Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner


April 15-30, 2006


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Predator-Prey Models, by Henry Carstens

We all know about ever-changing-cycles, what wasn't clear to me until yesterday, was the implied notion of 'continuous improvement' in the cycles.

A model:

Assume a predator - prey model. Assume the market is made up solely of mechanical trading systems. Assume that every day new trading systems are injected into the market and old, failing ones removed. Assume that the majority of the new trading systems are incrementally better than prior population (some are better, some worse but as a whole they are just a bit better)

What happens? At each cycle, some prey are removed from the game At each cycle, some predators become prey. At each cycle, old predators continue, but as a whole w/ reduced edge vs the young predators

Who doesn't survive? The fixed predator as he eventually succumbs to the continuous improvement of the new predator systems

Who does survive? No one. But it's the wrong question.

Who thrives? to be continued...

What does volatility look like under Kurzweil's law of accelerating change? to be continued...

What is so striking about this is the extent to which the model mirrors the circle of life...

John Kuhn responds:

I like this post; very interesting and crisply put. What is in the "cycle of life", though less emphasized in this post, is that in, say, the African plains the prey survive by sheer numbers. In systems' use, perhaps the most beneficial system to the overall market "system" is one in which the predator feeds very slowly and the overall population of prey, of protein availability, continues to expand. That predator seems to be the broker interjected into all trades in the form of the commish/spread vigorish.

The use of individual "trading systems" must be fairly limited (in a vast market they'd employ different feeding styles; one a falcon, another a basking shark, still another a shrimp-the fingertrader or crumb seeker) Setting aside for now the highly sophisticated systems of some of my genius friends, just in the daily financial papers there are so many systems for sale - with many sub menus or systems ala omnitrader or of the betty crocker variety ala Tradestation where you add an even higher percentage of your own ingredients albeit all from off the "supermarket shelf" of technicals, enhancing pleasure and pride of ownership. The more adept or fortunate can escape predation longer perhaps, even prey on others for a time; all the while tugging along the remora of vig which aims to feed but not to kill.

One extremely effective predator avoidance adaptation seems to be to just remain absolutely motionless for a very long period of time. Another dominant technique is the use of other peoples' flesh as bait. If one snares a big one, one takes a % of the win. If not, well.. one hopes one's not used up the last sacrificial goat.

One point you make is particularly intriguing; continuous improvement: The last several years' huge inflows into hedge funds suggests folks who may normally be considered as "prey" are looking at success of the predators and throwing their "protein" at them willingly to vastly expand their class. One thing the system perhaps can't tolerate quite so well would be an unnatural bloom of predators versus the prey population. In a natural cycle, this could entrain a gradual starvation based die-off of the predator classes.

A Lesson from Dr. Philip McDonnell: Robustness of Counting Studies

Suppose we have performed a study of some methodology for the last 1000 days of trading and found that it produces an expected return of r with a standard deviation of s at the 5% significance level. What do we really know and how much confidence can we have in our results?

First, the significance level implies that the result could have arisen through chance only 5% of the time. That means if we did 20 significant studies we would expect that 19 would be valid and one would be the result of a random data aberration. 95% of the time the study will have validity, 5% it will not. So if you want perfect guaranteed returns consider T-bills not statistics. I also hear that Elliot Wave, astrology and Gann work perfectly as well but haven't tried them.

If you've decided that 95% confidence is good enough for you then the next question is how to test your study for robustness. One way is to break the data sample into different time periods. If the study worked in an older period and in a more recent period one can have a higher confidence in it.

By the same token we can look at the variance of two different periods. If the variance is changing then we may have a problem called heteroskedasticity (simply means different variances). An F statistic can be calculated to tell us if the data has a significantly different variance in two different periods.

Markets often exhibit non-stationary variance and that is a fact which must be recognized. However our choice of model can also be the cause of some of the heteroskedasticity. For example with long term data choosing a simple linear model without detrending can result in serious heteroskedasticity due solely to the wrong model. Using a log transform minimizes the problem because it yields a better fit of the long term compounded returns of the market.

Another common syndrome is autocorrelation in the residuals or in the trading results. One can test for this with a simple autocorrelation of the residuals or use a Box Jenkins statistic. If present it usually means there is a missing variable which should be included in the model if you only knew what it was. One can explicitly include a variable for the last residual or alternatively use a Kalman Filter to do the same thing.

Classical non-parametric tests can be used if the underlying distribution is non-normal. Examples include Mann-Whitney, Spearman rank correlation, Chi Squared, ANOVA and simple binomial tests. Robust testing using bootstrap techniques can also give us confidence intervals and p values irrespective of the underlying distribution.

Dr. Kim Zussman responds:

I think there's a question of Epistemology.

If you are interested in predicting what MSFT does after a big jump in volume, you can look at prior examples to see if a significant pattern exists. But what priors to choose? Does what happened with MSFT the company, over the period in which it developed personal computing for everyday people, explain the early stock returns? Is this same revolution happening now, and if not can you extrapolate from the revolutionary period?

One should have the same concerns about entire markets: i.e., how pertinent today is what happened to the SP500 in the 1990s? What about 3/2000-3/2003?

One way to address this is to assume that the recent past is more relevant than distant (ask all the guys who think a 5% drop is the first part of 1929 revisited). This method can also help defeat the effects of data-mining, in looking for patterns which remain significant out of sample. However, assuming recent market behavior should have momentum has at times been a momentous mistake.

On a hike recently I was thinking about how epistemology relates to regression to the mean; and the way that the random scatter of real-life experiences hover around reality. Given how much changes over time, why should statistically significant patterns in markets repeat at all (assuming they are not arbed out yet)? I found an answer in the Chumash cave-paintings I saw recently, which were hundreds or thousands of years old. Regardless of what era we live in, how wealthy the people are, or who is president of Iraq, human nature is essentially immutable because it is written in the genome. And if you can identify those little blips on your monitors, like the telltale signature of an MI on an ECG, you can model the weakness of your lessers and the strength of your betters. More or less.

