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The List.

What is "The List"? It is often a window on the souls of its members. And a window on our own souls is often opened when we read what others write here. It is lessons on life. Chess strategies. Investment in markets, life, family, nation and the future. It can be and often is profound and superficial; deep and shallow and always enlightening, even when a writer may not be. It sends out tendrils seeking answers and finds them, coiled about ideas we would never have found alone. The List lives and throbs with the insights, prejudices, wants and experiences of the members. There is a selection process at work here, as some find an intellectual home … others move in for a while and then move on. Those who remain don't always agree and contention boils up, simmers and fades, sometimes leaving a residue of hostility but never, never boredom. The List is ephemeral. Although there are rumors that somewhere everything ever posted on the web is archived, the sheer quantity of material generated makes that less than credible. So our moving fingers write, and having writ move on, leaving little more than fading memories, but building new ideas and broadening the thinking of we who read, and answer, and ponder, blending what is read into a tapestry that, but for the List would never have been woven. Surely we, the weavers are much the better for it, and must acknowledge the debt each of us owes to each other, and to the two who first spread the warp and the woof.



 This is a paper by Victor Haghani of LTCM fame on bet sizing observing and analysing how people place bets on a coin flip that is biased to come up heads 60% of the time.

Ralph Vince writes:

It's a very interesting paper, and to many might be surprising. A couple of comments:
1. It assumes someone's criterion in wagering on this is to maximize what someone makes. This is certainly not the case in capital markets, where (the rather nebulous) risk-adjusted return is king, specfically: "Optimal F: Calculating the Expected Growth-Optimal Fraction for Discretely-Distributed Outcomes"

2. Even what the authors and Thorp himself claim are the amounts to wager so as to maximize expected gain, their answer is not quite aggressive enough! The amounts the refer to are asymptotic, as the number of trials ever-increases. The author himself points to a horizon of 300 plays in half an hour, and the actual optimal wager (which would, int hat time period, yield a greater return than the authors or Thorp point to) is slightly more aggressive, and can be determined from the above paper.

Not trying to toot my own horn (it needs no tooting, and besides, my horn will do a lot, but tooting it won't do) but the paper is inaccurate on these two points.

Jim Sogi writes:

Thank you for the interesting article. The other night at our band practice, the bass player's wife, who works at a public school, asked me if I was taking my money out of the market. She had heard a number of people were worried about the election and a market drop if either candidate was elected. I told her the market would probably go up, though it might jump around a bit. I thought that was interesting. Its an example of the public doing the wrong thing, for the wrong reasons. It reflects peoples fear about uncertainty about the election. It helps explain some of the market action recently. 

Rocky Humbert writes: 

Mr. Sogi's anecdote and conclusion is a textbook example of Confirmation Bias — which is the tendency to search for, interpret, favor and recall information in a way that confirms one's preexisting beliefs or hypotheses.

To wit: On what basis does Mr. Sogi conclude that the bass player's wife represents the "public" — as distinct from Mr. Sogi himself being the "public" ??!!

How the stock market will perform over the next 30 or 60 days has very little to do with the study of a coin that is heavily loaded to land on heads. At best, the stock market's performance over the next 30 days is only slightly better than 50:50. 

Alston Mabry writes: 

Just had to do a quick sim of their betting game.



 Swifts have an amazing ability to stay aloft.

1) 'Lead researcher Anders Hendenstrom, professor of biology at Lund University, said: "It's mind-boggling that they can stair airborne for 10 months without needing to come down. "Most of the time there is a trade-off between energy use and life: live hard and die young. "But these birds live quite long, up to 20 years, so somehow they have beaten this rule."


2) Why come down when it is safer to stay aloft? "So, what are the main selective forces leading to such an extreme aerial lifestyle as found in swifts? One factor could be that specializing in high-altitude aerial insects as a main food source requires the suite of adaptations for efficient flight shown by swifts which compromises terrestrial locomotion and make swifts vulnerable to predators and parasites had they been landing more often. Our data suggest that even if common swifts settle to roost occasionally, which has been observed also in young swifts if the weather is bad their predominant element during the 10-month non-breeding period is up in the air."



 I find it interesting the difference in public and private thoughts on fracking by the cattle trader. And also the price trajectories of the proppant companies. Sand companies (increased amounts now being used per well) have rebounded. On the other hand a leading ceramic (more useful in higher pressure/deeper wells) proppant producer hitting rock bottom. A tough business to be in.

"Chesapeake Energy Declares ‘Propageddon’ With Record Frack":

'The super-sized dose of sand — known as "proppant" — is able to prop open bigger and more numerous cracks in the rock for oil and gas to flow. Output from the well increased 70 percent over traditional fracking techniques, Jason Pigott, vice president of operations, said during a presentation.

"What we're doing is unleashing hell on every gas molecule downhole," Pigott said.'



The idea of systematic trading was not generally accepted 10-15 years ago. Markets were mostly viewed as efficient at that point. Or mostly efficient and any excess returns were just a compensation for risk taking – still efficient in a loose definition of efficiency. Today, trading systems are everywhere. Systems are now called "indexes" or "smart beta". Different strategies are now called "factors". Is 2/20 fee structure going the way CD, Dodo, floor broker, etc. If outperformance can be replicated by some "factors", who needs an expensive trader/manager?

Peter Pinkhaven writes: 

"Strategies that have reasonable sharpe ratios are usually cyclical" - Asness

I believe AQR were one of the pioneers of the recent systematic factor investing.

Bill Rafter writes: 

The automatic trading systems make the markets more efficient and more liquid. They are not predictive but extremely efficient in their reactivity. What the spec should do is view that as an advantage rather than a problem. It would only be a problem if he were a scalper. There is a very good solution to this for the spec (professional or near-pro), and it revolves around knowing which games to play and which to pass.

There will certainly be some professional specs who outperform, and they will be worth the fee. However that fee may continue to be 2&20 on the basis of value, or it may work lower for any number of reasons. Full disclosure: "someone we know" charges 1&10, as they want to keep clients forever rather than have the fee level be an issue in the future.



 One likes to use Israel open to close for prediction of US markets the next day over the weekend. This must be counted out. Strange to see it down 7% year to date versus our S&P up 4% year to date.

Anatoly Veltman writes: 

A few considerations:

1. A short term indicator - intraday trend Sunday morning as predictor of the intraday trend Sunday evening - may well be valid. One better know make-up of participation "over there". Are foreign "actively trading funds" significant participants?

The above notwithstanding, and to address the second observed anomaly

2. Longer term trends may be cyclical, and they may also be lagging. Being "surprised" with 11% discrepancy is not everything (yet). What was the delta in FX for the same period? (I'm assuming their index is in shekels). Maybe shekel also depreciated 11%, and under-performance is actually 22%…Interest rate differentials and trends are another variable. Finally, U.S. aid and geopolitical threats loom huge over any Israel forecast.

I wonder if anyone can weigh in on "Dem vs. Rep" impact on Israel's future.

Rocky Humbert writes: 

Please. Two stocks, Teva Pharma and Perrigo Pharma account for 20% of the TA-100 index. Both stocks have declined massively over the past 12 months and can account for the index underperformance.

As anyone who is sentient should know, the bio, pharma, and generic drug stocks have performed horribly over the past twelve months — beginning with Valiant and Shkreli and Hilliary's tweet — and more recently on bad R&D and earnings news and speculation about the end of price-hike-led earnings growth. When I was buying the drug stocks during the last Hillary-scare, the pe multiples were 9x to 12x. The multiples today are 15x to 23x — even after the declines.

Someone should tell the "public" …

TA-100 Index: The TA-100 Index, typically referred to as the Tel Aviv 100, is a stock market index of the 100 most highly capitalised companies listed on the Tel Aviv Stock Exchange…

David Lillienfeld writes: 

It seems likely to me that the generic manufacturers are going to come under a lot of pricing pressure moving forward. The ethicals? I'm not so sure. Yes, there's looking to be a potential product failure on Regeneron's cholesterol drug, likely partly because of price, but almost half of all drug development today is for orphan drugs—and I haven't seen much in the way of push back from the market with regard to them. Lots of kvetching, no changes in purchases.

One of the "wake-up calls" for the industry has been what happened with Gilead's Hep C franchise. (When Gilead bought Parmassett, from whom it got this franchise, everyone thought they grossly overpaid—not unlike Pfizer and Wyeth for Lipitor. It was the deal of the century thus far—for Gilead.) It made a lot of money—short term. There was lots of grousing about the high cost, never mind that it was curative in ways that existing treatments were not, i.e., it was cost-effective even if insurers didn't appreciate the fact immediately. What few understood was that most of that revenue—and profits—resulted from a backlog of patients, now emptied, through which Gilead had to recover its costs and pays the piper for past failed efforts. Did it overcharge beyond that? Depends whom you ask.

