This strange, ancient mariner guy shuffles over to us as we stand, 8:30 pm, in the short but growing queue outside Alice Tully Hall, where the movie will have its world premier at the 53rd Lincoln Center Film Festival. His hair flyaway, his body flapped in summer wear too light for the evening chill in the early autumn air; his skinny height curved in a cautious concave half-parenthesis.

"What movie?" He demands.

We tell him, "The Walk."

"Great special effects, average story…" he mumbles, wandering off uptown. We yell after him: "Have you already seen the film?!" He doesn't turn back. He's off to other adventures, the albatross having evidently flown from his back.

When we get to the auditorium, seated very close to the stage where a moderator introduces director Zemeckis and a dozen of the producers, photographers and lighting geniuses that created a 3D worth the time and effort it takes.

Behind us, Philippe Petit grins from a balcony in a floodlight illuminating his pixie genial face and those of stars Joseph Gordon-Levitt and the piquant female lead, delightfully named Charlotte Le Bon. From 'way up front, we can't see if co-star Ben Kingsley is also waving down at us all; the angle is wrong. The vast 2,000-person audience smiles and claps, delighted with our privilege at seeing the real deal, the actual tightrope walker, himself.

We weren't prepared for the gripping suspense of the story, as Petit/Gordon-Levitt goes through an amazing series of 'wire-walks' in his native France, sneaking into closed-for-the-night circuses, entertaining passers-by on the streets of Paris. Neither were we prepared for the spectacular and, frankly, eerie special effects of the film that spookily recreates the World Trade Center, up-close, constant, right there in front of you.

We know about blue-screen and all, but this work is altogether dizzying with verisimilitude.

The big shocker is that this meticulous planning of a caper plays like a heist, and we are along for the prep, the setups, the disappointments, the last minute reprieves, the heart-in-your-throat anxiety—will it work?

Hate to say it, but the Petit-gathered "accomplices" that Petit/Gordon-Levitt recruits to traverse the abyss of the 110-storey-tall towers gathers undeniable force, aided by the masterful stars and the outrageous effects that create both the height and the depth of the now-demolished Twin Towers. There is compelling movie-making here, as the plan to wire-walk between the buildings is, of course, illegal, daunting, unheard of. Crazy, sort of. You really can't figure out why anyone would do such a thing, even if their lifelong love is walking on wires without a safety belt—and without even the suggestion of pay.

Don't know if others felt as unnerved by seeing the towers in the glimmering distance and immediately in our faces, remembering that they are no more.

Of course there is no mention of the coming destruction of 9/11, as this was all done in the planks and wheelbarrow days of the WTC construction effort. Back in 1973 and '74, before the concept of al Qaeda was even a speck in the eye of Condoleezza Rice, Donald Rumsfeld or George W. Bush.

Not a swear word to be found, nor even a teeny sex scene. (Two chaste kisses, okay.) The focus is die-straight. And despite our misgivings about the tragic future of the vaulting towers, It elicited round after round of applause at the final shot. There are a few out of chronology fails we caught, but most people will miss them, or won't mind. Even the doubters, like us, were wowed by the effort, the acting, the filming, the suspense, the dizzying strength of the effective and powerful 3D, which really makes you jump, cynical as you think you are.

Even kids can appreciate this goal-focused tale—and how often can you say that about adult films nowadays?

And "average"? This is no average walk in the park.

Jim Sogi writes: 

In the 70s I was a delivery boy for my father's Wall street law firm. One of my deliveries was to the lower floor of the still under construction World Trade Center towers. I thought while I was there I'd punch the high buttons on the elevator. When I stepped out, there were no windows up a 100 floors and the wind was whistling through. On that bright summer day I could see to the ocean and the mid west, almost to California, or so it seemed.

Russ Sears writes: 

Mr. Sogi's story, the review of the movie the Walk and the conquest of Mount Everest by Mallory all remind me of the days I would go out on a early Sunday morning run going over a marathon distance at a pace that wins most amateur marathons. There were plenty of memorable sights a few wild adventures and plenty of solitude with nature outside and within me. But the reason I did it for as long as I could was a slight variation to Mallory's supposed quote, "because it's there"…. No it was "because I can". Despite what one might feel about a deity or nature, this time spent experiencing my world on the edge of what's humanly possible, assures me that conscience experience is at the heart of existence. Perhaps through quantum mechanics this connection can be quantified. 



 Can this be explained in words so that a reader like me can understand it? The question arises: how to explain this to a normal person not a statistician?

"The ‘Hot Hand’ Debate Gets Flipped on Its Head: A new paper shows how a simple coin toss may prove that basketball players really can get hot"

Prof. Stigler ?

Steve Stigler writes in: 

Here's one take.

It comes from averaging relative frequencies over different numbers of trials.
Here are the possibilities for n=4 and the relative frequency of H following directly after H:

HHHH 3/3=1
HHHT 2/3=.67
HHTH 1/2=.5
HTHH 1/2=.5
THHH 2/2=1
HHTT 1/2=.5
HTHT 0/2=0
THHT 1/2=.5
HTTH 0/1=0
THTH 0/1=0
TTHH 1/1=1
HTTT 0/1=0
THTT 0/1=0
TTHT 0/1=0
TTTH 0/0 undefined
TTTT 0/0 undefined

Total rel freq = 5.67; average over the 14 cases that give data = 5.67/14= .40
Even though the number of successes is 12 out of 24 cases of looking at a
result after a H.

Victor Niederhoffer adds: 

But isn't there a conditional probability explanation for this from normal statistics of bayesian or just conditional nature. Seems like a simple math team problem. 



 A beautiful bio: "Om Prakash Munjal, cycle tycoon - obituary". Entrepreneur who conquered the Indian bicycle market.



Jack Reacher, from Jim Sogi

September 30, 2015 | 1 Comment

 Jack Reacher is my favorite fiction character by author Lee Child. He's an investigator that suggests thinking like the perp to find him. Use his same thought processes to deduce where he'll end up.

When trading, I try to think how the sellers, especially a panicked seller, might think. Or how the buyers might think, and when they'll start buying. There are tells, there is the statistics of how they reacted in the past. It's helpful to think in the other guy's shoes and be one step ahead, proactive rather than reactive.

Ed Stewart writes: 

I've found that to be one of the most valuable thought processes for trading. Either anticipate the squeeze point or fade after it occurs at an appropriate distance (biased to trade with any drift).



 There is no such thing as a bear market. Nor is a 10% decline more likely to be followed by declines than rises. The limited number of such moves in past makes it completely non-predictive even if there were some conditional moves following it that were different from the first. However, the moves at the close yesterday before the 23 pt rise today have the semblances of death throes.

if we have any experts on such besides the hobo vet, it would be good to hear their insights.

Bo Keely writes: 

The pressed dinosaur image in the death throes article you linked to has a more probable explanation. I disagree with the paleontologists about the cause of death being agonizing and with the vet who diagnoses the cause as opisthotonus. It makes more sense that nearly every dinosaur skeleton, whatever the cause of death, is slowly weighted by accumulating layers of dirt, which press it into that position.

anonymous writes: 

1. The common definition of a bear market is a 20% decline from its most recent high price. The common definition of the Loch Ness Monster is a cryptid that reputedly inhabits Loch Ness, a lake in the Scottish Highlands. Some will say that neither exist. I have the photos of both.

2. The necessary condition for a 20% decline is a 10% decline. Hence the probability of a 20% is infinitely higher after a 10% decline than before a 10% decline. Based on what I've read, the pundits are obsessing whether this is "2011 all over again" (whatever that means). I am trading with the view that the answer is more likely "no" than "yes". Whatever that means.



I was discussing life expectancy vs. average age at death vs. life expectancy at birth and found the following article which was helpful: "Why 'life expectancy' is a misleading summary of survival". The discussion helps explain some problems with mean, median in skewed distributions.

The clustering in the skewed distribution of deaths was interesting. When I look at trades at certain prices, I see a clustering at certain prices. I think we notice this in the round number effect. Analysis of rounds is difficult due to adjusted prices at rolls. But in the same contract, or adjusted, there is clustering. Seems there might be some information there along the lines of my previous post on long thin bars and ranges.



 One wonders if the volkswagen problem is endemic to all industries regulated by their colleagues at the agencies. Since the companies vet and establish the regulatory hurdles, they would have every reason to design a way to pass the tests. The drug companies with their supposedly double blind studies of individuals free of other diseases who complete the tests, from a carefully selected group to start come to mind. The problem must be legion? Is this a reasonable way of thinking or am I overly cynical. I believe my father wrote a book or two about this starting with his cynicism tests for policeman in Behind the Shield.

Jordan Low writes: 

That makes sense. Reminds me of Self-Regulatory Organizations — looks like bankers, lawyers, doctors and realtors all have their own version.

anonymous writes:

A candidate for some measure of malfeasance in this 'technologically enlightened' age is surely the click through advertising piece; for example, advertisers paying based on number of clicks.



 One for Dr. Bejan.

The Coffee Ring Effect is a well-known phenomenon. A puddle of coffee leaves behind a dark ring, instead of a uniform brown stain. This video explains why— and how this phenomenon resembles what happens in an avalanche.

Dr. Adrian Bejan replies: 

Dear Victor and Pitt,

Thank you for this excellent video. Very inspiring.

I have not worked on predicting the coffee ring phenomenon, but I worked on related phenomena. Here I show you two related ideas:

First, my short video on predicting the architecture of the snowflake, which is based on an article in nature scientific reports.

Second, my article on how to predict droplet impact behavior, splat vs splash. No film about this yet.

The broader domain of life and evolution as physics, to which all evolutionary flow architectures belong, was reviewed during my lecture at the NYC Junto on 3 September.

With best wishes to all,


Adrian Bejan ( MIT ' 71, ' 72, ' 75 )
J.A. Jones Distinguished Professor
Duke University



 The movie Everest is riveting with displays of market risk. Without spoiling the summit, the history of Everest passes from 1953, when Edmund Hillary became the first up, to the present as four groups daily attempt the top.

Everest is the archetype on thousands of similar, though smaller, expeditions that set out daily around the world to reach natural wonders. I've been on a hundred of these: to waterfalls, peaks, wildlife fields, and elephant boneyards. Everywhere capitalism has invaded the guide business.

In the first hour of the movie it's difficult to hold still in the seat and not crawl into the plot to boost someone up a ladder, across a crevice, or hold the breath as oxygen dwindles near the summit. The competing agencies recruit, outbid, and sabotage each other to get clients up there first.

And then there's the celebration of cashing in at the top, and saying, I did it. Everest has brought market risk to the silver screen.



I thought I knew Mr. Ralph Vince pretty well until Monday night football which prompted me to search out his Grandfather, a Cleveland Brown stand out player and–inventor of the face mask as well as the play sheet "app" quarterbacks wear on their arm.



 Today's market (9/29/2015) reminded me of the scene in Princess Bride where the Sicilian is choosing the vial with the poison with the hero. The Sicilian is trying to double, triple or quadruple reverse out think the other guy. I know, that you know, that I know, so I will triple reverse out maneuver you.

Today the market is trying to out maneuver the FED so when the Consumer Confidence is higher, it means the FED knows the economy is not as weak as it thought so it makes it more likely to raise, which will affect the market, so we'll sell the market… but no, if the confidence and economy is strong then that's good, so we'll buy. Hence the quadruple pump.

After declaring his invincibility the Sicilian drinks the vial and promptly dies. The other guy had previously built up an immunity to the poision, and both vials had poison.



I did an interview with Marketsanity on why I expect a recession ahead. It includes six charts.

It is an interesting web site as well.



 I like to go on adventures. I am a ski mountaineer, and I like to go out on the ocean. You make your plans. You are prepared and have contingency plans. You've picked good weather. You have the best equipment. You know what you are doing.

As you hike up into the unknown, where you've never gone before you don't know exactly what will happen or how it will go. That is part of the excitement. You hope everything will be okay, and it usually is. If things turn bad, you turn around. You always want to return home safe. If things are good, sometime you extend your trip, or go further or bigger.

A trade ventures into the unknown in the same way. You don't know exactly what is going to happen. You've entered at the right spot and the plan looks good, but you just don't know how it will unfold. Hopefully things go well and you succeed. Sometimes you have to turn around. The main thing is, you don't want to get killed.



 We often hear that hard work is critical. I agree. But what about the power of waiting? Anxiety can drive one to take an action that is inopportune, not ideal, rushed, or sloppy. Wait and pick the fruit when it is ripe. The idea is related to time preference. I came to the idea when I noticed that much, if not most, work is a salve to cure the desire to "do something" instead of accomplishing something real. So what if one sits back and just waits and by waiting accomplishes in minutes or days or weeks what could not otherwise be accomplished in most of a lifetime. Is it possible? Yes, I think so, as long as one can work hard when needed and on command.

Vince Fulco adds: 

Very hard work is often an avoidance mechanism, and a terrible one, for active or passive significant underdevelopment of the rest of one's life…especially hard relationships which require smoothing out or resolution. I am seeing it with unhappy married friends now who work ridiculous hours because the thought of confronting the elephant in the house is too painful. I think it is a middle eastern saying, "if you wait long enough, your neighbor's body will pass by your doorway."



October 1st will be the day a new power market appears. It will be the product of a merger between two existing systems. The "Integrated System" (IS) is a emerging power market for Northern states. The "Southwest Power Pool" (SPP) is a more mature market for southern states. The merger will be called SPP.

