The question of profits growth versus the GNP and stock growth is an interesting one. How can profits go up more than GNP without it triggering countervailing tendencies? And how can stocks go up in the long run more than profits growth. It would seem to require an increasing p/e. The difference between profits growth and book value growth is also an interesting one. One notes often that a company has enormous gains in profits with a much lower growth in new worth. The difference could not be explained by dividends. Might one possibility for the growth of equities be that they have learned how to gain verisimilitude from Washington, and that this enables them to eke out a return on capital which when put into the p/e hopper enables them to increase their share of the total adjusted for interest rates? Inquiring minds wish to consider it.



We have now gone 8 days without a decline of 1 point or more in SPU, the last decline being on 5/20/2014. What does that portend for the future. In general what does a long period without a decline portend and more generally what does a long period without a move of x or more portend. An interesting follow up arises following the big rise or decline. For example, we've gone 8 days without a decline over the last 8 days. What happens after a period of big rises following the big decline. Does it head for the hills or the valleys. One quantifies it, and finds that the most bullish thing occurs when a big rise is broken by a big decline, i.e. one should hope that there is a bit of a decline in stocks now, as that will be quite bullish not bearish.



The long expected break-out to new all time highs proved to be the real deal, and not the obligatory fbo/bull trap we have grown accustomed to enduring. The market quickly reached escape velocity and extended it's historical move, with a strong second day and even added more distance as the eminis were marked up throughout the week into the last day-of-the-month. With consistent positive returns generated on Fridays and Mondays it appears, this timeframe is a sine quo non for continued bullish momentum. Equity only p/c ratios are all on a buy signal, and market breadth is bullish also, which lends positive confirmation to the breakout. The continued low volatility situation has received much press, and no doubt, signals an overbought condition, but it is not a sell signal. That being said, the market is good, and is headed much higher; but is overbought. This means there is a high likelihood that the market will experience a sharp, but short-lived correction at any time. However, a sell-off should be greeted with open arms and both hands, as an opportunity to initiate or add to a long position. As reported by trim tabs, savings accounts remain the most popular destination for investor money and saw $139 billion flow into them in the first four months of 2014, exceeding the $77 billion inflow into all equity funds. So with the taper winding up and qe winding down, the next impetus for higher prices may just be the (fomo) fear-of-missing-out trade, as retail money inevitably chases the market higher.

As we say farewell to May and welcome in June, we should keep in mind, that the last trading day of the month plus the first four days of the following month are the best performing days of the month. Nevertheless, the economic calendar is busy next week, with china pmi, the ecb meeting on thursday, and and the employment situation on Friday; and any of these events or others, could provide the catalyst for a sharp sell-off.

It still appears to me that the current rally has been fueled by lower interest rates, which was the result of the big yield grab in both u.s. and European bonds. money flowed out of the euro into bonds ahead of the ecb meeting while the rally was further fueled by bad short bond positions. Nothing has changed valuation-wise since last year, other than the fact, that the market as a whole, is growing more expensive; but with rates falling from 3% to less than 2.5% the ratio of earnings yield to bond yield is being dynamically maintained. Since the crash, the difference between the 10 year yield and the dividend yield has been shrinking compared to the historical norm. When this distance is negative, it is only natural that money moves out of treasuries and into blue chips (dividend stocks). It is interesting to see that this move reversed when the gap between treasury yields and dividend yields reached close to 2% - the current ratio is 0.60%. For a reversion to 2 % to come about, dividends would have to stay flat or fall while interest rates would have to rise to at least 3-3.5%. However, as long as treasuries keep rallying and interest rates keep falling, equities will remain undervalued and continue to rally. It is interesting to note that the money flow into equities was weak today, which is not normal for a Friday, especially at the end-of the month. Low volatility stocks outperformed their high beta counterparts and the utility sector was uncharacteristically strong for an up-day in equities. This supports the theory that investors are looking for yield and not growth.

It is also interesting to note, that an oversold spot $vix with a steep contango in the vix futures used to mean that smart money was betting on higher volatility in the near future– and they were usually right. But since 2008, and especially since the inception of the VIX exchange traded products in 2009, the steep contango has not necessarily preceded equity sell-offs. This phenomena exists even with the vix at seemingly oversold levels with the attendant expectation for mean reversion. This is because the volatility products lose money when they roll their positions before expiration to maintain exposure. Etfs are forced to roll long positions into more expensive deferred contracts… on the other hand traders are more-than-happy to take the other side of the trade, and continue to sell-the vol-and-roll their short positions, because it still remains profitable.



The next meeting of my NYC Junto will take place Thursday June 5, 2014 and feature Robert Begley on Man the hero: The crucial role heroism plays in life. All DailySpec readers are invited: Meeting begins at 7:30pm, speaker at 8:00pm.  General Society Library, 20 West 44 St, NYC.



 Any reflections on India? Reports about the new prime minister sound very promising. With a vibrant culture, India in my view could be in the spotlight at least in the coming 10 years, more so than China. Thoughts please?

Peter Tep writes:

I recently read a post by Martin Armstrong where he speaks about the difficulties facing India in the past. His main point was on language and that as more and more of the country learn and become proficient at English this will provide the platform for the next 'boom' - for lack of a better word.

Seems to make sense for opening up the skillset in the economy. Let's just say I wouldn't want to take on a young Indian in maths, programming or CFA calculations!

I did see that Modi's intention was to expand power access to the 700m+ population by focusing on solar. Purely from a headline perspective I'd be looking at which companies are set to benefit the most from that or whoever is closest to Modi and his administration.



 Running has historically suffered due to a couple reasons that makes anecdotal evidence pose as empirical science.

First running benefits stem largely from its first order damage it does to your body. It is easy to see the cause and effect of first order damage. It was only in 1980 that the women were allowed to run the marathon in the Olympics. It was thought running distance would make women infertile because it simply was too stressful.

When I started running in the early 80's the now thoroughly PC magazine Runners Times was then a underground magazine. It had an article titled something like "How to Avoid the 3 "D"s, Dogs, Doors and Doctors" sub-headed "so they will not stop you from running." ("Doors" were car doors opened while they drove by a runner on the roads shoulder)

It is much more difficult to see the second order effect, the enhancement of the bodies genuinely incredible ability to heal itself.

However, it has recently been shown that 30 minutes of aerobic exercise creates new brain cells. Aerobic exercise is the only known way an adult can create new brain cells. Hence science is beginning to understand the mechanisms for the neuroplasticity running gives a person. Often this neuroplasticity is more effective than the best drugs and counseling. Depending on your age aerobic exercise deceases your chance of Alzheimers up to 50%. Likewise your chances Parkinson is decreased only by moderate to high aerobic activity.

As for running "too much". Yes there is a limit where doing too much, no matter how healthy and young you are, were the damage simply is too great and the enhancement in the bodies healing mechanisms are overwhelmed. However, for most people, it simply is they do too much too soon. They never get to the maximum benefit, because they rush the process. But also, often this over dose is the result of "needing" to exercise to heal your mind. Your psyche thinks if some helps, more is better. During psychologically stressful times, I have had to be careful not to over do my running. For example depressed people often can find great relief from fairly high mileage, say 7 to 10 hours of running per week. But often after getting that relief they try doing double that, which is too much.

Secondly, if there is already something wrong with you, the stress of running will bring it out. Have a lingering knee injury from playing basketball? A sore back from golf, or football? Running will find that weak spot. But also starting the flu, mono, first signs of cancer, run and often you will have an early warning sign. Rather, than begin the initial cause, running can make it clear something is wrong. Anecdotally, running is the fall guy… rather than the real culprit. It is only through large statistical samples does this become clear.

Finally, for the specific cases at hand and for why pull-ups every day may help more than taking a day off, I would suggest that pull-ups are great for back and arm flexibility. A complete day off could stiffen one up and I suggest rather than no pull-ups one try a hard easy day cycle. On easy days go much slower, resting between and fewer reps. And on hard days go faster. Finally rather than focus on total done at once try doing "sets" of say 6. Or say a Ladder, 2, 4, 6, 8, 6, 4, 2.

The four minute mile was broke by doing intervals: repeat quarters, with rest in between. If the training purpose is thought to maximize your ability to heal, rather than simply run faster, get larger muscles or lift more, then letting your body learn to recuperate quickly makes much more sense.

Last but not least, what does seem to compound in a marathon, is not the time but oxygen debt….that's why its called "debt". Get in debt too quickly in a marathon an you find that the course is the longest 26.2 miles (42.2k) in the world. Larry is right the best times are negative splits. Because they did not tax themselves too much in the beginning. It is often said a person can complete a marathon, if they can run a half marathon. They do this by walking quite often the first few miles and run with little or no walking near the end.

Both these ideas, I believe, have some very direct implications to a trader. For example, stress and relax for brief periods, some "tough" days, week or months to clear the mind. Even short term traders need to have long term goals that supersede the short term payoffs.



 Forgive me if I haven't augmented the dinner party lately as one was at his 50th reunion at Harvard where I heard a great Boston Pops concert, did some bird watching at the very elegant and peaceful Mt. Auburn Cemetery, and found many of my classmates who seemed just like ordinary boys in '64 were now quite eminent and personable. About 1,000 out of 1,200 living out of 1,500 entrants were there. The joke was that if Bin Laden had been a Harvard student, the fund raising apparatus would have had his whereabout so they could solicit him. You will be hearing from me shortly.

Rocky Humbert writes: 

According to the Social Security administration, out of an all-male '64 class size of 1500 entrants, only about 1065 should still be alive.

Perhaps going to Harvard is the secret to longevity?

Russ Sears writes:

There is considerable self selection in going to college. Higher education could be thought of as an annuity ceasing upon death. SS death rates are higher than most actuarial tables, because life insurance is generally underwritten. But annuity tables have the lowest death rates due to the self selection. Incidentally the more options you have in a payout of say a pension plan or even SS, the more likely the annuitant will game the options. Where politicians often start with equivalent tables. 



 I started working my way through law school at Berkeley by serving process and writing complaints for a personal injury lawyer who had his offices in the old Alaska Commercial Building in S.F. By 2nd year I was able to move up to part-time civil service as a way to pay the bills; I moonlighted 20 hours a week as a clerk/analyst/go-fer for the California Coastal Commission. They were just getting started and the "smart money" among the bureaucrats was that they might not last so, for a brief period in the early 70s, the place was actually under-staffed.

In addition to its other idiocies, Harvard in the 1960s required its architecture students to learn what was then called "city planning" but soon became "urban". Being able to claim that I had "studied" urban planning was what got me the job with the Coastal Commission. It was colorably true; I had taken the courses, but it would not be completely honest to say I had studied. The subject did not require it. If only for amusement and to profit from the profession's cult rituals (restricting urban land use does NOT, we repeat, NOT drive up the prices for homes and apartments), I have kept up with the "profession's" latest efforts to make us all broke and miserable in the name of public transit. Here is my latest discovery:

Houston has $587 million for its new light-rail system. It has cost - so far - $3,000 an inch ($587 million/3.3 miles).

The first light-rail system built in the U.S. since the 1890s was the San Diego Blue Line aka the Tijuana Trolley; it was completed in 1981 and cost slightly less than $10 million a mile ($157 an inch).

The two systems have the same carrying capacity.



 There has been a 20 year drought here in Hawaii which is now ending officially. Severe drought is ending in many places. We've had 4 weeks of steady rain, which is unusual for recent times, but the old timers say this is the norm.

Weather cycles also extend in large waves across the globe, for example, the Pineapple Express, where Hawaiian storms surge east to the West Coast.

In any case, heads up. There's a weather cycle change afoot.



For those interested in understanding one's place in the market ecostructure, Kirlenko et al have updated their previous work. They use CFTC trader id data from 2010-2012. Very illustrative of the efficient transfer from the weak to the strong.



My fading memory of the opening breakout is that it was created by Jake Bernstein and the break out was of the first 15 minutes and required a close > or < than the 15 minute zone; that too I am certain on balance would not be very profitable it still needs discretion or another tool to make it valuable.



 Do markets move in the shape of a torus, which is at the heart of the constructal principle more frequently than chance, and is it predictive?

anonymous writes: 

When you say "torus" I think "circle times circle". (Referring to the surface of the torus, not a solid torus.)

The surface of a sphere, by contrast, is not circle times circle. (The standard physical models are: two angular measurements in a TIE fighter, versus lat/long measurements on the Globe. (Think about the poles and notice that lat is 180 degrees, not 360.))

From an external point of view the surface of a torus is a 2-dimensional curved surface with one hole in it.

By "markets" I assume you mean agreed prices over time (for some contract? for some index/composite?). Prices are (nonnegative) scalars, not surfaces, so somehow we need to make the prices "live" on that surface, i.e., map from possible price space to the torus' surface.

In that context — what would genus 1 (number of holes==1) mean?
A related idea, which is not speculative at all, is to use "projective spaces" in portfolio design. This is what is going on when people talk about purchasing a security for $0.97 and selling it for $1.00.



 To what extent can Pascal's principle where a change in pressure is transmitted undiminished to all parts of an enclosed liquid or gas system, whereby a small change in force on a narrow area can move a much larger force on a larger area as used in car lifts or construction machinery, be applied to markets in certain situations? Is this a useful question?

Stefan Jovanovich writes: 

The Chair has asked a question that I cannot answer so I will add to my stack of irrelevant comments. What is called the Industrial Revolution was neither. Metal working and large scale enterprise were not new things. The Arsenal at Venice and the Royal Navy's yards with Brunel Sr.'s block carving automatic lathe did not need the "invention" of the steam engine. It was the discovery and application of the paradoxes of fluid dynamics that created our modern world — first steam, then gases and liquids generally.

