The purpose of this post is to stimulate discussion about an important market development. It's not a prediction.

I believe that one of the most widely accepted memes in the financial markets over the past several years has been that the Chinese Currency was/is undervalued, manipulated and would not go down and must eventually go much higher. The fundamental arguments for this were the persistent balance of payments surplus, purchasing power parity, competitive advantage/cost, political pressure, the history of currency movements in places like Japan, relative growth rates and growth potential; monetary base; and the list goes on and on and on. In fact, I can't find any credible opinion to the contrary. (A couple of summers ago, Bill Ackman made a big PR splash buying "cheap" calls on the HK dollar predicting an inevitable and massive revaluation.)

Over the past few weeks, the Yuan has reversed course and started to decline. It has had a violent and 3 sigma decline in the past 3 days. The story is that the Chinese authorities are encouraging a "wider trading band."

I am not offering any predictions here. But it is striking that the impulse move is in the down direction, not the up direction … all the more so, when the universally accepted truth is that the Yuan can only rise.

Is this just a counter trend move? Or is something bigger going on? If the Yuan starts declining instead of rising, what are the second order effects on other markets? If this is more than a counter trend move in a secular bull market for the Yuan, then I believe there are some very important implications. Unfortunately, I'm not smart enough to know whether the supposition is true and/or what the second order effects may be.

A good place to start thinking about this might be historical analogs. What are the historical analogs? And when does the perma bull Yuan story get stopped out?

Alston Mabry writes: 

I agree. With all the issues out there on shadow banking, credit bubble, CBOC actions, ghost cities and shopping malls…who actually knows what's going on? If anybody "knows', it's the market itself. Once China frees up capital controls, import controls and currency controls and becomes relatively transparent accounting-wise…then the RMB will move on economics…mostly. But right now there are so many "shadow issues" in play that it's hard to assess the situation other than on a short-term trading basis.

Richard Owen writes: 

Disregarding the background 'China story' which is the key determinant of the secular factors (eg, do you believe China is massively insolvent or not, does it matter), when currencies are 'newly' brought to market (in the sense of being a new regime, if not a new currency), they often trade off initially. Domestic holders want to diversify and foreign buyers have no structural reason to accumulate inventory, thus have a 'show me' attitude on price. And since fx is a short duration asset, nobody is holding for the carry and a trend begets itself. Or to put it another way, as yuan trading is liberalised, does the marginal holder likely want to diversify out of existing stock more than a foreign holder wants to get into? Comparables are perhaps the euro introduction, where despite a hugely profitable convergence carry on long bonds, even underwritten by the ECB discount window, it initially sold off. Perhaps more analogously, when South Africa empowered its blacks, the Afrikaans community thought the end was nigh (as some chinese entrepreneurs do now) and began liquidating everything and selling into offshore currencies. They misread the situation, however, and the sandtown community provided a bid to the Afrikaans. My friend's uncle bootstrapped a working mans savings into a billion by buying the real estate liquidation, putting in newly arriving AAA multinationals as tenants and riding the yield curve down from teens to single digits.

anonymous writes: 

In the face of 2008 downturn, the Chinese government created more money than was done by the ECB or the Fed. The shadow banking system carried on making new loans to reestablish the housing bubble. Based on that slice of data, the RMB should not be rising against other foreign currencies, but falling.

Yes, trade surpluses are supportive to a currency, but China's big trade surplus with the US is balanced by some trade deficits with sources of raw materials, and production machinery, so that their trade surplus overall is not as big as with the US. The foreign direct investment into China has been very high as has the Carry Trade where borrowing in low interest rate countries like Japan and buying higher rate Chinese Treasuries, was profitable and gained even more as the RMB rose. This looks to be reversing and is thus a negative for the RMB and is big at maybe a half trillion dollars of hot money.

The image is of the Chinese government suppressing the currency to keep its exports growing and doing so by buying US Treasuries, and that was also pushing the image higher. But Chinese people are buying gold for safety, indicating that they have seen government spending and do not have confidence in the RMB. I think a downward spike in RMB could be followed by more selling if Carry Trade unwind becomes big. But PPP and Trade surplus will limit the move eventually, IMO.

anonymous writes: 

I also agree, (Chinese financial reporting is awful) but the assertion that we can know many outside variables from the US$ of the equation is very important. (Current account surpluses and deficits bear many similarities to double-entry accounting, in that aggregate balances in one direction or another should balance each other out.)

I submit that the current state of Chinese property and credit markets bear many similarities to what Hyman Minsky termed a "deviation amplifying" mechanism in his Financial Instability Hypothesis.

However, if asked how it will play out, my tendency is to say that at some point over the next few years, they are at substantial risk for a debt deflation. Personally, I'd have a tough time convincing myself to be short a deflating currency.

Charles Pennington writes: 

OK, here's an "N=1" kind of study…

Back in mid/late 2011 the Swiss franc ("CHF") was strengthening violently against the Euro, with the Euro almost going down to parity with CHF. Then the Swiss stepped in to weaken the CHF and forced the Euro back up to 1.2 CHFs. The Euro sat there, pegged at 1.2, but everyone feared that the risk was that the Euro would fall below 1.2. Instead the Euro ended up moving higher against the CHF in mid-late 2012 and 2013. Very similar to Rocky's China story.

Since mid 2012, EWL (the Swiss market etf) is up about 55% and FEU (the EuroStoxx etf) is up about 40%. EWL is probably a bit less volatile than FEU (though I didn't check), so EWL's gain is yet more impressive.

So the N=1 conclusion is that you should buy Chinese stocks.



 Does the hot hand exist or is it consistent with randomness?

"The Hot Hand Might be Real After All"

The authors contend there's something to it.

Ralph Vince writes: 

Fascinating article, I think he might have pursued some avenues of thought there just a little further.

Basketball shooting is not the same, say, nor the streaks one might feel in doing it, as the streaks one might sense at a craps table, the difference being the participating aspect of one's skill (unless you attribute throwing dice to a "skill," and many of us, no-doubt, have had uncles who held that view!).

So the feedback mechanism of the previous play impacts upon the next play where skill is actually involved. Where they speak of players feeling hot, and taking greater chances as a result, the player enters a different distribution of outcomes (or, at the very least, different parameters to the distribution of outcomes) than when he didn't feel hot. This is likely true in most of life's endeavors that we must perform something.

And what a lesson there, professional athletes inadvertently might be providing.

One "sport" I find pure torture is golf. Go miss a three foot putt, and the next one looks like it's thirty feet. Go get rattled and try to hit the next shot like you did X holes ago. Clearly, there are different outcomes based on how you react to immediate previous outcomes, pro and con.

Yet, professional athletes seem to be able to compose themselves such that the negative side of the coin they are able to disregard altogether. This may be the greatest facet of their skill in fact, I certainly wouldn't be the one to judge that, but I do marvel at how they can re-compose themselves and relax in difficult situations, even when things aren't going too well for them. 



The same way that the market saw going from red to black on year as a target, and it was hit as many of the studies predicted, and the same way triple tops are always broken, and round numbers always fulfilled, I make another hypothesis. The DAX is at 9700 and the SPU at 1865. One predicts 10000 DAX and 2000 SPU by end of year.



 The Golden Ocean, O'Brian's first novel of the sea and first of two about Commodore George Anson's incredible 1740 expedition to harass the Spanish off the South American coast. 

Of the five ships that set out on the voyage, only one completed the it, Anson's flagship Centurion. Of the 1,854 men who left England, only 188 returned. The squadron met with horrific weather off Cape Horn and men died by the score from Scurvy and injury. At one point Centurion was burying six men a day. It is a tale of unmitigated disasters, unlooked for deliverance and unbelievable, almost incalculable success.

The book is a prelude to the Aubrey - Maturin series, of which so much has been said on this list, and you can see O'Brian here developing the methods that he used in that wonderful series. In his second book about this expedition, The Unknown Shore, which is about the Wager Mutiny , and which I have yet to read, O'Brian sews the seeds for the friendship between Jack Aubrey and Stephen Maturin as midshipman Jack Byron (a real person) and surgeon's mate Tobias Barrow serve as prototypes for that pair.

The Golden Ocean
begins with young Peter Palafox, son of a poor Irish parson, leaving home to join Centurion as midshipman, never before having seen a ship. Peter and his traveling companions are on their way to Cork so he can take passage to Portsmouth. Along the way they stop in Derrynacaol to attend a horse fair. I thought this piece fitting as a jaunt to the Meadowlands approaches:

Derrynacaol: it was two full days' journey from Ballynasaggart to Derrynacaol, far out of the country of Peter's knowledge, but they were to try to reach it in a day and a half, for the great horse-fair was held at that time of the year and it would have been the world's pity to pass by without seeing anything of it. They would arrive in the afternoon of Wednesday if they travelled by moonlight, and they would be in time for the races. 'It is the race they call the Town Race that we must see,' said Liam as they went up the white road of Slieve Alan, 'for that is the great race and the town gives a silver bell to the winner.' 'Are they very fine horses, Liam?' 'Are they very fine horses? They are the best in the world, my dear, fit for Julius Caesar or the Lord Lieutenant, and there is half Ireland lining the course and cheering the winner. Why, even the worst and the last creatures that run there would be like a comet in Ballynasaggart and it would put the mock on Cormac O'Neil's brown gelding, the ill shaped thief.'

'I wish I could ride in a race like that,' sad Sean, who was up behind his uncle for a rest from the road.

'Pooh,' said Liam. 'A great long-boned, tick-bellied slob of a thing like you? Those tall and stately magnificent horses would bend to the earth. No indeed: unless the gentry who own them are as light as may be they have little jockey-boys who weigh no more than an owl. For they are mad to win this race, do you see? And not an ounce will they carry that they can spare. It is not only the honour of bearing the bell away, but each gentleman pays five guineas to enter and each lord ten, and the winner takes all — and there are side stakes too, and the betting: but I'll say nor more of that.'

'And why will you not?'

'Because it's there is the evil side of racing. Did his Reverance never tell you how wicked it is to gamble? And do I not tell you it is foolish as well, and I the best judge of a horse in the County Galway, if not in the whole of Connaught, whatever Cormac O'Neil may say. No: it is a fine and laudable sight, the glorious creatures, and then there is the piping and the dancing; but the betting and the wickedness–there's folly for you, and under his Reverance's command there will be none of it; nor any truck with the thimble-riggers and the common coney-catchers. And while I have it in my mind I will warn you against the pick-pockets, or they will certainly steal the teeth out of your head. Indeed, they may do so even then, for there was a man from Dungannon who had the wig snatched from his poll in the hurly-burly by the winning post, and he holding his pockets with might and main; which I had from his aunt in Dungannon itself: so if you have any money or valuable thing upon you at all, give it to me and I will carry it in the purse, God shield us from harm. For you cannot conceive of their wickedness.'

Now I will not ruin the story entirely for you, but if you know anything about O'Brian's writing, well, you can guess what it is coming.

I highly recommend the book, it is easily as exciting as any of the Aubrey-Maturin books, just as well written and filled with period and geographical detail. The Audible version is not narrated by Patrick Tull and so is diminished in that regard, however, the story is so compelling that one soon get's over the fact and is swept up into the action.



Everyone should be extremely skeptical about the meaning of "buying". While selling is selling, buying generally includes, and therefore is completely dominated by, receiving stock compensation. Unless someone is going through all of the Form 4 filings with the SEC and determining the transactions are coded as private transactions from insiders, meaning they actually ponied up their own money for the shares (was it required they buy them for be on the board?), then general "buy" as form 4 filing is pretty much meaningless. Also, the turnover of shares relative to the number constantly held is important. Some insiders might have what look like large holdings, but when you see the shares come that are coming through from compensation that are being dumped in large volumes all the time it can make one wonder if the holdings are just window dressing, and insurance against regulatory actions ("I had so much wealth with the common share holders").



 The Chairman of the Fed is known for her wit and wisdom. One thought it useful to memorialize some of her wit on a continuing basis. We hereby inaugurate a compilation of her "Sublime Jokes" so as to gain gravitas from her the same way her colleagues and supporters in the press who always admire her sense of humor.

Please feel free to augment this list with other examples of her hilarious remarks.

Janet Yellen's humor:


But even as she pushed for more aggressive policies to deal with the financial crisis [of 2008] and the economic downturn, Ms. Yellen also displayed an ability to disarm her critics with a sort of gallows humor, even in the darkest days. "In the run-up to Halloween, we have had a witch's brew of news," she said to the laughter of her colleagues, before quickly apologizing for her sarcasm.


As a forecaster, Ms. Yellen was at something of an advantage. She was based in California, where some of the earliest signs of distress appeared. In a lighter moment, she joked that the problems were not just in the collapsing housing market.

"East Bay plastic surgeons and dentists note that patients are deferring elective procedures," she said to laughter, according to a transcript of the meeting on Sept. 16, 2008.

"The Silicon Valley Country Club, with a $250,000 entrance fee and seven- to eight-year waiting list, has seen the number of would-be new members shrink to a mere 13," she said to more laughter.

But she also was looking for clues anywhere she could find them. In June, she told her colleagues about employees at her bank who "had their home equity lines slashed."

"One has deferred a planned home renovation project as a consequence," she said. "If that is happening to them, I can only imagine how hard it must be to get a loan if you have a merely average credit rating."

"Sales of cheap wine are soaring," Yellen reported to the Fed on March 8, a week before Bear Stearns collapsed


Yellen, unlike Greenspan or a pre-2008 Bernanke, is probably the last person you'd hear repeating one of Reagan's favorite jokes: "The nine scariest words in the English language are: 'I'm from the government, and I'm here to help.'