The Wright Brothers, by Allen Gillespie

I had an opportunity this weekend to visit the Wright Brothers Memorial, and I must say it left me highly inspired and with the impression that a speculator could learn a lot from the brothers.

  1. Optimism: It is not really necessary to look too far into the future; we see enough already to be certain it will be magnificent. Only let us hurry and open the roads. — Wilbur Wright
  2. Patience: The build up to the 1903 flights were years in the making and involved thousands of glider and lab tests.
  3. Observation: The Brothers learned from carefully watching vultures.
  4. Testing: The brothers tested many ideas before going with the one that made them famous. Reminds me of the Palindrome's theory on testing.
  5. Isolate Variables: The brothers methodically attacked each variable that effects flights.
  6. Don't Get too Excited by Success : Or you may loose your airplane in the high winds.

Thoughts on Restructuring and Meetings, by Victor Niederhoffer

It was regrettable to see the use of alliteration in Intel's analyst day talk where CEO Paul Otellini pledged to "restructure, resize, and repurpose Intel for the future". It has been anecdotally noted on this list that alliteration by corporations often is the signal of gilding the lily and fuzziness and decline.

Intel had its biggest percentage rise in five months on analysts days. I would speculate that analysts days in general are bullish as the recent Google one was, as the companies store up their good stuff to unload on analysts day as we all are prone to do when we have big meetings or the attractive "other" is in the audience.

There seems to be a standard way now of getting the stock of big companies up, go to a meeting and announce that they are taking a fine tooth comb and razor to every aspect of costs in the company and firing workers galore. Amazingly, I hold just a handful of individual stocks, and I have been victimized first by falling profits and then given a temporary reprieve by this message in the last year in a high percentage of the stock I've owned, Pfizer, IBM, and Intel among others. Somehow I believe this formula for goosing the stocks is rather ineffectual over a long term basis as it always seems that the cost savings involved are far smaller than the write-offs that are necessary to accomplish it. Someone should investigate this new tool of the CEO systematically and write a Harvard Business Review article on it as an adjunct to their consulting business which it seems is the unstated purpose of most HBR articles.

The whole subject of the performance of companies before and after meetings should be fruitful. Information and reduction of uncertainty is costly and after these meetings there is much more to base an analysts report on. It would stand to reason that there should be a spate of analysts reports after such meetings, and indeed I have noticed about 10 times the relative frequency of same after such meetings than before. Since most analysts reports are still favorable, one would suspect that meetings should be good.

There are some three hundred thousand entries on Google for various permutations of meetings, NYSE, NYSSA (New York Society of Security Analysts), et al. And services such as Bloomberg list hundreds of meetings each week under NI meetings. As far as I know, however, no systematic study of such meetings has been made in recent years, except for this lone effort by a collaborative pair.

One would hope that there would be many meals for a day in the pursuit of this subject.

Applying the "Rules of War" to the Market, from David Baccile

Bevin Alexander's "How Wars Are Won" details 13 rules for waging war. I'm just beginning the book and hope to provide a review when done. If it is anything like the short 10-page introduction, it will be a rewarding read. I will provide some quotes from the introduction and add some of my thoughts on how these rules of war may apply to the markets.

Both countries (France and the U.S.) tried to fight a conventional, or traditional war against the Vietnamese Communist forces, but the Communists insisted on fighting a guerrilla war. That is to say the Vietnamese used different weapons, and with those weapons they were superior. They, like the September 11 terrorists, eluded strength and struck at weakness.

The rule "eluding strength and striking weakness" is an old rule that all great warriors and commanders such as Napoleon have used to gain advantage.

How may such a rule apply to the markets? In the markets we are not matched against one great commander but many, many great commanders. Large Wall Street dealers with unmatched capital and sophisticated hedge funds both attract the brightest minds in the world to employ technology and methodologies to their advantage. In addition to this group, we are up against large money managers with teams of trained analysts and traders.

How do we, as smaller traders / investors, then elude their strengths and strike at weakness? First, we must identify the weaknesses and they - let's identify "them" as the Chair's "Market Mistress" - do not all share the same weaknesses.

Areas of Weaknesses for the Market Mistress:

  1. Tied to a benchmark. Perhaps the second worst concept ever created was that of comparing performance to a benchmark (the first being CAPM). Most money managers are pleased if they can beat a benchmark every year by 100 - 200 basis points every year. They adopt rigid styles to keep them invested in a similar fashion to their chosen benchmark.
  2. Short-term orientation. With some notable exceptions, Money managers, hedge funds and dealers focus on short-term success. When this short-term orientation is combined with a rigid style, the result is a flocking, or herding of managers within similar styles into the sectors and stocks that are "working" and out of those that aren't.
  3. Success get punished. A money manager or hedge fund that performs well is then "rewarded" with a flood of new money as investors seek to garner their share of any prospective success of this talented manager. The additional funds, reduce the managers ability to capitalize on his advantage and the alpha is diluted. This leads to a fourth weakness.
  4. Size matters. Successful money managers typically manage large sums which often limits their universe of potential investments. Liquidity constraints may keep a manager from investing in potentially fruitful areas.

Striking at the Weaknesses of the Market Mistress

Many reports and studies show that contrarian and small-cap strategies out perform in the long run. Both strategies strike at the weaknesses noted above. Contrarian strategies often take time to play out which requires the patience and confidence that many money managers lack - especially those "run by committee". Small and micro-cap stocks have gained popularity in recent years due to their strong performance - look at the Russell 2000 and you'd never know we experienced a major bear market in 2000 - 2002. By focusing on these two strategies, small investors can profitably strike at some of the Mistress's weaknesses.