The new SPP will cover 575,000 square miles from northern Texas to the Canadian border. It will serve all or part of Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming.

Not everyone is happy. The City of Lubbock will have none of it. They plan to jilt SPP and join Texas' closed system, which is called the Electric Reliability Council of Texas (ERCOT).

Also a neighboring market seems upset. SPP finds itself squabbling with the Midcontinent Independent System Operator (MISO) over territory and market rights. Perhaps MISO had grand plans to eat SPP or IS, but did not move fast enough or provide good enough offers.

SPP's new market footprint will serve a large portfolio of coal generators. While emission compliance is not their responsibility, SPP may price coal resources near the margin.

This merger is part of a grander plan. The Federal Energy Regulatory Commission (FERC) wants the entire nation to use markets. Many states resist. In particular, states located in the southeastern portion of the country hate FERC's idea. South Carolina, Georgia, Alabama, Mississippi and neighbors currently resist free markets.

It's not just the states. It's also utilities regulated by the states. Southern and Duke would prefer to have FERC stay out of their business.



Commodity fallout has put a lot of pressure on Glencore recently. Their CDS spreads have widened greatly over the past few months.

For the spec-listers who are of the commodity bent, how may this distress affect commodities?

Not that Glencore is involved, but when Lumber hits a 52wk low Thursday and new home sales were up 5.7% in August, released on the same day, I wonder if company specific problems are causing the dislocation.

Of course China is slowing. But I am more interested in Glencore.



While helping me pack the SUV the other day, the 5 year old casually remarked, "I went to the doctor today". Oh yeah, how did it go? I said. "I got a shot". How was that? "Painful! he responded, with a slight grimace. I know how you feel. I had to get out of my long SPOOs today. "How was that?" he remarked. Painful! I lamented, with the very same look on my face.



 This excerpt about Yogi Berra is from "The Last Catholic in America" (1973), a book I have treasured through the years as the author was in many ways my youthful, angst ridden doppelgänger, and Bapa, the grandfather who shared it.

The first man Billy Pierce had to face in the top of the ninth was Tony Kubeck. On the first pitch, Kubek hit a high chopper to White Sox second baseman, who threw him out by twenty feet. The next Yankee up, Bill Skowren, also swung at the first pitch and lined it right back to Pierce.

The White Sox were now one run away from shutting out the Yankees and Whitey Ford! One out away! Just one!

Then Mickey Mantle, the clean-up hitter, drilled a single to center field. Two out, a man on first, and we still led the New York Yankees by one run. One more out and it would be all over. Just one more.

Slowly, the Yankee kneeling in the on-deck circle got up and began moving toward the plate, waving four or five bats around his head. His squatty legs had apparently forgotten to keep up with the rest of his body. His beefy shoulders almost hid his neck.

As he stepped into the batter's box, he threw four of the bats behind him and leaned the chosen one against his shoulder. Yogi Berra was ready.

Billy Pierce checked Mantle's lead over at first. Then Pierce pulled both feet together and proceeded to slowly rear back on his left foot, stretching his left arm so far behind him that he appeared as if he were going to knock the center fielder's cap off. At the peak of his windup, Pierce's body became momentarily motionless. An instant later, Pierce started leaning forward , his arm came racing over his head, and the hand released the ball as the windmill lash of his body sped it toward the plate.

The ball was coming low and outside. Yogi Berra stood dumb. The ball was almost past him. Suddenly, the springs unleashed in Yogi's wrists, the bat ripped off his shoulder, and the smack of bat on ball migrained through the park…

I looked back toward the field. The ball was just beginning to come down. That familiar thud of Minnie [Minoso] went plowing into the wall and crumbling at the base of it. The ball landed in the upper deck, fifth row, seventy feet over Minnie's head. A two run homer.

As Yogi went into the dugout, a few of his teammates patted him on the behind as he walked by. None of the Yanks seemed too terribly excited, though. Pros don't get excited…Already the crowd was moving towards the exits even though the game had half an inning to go…By the time we reached ground level, the final score was being announced: New York Yankees 2, and the White Sox 1.

"Well," said Bapa, "one more time and Minoso will tie Wallerson's* record."

"Think he'll make it, Bapa?"

"Oh, I think so. Minoso's got the head for it."

*Woody, 'The Wonder' Wallerson, established the record for being carried off the field unconscious after running into the outfield wall seven times in 1914.



Will someone explain to me how a 57% man survey versus a 57.5 consensus in cha— must be 1 in 200 varied, with a standard deviation of the number of 5 percentage points or 25… could cause an immediate drop of 20 points in SPU and 300 in Nikkei et al. Is it random? Is it bullish or bearish in itself? The old story… a number is seen as bad for China. The US markets swoon. And then China goes up regardless, but the bearishness persists. When people are bearish they're bearish.

Gary Phillips writes: 

Herd behavior appears to have become more institutionalized i.e, ETFs, risk parity funds. Traders need to adjust to the reduced level of liquidity (Volker Rule's effect?), and the higher level of realized and implied volatility. Eventually these things sort themselves out and the fundamentals reassert themselves. I suspect that's what will happen this time too. 



 So you've decided to go vagabonding.

What you're doing is courageous, logical, and not that unusual these days.

The bottom line is you've decided to jump the fence of your backyard to explore what's beyond. I did this metaphorically and physically as an Idaho spud, and haven't turned an eye back.

For you, good things are ahead. In the 1990s it was just becoming popular for citizens to step outside their country or second nation borders to live. We travelers called their areas 'pockets of ex-pats' and they were small but established in a town or site in nearly every third & second world country.

Now, however, the movement is grander, with hundreds of these pockets around the world, and up to tens of thousands in each. Some I've visited or heard about first hand in the past few years are Saigon, large cities of India, Seoul, Bangkok, a number of Chinese cities, and many more.

The nuts and bolts of finding and selecting one is simple. Get a Lonely Planet guidebook (at any Barnes & Noble) for the country or region you wish to penetrate. Use the guide in plotting a rough itinerary & picking a places to stay–immediately you'll be hooked into the travelers' grapevine. This is because almost every travelers use Lonely Planet, thus end up using the same facilities. You'll be sitting in a hotel, hostel, cafe or bar with dozens of other travelers and tourists from a dozen countries speaking four languages (English dominates) and you simply listen or ask what you want to know– where should i go for this or that.

Nearly every traveler I meet these days is a 'digital nomad', except me with my muddy boots.

If you are targeting India, Bangkok or Buenos Aires, I can provide contacts.

Your exploratory trip should connect the dots of possibilities, staying only a couple days at each, and allowing for side trips to nearby pockets of ex-pats doing the same thing you want to do. It's a scouting trip for overview. In one month, with diligence, you can have composed, and visited, twenty strong potential sites. The next step is to pick the top three, and live at each for one month to get the feet wet. Then jump in.

if you decide not to jump in, you will have had a wonderful time.

Pitt T. Maner III writes: 

In Central America, Nicaragua, is an interesting and beautiful country I have visited and lived where one can find the finest coffee, good cigars, and excellent rum, or live healthily and eat many exotic and delicious fruits (dragonfruit, nispero, papaya, nancite) and hike through the amazing cloud forests and waterfalls of dormant volcanos. The people are friendly and generally happy and positive. 



 (I understand that Shkreli has announced that he will reduce the price but has not said what the new price will be. This is no matter. This analysis stands whether the price is $100 or $750 per pill.) The vilification of Martin Shkreli, who the Internet has dubbed "The World's Biggest Asshole", raises a number of interesting issues.


1. What is the proper price for the drug Daraprim?

2. Why was it selling for far less very recently?

3. Is Shkreli, in fact, an asshole?

4. Who is more moral, Shkreli or the Internet Masses?


1. Roughly $750 per pill.

2. Because the previous owners were more concerned about their reputations than Shkreli is.

3. Yes, he is, that is why he was able to realize the revenue maximizing price.

4. Shkreli

Let's examine the issue: Daraprim (despite being called an HIV drug in the media) is a drug that treats toxoplasmosis, which is caused by a T. Gondii infection. Some of these patients are sickened because their immune system is weak from HIV. T. Gondii hospitalizes approximately 9,000 people in the U.S. per year. It kills about 700 of those 9,000. It is preventable as long as you wash your hands after exposure to cat excrement. It is also important to properly prepare your food.

Congenital Toxoplasmosis effects about 3 per 100,000 live births. Turing has stated that at $13.50 per pill revenues are about $5 million per year. $5 million/ $13.50 = ~370,000 pills produced per year. At roughly 9,000 patients hospitalized per year, that equals 41 pills per patient.

What's the right price for these pills? For many years Glaxo sold them for $1 per pill. Glaxo sold the rights to Core Pharma in 2010. Core Pharma over a few years raised the price up to $13.50. Core than sold to Turing, which raised the price to $750 per pill.

So, in a relatively short period the price went from $1 per pill to $750 per pill. Why is that? From the drug marketer's point of view, there is a pricing sweet spot that maximizes revenue. The payors (mostly insurance companies, and various government programs) do a cost benefit analysis on treatments to decide which treatments they are going to cover.

The analysis can be complicated, but for the purposes of this article it comes down to "is it cheaper for us to pay for this treatment, or to pay for an alternate treatment and/or the side effects of not treating at all?" Ideally a drug marketer would price his drug at the perfect price where it is just high enough that the payors are willing to cover that price.

What is the ideal price point for Turing? I sure don't know, but I do know this: Shkreli has done this before, and backed with $90 million of venture capital money has surely done the most in-depth analysis of the matter, considering all the many variable involved. So, in answer to question 1, the revenue-maximizing price is $750. From the standpoint of the business owner, that is what the price "should" be.

If that is the case, why didn't Glaxo or Core raise the price that high? Were Glaxo analyst's idiots who could not figure out that the sweet spot was well over $1 per pill? Were Core Pharmaceuticals analysts slightly better than Glaxo analysts, raising prices from $1 to $13.50 but not realizing that it could have been raised to $750? When analyzing the price to sell Daraprim at that analysis must take into account not just the potential revenues but also the liabilities. As this case has proven there is a downside to sharply raising drug prices, namely, the wrath of the public and politicians.

In this case it is not a surprise that the price that the three companies were willing to sell Daraprim at is inversely proportional to their size. Glaxo is a massive company that carefully navigates public opinion and the halls of Washington to maximize it's profits, which includes doing things that make it look bad to the public for little or not gain. Core Pharma is a smaller company. I can't find the financials at the moment (appears to be private), but it is far smaller than Glaxo, although it has a few big drugs such as Adderall. Core was willing to take some reputational risk as an expanding company that needed the revenues, but again not wanting to bring the wrath of Washington or the public down upon it.

So just who exactly could wring the last cent of value out of Daraprim? Why, none other than the internet's Asshole of the Year, Martin Shkreli, who has shown over the years that he is not concerned in the least about his reputation. And besides, for a company his size the money to be made here is such that even if forced out of business after a few years he would retire a very wealthy man.

So, in essence, (and in answer to question 3) all of this happened because Martin Shkreli is an asshole, and doesn't care if the public hates him. Having settled that Shkreli is an asshole, does that make him more or less moral than the Internet masses? Let's examine this for a moment. We have already determined that the best guess for the revenue-maximizing price for the drug is $750 per pill. The Internet masses insist that the drug should be sold for $13.50. That is, society wants Turing to bear a loss of 736.50 per pill. There are three groups of people who can possibly bear this cost.
1. The payors (most of them huge insurance companies or government medical care).

2. The marketing, Shkreli

3. Society at large.

Morality is of course subjective, but I see no reason why it is more moral for society to demand that Shkreli bear this cost while not demanding that the payors bear some of it, and, more importantly, for outraged individuals not being willing to bear some of it themselves.

Further, let's not forget that Core Pharmaceuticals could very well have kept marketing this drug at 13.50 per pill as a sleepy little operation, but decided to cash in instead, knowing full well what Turing was going to do. The same goes for Glaxo when it decided to sell to Core.
I for one could not have done what Shkreli did, but I am also not demanding that anyone else pay to alleviate my outrage.

Solutions: This entire episode is already grist for more government regulation. However, if society is as outraged as it claims then there are some fairly easy free-market solutions.
There is no reason why the insurance companies, perhaps with the assistance of large charities, can't band together to buy the marketing rights to out-of-patent rare drugs and market them at a more "normal" profit margin. The outraged of the Internet could also chip in as well, as could companies like Glaxo and Core. Ehen they want to get rid of marketing an old drug such as this instead of selling out they could simply contribute it for free or at a reasonable price to such an organization.

Instead, expect to see the Pharmaceutical companies engage and rent seeking and look for government subsidies in order not to raise the prices on these drugs too much.



 I started playing board games about the same age I began a diary, at five, and so was dually pleased to review a new Web-based board game that lets aspiring writers trace their trajectory of what might happen out there if you try to become an author.

You roll the online die to start, and land on a progression of squares on an upward spiraling toward a best seller. I just landed on 'First book tour' that actually occurred forty years ago with The Complete Book of Racquetball. In looking ahead, after 25 published books, tomorrow I'll publish Hobo Moments: 30 Years in Pictures. With it, I'll roll the die for the 26th time and see what happens.

You may create and publish your own board game on whatever topic you wish. I created one once on Jogging, where the participants were required to run once around the block for each square advanced, and another on World Travel. The premise for nearly every board game is advancing around a string of squares, the number of jumps which is determined by the luck of the die or drawn card. If of a mathematical mind, you may calculate the odds and lay out the board from scratch; however, the underlying current usually uses the general formula of the classic game Sorry to determine the odds of advancement and time spent on the succession of spots.

