To what extent will the markets and companies that did the worst this year, do the best next year. And how could this be quantified and tested with as of the time data.



Really thin markets are always controlled by total insiders, that's why they are thin by design. Avoid them like the plague, because as the Chair has been known to say, stay out of markets where there are only a couple of market makers to take the other side, and they will only let you out at their price, not yours, or the last tick for that matter.



 Shake Shack has an upcoming IPO. Revenues are now about $150 million and have been growing about 60% / per year. Profit was about $20 million. They're talking about a proposed IPO valuation of $1 billion, or 50 times earnings. I'll buy some if I can get it at that valuation.

The reasoning: it's another Chipotle! Just to check for headroom, Chipotle's market cap is $21 billion. 

"We believe Shake Shack has become a compelling lifestyle brand. We helped pioneer the creation of a new fine casual category in restaurants. Fine Casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence in thoughtful ingredient sourcing, preparation, hospitality and quality grounded in fine dining."

Darien Taylor: "I'd like to produce a line of high quality antiques at a low price."

Bud Fox: "Sounds great. I'll take you public."

Rocky's financial analysis shall follow in due course. In the meantime, he recommends that one noodle at the IPO and subsequent stock performance of NDLS.

anonymous writes: 

First of all, it's fairly likely that this will jump on the IPO day if the overall market stays roughly similar to the current conditions. Why? Because restaurant IPOs have been jumping no matter what, including NDLS and given its NYC roots, a lot of people who buy stocks will find it comfortably familiar. So if you want to flip it, your odds are pretty good. Will it also go up for some time? Probably, since they all have, but hard to tell based on how quickly the new buyers will figure out the financials.

What struck me about this thing yesterday was it's curious road to IPO-dom. It was started by a diversified restaurant operator with multiple brands but curiously only this part is going public. Why? Who knows, but most likely because you can build the restaurants cheaply as they are self-described "shacks", and the other ones are more substantial in nature. Now imagine yourself as a large, slow-growing company that wants to make a billion dollars. You start building "shacks" after your first one is genuinely successful, so you have a GUARANTEED way substantially growing sales every year if you just grow the number of "shacks" every year. Obviously as all students of binary progressions know this can't go on forever, but it certainly can until the IPO (except in this case just lately they kinda let their guard down). So you've got a 50% growth story and now it's worth a billion bucks or so they say. Voila, it's magic!

The profits: for the first 9 months of their respective years, they went down from $4.4 million to $3.5 million. You equity should you chose to invest went down from $37 million to $36 million as your sales grew by 40%, not quite the 50% as in the prior years so nicely pointed out in the bar chart. Oh yes, and the same-store growth has slowed down to next-to-nothing from pretty damn good in years past. So go ahead, buy this 5 million in profit for a billion for the long haul because your manhood depends on it and because burgers are what America is all about.



It is interesting to look at all the stock indexes of the various countries, e.g. Asia [below] and see what the man from Mars would conclude. Most of these indexes were started at 100 at some time like 1970 or 1980 and now many of them are in the 20,000. What does that tell us about the prosperity of these countries and their inflation rate? What would the man from Mars a la Osborne think of this?



"Investors in U.S.-based funds poured $36.5 billion into stock funds in the latest weekly period, marking the biggest inflows on record as U.S. stocks surged to record highs, data from Thomson Reuters Lipper service showed on Friday"

They forgot to highlight the 18 billion outflows the week before …. I don't have access to this Lipper data feed, but it would be interesting to search for a relationship between inflows/outflows (values, changes, streaks) and prospective returns. Copper the public at all times?



No 4consec downdays for #SPX #2014in5words

What's your #2014in5words?



 To what extent are companies that have a high cost of search for an initial order from customers and then have recurring repeat business from profitable subsequent sales better values in the market than others. Such companies in my day were called mail order or data base companies. Companies like Keurig and LinkedIn and Gillette come to mind. Would searches under "repeat business" NYSE enumerate a subsection of companies with superior performance?

Richard Owen writes: 

At the other end, also a great source of accounting pyramids/shorts, as such long term customer strategies provide opportunity to diddle with customer acquisition costs, etc.

Ed Stewart writes: 

One good example of that type of business is the alarm business. U sell the equipment/sensors then sign the user up for a service contract. The service contracts are valued (and trade) at multiples of RMR (Recurring Monthly Revenue). The RMR multiple you can get is based in large part on the credit quality of your customer base - so if you ask for a credit check up front u get a higher RMR but might lose some sales of the basic system install or service up front.

It has been a terrific business for a long time and banks lend very willingly against the cash flow. On of my best friend's father took their relatively small business to a very large private company I estimate well over 1B private market value by pyramiding these cash flows with the aid of leverage, buying something like 70 companies over the years. One of the features of the cash flow is that the customer relationship is ammoritized quite aggressively. Basically so long as you grow u don't pay much in the way of income taxes on all the cash flow. Presently, they are considering keeping the highly valued (by investors) alarm business and sell their physical security (providing security guards to companies) business, which employs thousands of people. It is profitable yet not a great ROI, plus a major headache to operate do to employee count, potential liability, etc.

With employee problems growing including the new O care costs, It makes logical sense at the moment. Yet I can't help but think that in the next 15 years the Alarm business will face more extreme and innovative competition from tech companies (potentially from things like google nest?) as high ROI's must eventually draw in competition. At the same time the "crappy" business might go up in value as there is an increasing need for private physical security, even for residential areas. I could be dead wrong - perhaps Im rationalizing sellling the winner and keeping the loser? Perhaps the formula would be to sell the physical security, use the proceeds to expand alarms, then sell a few years beyond that? 



Some argue that Emotional Intelligence matters more. This study looks at IQ, trading behavior and performance.


We analyze whether IQ influences trading behavior, performance, and transaction costs. The analysis combines equity return, trade, and limit order book data with two decades of scores from an intelligence (IQ) test administered to nearly every Finnish male of draft age. Controlling for a variety of factors, we find that high-IQ investors are less subject to the disposition effect, more aggressive about tax-loss trading, and more likely to supply liquidity when stocks experience a one-month high. High-IQ investors also exhibit superior market timing, stock-picking skill, and trade execution.



 Uber is already in the process of making the necessary regulatory captures. What those of us stuck in the 19th century lane foresee is their being undercut by local Uber knockoffs that demand "equal access" — i.e. using their own (or even Uber's software) to provide local alternatives. I am not saying that these locals will make money any more than most short line railroads did in the last quarter of the 19th century; what I am saying is that they will undercut Uber's "network" profits with the same efficiency that short lines undercut the large roads in lawfaring before the ICC. Markets work in lobbying just as they do in so-called "free enterprise"; what is maddening to the people who keep score by money is that the efficiency of political markets is measured by people's perceptions of satisfaction, not by actual increases to their wealth.



 The film version of Guys & Dolls is often repeated during the holiday period. It contains some sage advice on gambling, handicapping and, if you so desire, how to run a floating craps game without getting caught. It features a thirty-year-old Marlon Brando at the height of his acting powers as big time gambler Sky Masterson. Brando was born in Omaha, Nebraska and so the financial advice should be reliable.

Here are some apposite quotes:

I know it's Valentine, the morning works look fine

You know, the jockey's brother's a friend of mine

And just a minute, boys I got the feedbox noise

It says the great-grandfather was Equipoise

I tell you Paul Revere, now this is no bum steer

It's from a handicapper that's real sincere

I'm pickin' Valentine cos on the mornin' line

The guy has got him figured at five to nine

So make it Epitaph, he wins it by a half

According to this here in the Telegraph

Nathan: Not Sky. He doesn't lend money. He bets money! So why don't I bet with him? Why don't I bet a thousand with him on something?

Nicely: You would bet with Sky Masterson?

Nathan: I am not scared. I am perfectly willing to take the risk, providing I can figure out a bet on which there is no chance of losing.

 Nathan: Offhand, would you say that Mindy sells more cheesecake or more strudel?

Sky: Going strictly by my personal preference, I'd say more cheesecake than strudel.

Nathan: For how much?

Sky: What?

Nathan: For how much?

Sky: Why, Nathan! I never knew you to lay money on the line. You always take your bite off the top.

Sky: Nathan, let me tell you a story. On the day I left home to make my way in the world, my daddy took me to one side. "Son," my daddy says to me, "I am sorry I am not able to bankroll you to a large start, but not having the necessary lettuce to get you rolling, instead, I'm going to stake you to some very valuable advice. One of these days, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, you do not accept this bet because, as sure as you stand there, you're going to wind up with an ear full of cider. Now, Nathan, I do not suggest that you have been clocking Mindy's cheesecake.

Sky: But if I wish to take a doll, the supply is more than Woolworths has got beads.

Nathan: Not high-class dolls.

Sky: There's only one class: interchangeable.

Nathan: A doll is a doll?

Sky: All dolls, any doll. You name her.

Nathan: Any doll? Will you bet on that? Will you bet $1,00 bucks that if I name a doll, you can take the same doll to Havana with you tomorrow?

Sky: You've got yourself a bet.

Nathan: I name her.

Sky: Her?

Nathan: Sergeant Sarah Brown [head of the Christian mission].

Sky: Daddy! I got cider in my ear.

 Arvide: What are you unhappy about, son?

Sky: Gambling.

Sarah: Apparently you're a successful gambler.

Sky: Is it wrong to gamble, or only to lose? I'll come back for help when I'm broke.

Sarah: Don't misunderstand. It's just so unusual for a successful sinner to be unhappy about sin.

Sky: Besides, my unhappiness came up very suddenly. Maybe it'll go away again.

Arvide: We can keep you unhappy, son. Give us a chance. You don't look like a gambler at heart. What made you take it up?

Sky: Evil companions. Evil companions who are always offering me sucker bets.

Sarah: Just what is a sucker bet?

Sky: A bet that is reserved for suckers. For a gambler to get sucked in on such a bet is most humiliating. But to lose it means that you are marked for a very long time as a chump. You must go all out to win it.

Sarah: Is that so terrible, to be marked as a chump?

Sky: Among my people, being a chump is like losing your citizenship. A chump is an outsider, a yokel who will buy anything with varnish on it.

Sarah: Like a solid gold watch for a dollar?

Sky: This is a real chump.

Sky: Only one thing has been in as many hotel rooms as I have - the Gideon Bible. Never tangle with me on the Good Book. I must have read it a dozen times.

Sarah: If all that was no help to you…

Sky: Who says it wasn't? In one of my blackest moments I came up with a three-horse parlay: Shadrach, Meshach and Abednego.

 Big Julie: And since I've been cleaned out of cash, I announce that I will now play on credit.

Nathan: Big Jule, you cannot imagine how exhausted they are. Especially on a non-cash basis. Me, personally, I'm fresh as a daisy.

Big Julie: Then I'll play with you.

Nathan: But I am not a player. I am merely the operator.

Big Julie: You been raking down out of every pot. You must have quite a bundle.

Nathan: Being I assume the risk, is it not fair I should assume some dough?

Big Julie: Detroit, I'm gonna roll ya, willy or nilly. If I lose… I'll give you my marker.

Nathan: And if I lose?

Gangster: You will give him cash.

Nathan: Let me hear from Big Jule.

Big Julie: You'll give me cash.

Nathan: I heard.

Big Julie: Here's my marker. Put up your dough. Anything wrong?

Nathan: "IOU one thousand. Signed X." How can you write "one thousand" but not your signature?

Big Julie: I was good in arithmetic but I stunk in English.

Nathan: Here. This'll put you through Harvard. Big Julie: I'm rollin' the whole thousand. And to change my luck, I'm going to use my own dice.

Nathan: Your own dice?

Big Julie: I had 'em made especially in Chicago.

Nathan: I do not wish to seem petty, but may I have a look at those dice? But these dice ain't got no spots on 'em. They're blank.

Big Julie: I had the spots removed for luck. But I remember where the spots formerly were.

Nathan: You are going to roll blank dice and remember where the spots were?

Big Julie: Detroit… do you doubt my memory?

Nathan: Big Julie, I have great trust in you.

 A lady wouldn't flirt with strangers

She'd have a heart, she'd have a soul

A lady wouldn't make little snake eyes at me

When I've bet my life on this roll

So let's keep the party polite

Never get out of my sight

Stick with me, baby, I'm the fella you came in with

Be a lady Luck, be a lady, Luck, be a lady Tonight

Jeff Watson writes:

Those are such great quotes. Runyon once said that all life is 6:5 against. You can make a hundred billion dollars like the Walton family has done, but Runyon's 6:5 grind ensures you will ultimately lose.