The commander must evaluate every new situation with great care, and *then*choose the rule or rules he must employ to achieve success. The rules of war relate to solving specific problems as they arise, and are not general rules always to be applied to all situations. In fact, applying a rule in the wrong situation can lead to disaster.

Sound familiar? This passage seems terribly similar to the Chair's concept of ever-changing cycles. Trading strategies must be adapted to shifting market sentiment and the Mistress's ability to punish those that cling blindly to what has been working for them.

The general seeks a quick victory, not lengthy campaigns; extended operations exhaust the treasury and the troops. The commander attacks only when the situation assures him victory. By threatening in many directions, he seeks to disperse the enemy to defend everywhere. If defending everywhere, the enemy is weak everywhere. As water seeks the easiest path to sea, so armies should avoid obstacles and seek avenues of least resistance.

The Mistress works to disperse us, the enemy, by spreading market myths and useless information from global business new outlets. Once weakened, the Mistress attacks and scores victory. Counting is one of the ways to combat this strategy and break-thru the myths and other market noise. Statistical studies and deep financial analysis combined with rationale business sense is probably our best, if not only, defense against this method of attack commonly employed by the Mistress.

Another lesson learned from that quote might include the need to stay within your strength - or build-up new areas of strength before venturing off in different directions. Trading only when the advantage is solidly in our favor will help to ensure ultimate victory.

Steve Ellison responds:

I eagerly look forward to the full review, after such insightful applications of just the introduction. One of the early proponents of contrarianism, Earl Hadady, argued that extremes of sentiment concentrated strength on one side of the market. If, for example, 80% of participants in a futures market were bullish and 20% were bearish, one could infer that:

  1. The average short held 4 times as many contracts as the average long
  2. The average short therefore had far more financial resources and was better able to withstand an adverse price move than the average long
  3. Thinly capitalized weak participants were concentrated on the long side

Dollar/Yuan Rate, from Sushil Kedia

A currency becoming stronger improves the purchasing power and hence may not be seen as economically worse than having a weakening currency where purchasing power actually goes down. In the immediate term this holds. Every example of a currency going real weak has brought in its wake circumstances similar to those in Zimbabwe or Indonesia. Please give one example where a strengthening currency produced a situation anywhere close to this. No, even Russian society went asunder once the artificially maintained high value of the Ruble came to terms with market value, not before.

However, a strengthening currency while raising PP assumes the risk of being witness to a depleting reserve (higher imports lower exports) on the trade account, yet on the capital account more and more investments would flow in. So, like all other optimality problems it's an ongoing discovery and adjustment of the variable values to ensure a balance between improving internal quality of life and maintaining sufficient forex reserves.

Irrespective of whether a nation is a borrower or a lender, a stronger currency helps in retiring external obligations cheaper.

So, why is everyone in the world ever since I have been an adult bothered about ensuring more exports, less imports, weakening their own currencies and strengthening others'? Are all of these mantras not part of a grand-meme?

Until a nation like China while under-cutting every one else on pricing (due to a suppressed Yuan) AND also because of focusing on producing quantity and not even bothering about quality is appearing to be building pressures on the trans-national corporations' competitiveness in selling, who else is really having a problem? Let's make an assumption that Yuan peg will not break for a long time, then what happens? Will it force manufacturers in the rest of the world to be worried about profitability competing against the 5 cent batteries, 10 cent dolls, 15 cent perfume packs churned out from China? If at a lower purchasing power of its currency China starts investing in quality improvement, pollution control, discoveries and inventions it has lower odds of turning a better competitor. Yet at a stronger Yuan it would cost them lesser chips to take on a Mitsubishi or a Caterpillar or a Skoda.

Now, focusing on Mr. Kipnis's question on how does the US break the Yuan peg? Well, in enterprising China as you point out with one of the possibilities and a hundred others, over course of time like water and like markets the Yuan will find its level. Why only the Chinese businessmen, but even all other businesses that are owned from elsewhere but run in China could be exporting through intrepots and havens to the rest of the world. Like water, the Yuan will also find its level.

However, what bothers me most, when markets do find their levels, why bother to encash one's own chips at a discount? Or is it that rather than do such independent thinking, it is better to focus on what was taught in Economics 101 at college?

Misperceptions -- Badminton and Rowing, by Pitt Maner

There is a world of misperception out there. And I am no doubt as guilty (or more so) than others on a variety of issues. But if one checks things out, counts (as this board strongly recommends), gets in the pits, puts one's nose to the grinder, consults with many, does due diligence and employs a hands-on approach, the miasma of misperception tends to recede -- and very quickly -- particularly in the field of sports.

Oh goodness, they say, badminton is such a child's game and so, so, utterly easy. Having played a bit of badminton in a college gym class I can assure you it is one of the most difficult racquet sports you can imagine.

You can't be serious! Well, yes I am. A Pakistani expert player once challenged me to win one point to his 15 or 20 for a case of Heineken -- fortunately I wisely avoided that losing bet. In the hands of a skilled player a feather shuttlecock can be barely dropped over the net (think "drop shot" in tennis) and then driven deep to the end line, over and over again until the novice player is totally exhausted after one point. It is a game of incredible touch punctuated by tremendous smashes. Yes, there is a similar game played in the backyards across this country--it bears little resemblance to pro badminton.

Several years ago a "personal trainer" was giving a tour to a new member of the gym I belonged to and stopped before the rowing ergs and stated something to the extent that these machines really did not provide much exercise and were amongst the easiest of exercise equipment to use. There is a lot of literature on this subject, but I can tell all from first hand experience that rowing is incredibly demanding and a sure way to test your tolerance for painful lactic acid buildup -- and a great way to stay in shape. Yes, you can go easy on your workouts and still get benefits, but the English don't call it a Weapon of mass reduction for nothing.