There is no better way to advance in life than to play it like a board game.



 In some states, like Oklahoma, there are no emissions inspections. So it would seem like now would be a good time to buy one of these cars on the cheap before the software upgrade and then not do the upgrade (assuming that is, that you don't care about the emissions).

A friend said: "Don't underestimate the seriousness of this.  I am not a lawyer, but isn't triple damages common due to fraud, if proven?"

My answer: Ha! You are assuming that laws actually apply to top corporate executives.

Jordan Low writes: 

I almost purchased a "clean" diesel vehicle. Even if the government is out of the picture, as a consumer I would be outraged. As a consumer, wouldn't you want to return a product that has fraudulent specifications? The liability would already be huge for VW.

Stefan Jovanovich writes:

Read the fine print, people. The car does pass regular emission standards; the software fix was needed so that it could also pass the higher standards that made it eligible for "clean" (sic) energy tax credits. Those were, for a brief period, so ginormous that they would, by themselves, sell the car. That was the incentive for the cheating. 



 Proprioception is one's capacity to grasp the relative positions of neighboring parts of the body, and the strength and effort being employed in the movement.

I used monkey bars, then horsehair mats, a physical board game called Twister, and finally sports.

You may also employ musical instruments.

You may foretell your career by the childhood instrument. Piano players make better tennis players, drummers step automatically into a helicopter's pilot seat, guitar players make the best martial artists (viz. Elvis), and the most interesting is the vertical space of the saxophone as in reading Chinese.

Close your eyes as you play for greater awareness into proprioception. Shift your body weight, and multi-task with another instrument such as a mouth harp.

Once, as an experiment, I spent a week where every waking moment was in motion, even while reading and eating.

Practicing proprioception improves balance, coordination, strength, weight transfer, quickness, and rhythm. As skill improves, more stimuli are added to continue improvement. As you type a letter, you may multi-task by lifting one foot at a time, and nodding your head.

Proprioception is movement intelligence, and should be started at the youngest possible age to improve one's lot in life.



 The strangest mating ritual furnished from the animal kingdom must be the octopus Argonaut with a detachable penis. It reminds me of how not to play the market, putting all your eggs in one basket and investing it in one place. The market will bear it, but it may be your last venture.

The male octopus has one arm longer than the others, known as a hectocotylus, which is used to transfer sperm to the female. The arm stores up the sperm, and when the male finds a mate, he inserts and detaches it while mating. The female will store the hectocotylus in her cavity, but unfortunately for the sea-faring investor, the male is only able to mate once. The female, however, is capable of mating several times over her lifespan. In fact, females have been found that have several hectocotylus in their cavity at the same time.



 With the new baseball replay rules are managers no longer the slow burning kettles of ire that erupt on umps and are ejected–sometimes as a stunt to rally the the team? With the technology of replay and the manager's use of "official questioning of a call", is this keeping the managers "managed" by the system?

Right now the Indians are being screwed by an ump on his pitch calls and it's a do or die game with the twins for wild card position. I am wondering if Francona should go out and kick dirt and get booted, or is his managerial process more detailed so he feels compelled to stay in the dugout? My gut feeling is that there is less dirt being kicked and more screens being watched by the managers. Therefore maybe less emotion and influence?

Also, here is a trailhead to ejection data: "2015 MLB Ejections"



1. Why don't the exchanges and the sell side research behemoths distribute the same descriptive information set about all markets equally?

For example, the FX Market disseminates certain highly valuable information into the public arena that would be most valuable to the trading of various futures markets. An exhaustive yet discreet enumeration of ALL available information released by exchanges about major futures contracts does not include the information to which I refer.

(I posit that the FX market does not realise the power of the information so it slips out)

2. What does it say about the value of financial information when it is given free of charge?

3. What value financial instruments sold as 'protection' when, if the feared or hoped for event occurs,  best prices (or no prices!) are not available to the participant due to extraordinary spreads, components of the instrument not opening or exchange diktat? I refer here mainly to options markets and the much degraded and over interpreted VIX, among much other detritus.

4. Why are strategies, techniques and other associated 'bells & whistles' best kept out of the public eye?

I don't think this is as clear cut as many other points. I do agree, to an extent, with the AQR research team's recent paper about how a strategy can still work in the public domain , but in the context of not relying on drift or long term returns, being leveraged and aiming for solid risk adjusted numbers - I think things are best kept close knit (perhaps with the judicious application of the law of contract). If anyone reads this post and wants to see the AQR piece let me know.

5. The HFT crescendo. The move from cable to things like sound, vibration and microwave line of sight technology that I have mentioned over recent years in the annals of this lists contributions have certainly coincided with a high public awareness of what goes on now.

Attempts to 'beat' them and devise strategies to mitigate the effective HFT tax should now be 'du jour' to all market players. If not… Well. The Chair's two decade old published comments on the ecology of markets have certainly withstood the test of time.

As a nice aside and another in the plethora of available examples of ever changing cycles, much of the HFT–ahem–'talent' has moved on. It started in the banks, then HF's and now much leading edge technique resides within private family offices. I refer here not to execution of orders but to short term trading based on the ingenuity of the portfolio managers.



 Scott Sumner, of Bentley University talks with EconTalk host Russ Roberts about interest rates. Sumner suggests that professional economists sometimes confuse cause and effect with respect to prices and quantities. Low interest rates need not encourage investment for example, if interest rates are low because of a decrease in demand. Sumner also talks about possible explanations for the historically low real rates of interest in today's economy along with other aspects of monetary policy, interest rates, and investment.

Jim Sogi writes: 

If real interest rates are in fact negative, then the FED rate is still high and offers the best return. Rates at banks are in fact negative when you subtract bank fees the return is negative. Its not real clear what negative interest rates are to me. I suspect it has something to do with international currencies and the strengthening of the US dollar, and the FEDs warning on the global situation. Maybe the US doesn't want a flood of foreign (Chinese) money.

Martin Armstrong writes: 

The Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money. The Fed is also caught between domestic policy objectives that dictate that they MUST raise rates or they will bankrupt countless pension funds internationally and emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the U.S. national debt. 

Gordon Haave writes: 

Perhaps I am not understanding something. Is this saying:

A. We can't raise rates or emerging market economies will be hurt due to their dollar debt, and; B. We must raise rates because if not emerging markets will go into default?

This makes no sense to me but perhaps I am misunderstanding what he is saying.

Stefan Jovanovich writes:

The presumption of central banking in the late 19th century was this: through adjusting the discount rate on its own good as gold credit, the Bank of England could literally regulate how much net foreign exchange (specie) flowed into or out of Britain. The presumption was believable, provided that no one questioned that the Bank of England would redeem all its own paper in gold. After 1914 there were nothing but questions.

Central banks now have two presumptions: by talking about adjusting the discount rate and by actually writing checks to their national treasury they can control not only foreign exchange flows but also how much credit its citizens and domestic companies will use in the immediate future.

Montagu Norman went to an early grave precisely because he knew there was now way for Britain to have its cake and eat it, too. If the Bank of England's own paper was going to continue to be priced based on private demand and not ability to pay out specie, on demand, then either the Empire would have to restrict trade to its own colonies or counter-parties would be the ones who determined the discounts at which foreign exchange could balance (translation: the Americans would have to let their gold go overseas by running a persistent deficit).

3 Trillion in U.S. IOUs is supposed to give the Chinese "power" but that pile of another central bank's money only has use if it is spent abroad. Like the Americans' gold in the 1920s, it is worth nothing if it is not allowed to be drained away. There is no reason to think that anyone with a higher education will allow that to happen in China or, if that miracle occurs, that the politicians in this country will not respond with the same imperial preference mercantilism that guaranteed Britain would win the war and lose its empire.

Larry Williams writes: 

So you really think we at Dailyspec are smarter and have more information on our fingers than the people at the Fed? I don't. In retrospect over many many years the Fed has done a remarkable job. I know, you people dis them at every turn, claim you know the answer, we know the answer, but the truth is year in and year out compared to what could've happened they have not done a terrible job. Probably I should explain something called upward drift for those who are not aware of it. It seems to be pretty important.



 Here are some thoughts I was considering for the last two hours about the smart beta and negative index [i.e. short ]vehicles:

Walking through Grand Central Station to get to the squash courts as a 20 something, I recall seeing the posts at Fidelity branches with banner marketing of their sector fund offerings with hottest ytd or x period performance. Businesses like Fidelity have many funds so that one of them is always winning and marketable. This is known by all.

Now some companies offer negative and positive each type of return so they always have something that is winning. They skip the sector rotation idea and just go "+ or - , we got it covered" now.

It's a good way to build a business and to get a product always to fit into the asset allocation/efficient frontier models made by the money guides. I can borrow the hedge fund efficient frontier portfolio optimizer, hit a button and make the fund that the allocation experts think should be 50% of their exposure. If I design a strategy that has a return that makes it the largest allocation in a fund of funds portfolio because it is not correlated am I a hoodoo, a charlatan or just smart? Can I raise enough capital to get the positive of the inverse of the fund so I am immune to market moves personally?

As a former fund manager, one of the questions that was normally asked was how much money of yours is in this thing. Are you getting a taste of your own cooking?

If I have a fund that is positive a beta factor and one that is negative this factor, do investors want the manager to put money into both of them and pay himself income on both sides? How does the manager reconcile having negative and positive funds with trying to put money where the mouth is?

To make it simple if there is negative fido fund and positive fido fund, one of them wins, they get the management fees on both sides, have no general market risk, and they can even make income lending positions that they don't have to fully share with investors. It's your fault for not picking the right fund if you fail.

Great business when you are willing to accept that they will never let you into in the most profitable funds (HFT) since they spin-off cash every month, and are handing over fees to a firm that wins because they hedged the value of your relationship in establishing the negative fund.

It was better when a fund went long and short and you could evaluate the skill to luck ratio. Now they just back out of any responsibility for the results because you picked your own beta. They gather hundreds of millions by gaming the asset allocation/efficient frontier model and also by gaming people who think they know how to time markets.

Thinking of it now an answer is to pay the management company based on the time weighted return of the investors even if they timed your negative and positive the funds wrong.



 A thousand tomorrows may soon pass without you once having tried dog food. Pet food has come a long way since I cleaned kennels in Michigan and sneaked every of the six types I dished out to the dogs and cats. I see that in 2001 Ralston, Purina, and Alpo merged to produce a line of food that surpasses in flavor and nutrition anything that I've sampled previously. Honestly, it's better than most fast food and some cafes. The Filet Mignon cooked in savory juices is great on spaghetti. The Chicken Rotisserie beats Colonel Sanders because it's not too spicy. It's one thing to enjoy a hearty Roast Beef for dinner, but something in the gravy takes it to a whole new level. The Lamb and Rice may be preferred by those who fear carcinogens in beef and chicken. Like dogs, cats, and most people, my two kit foxes that I feed nightly would rather have gravy on their food. Budget shoppers will find the food affordable in 13-ounce cans selling for about $.70.



 This is my advice to a college student or grad who is worried about answering the question "what are you doing with your life?". Have a little speech put together ahead of time. You can be sure at a family dinner, or other gathering some one will ask you, "what are you studying? What are your plans?". If you have a good sounding and coherent statement to make, whatever it is, say it confidently, mix in some recent related personal experience, and you'll impress the heck out of everyone. Be specific, even if you're not sure what you want to do. Don't just say, "international studies". Say what country you studied at least. Even little kids can do it. I want to be a fireman. I want to be like my Dad. I want to be an astronaut.



September 21, 2015 | Leave a Comment

 Jack Reacher, my favorite mystery thriller novel character, was a military investigator. One of his methods was to look for evidence that was missing, not just at what was in front of him.

Some years ago, I spoke to a programmer from a big Euro bank who was helping me with a project. I was describing what I wanted. One big problem he used to have was the irregular nature of trades. They don't necessarily happen in neat regular packages as the charts make it appear. Complete time and sales data available from the exchange at premium prices has 52 or more columns of information describing events. Most of this tends to get ignored to make analysis of data more tractable in real time by small computers and slow data streams.

The missing evidence would be the space between the trades. This would be calculated or deduced. This would give you speed as one piece of information. Sizes combined with speed would also give more information. But as far as I know this is missing.

I imagine some of the super high tech firms use this data in high speed trading and require super computers and co located data feeds. That would give them an advantage. Sorting through the data to pick out some of the lost info might give a smaller firm an advantage and still be tractable in real time using regular business computers.

In addition to speed, the additional data would give you density which is important to mass calculation and thus momentum. Other data would be historical time and sales to give a reading or evidence on the medium through which the market is moving under the theory that prior sales gives information of what orders might be there, who owns what.

There is more evidence available that may not be immediately apparent, but which is being used by some to their advantage, and that requires a high level of computational power and speed in comm. It is a race in fact. There is evidence there and it should be able to be deciphered.

"How to Catch a Spoofer"



 I love Formula 1 Motor Racing.

I love the technical side, the global locations and, after several attendances at the Monaco Grand Prix, I admit to a love of being aboard the super yachts and the beautiful women.

This weekend sees the staging of the Grand Prix in Singapore. It is a very challenging street circuit against a spectacular backdrop.

The qualifying stages are interesting.

There are three stages–Q1, Q2 & Q3. Q1 has the full field of 20 cars, Q2 starts with the quickest 15 cars and Q3 with the top 10. The point of the whole thing is to set places on the starting grid.