Gary Phillips writes: 

Mauboussin likes to talk about the market as a complex adaptive system and critical points where large scale reactions are the result of small scale perturbations, the implication being that causality can be difficult to identify because it is often very subtle.

Traders tend to focus on multiple and ubiquitous agents that may not drive price, but do support their directional bias, while ignoring potential outcomes with low probability that may be driven by hidden or obscure agents. Same with systems with too many degrees of freedom and over fitting.

Gary Rogan writes: 

I often think of the market as a Pascal system or a school of fish. How do all the stocks know to move the similar direction?

Ralph Vince writes:

In the context of fluid dynamics, Gary's question leads to the (near inescapable) conclusion that the movement of stocks prices, in this context (with an isomorphism to 3D space of the varioius stocks) is characteristic of the flow WITHIN the de/compressing cylinder itself, under varying states of compression at varying times.

A study of hydraulic flows would show that fluid flow within the cylinder itself is not uniform, and is also a function of various degrees of pressure.

From this we could create such a model.

Gary Rogan responds: 

It is kind of like that, but it's almost like there are local agitators within the cylinder. This morning provides a perfect example that I can see in my own stocks. Some joint venture news in MDLZ, one of the Kraft spinoffs has provided positive agitation to the food stocks, and more so to the specifically beverage stocks, and less so to the consumer non-durable stocks. This agitation is somewhat sticky in that when the market first rose for whatever reasons and then fell likely on Yellen's remarks, these stocks seemingly have experience a smaller sensitivity to the market had the important news not occurred. It's like a decompressing cylinder with small local explosions/collapses.

Ralph Vince adds: 

 Matter in the expanding (i.e. decompressing) universe may be a better model?

But it still boils down to a feed back loop where the output of one becomes the input for the next ( in one case amplifying and in the other dampening).

Gary Rogan writes: 

That's an excellent analogy and something I've been reading a lot about! It's not perfect but likely productive.

Immediately after the Big Bang the small world was pretty uniform. But then quantum uncertainty fluctuations have added a small pattern to the Universe that was the progenitor of what we all see today. In addition sound-like wave resonated within the Universe leading to the spectrum we still see in the microwave radiation today. Gravity has dramatically amplified the initial quantum fluctuation leading to the truly observable local pattern of galaxies, stars, and planets. And of course all the following star formations, collapses, and explosions created all the heavy elements as well reshaped the local structure of galaxies. Plus there is all the dark matter and dark energy (dark pools?) that exert gravitational and expansionary forces that can only be guessed at by their effect.

Craig Mee writes:

From the back benches, I think the problem may lie in measuring the change in volatility, since under no news conditions, the environment may be ideal, for example, after news releases in Europe mid morning before the states come in. After that though, it may be difficult to separate cause from effect. 

Jim Sogi writes: 

Might a small amount of money pouring into something like gold or oil or wheat move the entire market? The canary principle might be at work rather than Pascal's causal function, and there may be a lag, complicating the relationship.

anonymous writes: 

 The use of finite-volume methods in sell-side modelling suggests it is a useful question. Market cap is a "squishy" concept of volume, as it can change when prices rise and fall. Book value is less squishy but still far from rigid.

Imagine a directed graph of trade flows among several companies, forming a trade network. Suppose there is a bottleneck somewhere. Destroying this link might be more disruptive than destroying other links.

My father used to talk about one of his coworkers who whirled about his organisation with fingers in every pot. This individual did much more than his job description suggested. When he left the organisation many projects across departments floundered.

The Allies' North African campaign of WW2 was meant to attack a "pressure point": Rommel's petrol supplies. Paraphrasing ER: "The bravest man can do nothing without guns, the guns can do nothing without ammunition, and neither guns nor ammunition are mobile without petrol."

I would also use the metaphor of joint-locks in jiu jitsu. Consider the manifold of configurations of your opponent's feet, knees, hips, shoulders, elbows, wrists, fingers. Applying pressure (vector) to the wrist and fingers in most of these configurations will not move the opponent's feet or hips. Joint locks find the configurations where a small force in precisely the right direction will cause the opponent's feet and hips to move a lot.

Saving the geekiest example for last: in George Lucas' fantasy world, certain Jedi Consulars are able to, with sufficient meditation and magic, see "shatter points" in a situation–precisely the kinds of vulnerabilities that will spread and multiply force to a wider area.



 I'm reading one of the best training books I've ever read for training for endurance sports, which they define as almost any sport lasting more than two minutes. Training for the New Alpinism: A Manual for the Climber as Athlete House, Steve, Johnston, Scott. They draw on many studies from high level Olympic athletic training and physiology.

Technical physiological detail supports their theory. In a nutshell to train for endurance sport, duration as opposed to intensity is key. Building up an aerobic base where you can exert yourself without hard breathing is key to to building mitochondrial mass, capillaries and appropriate ST muscle fiber which builds endurance. High intensity is not a short cut, and can lead to a decrease in endurance and performance. Cross fit is an example of high intensity.

There is no shortcut. It takes long hours building a base for endurance. The effect builds over years.

Larry Williams writes: 

I would add to this discussion that endurance does not win races. The winners are the fastest runners, skater's bikers, etc.

When the marathon running aspect of my life began I was doing 100 miles a week, ran 50 milers and all that but could never qualify for The Great Marathon; Boston, as I had to post a 3:25 at a sanctioned race to qualify. I was then running 4 hour marathons, and while I could run all day that was not enough.

Once we began doing speed work on the advice of a Kenyan runner who, while running with I asked, "What do I have to do", was given the simple answer, "run faster".

So off to the track we went for speed work and that on— top of endurance— got us to 4 Bostons, one with Ralph V.

There is a difference between completing a race, triathalon, etc and wining. Winners are fasters and work very hard to gain speed.

Seems like this applies to the markets in some fashion but I'm too slow to put that all together.

Anatoly Veltman writes: 

We're always taught that staying in the game is the key, because that's your prerequisite to catch the once-in-a-lifetime move. But then again, ascribed to palindrome: it's not whether you're right or wrong; it's how much you have on when you're really right! 

Larry Williams adds:

It's that delicate balance between spend and endurance– above average performance and staying in the game— in our game it seems. At times I have had speed in trading, competition, and like all in this list we have endured, but getting both at the same time still eludes me.

Buffet only has endurance.

Anatoly Veltman writes: 

I don't think Buffet only has endurance. He'd been given valuable chunks on silver platter.

Gary Rogan writes: 

 It seems like being given valuable chunks came after 1990, when he was already a billionaire. He made his first million in 1962, and a million was worth a little more back then. Perhaps someone has the goods, but it doesn't seem like he built up his fortune early on on anything but taking advantage of available opportunities. Early on the opportunities were not flexionic, but later on they got to be that way more and more. He will do or say anything to make a buck, but was he given or did he take what he saw?

As for only having endurance, it would appear based on his objective net worth that in acquiring wealth endurance matters more than speed, unlike marathons.

Rocky Humbert comments: 

Mr. Rogan makes a key point which should be underscored. The tortoise beats the hare in investing because of the law of compounding.

In a marathon, the objective incremental value of the runner's speed at mile #2 is the same as at mile #22. That is, the marathon result is a simple sum of the time used for each mile.

In a lifetime of investing, the incremental value is different at year #2 versus year #22 … because net worth is a geometric series due to compounding.

There are many subtle aspects to this — the effects of volatility on the compounding, and the effect of a bankruptcy in year #1 versus year #22, etc.

Lastly, to the extent that one believes that there is a random/luck/chance is a factor, the turtoise will do even better than the hare.

Ralph Vince writes: 

Good points Rocky (ever-prescient, except in matters matrimonial and matriarchal, in my humble opinion). In reading what you wrote though, the following question comes to mind (and I am unable to answer it, perhaps you or someone with a more sports-physiology knowledge can — my interest here in in the mathematical function pertaining to…).

There is not difference in benefit accruing to the marathoner by a given speed at mile 2 versus mile 22. However, is there a tradeoff a cost, involved between running wither of these faster that would indicate a particular strategy as being more preferable than another? I know individual marathoners may have a different take on this, I'm more concerned with the actual physiological function however.

anonymous writes:

Overall fitness requires strength, speed/agility, and flexibility.  The mental component is extremely important as it is the brain that gives the signals to the muscles to act.  If there is no deep reserve, or lack of strength, the brain senses this and pulls back autonomic functions.  Motivation however allows the brain to tap the reserves of strength and endurance in times of need.

Each individual has different training requirements.  Many a sport trainer or coach has found this out the hard way.  Each individual reacts to training in different ways at different times in the training regime. 

Training actual changes the body and brain functions.  Mitochondrial cellular mass actually increases, as does enzyme production and along with muscle mass and function. 

Recently I started logging my training efforts in a quantitative manner.  Very helpful.

Overtraining is a common problem.  A typical cure is to increase training, but it is counterproductive.  When you feel tired, cut back, or rest.  Your body is telling you something.



 There is another aspect of winning races beyond speed and endurance.

I saw that today in our Memorial Day 2 Mile race. Teddy Seymour, a 71 year old trader and the first black man to circumnavigate the world by himself, knocked 2 minutes off last years time. For non runners that's huge.

I asked Teddy, "What have you been doing in training that was an amazing performance today?"

His reply was, "I'm resting more now, I run 5 days and take off 2, what I've found is that rest helps me get faster. All my life (he's a former marine) I have pushed it, it's taken a long time to learn stop, to rest."

Happy Memorial Day Trails to all.

Scott Brooks writes: 

Larry makes an excellent point. Rest is vitally important.

I was taught how to lift weights by Clif Koons. We used to work together at Executive Fitness in St. Louis (which went of business over 20 years ago).

One of the things Clif emphasized was rest.

We used to have guys coming into our gym that would work out long and hard……and do it 7 days a week. Those guys would hit plateaus that would last seemingly forever. Yet, other guys would work out just as hard, but take several days per week off to let their bodies rest and recuperate. They got better results than those that would work out everyday.

I think trading can be the same way. Yes, we need to immerse ourselves in the business and become students of trading, but at the same time, we need time off from trading to let our minds recuperate. Sitting around, doing nothing, hiking, spending time with the family playing games the kids enjoy (I HATE Mexican Train……but my kids love it… I play it……their laughter makes it all worthwhile, though).

Although Clif and haven't worked together in 30 years, we have run into each other around town a few times and have kept in contact via Facebook. However, all that aside, if anyone would ever be interested in working with a true master of his craft, CLIF IS THE MAN to contact. He is a truly skilled student of his business, and he's a gentleman. I highly recommend Clif

For those that may be interested, here is Clif's website.

(Even if you're not interested check it out. Clif is one in-shape dude…..and he's in his mid-50s.)



Please take time to reflect, this chart tells a very interesting story…

Alex Castaldo comments:

Wow! From 7000 to 35 in five years and four months. That is a rate of return of roughly -63% per year.

***Spoiler Alert***

The identity of this stock will be revealed if you read further.

Kora Reddy wrote:

Send me the prize money. It is this ETN .

Yanki Onen replies:

And the final question is where did all that money go?

Total issued since inception $320,000,000,000. By the way inception date is Jan, 29,2009. Not a century ago.



 I found this article on termite mounds, homeostasis, and especially the constructal law helpful in understanding markets and life.

Pitt T. Maner III writes: 

I found a few more items related to constructal law.

1. I believe Chair would find this website of interest:

2. Also Dr. Adrian Bejan's book Design in Nature

In this groundbreaking book, Adrian Bejan takes the recurring patterns in nature—trees, tributaries, air passages, neural networks, and lightning bolts…

3. Also this is a very good Q and A with Dr. Bejan:

Q: In the simplest non-technical terms, what is the Constructal Law?

A: The Constructal Law is my statement that there is a universal tendency (a phenomenon) toward design in nature, in the physics of everything. This tendency occurs because all of nature is composed of flow systems that change and evolve their configurations over time so that they flow more easily, to create greater access to the currents they move. '

4. Here is a Ted Talk by Dr. Bejan on the Constructal Law of Design and Evolution in Nature



In looking at markets with a view to what would maximize their flow, which I take to be volume, according to the constructal principle, I would believe flow would be maximized by the following:

S&P at 2000 versus 1900

vix at 10

dow at 18000

tbond at 140

bund at 150

gold at 1300

dax at 10000 versus 9764 today

spy at 200 versus 190

bac at 15

city at 50.00 versus 47.3 today

corn at 5.00 versus 4.78 today

naz 100 at 3800 versus 3675

brkshire big at 200,000 versus 190,205

copper 3.00 versus 3.16

platinum at 1500 versus 1472

silver at 20.00 versus 19.4

soybeans at 1500 versus 15.15

Let us see if these predictions are better than random.



 The more one thinks about it, the more one believes that the constructal principle  the principle of least effort, the law of uniform stress, and Lobogola's principle are all manifestations of a general tendency to minimize the wasted energy in a market system. How would you improve on that formulation, and relate it to specific examples, and test it's predictive properties?

Hernan Avella writes: 

One can add that markets minimize wasted energy by always facilitating the efficient transfer from the weak to the strong. This transfer has to run at maximum capacity for the system to flow. Whenever the weak "gets lucky"(Internet, Housing, Gold), flow is inefficient and lobagolas are needed to restore order.



I found this blog post on game theory very interesting.

"Game Theory Is Really Counterintuitive":

Every now and then, I hear someone say that game theory doesn't tell us anything we don't already know. In a sense, they are right—game theory is a methodology, so it's not really telling us anything that our assumptions are not. However, I challenge someone to tell me that they would have believed most of the things below if we didn't have formal modeling.

Stefan Jovanovich writes: 

People often take aggressive postures that lead to mutually bad outcomes even though mutual cooperation is mutually preferable.

Even if everyone agrees that an outcome is everyone's favorite, they might not get that outcome.