There were other viral diseases (Gilead's specialty) it was supposed to have turned its attentions to, as well as (finally) some performance from its oncology unit. About 6-7 weeks ago, though, I noticed that construction on the Gilead campus had slowed. Not stopped, though. I tried speaking with people that I know there, make that knew there, and heard that a couple of retired and have fallen off the grid. One was pretty disgusted and turned up at Genentech—and was unwilling to talk except to say that he was still detoxing.

Look at pharma companies like BioMarin and Ultragenyx and you might find companies with lots of pricing power. Also lots of waiting-to-be acquired power. Will they be hauled in front of a Congressional committee? Perhaps, but I doubt it. That's the nature of an orphan drug—and I don't see that changing anytime soon. The costs of development (fixed costs) are almost as high as for those intended for more common conditions. Yes, there are fewer patients, but they may also be harder to find (= expense). And there are the drug failures. Go ask Bristol-Myers Squibb about the impact of those—BMS is in the process of hacking off a good portion of its R&D department after a major failed trial/program.

Two thoughts: First, stay away from cancer immunotherapy. Yes, someone will win big there—maybe. No one has any clue as to whom/if. In 5 years, probably a different story, but at the moment, not ready for prime-time. (If you like to gamble, go to Vegas or Macau.) Think of this area as the equal of NASH. Maybe Intercept will be a big winner. I'm not so sure. One thing is clear—there's an increasing amount of roadkill on that highway.

So yes, Rocky, the generic manufacturers are challenged—and given the size of the generics marketplace and some of the price hikes that have taken place, I don't see that ending any time soon.

But the pharma space still offers opportunities, just not with the larger companies.



 "I have noticed that 538 are quite incompetent (and aggressively so)– they don't grasp something basic about an election probability as an estimator of a future binary outcome. The more uncertainty, the closer the estimator to 50%. But let us 'price' it as an arbitrage-free option."

I think that Taleb is correct here. The point estimate of an election probability is far more unstable than the 538 model portrays. Also, on the betting markets, the uncertainty should be reflected in wide bid-ask spreads, which is not the case in these markets either.

Stefan Jovanovich comments: 

The poll numbers are not trades that must be cleared; they are, at best, applied social science research.  There is no penalty for getting the estimate wrong; no one ever gets fired for having missed the spread.  When you all lay on a single trade, there is actual money at stake - far more serious money than anything these D List celebrities on the tube ever put at risk. (Reminder: "Politics is show business for ugly people.")  The stuff fascinates me because it is the random walk of actual history, but why do any of you serious punters pay attention to it as anything other than a minor sports bet - like wagering on Columbia basketball in Casino (the movie)?

For all the supposed money at stake in politics and the outcomes of political elections, the actual net expenditures - the money spent that goes outside the bubble of the campaign organization itself - are trivial.  There is more money spent by GEIGO and its rivals on pitching auto liability coverage than all the net payments to television for Presidential campaign ads for both parties. 

The poll numbers being reported, even this morning, are for samples taken before Friday's revelation about the Danger Man's laptop.  They "changed" because the pollsters decided to use a sample that was a statistical probability rather than one that was completely bent in favor of Mrs. Clinton.  ABC News had a headline that says it all "Shift in the Electorate's Makeup Tightens the Presidential Contest".  Yeah, right.  The makeup of the electorate over an entire campaign season does not change.  If it did, the Democrats would not be so passionate about enacting same day registration and voting. 

A week ago ABC News had a poll that showed Mrs. Clinton up by 12 points and at the magic number of 50.  The poll with the headline had her at 47 and Trump at 45.  What "changed" was the weighting of the sample.  The earlier poll divided the electorate as 36% Democrat, 27% Republican and 31% Independent.  The more recent one splits it 37, 29, 29. 

So, Stefan, how does this prove your thesis?  Easy.  The folks at ABC decided that 81% of the registered Republicans are now going to vote, as opposed to only 75% a week ago.  They also decided that 5% fewer registered Democrats were actually going to vote.

Who is in the electorate does not change.  Who is going to be foolish enough to waste their time to actually vote is always the question.

The enduring paradox of representative government is the fact that there is no statistically valid reason for any individual to bother with voting.  Your individual vote NEVER counts.  It is a pure act of faith.  That is the reason that the countries that are actual democracies are wise enough to make voting have a real cost; it is only in autocracies that voting is free, easy and compulsory.

As for who will win next week, I still favor the Harold Macmillan prediction.  When asked by a journalist (who else?) what will determine the coming Parliamentary election, he replied: "Events, dear boy, events."



I am reading here Ripley's Believe It or Not: Book of Chance and find it amazingly accurate and interesting. It gives ideas for inventions that are very useful and came to be, and has a million interesting things about luck and skill, and gambling.



This weekend, the BTC/USD has traded back up to equal its precise level of July 31, 2016–the day that the most outrageous hack in crypto-currency history started to filter through to global news domain…What an unbelievable recovery, and what an unmistakable indicator that even the worst known fears of man today are not feared as much as the unknown, or the ones that may be quietly swept under the rug. Might this be one illustration of what precarious world we are living in today, and an indication of how conventional personal property is becoming deemed less and less organically "secure"?



What it cost to see the cubbies play:

Standing room only ticket prices at Wrigley = 2.5K

Standing room prices at Progressive Field (really?) is 650

Cubs behind home plate = 18K each

Progressive field = 3K



 A symptom of what's wrong with America, economics, and the cattle trader's economics is this sentence in Robert Gordon The Rise and Fall of American Growth. If the stock market continues to advance, we know that inequality will increase, for capital gains on equities accrue disproportionately to the top income brackets". The book predicts that "the outlook for future growth in the standard of living is not promising" because of this predicted inequality (and slowing innovation, the baby boom, increased debt, and poor education). "We face headwinds that are stronger barriers to continued growth than were faced by our ancestors a century or two ago". Yes, the barriers are economists like Gordon and policies like those of the cattle trader. A totally flawed book suffering from the English and Pickety disease that could have been great if not suffused by collectivist fallacies.

Jim Sogi writes: 

Take a look at the Nikkei chart for the last 50 years. They had decades of tremendous growth. In 1989 it peaked, and crashed. Then for the next 25 years until now, its been in a range. Their population is declining. Young Japanese people, increasingly, are not attracted to the opposite sex. When you go to Japan, you really notice a lot of 60 year olds. There is a big population bulge at that age. Those are their boomers. There are no immigrants. There is no diversity. Diversity causes innovation.

Technology has a hard time increasing productivity in the face of large demographic shifts. The cell phone brought huge increases in productivity, but there is a plateauing zombie effect going on with increasing screen addiction.

Both the above are presented in support of my theory about long term market ranges.

Alex Castaldo writes:

Sogi-san's idea about the importance of demographic trends finds some support in a recent paper by Fed economists:

The United States, like other advanced economies, is undergoing a dramatic demographic transition related to the unfolding of the post-war baby boom. As a consequence, the growth rate of the labor force has declined and should remain low for the foreseeable future. In this paper, we investigate the extent to which demographic changes, especially those related to the baby boom, can explain the currently low levels of real interest rates and GDP growth.

We build an overlapping generation (OG) model that is consistent with observed and projected changes in fertility, labor supply, life expectancy, family composition, and international migration. The model allows us to explore the extent to which demographic changes, in and of themselves, can explain the timing and magnitude of movements in real interest rates and real GDP growth during the post-war period and beyond. […].

We find that demographic factors alone can account for a 1.25 percentage-point decline in the equilibrium real interest rate in the model since 1980 - much, if not all, of the permanent decline in real interest rates over that period according to some recent time-series estimates, such as Johannsen and Mertens (2016b) and Holston et al. (2016). The model is also consistent with demographics having lowered real GDP growth 1.25 percentage points since 1980, primarily through lower growth in the labor supply; this decline is in line with changes in estimates of the trend of GDP growth over that period. Interestingly, the model also implies that these declines have been most pronounced since the early 2000s, so that downward pressures on interest rates and GDP growth due to demographics could be easily misinterpreted as persistent but ultimately temporary influences of the global financial crisis.

Larry Williams comments: 

Amen! Especially now that everyone owns stocks in one form (retirement programs,etc) or another.

Like JFK said, "a rising tide lifts all ships".

John Floyd comments: 

I first arrived in Japan in 1985 in the midst of the boom. Reservations were necessary well in advance to have a sit down lunch anywhere and the likes of Maiko Kawakami were more than willing to pay me $40 an hour to teach them, English. But after many years of a palpable buzz that included the Plaza Accord, expanding money supply, real estate price increases, etc. came the arrival of a new BOJ Governor Mieno in December 1989. Mieno believed the gains in asset prices was a bubble and "undermined the stability…of Japanese society by weakening the ethos of labor…" and immediately began tightening monetary policy. Equity markets began a decline and with a lag of a year or so did real estate prices.