I was sitting this morning with my back against a vine lined wall eating rice and a hard-boiled egg, and looking around the streets of Iquitos thinking what a cartoon it has turned into in five years. Five years ago, a computer revolution created the first consciousness in this river locked rainforest port. The prior citizens had no inkling of space or time and existed in the present. The computers provided a model for thinking, which everyone quickly absorbed, so now the people can think and to a degree analyze.

Concurrently – and who's to say if the egg or chicken came first – an economic boom from gold, ayahuasca tourism, and improved conditions, has changed the city landscape. Five years ago, there were no motorcycles, and now there are tens of thousands. Now the citizens wear western clothes instead of rags. Tourists find the girls don't chase them as far for favors.

The origin of consciousness and the tide of money has come too fast and turned the town into a cartoon. The citizens have ballooned in weight, without stop signs there are continual motorbike crashes at intersections, the money has bought plastic junk for Christmas presents, and aguardiente, which is the local cane alcohol, flows in the streets like the adjacent Rio Amazon.

It's like living in a bubble, and the closest sensation is a psych ward. When i got certified as a psych tech and began working the bins, i found the psychology/psychiatry industry is the saddest, most perilous form of capitalism on earth. It's the only place where one's consciousness may be obliterated by idiots overnight. Keep those pills close to your gums and don't swallow.

A dwarfish man walked up full of aguardiente and holiday cheer. I smiled back, but he continued to stand with his large feet nearly on mine. After a minute, I waved him along with a spoon and he reached out to grab and shake my hand. This is custom: a friendly local grasps and pumps a tourist's hand…and won't let go. The grasp of a jungle born and bred Amazonian is stronger than the Olympic champion wrestlers I've known. Then this man started waving his oversize palm in my face. I replied casually, 'If you don't continue down the sidewalk, I am going to rise and push you.' He edged in, hovered his hand over my plate and the hard-boiled egg rolled down the sidewalk instead.

I grabbed his wrist rising simultaneously and twisted his arm behind his back. It requires two hands to pin it against his spine because their muscles are so strong the arm springs back. I wrapped him up like a Noel gift and marched him down the sidewalk toward a police substation. We ducked under a street vendor tarp knocking our heads on pots and pans before the man twisted his face around to mine and pleaded, 'Anything but the police!' for they would beat him. His body tautened in fear and the pinned arm popped out flinging me into the vine wall, as four swat team policemen hemmed us in.

'I was eating breakfast,' I explained, pointing to the squashed egg under my right shoe, 'and he wouldn't leave me alone. But it's Christmas, and everything is peaceful now.' They pushed him down the sidewalk, and that was his Christmas present.



 If ever the appropriate thought were "physician, heal thyself" it would apply to Smith. He's the source of most of their problems. And when he gets back in, the Knicks will be totally hopeless. One tends to forget how bad he is when he's out.

Jim Wildman writes:

It would seem to be a case of someone who is sure of their talents being unaware of what talents they lack. He is unable to see himself as part of the problem because he does not see himself as having weaknesses.

Pitt T. Maner III writes:

Happy Holidays and New Year to all. A quote from a Knickerbocker caught my eye:

While he has been out, Smith has spent a lot of time watching film, trying to figure out why the Knicks have struggled so often late in games, losing 16 times by single-digits. "I think that's the million-dollar question," Smith said. "It looks like it's so many things, but at the same time it's got to be something real small to change because we're still in most games. It's hard to tell right now. If we knew our record would definitely show it."  



Whenever I find myself thinking about something "everybody knows" regarding world history, my first impulse is to reach for Angus Maddison's data.

His autobiography is wonderfully detailed about his influences and experiences.

As a scholar he has had the greatest reward; people are keeping up his work even though he is gone.



 More discussion of falling oil prices…

Statements of OPEC oil ministers are regularly reported as if they were true, or even plausible. Consider today's implausible Financial Times headline: "Opec leader vows not to cut oil output even if price hits $20." Reporters seem to think OPEC is somehow like Apple or Microsoft that authentically care about market share and brand recognition.

The Financial Times article claims: "In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up Opec's traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel's market share at all costs." But actually, OPEC's traditional policy was to keep oil prices reasonable (below $25 a barrel) in order to reduce incentives for investment in non-OPEC oil production and alternative energy. That policy fell by the wayside as the Iraq war and later Libyan revolution destabilized oil production, and prices jumped to $100 a barrel and stayed there. Not surprisingly, vast capital was deployed to discover and develop many of the world's $40, $60, and $80 a barrel oil sources. Near zero interest rates further fueled the development boom for $100 a barrel oil.

On the demand side, $100 a barrel oil/$4 a gallon gas energized transportation entrepreneurs. Billions of dollars were invested designing more energy-efficient engines. Hybrid and electric cars were entering the mainstream. Tesla easily found billions of dollars from outside investors (and state governments) for their Tesla Battery Gigafactory. Toyota is planning to pour billions more into its new hydrogen car. Most future Teslas and Toyota hybrids and hydrogen cars will run on electricity from coal and natural gas (plus pacific northwest hydropower), not from OPEC or anyone else's oil.

So high-price oil not only sucks millions of new barrels of oil out of New World shale and tar sands, but also begins to push millions of cars off gasoline altogether. Wind and solar power have been small subsidized sideshows so far, but high oil prices attract billions of dollars and millions of engineer hours to searching for cost-cutting wind and solar inventions and innovations.

Now OPEC is apparently coming to its senses as oil sand and shale oil production continues to climb as production costs fall. Also, billion-dollar deep sea projects are coming on-stream as newly developed deep-sea technologies bring deeper reservoirs into reach. Again, though, only at $80 to $100 a barrel. At $40-$60 a barrel many of these sources go back off-stream, and new Arctic and deep sea projects will be cancelled or postponed.

The FT article quotes Saudi oil minister Ali al-Naimi: "It is not in the interest of Opec producers to cut their production, whatever the price is… Whether it goes down to $20, $40, $50, $60, it is irrelevant." Well, this is nonsense and an exaggeration. The goal is obviously to signal oil majors and investors to pull the plug on oil investments vulnerable at, say, $40 a barrel. (At $20 a barrel, most oil projects outside Saudi Arabia are vulnerable, but also the Saudi's themselves. Even if the Saudis "make money" at prices over $5 a barrel, they obviously won't make enough to cover bloated government expenses, plus the costs of thousands of Saudi princes and their wives.)

Why would Saudi Arabia care about market share? Isn't it more reasonable to care about total revenue from oil sales? What benefit is market share for the Saudis, apart from revenue from sales? The reality is the Saudis care about revenue, oil sales times the price of oil.

At $100 a barrel, shale oil from Texas and North Dakota went from zero to 2 million barrels a day over the last seven years, and production is on its way to 3 million by 2017 (according to IEA). Who knows how much oil can be produced from Canada's oil sands and U.S. shale deposits at $100 a barrel? The Saudi's didn't want to find out.

Current shale production is just from regions of the U.S. in private ownership. Additional shale oil reserves are locked in state and federal government lands, waiting to be opened by the next Republican administration. In China and the UK still more shale oil and gas deposits to ready to be brought into production. At $80 ro $100 a barrel, these reserves could break through government regulatory barriers at any time. At $40 to $60 a barrel, not so much.



 American Exceptionalism. I have always hated that phrase and the perverse doctrines that accompany it. The American Constitution is remarkably exceptional; one wishes it were still followed. But the idea that we Americans were born or (equally bad) become endowed with some special grace is one that makes me look for the Exit sign in the hall every time I hear it.

It also reminds me of the disastrous presumption that infected so much of the period that Stern writes about and led to WW I.

Ed Stewart writes:

I notice that every time I start believing that I am an exceptional trader (like I did a few weeks ago), a large loss is near at hand. Best to curtail commitments at the hint of that feeling– the opposite of what the feeling suggests to do.

Gary Phillips writes: 

Success is more destabilizing emotionally than failure.

Ralph Vince writes: 

Failure is absolutely necessary–in fact, nothing is more necessary, in all aspects of life.

For one, it teaches the individual not so much not to do what caused the failure, but how to regroup, reassess and recover from failure. The lesson of failure is about what you do afterwards.

Many things in life require failure. No one learns, say, to lift a lot of weight, to solve a differential equation, or do a backflip on pavement, without failing many, many times. There is no may to accomplish many things in life without enduring the requisite and many failures required.

Jeff Watson writes: 

Failures teach you much more than successes which can lull you into complacency and hubris (like when you have 10 successes in a row). But you must attention pay attention to and analyze the failures inside and out. You have to ask yourself "why?". Ralph hit the nail on the head with his post.

Ralph Vince replies: 

The 13-year-old boy looks around the gym, struggling to lift pipsqueak weight. Failing.

I point to all the old smellies, putting up ungodly amounts of weight.

"You see those guys - every one? Every one of them failed at every increment, every 5 pound increment between what you are failing at and lifting what they lift and they failed at every increment over and over. That had to keep trying, eventually, sneaking up on it. Failure, repeated failure, is part of the process."



Does Money Supply Growth Contain Predictive Power for Stock Returns?:

This paper examines the predictive power of money supply growth for stock returns. An understanding of any such predictability would be useful for market practitioners and policy makers given the monetary expansion of recent years. Furthermore, knowledge of this relationship can aid our understanding of the causes of stock price movement. Using monthly data over the time period 1959:1-2012:12, we illustrate that money supply growth has negative predictive power for stock returns over and above the predictability contained in more standard predictive variables, including the dividend yield, interest rates and output measures. Of particular note, the predictive power is strongest for future returns measured over a one- to ten-year horizon and suggests increasing money supply is associated with lower risk. Additionally using both a dividend growth predictive equation and a VAR we report results suggesting that predictability also occurs through the cash flow channel. Finally, by using rolling window forecasts we can determine that money supply growth contains incremental information over standard forecast variables and that the result is robust across the sample.



 It's barely 50 days until O's pitchers and catchers report, and already there are potential disappointments to the 2015 Os season: Matt Wieters may not be ready for opening day. While the Os have back-up defensive strength behind the plate, they're not so deep on the offensive side, esp after the departures of Cruz and Markakis. Then there's pitching, about which the Os didn't do a whole lot thus far. Of course, at this time last year, Nellie Cruz was still a free agent, so we'll see how the pitching rotation fulls out by opening day. I'm not sure that Buck wants to again wait for the staff to warm up during the first two months of the season, but that was a hallmark of the Weaver years—and those didn't turn out half bad. (Buck is a little more humane, though. There's a great story about one of the pitchers—I've forgotten who—limbering up in the outfield. This fellow had been throwing fastballs all the time. Maybe a curve (yes, that pitch is still thrown, but not like in days of the past (think of Sandy Koufax throwing a cutter? nope)) every now and again. So Buck goes out to the pitcher and asks, "Do you play golf?" "Yes, Buck, you know I do. I love golf." "And when you're playing, do you use only a driver?" "Of course not, Buck." "Just asking." And Buck goes back to the dugout. The next game, that pitcher threw more breaking pitches that in the season to that time cumulatively.)

But that's not to say that some changes would have been unwelcomed. Will the Os bullpen looks solid. If Gausman blossoms as a starter, a lot of problems start to disappear. Ditto with the Machado and Davis. Those are question marks, and the bench isn't quite as deep as last year. Or at least that characteristic isn't yet clear. Given that the Yanks may yet get a decent year from their starting rotation and Boston retains some punch, and all of the sudden, the AL East is competitive. The question of the day is what happens to James Shields. In an off-season in which Pittsburgh plucked a shortstop from the Korean League who looks like he maybe the power player to build a team around, that Shields—one of the most durable pitchers of recent seasons—is still available speaks volumes about the price of players and the expectations regarding length of contracts. Shields will land someplace, but exactly where isn't clear as yet.

So spring training will be interesting this year, as always, it seems. And we finally enter January, the last month of the year without any baseball (though if the MLB smells money in it, I'm sure the October classic would be moved wholesale into November and go right up until Thanksgiving—leaving only December and January with as baseball-free).

