Daily Speculations

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The Daily Spec:

Observations by Victor Niederhoffer and Assorted Operatives (2004)


Presentations of the Dignitaries 

Feb. 26, 2004 -- Prof. Pennington and Mr. Hillman take questions from Vic and colleagues. (Photo by D. Smith)

Mr. Singal and Grandmaster Davies describe scenarios. (Photo by D. Smith)


03/03/2004 14:20:17
Pleasant Divergences:

As the Keech cult finds one bearish prediction after another nugatory and infirmed , they move to constantly new possibilities. Whereas before a weak economy was the problem, now it's the strong economy. Whereas before a weak dollar was dangerous, now it's the strong dollar because of bad earnings reports (as if this isn't already discounted). Now Drobny, apparently the Greenwich fundist who follows Elliott Wave, who is proud of how he noted the 1987 similarities to 1929 and induced Druckenmiller to become bearish based thereupon (after the fact) and Moore follows, as well as the second-biggest fund Man follows, is bearish because Hong Kong is down from 13900 to 13400 over last few days. Looking at Asian markets' performance year to date one finds Japan (+7%), Hong Kong (+7%), China ( +11%), Taiwan (+20), South Korea (+12), Australia (+2), New Zealand (+2),  Pakistan (+8), Indonesia (+10), Singapore (+6), Malaysia (+10).

Indeed there is just one Asian market down for the year. I cant say its name, but it's down 10%, and cannibals ate the survivor of a plane crash while I was long there, and the cost of a coke there was a nickel when it got me the last time. How pleasant to see it bringing up the rear, even if the Drobny bearish case seems more contrived than a ship in a bottle.


03/01/2004 10:25:45
Good to See

It is good to see so many real profits from commodity funds emerging at recent local highs in commodities, so reminiscent of the hydra that grew seven heads whenever one was cut off. The total returns from commodities, as the Specs have calculated, was about 1.5% a year during the last century, coming to some 1/100th as much as stocks during that period. Julian Simon, in State of Humanity, has the reasons and the Specs in their articles provided the CRB statistics to put it in perspective. The dynamics of hateful-of-capitalism types, who have been predicting Dow 500 for so many years, is an interesting psychology study as they move like magnetic balls of similar poles from one failed hypothesis and money-making promotion gone awry to another, similar to the Keech cult described by Festinger and the Specs.


 03/01/2004 11:19:34
Toying with a Systems Model of Information:  

Many have seen my automatic toilet seat, which uses solar cells, op amps, transistors, and valves to open and close a toilet seat without touching. How could I not apply this to markets? I have been toying with a systems approach to information.

A fact comes in. If it's falsified, it's a distortion. If it goes to a positive amplifier and then comes back to negative input it's equilibrated. If a fiction comes in and goes to the positive input it's a distortion. If no facts are transmitted it's a secret. If facts are transmitted to the positive input, it's a disclosure. Depending on the feedback to the negative or positive input it's amplified or attenuated.

A related model appears in a paper by Myrdene Anderson bout deception as practiced by the Lapps,  in Deception: Perspectives on Human and Non-Human Deceit, edited by Robert W Mitchell. Such an analysis of information transmitted to markets puts many things in perspective and the amount of energy that's dissipated in such a system could be measured by the price change involved.

Feb. 23, 2004 15:20
From: Tom Downing  

Jan 1996 - Feb 2004
Occurrences    66
Chances    2047

Empirical Probability    3.22%
Empirical Odds  31.0
Freq Per Year    8.1

(happens about half as much as you'd expect assuming .5 probability of up per day)

Record is 267 days from 7/8/1996 thru 8/25/1997

Current streak of days without 4 consecutive down days is 169

Binomial probability of 0 successes in 169 trials with p=.0625 is 1.83293E-05 (odds 54557 to 1)

Feb. 9, 2004 23:59

Monday's hi lo open close:
1143.80 1138,00 1141.5 1139.9
is a record. The lowest range since 1230:
1108.9 1105.00 1107.7 1107.7.

It is beautiful to contemplate the order by which the buyer and sellers are so much in agreement that the price fluctuates so little during a day. And it is interesting to speculate what would happen if all days were so mild in their fluctuations. How soon the wheels of commerce would squeak, and how many brokers and floor traders would be out of a job because there was no public to do the wrong thing, to churn, to overtrade, to sell on fear and buy on hope. It is appropriate to count what happens when a range is so low so far away from a holiday, and to consider whether there are any strategies that work better on the days following. In so doing, we may take comfort in the knowledge that death is swift, and relatively painless to those who cease to marvel and count. --Vic

Friday, Jan. 23, 2004 22:30
Long Run

As of Thursday evening, the market had not been down two days in a row since Dec. 3. That's 31 trading days, a record. On only 13 occasions has the market failed to go down twice in a row within 21 to 30 trading days (30 is the previous record.)