Neither of these "insights" (sic) is a discovery that goes against intuition; children learn these lessons the first time they bring a toy to a "sharing" event with other toddlers.

Ralph Vince writes: 

Game theory is the study of what makes us tick, which means we step out of ourselves, observe our own behavior.

The danger with this is that we then draw conclusions about ourselves along the lines of our acting more intelligently than we previously thought; we ascribe to reflexive intellect that which is likely simply mere instinct.

And I would add at this juncture (and perhaps this bears consideration on every thread) intelligence which outsizes one's humility is a prescription for delusion. The smartest hamster on the planet is still just a hamster. 



Lots of experts are convinced talent is that crucial factor separating those who get what they want from those who do not.

But the issue is, as this article explains, that technology has taken a lot of the randomness out of the equation. Ironically, in an era in which ideologues have turned personal advantages into a political movement, we are awash in electronically engineered fixes that make it almost impossible for even the laziest or most clueless to deliver anything other than a polished product.



For historical reasons I manually downloaded the Daily Treasury Statement files and dumped them in a folder. Once there we go through our data mining process and extract what we want automatically. Our process could be made completely automatic, but it has not been a big enough inconvenience for us to code it. For virtually all other data our downloading and extraction is completely automatic.

Several weeks ago I noticed a change in the Treasury's website that irregularly makes me click once or twice more each time I download (which is only once daily). It has puzzled me why Treasury would take something that worked perfectly and change it such that it no longer worked perfectly. It has just occurred to me that the new little two-step process would certainly screw up an automated download and extraction procedure. Also of late the data is less and less favorable to a government that may wish to claim everything is rosy.

Am I being paranoid in thinking that there might be a connection?



 Another very interesting area of research that may lead to important medical benefits in the future is studying comb jellies– a complex organism that is now viewed as coming very early on the evolutionary ladder.

1. "Moroz Lab Research on the Comb Jelly in Nature"

'Comb jellies – a seemingly simple form of marine life — took a radically different path to neural complexity than the rest of the animal kingdom, a finding that could have implications for synthetic and regenerative medicine, new University of Florida research shows.

In an article being published May 21 in the journal Nature, researcher Leonid Moroz and his team decode the genomic blueprints for 10 ctenophore – or comb jelly – species, an analysis that suggests these beautiful sea creatures form the first branch on the animal kingdom's Tree of Life. In a remarkable evolutionary twist, ctenophores independently developed complex organs, neurons, muscles and behaviors that are far more sophisticated than sponges, which previously were viewed as the earliest lineage and do not have neuro-muscular systems.

The findings would reclassify comb jellies, reshaping two centuries of zoological thought, and imply that there are many ways to "make an animal" with neural and muscular systems, Moroz said.'

2. "The ctenophore genome and the evolutionary origins of neural systems" from Nature

"What if we could not only slow the progression of Parkinson's or memory loss in aging, but reverse it?" Moroz asks. "Ctenophores show us that there is more than one design for a complex nervous and muscular organization.

"Nature is much more innovative than we thought."



It is interesting to consider to what extent there are more or less two day moves in the same direction between markets. For example, the two day move in crude has been up on 9 consecutive days. How frequent is it, relative to other markets, taking account of the drift in markets. Is it predictive of anything in the future? Is it consistent with randomness. e.g. number of occasions that the two day move close to close was up versus down on two consecutive occasions.

2009 - present

market      up         down                                                   

crude      487          421

spu        558          342           

bonds     469           407           

gold      509           397           

euro      483           407                                                    

yen       442           463




Do losers average losers?

Averaging down is usually compounding your loss had been my experience.

Boris Simonder writes: 

Or, throwing good money after bad money.

Jonathan Bower writes: 

Averaging in or out looks a lot like hedging/scalping the gamma of an options position. Counter trend if you're short, trend following if your long.

Ralph Vince writes:

How you amend your position with respect to some factor (be it equity, time, what-have-you) is imho the next frontier, and the most productive, to-date, endeavor in portfolio management (and little understood because people had not crafted the tools to study it).

Adding to losing positions is portfolio insurance in reverse. The points bad of portfolio insurance, are points good now in this exercise and vice versa. There is an enormous, fertile, ocean-sized domain to be explored and exploited here, and there is the opportunity to step beyond mere aphorisms in this regard.

Larry Williams writes: 

Ralph, as I understand what he does is the worlds master of averaging positions—but not for short term trades—only trades where he knows the position will show a profit…unlike we short term traders that often buy at all time highs, etc.

Ralph Vince writes: 

I have endured, like Magellan's crew across the Pacific, trying to ignore the fact it was my own urine I was drinking. (Perhaps not fit for dinner conversation at the Captain's table). I did, however, survive intact and repeatedly.

Gary Phillips writes: 

Just because a trade goes against you initially, doesn't mean the trade isn't good. If the conditions that got me into the trade in the first place still exist and I didn't go all in with my full package initially, I'll add to my position. All it means is I was a little early on my initial execution, and when the trade is working, I'll add aggressively.

Ralph Vince writes: 

Yes indeed.

And so I found myself in a hotel room, in November, in Boston, staring at the face of a large margin call, literally seeing stars, that had to be met in a few hours to stay in the game.

With the great Mike Epstein ad my confessor on the phone, I boarded the T in Cambridge to deliver the check downtown and met the call.

It was a defining morning for me. 

Rocky Humbert writes: 

There is always a bit of truth to an aphorism.

For example: The early bird catches the worm.

anonymous writes: 

Rocky, yes, exactly. As a general rule,  averaging down, say, is a good way to get quite buried. What you say about carry, noise, etc. all certainly apply as well as far as I can tell. It IS complicated, hence the reason some sort of framework is required to arrive at conclusions to go about capitalizing on the idea (or, seeking to capitalize on other criteria)

Let's wind the clocks back to early 1987. At that time, there were certain programs pitched that were essentially based on portfolio insurance with a delta calculated assuming a strike at the current index price (in effect, the opposite of an "averaging down"-type of strategy). What was not widely-known of such strategies, is that losses incurred would take extremely long to recoup. The very programs pitched as ideal for retirement accounts, clearly were anything but (i.e. they were not crafted with an eye towards being at equity highs at some specified future point in time).

On he contrary, to be delta=1, 100% invested, is to be at very close to the full-out expected (asymptotic) growth optimal fraction, and endure all the lovely barbs and buds that has to offer — but who is operating based on this? Clearly there are benefits (early-get worm!) but there is far more to it than the aphorism suggests, and I think there is a lot of low-hanging fruit to be had here but, as you point out, many real and serious considerations.



 The chair reminded me of the idea of related markets.

He used oil as an example. That got me thinking.

I understand it can be a fool's errand. Time spent analyzing oil prices beyond 90 days can be time wasted.

However, oil is currently in backwardation. After this summer, prices are in a steep and consistent decline. WTI approaches $80 in 36 months.

This trend suggests strong macroeconomic forces are framing forward prices. I'm not sure I understand all those forces.

Is it oversupply?

Is it Keystone XL or related oil trains?

Is it deflation?

Is it a slowdown in the economy?

Are production costs declining?

Are investors dumping ETFs or index funds?

Isn't it odd that the crude backwardation is almost zero at the time of the expiration? Some body is profiting handsomely from the positive carry each and every month….



 I visited Nitmiluk National Park in the Northern Territory of Australia over the last few days, and in particular Katherine Gorge. One thing that stood out is the absolute calmness of the place. In that lay the strength. This will change of course in the wet season when roaring rivers floods and waterfalls prevail. Much like markets, slow low volatility trends exhibit strength, but with Larry’s seasonals and a shift in the prevailing wind, much may change.



 A protein, named after the youngest of the Greek "Fates" responsible for spinning the "thread of life", is being studied for its beneficial effects on longevity and cognitive faculties. One wonders what the implications and positive effects of a 6 point or more increase in IQ might be for individuals or societies–a fun thought experiment.

1. "The 3% Solution"

What they found was startling. KL-VS did not curb decline, but it did boost cognitive faculties regardless of a person's age by the equivalent of about six IQ points. If this result, just published in Cell Reports, is confirmed, KL-VS will be the most important genetic agent of non-pathological variation in intelligence yet discovered.

2. A scientific paper on the subject

Whether factors that prolong life can also prevent, delay, or counteract neural dysfunction associated with aging and disease is a critical question with therapeutic implications…



 1. Marion Tinsley, the greatest checker player of all time, had a favorite proverb of Wiswell's: "Moves that disturb your position the least, disturb your opponent the most. I believe it has a wide application in all games, and markets. I mentioned it to my new friend Ken Roman and he immediately said, "that's exactly what General Foods failed to consider".

2. One is reviewing the invaluable and unique cache of 10,000 proverbs that Wiswell faithfully wrote for me over a 20 year period, 20 to 40 a week. They are magnificent and timeless. It is unfortunate that few except kids play checkers anymore in the US, and that the British Empire where checkers was king has faded, as they would make an invaluable contribution to posterity.

I pick out one I like at random from the first of four 200 page books of them I have: "after you lose a tough game, there is only one thing to do: set them up and start all over again". Right below it is: "No master is so great that he has never lost, and will not lose again" and "the player who records his losses today won't repeat them tomorrow" and "the player who never takes a chance may be taking the biggest chance of all".

3. Crude and Gold are in a negative feedback loop with each other as are so many other pairs of markets. Does anyone agree with me that 95% of TV advertising is done for entertainment and not selling, and that the worst commercials are those of Geico which has the same superior, supercilious contempt for its viewers that the sage himself has for anyone else trying to improve his lot or make a fee in the world.

4. It is difficult to maintain one's equanimity on days that the Fed minutes are released knowing that the minutes are distributed to 100 important bank executives and public relations firms and other flexions on a "need to know" basis hours before it's released to the public. At least one can bite into the negative serial correlation that pervades such releases.

5. The movie "The Lunch Box" contains a beautiful depiction of food distribution methods in India. "Harvard studied it and found it totally efficient and flawless". And a beautiful literary romance adds to the poignancy.

6. The play "Act One" currently at Lincoln Center has an uplifting theme and heroic view of mankind that is worthy of the 5 successors that dominated musical theater for the next 30 years, Kaufmann, Rogers, Hammerstein, Hart, and Loesser. As Hammerstein said, "I never could write anything that didn't have a positive and optimistic view of humanity in it".

7. Corn and crude has been bouncing around the round numbers like the old ping pong matches where the women sometimes played a point that lasted 30 minutes, during which Marty Riessman could start and finish 3 of 5 match before the women finished the first point.

8. The Knicks will never rise about 500 in the standing until they get rid of the worst player in the league, JR Smith, who has an unholy friendship with Melo that exacerbates the weaknesses of both.

9. When you trade over night, if they give you a small profit, you would have made 5 times as much if you held to the close.



As for drawdowns, one has unrivaled experience with same. One would never play poker with men named Doc i.e. don't trade in inactive markets. Do you really wish to trade against people like Jeff who know their markets inside out including the freight car loadings in Kansas City each day. One would extend that to "don't trade markets where the top feeders take out 8 or 10 billion a bank, i.e. currencies. Whichever way you go, the market will go opposite with volume.

Anatoly Veltman writes: 

I respectfully disagree on staying away from FX:

1. Very liquid
2. Not a zero-sum!!

The only prohibitive thing is a very short-term orientation, given revelation of Virtu prowess. Virtu's record of 1282 straight wins must not be alone within the market-making community.

anonymous writes: 

I will go with Vic. I haven't seen, if not a very few, winners in Forex either big or small, except of course those with unlimited funding.

Larry Williams writes: 

One more with Vic with some hard evidence…look at all the real $ trading contests the Forex and Option buys never do as well as the future traders.

Hernan Avella writes: 

Regarding the Forex-Drawdown discussion:

There are 10-15 top feeders in spu that average 400K/day, don't play their game (See Andrei Kirilenko's paper

I found that to make consistent profits in Forex you have to completely forget the methods that made you money in spu, bond et al.

I know 2 guys that make consistently good money in Forex (~ 8 years). It's the only market they ever traded, they have an excellent quote aggregation software and they specialize in "momentum ignition".

anonymous writes:

In many games a good reason for playing tougher opposition is not to win, but to learn what can't be learned beating up on amateurs. Just got to keep the cost of tuition at a reasonable level.



It has been mentioned many times by many veterans not to trade when unwell. Although that's difficult, especially as a setup trader, I concur. If you lose, your immune system is no doubt compromised further by the bad news and your mood certainly does not improve.



 The term "pro business" is dangerous, and is often the first step towards some combination of crony capitalism, state subsidies to large businesses, and eventually naked fascism. If it means reducing business regulations and red tape in general, I'm all for it.

Someone like Modi is certainly a great improvement compared to the typical Indian flexion who is more from the government "class" vs. business "class", as he himself is a former businessman. On the other hand, when your claim to fame is bending over backwards to provide some conglomerate with enough incentives to build locally you are likely at the very least to start a subsidy race to the bottom, and eventually increase inequality, both in power and income, to the point where socialism will again seem like the obvious solution. As I firmly believe that what he should do is enforce property rights and reduce all manner of subsidies and welfare to individuals, local governments, and corporations only time will tell how well this will play out on the national level. In the medium term, just cutting through the red tape, reducing wasteful spending, and setting some abstract "pro-business" tone may be enough to start an overall economic growth spurt, which is why the Indian stock market responded.

Rick Perry is a crony capitalist by nature, but he just "incentivized" the Toyota headquarters to move to Texas for California, and he is certainly better for unemployment than the power elite in the latter state. But it may all still end very poorly in the long run.