In thinking about Japan I would consider some of the following, Further I would consider how it relates to what is happening in Europe, US, and China at the moment, to name a few.

Why has the "great hedge fund trade" that began in the mid 1990's of shorting Japanese bonds not worked?

Is there something inherent in Japanese culture that has prevented the open restructuring of debt that is more prevalent in Western societies? Why can you drop $1,000 of your English teaching money in a restaurant and have someone return it to you the next day gift wrapped?

Does an aging population save or spend more and what might that influence be on the economy and markets?

How does the rise in China debt levels over the past few years compare to both the Japanese(circa 1980 area) and US debt (circa 2000 area) expansions?

Do you believe the Japanese will stick on the path of the 3 arrows which have been partially successful? Might they expand their arsenal?

What is happening to the stock of JGB's and the ownership there of and thus the subsequent interest rates demanded?

What about this new 10 year yield target and how does it square with inflation and the Yen?

Is there a debt write off as that is the ultimate solution? General government gross debt has gone from about 50% of GDP in the late 80's to about 250% now.

What happens to the JPY, stocks, and bonds if debt is restructured given the impact on growth, inflation, etc.? I was last in Japan a few years ago and remarkably the prices had not changed much since the 1980's for hotels, noodles, beer, coffee, etc. But, alas I did not price out the demand for young English teachers.



 The cast of characters that goes along with the Zacharian "your own man" and the proverbial "useful idiot" is large in our field. I see "the captain", "the pessimist" (perhaps the bearometer), "the cheat" (perhaps a bio executive from Boston), "the complainer" (perhaps Steve Jobs), "the sanctimonious scoundrel" (from Nebraska). I am seeing the boy (market) who plays "lady I did it" with a big spike overnight then a return to unchanged at the open. What other characters from the playground do you see? Do you feel this is a useful type of thinking?



 I am quite certain stocks lift off here, immediately, and the beneficiaries are those who are long before the election should she win. It's going to be very hard to step into it once it goes for most who aren't in beforehand. We're on the long road to 1% long rates and similar numbers for unemployment according to my calculations.

As for the election, Trump lived to fight another day when everyone reacted in seeming horror to what he said about accepting the election results. He was so pathetic at the last debate, and the spotlight shifted, to his fortune, as a result of his "horrifying(?)" statement. As Pat Buchanan, who bears the furrowed brow I recognize and expect of all those who have tortured by Jesuits, puts so poignantly in his most recent column:

"The establishment is horrified at the Donald's defiance because, deep within its soul, it fears that the people for whom Trump speaks no longer accept its political legitimacy or moral authority."

I don't think this election is a foregone conclusion or can be measured anymore than we can know what a jury's verdict will be at this point. As difficult to predict as the market may be, it is a much simpler calculus than this election.



 You all will be saved from any future lectures about Ulysses Grant next week. That is when Ron White's biography becomes available on Amazon. It is, by far, the best ever written.

Apologies for not adding the appropriate "but". White comes closest among all the biographers to understanding who Grant was, but he still falls far short of understanding what he thought. The biography's treatment of Grant's economic ideas avoids repeating Henry Adams' lies; but it falls far short of understanding why Grant's pushing through Resumption was the key to the United States' extraordinary rise to wealth and power after for the last century and a half. That part of the story still remains to be written.

P.S. The best single modern volume on Grant, though not a full biography, is Mark Perry's book on Mark Twain and the man he admired more than any other.



On this date in 1775 the Second Continental Congress adopted, with modification, the motion that Edward Rutledge had first proposed in July. Rutledge had been appalled that the Continental Army and its predecessor the New England Army had black-skinned soldiers. (Under the Crown "blacks" had been excluded from all formally-established state militias, but the rebellious colonists in Massachusetts had accepted all comers.) Rutledge moved that all negroes be immediately discharged from the Army; the Congress, with its usual talent for Paul Ryan spreadsheet logic, decided that it would not discharge serving soldiers who were black-skinned but would not recruit any new "blacks".

The British responded immediately by publishing what became known as Dunmore's Proclamation, offering freedom to slaves who agreed to fight for the British. On November 12, 1775 General Washington had entered in the Army's Orderly Book Congress' formal instruction that negroes no longer be enlisted in the army. He then wrote to Congress to tell them what they had done: "the free negroes who have served in this army are very much dissatisfied at being discarded . . . it is to be apprehended that they may seek employ in the Ministerial [British] Army."

Simon Schama, who hates Americans almost as much as he despises Israelis, claims that as many as 100,000 slaves ran away from plantations as the result of Dunmore's Proclamation. (General query: What is it about this particular number that makes it a source of rhetorical magic? One is reminded of the first President Clinton's 100,000 cops, for example.)

The number was, according to the one scholar who has tried to do the actual counting, somewhere between 800 and 2,000. Roughly 250 of these became members of the Ethiopian Regiment. Another 300 embarked with Dunmore in 1776 when he fled Williamsburg. There is, with all of this, the usual irony. Like every man of property in the colonies, except for Quakers and the odd free-thinker, Dunmore himself was a slave owner.

People with extra melanin did continue to fight in the War for Independence. As the war dragged on, the "manpower shortage" (lovely phrase that only perfumed princes can use without gagging) forced even Virginia to accept negroes and mulattoes, when necessary.

The best summary of the full story is here.

Its author, Noel Poirier, now runs the National Watch and Clock Museum, which a wonderful antidote to all the worship of the dead at Gettysburg, if you find yourself in that part of the world.



The greatest single demographic change of the last 20 years among people born in the United States has been the collapse in the relative rate of growth of the "black" and Asian populations. (The growth rate for Hispanics born in the United States has not changed from what it has been for the last 50 years; what catches people's attention are the numbers that come from steady compounding.)

Sometime in the 1990s the production of new "white" people who do not have Hispanic surnames and new "black" and became the same; and the birth rate for new "Asian" people fell below that of non-Hispanic whites. The nomination of Barack Obama in 2008 did a great deal to hide this fact because registration and voting - turnout - by black people surged; that higher level of participation continued in 2012, even though there was no further increase.

The best evidence for this is the shameless weighting of the current political polls. No public pollster offers racial breakdowns of their party weightings. They tell you how many Democrats and Republicans and Independents they have but not how many members of each Census racial category make up the partisan groupings. If, as the networks clearly do, you want Mrs. Clinton's numbers to be up, you can do what I explained in my piece about ESPN polling: you can overweight Democrats slightly in relation to Republicans and then dramatically underweight Independents. You can then double down by overweighting the number of black and Asian Democrats and underweighting Hispanic and non-Hispanic white ones. (Note: Asians have replaced Jews as the second most reliable Census category of Democratic voters; it is the historical gift of Earl Warren that keeps on giving.)

Those of us who still profit shamelessly from selling services to "the media" are amused by the hand-wringing over the decline in the NFL's ratings. Your most popular player retires, and his famous rival is suspended and you wonder that your ratings go DOWN? Yet, the grieving and lamentation in network TV land may also be the recognition of the fact that, in terms of present and future ratings, neither blacks nor Asians now offer the prospect of more and more eyeballs. Soccer - i.e. the "real" football - anyone?



Rate Hike?

The trend has been for lower rates since the early 80s. It is precisely the "zirp minus" world that is one of the factors (the biggest factor) that will drive things farther and longer than anyone dreams. This condition has persisted far longer than anyone ever expected, and as I;ve said before, all money must now seek risk - and that exists in equities, private and public, real estate and "wild things" (art, sports teams, etc).

The world has been soaked in cash, so much so that there is seemingly no demand for it, and the pensions hunger grows evermore desperate each year.

What is too high a PE when the alternative is a certain loss? The world has changed, profoundly, as a result of this, and I would speculate it may get even stranger. For example, to be long equities is to be short volatility, and vice versa, and that relationship too, is not as cast as the sun rising in the East. That relationship too could flip.

Adaptation is the first rule of survival. Look at the hedge fund industry.



 One is thinking of retiring and setting up a radio flyer wagon on Wall Street, and selling guidance on markets for 5 bucks a query. One has given up studying the factors that determine the bull or bear of individual stocks., especially since no studies are valid unless they use a compustat as is file and according to Andy Lo, even those are adjusted. One wonders if there is any systematic way of dividing stocks into good and bad that works these days? A related query is whether the Value Line rankings of stocks into group 1-5 have held up now that the great Sam Eisenstat has been eased out. Do you think I could be as good as Kramer?

Jim Sogi writes: 

Years and years ago I read Value Line regularly in the binders at the brokers office and generally followed it during the bull market. It did well. Later, I subscribed, but found that by the time I got my issue, first by mail, then electronically, that the chosen No 1 stocks already had made their move making it impossible for me to get in with any hope of profit. I always wondered how that worked.