It brings to mind relative performances of and rank consistency in markets. Considering groups of stocks within an index it may be worth considering relative performances and rank consistency in a similar way to F1 motor racing.

I could include all stocks for the first month, eliminate the weakest 5% at the end of month one, and then eliminate the worst 5% at the end of month two and so on.

If there is anything to relative strength and momentum in physical stock trading and investment then there should be value in something derived from this.

I am definitely not the person to ask on this as none of my strategies deal with single stocks or momentum and relative strength (although like all reversalists I am a trend follower as soon as I put a trade on–ha!)



In looking back at this year, where all materialistic regularities seem to have been noxious, irregular, non-predictive, absurd, one is led to reread the works of Albert Camus with profit, especially “The Plague” and “The Fall”, where absurd remedies are hauled out in a world that is out of touch with day to day activities.



This paper is interesting.

It deals with the estimation of travel times on roads. Of much interest though is the volatility of these times.

In the context of the paper, the author speaks of the factors that influence average travel times such as traffic incidents, weather, time of day etc.

Looping back to markets one believes that time is at least as important as price. Given that, it is interesting to consider how the path of prices throughout a trading session impacts upon average price moves or ranges for a set holding period.

To elucidate further, imagine a market, let us call it market 'X'. Perhaps the average range of this market is 14 units.

It is interesting to consider the path dependency throughout the day and study if the steps and stumbles throughout the day will hasten or prolong the time it takes to achieve the average range.

[no need to be married to 'average range', the point is to have some measure of price performance whose average time to occur can be measured].



My first train ride from the Golden Spike in Ogden, UT to San Francisco made a pivot in my life. In the Feather River Canyon, CA, I jumped blindly into a boxcar with the two bad actors with short trousers on the outer borders of the photo. They glared at me like wolves for an hour, and began to move in. Suddenly, the train stopped, and the other two men in the center of the photo climbed in. The initial two were yegs [sometimes spelled "yeggs"], or outlaws of the road, apparently newly released from prison. The other two were bona fide hobos, and became my mentors, teaching me to survive on the rails by using a RR spike for protection, and catching pigeons to eat under bridges in a wicker basket. I jumped out in San Francisco, the first of about 300 freight rides.













 The trouble with progressive wagering systems is the vig is always much higher than the advertised 10%. Plus whatever the state take out is, it really grinds against you in both the short and long run. Plus the knockout rules without a rebuy (which is always a bad deal but suckers love it) tend to make this a random event….this should be tested.

I know Johnny Moss couldn't pass up 15:1 odds on that sucker punch to knock out the champ, but going for the long odds is stupid and goes against everything I have ever learned.

Anecdotally I will say without equivocation that I have never won long odds, and if I got a little "Lucky,", never was paid true odds. The market is always going to offer you the shortest odds it can charge because there is always a spread.

Since I became an adult, I learned to offer really long odds all the time (a big long term put or call so to speak), but I won't take long odds as I have no control of the vig with the taking odds whereas I do with the offering of odds.

One is better off taking a bet that feels good and think it's a real 3:1 shot but it's on the board it's trading at 11:2. Going for the 15-20% and greater odds is just making the bookie writing the long odds, rich. When you take odds like that, you are playing the lotto and we all know how that turns out.



 I thought the specs would find interest in this given past discussions on coal. Japan is decreasing LNG use in favor of Coal.

Carder Dimitroff writes: 

This is interesting. Thank you for posting.

Not mentioned in the article is nuclear. Japan is restarting some of their nuclear units. Nuclear displaces LNG, even at $7 per MMBtu.

From NEFTE Compass:

Baltic Republics Get to Grips With First LNG Terminal

The new LNG vessel moored in Lithuania's Klaipeda harbor represents for millions of Baltic consumers the end of a quarter-century of Russia's natural gas monopoly.

It appears European demand may be increasing as Japan's demand falls. Helpful news for $D and $LNG



 Water is unstoppable. Given enough time, it will defeat all the mortal ingenuity of the best and the brightest.

Two atoms of Hydrogen bonded with one atom of oxygen.

How can something so powerful in one context also be so weak in another. Jump off a high diving board and hit the water abdomen first and tell me it doesn't hurt, but sit next to the pool and you can effortlessly push your finger into the water.

I think it is very helpful to think of relationships between financial markets in this way.

There are circumstances under which past conditionality allows one market to predict another for a given holding period with much greater accuracy than normal. In this context the weak bonds between molecules that allow you to push your finger into the water correspond to those occasions when leading correlative effects are absent and vice versa for those fleeting periods when regularities are plentiful.

It makes some measure of sense to look at what situations might make the molecules (predictive relations) hold closely together and those times when the mistress collects her dues from market protagonists.

Clearly having the predictive relations is enough. But some measure of 'meta-understanding' does not hurt, even if such classification is elusive or futile.

There really is nothing to lose by doing so.

Jim Sogi writes:

The speed of water or the object over the waters will determine the interaction. Anonymous's belly flop example is good. A slow moving stream is easy to cross, but a raging torrent will knock down huge trees. A small little wave tumbles gently, but larger waves move faster. In the surf, the lip of the wave as it pitches out and over on an 8 foot wave can be over a foot thick moving at 50 miles and hour and is enough to snap your board in half. In surfing, one of the worst things that can happen is getting "axed" by the lip as it crashes over on hits you directly. The tactic to avoid this is first, don't be there, or second, on smaller wave is to duck dive, with your board, under the the water, under and below where the lip hits. A big wave will penetrate deeper than you can dive, so that doesn't work big waves. The strategy is to wait for a lull to get in the water. We time the sets, their period, and the amplitude in order to time entry.

The analogy to the market is that a fast moving market carries some momentum. Big waves, like we are having now can wash through. Measuring amplitude, period seems helpful. Expecting wash through can save some wipeouts.

Jeff Watson writes: 

One must be very careful when describing the characteristics of water or any other molecular compound. While bonding is of utmost importance, temperature is the main determinant of the characteristic one will observe. Water temperature at -50 degrees C is ice which can be as hard as a rock. Water at the triple point can have the lowest co-efficient of friction which is close to zero somewhere around .02-.05. Water above 100 degrees C assumes a gaseous nature and contains a latent heat of vaporization of somewhere around 2600 Kj/Kg which means it feels hotter at 100C than liquid water at 100C. At around 11,750 degrees C water can turn into plasma….But when describing compounds, one must take into account the temperature and pressure.

Temperature and pressure are important in the markets also. One might think by the looks of things an easy splashdown of a trade will occur because it's a soft landing in water. It could just as well crash into solid ice, land into steam and cook you, or it might land into plasma where very interesting things will happen to your electrons.

Metaphorically speaking, one must find the sweet spot where it will be easy to get out of a trade with an minimum transfer of energy. Ideally using water as an example, that sweet spot would be at the triple point (0C depending on pressure) where the ice on ice has a co-efficient of friction of 0.02. The nice thing about this analogy is that there are more sweet spots than one depending on pressure differences. Always go for the gentle landing, it's easier on your account balance. It would be interesting to study other (triple points) and learn some market lessons.

Sushil Kedia writes: 

With so many interesting insights into markets relating to the molecular chemistry of water, here are my two cents on the table.

This derives from a Chemistry exam term test in the 9th year of my schooling. We had an awesome new teacher in Chemistry Mr. A Das come into teach us. The entire school was swept over its heels with his intellectual purity and his natural charms as being a fantastic teacher. The term exam paper he set had maximum 50 marks and Minimum 20 was necessary to earn a pass. None but yours truly got exactly 20, several ended at 19 and no one could cross the boundary of 20. His entire question paper was to tear everyone apart and push everyone to go to the library and read far beyond the textbooks.

That game changer question where I "managed" to earn that 1 mark was as follows:

If Sulphur is a heavier compound (Its in the row after where Oxygen is in the Periodic Table) then how come H2S is a gas and H2O is a Liquid at the same room temperature and same atmospheric pressure.

This question was poking a hole into an "anomaly" into an "irregularity" of the almost divine knowledge that we felt we received in learning the Periodic Table.

In battling with that very humbling question paper, I didnt want to leave any answer blank. This H2O is a liquid and H2S is a gas question I made a "Story-telling" answer:

The true molecular structure of water must be (H2O)n where n is a random unfixed number creating large coalescing molecular structures of variety giving a lighter compound as H2O the properties of a liquid while a heavier compound as H2S is only a gas and I believe this number n is an unfixed (I didn't know how beautiful the word random was at that age so used unfixed) varying number due to which there is no specific colour or odour water has since colour and odour of any compound is an intra-molecular property and not an inter-molecular property and because water has no odour or colour the varying value of n cancels out all intramolecular frequencies to produce a null colour and null odour.

This question had 2 marks. I got 1 from the 2 possible, because I was almost right, it so turned out when our answer papers were discussed by our teacher! My teacher penalized me in not giving the entire 2 because I wrote unnecessary additional mumbo jumbo about how n must be a varying quantity.

Morals of the story:

When faced with an irregularity, ingenuity in your response does work at least often enough and there is something called luck we knew back in school and today I love to call it as randomness.

When you are still able to make an effort to pull yourself out of a pile of horse-manure be brief and to the point. 

Jeff Watson writes:

We were never lucky enough to get essay questions on chemistry tests. It was either multiple choice, or solve a problem with showing your work and getting the correct answer. Our teachers were sadists. they never gave partial credit.

Sushil Kedia writes: 


Is the glass half empty or half full? Yes, it depends.

An Essay Type test has an undefinable probability of scoring on guess-work. A multiple choice test does have a definable probability of 1/n if n is the number of choices! If teachers never gave partial credits the also could not deduct 1 out of 2 marks possible for telling more than required! Glass is half full and half empty, always. 

anonymous writes:

A final note on this subject:

I accept that a multiple choice exam can test the ability of a student to possess and regurgitate basic and essential factual information. And a well-written multiple choice exam can do somewhat better than that. However, I have met and worked with endless numbers of people who score in the 99th percentile on standardized tests and have perfect grade point averages and despite these "successes," these people lack the ability to differentiate between facts and knowledge; they never learned or acquired critical reasoning and creative problem solving skills. I believe that these things cannot be probed on a multiple choice exam — they requires a free-form response. (Some might say that these things cannot be taught, but I believe otherwise.)

Just for amusement, let's imagine a multiple choice exam for the Presidency:

Question: If Russia invades another country while the President is on vacation what should you do?

(a) Instruct the Defense Secretary to move the 6th fleet to the region and have US fighter jets engage in skirmishes near the border

(b) Call an emergency session of the UN Security Council

(c) Recall the US Ambassador to Russia and boycott the Olympics

(d) Launch a pre-emptive nuclear strike on Moscow

(e) Continue with his golf schedule because the President must appear calm and in control.

And here's one for a hedge fund manager:

Question: If the stock market suddenly drops .8% on an unconfirmed headline of a terrorist attack in New York City, what should you do?

(a) Immediately reduce all open positions by 30%

(b) Immediately cancel all stops to avoid getting stopped out.

(c) Immediately increase all exposure by 30%

(d) Do nothing because you are a long term investor

(e) Check Twitter and if the subject is "trending", then (a). If the subject isn't "trending", then (c).

And here's another one for a hedge fund owner:

Question: If a new employee is producing P&L results that are remarkably good and vastly superior to expectations and everyone else in the firm, do you:

(a) Give the employee more capital to manage and a pat on the back?

(b) Call the employee in and ask him probing questions about what's going on in his portfolio?

(c) Have another employee study the new guy's trading records and positions to figure out what he's really doing?

(d) Reduce the employee's capital because you think he's just lucky and his hot streak will end?

(e) Retire and hand over the firm to the new guy.

Now imagine what a free-form essay response would be ….



 When I first started trading actively in the late 90s there were some pretty massive swings in many issues and markets. Some popular simple systems being touted involved following trend lines or MA's or MA crossovers. With big moves and high gross values in those days such ideas worked ok for a while, but then they stopped working. They haven't seemed to work much the last 15 years except on a long term scale. I think it was called trend following or momentum. It was pretty basic chart based stuff. It was often combined with a predefined stop loss and a trailing stop after a fixed amount of gain. All the charting programs had presets for drawing the lines. Anyone could do it.

The recent 30 point moves in a direction reminds me of those times. You also have to remember that back then we'd been in a twenty year bull market in which the mantra the trend is your friend was true and had been a very successful investment strategy. Everyone one was lucky.

With the drift the way it's been for the past 120 years, one could make a cogent case that the only unlucky ones were the counter-parties to the longs. 



 'Cyborg Chess' or 'Advanced Chess' is an area that might be of interest to specs in that humans are allowed to use computers during the decision making process. There is evidence that strong human players can add considerable value to pure computer play when the process is managed in the right way, for example Arno Nickel defeated Hydra in a correspondence chess match in which he used a regular PC against the the most powerful supercomputer in the World at that time. This event wasn't publicized as much as it might have been, but you can read more about Nickel and Cyborg Chess here:

Arno Nickel

Advanced Chess

I've experimented with 'Cyborg Chess' in correspondence tournaments in which computers are allowed. The results haven't been great, probably because I don't use deep calculation setting on the engine, but the experience has been educational. A major issue is in understanding where it is that I can add value as there's a temptation to either overrule what the engine recommends or be led by it indiscriminately. Probably a series of protocols would be a good idea but where does one start? Here's a provisional list:

1. Write down your list of candidate moves, in order, and then compare them with the top choices of the engine.

2.Consider whether this is the kind of position in which engines are likely to do better than you (ie highly calculative tactical ones).

