the floor rumor had it that one Palindrome had accumulated an outsized long position (the whisper number I heard was over 10,000 lots). I traded Gold and Silver, which closed an hour and half before the SP. Feeling lucky from my metal profits, I decided to take my first plunge into stocks. I thought to myself: if a trading legend is compelled to accumulate that much into this close, then this must be an exceptional value. Still, the novelty of buying stocks and the discomfort of taking a Long position period, made me limit my experiment to a single lot.

Well, as history books will tell you — Black Monday's opening gap down was the largest in all of the preceding stock index futures history! And wouldn't you know it: a very rare opening signal developed by an exclusive research group of like-minded younger traders stared huge in my face that morning. The signal had three conditions, and that's why it would occur so rarely:

1. If a market dropped big into the close AND

2. If the sentiment survey diverged (I.e. went up) AND

3. If a market subsequently gapped down big against such bottom-picker sentiment

Then you must SHORT that gap-down opening!!!What made my one-lot Long the worst position I've ever taken in my trading career was that instead of executing this rare Shorting signal of mine on that Monday morning - I had to digest my damning stupidity of following somebody else's silly Long of Friday. Another younger trader, who was not burdened by any silly Long, did execute the Shorting signal and doubled his Short position once the SP opened down around 260.00 and proceeded to plunge lower. Lo'n' behold, that day ended up printing 190.00; and the younger trader has become the Robin Hood that the community admires today…

anonymous writes: 

I worked for the 'Robin Hood' you mention in your comment below for 3 years.

Although quantitative types such as I believe that he is an example of survivor bias I must say this — I have never witnessed such ferocity, focus and ability to cut losses with alacrity as I saw him demonstrate time after time. (In all fairness I was not fortunate enough to work alongside the Chair at NCZ back in the day….)

A genuine trading talent.

Anatoly Veltman replies: 

Yes, and therein another lesson: that the "survivor bias" is not entirely random. Were you part of that Liberty Plaza office that sported the sign: "Maximize size, minimize risk!"

That particular trade carried the trademark of the genius: nimble lightly to Short a potential bubble over 330.00; adding substantial Short that melted the 300.00 phantom support a month later; and finally doubling up below the 260.00 where the black hole of no bids guaranteed the break of 200.00 before the bell could save the day!



 As the cost of a college education soars and the middle class finds itself struggling with paying for public university tuition, MOOCs (Massive Open Online Courses) offer one possible way to lower the costs of a college degree. Lots of promise–and the potential for disrupting the American college, a bastion of the middle ages for the past two centuries–is meeting with lots of resistance, particularly from those with the most to lose from them.

Stefan Jovanovich writes: 

If David includes the Reformation and its Counter within the Middle Ages, then he is right. As Rocky can remind us, until very recently the avowed purpose of Yale was still for man to find God, preferably of the Congregationalist version. The land-grant schools were to be trade schools as Governor Perry's alma mater still is — as a proud "Ag" school. The modern university owes its corrupt origins entirely to WW II and the G.I. bill — as do our healthcare pricing and payment systems. If schools were truly medieval, it would be a good thing. Teachers were paid directly by the customers — the students; and there were no required prerequisite courses. You find echoes of that system as late as the mid-1950s when "name" professors still competed with one another to teach the introductory survey courses; without those butts in the seats the esteemed scholar had little chance of being the next big hit on the textbook circuit.



 I moved to Latvia, a former Soviet republic now in the EU, almost two years ago. Here's why I chose Latvia over Singapore, the US and my home country Norway.

First, ever since my teens - that's ten years ago - I realized that the world is full of new opportunities. With the internet, one can make a business and the income will be the same whether one lives in Nairobi or NYC.

Second, online trading has been my main occupation ever since. However in the last years I've been more into computer science and real estate as well.

I spent several months in Singapore. I liked it so much that I seriously considered moving there. It's a an ultra modern city with a mix of Chinese, Malay, Indian and Western cultures. The fact that capital gains and income from abroad are exempt from taxation does not hurt either. Reasons I did not choose Singapore are expensive rent, it's far away from my family, and its climate.

The US is a wonderful country in that anyone who moves there can feel like a real American within months. Unfortunately its tax rates and regulations make it a relatively unfriendly country for entrepreneurs.

Norway's credit bubble did not crash in 2008/2009, but has instead been fueled by oil money ever since. It will crash.

Latvia, or more generally the Baltic region, grew rapidly before the financial crisis, but excessive credit and foolish risk taking made for a terrible crash. It's a real human tragedy (without fiat currency and artificially low interest rates it would not have happened, or at least been much milder, in my opinion). The population is still very demoralized, and I sympathize with them, but from a rational perspective I believe the Baltic Tigers will bounce back - just as the Asians have since their crisis in the late nineties.

For individuals, capital gains are taxed at 15% and dividends at 10%. Small businesses can register a so-called micro company which pays 9% tax on turnover and normally no other taxes for the employer or employee. This seems like a low rate perhaps, but in reality it's not a "micro tax" but a smart way to collect taxes. I have my own micro company and each quarter I summarize all my revenues, collect all my receipts, hand them over to the accountant who sends a one page report to the authorities, and then I transfer the tax. Simple! However, my actual tax bill is much higher. All expenses are subject to 21% VAT. I can only pay myself 715 EUR without additional dividend tax. I also pay annual real estate tax and a 2% stamp duty on each real estate transaction.

The reason I chose Latvia was not because of low taxes. I estimate the various taxes add up to about 40 percent. The main economic reason is lower operating expenses, especially on housing. Other than that I like the culture. It's more old fashioned. One can buy organic food directly from the farmer. The level of pollution is low. Crime is low. Littering is rare. Achievements are encouraged, and it displays in the population. Most speak Latvian, Russian and English. Many have degrees is sciences. Obesity is rare and women put effort into looking their best.

The Baltic region is still quite poor. Employees generally make low salaries, and entrepreneurs can make a good living only through wise decisions and hard work. It will remain poor until it finds a good export - a niche in the world market. During Soviet times Latvia had the best factories in the union, or so they tell me. When communism collapsed, so did their factories.

Now they are in kind of a vacuum. Maybe they will use their proximity to Scandinavia, Germany, and Russia to attract multinationals, which in turn will grow it into a prosperous Singapore? Maybe Riga's port will become the bottleneck for a growing Moscow? Maybe it will become a new Silicon Valley? It can attract talents from both ex-USSR and EU/US. It even has one the world's best Internet infrastructures. Maybe they will stop exporting wood and instead ship out world class furniture?

The reason I chose Latvia was not because of low taxes. I estimate the various taxes add up to about 40 percent. The main economic reason is lower operating expenses, especially on housing. Other than that I like the culture. It's more old fashioned. One can buy organic food directly from the farmer. The level of pollution is low. Crime is low. Littering is rare. Achievements are encouraged, and it displays in the population. Most speak Latvian, Russian and English. Many have degrees is sciences. 

The Baltic region is still quite poor. Employees generally make low salaries, and entrepreneurs can make a good living only through wise decisions and hard work. It will remain poor until it finds a good export - a niche in the world market. During Soviet times Latvia had the best factories in the union, or so they tell me. When communism collapsed, so did their factories.