In my 30s I stupidly bragged to a veteran Navy SEAL while working on the former Roosevelt Roads Naval Air Base in Puerto Rico that I had done 2,000 meters in 7:02 minutes on a rowing erg (during the best shape of my life, age 37), which was a machine the SEALs used for training -- and he seemed impressed. The SEALs to me were and are some of the most impressively conditioned and courageously strong individuals I have ever seen. Watching them run hills all morning for hours with packs on their backs is a sight I will never forget. Incredible mental and physical discipline. Very inspiring to see.

A friend of mine, a former English Jr. Olympic rower who is about 80 pounds lighter, 5-inches shorter, and in his 40s (and just started getting back in "shape" after years of light training) recently mentioned that he is doing a 7:02/2000m now on the rowing erg -- no doubt on his way back to 6:40 min -- 2000 meters times. How bloody irritating! Psssssssssssst the air exits the ego balloon.

Morals of the story--the game is played on a far different level amongst pros -- say several orders of magnitude better. You may be stronger than average in some areas but the pros are stronger across the board and they are training every day starting at 6 AM. Don't foolishly assume something is easy until you try it. Be very humble, because there are a lot of people out there who are as good or much better than you. If you want to approach a pro level you need to do an awful lot of work and respect those who have done the work to get where they are and try to learn from them.

Hunting Easy Water, by Andrew Moe

Each day, we load up our account balance to some degree and head out across the mighty river of the market, hoping to pocket a bit of overplus for safe passage to the other side. From past history, we know the drift and thus can calculate the optimal average path to the other side. But as anyone who has ever tried to ford a river knows, localized conditions can be far from optimal. And when a big steamer plows upstream seeking easy water, even the best equations go out the window. But thinking about drift when you think about market moves is critical and I would suggest looking not only at the overall stats but also at short term 'crossings' before diving in.

"We fixed up a short forked stick to hang the old lantern on; because we must always light the lantern whenever we see a steamboat coming down stream, to keep from getting run over; but we wouldn’t have to light it for upstream boats unless we see we was in what they call a 'crossing'; for the river was pretty high yet, very low banks being still a little under water; so up-bound boats didn’t always run the channel, but hunted easy water." Huck Finn (Mark Twain)


River Crossing Problems:

Minimize the Total Time

Model with Islands in the Middle

Physics Classroom

Squash, from Justin Klosek

Recently, I have expanded my exercise regimen by taking up the fine game of squash. The club here will set up matches at my skill level, which is great: I have played some fellows in my office, guys who could lose 40lbs, a guy who is 5'3", 120lb soaking wet (I'm 6'9", about 240), my futures broker, and a fine gentleman who is probably pushing 70 years old.

Every single one of them kicked my butt!  It hasn't even been close.

While I am improving -- I hope -- this experience has shed some light on markets. Indulge me:

  1. Focus. Sometimes I will win a few points in a row (once, even a whole game). This is entirely consistent with randomness. But after 3 points in a row, I start to think I know something, and start to plan the phone calls to my friends ("I won!") -- and sure enough the focus wanes and I lose the game and match. I need to shut that part of my brain off and just play. There is always time to discuss victories years later--provided you actually win!
  2. Humility. Sometimes -- again consistent with randomness -- I can put a few good shots together. Wow, I think, I can dig the ball out of the corner/hit a boast/return that serve. And as soon as I think I can, something new happens, and I lose the point/game/match.
  3. Deception. Fortunately many of my opponents have been very willing to offer pointers on how to improve my play. On Wednesday I was pretty well schooled by my futures broker. He would be in position, take a full backswing, and see how I reacted. If I guessed hard shot, staying back in the court, he hit it softly. And vice versa. I fell for this over and over again -- but I wasn't in position to stop it.
  4. Anticipation. Let's say I actually hit a nice rail into a corner. My opponent's return (at least at this level) will probably not be strong, and will most likely go to the opposite corner on the front. I can move a little forward in the court to anticipate where the ball will hit so I can put him away.
  5. The perfect shot isn't necessary. I don't have to hit a low screamer right above the line to put someone away. A softer shot hit a little higher on the wall works just as well, and does not carry the risk-of-ruin inherent in the low screamer.
  6. Mentoring. Following the above point, there is much I can learn from those who are willing to teach me. I just have to listen and be open to their suggestions.
  7. Off the desk. There is nothing like getting off the desk and away from the blinking prices. Clear the head, get the blood flowing. Sparks the creative juices.

I have an 11:30AM game today.

Gabe Carbone notes:

I'm a pretty poor squash player (not only by list standards, which are obviously quite high, but also by most other yardsticks).

One thing I can tell you, however, is from the book Taking Chances: Winning with Probability (Paperback) by John Haigh. Given equal skill, the player who has the first serve has a 0.52 chance of winning the match. (This only holds for the standard club rules of playing to nine and having to win serve).

So, next time you have the first serve, be sure to press your advantage!

Cul de Sac, from Victor Niederhoffer

The market today reminds me of what happens when the Mafia captures a victim and puts a bag around him for carrying to the forest. He struggles so hard at first but then eventually he hangs peacefully. The Mafia, according to Puzo, changed their tactics in recent years to handle their murders with much superior force to prevent that initial struggling.

Thoughts on China, from Yishen Kuik

I was at a dinner last night where a Chinese professor from Yale was speaking on the Chinese historical experience with limited liability corporations and the stock market.One anecdote was especially memorable. In the 60s, 70s and 80s, when the great powers in the world were engaged in the Space Race and other feats of technological one-upmanship, the Chinese decided they too needed to prove their prowess in scientific invention and engineering to show to the world they too were a great power.

The thinking then went - to have great progress in science and technology, you needed two things 1) lots of scientists/engineers and 2) lots of capital.

