This afternoon I was thinking of the events of my honeymoon back in 2009 and while in Hawaii we visited the Sogi residence which featured some good ol' jam band rock-n-roll action by Sogi and his team.

The decay in current music quality versus yesteryear production came long before the decay we have recently seen in the financial services industry. About 30 years or so is my estimate. What is interesting is that classic rock and roll will always have its place — like an old shoe or old pair of jeans. Financial services should be so lucky. What is scary while also quite ironic is that technology is largely the culprit for the decline in both fields.

Jeff Watson writes: 

 Rock and roll is not in decline at all, far from it. Revenues might be down, but not the musical quality. People of a certain age just get stuck in the 60s and 70s and won't let go. But one tends to only taste the cream and forgets that the 60s and 70s brought some absolutely horrible music to the table, stuff (I won't even call it music) performed by Boyce and Hart, Cyrcle, King Harvest, C.W.Mcall, and The Cuff Links. This is the worst song ever written.

My parents thought music died in 1955. My grandparents thought music died in 1920, and on and on. Every generation experiences the same nostalgia for the past, for the music of their youth and feels the new music of the day is declining in quality. Nostalgia is big business because people miss their youth. Bands like the Mowglis, Black Keys, Of Monsters and Men, Daft Punk, Outkast, et al are producing some amazing music which is just as good, or better, than the rock of 40+ years ago. Troubadours like Jack Johnson write and perform music which is just as relevant today as what Bob Dylan wrote two generations ago. An entire new group of people, our kids, are listening to the new rock, and a few old people like myself enjoy it immensely. Stop listening to Clear Channel and find some music……it's out there just waiting to be discovered.

Jim Sogi comments: 

 One day someone asked while I was playing, "Do you know any songs less than 10 years old?" I was kind of stumped, so I've tried to find new songs. It's harder to learn things when you are old and have to beat the new neural pathways harder.

A childhood friend of my son is Ryan Fontana, of Sex Panther. He has achieved big success as a DJ playing electronic dance music. There is some good music there and it's good for dancing. The girls really like it. EDM keeps people dancing and drinking. Some clubs according to WSJ can sell a million dollars of drinks in a night. Some of the music can feel repetitive but when they're dancing, they're not really listening to the music, but feeling it. With the big sound systems, the ground literally shakes. It's an experience and it's good business. I've got an open mind and even like some hip hop stuff, though it's taken a while.



 For those of you interested in jobs data, this chart might be of interest.

The red line is very important, showing a 2 percent increase. Ceteris paribus the 2013 payroll tax receipts should average 2 percent above 2012. However as time has progressed, the government has received less and less of this increase, and the current receipts growths are running negative to the prior year despite the increase in rate. This is the Laffer Curve at work.

As of January 2014 the YOY growth will use as its base the tax-increased 2013 data, which should be interesting.



 Steamtrain converted this image into a post card that he would hand out to the RR people, hobos, at the Britt convention and others he met while cruising the highways in his later years in an old Cadillac.

One time I stopped in to see him in Toledo, learnt how to foraged and eat dandelion greens, and slept in his back yard. The next day he took me in the Caddy to the train yard, talked to the crew, and got me on an eastbound to Pittsburgh with a handful of the autographed postcards.

He waved goodbye as the boxcar pulled away, shouting, "If the bull gives you any trouble, give him one of these and tell him Steamtrain sent you."

The freight arrived two days later in Pittsburgh in a driving rain.

I jumped down and was immediately soaked as the railroad bull pulled up. "I have a postcard from Steamtrain Maury Graham for you, but it's too wet to pull it out!"

He said, "Thank you for traveling Conrail!"



 I'm a bit concerned about the last Apple quarter report—not because of what's going on right now but because the thing that i was hoping to hear was that the company wasn't concerned about margins so much as market share. That was the mistake of the 1980s—Apple focused on keeping margins up. Scully thinks that that was a mistake though not as much as firing Jobs. I think he has it backwards. Amazon is worth a fortune without having worried much about earnings. Apple would be the same—if it focused on market share first.

On the innovation front, Apple has always been about changing the relationship between man and his environment. That's what the iPod was, that's what the iPhone was, that's what the iWatch will be about, ditto for the iTV. What are the next two things in Apple's quiver? Try these two:

1. Apple purchases Nest, creates an iTune interface for all manner of modules to control a house. For instance, it reaches an agreement with Whirlpool to put those modules into Whirlpool's products. The modules cost all of $20-30, but they allow you to control everything in your house remotely. Everything.

2. Apple reaches an agreement with Ford to put an Apple iCar into each Ford auto. The iCar contains a description of what properties you want the car to be optimized for. Speed? Mileage? Handling soft ride? Handling firm ride? and so on. You could even build into the iCar a module, software programmable by an insurance company to monitor driving habits, a la Progressive. You could change the iCar with an iTunes like interface, and each driver in the family could have their own iCar. Junior wants the car? Dad puts the iCar into the car—using a secured compartment that Junior wouldn't have access to. Why? Because Dad's put a special limit on the iCar to keep Junior from going more than 70 for more than 15 seconds every 15 minutes. (Junior may need that momentary spurt to escape an accident.)

Ford would like the device because it could segment the market with it—the more expensive the car, the more capabilities in the iCar, and the iCars could be separated on the basis of the attached device, much as differentiates the iPhone 5 from the 4S.

There's lots Apple could do with such a device.

Strange that I have't heard anything about it—and that would sell quickly. You could even upgrade the iCars with each model year. Apple would have secured built in obsolescence. Upgrading the motor? Upgrade your iCar. Etc.

Now, if I can think of that, why hasn't Apple?

Jeff Watson comments: 

If you don't like what's going on, you can always short the stock.

Ed Stewart comments: 

Tying the aspirational Apple brand to something so lame as a mainstream car company seems like a terrible idea to me.

As for Nest, I think about my smoke alarm or other appliances in the home only once every 3 years or so, if that. It is a non-issue that does not solve any significant need. I can handle my smoke alarm without notes from my iphone. Why apple would want to tie in with such things once again seems a non-starter to me, degrading to the brand's appeal. If anything such features could be done through an app of little significance, a side feature among tens of thousands for those who want it, developed by a third party.

I could be dead wrong, of course. One person's strategic brilliance appears banal and foolish to another.

Good thing we can trade and sort things out.

Carder Dimitroff writes: 

I'm not an expert on Apple. I have no idea what they may be developing. However, I do think David may be offering an interesting idea.

Somebody will offer a simple home management system to manage energy consumption. It would take someone like Apple or Google to figure out a simple, easy to use system. It also could come out of somebody's garage.

Pressure is building for consumers to gain control of their energy consumption. Despite low wholesale prices, retail energy prices continue to increase. Regulators are promoting demand side management policies. Intermediaries are happily removing themselves between the consumer and the [volatile] power markets. Smart meters are being deployed across the nation to help consumers become responsive to market conditions.

The setup is nearly complete. A new day is arriving. Consumers will become fully exposed to the dynamics of the deregulated power markets, which operate 24/7 and change every three to five minutes.

The utility will always own the meter and outside wires. The consumer will own everything behind the meter. Creative developers will begin focusing behind the meter and help consumers manage their purchases of electric, natural gas and water.

Residential and commercial consumers will need programmable sensing and control devices. I have no idea what the technology will look like. However, it needs to be simple, buried and invisible to slow adoption consumers (like automobile computers). It also must manage energy consumption without altering lifestyles.

This is more than managing a thermostat. It is about controlling everything on the consumer side of the meter.

Apple and Google are very aware of energy issues. They are aggressively investing in large-scale alternative energy production facilities (solar, wind, fuel cells). Google invested in high voltage transmission lines.

Combining their energy knowledge with their consumer electronics experience suggests they are in a unique position to offer innovative demand-side management technologies. This would include the opportunity to manage massive amounts of data (Oracle is already trying to claim this space). If Apple or Google takes this path is another question.

Apple and Google have already demonstrated that change usually comes from the outside. One fact we know, consumers cannot expect their plain old utilities to develop innovative technologies. The question for me is whether Apple or Google can still deliver an out-of-the-ballpark product.



As we bid adieu to October, does anyone know how frequently busts and crashes have started/taken place during November/December during the last century or so (maybe 125 years)?

anonymous writes: 

Firstly, define busts and crashes. That is difficult enough given that market volatility keeps shifting. If only the big ones, you have only 12 datapoints!

If more generous, none recently on Dow Jones but since 1900:


Secondly, define market. Most recent would be 12/1989 but that is on the Nikkei.

Lastly define peak. There are some double tops where the actual high was in Oct or Jan.

I wonder myself what it means — is a December less or more likely, given it is the least frequent month historically?



 The FOMC announcement for the policy meeting is expected to leave rates unchanged. As Bloomberg reports "market focus will be on the FOMC's characterization of the economy-especially the labor market-and on any hints on timing of the start of reducing quantitative easing".

It seems markets are anticipating the release of the minutes expecting another hurrah: let's print some more money….! Markets have been printing new record highs day after day, and I completely missed this move losing instead my hard earned money trying to counter the impressive ongoing uptrend.

I have always wondered if my being contrarian has something to do solely with counting. I continue to see every day bearish patterns that miss their expectations, although I am aware that euphoria may invalidate typical mean reversion behaviors. I think there is something about being a contrarian by nature, like someone who is not willing to be part of a herd. Or to conform to stereotypes.

Extending the concept to its limits, being a contrarian could be also related to the inability (or unwillingness) to fully integrate oneself in the established common set of values of social contexts. As herd behaviors take a long time to exhaust their thrust, often times it would be better anyway to be less dogmatic.

Ed Stewart adds: 

A few thoughts about your post with an admission of little expertise.

Sometimes I truly feel that in spite of all the intelligence applied to it, trading is not much more complicated that other types of commerce where consumer tastes are fickle. As someone else said, it is the art of "what works now" or "what can I buy now to resell at a higher price".

To me, the best of counting is in studying, "what is our market is doing now" and "can i find a profit in it". I find when I get to far away from this basic notion my counting (limited as my abilities are) stops working.

In terms of contrarianism, I don't see it as a technical strategy or a need to always be fading price, so much as a mindset that recognizes that the great loss from the public shows up in money weighted returns, not just transaction costs. If you do what the public does you lose more than you rightfully should, as Vic has said many times.

I see much of trading as playing the forward curve of expectations. The easiest trade to me is shorter term fear against longer term drift or an expected value — and not to "dig in ones heals" but to stay nimble and play for a blip, at least in futures. And not massive fear but just the many little fears that show up regularly and give the other side a chance to exit or initiate at a poor price - and if it turns out out wrong adjust and move on quickly. Make the money back somewhere else.

The worst thing about shorting stocks to me is that it gets you thinking about covering when a more profitable thought at that moment might be to get long - So often on a short trade one squeezes out with a small profit right before the market blasts off again. And when you evaluate it you see that it was indeed a good time to get long, but you were oriented the wrong way and lose out.

One analogy that I liked a great deal in Practical Speculations is that energy dissipates through an ordered flow. That idea and its relation to studying price behavior and economic things like the impact of QE has been very useful to me. QE and similar is potential energy, the markets turn it into kinetic energy. Subsidized cost of capital lead to share buybacks, shrinking float. Shorts crushed. The entire market thermodynamics chapter is highly useful and one of my favorites.



Collateral plays a big role in the system at large. If the banks can survive only through overnight funding at either the repo, MRO/LTRO, or Fed discount window, acceptable collateral is as important as rates. To ease the Fed can ignore rates and just say one day they will except IBM or Apple debt or commercial paper as collateral in exchange for loans. Conversely they could slip in some language about raising "haircuts" on notes or bills to have a tightening effect. While all are focused on the level of bond buying, there are many other tricks they can pull from the sleeves.

Richard Owen writes: 

They say the securitisation markets died.

Not so. It is just the banks began wrapping to repo rather than sell.

The ECB gave it a pill by agreeing to accept any AAA collateral. Standard practice is to wrap your doo doo, top slice it, and fund the AAA at ECB.



 I got a call today, wherein a large bull in India was quoted saying, "Victor Niederhoffer has written in his book, the best time to buy stocks is when brokerages are shutting down."

I tried recalling where the chair wrote that.

I assumed he has been quoted correctly, my conundrum is:

Indian equity indices are whiskers away from all time highs, that were seen five years ago. In between in 2011 too a re-test of the all time high had happened and marked dived 30% from there.

While retail brokerages are shutting down en-masse near the highs, domestic mutual fund AUMs have shrunk a tad with hardly any new net in-flows, Foreign Institutional Investors are net buyers.

A further divide on the conundrum:

Individual local investors are in despondency, on one hand. Institutional Global Investors are described in every segment of the market food chain as being complacent at the near high levels with such global & local macro concerns.

Descriptive sentiments are thus split wide open vertically between Individual / Retail/ Local despondency & institutional complacency.

Which way to tip the hat?



 At what stage do you try and fade the elephant in the room. What is a leading indicator that the government will introduce a policy change that could change this ferocious bid, with a lot more fire power on its way, if no changes are made?

"Investors Become Like Bulls in a China Shop":

A Sydney property developer who is working with Chinese investors told me that if Chinese stopped buying in areas that are popular with Chinese home buyers, the value of these local markets would fall by about 25 per cent.

These local bubbles are having a ripple effect, pushing buyers into other areas of the Sydney market.The impact of immigration is also considerable and cumulative. More than 400,000 people born in China or Hong Kong have become permanent residents in Australia. The number of immigrants from China continues to exceed 30,000 a year. The number of Australians who speak Mandarin or Cantonese is more than 600,000. The number of people in Sydney who identify as having Chinese heritage is now more than 360,000, or 8 per cent of the population.

The Foreign Investment Review Board looks carefully at the culturally sensitive areas of farming and housing. If changes being made by Chinese governments to cool their property markets are causing market heating to spread to Sydney and Melbourne, it shows just how integrated Australia is becoming with China and the Chinese, which brings a new set of complications - the complications of intimacy.