Yellen is humorous. In the recently released transcript of the Dec. 16, 2008, FOMC meeting, she said: "An accounting joke concerning the balance sheets of many financial institutions is now making the rounds, and it summarizes the situation as follows: On the left-hand side, nothing is right; and on the right-hand side, nothing is left."

Charles Pennington adds: 

 This morning I began the process of picking out items of praise from
the link below, but it's lunchtime now so I'll have to adjourn for

from "What Janet Yellen will do with the nation's purse":

She's ultrasmart but also ultramethodical

Yellen was not ordinary, even as valedictorians go.

Yellen is inclined to ask probing questions and to be interested in people even as she grapples with abstract ideas.

revealed not so much a combative personality as someone prone to get to
the point and to avoid becoming too proud of her own intellect.

wanting to think through problems from every angle and with an open mind.

brilliant and a hard worker,"

"I don't think she ever just got along on brilliance."

Her thorough, skip-no-detail approach will be tested in the years ahead

Arguably no individual will have more influence over financial conditions for American families.

"The Fed is the only game in town,"

Yellen, that will mean navigating a difficult course from the moment
she occupies the head chair in the Fed's ornate conference room in
Washington: trying to move the economy toward more solid growth while
also backing the central bank off its stimulative policy of holding
short-term interest rates at zero. This will affect everything from
unemployment to inflation to stock market portfolios.

One of Yellen's challenges will be to defend the notion that the Fed serves all the American people

even Republicans don't doubt she has the résumé for the position.

 Her career path has led her from prominent teaching positions to varied roles in the Federal Reserve System.

Some have called her the best qualified nominee ever.

Yellen will be the first woman to head America's top financial policymaking post.

Yellen has said in the past that she hasn't felt discrimination during
her career, finance remains a male-dominated realm in America. Her
elevation carries both substantive and symbolic importance.

"every time a glass ceiling is broken it sends a signal that government is more inclusive"

once accompanied her parents on a transatlantic summer cruise. A
highlight for Yellen, then in high school, had to do with learning about
rocks. A geologist on board, thrilled to meet a young person with a
keen interest in his field, presented her with a trilobite fossil.

already had a credible rock collection. But instead of eagerly adding
the fossil..to her personal stash, Yellen loaned it to the biology lab
at her school so that others could learn from it, too.

Exploration was a kind of family trademark during her time growing up

"They had inquiring minds,"

The melting pot of New York City was itself a kind of global microcosm of arts, sciences, and culture…Yellen took it all in.

[family outings] included plays, concerts, or science lectures

youth wasn't all about igneous rocks and high-brow culture…one of
those concerts that they went to featured a young songwriter coming out
of the folk tradition, named Bob Dylan.

Yellen was a "very normal kid." "We would talk for hours by phone" about typical subjects such as boys, clothes, and "who said what to whom."

"the real gift to teenage girls like Janet and me was the way we were treated by our teachers, our parents and our peers." Instead of being beholden to gender stere­otypes, "[w]e were expected to take charge, just as our mothers and grandmothers did when men went off to war."

Yellen was an all-around scholar who, with encouragement from her parents, took an advanced-course track through middle school, allowing her to enter high school as a sophomore and graduate a year ahead of her peers.

Her prowess with language arts propelled her toward the editor in chief role at [the school newspaper]… yet her self-profile revealed her to be fascinated by science and math.

She was fun-loving and showed a ready wit

she said she enjoyed reading philosophy

also seemed to exhibit an unusual degree of discipline.

"She did lots of things, and she did them all really well,"

"What stood out to me was intentionality, purposefulness, a determination not to be better than others but to be the best she could be."

Yellen wasn't one to put on airs

Staff economists remember her eating with them in the bank cafeteria.

But she was motivated to achieve.

An unsigned editorial in The Pilot at the close of her senior year (Yellen believes she wrote it but, 50 years later, can't be sure) urged a do-something outlook that her own life embraced: "Be curious! Wonder why the sky is blue, what fire is, why peace-loving nations feud … but wonder about something!"

headed off to college at Pembroke (then the women's college at Brown University) in Rhode Island. Economics quickly drew her in. "She was totally smitten" after her first course, Grosart says, recalling the excitement Yellen shared when returning home on a break.

Graduating with highest honors led to the opportunity to do doctoral work at Yale University, followed by a rare invitation from Harvard University to start teaching there before she had landed a job anywhere else.

Yellen's career had begun its upward arc.

• • •

In 1977, Yellen met George Akerlof, another rising star in the field of economics. It was essentially love at first seminar.

"We liked each other immediately," Mr. Akerlof writes in an autobiographical sketch. "Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics."

The scholar spouses shared an interest in mysteries related to unemployment.

Akerlof's and Yellen's academic lives have been centered around the University of California, Berkeley, where he won a Nobel Prize and she taught for years at the Haas School of Business.

Family interests over the years have included cooking, hiking, tennis, and travel. Yet their dinner table discussions, Yellen acknowledged in 1995, might not be that interesting to an outsider (typically revolving around economics).

The home environment was stimulating enough that Robert Akerlof, their son, chose to enter the same field and now teaches at the University of Warwick in England.

When Mr. Kohn's team of staffers would present economic briefings to the board, Yellen almost invariably seemed to be the one who homed in on the key issue.

"She would find the central point in the briefing, sometimes the central weak point in the briefing. I was often surprised, especially at first," says Kohn, who later held the vice chair role that Yellen would eventually occupy.

It was surprising in part because the other six got to comment or raise questions – starting with Chairman Alan Greenspan – before she, as the newest member, could utter a word.

Kohn's view of Yellen is echoed by Ted Truman,..he recalls similar signs of a sharp intellect.

Yellen's job was to take notes for the whole class, because Professor Tobin wanted the students to be free to listen and discuss. "They were very elegant and careful notes," Truman says, "and they became classics"

• • •

All this may make it sound as if Yellen is a superwoman – someone who crunches numbers about the American economy while wearing a cape. She isn't.

She often prefers to speak from prepared notes rather than spontaneously, which some see as a sign of preparation and precision and others see as too programmed. The best shot one Washington gossip news report could take was to chide her for – horrors! – wearing the same outfit to both her confirmation announcement and her confirmation hearing.

Yet she does draw criticism for where she might lead the Fed.

Her confirmation vote, on Jan. 6, was 56 to 26 – the narrowest margin any Fed nominee has ever been approved by. All the "no" votes were cast by Republicans.

Yellen's history at the Fed shows her to be more pragmatic than ideological. It also suggests she can be tough and persuasive when she wants.



I've heard that the players in a commodity market know who holds the inventory, how much and where it is.

Is this true? I know it's been questioned for decades by those who indulge in gold and silver trading. With silver especially, it has long been argued that in any given month there is far more silver shorted than is deliverable. Similar questions have been raised about gold. Just recently I read a speculative assertion that a similar situation exists in the oil market.

Keep in mind, this is not an attempt to open a discussion on any of the above mentioned markets. However, if "real" commodities are allowed to trade in tandem with "paper" representations of those commodities, how do you traders determine if the "market price" is truly representative of a supply-and-demand dynamic rather than a manipulation?



Another festival in India today. Don't irritate or make Lord Shiva loose his temper or the markets across the globe will trade at zero the moment he opens his third eye.



 "It identified a bug that enables people to withdraw the same Bitcoins more than once…"

I submit that the demise of Bitcoin will be, in part attributable to the lethal cocktail of:

1. instant transactions

2. human/computer fallability

3. anonymity and the lack of well-capitalized exchanges/clearinghouses.

This 3rd factor is the boon and bane of Bitcoin.

Mistakes are human. Forgiveness is swift. Reverse wire transfers are divine.

From the Uniform Commercial Code (UCC) which governs wire transfer:

§4A-211(c)(2) states that cancellation of a payment order after acceptance by the beneficiary's bank is only available in instances where the payment was unauthorized or there was a mistake by the sender and that mistake falls into one of three categories: (i) duplicate payment, (ii) payment to a person or entity not entitled to the funds, or (iii) payment which resulted in the beneficiary receiving more that they were entitled to. The effect of this language is to take issues such as buyer's remorse completely off the table and legally limit the instances where a buyer can even attempt to recall funds already credited to the seller's account to only those instances where the buyer can make a claim that the seller received funds to which it was not entitled.

Mt. Gox Bitcoin Exchange Goes Offline as Peers Lash Out

(1) 2014-02-25 07:47:38.266 GMT By Pavel Alpeyev and Carter Dougherty Feb. 25 (Bloomberg) — Mt. Gox, the Bitcoin exchange that halted withdrawals this month, went offline as industry peers distanced themselves from the Tokyo-based company in an effort to defend the virtual currency.

Efforts to reach the www.mtgox.com website today directed users to a blank white page, a day after Mt. Gox Chief Executive Officer Mark Karpeles resigned from the Bitcoin Foundation, a key advocacy group for the digital money. "While we are unable to comment on whether or not Mt. Gox's business operations employed operational best practices and reasonable accounting procedures, we can assure the public that the Bitcoin protocol is functioning properly," the foundation said in an e-mailed statement. Mt. Gox, one of the first exchanges, said this month that it identified a bug that enables people to withdraw the same Bitcoins more than once, leaving it vulnerable to hackers. Prices quoted on the exchange plunged on speculation that account holders wouldn't be able to get their coins back. Mt. Gox didn't immediately reply to a phone message and e- mail seeking comment.

full article here.



The cold weather created revenue spikes for eastern power grids. According to RTO Insider, PJM's gross billings were $11.2 billion in January, about one third of the total for all of 2013. Collateral calls for the month totaled $2.6 billion, more than six times the total for all of 2013.

This suggests a Q1 boost for NRG Energy, FirstEnergy, AEP and Exelon.



 The all seeing eye would note that stocks and gold closed at all time and 1 year highs, and bonds are within a point of a 6 month high.

Anatoly Veltman writes: 

Janet effect?



I'm not sure which prof (Charles or Alex) was mentioning shorting the cost of certain stock at 60% ++ in one of the posts, but I found this interesting paper on the subject: "The Shorting Premium and Asset Pricing Anomalies".

Here is a two line summary of the paper:

1. The cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha

2. Top decile stocks by shorting premium (cheap to short) returned an average of 0.75% (gross) and 0.11 % (net) in the next one month, while bottom decile (expensive to short) returned -0.71% (gross) and -0.17% (net).



The subject of economic sociology with particular reference to the network of lawyers, investment banks, entrepreneurs, accounting firms, and proximities to each other opens up interesting ways of thinking about profits, and markets.



Herbert Gross is an excellent mathematics instructor. I have listened to many of his lectures on differential equations and find them the best way of learning them. He prepared these lectures 25 years ago, and teaches in that fashion to "community college students". Highly recommended.



 What can we learn from spiders. In addition to the Japanese and the Incas, Walt Whitman and Beethoven, and machines, Frank Lloyd Wright said the main influence on his work was the spider. He liked the lightness and strength of their webs. Can we learn anything about markets from the spider?

Ken Drees writes: 

King Louis XI was known as the spider king so named because he always wove the most intricate and well conceived plots against his enemies. Markets seem to see further into the move sequences. Maybe there is something to be learned by investigating him.

Gibbons Burke writes: 

 I trying to relate the spider to the markets the first thing that occurs to me is the quote from Reminiscences of a Stock Operator:

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon."

Spiders set up their optimized webs, and then just sit tight, patiently positioned for the meal to show up.

The webs are well-structured, robust, and, like trend trading systems the number of winners (flyies eaten) is vastly outnumbered by the number of losers (fly byes).

The best webs are difficult to see.

A spider does better by making a large web, but too large and ti won't be able to hold the tray. Liken the size of the web to the use of leverage… extend your line too much and when you get a big move (a rather large beetle) it destroys the web rather than getting caught.

In unfavorable conditions, the spider eats up its web and redigests the resource to put it up when conditions are better suited to catching flies.

Chris Tucker writes: 

Spiders use sophisticated tools to capture prey, most frequently a web with sticky silk to trap insects. Spider webs are a marvel of engineering and spider silk is incredibly elastic and stronger (by weight) than steel. Spiders are incredibly industrious, many orb weavers consume their webs every evening and build a new one each night.

Spiders are patient. Orb weavers set their traps and wait, letting their tools do the work. Spiders are observant, they wait patiently for signals from their webs (usually vibrations) before pouncing. Several types of spiders use camouflage to fool prey. Ant mimicking spiders wave their front legs in the air to disguise the fact that they have eight legs and no antennae.

Spiders use deceptive behavior to fool/lure prey.

I have copied and pasted some interesting info below from the excellent wiki article on spiders):

When at rest, the ant-mimicking crab spider Amyciaea does not closely resemble Oecophylla [it's prey], but while hunting it imitates the behavior of a dying ant to attract worker ants.

Also from the wiki on spiders:

 About half the potential prey that hit orb webs escape. A web has to perform three functions: intercepting the prey (intersection), absorbing its momentum without breaking (stopping), and trapping the prey by entangling it or sticking to it (retention). No single design is best for all prey. For example: wider spacing of lines will increase the web's area and hence its ability to intercept prey, but reduce its stopping power and retention; closer spacing, larger sticky droplets and thicker lines would improve retention, but would make it easier for potential prey to see and avoid the web, at least during the day. However there are no consistent differences between orb webs built for use during the day and those built for use at night. In fact there is no simple relationship between orb web design features and the prey they capture, as each orb-weaving species takes a wide range of prey.