Of note today: It is Jerry Koosman's 72nd birthday. Koosman is one of my favorite players, not so much because he was such a standout (he had an OK career—222 wins, 3.33 ERA—not shabby, but he also had 209 losses) but because he had endurance. Koosman was the sort of pitcher you needed to throw lots of innings during a season. That he did—for 18 seasons. While everyone thinks of Tom Terrific Seaver when talking about the 1969 Mets (he of the 25 wins and Cy Young awardee status for that year), Koosman was right behind him with a 17-9 season. Koosman came out of the 1968 season looking pretty solid on the mound, so much so that he was beaten out by Johnny Bench by a single vote for rookie of the year (a 19-12 record with an ERA just above 2 will do that). He was a rookie all-star in 1968—not too common, esp for a pitcher. But Koosman did not stay with the Mets for his career, eventually playing for three other teams along the way. It was during his stay in Minnesota that I came to appreciate his talent—on display when the Os were hosting or during a televised encounter from Metropolitan Stadium (rivaling only Candlestick Park as atrocities for a game with such enduring icons as Ebbetts Field and Yankee Stadium, Fenway, Wrigley, and so on). Going to Metropolitan Stadium in April rivaled any evening game in San Francisco—on temperature, even if the ball was always visible during the game. And while Koosman played for those 18 seasons, he also displayed volatility in performance that is itself remarkable, going from a 20+ win season in 1976 to a 20 loss season (leading the majors in that ill-sought status) in 1977, followed by another 20 win season in 1979. Another notable season: 1984. 14 wins sounds pretty good for a 41 year old arm, and the 3.25 ERA was better than during that 1979 20-win season. That ERA was better than his career one, in fact. But the 15 losses suggested that the long career should close, and after 1985 (6-4 with an ERA over 4.5 (4.62, to be specific)—not good by anyone's definition), it did. (He would also lead in posting 13 losses in 1981 during that strike-shortened season. And that was after a 16-13 1980 season.)

Happy birthday, Jerry Koosman!



Here's a pretty kettle of fish. Suppose you have two forecasts that are disparate. One is bullish and the other is bearish. For example it's up 100 over 4 days. That's bearish. But it's up 4 days in a row, that's bullish. How to combine? There's a bayesian approach, a regression approach, and an inverse variance weighted approach, and a practical approach that Zarnowitz found. Just add up the number of bullish and bearish and that's your forecast. But what's your best way of solving same? The answer might provide a meal for a lifetime. I asked Stigler this question 15 years ago, and he thought it was a very good question, and I've not seen a good answer yet.

Alex Castaldo writes:

I would start with Diebold and Pauly: The use of prior information in forecast combination.

Gary Rogan writes: 

There has got to be some way of incorporating the rare nature of one of the set of circumstances. Clearly 100 points is more unique than 4 days. Does this carry any special weight? Also there is a very large number of other possible "circumstances", like time of day, month, year, what the future portends if prior history was similar during this time of day, month, year. where are we in the economic cycle? With respect to various moving averages? What's the money supply and it's history? What has the price of oil and any number of other thing doing and where is it? And what matters more: all these other things or the one unique thing?

anonymous writes: 

You're mixing apples and oranges. The premise for regression and related approaches is that there is a fixed law that can be discerned, or at least modeled, in such a way that it does not vary in any dimension. Whatever the model/rule was 50 years ago is still what it is today—unless of course, additional information either disproves the model or allows for its refinement. Either way, it's time invariant. Bayesian analyses are different by definition. Unless the prior is the same, the result will be different. Since priors will change with the passage of time, the analysis is time-dependent. You might try to specify the Bayesian model as fixed at any one point in time and try some form of combination, but since the moment you do that, the prior will shift and the exercise becomes worthless.



I know I have lot of biases about trading– that day trading is a losing proposition, that I get sucked into the bear camp… Early on my bias was to think the markets were totally rigged and also fully predictable.

It all leads me to the notion that our biases are what prevent us from prospering to our peak potentials.

Anyone else have thoughts about this?

Jeff Watson writes: 

I see biases from many of my friends that are permabears who make Abelson look like a bull. They just don't understand that as long as the conditions that allow stocks to carry themselves don't change, the stock market shouldn't suffer greatly. I would assume that the permabears are losing money but according to most of them they are making money. The Chair indicated that on Tuesday, to put words in his mouth, the market told us that seppuku was an option, then the stocks rallied and are 4% higher than Tuesday. It's amazing what can happen in 3 days. My bias is that being bearish in a bull market is just as fruitless as rowing the Bay of Fundy when the tide is coming in. Never fight the tides, the headwinds, the hidden powerful forces that control things.

Paolo Pezzutti writes: 

The bias is not in understanding the market's rhythm and extensions. The bias is fighting one's fear in order to balance risk and reward. The bias is the ability to trade bigger sizes when the opportunity is there and keep the trade open much longer to get a full profit. As one tends to scalp markets for small wins…. the bias is recognizing that you cannot win if you are not ready to lose.

Hernan Avella writes: 

The biases people have mentioned the most are: daytrading/scalping and not letting winners ride. I have two observations:

1. The real bias of daytrading/scalping is overestimating one's ability to compete in the most difficult arena of trading. It's is the most difficult because is the most profitable if you are a winner, the shorter your timeframe the more deterministic your process is, hence it attracts the most capable people in the world.

2. 'Not letting winners ride' - People have a bias to remember what they missed. They don't remember the 900 point draw-down they saved by puking when they did. After watching the market go from 665 to 2075, most peoples definitions of biases are towards holding their buys. After the market went from 1586 to 665, most peoples definitions of biases were about flexibility and cutting losers.

In sum we are biased about our biases.

Gary Rogan writes: 

"the shorter your time frame, the more deterministic your process is"

Came across a quote yesterday with a different perspective. Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein:

"He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner."

Stefan Martinek writes: 

Maybe our biases can be traced back to our good/bad memorable trades (long vs. short price, long vs. short tail, futures vs. stocks, slow vs. fast, systematic vs. discretionary, science vs. some market religion, etc.). Non-trading related education can create massive distortions about what is good and bad as well.

Henry Saad writes:

Overspecialization in the tape. Watching every single tick has been detrimental to my personal trading. Removing myself ever so slightly improved my results. Been watching the dog on the leash for so long haven't even noticed the owner.



 "Ralph Baer: the man you never heard of who changed technology forever":

Having fled Nazi Germany with his family in 1938 and been recruited into the US Army in 1943, Baer used his training as a technician for the benefit of military intelligence. As a 23-year-old, he returned from Europe at the dawn of the television age and - when only a few thousand TV sets existed in the US - began a career as a TV engineer.

At the time of this death, Baer had amassed about 150 patents for products including talking books, greeting cards and door mats. He had created famous board games such as SIMON for Milton Bradley, and Laser Command.

Baer said in a US TV interview in 2013 that inventing was what kept him going into old age. "All of my friends have died. What am I going to do? I need a challenge," he said. "I'm basically an artist. I'm no different than a painter who sits there and loves what he does."

"His desire and his genius was always 'What's the next thing?'" his son Mark Baer told The Los Angeles Times.

Baer was working on an electronic doll two weeks before his death, his son said.



 The CME and the CFTC are doing a great job at destroying the market ecology by exterminating the 'spoofers' out of the futures markets. This clever species helps maintain the equilibrium of order flow by gaming liquidity asymmetries and thus keeping the population of naive momentum front-running strategies in check. It reminds me of the extinction and later reintroduction of the wolves in Yellowstone.



 As a vet, I saw many animals who appeared to be healthy and suddenly 'kicked the bucket', and could only think that they were unaware of their illnesses which abetted the immune response… until it was too late. Having put dozens of animals down by injection, and held them caringly through the last gasp, the thought in their eyes isn't death but happiness and trust. I believe animals, especially younger ones and ones that haven't witnessed the death of peers, have no inkling of death. The animals died in my arms, and in the zoo or the wilds, thinking they were going to sleep. The same with disease, as they are dying until the illness reaches a point to incapacitate them physically, they will carry themselves well with a smile on their faces. We're all animals, some smarter than others, and in my case I can acknowledge complete death but decades ago chose to turn a blind eye to the misinformed conventions of treatment of illnesses.

Most maladies are best treated by exercise rather than lounging in bed watching wide screen and texting until they pass. This approach has saved me thousands of hours in recovery from hundreds of times being down but not out, however it has worked the other way in at least three cases. I passed out once with malaria at the feet of a roaring lion. I collapsed while running on a San Diego beach with the second worst case of mononucleosis in the county history. And six months ago, I had the worst case of chronic anemia with half the normal hematocrit in the history of Iquitos, Peru.



 It has been said by many biologists and vets that wild and domestic animals will appear to be healthy while they are really sick or terminally ill. It's a survival mechanism of the most basic order.

Reptiles often exhibit this type of behavior, within a 24 hour period going from relative calm to death spasms, then death. How many players in the markets put up fronts that all is well, while keeping their hand over a cut femoral artery because they are bleeding so badly.

Humans and animals use the same defense mechanism. Animals don't want to get eaten, and traders don't want the competition to know the weakness of their hands, so they act strong.



I saw a sign reading "abandon all hope" in the SPU on Tuesday and crude yesterday. What other markets leave ye hopeless and without funds before torturing ye by taking a path to all time highs. How can this be quantified.

Vince Fulco writes: 

Only caught it on the periphery through news stories (thankfully). Cattle was a house of pain the last 2 weeks.



I would like to draw your attention to this post from MoslerEconomics (the web site of Warren Mosler), this guy seems to know what he is talking about:

Crude pricing

The Saudis are the ‘supplier of last resort’/swing producer. Every day the world buys all the crude the other producers sell to the highest bidder and then go to the Saudis for the last 9-10 million barrels that are getting consumed. They either pay the Saudis price or shut the lights off, rendering the Saudis price setter/swing producer.

Specifically, the Saudis don’t sell at spot price in the market place, but instead simply post prices for their customers/refiners and let them buy all they want at those prices.

And most recently the prices they have posted have been fixed spreads from various benchmarks, like Brent.

Saudi spread pricing works like this: Assume, for purposes of illustration, Saudi crude would sell at a discount of $1 vs Brent (due to higher refining costs etc.) if they let ‘the market’ decide the spread by selling a specific quantity at ‘market prices’/to the highest bidder. Instead, however, they announce they will sell at a $2 discount to Brent and let the refiners buy all they want.

So what happens? The answer first- this sets a downward price spiral in motion. Refiners see the lower price available from the Saudis and lower the price they are willing to pay everyone else. And everyone else is a ‘price taker’ selling to the highest bidder, which is now $1 lower than ‘indifference levels’. When the other suppliers sell $1 lower than before the Saudi price cut/larger discount of $1, the Brent price drops by $1. Saudi crude is then available for $1 less than before, as the $2 discount remains in place. Etc. etc. with no end until either:
1) The Saudis change the discount/raise their price
2) Physical demand goes up beyond the Saudis capacity to increase production

And setting the spread north of ‘neutral’ causes prices to rise, etc.

Bottom line is the Saudis set price, and have engineered the latest decline. There was no shift in net global supply/demand as evidenced by Saudi output remaining relatively stable throughout.



 A recent Financial Times headline focuses on a threat: "Oil price fall threatens $1tn of projects."

A bigger threat though would be to invest $1 trillion on oil development projects when oil is available from less exotic and expensive sources.

Frederick Bastiat's essay "What is Seen and What is Not Seen" explains why it is misleading to look only at the scene under the media spotlight.

Oil firms putting on hold $1 trillion in oil projects leaves that capital available for other uses. We can't know what investors and firms worldwide will do with that saved trillion dollars. But falling oil prices signal then that it's time to widen the search. A extra $1 trillion spent on roads and railways in the U.S., Asia, and Africa, for example, might bring higher returns.

In could be the oil drop is temporary and prices will soon bounce back. And investors are reasonably concerned the unexpectedly steep fall reflects global demand driving off a cliff. Still, it's good every so often to look on the bright side of life. Apart from the savings to consumers now with more to save or spend on other goods and services, investors now have more to invest in other sectors with other profit opportunities and human well-being potentials.

Newspapers and pundits complain that lower oil prices hurt Nigeria, Russia, Venezuela, and Middle East countries. That's misleading. Maybe Swiss banks will take a hit, with billions of dollars less flowing in from siphoned oil-revenues. But the people of Nigeria, Venezuela and Russia suffer BECAUSE long years of high oil prices enabled their governments to get drunk on oil money and further distort and disrupt their economies.

Lower oil prices also pulls the rug out from under hundreds of green energy projects. Expensive wind and solar projects in the U.S. and Europe have diverted research, engineering, and manufacturing talent away from higher-valued uses and have raised energy costs for companies and customers, especially in Spain, Germany, and the U.K. Maybe far lower oil prices will help Europeans and Americans see the light on weaknesses with today's subsidized and regulated alternative energy sectors.

Another Financial Times story "The Big Drop: Cheap oil burns green" takes a glass half-empty look at these issues.

Again though, today's "green energy" projects are what is seen. What is unseen, and unseeable, are what the world would have developed had those same research and development man-hours and dollars been market-directed rather than politician and green special-interest directed.