Stefan Jovanovich writes:

Both of Thomas Mellon's sons, Andrew and Richard, remember their father the Judge being amazed and alarmed at how much the prices of Pittsburgh real estate continued to escalate as more and more of the Irish and other immigrants spent money to buy property. When they would, as young men, take their father to lunch, they would always be careful to pay the tab because, for their father, prices should always have been what they were when he first ascended to the bench "before the war".

Victor Niederhoffer writes: 

This is why the values of privately held companies always lag behind the prices of publicly held companies. The idea should be generalized perhaps into why big stock market moves in one market filter and percolate into other markets. That has been tested.



 As the folks at Global Financial Data remind us, sometimes "real" property prices are virtual. As their Chief Economist, Bryan Taylor, notes in an essay on the Florida Land Bubble of the 1920s, "two-thirds of all Florida real estate was sold by mail to speculators who never visited Florida. Many of them tried to flip the land through ads in the Miami Herald. For those who actually went to Florida, binder boys were hired to expedite purchases." The "binder boys" were what many mortgage brokers/real estate agents were during the most recent real estate bubble; they collected down-payments and offered seller financing for periods as little as 30-days.

One can get a gauge of the size of the crash from the price for The Land Co. of Florida common stock.

As Dr. Taylor notes, "The stock traded on the New York Curb (later the American Stock Exchange) and traded in September 1925 at 93. After the train embargo was announced in October, the price fell to the 60s, and continued to fall, decreasing to the 20s by February 1926. One would expect that the hurricane of September 1926 would have caused a further collapse, but in reality, the stock price rose after September, hitting 41 in December. Perhaps the impact of the hurricane should be reevaluated, but it was downhill from 1927 on. By the time the stock market crashed in October 1929, the price had fallen to 5 and by the end of 1930, the stock was at $0.50, never to recover. The stock stopped trading on the Curb in May 1931."



I have a model which at its root is theoretically (but not operationally) similar to the Fed Model, and its job it to tell me where to allocate assets among equities, debt, gold and/or REITS. I also include a few other items as 'tracer bullets'. At this time the allocation model would have most of its money in equities, and importantly no money in REITS. However when I look at my list of 30 stocks to buy, 23 of them are REITS and 2 are utilities. So if I have to rotate out of something, my only choice is cash.

Could this suggest something ominous?



 I saw this clever book on Amazon: "The Essential Scratch and Sniff Guide to Becoming a Wine Expert: Take a Whiff of That" by Richard Betts.

Perhaps a scratch and smell investment guide in a humorous vein would be a fun thing too. One conjectures that if investments had attached smells that many longshots (and decaying ventures) would be avoided and bargains would be more readily identifiable.

My environmental geologist snoozle became very adept at detecting 50 ppm or greater ("impacted") hydrocarbon levels in soils–but that is another story. At any rate, back to articles about the book:

1. "Knock wine off its pedestal. That's the goal of wine expert Richard Betts. And he has come up with a brilliant way to do it: a scratch n' sniff guide to the aromas and flavors of the wine world. With beautiful illustrations from Wendy MacNaughton, the 10-page board book looks like it belongs with your kid's toys instead of next to The Joy of Cooking.But don't let the playfulness fool you. There's some serious wine science in Bett's new book, The Essential Scratch and Sniff Guide to Becoming a Wine Expert."

2. 'Betts points out that all we actually taste is sweet, sour, salty and bitter.

"Everything else we experience comes from our sense of smell. And we can break that down into three specific areas that define all wine: fruit, earth and wood, oak in particular."

Earth is the toughest one to explain, he says, but as soon as he invites people to recall the smell of potting soil or river mud from a camping trip, they get it. For fruit, it's red fruit or black fruit. For oak, if it's American it smells one way, French another way. '



Buffett buys Heinz with 3G, brings in Burger King's (3G owned) ex-CEO, and McDonalds throws a strop and drops Heinz from the menu.

Does anyone know any of the politics behind this?



 You may never eat street food in China again after watching this video.

The last words on the video are: "In today's society, everybody tries to swindle everybody else. There's nothing we can do about it."

From the top down, vendors to markets participants, ain't that the truth.



Using Robert Shiller's monthly data* (1900-2013 ), I constructed SP500 earnings yield:

E/P = (monthly earnings) / (SP500 price)

(Note this is conventional earnings yield, rather than his P/E adjusted with earnings smoothed over 10 years)

Shiller's data also contains contemporaneous "long interest rate"; GS10, which is 10 year Treasury Constant Maturity Interest Rate.

Used E/P and long interest rate to construct a "FED model": (E/P) - (long interest)

E/P - long interest is plotted monthly from 1910 - 2013 as the blue line.

For each month, mean monthly stock returns were calculated for the future 36 months (3 year mo avg return), plotted contemporaneously in red.

The FED model generated with this data is a great deal less stable than corresponding future stock market returns. This is in contrast to one of Shiller's main observations that stocks are too volatile compared to expected dividends (earnings, etc). It is an article of faith that investors and scientists are forced into stocks when bond yields are small compared to earnings yields. If this were true one would expect a more stable relationship than observed here.

Instead it appears the FED model changed around 1980; with E/P getting smaller than long interest rates - making the curve go negative. Recently it has trended back up as bond yields dropped and earnings stabilized. Perhaps we are headed back to an older religion.

anonymous writes: 

Please elaborate on your statement: "It is an article of faith that investors and scientists are forced into stocks when bond yields are small compared to earnings yields. If this were true one would expect a more stable relationship than observed here."

I don't understand your logic. Which are the independent variables? In the arbitrage-free model, isn't everything explained by the equity risk premium — which is yet another independent variable? And isn't the Fed model essentially a Cauchy (ratio) Distribution? I believe your comment therefore is to be expected. Please direct me to any academic papers (not popular press) where Shiller cites the Fed model. I thought his point is that stock prices move around a lot more than the underlying earnings/dividends. Is that incorrect? 



 I wish I hadn't written the chapter on poker in edspec. I hadn't played for 30 years when I wrote it, and all I did was read some books from the gamblers book club, and then write about it as a layman, poseur, armchair geezer. I wasted 5 pages of everyone's time on it. And anyone who knows the game would have seen I was out of my league. I try not to be as ignorant of my ignorance as I once was.

The current issue of Outside is all about the secrets of survival. What it takes to stay alive. I am ignorant on this subject. The only thing I know about it, is from books, that when you're the captain, you're supposed to be the last man out, until you say "every man for himself" as Aubrey did. Also, what I read in L'Amour about always being aggressive at the beginning when threatened with a life saving situation. But people on this site are infinitely more knowledgeable than I on this subject as are all my kids and partner, who all had to spend a few days alone in the Vermont wilderness as part of the Mountain School they went to.

So please, give us your survival things, and comment on what Outside said, so that we can survive better in speculation, a consummation devoutly to be wished, and which the all seeing eye would like to do so many things in this life over again related thereto.

Jim Sogi writes: 

 Many cases of death in the wilderness are as a result of a series of small stupid mistakes that compound and make what is not a deadly situation, into a deadly one. First is lack of preparation. The classic case is the two hour hike without proper basics such as jackets, maps, water, shoes, compass and the weather gets bad. The party hurries, mistake 2. One in the party gets injured: mistake 3. The parties separate to get help: mistake
4. Both parties become disoriented and lost and panic, running about. mistake 5. Their bodies are found days later a few feet off the path. All stupid mistakes, compounding a nice situation and tipping into irretrievable disaster. It is the same as Chair talks about: a good base of operation. Basic needs of the operation in the wild are adequate shoes, protection from weather, warmth and hydration, and basic navigation.

The second main survival issues are the basic needs of human survival: water and warmth. One can go for days, and almost weeks without food, but without water, hours can bring on death. If the body goes just a few degrees below or above its normal temperature, body and mental functions shut down and the person goes into a stupor. It can happen in 70-80 temperatures surprisingly.

Often, the simple cure to avoiding the above is just to stop. People have a real need to be doing something, and often it is not helpful and leads to disaster. How many parallels there are to trading!

I have a simple survival first aid package. Loss of blood is one of main causes of battlefield death. Unless bleeding is stopped, death will quickly follow often in minutes. Cetox granules go in the wound and staunch the bleeding by forming clots. Pressure and bandaging or sealing with stitches or tape will stabilize until further help. Also in the kit are pain killers. Sprains and breaks are common, and pain killer will allow the party to limp or carry to further help. The commercial first aid kits are often a waste. Water treatment is top of the survival bag list to kill giardia and cryptosporidium that will cause runs and dehydration. A small tarp or space blanket and jacket will provide enough shelter to avoid hypothermia by blocking wind and rain. Tape such as dermoplast or even duct tape can be used to staunch bleeding, make splints and stabilize breaks and sprains. A good flint and steel and tinder and water proof matches will help build a fire to keep warm. That's about all in my kit. All the crap in the commercial kits tend to be useless weight. Most survival situations only last 3 days. By then 95 percent are rescued or dead. Just stay warm, drink water, and keep your blood inside you.


98.6 The Art of Keeping Your Ass Alive
Cody Lundin
Backcountry Skiing Skills Wheeler, Margaret
First Aid: A Pocket Guide Van Tilburg
Glacier Travel and Crevasse Rescue ,
Selters, Andrew

Deep Survival, Gonzales, Lawrence

Phil McDonnell writes: 

About the only thing I can add to Mr. Sogi's excellent summary of survival techniques is to recommend the choice of tinder for the flint and steel technique. I have considerable experience from Boy Scout days with flint and steel. The best tinder by far is steel wool. I believe the reason is that hitting the steel against the flint throws off molten steel sparks which somehow are attracted to the steel wool fibers. In competitions I used to be able to boil a #10 tin can of water in 3-4 minutes.

Pitt T. Maner III writes: 

 I occasionally watch the Les Stroud Survivorman show and he has some good ideas on the subject. Similar to Mr. Sogi.

For urban disaster he emphasizes having a basic kit stored in a plastic container.

In Stroud's view it is ideal to keep:
1) a week's supply of water and 2) a nice first aid kit (probably doesn't hurt for everyone in the family to take the Red Cross First Aid/CPR course or from another qualified provider. He advises having a 3) crank-up radio to keep in touch with outside world and 4) a shake, non-battery flashlight. 5) Water proof matches, 6) Rope, 7) a Multi-Tool.

During the hurricane season a trip to Costco to prepare for a possible storm is important. Easy to pick up canned goods, water and other items needed. A little wine to share with your fellow condo survivors doesn't hurt either when the power and water go off for a week and you are sweltering without the A/C. I like a big lantern-type flashlight with fresh batteries so you can read a bit at night.

At any rate, Stroud emphasizes staying dry to avoid hypothermia in the wilderness. Exposure is a big risk in the wilds.

Ed Stewart writes: 

 James has an excellent summary of important points.  I will add (or expand on) a few.

First, be very cautious when venturing into new territory.  If one is experienced at hiking a certain path or mountain or area, Don't assume "it is all the same" when you go to a new place.   Don't assume, "I know how to find my way".   I grew up in rural New England and spent a great deal of time in the woods (back country type skiing, hiking, fishing, etc) from a young age.   My families home was near a govt owned wilderness area, and over time I got to know the terrain extremely well in terms of having a mental map and orientation, but also things like natural formations that could be useful as shelter, etc. Knowing a wilderness territory is like knowing where the "utilities" are that you can access from any position.

It is very dangerous to generalize such specific knowledge into thinking "I am good at finding my way", a mistake I experienced and learned from.

Wear the right clothes initially, not just in a backup capacity. What is comfortable in ideal conditions (light cotton long sleeve T-shirt, etc) can be a disaster when conditions change. Material that is waterproof and/or maintains insulating ability when wet is always good.

Extreme danger emerges out of "usual" situations and seemingly small challenges. It is hard to see danger without experience. For example a recreational hiker thinks, "that small rock formation would be fun to climb".   The problem is, how it looks at the bottom (easy!) is a distortion relative to what one sees close up (unstable rocks, dirt, etc) from a now dangerous height. "From a distance" assessments are not an accurate judge of things for most people.

Focus on external factors that reveal themselves through the five senses. Take the time to observe. Stop and listen. Look at shadows, type of earth you are on, gradient, sounds, smells. Getting into that observation mode, not talking, not focusing on your own thoughts but on what is "out there." Bringing the senses alive to the slightest changes in the environment is a significant survival skill.

Experience coping with blood and guts, both literally and metaphorically, prepares one for survival. Many people are very deceived about survival situations because most of modern life is very safe, sanitized, and compartmentalized. Meat comes in a plastic package. "Someone else" does the dirty work. "Someone else" fixes an injured person. "Someone else" makes things safe and secure. People are squeamish about crossing boundaries, and when confronted with them can panic or become ill. An easy way to develop a natural survival mentality in any circumstance is to look for ways to cross boundaries before one is forced to do so.

The sound of a heavy metal bell can carry a great distance.  As I said, I grew up in a very rural area and our home was on a large number of acres. When I was out late fishing, etc, my mom had a very heavy metal bell that she would ring– a sound which would carry for miles and alert me to come home — and immediately, automatically set my orientation.   There are plenty of ways that a low cost item like this can be used.

Vince Fulco writes: 

 Besides some of the other great pubs listed here, the US Special Forces Medical Handbook (a bit dated) can be found on amazon and similar for $10. There is plenty of food for thought for the non-medical professional for when the stuff hits the fan in a bigger way.

Vincent Andres writes: 

I remember well one of Reinhold Messner's simple tips.

When in danger, you are yourself the very first level of protection (and also one of the best, since your reaction can be very immediate). So work well on this very first level, and don't count on somebody else doing the job for you.

This is also a very libertarian and Randian tip.




 The greatest storm chaser, Tim Samaras devoted his life to unlocking the mysteries of extreme weather (his father placed an ad for used tv sets for him to fix). Then came the tornado of May 31.

The monster storm. 

"His mother had given up making him play little league baseball after she noticed that he would spend game time gazing not at the ball but instead at whatever in the sky interested him"

"And if it happens,  I die chasing the tornado), I'm going to go out collecting my data."