Spiders leverage their best talents and keep an escape route handy:

The hubs of orb webs, where the spiders lurk, are usually above the center, as the spiders can move downwards faster than upwards. If there is an obvious direction in which the spider can retreat to avoid its own predators, the hub is usually offset towards that direction.

Bolas spiders are like fishermen and use deceptive lures to attract prey:

Bolas Spiders are unusual orb-weaver spiders that do not spin the typical web. Instead, they hunt by using a sticky 'capture blob' of silk on the end of a line, known as a 'bolas'. By swinging the bolas at flying male moths or moth flies nearby, the spider may snag its prey rather like a fisherman snagging a fish on a hook. Because of this, they are also called angling or fishing spider (although the remotely related genus Dolomedes is also called fishing spider). The prey is lured to the spider by the production of up to three pheromone analogues.

Pitt T. Maner III writes: 

I found this article on the developing market for spider silk interesting:

"Despite being a protein, spider silk is by weight five times stronger than steel and three times tougher than Kevlar, a p-aramid fiber from DuPont. Strength is defined as the weight a material can bear, and toughness is the amount of kinetic energy it can absorb without breaking. The silk's primary structure is its amino acid sequence, mainly consisting of repeated glycine and alanine blocks.

Potential applications include cables and bulletproof vests. Spider silk's antimicrobial properties make it suitable for wound patches. Because the silk is not rejected by the human body, it can be used to manufacture artificial tendons or to coat implants. And its thermal conductivity is similar to that of copper but its mass density is one-seventh of copper's, making it a potential heat management material."



Considerable topsy turvy about who is right and who is wrong about crossing from the red to the black in the first months of the year has passed through these portals. Is it good or bad classified by month? A related query is whether it's good or bad to be in the red or black as of a particular time. I thought it apt to test. We have had 34 trading days in 2014 as of 2/21. I thought it apt to look at those 20 occasions as of Feb 21 to Feb 24 when the market has been down from beginning of year versus those 23 occasions when as of Feb 21 to Feb 24 it has been up from beginning of year. A nice difference exists. After the market was up, the move the next 7 days was -3/4 % after the market was down, the moves next 7 days was up 3/4%. The difference beween t's is 2, and the difference between proportions up, 60% in both cases is 0.



 I just finished watching England defeat Ireland (just) in a very close game in the Six Nations tournament.

The way the game develops between the two teams is quite reminiscent of markets trading in ranges before a large directional move.

There are a lot of frustrating back and forth with the play not moving much along the pitch. One can observe the crowds starting to get frustrated (and those watching at home or at the pub have gone to get a drink or whatever) then all of a sudden BANG….a player has moved 40 or 50 feet at it's on. Everyone scrambles toward him looking for the pass or to knock him down (no padding over here - take note Gridiron aficionados).

Then after the play all settles down again. Anyway, three cheers for Her Majesty's finest.



 It is time honored policy for governments to run up huge debt, then via inflation to pay back that debt in pennies to the dollar or not at all. The most extreme example would be Wiemar republic in the 20s, but there are devaluations all the time, witness Argentina. It is an easy and quiet destruction of wealth of the citizenry by their government. Keynes wrote about it. Though eventually it will work in the US, there must be frustration it is taking so long here. There must be other forces at work holding up the dollar I would call these the positive affects, like the production, innovation, demand for US currency for trade, a slowing of credit growth (second order affect). Amazingly for the time being these forces counter-act a destructive currency policy and there is a stand-off.

Stefan Jovanovich writes:

I think anonymous' point needs further support. Governments have not, in fact, "paid back" debt using inflated currencies. That is one of Keynes' historical fantasies. The debt was simply defaulted. After the new currency was refloated, some of the former debtholders (but never all or even a majority) are lucky/influential enough to be "repaid" by having their old debt instruments swapped for new IOUs using the new "sound" currency; but actual payments that extinguish the debt are never made for the simple reason that the government had no reserves in the old currency and no political ability to make one grand final payment in full. This may seem like a distinction without a difference, but it is not. Default allows the governments to wipe out all the other promises made that were not secured by indentures (pensions, social service payments, subsidies) in the name of "reform". If those obligations had, in fact, been "paid back" in the inflated legal tender, the claimants would at least have gotten old "dollars" that were worth new pennies; what, in fact, happens is that they get nothing.

The rise of the National Socialists can be directly tied to the fact that the currency reform after the hyperinflation left all the old Bismarck safety net promises in default. Hitler's most successful campaign promise was that he would restore those vanished pensions at full value (one can find parallels with the American Progressives' promise throughout the last third of the 19th century and all the times thereafter to assure farmers that they would receive "par" for their crop payments. The just-passed farm bill is a legacy of that toxic doctrine of equalism.)



 "Japan Snowstorm Kills 12, Strands Thousands of Motorists"

This follows on my comment about people wanting to stop global warming, but not stopping to think what the alternative is. Probably a good time to head over there to ski though.

A severe snowstorm sweeping across Japan has killed 12 people and left more than 1,650 injured, Japanese media reported, as the extreme weather sparked widespread transport chaos.

At least a dozen people have died in snow-related incidents in seven prefectures after the storm broke records, with Tokyo blanketed in 27 centimetres of snow, according to the Kyodo news agency.

A further 2,150 people have been evacuated from their homes over fears the weight of the snow would cause their houses to collapse, public broadcaster NHK said.



 I read two great books lately. The first was Milady Vine, The Autobiography of Baron Philippe de Rothschild and the second was The News: A User's Manual by Alain de Botton

The Rothschild biography begins an ending chapter with a quote from Laurence Sterne:

"His opinion was that there was a strange kind of magic bias which good or bad names, as he called them, irresistibly impressed upon our characters and conduct. How many Caesars and Pompeys, he would say, by mere inspiration of the names, have been rendered worthy of them? And how many, he would add, are there who might have done exceedingly well in the world, had not their characters and spirits been totally depressed and Nicodemus'd into nothing"

Philippe de Rothschild was a French family member with lineage in the arts, society and agriculture rather than the banking franchise which other cousins inherited. The quote captures the burden upon (and rocketship beneath) Baron Philippe as he goes about his adventures. His principal asset becomes Chateau Mouton which, alongside Chateau Lafite is one of France's premier wine estates.

The quote possibly also applies to the author of The News: Alain de Botton is son of Gilbert de Botton, formerly president of Rothschilds in New York and founder of asset manager GAM. de Botton is a specialist in the application of classic philosophy to modern situations and to quote him "somebody who has made a few stabs at trying to bring elite culture into the wider culture".

This is manna to the broadsheet newspapers and possibly why many reviewers of his work try and unfold a psychoanalysis of de Botton's background, rather than taking his writing on its merits. In the case of The News, however, we at Daily Specs can legitimately hope something of de Botton Snr's financial genius was channeled from the ether into de Botton Jnr's assessment of the media's reporting of Economics, Politics and beyond. But nonetheless, de Botton Jnr's flair - like Barron Philippe's - is fully self-made.

But first, back to Barron Philippe. The biography is an efficient and entertaining one, with plenty of salacious content covering Philippe's love life and - perhaps uniquely for a Rothschild biography (albeit I speculate with limited data) - some detailed analysis of his private parts.

It also contains several interesting lessons on business and wealth. Every man is ultimately self-made, and this is no less true for Philippe. One of the themes is how much unhappiness, isolation, and jealousy can come from privilege. High birth has its own unique challenges: Philippe has a very difficult relationship with his mother who openly mocks him as a child in front of friends, until Philippe finally snaps and runs away to live with an Aunt. He then doesn't speak to his mother for many years.

Nonetheless, he inherits his principal asset from his mother: Chateau Mouton. At the time that he takes the estate over, it is in heavy disrepair and loss making. Indeed, a key staff-member has been siphoning off the profits to build his own estate and has even stolen the vines. Barron Philippe is remarkably sanguine about this discovery and doesn't pursue the thief, reasoning that they deserved what they got as negligent landlords. The book is full of examples of the difficulties of managing a large estate and the various dissipations that occur. When his father passes away, many assets cannot be properly traced or tracked.

Philippe's key business success is vertically integrating Mouton as wine producer. At the time he takes over, wine is not fashionable, having taken a backseat to cocktails. Mouton takes the wine only as far as the barrel, and wine is bottled, wholesaled, and retailed via a complex supply chain. Philippe takes out the middleman, and begins bottling on-site. This gives much higher control of the vintages and prevents any interference or fraud by the bottlers.

Baron Philippe has an instinctive understanding of luxury goods with a commodity input. He forms a combine between five elite wine estates who all begin bottling on site. He manages the quality ruthlessly, and happily disposes of 90% of the vintage if it isn't up to spec. This creates supply squeezes and heightens emotional desire through occasional withdrawal. Philippe hires famous artists such as Warhol to provide unique labels each year. Philippe perfects the protection of brand equity whilst delivering a more accessible product: he forms a junior brand "Cadet Mouton" which has a price point accessible to all. This creates a virtuous circle, cementing the name with the public whilst bolstering the inaccessibility and privilege of the elite brand.

Perhaps the most interesting part of the book is Barron Philippe's experience during WWII. Despite a decade of run-up, much political data on the horizon, and plenty of financial resources to prepare, when the moment comes, Philippe has zero assets offshore, has made no preparation for escape, and is rendered an everyman (well almost) by the Vichy government.

Philippe socialises with wealthy French families who sympathise with the Nazis and, having listened to them delivering excoriations about the "jews and freemasons" being responsible for societies ills, he is graced with a caveat that - of course though - they don't mean Philippe: he and the Rothschilds are different.

Ultimately, Philippe has to escape alone on foot to Spain, Portugal, then England. His wife refuses to leave. Albeit she is protected somewhat by membership of an old Catholic French family, the mental hysteresis of uprooting to England is so great that she prefers to face danger at home.

Such is the lack of preparation of his affairs that, had Philippe's estate not been focused upon a hard asset like Mouton (which is commandeered by the Germans), and France not liberated, his financial losses may have been total.

The book is entertaining, Philippe writes very well (albeit he has a ghostwriter), and did I mention the bit about (to adopt own terminology) his cock?

 Now onto The News: A User's Manual by Alain de Botton

de Botton's book is an fascinating essay on the modern media. His ambition, well realised, is to answer "what should the news ideally be? What are the deep needs to which it should cater? How could it optimally enrich us?". de Botton moves by category, and we can contract the answer to his questions as:

- Celebrity News should let us draw inspiration and insight;
- Disaster News, a sense of our ephemeral lives and a gratefulness for our blessings;
- Consumer News, a sense of which goods might best assist us in answering our underlying aspirations for a fulfilled existence;
- Political News should help to create a rounded, tolerable nation;
- World News should open our eyes to the nature of life in foreign countries above and beyond their moments of crisis; and
- Economic News should evoke the human realities that lie beneath the data.

de Botton makes a good case for why we are drawn to celebrity ephemera over serious news. And like Freud, having dawn the underlying neurosis from his own experience, makes us feel more normal for having experienced it too.

Perhaps most interesting for Daily Specs readers are his chapters on economic news. de Botton states *"to assess a nation through its economic data is a little like re-envisaging oneself via the results of a blood test, whereby the traditional markers of personality and character are set aside and it is made clear that one is at base, where it really counts, a creatinine level of 3.2, a lactate dehydrogenase of 927, a leukocyte (per field) of 2 and a C-reactive protein of 2.42". Amen. And this is before adding the Camp Kinder layer of obfuscation that our Daily Specs Chair comments upon regularly.

de Botton even provides a chapter specifically on Investor News, which again to quote him: "investors are like pilots flying high over a landscape at night. For navigation, they rely on only a few beacon signals and visual cues: the nuclear power station on the peninsula, the main north-south motorway and the medieval city, glowing like an encrusted diamond ring at the foot of the mountains. But there is no need to worry about the discussions in the apartment block near the piazza; the dilemmas of the lorry driver at the service station or the dreams of the technician in the turbine hall."

This seems correct, albeit that extending oneself to discover clues in the latter non-standard, non-quantifiable minutiae is possibly a sign of profitable maturity in ones financial analysis.

Overall, the book is perhaps utopian in its aims: to create a news media that serves to enhance us rather than just capture our clicks and attention. But I am sure de Botton well realizes this. One must always have a mighty target on the horizon in order to appropriately set nearer, more realistic goals.

de Botton makes cogent points on the personalisation of news streams available with modern technology. That we risk confining ourselves to informational cul-de-sacs to our own detriment. Indeed, he proposes, "only after extensive self-examination, perhaps with the help of a psychoanalyst, would they be adequately prepared to set the dials on their personal news engines, aware of the sorts of stories that were needed to challenge their defences, expand their horizons and excite in them the right sort of envy."

Or perhaps, as the Chair cogently advises, we should all stick to the National Enquirer.

In sum, an efficient and educative read, and did I mention that there is no bit about (to adopt my own terminology) his cock?



Condition: $SPY up for five or more days in row , and current day is plain Tuesday.

(no NYC winter storm in the prev week/day/month, nor new Fed chairman's first year in the office are considered)

data since Jan 2000 on spiders…



The stop loss, if not used properly, will kill by a thousand cuts. It operates on fear — fear of decimation, which is a powerful and justified fear, but a fear just the same. A rookie's desire to keep his losses small will inevitably lead to a host of small losses over a long period of time. But it is hope which will keep him in the game, feeding his account every few months with a few hundreds or thousands more dollars in the hope that some day he will strike it big, all the time netting his broker a tidy sum in commissions.

Fear and hope are powerful motivators but they can inhibit your ability to think straight, which puts you exactly where the professionals want you–making hasty and rash decisions.



At the risk of telling all to be calm before a crash….I offer the below chart as an antidote to the 2014/1929 'analogue' stuff flying through cyberspace at the moment.