Such a run, and all similar long runs without two consecutive down days, were highly bearish to the next instance of a "success" -- i.e., two down days -- with Z on the order of -2 and expectations of -12% and a four-day duration being the norm.

But no sooner had we written about this long run than the market actually dropped two in a row. The run was only a 3-in-10,000 shot by chance. But now the streak is broken.

And what is forthcoming when a long run without two consecutive declines is broken? That's what an analysis of survival statistics can tell.

Read a discussion of Poisson distributions in connection with the above-mentioned record>>>

Jan. 18, 2004
Pittsburgh Phil

Racing Maxims of "Pittsburgh Phil," available from the Gamblers Book Club, soothes the spirit and expands the speculative firmament much as a reading of Cervantes or O'Brian does for me. Opening up the copy I keep by the bed, I read: "I have seen a good game horse striving with all his heart, fighting his rider to allow him to push into a space that only his trained eye told him gave him a chance for victory. I have seen these horses plough between two other horses and spread them apart as a giant football rusher will do with only the goal on his mind. Gold Heels was that kind of a horse." Yes, and certain markets are that kind of horse. Would one such market be the kind that continues bouncing back from substantial lows on the day by the close? This could be tested well by the ratio of close to low on a day as a time series. Is it bullish for the opening and then does the horse tire the next day at the close only to win the next time out?

Regrettably, Phil was not partial to romance in the speculative arena. "Between races a man has enough to do without replying to the questions asked by her. This has been of such importance in my opinion that it has only been upon rare occasions and then only in Saratoga that I have asked even my mother to accompany me. Upon such days the card showed to me that there was little chance for speculation and I would therefore be free to devote my time otherwise." Might I suggest that we find some very quiet days (the days before the end of the year in stocks comes to mind) and reserve these for the sexiest significant other we know to enter the speculative fray with?

"You cannot be a successful horse player if you are going to get the worst of the price all the time." I feel the same way about market orders and stop orders and use them less than one-thousandth of the time.

"The resistance of the wind is very great in a horse race and it is correspondingly great when  acting as a propeller. Wind and atmosphere have considerable effect on horses that are troubled in their respiratory organs." Are retail stocks affected more by the weather than others?

"Look for improvement of mares in the fall of the year. They train better and are more consistent." I find that I look for improvement in December when my stock market horses have been running well in the first 11 months of the year, the predictive yearly regression equation of same having an r2 of some 0.6 for the last 20 years.

"A horse that is not contented in his stable cannot take on flesh and be happy." The one thing I dislike the most in my operation is disgruntlement and argumentation. During the 30 years I have been mainly in the speculative business I have only heard two or three arguments and raised voices, and shortly thereafter I have relieved the offending party of his accoutrements.

January 2004:
Sentimental Readings:

Vic delves into recent academic offerings on the causes of crashes and investor sentiment.

January 2004:
No Surprise

It Is Not Surprising that Leon Levy and my former friend George Soros were great comrades who both served by proxy on the board of the Metropolitan Museum of Art and gave hundreds of millions there. A very Sorosian anecdote: De Montebillo, president of the museum, said he wanted to name the  new archaeology wing there after the Levys "in perpetuity."

"Very good," Leon answered. "How long is perpetuity?"

"50 years."

"Make it 75 and you got a deal."

The wing is so named.

I had an similar exchange with Soros. "George," I said. "Look. Dan and I want you to join us on these investments on exactly the same terms as we get in on, with absolutely no promotion."

"Great. I'm in with you," he said. "But exactly how much is no promotion?" -- Vic (January 2004)

Jan. 12, 2004:
Archaeology and Markets, a Sorely Neglected Topic.

On a dig, archaeologists record the exact spot where an object is found, using the three dimensions of longitude, latitude and depth measurements, in order to consider their association with other objects and the layers where they are found. Astaghfaru'llah! Why have we not considered the horizontal relations of markets when we predict? Shall we rank stock, bonds, dollar, and oil on a day, and look at the different serial correlations and intercorrelations of a predictive nature to take account of the horizontal layers? I must take out the back of the envelope again and see if a few useful artifacts can be found.