So, China proceeded to push tens of thousands of engineers and scientists through its universities. Since all national savings were centralized through the State, the State had unlimited resources to put at the disposal of these engineers and scientists.But no great science or technology emerged.What was lacking was incentives?

The Chinese stock market was reintroduced in 1990. Hong Kong and its exchange was returned to the mainland in 1997. Today, Chinese entrepreneurs like Robin Li, a youthful multi-millionaire after the IPO of Baidu and others are the poster children of success in China. His storie and others like him are igniting a frenzy among the engineers and scientists, excited by the possibility of IPO riches.

If Chinese companies continue to produce successful IPOs making young men rich, the long awaited results from combining talent and capital may yet take place in China.

Thoughts on Russia, from Dr. Kim Zussman

In my travels and experience with modern Russia:

  1. The average Russian is not only religious, but also very superstitious.
  2. They are nationalistic in a way different from America. Northern Russians consider themselves a Russian race (i.e., Jews, Azeris, etc are not Russian), and this race identity manifests itself in language, culture, arts.
  3. They have trouble living down the great ironic lies; that virtues described in Russian writings and music are the exception in real life, which is replete with dishonesty, graft, corruption, infidelity, alcoholism, etc.
  4. MAD (mutually assured destruction) of the post WWII period has lost potency, and the vacuum has been filled with Russian oil money and its influence.
  5. Most of the time Russia will take the other side to the US, in part out of competitive envy and in part to pad its influence account.

The fact that Russia sits on huge oil while having military deterrence makes for a formidable opponent.

"Make It An Old-Fashioned, Please" from Victor Niederhoffer

From "Make It Another Old-Fashioned, Please" in Cole Porter's Panama Hattie:

                Make it another old fashioned, please
                Make it another double old-fashioned please
                Make it for one who's due to join the disillusion crew
                Make it for one of love's new refugees
                Once high in my castle I ran to you
                And oh what a castle, built on a heavenly dream
                Then quick as a lightning flash, that castle began to crash
                So make it another old-fashioned, please

Today I woke up to find the S&P 500 down 8 points, its biggest overnight decline since July 7 when it opened down 12 points. I looked at the headlines and sure enough Ben Bernanke was scheduled to testify in Washington. It turned out that he was scheduled to testify before the Joint Economic Committee -- twice a year in April and October without specific dates.  Like the old times I immediately said "darned Humphrey Hawkins Testimony!"

Now, of course, there hasn't been a Humphrey Hawkins testimony since the late 1990s. However, there's a monetary policy report to Congress that's semi-annual in February and July where the Chairman voluntarily tries to walk between the Scylla and Charybdis of economic growth and inflation while advancing the power of the Fed and maintaining a Delphic persona. But it's an old fashioned reaction to think it was Humphrey Hawkins and it was an old fashioned kind of day. The market eventually opened down 5 points at 1304 (an eight-day low) and quickly moved to 1300 to induce liquidations and squeezes. All who follow trends, pivots, and follow the fear factor in general were liquidated and like the old fashioned corners on Wall Street, once the weak holders were out, the wives wouldn't let the old timers reach for their canes. So it was fair game to take it up to within a whisker of the six-year highs at 1321, just 4 points below the 1325 high of last Thursday.

In any case, the move got me thinking of how to tell if you're truly old fashioned so that you will better be able to circumnavigate squeezes like this in the future with a historical and disinterred view of your cane in the grandstands. Here's a list that I came up with to tell if you're old fashioned .


How to tell if you're an old fashioned market persona:

  1. You wait for the money supply to come out each Thursday as the key to moves in the fixed income and stock market.
  2. You refuse to buy stocks until there's a true selling climax where not one weak long is left in the market and there has been confirmation of a rise.
  3. You follow Western Union, AMF, or General Motors or JDS Uniphase as the bellwethers.
  4. You still think of IBM as the leading computer manufacturing company.
  5. You believe the greatest trader of all time was Gann, Livermore, or the Large Man.
  6. You're waiting for Granville, or Prechter, to turn bullish before you get back into the market
  7. Your favorite game is checkers and you remember seeing the game room at the Big Board or the Ocean Liner or the barber shop where all the checker boards were set up.
  8. You love to be spanked on the bear side by female market technicians with very great legs who may have appeared in a nylons ad.
  9. You refer to the phone as "the wire" and a CD as a "tape".
  10. You have to have the 20-year-old in the next seat show you how to turn on the airplane media system.
  11. You don't own a handheld video game, and you listen to  music and books-on-tape on a cassette recorder instead of an iPod.
  12. Your greatest computer proficiency is on a VAX or Wang or Radio Shack TRS-80.
  13. You refer to any squeeze engendered by a Fed Chair speaking in Washington as a "Humphrey Hawkins deal".

I am open to other signals of old fashioned thinking so that we can at least know what the characteristics of the disease are, so that we will have less tendency to succumb in the future.

George Zachar notes:

I sometimes still think of a price screen as a "Quotron".

Andrea Ravano adds:

  1. You wait for the fixing of European forex cross rates until it's bed time.
  2. You believe a certain stock is moving up/down because KIO (Kuwait Investment Office) is moving on it.
  3. You wait for central banks interventions to moderate an upward/downward move in the dollar.
  4. You call the British Pound "Cable".
  5. You offer a lady your seat.
  6. You don't find VHS films for your VCR because at your local shop they have only DVDs.
  7. You razor still has only two blades.
  8. Is Kaufman still at Salomon Brothers?


Duncan Coker offers:

I Couldn't find much on short squeezes, oddly, but I liked this one:

One of the strongest anomalies of speculations is in the facility with which men are induced to take large risks on false information and manufactured "points" . Considering the readiness with which a numerous class of "outside" operators buy or sell on sensational rumors, its is not surprising that the professional operators should keep the market well supplied with decoys: and it is not easy to say which most deserves condemnations-the heedless credulity of the dupes, or the deliberate lies of the canard-makers. -- "Twenty-Eight Years of Wall Street"

Perhaps today and all week with every economic number of strong news pointing to rate increases, then China raising rates today, it contributed to false information and squeezed first, the longs, then the shorts.