One hopes Messrs Stigler & Lorie would be proud of me.

Phil McDonnell adds: 

One of the common caveats in looking at correlations and analogs is that the correlation should be based on price changes rather than price levels. Using levels leads to spurious high correlations in both directions.

My concern is that using charts of price levels is essentially the same thing as calculating a correlation based on levels. It will lead to spurious conclusions.



I believe there are 4 cases, conventionally called:

h(t) > h(t-1) and l(t) > l(t-1) an uptrend day

h(t) < h(t-1) and l(t) > l(t-1) an inside day

h(t) > h(t-1) and l(t) < l(t-1) an outside day

h(t) < h(t-1) and l(t) < l(t-1) a downtrend day

Victor Niederhoffer writes: 

Excuse me? 

Alex Castaldo replies: 

OK, OK, let's call then upshift day and downshift day then.


Kim Zussman adds: 

What about outie and innie?

Using SPY (2000-present), checked for outside days (today's high > yesterday's high, today's low < yesterday's low). Then checked the return for the next day.

Days after outies were also checked if the market was up-trending (20DMA > 100DMA), and, in addition to up-trending, if the intra-day return was up (C>O). Here are the c-c returns after (vs zero), for all days (c-c ret), all days after outside days outie+1), days after outside days and up-trending (and 20>100), days after outside days and up-trending, and the outside day was up intra-day (and C>O):

One-Sample T: c-c ret, outie+1, and 20>100, and C>O

Test of mu = 0 vs not = 0

Variable        N       Mean     StDev   SE Mean       95% CI             T
c-c ret         3550   0.00022  0.0131  0.0002  (-0.0002, 0.0006)   1.01
outie+1         353   0.00049  0.0118  0.0006  (-0.0007, 0.0017)   0.77
and 20>100  234   0.00061  0.0090  0.0005  (-0.0005, 0.0017)   1.03
and C>O       89    -0.00047  0.0090  0.0009  (-0.0023, 0.0014)  -0.49

Zeroish, with none significant, and days after outside days and up-trending winning the race at 0.06% per day avg.



 Among the 4 Chinese companies on MIT's 50 Smartest Companies 2014 list, Tencent is very well positioned with their products and services. Its enhanced instant messaging service QQ has been the most popular by far in China for years, nearly used by everyone. In recent years, its new service WeChat which runs on both Android and iOS and includes free voice/video calls/messaging among members are gaining similar status. For sometime already, WeChat has been cutting revenues for mobile service providers. One interesting thing is that an elder man from Denmark whom I met recently in Thailand uses it. He said a lot of people in Europe use WeChat and regard it to be far better than Skype.

Alex Forshaw writes:

I use WeChat partly because I cover Tencent and partly because I need to stay in close contact with Chinese people, but I can confirm that more Westerners are beginning to use the service as well. The English version is very simple and effective. The Chinese version has a lot more features and is becoming the top mobile communications client in the world.

Globally, Wechat competes aggressively with LINE, a South Korean company that has locked up the Japanese market for this service. LINE, Wechat and WhatsApp are now in a worldwide land-grab over these services. WhatsApp seems to be a distant third in this niche.

Tencent is very intelligently turning Wechat/Weixin into a "mobile OS within a mobile OS," and it's beginning to up-end a lot of basic services in China. They are partnering with Dianping (Chinese Yelp + Opentable + GRPN component + others), Didi DaChe (Chinese Uber) and other local services companies to drive a lot of 'local business' traffic. The really big call option in Weixin is to turn it into a mobile payment client (a lot of Chinese make mobile payments thru their cell phone as opposed to with a credit card because of idiosyncrasies in the Chinese payments system.)

Analysts argue that within Tencent's current US$125bn market cap, $40bn or so is due to Weixin/Wechat. 

Peter St. Andre writes: 

Facebook is buying ~500 million locked-in users controlled by WhatsApp, so that they can add those poor souls to the 1+ billion locked in users already controlled by Facebook itself (although presumably there's some overlap in their users).

I'll note that, although both Facebook Chat and WhatsApp use modified versions of the chat technology I've worked on since 1999, I ain't seeing any of those billions of dollars. I am, however, probably having a lot more fun than the folks working at Facebook and WhatsApp.



 Today, the DOE is expected to announce a $6.5 billion loan guarantee for Southern Company's new nuclear facility in Georgia.

This guarantee is for the lender, not the borrower.

The borrower benefits in two important ways. First, the guarantee lowers the project's capital costs. Interest during construction is capitalized. Lowering the interest rate lowers construction costs.

More important, the federal involvement forces the state's hand. The state's utility commission cannot easily cancel the project without first considering the federal guarantee's impact on cost recovery.

Georgia has not deregulated or restructured its utilities. Their utilities operate under a cost-plus arrangement. Utilities' operations, maintenance, capital and fuel costs are passed onto the state's commission plus a fee. The state then passes all approved costs plus the utility's fee onto consumers through state-approved tariffs.

The state already approved $14 billion for Southern's new nuclear units. That deal is done. However, cost overruns are not approved.

The state believes cost and schedule overruns are coming. The total cost could be much more than $14 billion.

Prior to the loan guarantee, the state could have cancelled the project. I believe they were considering a delay or a substitution. They could use the same site to construct combined cycle gas turbines. Capital costs for an advanced gas turbine is approximately 15 percent of the estimated cost of a new nuclear unit. Of course, the operating profiles are much different.

Now with the federal loan guarantee in place, the state will find it more difficult to retreat. For a utility earning a guaranteed return on equity, this is good news for Southern.



Working backwards, whenever the trailing 12 month returns on $EEM were less than -9.3% , the forward 12 month returns (by dollar cost averaging?)von dividend adjusted data, based on month end values underlined were 3 non-interleaving instances.

Date    $EEM    t-12 (%)    t+12
Jan-14    38.19    -11.72      ??
Jul-12    38.02    -15.17    1.68
Jun-12    38.03    -16.03    0.34
May-12    36.21    -20.78    11.30
Apr-12    40.55    -13.91    4.44
Mar-12    41.25    -10.01    1.43
Dec-11    36.44    -18.79    19.05
Oct-11    38.83    -9.87    3.01
Sep-11    33.39    -20.16    20.31
Aug-09    32.5    -9.85    15.14
Jul-09    32.93    -14.42    17.43
Jun-09    29.66    -27.16    17.53
May-09    30.34    -33.17    16.55
Apr-09    26.17    -40.54    49.10
Mar-09    22.65    -43.82    72.58
Feb-09    19.38    -53.74    86.53
Jan-09    20.68    -49.66    71.76
Dec-08    22.79    -49.47    68.98
Nov-08    20.66    -54.83    80.49
Oct-08    22.89    -53.79    51.03
Sep-08    30.76    -30.53    16.42
avg    31.25
std    29.10
min    0.34
max    86.53
t-test    4.80



 It should be obvious to all speculators that truth lies underneath a thick layer of dust. Much like Michelangelo's idea of sculpting, which relied on "Per via di levare" (By means of taking away, translated), we should make all efforts to see the idea hidden in Michelangelo's marble.



This article on oxytocin on wikipedia made me think that it's possible different markets release their own cytokines and perform better and recover faster when interacting with their favorite partners.

Social behavior and wound healing: Oxytocin is also thought to modulate inflammation by decreasing certain cytokines. Thus, the increased release in oxytocin following positive social interactions has the potential to improve wound healing. A study by Marazziti and colleagues used heterosexual couples to address this possibility. They found increases in plasma oxytocin following a social interaction were correlated with faster wound healing. They hypothesized this was due to oxytocin reducing inflammation, thus allowing the wound to heal faster. This study provides preliminary evidence that positive social interactions may directly impact aspects of health.



One of the common caveats in looking at correlations and analogs is that the correlation should be based on price changes rather than price levels. Using levels leads to spurious high correlations in both directions.

My concern is that using charts of price levels is essentially the same thing as calculating a correlation based on levels. It will lead to spurious conclusions.



 The Hudsucker Proxy is one of the best stock scam movies Hollywood has produced. Much more relevant to the realities of Wall Street than the hookers and blow cartoon of Scorcese's Wolf (not that I am criticising the latter: art isn't documentary).

The script has some beautiful subtleties in it.

And the film is perhaps a sign of how those who love their trade can sometimes carry a lucky star: it was part of a string of low financial ROI movies for the Cohen Brothers, but did not hamper their progress.

Sidney J. Mussburger: It's working already. Waring Hudsucker is abstract art on Madison Avenue. What we need now is a new president who will inspire panic in the stockholder.

Board Member 6: A puppet.

Board Member 5: A proxy.

Board Member 2: A pawn.

Sidney J. Mussburger: Sure, sure. Some jerk we can really push around.



 Marshall Islanders use stick maps to navigate the currents between the 4 islands which are on straight lines of a square.

Where the currents from the two equidistant islands cross, they find turbulence.

Navigators from other countries memorize the stick maps to guide them when approaching the islands.

Would stick maps be useful for market prices? Perhaps between bonds, stock, gold and currencies.



I learned a lot from Mary Carrillo's Badminton Rant about the difference between pros and amateurs from the 2004 Athens Olympics.



 The young middle bridge to Palm Beach is now lit in pink and red lighting at night for the Komen charity and Valentine's. It has an interesting history summarized as:

1) Spend oodles of money to restore the old bridge superstructure only to send divers down and find that the footings and supports were rotting from attack by marine organisms.
2) Build a temporary bridge by pile driving casing into the intracoastal sediments until bedrock was reached. Tremendous noise for months
3) Demolish old bridge.
4) Build new bridge.
5) Remove and demolish temporary bridge

Ah, yes, "lessons learned" and "your tax dollars at work". Attached is an interesting warning sign on the bridge. Those waiting for advice, signals and divinations from the sages, oracles, and other prophets take heed at the message. (it's real purpose is to prevent accidents around pinch points as the bridge is raised and lowered and to prevent interference with bridge tender operations).



 In world cricket at the moment, I don't believe we have seen (I certainly haven't) a player of this devastation unleashed on batsmen with his fast bowling ferocity for decades. He almost single-handedly wiped out the best team in the world in the last 4 days, and for anyone who enjoys a sportsmen at the pinnacle of success this would have to be it.

It reminds me of outperformance in markets at every turn and that almost once in a lifetime manager no body comes close too.



 During dinner conversation, Lindbergh expressed annoyance about his son's mountain climbing. I asked why he was concerned.

"Too risky" he said.

"Who are you to talk about risk after flying across the Atlantic in a single engine monoplane?" I asked

"One must measure risk in terms of gain." he replied. He didn't see much gain on reaching the top of a mountain.



 The cat parasite Toxoplasma gondii, which can cause blindness in people, has been identified in Beluga in the western Arctic. The discovery by University of British Columbia scientists has prompted a health advisory to Inuit people in the region who eat the whale's meat. Researchers say it is an example of how the warming of the Arctic is allowing the freer movement of pathogens.

Gary Rogan writes: 

Beware of Global Warming: it now causes blindness in the Inuit people. I bet there is also a link to the non-randomness of the down-for-the-year to up-for-the-year transitions. Researchers say Global Warming is ultimately responsible for anything (a) random (b) non-random.



 This is an interesting video about how the introduction of wolves led to less deer, which led to more vegetation, higher trees, more beavers, and more birds, which eventually led to changes in river flow. Pretty surprising.

This could be relevant for us on two levels:

1. Introducing new legislation will create many many many unforeseeable events. Maybe this could be an argument for smaller government intervention in business?

2. Introducing new legislation or new financial products or new institutions can completely change the landscape of the markets and contribute to the principal of ever-changing cycles (destruction of old profitable opportunities/creation of new profitable opportunities.)

Gary Rogan writes: 

There are almost never totally certain explanations in these situations, because of the number of variables and the inability to know so many things or to go back in time to be sure. It is funny though to hear some of the explanations every day about some market with only the relationship to some favorite factor changing (the markets are rising/falling/staying flat today as/in spite of/while/etc. something else is happening). The truth is rarely does anybody know for sure, and those who know aren't talking.



 A good article (for Valentine's Day) on how a 900-year old rune inscription was deciphered that read "kiss me".

'Why did Vikings sometimes use codes when they wrote in runes? Were the messages secret, or did they have other reasons for encrypting their runic texts? Researchers still don't know for sure.

But Runologist K. Jonas Nordby thinks he has made progress toward an answer. He has managed to crack a code called jötunvillur, which has baffled linguists and historians for years.

His discovery can help researchers understand the purpose behind the mystery codes. "It's like solving a riddle," says Nordby.

"After a while I started to see a pattern in what appeared to be meaningless combinations of runes," he says. '



I looked at all combos of today's highs versus yesterday's highs, and today's lows versus yesterday's lows, for daily S&P from 2009 to present I find 96 inside days going up an average of 2.8 points with a sd of 15 the next day for a t of 1.7

today high > than yest high, today's low great than yest 516 ob u =0.3

today high > yest high & today low < then yest lo 121 ob u = 0.2

an outside da today high < yest hihg & today low > yest low 96 ob u =2.8 t=1.3

inside da today high < yest high & today lo < yest low 380 ob u = 1.0 t= 0.3

futures prices.