"The Oklahoma city mortuary director refused to be paid or his efforts. He was doing research, trying to save lives". "Winter (his son who didn't know who his father was until 28 years old ), pleaded to be allowed to stand outside to watch the tornado while the other kids clambered into the basement."

Perhaps Nassim will live and I will die chasing a 10% decline.

Note that the reason for unusual and premature deaths like that of Tim Samaras are usually from romance or getting in over the head about money. Tim was in a small Saturn car rather than the land rover because he only had 10,000 to spend on the rest of the year for all his gas and employees. The son died with him. 

Pitt T. Maner comments: 

 A couple of more quotes from an excellent article by Brantley Hargrove in Dallas Observer News:

'Their deaths have forced the insular storm-chasing community to search its soul. None from their ranks had ever died in a tornado. And this wasn't some amateur yahoo with an iPhone. Samaras was the godfather of this pursuit. Now he and the compacted hull of his white Chevy Cobalt had become the glaring evidence of their own fallibility. If so great a man could not save himself, how could any?'


"There's always been chasers who pushed the limits, got too close, and I've certainly done that a few times myself," Robinson says. "You'd think maybe it should have been somebody who did something reckless or careless. It shakes you up when you realize that someone with his experience can end up in that situation."

One of things Samaras loved about the study of tornadoes was that it remains a wide-open frontier. So many fundamental questions continue to go unanswered. How much can the pressure fall inside of a tornado? Why do some mesocyclones produce tornadoes while others do not?'



 We have all experience or witnessed the thing called beginner's luck in sports, games or other competitions. I will make a hypothesis that this is not luck at all, but a non-random effect. It may be like the home field advantage, which was never fully explained until recently. In beginner's luck what the player lacks in experience he more than makes up for in other attributes allowing him to compete better. It could be a higher performance mental state. Lacking experience the player also lacks other things like fear, disappointment and loss. Free of these, he is willing to take on more risk. He is not anchored to one belief system or set of rule. Rather he is quite flexible and adaptable to new conditions as they present themselves. Beginners see the world as children again, albeit all too briefly, and may find simple opportunities that a more experienced player would overlook. In a competition, an opponent could underestimate a beginner giving him an advantage and allowing him to play with less pressure to win. It would do well for a more experience players to understand what is behind beginner's luck and to find ways to either adopt or counter it.

Anatoly Veltman writes:

I experienced it first hand in spring of 1987. I've decided to make my first major trade by that time, because I spent several months eyeballing all available charts and was struck by an unmistakable basing pattern in Silver. I surveyed dozens of veteran Silver traders around COMEX - and none of them would get excited at that particular junction. They all got burned, some less and some totally, in the course of the preceding 6 years worth of price action in Silver - and that seemed to convince them that Silver can never again master a sustainable rally.

Well, as my beginner's luck would have it: I started accumulating as much as I could over 30 consecutive trading days from 50k of initial margin money, and by April 27 I already owned hundreds of lots, worth over a million! But on that one day - easy come easy go - Silver rolled back from $11.25 to $7.50, leaving me with barely positive equity and a single lot for memory keep-sake! So, admittedly, the old wolves did end up skinning me: during that one unprecedented futures session, which flipped all futures months from limit-up to limit-down lock - only they knew how to execute in the Spot month of un-traditional April futures and front run (via switches) all outside would-be sellers, none of whom got to sell anything that day! And by next day the April contract was not just spot delivery - it didn't even exist!! That one trading session proved too arcane for any amateur futures trader, and the Exchange insiders fully capitalized. Just like in their good ole times of the famed January 1980! 



 Vladimir Keilis-Borok remembered:

"Scientist Who Sought to Predict Quakes Dies at 92"

"Earthquake prediction today remains elusive. Most scientists are generally pessimistic about ever having that ability and have instead focused on emergency preparedness and advocating for an early warning system designed to give people a few seconds of notice after a quake occurs but before damaging waves spread widely."

and perhaps V K-B's methods may be useful for political election outcomes?

'Keilis-Borok and his team identified patterns of seismic activity using mathematical algorithms. Their predictions were based on finding a "seismic chain," or series of smaller quakes, that could be a precursor to a major jolt. He called this methodology "tail wagging the dog."'



One can learn a lot from Lego. Please notice the piece at the bottom which Sasha decided to use as his first piece in his tower. Second attachment is this first piece for better viewing (big base). Ties into your theory of 'base of operations'.






















 Okay, I'm ignorant, and don't know anything about the outdoors or subject of survival although all my kids regularly go to such place as the Grand Canyon where you can't leave Anything!!!!! inside the canyon. But I know that Tom Wiswell was very sagacious and he prepared proverbs for us that he felt was the best book he ever wrote. When he'd be playing, about once every five games, he'd shake his head and frown "I'm in over my head, I have to simplify". He didn't lose a game for 25 years. And then he'd say at the end "take care of the draws and the wins will take care of themselves".

The most important business lesson I've ever learned is "Never get in over your head". Oh my goodness, I've lost so many hundreds of millions by not following that. How could you quantify it. You might always have a reserve of at least 1 times the amount that is required to support a position. For example, if you have 10 of liquid capital, never put up more than 5 of it. Whenever anyone offers to provide liquidity for you when you are about to be tapped out, that's the time when you should have been adding.

Richard Owen comments: 

Kipling's story with his son and the Great War is an example of people simply not knowing what they were getting themselves into. They should have listened to Kitchener.

That's a general trading and survival point: Do you know what you're getting yourself into?



 There's lots of chatter about the decline in oil resulting from perceived risks of war in the Middle East. That's strange, since the risks haven't been higher in a while. Consider: Turkey did a pretty good job of betraying the Mossad by revealing 10 agents in Iran. How many of those agents were involved in monitoring Iran's nuclear weapons program I do not know, but I doubt that their absence provides the Israelis with any sense that Iran is far away from being able to build a nuclear weapon.

As a result of the above event, the US responded by canceling drone shipment to Turkey. Since Turkey was trying to reposition itself as a ME power and away from the EU (which it assessed as a losing proposition a few years back), it's not clear what the impact of this action may be, though it certainly doesn't increase US influence.

The US cut off aid to the Egyptian military, losing leverage. The Israelis are concerned because they saw that aid as the guarantee on the peace treaty with Egypt. Israel is also concerned about the return of the Muslim Brotherhood to the Egyptian government, with its connections with Hamas and complicity in support of the Gazan tunnels into Egypt. Of equal concern is the re-emergence of Russia in Egyptian affairs, with Putin moving to sell arms and provide financial relief to Cairo.

Saudi Arabia just turned down election to the Security Council as a protest against inaction in Syria and against IranThe Iranian PR offensive continues with absolutely no suggestion of any real behavior change by the regime.

Bibi is again talking about Israel's right to defend itself and that Israel will not tolerate anything short of the shutdown of the Iranian nuclear weapons program, including Iran's ability to enrich uranium (which Iran has declared to be off the table). I've seen no suggestion that concern among the Israeli electorate about Iran's intentions has lessened.

Syria has attempted on three different occasions in the past month to move chemical weapons to Hezbollah in Lebanon, even as the Lebanese re-evaluate their tolerance of the group in Lebanon.

Syria continues to decay, the Iranians continue to prop up the Syrian economy (or what's left of it), and refugees continue to enter Turkey and Jordan. Russian influence in Syria has increased in the wake of the negotiated quasi-destruction of some portion of Syria's chemical weapons store (the part that's visible and easily monitored). Iraq deteriorates as political support for the government continues to drop.

US credibility in the area is greatly diminished as a result of multiple international and domestic missteps. None of these occurrences should be a surprise. But in light of them, why is the "war premium" going down? If anything, instability in the Middle East, especially in the Gulf, has increased.

Ed Stewart writes:

You said: "None of these occurrences should be a surprise. But in light of them, why is the "war premium" going down? If anything, instability in the Middle East, especially in the Gulf, has increased."

It might be the difference between kinetic vs. potential energy. A specific crisis (kinetic) creates focal point for risk premiums. Some of the regional potential energy has been talked about for so long (business as usual) it is less relevant until movement occurs which signifies it is activated and being released.

As to if the "chatter" is correct or not, I have not, I have no clue.



 When confronted with new ideas, the Dailyspec acts like a collective doppelganger; a looming reminder to suspend judgement until empirical proof is provided. It forces one to rethink all that had previously been taken for granted, with inference supplanted by intellectual caution, and reification replaced by consilience. Even one's successes are called to task to insure they are reproducible and not a victim of post hoc fallacy.

These predispositions to incredulity may not sit well with the secular world nor one's mate; they are often misconstrued as pretentious or disputatious, but in the context of the list, polemic comments are neither deemed arbitrary nor argumentative, and a degree of doubt is always welcomed.

So, what's the schtik about candlesticks, and single-day signals, and other simple linear relationships? It's true that a lot of extremes have reversal days; so, the probability is a reversal will occur with an attendant price extreme. but, it does not tell you the probability of having an extreme and a sustained change in market trend-given that you have a reversal day.

These approaches are intoxicating to the contrarian, but in a momentum, algo, and QE driven market, they only serve as a rationale to prematurely exit a successful trend following trade.

Anatoly Veltman writes: 

One reversal bar (or candle) has proven to work better on Weekly than Daily charts. This is a very important note, as old technical analysis books glorified Daily reversal bars, "outside reversal". All of them implied Daily - and this just doesn't work in modern markets. But Weekly reversals do.

Someone will be expected to produce test results. Test results depend greatly on input, and on coding particular signal conditions. I'm afraid the test results we may hear on the list will not be based on proper signal conditions. I'm not aware of any one-dimensional signal that performs in today's markets, but unfortunately we'll likely hear back precisely that: a one-dimensional weekly bar reversal signal.



 I see this as a sign of Apple's hubris. Note the demolition of existing space.

Selected text from Cupertino City Council:

Development Permit to allow the demolition of approximately 2.66 million square feet of existing office, research and development buildings and the construction of 3.42 million square feet of office, research, and development buildings; 120,000 square feet (1,000 seat) corporate auditorium, 100,000 square feet corporate fitness center, and 25,000 square feet Valet Parking Reception uses; 92,000 square feet of utility plants; and associated parking facilities and ancillary buildings (such as security reception areas and landscape maintenance buildings) (DP-2011-04); and…

Bud Conrad writes: 

The space is in my back yard. It was previously Hewlett Packard, I think for the hand held calculator. It is plain vanilla tilt up type single story.

The design from Apple was presented to Cupertino by Jobs in one of his last days. It is a multi floor circular structure. Yes Hubris, but that is Silicon valley. Look at Oracle's HQ that is often called OZ because of its color. Larry called Jobs his best friend.

Anton Johnson writes:

Maybe the locals will refer to it as "The Tire".

Steve Ellison writes: 

There has been something of an arms race in Silicon Valley office buildings. The company for which I work built a new office building with a gym and a health spa a few years ago. A comment I heard at the time was, "We bring new graduates in for interviews, and they've already been interviewed at Facebook and the Googleplex. Then they walk into one of our dumpy 30-year-old buildings."

Bill Rafter writes: 

I have conflicting opinions on this and I would love someone to have the definitive answer.

When I first did a management buyout I moved the business to a prestigious Mid-town location overlooking the ice rink. But I never looked out the window. However, clients and prospective clients would come and take in the view and then comment that they felt very comfortable dealing with us. I understood that to mean they felt very comfortable in the office, but it only mattered that we got the business. We did get the business, but the location was costly. Effectively the pricey location was our advertising, whereas actual advertising was prohibited.

Several years after I had to meet with a very wealthy person (Mr. Big), who was generally unknown to the investment community. Well this guy had the shabbiest office building on an obscure road in East Nowhere. But he had plenty of money. I took that as a lesson that the purpose of business is to make money, and Mr. Big had a better handle on that concept than I did. Subsequently I met two other Mr. Bigs with the same MO. When my lease was up, I moved from the pricey location.

I think that young people want to be rich and famous, and a fancy location supports the latter at the expense of the former. Older people (at least some of us) want to be rich and unknown, and inexpensive digs supports both those goals.

Craig Mee writes: 

I use to see something similar to that on the future floors. At the age of 25-30 years old the ferraris were in force with the expensive suits but by 40 many started being understated in their belongings, dressing more conservatively, etc, while many in other fields were still looking to show pony. Maybe due to the exposure of money and wealth coming and going at an early age, it had an effect of its own.

anonymous writes: 

Bill, I think that for both some sellers and some buyers, the fancy address is a signaling mechanism. It's exactly the same reason that in the early 20th century, banks built huge structures with granite walls and soaring ceilings. And it's not completely unrelated to the history of Roman Catholic cathedrals either. It's not the view out the window (unless one is planning to jump.) Rather, it's the sense of permanence and power and stability.

Putting aside whether you personally get pleasure from the view, it's more than advertising. It's signaling that "you must be a really successful investor if you can afford the rent." Same with the Armani Suit, the Rolex watch, the crocodile shoes. (But NOT the Ferrari — unless you race it.)

Sam Walton drove a pickup truck. Sid Weinberg (GS) drove a Ford sedan. Trophy Wife drives an 8 year old Honda minivan. Sam and Sid may be signaling too. They are signaling frugality and reverse snob appeal. My wife is signaling that she loves to schlep exotic plants from the local nursery and is always trashing the rear bumper.

I dare say that Craig is a young guy. One needs at least one proper mid-life crisis to appreciate the Porsche, Ferarri, Lamborghini, etc.



Kiwi hit hard…batton passed to

Aussie hit hard…batton passed to

Cable hit hard



 Confirmation of a trade signal can be helpful to avoid drawdowns. Many small gains,and several large losses tend to be a pattern when using normal expectations in a non normal market. It's the 5+ sigma moves that cause big losses when working in a 2-3 sigma model.

