Following the usual Holiday/Valentines gold run-up (which was magnified by the flight to safety during the now official NDR bear market), the seasonal winter gold short is set up well this year. There is a weak price period for gold from mid-February until mid-March. Entering a short position on or about February 17 and holding until March 15 on the April contract has been a successful trade 25 times in the past 41 years for a success rate of 61.0% with a cumulative profit of $43,860 per futures contract. However, in recent years holding onto the short position established in February longer has been more profitable.

The chart below is a weekly chart of the price of gold with the exchange-traded note (ETN) DB Gold Double Short (DZZ) overlaid to show the inverse price correlation between the two trading vehicles. The line on the bottom section is the 41-year average seasonal tendency showing the market’s directional price trend with seasonal weakness highlighted in yellow.




What happens after red days with both bonds and stocks down? From 1/1/2015 to date: 

                        expectation next day
bonds stocks
bonds down/stocks down (n=43) 0 -2.4 (sd = 16)
bonds up/stocks up (n=47) 16 (5 ticks) -0.5 (sd = 18)



Forgive me for posting two items, but I believe them to be related.  In the first instance we have our oldest algorithm (from 1988), nicknamed “Thermos”. This plots a moving correlation between stock and bond levels. As of Friday (2/26) it has gone bullish for stocks.


Secondly, a major Teutonic bank just announced a buy recommendation in gold. Coincidentally we notice that our measure of professional sentiment just went bearish on gold.


A week ago we had a similar signal to sell bonds. We have long noticed that whenever bonds and gold are in agreement, equities make a move in the opposite direction. Either way, long or short.  



Yesterday was one of the best days of my life. I was healed enough to be able to go surfing for the first time in months, Ceres treated me well in the market, and The Eddie went, and I watched it on a screen.

The Eddie Aikau Memorial is the most important contest in surfing. It is the World Series, Superbowl, NBA Final, Kentucky Derby all wrapped up in one. The Eddie is so important that it is not run every year, only running when the conditions at Waimea Bay are perfect. The contest was named in honor of Eddie Aikau, the Hawaiian big wave surfer and lifeguard who lost his life in 1978 during an ill fated canoe voyage from Honolulu to Tahiti. The 9-man canoe capsized around 15 miles from shore, and Eddie tried to paddle to Molokai to get help. The people on the canoe were rescued by a Coast Guard cutter, but Eddie was never seen again.

In 1985, surf giant Quicksilver put together a big wave invitational contest in memory of Eddie Aikau. First held at Sunset Beach on Oahu's North Shore, the second year brought it to Waimea Bay where Eddie was the lifeguard for many years. In 31 years, the contest has been run only 9 times, despite having a 90 day window. The last time it was run was in 2009. The surfing tribe started getting excited last week when the models showed a huge El Niño swell showing up this week. Not only was it a huge swell, it was one of the biggest, with waves reaching 30-40'+. The conditions were perfect, and the waves were well formed, Waimea at it's finest.

The contest consists of 28 invitees each surfing in two rounds of 60 minute heats with only 6 other surfers. Each contestant was only allowed a maximum of 4 waves per heat. There were 5 judges that scored each wave 1-20, with the sum of their scores being the total for the wave.  The contest started at 8AM Hawaiian Time and was finished in a little over 8 hours. It was the best big wave contest I've ever seen. The contest was very therapeutic for the surfing tribe and the contestants who last week lost a popular big wave surfer, Brock Little, to cancer. Much mention was made of Brock, and the Hawaiians attributed the good swell to him, naming it the "Brock Little Swell." Thousands of people were at the beach and the Kam Highway, watching the spectacle.

The heats were very exciting, with many good rides, and very scary wipeouts. The waves were so big that big sets would blow out the entire bay, sending jet skis racing to shore to avoid the 20' whitewater.

All the usual suspects like Kelly Slater, Peter Mel, Shane Dorian, Tom Carroll, et al, were competing. A bonus and the crowd favorite was 66-year-old Clyde Aikau, past winner and younger brother of Eddie. Clyde put on a great show, totally ripping up the waves in a very old school Hawaiian style. Ultimately, John John Florence won the contest, bringing the title back to Hawaii. Florence is billed as the next Kelly Slater, and his performance was spectacular. Incidentally, Slater came in 5th. Clyde Aikau came in 20th place. A horrible wipeout from Mason Ho deserves a look. And here are some highlights of the best waves in the contest.

The 9th running of the contest was spectacular, and was a great time for for all contestants and spectators.



Gut feelings matter, but not the way you think. An individual’s gut feeling is anecdotal. Chances are that even he cannot statistically study his sympathies. However many of us model the gut feelings of investors at large, and those can be statistically studied. Here are a few examples:
Commitments of Traders of futures. Many researchers ply a theory and then try to find data to support it. And their theory typically revolves around following the large (reporting) traders and mimicking them. The trouble is that not even the big guys are right all the time. A better approach is to examine the data without a preconceived theory. In doing so you will find that the small (non-reporting) traders are more consistently wrong than the big guys are right. That is, winners rotate, but losers are consistent. Further analysis reveals that the little guys tend to be even more wrong when they are short. And the best combination is when the little guys are short and the big specs are long. Following the hedgers should be avoided as the hedgers speculate, but on the basis, not the actual price. If you don’t know what that means, don’t play in that venue. 
Options data. This usually takes the form of the putcall volume ratio. Excessive levels tend to occur at market turning points. And by the way, the smart money bets against the excessive level. One problem to be mindful of is that most researchers look at CBOE data, which typically only constitutes a third of all option data. If you want to get it all, get the Options Clearing Corp data, which is free just as CBOE data and more reliable.
While you are looking at option data, go a step further and look at the open interest levels.  I assure you that if you like putcall volume data, you will value the open interest data more.  The latter also tends to give less ephemeral signals. 
Is there any way to combine the two?  You betcha!  In any given period the number of New Positions (NP) equals the volume plus the change in open interest.  Further, the total open interest divided by the backward cumulative NPs identifies a number of trading days which can be described as either the age or average holding time of those positions.  On a very broad scale that data gives a view significantly different from putcall volume, and one that is quite reliable. 
Polls?  There used to be a newsletter which purported to measure contrary opinion for futures. What the publishers (Mr. James Sibbet and Earl Hadady) did was rank the bullishness of various newsletters and take a percentage. The theory was that if every publication was bullish, the market was overbought. The trouble was (paraphrasing Keynes) opinions could stay bullish for longer than you had margin money for picking the top. However if a market was up in the high 90s percent bullish for several weeks, the first downturn in opinion to even mid-80s presaged a price selloff.  It wasn’t the same people each time, but when the collection of gut feelings changed its momentum, the price tended to go along. 
While on the topic of polls, VIX and its offshoots are surveys that are very reliable. 
Price alone. What do you do about a market without telltale derivatives or surveys of newsletters? If you run a regression fit of the price data and extend it, you have a forecast. The deviation of the actual price from the forecast provides a measure of the combined opinions of professionals regarding that price. Small deviations go hand in hand with low volatility which is bullish on prices of assets that go into portfolios. Large deviations are scary which manifest themselves in price discounts. 
So all in all, Virginia, gut feelings matter. 



I was listening to  the rebroadcast of last night’s Charlie Rose show this afternoon. One of his guests was Maria Konnikova, author of The Confidence Game: Why We Fall for It…Every Time. While I have not read or even seen the book, based on the interview it seems that this book on deception and how people are conned might be of interest to many on the list.”

The top review posted is less than impressed by the book, so I offer no assurances about how good the book will turn out to be.




I'm reading Stefan's recommendation, Essentials of Sea Survival by Golden and Tipton, and it is a gripping read.  As I'm not a Kindle reader, I had my wife hunt it down in paper and the only library that carries it on Long Island is, of course, the Montauk Libarary, home of Frank Mundus, the inspiration for Quint. The book briefly mentions a couple of other incidents that I've read about before.
If you enjoy harrowing, real life tales of the sea and especially of sailing, than I must highly recommend Derek Lundy's mesmerizing account of the '96-'97 Vendée Globe single handed solo race around the world, Godforsaken Sea: The True Story of a Race Through the World's Most Dangerous Waters.
One of the many stories within is about Tony Bullimore who capsized in the Southern Ocean in 52°S 100°E and survived five days up to his chest in icy water within his overturned vessel.  See a reenactment with actual footage of the rescue (~6 min).
Another even more amazing tale is that of the rescue of Raphaël Dinelli by former Royal Marine and fellow competitor Pete Goss.  In 70 knot winds and thirty foot seas, Dinelli capsized and his mast crashed through the deck of his yacht like a straw through a fountain drink lid.  After the boat righted itself, it was full of holes and slowly began to sink. He stood on the coach roof in freezing waters for 24 hours while Pete Goss, hearing of his emergency, turned back into the face of the storm and sailed to find him.  Goss sailed for two days to Dinelli's location, suffering constant knock downs (boat rolled to the horizontal with masts in the water), when he finally got there he couldn't find him. Meanwhile, the Australian Air Force had located Dinelli and dropped a life raft which he promptly crawled into ten minutes before his boat sank completely.  An Air Force plane helped Goss find the raft and he managed to get Dinelli aboard safely. Goss recieved the Legion d'Honneur and the MBE for his efforts.
Goss' narrative of the race and rescue is also a fantastic read.
Video of Pete discussing the incident with photos.
"I'm not a naval gazer, I don't have to find myself, I'm not a tortured soul, I just do it 'cause I enjoy it.  And that sometimes disappoints people."



The Corvids are a fascinating family of birds.

1)  "It’s a good example of a behavior with widespread anecdotal evidence and the appearance of intelligence and complexity. Overall, there are few animals capable of distracting another individual to steal its food—for most species, food-stealing is always just opportunistic."
Crows: The tail-pulling, food-stealing bird prodigies
2)  Kaeli Swift runs a good blog site on corvids.
3) Swift's research on raven "funerals" and remembering threats is very interesting: The birds that fear death.



"Invisible walls: Do psychological barriers really exist in stock index levels?"

Larry Williams writes: 

I've always thought the reason for resistance around round numbers is simply when traders decide where to place stops, targets and such they round up. The human mind naturally goes to round numbers. So it's not some mathematical magical thing happening, just how humans function. It was very clear in the old days when brokers would ask where a client wanted to place her stop that the reply, based on my research with several brokers, was always round numbers or .50.