3. Give greater weight to particular candidates based on point 2.

4. Check your top candidate(s) more carefully, perhaps using deeper engine settings, until a particular confidence level is arrived at.

It seems reasonable that different people might give a different weighting to their own choices versus those of the computer, but in either case it does seem that better decisions might be arrived at. In fact Nickel's achievement sort of proves that, and even if computers get so powerful that the more or less 'solve' chess the synthesis of man and machine should still have value in less finite fields.

Victor Niederhoffer writes: 

 "Cyborg Chess" by Nigel brings up the effectiveness of human versus
robot trading in markets. Certainly costs must be considered as well as
effectiveness the way it is in all the studies of robotic versus human
surgery. Apparently robotic beats laporofic.
There should be areas where the robots have to be turned off for the
evening where the humans could develop an advantage. It seems the robots
are forcing early capitulations in many markets which is presumably an
effect of their programs.

anonymous writes: 

To list just two of scores of regular robot shutdowns that one knows of:

1. On Sunday nights in the professional electronic FX markets (using HotSpot as an example), one only has access to prices from 5PM NYC time unless you get on the phone and call a counterparty direct in New Zealand or early Sydney.

This 'dead zone' is almost completely without 'silicon based entity' interference and often sees a reasonable range that goes unrecorded. A stint in that dead zone is a prized achievement for FX traders learning how markets 'really' trade. Much like time on the floor of an exchange, it is an experience that is dying off.

2. Each night at 5 PM NYC time the professional electronic FX market goes dark for a few minutes as the value date changes.

After reopening, the market making algorithms kick in first with relatively wide spreads that narrow quickly when the Carbon based life forms start to interact. The HFT 'order facilitation' ( Ha!) kicks in next.

What is of increasing concern is that the lunatics are running the asylum. Meaning that the firm's running the robots are deciding when and why markets open and close rather than some supervisory body. I guess this is more a question of nature versus nurture.

Arguably, there is some marginal information that is helpful, in an accretive sense, to the buy or sell decision–from the opening procedures of robot dominated markets.

The first order possibilities for testing might involve: number of transactions per unit time, rate of change of spread contraction, the epps effect All for relatively short periods as the robo-market opens.

At a practical level, and without investing what I know to be substantial funds to study this issue, I believe it still comes down to basic conditionality, expectations based on that conditionality and finally path dependency.

Additionally, the predictive nature or otherwise of the situations introduced into the price generation process by exchanges, that I have previously posted on - must be tested and incorporated.

Jim Sogi writes: 

 By their nature, cyborgs must look for fixed patterns. They have limited adaptability. Sudden bugs, unexpected changes, changes in cycles, and divergences will always surprise them. They can't anticipate. Their advantage is that they are as fast as their circuits, and comm allow. The unknown is how they perform in a complex system with other cyborgs and humans. As Nigel points out, a human can add value and beat a pure cyborg. Human foresight and understanding of human nature can add value.

Hernan Avella writes:

Machines keep improving, some moving away from brute force approaches…

"Deep Learning Machine Teaches Itself Chess in 72 Hours, Plays at International Master Level":

"Lai has created an artificial intelligence machine called Giraffe that has taught itself to play chess by evaluating positions much more like humans and in an entirely different way to conventional chess engines.

Straight out of the box, the new machine plays at the same level as the best conventional chess engines, many of which have been fine-tuned over many years. On a human level, it is equivalent to FIDE International Master status, placing it within the top 2.2 percent of tournament chess players"

Andrew Goodwin writes:

I still have my ticket stub from the match that Kasparov lost to Deep Blue in 1997 in NYC. Maurice Ashley was using the Fritz engine to evaluate the moves of the champion and the supercomputer in real time for the theater audience, as I recall.

Instead of making the next move optimization target the best calculable move, the supercomputer could make goal seeking calculations that lead the match to the most time consuming calculable end game for human competitors. It won that match with clock time to spare. That's the advantage.

The Chair's idea of a downtime for computer engines sounds sound for human comparisons.

Jim Sogi writes: 

I would challenge anyone to quantify what exactly is the difference between a cyborg traded market and a human traded market. Sure it feels different, but how exactly? How do the numbers trade. Are there less big blocks? Are there fewer round sizes? Are there fewer takers on breakouts, i.e stop buy orders? Where are the numbers on the table?

Hernan Avella writes: 

Difference? Generally speaking, most of the time, when bots are the market makers there is less friction, reduced bid-ask spread, more ability to get the trade done with less price disruption. Winners: longer term traders willing to pay the bid ask spread or less to get into or out of a position. Losers: human market makers who want to earn the bid-ask spread. They can no longer compete.



 "Zimbabwe seized white farmers’ land. Now some are being invited back.":

When Tracy Mutinhiri struggled to get her tobacco crop to grow, she turned to some of the country's most experienced farmers for help.

There was only one complication: They were white.

In Zimbabwe, farmland has been a central issue in the African nation's violent struggles over race. Fifteen years ago, the government began seizing property from thousands of white farmers and giving it to blacks as recompense for the abuses of colonial rule. But now, as agricultural output stalls, black landowners are quietly reaching out to white farmers who were thrown off their land.

"The problem now is that we have the land, but they have the experience," said Mutinhiri, a black landowner. "We need to help each other."

Ian Brakspear writes: 

Ex Zimbabwean farmer here. I had a 30,000 acre cattle ranch and 2,000 acre tobacco farm–both stripped bare. The house is a shell, as are the sheds and barns–water pumps, fencing, you name it, has gone and the land is unproductive–even the wildlife is not to be seen.

The "war veterans" that took over, sold everything and then came back years later and wanted a partnership – but they only wanted us to buy tractors, ploughs etc. and redo the barns for curing the tobacco and the sheds for grading and packing and then to transport the tobacco to the auction floors which used to be the biggest in the world – and in return a small % of the profit.

No one I know accepted these terms. I have not gone back in years – the deterioration is beyond belief. I'd rather keep the good memories than see the decline.

Marion is spot on. Mugabe needs to go, but the problem is all the good black Zimbabweans have left and are making good lives for themselves elsewhere



 I thought this was an interesting article on how young people learn:

"How the Rams Built a Laboratory for Millennials: St. Louis has used consultants, standardized tests and visual-learning aids to educate the youngest team in the NFL"

Snead's conundrum was obvious: You are, he said, taking young people who in most fields would be entering an entry-level job with little pressure and putting them in a job where they have to perform at a high level under often intense public scrutiny.

"The next frontier in football is understanding the mind and figuring out how you can test and teach," he said.

The first step? Like most workplaces that seek company-wide change, they needed consultants. The Rams brought in a group of academics who run a research firm to evaluate the Rams' football teaching methods. (The Rams did not identify the firm for competitive reasons with other NFL teams.) Those consultants observed portions of off-season training and training camp. They also put rookies through a standardized test, Snead said, aimed to determine how their players absorbed information. The test is supposed to mirror exams like the GRE or LSAT—which are trying to gauge future performance, not how much you've already learned. It also, Snead suggests, gauges some intangibles such as "grit, perseverance and mental toughness."



 I was recently on a ski mountaineering trip in the high glaciers of New Zealand. New Zealand has large storms coming in from the Tasman sea which hit the mountains and deposit snow and the wind blows hard. This creates avalanche conditions which can be very dangerous. One of the methods, among many others, is to use what is called a Compression Test. It involves digging a pit in the snow on a steep hill and isolating a column of snow about 25 cm square for the depth of the snow. One smoothes the edges and feels the snow to see where the layers of snow and the different types of snow. There might be layers of ice buried if it rained. There might be loose sugar snow if it is old and cold. There might be hard layers of wind packed snow. One taps the top of the column with progressively harder taps, ten from the wrist, ten from the elbow and ten from the shoulder. If the column breaks away and slide from a certain layer, one knows, depending on the amount of taps, and the energy from the break how strong the snow is at that particular location. One uses that information to make forecasts of weaknesses in the snowpack and the likelihood of an avalanche.

As I performed these tests, I wondered why one could not use the time and sales data to examine the strength of the market at those particular times. Some markets execute thinly with few sales at a particular price, others are thick with sales, at a fast rate. One can also look at how the market executed. One could probably make some hypotheses as to the strength of the market at those prices and the possibility of collapse or avalanche. One presumably wants to avoid being in a market avalanche. In Reminiscences of a Stock Operator, a tipster goes to the big time trader with a tip to buy. The trader tells his broker to sell a few hundred, then to sell a few hundred more. The tipster asked, wait, I thought I told you to buy. Yes, says the Commodore, I just wanted to test the market and see how it would take my offers.



 Of the myriad kinds of risk, many people graduate to the coffin never having sampled any until the last breath. This is a shame because risk is inherent in our being as evolutionary products of the original thought.

There is financial risk, credit risk, survival risk with which I'm more familiar, market risk, business risk, sport risk, political risk, romantic risk, health risk, and any other event where the outcome has a value and a penalty with choices involved.

My rules for handling risk are:

· Gather as much information as possible before entering any risk.
· Get a toe wet first, if possible, before the final plunge.
· Risks alone are more valuable than when shoaled with others.
· During the peak moments of risk constantly evaluate and reevaluate.
· Always have a backup plan.
· Always have an exit.
· When in doubt, be bold.

Whatever your brand of risk, these guidelines will keep you afloat to take another, and another, through the discovery of self.



This is my review of a terrific new book about the New Deal financial reforms. Read about the extraordinary financial skullduggery surrounding Boeing's initial public offering.



 I remember the 80s real estate boom. There were systems for buying no money down. Flipping real estate. There were 10% months. People leveraged investments. People bought with balloon payments. Then Volcker started tightening. Imagine having Treasuries at 14%. Lots and lots of people went bust, got caught. Lots of foreclosures. No more financing. No one could refinance at 17-24%. The long term average interest over the millennia is something like 4-6%. The cycles are very long. The Fed tightening cycles continue for quite while.

Paul Marino writes: 

This was from March but has stuck with me since and sort of guides my thoughts on rates. Basically, Bernanke doesn't expect the Fed Funds rate to rise back to its historical average of 4% in his lifetime. That is a long time at low rates and basically non-existent inflation for that to occur.

"At big-ticket dinners, a blunt Bernanke sounds theme of low rates"



 Hi Vic

I send you greetings from Pretoria.

Here is a reaction to my lecture last week at the Academy of Europe.

Please share this with Mr. Epstein, in the hope that he will review my book Design in Nature.

With thanks and best wishes,


Adrian Bejan  ( MIT ' 71, ' 72, ' 75 )
J.A. Jones Distinguished Professor
Duke University
Academy of Europe



One for Dr. Bejan.

The Coffee Ring Effect is a well-known phenomenon. A puddle of coffee leaves behind a dark ring, instead of a uniform brown stain. This video explains why — and how this phenomenon resembles what happens in an avalanche.



 From the 1960s-1982 the Dow stayed in a range between 600 and 1000, with several 40% swings. Then came the great bull market.

Is there any reason why we might not return to such a range for 20 years or more? We are off all time highs, but with quite the penumbra around 1950s. Also, it's been a bull market for 7 years.

anonymous writes: 

In real terms (adjusted for inflation) from the peak in 1966 to the bottom in 1982, that was a 75% decline in the value of the Dow, and a 29-year trough before a new high was made. The decline from 1929 to 1932 by comparison was 85%, also with a 29 year valley before the 1929 peak was surmounted.

Ralph Vince writes: 

Yes, but in August of 1982, you KNEW the lid was coming off.

On Friday the thirteenth, after a languishing bear market, things jumped. It had a different feel to it. By the next Tuesday, the 17th, it was off to the races.

I remember it well. It was a complete change in market character from what had been going on for several years before it (at least since the Summer of 1980, and August of 82 was profoundly different than that even).

My point is, you didn't have to be a contrarian to know something big was just getting going. It came in with bang,

We live in an era where damn few remember — if anyone ever knew — how to read a tape, the pace of whats coming across the Electro-Lux. I've tried to catalog this in terms of patterns of volume bars. If you go back and look at the Friday, August 13, 1982, it occurred on a low volume bar turnaround — v. bullish (assuming a descent into it).

But the real tell came later — the 18th, a high volume bar day, the end of the short term runnup, On the 18th, the DJIA dropped a small amount, on very heavy volume, marking the high that day as an interim high that should hold for a few days. Not only did the market blow through that, showing extreme strength, but the coup de grace was the following week when the market continued higher on very high volume. Often, a single bar making a high on high volume markets an interim high (there are fine points I am not mentioning here), or, even stronger still, if there is a few bars in between and another high on high volume. But a series of 3 or more bars, on very high volume, where the market continues to grind or grind higher, is very, very bullish.

There was a confluence of factors leading up to that — negative sentiment, bank failures, bankruptcies, etc. amid an environment of declining energy prices, falling rates, technological breakthroughs (as evidenced by Ipos in the 18 months leading up to it — Apple, Genentech, etc.) the pc was in its infancy , Apple was talking about "Lisa," the mother of Mac, there was by many people's accounts, a political climate favorable to business.