Easan Katir adds:

  1. Nifty Fifty
  2. Hotchkis & Wiley
  3. Engraved stock certificates
  4. High commissions
  5. Expensive data feeds
  6. Ticker tape parade
  7. What's good for General Motors ...
  8. Reading 'paper' newspapers
  9. Fortran, Basic
  10. Depositing cash at a brokerage office
  11. Sam Walton hula'ing on Wall Street
  12. Bearer bonds
  13. Gold mines ( oh wait,,, that's new-fashioned too )
  14. Triple-A credit ratings
  15. Suspenders, power ties, horn-rimmed glasses
  16. Bankers 3-6-3 rule: borrow at 3%, loan at 6% get to the golf club by 3 pm


Peter C. Earle contributes:


  1. You've got a couple thou worth of Prussian bonds in the old safe. After all, you never know...
  2. Just how long *is* the hem on the office girl's skirt this quarter?
  3. You don't worry about missing the Friday session - after all, the market will be open for an hour or two on Saturday morning.
  4. "As goes GM so goes the nation!"
  5. Despite having merged with the NYSE, to you, ARCA will always be plucky little TNTO.
  6. You remember any of the following OTC acronyms: PENL; SYND; BIDW; OFFW.
  7. You know what a dealer saying "out to competition" or "stale" means.
  8. You are aware that "program trading" did not, for the first couple of years of its existence, involve actual programs.
  9. A *fax* machine? What can that do that your Teletype cant?
  10. You could be sure - if just from the commissions you were charged (*ahem*) - that there was a difference between a *held* and a *not held*order.
  11. The mile-long lines out the door of the WTC Krispy Kreme. (Alas.)

And, (For Lack) You recall any of the following:

Ah, memories.

A Good Market, by Victor Niederhoffer

The question arises: What makes a good market?

As a preliminary step in this direction, I counted the number of times that various representative non-stock markets are up in conjunction with an S&P 500 rise of 40 full points, in the last 20 days, a mark which it set some 17% of all days in the last 6 1/2 years.

All independent variables are measured over the same contemporaneous 20-day period that the stock market was up 40 points, i.e., the query is what were the concomitants of a great good market. (Thus in part we are making the same mistake that Sornette and so many others make by concentrating on the likelihoods of an extreme up, not taking into consideration that the same variables that enhance the likelihood of an extreme up might enhance the likelihood of an extreme down.)

The answers were as follows:

Percentage of times that Markets Moved in Conjunction With The S&P 500 up.

   Market               % of co-movements
   bonds up                  53%
   bunds up                  58%
   Gold down                 58%
   Eurodllr down             62%
   Yen down                  60%
   Crude oil up              59%
   Natural gas down          55%

Now assuming perfect knowledge that a move of more than 40 full points has occurred in the S&P 500 over the past 20 days, what is the best quantitative forecast given perfect knowledge of the independent variables.

Here's the best perfect knowledge descriptive equation for the S&P 500: S&P 500 = 45 points + 3 times the move in bunds less 1 times the move in us bonds less 230 times the move in the euro less 1.5 the move in yen per dollar( a fall in yen per dollar means the yen is up and the dollar down). The key variable that describes and accompanies a big move in the S&P 500 is a decline in the dollar and a rise in bunds.

That equation has a r2 of 0.10 which corresponds to a correlation between prediction and actual of 0.3, quite helpful assuming you had perfect knowledge of all the independents and you already knew that the S &P 500 was up over 40 points over the last 20 days. None of the other independents such as gold or crude are significant.

Now, consider an unconditional description of the S&P 500 move over the next 20 days without any knowledge that it went up or down. That descriptive equation is S&P 500 = 3 points + 2 times the move in bunds less 2 times the move in bonds less 264 times the move in euro less 1.5 times the move in yen per dollar less 1 times the move in crude .

That equation has an r2 of just 0.04, thus the squared error in forecasting the S&P 500 over the next 20 days is reduced by just 4% even if you had perfect knowledge of all the other key independent variables during that same 20- day contemporaneous period. (Of course this excludes markets that are part of the US stock market like the Dax or the Nikkei.)

I have seen various other approaches to the philosophy of what makes for a good market including the amount of good news, the state of the p/e, the number of terrorists detained, the amount of positive news about the economy, the number of years into the Presidential cycle.

I prefer the approach based on market co-movements as it's less wishy-washy, but then again I know almost nothing about philosophic questions like this and would appreciate guidance from my friends and readers.

Abe Dunkelheit replies:

I would assume that people as a group tend to be more happy if they have steady and predictable returns over a long time period. Therefore, I'd define a Good Market as 'low' volatility around a 'normal' and 'long-lasting' drift rate.

In analogy to the life of a human being, 'long-lasting' means a long life; 'low' volatility means no exposure to stress or physical disease; a 'normal' drift rate means the right mix of emotional and mental stimulation (not too much nor too little) to have a fulfilled life.

Sushil Kedia comments:

A capital market has as its core function the allocation of capital. So, a good capital market would be one that refrains from repeatedly or regularly getting either into states of manic euphoric bubble conditions or even the severe depressive conditions where it saves the economy and its people from not allocating capital to fly by night fanciful operations or does not hesitate ever in facilitating the formation and dissemination of new capital.Through expansion of investment wisdom, sharing of knowledge and embracing openness to change societies, possibly, are endeavoring in sustaining the primary goals of their capital markets.

A good market is one which would reward the enterprising astute risk taker and one which does not bring about passive investing as the best option. Such a market would also continue to place premium on credibility, prevalence of trust and, ideally, be self-regulated well enough to keep external regulators, the public and the media in harmony with itself.