Theo writes: 

The paper offers nothing new. They apply the exact same methodology that Donaldson and Kim (1993) applied in the Dow (you can read it for free here). The majority of the academic papers I've seen on rounds focuses on the index levels and not on futures prices. Also most of them approach the subject from the scope of clustering of particular digits whose applicability in real trading is limited instead of looking at market behavior around those levels. 



 Ann Landers was a pen name taken by an advice columnist that became a regular feature in most newspapers across the country for 56 years, and was a cultural icon as I was growing up. She offered practical advice on a broad range of topics, from marital problems to drug abuse to petty squabbles, to become one of the most trusted sources of advice in America.

It's funny how the past shows the way to solutions now.

I have become the Ann Landers of Slab City, CA by default, and with a veterinary and psych tech degree. My advice is usually dispensed verbally at the Music Range, Oasis Cafe, Salvation Mountain, hot spring, or on desert hikes in and about this city of 1000 nonconformists caught in a net of free choice without the anchors of solutions.

Some of the recent counsels have been to a new arrival from New York who had given birth and raised her baby for two years without papers among the human underground dwellers in the subway tunnels; a hostel proprietor who questioned his own morality of giving his clients free drugs to secretly video them having sex to sell around the world, a girl who wears bumble bee wings and wishes to keep her feet on the ground, a man who asks the decency of putting an artificial vagina on his favorite mannequin of the harem, and a husband who wants his wife to quit spraying herself with Raid before they have sex.

Yesterday's advice was to a gorgeous girl who asked me to a walk up a wash on a private matter, and soon we sat under a Palo Verde tree. She claimed to be a hermaphrodite. I told her that in biology a hermaphrodite is an organism that has reproductive organs associated with both male and female sexes. Wordlessly, she shed her clothes, and I gazed with great scientific interest at her dual parts. There was a 1" small vulva, one diminished testicle, and a 2" perfect penis. Most newborn babies are sexed by their gonads, but it had been impossible in this case and she was genetically gendered before female was written on the birth certificate. The obstetrician normally decides on how large the vulva opening is if it should be sutured shut, or how small a penis is if it should be clipped, and her doctor shirked the duty and so she displayed both.

She redressed, and admitted to being confused about her sexuality. I advised, 'This is an intellectual question. There are three answers: You can be a male, but that would be a lie. You can be a female, but that would be a lie. Or, you can be both and live with the truth. Most flowering plants, or angiosperms, are bisexual, and the invertebrates such as worms, snails, and barnacles are hermaphroditic. Humans are called intersex. Don't think of yourself as disadvantaged but privileged.'

'I will learn to love myself,' she smiled, and left me under the tree.

I think Ann Landers would agree that every problem can be solved with an open mind and large enough bank of knowledge.



Now there is an announcement by the MFMP group which has been performing Live Open Science, which means that all of their methods and results are published, as well as live interaction with observers who can criticize and make suggestions. The announcement is that they have a replicable method of demonstrating the production of heat due to what used to be called "cold fusion" and is now referred to as Low Energy Nuclear Reactions.

Since many people will be able to test it, it won't be long before the effect is either confirmed or falsified. Take a look here for a trailhead. And here is an email that they just sent out, with more to come on Wednesday. Maybe they are mistaken, but it is very unlikely that they are scammers.

During ICCF-17 in South Korea, shortly following the sad death of Dr. Martin Fleischmann, it became abundantly clear to a group of fresh attendees that the old approach to science, combined with the ostracisation of the great minds that had worked in the face of ridicule, was not delivering on the promise of of what we immediately called, "The New Fire".

It also was clear that there was something to investigate and we were morally bound to do it.

We said that people would not believe, until they could experience it as if they were doing themselves and so the idea of Live Open Science was born. That was not enough, it had to be an effort that was free from commercial or government interests and that result and so it had to be conducted by the people, for the people. Our journey was made possible by the courage of Francesco Celani and we thank him profusely.

Your donations played a critical role in realising this vision, but you know that, what we know you will want to hear is what we have to share tomorrow.

We have been running and analysing an experiment live over the past Month. First for us in this experiment were:

- Parkhomov Baking of Ni(correctly done)

- Pre Hydrogenation of Ni

- Proper baking out of cell under vacuum

- Parkhomov pressure

- Piantelli de-oxygenation

- Piantelli 'loading' + proper dwell times

- Piantelli capture analogue

- Use of free Lithium

- Use of calibrated NaI

- Cycles attempting to create nano Ni distillates (inspired by "Bang!" discovery of dissolved Ni)

- Long Run

You can see that there are steps in there that came about only because of activities that were made possible by donations. The critical visits to Piantelli and Parkhomov.

Around the beginning of the month we saw what appeared to be up to a COP of 1.2, not earth shattering, but sustained and robust and in line with both observations by others and the Lugano report when adjusted for correct emissivity. Over the next weeks we tried various bookend calibrations which supported this finding.

We have said that only two paths would satisfy us:

Statistically significant Isotopic or elemental shifts from Fuel to Ash Statistically significant emissions commensurate, correlating, or anti correlating to excess heat We are happy to tell you that we believe we have satisfied our condition 2, yet of course we'd like to replicate ourselves. Actually, though, it goes much further than that. What we will share is that the way in which we discovered it and the journey of analysis that makes it virtually impossible to say that Rossi does not have what he claims. It also shows that, whilst he may have been optimistic in how fast this would play out, he has been telling the truth, quite openly for years. Not only that, nature itself has been telling the same story and it told us too.

By the 16/02/2016 we had given up trying to destroy the *GlowStick* 5.2, part of a long lineage of []=Project Dog Bone=[] experiments. After the reactor was turned off, Alan shared the remainder of the data files from the NaI scintillator kindly donated by a project follower called Stephen (Thankyou Stephen, really).

Project follower and open science legend, Ecco, first took a look at the data and found some anomalies - one SO striking that we thought there had been an equipment failure. We did not know the time that the anomalies occurred and had to wait until Alan woke to explain the time stamps so we could correlate it with the thermal and power data published live to HUGNet (Thankyou Ryan and Paul Hunt).

To our extreme surprise, the onset of excess heat followed the massive anomaly in emissions and the minor anomalies were during and only during excess heat.

This led us on a path of discovery, the sequence of which explains:

The massive count signal discovered by Francesco Celani during Rossi's first public demo

How Rossi knew his reactor had started

How the E-Cat generates excess heat

How it self sustains

How it can scale easily

That it is safe

It also showed us how replicators can know they have succeeded in triggering the New Fire and how to enhance the excess heat.

Subsequent to this, we found out Rossi had traveled the same design journey and had publicly shared it in the past.

The irony is - this was all being conducted live in the open, including discussions and graphing, whilst people were distracted with news of the end of the 1MW 1 year test. Same day…

In the past week we have been checking, cross checking to verify and this morning we cleared our last serious doubt, again live, with shared data. Because this is already in the open we want people to know so that they can start replicating based on what works, moreover, the insight will allow people to immediately start improving on our results.

Thank you for making this possible.

We did it.

We lit the New Fire Together!



 Sixty feet six inches. The distance a baseball with minimal spin flutters in the the breeze as it meanders its way towards home plate. The knuckleball. Generally, if the batter swings at the pitch, he would likely look foolish—he has no better idea of where the ball may go than anyone else—pitcher included—does. And in catching the pitch, the catcher may also look pretty foolish. David Skaggs, a one-time catcher for the Orioles, kept an extra-large mitt when his battery mate was a knuckleball pitcher. (Take a look at one such pitch The only pitch that made a batter look nearly at foolish was the Sandy Koufax curve—attested to by both Willie Mays and Hank Aaron, neither of whom was exactly a slouch in the batter's box. (Yogi Berra is reputed to have observed—whether at a World Series or spring training game—during a Koufax warm-up, "I understand how he won 27. What I don't understand is how he lost 5." Maury Wills, the Dodger's infielder, responded, "He didn't. We lost them for him.") Arguably, Mariano Riviera's cutter came close, too.

The knuckleball is one of the more difficult pitches to master in baseball, so much so that it merited exploration in a documentary. It can be effective as a means to dominate a line-up, though, and it's easy on the arm (which means it may be better for those little leaguers who are determined to screw up their arms in throwing curve after curve after curve). RA Dickey demonstrated a few seasons back that its mastery can lead to that pinnacle of pitching performance, the Cy Young Award. And recently too, Tim Wakefield has used it to great effect too. The physics of the knuckleball is described in this link. I'll leave that part of the pitch alone.

Supposedly, it can be traced back to the early years of last century, but I suspect it was around even before, though probably unnamed as a pitch. A knuckleball travels at a seemingly impossible speed of only 60 or so mph. Not much force behind it, also one of the features that aids in minimal wear and tear on the throwing arm. Of course, with that speed, stealing a base or getting a good jump on the pitch is easier. I don't know the stats on runners thrown out trying to steal when a knuckler was on the mound.

It will be interesting to see if Gamboa makes it to the starting roster in Apri. Hoyt Wilhelm was also a knuckler. Also an Oriole. I wonder how many teams have had one knuckles, never mind two, in their history, though the Senators had an starting rotation of knuckleballers during WW2. Only 75 pitchers in major league history have thrown knuckleballs as more than an incidental pitch, i.e., in a deliberate way.

The Orioles have made a concerted effort at developing knucklers, with Phil Neikro attending a few of the Os' training camps. Buck Showalter was the one who started Dickey on the knuckleball path; A Cy Young suggests that it was a good decision by all. It's not hard to understand Showalter's thinking: Throwing the knuckleball is a long-term commitment, one that may not mature for several years. But it's a pitch that's easy on the arm. Speculating a bit, it's not hard to imagine going back to a 4 man rotation with 3 or 4 knucklers in the starting rotation. That means there's space for another hitter or a stronger bullpen. Win-win. Moreover, an older pitching staff means more maturity during the inevitable ups and downs of season—and good minds to train younger players who might even be in the minors and attending spring training. And those arms, even on an older pitching staff may not be quite the headwind that it would be if the staff were based around 95 mph hardball throwers or breaking ball pitchers.

This year's Orioles spring training camp promises to be an interesting one. Perhaps the season will be a fruitful one.

In any case: Play ball!