Larry Williams writes:

We tested value line ranking is Q&A software (Thompson/Reuters) about 2006-2009 time frame and were not able to come up with much that rolled into/out of top ones or bought and held for 6 to 9 months. Maybe need a long hold time. 



In a rather simplistic and limited analysis this is the first time after a debate or "election news/event" that was deemed to favor the Dems that the Mexican Peso is lower on the day.



On the way to the office today I was blasted by Bloomberg from so many angles and reporters about Trumps "I will keep you in suspense".

A little context to remember is that during the Republican primary debate, all of Trump's opponents solemnly raised their right arm to pledge to support the Republican nominee, whoever it might be. Trump was the lone holdout, and he took heat for it.

Then more than half of them reneged on their pledges, including Jeb! Bush and St. John Kasich.

The truth is that if any candidate seriously suspected fraud, or a miscount, or whatever, they would field an army of litigatin' lawyers, as did Al Gore. Trump's the only one honest enough to acknowledge that.

Rudolf Hauser writes: 

You may recall that Nixon did not do that in 1960 despite the likelihood that the Chicago vote was rigged and that winning Illinois would have given him the presidency. He did not want to put the nation through such a crisis.

Stefan Jovanovich writes: 

It is a nice story, which Nixon did his best to promote; but the numbers do not support RH's assertion. Nixon only got 219 votes; adding Illinois and its 27 would have left him 24 short. Subtracting those votes from Kennedy's total of 303 would have left him with 276, 6 more than he needed. What few people mention about the election is that it was the last time a 3rd candidate won electoral votes. Harry Byrd won 15.



Who are the most resonant useful idiots in our day that can always be counted on to say something idiotic? I find it useful to look at El Erian and Gross, as both are never bullish on stocks.

Steve Ellison writes: 

Anything on zerohedge



Fairness, from anonymous

October 20, 2016 | 1 Comment

 My daughter Eddy used to be interested in the question of Fairness. Not any more. "Since it is not a question of whether but only one of where and when, why bother?"

But we do still talk about it with regard to taxes. We still laugh over her reaction to her first paycheck (issued for cleaning the animal cages at the local vet's office on the graveyard shift). "Who is this bitch FICA and why is she getting my money?"

The best that the two of us have come up with for a "fair" tax system is our own variation of the Major League Baseball "luxury tax" and revenue sharing model. Under the collective bargaining agreement that expires this year, each team in MLB puts roughly 1/3rd of its own revenues into a pool. The money in the pool is then divided up and distributed equally to each team. In 2016 the richest teams (those in the 15 largest markets) no longer received their share as a payout but instead received a credit against their revenue share to be paid the following year. (This was, IMHO, an artful way of assuring that the rich teams would agree to have revenue sharing as part of the next CBA.)

The Eddy and I conclude that FDR's unerring political instincts were wise policy. (When his Marxist academic advisers wanted Social Security to be means-tested, he told them to get real. The American people would only support a program that had a fundamental equality; if you paid into the system, you got something out of it.) We would like to see all government benefits to have the same recognition of the Constitution and its equal protection clause; if a benefit is paid to someone simply for breathing, then everyone gets it. If the government collects taxes, then everyone pays the same rate.

Eddy's final word: "Never going to happen, Dad. Too simple and too fair."

Alston Mabry writes: 

This reminds me to recommend an excellent recent EconTalk:

How are those in favor of bigger government and those who want smaller government like a couple stuck in a bad marriage? Economist John Cochraneof Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about how to take a different approach to the standard policy arguments. Cochrane wants to get away from the stale big government/small government arguments which he likens to a couple who have gotten stuck in a rut making the same ineffective arguments over and over. Cochrane argues for a fresh approach to economic policy including applications to growth, taxes and financial regulation.



 We are listening to Rigoletto here, and it occurs that the theme of 90% of the operas before 1870 are with Trump like rich men taking advantage of poor beautiful women before receiving their retribution. Would that be correct?

Stefanie Harvey replies: 

This is also a war rallying theme. I just finished SPQR: A History of Ancient Rome by Mary Beard. Many a campaign began after a rape or attempted rape of an elite or community of women.

Short book review: a bit of slog due to excessive detail but wonderful humor and a light tone in writing.



 Many full moons ago Mr. Bollinger asked me if I could find the source for the remark about Joplin that I quoted. I don't remember what I wrote then, but the gist of it was that Joplin was the only one of the ragtime players who had the guts to write down what he had improvised the night before on the piano. I still have not found the source of the remark; but I have no doubt that it was true.

I also have no doubt that we are not going to be seeing Bollinger and Joplin's kind of candor about methods of thinking - where "public opinion" is concerned. The current response rate for telephone polling is - allegedly - 9%. That is the number the Pew people disclosed about their own polling in 2012; and it is now taken as current gospel. In 1997 when the Pew people also disclosed their response rate, the number was 37%. It is likely that the actual response rate now is roughly 1 in 20; but that is a mere guess. The actual polling may be even less.

But, have no fear, the Pew people assure us that their numbers are still good because the results track with the data acquired by the government in its census and other surveys, where the response rate is unquestionably high enough to be accurate. "Pew Research Center devotes considerable effort to ensuring that our surveys are representative of the general population. For individual surveys, this involves making numerous callbacks over several days in order to maximize the chances of reaching respondents and making sure that an appropriate share of our sample are interviewed on cellphones. We carefully weight our surveys to match the general population demographically."

Thurston Trowel III replies: 

What is your point on low response rate?

A low response rate merely means the polling outfit has to make more phone calls to get the requisite representative sample.

It does not reflect negatively on the scientific accuracy of a poll in any way, if this is what you were suggesting. No idea if that is the case but it seemed to be where you were going and apologies if wrong.

As to Joplin writing down improvised ideas, musicians everywhere for decades have recorded sketches as part of the creative process of developing ideas. I do this all the time. Whether one does so on paper, magnetic tape, hard drive or cell phone is largely irrelevant, and a matter of personal preference and convenience.

Stefan Jovanovich retorts: 

Dear Third Shovel: Joplin had the courage to share his method at a time when the people playing ragtime were selling it as magic. They were not sharing the tricks of their trade. Mr. Bollinger remains exceptional in much the same way. The solution you offer– the polling people just have to make more calls - sounds logical until you ask the question the broker posed to his client. Who are the new people going to be? The reliability of opinion polling has been founded on the assumption that the sample will be homogeneously responsive, that the response rates will not vary no matter what the respondents answers are. But that is no longer the case. Making greater effort becomes a statistical frontal assault; the added costs gain no ground. Then there is the further issue of outright bias. How do you know what the proper weighting should be if you choose to ignore the only data that you have– the results of the most recent elections before this one? 



 Like any relationship, correlations have life cycles which can vary over time; increasing, decreasing, or even disappearing, depending on the steady or changing market environment. There was a time when there was a positive relationship between yield movements and stock returns, especially when the 10 year treasury yield was below 5%. Rising rates were historically associated with rising stock prices; but when the 10 year yield was above 5% a negative relationship between yield movements and stock returns existed. Since '09 the S&P rallied from 666 to near 2200 while 10 year rates fell from ~4% down to ~1.3 due to central bank monetary policies. However, the Fed's actions may result in changing the correlation between treasuries and equities once again, ushering in a secular regime change where rates are rising and are positively correlated with rising equity returns.



 This is a fascinating book of 1848 by an exacting character who writes like Galton: "Eight Years' Wanderings in Ceylon" by Sir Samuel White Baker





 The cistern crouched beneath the creaking windmill in a slight breeze. It was a hot day out from Slab City, CA. An ancient lock prevented my refreshment.

An old desert lock is a cue to look for a 'dummy' latch because who keeps the key so long? The strap hinge on the cistern cover was bolted such that its nuts hand screwed loose!

The concrete cistern itself measured 10'x10' and who knows how deep it falls into the ground?

I lifted the 100-pound steel cover on its rusty hinge with a full body effort and peered down… The inside was a dripping cement cell, measuring 10'x10' and 6' deep with two feet of water at the bottom.

A pink stick – no, a 4.5' racer snake! had crawled in a crack of the cistern top and rested with its head on a protruding inch of rebar, while the rest of its slender body dangled underwater. The lifeless eyes were enlarged blue marbles like a Halloween mask. The thirsty serpent could have been there for weeks, as even October is a thirsty month.

I dropped a pebble and it sprang to life, swimming the perimeter of the cell again and again.

How to get it out, so I could go in for a drink and dunk? I talked to the snake bouncing my voice off the water for a few minutes, and as it calmed, reached and lowered a branch under its head and gently lifted it out onto the concrete top. Snakes don't have eyelids to blink; this one stared for a few seconds, and then slithered across the concrete top onto an overhanging limb, stretched out and air dried.