Nison in Candlestick charting methods describes Japanese rice traders waiting for confirmation of a trade signal as the next day shows the reversal or continuation of the signal. This avoids the falling knife syndrome. Larry Williams wrote about confirmation of patterns either as completion of the pattern or as confirmation. The later entry is not as good a earlier entry, but avoids the multiple sigma losses, which may be worth it overall. It would be a worthy exercise to examine and test this. Recent doji reversal signal with narrow range off 1650 after long decline and multiday drop was confirmed the next day is an example of the candlestick idea of confirmation.

Anatoly Veltman writes: 

On Candlesticks: weekly Candles have vastly more meaning. Daily are now meaningless due to seamless Sun thru Fri action. Intraday are totally ridiculous because they vary with arbitrary choice of 5 or 10 or 15 or 30 or 60min period.

Confirmation is a tough dilemma, which may border on trend-following vs. contrarian dilemma.

Gary Rogan writes: 

"Dilemma" isn't strong enough in this case: it's like saying that the market will go up tomorrow for sure unless it goes down. At least Larry Williams developed incorporating multiple time frames into the calculation, but by itself confirmation seems like it can't possibly be meaningful considering the ever-changing cycles: a trend that can be "confirmed" in a statistically significant way using the same methodology over the years seems as likely as a unicorn.



"Obituary: Wolfgang Holzmair was a master of the sawdust ring who tamed elephants and chimps but excelled as 'Lord of the Lions’"

"I'm scared before I go in, but when I get inside I'm the same as with elephants and horses. And then when I come out I'm shaking again."



 There's lots of talk, understandably, on this list about trading patterns and technicals. All well and good. But I'm a fundamentals kind of guy (back in the 1970s, I was a fundamentalist, I guess, but that word has a different meaning altogether these days). And, as Rocky can attest based on numerous emails, technicals remain something I'm still figuring out. So it was with interest that this choice article appeared yesterday in the NYTimes about the making of Fiddler on the Roof.

Many may suggest that the show was a success because it was such a compelling story–and it was/is, particularly for the 1960s, with its celebration of the centrality of the family in the journey of life. I don't mean to get off into the high grass on that topic. Rather, there's a comment in the story about when Zero Mostel went through a doorway and touched the mezzuzah, the piece of parchment on the doorpost ("You shall write them on the doorposts of your house and on your gates", Deut 6:9).

Some have suggested that the mezzuzah represents the painting of the doorways by the Israelites during the last of the 10 plagues, but it's not inferential. Robbins, who had little interest in Judaism and detested any suggestion that his parents were immigrants, changed his name to minimize his connection with a Jewish heritage. On the other hand, having been raised in an observant household, Mostel could not conceive of Tevye, the lead character of the show, going through the door without touching the mezzuzah. (Not noted in the article is Robbins' previous collaboration with Mostel in A Funny Thing Happened on the Way to the Forum.) Robbins, the director stood his ground, and Mostel deferred. The next time Mostel went through the door, he crossed himself, and touching the mezzuzah went back into the show.

The point of this story, on the Dailyspec, is its demonstration of two different views of the world. Robbins, in the here and now, could have cared less about the historical roots of Tevye and the rest of the plot. All that mattered to him was what just happened, more or less. Authenticity? Robbins wasn't bothered–it didn't affect the pattern, it wasn't therefore of interest. He was a technician, basically. If there was a pattern that might be present, he wanted to find it and use it to advantage. His choreography reflects that approach.

 In contrast, Mostel had essentially lived Tevye's life, not so much in Europe as from an observance perspective. His approach to Tevye wasn't based on the here-and-now of Robbins, but rather on the fundamentals of Tevye's character.

This isn't to say that fundamentalists and technicians need be at loggerheads, just that they are complementary views of the world, not merely different methods of addressing a given situation, and not limited to the activities usually of concern to list readers.

I thought I'd share that synthesis with the list–it provides some insights into what we do and why we do it, not merely how we do it–in life.

All of which is preamble to my question of the day: Does anyone have more than a passing familiarity with 3D printing? Please contact me off list if you do. I'm looking into the area for an investment for my grandchildren's college funds. Yes, there's a bubble now, but there won't always be.

Stefan Jovanovich writes:

"Mostel had essentially lived Tevye's life from an observance perspective."

Err, no. Zero had no fear of the Czar or the Cossacks; on the contrary, he expected to be the one wearing the uniform. (He was a member of R.O.T.C. when he was at CCNY.) Tevye was a successful dairyman; Mostel's family were such poor farmers that they fled Connecticut for the Lower East Side, and thereafter his father worked in an office as a chemist. Mostel was, like practically everyone who worked for PWAP, a communist; it is impossible to imagine Tevye being a communist or having any more success with the Leninists than any other "rich" (sic) peasants did — assuming he survived the war.

David Lillienfeld responds:

I'll go by what my grandfather and aunt, both of whom lived in the Settlement, and offer that Tevye was hardly a successful milkman–at least by community standards. The butcher was a major, wealthy member of the community, not so the diary man. There's Tevye's comment somewhere in Fiddler about having 5 daughters. That meant 5 dowries, and for a milkman to so provide as one of the lower folks on the economic totem pole was a challenge.

As for Mostel, the fact remains he was raised in an observant household. Whether he aligned with socialists, communists, Paulsenites, or whatever, isn't relevant to the discussion at hand. Both my parents were raised in observant households–my maternal grandfather was one of the founders of the Ner Israel Yeshiva back in the early 1930s and my mother used to regale my siblings and me with stories of the students who would room in my grandfather's house during the 1930s. Both of my parents were pretty liberal, my mother slightly less so than my father. That didn't impact on either's understanding of orthodox observance. One of my earliest memories of my father these days is his arguing with the Ner Israel Rosh Yeshiva (head of the yeshiva) about how one performs a bris, a circumcision. I don't remember the specifics any more, except that there was one point where my father started to curse at the Rosh Yeshiva in Yiddish, and you could tell from the RY's face that that was the last thing he was expecting. Years later, when the RY's wife was diagnosed with breast cancer, my father was the physician he consulted on what an optimal treatment might be. I guess whatever my father said during that argument didn't impact that aversely on my father.

In any case, neither Tevye's nor Mostel's political beliefs are relevant. Unless you're suggesting that Mostel was making a political statement by kissing the mezzuzah?



 It's bush fire season in Australia. Maybe there are some market lessons on the table as well.

"NSW Fires: If you live in the bush, build for the bush"

"Individuals who choose to live in the bush as a lifestyle or economic decision might learn from Europeans threatened by Viking raids. They responded by retreating to compact, walled, defensive townships surrounded by open killing zones. Similar principles apply against bushfires — concentrate dwellings behind a short defensive perimeter, build houses that survive fire, and avoid, at all costs, dispersed housing that is vulnerable and costly to defend"

My market lessons are as follows:

Concentrate dwellings behind a short defensive perimeter = tight stop

Build houses that survive fire = trading account with solid management and plan

And avoid, at all costs, dispersed housing that is vulnerable and costly to defend = wide stops, in a high volatility environment that has not been back tested and uncorrelated to your main trading strategy. 



Here's an excellent video on how to split a 20,000 pound piece of granite in half. What you think about after watching the video is how musical it was. It's those who have perfect pitch in the markets who can hear the market like the splitter hears the rock.



 You may have heard of the term "soft hands" in reference to horse riding. I found these explanations of the terms on a forum:

"Having soft hands is all about what the horse feels
in his mouth. Being able to feel even the smallest amount of pressure
you are exerting and being able to adjust it every moment of every ride
to ensure the horse's comfort and
responsiveness. Not being so quick with your hands that you bump him in
the mouth and having the proper timing to release the moment that they
give to pressure is also a big part of having soft hands."

"Generally when referring to soft hands… its not about how tight you
hold the reins. But more how tight you hold the horses head with the
reins if that makes since. Being soft handed also means having quiet
hands so not bumping the horses mouth when working. Basically…. soft
handed people use very little pressure of the reins to direct the

We should strive for soft hands in trading as well, and in all sports. To snatch and grab and hold on too tight for any outcome can spell nerves, caution and anxiety. This should never be the case when trading.



 I thought this article might be interesting to those of the Randian mindset looking for love. From the Wall Street Journal:

"Finding Love With a Farmer, a Gluten-Free Eater or Ayn Rand Fan"

James Hancock wanted to meet a woman who shared his core values. But when you're a strict Objectivist, it can be a little tricky.

Jason and Morgan Kontz, with baby Elliette, met on the dating site Farmers Only.

Mr. Hancock is a proponent of Russian-American author Ayn Rand's philosophy of capitalism and self-interest. At age 30, he had already been "looking for a very specific kind of woman" for three years when Google searches led him to the Atlasphere, an Ayn Rand appreciation site with a dating component.

There, he found his dream date: a woman who also wanted to do logical cost-benefit analyses of every decision.

A growing number of niche dating sites have popped up to serve people who think they know exactly the type of person they want. These includes Farmers Only, whose 100,000 users may have been attracted to the site's tagline, "City folks just don't get it." More recently, GlutenFree Singles launched for love-seeking wheat-free folks.

Atlasphere founder Joshua Zader, 40, of Phoenix, says niche sites are more efficient than broader sites such as OKCupid or Match.com.

"If you assume that maybe 1 out of 500 people is a serious fan of Ayn Rand's novels, on a normal dating site you have a 1 in 500 chance of someone sharing the same basic values," he says. "On the Atlasphere, every profile shows you what you want," he says. The 10-year-old site has seen a spike in membership in recent years—it has more than 16,000 dating profiles—after two "Atlas Shrugged" movies were released, says Mr. Zader, a Web developer. User handles include "Atlas in Arlington" and "ObjectivelyHot." 



Currently, as today's action demonstrates, bad news that is likely to keep the Fed from tapering (or even increasing easing) is taken as good news. Can this go on forever? At some point when the Fed's behavior is seen as pro-liquidity in the foreseeable future, will bad news start being interpreted as bad news?



Laurel Kenner extends a special holiday season invitation to DailySpec readers to visit www.glassery.com. You can find beautiful holiday presents, lovely hostess gifts and a wide range of glass containers for food storage. Here is our holiday catalog. Or, call us toll-free at 855-707-8800 and let us put together the perfect gift package for the people on your list. We specialize in corporate gift-giving.



 "James Baker Says Republicans Were Losers in Government Shutdown"

Why does it always play out the same with Zachar's "your own man says you were out" coming into play. And Kostelanetz "useful idiots" out of woodwork, and the impartial government organization weighing in on the part of more agrarianism.

Gary Rogan writes: 

When else is "your own man" useful but in these types of situations? They come out because their designated role is to stab "their own side" in the back when there is a choice of direction for that side. When does the sage offer his most damaging pronouncements? Whenever there is something to decide or support a decision just made so that "everyone" knows that agreeing with the forces of darkness was the sensible thing to do.



 It begins with a new uncertainty, we're going to attack Syria, we're going to default on our debt, a Middle East fight, in conjunction a 1 1/2 % decline or more in stocks or bonds then fighting between the conservatives and the liberals a call by Buffett and Krugman for government intervention and more service revenues. A resolution with a big stock market rise to new 20 day highs an end with blame being put on those who wish lower service revenues and reduced intervention and unanimous agreement that we should never strive for reduced intervention again, and tea party types must go back to caves. How would you improve this or possibly profit from it?

Anatoly Veltman writes: 

But of course crisis starts on the way up. It's been said that no market has ever topped because someone sold massively short at the high. Any decline from the high is merely profit taking, not new shorting. So the beginning of crisis is such overvaluation that's liable to cause aggressive profit taking.

Gary Rogan writes: 

The way to predict the quick resolution of the next crisis is to figure out who is in control of the mechanics. While there was some ambiguity in this one, John Boehner played a truly masterful role in its handling and supposedly (although not by all accounts) received a standing ovation and no blame in the end by most of his tea party opponents, a deliberately induced case of the Stockholm syndrome. Next time he initiates a crisis (and there will be two opportunities early in the new year) bet on a timely resolution, and this time probably a couple of days before the deadline, as in this last one he was almost by his own admission compelled to give his tea party "friends"/antagonists as much rope as was needed to supposedly hang themselves and this will likely not be the case in the future.

Kim Zussman writes: 

Doesn't seem that ambiguous.

When the Organizer and his operatives said to worry the market worried. When the conscientious objectors gave up it went up.

We were re-elected and you will go quietly.



 There are nearly 100 current automotive based television series, with much of the recent growth seen in the restoration, flipping and auction arena. The situation seems similar to the rapid growth in the number of home improvement and house flipping television series coincident to the peak in residential estate, construction materials and contractor prices.

Secondarily, most systems on cars built since the 1990s, are not easily diagnosed or repaired without expensive specialty tools, and a greater knowledge base then that of the typical shade-tree mechanic.

Accordingly, the near future may be a propitious time to unload equities of DIY themed automotive companies, and even the 1970s muscle car project vehicle that you've been sitting on.

Peter St. Andre writes: 

Alternative view: more and more people will become interested in vehicles that don't have black boxes and location recorders built in.



 The Value of Debt by Thomas Anderson is a good book for any individuals to read. It makes the point that most individuals don't have enough debt. The average for companies is 50 % of assets. No companies amortize their debt but all pay interest only. The ideal debt ratio changes as one ages, but a rule of 25 % of debt to assets is recommended. Anderson points out that debt has many advantages in providing liquidity, insulating from crises, and capturing the spread between cost and return, and availability for one time purposes including helping kids out on the path to life. He recommends that everyone set up an asset based loan facility. He recommends 50 % of assets as a good ratio. It's a good book for parents to discuss with their kids. The book is written for the layman but the author bases many of his discussions on Ross, Westerfield, and Jaffe's Corporate Finance which seems to have good academic distillations of many of the topics covered in the book.

Richard Owen writes: 

It sounds like a good book. I believe the thesis is probably correct… except for the practicalities.

I am not aware of any providers to the consumer at a bulk level of either secured or unsecured long term revolving credit facilities of either fixed or floating form.

Of course, there is the mortgage facility in the USA, but most people have substantial debt in this regard already.

Also, as a consumer it is hard to ring fence one pocket of borrowing, unlike for a corporation. In the USA, walking away from your mortgage affects everything else in terms of credit score. In the UK everything is recourse to your mortgage.