There are perhaps many similarities to today, and many differences. I suppose it could happen, could happen in the coming months (look at the advances in cancer treatment, and I don't think we've even begun to feel the effects of the technological advances afforded by a true, coast-to-coast high speed network drones and mass transport, or even the productivity created asa result of the handheld devices most of us use today). But if it's anything like the last, great bull market, it come in with a roar, and I would expect it to be evidenced by inexplicably high trading volume that generally persists.

anonymous writes: 

I miss the noise those Trans-Lux jets made, with those funky fluorescent black lights and those little colored pegs. They were crude, but effective. The bars around the exchanges all had jets so you could have a drink and still see the prices, real time. Nobody minded in those days if a broker went down to the bar for a quick one or three as long as they were good earners. The Germans, Irish and Italians were the ones who went to the bars for a quick one during market hours……..the Jews at the CME always wanted to maintain decorum and control, and never show public intoxication…..the drug of choice for the Jews was cocaine and naturally they didn't drink like the Germans/Irish, and the lack of good drinking establishments around the CME was evidence enough. The bars around the Merc were never legendary like the ones at the CBOT like Broker's Inn, Sign of the Trader, Trade Inn, and Alcotts around the corner. Those bars were in a league of their own and the back stories of what went on in those establishments would be worthy of Runyon or Hemingway. I have sources that have the 1970's Russian Grain Deal being worked out at a back table of the Broker's Inn. Whether or not this event occurred and is verifiable, I wouldn't say it would surprise me. I've seen 20mm tonne cash grain deals done on the back of a napkin and with a handshake.

Steve Ellison writes: 

It took the S&P 500 7 years to regain is 2000 high, but it could not hold that level for long. It was not until 2013 that the S&P 500 again reached its 2000 high, so we already had a retrospectively-defined trading range for 13 years. I have a hunch that the next "great bull market" is already here. The so-called millennial generation in the US is larger than the baby boom generation. I keep noticing things about this decade that remind me of the 1980s, including a commodities bust and concurrent strength in the US dollar and US stocks.

Stefan Jovanovich writes: 

Steve gets my vote. Part of what happened in the 80s was the destruction of previously secure franchises. Mr. Walton's stores destroyed thousands of local "downtown" merchants who had enjoyed distribution monopolies in the villages and towns of what became known as flyover country. Even as AT&T decides that satellite streaming of NFL football games is worth $3200 a customer, the kids are growing up wondering why anyone would be so stupid as to subscribe to a service whose ability to provide programming on demand is as ancient as a Betamax recorder.

anonymous writes:

But where can rates go, Steve? Or perhaps it isn't the direction of rates, so much as their absolute values?

The other big element that concerns me is not the systemic liquidity problem (which we had a taste of on 8/24) but that volume has been tapering off throughout this run up from the 09 bottom.



Most specs need to work on their skills of sizing up a market, whatever it is they trade. A successful spec should at all times have a pretty good idea how much of whatever they are trading is for sale, they need to know the size of the market. In the wheat market, one can expect a market and likely fill of 1/2 million bushels at every quarter cent, possibly several million bushels at the cent. Be very wary when you're in the grains looking at the highs of the day/move and there is nothing for sale. It's times like these that cause people to jump out of buildings.



I would say again it's the level of interest rates versus the rate of return on capital. Consider the rate of return of 15% versus 3% interest rates. Eventually, the 15% will be 1000 times as great as the 3% in 20-50 years. The differential is what matters because of compounding. The difference between the situation in 1987 and today is that rates were about 8 or 10% then. The compounding effect didn't swamp it. We'll go much higher shortly one believes.



 On my last haircut before moving, I gave my regular lady a $100 tip on a $17 haircut (applause line here?). That small gesture brought her to tears. She is a very interesting older woman. I've enjoyed talking with the past few years. She knew I worked in investments/trading and asked if I had any ideas for her. I asked about credit card debts and she told me she just cashed in 25K of an IRA to pay down 25K of credit card debt, yet already had accumulated 2K since then and was getting in the hole again. I might invite her down to do some murals in my kids room, and perhaps do some studies on trees (She is an artist who made a living cutting hair for the last 40 years).

The point is (perhaps? At least the relevant one?) is the deadly financial problem of never having working capital that provides the flexibility that keeps one off the spike of usurious interest.

This lady had been sold on long term investments (by her branch XYZ big box bank) in high fee mutual funds with perhaps at best a 5% yr expected value over the long term, while paying off 25% interest rates on credit cards. The scams run on the lower middle class or working class are obscene.

And it is not income. Clearly if these folks can pay these obscene high interest rates, they can afford much more than they have. The problem is that they never understood the idea of having "working capital". I told my friend that her best investment is at least 6 months of living expenses in the bank. As basic as it is, and at such a low margin for error that standard that is, for many it is an alien concept. Her recent issue was a car repair that blew up her budget and started the credit card problem again. With no working capital plus compound interest against, it is like a giant pit metaphorically with wood spikes and lions at the bottom to gobble one up.

So in trading and investing, how can we use this idea? Victor has taught "never get in over ones head" as one of the key tenants of speculation. So how do we manage our cash in our speculations, investments, life's "issues" to have the flexibility to seize opportunities and avoid pit of being bent over a barrel–while still getting a solid return.

Scott Brooks writes: 

The problem is deeper than that.

The people that Ed is referring to don't have the mentality to accumulate wealth and get rich. They are sold on the "here and now" mindset. They go into debt to satisfy the here and now. Something will always come up that will prevent them from succeeding. The only thing they are really good at is coming up with PLE's (Perfectly Legitimate Excuses) to justify their failures.

They are defined by their failures.

anonymous writes: 

Especially with respect to this site, I would wonder the data and testing behind those assertions. Otherwise, one might consider them to be presumptive, elitist, and uncharitable, with mean-spirited implication. But for the grace of god….

Ed Stewart writes: 

"presumptive, elitist, and uncharitable, mean-spirited"

Yes but who cares. I'm guilty of most those things at most times. Is time preference the essence of trading? That might be a more interesting question vs. my original one. Can it be quantified? I think so, as a hypothesis generator. Does it work better than other thought models?

Russ Sears writes: 

Sorry, I disagree Scott. Ed is correct, it's a matter of education and coaching. Have a plan, believe in the plan, stick to the plan.

The average working poor Josie is not a loser. It's the average bank has learned they are more valuable dumb and paying fees than smart with small accounts. The stats say that the fees are several hundred dollars per person in the USA. So some are paying several times that. The banks have the average poor working single parent or mom in a snap trap that they can't figure how to unsnap and lift the door.

The first thing I tell kids is that you need a minimum of $1,000 in emergency cash preferably $2,000. Have a garage sale, stop buying lottery tickets, no gambling, stop buying new clothes, stop cable, and stop smart phones, etc until you have that emergency fund. Also budget, if you can't fix the budget to the pay, downsize housing, get roommates, no car, bus, pay for car pool, whatever it takes to have a workable budget. Then save for the 3 to 6 months expenses in a cash account ready for a big expense. Only then should you invest.

Most people in this problem don't have anyone they can trust to give them the advice and perhaps the tough love they need to stop living in denial. The truth is the banks want the poor.

What does this mean for "investors". Frankly I think most investors have it wrong. It's not so much managing your risk as it is managing your cash flow first, then manage your risk. You can take a lot of equity risk if your investment horizons 20 years out.

Also the lesson to investors is just because someone is in the best position to give you advice and would make some money off you if they gave you that advice, it doesn't mean they will give you the advice that's in your best interest when it conflicts with their best interest. Their best interest is CMA (cover my …) by silence or sin of omission. Then it's to make more money by selling what gives them the most profit to "cover" you like payday loans.

anonymous writes: 

The thing I practice (and I don't know if it adds any edge that can be computed) is to always take some off after a good run. No mater what, be it trading, investing, bonus, etc. Never spend it all–or even most of it. Put it away for when SHTF, because as day follows night, it will…

Andrew Goodwin writes:

A major part of the problem is the thinking that makes the credit limit on credit cards equivalent to ones own money.

For my part, I will never willingly stop at a gas station that has two prices for gasoline with one higher for the credit card user than for one paying cash.

In a world where there are card rebates on gasoline, what is the point of acting responsibly with credit when those who did not act responsibly get subsidized by those who did. The dual pricing also serves to support a cash economy against the public interest.

Peter Grieve writes: 

I feel that I am unique on this site as having been in this hairdresser's situation for most of my life (Hello, Peter). Obviously this is not due to a lack of economic education or upbringing. I feel that the factors include a lack of skepticism regarding my own appetites, a lack of faith in the future, a certain immediacy in response to the world. These are traits associated with immaturity, to which I confess. Of course this leads to tremendous inefficiencies, even when viewed from a purely hedonistic perspective, but it does have its compensations.

I do not regard Scott's comments as elitist, presumptive, uncharitable, or any of that baloney. On the contrary, I find the the use of the word "uncharitable" to be condescending. I do not feel that people in my position are a fit object of charity.

Everyone has their irrationalities, and they are often incomprehensible to those who do not share them. Scott's words are simple, honest truths, which many people (including me) would benefit by internalizing to a greater degree.

Stefan Martinek writes:

It is good to have an emergency cash for at least a decade; locked, untouchable for trading or similar. The rest can be at risk. And after MF Global steal from client accounts (is Corzine still free?), I think it is prudent to keep as little as necessary with FCM. In case of a brokerage failure, the jurisdiction matters (Switzerland is preferred, the UK is too slow but ok, then Canada, and the last option is the US broker).

Ralph Vince writes: 


I entirely disagree; emergency cash has a shelf life which is very short, and our perspective warped as we are speaking in terms of USD. Being the historian you are, you know full well how quickly that cash can be worth nothing. (And again, a many of our personal experiences here would bear out, money is lost far quicker than it can be made).

A bag of air on hand is good for one breath.

People are taught that "saving" is virtuous, borrowing a vice. I would contend that we have crossed to Rubicon in terms of the notion of stored value — no more able to contain that vapor than we can a bottle of lightning. The circulation brought upon by a zirp world, turning all those with savings into the participants at a craps table, the currency being used the product of a confidence game, among the virtues to be taught to tomorrow's youth is that of creating streams of income — things that provide an economic benefit their neighbor is willing to pay for, as opposed to a squirrel's vermiculated nuts.

"Stored value," is a synthetic notion we have accepted and teach as a virtue. It has no place in nature, it is a synthetic construct, one that is not scoffed at in the violent, life-and-death world of fire and ice. Young people need to be taught the fine distinction between the confabulation of "storing value," and that of using today's fruit to generate tomorrow's.

Stefan Jovanovich adds: 

From the other Stefan: I agree Ralph. "Stored Value" is another part of the economist dream that platonic ideals can be found. Money is and always has been one thing: the stuff you could voluntarily give to the tax man that would make the King find another excuse for throwing you into the dungeon. The gold standard did not change that; it simply gave the citizen a chance to make the same kind of unilateral demand on the government. It is hardly surprising that the fans of authority and "government" hate the Constitutional idea of money as Coin. How can you have a permanently elastic official debt if the citizens can ask for payment in something other than a different form of IOU?

However, Stef does have a point. Having a hefty cash balance is a wonderful gift; it gives you the time to figure out your next move. The sacrifice is the absence of leverage; the gain is having literally free time.

Scott Brooks comments: 

There are a lot of companies out there that take advantage of them and the bad advice they were given from their parents. Banks certainly do. Then you've got insurance companies and brokerage firms selling them crap products as well.

But that doesn't hold water in today's society with Suzie Orman and others like her being nearly ubiquitous on the airwaves and net.

These people live beyond their means. Plain and simple.

Yes, they lack education, but even with education available, they don't take advantage of it. They are just doing what they were taught as kids. For far to0 many of these people, as long as they've got enough money for their 1-2 packs of cigarettes/day and their quart of Jack/week, they go and live lives of quiet desperation, hoping that they don't lose their jobs and are lucky enough (i.e. like not spending money on stupid stuff is "luck") to pay off their debts by the time they are in their early/mid-70s so they can live out their remaining few years (if they even make it that long) on social security.

I know. I grew up with these people. I know how they think. But for grace of God (as was mentioned earlier), I might have been one of them. But for some reason, I was blessed with gray matter that works, and I saw the error of those ways, and I was able to get out.

Ken Drees writes: 

I knew a guy–lost touch with him over the years–who exclusively dealt with hairdressers and salonists. He sold variable annuities to them since these people had no retirement plans given to them from the salon owners. I believe in his mind that he was doing them a service–and I really do not know the quality of his products–but at a glance I saw them as mutual fund annuity hybrids that came from heavy fee fund families. He was a tall, dark and handsome gent and he would actually get entire staffs of salon ladies to invite him in after hours for a group meeting/financial planning discussion presentation.

He always said that business was brisk! 

Jim Sogi writes: 

When young friends ask me, how should I invest, I give them a simple asset allocation model based on ETFs or Vanguard and an averaging model. Invest x% of your paycheck off the top each time. Doesn't matter how much really.

Russ Sears writes: 

 Scott, since this is the DailySpec let us bring a little science into the discussion, even if it is social science.

Where we differ is not what is causing the hairdresser's problem. It is in what can be done about it that I differ. I believe you can coach people to delay gratification. I coached kids that never did homework before and got "D's" and "F's" during a summer and by fall the kid was an "A" or "B" student. You probably owe a hardy thanks to the coaches in your life.