I jumped into the cement tank and splashed like a gleeful kid, and drank heartily.

In a few minutes, it was time to go and I peered up at the head high opening. Uh oh. I reached up but couldn't drag myself out the tank. So, I sat back down in the water and looked up through the 3' square at the snake on the branch.

We had traded positions. I yelled but received only echoes.

The significant thing at the moment that distinguished me from the snake was my shorts. I removed and stuffed them into a 3" opening in a side wall for a drain pipe that went off underground, and limited the water's rise.

In twenty minutes the water level climbed a half-inch. I could float to the ceiling in 32 hours, as long as the breeze kept up.

The water dripped from the hard-wearing windmill above into the cistern top.

The snake slithered off, and I was alone for the longest time. As the water rose, my eyes adapted to the dim and I spotted the rebar that had been the snake's hard pillow for so many days. I stood, and stuck one boot on it, and with the ceiling opening near its side wall, could boost myself up and out the watery crypt.

But the first step was to string an 8' length of abandoned hose in one corner of the cistern up from the water to the crack in the top that the snake had entered, and out into the sunlight.

Then with a big effort I leaped out.

Now I sip the memories of my escape from the cistern.



Joseph Garber Stadium

The best one-wall handball player in the world in 1940 was Joe Garber. He was drafted an Ace, and got killed flying in a Boeing B-17G over Munich on 21/7/1944. The Brighton Beach Baths, now Russian condos, built a handball stadium holding 500 in his honor. Artie Niederhoffer, my father, and I watched the handball sweeps every weekend from a perch in fourth tier. To add to excitement, Artie always sat next to Bookie, and they played a game of checkers as they watched the handball, often the notorious Uncle Howie teamed up with Hershkowitz against the runner Moey Orenstein and Mortie Alexander, who could kill the ball from 20 feet behind the long line. Bookie took bets on all the games, at 11-10. Pick em on Moey. Or Eisenberg, +3 against the Milkman. (That game was rained out, but that's another story.) It was hot in the concrete stadium and if the score got to 18-11 or some such in a game Bookie would pay out all the bets on the winning teams so that the winners could get a swim in the adjacent public ocean. Shades of Paddy Power paying out all the bets on the Cattle Trader.

Stefan Jovanovich comments:

Political bets are not really like athletic contests since there is no running tally. The polls issued throughout the election campaigns used to be a kind of pseudo-line score so you could use some of the techniques that the Brighton Beach bookies used for in-game sport betting. But that is now gone, like the Baths. The public polls are now so thoroughly corrupted (statistically, not morally) that you cannot think you are watching a game progress. Even if Vic had not decided that state polls' collective predictions for the Electoral College were an inappropriate intrusion of politics, I would have abandoned the daily score-keeping. The collapse in sampling that has occurred this year makes the fall-off in TV ratings for the NFL seem moderate by comparison; and there has been a quantum increase in the distortions in pollster's models. Those distortions are partly the result of the sampling problem but they are also from political bias. The models' partisan break-downs are completely inconsistent with anything seen in the actual elections last year and in 2014. The only information out there that is statistically valid are the longitudinal polls like the LA Times/USC poll - where the same people are repeatedly polled. Those continue to show a score that is 13-11, not 18-11. Nate Silver made the smart move over to ESPN just in time.



 Regardless of who wins this election, this market is going to rip to the upside — and I can be quite certain of that without even looking at the numbers, just the very tentative nature of nearly everyone around it. I've smelled this dish cooking before, and so have a lot of folks on this site. I don't know who is going to win this, but I do know that a 500 bln stop (not even flip) in the hemorrhage of balance of payments translates into an instant 3% GDP growth, and the multiplier effect on that puts us at 1965 growth, or even Truman-era growth. I was fortunate, in the 1980s and latter half of the 90s, anyone who showed up on time with their shoes on did pretty well. I had some lucky breaks too, which didn't hurt (and, as I have said repeatedly, and bears repetition for no one's sake other than my own perspective — "Anything that I may have has been given to me.").

But nothing has gone anywhere since the Spring of 2001. It would be wonderful to see growth in double digits, or just robust, 80s-90s style for the morass of all these millennials. People teasingly refer to them as "Snowflakes," but I have proactively and of my own volition gone out of my way in the past since 2007 to get into their heads, to work alongside them — not your typical snowflakes but snowflakes of all varieties. For all the negatives said about these kids (which I do not disagree with!), they are a much harder working, industrious, adaptable and far more pleasant gang than we boomers were. And for exactly them, I hope they get a break here and get the the change they deserve, and the economic growth they can use.

Stefan Martinek writes: 


The whole 2014, maybe the first part of 2015, you mentioned multiple times the issue of liquidity, the risk of a huge crash, structural liquidity problems, ETFs, etc. Do you consider all that is over? I always thought that the trend in equities (from 2009) will take some time to reverse, that there will be some chopping on the top before the next up move. I never tested this, but the chopping for another 1-2 years would look proportional, beautiful, expected… Of course growth will resume at some point. I thought that maybe market needs to take back some easy money generated in the last decade before going forward.

Jack Tierney, the President of the Old Speculator's Club writes in: 

A few observations on this thread.

First, perhaps because of its nature, Dailyspec tends to look for the cause of many social phenomena in financial terms. In our discussions, Mr. Haave suggested "that while the Southern states get more benefits those benefits go predominantly to the minority that votes democratic." Mr. Aiken's thoughts illustrate exactly why: "NY and IL are 'red states' outside of NYC and Chicago, respectively…" I can't speak for NY, but "ethnic demographics" are the key driver Big D majorities in IL…I have no idea how to quantify, or define, the effect of "cultural indices."

Mr. Hauser added a vital insight in suggesting that "many elderly move South in their retirement years" and, by extension, while their benefits add to the states' totals, it does not necessarily translate into democrat votes. I am one of those "expats" and can say with some certainty that we have had a marginal impact.

But several very important issues are either overlooked or avoided to explain why these states remain in the red column. First, and most important, many in the current (and, more than likely, continual regime) have quite boldly and heavy handedly attacked the religious foundations of many individuals in these states…certainly enough to swing the vote.

Second, gun control is no minor issue. Its rare to find a resident in my part of the state who doesn't own both a shotgun and a deer rifle…their purposes, though, are concentrated on bringing down consumable game and/or eliminating non-human varmints. Though many own pistols, their numbers are dwarfed by the many in our larger cities who use them for quite different purposes.

Third is education or, more specifically, the make-up of the curriculum and the content of the mandated text books. Many of today's parents and grandparents are now, after a significant amount of published and broadcast news, aware that they have received a less than adequate education. When school prayer was outlawed they were upset, but, over time, grudgingly came to accept it. However, when the study of Islam was made part of required courses, things became (and remain) a point of relentless debate.

Other points of contention which aren't appreciated outside the immediate area, but which lead many to the red side of the spectrum are the "elite" dictates discouraging, eliminating, or outlawing the Confederate flag, tobacco farming, soft drinks, fried food, salt, and "dipping."

Individually, these may seem to be trivial matters and, in many cases, "settled issues." Big mistake. Taken together, these represent stark examples of big government going well beyond its mandate. It took the Tea Party to underscore this and galvanize the voters…not just here but in other states as well. The current Democrat platform offers them nothing of substance and can do nothing to alter this situation.

Will things change? Sure they will. Despite a growing number of home schoolers and charters, an overwhelming majority of young students remain classroom captives in a system that has essentially replaced much that shaped western civ with new age agitprop.

But there will always be a remnant and as surely as all grand socialist experiments fail, this, too, shall pass.

Andy Aiken responds: 

It's tricky to quantify in toto, but consider a simple variable: married vs. unmarried. There is a stark difference in party ID and voting behavior between the two subgroups, all else being equal.



 The market has been in range mode for quite a while, then one day it breaks out/down into a new range where, in this theory, it will stay for a while. Sub atomic particles have a probability that the particle will be in a certain energy sphere, but not its specific location. In the market, there would be a probability that the price will be in a certain range, but one might not know the exact price. At some point due to energy input of some sort, the particle or price jumps to a different level. The ranges seem to have some regularity as do the jumps.

Peter Grieve writes: 

Very nice– the quantum theory of markets. Particles can also "tunnel" out of boxes which they shouldn't be able to leave under classical theories, and get into other boxes. There may be a market analogy here also.

I took a class from Feynman in my undergradute days (about a million years ago) and he was a powerhouse. He had tremendous intellectual integrity, and was a strong advocate of intellectual discipline. He said something like "the person you least want to fool is yourself, and you are the easiest one for you to fool".