Now they are in kind of a vacuum. Maybe they will use their proximity to Scandinavia, Germany, and Russia to attract multinationals, which in turn will grow it into a prosperous Singapore? Maybe Riga's port will become the bottleneck for a growing Moscow? Maybe it will become a new Silicon Valley? It can attract talents from both ex-USSR and EU/US. It even has one the world's best Internet infrastructures. Maybe they will stop exporting wood and instead ship out world class furniture?



 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

 Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

 Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.



A warning in Latin from Jeff's son perhaps could serve as a motto for us in the future— a motto that one wishes one had hardwired in his being:

Aleatores Omnes Moriuntur Rupti

(all gamblers die broke)



 One walked past the Sherry Netherlands hotel tonight where the boy wonder, Jesse Livermore, took his life. The fact that The Reminiscences of a Stock Operator is considered one of the best books on investments ever written is guaranteed to happen. Anyone who follows his advice and example is 100% certain to go broke. His pyramiding, leveraging and vig paid were each in themselves 100% certain to cause his entire stake to go to the stronger hands and flexions and top feeders like the "banks". Naturally the book is recommended as the bible for new traders to read. I am chagrined when people come up to me and say that aside from Reminiscences, their favorite book is edspec. Fortuitously, I believe that none of the other authors on this site have had that horrible experiences. Nevertheless, just walking by the hotel, and seeing the models from Fifth avenue that the boy wonder wined and dined on his yacht walk by, just as leggy and beautiful as in his day 100 years ago, made me shudder. I saw a balding man dressed in nautical attire and a top hat exiting the hotel and I whisked Aubrey away and changed my sweater as soon as I got home. 



 I have seen more and more of this story reiterated over the last few months… That hi-tech and robotic innovation are leading to greater displacement of the middle class in the United States and around the world.

"Think Your Job is Robot Proof? Think Again"

A Stanford professor recently commented that technology and scale are greater drivers of job displacement than previously expected. They are also the strongest drivers of significant wealth. The Forbes 400 is now dominated by innovation and those who have perfected scale.

I am surprised that so many economists have been commenting on this so often so recently, as if it's new news.

Ricardo noted this trend in technological unemployment long long ago, but it completely seemed to have disappeared as a story for 190 years.

Even Krugman admitted that if technology is such a significant driver of the divide between the rich and the poor, then surely it makes a mockery of any attempt to balance wealth in this nation since you cannot tear down innovation in the pursuit of balanced distribution.

How did economists ignore this? For fear of being labeled Marxist?

This reminds me of my first three minutes at Hopkins. I asked a professor who had worked at the DOE what would happen if a radical green innovation displaced oil…

He replied… "You don't want to go down that road…" Innovation has its downside, and to him, it was millions of angry young men in the middle east without a source of income from oil.

Stefan Jovanovich comments:

The principal argument of the intellectuals who supported slavery was that economics itself was an inherently "dismal science". Carlyle genuinely believed that a system of accounts based on money prices was far more vicious than any lash. His spoken corollary was that black people needed slavery because they could not otherwise compete. The unspoken corollary of his intellectual successors was that many other groups of people needed protections from the market because they, too, could not compete. That unspoken corollary became spoken when Progressives discovered Marx.

No believer in liberty in 19th century (the people who called themselves "liberals") had any doubt that machines could do it better, faster and cheaper. That was the point of inventing them in the first place. Those liberals also had no doubt that, in a world of scarcity, "better, faster and cheaper" was a good thing because savings and costs were more important than incomes. That is the same reason why they wanted Money to be made only out of the 16K tons of the one metal that was indestructible and, in milled coinage, impossible to fake. If prices had their unit of account determined by the supply of something that could only be produced with great ingenuity and industry, then the implicit fraud of government (we take money from you as an individual at the point of a gun so people you do not choose can receive benefits) would be limited;and thrift would be rewarded.

The liberals' faith was the presumption that, over time, thrift and family virtue would outrun the machines because accumulated capital would profit from the ever-lower costs that machines always produced. The Progressive/Marxist answer was that we could all speed up economic evolution if we just let the government keep the capital and define the costs. What is truly dismal about much of current academic economics is that the basic argument that produced the science itself is now considered to be a fully-settled question. Meanwhile, the economists on the street are filing for disability with the help of the friendly lawyers they found on TV, highly-penalized work (the stuff classified as "wage and hour" employment remains scarce, and yet per capita discretionary retail sales (what people buy after they pay for food, energy, communications and shelter) are once again rising.

As the Lackey would say, "Hah!"

The principal argument of the intellectuals who supported slavery was that economics itself was an inherently "dismal science". Carlyle genuinely believed that a system of accounts based on money prices was far more vicious than any lash. His spoken corollary was that black people needed slavery because they could not otherwise compete. The unspoken corollary of his intellectual successors was that many other groups of people needed protections from the market because they, too, could not compete. That unspoken corollary became spoken when Progressives discovered Marx.

No believer in liberty in 19th century (the people who called themselves "liberals") had any doubt that machines could do it better, faster and cheaper. That was the point of inventing them in the first place. Those liberals also had no doubt that, in a world of scarcity, "better, faster and cheaper" was a good thing because savings and costs were more important than incomes. That is the same reason why they wanted Money to be made only out of the 16K tons of the one metal that was indestructible and, in milled coinage, impossible to fake. If prices had their unit of account determined by the supply of something that could only be produced with great ingenuity and industry, then the implicit fraud of government (we take money from you as an individual at the point of a gun so people you do not choose can receive benefits) would be limited;and thrift would be rewarded.

The liberals' faith was the presumption that, over time, thrift and family virtue would outrun the machines because accumulated capital would profit from the ever-lower costs that machines always produced. The Progressive/Marxist answer was that we could all speed up economic evolution if we just let the government keep the capital and define the costs. What is truly dismal about much of current academic economics is that the basic argument that produced the science itself is now considered to be a fully-settled question. Meanwhile, the economists on the street are filing for disability with the help of the friendly lawyers they found on TV, highly-penalized work (the stuff classified as "wage and hour" employment remains scarce, and yet per capita discretionary retail sales (what people buy after they pay for food, energy, communications and shelter) are once again rising.

As the Lackey would say, "Hah!".

Jim Lackey responds:

Correction! It is Mr. Vic that says HA! Lackeys say, "get the joke", which is a joke as it takes me 3 times to get it… or the "get the joke is "we are the last to know" when it comes to the "news".



A famous fixed income trader alerted the public via social media in somewhat existential terms that he was bearish on bonds stating several points after the peak of 1 week ago that the bull market was no longer intact. It elicited this thought from a old speculator. It is surprising to see someone who presumably holds many hundreds of billions of dollars long in a portfolio reveal such a thing. A big speculator I knew well often discusses his views on the market and the world state. And while he would never buy before a bullish pronouncement, he certainly would not sell. That would be unfair. And while insiders in general don't always buy before good news, they are often loathe to sell before good news is announced. Thus the surprise. This is human nature. In any case it elicited the thought "never ask a barber if you need a haircut".

Alex Castaldo writes: 

Some old timers I know are talking about how this reminds them of the day Henry Kaufman and Albert M. Wojnilower turned "bullish" on bonds. Probably there are not many on the SPEC_LIST who remember those days…

Victor Niederhoffer replies:

One wondered that day whether the houses that they worked for became long before the 4 point rise at the 9 am announcement. And one wonders whether the upside down man alerted his colleagues with the 2 trillion position of his turn to the bearish side before the tweet. One noticed a 1 1/2 point drop on the day following the refunding of 30 years before the announcement, a greatest decline ever. My former friend the large speculator turned from bearish to bullish that day as now "the great Henry had changed the playing field and we're in a bull market". His change was very sagacious as the bonds went up about 10 or 20 points the next 6 months. I must confess that I did not participate in that move as I felt that I had to go with my numbers.

anonymous writes:

Apropos the recent social media expressions about bonds, could this be like a paranoid man who fears his wife is cheating on him? He subconsciously wants to catch her in the act so he can finally know that it is over. 