Rocky Humbert writes: 

What about if you limit your studies to 1) Fridays? 2) Fridays before 3 day weekends? 3) Fridays before 3 day weekends after severe weather/NYC school closings? 4) Fridays before 3 days weekends after severe weather/NYC school closings when the weekly closing price in natural gas is at a multi year high? 5) Fridays before 3 day weekends after sever weather/NYC school closings when the weekly closing price in natural gas is at a multi year high and the fed funds strip is pricing in no tightening for the next 90 days? 6) Fridays before 3 day weekends after severe weather/NYC school closing when the weekly closing price in natural gas is at a multi year high and the fed funds strip is pricing in no tightening for the next 90 days and there is a new Fed chairman and it's the second year of a presidential cycle and the trailing SPX p/e is 17 and the dividend yield is 1.95 and my dog threw up after eating too much snow?

Victor Niederhoffer writes:

It is always good to have Rocky poking fun at statistical studies. Apparently the mean and measures of the distribution variability have no value to him. However, we are agreed on one thing that splitting a variable with a zero mean into many bins does not add much value to decision making. Without meaning to denigrate the gist of the critique, I hasten to agree that there is a big difference between statistical significance in the past, and predictivity for the future. If there were no such difference, then all my followers and I would be very wealthy men like the Rosthchilds who always said that if they knew where the market was going "I would be a wealthy maaan". How do you say that in German.

anonymous writes: 

Ich ware ein reicher mann

Paolo Pezzutti writes: 

There are certain market paths and regularities that help making decisions about opening and closing trades. I am not sure whether this process can be fully automated in order to search, evaluate and implement these regularities. For sure, however, knowing and using the methodology is not enough to make you wealthy. There are many other factors, as your trading choices are discretionary, that influence your performance such as money management, discipline, consistency and so forth. I find that the "technical analysis" aspect of trading is not the main problem. Before beating the market I have to beat myself….. In this regard, Brett Steenbarger, for example, highlights pretty well the psychollogical and behavioral issues of trading. 



 The first ROBOCOP, made for somewhere in the neighborhood of $10 million back in 1987, with Peter Weller and Nancy Allen in the critical roles, directed by the capable Paul Verhoeven, was a hit. A sequence was quickly made in 1990, with Irvin Kershner as director. This being the animation- and action-feature era of films, 15 years is enough passage of time to give a permit for a run at a second potential franchise.

It's now 2028, but the plot is still the same: A dystopic and crime-ridden Detroit, and a terminally wounded police officer, Alex Murphy, is engineered by clever scientist Dennett Norton (played by the ever-suspect Gary Oldman) to return to the crime-fighting force as a powerful part-man, part-cyborg haunted by submerged memories. Norton is managed by Michael Keaton's opportunistic C EO of OmniCorps, Raymond Sellars. All together now: OmniCorps is a multinational conglomerate. Hiss, boo. And we know that though there are bad guys [inside and] outside the streamlined, latest-word police station that loving husband and father Murphy will get to dispatch without a backward glance, unerring in aim, the real baddie is the corporation. Surprise.
While it's good to see Keaton after a too-long hiatus, he seems slightly overshadowed by the acting firepower wattage of Oldman. Keaton was always better as a sardonic outsider, a cynic. Similarly miscast is a new character, Pat Novak, a talk-show host in the rabble-rousing, controlled-fury mode of Howard Beale, played by an over-the-top, too-out-there Samuel L. Jackson. He seems to be the moral conscience of the film, the Greek chorus, telling us that whatever fun being bad seems, the US is the greatest, and we must remember that through all the gunplay.

Today's eponymous popcorner was made for $130 million, about 10 times the cost of the original. And, yes,it has a glossy sheen with technology and whizz-bang graphics—as well as a blunderbuss percentage of special effects CGI that practically draws a text-message box at the audience—Here Be CGI for the ruined body of the Injured cop, played now by the unremarkable (though tall) Joel Kinnamon, new to films. The political angle enters as the Senate acts against the inclusion, Stateside, of robot cops with human internals. Around the world, we see the 'bots clomping around Japan, Afghanistan and elsewhere making the streets safe for pedestrians, but the corporation fears Americans won't cotton to huge, clanky-geared mechanical minders and transformer robots stomping all the spontaneity out midtown areas. The introduction of robots with "feelings," instead of the pandemic law-enforcement droids that maintain order around the world, is deemed the solution, but is debated hotly through the proceedings, and called, amusingly, The Dreyfus Act.

Not given enough to do is the beauteous and talented Aussie, Abbie Cornish, playing Murphy's determined and loving wife, Clara; we interviewed her in 2009, when she starred in the refined BRIGHT STAR, the captivating romance between 19th century poet John Keats and Fanny Brawne. We thought she deserved an Oscar for her portrayal. Also lovely in a supportive role is the porcelain beauty, Jennifer Ehle, one of the corporate bad guys. Titian-haired Ehle was seen in ZERO DARK THIRTY two years ago, for too few minutes, before she was heartbreakingly terminated by an IED in front of us.

As depicted in the gorgeous computer graphic representations and on-street live action sequences, Detroit looks spectacular. Though it is apparently riven by petty crime lords and drug dealers. Detroit should live so long to look the way it's depicted here. Glitzy enough to rival Las Vegas. There is no hint of the ravaged city we know it to be, with vast swathes of the urban landscape blighted and abandoned to wild grass and the Northern equivalent of sagebrush. We see on Novak's hologram-inflected TV show that the President is some older guy, not H-R-Hillary nor Chelsea. [Thank the Deity.]

With enough shooting and white-hat carnage to rival the most violent video game, we can begin to see why there is a national shortage of bullets. Neither the fleshly, greedy creeps nor the droids get a shot in, 99% of the time, so there is little suspense. Murphy is, after all, largely managed by a chip that makes him near-invincible, and nearly mechanical, though his humanity seeps back in somehow at frequent intervals. Despite the constant fusillades and street firefights, we see little blood, and even the massively damaged Alex Murphy is discretely disarrayed when shot, his excellent red-laser-slit visor broken and sedately askew. There is little haunting injury or picturesque violence that speaks to the reality of gun contests , as there are few profanity logrolls, save for one sequence—bleeped–on Jackson's Crossfire-like program. Kids won't notice the underlying message of unbenign corporation vs. man vs. criminals. It's so like their video exploits, their fingers might twitch. The one stylized spousal scene between Clara and Alex is oblique and chastely not graphic.

Takeaway: The original, modest ROBOCOP of 1987 had more humor—more heart, too—than this one does. Despite the tacked-on patriotic message we get thrown at us out of the ether. Catch the original on late-night TV.



This is a good example of how to solve simultaneous differential equations with applicability to dysfunctional relations between lovers and the relations between stocks and bonds.



 1. One wonders whether the days of extreme unpleasant weather in NY, like today when it's snowing and freezing, tend to have an inordinate negative expectation.

2. To what extent can quantile regression , a technique studied by Roger Koenker in Quantile Regression be used to improve market results? One often is confronted with situations where the market has moved a certain amount, and one wonders if it is likely to continue or fail or remain stable. By focusing on say the likelihoods of getting to the 3/4 point of the data once one has exceeded the median, interesting results can be gleaned.

3. It was ludicrous to hear Smith apologizing for not being able to play in the Knicks Sacramento game when his not playing was the only chance that the Knicks had to win. It reminds one of the market salesman who apologizes for his inability to get you an allocation of a hot public issue, or the adviser who's very bad but apologizes when he is out of the office and can't help you with the trades. There's a great joke about the two brothers who lose all their money in commodities and one brother tells the other he's going to tell his broker to meet the Bad One. And the other brother tells him not to do it, as the broker might not help them in future.

4. The magnificent book Blundering to Glory by Owen Connerly recommended by Mr. Jovanovich has many insights into Napoleons modus operandi that are illuminating and fascinating. I like that during the height of the battle of Waterloo he purposely disseminated the false rumour that Grouchy was entering the battle and would save them in order to rally his troops. He liked to say that "The whole art of war consists of a well reasoned defense, extremely circumspect, and a bold and rapid offense". Great advice for market people rarely taken. It is interesting to compare Victor Hugo's description of the battle of Waterloo in Les Miserables with that of Connerly. The former leads one to believe it was all a matter of fate, and the latter puts much emphasis on the strategic decisions and arrival of the Prussians. I like that when Napoleon spotted the Prussians marching into the battle, he asked his depute what the news was: "Bad Sir, they are Prussians."

5. The latest Gavekal piece has an interesting implication that the Chinese banks stocks are vastly undervalued. I always learn much from reading Gavekal, but never can figure out what to do based on their analysis, as they like to ride on both halves of the camel.

6. The market has gone up 7 days in a row, an is now at the open in the 1800 to 1810 decile and is in dangerous territory. As Gavekal would say, its dangerously close to being absorbed by the Round, but on the other hand, it's usually not bearish when it opens big down after a big run on the upside. Ill go with the upside down man today and speculate that the flexions will not be discommoded at the auction.

7. One has enjoyed studying differential equations on Youtube and finds that the lecture in the MIT open courseware series are uniformly excellent and thought provoking.

8. The book Mavericks by Jack Schaefer is one of the most enjoyable I've ever read, and makes one want to rush out and buy a Mustang for my young kids. It confirms once again that Schaefer is the best Western writer I've ever read. Schaefer truly respects and admires the men he is writing about in the same way that Stubby Pringle is heroic. By the way, Stubby makes a cameo appearance in Mavericks, worth the reading in and of itself. The problems that the hero encountered in the 650 mile race to Nebraska are reminiscent to the ascent we must all face in our trading every day, against the evil owners of the Thoroughbreds who are so much better capitalized and will stop at no evil in order to do us in.

9. The stock bonds ratio a week ago was at its lower level since October and is still some 8% down from its October highs.

10. I find few limit orders on the books at the number 13 in any market, and wonder whether that's a good place to put ones orders in. Whenever I try to put an order in before a big announcement, to take account of erroneous front running by high frequency boys who front run the number because they get it early, I miss my limit by one tick unless it's going to go against me by a full standard deviation or two.

Kora Reddy submits: 

With the help of the NOAA, I found this.

The database goes back to 96

$SPY changes in percentages, t(1) is the one day later in % , t(2) is the $SPY change % 2 days later .

XXX - Market closed
— - two events recorded on the same day 

Date    Type    Time    t    t(1)    t(2)
19-07-2013    Excessive Heat    AM    0.18    0.20    -0.21
08-02-2013    Winter Storm    AM    0.56    -0.02    0.16
31-01-2013    High Wind    AM    -0.24    1.03    -1.13
26-12-2012    High Wind    PM    -0.42    -0.13    -1.08
29-10-2012    Coastal Flood    AM    -    -    -
29-10-2012    High Wind    AM    XXX    XXX    XXX
18-07-2012    Excessive Heat    AM    0.74    0.26    -0.91
29-10-2011    Winter Storm    AM    XXX    XXX    XXX
28-08-2011    Tropical Storm    AM    -    -    -
28-08-2011    Storm Surge/Tide    AM    XXX    XXX    XXX
21-07-2011    Excessive Heat    AM    1.39    0.06    -0.56
16-04-2011    Coastal Flood    PM    XXX    XXX    XXX
01-02-2011    Ice Storm    AM    1.61    -0.20    0.22
26-01-2011    Heavy Snow    AM    0.39    0.25    -1.74
11-01-2011    Heavy Snow    PM    0.36    0.90    -0.17
26-12-2010    Blizzard    AM    XXX    XXX    XXX
04-07-2010    Excessive Heat    AM    XXX    XXX    XXX
13-03-2010    Coastal Flood    PM    XXX    XXX    XXX
25-02-2010    Heavy Snow    AM    -0.14    0.07    1.04
09-02-2010    Heavy Snow    PM    1.26    -0.20    1.04
25-01-2010    Strong Wind    AM    0.52    -0.43    0.48
19-12-2009    Heavy Snow    AM    XXX    XXX    XXX
01-03-2009    Heavy Snow    PM    XXX    XXX    XXX
12-02-2009    High Wind    AM    0.07    -1.08    -4.28
06-09-2008    Tropical Storm    AM    XXX    XXX    XXX
08-03-2008    High Wind    PM    XXX    XXX    XXX
22-02-2008    Heavy Snow    AM    0.62    1.26    0.75
09-01-2008    Strong Wind    AM    1.06    0.66    -0.81
16-03-2007    Winter Storm    AM    -0.27    1.20    0.55
13-02-2007    Winter Storm    PM    0.84    0.66    0.14
04-02-2007    Extreme Cold/Wind Chill    AM    XXX    XXX    XXX
20-01-2007    Strong Wind    AM    XXX    XXX    XXX
01-08-2006    Heat    AM    -0.49    0.68    0.26
12-02-2006    Heavy Snow    AM    XXX    XXX    XXX
18-01-2006    High Wind    AM    -0.40    0.39    -1.82
09-12-2005    Heavy Snow    AM    0.26    0.09    0.68
24-11-2005    Strong Wind    AM    XXX    XXX    XXX
25-10-2005    Strong Wind    AM    -0.21    -0.29    -1.06
16-10-2005    Strong Wind    AM    XXX    XXX    XXX
12-10-2005    Flood    AM    -0.79    -0.06    1.06
08-10-2005    Flood    AM    XXX    XXX    XXX
28-04-2005    Strong Wind    AM    -1.25    1.35    0.57
08-03-2005    WINTER WEATHER    AM    -0.38    -1.11    0.23
01-03-2005    Heavy Snow    AM    0.50    -0.05    0.04
25-02-2005    Heavy Snow    AM    0.99    -0.65    0.50
21-02-2005    Heavy Snow    AM    XXX    XXX    XXX
22-01-2005    Heavy Snow    PM    XXX    XXX    XXX
28-01-2004    Winter Storm    AM    -1.14    0.10    0.00
15-01-2004    Cold/Wind Chill    PM    0.25    0.40    -0.02
05-12-2003    Heavy Snow    PM    -0.70    0.67    -0.77
13-11-2003    High Wind    AM    0.02    -0.84    -0.50
07-04-2003    Heavy Snow    PM    -0.18    0.15    -1.32
17-02-2003    Heavy Snow    AM    XXX    XXX    XXX
05-12-2002    Heavy Snow    PM    -1.11    0.66    -2.76
01-10-2002    Drought    AM    4.80    -3.00    -1.01
11-09-2002    High Wind    AM    -0.63    -1.83    0.24
01-09-2002    Drought    AM    XXX    XXX    XXX
01-08-2002    Drought    AM    -2.62    -2.23    -3.49
29-07-2002    Heat    AM    4.87    1.30    0.25
02-07-2002    Heat    AM    -2.12    0.57    3.98
01-07-2002    Drought    AM    -1.95    -2.12    0.57
01-06-2002    Drought    AM    XXX    XXX    XXX
01-05-2002    Drought    AM    1.23    -0.38    -1.09
01-04-2002    Drought    AM    0.04    -0.55    -0.71
01-01-2002    Drought    AM    XXX    XXX    XXX
08-08-2001    Heat    PM    -1.85    0.30    0.34
06-03-2001    Winter Storm    AM    1.08    0.71    0.11
22-02-2001    Heavy Snow    PM    0.15    -0.68    2.13
21-01-2001    Winter Storm    AM    XXX    XXX    XXX
30-12-2000    Heavy Snow    AM    XXX    XXX    XXX
12-12-2000    High Wind    AM    -0.43    -1.38    -1.26
19-02-2000    Winter Storm    AM    XXX    XXX    XXX
27-01-2000    Extreme Cold/Wind Chill    PM    -0.40    -3.11    2.71
25-01-2000    Winter Storm    AM    1.14    -0.79    -0.40
21-01-2000    Extreme Cold/Wind Chill    AM    -0.21    -2.84    1.14
17-01-2000    Extreme Cold/Wind Chill    AM    XXX    XXX    XXX
04-07-1999    Heat    AM    XXX    XXX    XXX
18-03-1999    Strong Wind    AM    1.61    -1.68    0.20
04-02-1998    High Wind    PM    -0.13    -0.05    1.11
27-11-1997    Strong Wind    AM    XXX    XXX    XXX
01-11-1997    Strong Wind    AM    XXX    XXX    XXX
31-03-1997    Coastal Flood    AM    -2.12    0.66    -1.80
06-03-1997    High Wind    AM    -0.58    0.91    1.05
27-02-1997    Dense Fog    AM    -1.48    -0.29    0.66
13-12-1996    Coastal Flood    AM    0.26    -1.29    0.80
07-12-1996    Coastal Flood    PM    XXX    XXX    XXX
06-12-1996    Coastal Flood    AM    -0.60    1.47    -0.47
19-10-1996    Strong Wind    AM    -    -    -
19-10-1996    Coastal Flood    AM    XXX    XXX    XXX
19-03-1996    High Wind    AM    -0.21    -0.12    -0.25
07-03-1996    Winter Storm    AM    0.50    -3.24    1.16
25-02-1996    High Wind    AM    XXX    XXX    XXX
16-02-1996    Heavy Snow    PM    -0.40    -0.99    1.23
03-02-1996    Heavy Snow    AM    XXX    XXX    XXX
27-01-1996    High Wind    AM    XXX    XXX    XXX
19-01-1996    High Wind    AM    -    -    -
19-01-1996    Flood    AM    0.67    0.00    0.24
07-01-1996    Blizzard    PM    -    -    -
07-01-1996    Coastal Flood    PM    XXX    XXX    XXX