Perhaps the greatest social science finding has been the "marshmallow experiment" done at Stanford. They did test on 600 4 year olds telling them if the child did not eat a marshmallow for 15 minutes after they left, they would get a second marshmallow. 1/3rd of them made the whole 15 minutes, a small percentage ate it immediately after the others had waited various amounts of time. They followed up on these kids several time in the last 40 years. Just about every way you can think of to define success was highly correlated with the time the 4 year old delayed gratification: SAT score, college/HS graduation rate, credit scores, long term committed relationships, contentment etc. And almost any way you can define failure was inversely correlated: jail time, high school.

The correlation was stronger than IQ, social economic status at 4 years old. In other words even the dumb poor kid that delayed gratification was happy/content/successful 40 years out. He may not be making much but he is happy with it.

For a humorous view of this experiment reproduced: Joachim de Posada: Don't eat the marshmallow! 



 In deciding on strategy, I think it efficacious to consider, for the intended holding period of the trade or investment, the ratio between the expected return on the one hand and the 'coastline' on the other.

Some specs may not have heard of the concept of the coastline in markets. It refers to, at the tick by tick level, how far a market actually 'travels' in getting from point A to point B.

In terms of markets, an investment or trade may depreciate 6% from point A to point B but the 'coastline' might be 30%. i.e all the up and down squiggles add up to 30%.

Another way to think about the coastline is as a measure of pure path dependency. By definition the coastline will always be longer than the simple difference between A and B.

Those who care if their transactions move against them may want to study past examples of the trade and ascertain:

1. Whether the ratio of expected return to coastline over the predetermined holding period tells you whether buy( or sell) and hold is more or less efficient than an active trading strategy.

2. In market moves in general of a given elapsed time and net magnitude, might the future distributions subsequent to shorter coastline measurements be more harmonious with a counter trend or momentum approaches.

3. Might relatively longer coastline measurements be indicative of impending volatility.

4. For a move of, say, 1% in the price of a macro market- do the different coastlines for the different markets foretell subsequent individual and relative performances.



"What Markets Can Learn from Statistical Learning: Systemic Risk and Systematic Value" is a reasonable introduction to what all the fuss has been about in recent years. In an of itself predictive of little but a good read nonetheless.

For non technical readers out there, there is barely a summation sign or Greek letter in sight.



 Twenty three years ago, when I was more stupid than I am today, I stood beside my Senpai on the floor.

He had just been given (had sold to him) the equivalent of 2000 contracts in the Australian Share Price Index futures market. This was a sizeable position forced upon him and the market was immediately well lower with no bids. All of a sudden he started buying short dated interest rate futures.

What was he doing? As the colour drained from my face and I metaphorically soiled my shorts, he found the bids in the SPI and then covered his longs in the interest rate futures. Nett he lost small but only about 20% of what he would have lost just covering in the core market.

During my post trade inquisition he told me there was no liquidity in SPI so he 'hedged' in the next best liquid instrument. He subsequently did this scores of times and later when the student became the master he did too. He kept manual records of reactions of the local markets to one another in 30 minute increments and used it as a 'hedging cheat sheet'.

But that was in the 1990s, that was before the Internet, when promoters of dying strategies in warm climates raised billions–before the best and brightest lost interest in the world.

It is interesting to note how things that used to be excellent short term 'hedges' have lost much (if not all) of their efficacy. One notes the much reduced to useless hedging effectiveness over the past decade or more of:

The Swiss Franc, Gold, Short Dated Interest Rates, Options based markets: Like all insurance products the spreads to exit during the panic right at the low in the futures market - that the option was purchased to protect against or profit from - are so wide as to make it not worth the bother - better to stick with the futures.

It is changing 'Baconian' cycles, it is government & central banks learning the game (the ruthless and gifted Swiss National Bank is the absolute master), it is interest rates at zero, it is technological advancement and it is - in some way - 'natural' and just that what was once done so well by the true masters has been traded away into nothingness by the smarter student.



If Volume as well as Open Interest are indications of the amount of struggle for the discovery of price, which seems a likely good way to look at these two important variables in market data, then price gaps or price jumps must be occurring at moments of high consensus and low struggle.

Consensus fades. A point of high consensus, if identifiable, is a good point to search for fading trades.

Then, how come a market as Hong Kong continues to display for long years continued gaps on the daily price plots? If indeed these opening gaps are a strong consensus developing with overnight news (I wonder why should only in the Hong Kong market the news-vendors are so efficient, chuckles) then why are the daily candles not displaying too many hanging mans and the faders are unable to prevail? This leads to a disturbing instinct, that the gaps in Hong Kong are something else and not points of low struggle high consensus price jumps. Those price jumps are something else.

What is underlying this "regular" opening gap behaviour in Hong Kong that is "irregular" in the context of how other large markets are?



 Something I've been considering lately is how to combine different types of consideration that occur in different time frames. This seems to be an issue in both chess and speculation, for example stocks have a long term bullish bias which short term traders may sometimes forget. Chess meanwhile has thinking based largely on the calculation of variations, and this needs to be married with long term almost glacial changes involving the pawn structure.

The main issue with chess at least seems to be that the longer time frame tends to be sidelined or ignored, particularly in games in which it's 'all hands on deck'. So players often calculate like mad and lose sight of the 'big picture', often to their cost.

One thing that I've found can help is to set aside particular times for the different thought processes. Alexander Kotov, in 'Think Like A Grandmaster', reported that Mikhail Botvinnik tended to do this in his own games, considering 'strategy' (pawn structure) when it was his opponent's turn to move and then calculating variations when it was his own. I think this is a useful habit to cultivate, though it can be derailed if an opponent moves particularly quickly after a structural change has occurred.

It would be interesting to hear if any specs have comparable examples and how they organize their thinking to cope. Is there a decision tree, a simple heuristic ('trade smaller on the short side') or does everything just fuse together when enough experience has been gained?

Let's say that most fed/economy/war issues are going to develop over weeks and months and that we take a particular view (eg that QE will continue as and when needed until systemic failure). How does one then marry this with shorter term considerations, such as the Friday-Monday effect?

Anonymous writes:

Nigel, I think this is actually much easier in the markets than in chess.

Firstly, in chess, you are forced to make a next move at the lowest time unit. The clock is ticking literally. In the markets, you can always walk away from the table and choose to play at a completely different game where the risk/reward is more appealing.

Secondly, in the markets, it is very easy to implement a low pass or high pass filter. The simplest example is to use only weekly or monthly prices with no high/lows. Other examples of filters to allow one to see longer time frames including moving averages. Personally, I use multiple strategies at multiple time frames — and some of the strategies are canceling each other at any given moment. This requires extreme mental discipline to implement and maintain. But it results in a very different overall performance than focusing on a single timeframe.

Thirdly, in the markets, the game never ends. At the checkmate or resignation or draw, the game has ended. This end of game phenomenon directly affects risk taking choices and time horizon. I would hypothesize that the issue you raise is more similar to risk taking on games of chance like horse races (and the concomitant Kelly strategy) than on continuous outcomes.

Lastly, and most importantly, unless you are managing a massive amount of capital, one's "move" in the markets does not change the outcome. In Chess, your risk taking and behavior directly affects the future.

Jeff Rollert writes: 

Doesn't the "game" end when you close out a position? I could see the game continuing if you repeated a strategy, but the probabilities would be different, hence a different game.



One of the key elements in trading is to ask the right question, almost in a Columbo like fashion. Holding the issue of macroeconomic policy theory in abeyance let me outline just a few questions on my mind.

The Greek election is September 20 and the polls are showing Syriza and New Democracy tied at around 27%. The winner of the election will likely be forced to form a coalition with at least two other parties. Stronger Greek governments in the past were not able to meet the conditions of similar creditor bailout programs. Is it right to question a new and weaker Greek government's ability to meet the conditions of the third bailout? What are the implications for Europe and the respective financial markets?

China's share of world GDP(USD terms) has gone from 2% in 1995 to 12% in 2013 and is now the world's second largest economy. Chinese growth is now slowing sharply by any measure and the credit bubble is deflating. By comparison, Chinese credit growth between 2006 and 2014 is estimated to have been 90% of GDP while Japan's preceding the 1990's bust was 45% of GDP and in the US it was 40% of GDP during the credit boom preceding the 2008-09 housing bust. Is it right to consider that the inevitable prolonged slowdown in China will continue to influence global financial markets, support further US dollar strength, and continue to negatively influence emerging markets?

The FOMC on September 17 will announce any changes to monetary policy. Markets currently show the probability of a 25 basis point hike at just under 30%. The reasons for the Fed to hold off from tightening monetary policy might include: fragility in global financial markets, the strength in US dollar, the weakness in oil prices, credit conditions, inflation and inflation expectations well below target, weakness in diffusion indices, labor market conditions, etc. While one tightening may not influence the economy in the medium to long term it may influence financial market in the short term which have a feedback loop to the real economy. Is it right to consider there may be other reasons for the FOMC to raise rates a token amount? Perhaps this is a coming of age moment for the FOMC where they have waited a long time to raise rates and now finally will take the step, even if by a token amount? Perhaps the FOMC wants to nudge rates off the floor and test out the new money market operations? Perhaps certain FOMC policy makers have been concerned about the influence of QE on financial markets and excessive speculation and risk build up? Does a small tightening allow some room to test the impact on markets? The real question going forward though medium term is if the FOMC is going to parallel to Benjie in the movie Summer of '42. Is a consummation of tightening by the FOMC looked back upon as a onetime event as the tracks of the economy in the sand remain of subpar growth and low inflation?



 Think Like a Grandmaster also applies to survival. My shingle as Catman Keeley is having lived nine lives. Nearly every disastrous event that I've experienced has three mathematical elements: Danger closing, fewer escape options as the clock ticks, and less time to consider them as the flag starts to drop.

Some personal examples are approaching men with knives, a ring of snapping dogs closing, a freight train accelerating with one hand hooked on a ladder, heatstroke under a desert sun while hiking toward water, hypothermia while stumbling toward a distant campfire, swimming fatigue in a rip tide, an approaching head-on collision, cerebral malaria knocking at the brain, encased in a swarm of stinging bees, altitude sickness on a peak, flames licking on a roof, lost on the Pantanal as the moon sets, human stampede as gunshots near, runaway raft filling with holes, sinking in quicksand, cannibals on a slippery riverbank, musical trees in a herd of rhinos, ax chopping through a hotel door, 13' alligators on a one-lane levee, and rising tide on a cliff sided Baja beach.

These makes me want to go out and test myself again.

Effective ways to train for survival in the wilds are board games for children, sports for teens, and business negotiation as adults. Therefore, everyone has a background to adventure.



Time to reflect on the market as we are at the anniversary of the 6 year bull market.

I hardly know anyone who was bullish at S&P 666 in March 2009, then the market tripled. Think back, who was bullish, maybe that person is worth listening to.

Over the past 8 years whenever I speak to a new hedge fund they are short the same stocks, Kone, H&M, Novo, throw in SHB and Autoliv and you have a basket of the highest quality stocks in Scandinavia (and the best performing companies over the past decades). Therein, I believe, lies the value of local research and knowledge.

Even though every fund is said to be 'contrarian' there are always the current fashionable ideas that everyone gravitates to. Currently, in Scandinavia it is short ICA SS (on the thesis that Sweden will be hit with hard discounters like the UK. ICA's margin was hit in Q4 which reinforces the short sellers thesis independently of the reason) and long AKA NO (oil is said to be 'contrarian', couple that with a divestment case and you have powerful story for the analysts to pitch to their PMs).

Crashing commodity prices, currency war, crashing yields (with a big chunk of European debt trading at negative yield), surely this can't be because everything is so rosy in the world, this cant possibly be 'good' news. Couple this valuations close to ATH and I have for the first time in 25 years sold everything (I started investing when I was 12). Everything.

The ones who were bearish during the past 6 years blamed, QE, the Fed. 'My model couldn't possibly predict the government distorting the market like this'. Now the thesis is 'money is free, the only place to invest is the stock market', 'yields will stay at zero forever', 'buy high yielding stocks'. Peter Thiel argues that high dividend stocks are one most bond-like, so aren't that the biggest bubble around. And at the end of the day aren't Peter Thiel smarter than all of us?

Just to keep things honest. Today, I've have started to buy back. Since I usually sell too early and buy too early, I'm looking to scale in over the coming month or so. Even though I sold at around 2070 and we are now 150 points lower (not sure what the futures are exactly right now), it is really painful to see the market go higher when you're out–it is too hard to get back in when you sold, the lesson is of course not to time the market (even though I was successful this time). In my 401k, I have a guaranteed 3% pa return fund, which was not a bad option during the past 6 months.



There are many market lessons here in this Seinfeld clip and many more questions begging to be answered.



There were 75 pairs of shoes at Susan and Vic's doorway, lots of cheery folks eating, songs by two different women, delicious delicacies, flowing libation, a starry, clear night twinkling beyond the large windows of the greatest city… and men striving to establish their alpha maleness in the face of longtime demonstrators of testosterone and smarts. We left after 11, full of carbohydrates, grape, protein, ideas.



 Our last Ulysses Grant-inspired pilgrimage was to Penn Yan. It has one of the few monuments to the cause of Union from the Civil War. There are literally a thousand courthouse square monuments here in the South for the Confederates but there are almost none for the Unionists in the towns of the North. The winners seems to want to have forgotten the cause of the thing as fast as possible, while making sure that everyone however remotely connected to the Federal army and bureaucracy got a pension.

I mention all this because many of the Amish from Pennsylvania have moved up there–cheaper land, far fewer tourists. The local merchants are welcoming; the local Aldi has spaces in its parking lot with hitching posts.



 One of the goals of a person's life, after the work day and reproduction are done, is to discover 'Who am I'?