The Offset mortgage in the UK is marketed like a personal revolver but the small print makes it entirely unusable in such a manner due to stated repayment channels and penalty fees and so forth.

The problem also is that an individual can typically only possess capital markets assets or a small private business stake. Borrowing facilities for equities tend to be low quality and borrowing for small businesses or stakes therein quite expensive.

I was at an NHS hospital the other day and chatting with the student whilst the doctor disappeared. He was American and funded from the US system. His five year course was funded at USD 65k per annum at an 8% interest rate with federal loans. That sounds horrendous to me.



 I'm absolutely thrilled. My sister-in-law MaryAnne Vacho Angliongto is the rocket scientist (astrophysics) of the family and I was a wannabe astronomer (childhood dream). I had that chance finally when we booked a night in the (public) Advanced Observing Program at Kitt Peak Observatory in Arizona while on a vacation and family gathering in Tucson, Arizona. The night of April 19, 2002 MaryAnne photographed spiral galaxy NGC5850 in the constellation Virgo, while I opted for a galactic cluster (cluster of galaxies - not stars) in Coma Berenices including galaxy NGC4889, on a professional telescope in a dome with all the software and photographic gear. We were trying for colour, but there were technical problems and we didn't have time to do all the runs with colour filtration (the images then get reassembled by the software to produce a colour image), but we still got very impressive black and white images.

I thought I had lost the images over the years changing from computer to computer, but I just found, buried away in old files, the original CD the observatory had given to us!

Finally, what is super cool, is that unbeknownst to me until I just googled NGC4889, is that apparently it contains one of the two largest known black holes in the universe! In 2002 I was photographing not only a galactic cluster, but a massive black hole (you won't see that in the photo - but it was there). In its photo, NGC4889 is the brightest object near the bottom right.

I highly recommend this is a very different experience you may wish to try with a spouse, friend or on older child (especially a child — to fire their imagination. My father and my son Ben went up the night before). The format is that you book the telescope and a volunteer for a night from 10PM to 6AM. You have dinner on the mountain at midnight with the astronomers, set up and observe till dawn, and then you have the dormitory during the morning to get some sleep - all in a spectacular mountain/desert setting in southern Arizona. If/when you do book make sure it's the night of a new moon or a negligible one if you want to get the best out of observing deep-sky objects. You can visually observe, or you can do photography (my choice). To save time, you should probably plan what you wish to see ahead of time. I was just photographing one small piece of space (a fascinating one mind you), while my dad made a list of about 50 things he wanted to visually observe.

Here are the program and pricing details.



How often has one been in the position of Nick the Greek vis a vis the markets. "Mr. Market, I have to let you go". "Near the end of his life, Nick was near broke and playing $5 limit draw poker games…. 'hey, it's action, isn't it?'". Thereby proving once again Artie's admonishment "all gamblers die broke".



 Out here in SoCal land, specifically San Diego, life has been good. 70 degrees every day, no rain, usually no clouds, etc. But all is not as it appears: the housing market is weakening.

For those not aware, in San Diego, the military is a major employer. By some estimates, directly or indirectly, between 20 and 30 percent of the economy of San Diego is based on federal spending. The home base for the USN Pacific Fleet is in San Diego. Also Miramar (think Top Gun), Camp Pendleton, among others (and there are others).

While the softness in the housing market out here isn't solely due to the sequester, even local economists of the conservative persuasion acknowledge that the sequester is having an impact locally. The assertions from some that the effects of the sequester are minor do not seem to ring true, at least not out here. I expect that while there are housing markets that will be less affected by the sequester than San Diego's, there will be an affect.

Staying away for the moment from housing-related stocks seems a prudent course of action.

a commenter adds: 

Second best city in the world behind Sydney.



 Those who follow the biotech world may have seen that Regeneron reported some fantastic results on its lipid-lowering drug. Much more efficacy than statins. Safety data was not reported but it seems safe to say that suggestions of hepatotoxicity that first appeared with the early statins and seem to be a fixture in use of statins for the first 6 months is a segment of the population, were not present; FDA wouldn't have hesitated to intervene if there had been such suggestion, since in FDA's eyes there are already "safe" lipid-lowering drugs on the market.

The same is true for rhabdomyolysis–essentially break down of muscle (some thing the muscle soreness often associated with statin use may be a pre-rhabdomyolysis state, but the data are anything but clear on that). It was rhabdomyolysis that was the reason Bayer's Baychol was withdrawn from the market.

There are some caveats:

1. There has long been the observation that if cholesterol levels are brought below 90-100, there is little gain in mortality (some studies suggest there may even be an increase) and that cancer risk in particular goes up. Of course, recovering from a heart attack has a higher probability than doing so from cancer. Unfortunately, I can't tell you which sites–I just don't remember.

2. There are some established drugs in the lipid-lowering space. Lipitor and Crestor come to mind. The former is generic, and it is probably finally making it onto many P&T committee lists. The latter is still patent protected and, not surprisingly, costs a bit more than the former. That's not to say that Crestor is more efficacious than Lipitor. In a given patient, one may prove to be less efficacious or better tolerated than the other. YMMV.

3. The thing that made the statin market what it is today was a series of studies by Bristol-Myers Squibb and Merck showing that use of statins was associated with lower mortality–quite a bit in fact. Since the effect of Pravachol from BMS in mortality reduction was greater than might be expected if only lipid-lowering were the explanation, there has been a persistent question over what exactly it is that statins are doing besides lowering lipids. There are suggestions that they reduce chronic inflammation (considered part of the pathophysiological process underlying atherosclerosis), reduce risk of osteoporosis (very controversial), reduce risk of gingivitis and periodontitis (Dr. Zussman is better positioned to opine on that one than I am), and some suggestions of reduced risk of Alzheimer's disease, among others. Will Regeneron's drug do any of these? We don't know. Will it even lower mortality? Again, we don't know. Such studies take some time to complete, and I'm not sure if they've even been started. There's also the comparative effectiveness matter. How much this drug will cost for each QALY (quality-adjusted life years) gained isn't yet know, and whether the drug is seen to be as good a value as the statins were when they first came to market isn't known. However, make no mistake, all of these factors will enter into the calculus of how successful, if at all, Regeneron's drug might be.

4. As one who has taken Lipitor for 13 years (horrible family history of heart disease–I keep my total cholesterol below a 100 and LDL below 75), I'm not particularly interested in switching drugs, never mind drug classes. There are many patients taking statins who, I think it's probable, think likewise. That most statins are now well off patent (and cheap generics) is another reason to stay with something of known efficacy in a particular patient. That presents a problem for Regeneron: How to convince physicians to put new patients on its drug and to convert those on statins to switch. The former may be straightforward, though the issue will be one of how much more growth can there/will there be in the lipid-lowering market. I'm agnostic-to-skeptical that there's a whole group of patients needing another lipid-lowering drug. That's not to say there aren't some, though. On the other hand, obtaining health insurance coverage may be problematic, as I'm sure that Regeneron will price the drug in the "near and dear" category (to use industry parlance), meaning high. Very high. I doubt that Regeneron will follow the Pfizer strategy of pricing the drug 10% below the leading statins (or in this case, perhaps, Crestor) for two years to gain some traction in the market, but I could be wrong. One thing to consider is that biotechs are not used to pricing competitively. Usually, they are the long entity in a market space, and they will price accordingly. As for switching patients off of statins, I guess if there are those not getting enough of a reduction, perhaps with LDLs over 140-150, there's a chance of a switch being made. There aren't that many of such people, though. All of this means that Regeneron will have some work cut out on the marketing end to get newly diagnosed hyperlipidemics onto its drug, as well as getting insurance reimbursement.

The long and short of it is the Regeneron's drug may be a game-changer in heart disease–but we just don't know enough as yet about it. The data released yesterday seem compelling, yet they are only in terms of reduction in lipid levels. Fine, except we know from the statins that something may be needed to get much benefit from a lipid-lowering drug.

For those of you liking growth stocks or story stocks, this is a company with a nice story to follow, perhaps to take a position in. For value investors (read: Mr. Melvin), enjoy using the drug (if it gets to market) but don't even thing about looking at this stock. It won't be a "value" one for a decade or two at least.

The President of the Old Speculator's Club writes: 

I wonder if any studies have been done on the increased cancer risk. A little while ago, a scientist did a study and claimed that a cancer cure could save something like $5 trillion a year. However, tagged on to the end of the study was a one sentence disclaimer to the effect that the suggested savings did not take into account that while a cancer cure could well cut down on costs, survivors might find that their longer life brought on equally (or more) expensive disabilities - like diabetes or, more likely various dementias. I've been in two post-operative cardiac exercise programs - both for several years. In that time, quite a few individuals come through - most stay for the minimum period; others, like myself continue on. One thing we long-timers watched for was the continued health of those who stayed and, if possible, those who left. The nurses at one hospital were especially diligent in keeping in touch with members of both groups. Over the years (18 to be exact), as one would expect, there have been numerous deaths. However, very, very few were due to cardiac problems - more often, cancer was the cause. So, here's the question: is the propensity for cancer among cardiac survivors an inevitable result of their survival, or can (and should) their deaths be attributed to statins. I know the latter is a popular one, but hell's bells, lawyers couldn't make a dime if it proved out that longevity was the real cause.

Kim Zussman writes: 

Life should be more expensive than death because it is more valuable, especially to survivors. The problem is that the disease lottery is zero sum: you will die of something. As medical / nutrition science advances, death rate due to some diseases has plummeted - and survivors go on to die of something else.
Hand (and voter) wringers over increasing medical expenses should start by blaming antibiotics:

"Historical Diseases Death Rates" (see first table)

The progress made with infectious and cardiovascular disease has been faster than cancer treatment (and cheaper). So don't smoke, eat fish, hit the gym, wash your hands, and prepare for the final fight with unregulated cell division.



 The consilience of the Nobel to Shiller and IBM reporting earnings and IBM dropping 7 points from the close reminds one of how careful you have to be in developing systems based on past data.

How many things are wrong with Shiller's data. For one, they didn't report earnings in many of the time periods he uses. For another, they reported them 4 months late. For another, the earnings series are adjusted many years later. For another he's using average of 10 year earnings and 10 year prices, to come up with his p/e. Okay, it doesn't take account of expected earnings the next period. It doesn't take account of the movement up from the end of the year when reported earnings are better than expected and the move down when reported earnings are less than expected thereby giving a 100% change that the low p/e will show superior performance but certainly not feasible to implement. And of course the best estimate of the p/e is the current level not the level 10 years ago. Yes. Earnings and prices are a random walk in changes not levels. And yes, the use of averaging introduces spurious serial correlation as working pointed out. But yes, even for those who know that when the stock price has a tendency to go up in the period before the report, and it's statistically significant, you can't use it or make money with it. Because yet, like IBM, when the earnings are bad, they often report it earlier than the due date. So you're waiting for the report date, knowing that prices are going up, but then they report early, (perhaps the flexions acted), and you get caught with the down 20% price move even though the move up to the estimated reporting date shows positive correlation with the forward. I.e. you can't make a profit with it even though there's a extraordinary regularity in the past data.

It makes one wonder why the Nobel was given to a chronic bear when the reason the Nobel prize is so high is they put much of their endowment in the triumphal trios' drift upward in equities from 1$ in 1899 when they started to 30,000 today, etc. 

Richard Owen comments: 

Only the Chair could pack so many statistical anomalies into a handful of sentences!

Perhaps I have misunderstood the use of Shiller PE, but the traumas you describe apply to reasonably mediumish timeframes, whereas Shiller's work is typically discussed in the context of long range endowment allocations of Yale type money to broad indexes. Whether it is even then a useful tool is a different question. But hasn't a very low shiller PE typically coincided good prospective long range returns? But the issue being one would sometimes have to wait half a career or so to be proven right.

Ben Graham did similar work but discarded it as a means of allocating capital as the Baconian issue caught up to it. Grahams issue was the other side of it: exiting on a high shiller PE with a decade of bull market to go.



The good one forbid that all the money saved by the shut down should be disseminated to the public in form of lowered service rates. No politician would even dare to suggest that the moneys of all the furloughed employees not paid should be given to public. But one group that is truly hurt by the shut down is the Exchanges. Now the releases of the random government numbers like claims, and CPI, and durable goods and housing will not be released so the public won't be able to do the wrong thing and churn their accounts, and the flexions will not get the information first and be able to front run the public. It isn't cricket. There should be a law. 

George Zachar writes:

Due to a technical seam in the funding mechanisms, the claims number IS being released every week. 



The threat is worse than the execution. Stocks going up on threat that the senate will pass a bill to avert shutdown. Okay, it will be announced. Then the threat will be that the house won't pass it. So it will go down. Then probably it will go down to wire in house. And perhaps the first time they vote they won't pass it, but then a change will be made to avert catastrophe, and then the market will be ready to go down again. Just a prediction in general based on board logic. 



From Anatoly Veltman:

I just saw this Weekly SP chart, and it's honestly… Ugly (link).

I can't imagine how we're supposed to be Bullish on such chart. Mock me all you want, I am no buyer here, sorry. I'll probably miss another tremendous growth opportunity.

Victor Niederhoffer comments:

Needless to say my silence about the chart interpretations should not be taken as acceptance. And aside from the ecology of markets, deception, avoidance of fear, relation to music and barbeque and sport, longevity, board games, etc, the whole genesis of this site from its founder was to avoid such mumbo jumbo.

Gary Phillips writes a poem: 

beware of greeks bearing gifts
and single data points
they support a myopic view
and play into the hands of the deceivers

at any given point in time
an equally compelling case
can be forged in either direction
depending on one's bias

the thing about charts
is that they fail to let one see
the markets for what they are,
but instead, for what they appear to be

Kim Zussman writes: 

Charts! Charts!
Like musical Tarts
The more you looks
The more it smarts

So look away
From Siren curves
Or you will get
What you deserves

anonymous writes: 

I refer everyone to Bruce Kovner's quote regarding the utility of charts below. If you have a better track record than he does, then you are entitled to mock his wisdom. I will gladly wager that no one who is reading this comes anywhere close to his long-term, continuous, audited track record.