The Treasury Dept. puts out a Monthly Treasury Statement that breaks down a lot of interesting data. Mostly it's redundant information to anyone following the daily data, but this month (i.e. April) the payroll tax receipts from self-employed enterprises is a few sigmas to the upside. This April's self-employed number was 8.86 percent higher than that of 2012. The non-self-employed number was up 4.55 percent, which interestingly does not agree with the numbers reported in the Daily Treasury Statement. Recall that payroll taxes for everyone were increased 2 percent. Also note that the Daily Statement is done without human intervention, whereas the Monthly Statement has fingerprints all over it.



 The Rothschild dynasty famously got one of its big breaks following Wellington's victory at Waterloo. With an information network, backed by his four brothers spread across the Continent, Nathan Meyer was able to receive news of the victory twenty-four hours ahead of everyone else. He then either (i) bought the British bond market, (ii) bear raided it and then bought it, or (iii) was really short (as the tale is untrue) and lost money, depending upon which version of history you want to believe. To finance the trade, Nathan Meyer utilised OPM. He had been elected fiduciary of Prince William's fortune. This should have been invested in gilts, but instead was used to back the Rothschilds' speculation.

But the Rothschilds were far from the only banking family to sprout up in the era. Constant European conflict provided repeated demand for sovereign capital. For example, 1715 and 1745 (eerily familiar dates) saw domestic invasion of Britain by the Old Pretender and Bonnie Prince Charlie.

Some useful lessons can be learned from the Goldsmid banking family. Led by Benjamin and Abraham Goldsmid, they were essentially on the other side of the Rothschilds' famous trade.

According to historian Derek Taylor, the Goldsmids got their start as London bill brokers to provincial banks. They moved into forex and loan raising, and eventually received an appointment as the Government's preferred banker alongside Baring Brothers. The Goldsmids were granted British preference by breaking a City cartel. The Government had historically raised funds on the back of gold reserves, but towards the end of the 1700s reserves had dwindled and brokers were demanding high discounts on underwritings. By fully extending their resources and forgoing substantial discounts, the Goldsmids broke the cartel.

Leadership of domestic financing led the Goldsmids to capital raisings for British supported activities in Russia, Prussia, Austria, and Hanover. The Goldsmids, not wanting to loose their preferred status, continued to back operations to the hilt.

 Sadly, the strain from it all led to the suicide of Benjamin Goldsmid inv1808. Abraham Goldsmid continued operations, but in 1810 was caught with £800,000 of an unsaleable new issue, at which point the bond market dropped heavily in value. Abraham continued to back the deteriorating position, to great cost. He eventually committed suicide as well. The tragedy came only a few years from the nadir of the bond market and the Rothschilds' huge coup.

We might draw some useful lessons from the comparison:

1. If you accrue a fortune by repeatedly backing an attractive risk, at some point, stop doing that and diversify.

2. If you're leveraged in a position that's breaking down and could take you under, get out no matter what the emotional or reputational cost.

3. Make sure you have sufficient reserves to survive the nadir of the market in order to prospect in the rebound.

4. If it all blows up, dust yourself off and try again. People hated you for your success on the way up and hated themselves for their schadenfreude on the way down. Either way, suicide is not the answer!

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

It seems there are several other useful lessons here. First, bankers with "skin in the game" will tend to be far more scrupulous in their lending practices than those utilizing other people's savings and backed by government deposit insurance. Second, shame and disgrace, once as fundamental to business as honesty and integrity, has been supplanted by bailouts and reinstatement.

Richard Owen replies: 

I dig that people want to see bank CEOs disgraced, so these are great points.

I away wonder though, given there is a banking crisis approximately every decade, and without central bank support, e.g., in the 19th century, thousands of banks went poof every crisis, the only logical conclusion would be that no rational individual should become the CEO of a massively leveraged carry trade, as is will automatically lead to disgrace at some point. Nature is pretty smart for solving solvable problems by iteration, it has failed to do so for banking so far. Which gives pause for thought. [*Pulls out narrow banking manual*]. The only banks that seems to survive century to century are places like Moses Mocatta, which don't run a real balance sheet.



 Prigioni is so much better for the Knicks than Smith who hit a few lucky shots at the ends of games in the regular season that people remember and has lost a million games with the same shots that people don't remember.

Prigioni, when he's on the floor for the Knicks, has taken 60% of their shots with assists but only 30% with assists when he's off the floor.

Bonds and S&P were both up yesterday, so stocks were up with an assist. They like this much better than fighting the Fed model when they're at the new high with a Smith like bonds pushing them down for the future.



 Cicadas leave the depths below to mate on prime numbers every 13 or 17 years so as not to be eaten by predators with normal life cycles of 1 or 2 or 3 years. One wonders whether other living things in nature have such prime cycles. The market has prime cycles. It likes to do overnight what a person that has to sleep can not take advantage of. If it's down big one night, and you cant sell a position, then it knows you can't stay up the next day or two, so it will go up to let others but not you get out of the position the next day. The idea can be generalized one thinks. 

Scott Brooks writes: 

Another thing to consider is the confluence of cycles leading great highs or great lows.

The year was 1998 (give or take a year or two) in MO. We saw the normal group of Cicadas make their appearance as always in the summer. But that year, we saw something that we only see once or twice a century. We saw all the groups of Cicadas make their appearance at once.

I remember the normal soothing sound that I fell asleep to at night as a child become a constant irritating and often uncomfortable non-stop drone of Cicadas looking for love.

My backyard was often a fog of Cicadas flying through the air. The carcasses littered the ground and the trees. It became almost impossible to even walk a short distance outside with several Cicadas landing on you. Of course, they were harmless, but that didn't matter. It was a little freaky to know that you were surrounded by millions upon millions of Cicadas many of whom just wanted a place and decided to make you that place.

Although I didn't try it, I'm sure that if I were to have stood perfectly still out in the yard for any length of time, I would have had dozens, if not hundreds of Cicadas covering my body.

I had never seen anything like it in my life before. It was as though the world had become a horror movie with Cicadas starring as the monster that ate the Midwest.

I have lived through Cicadas' highs and lows. I believe I prefer the normal years, when their population is steady and stable and they lull you to sleep at night with melodic song.

Pitt T. Maner III adds:

You have to wonder what the collateral, human irritation effects will be this time with the billions emerging from Brood II. More crime? More accidents? People who are even more sleep deprived than normal? An increase in the sale of ear plugs? Might be interesting to look back for things possibly associated/correlated with the 17-year cicada cycle (1996, 1979, 1962, … etc.)

"US Braces for Billions of Cicadas" :

"The insects, though harmless, are considered a nuisance both for their size and sheer numbers, not to mention the noise pollution that has been measured at up to 94 decibels, loud enough to drown out the sound of overhead planes according to the Associated Press."

(but they do have a couple of positive effects):

"Additional effects linked to the cicada mating swarms include higher yield for fruit trees, beneficial tree pruning, as well as an increase in bird populations."