Start by considering a report by Brian Fagan with a discussion of space-context. Archaeologists on a dig record the exact spot where an object is found, producing the latitude, longitude and depth measurements that define a point uniquely. "Space is important to archaeologists because it enables them to determine the distances between different objects or features, or between entire settlements, or settlements and key vegetational zones and landmarks. Space studies in archaeology depend on another fundamental law. the law of association, i.e., the horizontal relations between artifacts and other archaeological finds or results of human activity. "Finds are said to be associated with one another, or with occupation layers, in a site when they are deemed to be contemporary with one another. This is directly tied to the concept of context." Through the recording of association, archaeologists place things in context so that one can infer behavioral references.  Ha...astaghfaru'llah. Why have we not considered the horizontal relations of markets when we predict? Shall we rank stock, bonds, dollar, and oil on a day, and look at the different serial correlations and intercorrelations of a predictive nature to take account of the horizontal layers? I must take out the back of the envelope again and see if a few useful artifacts can be found.

The study of archaeology and the stock market (only 42,000 references on google) turns up some other interesting things including the statement that archaeological artifacts have appreciated more than the stock market, and the UCLA professor's 2002 certainty from physics and ancient earth quake data that 2003 would witness a major crash.... But nothing more interesting than the life of Leon Levy, who died at 77 on April 7, 2003. He gave hundreds of millions for archaeology and likened finding new stocks "to the delicious thrill of finding something that confounds the conventional wisdom." He bought Chicago and North Western, as did Ben Heineman on an archeological search for the pieces that would be worth many time more than the site seemed to hold and made hundreds of millions there. Somehow he got out of stocks in 1999 and bought eurodollars and multiplied his wealth 16-fold in that. But what I find most archaeological is that his memory was very selective  He once "forgot his wife at a party , but could remember the price of every bond he ever bought." Reminds me that almost all the checker players i knew were divorced or not married. Their games and manuscript always made them forget the wives. Tom Wiswell used to come to office, look around four times, touch his hat and say: "Vic, if only I had married a girl like Susan. That's the biggest mistake of my life. But then again, I might not have written 25 books if I had."

Forgetting the wife is a classic. Reminds me of woman who came up to Soros. "How are the kids. And any more helicopter skiing? Susan treating you well?" Etc.... "You don't remember me, do you?"

"Well no, in all candor."

"I was your first wife."

J.T., a regional broker friend, writes:
Through my many years of college I at one time was a geology major and while trying to get the GPA up to acceptable levels to transfer had a great professor at a community college. We did a lab that consisted of a dig "no dino bones" Civil war artifacts instead. The horizontal and the vertical relationships were really important for the "data" gathered and the dig because just like doing a trade you can only do it "once." No dress rehearsal! She stressed that once you start digging then you are disrupting evidence and it could be detrimental. Same in trading. The other thing I remember was that we had to dig square holes, not round ones. The purpose of this was to make it easier to map with a grid system. To keep the thread going I did get the GPA up and transferred eventually to Virginia Tech where I took a course in Geomorphology. I was introduced into Stratigraphy. The same emphasis on horizontal and vertical relationships was present in dealing with soil strata studies.

I ended up with a degree in History (Historical Method is highly insightful in trading) because I could graduate a semester early and had already spent eight years in college.

Jan. 7, 2004:
We Get It Right

Every Once in Awhile, one gets it right. We said at the start of 2003 that all delta-neutral investments and funds-of-funds based thereupon would converge to a Sharpe ratio of -90. Also, that the contribution these delta-neutrals would make to the market would be in the trillions of dollars, and would dwarf the temporary superior returns they made in 2001 and 2002, and also that all the momentum traders, large short-sellers and users of systems based on buying the academic anomalies like the earnings surprises would lead to disastrous results considerably worse than random this year. Also that high fees, the regression phenomenon, commissions and bid-asked spreads would add to the grind and hasten the convergence to Sharpe -100 -- let's say an implicit -90% relative to the market over the next five years with a standard deviation of 1%. 

Now the numbers are out, and our prediction has held true. Here a link to a status report, forwarded to us by a reader, on some vol funds over the course of 2002 and 2003:

"The Chair's and Mr. E's prediction so far are bearing fruit," observed our correspondent. "I wonder if converts are next. I know that similar stories about stat arb abound."

Jan. 6, 2004:

A study of the crash of the Viennese stock market in 1873 surrounding a very successful world's fair and the growth of atavistic sentiments like those of Greenberg, Prechter, Abelson, Buffet, Soros et al. has led me to the paper "Railroadization as Schumpeter's Standard Example." by Exben Sloth Anderson. He has a nice discussion of growth of a company in terms of the carrying path of the industry.