 There was a lot of interest a few years ago in Joel Greenblatt's book The Little Book That Beats the Market . He set up a web site www.magicformulainvesting.com which selects stocks based on this method (using a combination of 2 criteria: earnings yield and return on capital).

Two years ago I saved a list of 30 stocks it recommended and just recently I calculated the performance up to now. The results are below:

MagicFormula Investing Stock total return from 2012/01/29 to 2014/01/29

Source: Bloomberg

atvi       43.04
apol      -40.51
amat       44.77
hrb        87.55
cub         9.80
dell      -14.40   acquired 10/30/2013
dlx       102.63
dlb        27.57
xls       110.55
expe      111.76
gtat       10.06
gme        54.34
esi       -44.16
icon       95.89
idcc      -18.98
klac       24.79
lps       129.00   acquired 1/3/2014
lo         51.17
mant      -10.67
mrx        37.67   acquired 12/11/2012
msft       32.90
nsu       -38.53
noc       103.22
prx        37.99   acquired 10/01/2012
rtn        94.84
ldos       48.21   ticker change from sai to ldos
sndk       48.91
save      183.80
stra      -65.67
vphm       67.37

average    44.16

spy        40.30
rsp        44.02

As you can see the return over 2 years was good, at 44.16%, but indistinguishable from the equal weighted S&P at 44.02% and close to the (ordinary) S&P at 40.30%.

[Strictly speaking you are supposed to hold the portfolio for a year and then rebalance it, which I forgot to do, so it is not a completely accurate replication of the MagicFormula method.].

Bill Rafter writes:

Before Greenblatt there was Haugen who ranked stocks by 60+ variables. He published them in his book, the Inefficient Stock Market. BTW all of his books are interesting. Haugen's material looked really good, but seemed to fail to deliver outstanding returns.

Then Greenblatt's book came out and showed good results from only using two variables: ROE and ROA. One of those was a Haugen variable (I forget which). Then Haugen produced a second edition in which he bumped up the number of variables to ~70, and included both ROE and ROA.

We did a lot^2 of work with both H and G and found that neither are particularly good at picking winners, but both are very good at finding clunkers. And of course if you eliminate the clunkers, the remaining portfolio will certainly outperform the market indices. But of course that only really works if you essentially invest in ALL of the non-clunkers. Thus they are good strategies for large mutual funds.

FWIW we found that you can cull out most of Haugen's variables (but include ROA and ROE) and do fairly well with 16 variables. But again, they are best used as ranking tools to eliminate the underperformers. Our opinion is that both H and G methods are the financial markets equivalent to comfort food. If comfort food makes you feel better, then use it.

anonymous writes:

I agree that Haugen (1942-2013) was an interesting character who did some innovative work. I have read many of his books/papers; how well it holds up remains to be seen. He used the kitchen sink approach which Rocky so detests, but he found things (such as the low vol phenomenon) that were new and interesting (now low vol has maybe become too popular). BTW the two year test period I used is far too short, it could be argued. You need more like 10 years.

Gordon Haave writes:

"Our opinion is that both H and G methods are the financial markets equivalent to comfort food."

This by the way is very important for non-professionals. Most not-professionals lose money because of over-trading, moving in and out on a whim, chasing winners, etc. (actually, most professionals do as well).

A system like Greenblatt's that tells a good story, tells you to only re-balance one per year, and does "as good" as the market will tend to outperform what the individual otherwise would have done.

Richard Owen writes:

Bill, when you say clunkers, do you mean it was great at selecting clunkers by the lowest ranking? Or it was great at selecting clunkers by false positives - i.e, many of the best stocks were very bad despite their attractive ROE etc. and this is what hurt performance? And so they are good for 'cleanup'? Perhaps it's a bit unfair to pick '12-14 data, but very interesting nonetheless. I suspect the best outperformance of such strategies would come in the early bull market and then converge with the market as it matures, then lagging at the end / collapse of the bull?

Bill Rafter writes:


Sorry, I did not mean to be cryptic. By clunkers I meant stocks that you should not own, because they are and will be poor performers.

We used both Greenblatt and Haugen variables to rank the Russell 3000 for 20 years and put the stocks into 10 bins (i.e. deciles) and observed the performance of those bins over the following 6 months (with no overlapping periods). Considering the deceased stocks the total number of securities exceeded 8,000. You have to include the dead stocks or you will have survivor bias. The lowest ranked bin performed really bad, such that they could have been shorted profitably (we are long-only and had no interest). Importantly the performance of each higher decile was monotone increasing. That last bit means the strategy has merit. However, the top three deciles did not have the performance that would encourage us to pursue the strategy. That is, they outperformed the market, but they were not an improvement over other strategies.

It makes perfect sense to find those clunkers and eliminate them from your subsequent ranking routines. But there are many ways to find them. It turns out that the underperforming stocks have the mark of the beast written all over them, and you don't need to look at 10+ variables. If data mining for fundamentals is too onerous for the researcher, ranking by volatility will find clunkers. Deselecting for volatility will also keep you out of some high-flyers, but that's a good price to pay. High short interest coupled with declining prices is another.

We did the research 2-3 years ago and I apologize that I don't have the time to dig it out and clean it up for public consumption, as it was only done for our shop. Realize that we are statistical traders who typically hold either ~20 or ~50 positions because we cannot forecast individual security performance, but only bin performance.



 I've been thinking about failure. There are several kinds. One is inevitable: the failing of organs leading to death. Everyone fails in this regard. I suppose it is the manner of living, style, and health before that defines whether death is a failure or the end of a good life. Failure of health is bad. It's important to take care of health. It's the most important thing there is.

Another kind of failure is  failure of judgment. We've all had them. These are mistakes, failure to see the train coming at you. Looking back, they are usually pretty stupid in hindsight, but very hard to see in real time. If you learn from them and grow, and let them go, they won't ruin your life.

That brings up the next type of failure. Failures in a career, a marriage, a relationship, a friendship, an investment, or a business are serious and not easily overcome. More than one is very bad. Sure Ray Kroc overcame failure dozens of times, but most cannot. The odd thing is that some people don't see why they failed. They don't see what they did caused their failure. This is the bottom half that thinks they are better than most, the rationalizers.

I look back on my failures and see they are from personal defects. I can only try to work around the defects. I'm not sure its possible to correct personal defects even if you recognize them.

Jeff Watson writes: 

Personal defects are so ingrained, they need to be worked around…..I have not seen any credible evidence that they can be corrected. I trade around my demons every day.



Bulk power prices unusually high for 23:00. Some prices over $1,000

It is clear the markets are short capacity. Power plant capacity and transmission line capacity. Consumers will be surprised with high electric and gas bills.



One of my favorite short term patterns here today; outside day in up close in tight trend markets are bullish and daily a/d line at new high…

Gary Phillips writes: 

Beans in the teens already, but seasonally ripe for a rally…also my only worry is post-taper/risk-on has seen a stronger dollar, although it did decouple today after the european close…



 Is it just me or has something changed in the recent Lobagola move with regards to short term price change that we have not seen in awhile. It reminds me of when I first started trading seriously. Old tricks are new again. I wonder if this elephant brought seeds on his feet that have been ground into the village dirt, which might lead to longer lasting environmental change. Did he bring discomfort to the new first lady: "Not on my watch, not my reputation." Moves from somewhere in the back of the mind are struggling to form a conscious thought. I will attempt to put meat on the observation tonight.

Victor Niederhoffer writes:

As the creator of Lobogola, or should I say the keeper, I would say that Lobogola is timeless. The funny thing is that Lobogola was a Jewish dentist imposter and all his stuff was created from the British Library. However, I have looked often for details about elephant migrations and have found very little concerning their singularity with respect to paths. The monkeys are a different story. I named my macaque after my thesis adviser, Jim Lorie. The rest of the story is too sad to tell.



I find there are two type of buy/sell climaxes, and find it interesting that many models I see only handle one.

You can call one the "Oh Shit!" and the other the "I'm bored and am watching youtube, not bloomberg."



The Direction Field method is used to find the shape of the function that yields a field of slopes going through various points. (Here is a lecture about it on youtube). One wonders if it might be useful to use it to find the shape of a predictive function during the remaining part of a period. For example, using the changes on each of the previous 4 days to predict the change of the fifth day. One has explored some tendencies in that direction without much success but finds it opens up some interesting speculative ideas. In any case, it's a nice foundation to put in ones' Ken, especially for those who like geometry.



 Welcome to New England. This weekend, there was another protest. Approximately 400 people protested a new $800 million combined cycle gas turbine to be built in Salem. Approximately 50 protested in favor of replacing the old coal plant with natural gas. This spectacle after similar protests took place at Seabrook and Pilgrim, Boston area's two nuclear units.

If you add it up, New Englanders want no coal. No natural gas. No nukes. No new transmission lines.

At the same time, New England conducted their annual auction for [power plant] capacity. IIRC, the auction came up short by about 350 megawatts, including Canadian sources.

New Englanders are getting what they want. Major coal plants are exiting. Nuclear plants are retiring decades early. Few people are willing to invest in new natural gas based power plants. No new transmission lines of consequence are being built.

In addition, since no new natural gas pipelines are being built, there is a chronic shortage of natural gas. Boston has to import marginal natural gas from Africa through LNG channels. The practical solution is to burn oil.

Energy costs are becoming a major element in household budgets. I believe New England's energy costs are affecting real estate values. It would be interesting to see any credible studies.

Rocky Humbert writes: 

Carder writes: "I believe New England's energy costs are affecting real estate values. It would be interesting to see any credible studies." Energy costs for people whose income is over $50k have already grown from 5% of after tax income to 9% of after tax income from 2001 to 2012. This is a national statistic (www.americaspower.org).

That the NYC Tri State area has both among the highest energy costs and most expensive real estate challenges Carder's theory. My guess is that this is a long cycle phenomenon and not well suited to short-term studies. The change in real estate prices are primarily a function of the short term change in employment, income, interest rates, taxes ; the costs of energy are (I believe) a much bigger deal for employers than employees.