 Oh, and by the way:

From the Dept. of Stork/Baby statistics.

Who knew there is a "cicada market theory"? If only some of the critters could make it into the city!:

1) "The Wall Street Cicada Index"

"The large insects — which emerge every 17 years — turn out to be great news for the market. During years when the critters appeared — going back to 1928 — stocks posted an average annual gain of nearly 21%, roughly double their historical average. That's a far better track record than most active mutual fund managers enjoy, the majority of whom tend to lag the market average over time." and 'Standard & Poor's market-data guru Howard Silverblatt agrees. When MarketWatch called to sound him out this morning, it turned out he'd already thought to check out the cicada market theory and had been pleasantly surprised by the results. Of course, that doesn't mean he's rushing to buy. Just like when we gaze at the stars or tea leaves, it's easy to read too much into stock market returns, he warns. "You can prove anything you want," he says. "Start with your answer, and I have the data to prove it."'

2) But the "flash crash" of May 1962 would have occurred during a cicada emergence too.



This chart plots compounded return for SPY day and night (open-close, close-open) for the prior bull market of 3/03-10/07. Most of the period's gain occurred overnight, though day returns were strong in the initial rally. The overnight returns were consistently good over the period.

This is a similar chart of compounded SPY day and night returns for the recent bull market 3/09-present. Unlike the prior one, the current bull market was up both day and night with advantage going to daytime returns.

One possible explanation would be the visible hand of Ben and Co: heavily pulling levers during market hours to maximize return (of voters).



 Last day at my office, and I'm cleaning out files… I found this.

It's the epilogue to my first novel, which still sits in LA unpublished over an argument on the name of a character. It's about the failure of our leadership. It's been about seven years since I last read this… and I get the sense it's more true today than when it was first scribbled during a vodka-induced rant across a bar napkin somewhere in the Battery of Manhattan…

Thought I'd share…


The Men on the Hill

at the set of the star, when each pass down Our Hill

to a plate ever gamely and cup overfilled

the men, they forget, the source of their fare

it was those in small town where cupboards grow bare

now ignored to provide allies’ weight in pork

they carve with the tongue, to drive us to forks

there are men on the Hill, who sneak and conspire

to cohort with Brutus and lead to new choir

there are men on the Hill, denying their fault

as they deepen the wounds and scourge them with salt

there are men on the Hill, not just one, nor one team

confuse his ambition with one country’s dream

a cry comes each voice, are there men on this hill

to stand by the cupboard, risk politic killed

you are safe on this Hill, for the process is rare,

that another ascend to relinquish your chair

on the hill is a hush – now a cast of the blame

now a finger is wagged, to preserve masters’ fame

but fall to the side, when the masses erupt

for power is fickle as power corrupts

are there men on the Hill? each street cries fervent

to answer this call as public servant

are there men on the Hill, stand up if you will

a hush…

a hush…

there’s no man on Our Hill. 



 This article echoes a nice perspective on the American Revolution with a Harvard Princeton twist.

"When Austerity Pushed American Colonists to Revolution"

Stefan Jovanovich retorts: 

This is bad history. The Stamp Act was repealed in 1766, and the Royalists were completely in control. The few attempts at rebellion that happened after repeal were horribly unsuccessful; Sam Adams even lost his position as party boss of the Southies. When Ethan Allen arrived in Philadelphia to ask for supplies to reinforce the Green Mountain Boys' control of the New Hampshire Grants (what became Vermont), the Congress told him to do a full inventory of the cannon and powder that Allen and Arnold had captured at Ft. Ticonderoga. Why? Because Congress was offering to give it all back. The Revolution was anything but inevitable. But for the Battle at Breed's Hill, it would not have happened; even Concord and Lexington would have been papered over (warning - Stamp Act pun) if Gage had not decided to try to capture the colonists' two useless cannon that "threatened" (sic) his ships in Boston harbor. But, after Bunkers Hill, it was on. The 2,000 British soldiers suffered 55% casualties (the colonists' first volley was sot at a distance of 15 yards), Gage wrote to London asking for reinforcements of 30,000 men, the Congress decided that they had to get in front of the mob so it could be a parade by sending Washington to Boston, and the arrival of the cannon from Ticonderoga forced the British to abandon Boston. London did send the 30,000 and more but not to Boston but to New York.

How any of this applies to Cyprus is beyond me, especially since it is doubtful that the EU countries combined could currently mount an amphibious invasion of 3,000 men, let alone 10 times that number.



Turning on my Bloomberg this morning, I see that the Nikkei gained 486.2 points last night.

This reminds me that among the most difficult actions for a long-term investor is to do absolutely nothing.

It also confirms my belief that ka-chinging a tiny profit in a long-term position assures that the market will continue to move in the desired direction.

Both are platitudes for sure. But one's P&L speaks louder than poetry.



 My wife wrote:

Does this count as an Economics lesson? I pay 1 cent per dandelion picked from our yard (organic control). Two children secretly agreed to leave a breeding stock. (A third child ratted them out, but I did nothing as there were more children not party to the agreement than party.) One of the children who made the agreement secretly picked all the dandelions that had been set aside as breeding stock and turned them for cash. The other wigged out.

Jeff Watson writes: 

Very smart kids who deserve a reward. But I advise you to gently punish the one who queered the deal. Nobody ever liked or respected a tattletale.



 Dear A.,

You might want to know some day how you were at 7 years old and what the paths and choices for the future looked like. Perhaps it will remind you some day of the good old days. You love to sing and one of your favorites is "The Good Old Days". "Like the hopes that were dashed when the stock market crashed. Ha ha ha those were the good old days". It's hilarious when you sing it and just before that line you turn around and look at me sheepishly.

You are by all accounts, the most affectionate and gregarious boy that ever lived. You radiate happiness to everyone about you. Many people have told me that they feel like a second father to you and that they'll promise to take care of you when the time comes. Wherever you go, you enter into conversations with strangers and store people. And you love to squeal with joy when you connect with someone on one of your favorite things.

You are very sensitive and aware of the emotions of others. And you have lots of empathy for those in need. You believe that even fish deserve sympathy and won't eat them because you think they're endangered. (I hope you change your mind about this because eating fish regularly is a necessary condition for a long life I think). You walk out of all movies if anyone's getting hurt and you hate superheroes for that reason. You like to be helpful around the house and to garden and cook and help anyone in need. You are particularly caring of older people in old age homes who you like to visit and always ask about you, and also for very young kids who you treat very protectively and gently. The ability of yours to inspire love is good for you.

The most important thing in traveling the path to success aside from hard work, proper organization, ability and health is to have proper mentors. I had great mentors in Barnaby , Lorie , Redel , Wiswell . You will have great ones from among those that love you. Do be sure to be properly appreciative and mentorful. The favorite things for you are singing, chess, scrabble, squash, baseball, music, counting, eating sushi, playing games (both computer and board), reading, biking, skiing. You do the first nine every day. Also recently you have shown the influence of your heritage in music. You have started to play songs by ear on the piano, you can sing many of the patter songs from Gilbert and Sullivan from memory with perfect enunciation and you can play 7 songs on the violin even though you don't practice and only take lessons twice a week.

 Some stories about them might be easy to remember in the future, and help make sense of where you are. I ask you, "what's your rating in scrabble." You say, "it's 2200." "How did you get there?", I ask. "Well, I beat someone very good. He wrote the book I read. He was the world champion." I ask, "did you tell him you were 6?" "No. I didn't want to embarrass him. How do you spell embarrass."