Solar, wind, and other alternative energy sources offer a bright, clean, and wonderful future. But market forces will bring these technologies on-stream when inventors, innovators, and entrepreneurs have solved the various cost and development puzzles in their own unexpected ways.

For today, consumers are the majority winners from lower energy prices. Concentrated groups of energy producers, investors, and green-energy projectors benefit from higher energy prices. Media naturally focuses on the concentrated producers hurt by falling energy prices.

Bad news sells newspapers and draws page-views. Stories hinting at it-might-get-much-worse scenarios sell even more papers and page views.

Unseen though are the billions of stories worldwide of everyday people saving at the gas pump, and thereby gaining a little more control of their earnings and lives.



Speaking with a friend in Latvia (Skype is amazing), he told me things are very quiet for this time of year. Normally it is full of Russian students. Now, their student debt has increased by a factor and they are staying home. I am sympathetic to anyone whose nest egg evaporates from being caught holding the wrong government paper. Politically a group of wildcatters in North Dakota have achieved far more than the UN sponsored sanction entities could do. Two rhetorical questions: who could ever have connected the dots in advance, and should I take the rouble vs dollar off my quote screen yet.



 In Codes of the Underworld: How Criminals Communicate, he mentions that since criminals find it very hard to communicate directly they often take their signals from vivid events and happenings like in The Godfather which is their favorite (by the way, Puzo had never met a gangster and wrote the book completely from transcripts). They adopt the language and the styles and the activities.

The top feeders in our field have a similar problem. They can't communicate their actions directly as they would be front run and also the public would not be able to weaken and succumb to give them good fills. So they wait for vivid events like today to do their stuff, first clearing the action to make sure there are no others around to intercept their messages. The horse's head was yesterday, but today FOMC was the massacre of bears.

Ralph Vince writes: 

The best bridge is played before the first trick is.

Orson Terrill comments: 

What about the ECB signaling that next year is when they'll stimulate. Was that a "FOMC, we know you're tightening to some degree soon, and this time we want to lag behind in the interest rate cycle, to get a relatively weaker currency"?



A CEO returns 44,445 shares of restricted stock (not options, actual shares worth $41 each) because he feels he should not receive such benefit unless shareholders receive an increase in their investment return.



"Everything went right on final day. I had an inkling when momentum was starting to shift my way. I took my chances and they paid off." -Greg Chambers, Winner of Australian PGA



I didn't catch this in 2009–Luby's 3 stages of psychological development of traders:

1. search for the Holy Grail (the quick big win)
2. managing wins and losses, trying to stay in the game
3. maturity




I've been thinking of this for awhile.


Why Let Drivers Speculate in Oil Futures?

Gas prices are way down. Will they stay down?

Why not let drivers try some speculation on their own behalf, and reserve an extra hundred or thousand gallons at fixed prices today?

Drivers, like farmers, don't like the uncertainty of prices. Drivers like it well enough when gas prices fall, and farmers like it when prices for their crops rise. But sometimes gas price go up and stay up just as prices for farmers crops go down. Farmers can enter futures contracts to lock in prices for some percentage of their future crops. Why not let drivers lock in future gas prices?

Instead of point-of-sale terminals at gas pumps asking if we want a car wash, the could ask: "Would you like to reserve more gas at this price? (With options to choose 100, 200, 500, or a 1000 gallons.)

Exxon, BP, and other firms, along with futures traders would be happy to take the other side of these purchase reservations, for a fee.

Of course state regulators would likely block such speculations as too risky (though they run lotteries out of the same gas stations).



 We had a brief thread on favorite podcasts, in which I mentioned EconTalk as a favorite — Russ Roberts sets the bar pretty high. And I also mentioned Barry Ritholz's Masters In Business podcast on Bloomberg. Here are a few more, varied in subject matter, all available on iTunes:

For some great intellectual fun (and if you're a Yank, to get a stretch trying understand the UK cultural references), I recommend The Infinite Monkey Cage very highly.

For an interesting take on general news, On The Media is however far left you consider National Kommunist Radio to be, as well as being a good listen.

If you like to actually cook, America's Test Kitchen has an excellent podcast.

If you enjoy understanding current legal issues, the Bloomberg Law podcast is very listenable and informative.

For amateur or aspiring-pro photogs, the Improve Photography podcast is excellent.

For stories, I have enjoyed the New Yorker Fiction podcast (which has no separate page other than the NYer podcast page, but is distinct in iTunes).

The Planet Money
podcast surprises me often with interesting short pieces with a surprisingly (if you think NKR is too left) free-market slant.

Just recently, I've started listening to the TED Radio Hour podcast and have been enjoying it quite a bit. Sometimes it seems like TED talks can become overly-smart people enamored of their own ideas which simply don't have much punch out in the real world; but often it lives up to the hype.

Philosophy Bites covers lots of interesting topics, the most recent being probability.

I get a lot out of Consuelo Mack's WealthTrack and never miss the podcast.

For general human-interest stories, This American Life is the standard by which other shows are measured. The spinoff, Serial, is also good. And RadioLab is sometimes a little precious but does a good job in the end.

Clive Burlin comments: 

BIG thanks for all these links. They all seem worthy of a listen. By the way, between the dogs, photography, markets, the lists, podcasts, ûTůb, etc, etc, when do you find time to sleep? : ) I for one have always admired your breadth of interest and knowledge. Thanks for being so generous in your sharing.



Is this really true in general?

"The most important thing you need to know about commodities" :

If you have traded stocks for a while, you probably have a sense of when a move has gone far enough to be due for reversal, and you're probably used to seeing longer term positions more or less alternately green and red on the day over any reasonable stretch of time. Be careful, because these (correct) instincts will work against you in commodities, which can trend and trend and trend and end in blowoff moves that go far beyond what anyone expected. Simply put, if you come to commodities from a stock trading background, temper your urge to fade moves…

There was a time in market history when S&P 500 traders (experienced, professional traders) flocked to the soybean pits to daytrade, thinking they could apply their ability from one market to another. That incident ended badly for the S&P traders (but very well for the locals in beans!).

Bill Rafter comments: 

Futures are mean-reverting in the shorter run, and that also applies to equity indices. Much less so with individual equities. That being said, that statement does not apply to squeezes in either. Futures moves tend to be linear, whereas stocks and their indices tend to be parabolic. There are logical reasons for these, but not enough room here to write them.



"Can Money Supply Predict Stock Prices?"



 Will the increasing popularity of securities-based lending create the next opportunity for "strong hands"? Lots of "potential energy" if certain pain points are breached, I would think.

On a related note, I've read that the super high short-term rates encouraged people to invest short-term in the early 80s, when with hindsight they should have been invested long term and locked in those 10% rates. Are super low short rates (opposite condition of early 80s) creating a mirror distortion reflected in things like securities-based lending - causing the public to lean the wrong way at the wrong time?

"The rise of rich man’s subprime"



In looking for major lessons for a lifetime beyond the day I thought of how the moves in gold and grains up, even bonds preceded the debacle in stocks and oil. I found this version of the predictive power of the quantity theory relatively accessible and also good for separating out the long term and short term properties of the growth of money supply. It could be simplified for reasonable short term predictivity.



The Open Boat and Other Stories by Stephen Crane is an awesome piece of literature in case you do not want to see movies over the holidays.



"It's easier to die when you have lived, than it is to die when you haven't. So I say to all of young people: go make memories, beautiful memories. When the time comes for you to go, you will not go alone."

-Dorian 'Doc' Paskowitz



 Sneaky auction tactics puts buyer on top in Cremorne:

Sneaky bidding tactics paid off for a family at a Cremorne auction on Saturday. Seven buyers registered to bid for the unrenovated Federation house two blocks north of the Oaks Hotel at 214 Ben Boyd Road, but only four groups raised their registration cards. When auctioneer Peter Matthews, of Ray White Lower North Shore, brought down his gavel at $2.09 million, the underbidder crossed the front path and hugged the buyer.

The crowd of 30 onlookers were left scratching their heads. The decoy was distracting her competitor with incremental bids, paving the way for her father to slam down two intimidating bids, the second of which ended the auction.

The pair had used the little-known "daughter decoy" strategy, which managed to muscle out a young Paddington family, who retreated looking disappointed. "You do what you have to do," the decoy said.



 It was 10 days before Christmas, Dec. was soon to expire

We neared the festival of lights, with its eight days of fire

The bulls were dormant, their hubris handily contained

Stocks had collapsed, and crude oil was to be blamed

While visions of dollars, danced in their heads

the bears rejoiced, as the bulls slept in their beds

Dreaming of a sleigh, pulled by many a reindeer

Bulls wondered, if St. Nick would show up this year

One long abruptly awoke, searching for the great man in red

But, found a woman standing there, dressed in blue instead

No one else awoke; there was nary another soul to see

He whispered to himself, Janet Yellen is standing next to me

"Happy Hanukkah", she said as she brushed off some snow

Maybe you were expecting someone else? I just don't know

A fat man named Chris with a sled pulled by many a reindeer

Turned out, PETA complained, and I'm replacing him this year

Thought some charitable work, would be good for my reputation

Hit a few homes here and there, before I go to Miami for vacation

No sliding down chimneys, nor any high flying sleighs in the sky

No reindeer named Rudolph, just a limo with a driver named Sy

With a smile, a wink in her eye, and a tilt in her head

"i'm long chocolate coins covered with gold", she said

I feel your pain; the price of gold is way down there too

Just have faith in the Fed, as she began to fade from view

I know you've been good, not bad; and not naughty, but nice

So no need to pout, that stocks are at such a reduced price

Yet, it's only fitting to give credit, where credit is rightly due

Not to some fat man in red, but the munificent lady in blue.



 I have been thinking about the origins of stealth aircraft. The theory was developed using unsung ideas from a Russian scientist.

"How Lockheed's Skunk Works Got into the Stealth Fighter Business"



 Suppose we consider prices as a building whose purpose is to reach a certain goal as do architects when they are building a skyscraper or some such. What form does the price have to take in order for it to reach its goal? What attributes must it take on the way up, and what backing and filling must it take in order for the building to have a proper stability?

Jonathan Bower writes: 

In my early days on the exchange floor I was intrigued by Market Profile (sample) which is the accumulation and "stacking" of ohlc bars. Several companies allowed one to aggregate on different time frames other than the original 30 minutes. While I never became interested in the "analysis" of profiles, I always thought they were useful in viewing the market from another perspective. Maybe it's worth going back and doing some quantifying.

Paolo Pezzutti writes: 

One interesting characteristic on the way up is the continued occurrence of false breakouts to the downside on the various time frames as bad news hit the market. Regardless the efforts of the "jinx of the day" prices move down just to hit the tight stops incautiously positioned by traders and regularly move up and squeeze the few shorts left in the market.

anonymous writes:

One industry analyst with which I had frequent contact (he covered the metals and mining industries) used to assert that whenever a company senior exec is about to retire, you can be pretty sure that his incentive options will be nicely in the money.

Stefan Martinek comments: 

Victor, I would argue proper stability is not needed, as those with stability i.e routine retests of previous highs on a break out, are just as susceptible to fail over time as a market which trades parabolic. It is just the problem that these markets, like usdjpy recently, give you few constructed setups re: risk reward–to get on, when they start moving.

Victor Niederhoffer responds: 

 But this must be quantified, Mr. Martinek. Regrettably Mandelbrot was not able to program or count. See Roberts work on 1950 showing the similarities and impossibility of differentiating all the "scaling" and "regularities among the irregularities" of Mandelbrot and random charts.

Stefan Martinek adds: 

From B. Mandelbrots The(Mis)Behavior of Markets:

There are too many very big and very small changes, not enough medium-sized ones. And the changes appear to scale with time: The proportion of bigger to smaller price-moves follows a regular pattern as you look at monthly, weekly, or daily charts. […] The size of the price changes clearly cluster together. Big changes often come together in rapid succession, like a fusillade of cannon fire; then come long stretches of minor changes, like the pop of toy guns. There is scaling here, too: If you zoom in on an individual cluster of big changes, you find it is made up of smaller clusters. Zoom again, and you find even finer clusters. It is a fractal structure. Nor is it just the price changes of interest; at times, the price levels also exhibit some kind of irregular regularity. The charts sometimes rise or fall in long waves, or with small waves superimposed on bigger waves. But none of these phenomena—clusters of volatility, or irregular trends—resemble any of the cycles, waves, or other patterns that characterize those aspects of nature controlled through well-established science.

Craig Mee comments: 

"But none of these phenomena—clusters of volatility, or irregular trends—resemble any of the cycles, waves, or other patterns that characterize those aspects of nature controlled through well-established science."