There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he's not going to take a patient's temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge. Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates anew chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.

Gary Phillips writes: 

Indeed, I look at 22 charts on 4 screens myself. But, what I should have said while in my rush for cynicism, is no one single chart stands out and provides me with a competitive advantage or a forward-looking view of the market; at least not in the time honored edwards and magee kind-of-way. But when charts are related to a broader network of market events, themes, and correlated markets, etc., and provide (to borrow from the chairman) a consilience, then one can assess the departures from value that govern trading opportunities. which is what, I may say, you do so well.

Victor Niederhoffer adds: 

Please forgive my not using the term "armchair speculatons" or "furshlugginer" with reference to all those untested hypotheses and impressionist descriptives but not predictive things about chart movements and also ideas about secular bearish markets when we are within 1% of all time high, and a Dimson 1 buck in 1899 would have risen to 60,000 at present.

Scott Brooks writes: 

I say this respectfully. Vic and I have jousted on this front several times (and I believe the back forth has always been good natured). But my overarching point on secular bear/bull markets is valid to the average investor.

The extreme highs and lows we've experienced since 2000 is all well and good for the speculator who can take advantage of the market ups and downs.

But to the average 401k investor, 2000 - 2013 has been the lost decade (plus 3+ years).

Yeah, they've continued making deposits and benefited from DCA'ing. But for far too many of working class Joe's, there is very little gain outside of deposits.

The trader can benefit from the market movements. Johnny Lunchbucket has no idea what to do except to move his money around chasing last years returns, and after a few years of that, he is just flat out frustrated. Johnny Lunch Bucket and Working Class Joe do not care that the market is near all time highs. What they intuitively know (maybe even only on a subconscious level) is that even though the market is near all time highs, they've lost something far more important–13+ years of time for that their money should have been, but wasn't, compounding.

I'm not trying to be contentious with the Chair….I'm just trying to present a different POV that many on this list never experience….the plight of the average investor.

Gary Rogan comments: 

Scott, the average investor is handicapped by having the urge to sell low. If you sold during the 2008/2009 lows and waited to get in you are certainly left with a very negative impression of the market that feels like a bear market. The only feasible way for an average investor to think about the market is to look at their 45 or so year workspan as the period to evaluate market performance. 13+ years should mean nothing in that frame of reference. Now, if you start investing when you are 55, it means a lot, but you are doing the wrong thing so getting the wrong impression comes with that.

It is true, in my opinion, that the market today is expensive by such measures as total capitalization to GDP ratios. This is somewhat likely to limit returns in the next 15 years although it means very little for the next say 7 years, but within any 45 year period starting from 45 years ago to 45 years into the future market returns are likely to remain close to their historical average (barring a major calamity). The average investor who knows next to nothing should learn this very simple behavior: put a certain percentage of your income into stocks every year, and stop complaining.

Scott Brooks responds: 

The best thing that the middle class working man who who is NOT eligible to invest with top tier money managers (due to accredited investor rules) and is stuck with 15 expensive mutual funds in his 401k or his cousins fraternity brother as a broker or some State Farm guy as his insurance agent, is TIME.

Over time he can make handle the ups and downs. But the fact that the S&P peaked at around 1550 in '00, and is now in 2013 getting ready to hit 1700 means he wasted 13+ years with less than a 1% average annual growth rate. Sure, he picked up a point or two in dividends and maybe benefited from DCA'ing….assuming he wasn't one of the many that stopped putting in money into their 401k's for whatever reason (got scared, saw his pay cut or his job outsourced or his spouse got laid off….or whatever)…..but when you subtract out management fees and 401k fees, he almost certainly netted 1% and maybe less.

That my friends is a secular bear market…..and that's the world that 90% of America has lived in for the last 13+ years.

We gotta remember that people on this list are not like the rest of the country, and it's easy to lose sight of that.

I hope it is clear to everyone that I don't pretend to be something that I'm not. I don't pretend to be a counter or even a trader. I'm a simple man who was raised in a lower middle class world and 90% of my family still lives in that world. I'm not trying to raise anyone's ire with these posts. I'm just trying to shed some light on a subject that is very real…..

And maybe somewhere in my words there is a way to create even more profit for those of us that are blessed with:

1. a brain that works better than 95% of the population and
2. have a burning desire to use that brain to it's fullest.



 Shiller got the Nobel Prize? I haven't read his scholarly papers, but from what I have read he seems prone to making blatant errors in his statistical thinking.

A common theme of his errors was to take N heavily overlapping intervals and sort of pretend that they were all independent observations. In one case he took annual stock market levels for ~30 years ("x") and compared them with the retrospectively known "present value of future earnings" ("y") summed over the following ~50 years. He then claimed that the market was irrational because there was a lot more variability among the "x" numbers than among the "y". He failed to appreciate that really the "N" for his "y" values was approximately one.

The other supposedly big insight that he had was to smooth the S&P earnings over a 10-year period to come up with a valuation metric that's averaged over the economic cycle. That's fine, but Nobel-worthy? Probably Larry Williams has come up with dozens of indicators of that sort.

Victor Niederhoffer writes: 

He also concluded that the stock market is much more variable than dividends and is therefore irrational. I guess they had to give one irrational person a Nobel and another rational person a Nobel. The terrible thing is as Tyler Cowen pointed out vis a vis the choice between the two frond runners for the Chair, one is worse than the other. As Sholem Aleichem would say, a plague on… 

Richard Owen adds: 

Mr. Shiller's work is used all over the world. It is quoted by near every stock picker fund manager and used by many in their allocations.

People state Shiller's work was "obvious". Similarly perhaps Kahneman. All this, whilst understandable, seems a bit rum. Their insights came at a time when they were heterodox to the consensus. And if his data was limited by reality, he still slugged out a conclusion. Surely that is a good thing?

If Shiller's work was easy, then good for us all that an economic Nobel is on the shelf for all of us to claim should we wish. But perhaps it only looks easy in hindsight?

I should imagine felt somewhat of a buzz that he could out-think the Nobels, and made a fortune from it. Professor Shiller got worldwide acclaim and academic pedigree. Both seem satiated. Perhaps Mr. Seykota is in fact correct that everyone gets what they want out of the market?

Stefan Jovanovich writes: 

Do the site readers who have Charles, Kim and the Chair's understanding of statistics have any thoughts about the fact that "earnings" changed their definition after 1913? Before that date they were, for all practical purposes, actual cash dividends because corporations did not have income tax returns. In the late 19th century it would not have been enough for the S&P's dividends to be comparable to bond yields; they would have had to be nearly double for equity securities to be seen as sound. To those of us in the bleachers still suffering from the Pirates' defeat, it seems fairly clear that neither "dividends" nor "earnings" can meet Professor Shiller's test of rationality for the entire period for which he collected data since the game changed from rounders to baseball after the 3rd inning.

It also occurs to those of us crying into our popcorn that the influences of "book value" only become important after the IRS becomes a stakeholder in the earnings of corporations. If you as an owner/promoter find yourself unable to maintain the payouts that were once "normal", the logical and rational move is to persuade the buyers of your securities that they are not just buying earnings and dividends but also assets. The Morgan Bank were meticulous about identifying the physical security for railroad debt - the deeds, trackage, mineral rights, etc. - but they made no assessments of the "value" of those assets. "Net book value" is not a term you will find in their accounts. Yet, magically, by the 1920s the term begins to appear and by the 1950s the Oregano and others have made it a metric to be engraved on the tablets of sacred financial wisdom.

Richard Owen writes: 

This is a great explanation of the money system. But the labeling of it as fraud seems quite a leap. To take just one point: the idea the fed has private shareholders. Sure, when the fed was originally set up, it was a concession granted to the participants of good value. But so was the nuclear and broadcast industries and oil rights and so many other things.

The UK bought out the boe shareholders post war. The USA they remain. However, I believe the fed has a profit sweep to the treasury so the balance sheet expansion is of low incremental profit value. Indeed the shareholders might even get a fixed coupon on par value thus it is not much more exciting or nefarious at this point than holding an 8pc government bond? But I am not sure.

The reason why the fed shareholders have never been published line by line (if this is correct)? I am not sure, but it probably is just a bunch of major banks and the 8pc on their stock is a tiny fraction of total profits. And holding the stock is perhaps is admin quirk for being a dealer or something?

As to the idea of a world without fractional reserve banking. It is possible, but a totally different economy. General Electric can either hold its working capital as subordinated creditor to a bank or cut out the banks and hold the mortgages the bank holds instead. Each has different merits, but currently not many engineering firms will accept a pile of New England mortgage certificates as down payment for a jet engine.

Stefan, is it like that? Or is there misunderstanding here?

Stefan Jovanovich writes: 

Richard raises the central question that had Americans literally at arms with one another long before slavery was a political issue of any greater importance than the Grand Bank's fishery. What is money and what is credit? What is the ultimate payment unit of account for those who want to be Keynesian traitors to the greater good by just holding cash? The Constitution offered the answer but most Republican-Democrats and a good number of Whigs quickly found that they did not like the answer. They still don't.



This book Benson and Hedges presents: Recipes From Great American Inns honestly has the greatest chili recipe ever, plus a bunch of other recipes that have influenced my cooking over the past 30 years. 



 There are several reasons the Oregon Ducks have become a powerhouse in football. I listen intently for life and trading lessons from this team.

Here are a few pointers:

Was it about what Kelly expected, based on the practice week Oregon had?

"We don't put a point total on it or think about it that way," he said. "But it's almost like, you studied really hard for the exam, and you can't wait for the professor to put it on your desk."

"Obviously it's not the same as a game-time situation, but throughout my career we've gone through practice scenarios, what we need to do if we are down six or down four, three," he said. "We try to make us feel uncomfortable. Whatever situation we end up being in, I think the team is prepared and is confident in our ability to be successful in those situations."

Coach Mark Helfrich echoed Mariota's sentiments, with his own catchphrase being making sure his players were "comfortable being uncomfortable."



 A presently rare, and therefore useful, service strategy is a pause near the top or during the downswing.

This hesitation serve is unlike any other and with distinct advantages. There is a pause between the start of the downswing and the ball contact. It is like a hardly perceptible stammer, or a slight hitch in a horse's gait. In that split-second, a decision is made to adjust the flight of the ball relative to the lean of the receiver. The basis of the decision is the old sport adage, 'Hit it where he ain't'.

Learning the hesitation serve is easy with a quick read of this article and practice of 1000 shots on the court. Then you will understand its success comes from the receiver. In The serve gains three smaller advantages that quickly will be discussed before getting to the fourth and heart of hesitation.

The pause in the stroke provides:

A) The body weight shifts to lower in the legs (lower center of gravity) to increase stroke power.

B) By crouching the ball becomes screened from the receiver's eyes.

C) The returner physically vacillates in his tennis shoes with uncertainty.

D) He is also caught in a quandary of building suspense throughout the match.

Looking at these individually, in the first effect the short pause in the stroke automatically lowers the body weight to the legs, in the model of a lifter hefting a barbell overhead with a Clean and Jerk. At the pause in the clean, or uplift, the knees are bent to provide better spring to the legs. In the second effect, by the weight lowering into a slight crouch the ball becomes eclipsed from the receiver's eyes by the greater 'balling' of the server's body. An analogy is trying to see the sun with the moon in the way, a solar eclipse. And the third effect is that the returner must rise and ready on his toes to quickly shift weight depending on if the ball is hit to his right or left. This is fatiguing, and becomes irritating in a three game set.

Now to address the major effect brought about by the hesitation serve… quandary. This is a psychological upset. During the short stutter, the returner falls into a trap of indecision. An internal dialogue of uncertainty occurs, don't you think. The receiver must ignore the stutter serve, which is difficult, or fall into a trap of doubt. It creates a quick freeze and a wait-and-see attitude. This will be ameliorated and wear off in a fairly short time… after the rally is over!

For all four reasons, a short delay in the server's downswing increases the receiver's relation to risk. It is said that on the hardwood plains of hesitation bleach the bones of countless losers who, at the dawn of decision, stood to wait, and waiting watched the crack ace.

In baseball pitching it's the same. When you hesitate on the throwing motion, the receiver is forced to do the same, and you become his driver. The hesitation, like a fastball, works best on low, hard serves including the drives to both side and the Z.

The game is like a dance, and one must know when to move and when not to. When you pause on the serve, the receiver is thrown out of step with the ball coming out of reach or at his face. You make one error, you pause, waiver, stumble and lose the edge on the return. Colonel Tom Parker of Elvis fame said, 'Either operate from a position of advantage, or do not operate.' This advantage repeated dozens of times per game fetches points that lead to championships. This is called a specialty champion who has one difficult-to-see ploy that is his game lever.

The first player ever in racquetball to use the hesitation serve was Dr. Bud Muehleisen, winner of the first 1969 IRA Nationals and in the ensuing three decades 70 more national and international titles. Bud was a patient dentist, and patient were his opponents focusing on the pause at the top of his backswing. Because the ball was slower then, it was more of a stutter than a stammer, but with the same effect. I had the bright idea to study it from the gallery a hundred times, and surmised two extremely important things. First, his opponent was gung ho, and it is interesting to watch a Type A go nuts in a staccato tempo in the full course of two games. Second, and more important for our upcoming match, I learned what I believe is the ONLY secret to beating the hesitation serve. You may not expect to watch the downstroke with its hitch and stay focused. Instead, during the downswing you must watch something near him- the 'E' in the Ektelon on the back of his shirt, or a spot on the wall, and then, at the contact viewing the racquet and ball again. It is like leaving one frame out of a video and not missing a thing… except the debilitating pause.