A typical chess story of yours. You love to go to Washington Square to play chess with the hustlers. You often beat them. And you love to jump from one table to the other commenting on the games as you play them.  "That's a wasted move. It breaks up your pawn duo and puts you offside. Now your pieces are all apart. I think you can resign." The chess players love you because you are creative and appreciative, and dynamic and vocal– qualities that pervade everything you do. Your parents read to you every day and you love to read yourself. You said to me the other day, "I can't believe that some people don't love to read and find it boring. There's always something so interesting in it. I could read all day".

The first time I knew you were a genius was when Mommy took you to Italy, when you were three, and she said "He didn't stop talking the entire trip."It's true. Wherever you are, you always ask questions. You have to ask about every new word you hear, every joke that people are laughing at, every way that something works. Actually there was another time when you were 3. We were riding the bike back from 59th street to your apartment which is 120 blocks away. When we got to first street, you turned to me and said, "we've gone 59 blocks. In another block we'll be at the -1 block, and that will make it exactly half." I should mention here that you can do all the squares up to 100 in your head, and can multiply most two digit numbers in your head using quick math techniques, and this never ceases to amaze your friends and their parents. Yes, you are very good at math, and take the Stanford course each day, and are just about a week or two away from completing your fifth grade exam, where you got a 77 on your last one, which is very good considering how easily you are distracted, and how you often have 20 computer chess games and related conversations and 15 scrabble games going on at the same time. As uncle Roy said about you: "he's a chip off the old block". What he meant was you are in the line of geniuses and renegades in our family like great grandpa Martin, grampa Artie, Roy, and nephew Ian.

 You take lots of lessons each day and week. Chess about twice a week from Raphael or the hustlers or the chess teacher, squash every day from me or Hisam, piano and math from your mother, violin and baseball from Anthony, Chinese from Jane, swimming and chemistry from Mr. Rook, tennis from Nemanya, two science classes from Jodi, history at the museum. And each weekday you always find time to play board and computer games with Doc. Sometimes you'll flop down on the bed when you're at home and say "I've just had 4 lessons in a row. Give me some time to do a little thinking on my own." But as your mother says, "Sometimes he'll flop down and claim to be tired. But he always has plenty of energy for chess, scrabble, and the odd computer game. I have to take the mouse away because no computer can withstand him.

He eats banana pancakes every day for breakfast, and remembers all my mistakes like when I burned the rice or when the butter spurted all over, and goes into fits of laughter years later. He always asks what is funny when I laugh at something and he doesn't get the joke. He is extremely social and a real ladies man. He writes notes to all his girl friends, calls them on the phone when they're not taking lessons themselves, and he often says to women, "you look very nice today all dressed up in fancy clothes".

I have to mention here that Raphael said after your second lesson that he thinks you could be the world 7 and under champion. Raphael has taught Kamsky and many other champs and won from Bronstein and Alekhine so he knows what he's talking about. And Hisam your occasional squash teacher whose brother is world number 1 said, "I think A. will be the best 9 and under in the world shortly also." I know a little about squash, also, and I am amazed that you can hit a backhand with tremendous power down the line. When I was 7 I couldn't even hit a backhand, and I was able to beat most adults at that age at handball and paddles. You also hit a beautiful bull whip forehand down the line which you're learned from watching racketball on youtube.

Your singing teaching experience is not without its highways and by ways. You tried out for the Met Opera children's chorus and had a great audition singing happy birthday perfectly and getting all the intervals correct when you had to repeat them, but then you were so pleased with your performance that you jumped around the room the way you do from chess table to chess table, and the teacher had to ask you if you wished to go into another room. Perhaps he did not realize that you like to learn at your own pace in your own way and time and express your joy when you hit the bulls eye.

Yes, you are somewhat unruly. You like to talk during movies and shows that we have been taking you to since you were 2 (you were asked to leave South Pacific on each of the 5 times we took you there). And you sometimes like to jump on the table or lie down when you're in a class with others, and when you're playing baseball, you cover all the bases on every hit when you're in the field. Perhaps this is a trait you inherit from your father. Whenever I didn't shut up in class, I found myself in the principal's office. "You should know better he'd say to me. Your father is a cop." Doing one's own thing runs rampant through our families. I brashly announced to the revered squash coach Jack Barnaby the first time I saw him: "I am going to be the best rackets player in the world in that other game you teach before I had even played it" and your mother took a year off when she was 18 traveling around to night clubs and bars making her living playing the piano and singing blues songs she wrote. I don't think you would like going to a traditional school very much where you have to listen to the teacher give a lesson on things you already know or aren't interested in. You like to say to me, "Why should I listen to you when I know so much better what I want to do then you do. You're such an autocrat". Teachers wouldn't and won't like it when you say that to them.

 One of the favorite things you like is business. You love to talk about the pricing of your mothers glass products, and how much inventory she should buy. You asked me at the age of 4 if I was bullish or bearish on gold and I said "bullish because it went down a lot yesterday. And you said, "but what about the previous day. Did you test it?". You are good at selling lemonade. And you love to Tom Sawyer up to passers by, and buttonhole them and ask them if they want to buy a very good lemonade, only 25 cents. All the people in my building are always asking me, "When is A. going to sell lemonade again. We like it".

I should mention that you are very fortunate to have two families that you love and love you very much. You love to do morning and afternoon things and evening things with your mother. You cook, you bike, you read, you learn things together, and you do everyday things like getting proper clothes and haircuts and buying food and supplies, and go to the Dr. You love to do weekend and afternoon things with me and Susan and your sisters. Often you will go for walks in the woods, mountain biking, banana grams, gardening, sledding, soccer, baseball, air hockey, chess, and cooking bread with Susan in just one day, back to back. (Sometimes I wonder if she still recognizes me because she's so busy). You are particularly close to Kira and Toria and often follow them or lie under their locked doors so that you can copy their dance steps or hear their stories or play games with them. I love to see you hugging your mother and the Connecticut family when you see them but I sometimes feel bittersweet that they are so good at playing with you that you often prefer their company to mine. When I try to read the book of the day to you, you often run away from the table saying "I know what books I want to read and hear better than you. Why are you so dogmatic?". You often ask me, "Why can't you let me have more fun?". I guess the reason is that I don't have that much time left to parent and teach you, and I want to provide a foundation, a base of operations for the rest of your life while I am young and energetic enough to transmit it. I love you very much, and the few things that I can do that I learned from my father, mother, grandparents, and siblings, I want to get into you before it's too late. Regretfully, I am the type of father that can't do all the things that men and kids are supposed to do, especially boy scout things and art things. I know my weaknesses, but fortunately between Mommy and Susan and your friends, John and Rose, who we go on a few trips a year with, and your friends, Doc, nannies, and teachers from the past, they can fill in what you didn't learn from me.

One of the most important things to learn in life is "to be unaware of your ignorance is the sickness of the ignorant." And even more important is to know that everyone is different and everyone has different abilities. Those who are good at something often specialize in it and excel at it. If you want to be a champion at something, specialization is necessary. The world works that way with people choosing to do the things they're good at. Then the whole pie gets made by the separate people that are good at things. Those two things, specialization and division of labor and the ability to choose and trade with the specialist people in their divided slots make the world a very good place.