 In every election since 1984 and in 19 of the 22 elections since the Composite Index was introduced in 1923, the S&P 500 Index has been the most reliable gauge of Presidential election results. If the Index on election day is higher than it was three months earlier, the incumbent party retains the White House. 2181 is the magic number; that was the close on August 8th. Back to life not lived through "the news"….

Andy Aiken writes: 

I am also low-news/high-information. I seek out primary sources, e.g. read the academic paper or CBO study instead of a journalism student's usually flawed interpretation of it. As Nietzsche said, "All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not truth." The major media in the US have been speaking power to truth for a long time.



The S&P 500 has been in backwardation continuously since October 17, 2008 as the dividend yield on the S&P 500 has exceeded the risk-free interest rate. Prior to that date, the S&P 500 was always in contango except for a few days in March 2008. I think the backwardation is bullish; Philip Carret said in 1931 in The Art of Speculation that "borrowed money is the lifeblood of speculation", and it is very bullish when "stocks carry themselves."



All these possibilities are quite analogous to those who like to fight the drift in the market. There are so many things that could go wrong. There are so many factors that people don't consider that could cause a big drop. Just in the last 4 days, there was the w.f. wagon, the Chinese trade, the alcoa signal, the Hillary speech. Every day there's some unaccounted for worry. My goodness, that's what the market takes into account, why it is where it is, where people put their money on it, and equilibrate taking into account all the positive and negative factors. That's how it is with the predictive markets. They take account of the turnouts, the prevalence of preference, the changes in votes as the election nears, the states, the coming news, the efforts to bring out the vote. If it gets too far out of line, money comes in to move it to the right direction. It's just like the market, and the reason that the best estimate of the market for the next period is always the drift.



 I tested the old Jewish trader axiom "Sell on Rosh Hashanah and buy back on Yom Kippur?".

Andy Aiken writes:

Historically, returns between the two holidays are negative, but not often enough so to be a reliable calendar trade. Average returns are distorted by 2008.

Year    SPX change (%)
2000    -2.40%
2001    -1.94%
2002    -0.32%
2003    3.76%
2004    -0.92%
2005    -4.06%
2006    1.26%
2007    3.68%
2008    -17.76%
2009    -0.50%
2010    2.43%
2011    0.38%
2012    -2.21%
2013    1.77%
2014    -2.03%
2015    0.31%

% negative      56.3%
average return  -1.16%
median return   -0.41%

A 2004 paper suggests that the negative returns during this period may be due to lower-than-usual volume.



One of the off-the-radar things we watch is the length of time various subsets of options are held. The flip side of that is the turnover rate of those options. Several years ago I put out a white paper on the concept, and about a year ago there was a small WSJ piece. There is evidence; it's not anecdotal.

The general gist is that those who are more conscious of attuning their options positions (i.e. greater turnover) tend to be correct. Conversely, those who are complacent tend to pay for their complacency. Whoever is longest in a position tends to be "wrongest". As of this evening it is the holders of call equity options who are the more complacent.

One beautiful thing about this indicator is that it appears to measure portfolio shifts rather than mere trading shifts. That is, there isn't much fluttering back and forth.

Disclosure: we have been out of our longs for about 2 months (on the strength of other indicators) and we don't ever short equities.



 As Cleese would say, "now for something completely different." And just in time for Halloween. Well certain species of trees and plants have already been used to clean up former landfills and contaminated soil areas but it would be very neat if a way were found to further modify them genetically to make them even more efficient at extracting contaminants ("enhanced phytoremediation"). Time is money and reduced cleanup times for impacted properties can save significant amounts of money!

'Mystery of 'ghost trees' unlocked?:

'Now a San Jose researcher is showing that these "ghosts of the forest" may be more than a biological novelty, perhaps solving a generations-old question. Zane Moore, a doctoral student at UC Davis, analyzed the needles of albino redwood leaves in a lab and found that they contain high levels of the toxic heavy metals nickel, copper and cadmium.

The phantom-like plants, which rarely grow more than 10 feet tall, appear to be drawing away and storing pollution, some of it occurring naturally in the soils — particularly shale soils — and some left from railroads, highways and other man-made sources that otherwise could degrade or kill redwoods.



 The thrill of coming home has never changed.

Homecoming is an annual tradition in the United States. People, towns, and particularly high schools come together, usually in early October, to welcome back alumni and former residents. It is built around a central event, such as a banquet, parade, and, most often, a game of football.

The field lights drew me from deep in the desert where I'd been hiking all day. I stared long and hard and was taken back to my last visit seven years ago at the Blythe, CA high school homecoming. I was a newly fired sub-teacher at the high school – the most treasured by the students and teachers echoed their evaluations – after dismissal for trying to stop a playground war. In California a teacher is expected to stand back and let kids clobber each other.

Why not? I drove toward the field lights. I was curious to discover how the rules of engagement had changed.

The last time, in about 2009, I had sat on the opposing side bleachers to avoid the embarrassment of the kids standing and cheering when I entered the barbed wire perimeter, way out by the cotton and cow pastures, onto the sidelines. It was 90 degrees at 7pm at the kickoff, and the opposing team bench warmers sat after the pledge of allegiance as the kicker teed up the ball. A hissing and chugging behind me drew my attention from the field, as the city insect fogging machine bumped along directly behind the rival team bleacher and fogged them with insecticide. Tackles and guards puked, a cheerleader fell to the ground in convulsions, and hot, dead bugs rained on the visiting families' hair like Briylcream.

By the time the visiting team recovered from the exterminator, they were down 13-0 and never recovered. The Blythe Yellow Jackets won the homecoming.

But now, seven years later, a new stadium had been built with a perimeter chain link fence that prevented the fogging truck from entering. Brawley high school, my new home, was the visiting team. Clear headed, the Wild Cats took the ball to the goal posts every time in the first quarter, holding the Yellow Jackets to zero yardage as the first quarter gun shot. Final score, as Brawley started substituting everyone but the water boy from the bench: Brawley 35 – Blythe 0.

Blythe had lost its cheating edge.

The student body had changed dramatically since I taught in every room on campus for almost ten years. They were overweight, listless, and lacked the usual spark in desert kids' eyes. They were soulless fans.

It was good to leave for my new home.



 It's somewhat relieving to know that one is not an automaton, a psychopath, or possessing low expectations because one is mostly indifferent when trading.

Abstract of study:

Trading experience modulates anterior insula to reduce the endowment effect. Trading experience has been shown to reduce the endowment effect, a decision-making bias that distorts market prices and reduces trade. Understanding the mechanisms underlying how experience changes this bias will provide important insights for developing interventions to improve market efficiency. Using functional magnetic resonance imaging, we show that market experience causes a reduction in right anterior insula activation during selling, which mediates a decrease in the endowment effect. These findings suggest that trading mitigates negative affective responses in the context of selling. People often demand a greater price when selling goods that they own than they would pay to purchase the same goods—a well-known economic bias called the endowment effect. The endowment effect has been found to be muted among experienced traders, but little is known about how trading experience reduces the endowment effect. We show that when selling, experienced traders exhibit lower right anterior insula activity, but no differences in nucleus accumbens or orbitofrontal activation, compared with inexperienced traders. Furthermore, insula activation mediates the effect of experience on the endowment effect. Similar results are obtained for inexperienced traders who are incentivized to gain trading experience. This finding indicates that frequent trading likely mitigates the endowment effect indirectly by modifying negative affective responses in the context of selling. 

There are basic summaries around the uchicago site.



 I have tried to learn from the poker players here, although I don't play myself. When somebody posits "seasonal weakness" (of which there has been precious little this year, except maybe in the last 2 hours), no matter what the supporting data is, my question is, who is the sucker at the table that will continue selling too low every year? A couple of decades ago, it was alleged to be mutual funds that were trying to avoid taxable distributions by dumping shares of companies in which they had losing positions.

anonymous writes: 

I was in Vegas recently, and although I wasn't a sucker, I had the second worst bad beat of my life. I was playing $10-20 NL hold'em at the Bellagio with six rocks (tight players) and a wild Asian woman. I was dealt Jh, Jd. The flop came out Qs, Js, Qd, giving me a nut full house. I raised to $300 and everybody else dropped out except the Asian lady who re-raised $600 which I called.

 The turn card was the Jc giving me quads. Her play all night was such that I made her to definitely have a Queen and either an Ace or a King and that she was betting on a strong set with a big kicker. From her style of play, I also knew she wasn't bluffing and would at least call whatever I bet within reason. I made a hesitant continuation bet of $600 which she promptly answered by going all in. It took me a millisecond to snap call. We turned over our cards showing my Jacks, and her Ad, Qh which gave her a set. I correctly called her hand and noticed that she had only one out that could beat me which was the Qc. Of course the river card was turned over and it was the Qc, and I subsequently lost the pot.