I'm not so sure about that statement. Irregular trends and phenomena = what he discussed = do not resemble other patterns of nature controlled through well established science. Price does not have to equal nature all of the time. Just some of the time. Pick your battle.



 There is some nice WSJ commentary about Patrick O'Brian today.

"A Centenary Salute to Patrick O’Brian":

Aubrey is an apostle of duty, an advocate of order, and yet he knows that leading his men depends less on his power to punish them than on his power to inspire. Maturin has a far greater appreciation of freedom, rebelliousness, even anarchy, and yet possesses a fierce sense of right and wrong. Together they embody the values of freedom and democracy that allowed Britain to lead the world.

First section, back with the editorials.



 Monkeys trained to use a fiat currency make the same mistakes as humans: they are loss-averse.

There are few ways how traders manage loss-aversion: (a) Deleveraging. In other words, everyone has a breaking point and can operate below this "gambling" threshold; (b) Diversification. By spreading a total exposure over wider group of instruments our anchor to individual outcomes is weakened [focusing illusion]; (c) Operational controls to enforce trade exits in case that all the other things fail [Paul Willman's research of traders in the City of London].

But how to design a trading strategy which is built to directly profit from loss-aversion of others?

Leo Jia comments: 

If this means one decides to totally abandon the nature of loss-aversion, then one can go do against all he recognizes as loss-aversion behaviors. This brings a question about its true benefit. If on the other hand, one only wants to take advantage of others' loss-aversion behaviors but maintain his own loss-aversion nature, then what he can do perhaps is limited.

The question is what really counts as loss-aversion.

If what we mean by loss-aversion is losing 1% of assets, then clearly it makes great sense to abandon it. But as one is willing to lose no more than 50% of assets, is he still considered loss-averse? If yes, then how much benefit would he gain by relinquishing this 50% limit?

So if God enforced us a loss limit within which we humans operate, perhaps he gave us a limit that is too small. Is it truly limitless in His mind? Perhaps there is also a limit with Him which just happens to be somewhat larger than ours. This latter may seem reasonable.

anonymous comments:

For those who believe loss aversion is an evolved behavior, it makes sense in the world of extreme scarcity: if you are on the edge of starvation and have a little bit of food, losing all the food could be significantly more detrimental than doubling it is beneficial. This does have some parallels in today's world, as for an average person near retirement age losing all of their savings is significantly more detrimental than doubling them is beneficial.

In terms of the markets, taking advantage of this asymmetry would be something like this, I imagine: let's say the average market participant hates to have their holdings go down by 1% (or any other number) twice as much as they would like them to go up by the same percentage. Let's also say that on the average everybody's holdings have an equal probability to go up and down. If you can figure out how to bet a small enough amount of your capital not to go bust multiple times in such a way as to counteract that tendency than on the average you'll make good winnings. The big question is of course how to bet against this tendency. Should you always bet when others are fearful against their fear regardless of any other evaluations of the situation?

Ed Stewart writes: 

"But how to design a trading strategy which is built to directly profit from loss-aversion of others?"

I think you can open up the concept far more broadly. I see it as the fundamental concept for a near unlimited number of strategies — an idea close to the core of the trading game, regardless of the market.

I told a spec-lister I met with a few weeks ago that the concept (described differently) is 80% of my short-term trading focus — meaning if I don't see it at work I don't trust the idea much at all — to such an extent I've mostly given up on other things. It is very similar to the Bacon cycle idea, but on a specific duration or circumstance (which itself is subject to the larger bacon-cycle effect). Loss-aversion creates urgency, price-insensitivity, and enough order flow to at times scare market makers — all things which open the door to speculative profits.


-Times of day that loss aversion is most impactful or loss averse traders are prone to being active
-Price movements that signify loss aversion - quantitative definition
-Events that will trigger loss aversion
-If you know the basic "plays" or trades used by speculators on different time horizons, u look to anticipate who is about to be squeezed. If u define the setup condition (basic play) and a trigger event (of loss aversion) and combine them, you can find interesting ideas both on a discretionary and systematic basis that are highly counter-intuitive to most traders.



 "GCHQ Launches Cryptography App for Budding Codebreakers"

I have not yet seen the Cumberbatch flick Imitation Game and was wondering if it gave any credit to the Poles, who had cracked the first generation of the Enigma. Prior to 1938 there was a disgruntled German turncoat who provided intel to the French (who shared it with the Brits). Both the French and Brits were stymied, and passed what they considered useless intel to the Poles, who then cracked Enigma. For years the Poles managed to read everything put out by the Germans, and even had created a mechanical device to do the work. Then the Germans increased the number of rotators from three to five, and the plug-connections from six to 20, requiring huge additional work. [See Technical Details of the Enigma Machine]. Two weeks before Poland was invaded the Poles gave the Allies what they had on Enigma, shocking them. Without that head-start the Bletchley Park effort would have failed.The market parallel to this is that someone else's research castoffs may be useful to you. Just because someone else has failed to find significance, does not mean you cannot gain utility. Our own most useful tool was a castoff from someone else who failed to make it work.



 This website is a nice visualization of global weather conditions through the use of supercomputers. It will be interesting to see how the jet stream responds to larger systems this winter and what the impacts might be on the use of natural gas.

Now if there was just a streaming model of where money was flowing around the world…



An unusual lobogola. Usually the elephants are diffuse as to time but this time, they were like the crocodile. The exact time, and the exact announcement. The all important inventories of natural gas at 1020.



 From the Facebook page K9s4Cops, by Lt.  Daniel Furseth:

Today, I stopped caring about my fellow man. I stopped caring about my community, my neighbors, and those I serve. I stopped caring today because a once noble profession has become despised, hated, distrusted, and mostly unwanted.

I stopped caring today because parents refuse to teach their kids right from wrong and blame us when they are caught breaking the law. I stopped caring today because parents tell their little kids to be good or "the police will take you away" embedding a fear from year one. Moms hate us in their schools because we frighten them and remind them of the evil that lurks in the world.

They would rather we stay unseen, but close by if needed, but readily available to "fix their kid." I stopped caring today because we work to keep our streets safe from mayhem in the form of reckless, drunk, high, or speeding drivers, only to be hated for it, yet hated even more because we didn't catch the drunk before he killed someone they may know.

Nevertheless, we are just another tool used by government to generate "revenue." I stopped caring today because Liberals hate the police as we carry guns, scare kids, and take away their drugs. We always kill innocent people with unjust violence. We are called bullies for using a Taser during a fight, but are condemned further for not first tasing the guy who pulls a gun on us.

And if we do have to shoot, we are asked "why didn't you just shoot the gun out of their hand?" And when one of us is killed by the countless attacks that do happen (but are rarely reported in the mainstream media) the haters say, "Its just part of the job." I stopped caring today because Conservatives hate us as we are "the Government." We try to take away their guns, freedoms, and liberty at every turn. (continued)

Stefan Jovanovich comments: 

What Lt. Furseth is really complaining about is the 1st Amendment. No one in his actual life has ever asked him to shoot a weapon out of the criminal's hand. That is a question that he has only read or seen asked in the public soup we call social media and the press. For cops this the golden age in terms of pay, weaponry, body armor, mortality and public pensions so, of course, the logical consequence is that their public posture should be to complain about the lack of respect from people in general.



 Hi Vic!

I gave a shout out to Junto in a recent podcast I did! It's called "economic rockstars" and I'm entirely unqualified to be on a rock called that, but I did the interview anyway : )



Tis the Season by Russ Sears

Tis the season
angels bow their heads in shame,
Children joyful chorus sing,
Pure snow-angels sparkle
in the sun,
wise men go long Youth.
Mother’s love takes
center stage,
families gather round to taste the past
And drink to the forthcoming.

Tis the season angels
cover their eye and cry
Children’s hope soar past their wings.
The night sky never
shined so bright
young men’s candles burn.
Fathers are the focus
of a group embrace
families gather round to give from the past
And make vows in Faith.

Tis the season
angels lose their halos,
Children’s hugs outshine their aura.
All the miracles again
twinkle like new,
kids dream the impossible.
Babies are the middle
of everyone’s hopes,
     As families gather round to relive the past
           And plant seeds of Love to the Future.



 With the price of oil down from 120 a few months ago to 66 today, what do the energy boys on this site think about the prospects for oil and oil industry in the future, near and middle. I am interested in a forecast for the next 3 months particularly.

Gordon Haave writes:

Mine is that oil will continue to collapse. The whole boom was a creation of the commodities index industry and it is starting to unwind and also nobody gives a shit anymore about the Americas and Israel's wars.

Orson Terrill writes:

Sorry about the delay, quite busy, we're planning to take advantage of a slow down.

Saudi Arabia is the Fed in oil. Don't fight them. They said 50% of production in TX would be effected about a month ago. That was a promise not a description. The models I've used suggest we are getting close to that.

It is not far fetched that TX WTI production is showing signs of leveling off in 3 months.

Crude rough models (double entendre) for TX suggest that WTI Production should be down by at least 25% or more in 18 months given current prices, the initial production curves in TX relative to the price of WTI, the decline rate, and the total cost completing a well. I can go back and find the work I did on that, if someone wanted to take my back of envelope work more seriously.

Re-pressurizing presents a threat to that drop in production, but there is some evidence that zipper fracturing is reducing the returns to re-pressurizing wells, which is an expensive process. They can merely stabilize the well, pack up and come back later.

Given that most tools and equipment are leased, the land is leased, the well is drilled by contractors, and it can be done in 30 days…. The short run price elasticity of supply for land based shale plays is very high; they can just send everything and everyone one home, and wait.

The larger companies own rigs; EOG owns about 22 rigs in the Eagle Ford (I use EOG as a yardstick to measure others with).

That is what might catch people by surprise. Just how fast they can and will stop, and how quickly the production comes down to the extremely high decline rates (45%-90% in the first year, roughly 50% in the second, and 30% in the third).

FACT: drilling is slowing down already. FACT: The two merged companies are demanding less of certain services related to drilling. FACT: EOG is one of the, if not the best company in TX at drilling in these complicated shale formations; at these prices many of their wells will not be profitable. I know that is true. FACT: CHK wanted to unwind their aggressive push towards gas under the last CEO, and has been pushing hard in TX for Oil…. The wells they developed in the summer were more expensive than EOG's in the summer. EOG averaging about 6.7 million a well in total cost, it looked like CHK was closer to 8. They need to get initial production rates of twice the average to make sure they are doing better than breaking even. FACT: Saudi Arabia said they believe about 50% of production will be affected by the current price. On Speculation: I advised that was as a promise, not a description of the price at the time… and sure enough OPEC, on Thanksgiving, was not good for TX.

SPEC: I think that its just the beginning for the oil field services companies, because there are some planning and services that go into drilling a well, cementing, fracturing, re-pressurizing, plugging and abandoning.

SPEC: The oil field services that have heavy equipment which is rented out will suffer proportionately.

SPEC: Some E&Ps may generate huge cash flow as they substantially reduces CAPEX on new wells,relative to the next year of flowing oil…



 Benedict Cumberbatch has an astringent face — high-planed cheeks, small eyes, soft small mouth — one that seems particularly English. His ascetic, near-obnoxious imperviousness fits well with the part he plays in Imitation Game.. Cumberbatch stars as Alan Turing, the flinty British mathematician, logician, cryptologist, and paradigmatic pre-computer scientist who led the charge to crack the German Enigma Code that turned the tide for the Allies during WWII.

Other films have related this history with varying degrees of accuracy and interest, but this iteration seems for many reasons to be most compelling; and even if some celluloid has been given to the subject heretofore, millions still have no idea of the remarkable efforts that went into deciphering the "unbreakable" Enigma machine that transmitted orders to the German juggernaut, submarines and air fleet, over the deadly years of the war.

Part of the joy of viewing this film is its female star, Keira Knightley, who redeems her peculiar performance in that recent film, A Dangerous Method (2011), where her facial contortions made her unwatchable. In Imitation, Knightley plays the brilliant Joan Clarke, who fights to work amongst the male cryptographers despite the glaring sexism prevalent in 1940s England, both in the country at large and especially among the tight knot of top secret scientist-geeks working at Bletchley. Clarke's proficiency at solving crossword puzzles faster than Turing himself won her a coveted spot among the decoders at Bletchley. Bletchley Park, in Milton Keynes, Buckinghamshire, was the central site of the United Kingdom's Government Code and Cypher School, which during the Second World War penetrated the secret codes of what our Mancunian forebears used to shorthand as "the Gerries."

Dozens of dedicated and talented women, too, worked at decoding and message interception at Bletchley, but this film addresses Turing and his small crew of decoders.