Cliff Swain has one of the best hesitation serves the sport has seen, and it's because he has a set of eyes that can focus on so much at once. He learned it in his first year at Providence State and months later captured his first big pro win. He described to me, "I think the hesitation at the top of the swing is the best, most consistent and most powerful." Swain used ESP (Early Swing Preparation) in holding the racquet high in the backswing while following the ball around the court. In the case of the serve, the only difference is that the forehand is more stationary, with a step into the ball. Where most players use a smooth, rhythmic backswing and downswing to strike the serve, Swain has a hesitation at the topswing that allows him while watching the ball to also observe the opponent's position and lean. For Swain, the first pro win due to the hesitation serve lost him the ensuing Regionals when he was disqualified for having accepted money as a professional.

Predecessor pro Jim Spittle had success in the 1980s pro tour as the ball livened to allow his big serve to come to bear hideously on his opponents. Unfortunately, Jim had no backhand to augment his ace serves and kill forehands, or he would have been seen in the winner's circle with Hogan, Mike Yellen, Dave Peck, Jerry Hilecher, Davey Bledsoe, Brett Harnett, Ruben Gonzales and Ed Andrews.

Sometimes you meet an unknown player in a remote court with a narrow specialty that makes him a virtuoso. You have just met two. Swain had the specialty hesitation on his serve (and strokes!) with a balanced game to be one of the greatest. The only difference between Cliff and Jim is that the latter couldn't hit a backhand into a dumpster from ten paces. This is all the more reason to focus on his hesitation serve that enlivened his pro career. Once he demonstrated and explained the mechanics around his attorney instead of a referee in his Memphis office.

"Your down-the-line drive serve is used in combination with a cross court serve that is effective because of a hesitation in the swing before striking. For me, this 'hitch' is on the downswing is a split second before contact. In that frame of a split second, you look at both the ball and the receiver's position. At his position and his lean in anticipation of the serve going down-the-line or cross-court. The hesitation allows me to adjust the angle and point of contact to direct it away from the returner's commitment. 'It's all about first intent,' piped the lawyer ducking a swing, and he is right. The receiver must commit and cannot recover before the server decides which of the two sides of the court to serve the ball. The decision is made during the hesitation."
For Swain, the pause and choice is made at the top of the downswing; and for Spittle it is at mid-swing just before ball contact. Which is better? I don't know, and it probably depends on the physiotype of the server. In both cases, the receiver is left holding his jock.

This is called the big game, of a booming serve for an ace or weak return. Everyone these days is familiar with the style, but few take the step of adding a hesitation for a quantum improvement.

The key component of the hesitation is it allows you multiple serve options, and often gets your opponent to commit prematurely. You look, he moves, and during the downswing from the pause near the top of the swing you serve away from the notion of his lean. If the receiver is leaning toward the cross-court serve, the pause enables you to serve down the line. But, if he is leaning toward down the line, you can hit it cross court.

When one considers how many serves are hit to game point, and that the modern quick ball makes the service the most important part of any strong player's offense (the second essential is a killshot), it makes winning sense to spend more time practicing it than any other shots. In tennis there is the parallel of practicing the 'big serve' over and over until there is enough muscle memory that the motion becomes natural, fluid, unconscious, and independent of fatigue or psyching out.

The bottom line is that if you had an exact racquetball twin with whom you played every game to a draw using identical shots and strategies, the first one to add the hesitation to his service would gain a five point spread in every game to 15.

He who hesitates is won.



 One of the worst things that happened to the Knicks last year were the lucky end of game winning shots by Smith. He won two games with the shots and lost at least a dozen near the end. He was told by Woodson to pick up his pants so they didn't show the ass, but he still partied hard until the wee hours during the playoffs and cost the team the loss.

It's exactly like the hail mary of the big rise in the stock market during the last hour of the day after a big decline. Yes, it bails you out for one close, but it sets up for horrible declines the next time. One becomes complacent with the big declines and hopes that Smith or some such will come up with a hail mary and bail you out. But the man has a weak character with the pants way down, and the partying and relying on him or a last minute rally for a win, is bound to lead to disaster.

I predict that until the Knicks bench Smith, they will have one of the 5 worst records in the leagues.



 Susan just went to a conscious capitalism conference that she supports and heard this story from Nick about how a letter to customers admitting his failures and asking for help saved his business. I believe there are many lessons here, including the importance of keeping in touch and honoring your customers. Every business should treat their customers as good friends, I think. What do you think?

Craig Mee writes: 

I found this article about ten attributes of a good friend. Maybe these are good ideas for keeping in mind when building your relationship with the markets as well.

1. Keeps your secrets (unless you are about to harm yourself)
2. Defends you
3. Gives you good advice
4. Listens to you
5. Cares about your well-being
6. Does not change how they treat you based on other people's feelings about you
7. Tries to help you when you need it
8. Shares personal things about themselves with you
9. Tells you when you are wrong
10. Gets over disagreements without getting crazy revenge

It also makes me think about how sometimes Mr. Market talks to you as a friend and you don't listen. Most of us treat him as an enemy. What if he is, in fact, a friend, but our insecurities and weaknesses let us down in building a strong relationship with him.



 One thing that I've learned about trading is that sometimes working harder does not help. Sometimes it's best to go surfing or take a vacation and forget about it for a while.

Ed Stewart writes:

I agree.

I think what confuses things is that a lot of modern 'work' is busyness without much productivity, yet people consider all of their time in the office to be work. Real productivity (other than manual labor), particularly creative work, seems to have a natural cycle, or rhythm, and the amplitude of different people's seems to be different.

For example, I have found that I work best in long stretches. After a focused stretch I need to rest and tune out. Time in nature is the best for this. If I try to fight the cycle my real productivity plummets and non-productive busyness sets in (including bad trades, impatience, cluttered, non-creative thinking, irritable, etc). 



Since Bamster has apparently figured out that de-linking the CR and the debt increase isn't in his interest, isn't it clear that political strategy is now the dog and the market is the tail? If the market is so smart, why can't it see more than a day ahead, and why does it swing wildly based on words, leaks, conjectures?

Rocky Humbert writes:

When this whole thing started, I wrote: "This slow motion train wreck will probably continue (and stock guys will keep denying it) until CNBC puts the 1 month Tbill on the side of their price montage. Once that happens, you'll know it's safe to go back into the water. (I'm only half kidding)."

Remarkably, that happened late on Wednesday and the WSJ dutifully carried a large news story about the breakdown in money markets after the close Wednesday and in the print edition of Thursday. The current Obama administration is pretty light on people who understand the systemic importance of the money markets and what would have happened if the panic continued to accelerate.

I suspect that they (and perhaps you) got an impromptu lecture from the NY Fed Open Market Desk and understand this better now. (Or perhaps you consider the timing of the stop-gap, face-saving 6 week extension headline to be total coincidence???) The plumbing of our entire economy is the money markets. Not the stock market. Not the bond market. The money markets. It's the dog. And everything else is the tail. 2008/2009 demonstrated this powerfully. If you've ever been in an argument with your wife and both noticed a serious plumbing leak in the midst of your argument, you stop arguing and call the plumber. It took a spike in yields of roughly 5,000% to get the politicians back to the table. The dog wagged the tail.

Gary Rogan replies: 

I appreciate this line of thinking, it's very instructive. But help me out with one thing: my model of how Obama operates is that he would LOVE to crash the economy if he could blame it on the Republicans. While I can see how the Republicans would be forced to negotiate, is there any real pressure on Obama, Fed lectures or not? Perhaps than this is a recipe for the total Republican surrender, since they are the only side with the market pressure on them, but still: is Obama in any sense motivated to solve the market problem as opposed to find a way to assign the blame to the opposition?

David Lillienfeld writes: 

So you subscribe to the thesis that the GOP crashed the economy in 2007 to blame it on Barney Frank and get Dodd-Frank repealed?

Gary Rogan replies: 

No, this is a random thought that has never occurred to me. The GOP would never crash the economy on purpose because they are not Marxist revolutionaries and because they are largely beholden to a lot of business owners and operators. It would also be hard to believe that as a party they would want to hand the victory to the Democratic Presidential candidate in the following year, so this is an absurd suggestion.

Obama has clearly demonstrated that he personally only cares about the following things: (a) income transfer to the "unfortunate" (b) gay rights (c) Muslim rights (d) black rights (e) triumphing over any opposition regardless of any collateral damage" You can see that he has a tin ear for what's important in the "flyover country" by his handling of the "death benefit". Getting him to act normally is like trying to explain human behavior to a creature from some Alien movie: they can certainly pretend most of the time, but once in a while the algorithms fail and a few humans bite the dust.

David Lillienfeld retorts: 

Sorry, but you'd have to go back to the DNC's decision in 1972 to have George McGovern give his acceptance speech at 3 AM (at least I think it was 3 AM–I was pretty sleepy at the time) rolling all the way forward to McGovern's declaration of "1000%" support for his Vice Presidential candidate a few days before the latter withdrew to find anything rivaling the political stupidity and naivite evidenced in the GOP's actions in the past couple of months. As for the biggest absurdity in the present situation is the GOP's apparent suicide wish. I had thought after the last election, there was some desire in the GOP to come to terms with its growing political isolation, that it understood that the American electorate was not amused at the sight of an 82 year old man lecturing an empty chair on a stage. Apparently I was wrong. I also find your premise that business owners and the like are beholden to the GOP. That's starting to change, though I don't think that means they will be any more interested in aligning with the Democrats than they are right now. The effect of the shutdown and even moreso the debt ceiling doings on business has hardly been a positive one.

Not everyone in the Democratic Party is a Marxist and not everyone working in the White House is a Marxist (the idea of Chuck Hagel as a Marxist is humorous, though, I grant you, and ditto for Jack Lew). Not everyone who voted for Obama is a Marxist. And there are those who voted for him while not supportive of everything he says or does if only because of the choices they were confronted with. Just because someone disagrees with you doesn't make them a Marxist, either.

I lived through the "America: Love it or leave it" period in the late 1960s and 1970s, and I'd like to think that we're past that as a society.

Stefan Jovanovich clarifies: 

David is too good a scientist not to know that public opinion polls have become suspect precisely because so much of the actual electorate chooses not to answer the phone or answer the questionnaires. In fact, for more and more people answering Gallup's questions is considered to be the equivalent of voting - i.e. I answered the poll questions so I don't need to get an absentee ballot. Some of us made this mistake in predicting the last Presidential election; David seems determined to repeat our error by taking the "public's voice" for being equivalent to the electorate's.

As for the description of the Democrat Party, I am afraid my answer is "yes, they are all Marxists". To say that, I have to rely on my own peculiar definition of Marxism; but I think it is an accurate precis of what Marx, Engels and Lenin all thought. In their world a person always and everywhere believed that labor had a value independent of (and almost always superior to) its market price? Since the late 1950s, when I first started following politics, I have never met a Democrat, left, center or right, who did not agree with that assertion. It is hardly an odd opinion; for most of my life it has been shared by not only all Democrats but also a majority of Republicans. Both parties have shared the fantasy that there are two "sectors" in an aggregation called the economy and that the prices for the "public" sector and those for the "private" can be directly compared to one another. That is why, even now, a majority of the Congress supports labor unions, Davis Bacon, non-judicial regulation and all the other forms of soft and hard government-enforced monopoly.

All this upsets Gary - understandably. It would upset me if I were not a hopeless optimist. The idea of actual liberty - of people being absolutely free to paint their houses whatever colors they liked, swap fluids with whatever consenting adults they chose, eat, drink and smoke things that are "bad" for them, believe in Joseph Smith's golden plates, heavenly virgins, Darwin's universe, whatever - has always been a truly radical idea. That it has never yet been the majority opinion is no reason to believe that it will not someday become the "common sense" of humanity. The dedicated Communists who were my grandfather's friends - the ones who actually went to Spain to fight Franco and the Nationalists - had, in their own way, the same stubborn faith. They thought Stalin was a monster, but that not shake their belief that someday the dictatorship of the proletariat would not longer be necessary and we would all be free. Grandfather agreed. He just thought we could skip all that petty and monstrous bossing around of other people and get straight to the Don't Tread on Me that had been his reason for coming here in the first place.



There stands Mr. Sogi's 1650, attractive as a stone wall.

Jim Sogi writes:

It's the "1650 Blues"… sounds like the name of a blues tune. However under the improvisation rule, no rendition should repeat the prior performance exactly.

2013-10-09    16:00:00    1656.25    1656.75    1648.25    1650.50    291418
2013-10-09    15:00:00    1653.25    1656.75    1651.25    1656.50    267649
2013-10-09    14:00:00    1645.50    1654.75    1645.25    1653.50    324510
2013-10-09    13:00:00    1646.75    1649.00    1644.75    1645.25    167887
2013-10-09    12:00:00    1645.00    1647.50    1640.00    1646.50    369039
2013-10-09    11:00:00    1651.25    1652.75    1644.25    1645.00    414612
2013-10-09    10:00:00    1653.25    1655.00    1646.75    1651.00    299764



Someone someday should go through all the dailyspec stories in history and put them into categories like sports and trading. A person could click on a category button and bring up a wealth of material for research or making it into a book, etc.



 Has the ted spread inverted at 1 month? That's what I"m seeing. The money market funds perhaps can't risk a liquidity event or they would be selling CP and buying bills right now.

I don't see any trade that I can do here. All dressed up and no where to go. But what I don't understand is why money center banks aren't using their excess free reserves to buy 1 month bills. There should be essentially no capital haircut unless the new Basle rules have totally mucked things up. Something isn't working. This is down 40 SPU point kind of stuff. (NOT a prediction and I'm not short SPUs).

anonymous writes: 

The Greek Theater partial government shut down has made the plunge encouragement team lazy, or else they're incompetent. I'm looking at the entirety and it feels like I'm on a submarine or other naval vessel and the klaxon horns are going off and the call is man your battle stations. Things could get wild. Grains are very nervous, especially with export worries and that is showing up in the volatility of the basis in different areas. My mentor taught me that nervous markets generally close lower and you have an edge selling into strength in nervous markets. I never even quantified this, as I accept his advice like I accept the fact that the shortest distance between two points is a straight line.



One interesting thing about markets that helps them to take from the herd is how one day, one hour, one minute, they will be the strongest price you have EVER seen, and then the next, the polar opposite. Draw them in and spit them out all day every day is the name of the game for Mr. Market. Any one involved is fighting that and their own deficiencies from the get go.