Today I had a discussion with a computer science professor on the definition of self. My thesis is that we are walking computers housed in sentient bodies due to evolution. The sensations of the five senses, plus a few that probably haven't been discovered, are evolved to support the central nervous system computer. There is no other way, or we would not be here.

I supported the thesis as one of the oldest living persons to start studying computers. Fifty years ago, I won a science fair blue ribbon for a shoebox full of erector set parts and rolling marbles that solved equations as quickly as an abacus or slide ruler. A perk was a twice weekly class with three other ribbon winners, to a Jackson, MI IBM office full of refrigerator size computers that calculated data using a language called FORTRAN. That evolved into the other programs, and so did I.

It's hard to swallow that we are evolved machines encased in flesh in order to become better machines, but defining oneself is where self-improvement starts.



Like many of us on the spec list I was fortunate to develop a very good relationship with Mr. E, a.k.a. Ed Dunne which taught me many things.

My first impressions were pretty much a mixed bag; seemed like Ed did a lot of talking about grandiose things… Like being actively involved with Andrew Breitbart, getting Drudge Report up and going and a few other things that seemed a little out of place. However at one point I was fortunate enough to have dinner with Andrew, mentioned Ed and he lit up like a Christmas tree telling me about many of the things they had done together and what great admiration he had for Ed.

I had a market idea that Ed thought had legs to it and promised he would have a couple of fellows get in touch with me… I thought was a very nice offer but really never expected people of that caliber, or far up, ever give me a call. To his word however I got the call discussed the idea… there wasn't much interest in it but certainly Ed could get people to do things and was more than willing to do that. He always seemed very willing to reach out and help.

My big take away, the really big thing I learned from Ed, was right at the bear market low in 2009. Ed, always Mr. politics, and a bit on the conservative side, was railing about Obama when Vic was mentioning that the long-term trend was still up. It's one of those memories I will always carry with me a group of spec listers were at John Bollinger's in California Vic was on a conference call or something we were listening to him talk at the same time Mr. E had been extremely negative on the marketplace.

In retrospect Vic nailed the low… Mr. E stayed short way too long. That happens— none of us are always correct in the markets— but my take away point was don't let your political beliefs getting way of market beliefs or trading strategies.

That's a lesson I have learned –and relearned –over the years but finally learned it for certain, absolute certain, in 2009. Ed also had some brilliant calls like at the first of this year I mentioned to him I had some very bullish stuff on cocoa he said his indicators were equally bullish based on supply demand etc. and the rest is kind of history…we had some great rallies there.

Ed and I shared a love for good steak dinners (Gallagher's) as well as trading the bond market. It was very interesting to watch his prognostications which were based more on relationships of the different instruments, time, spreads etc. and mine which is based more on technical stuff cycles and accumulation… how these two things could come together to set up some very good trading opportunities.

The rumor is that Vic and Mr. E had their differences, yet both shared a love of helping other people begin their careers. Some world-class traders began with both of these guys and is probably the hallmark of their career. After all making money is one thing but giving inspiration and beginning careers for other people is much more of an accomplishment.

The final take away point I got from Ed was his incredible interest in learning anything about the markets… Whether it was weather, intermarket relationships, conjunction of Saturn with Venus… It didn't matter… his mind was wide open to learn even from people like (a loop I was fortunate to be in)… and the truth is I was the one that did the learning.

Jeff Rollert writes: 

My memories of Ed were similar. We would talk intermarket relationships and weather. He understood weather as well or better than many of the professional sail boat racers I knew. Only one who goes many miles offshore and thus unable to outrun a storm into a harbor, carries this knowledge.

What I found interesting about Ed, was you had to separate his anger from his frustration. From my perspective, his 2009 views were frustration…a path taken when you see a suboptimal path being taken, like your teenager, and being unable to understand why.

He too helped me, and I don't forget that.

Allow me to also add Vic has shared an enormous amount with me (whether he agrees or not). I've always loved that in private discussions both Ed and Vic allowed you to give your $0.02 and not dismiss you as an idiot. They disagreed without making it personal, which appears now to be a lost skill. Great mentors, which both are, excel at that. Note, Ed did love to poke at you, if he thought you were being grandiose.



I have read that holding periods for stocks are getting shorter. I could ask if lower average holding terms in one period are predictive of higher volatility in the next period. -  A reader.

If you visit Google Scholar, you will find hundreds of papers that address the relationship between market friction and turnover, average holding periods, etc.

Changes in price volatility can be associated with many things. But I find it difficult to see any theoretical economic logic why increased turnover (shorter holding periods) should predict higher price volatility. In fact, I think the opposite can be compellingly argued. That is, if most people don't want to change their holdings, then those people who want to transact will pay a higher price for an execution.

Here's my thought process: Turnover and friction are inversely correlated. Friction consists of commissions, fees and capital gains taxes, bid/ask spreads, and the true depth/size "liquidity" on the bid/ask. Of these, commissions and bid/ask spreads have been in a secular decline since 1990 and I believe this explains the bulk of the data in that chart. Secondly, if you are subject to a 90% capital gains tax and a $1 per share commission, your holding period will increase a lot. That was the case from the 1960's to the 1982. (Note that capital gains taxes increased with Obama's election in 2008.)

Also, in bull markets, one generally sees increased participation and increased turnover; in sideways or bear markets, there are usually fewer transactions, wider bid/ask spreads, and obviously, higher risk premia. This is generally true in most markets including real estate, collectibles and stocks.



Take it for what its worth, but I haven't seen this kind of academic study before.

This study assesses the economic value of technical and fundamental recommendations simultaneously featured on "Talking Numbers," a CNBC and Yahoo joint broadcast. Technicians display stock-picking skills, while fundamentalists reveal no value. In particular, technicians overwhelmingly outperform fundamentalists in predicting returns over horizons of three to nine months and moreover they produce large alpha with respect to the Fama and French (1993) and momentum benchmarks. Considering market indexes, Treasuries, commodities, and various equity indexes, both schools of recommendation generate poor forecasts. Overall, the evidence shows that proprietary trading rules could, at best, enhance investments in single stocks, while returns on broader assets are unpredictable.

"Consider first the stocks that the technical analysts identified as strong buys. They on average proceeded to outperform the overall stock market by 7.9% over the subsequent nine months, while the stocks they recommended as strong sells underperformed by 8.9%. That spread of 16.8 percentage points is highly significant from a statistical point of view. As the professors put it in their study, it means that "technicians display rather impressive stock-picking skills." "Contrast that with the performance of the fundamental analysts. The researchers found that their strong buys proceeded on average to underperform the market over the nine months following recommendation — though not by enough to conclude at the 95% confidence level that these analysts were actually worse than random. Even worse, the stocks that these analysts rated as strong sells did not perform appreciably differently than those they considered strong buys."

Andrew Goodwin asks: 

How would a chart technician buyout fund do? 



 Adrian Bejan gave a great talk at last night's Junto. You can get a good feeling for the content by watching his videos. This one uploaded by Duke University is almost identical to his talk last night with the same slides. The ideas presented are very interesting and WELL worth a half hour of your time.

Other similar talks:

(TedX Bucharest 2010, 20 min)

(TedX Mid-Atlantic 2012, 15 min )



Fighting the Federal Reserve for the most part has always been useless… They prevail.

Which raises an interesting point. What's China now, number one or number two economic power in the world? Take your choice, it is one or the other. China has her own version of the Federal Reserve. They've made it very clear and apparent that they will regulate their economy do whatever it takes to ensure financial stability.

Perhaps that's why "they have been eating our lunch" as Donald Trump says, but it is definitely something to consider when approaching their stock market or economy. Do you want to buck their Fed?












 Another beauty escapes into the clutches of cyberspace.

The Baconian saying 'Copper the public' is developing more into something like 'iron pyrite the public'.









From the NBER Digest, National Bureau of Economic Research, September 2015 Issue:

Cheap Talk, Round Numbers, and Signaling Behavior

Items listed at multiples of $100 ultimately sold for 5 to 8 percent less than items with non-rounded prices, but received offers faster and were more likely to sell. In the marketplace for ordinary goods, buyers and sellers have many characteristics that are hidden from each other. From the seller's perspective, it may be beneficial to reveal some of these characteristics. For example, a patient seller may want to signal unending willingness to wait in order to secure a good deal. At the same time, an impatient seller may want to signal a desire to sell a good quickly, albeit at a lower price. This insight is at the heart of Cheap Talk, Round Numbers, and the Economics of Negotiation (NBER Working Paper No. 21285) by Matthew Backus, Thomas Blake, and Steven Tadelis. The authors show that sellers on eBay behave in a fashion that is consistent with using round numbers as signals of impatience.

The authors analyze data from eBay's bargaining platform using its collectibles category˜coins, antiques, toys, memorabilia, and the like. The process is one of sequential offers not unlike haggling in an open-air market. A seller lists an initial price, to which buyers may make counteroffers, to which sellers may make counteroffers, and so on. If a price is agreed upon, the good sells. The authors analyze 10.5 million listed items, out of which 2.8 million received offers and 2.1 million ultimately sold. Their key finding is that items listed at multiples of $100 receive lower offers on average than items listed at nearby prices, ultimately selling for 5 to 8 percent less.

It is tempting to label such behavior a mistake. However, items listed at these round numbers receive offers 6 to 11 days sooner and are 3 to 5 percent more likely to sell than items listed at "precise" numbers. Furthermore, even experienced sellers frequently list items at round numbers, suggesting it is an equilibrium behavior best modeled by rationality rather than seller error. It appears that impatient sellers are able to signal their impatience and are happy to do it, even though it nets them a lower price.

One concern with the analysis is that round-number pricing might provide a signal about the good being sold, rather than the person or firm selling it. To address this issue, the authors use data on goods originally posted with prices in British pounds. These prices are automatically translated to U.S. dollars for the American market. Hence, the authors can test what happens when goods intended to be sold at round numbers are, in fact, sold at non-round numbers. This removes the round-number signal while holding the good's features constant. In this setting, they find that buyers of goods priced in non-round dollar amounts systematically realize higher prices, though the effect is not as a strong as that in their primary sample. This evidence indicates the round numbers themselves have a significant effect on bargaining outcomes.

The authors find additional evidence on the round-number phenomenon in the real estate market in Illinois from 1992 to 2002. This is a wholly different market than that for eBay collectibles, with much higher prices and with sellers typically receiving advice from professional listing agents. But here, too, there is evidence that round-number listings lead to lower sales prices. On average, homes listed at multiples of $50,000 sold for $600 less.

˜Andrew Whitten



In the past six years, we have basically seen two phenomena in stocks: 1. etf growing use, and 2. share buybacks. My theory is that these two forces combine to totally drain liquidity from the stock market. The general downward trend in volume is the proof, also probably explains persistent small upward march of stocks, and the tendency for "corrections" to be much more like "flash crashes."

With one, we have something like robotic superfunds who accumulate mass quantities of stock and hold, rebalancing based on volume in the etf. With two we have drastic reductions in float.

A bear market in that environment will bring a certain violence and toxicity never seen before. Down days are almost forced to be large. So when we talk about a bear and months of down days, it will probably be something truly awful. Etfs will dump stocks on a reduced float market that is largely composed of funds anyways.

The size of the exit is determined by volume and float. Door is getting small…

Ken Drees writes: 

This article explains ETF mechanics well.

Almost as important for the ETF are the authorised participants, or APs, which act as marketmakers. The APs, most of which are banks, help to keep the share price of the ETF close to the value of the underlying assets. Imagine that one big investor in an ETF with, say, a 10% stake, wanted to sell its holding in a single day. There might not be ready buyers for such a large holding, causing the ETF to fall to a price below the value of the assets it owns.

To avoid this, the APs act to balance supply and demand. If the ETF is expanding (more people want to buy shares than to sell), then the AP puts in an order to the fund manager for a block of new shares, dubbed creation units, in the ETF. In return, it transfers a bundle of securities, based on the index the fund is tracking, to the manager (this bundle is known as the creation basket). If the ETF is shrinking (more people want to sell than to buy), then the AP sells creation units to the fund manager and receives in return a bundle of securities known as the "redemption basket".

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

So how might this process go wrong? One obvious danger might be the role of the APs. If they fail to make a market in the security, then the price could get out of kilter with the asset value of the fund. Alternatively, they might go bust in the middle of the creation or redemption process, which takes three days to complete. That might leave the ETF short of the shares needed to top up the fund (and match its benchmark) or the cash to pay its investors.

anonymous writes: 

Larry, your analysis seems reasonable. I'm curious if you or other folks here think the lack of liquidity applies more generally than just the stock market (e.g., in the banking and currency markets). See for instance:

"Into The ‘Dollar’ Run Now More Than Illiquidity?"

"Volatility As ‘Money’; Or Really Rising Vol As Anti-Money

Ralph Vince writes: 

And the fact that leveraged and short ETFs must move stock exponentially with a drop in prices. That is to say, the more the underlying securities in the ETF drop in price, the more shares must be sold and this is not — a a drop of 2d takes more than twice as many shares to be sold as a drop in 1d. This would seem not such a big problem except that it is likely to occur during times of vacuous liquidity. 



The Junto on Thursday, Sep 3rd will feature Adrian Bejan, Professor of Physics at Duke, inventor of the constructal theory, one of the most important and wide ranging scientific discoveries and principles of the century. It starts at the Mechanics Institute 20 west 44th street at 7:15 pm. All invited.


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