Although Turing is clearly not inclined toward females (or even toward his coworkers, as he shows through scenes of aristocratic arrogance), he gets along splendidly with Ms. Clarke, and his team endures considerable scathe and opprobrium from their uppers, especially Charles Dance as skeptical Commander Denniston. The effort to decrypt the Enigma stalled for months, no matter what Turing and co. tried on Turing's ingenious "Christopher" simulacrum of a decoder. Naturally, there is also a spy in the works.

Turing was, of course, the precursor of, and father to, today's computers. Early computers were tagged, in fact, "Turing machines."

Another pleasure was the quaint environs of Manchester, this reviewer's natal home, and the Brideshead Revisited atmosphere pervading the goings-on. Scientists on bicycles and cobblestoned streets, richly captured and photographed, are charming reminders of past efforts in the field, preceding the grungy garages of the recent past, and sleek labs of today.

We all know the outcome of the war: We speak English, Jews still live in the world, and few kids are named Adolf. But the tension and suspense inherent in this race against time and destruction of villages and continents holds us tightly in its unrelenting grip.

Although Turing then worked on the development of computers at the University of Manchester after these events, he was hounded by the UK government for then-illegal acts deemed "unnatural." He ended his life at a terribly early age, losing the world his huge potential genius to the morality police of the time. His indefatigable efforts to defeat the Enigma was kept secret by the British government for over 50 years. It is estimated the group effort saved 20 million lives.

We remember well how Harvey Weinstein stood downstairs at the Walter Reade Theatre after the Film Festival screened the ebullient silent black-and-white experiment, The Artist. Weinstein knew he had a winner when everyone exiting the theatre bore a huge grin and fairly floated out of their seats, a nimbus of pleasure wreathing their faces. With Imitation Game, history has been served, audiences are piqued and pleased
– and Harvey scores another bulls-eye.

Crossword-puzzle enthusiasts, there is hope for you, yet.



 This amazing video shows the moment the Team Vestas Wind crashed their 65-foot racing yacht into a reef in the middle of the Indian Ocean during the Volvo Ocean Race.

The boat was doing about 19 knots when it struck the reef on Saturday at approximately 1510 UTC. The nine crew members stayed on board until the following morning, when they made the decision to abandon ship. The crew was eventually picked up by the local coastguard and taken to a remote islet known as Íle du Sud, where they spent three days trying to make it back to civilization

It reminds me of devastating days trading in the distant past…chaos, suddenness, the unknown, post-mortem…



Why does the Fed have a mandate to insure 2% inflation. Perhaps the better question is who benefits from inflation. The average Joe 6pack has no savings, rents an apartment, leases his truck, owns no assets, no stocks. He gets his paycheck and spends it. He wants lower prices. When gas goes below $2 he's happy. When beer goes down he's even happier, and the more he drinks the happier he is and the more he saves. Who wants higher inflation? Big debtors. Who is the biggest debtor: US govt. Who has the most assets at the most leverage: Big banks.

Orson Terrill writes: 

I disagree with the Feds own explanation, and I think many economists would too.

The Fed doesn't have a mandate for any target rate, and the dual mandate puts employment at odds with inflation. Their stated concern about falling wages is disingenuous.

While they talk about falling prices, the fact is that the Fed is powerless if rates hit zero and deflation persists. The Fed wouldn't have control over the money supply or the economy. Though there are experimental tools that could be used.

The Fed will never say they are powerless. That creates a game theoretic situation where in deflationary panics The Fed could lose credibility in the markets, and deflation with rates at zero could become a Suboptimal Nash Equilibrium.

Why 2%: There's not really a good reason, and what the the Fed published is moronic….

Theoretically, you can have very stable 10% inflation target, and life would be no different than at 2% inflation target, because REAL prices would be same, so as long as inflation expectations were stable. Most monetary economists would probably agree with this….

Gordon Haave writes: 

There are two things going on here really:

The first is the idea that price stability is a good thing in that it aids in long term decision making. The most important point though is the fed view that deflation is a bad thing. The origin of that line of thinking is the Keyensian notion that the market for labor doesn't clear because wages are sticky.

To elaborate: Classical economics would dictate that you would never have ~25% unemployment because the price of labor would fall until it hit equilibrium. However Keynes said that during the great depression this did not happen because wages are "sticky". Due to contracts and other things the price of labor does not fall. Hence, to reach equilibrium the government needs to stimulate demand. There is at some level some amount of truth to the "Wages are sticky proposal" however the cure is much worse than the diseases. The primary policy of both the fed and the federal government is to prevent markets from clearing at all. Hence, when homes are overbuilt and a crash occurs the powers that be actually think that building more houses is a good idea.

The reason for this is the second reason why the fed targets 2% inflation: The idea that deflation is a bad thing. Main stream economists believe that if the economy enters a general deflation that it will enter a "deflationary spiral" where prices will keep going down. Under this theory nobody will ever buy anything because why would you buy something if you know the price will be less next year?

A funny thing is that the Keynesians like to scoff at "Austrians" and other free market theorists for having ideas that don't hold up under scrutiny yet the deflationary spiral nonsense is easy to examine.

First: We know that flat-screen TV prices have gone down every year for the past 15 years. Yet, is it the case that nobody bought them because everyone knew that they would be lower the next year? So, with that one example alone we already know that the entire theory is bogus.

2nd, the deflationary spiral theory poses that basically there is no way out of it. Yet, society still exists as a whole despite many bouts of deflation, so we know that the markets have a way of righting themselves.

This entire theory explains the seeming disconnect between GDP numbers and how the average person sees himself in the economy. In order to keep housing prices up, for example, millions of homes were being built due to false price signals by the Fed while millions of homes sit unoccupied. Everything is being done to keep markets from clearing.

When markets are not allowed to clear and prices not allowed to fall what you get is what currently exists in Japan - the death of civilization as young people, priced out of marriage, home ownership, children, etc. simply check out of society. It is coming here.



Patterns patterns USDRUB…why not look at them? The inner workings of price action…There is increasing volatility and a lower swing on the right shoulder. An in focus head and shoulders with a neckline coming into its own on a break below 52.60. Risk and reward is what this represents– your risk is your call.



 Another golden age myth bites the dust, or, in this case, drowns. The notion that the days of the Roman Republic before the Empire were a period of virtuous yeomanry has been an historical fiction beloved by everyone from Thomas Jefferson to Patrick Buchanan. It just doesn't seem to fit the facts of who had the money and land in the good old days.

"Massive Water Basin Unearthed in Rome"

Pitt T. Maner III comments: 

Here is another bit of fiction, but maybe not so far off with respect to the ravages of time– the modern world and subway systems unearthing ancient ruins. Amazing how much is left to be found.



 I found this article on the use of different shock methods by electric eels quite fascinating.


Electric eels produce the most powerful shocks of any fish. They can zap prey with up to 600 volts of electricity, enough to hurt even a human. But the serpentlike fish have an even more amazing trick up their sleeve, new research reveals. The eels can shock their prey from meters away, making them twitch to reveal their hiding spot and providing the eel with an easy snack." and ' "It's a fascinating example of evolution in action," Gallant says. "The eel isn't just applying a voltage to the water and hoping everything dies. It's a very specific behavior that's obviously been acted on by selection to be refined."



 There's been lots going on in the baseball world, and I thought I'd start with (surprise!) the Orioles. The Joe Piscopo report would be something like this: "Cruz—gone. Markakis—gone. Miller—who knows. Davis—more drugs? who knows. Justin Upton—meh. Jimenez—oh, please.Orioles in 2015—not a chance so far. Yanks—always." I think Piscopo would have blown, just like the sportwriters who insisted the Os would troll for 4th place in the AL east in 2014, and would be lucky to even see 3rd place for part of the season. Then again, Baltimore's never gotten much respect from the sports journalism club. I still remember the predictions that the Big Red Machine would dominate the 1970 World Series—until Orange Crush took the machine apart. Check that, Brooks Robinson took the machine apart, while it seemed at times like the rest of the team came along for the ride and gave him great support. That series was Brooks Robinson vs the Big Red Machine. Go ask Sparky Anderson. (And if you succeed in doing so, please let me know how; there lots of money to be made there.)

The Os didn't do much last winter to shore things up for the 2014 season, other than sign Jimenez (which rivals the Glenn Davis-Curt Shilling and Frank Robinson-Milt Pappas as the worst off-season actions in baseball history). This year, well, it kinda depends on three player who didn't play last year who the Birds need to get solid seasons from to deal with some of the free agent departures. For instance Nelly Cruz signed with the Mariners. Ouch. He was a major piece of the success the Os enjoyed in 2014. Maybe it was money, maybe something else. It sure wasn't Buck; he loved playing under Buck (and that's a common refrain, not unlike players talking about Davey Johnson as a manager). Still, a big loss, particularly for a team that scored half its runs on Big Daddy Long Ball.

Then there's Nick Markakis going to Atlanta. Not such a big loss. He had been a solid player for the Os Great arm in right field. Just spot-on. Not much of a hitter anymore though. So while he may be missed (and maybe not depending on who the Os have to replace him), it's not nearly the loss that Cruz was. Signing Cruz in 2014 was a masterstroke for the Os.

So, one big loss, one so-so loss (good player, hopefully replaced in kind or better). And then there's Andy Miller, the wild card, and it's unclear what clubhouse he will inhabit come the spring. But one needs to remember that during 2014, the Os did not have Matt Weiters or Manny Machado for much of 2014 (Weiters was the whole season) and Chris Davis was out for long segments of it. If Davis gets his groove back (and learns not to swing at every first pitch so he doesn't strike out so much), the Os should be able to compensate for Cruz's departure. Weiters too. And Steve Pearce, with another solid season, would help to fill the hole.

Machado's offensive production and defense were hard not to miss in 2014. He's the first third baseman in Os history since 1977 (when Brooks retired) to be spoken of as harkening back to that era when the hot corner in Memorial Stadium (where the Os played back then) was manned by one cool cucumber. Weiters's offense was missed, but on defense, Caleb Joseph displayed defense talent not unlike that of Rick Dempsey. So at least one half of the battery is solid. It's the other part (until you get to the closer) where the Os need to do a lot of work. A lot. Having to wait through the first two months of the season for your pitching to warm up means you're digging an awfully big hole, and violated that first rule. Badly.

So that's some of where things stand with the Birds at the moment. I'll try and update soon. And provide something about some of the other teams (though Scott, I can't possibly know the Cards nearly as well as you do).

As Walt Whitman put it, baseball: America's game. And no, baseball hasn't been bery, bery good to me, but it's been fun.

Best of all, only 75 days until Orioles pitchers and catchers report (revised reporting schedule).

Play ball!



 What the statistician traders miss is that the human brain is programmed to observe and create geometrical patterns. Since the observers admit to looking at price charts then they know that they might influence results.

Homo erectus was making patterns on shells long before today's speculators were trying to use patterns to turn a profit.



The next meeting of the Junto this Thursday, December 4th, will feature GMU economics professor Donald J. Boudreaux whose blog is CafeHayek.Com.  Meeting begins at 7:30pm, main speaker at 8:00pm.  It is free and all Dailyspeculations.Com readers are invited. It will be in NYC at the General Society Library, 20 West 44 Street, between 5th and 6th Avenues.



Here is a prediction from an experienced old timer–with natural gas leanings. T. Boone's take:

Oil price prognostication has become a new parlor game on Wall Street and in shale-oil pockets across the U.S. Pickens, in backing his own call, alluded to his roughly 50-year tenure in the oil industry, saying: "You can't imagine how many of these cycles I have seen and endured." 

Reminds one a bit of "Horse Tradin" by Mr. Green.



 First thing was, they gave all the attendees, several hundred of us, free big bags of popcorn and giant slurps of soda. In the past, such freebees usually meant the movie we were about the see was stinko. But we were told that the screening was a mixed one: Part Academy invitees, part movie reviewers, part mystery meat.

It is a true story, as we figured out by closing credits. With practiced and stellar screenwriters like the Coen brothers, we expect smart writing, pacing, storyline and developments along the way.

And there's no denying that the long film depictions of three men in a yellow neoprene rubber raft for 47 days before they are captured by the Japanese and interned in a hellhole of deprivation and wanton torment by sadistic commander Watanabe makes one thirsty and hungry. Asked what he thought of the film, one associate had but one word: "Long." The protagonists grow emaciated and filthy by degrees, threatened by sun, salt water, hunger, sharks, storms and giant waves. Then tossed into dark, dank, blighted cells before they are aggregated as unwilling slave labor for the classically brutal Japanese in several prison camps.