Over the longer term, companies will presumably locate plants where there is ample energy and employees will follow and in that way real estate prices can be affected. But unless there are regular blackouts and/or reduction in net income/employment I would be surprised to see electricity prices affect real estate prices in a discernible way.



 I just published a new book on amazon. Feel free to buy and review.

George Meegan: The Longest Walk Companion
by Steve "bo" Keeley

From the description on the site:

'Thirty years after The Longest Walk, a companion has come out! And where else to meet the intrepid biographer, Bo Keeley, than in the Peru, beside the Amazon, in outrageous Iquitos.' – So begins the most celebrated world walker of all time, George Meegan, in the Introduction to the Companion book to his famous The Longest Walk.

The Longest Walk Companion is as much autobiographical as biographical. It holds new tales, lists, sources, and pictures captioned by George. George Meegan holds eight Guinness World records for his walk of the entire Western Hemisphere from the southern tip of South America to the northernmost part of Alaska at Prudhoe Bay. The journey was of 19,019 miles from 1977-1983, and is documented in his book The Longest Walk. This Longest Walk Companion by George and Steve Keeley contains all new material.


· Biography
- What kind of man leaves hearth and kin

· The Walk Itself - Highlights from the walk itself with photos

· Democracy Reaches the Kids - Original notes from the authors lifelong passion

· Letters and Papers - Dozens sent around the world on his favorite topics

· Articles & Coverage, Sources & Lists ­- Hundreds on Meegan courtesy of the computer age

· Records and Accolades - three pages of honors

· New Photos - Most never published and captioned by Meegan

· The only authorized biography of George Meegan - by adventurer and author Steve Keeley


· Larry King Live

· Today Show

· CBS Morning News

· Good Morning America

· 11 PM Show

· Stud's Terkal Radio

· The Joe Franklin Show

· Phil Donahue

· Hugh Downs



 It seems commercial construction in Sydney is picking up again as Chinese money is arriving. Apparently it appears they are just scratching the surface.

Side Note: an apartment in the middle of a Chinese area in the middle class north shore of Sydney had 16 registered ethnic Chinese buyers and sold for a million. It seems there's plenty of fire in that dragon down under… or I should say buck in the horse.

David Lillienfeld writes: 

I'm hearing from friends that the Singapore construction market is bloated at the moment. Might that money now be going to Australia? And is that money flow into Sydney indicative of problems developing in China and everyone who can is getting their money out?



 There's lots of discussion about raising—or not raising—the national minimum wage. Lots of arguments on both side of the issue. There's a recent analysis from the Chicago Fed which suggests that while the impact of such a change on jobs per se may not be much, it does have an impact—many small businesses close and approximately an equal number open. The conclusion was that the closures occur as an "older" management with a staid business model finds it difficult to cope with the new wage floor and shutters, while a newer entity, with a "younger" management, starts with a fresh business model that is adapted to the new reality. 

Stefan Jovanovich writes:

As is so often the case, the light from the brightest bulb blinds rather than illuminates. The point of the minimum wage is to create a higher floor above which fixed rates are calculated. David has no idea how many contracts set pay rates as a multiple of the minimum wage. He also has no idea how easy it is to offset the minimum wage raise effects by doing a speed-up. For the more modern employers that is no problem at all; for us old farts who have actually bussed dishes ourselves, that requires being a bit more of a bastard than the face we shave allows.

There used to be two choices with businesses that hired teenagers and other people with limited skills - teach or grind. Thanks to academics of proper authority there is now only one so some of us have retired permanently from teaching.



 I see that SAC portfolio manager Mathew Martoma, convicted of selling a pharmaceutical company's stock based on insider information received prior to an announcement, faces a sentence of up to 45 years in jail.

While I wouldn't want to stake my freedom on an unsophisticated NY jury's understanding the legal subtleties of insider information (and its ability to resist the powerful US Attorney's office and their 95% conviction rate), I'm not questioning that Martoma may have broken the law and be deserving of some punishment.

But I do question the fairness and proportionality of up to 45 years — or even 10 years or 5 years — when we on this List every day see strong evidence of others trading on inside information prior to an announcement. Beyond Victor's flexions trading prior to government announcements, it is common (usual, one would say) prior to a company's takeover or other highly favorable event to see the stock moving up in the days prior to the announcement. In fact, when there is no prior movement and the announcement comes as a complete surprise, it is remarked upon how unusually well the secret was kept.

I dislike cheats, but this kind of non-violent, non-Madoff-like offense (whether there's an actual victim is questioned by some academic experts) could better be punished, for example, by a monetary fine and a year of community service devoted to helping disadvantaged businesses and families with their financial strategies.

BTW, I'm sure Martoma's legal expenses are already in the millions of dollars. And if the idea is to get him to testify against Steve Cohen, I'm sure some sort of deal was offered to him before his indictment or trial, and if didn't accept then, why should Martoma be pressured now after he apparently thought he was innocent enough to take his chances in a trial, and when his ratting on Cohen on the verge of a long-term prison sentence would be even less reliable?

Why is the prospect, or actual imposition, of this kind of overly severe prison sentence so easily accepted by media reports, legal commentators, and the public? Where is some sense of proportion and fairness?



 For fans of the Fab Four, John, George, Ringo and Paul, Lennon elder son Julian Lennon has curated a round-up of many affecting or amusing, B/W photos (some in color), album-cover fodder, on the occasion of their 50th anniversary.

The venue is the somewhat grungy, atypical 2nd-floor gallery of the SOHO Morrison Hotel on Prince Street.
The opening on Thursday, 6 February, was underwhelming, stuffed with neighborhood and uptown types jockeying for position in front of the minicams and still photogs, a bare wine table on offer to those slogging through the freezing night. For a minimum of $700 per, to well into the four-figures, one can purchase a prime shot of the mop-tops as they arrive for sundry song celebrations and interviews in the UK, US and around the globe, with Muhammed Ali, on the legendary Ed Sullivan Show appearance, solo and group portraits of each of the four, with guitar or on the tarmac. Limited editions of 25, 50, 75 or open editions, plus estate-stamped prints. Signed originals go for $7,500.

Surprisingly lean opening, considering the preciousness of entree, where one had to swear one's first bale of spun-gold hay or one's pancreas to get in. Up the rickety steep stairs, the gallery isn't much to look at, and of course, there's no John or George anywhere to greet one.
No Yoko or Julian, either.

Maybe no one else expected it to be so bland and sound-challenged. It did seem as if they could have played at least background Beatles, if the venue and fare were both so declaratively modest. Of celebs, nary a one in the throng of wine toters. Few if any fashionistas spotted in the crowd, though Fashion Week–held all over town, which begins on 6 February, too–may have siphoned off the tonier types.

In fact, it could have been the second or third anniversary of the brilliant band, not the 50th. Quietly on the down low, with little external glitz to clue one to the importance of the band.

Maybe it is a belt-tightening signal of filial devotion by John's first son in a notably straitened economy.

As they say, Let It Be.



 bots stepped-up the es all day
& the shorts were made to pay
due in part to talk of a taper-off
that became the theme of the day

bad news became good news
cnbc pundits changed their views
while the u.s. dollar retreated
and roro correlations repeated

the curve finally steepened
and the gold mystery deepened
as the venerable nikkei led
an ecb ease was put to bed

emerging markets looks shaky
we know this much is true
their currencies look flaky
not much there to add value

yields now look ready to abate
they want to subvert inflation
with a negative real interest rate
we could become a borrower nation

merkel is troubled by russian phonics
japanese women bleed over abenomics
dimson says,markets inevitably drift higher
so fuk-u draghi - i am a risk-on buyer



Compliments on the nice Long last week. There is a good chance the market will stabilize for a couple of weeks, and even end up rallying. But this will be the final Long stint for maybe years to come. Technically, the reason it should work is because this was first drop from the Highs. You always make money buying first correction. And then you always make money Shorting next rally. That's just how it is, technically speaking. As far as why US stocks will (ever) drop: the time will finally come to address and digest the years of impropriety: all policy, all politics, all debt, all moral hazard, all geopolitical posturing. If nature is cyclical, then why not a catharsis.

Those Long-term (240 years) charts published overnight certainly illustrate that stocks are in the worst position of all spaces. Treasuries don't look good either, but not necessarily this year. Crude looks potentially veeery bad. So does Gold, but not quite to halve its value. Commodities are to correct even less. The USD chart appears to have tremendous upward potential; my speculation: that's where the surprise is.



 If one hasn't noticed, the Olympic judging of figure skating has changed. One no longer gets to see how the judge of each country has voted on skaters' performances on TV. This change from a disclosed 6.0 scoring system by judge with country affiliation revealed to the new ISU scoring system creates the prospect of great unmonitored injustice.

No longer can we see the scoring by judge of each country for each performance. If one can't measure a scoring bias by seeing the country by country judge data, then how can one register a complaint as an athlete? This creates a de facto measurement method on par with that of a Court of the Star Chamber in use famously during the 15th until mid 17th Centuries.

Far from taking a step forward, the new scoring system, in reducing accountability of judges, increases their omniscience. One might argue that hiding the identity of the judges through the random selection of judges' scores might allow a judge from a non-totalitarian state to make a fair call. That would make the assumption that the judges aren't under some other type of surveillance or control.



 Victor writes to Bo:

What is your relation with the book The Longest Walk. It's very good. And the author has a nice character and adventurous spirit that reminds one of you. 

Bo Responds: 

See George Meegan's wikipedia. I wrote it.

George comes to NYC often and you and especially Aubrey would benefit from meeting him. However, he would need a place to stay for a couple days while visiting. His primary interest is children's education and has written Democracy Reaches the Kids that I may also self publish for him.

George and I met in Iquitos on the amazon river via a mutual friend as an introduction of 'walkers'. You're right, we're a bit like each other except he has a seafaring gait from like Ken Smith from 7 years at sea. He would be a strong speaker at Junta, and has spoken at the NYC Explorer's Club, Studs Terkle, Larry King Live, etc. and they all asked him back twice.

When I read his book & learned that it was out of print & that he wasn't making a penny on it, and that he had the copyright, we huddled & inserted some new front material, appendices, & pics. I just published a second book by him that went amazon.com yesterday The Longest Walk Companion authored by me.

After The Longest Walk trek and book, George faded from the American spotlight. He travels exactly as I do, on a shoestring, but pauses in one spot to live longer. He's been more or less on the road for an age. Read his wikipedia link above, and I'll send a note of introduction.



 One thing that is striking to me is that many of the online businesses that appear to be bubbles would be incredibly great small/medium sized businesses if the founders and people involved were not dead set on hitting a grand slam home run via market capitalization.

On one hand, the massive valuations stimulate investment in new technology, which is good.

On the other hand, selling stock to investors with a grand scheme to dominate the world could make hundreds or billions while running some of these sites as "small businesses" might still pull in high 7 or 8 figures of real economic profit from customers, without the public scrutiny or "cashing out".

The bubble pops when all the spending to make the "world beater" can't help a niche become something it never really could become. So the company becomes a vehicle to satiate speculative desires, which founders and advisers can take advantage of.

I wonder if on net that home run mentality helps or hurts. I'm inclined to think it adds a pyramid scheme element to enterprise that is not necessary. On the other hand, it does fund research and allow little ideas and little companies to compete with the bigs.

Chris Cooper writes: 

In my experience, it is not just money that motivates founders to swing for the fences. It turns out that there are a whole new set of challenges and things to learn with each order-of-magnitude increase in revenues/size. If one happens to find oneself in a high-growth, high-potential situation, one quickly realizes that it may be a once-in-a-lifetime occurrence. It can become one's chance to gain new experience and knowledge, to learn how to manage an organization as it grows, and many other things that most people never have a chance to attempt. It sometimes leads to failure, but that's part of the experience, too.

Knowing that probably doesn't change very much the way it looks on the outside, but to attribute "a grand scheme to dominate the world" to purely monetary motivations is not an accurate picture of what is really in the heads of many founders.



 A look at last night's highly enlightening talk by anesthesiologist Keith Smith and co-founder of the Surgery Center of Oklahoma, who spoke about the tremendous cost of health care and how he is profitable while charging one fifth to one tenth what traditional hospitals charge for the same procedures. He is an advocate of free markets and price transparency and publishes prices for procedures directly on his website. This is a good article about his work.

Smith explained how insurance providers make more money repricing claims than they do collecting premiums. Incentives are in place for the insurance carriers to seek out the highest cost providers.

He explains it like this on his blog:

Nobody talks about this one: PPO repricing. You see, some PPO's (actually all of them I think) charge PPO repricing fees. This means that if the PPO pays $10,000 to a facility for a surgery or hospitalization that the facility charged $20,000 for, the PPO, by virtue of having "repriced" this procedure or hospital stay, gets a percentage of the money they" saved" whoever was paying the bill…usually no more than 25%.

"Wait a minute," you say! "You mean the PPO collects the premiums, then maximizes their profit by ratcheting down the payment to the physician and facility but also makes a percentage on the difference between the beginning and ending bill amounts? So the higher the bill is to start with, the more they make?"

I was amazed to learn that surgeons can perform the same procedure at Smith's Surgery Center and at the hospital across town and get paid more for their work at the Surgery Center than they do at the hospital.

Smith is disgusted with the fact that the current healthcare system is a syndicate or cartel that rigs the system and is bankrupting us in the process. He explained how Obama Care is only going to make things worse. However, he ended on a very positive note stating that the government does what it always does and screws things up so badly that the system will collapse on itself and people will find new ways to save on healthcare.

Smith ended by paraphrasing Camus and reminding us that

"The welfare of the masses has always been the alibi of tyrants."