Kora Reddy writes: 

For the Indian elections there is hope of a stable government with further development a theme this year (a toilet at every home is one of the Modi's fabricated promises this year). Take it with a pinch of salt, all my biased qualitative comments against the right wing party who won (I supported the national congress/non right wing party equivalent/ branded as dynasty politics in India/losing party, but the USA has no problem, when it might be Bush vs. Clinton in 2016 ) …

Anyway the S&P 500 index 3 months prior to election date, (Tuesday after the first Monday in November) since 1950:

#  16
% wins       56%
avg 0.39
med        2.34
avg win    4.61
avg loss   -5.02
max loss    -21.99
stdevp   6.78
t-test     0.23

vs any 62 trading days period

# 16134
% wins    65%
avg 2.09
med 2.37
avg win    6.13
avg loss   -5.42
max loss  -40.60
stdevp      8.91
t-test     29.83

It is bearish (as in it under-performs, slightly by 20 basis points minus that 2008 out-liar) in the USA.

Below are the moves 3 months prior to elections till election date:

Election    SPX    t-3mth    SPX    chg %
06-Nov-12    1428.39    08-Aug-12    1402.22    1.87
04-Nov-08    1005.75    06-Aug-08    1289.19    -21.99
02-Nov-04    1130.56    04-Aug-04    1098.63    2.91
07-Nov-00    1431.87    09-Aug-00    1472.87    -2.78
05-Nov-96    714.14    07-Aug-96    664.16    7.53
03-Nov-92    419.92    05-Aug-92    422.19    -0.54
08-Nov-88    275.15    10-Aug-88    261.9    5.06
06-Nov-84    170.41    08-Aug-84    161.75    5.35
04-Nov-80    129.04    06-Aug-80    121.55    6.16
02-Nov-76    103.1    04-Aug-76    104.43    -1.27
07-Nov-72    113.98    09-Aug-72    110.86    2.81
05-Nov-68    103.1    06-Aug-68    97.25    6.02
03-Nov-64    85.18    05-Aug-64    82.09    3.76
08-Nov-60    55.11    10-Aug-60    56.07    -1.71
06-Nov-56    47.6    08-Aug-56    49.36    -3.57
04-Nov-52    24.6    06-Aug-52    25.44    -3.30

perhaps different election manifesto's for different parts of the world ?? 



 "The Strange, Secret History of Isaac Newton's Papers". It's a must read.

Richard Owen writes: 

"But then at the same time he left us 10 million words, which is one of the most extensive of any scientist, or even any one person."

You need to live until about 90 and be averaging about 400 words a day from the days you're out of short trousers. Albeit the 10m seems an exaggeration since much of it was transcripts of others stuff.

anonymous writes:

"Academics have spent much time assessing Mr Niederhoffer's papers in light of his contribution to quantitative finance. It has surprised many that he had a burning obsession with furniture, being that he constantly referred to chairs in reverential fashion. He was also fascinated by forearm strength, regularly making reference to the world's grip. Most surprising of all was a seeming chemical discovery in terms of a compound called flex-ions. Sadly the papers do not elucidate and scholars continue to debate the implications."

Victor Niederhoffer writes: 

The Newton was very good with the alchemy. And I have a few of his letters where he transcribed the alchemy. As for the Niederhoffer, he has an unquestionable shibboleth against the charting, and the trend following, which led to his premature death on many occasions.



 This Flak Evading anti-aircraft Fire World War II training film is a very interesting video for the history buffs. Trading lessons abound.

Stefan Jovanovich comments:

Since I don't trade and always hated school, I leave the question of lessons to the rest of you. American bombers in WW II had no effective means of avoiding anti-aircraft fire. The abysmal tactical doctrine of formation flying combined with the ridiculous mechanism of the Norden bombsight combined to make odds of survival horrible. For a full tour of 25 missions the bomber crews who served before 1944 had worse odds of coming home alive than those given to the Marines who landed at Iwo Jima. The British had the good sense to only fly at night since area bombing was all that gravity bombs could achieve anyway in terms of accuracy. That is why to this day they are called "dumb".



 Have you ever heard of Oklo Nuclear Reactors. It is a very interesting subject.

"2 billion-year-old African nuclear reactor proves that Mother Nature still has a few tricks up her sleeve"

The objects in question are called the Oklo reactors, naturally occurring nuclear reactors named for the West African region of Gabon in which they reside. They've been dead for a very long time, probably over 1.5 billion years, but the evidence of their prior action is unmistakable. Sometime a bit less than 2 billion years ago, and lasting for about 300,000 years, the Oklo reactors held a series of stable nuclear fission reactions.

There has only ever been one natural nuclear reactor found, but study of how it worked, and why, is still informing nuclear decision-making to this very day.

 "Oklo Reactors and Implications for Nuclear Science"

"Unravelling how the geosphere and the biosphere evolved together is one of the most fascinating tasks for modern science. The Oklo natural nuclear reactors, basically formed by cyanobacteria two billion years ago, are yet another example of the surprises to be found in Earth's history. Since their discovery over forty years ago, the reactors have provided a rich source of information on topics as applied as can nuclear wastes be safely stored indefinitely to topics as esoteric as are the forces of physics changing as the Universe ages? "



Stories about the bid decline in Nasdaq versus SPU are beginning to make the rounds, from Bank of America no less, and one raises the clarion cry of "what does it portend? have you tested that?".

 Nasdaq June 2014 Future



 Wealth Creation by Bartley Madden provides a systematic way of looking at the performance of individual stocks. He believes that values are determined by 4 things. The return on past capital, the growth of assets, the rate of drift from innovation versus competiton, and the stock price itself. He gives examples of how to apply these measures to Apple, Bethlehem Steel, Digital Equipment, Eastman Kodak, IBM, Kmart, Nucor, Medtronic, Walgreen, Donaldson Company. He believes that lean management is one of the keys to success and contrasts Toyota with Bethlehem as examples of the best in lean versus the worst. In 1950, 7 of the top 10 highest paid executives in America worked for Bethlehem. The vice presidents had office windows in two directions. Union rules made them uncompetitive.

He applied these methods at a Hold affiliate which was bought by Credit Suisse. His methods are apparently widely used by many institutions as well as by Credit Suisse. All his ratios which he suggests be considered I n a feedback look must be tested. The Schumpeterian drift from competition is hard to measure. As is the return on future assets. However, the ideas make a lot of sense and provide a good template for analyzing a company.

He is a champion of free enterprise and the benefits that competition and innovation can bring to stockholders and consumers. There are interesting references to behavioral biases and shortcoming in the capital asset model. He recommends for example a visit to the San Francisco Museum of Science to see all the Ames exhibits on lapes in visual perception. I have followed his career for some 47 years when I first noticed him as a star at Berkeley.

Bartley Madden responds: 

As to discount rates, the key idea in the Wealth Creation book is on p.89 … "This systems mindset leads one to the conclusion that the assignment of a discount rate is dependent on the procedures used to forecast [firm's long-term] net cash receipts. This is particularly relevant to models incorporating standard ways of forecasting future fade rates based on company characteristics. In contrast, mainstream finance relies on CAPM-based calculation for the discount rate.. these discount rates are then parachuted into valuation models without regard to how users make net cash receipt forecasts.."

I am arguing that the same market-derived discount approach for bonds (yield-to-maturity) be applied to stocks. Hard part is to maintain a monitored database of forecasts of firms' future net cash receipts .. obviously easy for bonds since we know the anticipated net cash receipts (interest and principal). Long term future fade rates of economic returns (return on capital) and reinvestment rates can be assigned based on firms' observable characteristics. For example, all else equal high return companies with higher reinvestment rates fade (regress to cost of capital) faster than low growth firms.

All of this is easy for bonds and we see that all else equal, higher (lower) credit rating (based on observable characteristics) leads to lower (higher) discount rates. For stocks, high debt loads and lower liquidity tend to result in higher demanded discount rates. This approach is rarely attempted in the academic literature because it requires enormous effort to build a database suitable for this type research.

Bart Madden 



 A Churchillian view of the market:

The future course of the market turns on its ability to absorb this stock. After this almost automatic recovery, following a semi- panic break, the market usually sells off again, slowly, day by day, and not uncommonly approaches the old low level which the first fever of selling had established. It is not true that such breaks necessarily mark the end of major movements, although they have occurred at such times."

-William Hamilton, WSJ, April 4, 1926.

One admires the colorful language "the fever of selling", the semi-panic break, the ability to absorb the stock after the almost automatic recovery. And one thanks Alan Millhone for sending me the book The Dow Theory from which this coloratura is taken. Mr. Hamilton has none of that terrible haughtiness and chronic bearishness of his unworthy successor Mr. Abelson, having passed away on Dec 10, 1929, after riding down a 50% decline in the market in the preceding two months with his daily forecasts in the WSJ, but his writing is Churchillian, and although nothing is tested in what he says, he elicits many interesting hypotheses, pregnant to this day. I will take the liberty of transmitting some of his colorful prose and or leading ideas subsequently.

Also, always to be remembered, as Hamilton said on March 17, 1909:

It cannot too often be said that the road to ruin lies in dogmatizing on charts, systems, and generalizations. Trading on any such basis is Gambling as distinguished from legitimate speculation. It is no more defensible than an attempt to break the bank at Monte Carlo with one of the innumerable systems which have tempted weak human beings since the prehistoric ages when man first learned to count beyond the number of his finers and toes… stocks have been for sale on any recovery.




A new Bong Joon-ho is in the offing. Chilling news for his aficionados.

SNOWPIERCER takes place in 2031, 17 years supposedly after the world has become so intolerably warm that scientists, in a bid for immortality and man\kind's enduring thanks, have manufactured a substance that can cool us down. Alas. The coolant does such a bang-up job that the Earth freezes, and nearly all life ends.

The dystopic SNOWPIERCER begins on an infernally lengthy train bearing the last remnants of living beings. The hellish conditions aboard the train, run by a perpetual motion engine in the very front of this grim, dun-covered ark of humanity's remains, are what we see first, and for the better part of an hour.

A class system has clearly evolved, though the resident passengers we see and empathize with are not fully apprised of how deep go the class divisions. In a status-cleaving that to this reviewer echoes the horrors of the DPRK and its starving, abused Korean populace, the abused inmate/inhabitants of the back of the train are given 'protein' gel bars–rubbery black yuckiness incarnate. But it is all there is, they think.

Every face of every passenger/inmate is filthy, and many of those present have a peculiar lack of limbs, cut off from above the elbow, or only one leg. Like the inmates of the Concentration camps, the luckless riders are herded and forced into attendance cadres, rank upon rank. Those failing to sit or stand on command meet the bark of the visiting uppers, threatened with machine guns.

It becomes clear that the rulers of the train, who carefully avoid any nomenclature that would delineate their role as overseers and dispensers of goods or otherwise, come from "the front" of the train. They arbitrarily punish the grungy mass of leftover humanity, remove those of their children that are particularly appealing, and on occasion simply shoot those who get out of hand. The worthier privileged are safely in front, near water and real protein, real coats, real beds. Rebellion, revolution, dissatisfaction rive the back-people, while their betters are imperturbable, save for the slightest contact needed to scrape off the cutest young and raise them for their pleasure.

Stalwart Chris Evans, in black beard and hair, shies from becoming the leader of a desperately needed insurgency. He has all his limbs as well as that profoundly handsome profile. A wise elder, one who has been clipped by the overlords, judging by the evidence of his iron peg-leg and ratty attire, is John Hurt, who tries to appeal to the reckless or intrepid to fight for more, to "go to the front."

Tilda Swinton, in a star turn, represents one of the privileged frontpeople, but her PR-polished body language and out of touch backpedaling words seem to imply comfort and all-is-well, despite the evidence to the contrary. She is a feast of eccentricity, bizarre in her white Nehru-like suiting, her pinned-back russet hair, her outsize wide-mouthed assertions meant to comfort that all will work out. She is the bromide. But the crowd does not buy her threat-laced brand of propitiation, denial, awkward well-intentioned there-there's.

The film proceeds to depict the car by car revolution, the fight-back thugs who shoot randomly and ferociously at the men and few women braving the advancing train cars.

We see the evident transmutation from brutish environs to whimsical gardens, schoolrooms taught by the amusing and serpent-like Alison Pill as agenda-driven instructor of the brainwashed children in her command. Pill's bright, wide, even innocuous face is a denial of the seething mission of her teaching duties. We see the water-cars, central to the continuation of life aboard the rushing train. Gardens cars. Club cars and their dissolute druggies and drinkers, their elegant fashionistas and stewards. We see windows, and the thin sun through the glass that is denied the backmost cars, the groundlings revolting from their wallpurgisnacht lives. We are sickened by the evident madness of the train's "chef," whose base material for the gelatinous bilge the back-people are provided appears to be nauseating dead ingredients too vile to identify. Better, the rebels realize, not to ask, or peer too long into the cauldron of muck.

And so it goes, with axe fights and gunfire and resistance and unsparing ghoulishness, they advance, losing many. There are many casualties along the route. We pass cities mantled in icy towers and peaks of global warming—ha—unlived and unlivable.

And there is the always-intriguing Ed Harris, the soignée plutocrat's plutocrat, again in a position of major manipulator, as he was in TRUMAN. Asian action is engaged in the persons of 'hero-warriors' Ah-sung Ko, Kang-ho Song, and Steve Park. And tough Octavia Spencer fights along with the men for her liberty.

For some, this bleak dystopia might be too wrenching to stomach. To be fair, many reviewers, fans of award-winning Korean Bong Joon-ho (The Host [2006]; Mother [2009]; Memories of Murder [2003]) were not turned off by all the gore and mayhem, as this is, as many now know, par for the course with Bong. Tarantino, that understated maestro of idyllic serenity and uncomplicated amatory delights, considers Bong works "masterpieces." The passage of the film, like the unspooling of a similar negative utopia, ELYSIUM, from 2013, is not hard to predict. Fight the evil overlords! Claim one's rights, better conditions, real food. There is little suspense, frankly. One watches it all unroll, but there is not that doomy foretell spasm we so enjoy in the true masterwork. But perhaps fanboys of this director, and this genre, clearly know the ground-rules, and suspense and surprise are not foremost on the menu.