A long-lasting attribute akin to the human life is for a good market to show its resilience to overcome challenges and difficulties that would be part and parcel of its existence. A good market would foster institutions of disseminating education to its participants, instill proper risk controls for executing fairness of dealing and sustain liquidity to ensure longevity and survive in the face of adversity to come out as a stronger institution. It would be a vehicle for helping achieve and sustain the cherished societal goals of fostering freedom of choice, fair exchange and productive economic contribution.

Lies, from Hany Saad

In today's society, there is a fine line between lying and deception. When one assumes a person is a liar, one dismisses anything this person says. This is where the folkloric expression "with a grain of salt" comes in. However, a generally truthful person can and will lie if subjected to a certain amount of pressure. The distinction between the two, while a fine line can make all the difference between the survival of a society, a relationship, etc, or their demise altogether. This largely depends on the open-mindedness and the forgiving ability of the partner subject to the lie.

I personally hate being lied to. With the exception of violence, it is the worst thing you can do to me. Lying is in essence is stealing. One takes a lie to be true and as a result invests time, or money, or even love and care based on the lie. Everyone agrees that lying is morally wrong even the most astute liars. It's curious how they can be very defensive if accused of lying. Lying creates a short term advantage for the liar (seemingly so), and frequently only in the liar's mind. A liar naturally does not like being lied to; so he/ she is operating from a premise of inequality and possibly intellectual superiority (as no liar is expected to be caught in his lie) with the outside world.

Before I pursue my naive philosophical ramblings any further, I would like to dispose of the idea that, where lying is concerned, a lie is a lie is a lie. No such thing as a white lie, etc. Some people believe lying is more justified in one area than the other. I despise the distinction and would dismiss it altogether as hypocrisy. This may contradict "the pressured to lie" previously mentioned but I am possibly, subconsciously justifying my own lying, albeit infrequent, and the lying of my loved ones or, even worse, intellectually twisting my beliefs to fit my actions.

Once relationships evolve to become partnerships of equals, truthfulness becomes an obligation - a requirement more than anything. Truthfulness comes to the fore, as it does in any kind of partnership. With this expectation in mind, a miniscule lie or an intentional oversight of what one partner may deem a material information can make a partnership crumble or in the case of marriage, even if the two parties decide to overlook it for the sake of children, need (whether emotional or material), or whatever the reason may be, will always leave a bitter taste years and years after the lie occurred. This is providing that the partner subject to the lie was able to find out that he was lied to. Again, this is where the folkloric "what you don't know won't hurt you" nonsense comes in.

Please notice that all the above ramblings are not based on any religious beliefs. So let's not hear any lectures on Christianity, the ten commandments or how Islam is the solution.

The basic reason why you, as an educated and well balanced individual hate and should hate lies is because you wish to navigate carefully through the abundance of choices life has to offer and wish to do so with the availability of what you deem reliable information. The key word here is "reliable" ,in order to make educated choices / bets. Do you see the similarity here with the scientific method? processing "reliable information" to make scientific/educated choices. In markets more than anything else in life we are exposed to lies after lies. The chair uses elegantly the words "propaganda", "deception", etc., but what we are exposed to on a daily basis is lies. Unlike marriage where you would separate from a partner that lies to you constantly, you come back to the markets for more. In fact, you are expecting a lie even before you set foot in the fray.

The web of lying in the market is so complicated and sophisticated that it takes a very curious and sometimes a very suspicious mind to be a good trader. George S0r0s when offered to join a partnership with Vic and Dan at no fee asked "how much exactly is a no fee?"

Vic and his crew put statistics on the table to go against public beliefs (persistent lies). These are just two familiar examples of traders operating from the premise that the mistress is pursuing her nasty habit of lying to the participants. Some example of lies and some unquantified truths.

Lying about intentions: A trader puts an order to sell a thousand contracts while his real intention is to buy or vice versa.


Cliches (persistent lies):

Unquantified and unquestioned truths from credible people and figures of authority:

When the chair asked on this list "why good problem solvers don't make good traders?" everyone in a rush came with a response justifying the statement. Now, is it true that good problem solvers don't make good traders? Did anyone consider that the chair's statement is possibly false?

Did anyone ask the chair for statistics on the table to prove or disprove his statement as he always asks of us?

I don't have the answer to this question and if I do, it is irrelevant to the main premise of this post. It's just an illustration of succumbing to higher authority statements (even unquantified) specially from people with historical credibility, in this case the chair. I am not questioning the statement but the lack of questioning.

James Sogi adds:

The line between truth and lies is even thinner. One person is self-righteously convinced of the truth of his words, the other convinced that those words are lies. Who is right? It is a difficult question in practice between people and there are many shades and circumstances that affect the judgment. In one sense, this is an area in which the markets are simple and 2 dimensional, and for that very reason so great. The transaction has been boiled down in our great markets to simplicity: buy or sell, up or down. No haggling, reneging, breaches. Tell whatever lies you want, just put your money where your mouth is. Oh would that life were so simple! Compared to the questions of life and death doctors deal with daily, or the judgments affecting lives in the legal process, the markets are refreshingly clear cut. There are no algorithms or neat formula to decide life and death.

For those who worry about other's lies, first look inwards and see what lies you tell yourself. Most deny the truth. So we live with lies clothed in the guise of truth, self-righteousness and rationalizations.

Must read books, from Tyler McClellan

I would appreciate in the spirit of sharing, and for my own selfish interests of building a suitable collection of books to read for the summer, if everyone could share the one book, that in hindsight, has challenged or invigorated their mind most substantially. Of course books on trading, markets, et. al are always valued, but others are equally encouraged for hypothesis generation and filling out the mind.

I see Daily Speculations already has an overall List of Book Recommendations and a Spec Reader's List, as well as a substantial Review List.