 It's not easy to find good books about chess for those who are beyond beginner level but are not yet serious tournament players. But here's a selection with which you can't go too far wrong.

1. Lasker's Manual of Chess by Emanual Lasker

This profound philosophical work is one of my personal favorites. Whilst it is not really a book for beginners, even rainy day players should be able to get a lot out of it in terms of understanding the nature of the chess struggle.

2. Weapons of Chess: An Omnibus of Chess Strategy by Bruce Pandolfini

Pandolfini is a fabulous author for those at post beginner level. This one is a book which presents strategic concepts but without needing a chess board. Adults can read it on their daily commute whilst kids can combine developing their chess understanding with reading practice.

3. How to Beat Your Dad at Chess by Murray Chandler

Chandler presents a selection of mating patterns and explains that chess is essentially pattern recognition. More tactics books and software are needed for excellence in this area but this one is a good start.

4. Silman's Complete Endgame Course by Jeremy Silman

The endgame is such a vital area yet very few books are accessible to less experienced players. Silman's work is a notable exception with this book giving endgames that you need to know at different levels.

5. Chess Fundamentals by Jose Raul Capablanca

Like Lasker's Manual of Chess this is one that Grandmasters can also learn from. For beginners it clearly explains key concepts in a lucid and understandable way.



 We're all quantitative traders, but we still have gut feelings. The body has a self awareness of its internal conditions. The stomach has more bacteria than human cells. The stomach has more seratonin receptors than the brain. When nervous you can feel the butterflies. You get gut feelings about things that govern conscious decisions. I have a theory that dreams are the sleeping brain receiving feelings from the body and stomach during the night. Gut feelings are distinct from the amygdalian flight impulses. I've never heard of any studies or information about gut feelings other than anecdotes. How often has a gut feeling saved you, or how often does it lead to wrong decisions?

Russ Sears writes: 

Dr. Janice Dorn a former list member, wrote a book, in which she and her co-author argue that your gut feeling is not programmed for market risk, but market risk will give your gut the opposite reaction than you should take. When I tried trading the stronger my gut was scared the more I knew I should trade and vice-a-versa the more passive I was about my position the more I knew I should be out. Rather than honing in on this "skill", I would suggest a more palatable method, nerves were my undoing as a day trader. I suspect Dr. Brett S. would say something similar.



 Dunbar's research says that on average there are 5 friends close to us and this number grows by a rule of three as we include people not so close to us, reaching 150 for casual friends. Is there a similar number for the number of relationships between markets? What is the number of markets we need to forecast cross-sectional relationships?

Dunbar's number

A good article is "The Limits of Friendship":

The Dunbar number is actually a series of them. The best known, a hundred and fifty, is the number of people we call casual friends—the people, say, you'd invite to a large party. (In reality, it's a range: a hundred at the low end and two hundred for the more social of us.) From there, through qualitative interviews coupled with analysis of experimental and survey data, Dunbar discovered that the number grows and decreases according to a precise formula, roughly a "rule of three." The next step down, fifty, is the number of people we call close friends—perhaps the people you'd invite to a group dinner. You see them often, but not so much that you consider them to be true intimates. Then there's the circle of fifteen: the friends that you can turn to for sympathy when you need it, the ones you can confide in about most things. The most intimate Dunbar number, five, is your close support group. These are your best friends (and often family members).



 "The Real Reason We Need to Stop Trying to Protect Everyone's Feelings" by Ryan Holiday

Pitt T. Maner III writes:

Ryan Holiday has a great list of "his favorite books":

I used to go around and ask every smart person I met—even emailing important people I didn't know— "What books do books when you recommend to a kid like me?" That's how I was introduced to the Stoics. That's how I found many of the books on the list below. The quake books—as Tyler Cowen put it—that shake you to your core. Having been introduced to them by those kind, patient individuals, I thought I would pay it forward by putting together a list of the books that have shaken up my life and that have helped make me the person that I am. It's a list that has changed over time—and will continue to change—but it's a good enough place to start.

I remember Joyce Carol Oates saying that she liked to tack inspirational quotes on the wall in her writing den. These Bartlett-worthy quotes served her as a kind of touchstone or centering device to stimulate reflection or proper thoughts before starting work. What other short but powerful sayings or books should be included (or omitted) in this list?



I thought this was an interesting opinion piece from David Deutsch who has some creative ideas in physics theory:

"Probability is as useful to physics as flat-Earth theory"

Gibbons Burke writes:

String theory, or more particularly, M-theory, which represents a current SWAG (Scientific Wild-Assed Guess) at the grand-unifying-theory-of-everything, requires some eleven dimensions to make it all work out.

Our mortal finite deterministic mental capacities can wrap our space-time evolved brains around four or five, with instruments perhaps a few more.

Perhaps randomness is how we get a handle on behavior which defies rational explanation in our four-dimensional flatland of what seems to be the 'natural' material world; if there are eleven or more dimensions, then perhaps what seems random for us has rules beyond our ken which govern the dynamics of the other invisible, shall we say, 'super-natural', dimensions.

Ralph Vince writes: 

I think people are missing the point of the article Dylan puts here. The author of this simple piece is discussing things that are right in my ambit, what I call "Fallacies in the Limit." The fundamental notion of expectation (the probability-weighted mean outcome), foundational to so much in game theory, is sheer fallacy (what one "expects" is the median of the sorted, cumulative outcomes at the horizon, which is therefore a function of the horizon).

To see this, consider a not-so-fair coin that pays 1:-1 but falls in your favor with a probability of .51 The classical expectation is .02 per play, and after N plays, .5N is what you would expect to make or lose for player and house, as the math of this fallacious approach - and I say fallacious as it does not comport to real-life. That is, if I play it on million times, sequentially, I expect to make 20,000 and if a million guys play it against a house, simultaneously, (2% in the house's favor) the house expect to make 20,000

And I refer to the former as horizontal ergodicity (I go play it N times), the latter as vertical ergodicity (N guys come play it one time each). But in real-life, these are NOT equivalent, given the necessarily finite nature of all games, all participants, all opportunities.

To see this, let is return to our coin toss game, but inject a third possible outcome — the coin lands on its side with a probability of one-in-one-million and an outcome which costs us one million. Now the classical thinking person would never play such a game, the mathematical expectation (in classical terms) being:

.51 x 1 + .489999 x -1 + .000001 x - 1,000,000 = -.979999 per play.

A very negative game indeed. Yet, for the player whose horizon is 1 play, he expects to make 1 unit on that one play (if I rank all three possible outcomes at one play, and take the median, it i a gain of one unit. Similarly, if I rank all 9 possible outcomes after 2 plays, the player, by my calculations should expect to make a net gain of .0592146863 after 2 plays of this three-possible-outcome coin toss versus the classical expectation net loss of -2.939997 (A wager I would have gladly challenged Messrs. Pascal and Huygens with). To see this, consider the 9 possible outcomes of two plays of this game:


0.51                     0.51    1.02

0.51             -0.489999    0.020001

0.51             -1000000    -999999.49

-0.489999            0.51    0.020001

-0.489999    -0.489999    -0.979998

-0.489999    -1000000    -1000000.489999

-1000000            0.51    -999999.49

-1000000    -0.489999    -1000000.489999

-1000000    -1000000    -2000000

The outcomes are additive. Consider the corresponding probabilities for each branch:


0.51          0.51                 0.260100000000

0.51          0.489999          0.249899490000

0.51          0.000001          0.000000510000

0.489999   0.51                  0.249899490000

0.489999    0.489999          0.240099020001

0.489999    0.000001          0.000000489999

0.000001    0.51                 0.000000510000

0.000001   0.489999           0.000000489999

0.000001    0.000001          0.000000000001

The product at each branch is multiplicative. Combining the 9 outcomes, and their probabilities and sorting them, we have:

outcome             probability         cumulative prob
1.02              0.260100000000    1.000000000000
0.999999       0.249899490000    0.739900000000
0.020001       0.249899490000    0.490000510000
-0.979998      0.240099020001    0.240101020000
-999999.49    0.000000510000    0.000001999999
-999999.49    0.000000510000    0.000001489999
-1000000.489999    0.000000489999    0.000000979999
-1000000.489999    0.000000489999    0.000000490000
-2000000    0.000000000001    0.000000000001

And so we see the median, te cumulative probability of .5 (where half of the event space is above, half below — what we "expect") as (linearly interpolated between the outcomes of .999999 and .020001) of .0592146863 after two plays in this three-possible-outcome coin toss. This is the amount wherein half of the sample space is better, half is worse. This is what the individual, experiencing horizontal ergodicity to a (necessarily) finite horizon (2 plays in this example) expects to experience, the expectation of "the house" not withstanding.

And this is an example of "Fallacies of the Limit," regarding expectations, but capital market calculations are rife with these fallacies. Whether considering Mean-Variance, Markowitz-style portfolio allocations or Value at Risk, VAR calculations, both of which are single-event calculations extrapolated out for many, or infinite plays or periods (erroneously) and similarly in expected growth-optimal strategies which do not take the finite requirement of real-life into account.

Consider, say, the earlier mentioned, two-outcome case coin toss that pays 1:-1 with p = .51. Typical expected growth allocations would call for an expected growth-optimal wager of 2p-1, or 2 x .51 - 1 = .02, or to risk 2% of our capital on such an opportunity so as to be expected growth optimal. But this is never the correct amount — it is only correct in the limit as the number of plays, N - > infinity. In fact, at a horizon of one play our expected growth-optimal allocation in this instance is to risk 100%.

Finally, consider our three-outcome coin toss where it can land on it;s side. The Kelly Criterion for determining that fraction of our capital to allocate in expected growth-optimal maximization (which, according to Kelly, to risk that amount which maximizes the probability-weighted outcome) would be to risk 0% (since the probability-weighted outcome is negative in this opportunity).

However, we correctly us the outcomes and probabilities that occur along the path to the outcome illustrated in our example of a horizon of two plays of this three-outcome opportunity.

Russ Sears writes:

Ok after a closer look, the point the author is making is scientist assume probabilities are true/truth based on statistics. But statistics are not pure math, like probability, because they are not infinite. Therefore they can not detect the infinitely small or infinitely large.