In the end, it was fairly evident that this was a parable on the horrors of closed societies, and as Bong is Korean, North Korea seemed the logical target of his venomous saga of denials, revolution and take-over.

The time frame disturbs, as it is only 17 years hence. Is this North Korea or another dictatorship of abysms, is it the future of the United States, with well-meant but unsupported non-science propelling the train of state to a desperate catastrophic end? Or is it a tale of lefty economic upheaval/rebellion?



 I have a Roomba vacuum cleaner. This article explains how it navigates when cleaning a room:

The first thing Roomba does when you press 'Clean' is calculate the room size. iRobot is a bit hazy on how it does this, but HowStuffWorks believes that it sends out an infrared signal and checks how long it takes to bounce back to the infrared receiver located on its bumper. Once it establishes the size of the room, it knows how long it should spend cleaning it.

Possible market application: Check the depth of the order book.

When HowStuffWorks tried it out, we found that Roomba starts cleaning in an outward-moving spiral and then heads for the perimeter of the room. Once it hits an obstacle, it believes it has reached the perimeter of the room. It then cleans along the 'perimeter' until it hits another obstacle, at which point it cleans around it, finds a clear path and proceeds to traverse the room between objects like walls and furniture until the allotted cleaning time is up.

Possible market application: Bounce between the bid and ask for a while, then trend for a while to see how many bids or offers actually get hit. When volume dries up, try the other direction. Conversely, if there is an "obstacle" of deep liquidity at a specific price, try the other direction.



 "I understand your here to collect your share?" said the Keeper.

"My share of the taxes, yes," said the Visitor, "Piketty sent me."

"Are you sure you want to tax capital? I mean, really sure?" said the Keeper.

"It's only fair," said the Visitor.

"Well, to register and receive you must put on this headset," said the Keeper, handing over a kind of halo object, "it will read your Identity Number, calculate your distribution and begin making a fair deposit."

"Perfect!" said the Visitor, and popped the contraption onto his head. The Keeper stared at him directly, a thin smile on his lips.

The Visitor pressed the power button on the halo. "Aaaah! No, please. What." The Visitor spasmed wildly. "Aaargh! Oh my God! Please, please." The Visitor's flight reflex kicked in, his muscles began to shake violently, bringing him to his knees. The tension in his bladder collapsed and piss soaked his pants. The Visitor writhed on the floor, "MAKE IT STOP! What is this?!"

The Keeper quickly pulled a handset from his pocket and clicked the interrupt. Nobody so far had completed the deposit in full. The Visitor fell to the floor, exhausted. With his eyes blood shot, watering, the Visitor cried out, "how dare you, what was that torture? You fiend! This is criminal."

"You asked for your share," said the Keeper, "and your bank account is in credit now. Your share of the capital taxes have been delivered, proportionately."

"Are you some kind of SICKO?" screamed the Visitor.

"No. You see, you asked for your fair share. We decided in transferring capital taxes, we should also make an additional deposit to keep it balanced. We gave you a concentrated dose of every sleepless night, strained relationship, cheating business partner, every lie heard, every deal that didn't close, every set-back, every busted asset, every temptation skirted, idea stolen, regulatory intervention, bankrupt supplier, every loss adjusted insurance policy, every giant competitor… all of it. And there's much, much more. Should I complete the deposit?" asked the Keeper.

The Visitor staggered up to his feet, raised his eyes to the Keeper and paused to speak. But nothing came. Instead, he ran straight for the door.

Jared Albert writes:

I think the basic problem with Piketty style wealth redistribution is that everyone wants to read poetry, while no one wants to take out the trash.

That effort is often necessary for wealth, doesn't answer his basic point that in a fairer world we'd help those who strove and failed as well.

Victor Niederhoffer writes: 

Yes, Mr. Albert has encapped the idea that has the world in its grip. When I played ball, I always wished that my opponents would share their points when they beat me. There should have been a law. 

Jared Albert replies: 

A lot of effort has gone down dead ends in battery technology. Those efforts uncovered what doesn't work, and provided methods that may end up pushing some methods forward. Those failures benefit all of us.

According to an ideal Piketty model, the losers should be compensated in some form by winners as they helped move the sum of the effort forward.

I don't know for sure obviously, but I doubt you can find a nobel laureate who doesn't feel that they stood on the shoulders of others.

My point is that in general people are dis-incetized to try any of the routes if their reward has nothing to do with effort.

Stefan Jovanovich writes: 

In a fairer world we do help those who strive and fail; that is how successful teams (right now and for the past 5 seasons under Bruce Bochy, the SF Giants) and families (the anonymous R-Man's to take one of many examples from the List) and enterprises all work. As with most Leftist ideas Piketty has a valid complaint; as with all ideas based on the sacrifice of individual freedoms for collective good his Marxist solution is catastrophically bad. Some people do want to take out the trash rather than let it pile up, but no one does it for very long for the sake of strangers without getting paid in money that he or she gets to keep and spend. That is why inventive and naturally poetic people in Cuba live in a world of uncollected trash and free medical care where the patients bring the medicines to the doctors. But it is fair — everyone lives under the same collective incentive to read official poetry.



 Placed Insights calculates that people in America eat 17 Big Macs a second, 1,020 a minute, 61,200 an hour, 1,468,800 each day and 536,112,000 a year; this amounts to $2.4 billion in annual revenue from bread, beef, pickles, cheese and ketchup for the McDonalds corporation and its franchisees.

Dunn Warren Investment Advisors
thinks the Big Mac is a better measure of "inflation" (yet another word, like capitalism, that describes a real thing by giving it a unicorn label) than the C.P.I. A CFA at that firm, James Cornehisen has, with the help of his assistant, regularly tallied the price of a Big Mac at 30 McDonalds restaurants throughout the U.S. They find that the current price of the hamburger ranges from $3.78 to $5.28 with the average price being $4.45. This is an increase of 9 cents from what they found to be the average price January 2014 - a rise of 2%. However, the current average price is a drop of 11 cents (a decrease of 2.4%) from the average price in May 2013 which was $4.56.

Rocky Humbert writes:

The Economist's Big Mac Index has caused indigestion for foreign currency traders for many years.

The Big Mac Index might work a bit better to demonstrate regional differences in the cost of living within the USA. But as a general indicator of price, it suffers for the substitution problem. (That is, if the price of beef rises, people will switch to chicken.) It also assumes the premise that McDonald's has a fixed profit margin on Big Macs.

But fortunately (or last I checked) there are no hedonic adjustments necessary for 2 all beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun." (Any speclister who has no idea what I just wrote has not done enough backtesting on their trading models.)



This article made me think about what ways markets are presented to alter whats actually underneath.

"Colin McDowell dissects the anatomy of fashion":

In The Anatomy of Fashion McDowell says he wanted to explore the obvious, but often overlooked, foundation of fashion: the human body. Starting from the beginning of recorded history and carrying through until the present day, he catalogues the various ways the body has been fetishised, forbidden and used to excite people through the ages. As McDowell writes in the introduction: 'Clothes do not simply conceal the body: they alter it. Pads make shoulders wider; bras change the silhouette of the breasts, corsets and belts provide narrower waists; collars make necks longer and more slender; vertical stripes elongate the body; dark clothes appear to slim. These physical trompes l'oeil have an emotional counterpart: if we think we look good, we feel good.'



 Whether it is scientists who have worked on a issue for years, a man whose marriage has broken up after 25 years, or an investment manager who is used to pocketing big profits on fees and no matter the fund's performance will always find a way to underpay his staff, so much depends on personality types. Man is not the most flexible of creatures. Ego and bravado no doubt play apart. The setting of one's mind by repetition becomes a formidable force.

Could it be with Manchester United that the players group had mentally prepared for the exit of sir Alex Ferguson and after his tight reign had prepared for a "break"? No matter the coach that followed, the result would have been much the same. I wonder if traders make the same mistakes with profit and loss curves and goal setting, creating the gremlins that brings their trading down.

Jordan Neuman writes: 

In his baseball analysis, Bill James conjured the "Shotten Syndrome," named for mild-mannered Burt Shotten (well played by one of Barney Miller's colleagues in the movie 42). The theory was when a relaxed guy followed a taskmaster, in Shotten's case Leo Durocher, the team would respond positively.

In trading the analogy would be hewing too closely to a fixed idea of one's trading. Whether that is limiting the type of contracts one trades, long or short bias, long or short premium, it tends to eventually narrow the processes of the mind. Of course straying from one's area of competence is a separate problem, but who said this is easy? I have been running my own fund for 16 years, and while I wish I could have more than a few "pitches" back, as the low-level Air Force guy said in War Games, "#@$%, we're still here!"



I have a question for the counters (and Dr. Z):

When the S&P makes a new, all-time high, what has been the historical reality of additional closing higher highs in the subsequent 1, 5, 10 days? The theoretical answer is obvious. But what is the historical reality?

My gut says that there will be more additional closing highs than the theory predicts. But what is the real answer?

Kim Zussman writes:

The attached plots waiting time (in trading days) between new all time highs in SP500 (1960-present).

Obviously you're more likely to get a new ATH tomorrow if there was one yesterday as opposed to 100 days ago.

Over this same period new ATHs were followed by another ATH the next day 56% of the time. This is slightly higher than drift, as over the period up days occurred on 53% of all trading days.

Victor Niederhoffer adds: 

Perhaps this will add some stats to Rocky's question. Since 1996 there has been a remarkable consistency to the distribution of moves after big highs. For example, after 1000 day highs, there were 172 of them. The expectation the next day was - 1/2 an S&P point. Or about minus 1/10 of 1%. The average duration to the next 999 day high was 2.3 days. The expectation 3 days later was about -2 points or minus 1/3 of 1%. On average, considering that you were not in a 1000 day high, the average duration to the next 1000 day high was 58 days. The expectation was 2/10 of 1 big point the next day or 2/10 of 1% a day. The expectations for 100, 200, and 500 day highs are remarkably similar, i.e. random to slightly, slightly, insignificantly, meaninglessly, negative. All this is based on continuously adjusted futures data so that the actual changes, not meaningless adjusted changes, were used.

Kora Reddy writes:

I am doing the below study on dividend adjusted $SPY ETF closing prices (regarding continuous future contract prices and I need an opinion on how to avoid what the chair says "it's better not to roll". Do we trade the next month expiry futures while taking the signal on current month futures on the expiry days…) but if after closing on an ATH, and then if $SPY presents a dip after 10 trading days, at close, the expectation from t+10 th day to next 10 trading days (non-interleaving trades).

#    24
% wins   63%
avg     1.05
med    1.21
avg win 2.99
avg loss       -2.18
max loss      -5.41
stdevp        3.29
t-test  1.57

For the dip presented after 20 trading days after $SPY closes at ATH, expectation for the next 20 trading days (non-interleaving trades).

#  15
% wins   80%
avg % 2.54  ( vs 0.8 % for any 20 trading days , or 1.26% barring the trades in 2013 year  )
med % 3.34
avg win %      4.03
avg loss %        -3.41
max loss % -4.96
stdevp  3.61
t-test 2.72

below the 15 prior trades since Jan 2000 ->
Date    t+20    t+20 %
01-May-14    ??    ??
27-Mar-14    1.71    0.93
24-Jan-14    6    3.37
12-Dec-13    4.5    2.55
15-Oct-13    7.19    4.28
15-Aug-13    2.9    1.77
05-Jun-13    0.85    0.54
25-Feb-13    6.48    4.46
10-Oct-12    -4.96    -3.57
02-Nov-07    -3.06    -2.32
09-Aug-07    0.59    0.47
07-Jun-07    3.92    3.05
02-Mar-07    3.34    2.8
05-Jan-07    3.71    3.07
14-Apr-00    7.12    6.82
14-Feb-00    -2.2    -2.06

that 1-May-14 trade is the result of $SPY closing at ATH on 2-Apr-14 and 20 trading days later $SPY closing lower, as on 1-May-14 ( lost -0.29%).

ps: no major edge for the dips presented after 1/2/3/4/5 trading days after $SPY closing at an ATH.

Victor Niederhoffer replies:

Just adjust algebraically. Or do it the best way. Maintain the original prices for percentage calculations, and work with algebraically adjusted changes for all other price changes and independent variable calculation. Fortunately, the market is evil, and likes to take the same amount from the poor lower feeders all the time. So it moves 5 or 10 bucks with impunity whether its 850 or 1850 with the same frequency. 



 I've been to some strange places on earth but when I landed in the LA county jail for jaywalking I thought this is the end. First, two hundred of us were jammed into a large room with one open toilet where the feces literally overflowed onto the floor. I sat on the floor near there so people wouldn't bother me. A guy went into convulsions nearby and they just let him twitch for 20 minutes before unlocking the door and bringing in a stretcher. Then we were herded in groups into a smaller room where they gassed us through the ventilation with chloroform as they threw our cage assignments onto the floor. For the next three days we were shuttled from cage to cage every three hours not knowing if it was day or night in the underground 2000 person facility. There was a baloney sandwich every 8 hours when they made us sit crotch to crotch but on a long bench to eat. The guards warned us that if any of us acted up the others should jump him. My last cell was the size of a small bedroom where I was the only white but we all stood because there was no room to do anything else as a loudspeaker crackled our court times.