Perhaps you will remember your seventh birthday which was a typical thing for you. You started it with a bike ride from river terrace to 59. Then you played bananagrams and fisher chess with Susan, then you rode to the Museum of Math , where you built Sierpinski tetrahedrons, then you subwayed over to Nobu for a sushi party, then you biked back to 59, went to the Jackie Robinson movie, (which you said you were going to hate until you saw him stealing home when you squealed). Then we went to the best burrito place, your favorite meal, you slipped in some minigolf at Arman's birthday party, and then we bought some big pizzas and cake which we had delivered to the hustlers at Washington Square, and we had a surprise birthday party for you and them there where they had their first square meal outside of The Salvation Army and you beat a few of them at chess as you jumped around and kibbitsed all their games.

 Okay, enough of the past. Lets turn to the future. You love to ask me about the stories that connect my past to the future. I think it might be good to put a few of our favorites down so that they might guide you and provide a base for the future. One of my favorites is the time I won the North American Open in Mexico in 1976. I had 20 injuries that final match, ranging from having Mexican disease to cramps and jock strap burn and Sharif hit me in the head full on with one of his crazy top swing follow throughs and gave me a concussion to boot. Then he got his contacts jammed and I was entitled to a win by default. Instead I told him I'd wait a week for him to get back on the court, and I waited 3 hours and then won it fairly as he came back stronger than ever. I won the Unesco sportsmanship award for that and met the four horsemen of France for that, but that's another story. The story illustrates that hard work and perseverance will win the day. And always give the other side a fair shot. Artie always gave the opponents the benefit of every doubt and call when we played. And he'd say to me "if you need it that much, you should work harder. It's only a game".

Another story I like is in EdSpec about how grandpa Martie wrote a letter to the football coach when he yanked Artie out of the game. "How could you dare to take all American Niederhoffer out of the game when he was the only one to catch, kick, and block the ball with impunity throughout the 3 to 42 loss." The coach read the letter to the players in the locker room, and my father was so embarrassed the rest of his playing days. They always kidded him and called him All American after that. Yes, but if your parents won't stand up for you and think you are the best in the world, who will? You will find in life that the ones you can trust and rely on the most are your parents and very close relatives, and everyone else you will find will be very likely to let you down in the pinch. I have carried on the tradition of defending my children with letters and one time I wrote a similar letter to Martin to Galt's teachers when they wouldn't let her in a talent show because her moves were too dynamic. I pointed out to her teachers that because of their own failure to achieve greatness, and lack of self esteem, and their oneness with the idea that has the world in its grip, i.e. that all outcomes should be equal and that the individual doesn't count for anything, and the purpose of life is sacrifice, they were threatened by the greatness they saw in her. I did use the word maggots and envy in talking about their personages, and for the rest of the time Galt and Katie were at school, the teachers called me Mr. Noriega, the terrible dictator from Panama in retaliation.  (By the way, Galt did get in the talent show after all, as people who lack self esteem are often cowards at heart and they didn't want to have the story of their suppression of talent get spread around).

I got hundreds of stories to tell you like that which will guide you in life. And many of them are in EdSpec. I'll tell you more from day to day. However, I would suggest to you that you should read stories to learn and remember things about life. And there are born story tellers like Louis L' Amour, Ring Lardner, Patrick O Brian, Victor Hugo, Jack Schaefer, Alexander Dumas, Mark Twain, whose books we are beginning to read to you who will make your life scintillating and memorable and inspire you to greatness and heroism. Well, I think you get the gist. Life can be a very beautiful thing if you work hard, play at things, learn from the greats, do some good reading and music, pursue your fantastic talents, and try to be happy. You will learn as my father said to me when I was your age, "the old buck is not so bad" and all the things I try to father with you are done to put you on a proper path for a life that is great now and in the future.

Love, dad

The Hobo responds: 

Rx for an everyday Niederhoffer from a hobo

Your letter is good and v. valuable. but u don't want to hear that.

reactions and suggestions: surprised he's gregarious.

you take him to Washington square to play chess– what a treat if he likes it.

'have 20 computer chess games and related conversations and 15 scrabble games going on at the same time'– impressive not because he can do it, but because he wants to.

suggestions for sports: judo, aikido, wrestling, gymnastics. more individual sports since he's social enough.

no tap water, no fountain drinks…

he must learn at least one foreign language or will lose a majority of thoughts in the context of words.

don't make girls a curiosity. explain them or he will want to explore them, and it's a waste of time.

he must continue to travel outside the country for perspective in all things.

expose him to poverty & more slowly to the sordid and let him make up his own intelligent mind.

appeal to his logic on all matters and keep emotion secondary.

u are at fault for not supplying him to date w/ The Memory Book by Lucas & Lorraine.

home schooling is better exactly for him unless there's a school w/ peers, which is unlikely. he will naturally bond and develop below his mental giantness unless exposed to your usual diet of transient specialist geniuses. a public school will stunt his growth; the best private one will turn him into a state champion; home schooling into a national.

Important- 'I should mention that you are very fortunate to have two families that you love and love you very much.'

'expose him to monthly situations that demand 'hard work, and preference will win the day'. he will acclimate to the difficult. the gains can only be learned the hard way, as our sometimes good chairman Mao says, 'through a little bitterness in life'.

'you always ask questions'- indicates he has a big 'I am' to fill, and a drive to become what he may. your job is to provide the smorgasbord environment.

explain what 'thinking outside the box' is. he does it, but knowing it will expedite many thought processes.

he needs logic puzzles: how to get a fox, bag of grain, chicken across the river; bear walks by a house w/ four windows & you look out a window and the bear is white– where are u; found a coin dated 94 BC– it's fake.

he is old enough to take the big step: list the priorities in life. let him do it. review annually. it can be altered, any plan can.

he's a chip off the young block.

the most valuable sum up comes in the middle: this letter will 'help make sense of where you are'.



How often does the market offer hidden messages, specifically tailored for a particular segment of the market (victim of the Mistress)? Here is a great example of a hidden message in real life: "This Ad Has a Secret Anti-Abuse Message That Only Kids Can See"

What are the market parallels, if any?



 An article displaying many interesting price psychologies towards an asset of no intrinsic value is "Why Do People Still Buy Personalized Number Plates?".

And it's a successful £2bn seigniorage raised for the UK government.

Notice the classic auction room behaviours of those interviewed.

Not a single person overpaid (they declare).



 The talented, entertaining and volatile Knicks put on quite a display the other night in winning their first playoff series in 13 years by taking Game 6 against the aging Boston Celtics. With less than 10 minutes to go in the final quarter and leading by 26 points the Knicks however managed to throw the outcome in question by rapidly giving up 20 consecutive points. Even the rants, raves and exhortations of the garishly orange-clad, sideline, Knickerbocker cheerleader, Spike Lee, seemed to no avail as shot after shot was missed and turnovers came in quick succession. I just happened to tune into the 3rd and 4th quarters and have never seen an NBA game ending quite like it.

The NBA record for the largest 4th quarter comeback is mentioned here:

"It's harder still to overcome a 29-point deficit with just 8:43 remaining in the game, as the Milwaukee Bucks did on Nov. 25, 1977 against the Atlanta Hawks."

One would think coaches, if they're not already doing so, would resort to instant statistical displays (such as those by Synergy Sports on large hand-held tablets in order to show players during timeouts where things are going wrong, but maybe this would be too much information for the already stressed athletes.