But the author assumes that quantum scientist must have this fallacy and do not understand. Hence he proposes that thought experiments or philosophical assumptions of deterministic underpinnings of physics must hold and should carefully supercede statistical modeling. Hence denying the conscious mind any role is creating a physical world outside itself.

So basically the author accuses others of not understanding the difference between the superiority of probability over statistics. So he tries to use pure thought to get pure physics devoid of the necessity of consciousness to exist. Perhaps he does not confuse the terms himself. It would be better written however, if he used the terminology a 1st year probability and statistics student learns. 

Jim Sogi adds: 

I believe that the number and size of trades at a price, or the lack of density at that price lead to certain gravitational effects. The other somewhat unknown are the standing orders at those levels but the orders and trade density are related.



The options viewpoint.

Point 1: Virtually any macro investment strategy can be replicated with options. (Previously stated by one brighter than I.)

Point 2: The use of options can enable the strategist to hide his moves.

Point 3: Options transactions tend to be the milieu of the professional.

Possible conclusion: The broad analysis of options transactions can reveal some interesting truths about the current investment environment.

We have studied the broad pattern of equity options transactions this century and have found whichever side creates more options positions is correct. That is, the condition where new positions consistently exceed liquidations. This is equivalent to a shorter age or holding time (open interest divided by new positions). "Whomever holds longer is wronger" to coin a cheeky phrase. Specifically, if the turnover rate is higher for calls than puts, it's generally safe to be long.

Being long equities when the bullish patterns existed (since 2000) yielded a compound annual rate of return of 11.5 percent. Being short equities during the bear patterns yielded 3.5 percent (CAROR), such that the combined compound annual ROR was 15 percent. Not bad. The trouble for statisticians is that there aren't many switches (less than 40), making statistical reliability problematic. But the minimized "signal flutter" is comforting to longer term investors.

Although this metric called the 2009 turnaround on the money, it should be used to check the climate rather than the weather. Where are we now? Very close to going long. I would be reluctant to give a heads-up in advance of the actual signal, except the chart I show is a smoothed version. The unsmoothed version is already positive.

Here are two charts (2009 and current).



 There are two ways to learn before actually doing to increase the chances of winning when the chips are down in sport, survival, negotiation, or romance. The first practice is mental rehearsal which is also known as imagery or visualization. All of the senses are used to create an event or image in the mind in order to perform it at a future time. Mental rehearsal activates a network of neural responses that triggers physical responses.

The other kind of drill is physical rehearsal where a behavior or reaction is practiced over and over like dress rehearsal. It is a deeper practice than imaging because movement is involved to instill a muscle memory. This is important because the things you practice mentally may disappear in a blur of confusion in a crisis, but a muscle memory remains to react quickly, automatically.

For example, when Nolan Sackett in L'Amour's Mustang Man gets lost in Comanche territory and is ringed by Indians, the chief puts a lance to his heart as Sackett sings an Irish lullaby. He kept on singing, and escaped with this bravo. Remembering, once I was lost hiking in Mexico's Copper Canyon, so big you can drop ten Grand Canyons into it, when an hombre on horseback galloped up, stopped on a peso, and reared the kicking hooves at my chin. He pointed a pistol at my breastbone, as I recited the only poem recalled from high school Spanish, 'I like milk, I like tea, but most of all, I like your eyes'. The cowboy broke into a wide grin as the horse snickered, and they rode off.

Two nights ago, I rehearsed in my mind's eye Jack Reacher's technique in Lee Child's Killing Floor to disarm a man with a knife at your throat. You jam the knife aside with the heel of one hand, and push his wrist the opposite way with the other hand, and the knife drops. So, yesterday afternoon I walked along a gulch into a series of Ironwood branch points, and disarmed them in this manner, leaving a trail of broken branches behind me until the mental had become a physical memory.

As the wash widened, I knelt at a spring beneath a broken windmill. Shots rang, and zinged over my head. One, two … ten bullets zipped 5' overhead, as I went face down into the spring to finish drinking and create a flush profile. Two shooters continued firing semi-automatic rifles, who must not have known I was there, aiming at the windmill blades. I made the link that, two days earlier, a case of rifles was stolen from the nearby Chocolate Mt. Gunnery Range. I crept dripping along a 3' ridge between the spring and shooters, as I'd read in westerns, until I was out of the fire arc, and crawled up the rise, took off my hat and sunglasses, and peeked through a tumbleweed. It was just two guys target practicing, but now I had the physical rehearsal under my belt.

Read enough, and practice mental and physical rehearsals, and you ready yourself to do almost anything.



 The search for happiness has a Heisenbergian aspect: the more certain you are about what you want, the less happy you will be attaining it. It seems to happen unexpectedly, and often only in hindsight.

There is also an "aspergian" aspect: like Viktor Frankl's "The doors of happiness open outward". I take this to mean searching and engaging with the world (rather than perpetual introspection), but it could also be the joy in helping others (as risky as it may be).

In markets it is very hard to find happiness, and it is probably foolish to look there. A good source of unhappiness, however, is limit orders. You place them with great hope and the market runs away and leaves you behind. Or you get filled and then it takes you way down. Or you're overjoyed to finally get out with a modest profit, only to find you sold too soon and missed the big one*.

*Holding losers long and selling winners short: the hardest thing not to do.

Sushil Kedia adds:

Happiness is life. It has a unique property. The conditional probability of happiness is a certainty if you have a happy nature else it is zero for every other variable.

Anything contingent on an outcome (event) or a property (belongings) is not happiness. Happiness is unconditional. Happiness is an absolute.

Happiness is neither a milestone nor the journey of life. Happiness is the fuel of life. By this assumption or understanding one can see pain is not the opposite of happiness. Pain is only a signal asking us to change something.

On a lighter note, obviously no one normally seeks happiness from a mistress. In Markets, you come for taking what you have come to take and not search happiness, since happiness is within. 

Ken Drees writes: 

"You never see the stock called Happiness quoted on the exchange."

"It is better to desire the things we have than have the things we desire".

-Henry Van Dyke



 In the Chaos Manor that is our family's daily round, Kurzweil's web site and Vic's List and our own discussions are the 3 constants. Kurzweil had a great article on the gravitational waves.

Then Jeff's email mentioning Newton arrived.

That led to her idiot Dad asking the daughter if medicine had arrived at its equivalent of Newtonian physics. Eddy said, "yes, but just barely. In practice we are barely past the Newcomen steam engine.

That led to an expression of hope from Eddy that, in her lifetime, medicine will get to what would be the equivalent of Maxwell's equations for the body's messaging. But, Kurzweil's dream of immortality will remain as permanent elusive as time travel. The machines will have to do the exploring.



I solicit DailySpec members to write one interpretation of the phrase "ever changing cycles". Let's see what gets compiled.

My favorite one line description of what ever changing cycles are reflected most in is that the correlations of no contracts remain the same, they keep changing and often in gradual non erratic "tendency". (No please don't kill me, I didn't use the equally vague word 'trend', but only said tendency).

I also request, our generous host, the chairman of the list, and the one who coined the phrase ever changing cycles, helps elicit as many responses as he can and then shares with us his own notion of the mystical ever changing cycles.

Gibbons Burke writes: 

Two words: random walk. 

anonymous writes: 

Are the cycles ever changing?

I'm not certain, I think the cycles are always there but they get accentuated from one time to another. It is what causes them that is the great mystery which has caused me to pound my head into the wall many times late at night. That helps, occasionally I get a glimpse of something going on that is causing this.

However no clarity yet on that point.

Paul Marino writes: 

Mr. Mac, the most practical thing that you ever did in your life would be to shut yourself up for three months and read twelve hours a day at the annals of crime. Everything comes in circles – even Professor Moriarty. Jonathan Wild was the hidden force of the London criminals, to whom he sold his brains and his organization on a fifteen per cent commission. The old wheelturns, and the same spoke comes up. It's all been done before and will be again.

- Sherlock Holmes

The Valley of Fear
, Arthur Conan Doyle

I see ever changing cycles inside the big cycles, demographics, interest rate regimes, etc.

The President of the Old Speculator's Club writes: 

The inability of law enforcement to police the streets effectively provided Wild with the perfect conditions in which to build his new business. Victims of theft generally had little chance of getting back what was stolen from them, let alone catching the thief. Through Wild's new service, however, owners of lost or stolen property could apply to him for help in recovering their possessions for a fee that fell below what it would cost them to replace the objects. His business proved to be extremely popular.

Wild benefited from this policy by collecting a fee every time he was able to prosecute a criminal. His office, then, essentially served as the de facto "Scotland Yard" of the day. Jonathan Wild, the man supposedly responsible for clearing the streets of criminals, was in point of fact the head of a vast criminal empire and a well-oiled criminal machine. Wild's Lost Property Office was actually a clearinghouse for stolen goods that members of his own organized gang had themselves acquired. The thieves he apprehended, supposedly for the good of the community, were fall guys; they either belonged to rival gangs, or were members of his own gang who had tried to double-cross him, quit his business, or ceased to be more valuable than the 40-pound reward given by the government for capturing and convicting a criminal.

This new [Transportation] Act gave judges the option of removing felons from the streets and jails without having to take away their lives in the process. As a side benefit, the Act seemed to offer help with the American colonies' desperate need for cheap labor. Settlers in America faced the problem of securing labor at a cheap enough price for them to grow their businesses, mainly because anyone who had sufficient means to make the trip overseas from Great Britain to start a new business in America had no intention of working for anyone else…convict transportation killed two birds with one stone: It rid the Isles of unwanted criminals and provided cheap labor for the American colonies.

A provision in the draft of his Transportation Act aimed specifically at curtailing Wild's organized criminal activities. This provision made it a crime for anyone to take a reward for returning stolen goods to their owner without at the same time capturing and giving evidence against the thief. Failure to turn in the criminal could subject the person taking the reward to the same punishment as the thief, assuming the latter was ever caught. This provision was so clearly aimed at Wild that the Transportation Act also became known as "The Jonathan Wild Act."

Since the Transportation Act made it a crime to collect a reward for returning stolen goods without turning in the perpetrator as well, Wild shielded himself by using transported convicts to return stolen goods and collect the reward from their owners. Returned convicts not only provided Wild with protection from the provision in the Transportation Act aimed directly at him, but if they ever tried to betray him, he could easily turn them in for a large reward, and they would receive an automatic death sentence.