Things like that happen in poker, trading, in life. Since I played the the hand perfectly, there was no self flagellation. One can play a hand of poker perfectly and still lose so no sense getting upset things turn out badly. It's better to dust one's self off and keep playing the game as long as the edge is still there. In the markets, one can make a (perfect) trade with a 98% edge and still have it blow up in your face. In fact, those huge edge blowups seem to be more common than the numbers dictate. For what it's worth, the baddest, bad beat I ever had was getting a nut straight flush where my two cards were the low cards, and my opponent had the top two cards. No way would I ever lay down a straight flush.



 A very interesting article written by Lyft co-founder:

"The Third Transportation Revolution: Lyft’s Vision for the Next Ten Years and Beyond"

What are your thoughts? Any investment ideas in light of this?

One fact mentioned in the article is "The average vehicle is used only 4% of the time and parked the other 96%."

I guess it is tempting to fix this huge inefficiency, but unfortunately the 4% usage time is not arbitrary, probably 90% of people have concurrent usage time: to commute to/from work.

Jim Sogi writes: 

Not only that, but when it is used, only one person is in the car. Better to have a small form factor car.

David Lilienfeld writes: 

I keep thinking about the Segway. Wasn't it supposed to revolutionize transportation too?

Stefanie Harvey writes:

The issue I find with the Segway is battery life and time to become comfortable using it. I have a Ninebot mini Segway pro; it took two rides to get comfortable with it but I almost returned it after the first.

Navigating uneven roads and curbs are also a challenge. Weather is challenging and it's sufficiently heavy that carrying it on/off bus or train is suboptimal (heavier than a commuter bike.)

Jeff Watson writes:

My son and I were early adopters of hoverboards (a mini-Segway clone), a year before they got big. These days we don't ride them any more due to safety concerns, and quality issues. But then again, why would one ride a hoverboard, when one can ride a one wheel. My son and I got a couple of them in summer 2015 and haven't looked back. They will go anywhere, on any terrain, fast, dangerously fast. The boards are well made, fly like the wind, and one can even use them at the beach as long as they are not totally submerged. The battery charge lasts longer than one's legs. One Wheel's are seductively dangerous. My go to board that every day I ride around the neighborhood is still the boosted board. Expensive, but worth every penny.

Vincent Praver writes:

Many of the ideas in the blog post reflect common wisdom in the sector.

A recent presentation from morgan stanley's auto analyst [related link ] covers these ideas well.

Jim Sogi writes: 

I have 150 miles on my electric bike so far and now ride it everywhere under 10 miles. It does 25 mph and most of the roads around here are 25-30 mph so get there almost as fast as a car, and can maneuver in close, park at the door, and be out faster than a car. I can visit 4 places in the time it takes to park. It THE way to go. I put some grocery bags on the back. It has tail lights and headlights. Its great exercise and feels great to be in the out of doors. Mine has electric automatic continuously variable gears by Nuuvinci. I got the custom Moto wood laminate pedals with skateboard grip to ride in slippers. It has a 750W mid drive motor and a big battery.

The small factor electric vehicle is the wave of the future.

Vincent Paver elaborates: 

Three tidal waves of the future, breaking simultaneously:

electric vehicles

autonomous vehicles

shared vehicles

They are highly complementary to each other, empowered by software, and will fundamentally change transportation.

It's a question of when, not if. Will we substantively change in the next decade, or will it take 2 or 3 decades?



 "The Coming Anti-National Revolution" by Robert J. Shiller:

For the past several centuries, the world has experienced a sequence of intellectual revolutions against oppression of one sort or another. These revolutions operate in the minds of humans and are spread – eventually to most of the world – not by war (which tends to involve multiple causes), but by language and communications technology. Ultimately, the ideas they advance – unlike the causes of war – become noncontroversial.

I think the next such revolution, likely sometime in the twenty-first century, will challenge the economic implications of the nation-state. It will focus on the injustice that follows from the fact that, entirely by chance, some are born in poor countries and others in rich countries. As more people work for multinational firms and meet and get to know more people from other countries, our sense of justice is being affected.

Indeed a likely big wave in the comin' decades.  Any further thoughts?

Rocky Humbert writes: 

Shiller may have gotten this 100% backwards. If my perception of the global and popular mood is correct, then the pendulum may be about to start moving in the opposite direction. The Brexit/Trump meme is the instant when the acceleration of the globalist/intellectual elite/HYP is changing sign. (Stefan can elaborate–but I am unaware of any of these so-called revolutions being wholesale wealth transfers…without bullets flying.)

As a footnote, I am surprised that anyone claims to be surprised by the most recent lewd Trump video–it is entirely consistent with the persona that he projects. In my 30 years on Wall Street, I've heard and seen much much worse. Similarly, the Wiki document dump on Hillary's speeches confirmed the perceptions that her detractors have.

Lastly, someone posted an article about the wisdom of crowds and confidence. And that confident observers (as a group) make the best predictions. I have gone on record and remain confident that Trump will be the next president. I do not share Mark Cuban's belief that this will result in a stock market "crash" — but on the edges, none of this is particularly bullish. The most interesting question for me is whether when Trump wins and if the markets get turbulent, will the Fed blink in December? Given the number of HYP's there, and their collective beliefs…

Back to Shiller. The UN will be the first globalist institution to suffer Trumpture. (Trumpture is the rupture of a bubble by Trump. If the NY Post and Drudge pick this up, I will be most pleased.)

HYP=harvard/yale/princeton. For full disclosure, I'm a Yalie.



 What were significant real estate bubbles in history? What were the aftermaths of their popping?

Stefan Jovanovich writes: 

In U.S. History you can start with William Duer and the Ohio Company.

anonymous writes:

The book Manias, Panics and Crashes is good as is the book Devil Take The Hindmost



 Contagion and infections of new groups of susceptibles may work to create a landslide to throw the real estate promoter proud of stiffing thousands out of the race now with favorable impact on stocks, and lessened pressure on centrals to hold off from tapering and hawkish interest rate increase talk before election. Thus, while the hurricane theory that insurance companies will have to sell bonds to cover losses is off the table, the hawks may be let out of their cages.



 We're getting through the first week of October and just starting the post-season. But it wasn't always like that. The World Series was called the October Classic. These days, though, it's getting close to being the November Classic. But it wasn't always like that. These days, one has pitchers who go maybe 100 pitches ("oops, have to make a pitching change"). But it wasn't always like that.

Fifty years ago, on October 6, 1966, in game 2 of the October Classic, the Orioles were playing in Los Angeles against the Dodgers. The match up was Jimmy Palmer, just days away from his 21st birthday, vs Sandy Koufax, the Dodger ace pitcher. Koufax had had a series of seasons pitching that can perhaps best be described as incredible. Not only did he dominate the NL (if not all of baseball—and you had Whitey Ford and Bob Gibson playing at the time) with multiple Triple Crowns, he was also awarded not only the Cy Young but was also the MVP.

Back in 1965, Koufax had established a different reputation—he refused to pitch game 1 of the Series against the Twins (or Twinkies, if you prefer) because it was Yom Kippur. Across America, Jewish mothers who thought a squeeze play was something you did with an orange and that a hit and run was a type of car accident came to know about Sandy Koufax.

Back to 1966. It was Palmer vs Koufax. Palmer's first World Series game. Koufax's last. The Orioles had had just an OK first game, though they won it and I guess in the end that's all that mattered. But in the middle of game 1, the Birds' bullpen kicked into gear, and from the middle of that game through the rest of the Series, the Dodgers did not score a run. I think it still stands as a record. (Cal Ripken's wasn't the first baseball streak in Baltimore.)

Koufax had had another stunning season in 1966. 27 wins (he started 41—find someone with that kind of stamina today!). A 1.73 ERA. No surprise that he received his third Cy Young Award in 1966. (The story goes that in the 1963 World Series, NYY vs LAD, Yogi Berra (NYY catcher and the key to so many NYY pennants and World Series championships) and Maury Wills (Dodger shortstop) were watching Koufax warm up before the game. Berra said to Wills, "I understand how he won 25 games. What I don't understand is how he lost 5." To which Wills responded, "He didn't. We lost them for him." (1963 was Koufax's first CY Young Award, as well as MVP.)

Coming into that second game, it isn't hard to understand that Palmer may have been a bit intimidated. If so, he didn't show it. The game was a pitchers' duel through the 4th. In the 5th, though, Koufax's defense failed him (shades of Maury Wills from three years before). In that inning, the Orioles scored three times, with Dodger center fielder Willie Davis committing three error—in that inning! (The next day, in Baltimore, Davis was spoken of as the 10th Oriole.) Those runs would be all the Orioles needed. Palmer shut the door, becoming the youngest pitcher to throw a complete game shutout in the Series.