I hadn't jaywalked and stopped traffic on the 2 am streets as the ticket said, so I planned a defense. Next I was daisy chained with a line of other inmates and marched through a dark tunnel and suddenly into a huge bright courtroom. The judge looked like Groucho Marx. "Well, gentlemen, I have good and bad news," he intoned. "the bad news is the jail is overcrowded; the good is that you are all going to be released with 'time served' if everyone pleads guilty." I looked around and knew these guys would shiv (stab, knife) me if I said otherwise, and we all answered guilty. Hours later they examined the Mickey Mouse tattoo on my left shoulder to make sure it was me, and I was released onto the streets of LA on July 4th.

Tim Melvin writes: 

In the misspent days of yore I was a traveling door to door book salesman for several years. One of the drawbacks of this profession was being subject to arrest in various cities and towns that had some sort of ordinance against door to door sales. As a result I got to experience many of our nation's jails and lockups for a brief period of time. LA County is second only to Albuquerque for filthy and horrid conditions. For those keeping score Boulder Colorado was the best. I was there for a weekend and took a macrame class and caught up on my reading. 



 Have you seen this interesting graph of debt/GDP ratios of the G7 countries since 1946.

It's puzzling to me that in 1946, UK had 270% debt to GDP, and US and Canada had >100%, while at the same time Germany, Japan, and Italy had almost no debt.

I'm sure the allies didn't want another Versailles, but still this seems like an extreme outcome.

David Lillienfeld comments: 

Germany, Japan, and Italy also had almost no assets. Their currencies were worthless, hence no debt. I'm guessing that the same phenomenon occurred with the Confederacy as the end of the war approached.

Stefan Jovanovich retorts: 

David's answer is - alas - a muddle. The currency and the debt of the government of the Confederate States of America was officially worthless after the surrender at Appomattox. (Read Section 4. of Amendment XIV of the U.S. Constitution.) So were Germany's debts, currency and laws after the formal surrenders signed by the remaining German General Staff officers with first the Americans and British and then the Soviets. Germany, like the Confederacy, literally disappeared. That is why the line for Germany beginning in 1945 is flat at 0 until the reconstruction loans that were part of the Marshall Plan took effect in 1948. What is interesting is the other flat-line - the one for France. The Vichy French government never formally surrendered; one of deGaulle's marvelous bits of arrogance was to assert that Vichy itself was not a government and could have no recognition. Somehow that also became the rule for the debts of the Third French Republic (I don't know exactly how) as well. After the war, their debts, like those of Vichy and Germany, seem to have legally vanished. When deGaulle took charge after the Normany landings he was meticulous about asserting that he represented the Provisional Government of the French Republic (GPRF), not the Third Republic. Yet somehow the financial assets of that Republic - specifically the gold on deposit with the Federal Reserve bank - were "saved" and became the property of the new Fourth Republic that came into existence after deGaulle resigned in 1946. Italy, which had overthrown Mussolini and signed an Armistice with the Allies, and Japan, which retained its Imperial Rule, both continued to exist as governments; their debts were restructured but not officially abolished.

FWIW, Charles, I don't think the the parts of the graph that deal with the immediate aftermath of WW II have any meaning. They are another attempts to put prices on things for which there is no market. The statistics for the U.S. GDP during WW II are another example. As Higgs and others have pointed out, the "recovery" of the U.S. economy in WW II cannot, in any sense, be measured in dollars. We know what the U.S. "spent" but that money cannot be considered an "investment"; the factories had no value except to make things that only governments would want to buy and this was at a time when all the governments of the world, except the U.S., were broke.

 So, how did the U.S. "recover"? Sewell Avery and others conservatives feared that hard times would return; Truman was certain that the U.S. would need to return to Hoover and Roosevelt's managed economies. They were both wrong; just as the voters in Britain threw out the existing government, the voters in the U.S. decided that whatever they wanted, it wasn't what they already had. They voted for the war plants to be closed and the military to be demobilized, and they all went out and spent the money that they had been saving. The war had been financed by money created by the central banking system; what made this less than a fraud were the wartime restrictions on spending. The war debts were funded by the ability of the banks to draw on the deposits from the defense workers' and military inductees' pay. When WW II ended and triumphal march to socialism (ah, national health care) was at least temporarily post-poned, what came instead was a boom of spending on consumer goods by a population that had been on rationing for a decade and a half. That cash spending, plus the flood of borrowed money from consumer finance (something previously unknown except on a small scale for radios and cars) and home mortgages, did not (contrary to the usual myths) "pay off" the debt or inflate it away; but it did create incomes and the taxes that go with making money. That revenue was more than enough to fund the much smaller government and to sustain the rolling over of the maturing debts from the war. When the British and Canadians got tired of Laborism, much the same thing happened for them - as the graph illustrates.



 I came across the term "battler" the other day and found the wikipedia definition very interesting.

A battler is an Australian and New Zealand colloquialism referring to "ordinary" or working class individuals who persevere through their commitments despite adversity. Typically, this adversity comprises the challenges of low pay, family commitments, environmental hardships and lack of personal recognition.

It is a term of respect and endearment intended to empower and recognize those who feel as though they exist at the bottom of society. The term has seen recent use in mainstream politics to describe a demographic section of the Australian people.

I wonder what is the USA equivalent?



 I found this article quite fascinating: "Want to Get Out Alive? Follow the Ants: ants show that emergency exits work better when they're obstructed"

Shiwakoti and his team are experimenting with placing barriers in front of the Melbourne football stadium exits that lead to the train station. The preliminary results look promising. "Just by having small architectural changes in the layout, or the train stations, or stadiums, you can have thmassive improvement in terms of evacuation rate," Shiwakoti says. Perhaps we shouldn't be surprised at the unexpected lessons we're learning. Ants have been learning how to deal with congestion for millions of years. They might just show us the way out.

Carder Dimitroff writes:

This is incredible. There have to be important market lessons here.

Ken Drees writes: 

I keep thinking that an element may be missing in this concept. Ants basically lay flat, like cylinders on legs, and they can climb up and over, lift more than their weight, etc. The blocking strategy may lead to more orderly traffic for their bodies where as the human biped body is almost opposite. I can see the panic happening around the new block in my mind just the same with two packed flows all crowding and then choking at the exit. Plus what usually happens is someone falls down and then there is trampling and bunching, not to mention there are large slow body types. I am not sold on the idea, although it is very interesting.



I have now read the paper sent me by a momentum fan. Our friend, Mr. Zachar, has a poignant phrase to describe such papers: "your own man". The paper consists of a series of hypothetical critiques of momentum, which he then debunks. Somehow he concludes that value beats growth. But all the prospective studies in the last 5 years, show that growth beats value.

The problem with the studies from my viewpoint is that they don't take account of ever changing cycles. The results from the 19th century don't really affect the current, since the strategy was not followed. The problem with studies of value from the past is that they use retrospective studies in one form or another. And the results are highly dependent on trying to find the few 10 bagger stocks that didn't go bankrupt that are still in the files and remain in the lowest decile of price to book.

The other problem from my viewpoint is that they don't take account of the Gordon model. The return on stocks comes from making a high return on capital say 15% and the compounding effect. Momentum and value go against this in one way or another. There are several fund that try to track trend following funds in real life. There's an ARQ managed futures fund that tries to replicate the performance of momentum funds. It's down 7% this year. The fund was started in 2010 and it's down from there. But it still has 6.3 billion in it.

I believe Dimson tried to track the performance of the best versus worst stocks in a year, and found that in 2008 the best performed 80 percentage points worse than the best. Such results would give one pause. I previously reviewed a study from France where the regression results of trend following showed no practical significance, i.e. a strung out beta of 0.03. I would have to study the Fama french data much more closely, to see how much retrospection is involved. But since the results don't hold up in the real world, I will not review the errors in such, too closely. All this is from memory, and I will have to check all the references to get the figures and references correct.

Jeff Watson writes: 

Lots of grain managed futures guys are closing shop. The managers just don't, as Lack says, "get the joke." There's so much liquidity in grains, I would think fund managers would be jumping at the chance to pick my (and C@rgill's) pocket.



 The more the performance of a system lags behind buy and hold, the greater the initiation period that is necessary or that evolves like the initiation into cults like those in Florida or other "societies" to teach you not to divest, and to hold through the good and bad. In many "societies" the initiation periods costs you money, which is shared by those at the higher level, but to the credit of many funds, the only thing you lose by the initiation period is time, and opportunity cost of buying the Spyder or some such which outperforms in the real life once the academic papers behind them can waft out of boot hill.



 There is something like the keech cult in many academic papers about systems. Many of them don't work in the real world. The more they don't work in the real world, the more the academic papers with titles like "is momentum really momentum?" or "the disposition to ride winners too long—" or "investing with style" or "value and momentum everywhere" or "dissecting anomalies" or "251 years of price momentum" or "the world's longest back test" exist. There seems to be no awareness of the principle of ever changing cycles to explain why things like fama french discovered in 1992 with retrospective compustat data, don't work in practice. Similarly why momentum strategies will reach a peak before a year like 2008 when they lose 85 percentage points relative to neutral.

Ed Stewart writes: 

I believe the failure to account for changing cycles and how the profit incentive inevitably leads to a reduction or removal of a static profit opportunity to cost or worse has to do with the academic's need to create an aura of prestige and permanence in their work. You don't see academics studying supposed profit opportunities in retail or other mundane businesses that lack (what often is) the veneer of intellectualism that finance offers. Reducing things to this reality would kill the profession.

anonymous writes: 

I'm glad the Chair brought up again the subject of Ever-Changing Cycles, a.k.a. "regime switch". Where could one find literature about it, aside from Bacon?

There's an entire industry of publishing about "alpha-generating signals", but I can't find one reliable source of how to treat data in order to be aware of the regime shift as soon as possible.

It seems this is the "Great Arcanum" of speculating, and even the liberated Adepts are not allowed to mention it.

PS: We just suffer the effects of regime switch recently, in a very frustrating way: after 3 months of incredible hard work to put together a portfolio of futures strategies (in order to go "full f" with it), we noticed that something wasn't ok with the distribution of outcomes. We then realized that PBR (Petrobras) which is "the" political brazilian stock, was being traded very differently than the previous years, due to this election year of 2014. It seems that the whole communist party (which PT - Partido dos Trabalhadores really is) is buying the stock, pricing it higher with great urgency, in order to make up the immense dammage they (the government) did with the company. (They could make an oil company to go broke).

But, that's post mortem reasoning: our portfolio remain useles, since PBR (Petrobras) has a great deal of impact in the stock futures contract (our primary trading vehicle).

The question that arises is:

What length of testing should be used as metrics for regime switch awareness?

What is the testing one should do to put aside a strategy that is performing badly?

In other words, what would be the procedures a spec should be doing to prevent being caught in the changing cycles?

We would appreciate very much any guidance.



"Can Kensho Bring Google Style Search to Stock Picking?"

Apparently the program developed by Susan and me 37 years ago, and continuously used by this firm and my many followers and employees thereafter and it's many imitators has yet another instantiation.

Shane James adds:

There have been products like this around for years. Some of the brand names are/were LIM (now a Morningstar product), ECOWIN , Ranger and one other I have seen whose name I shall not mention.

Some of the differentiating variables between them are:

1. quality of source data ( stale, as is, 'real' files). One of the above uses revised economic data to test on financial market activity that occurred before the revision!!!!!!!

2. speed.

3. security.

It makes my old bones feel better to read an article whose author implies than RenTech are quaking in their boots about this or that new machine that in the hands of 99.999 percent of people would lead to the 'discovery' of non predictive, non valid relationships between asset prices.

As for the involvement of a major Wall Street bank. Let's just say you were sitting around asking the computer what happens to Y when X happens and you uncovered the grail… Well… Do you really believe that the spyware build in to these things would not report same to the in house guy at the bank.

Energy traders are particularly fond of one of the products above, to a firm, none of them use the GUI provided but rather lease the data bases so they can better protect themselves.

I am sure the latest 26 year old who wears Converse shoes around the office and has a soft play area to de stress will have the market shaking in their boots. By the way, did the protagonist contact the SEC, CFTC, the police– whoever– about the alleged calls from the hedge fund traders???

I'm just saying is all….



 A friend asked me what I thought about this article about momentum investing by Cliff Asness.

I read the current interview with Cliff in Forbes as I couldn't download the paper. He manages 100 billion. Can't make money that way other than buying stocks and holding. He likes value. All the studies show that growth beat value the previous 5 years. As for momentum, there are too many years like 2008 where the worst did 85 percentage points better than value. I doubt that Asness uses as is files for their work before 2000 or so, so everything before hand is worthless. He talks about Shiller respectfully who some think is a charlatan, bearish since 1996, that Professor Lo has often brought to bear. I don't believe p/b gives useful result because of the survival bias not taken into account in any of the studies. Asness seems a plodding, well intentioned personage who must talk his book as is appropriate. One wishes there was a way to short the results of his fund versus the market.

Anatoly Veltman writes:

Just want to check a revolutionary idea. We've passively observed many regulatory misdeeds for a number of years, without getting bearish. It was ok with me as valuations gradually changed over 1000, 1200, 1400, 1600, 1800. I'm getting somewhat quizzy, when I hear "Can't make money that way other than buying stocks and holding. He likes value." Reminds me of the very-very common thinking about "real property" prior to the eventual 2007 unravel. Most people (or families) back then have never made a single investment decision in their lives (other than buying one house long ago) - yet they were all paper millionaires and felt special about their investing prowess… I'm not saying market demise is imminent, I'm just saying "Can't make money that way other than buying stocks and holding. He likes value" should objectively be nauseating.



 I read and loved this excerpt from A Jewish Peddler's Diary, (1842-1843).