From Bound with an Iron Chain (The Untold Story of How the British Transported 50,000 Convicts to Colonial America) by Anthony Vaver



There are endless applications of the concept of gravitational waves to markets and much more easier to perceive every minute, every hour, every day that one might even state that market folks are humbler in not stretching their own perceptive lenses to theorize physics and wait for scientists to do their jobs.

Market Cap Gravitational Waves: Very large cap stocks make a sudden wobble, indices wobble, sentiment wobbles, most stocks move with the wobble. A large mass stock wobbling the volume price fabric of endless other stocks and dramatically the smaller ones.

Earnings Gravitational Waves: Earning Season is witness to undue anxiety or excitement. The prevailing Volume/OI - Price Fabric is already constructed and the extension of this fabric, i.e. immediate next bet, is much more largely a function of the existing V/I-P Fabric. Yet, a lot of volume or change in OI continues to be witnessed on most widely researched large cap names that are good fades. Rarely do quarterly earnings ever alter permanently the existing "fabric" but most often create a temporary wobble.

Contested Gravitation Waves: Significant change in Volume or in Open Interest, both reflect a significant change in the level of contest for discovery of price. Large dramatic moves or wobbles in High Volume or High OI pits put gravitational distortion on other pits. Margin selling or contgations as their extreme are observed in falling markets and complacent buying into un-understood unanalyzed trophy adventures as a wealth effect in rising markets. Market is a casino where players' behaviours alter with the level of House Money.

Food Chain Gravitation Waves: The waves, the unduluations, the idiosyncratic movements, the never at equilibrium but tending to equilibrium behaviour of prices are all a matter of the big fish (the White Shoe Firm included) nudging with their Gravitational Waves the small fish to be swimming hither and thither. The never wavering permanently rising equity curves of some of the rarest wealth creators in markets is what one would notice at the top of the food chain. Whereas the brownian motion equity curves are at the bottom of the food chain. Gravitational Waves are working from the top down to the bottom of the chain.

So on and so forth, every perspective in markets is explained by ideas similar to gravitational waves. I should leave this note open for others to help tautomerize further.

What perplexes me much that marketmen have evolved in their thinking far ahead of the evolution of Physics. When you think about Reflexive Gravitational Waves as an idea that is routine in our "universe" wherein the Space Time Fabric itself is exerting Gravitational Waves on the future events and keeping the ecosystem in a self contained completeness, will a future discovery in Physics be guided by this imagination that the endless expansion of the Big Bang Universe is not for a reason beyond this Universe, but the Universe is the reason and that the Universe is the influence on the Universe?

Peter Grieve responds: 

From the LIGO wiki page:

"Gravitational waves that originate tens of millions of light years from Earth are expected to distort the 4 kilometer mirror spacing by about 10−18 m, less than one-thousandth the charge diameter of a proton. Equivalently, this is a relative change in distance of approximately one part in 1021"

The gross world product is estimated at $76 trillion, a fluctuation with the same proportion world be 7.6 millionths of a cent.

Which is not to say they haven't detected something, but is (in my mind) a good reason to wait for more confirmation. I hope it comes. Imagine detecting a black hole coalescence!



Apparently the 5 people they survey in the consumer sentiment survey don't own stocks or commodities as 90% of them are still optimistic. Amazing it's only down 2% from last month and shows how worthless the number is.



The yearly update to Dimson, Marsh and Staunton's statistical masterwork is out:

Credit Suisse 2016 Global Investment Returns Released

anonymous comments: 

I guess I shouldn't be surprised, but still I am, by the number of country equity market wipeout events. The Austrian market got wiped out after WWI (and II). There was a hyperinflation, but aren't stocks supposed to represent ownership of real assets?

Obviously Russia and China had wipeout events.

None of the island countries — UK, New Zealand, Australia, arguably US, or Japan — ever saw their equity markets wiped out, although Japan came close, with a ~2 order of magnitude collapse from WWII.

Possible lessons:

–own the island countries
–equities can't keep up with hyperinflations

Elroy Dimson responds: 

Hi Vic,

Thanks for writing. Hope you and yours are well.

The former Austrian Empire comprised present-day Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Bosnia-Herzegovina, Croatia, parts of Poland, Romania, bit of Italy, Ukraine, Moldova, Serbia, and Montenegro. All but one of those countries ceased to be part of Austria. No wonder it disappointed in investment terms.

I don't like the "own the island countries" conclusion. Sticking with your facetious interpretation of history, how about "buy English-speaking countries"? Or "invest in nations that speak excellent English"? See the chart from page 21 of the Global Investment Returns Sourcebook 2016:

Chart 8: Real annualized equity returns (%) in local currency and US dollars, 1900–2015



 Gold is glittering one more time.

The question that comes to mind and one not normally asked in popular press is is gold only a super currency or does gold behave sometimes as super currency, sometimes as a super asset and often in normal times as another asset, which many pundits love to dismiss as a latent unproductive asset.

If one were to run correlations of gold across these varying regimes, how can we have a logit or a probit model where a probability distribution of risk-off factor is included.

When risk is a bad word in the markets, does gold first behave as a super currency and only later as a super asset or is it vice versa? Or there is a more likely scenario that the super currency vs super asset status also has a localised idiosyncracy that can be modeled using another function?

anonymous writes: 

It is a manipulated asset. Study the structure of the Futures market, the term "Paper Gold", and the dominance of the handful of bullion banks in the delivery process. Look at the international shifts in holdings, and question the "reality" of the Ft. Knox inventories.

More importantly, who do you trust? Central bankers, governments, and economists all have biases, some with monstrous financial incentives to have bases for their pronouncements.

You might want to describe what you mean by super asset, since that is not a term used around gold that I know of.



What portion of price movement is based on risk i.e. squeezes and hour of the day (open or close), and when does rational thought basis news or fundamental back drop come into play? Should strategies be tailor made for each period? And can you distinguish one from the other?



Nasdaq 4000

Nikkei. 15000

HangSeng 18000

Bovespa. 40000

CAC40. 4000

IBEX. 8000

Dax. 9000

Aiken writes: 

AUDUSD = 0.71

NZDUSD = 0.67

Also, US treasuries are making big moves up today, with 30Y yield hitting an all-time low.



Today came the announcement that gravitational waves have been observed. This is bigger than the moon landing and is the biggest scientific thing since Newton's First Law. The cleverness of the human mind makes me think that the space time fabric will be successfully hacked in 100 years. Commercial applications anyone?



 Many of us are familiar with the brilliant chapter in Bacon's Secrets of Professional Turf Betting about the changing cycles in a summer meeting in NY. The horses coming from the hot climates aren't accustomed to the NY tracks at first so they lose, then as they get accustomed they win, then they got tired and they lose. 3 cycles at least in one meeting.

I wonder if there are similar cycles in the earnings announcements. Invariably 75% of the companies beat their estimates. At first the banks, and big companies with very rigorous accounting like google and Microsoft report. Next the drug companies and industrials report. Finally a morass of companies that can't get their quarterlies together in 30 days take the stage. For each there is a different % of beats, and a different reaction for the individual company and the market itself. Also to be mentioned are the companies that are late in reporting. They are usually fighting with their auditors and bad results can be expected. Also, the days the market itself opens way down or up on reports like Apple, Google or Amazon as if these companies were the whole market and the market itself wasn't going to do its thing regardless and reverse the absurd reaction where it goes down or up 7 points on a single earnings. The whole subject is endlessly fascinating and is worthy of a Baconian study.



 Slab City, C A is more riddled with intrigue than an Ellery Queen novel. It is ridiculous to set a detective story here. Slab City itself is a detective story.

At sunrise, a camouflage pickup with roll bars careened past my campsite on a remote creosote flat a mile south of the The Last Free Place. I picked this detached spot on its fringe nine months ago because isolation is my definition of freedom. No one has passed here until this speeding pickup. It bounced up-and-down on springs along a virgin track past an Ironwood tree, and disappeared.

I lay pondering for five minutes, and rose. The tracks led until the road petered into open pathless desert. Intent on the tracks, head down, I felt as much as heard someone brush behind me. I twisted to see a person in a mid-calf dress over red longjohns and curly blonde locks tucked under a sweeping white sunhat that hid the face marching with intent at a diagonal just behind me, who did not respond to my cheery 'Good Morning'. I followed the truck treads rather than the masculine stride of the hiker across the sand that stretched wide around, as flat as a killing floor.

I lost the track on a stretch of desert pavement and had to circle for thirty minutes to pick it up again. It entered a concentrated arena of sand dunes where I hoped it was a four-wheel drive, but 30 minutes later I heard the low-gear grind and shouts of a stuck vehicle. I topped a dune and spied two stuck vehicles: the pickup and a battered rose sedan. The pickup had sunk to the hubs in sugar sand trying to pull out the sedan that had nose-dived by intent into a dune.

Without a word, I joined a braless broomstick girl pushing the pickup, and noticed it was filled with scrap, some of it from my camp including my water. Nonetheless, we shrugged after failing to extract either vehicle from their sandpits, and shook calloused hands. The pickup driver stepped out blinking, and somehow looked familiar. The same size as the hiker who had been walking the opposite direction.

'It took me an hour to find this yahoo!' he exclaimed. 'She borrowed my car and got it stuck. Then she borrowed my truck and got it stuck!'

'Is there a second lady in your party?' I asked. Two dual blank faces. Soon they hollered at each other like a couple of rattlers about the predicament, heat, and fighting over the last drops of water in my purloined jug. I rose like Dune and yelled, 'Let's get help from Salvation Mountain.' She stayed with the vehicles, and the white haired owner who had just joined her now accompanied me.

As we walked he droned about an enlightened city on earth, how he should spank the girl for getting his vehicles stuck, and how he spliced love scenes of porno movies into John Wayne movies.

In thirty minutes, we rapped on the door of the Salvation Mountain painter and begged a tow from his 1950s tractor splashed with sunflowers. The white haired man vanished as we loaded the tractor scoop with a 50' towline, rusty shovel, high jack, and gallon of water. I climbed in the scoop, and we began the mile slog through sugar sand, until the painter decided he could go no farther. He cut the engine, hooked a knee around the saddle, built himself a smoke, and as I jumped from the scoop, offered, 'Did you hear about the double murder last night?' 'No,' I replied. 'About midnight, it was a girl's last free moments who was stabbed in the stomach and her throat cut.'