(the actual quote: "The welfare of the people in particular has always been the alibi of tyrants." - Albert Camus)



 I hate satellite phones. For one thing, I like to be alone, for two, unreachable, and for three, untraceable. It isnt possible with a satellite phone or family. Explanation: two years ago I told my family that I was going to mexico and would return in a couple months. Two months later, I didn't get to a computer before returning directly to my desert digs. A month after, when I did finally get to a computer, I discovered I was 'dead'.

I also never knew I had so many friends. There were a dozen facebook posts, two dozen emails, a memorial was in the making, and a syndicated columnist wrote on 'the legend passing'. I notified everyone that 'the rumors of my death are greatly exaggerated' - Mark Twain. What happened?

My brother had called in a missing person report, my sister-in-law had posted 'where is Keeley' on facebook, and someone had contacted the American Embassy in Mexico to send out a search party. The day after learning of my demise, I went across into Mexico again for a prescription and when I tried to return the US immigration declared I was not whom my passport purported I was. I was missing or dead. Nonetheless, they strip searched and detained me at the mexicali border, and then sent me to the sheriff's office to identify myself. Then i carried on with life.

no satellite phone for me,




 The latest contestant on the popular game show "Jeopardy" has found an unorthodox way to beat the game. Using game theory, Arthur Chu has managed to win 4 times in a row. His unorthodox methods have traditional Jeopardy fans upset as he follows the rules, but goes non traditional, and hits the big money first, then searches for the daily double. In fact, in one daily double, he found it in the category of sports (which he has little knowledge), and bet only $5. His style of play is to deny his opponents the big money, just like we try in the markets.

Anyways, Chu has upset the apple cart and won over $100K. Fans, along with the host Alex Trebec are visibly upset, but Chu is playing to win, not appease viewers or the host. This reminds me of speculators who get upset and blame HFT, flexions, the other side, etc. when they lose. They were mad at old man Rothschild when he had news of Wellington first and scooped the market. I'm sure that in the future, there will be many boogeymen to blame things on.

I applaud Mr. Chu for his out of the box thinking, and wonder why nobody has done this before, considering Jeopardy has had a 30+ year run. Mr Chu can teach us many valuable trading lessons.

Andrew Goodwin writes: 

This guy is a close friend of my gf. He has garnered much anger from the crowd. He has won four times in a row and is now being called the "Jeopardy Villain" by the press and fans of the show.

This is a take from the net describing his methods:

"What is Chu's game theory, exactly? While most players opt to stick with a single category and work through it from lowest to highest prize amounts, crossword-puzzle style, Chu begins with the most difficult clues in an effort to solve the Daily Doubles and doesn't hesitate to lay down the big bucks when he finds them in a topic he's familiar with. If the question belongs to one of his less-practiced knowledge categories, like sports, he'll only wager $5 and throw it away, knowing that it's off the board for his competitors. He also spat in the face of the $1-over wager tradition in Final Jeopardy, in which the extra dollar prevents a tie; instead, Chu intentionally bet to tie twice, though only once did he and his competitor (Carolyn Collins) both answer correctly and move on. This is not a humanitarian move, by the way, but it is a clever one (Keith Williams, former Jeopardy! winner and obvious math person, breaks it down for you in detail here.

Playing to tie increases your chances of advancing both because of game theory and mind-fu—- your opponent ("if your opponent knows you're going to wager for the tie, he might disregard a rational wager and go for broke in an attempt to tie you"). Chu is also quick to buzz in, which is perhaps the most useful Jeopardy! skill of all."

Chu has already won four games in a row and gets to compete again on Feb 24th. He is using game theory and statistics to beat the other opponents and has mastered them all so far using his unexpected system.

I suggest we watch to see if his play changes the behavior of the next opponents so that they match his tactics and alter the game show for good. This is the live popular culture version of the theory of ever changing cycles at work for all to see.

Far from a game of mere trivia knowledge, Jeopardy now is a game of greater complexity than thought previously due to the skilled tactics of Arthur Chu. Granted, I understand that Chu was considered a genius back in college, but he is not winning like Jennings in knowing all the trivia.

Adam Robinson would really enjoy this story.

Best regards, Andy



We had a brilliant talk yesterday at my Junto by Keith Smith about his low cost, out-patient surgery with 0% suits against them, 99% patient satisfaction and 1/10 of the cost of comparable operations. The outfit has a founding philosophy in Austrian economics, and its creators gave up regular anaethesia in main stream hospitals because they didn't cotton to the bureaucracy and the situation where a hospital bills the patient 100000, the insurance company pays 30000, the surgeon receives $500. And the hospital reports a loss of millions from free care that they provide, and has cranes outside every wing of their existing facility.

Gene Epstein said: I first learned about the amazing work of Keith Smith in this video and article by Reason journalist Jim Epstein: Surgery Center Provides Free Market Medicine .

He quotes "the welfare of the people in particular has always been the alibi of tyrants" by Camus in reference to the eleemosynary activities of the " loss making" free care provided by emergency rooms. Also of note was the back and forth that emerged when I suggested that this national anthem mite be played at the BLS today. My successor as moderator of the Junta pointed out that not only the children of Furrier Workers were sent to Camp Kinderland in the Catskills, but future economics editors like himself went there also.



 Slater won the Pipe yesterday. Check out this minute and a half video of a perfect 10 on a wave he rode. Even a non-surfer would regard this as a perfectly ridden wave. What other moments in sports are comparable? What trades are comparable?

Jim Sogi writes: 

Perfection. It's rare, but when it happens, it's the best. Yesterday the surf here was perfect. Same size as the pipe pictures, west swell, perfect form, no wind, perfect size. It was like the cover of a Beach Boys album.

There were only about 8 people out, all of whom I knew. I caught many waves and didn't fall. Caught them right on the peak, in the pit, dropped in, the wave walled up and then kickout on the inside. Just a perfect day. Everyone was hooting and hollering and smiling. A pretty girl in a bikini paddles by and says the waves are so good she feels like she's on drugs. Just perfect.

The other great thing is the perfect day of powder snow, sun, no wind, new snow, no people, untracked lines.

Another great thing is the perfect trade. Great volatility, good entry in size, and good mental condition to ride the trade to a good exit with no pain.

All very rare, but just the greatest thing. You have to watch and wait and then be on it when it happens.



 Weather must play a factor in ag commodities. The weather has been pretty weird lately with weeks of rain in Alaska in January, snow in Hawaii (skiied 2 days last week), bad East Coast weather, drought in California. I am guessing this will affect the volatility of the ags and energy in the coming years. On a larger scale, weather can affect the economy of the entire world.

Jeff Watson writes: 

The big drought played havoc with the grains and we had a monumental rally. Weather also affects shipping of grains by barge, and sometimes the Mississippi River is unnavigable due to a variety of weather conditions. The basis for corn and beans can easily double in a matter of days at the Port of New Orleans when that happens. Since the system is all interconnected, other ports will see an increase in the basis.



TWTR, from Kora Reddy

February 6, 2014 | 1 Comment

This is post-facto, and I have to count on the whole data set, but $ZNGA, $FB, $GRPN etc, tanked by more than 10% on their first ER date with the street… now $TWTR …



 In the short term trading world is it better to diversify and trade many things or specialize and trade just a few. I am in the later camp, as it takes all my usable mind capacity to manage just one or two positions concurrently.

Others prefer to trade many instruments saying it increases opportunity and reduces risk by diversifying. However in futures trading, and short-term in particular, there is no Markowitz "free lunch" that comes from diversification which applies only to stocks. By trading more instruments it does perhaps give you something to do when other markets are slow. This however could also be viewed as a negative, and maybe it is better to not be in the markets at times. It makes sense to me to trade based on opportunity. Yet, in practical trading-life these opportunities are so difficult to find, it takes being a specialist to uncover them.

In angling, I am a bit of a hybrid. I specialize in flyfishing, but I will go after anything with gills and scales and recently added the beloved carp to my list. In economics, comparative value tell us to specialize and has been the source behind much advancement. Ben Green traded just horses and the occasional mule. Bacon just bet on the ponies. Specializing served them both well.

Anatoly Veltman writes: 

The main advantage of algo trading is the ability of your portfolio to simultaneously participate in all futures you've pre-programmed. Certainly that's an impossible task for a manual trader

Kim Zussman comments: 

Duncan isn't trading index futures lunching with Markowitz? (Albeit less so than before the period of widespread indexification).



 Hypothesis: inflation is rampant but hidden by federal subsidies. Prove me wrong or prove me right. If I am right I will go into politics.

Jim Sogi writes:

This seems to be what Gross at Pimco is saying as well. Credit growth fuels asset price. Credit deflation may result in asset deflation. Seems to be what is affecting stocks.

The alternative theory is to follow the Fed's explicit explanation that the Fed is preventing deflation, and that removal of the stimulus will allow prices to deflate. This as they say is the greater risk.

Ed Stewart writes:

That makes sense to me. Credit growth or fed asset purchases have created asset price inflation relative to the rest of the economy, which is known as "the rich getting richer".

Deflation of assets is harmful as it impacts the money supply that leverages off of asset prices via credit. Kind of a different dynamic than what most people think of when discussing inflation based in consumer prices. One thing Mises said that I like is that money creation is never neutral across the price structure. It enters in specific ways and impacts specific prices relative to others. I used to think someone must understand how these things work, I now wonder if it is that things change enough such that understanding is not possible.

Gary Rogan writes:

Presumably asset inflation is related not just to the growth of the money supply (a large portion of which sits as excess reserves right back at it's point of origination and isn't contributing to anything other than bank earnings) but also to the intent of the Fed. Otherwise why would relatively tame tapering result in some deflation even while a huge amount of money is still being printed?



 The dollar is strong. I have been traveling internationally this past year on ski mountaineering expeditions (surf-n-ski.com) and found the dollar is strong and there are good travel deals now.

Canada and New Zealand are both below the dollar 10-15%. With the modest life style in those countries hotels and meals and car rentals were low, and cheaper than the US. Argentina, where the pesos dropped from par to 8 or 10:1 is cheap. Nice Malbec wine is $10. A dinner for 3 in a nice restaurant in downtown Usuaia is $40. Japan is the surprise. I'm heading there next week and hotels are under $100. Ski lifts are $30. The yen has fallen over 30% recently. Surprising last year also was the Euro. In France a modest prix fixe lunch with 3 courses, wine was $12. Can't find that in US. I am surprised the Euro has not dropped reading the news. The prices there have self adjusted notwithstanding the exchange rate.

You may think Hawaii is not such a good place to live for a ski fanatic, but its less than a day to NZ, Japan, Alaska, Canada, Sierras, Rockies, for year round skiing. There is even snow on Mauna Kea where I've been skiing.



Henry Paulson, 'Mr. Bailout,' fears a new finance crisis is brewing Tuesday, February 04, 2014

Feb. 04–Henry M. Paulson Jr., the financial firefighter stationed at the epicenter of the biggest financial crisis since the Great Depression, worries that the nation is headed for another crisis because political leaders failed to learn critical lessons from the last one in 2008.

In an exclusive interview with The Washington Times, Mr. Paulson, former President George W. Bush's last secretary of the Treasury, said the most serious lapse may be Congress' failure to reform mortgage giants Fannie Mae and Freddie Mac in a way that would revive the private market for mortgages, which has all but disappeared since the crisis.



 At the Metropolitan Club and University Club on Fifth Avenue, it was customary for the older members to sit by the window, and frown at the shortness of the women's skirts. "There should be a law against it". When the women covered up there was aplomb. The old codgers at Davos were very concerned that people of color were being hurt in the emerging markets. They had to do something about it. One can imagine that at private meetings at the slope shortly after Davos closed down, they buttonholed the members of the centrals, and the other big world operatives and demanded that something be done to help the poor, to create a more egalitarian society. With the S&P up 16 today there must be much patting oneself on the back going on over there.



Dr. Keith Smith of Surgery Center (Oklahoma City, OK) will be speaking at Junto this Thursday, February 6.  8pm to 10pm at 20 West 44th Street, ground floor. Gene Epstein says: I first learned about the amazing work of Keith Smith in this video and article by Reason journalist Jim Epstein: Surgery Center Provides Free Market Medicine .



 The mocking press about Sochi accommodations shorts the many thousands of workers who made a great effort to create a venue where none existed previously. Given the well known corruption and central command government in Russia, expecting 5-star hotels by journalists, athletes, or spectators was never realistic.

"Journalists at Sochi are live tweeting their hilarious and gross hotel experiences"

Putin bears much responsibility for the mockery so far, because of his ego, vested interests, tsarist regime, and hostility toward the West. Probably Gorbachev would have been given more slack, and would have rightly approached such a task more humbly. No doubt Mexico, under similar circumstances, would have been given a full pass.

There are many who believe we in the US are living under an increasingly repressive and controlling government. Russians have lived like this for a thousand years. One of their few permitted joys is pride over national sports. I for one hope they have reason to cheer at this Olympics.

Tim Melvin writes:

Mocking press my flaming ass. This is the Olympics and Russia committed to providing world class accommodations in their bid package. The rooms are not finished and some have no water. At least one hotel is telling people not to use the water on skin as it is dangerous. Do you think for a minute it would be this bad if Austria or South Korea had won the bid? If it was never realistic they should not have won the bid. Period.

Gary Rogan writes:

It's amazing how corrupt the whole world has gotten: very little of importance is done for the right reasons. Nobel prizes, Olympic venues, Global Warming. It used to be that individual countries and locales were corrupt, and that's still going strong, but globalization has led to global corruption. Everything is Kabuki theater of one form or another.

keep looking »


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