UNBROKEN relates the trouble-spackled life of Louis Zamperini (played by Jack O'Connell), an Olympic runner taken prisoner after many days at sea with two Air Force compatriots by your horrendous Japanese forces during WWII. Seems that, with IMITATION GAME and other WWII sagas running currently, this is the look-back at the Greatest Generation season.

 The problem is we have seen this before, with less picturesque flyboys in the key roles. In BRIDGE ON THE RIVER KWAI, the men were not lovely of face, with glistening white teeth and no growth of beards after endless days sans hygiene rescue. In a Colin Firth factual biopic, the powerful THE RAILWAY MAN (2013), the savage Japanese seemed realer, the tortures more routine and less prettified. Our hero, Louis Zamperini, an athlete from Torrance, California, who ran in the Olympics, is handsome as hell, and he suffers picturesque torments. Yet when he emerges on the other side, he is no thinner than any healthy frat boy would be, his skin unpocked and unpunctured by the beatings and starvation and privations he sustained. The American men are interned, starving, but they are, amusingly to us, anyway just a bit more robust than all the Japanese guarding them.

We understand: It is Jolie's debut work, and while it is competent enough, it lacks a formalistic look. There are no heightened Jolie-esque set pieces or particularly memorable scenes—though the cold, snowy sweeps of the northern Japanese prison camp come closest to indelible, with the calligraphic ascending queue of hundreds of American POWs sooted nearly grease-black by the coal-dust they are forced to mine, carry and transfer. Nothing particularly says this could only have been done by Jolie, like David Lean in his immaculate LAWRENCE OF ARABIA (1962).Perhaps that cavil is unfair, as she is here a novice on this side of the camera. There's lots of string left in that skein.

More important is the arid sense of the film's trajectory—you just don't care all that much about the protagonists. They are too quickly healed. Their skin is too pristine, those American pearly whites never gummy with confinement plaque. Their bodies are not as emaciated as you think they would be. The handsomeness of the POWs seems not… quite…right, their shaven faces, sturdy boots and untroubled eyes a signal that this is after all, only a movie of a "true story." Early on, and for too long, there are too many featureless days bobbing, sluggish and sunburnt, asea. There are questions about how the menfound anything to drink. They ate, of course, the fresh-from-the-drink captured precursors to what we eagerly scarf down as sushi—without the soy sauce or wasabi. One man dies seemingly because he decided to die, "I shall die, I think, tonight." And he does.

Thanks to the director, with Jolie and Pitt wizards of PR and self-promotion, the film will garner lots of ink, and is having umpteen previews (with popcorn and soda). To us, and despite loads of yen and yin expended on production and sets, UNBROKEN seems an extent of punishment, with occasional moments of interest and "acting."

In its favor is the anhistoric public, who have not been exposed to this theme for a while, but for late-night reruns of WWII classics on Turner Movie Classics. This film goes some distance is coloring in the privations and scalding truths of armored belligerency on the world stage. It may educate a few of the feckless and frivolous.

The stirring Victorian poem "Invictus"–penned by William Ernest Henley in 1875, published in 1888–accomplishes much the same defiant clarion, in less than a minute:

"Out of the night that covers me/ Black as the Pit from pole to pole/ I thank whatever gods may be/ For my unconquerable soul…"

UNBROKEN is no KWAI, and maybe not everyone's cup of saki, but we will no doubt hear much more of quality from the feisty Jolie. This is at the least a noble effort.



 The Iranian Revolution led by Ayatollah Khomeini had consequences outside of Iran/Persia as well; it was the inspiration to the Arab world for much of the radical movements increasing influence. Until then the Arab world was ruled either dictators who were not extreme Muslims or monarchs who had ties with the West that had colonized or heavily influenced the Arab world earlier in the century. Khomeini not only took control from a Western supported Monarch who had tried to bring more modern ideas into Iran threatening the interest of the clergy but also espoused a desire to export his version of Islam throughout the Muslim world and then throughout the world. This desire to recreate a Muslim caliphate was a common thread throughout these stirrings. The origins go back further in time but the Khomeini revolution reignited. The movements gained considerable support in the Islamic world. Most like the Muslim Brotherhood were willing to move to their goals more gradually. The roots of these moves trace back to the Saudi brand of Islam known as Wahhabism. It is based on the most conservative of the four schools of Sunni Islam (Hanbali) using the doctrine of some of the more extreme theoreticians of that school. The alliance of the Saud clan and family of Muhammad ibn Abd al Wahhabi (the founder of the Wahhabi school)was to the advantage of both families. The former gained legitimacy for their attacks on caravans and the latter muscle behind their religious doctrine. That relationship has continued over time. The Saudi monarchs have followed traditional Islamic tactics of aligning with lesser enemies to defeat the main enemy at the time. As such the Saudi's first aligned with the British to deal with the Ottoman Empire and subsequently with America to deal with such threats as the likes of Nasser and the communists. They supported radical movements elsewhere but not at home. In essence, they paid lip service to the ideas of converting the world to Islam but did not seriously pursue that goal. The lifestyle of the Saudi monarchs did not quite conform to their religious teachings, offending the more extreme groups. The Sunni's often view the Shiites as heretics, which is even worse than being an infidel. This dates back to the early days and a question of succession as head of the religion, but there are considerable other differences. The Iranians hoped to become the leaders of the move against the West. Among the Sunni, groups such as those led by bin Laden exposed a desire to bring about the ultimate goals much more rapidly by violent means. These extreme views attracted only a small minority of Muslims but enough to become a threat to be reckoned with. The Islamic State is only the latest significant manifestation of these groups. By gaining military victories and proclaiming a reestablishment of the caliphate they have gained more followers. They currently have no power to be more than regional problems. The main concern would be if events in Pakistan allowed them to gain control of some nuclear weapons there.

The war between Iraq and Iran was started by Iraq. When the Iranian counterattack started to make some progress, Iraq resorted to chemical weapons. (We provided some help in that effort and did not condemn it at the time except when it was used internally.) This development caused many Iranian lives and had a profound effect on the Iranian psychic. The desire never to be at such a disadvantage in weapons of mass destruction was probably the main factor in the Iranian desire to have a nuclear weapon capacity. The political situation in Iran is complex with many competing groups. On the whole there has been a moderation in the extreme goals of Khomeini. The leaders of Iran had reason to fear the U.S., which was another reason to build a nuclear capacity as the only way to insure that Washington would not try to repeat past efforts to overthrow an Iranian regime. But the actual foreign policy of Iran has not been marked by recklessness. They might be very content to achieve a state like Japan in which they could build a nuclear weapon on short order but avoid getting that capacity before it was needed for self defense. Even if that were not the case, I doubt that they would be so suicidal as to use them unless attacked despite their threats against Israel. I suspect they will confine themselves to conventional (i.e., not nuclear) means and operate through proxies. If we were to attack their nuclear facilities, I fear it might result in an Iranian counterattack on American targets and on Western energy supplies and transport routes. This might then lead to a wider war that would involve a major US ground involvement. The assumption that the Iranians would just accept the consequences of such an attack without a significant response is conceivable but not an outcome I would count on. Both we and Iran have an interest in attacking the Islamic State.

 The Shiites in Iraq were repressed by a Sunni government under Saddam Hussein even though they became a majority in the country. The Alawites were an oppressed minority in Syria until the French took control. Following the strategy of the British they put the Alawites in control. The Alawites as a minority group could be counted on to work with the French as they needed the French power to retain their position of power. The gained influence in business and the military as a result. The latter gave them the ability to retain power under the Assads. Under the Assads and under Hussein, both more secular regimes, non-Islamic minorities faired far better than they would under more religiously extreme Sunni regimes. Neither had ambitions of world conquest. Yes they are/were ruthless dictators but they were a better alternative to the chaos that now dominates both countries. There is no question that Iran desires a more dominate position in the Middle East and aligns with the current Shiite regime in Iraq and Assad in Syria, and might at some point harbor wider goals of conquest. For now it has its hands full with internal and regional concerns and will for quite some time to come.

The Sunni extremists have been responsible for terror attacks on Western soil. The Iranians have done so regionally but not on Western soil, even though they would have to potential to do so. Unlike the Sunni extremists they have not been trying to convert Muslims in the West to engage in terror attacks in the West. The likely terror attacks by Sunni's have to be put in perspective. On the whole they are not a worse concern than regular crime. Even another success on the part like 9/11 as horrible as it is, would not be a major blow to the U.S. These groups are a concern but not something that will easily lead to our downfall.

In short, I do not agree that Iran is as great a threat as the author of the article Vic referenced suggests. To the extent these various groups fight each other they are not an immediate threat to the West. Over time, both Iran and the Islamic State will have to be contained, requiring that we keep up our military strength.



 An important connection. Bill Gross, the former Upside Down Man, in his quest to find out the disseminator of the missing emails, his insistence on firing the others, his calling himself Secretariat rather than "The Dalai Lama" or "Eagle" as Foxcatcher insisted on being called. He was called "The Manchurian Candidate" in his own firm. His largesse in sponsoring the trip to Alaska rivals Foxcatcher's in starting the natatorium as well as the wrestling facility. While he shared Foxcatcher's interest in philately, as far as I know he was not interested in conchology. I have Foxcatcher's book on the volutes in my library and share the conchologists interest in classifying and observing them.



The normal pattern for INDEX options open interest is for the OI of puts to exceed that of calls. It happens more than 90 percent of the time. It's a bit easier to see if you smooth the data, recognizing that it has a 21-day periodicity. But from approximately January 2013 to September 2014 call index OI exceeded put index OI (or was close enough to be indecisive). Since late September the pattern has reverted to historical.

N.B. the OI pattern for individual equities is that calls outnumber puts, all the time.

A return to normalcy?



 My daughter and her mother have a recurring holiday joke that probably has its origins in their love for "Diamonds Are a Girl's Best Friend". (Their favorite part: Time rolls on, And youth is gone, And you can't straighten up when you bend. But stiff back Or stiff knees, You stand straight at Tiffany's.) The holiday joke is this: "Memo to True Love: Keep the Animals, Send the Rings".

The joke is mostly a tease of my interest in the Constitutional gold standard and love of its savior Ulysses Grant. It certainly is not a hint about what I should do to express my gratitude, lover and devotion. (The women will buy their own jewelry, thank you!). But it does remind me of another part of the Constitution that they do insist on importing into our domestic lives. It is Clause 7, Article I, Section 9: "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time."

The only debate in Philadelphia was over the question of how often the statement and account would be published. Many wanted it to be annually, and some even monthly; but it was agreed to leave the scheduling question to Congress.

The accounts here in Chaos Manor are produced monthly, and they are models of 19th century American book-keeping (which is to say, 13th century Italian accounting). All Money is recorded without regard to whose name - human or corporate - is on the account, all assets are marked to the market or to the estimation of market price based on the most recent similar transactions, and all debts are booked at their full liabilities without any discounting. What is never calculated is a rate of return. All really, really, really small businesses (those that in good years earn their owners the equivalent of a GS-15, Step 10 base salary - roughly $2500 a week) are incorporated wallets. They have no access to credit other than credit cards and the asset prices of the businesses themselves cannot even be estimated because there are never any real comps. So, a rate of return calculation is meaningless. So are projections. There is no way to predict how often the phone will ring or an email will arrive with a customer order; and we certainly have no control over prices. All we can estimate about the future are costs. And the goal - every year - is find ways to make those go down by figuring out how to do the same thing better, cheaper, faster so we can follow John Wanamaker's example and waste at least half the money we spend on adding more and new things to our inventory of stuff to sell.



Here's a very educational article on why forecasts based on trend lines are always biased to look disturbing with some nice references, allusions, and diagrams from this list's favorite statistician, (also the namer of this humble old shaver's first child).

Gyve Bones adds: 

Trend lines, no matter how they are drawn, whether projecting rays into the future from price extremes, or drawing a least square fit line, or doing a polynomial curve fit line, or a moving average… One simply must understand how the line is calculated and take pains not to delude yourself by drawing a line into the past which contains information which would not have been available at that point in the past. A common way this is done is by drawing a trnedline through two lows, and extending that line leftwards from the first of the two lows. Most charting software does this by default, and it tricks the eye and the mind in a subtle way.

The problem with the original chart Larry posted was not the regression line per se, but in the lane below where an indicator was calculated showing how far above or below the regression line the price is. Here is where the contamination of the analysis happens. The indicator first calculates the regression line for the entire data set from alpha to omega. Then for every time interval between alpha and omega it measures where price is relative to that line and normalizes that value to some scale. then it looks at points in between where there was a high, like 1929 before the crash and says ah, the level of the indicator is 74, so anytime we get to a level of 74 we are in danger of a crash. But that number, 74 has encoded into it knowledge of the future. If one had calculated the same indicator in 1929, it would not have been 74 on that same date. The indicator is time-unstable.