'That's terrible, and the second?' He replied, 'The Youth think they got the right guy.' The Imperial County Sheriffs are so despised by Slab City residents, and vice versa, that two vigilante groups formed long ago: Oldsters, who are a handful of ex-military and bikers, and the Youth, who step in when something goes amiss within their peers. The painter sparked the tractor, and I walked the short distance over sugar sand to the bogged vehicles to deliver the bad news.

The thin girl with dragon tattoos in leather pants and halter top blurted, 'Where is the freak?' 'Who?' I enquired. She answered, 'The owner.' 'Disappeared.' Her upper lip trembled until the nose ring nearly dislodged, and then she firmed it, and muttered, 'Go with me back to our camp, and I'll show you something you won't believe is possible anywhere but in Slab City.'

We slogged through the sand like tortoises to the encampment of the odd girl and stranger guy. He wasn't there. She opened the trailer door and we peeked in: There was a mannequin that looked like her, sitting on the toilet with limbs that she claimed had been dislodged one-by-one over the past three days since she had been hired as a housekeeper. There were hundreds of VHS tapes of westerns and porn, a pile of wigs, and she led me to a 4' high pile of clothes she said she had cleaned from the trailer that included blouses and dresses matted with blood. I pawed through them, and at the bottom of the stack was a stick cross that she had fashioned from creosote and tied with twine. She said that she put it there to ward off the negative energy of the blood.

One doesn't go to the police in these parts or he'll get thrown in jail. I've made about 100 complaints over the past months about their misconduct, and been harassed for it. Wary as I was, I was also curious. So I removed my sunglasses, accepted a 2' kitchen knife from the girl who had been honorably discharged from the U.S. Marines for agoraphobia, and checked the rest of the trailer – under the bed and closets - before she would enter the trailer with me.

This wasn't a time to discuss another man's moral outlook. I'm known for equanimity in pickles, an accord with all the factions, and chess-like problem solving abilities in hobo bloomers with rope suspenders like a barrel, and 20 pounds of ankle weights – one hollowed out like a Batman Utility Belt to hold a compass, rope, paperback, and lighter, and duct tape tapering off on my nose like an inquisitive insect. After I finished consoling the girl, I pulled a cell phone out of my Batman ankle belt and called the San Francisco FBI. Within an hour the place was swarming with sheriffs.

I had left, because a really good detective never gets married to the plot.



 The Iowa Caucus system for Presidential candidate selection began in 1972 for Democrats and 1976 for Republicans. Since they started 40 years ago for the GOP, every Republican candidate who received the party nomination had these results:

(1) First in Iowa, Second in New Hampshire (2) Second in Iowa, First in New Hampshire

Ford, Reagan (twice), G.H.W. Bush, Dole, G.W. Bush, Romney all had these results.

Among the present candidates Donald Trump is the only one who has passed the 1-2 test.



Negative rates are:

1. Tax on cash.
2. Service charge, like a bank.
3. Currency war weapon. Weaponize as Mr. E used to say.
4. Policy tool to encourage risk and capital movement.

Stefan Jovanovich writes: 

Negative rates are, as James writes, a tax on short-term IOUs from government-guaranteed issuers; but they are a subsidy for actual cash currency. The banks already charge for holding our "cash"; and anyone who has held significant balances already knows that their cash has been trashed in terms of any returns from interest.

Those of us sitting here in the back of the bleachers see the central banks as doing everything they can to force the banks to "go long" - i.e. push the maturity of their reserves much further out than they have been. Could it be that we have a new consensus among the countries that have dealings in size in each other's currencies? They will each do their best to enable their national Treasures, state-owned enterprises and retirement systems to continue to fund the transfer payments that are now at least 2/3rds of total government expenditures and no one will worry about exchange rates because capital flows between countries are now a trivial concern compared to the actual and potential losses of capital itself from a "crash".



 One wonders if the structure of end games in chess and checkers might be useful for aids to proper money management. The pawn chain and the triangle are very good in both games as is having the move. This would correspond to putting on your positions in stages, and constantly forcing your opponent back respectively. Too advanced a position would expose your pieces in both games to attack. The isolated pawn would correspond to a single limit order left way away from the market. The holes in your position where you could get stopped out. Fisher always said he liked to be able to grab all his pieces, not keep them disparate. This might correspond to trading only a single market. Nigel recommended Pandolfini's Weapons of Chess as a guide to proper pawn play, and Kmoch's book Pawn Power I got for Aubrey but it was too complicated for both of us to understand. The end games in chess are very similar to most checker games. I hasten to add that I am a very poor chess player, but I am trying to learn so I can help Aubrey.

anonymous writes: 

It can be proven both theoretically and using empirical data that it is sub-optimal to only trade a single market. Or put another way, diversification is the only free lunch.

Are you challenging this conventional wisdom?



 Like many on this site, I have created economic, trading, and predictive price models. Therefore I have an appreciation for the work that goes into building them. Donald Trump's "Superlatives without Specifics" (SWS) political model is pure genius. It is structured to be multi-faceted and applicable to nearly any interview situation. Not only does he not provide specifics but in many ways he makes that one of his strengths. Like any good tease in a sales process, you find out the answer only after you have made the purchase.

Another key point and what I love even more is that it completely contradicts conventional election wisdom about what it takes to win over the electorate. While I don't know how this will ultimately play out, this has a certain air of "money ball" aka Billy Bean of the Oakland A's, who actually analyzed the player stats in a different way and signed free agents as well as drafted accordingly. My suspicion is that this algorithm of Trump is no mistake and most likely the byproduct of rigorous modeling of both semantics and exit polling data of past elections.



Here is a promising area of research.

"Drug to prevent ageing closer as scientists extend life of animals by 35 per cent"

Now scientists have shown that mice who received a special compound to clear out the senescent cells lived 35 per cent longer than those allowed to age normally. They were also stronger and healthier for longer.



SP500, from Craig Mee

February 8, 2016 | 1 Comment

From my view point, half way up the stands, it would seem to be a worthy time to discuss the balance of power and the ground that was made and ultimately lost in the price action of the market since the initial wave of fast selling hit in early January. The struggle of price to fight back from its low point with minimal great runs, epic short term battles between good and bad near the recent highs, and finishing the week on a low point, and the potential changing fundamentals at play, (with heavy selling in USD this week), puts this conflict on the big screen. Could it not be said, that the market during January did little to flush positions, and that the opportunity costs of holding longs at this juncture is just far too great? I say this to engage everyone in discussion, as I see a break from these levels as a high risk of opening up some clean air to the downside.



 After reading this article "The Rich Are Already Using Robo-Advisers, and That Scares Banks", I wonder three things:

1. Making a broad assumption that most of these "artificial intelligence" schemes do similar things isn't it likely to cause even more herding behavior as assets in these plans increase?

2. Placing money in several plans and observing what's done might provide foreknowledge of what might be executed in the future.

3. Are they using ETFs or individual stocks? From the small amount I've read about these plans it seems to be ETFs.

For sure the assets in these plans are not currently enough to move markets -yet. But like ETFs which began as a small force and grew to be of great influence they could eventually move markets on their own. It's the commoditization of investment advisors in a similar way that ETFs commoditized retail trading.

Rudy Hauser writes: 

I would add the move by pension funds into equity investing. When my late friend, Prof. Paul Howell, who at the time ran the NYC pension funds, wrote an article in 1958 that appeared in the Harvard Business Review and madeg the case why pension funds should mainly be invested in equities, it had the largest request for reprints of any article in that publication up to that time. The idea of pension funds investing most of their assets in stocks was a new trend at the time. I would also add the event of mutual fund investing, that really took off in the decades after WWII.

Stefan Jovanovich writes: 

Another really dumb question for Jonathan and the other pros. But, first, a brief description of what those of sitting in the bleachers see as the great events in "financial history" since WW II.

1. End of fixed commissions; "discount" brokerage
2. Retail/commercial trading in Financial futures
3. Retail/commercial trading in Options
4. Derivative trading
5. Retail/commercial trading in Currencies

Now the dumb question: Which, if any, of these 5 developments are the historically comparable to the rise in ETFs?



 Mosquitoes aren't going to be the means by which this virus spreads in the US. And health officials have likely made a mistake suggesting that the risk in the US is low. That's not a statement that an outbreak is imminent, just that there's more to this virus than just swatting flies.

And don't be surprised at the economic effects. SARS, you may recall, led to essentially empty planes flying to and from Hong Kong for a period (albeit somewhat short) of time.

Any sense of what the impact of zika will have on the Olympics this summer? Not that Brazil needs any help in figuring out new ways to torture its economy (the nationalization of Petrobras being Exhibit A), zika may have an economic dimension the effects of which aren't yet fully appreciated. I wonder how big the tourism industry is in Brazil.

Stay tuned, same bat time, same bat station.

"Brazil Finds Zika Virus in Human Urine and Saliva, but Risk Is Unclear"



 The comment has been made that Moneyball strategies undervalue pitching and defense. As a Braves fan I can most assuredly attest that post-season pitching needs and season pitching needs are different. During the season, a 4 deep pitching rotation almost assures extra wins as the other teams pitching tends not to be as deep (so hence the long runs of divisional wins), however, post season pitching rotations get shortened, so one needs one less pitcher and one more bat (hence all the post-season loses). This is why the Braves had incredible records but only the one World Series during their amazing run.

Stefan Jovanovich writes: 

The data suggests something else: they (the GM and Cox) never let John Schmoltz–their one genuine strikeout pitcher–start Game 1. Strikeouts win World Series.



 I go fishing with my best friend. We start at night about 2 or 3 am. He has a fish finder and can see the fish. We fish for Opelu which is a small silver fish about 6 or 8 inches long to use for bait for bigger fish. We use a hand line on a spool. We hang a bright light over the side to attract the shrimp that the Opelu like to eat. On the end is a leader rigged with five or six different color hooks with small colored plastic skirts that imitate small shrimp or squid. There is a weight on the bottom. We drop the line down and jiggle the line. Almost immediately there are several sharp tugs on the line and the line is pulled in with several wiggling silver fish. Its great fun. The fish go into a tank in the bottom of the boat where they swim around while we head out to sea to fish aggregation buoys. The small fish are rigged, alive, to a big hook. The Mahimahi are large aggressive fish who love the opelu. Whatever we don't use for bait we can eat fried up and are very delicious. Mahi, however, is my favorite fish. When they strike, they jump high in the air spinning. When they come into the boat, they glow in rainbow iridescent colors.