As the Chair mentioned earlier, too many isolations by Carmelo Anthony from 3-pt range is not always the best way to run an offense. I enjoyed this article about it: "One Reason Carmelo Anthony's Knicks Are Shooting Worse–Isolations".



 Has the DNA of the market been changed of late due to the type and nature of trading?

Has the molecular structure which provided the support in floor trading days been abolished with the whizz and bang of market maker's (never there when you need them but screaming that they're the life blood of the market) and DMA strategies that are quicker and more deceptive then a gypsy in Barcelona? Have the flash crashes of late provided the canary, signalling we are ill prepared for these new dynamics and any back-testing prior to 97 is null and void.

Smoke and mirrors, smoke and mirrors.



 My wife recently had a PET scan (eyes to thighs). Fairly routine and they've been around for years. We're required them 2-3 times a year. The bill came to $17,000 of which the insurance company paid $14,000 and we are responsible for the balance. This is with "the Cadillac" of insurance. From now on, I really should pay cash only.

Per BHO's system of government, overburden those who have the resources to pay, de-emphasize or suppress the activities which will allow others to grow their own path to middle/upper classes, and kill the country's vibrancy.



What are the chances…statistically, that the Dow and S&P would cross big round numbers on the same day? The Big Round Number phenomena first pointed out by the Chair in early days …. still holds true.



Has anyone noticed the rally in the 10 year Bund? I thought that it perhaps had finished, but that's not the case. The yields just keep dropping.

Anatoly Veltman writes: 

David, if you missed that story: major Central Banks vouched they'll never raise rates again. So you can't be short any core sovereign bond today.

My take, however, is that following 32-year-long advance in US bond prices — it's just as important to be ready for the reversal day. Once you think we are getting a reversal day, just imagine how many years you'll be following this position down!

Jeff Watson writes: 

What if bonds don't reverse for a long time? That could happen you know….Logic does not always work. How long are you willing to wait, 10 years? The Fed has stacked the deck and the new deck is a 6 deck blackjack shoe, marked cards. and the deck is very rich, a counter's delight, and there is a run of AK,A10,AQ, all paying the new, reduced odds of 6:5 for blackjack that many games are offering. Unfortunately, when they reshuffle, we get the 2's and 6's while the dealer shows an ace, and the key element to keep the sagacious away is the dealer gets to go last after we all bust out. How do you beat that game? People tend to over think things, and assume that because A=B and B=C, then A=C. We know that the best trading opportunities sometimes lie when A does not equal C for whatever reason. Sometimes I tell people that intellectualize too much to take a page from Charles Bukowski, who in an alcohol fueled rant said "Don't try," but I changed that to "Don't think." I'd like to know how much money has been lost by "Thinking."

Anatoly Veltman adds: 

First there is a Long trade, but I'll let someone else formulate it. I'm really no good in playing the momentum of a 32y old trend. Then, there will be a short trade.

One way to formulate the future Short trade: what's better a. to enter Short at some relatively high point OR b. to enter when the future down-trend "is" in earnest.

I'm reminded of Gold nearing $1900 in 2011, with Rocky (who's been Long since probably $1000 lower) proclaiming: what's the use out-thinking the trend just because she may be "overbought". There are no signs of a bubble, just stay the course. When the top is finally confirmed and the down-trend develops, you'll have years of riding a Short…

So in case of Gold, Rocky finally declared in 2012 that "something has changed in Gold" as it was rapidly correcting toward $1525 for the second time - and he didn't want to be Long of it any more. In 2013, Rocky was anticipating the break of $1600, and announced his now Short bias.

Back to Bonds: there are way more signs of a bubble!! So lets see if Rocky will pick a., b. or a future way of Shorting I haven't thought of.

a commenter adds: 

There are those self promoters who picked the real estate bubble (Shiller et al), the guys who predicted 2008 etc. What you don't hear is their predictions that went south as that would diminish the brand of the promoters. Even a broken clock is right twice a day. And really, how does one really know, and how does one predict with certainty there is a bubble? And if it really is a bubble, who cares as long as you can sell at a high price on the way down. Isn't commentary regarding the morals of whatever kind government action a waste of time? The government does whatever, you go with the flow and relax. Fighting headwinds, fighting the Fed, wasting time on worrying about why things happen, making decisions on emotion and false logic…..these little things are what make the account balance bleed, and drive one insane.



One searches for regularities, vis a vis the current release, knowing that other important things like the minutes are apparently leaked to important people like heads of banks and lobbyists and journalist before its announcement. When I wrote about my chagrin concerning this, many readers wrote back to me and said "how could you be so naïve. Of course that happens for this release and that release also." It reminds one of how I felt when I played against someone twice my size and strength in junior tennis when I was 12. But one searches for regularities that might signal such assymmetries in information and notes that there have been 22 small up openings as of gmt 800 before the release and 20 small down openings. The standard deviation of the sub move the rest of day is 10 in both cases which is normal for any day regardless of a ananoncement. And one notes that there seems to be no departure from randomness the rest of the day vis a vis expectations after the down and up with an average move less than 0.1 % in both cases.

The one thing one does note is that stocks and bonds are both close to their all time high. Stocks are close to the round of 16000 as is the nkikkei close to th round at 13900. Gold is close to the round of 1500 at 1476 and the yen is 2 away from the round of 100 at 9800.The euro at 131.00 seems to be at the level where the troika wants it. None of the rounds have been breached. You might say from all the numbers that the markets are very happy. One would only hope that the strength of our economy matched the strength of the markets. When B was asked how he was feeling he always answered "for a poor musician as well as expected." One feels the same way but is bewildered playing against these strong opponents.



The Junto will be held Thursday May 2d at The Mechanics Institute (20 W 44th St between 5th and 6th, NYC). The speaker will be Dr. Bradley Thompson Professor at Clemson and Director of the Ayn Rand Institute . The topic will be "The Pitfalls of Education". Thompson writes:  "The theme of the talk is, to quote William Lloyd Garrison and the American Anti-slavery Society, 'Immediate Emancipation, Immediately begun.'"

All are welcome. 



 Novices can be the scariest opponents a solid poker player can face, especially in a one on one situation. Novices make bad bets all the time, bets no rational player would ever make. Bets like drawing to an inside straight, which gives him a miserable 4 outs, but happens. Since you are playing an irrational player, someone who might have more "gamble," and less knowledge, you need to change your game. If he is really loose, a good player will play tight and vice versa.

In poker, not all weak players are novices. Some are lifetime degenerates that are like ATM machines. I think novices can be extra dangerous because of the belief that beginners can do very well (some would call it luck). I drew a pat queen high straight flush on my very first commodity trade (soybeans) almost 40 years ago as a 16 year old kid, and things like this happen. Most of the poker games I used to play in were full of very tough players, opposing forces, so to speak. I've traded against some pretty solid players in the pit. In both poker and trading, one needs to play around, and not against the tough player, and go after the weak (which is not necessarily the novice). Does the least irrational player come out ahead in the long run? In poker or trading, that is worthy of further study. Then again, I have found on many occasions, the most rational thing to do is act irrational, or at least make your opponents think you are acting irrationally. In any case, the key lesson is to play a very strong defense at all times and keep one's guard up.