 It's only a flesh wound…as Monty Python would say.

I thought this was a great article about chemical codes and signaling amongst plants.

"Learning to Speak Shrub":

'Entomologist Richard Karban knows how to get sagebrush talking. To start the conversation, he poses as a grasshopper or a chewing beetle—he uses scissors to cut leaves on one of the shrubs. Lopping off the leaves entirely won't fool the plants. So he makes many snips around the edges and tips of the leaves—"a lot of little bites."

A few months later, Karban, a professor at the University of California, Davis who studies plant defense communication, returns to the sagebrush and examines its leaves, many of which now have damage from real grasshoppers or beetles. However, within about two feet of the branches he clipped, leaves have been spared the worst ravages of the hungry insects. That's because Karban's cuttings convinced those damaged leaves they were under insect attack, so they sent chemical alarms into the air. Neighboring leaves intercepted and deciphered the code messages, and began prepping their own defenses against the bugs.

It makes me wonder what pheromones the markets release?



Between 1962 and 1984, the Dow made five 30-40 % swings up and down from 1000.

There were huge interest rate and tbill swings also with Volker.

1946 - 1981: Bear Bond Market, yields soar from 2% to above 15% during 1981.

With the Gold standard there were some big liquidity squeezes.

We were coming out of two big losing wars.

I see many similarities to the current era.

Scott Brooks adds:

Similar demographics are very much in play.



 Dailyspecs may be interested in reading "The Sage of Equipose," a review on p C7 of the weekend WSJ of Frank Prochaska's The Memoirs of Walter Bagehot. Bagehot was the longtime editor of The Economist. The book consists mostly of Bagehot's own writings.

Fed critics will enjoy Bagehot's "Lombard Street" passage in which he "traced British financial instability to the Bank of England's special privileges, which, by restricting other banks' ability to issue circulating notes, caused them to employ Bank of England notes rather than gold as their cash-reserve medium."

Stefan Jovanovich elaborates:

Bagehot was — like all successful financial journalists — always loyal to authority and convention while seeking, whenever necessary, changes in the name of progress and the general welfare. Magically, those "reforms" invariably end up benefitting the people holding the largest sums of money– usually, but not always, the banks.

I don't fault Bagehot for any of this; it is the financial journalist's job. My difficulty is with what he had to say.

Bagehot was a supporter of the gold standard only in the sense that he did not want banks to be completely free to issue notes without some fractional reserve being held against those IOUs. One can say as much for Keynes; at Bretton Woods he did not propose that the world central banks to be completely free to issue script. Both men thought that currencies needed to have some connection to gold; but neither thought it was, in any way, a good thing to have ordinary people able to demand specie for their measly savings and then "hoard" it in hard times.

Bagehot's essay on Universal Money is a fascinating reminder of just how much snobbery underlay all modern discussions about currency "reform". Bagehot is horrified at the French and Americans for wanting a "low" gold standard - i.e. one that puts an ordinary laborer's wages within the reach of actual coin.

Bagehot was equally horrified by the Americans' notion that there should be not central bank at all. People have been taught to read Lombard Street as a prescription for somehow limiting the printing of money; but it is really a tract in favor of allowing banks to call upon the BofE for notes in a crisis without any restriction at all in the amount that the BofE itself can print or how much debt the government can sell to the central bank.



I see the following t-bill rates on my screen. The date is the t-bill maturity. The yield is the bloomberg conventional yield:

 10/10/13 0.035%
 10/17/13 0.112%
 10/24/13 0.132%
 10/31/13 0.112%
 11/07/13 0.086%
 11/14/13 0.096%
 11/21/13 0.046%
 11/29/13 0.035%
 12/05/13 0.020%

 12/12/13 0.020% 

What is going on here? Let's assume that the government "defaults" (whatever that means) and the holders of the t-bills maturing on 10/17 and 10/24 cannot get their money back for a while. The market has priced "normalcy" (whatever that means) into the market with about a month.

Yet, the extra yield being paid for the 10/24 t-bills equates to about 3-4 month's worth of yield. And the Fed is going to be doing their usual system repos during that period.

Question for GZ and the t-bill arbs: Is there something funky going on? Or is this a real arbitrage?

George Zachar writes:

As far as I know it's really there. Large classes of natural t-bill holders can't take ANY risk of not getting par on dates certain.

Rocky Humbert:

Cool! So I was all excited about backing up the truck and buying some … until I realized that for every $5,000 invested, I make $0.50. ($100 per million.)

I think this anomaly may be good to watch since it's the only objective market signal for assessing the probability. And so we have a baseline unfolding. But not worth the effort to trade (yet) — since if they really do default, there will likely be much lower prices in other stuff. I'll go so far as to predict that an actual default will be worth between a 3% and 7% panic haircut on the S&P. Don't ask for historical, quantitative proof. They ain't any.  But you heard it here first…. 



 When I went to New Zealand as few weeks ago I thought it would be pretty easy since they speak English there. But when I went there, people would speak to me and at first I couldn't understand more than 60% of what they were saying, and much of that just by context. With the accent and the many many different terms for things, a lot just slipped by me as noise not information. Where I was staying a guy stopped me and said, "where is sife wi?" I look at him and say," Huh?" He says, "Sifewi"…finally it dawns on me he is asking for Safeway. That's how I felt all the time down there.

For example, they say "trundler" for shopping cart; Tramping, for hiking; ski field for ski area; kitting up instead of gearing up; cuppa instead of cup of tea; long black instead of double espresso, tall white instead of cappucino, and the list goes on.

The guy who developed the algorithm to decode cellular data from noise and other cell phone had a great idea.

The information conveyed in the market is hard to understand, but it's there. Like language, the information and how it's conveyed changes and evolves.

A French friend who has lived in the US 20 years said she can hardly understand people speaking in France now, and the kids there say she speaks like people did in the old days. It would be like using terms such as "groovy" or "far out, man" these days.



The volatility in many markets over the last 10 years I believe has created a desire in us to crave more action and to crave and indulge in childlike activities, like climbing trees or playing football. Does this negatively condition us to over trade? As we get older and lose natural energy, could this actually make a positive difference in our trading?



 My favorite Hume story is the one about his slipping and falling in a muddy lane and finding himself needing help to get up (he loved food and had acquired the shape and relative instability of a penguin on land by the time he was middle-aged). He was, by then, a recognizably famous man in Edinburgh.

A passer-by saw him sprawled in the mud and, as a good Christian, offered to help Hume get upright but only on condition that the philosopher renounce forever his attempt to prove that miracles could not happen. Hume gratefully accepted the offer and went home to dry off.

When a friend hear about the incident, he allegedly chastised Hume for having abandoned his principles. Hume replied that he had done no such thing. Miracles were entirely matters of faith; they could not, by their very nature, be proved or disproved and so he was happy to renounce an effort that would have been utterly fruitless.



 For boxing and climax, or in any sport, these facts emerge from my recent research: testosterone peaks about 2 weeks after the last orgasm.

Such is the design of evolution.

Because testosterone is converted to oestrogen by the aromatase enzyme in adipose tissue, a sustained high level of sexual activity causes 'testicular feminisation' of a person's body.

Testosterone causes vasodilation of blood vessels by a direct effect on the smooth muscles, which is different from estrogen because it is independent of an impact on endothelium.

As my boxing trainer, who disallows sex one month before an upcoming bout, states, "sex makes fat babies in the ring."



The fed's quantitative easing policy per se is nothing but bad for banks.

1. QE forces the member banks to have excess reserves as assets on their balance sheet. These balances earn only .25% lowing the banking system's net interest margin, return on assets, and return on equity

2. To maintain high enough average net interest margins (that include the holding of excess reserves) to attract capital, banks tend to charge a bit more for loans to business and consumers, which causes more borrowers to go direct to credit markets and private lenders in general. In other words, qe tends to support disintermediation, as those who can avoid the banks.

3. QE lowers interest income paid by government to the economy, as per the $100 billion of fed profits turned over to treasury last year. Lower interest income makes the economy that much less credit worthy, thereby lowering its ability to borrow and service bank loans.

Bottom line: QE is a tax on the economy. And QE is functionally the same as the TSY not having issued the securities in the first place.

However I favor, for example, the TSY not issuing anything longer than 3 mo bills, which is functionally 'QE max'

Yes, it reduces aggregate demand.

But, for example, I'd rather get my aggregate demand, for a given size government, from lower taxes than from the TSY or Fed paying interest. But that's just me. 

Rudy Hauser writes: 

The fact that banks hold so much in excess reserves is because they apparently prefer the returns over those of equally short-term T bills. They appear to want to hold such safe short-term assets for whatever reason. One would expect them to want to earn higher returns at some point. Hence the concern as to whether such actions could lead to a drastic reduction in excess reserves and explosions in M1 and M2, with all its inflation risk. The Fed could try to offset this but whether the will to take necessary action will be there or the ability is somewhat questionable. But that does not appear to be a risk for the immediate future.



A site claims to have an algorithm for determining "optimal puts" for your portfolio:

"So far, judging by the costs of hedging the iShares Barclays 20+ Year Treasury Bond ETF (TLT), options market participants don't appear to find the prospect of a default likely. But if one were to happen, it's difficult to predict how hard Treasury securities (and ETFs comprised of them) would get hit. For investors who would like to insure against an unlikely but potentially disastrous scenario, here are two ways of doing so."



 I had to intervene yesterday when David Stockman gave one shibboleth about the coming armageddon after another advising people to put their money under the mattress, and to anticipate tremendous increases in interest rates, and the end of civilization all caused by the increase in the Fed's balance sheet.

I hated to have all the junta attendees nod in agreement as this ruinous guidance, similar to the chronic bear at Barrons, sunk in. At most such epicylic presentations, none have the courage to get up to present an academic, or empirical, or systematic rebuttal. But since it's my junta, I felt I had to point out that the scenario he envisioned was rated at 1 in a billion by market options, that following his advice over the years would have led to multiple bankruptcy and poverty, and that the fears he discussed in recent years were not any greater than those that occur on average every other year.

I referred him to Dimson and Ibbotsen, paid him his fee, and felt like Odysseus coming home to Ithaca to find his home overrun by imposters and suitors of the wife. It's my junta, but the economics editor of Barrons moderates it now, and he's one of those who believes that 6% interest rates are a good average for the next 10 years, as used by the "impartial" congressional budget committee.

In any case, one of the shibboleths most often bandied about is that the POMO from the Fed is the cause of all the market rises. Indeed many anecdotal reports on such sites as Zero have limned this theme. Easy way to make money. Just buy on days that POMO is in play. The days they buy the bonds and mortgages and the amounts are announced in advance on the Fed web site to give an aura of non-flexionism to it all.

But, have you tested it one wants to ask. I did with the assistance of Tim Hesselsweet.

Let's divide the days up three ways big QE buying, small QE buying, no QE buying: number of obs were 406, 258k, 144, respectively. The average move is up for each of the days and each of the afternoons. But the greater the QE, the less the average rise, but for the whole day, and the afternoon following the POMO. The average change respective: 8/10 of a point, 1 point, and 1.4 points. Where there was no POMO, the market went up the most. Thus, another mumbo jumbo, and easy way to make money, and untested reason to hate the system bites the dust.



 A Pair of Pants in checkers occurs when the opponent's king is between your two checkers on the adjacent row above and below




The market often puts you in a pair of pants. Say you have a good position and you're long, and you're willing to buy a few points below, but you'll take your profit if it goes up a few points. Like today. But the market refuses to go down or up to let you win.

What other plays from checkers or chess resonate in the market? And can we learn something from them.

The pair of pants reminds me of the CTA who's down much for the year. He doesn't want to show a really good return for the month because his investors will get out. But he can't show a bad return either or else, the attorneys and vultures and clearing firm will be after him. 

Anatoly Veltman adds: 

It seems Chair totally forgot about the flying king of non-British checkers variety. The pattern played out perfectly courtesy of the latest FOMC surprise: the market flew exponentially to a record, driven by the news of the day — only to fly out the other end on logical wave of value-oriented profit-taking. In checkers, that combination is often used to END THE GAME.

Alan Millhone writes: 

Hello Anatoly,

Checkers is like the Market — you can study both forever and yet never figure out or master either. Either may master you.





 There is a strange law of traffic congestion which says that after an accident has been cleared, there is still congestion at the site. I believe this goes beyond people slowing down to see what happened in the accident. Perhaps I am wrong. One notes that prices are extroardinarily jumpy today just as if there was an employment number that was announced at 8:30 when prices jump by 1 standard deviation on average in the second. Gold at 8 am was 1306, then at 8:10 it was 1322. The S&P was 1671 at 8:10 and now 1664 at 9:00. Similarly for other markets.

If this is a true phenomenon, what is the explanation. Or as Cootner or Harry Brown would say, these are just properly anticipated random moves that palooka onlookers confuse as regularities. 



For the first time in history we have a plunge encouragement team. 



Two down swings ago 130,

Last Down swing 80,

Current swing 63.

Kind of an upward flag shape thingy.



Possibly the most major inhibitor of short term trading is not reacting enough to fundamental changes in the environment of changing cycles and inter-market relationships that you're not privy too until long after the flexions and insiders have pushed their boat into the pond. Discipline is the only way to combat this. The more the deception, the greater the chance of failure.

Gary Phillips writes: 

I try to think of myself as simply an observer, not a trader, but an opportunist, which means I do not initiate arbitrary trades that inevitably degrade my P&L. This entails allowing questionable trades to go uninitiated, while waiting for trades that are well defined and have a proven edge, and levering up when a real opportunity is presented.



 The next meeting of the NYC Junto will be tonight, Thursday, October 3 at 7:30pm.

As usual it will be held at the Mechanics & Tradesmen Library, 20 West 44th Street, NYC.

The main speaker will be David Stockman, former Congressman, former Director of OMB, businessman and author.

He will be speaking about "the Corruption of Capitalism in America."

All are welcome. 

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