When the market is taking a dive, I figure its going to drop to around its maximum recent range, and that is a safe depth to drop my line of hooks at different depths to try land some silver spus. Hopefully I don't catch a huge marlin or shark that takes me and my lures down into the deep dark depths. The goal is to pull them right up. Its funny that the lines on the charts look almost exactly like the readings on the fish finder. Its important to find the right depth.



The NYC Junto will meet on Thursday February 4, 2016 at the General Society Library, 20 West 44th Street. The open discussion begins at 7:00 PM and the featured speaker begins at 8:00 PM. Acclaimed writer and sociologist Charles Murray ("Losing Ground" (1984), "The Bell Curve" (1994), "Coming Apart" (2012)) will be speaking about his latest book "By the People".



 The Global Burden of Disease Study published in 2012, is the most comprehensive and systematic analysis of causes of death undertaken to date, involving nearly 500 researchers from more than 300 institutions in 50 countries, and starting with almost 100,000 data sources. What did the researchers find? Here in the U.S., they determined that our biggest killer was our diet. Number 1 on their list of the most important dietary risks was not eating enough fruit, responsible for an estimated 4.9 million deaths a year around the world.

link to article

link to study



 The gravitational constant, G, is 6.7 x 10^-11 N-MM/kg. Is there a similar G in financial markets for the super hot stocks? It is conventional wisdom that information is analyzed faster and better today than 20 years ago. If that is true, then G has increased. But is it true? Or is the constant really human nature?

An anecdote:

Iomega, the (in)famous disk drive manufacturer that was going to take over the world, ipo-ed in June 1996. It went parabolic. And then flamed out. It took 22 months to trade back at its IPO price before descending into oblivion and a takeover by EMC for about 3$/share in 2008.

GoPro, the hip portable camera manufacturer (with a surfing dude for a CEO) was going to take over the world (and was the next BIG media company), ipo-ed in June 2014. It took 17 months for this stock to trade back at its IPO price amidst a flameout — and with yesterday's news of a loss, is on its way to oblivion — to be acquired by Sony? for about $3/share in about 5 years?

Based on this non-scientific study, the market is indeed moving someone faster. But still plenty slow enough that if you strap a gopro to your forehead and point yourself in the direction of the major slow trend, you'll still make plenty of money (and have a nice video to upload too).

Steve Ellison writes: 

Anecdotally, when I started working at Hewlett Packard in 1992, I worked in a division that manufactured hard disk drives. It was a very dysfunctional organization (that was shut down by the company a few years later because of excessive losses). The production lines were especially dysfunctional. To ensure quality, the drives were tested in a "burn-in" process that took more than 24 hours. Only a minority passed the tests and were shipped; the rest went into a rework queue. The lines prioritized producing new drives over troubleshooting and fixing those that had failed burn-in. This tactic kept revenue flowing, but resulted in ever-growing inventory.

Fast forward to 1995. The division was drowning in red ink. Over a few months, nearly all the manufacturing managers left the company to go to Iomega. Imagining the practices I had seen being implemented at Iomega, I had an idea that Iomega was going down.



 Joe Stock is a IFGMA internationally certified alpine guide from Alaska and an all around great guy, full of energy and smiles. He has done some truly epic feats traveling though and across hundreds of miles of mountainous terrain on foot. He has a system to stay alive which addresses the human factors and the group dynamics.

He quotes Sarah Carpenter's system as an example.

1. Check the avalanche forecast every day.
2. Follow the weather.
3. Track avalanche activity.
4. Plan before you leave the house.
5. Be prepared.
6. Have an opinion.
7. Adjust your plan if conditions are different than you anticipated.
8. Report your observations.
9. Review your tour at the end of the day.

How appropriate such a list is for trading. Joe says: "test every slope before skiing". For traders, like Chair, it is advised to test your ideas before trading.

The main thing is to avoid the silly mistakes, which happen no matter how much you know or how careful you are. Probably one of the most important things I've ever learned since growing up is I can and will make mistakes. You need to mitigate that though, and give yourself the leeway to get out of a tight spot you'll eventually find your self in.



 One problem with using satellites for measuring crop yields is that although they don't involve much manpower, they are not as accurate as direct measurement on the ground and in the fields. Still, the costs of satellite data keep decreasing, and the images are getting better. One problem with remote sensing is the yield gap, which is the difference between yield potential and and the average yield.

Lobell has written a paper explaining the methodology of using remote sensing for estimating crop yields and calculating the yield gap. This is a fascinating high level overview of remote sensing of agricultural fields, what goes into determining usable parameters, methods of calculations, fudge factors, etc.

The techniques discussed are not only another tool in the trader's tool belt, but can be useful to anyone in the grain business.

Andrew Goodwin adds: 

It is possible to clock the timing of the passes of the satellites over the relevant areas. This is how the weapons inspectors have been defeated. You simply cover up the activity when you know the satellite is about to get an orbit able to take pictures of the sensitive sites. One counter method is to put propulsion on the satellites so that you can change the orbits and catch the brigands in a position of culpability. This is why the time of day and day of the week pattern trades should not work well in trading against those who can access the data of the satellites with the flexible orbit change features.

I would prefer to have stealth high altitude planes do fly overs randomly in the sensitive areas to garner useful data on agriculture.



Wild elephants migrate back every year to partake in an annual mango feast, retracing their steps right through the lobby of a hotel. It seems to be snopes certified.

Here is a great short video about it: "The Elephants that Came to Dinner"



The book Advanced Raquetball by Steve Keeley (the hobo) is the best book on racket sports that I have ever read (and I've read them all) and I recommend it highly to all players of squash, racketball, and tennis.



 Astrology and numerology rule markets, ok, Julian?

"We're all prone to a bit a Calendarism thanks to the birthday cult, but this "worst start to the year" thing doesn't make sense even by time measurement standards. A year is the unit of time the earth takes to make a revolution around the sun, so every day is the start of another 365-and-a-bit-days period.

And one man's calendar is another's papist intrigue. The Gregorian calendar would have you believe today is February 1, and all that January stuff is over. By the Julian calendar, it's actually January 19. The All Ordinaries Index has had a positive start to the Julian year, it hasn't fallen at all. And the Julian is only one of many alternative calendars to play with or live by.

Never mind months, there are myriad years to choose from. Go all North Korean with the Juche calendar (it starts on Kim Il-sung's birth) and it's only 105. Or break out your ab urbe condita toga to make this 2769. (I thought we'd have intergalactic travel by now.) Personally, I like the choice provided by the various Hindu calendars – we could be pretty much anywhere between 1938 and 5117.

It might help to apply some perspective to the market's outbreak of Calendarism by looking at a graph of the All Ordinaries Index over the past five or 10 years – either Julian or Gregorian.

"There's suddenly nothing particularly special about the latest tooth added to the saw – it's just another one. There have been falls bigger and smaller. It matters little what name the calendar puts on it."



 A friend of my daughter works for Tesla. His parents described driving in a self driving car in San Francisico. As I drove through LA traffic, I thought of the many benefits self driving communicated net cars would have.

Almost all accidents are caused by driver error. If all cars were self driving, and communicated with each other, it would reduce accidents, increase traffic flow and congestion. Lane changes could be done quicker and more safely when other cars knew the changer's intention. Cars could drive faster and closer together where human reaction attention and reaction time were eliminated by communicating cars. Rear enders would be eliminated by front sensing brakes. Cars could self park like auto valets.

Stefan Jovanovich writes: 

This is really the night for "let's all submit to higher authority". The problem Google and others are trying to solve - traffic congestion - is not going to be resolved by turning the public roads into digital autobahns, not without the complete loss of individual liberty.

Our "traffic" problem comes entirely from the commons theory of access. Right now, no one pays any direct price for deciding to use the freeway during rush hour; the road usage is - quite literally - free. If those same smart, smart folks would put their attention to the question of mechanisms that priced timed usage by location…

Thomas Miller writes: 

One problem with self driving cars, (for municipalities) is that they wold lose all the revenue they now make from traffic tickets, which is not insignificant. Self driving cars would never break the speed limit, run red lights, make illegal turns, etc.

Stefan Jovanovich writes: 

When roads were uncommon, they were privately owned and subject to usage tolls. Road travel was incredibly expensive because of the physics of friction and gravity (in a boat the water does the carrying; in a wagon the rims) so almost all freight moved by ocean and river which were the commons. When iron and steel rails solved the friction problem, land transport exploded - still under private ownership. Our present commons of free public roads only really go started in the 1920 after the development of pneumatic tires and leaf spring suspensions made transport of heavy loads possible. There was no practical way to put tariffs on the road usage but cars were so expensive to own that "traffic" did not become a problem until the combination of cheap gasoline and inexpensive used cars developed in the late 1950s.

This is not a difficult problem to solve, given the capacities of digital technology. What I find fascinating is how much the people who know that technology best (the folks at Google) are determined to use it to limit people's freedoms and prevent government's monopolies from dissolving under their own economic obsolescence. There is no social justification for "driverless cars" - auto accidents continue to decline and the injury rates for vehicles where people are passengers, not drivers - buses, vans - are far, far more bloody than for personal vehicles. This is a technology avoiding a useful solution in order to promote what will be an utterly useless green fascism.



SPY (2000-present) was checked for instances when the last day of the month was up more than 1%, while the 20 day return to the end of the month was down (including the up last day). Then, what was the return for the next day (first day of new month), and the next 5 days (first 5 days of the new month).

Here are the results:

One-Sample T: last DOM+, prior 20 day ret-, 1OM, 5OM

Test of mu = 0 vs not = 0

Variable              N       Mean     StDev   SE Mean             95% CI
last DOM+         14   0.016441  0.008813  0.002355  ( 0.011353,  0.021530)
prior 20 day ret   14  -0.043020  0.032422  0.008665  (-0.061740, -0.024300)
1OM                  14  -0.007521  0.025683  0.006864  (-0.022350,  0.007308)
5OM                  14  -0.019825  0.041358  0.011053  (-0.043704,  0.004055)

Variable              T      P
last DOM+          6.98  0.000
prior 20 day ret   -4.96  0.000
1OM                  -1.10  0.293
5OM                   -1.79  0.096

There were 14 down months with big up last days. The mean last day of month return was +1.6%, and the mean down month return was -4.3%. The next day and 5 day periods were negative, with the 5 day about -2% (both NS)



 This article is quite thought-provoking; although my amazement probably results from my somewhat novice understanding of quantitative finance; although I've learned quite a bit over the last year and a half (in large part due to this site, and of course The Chair, who has greatly inspired my relentless study of statistical analysis, and computational finance).