David Lillienfeld writes: 

The same thing is true in chess. When something moves out of a rational context, it is challenging indeed. When I played tournament chess (a lifetime USCF member) a while back, I used to go for the upset prize–it meant winning one game instead of the best of 5, and the prize was not quite that for the tournament overall, but it also involved less work. My opponent usually had a much higher rating than I did, and often didn't pay much attention to the board because, obviously, I wasn't close to his measure and he could focus on other things during our match. Sometimes, in the early middle game, I used to start using inane sequences of moves that would absorb lots of my opponent's time (we played on a clock) as he tried to figure out what I was doing. This would absorb a lot of his time. I would then sacrifice a piece or two, which made no sense, but it again absorbed time on his end figuring out what the madman he was playing against had in mind. About half the time, his clock would expire and I would win what was basically a lost position. It's not the best strategy for trying to win a tournament, but for the upset prize, it worked a lot of the time.

Anatoly Veltman comments: 

You may laugh, but at the level of Soviet and International grandmasters, directly the opposite was sometimes practiced by a few leading players who were best of the best in lightning chess (blitz). If they didn't like what they had on the board, they would purposely allow their clock to run down to only like 50 seconds remaining. What they gambled on was that the opponent, who already had a very good game on the board, might instead focus on their clock…



I attended a presentation yesterday on "Optimal Order Placement in Limit Order Markets" given by Arseniy Kukanov.

It was an interesting presentation but was perhaps best summarized by a well dressed white haired gentleman in the audience who asked at the end: "given all the simplifications and assumptions you had to make, of what use is this 'solution' other than to enable you to get a PhD".

In choosing between limit orders and market orders you have to trade off cost savings provided by limit orders against "non-execution risk" that accompanies limit orders (risk that the limit order will not execute).

The problem is: you must buy S shares of stock within a time horizon T.

There are N markets (exchanges) available, for each market you know: the bid ask spread the bid queue lengths at time zero the maker/taker fees that each market charges.

In each market you can at time zero place a market order (which has a 100% probability immediate of execution) and/or or a limit order at the best bid price (other price choices are not included in this version of the model).

There are two parameters lo and lu which are the penalties (in dollars per share) that you charge yourself for buying fewer than S or more that S shares in the available time.

The model minimizes the sum of the trading costs plus the penalty.

The simplest solution is in the case of only one exchange (ex: the minis are only traded on the CME).

In this case there is an algebraic expression for the optimal strategy, and what to do depends on the value of lo:

If lo is below a certain value lbar1, it is optimal to enter a limit order.

If lo is above a certain value lbar2, meaning there is a high urgency to buying the stock, it is optimal to enter a market order.

For lo intermediate between these two values it is optimal to enter both a limit order and a market order at time zero that add up to the desired quantity.

Certain theorems about the solution can be derived, for example as the amount of stock S to be bought increases there is an increased reliance on market orders.

From my point of view one of the most unrealistic assumptions is that the probability distribution of future order flows and cancellations does not depend on the size of the order you enter. In my experience on the contrary if you enter a big limit order it can 'scare' the market and move it away from you.

All in all it was very good for an academic presentation.

The full paper can be found here.

Thanks to Anatoly for the invitation.



I've found a British version of the Chair's recommended "Letters from a Self-Made Merchant to his Son". It is "Letters to his Son" by the Earl of Chesterfield on "the Fine Art of becoming a Man of the World and a Gentleman."



 It is rumored that AAPL placed their 10-year paper at 10yrTbond+75bps, which means about a 2.4% rate, if I'm reading the screen correctly. Given that the yield on AAPL's equity is about2.9%, that's a nice positive-cash-flow way to conduct a buyback and still keep your overseas cash hoard protected from taxation. Not that it matters (or has any magical power), but for the equity to get to a2.4% yield, with a divvie payout of $12.20, it would need to hit about $508.

One wonders how many other firms are doing, or considering doing, this type of buyback financing.

Rocky Humbert writes: 

For the period January 2008 to June 2012, Apple stock rose at a compounded IRR of 40% for a price change of 331%. For the same period, the Nikkei declined at -1% …. for a price change of -12%.

For the period June 2012 to present, Apple stock declined at a compounded IRR of -27% for a price change of -25%. For the same period, the Nikkei rose at a compounded IRR of 34.5% for a price change of 26%.

Who in "their right mind" would argue that the Japanese aversion to iPADS does not fully account for this statistically significant negative correlation?

Furthermore, with respect to your comment about my trade in Apple stock (which I ka-chinged yesterday as it finally valued the arbitrage accretive value of the buyback with no regard for growth prospects about which I have no opinion): I would note that Warren Buffet argued cogently that Apple should use its cash pile to buy back stock when it's below intrinsic value and create wealth when Mr. Market is irrational. As Apple followers know, there was much speculation about Apple's cash deployment plans — and that the behemoth actually traded down on the morning following this announcement shows that it took some time for Mr. Market (as distinct from the HFT bots) to correctly assess the significance. If Hewlett-Packard had followed the same path, instead of literally throwing out billions on (what turned out to be) a fraud acquisition in England, I might still own that stock and it would likely be trading in the 40's today. Instead I sold it "horribly" at 27 on the news of the acquisition and incurred a loss and the ridicule of many on this site.



I have reviewed the HBR forthcoming study, predicting the next big thing. The data it uses are based on data from mid 2002 to mid 2005. In an era where markets can move 10% in a minute or two, with high speed computers and printers avaiable to even the most non-computer person, it is amzing to see results based on just 3 years of data 10 years old. Certainly the question emerges as to why they didn't use more current data or more than 3 years. The query relating to selective starting and throwing out negative results arises.

The measure used to test their thesis is an amazing one that one has never seen before even though I worked with Zarnowitz on many of his forecasting studies and have kept up with subsequent work in the field: "(they) calculated for each forecaster, the proportion of forecasts that were more than 20% above or below the average prediction… When the average outcome was more than 20% above or below the average prediction". ?????? Huh? They find that the correlation between this measure and the average forecast error was 0.53. Naturally by chance, when the proportion of above average relative to actual is high, then the average outcome for these forecasters is going to be bad.

There are also several contrived experiments that the authors carry out to set a foundation for their empirical study and a few appeals to Bayes rule for standard forecasting that are contained in the opening pages. However, in view of the statistical biases in their results, the short and untimely period of their data collection, and the consonance of their results with the idea that has the world in its grip— that egalitarianism is the goal, and that all variations in outcome are due to luck and unfair initial endowments, we can see why  Harvard would find such a study propitious.



 Sometimes it's the thing that makes it good that makes it bad, something I believe is known as the reflection principal.

I got a new Gopro Hero3. Great little cam and it's small and light because it doesn't have an lcd to look at the pics. But the lack of the lcd makes it difficult to see what you are and what you've been shooting. It has a wide angle lens which is good for selfies including background, but not so good for shooting others doing anything. So it goes.

The principal applies more broadly to things like relationships. The responsibility which attracts one person to another in ten years of a relationship can become boring. An exciting and free personality, after ten years of a relationship, becomes an irresponsible personality. So it goes. Life is full of tradeoffs.

Jeff Rollert writes: 

Relationships are like cars…if you don't add energy or maintenance, it becomes just a car. Add gas though and it's a trip and adventure.

Wish I'd met mine 10 years earlier and had the wisdom to know it.

How many of you have a girl who rides motorcycles, fly planes, builds skyscrapers, or make a killer German meal (or French) from scratch? … just bragging…

Seriously, many times I find people forget what they have right in front of them. I've always felt that risk was a derivative of boredom. Really. Really. Really…

Thank God for the fashion/society pages…how else can you so easily find boredom?


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