The regression indicator posted in a subsequent post is time stable because it doesn't use information from the future, only information from the last to produce the value. This is a better way of using the tool, according to me.

I don't think we can generalize and say either trend lines are good or trend lines are bad. They can be used well or badly. He key is finding a way that will work logically and reasonably and that works for you. If you can make money using trend lines drawn on charts, then it is a good thing, subjectively. The only thing we can say objectively about the methods is that they can be dangerously deceptive if one doesn't understand how the lines are constructed, and one unconsciously is creating a tool that uses next week's Wall Street Journal as a source. That would be building a foundation for market analysis on sand.

anonymous adds: 

To the extent trendlines are useful the ideas surrounding how to "trade" them can be simplified. For example buying at a trend line support level is just a visual way of buying a dip in a rising market. There are simpler ways without the ambiguity to define this event that will most likely generate more events as well - making the underlying idea easier to evaluate. At the same time if one has evaluated millions of variations of a basic idea that tends to work or have some merit, what is the harm in trading that basic idea off of a visual cue? Perhaps the failure to scale well and movement toward mental laziness.

Sam Marx comments:

This can be said about many TA tools and indicators. For example, you cut a piece of data from alpha to omega, today is omega, calculate a mean and volatility for the sample, and then you may find that volatility at omega is extremely low which can lead to certain things. No one cries that somewhere before omega we measured volatility relative to mean which took into consideration the whole interval alpha-omega. All signals are usually generated for the period omega +1. I think the core weakness of these studies is that we can prove whatever we wish almost regardless of tools by simple selection of look back in these rolling derivatives of price.



 Here is an interesting article about hacking passwords: "How Crackers Make Minced Meat Out of Your Passwords". It has an obvious relationship with counting.

"It's all about analysis, gut feelings, and maybe a little magic," he said. "Identify a pattern, run a mask, put recovered passes in a new dict, run again with rules, identify a new pattern, etc. If you know the source of the hashes, you scrape the company website to make a list of words that pertain to that specific field of business and then manipulate it until you are happy with your results."



 In honor of our new spec and Larry, I hypothesize that like Pascal's Law, that a small move in a big market will cause probabilistically, a large move in a smaller market. I'll give 1,000 bucks to the personage that comes up with the best predictive relation on that theme.

Mr. Isomorphisms replies: 

I would start looking in smaller markets that are dependent on the larger one. Eg, look at a town where >50% of the workers are employed at one company. The decline of various parts of Detroit's supply chain could fit this story. Or Iceland/Scotland with their large banking sectors relative to within-country wealth.

Steve Ellison writes: 

Chair: "I hypothesize that like pascal's law, that a small move in a big market will cause probabilistically, a large move in a smaller market."

Let us first get an idea of which markets are big and small. Glancing at the futures contract listings in the newspaper, here are some rough estimates of open interest:

3-month Eurodollar 10,000,000
S&P 500 e-mini        3,100,000
10-year US Treasury 3,000,000
Crude oil                  1,300,000
Soybeans                   670,000
Euro                           465,000
Gold                           400,000
Wheat                         360,000
Cocoa                         175,000
Copper                        155,000
Silver                          150,000
Palladium                      31,000
Oats                               8,500
Lumber                           5,000

Next, I would like to introduce the bullwhip effect. Most goods have a "supply chain" that begins with raw materials, progresses to components and finished goods, and may include warehouses and stores. The bullwhip effect posits that, the farther "back" in the supply chain an operation is (farther away from the end customer), the greater the swings in production and inventory will be in response to fluctuations in end customer demand. Here is an article on the subject.

During the dot-com crash in October 2000, stocks briefly rallied on a glowing earnings report by JDS Uniphase. The CNBC screamer correctly noted that JDSU was a component supplier, farther back in the supply chain, and its record sales had probably just bloated the inventories of companies such as Cisco Systems that had already reduced forward guidance.

From this perspective, lumber seems a good candidate for a Pascal's Law study. It is a raw material that must go through additional processing before reaching most customers, and its futures market is very small. The S&P 500 is a large market that theoretically is based on the whole economy and should be more sensitive to final sales.

Using 3 months as a rough rule of thumb for total lead time in a typical supply chain, I compared quarterly net changes in the S&P 500 with net changes one quarter later in the lumber price.

LUMBER                        S&P 500
          Adjusted  Net              Adjusted   Net
Date      Close     change   Date    Close      change
                           09/30/11   1048.50
  12/30/11   291.1         12/30/11   1180.75  132.25
  03/30/12   283.0   -8.1  03/30/12   1337.50  156.75
  06/29/12   294.8   11.8  06/29/12   1297.50  -40.00
  09/28/12   311.3   16.5  09/28/12   1382.00   84.50
  12/31/12   391.4   80.1  12/31/12   1373.75   -8.25
  03/29/13   407.6   16.2  03/28/13   1521.50  147.75
  06/28/13   310.2  -97.4  06/28/13   1563.75   42.25
  09/30/14   355.7   45.5  09/30/13   1645.50   81.75
  12/31/13   365.7   10.0  12/31/13   1818.75  173.25
  03/31/14   334.4  -31.3  03/31/14   1849.25   30.50
  06/30/14   340.3    5.9  06/30/14   1944.50   95.25
  09/30/14   338.0   -2.3  09/30/14   1965.50   21.00

There were only 11 data points since 2012, not enough for significance. In a regression, the t score was -1.55, and the R squared was 0.21.

The quarterly changes in lumber were a little larger in percentage terms (about 8% mean absolute change) than in the S&P 500 (about 6% mean absolute change).

Victor Niederhoffer writes: 

Excellent. You win the prize. Everything a report should be. (A little weak on the predictivity but not your fault.) If it was easy, we would all be wealthy men. 



Big move covers small move is the "secret" to most magic effects. As a small move that covers a large one would have a very small ability to "predict" stocks.



A disturbing chart: "This is Probably the Second Worst Time in History to Own Stocks"

Bill Rafter writes: 

The trouble with the chart is that the regression fit was done cumulatively, resulting in older data being subject to look-ahead bias. Thus only the current values are useful, and one wonders exactly how useful. As Steve has commented, the way to foil that is to use a moving regression fit in which the values are static over time, always taking the last point in the fit. Thus all data, past and current are relevant and can then be used in statistical studies.

The question that then comes up is which lookback period do you use. Wherever possible all lookback periods should be adaptive, the question then being to what input. In shorter term price data the market will tell you the relevant lookback period. I have never tried determining lookbacks for longer term data because (a) I don't expect to live long enough to take advantage of it, and (b) too many things can happen in the short run to screw up a good plan. Most people don't marry someone in their 20s based on the supposition that (s)he will look good in their 70s.

I also question the use of any equity or debt data prior to 1972. If you don't know why, ask Stefan. **That's one of the great things about the list; there are sources for just about everything.

Several moving functions you should consider:

Moving linear (i.e., regression) fits and their slopes.

Moving parabolic fits and their slopes. Since most economic and price data are parabolic, this is the better of the two. There is also something to be gained in the difference between a parabolic fit and a linear fit. Fitting parabolas is quite tricky, and it took us a while to code it. If you try to do so and want a check on your efforts, try fitting a parabola to a straight line. If the result is ludicrous, try a different method.

Moving correlations are particularly interesting between markets that might be alternatives to one another. Moving correlations between stocks and bonds (levels to levels) are something we have used for years and continue to do so. I thank Gibbons for his comment that Colby & Myers recommended them, as I had not been aware of that. (I'm not a fan of C&M.)

Gyve Bones responds: 

Colby and Myers didn't recommend the linear regression study per se… the empirical analysis simply showed that study to perform best with a fixed loopback parameter over NYSE index returns data over a long period of time compared to other trend following signal generators. This book was an early attempt to quantify different approaches to see how they performed trying as best as can be done to compare apples to apples. In the mid-to-late 80s, it was the best thing that had been done like that since Dunn & Hargitt's study using punch card futures data in the late 1960s (which found that the Donchian Four Week system was best, the system which launched a thousand CTA, including the Dennis Turtles and their spawn.) Another similar study was done in the 90s by Jack Schwager and another fellow whose name escapes me at the moment which was well done.

Larry Williams adds: 

A question: when was the regression line fit? Today? 20 years ago? 50 years ago? The slope will change based on your starting and end points. How overbought or sold is a function of this. A more careful analysis would either apply this same "method" every year with a set of rules (i.e sell above x% overbought) or would do the same thing on a rolling window basis. It's an interesting chart nonetheless and gives one pause, but I would suggest it lacks a certain amount of rigor. 

Gibbons Burke writes: 

It seems to me that this is a flawed chart to look at historically to make rules from because the trend line drawn into the past contains information about the future. The line is drawn using the linear regression of the entire data set so, for example, the line segment covering 1998-1999 "knows" about what happened in 2014. Very deceptive and misleading to make a rule based on the relationship of the data to the trend line.

Victor Niederhoffer comments: 

The disturbing chart is a case study of why charting is so misleading because of the regression bias and also at the variance of a sum is the sum of the variances. 

Steve Ellison says:

Here is the way to solve the problem of the regression line incorporating future data. Attached is a graph of a "moving regression", as Dr. Rafter calls it. For each date, the red point is the last point of a 30-year regression of the S&P 500 as of that date (the graph is from 2010).



 An all seeing eye could write a novel about what happened today. Some lessons seem to cry out. Buy on the announcement of the bad news. Gold lost the vote in the mountains, and oil lost the OPEC meeting amid talk of 40 buck oil. They both sent up 10% or so from low. The first day of the month is the most bullish day. Great. Too many people know it. Great time to sell when it don't open the right way. Bonds, nas, and dax finally went down after 12 or 13 of the last 15 up. Nothing goes up forever even stocks and bonds. Gold's price up 50 bucks from its overnight low has nothing to do with deflation. It's beautiful, useful, and a hedge against evil. When the battleship is leaking, that's the time to buy. Commodities all around at 5 year low. They're up 3 or 5% today.

What other things do you see that the all seeing eye should note?

anonymous writes: 

The sneak attack has to come at night, on a holiday, when the Americans, and only the Americans, are eating turkey and on holiday, stuck in airports.

Ken Drees comments: 

The grains at the end of the summer–indeed. 

Gary Rogan writes: 

Something needs to be done to avoid the supposed "government shutdown" by Dec. 11. Talking about it could provide some mild market-related entertainment.

Steve Ellison writes: 

Silver made both a 20-day low and a 20-day high on Monday. Going back to 2006, I find no previous occurrences of such an event.

Craig Mee comments: 

It would appear the commodity turn around was a function of a Friday Monday suicide run created by combined single factors and then astute cover, not by a function of any meaningful low being in and a return to global meaningful growth.

Duncan Coker writes:

March Chicago wheat had a robust move to the upside almost at limit on Monday, which in this case was not mimicked by the other grains, in other words grain spreads got a lot wider.

Jeff Watson comments:

Yesterday, the spread between beans and wheat narrowed, and is still narrowing, while the spread widened with corn. Spreads in wheat stayed pretty much in line. Due to arcane exchange rules for the delivery in grains, there is much gamesmanship in the front month that's ready to expire. The gamesmanship comes from the cash side of the business.



 Unusual comments in this article: "Oil Shock Streaks Across Globe From Moscow to Tehran to Caracas. Ready for $40?" .

The exploration budgets vs. chaos take–a correlation with rioting in Venezuela? Who blinks first?

"If the governments aren't able to spend to keep the kids off the streets they will go back to the streets, and we could start to see political disruption and upheaval," said Paul Stevens, distinguished fellow for energy, environment and resources at Chatham House in London, a U.K. policy group.

"The majority of members of OPEC need well over $100 a barrel to balance their budgets. If they start cutting expenditure, this is likely to cause problems."

More from Professor Stevens:

However, in terms of OPEC's current strategy, the break-even price is the wrong metric. What matters in the next few years is the shut-in price. After the 1986 price collapse, a number of stripper wells in US (with high variable costs) did close, but the loss of production was minimal. North Sea production, which had been OPEC's prime target, was hardly affected and actually increased in 1987. The current level of shut-in price for shale oil is again debatable, but almost certainly is well below $40 per barrel. Thus it will be some time before existing shale oil production falls, even if prices stay low. Should the oil price fall towards variable costs, threatening shale supply, it will be the OPEC producers who must blink first. They will then try to take back control of the market, if they can.

See more at: "Deja Vu for OPEC as Oil Prices Tumble".


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