Last week in the vicinity of Plymouth I met two peddlers, Lehman and Marx. Marx knew me from Fürth, and that night we stayed together at a farmer's house. After supper we started singing, and I sat at the fireplace, thinking of all my past and of my family….

Today, Sunday, October 16th, we are here in North Bridgewater, and I am not so downcast as I was two weeks ago. The devil has settled 20,000 shoemakers here, who do not have a cent of money.

Suppose, after all, I were a soldier in Bavaria; that would have been a bad lot. I will accept three years in America instead. But I could not stand it any longer.

As far as the language is concerned, I am getting along pretty well. But I don't like to be alone. The Americans are funny people. Although they sit together by the dozen in taverns, they turn their backs to each other, and no one talks to anybody else. Is this supposed to be the custom of a republic? I don't like it. Is this supposed to be the fashion of the nineteenth century? I don't like it either.

"Wait a little! There will be more things you won't like." Thus I can hear my brother talking.

The week from the 16th to the 22nd of October found me feeling pretty cheerful, for I expected to meet my brother. Ah, it is wonderful to have a brother in this land of hypocrisy, guile, and fraud! How glad I was to meet my two brothers in Boston on Saturday, the 22nd! Now I was not alone in this strange country.

How much more could I write about this queer land! It likes comfort extremely. The German, by comparison, hardly knows the meaning of the word. The wife of an American farmer can consider herself more important than the wife of a Bavarian judge. For hours she can sit in her rocking chair shaking back and forth as she thinks of nothing but beautiful clothes and fine hairdo. The farmer, himself, unlike the German farmer who works every minute, is able to sit down for a few hours every day, reading his paper and smoking his cigar.

Here is a little about the Peddler, Kohn, from the introduction.

In 1842 Kohn was twenty-three years of age when he left the Bavarian village of Mönchsroth and sailed to seek his fortune in the new world. Less than two years later he was already located in Chicago as the proprietor of a store.

Kohn had a strong sense of Jewish loyalty which caused him to be one of the fourteen men who in 1847 were founders of Chicago's first congregation, the Kehilath Anshe Ma'ariv, now popularly known as K.A.M. Kohn became president in 1853, and, in the words of Hyman L. Meites, the historian of Chicago Jewry, he "placed the congregation on a firm foundation."

Kohn took his American citizenship as seriously as his Jewish ties. Because he refused to accept a second-class status for the Jews. He was prominently identified in the campaign to obtain for Jewish American citizens the right to reside in Switzerland. He was elected city clerk of Chicago in 1860, and showed himself an enthusiastic Republican and ardent advocate of that party's presidential candidate, Abraham Lincoln of Springfield.

Kohn's admiration for the new president resulted in a gift that brought him some national attention. He sent Lincoln an American flag on whose red stripes he inscribed six of the verses from Joshua 1, including the stirring words: "I will not fail thee nor forsake thee. Be strong and of good courage." This was indeed a fit message for the leader embarking on a desperate war to preserve the Union.



Granted, es's test and failure failure from last Friday's unemployment-spike-high cannot be ignored, but still, the market has been going sideways for around 3 months (and is still priced in the upper-half of the range); yet, the cognoscenti appears to be convinced there has been a regime change. Methinks everybody is a) a bit TOO bearish, b) believes everything they read, and c) is prone to a multitude of cognitive biases and faulty heuristics.

Let's take a look at comments from zero hedge this a.m.

*It has been a very quiet session so far, and despite the slow-mo levitation in the USDJPY, its impact on US equity futures has been minimal if not negative. In fact, following yesterday's latest late day tumble, which Goldman summarized as follows, "Equities tried and failed again to break 1885, it continues to be the level that we can't escape"… it would appear we are increasingly changing the trading regime, and as Guy Haselmann explained simply, markets are slowly but surely coming to the realization that the Fed's crutches are being taken away (that they may well return following a 20%, 30%, or more drop in the S&P is a different matter entirely) and that the economy will not grow fast enough to make up for this. Perhaps the most notable "event" is the sheer avalanche of banks pushing up their forecasts for an ECB rate cut (and or QE start) to June following Draghi's yesterday comments. And so the 1 month countdown begins until the end of forward guidance, or until the ECB "shatters" its credibility as expained yesterday.*

My thoughts:

1. I wouldn't trust Goldman's "opinion" even if Donald Sterling were to give me all of his money.

2. Guy Hasselman is "assuming" a) the 5 yr equity rally was "entirely" a result of qe, simply based on correlation b) taking that stimulus away will prohibit the market from continuing higher and c) earnings growth will not be able to keep up with the market.

Here are two opinions that essentially meaningless, if not self-serving, but because it is in print on a widely recognized site, they will be taken as gospel by the herd. Indeed, the market looks like crap, largely in part to momentum stocks that got way ahead of the market, and are still in the process of getting re-priced to acceptable levels.

What they fail to take into consideration or fail to say is:

continued low interest rates are:

- improving(shrinking) spx dividend yield/10yr yield ratio
- taking the "pressure" off of earnings growth
- making equities under-valued as risk-free rate drops
- and even more undervalued if equity-risk-premium drops
- helping fund buy-backs

…driving price, and keeping equities undervalued on a relative basis

and, as long as the ten doesn't get back above 3.00%, the bull market may be tougher to derail than most people think

granted these too, are all assumptions

but that's the point…isn't it?

p/c ratios are split, breadth is struggling, $vix is still bullish, the indicators are mixed, and the outlook is neutral, but the bull trend is intact. both the bulls and the bears had their chances to assert their dominance, but at the end-of-the-week, all we are left with is an inside week

key levels look like this:









It's not central bank policy per se that makes the price of the market go up or down, it's Common Knowledge regarding the ability of central banks to control economic outcomes that makes the markets go up or down.

-Ben Hunt

The market has been locked in a trading range for an extended period of time. Is it because the market is still in the process of vetting both the taper and Janet Yellen or is it simply Le Chatelier's principle's market clearing effect? And, while there has been, both a policy change and a changing-of-the-guard at the Fed, it is still unclear as to whether there has been a regime change in the market. What we are left with is a stable equilibrium where competing influences are balanced, resulting in no net change. While it is virtually impossible to predict, it will certainly be interesting to see, what shock to the system will have enough influence to disrupt this equilibrium.

Stefan Jovanovich writes:

What the market may, in fact, be forecasting is the beginning of a shift in sentiment to a common opinion that the government cannot and should not "control economic outcomes". What we now see as the classical liberalism of John Stuart Mill - laissez faire - was hardly the product of benign progress. It came to be received wisdom only after a deep skepticism had taken hold of the country. People whose families had seen a 100-fold increase in public indebtedness over the previous century had had enough when that spending to defend Britons had ended not in freedom but in the loss of traditional liberties.

I leave it to the readers of this site to gauge how the exact parallels between the post-Waterloo period and our own; but there is no question that the rise in the sentiment for "free trade" would not have occurred without the reaction to Robert Jenkinson's ministry. The suspension of Habeus Corpus in the U.K in 1817 (which had not happened during the Napoleonic Wars) was a shock; the adoption of the Six Acts was the last straw. Between them they produced a financial and political revolt that ended with the bi-partisan abolition of the Corn Laws and the adoption of the Bank Charter Act (think the repeal of the Internal Revenue Act and the enforcement of the gold clause in the original Federal Reserve Act for the appropriate modern American comparisons).

For those who may not know them, the Six Acts were these (my numbering):

1. The Training Prevention Act - which made attending a meeting for the purpose of receiving training or drill in weapons a crime punishable by transportation.

2. The Seizure of Arms Act. It allowed local magistrates to order the search of any private property for weapons, the seizure of weapons and the arrest of the owners.

3. The Misdemeanors Act. It restricted the availability of bail and allowed summary trial.

4. The Seditious Meetings Prevention Act. No meeting of more than 50 people could be held without the permission of a sheriff or magistrate if the subject of that meeting was "church or state" matters. Attendance by people not inhabitants of the parish was a violation.

5. The Blasphemous and Seditious Libels Act confirmed that political speech could be a crime; punishment was increased to fourteen years transportation.

6. The Newspaper and Stamp Duties Act required all publishers to post a surety bond and pay a duty for any publication (previously only "news" papers but not journals of opinion had been required to pay a duty; neither kind of publication had had to post a surety bond.)

Gary Phillips comments: 

Perhaps they're taking a knee, but I wouldn't count out the perception that Fed policy was responsible for sanguine market outcomes; if that wasn't the case gold would be trading at much higher levels. The QE narrative continues to persist and effectively shape our world today and like all good narratives it succeeds because it has an intrinsic ring of truth which speaks to broader interests on an intellectual and emotional level and even though, it always coincides with flexionic goals and preferences.

Stefan Jovanovich writes: 

During the century in which the Bank of England's notes were taken to be as good as gold, the metal's price declined. The market expectations are never true in a compass sense; they are always shifting - sometimes against insiders' certainties. The bets made against the dollar during and after the Civil War did a great deal to weaken the City's dominance over American finance. If the flexions in London and Amsterdam and Vienna and Paris, the Morgan Bank would still be a mere correspondent.

Anchors drag.

David Lillienfeld writes:

A number of railroad bankruptcies helped, though they also affected the Dutch, not just the English.



 I found this 1926 paper "On Being the Right Size" by J. B. S. Haldane quite fascinating.

To the mouse and any smaller animal it presents practically no dangers. You can drop a mouse down a thousand-yard mine shaft; and, on arriving at the bottom it gets a slight shock and walks away, provided that the ground is fairly soft. A rat is killed, a man is broken, a horse splashes.

Gary Phillips writes: 

That reminds me of Billy Eckhardt's comments on bet size…

If you plot system performance against bet size, you obtain a curve in the shape of a rightward-facing cartoon whale, going up in a straight line before dropping dramatically.

He said: "Trading size is one aspect you don't want to optimize: the optimum comes just before the precipice. You want to be at the left of the optimal point, in the high zone of the straight curve."

Ralph Vince comments: 

Not altogether true.

Expected growth-optimal bet size is a function of horizon, i.e. how many plays or periods.

For one period with a positive probability-weighted expected outcome (what most refer to as the misnomered "positive expectation") the expected growth optimal bet size is 1, one hundred percent.

As the number of periods approach infinity, this diminishes to the asymptote at what I refer to as Optimal f (not "Kelly," which is subset of Optimal f).

But all that is f we are discussing expected growth-optimal as criterion.

In capital markets, the criterion is often to maximize the risk-adjusted return, which occurs in the region between the inflection point less than the peak, and the point where the curve's tangent has the highest slope, which is greater than the inflection point, but less than the peak. These two bounding point for risk-adjusted return optimality are, as with the peak itself (and, as I hope I have convinced in another, previous post, the actual "expectation") a function of horizon.



There are many market lessons in this article: "Anarchy and Surfing".



One of the bigger surprises this year for me has been the rally in the bond market up some 7% on the long end. It appears as if the vigilantes will never ride again. Rather than the Fed as the cause, I would look to the Treasury. Related surprises are the federal deficit which has decreased sizeably from the peak several years, and spending, as bad as it is, has remained relatively flat. Massive new discoveries of energy reserves have helped to push down prices in commodities and boosted tax receipts. As the Fed unwinds its buying program apparently there are many others willing to step up.



u know the old skool chartists
are looking at the daily,
and can't help but notice
what they believe to be
an inverted complex head and shoulders (bottom/continuation) pattern
replete with upward sloping neckline and a higher right shoulder
and the attendant bullish implications
they have come to expect,
perhaps they visualize a diamond pattern (debatable implications, there)

if the market does indeed trade higher
and makes new historical highs,
or fails to do so,

it will have nothing to do
with the perceived formations



 Here's a reasonable explanation of money flows: "Money Flows-the Ultimate Indicator: Laszlo Birinyi on Why This Beats Technical Analysis"

The concept of money flows developed by Birinyi predicts individual and market performance. It's up volume versus down volume. If an institution wants to get rid of a big stock for example, they'll sell big volume on a down tick and let little volume drive the price up. Several academic studies found it worked. But Birinyi doesn't think it works anymore because of the dark pools. I wonder if it works in markets. Presumably this stuff is available on market profile type for stuff carried on Bloomberg. The measure is entangled with the price move also. It might be worth a hand study.



When a stock is down, and then jumps to up, one wonders if the average person is so happy not to take a loss, that he gets out at the break even point, and whether this causes such stocks to be good buys at the time. It just happened with the S&P which was down a few bucks all night, and then suddenly jumped 6 points.



 Over a decade ago, when I was speaking to VC guys (I think most of the private equity universe is in the losing money business. I am in the making money business, so we were unable to get anywhere) and how what these guys saw as the application of my creation — things like a better voice tree, or other imbecilic applications (Siri being about the best one out there yet, but even that is a far cry), I would pull my hair out in frustration. Even the world's largest transactional law firm, whose head told me "I don't know if there is a market for it, but if there is, we can market it," could not be penetrated to see the applications. And it occurred then to me– and we are seeing this manifest — that the replacement of humans by machine is happening very, very incrementally, almost imperceptibly, as opposed to an abrupt "leap" as I believe Turing had hoped.

Ultimately, dumb people are still cheaper than smarter machines, and ultimately, the investment required to make this a reality won't be decide by people, but by the machines themselves.



The kiwis jaw-boned today heavily on the bird. After major talk and rate increases saw selling through Asia into Europe, I will be interested to see if the news will be acted on and if it will further reposition into the morning in the U.S. and beyond.

Earlier in the day it appears the European open drove buy stops after heavy Asian selling for the first hour to two, which gave the bank dealers a nice bid to sell into… then, wack. Lovely juvely, I will have to look to see under such conditions if it is their usual form….quacks like duck, walks like a duck …. 