The standard equation a lotka verhulst curve can be found in any good book on ecology and leads to a growth equation

n(t+1)= n(t) + r n(t) ( 1-n(t)/k)

The last expression in parentheses gets progressively lower as n(t) comes near to k, leading to a lower growth rate that asymptotically approaches k in the continuous case or that chaotically fluctuates around k in discrete case.

For example if n(t) = 10% of k then the last factor is 90%. but if n(t) is 80% of k then the last factor is 20% and the growth rate is reduced accordingly.

"With this interpretation each established railroad unit may be seen as a starting point for further railroad construction. The effects of the pioneering railroad construction on further growth is only dependent on the potency of spread. n. But as the established railroad miles increase, the distance to the carrying capacity, k becomes smaller. This means that the effect on further growth of an established railroad unit becomes smaller and smaller since it is proportionate to the difference between k and n. 

In the early stages of the railroad diffusion, selection favors the fast action and spread, i.e. pairs of entrepreneurs and financiers able to provide high r values. This expansion is normally related to financial vulnerability. Later, when the railroad system is well developed, fastness is dangerous and does not lead to any results. What is needed is the fine turning which may give a lead vis-a-vis the competitors or which may marginally move the k frontier."

To what extent can the growth of IBM and Microsoft be understood within this framework? And, more generally, is there any profitable investment strategy related to the stages that companies are in relative to their own growth and the industries growth vis-a-vis the time to buy, and management decision-making?

When I visited Japan in 1993, they had seen a decline in the number of coffee shops by some 95% over the previous 10 years. How long will it be before the k limits such companies as Starbucks and will the growth rate of sales provide the signal? -- Vic

Jan. 6, 2004:
The Economics of Location.  

In the old days, in the Moslem lands, grand viziers and sultans granted licenses to open stores of the same kind in the same district. I notice the same clustering in New York -- lighting stores, for example, on the Bowery. The usual explanation is based on the economics of information. It's less costly for consumers to search, and less costly for the producers to keep up with technological change and hiring of proficient workers. Externalities also play a part with the traffic from big department stores spilling over to others in the same district, including related services like banks. The tendency to clustering and high competition would seem to be opposite from the tendency of animal species to carve out niches where they don't have to compete for the same resources, the classic example being the different kinds of growth versus stability strategies of the plants in a rain forest, and the territoriality of lions and other carnivores. To what extent are new issues in similar fields benefited by the success or lack of the predecessor? Do companies with the same alphabetical first letters or similar beginnings like "gen-" tend to perform with predictable leads and lags? Are innovations which change the traffic flow and information patterns for traditional stores especially detrimental to same? These are some of the thoughts engendered by a recent trip to Istanbul. -- Vic  (Jan. 6, 2004) More>>>

Jan. 5, 2004:
The Dangers of Stagnation.

In the 17th century, one Hezarfen Ahmet Celebi jumped from Istanbul's Galata Tower and flew across the Bosporus with a handmade set of wings, surpassing the much later feat of the Wright brothers by a significant distance. The Sultan, watching the flight from his palace, was ready to reward the inventor handsomely. But the top religious official advised him not to do so. "If you call attention to this man, people will start saying that you, the Sultan, cannot fly, and they will disrespect you," the religious man said. The Sultan was swayed by the argument. He summoned Celebi, gave him a reward, then exiled him to Damascus -- with secret orders to have him murdered on the way. After Mr. Celebi's demise, the Sultanate remained stable for some 300 more years. But when Turkey started trying to catch up with Western technology in the 19th century, it was too late the phalarope. European history might have been very different if the Ottoman military had used Mr. Celebi's remarkable invention during the siege of Vienna in 1683. As it was, the Viennese repelled the Turks. The retreat from Vienna marked the high-water point of the Ottoman empire. Vienna experienced its own revulsion toward technology in the 19th century, when aristocratic landholders with their vast farm estates resisted industrialization. As a result, the Viennese stock market crashed in 1873. As a result, Catherine Dean writes in Klimt, her excellent history of the Viennese painter, "The middle classes lost any say they had previously had in political affairs and, when the strident demands of the working classes brought about the formation of the Christian Social Democrats and the Socialists, the middle classes turned their attention to art, music and literature instead."  The Specs, of course, are second to none in their love for art, music and literature. Yet there is no end to the mischief possible when creative people stop pressing for the freedom to pursue happiness through economic choice. -- Laurel (1/5/4) More>>>

For Daily Spec observations from 2003, click here