This article discusses a study conducted by Poland's Institute of Nuclear Physics who studied 100 works of classic literature using advanced statistical techniques. They discovered that the works that have stood the test of time are actually fractals, an ideal mathematical pattern found in nature. Some are actually multifractals.

Among the works analyzed in the study include those from authors like Sir Arthur Conan Doyle, Honre de Balzac, Charles Dickens, Fyodor Dostoevsky, Aleaxander Dumasn, Umberto Eco, George Elliot, James Joyce, Victor Hugo, William Shakespeare, JRR Tolkien, Leo Tolstoy and Virginia Woolf. One particular book mentioned is War and Peace.

"Study Finds Mathematical Structure in Great Literature"



 On this day in 1835 on this day Richard Lawrence attempted to kill President Andrew Jackson. Jackson survived the attack because both of Lawrence's pistols misfired (probably because the powder was too damp to ignite).

The Schlesinger story of the Jackson Administration focuses on the Bank War; but that was not nearly as important as the political explosions that came during Jackson's second term. No one, who had not been bribed, was in favor of Biddle's bank, any more than people now are in favor of the Federal Reserve. (According to Gallup's last poll on the subject, the IRS is the only Federal agency that has a lower current approval rating that the Fed.)

The Lawrence incident brought out into the open the much more important split that would be Jackson's legacy - the divide among the two tribes of War Hawk spenders. The moral issue of slavery was not the cause of the Civil War; it was, if anything, the camouflage for the rivalry between the people who wanted the U.S. to go West and those who wanted it to go South (to the Caribbean, Mexico and Central America). That is the sub-text of Horace Greeley's famous bit of advice that gets completely lost.

If the Bank issue had been truly divisive, Jackson would not have chosen a New Yorker, Martin Van Buren, as his successor; and accused his long-time ally, George Poindexter, of being part of Lawrence's "conspiracy" (sic).

The argument between Richard Mentor Johnson, Van Buren's Vice-President, and Senator Poindexter, over the subject of race is fascinating. Johnson had married his Julia Chinn, his slave mistress, openly.

"Unlike Jefferson, Clay, Poindexter and others, I married my wife under the eyes of God, and apparently He has found no objections."



 Moneyball is a wonderful movie made out of what is a lousy baseball book. The A's teams that Billie Beane built ignored defensive skills and looked for home run power. Beane's giving Billy Butler $30M in 2014 is a classic example of his trying to buy "power" on the cheap. The result was absolutely the worst team in American League baseball.

What wins in the post season is (1) pitching (everybody knows that), (2) fielding and (3) being able to put the bat on the ball, even if all you do is hit a weak ground ball to 3rd base.

Kansas City, winner in 2015, runner-up in 2014, has the formula: "Because contact is less prized by modern teams than patience and power, it's also less expensive. And given the physical skills of the players who tend to possess it, it might also be easier to pair with good defense, another commodity that the free-agent market has historically undervalued. In the most generous interpretation of their roster construction, the Royals' old-school approach is actually innovation in disguise, a version of Moneyball built on the opposite strategy of the early-aughts A's."



Question: Does January serve as a predictor of volatility over the next 11 months?

For fun, I dug up an old measure of volatility I used to use, where I calculate the "minimal path" that a price would have to traverse through the normal Open-High-Low-Close data, i.e., either C-O-H-L-C or C-O-L-H-C. This can be over any given time period. (For many calculations, the High-Low range gives similar results. Note at bottom on calculation.)

Using SPY, calculate the minimal path for January, as a % of the December Close, along with the minimal path for February-December, as a % of the January Close. The results:

Date / Jan minpath / Feb-Dec minpath
Jan-15   5.1%   29.9%
Jan-14   6.0%   28.7%
Jan-13   7.4%   25.9%
Jan-12   10.1%   25.0%
Jan-11   6.6%   43.8%
Jan-10   10.6%   31.0%
Jan-09   23.7%   76.4%
Jan-08   22.7%   67.5%
Jan-07   4.9%   27.7%
Jan-06   6.8%   22.2%
Jan-05   6.7%   19.4%
Jan-04   9.2%   20.4%
Jan-03   19.6%   45.6%
Jan-02   15.8%   50.3%
Jan-01   13.8%   47.9%
Jan-00   13.1%   37.3%
Jan-99   9.8%   27.7%
Jan-98   17.1%   44.0%
Jan-97   14.1%   42.5%
Jan-96   9.6%   35.3%
Jan-95   4.0%   36.8%
Jan-94   4.7%   15.2%

Correlation between the two series:  +0.843
R square:  +0.711

Given the strong R square, I ran a regression with "Jan minpath" as the independent variable, and got the equation:

Feb-Dec minpath = 0.123062 + 2.197213779 * Jan minpath

The minimal path for January 2016 is 18.8%.  Plugging that into the equation:

Feb-Dec minpath = 0.123062 + 2.197213779 * 0.188208

= 53.7%

Multiply that by SPY December Close of 193.72

= 103.95

Or approximately 1040 points on the S&P, i.e., the equation predicts that the minimal path for the S&P for Feb-Dec 2016 will be 1040 points.

Even assuming this estimate is accurate, it doesn't tell you what
*shape* the market will have over the next 11 months. You can, however, model some scenarios.

For example, I saw a recent collection of big-bank predictions for where the S&P (cash) would end 2016, the highest of which was 2350. If you plug 2350 in as the Close and also assume it is the High, then the minimal path for the next 11 months looks like this:

Jan Close:  1940
2016 High:  2350
2016 Low:  1623
2016 Close:  2350

In that scenario you get a predicted Low of 1623.

Assume that the Close is 2350, and raise the High to 2450, and you
also raise the low by 100 points, but still have to get down to 1723:

Jan Close:  1940
2016 High:  2450
2016 Low:  1723
2016 Close:  2350

Assume a Close of 2100 and a High of 2200:

Jan Close:  1940
2016 High:  2200
2016 Low:  1598
2016 Close:  2100

Et cetera…

For me, this analysis works as a mental exercise to help me with a severe shortcoming: My idea of what is possible is always much narrower than the market's version. For example, if from here we drop to 1600, it will be hard for me to think, "We could easily pop back up to 2200 and then finish at 2100".


The minimal path calculation looks like this:

abs(Open - prevClose)
+ (High - Low)
+ min(
[ (H-O)+(C-L) ],
[ (O-L)+(H-C) ]

Divide the result by the previous Close to get the %.



 "Still Mine" is a decent flick that could never make it near modern Oscars (not even best janitor):

An old but stubbornly competent white guy dogged by epicrats* while trying to help his infirm white wife who was the love of his life.

No people of color. No disease. No apologies. Therefore to see it you will need to search and find it.

*epidemic bureaucrats



 We've been enjoying an excellent BBC series, Men of Rock, about the Scottish geologists who moved that science forward: "Geologist Iain Stewart retraces the steps of a band of maverick pioneers who made ground-breaking discoveries in the landscape of Scotland about how our planet works."

The series has terrific photography that highlights the beauty of Scotland. For me, the science is fascinating because while I have read the general outline, the series does a nice job of presenting the actual observations that these men were making, as well as the conclusions that were the result.

Three parts:

Part 1: Deep Time

Part 2: Moving Mountains

Part 3: The Big Freeze

We use Chromecast to put it to the telly, and the BBC science shows alone make the investment well worth it.



People are afraid. They watch too much TV. TV shows many bad things. They access net info aggregating and confirming their fears in confirmation bias. A friend of my wife appears unreasonably afraid of Dengue fever, but the chances of getting it are very very low. Seems there is a lot of fear in the market shaking out weak hands. People vote from unreasonable fears. People fear crime, but crime is lower. The fears are mostly unreasonable, and should create opportunities.

Alston Mabry writes: 

Check out this article.

Fear and Loathing in Las Vegas: Evidence from Blackjack Tables



Psychologists study regret primarily by measuring subjects' attitudes in laboratory experiments. This does not shed light on how expected regret affects economic actions in market settings. To address this, we use proprietary data from a blackjack table in Las Vegas to analyze how expected regret affects peoples''decisions during gambles. Even among a group of people who choose to participate in a risk-taking activity, we find strong evidence of an economically significant omission bias: players incur substantial losses by playing too conservatively. This behavior is prevalent even among large stakes gamblers, and becomes more severe following previous aggressive play, suggesting a rebound effect after aggressive play.

from the paper:

Panel A also illustrates the first-order result: approximately 80% of all deviations from the Basic Strategy involve passive mistakes; ones in which the player should have taken an extra card and did not, ones in which the player should have split or doubled down but did not. Only one mistake in five involves players behaving overly aggressively. In panel B we no longer restrict attention to single-hand deals, but also include deals in which the player (rightly or wrongly) split. In a handful of cases, the player splits more than twice, but in general the basic fact that passive errors are much more common than aggressive errors holds regardless of the number of hands played (or won).

[ … ]

This paper uses novel field data obtained from actual play at a Las Vegas Blackjack table to show that errors of omission are four times more likely than errors of commission. This profound omission bias occurs in spite of the fact that real economic agents are making real decisions with their own money, reaping the rewards of skill and good luck, suffering the costs of bad luck and mistakes. The bias we observe grows more common in the wake of past aggressive play, and is robust to controls for memory and skill. Perhaps few decisions of economic consequence are made at a Blackjack table. Nevertheless, the underlying mechanism here—choosing between acting or not acting in an economic environment with uncertain payoffs—is present in many economic problems, such as planning for retirement, searching for a job, or starting a business. Indeed, the findings from our field study are striking when one considers that Blackjack players are not a random sample of economic agents: they have self-selected into the game of Blackjack based on their willingness—indeed, desire—to bear risk. The conservatism that we identify at a Blackjack table is all the more severe when we consider this self-selection issue.


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