Koufax was pulled after the 6th inning, having given up an additional run. Davey Johnson, the O's second baseman, got the last hit off of Koufax. Andy Etchebarren, the O's catcher, was the last player to ever face Koufax. After the Dodgers lost the Series, Koufax hung up his cleats in an effort not to further injure his left elbow, already arthritic. Thirty years old and retired. Six years later, Koufax would be inducted in the Hall of Fame—the youngest such player, and I think either the least or second least number of wins for a pitcher. The induction, though, surprised no one. It had been well earned.

As for Palmer, over the years when he was announcing on radio/tv, he would occasionally talk about that game, one inning at a time, one inning per game announced (at most), ball by ball.

50 years ago today—Sandy Koufax's last game. Back from when pitchers weren't coddled, they started 40 games in a season, and they pitched complete games.



 It's been predicted that wave heights could be significantly above average due to Hurricane Matthew passing our region of the Atlantic Ocean around Thursday of this week. Some have said over 10 feet–perhaps with 30- 40 mph winds. An opportunity for very experienced surfers that does not come that often.

In Palm Beach the favorite spot is near the inlet and it is aligned with and called "Reef Road". Not a lot of public parking there but I imagine a ferry service will evolve to carry local surfers back and forth from this beautiful beach location. It's been said that due to a gap in the Bahamas chain of islands that our area enjoys increased wave amplitudes whenever a storm or hurricane tracks along the Bahamas. I imagine die hard surfers are beginning to monitor all of the technical information available online and start to look at potential treks along I-95 to maximize opportunities.

On another note a photographer in NE Florida near Jacksonville has photographed surfers with over 20 or so years of experience and they look to be a very happy lot. He calls them "Salty Dogs" which is also the name of an old college bar at UF.

Jeff Watson writes: 

Reef Road is very hard to access, as there is virtually no parking and the PB police love to ticket or tow cars parked illegally. I have a friend that lives on the north end of PB and he is very benevolent the few times a decade that we get over for huge swell. There is no place on the East Coast that can handle big waves (Hawaiian size) like Reef Road. It is the premier big wave break in all of Florida, and handles big waves even better than Montauk, NY. Thursday AM, the Surfline forecast is for 10'+ after Matthew has passed by and headed up north, which will be the best time to surf. One can expect that when the storm is parallel to the break that one might see 20'+ waves, but those big conditions will be like a washing machine, totally blown out, almost impossible to surf. I'm trying to put a bug in my wife's head to take the trip over, but the conditions are fluid as nobody has an accurate model of the path. Right now, I'm fixing a ding in my big gun, getting ready for what might be my last time surfing really big waves. To say that I'm stoked would be a very accurate assessment. 

Jim Sogi writes: 

Jeff, catch some good ones for me!

As even Market waves start increasing, it's good to be ready, in shape, and have good equipment. Have good timing by watching the wave sets for a while in advance, and let the daily pattern reveal itself. As Shane Dorian says: "trust your board and ride the wave". It's not good to bail prematurely as that is when you can get hurt. Ride it until the wave has spent its force. That's the safer time to bail or end the ride.



Can anyone point me to research regarding Futures settlement price vs closing price and subsequent returns in a volatile market environment? I would like to see if settlement is more important (due to margin) during periods of high volatility which I foresee over the next few weeks. I'll try some back of the envelope tests over the weekend.

Bill Rafter writes: 

We have tested many possible prices for importance with regard to generating signals (e.g. momentum, sentiment, etc.). In reality the only price you can guarantee for testing execution in retrospect is the settlement (subject to slippage), followed by the opening (greater slippage). But for signal-generating capability we tested highs, lows, midranges, etc. We also tested subsets, such as the ability of using lows to indicate up/down, vs. highs to indicate up/down. Nothing beats the settlement. Specific to your question, if the settlement differs from the last sale, take the settlement. "There's a reason why it is the settlement."

With regard to stocks we also tried VWAP. Same conclusion.

We also tested to see if the futures settlement influenced cash, or the opposite. In virtually all cases the futures dictated to cash. That conclusion suggests that cash can be manipulated by some clever futures transactions, which of course has happened. Certain markets were famous for it (eggs comes to mind). Anyone who has ever manipulated a market will tell you that you wait until the end of the day and pick your spots (i.e. low liquidity).

If however you are doing some "fuzzy" work, you might explore using something other than the settlement or close. That is, suppose you just needed a qualification as to whether a market was "up" or "down", without regard to actual changes. Consider the following: "The market was up all day, but closed slightly lower." Was it up or down and how do you code for that? This is not esoteric BS; it makes a difference.

The above is the benefit of our own testing. I am not aware of any academic work in this area. It seems too mundane a topic. A cash v. futures settlement thesis might be interesting but the conclusion would be anti-flexion and we know how that would be perceived.

Larry Williams writes: 

Hold on…

In reality data providers have something they call the closing price. That's what we get when the market closes and that stays in our data until about an hour and a half, sometimes two hours, after the markets open in the afternoon when they change the closing price to the settlement price.

You have to be very careful because there can be a wide difference between the closing price and the settlement price. Unfortunately we don't have the settlement price until after the market is open when we have already begun trading. So most trading systems are developed using the official settlement price because that's what is in the historic data but for signal tonight after the market closed we don't get the settlement price until after trading has begun.

Whoever said the life of a trader is an easy one did not look into closing prices.



I remember seeing some videos of the rough and tumble pit traders from Brooklyn back in the day. They had no college degrees, no charts. They got in there and what they watched was price levels and order flow. They had a little pad with some price levels. That was their strategy for the day. The strategy seems good in the current range this last couple weeks.



 I saw Queen of Katwe this weekend and highly recommend it as one of the best movies of the year. Lupita Nyongo will get awards. The movie is about a young girl living in the slums of Kampala Uganda who becomes a chess master. It is a feel good movie. It's actually filmed in the slums of Kampala and captures the feeling of the city, with its hustle and crowded traffic and people hawking wares in the streets between cars.

I'm not sure if our resident Grandmaster is reading this and I hope he comments on the movie. In one scene her coach realizes that she can see 8 moves ahead. Chess is complex, but compared to life, it is simple. Life can be simplified by realizing that the most important thing is to love and be loved by others.

Even though she did not learn to read, she was able to master chess. I'm always fascinated by the pit traders, rough tumble, uneducated guys making good money trading. Trading basically is simple. When you learn it it becomes complex. When you get better at it, like many things one masters, it becomes simple again.



Night Time Surgery 'Doubles Death Risk':

People who undergo surgery at night are twice as likely to die as those operated on during regular daytime hours, research suggests.

The findings, being presented at a conference, also suggest a higher than usual risk of death among those who have surgery later in the day and in the early evening. 30-Day Hospital Survival Rates The results are based on studying 30-day survival rates for patients at a hospital in Montreal, Canada. Between April 2010 and March 2015, the researchers were able to compile a database of 41,716 emergency and routine operations carried out on 33,942 patients.

The operations were classified as taking place either in the daytime between 7.30 am and 3.29 pm; during the evening between 3.30 pm and 11.29 pm; or at night between 11.30 pm and 7.29 am. The researchers found that, after making allowances for assessment of patients' overall health and other factors such as age, those patients operated on in the night were 2.17 times more likely to die than those operated on during regular daytime working hours. Also, patients operated on late in the day were 1.43 times more likely to die than those operated on during regular daytime working hours.

Arch Stanton notes:

The article says the study made “allowances for assessment of patients’
overall health,” but in my experience hospitals undertake surgery at
night only if it’s urgent. This seems like a huge bias.



 My friend sent me this article on how to survive a rattlesnake attack.

It's disinformation, poorly and ignorantly written, but I appreciate the thought.

The best defense I used in rattlesnake territory was on the Pacific Crest Trail where they were coming out of the cracks in the desert hourly. 4' long fat rattlers. I had a pair of loose pants and passed an orange orchard. I filled the pants w/ oranges to the knees, tying shut the cuffs. Then I walked confidently, enjoying the orange juice until they were gone and I was out of the territory. 



 Like the German fairy tale Hansel and Gretel, the financial markets often have clues you can follow to safety and profits.

Sometimes though the clues that you intended to use, or thought would be there, are not. The question with DB is not if there will be a Lehman moment because there surely will not be. Rather, the consideration should be of the vicious cycle of bad politics leading to bad economics.

The key questions that should be asked include some of the following: First, to what extent does this weaken Chancellor Merkel's position in front of next year's German elections? Second, what does this mean for ECB chief Draghi and easy money which is wildly unpopular in Germany already? Third, what does this mean for Italian banks?

Surely, if Germany bails out DB, which is a given, how can the Germans ask Italians to play by different rules? Fourth, what does this mean for European banking union? Fifth, how might this influence German growth which has been the locomotive for Europe? Sixth, if Europe can't grow with a weaker Euro, low energy prices, and record low rates what does it take?


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