 I came across this article today: "Royal Mail float scandal: how hedge funds cleaned up"

Is it not the case that, for almost every IPO in history, the first days of trading are typically vastly outsized volume days in the stock? And that good underwriters will put in the book shareholders with a mixture of holding time horizons, thus ensuring two way liquidity upon listing? And that the point of a share listing is to provide ready liquidity and freedom to chose to buy or sell shares at any given moment?

For example, what percentage of retail owners "flipped" their stock straight out of the gate? Was this higher or lower than the mean and nasty hedge funds (as portrayed)? And if the hedge funds flipped their stock overnight (to presumably more loyal and less mean and nasty buyers), did they not actually forgoe substantial gains versus the longer term holders, and thus it is they who are really greedy and bad for wanting profits (per the article's logic)?

Or perhaps next time, lets hold a seance for Oliver Cromwell's ghost and have him run the IPO?

Gary Rogan writes: 

There is an interesting contrast between these two parts of the article:

1. An analysis of Royal Mail's share register shows that Och-Ziff, an aggressive US-based hedge fund, had a holding of 10 million shares on 15 October, the day the company's shares started trading. A week later it had reduced its holding to 3.5 million shares. It is not known if Och-Ziff was allocated shares or bought its holding from other institutional shareholders who sold out as soon as shares started trading.


2. "We wanted to make sure that the company started its new life with a core of high-quality investors who would be there in good times and bad, interested in Royal Mail and the universal service it provides for consumers over the long term. We were told if we sought a higher price, these investors would have walked away, leaving the company exposed to short-term hedge funds with different objectives." Mr Cable in an interview in December 2013 "Having a long-term investor base remains a basic objective, and we have achieved that fundamental objective."

Was the second part a statement by a crook or an idiot, considering the first part? Regardless this supposed contrast between the benevolent, long-term "lord of the manor" holder vs. the evil speculator is something both Dickens and Marx would appreciate, but perhaps for different reasons.



maybe i'm just an old school trader
unaccepting of the postmodern world
weary of the intellectual masturbator
no skin of his own exposed and unfurled

and the varied self-serving ramblings
of journalists who in reality never trade
not a penny earned from their gambling's
just a wall street journal and cnbc fade

granville, garzerelli, prechter, & cohen
self appointed legends of just one hit
yet, they just keep on comin and go'in
like armchair rappers talking their shit

forever searching for fortune and fame
always eager to proclaim & bet the pot
proficient at talking a brave good game
especially when taking a virtual shot

risk and reward it's inherent in the biz
short some futures or even sell a call
put your money where your mouth is
and where they may the chips will fall

why predict and degrade-the-trade
to show all you can’t be tricked
sharing success before you've been paid
just to show you got the market licked

long and protracted is the bullish status quo
as gimmicked prophecies seek to behold a top
iconoclasts looking 2b right just once-in-a-row
with so few outcomes why* not* call for a drop

they look at the age of the bull and it's lofty level
say markets look forward and emh must be true
not realizing it’s backwards the details-in-the-devil
as the data has nothing to do with objective value

oh so many disillusioned by gambler's fallacy
hubris and greed led to tug on shiller’s c.a.p.e.
or influenced by evolutionary red-queenalicey
yet equity-risk-premium reality they can’t escape

so short of a m.a.d. russian icbm first-strike
the beginning-of-the end & world war three
or mario draghi caught with a nubile young tyke
playfully bouncing on his eurocentric roam'n knee

we drift higher….



 Growing up, like many of the kids on my block, a hot summer day in Baltimore was as good a reason as any for a stickball game. We'd find a tennis ball or maybe a pinkie, and a broom, and in the street we'd set out our bases. The broomstick provided us with a bat. With little hands, it was far easier to manipulate than a real bat, and a plastic bat (a la whiffle ball) didn't work too well, getting dented. We'd play for 3 hours and then the Good Humor truck would come through, or maybe the ice cone truck, and off we'd go to our individual homes to get some money for some relief from the heat. Then it was back to the street for another hour before the calls for dinner started. Getting older, use of a real bat became practical. It was a symmetric piece of wood with an little bit of a handle at the end, usually with a stamp that one was to always keep facing away from the pitcher (and presumably the ball). These were the days of the 4 man rotation, the long relievers in the bullpen, strategy around whether to pinch hit for the pitcher late in the game, and so on. Baseball in the 1960s and 70s bore a remarkable similarity to that in the 1900s and 1910s. There were now black players, and Daddy Longball, as we used to call a homer, had made a visitation and decided to stay for a spell, but the similarities were still striking.

Great pitching (the era of Koufax and Gibson, McClain, Ford and Palmer still shut down great hitting. And there were great hitters (Mantle, Robinson (F), Mays), great runners (Brock), and just basic competitors (Robinson comes to mind immediately, but there were others like Berra, albeit in the twilight of his playing years, and Ernie Banks). Starters tried pitching a full game, and the question was usually whether he made it through seven innings, not when has he thrown 100 pitches. (101 pitches? OMG, his arm?!) Throwing a complete game was a sign of strength, and shut-outs were a good example of pitching skill. A no-hitter was a special show of pitching finesse. Then came the divisions, and the designated hitter. I get the DH. Liven the games up with some hitting. It ruined the whole idea of pinch hitting for the pitcher late in the game, but it still fit within the framework of the game. Career stats in the 1970s and 1980s were comparable with those 80-90 years before. Then came Rollie Fingers and the "Specialist Reliever" (I think it was Fingers who defined the role). Still, baseball was still baseball. All was at peace in the world.

Fast forward a few years. Now we have inter-league play. Why bother with a World Series, then? TV money. If you're going to have inter-league play, liquidate the leagues and form geographically defined divisions. Most recently, there's been the imposition of instant replays to "clarify" the ump's call. This would be done at a central facility in NY. Baseball has always been a relatively slow game compared with football or basketball. This new "innovation" is one which robs the game of much of its feel, at least to me. Maybe the idea was dreamed up by some NFL marketing maven. Count me as one of those who sees little benefit and lots of downside from this new rule. Some of the other recent rule changes are equally vexing, like where the catcher can stand, what constitutes a catch, and so on. But baseball continues.Baseball endures. An Earl Weaver special remains a 3 run blast.

So you might imagine my surprise at hearing a report on NPR this morning of an proposal to change the shape of the bat to be more like an ax handle. In some ways, I can understand the idea—it may be more comfortable, especially for the kids. Fair enough. But how do you bunt with such a beast? What about bat control—will it really be easier or harder? Some of these question will need to be considered—and considered with more care than some of the more recent misdirected effort at progress have been.

In any case, it's just the first week of May. There's a lot of the season to be played. I just hope they don't muck it up with more talk of an ax-handle bat. What will they do next, lower a basketball net to 9 feet so the average fan can hit more baskets?



 In honor of Ralph who has occasionally pointed out that if risk is actually assessed the way financiers claim it is, we would never get on a plane, here is a list of activities that seem to me to have uncompensated risk embedded in them.

I have heard too many stories of each of the below, from friends, media or books, such that I would be reticent to engage in them. Can anyone add to the list, and am I being a chicken?

I was prompted to think them through by reading that Kirk Douglas nearly died twice in small planes/helicopters and twice on the set of action movies.

Horse riding

Cycling on roads

Small planes/helicopters

Motor car racing

Action movie sets

There was a line in the Ayrton Senna documentary where, in response to the accusation that he drives recklessly, Senna says "if you see a gap and you do not go for it, then you are no longer a racing driver." Sadly Senna died at age 34.

Charles Sorkin writes: 

That's more a question about decision making, as opposed to whether or not that flight improves my well-being (by getting me to a destination, and by possibly being enjoyable.)

If the risk was known to be that high, then clearly the distress associated with being on that plane (the marginal cost) would largely offset any benefit from flying. That would not be the case if the flight was in the same risk category as, say, that risk that we take when crossing the street.

Ralph Vince responds: 

Charles, I should have been clearer — the cost associated with a negative outcome on the plane, let's assume, be certain death. And my proposal on this is that being sane men, nothing is worth that in terms of risk assessment (I understand there are outliers — love of country, say, or certain death withing a finite x periods even in the positive outcome, but those aside for simplicity here) and that we get on a plane (or even cross a street) not because the risk is so low relative to what we might obtain (the risk of death being always too high a price to pay), but rather because we "expect" the positive outcome. In the limit, to continue crossing the street, to continue getting on planes, as the number of trials approach infinity, the probability of dying by such approaches 1. But in the very limited, finite space of our existence — say, x thousand flights in a lifetime — we don't "expect" a disaster, we expect, rather, to "get away with it."

And I think this notion of "getting away with it," is necessary to our survival, and we make and have been making decisions along these lines from the beginning, and the same type of assessment perhaps is present in how we trade (or, perhaps ought to be).

Take, for example, a famous big hitter commodity trader of yore who claimed that 90% of his profits came from 10% of his trades. Now, to be able to "expect" to be aboard on of those trades means you would mathematically have to sit through between 6 and 7 trades till you could have "expected" to have had one of those 10% of his big winning trades.



This is a great article on the similarities between surfing and entrepreneurship. Some market lessons are included.



 I have seen many of your posts finding trading wisdom from so many other disciplines. I think they are valuable. Here is a relevant one relating to Roger Federer. "Roger Federer May be More Machine than Man". It is not current and you may know this piece already, but fyi. All the best, Fred Rickey.

Victor Niederhoffer comments: 

Very interesting consistency stats for Federer. But is it good or bad to be that consistent in trading?

Vince Fulco writes: 

As our august surfers on this site have remarked often, i am coming around to the view that trading is more like surfing. Have to watch a number of opportunities pass by until one is right for you then take the risk and stay flexible for the inherent churn, back and forth, sturm und drang caused by the newer HFT players, news/tape bombs and the over-reactors. The minor undercurrents will push you around for no apparent reason. It is as much knowing and developing one's ability to cope as it is having a strong market opinion.

Richard Owen writes: 

A Fed that never delivers surprises? I guess there's also the question of whether the stats are consistent only for Federer, or if this is typical of pro players?

Ralph Vince writes: 

Consistency, if it is the equivalent of variance = 0, is, to my way of thinking, certainly something beneficial to the trader. Given that variance, contrary to the generally-held notion that it is somehow (at least an aspect of) risk, is actually a diminishment of returns (i.e. variance is negative average return), then clearly you want as little of that as possible.



 From the March "Cass Freight Index" report:

Manufacturing and production have turned a corner and are back in expansion mode. Strong new orders and backlog figures bode well for the freight sector. Imports were up in February, especially for autos and parts. Sales of cars and pickup trucks ‐ which are considered a harbinger of recovery in the construction sector ‐ rose sharply in March. New housing starts actually fell for the first two months of 2014, but permits were up 5 percent. January and February are traditionally low because of the weather, and this year's weather has been especially severe. Rising home prices and interest rates will likely have a dampening effect going forward.

All in all, lots of strengthening in the economy, but taking everything into consideration the signals are still mixed. It will be interesting to see if we can continue to climb up or if we will keep with the trend of recent years and stumble in the second quarter.

From Association of American Railroads 5/1/14 report:

Increased Weekly Rail Traffic

WASHINGTON, D.C. – May 1, 2014 – The Association of American Railroads (AAR) today reported increased U.S. rail traffic for the week ending April 26, 2014 with 302,108 total U.S. carloads, up 9.5 percent compared with the same week last year. Total U.S. weekly intermodal volume was 264,228 units, up 6.7 percent compared with the same week last year. Total combined U.S. weekly rail traffic was 566,336 carloads and intermodal units, up 8.2 percent compared with the same week last year.

Doesn't look like imminent recession. Plus Sam Eisenstadt is bullish at least till September.



 Risk facilitates exchange and all prospects of any gains arise from change. If there was no room for any uncertainty or risk, then no exchange would ever occur. In a risk-free world if a decline is guaranteed no one will buy and if a rise is guaranteed to happen no one will sell. Thus no one will be able to gain even if it was guaranteed that a fall or a rise is going to come, due to absence of any exchange.

Therefore, those who are ready to lose only have a prospect of winning.

How much is one entitled to lose is something each must assess, on a single trade, in a single period of time, in a single window of measurement etc.

Yet most end up focusing on forecasting. Now forecasting to my mind is nothing but studied imagination of the future refined with the help of analysing the past. It is this nature of forecasting, that there is imagination involved not foreknowledge prepares one to accept existence of risk and the need to manage it.

Whether one uses tea-leaves or frequency-leaf-diagrams, it therefore is critical to practice your chosen form of art or science with humility.

If anyone believes humility is the most powerful currency to prevent the market-mistress from collecting a toll larger than you should pay, then there is respect for risk. If there is any other who refuses to respect risk, the mistress then clearly finds a gaping hole in such personae to serve humiliation.



 I read a National Geographic article about a women who set the record for hiking the Appalachian Trail. The consensus thinking was that it had to be approached as an ultramarathon. The male record winners all ran 9-10 hours a day to beat the 57 mile a day average. This lady was a hiker and everyone pooh-poohed her strategy to hike it. Well she hiked it, 14 hours a day, and beat the record.

It's the tortoise and hare strategy. Maybe we could call it the Rocky/HFT strategy. Discretionary daily trading can be strenuous, like ultra marathoning. Recently, I've been holding longer and doing better. Let the market do the walking. As Lack would say, "get the joke".



So this is why large caps favored obamacare:

"The Affordable Care Act Could Shift Health Care Benefit Responsibility Away From Employers, Potentially Saving S&P 500 Companies $700 Billion".

It seems like all the big initiatives wind up with privatization of gains, and socialization of costs: this, the credit crisis, illegal immigration. Perhaps there is no way to avoid it as every system eventually winds up being mostly crony-whatever. At least some of those who have a lot of money/power use some of it to assure this outcome occurs.

keep looking »


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