I would like to see them augmented and will start with my submission. It is the three part series of Immanuel Kant's that followed his ten years without any written work. The Critique of Pure Reason, the Critique of Practical Reason, and The Critique of Judgment.

Nothing has challenged me as deeply, nor rewarded me so fully as this inspiring output.

Steve Leslie suggests:

I will submit Zen and the Art of Poker by Larry Phillips. I always recommend this book to anyone interested in poker. A very easy read. I guarantee a consistent review of the book will yield much at the tables. However, it has far wider applications to trading and life. In it are contained 100 lessons how to improve your general acuity to the game and much more.

From Stefan Jovanovich:

In honor of his birthday today, Memoirs by Ulysses Grant. 75 years after his birth in 1822 -- to the day -- Grant's Tomb was opened in New York.

Dr. Michael Cook offers:

I'm going to recommend a novel by Ken Follett, Pillars of the Earth. I have read little fiction over the years, but I discovered Follett last fall and have read seven of his novels since. "Pillars of the Earth" was the best - it is a historical novel, with great characters, great atmosphere. I will use a cliche that I never expected to use, but which is literally true: I did not want the book to end. It's a historical novel, set in the 11th century in the milieu of the cathedral builders of that time.

Richard Miller recommends:

Joseph H. Ellis recently published Ahead of the Curve. It's one of the better economic forecasting books that I've read. This Goldman Sachs retail analyst (the best in his business for 18 years) brings clarity to the host of economic numbers that we're inundated with daily. Further, it's an easy read, even for the economics challenged.

Consumer spending drives corporate earnings, which in turn drive stock prices. The chain of events makes perfect sense to even non economists: real consumer spending accounts for 70% of GDP, and it's directly related to hourly wage. The first has been an accurate leading indicator for the changing business cycle, the second a leading indicator for the former. Impressive work. Ellis maintains free updates of his charts at this address.

Market Moves: Gold, from Victor Niederhoffer

It is interesting to contemplate the big moves in gold and their impact on markets. Monday, gold was down $12 (and silver down $1.20), one of its 10 largest declines of the last six years. It turns out that contrary to popular belief the move in gold is slightly bearish for future bonds, slightly bearish for gold itself and highly positive for the stock market -- up 80% of the time, an average of about 1%, over the next 3 days with a reasonable t-score. I say this not as a prediction but to try to get a handle on how the current double 10% daily declines in silver shape up vis-a-vis the markets of 1979 and 1980 which are so reminiscent of today vis-a-vis stocks, bonds, gold, and silver.

COT, from Jason Shapiro

I've been trading metals based mostly on my reading of COT data. Important to note: I found out yesterday these data were changed a few months ago such that the long only commodity funds are classified as commercials, not speculators. This to me explains why the commercials have been getting long the last few months and therefore the speculators short. Given this new information it makes the COT data much less valuable and I am now out of all metals positions. What a world of randomness we deal in.

Back To The Future, from George Zachar

For the first time in recent memory, an on-the-run treasury issue is trading with a sub-90 handle (dollar price).

This is the current long bond from Bloomberg:

4 1/2 2/36  89-20 /21  5.18 - 13+

"In the day" of high and volatile rates (circa 1981), most issues traded at substantial discounts to par. More recently, there were spans when "the list" was entirely trading over par.

But a treasury "par bond" trading with an eighty-something handle is something not seen for a very long time. And it is a good bet that many of the folks sitting before screens today have never seen it in their careers. I wonder if there's a round number effect here.

Placebo Forecasting, by Steve Ellison

I am teaching a class for APICS certification and am covering measures of forecast accuracy this week. Sales forecasting techniques are highly relevant to trading, since entering a trade implies that one has a forecast for the market.

The standard measures of forecast accuracy are bias and mean absolute percentage of error. Bias is calculated by summing the deviations of actual sales from forecast and dividing the sum by the number of periods. Bias should ideally be near zero; a bias far from zero indicates that the forecast is consistently too high or too low.

Mean absolute percentage of error is calculated by sum (|A - F|/A), where A is actual sales and F is the forecast for a period. Mean absolute percentage of error provides a measure of the typical magnitude of forecast error, similar to mean average deviation.

I read an excellent article by Michael Gilliland in Supply Chain Management Review called "Is Forecasting a Waste of Time?" Gilliland argues that bias and mean absolute percentage of error measure the results of the forecast, but do not measure whether the process that produced the forecast added any value (in a corporation, the process might include inputs from multiple people and review and adjustment by one or more levels of management).

To remedy this deficiency, Gilliland suggests using a testing method similar to that used by drug companies. Drug companies have a control group that takes placebos in order to compare the efficacy of the drug with the placebo. Applying this concept to forecasting, one would develop an alternate forecast using an extremely simple forecasting method that costs nothing, such as forecasting the next period's sales to be equal to the prior period's actual sales. One would then determine the bias and mean absolute percentage error of both the "placebo forecast" and the real forecast to identify what value, if any, the forecasting process is adding.

An Unending Meme, by Tyler McClellan

The list always looks at instances where the perception of events differs widely from the reality. I am thinking here of our look at the "terrible" dollar or unattractiveness of stocks since 1900 or other such. One that I have increasingly been hearing over the past couple years at all levels, that is at the street, at the undergraduate, at the professorial level, is some variation on a very simple meme.

America is going to be poorer because its economy is not sound in terms of mercantilism. The re-emergence of mercantilist thinking would surprise me were it not now so widespread as to almost be common place. And this is where I ask the list's help. Is it that as a liberal, raised and educated in the tradition of Adam Smith and classical economics, I simply don't understand the nuances of free trade. Is it as Krisrock says, "the numbers on free trade don't add up". Someone tell me once and for all, how is trading United States assets to foreigners for consumption going to make us poorer. Is it just the old argument that we save too little? That is, is it simply a neoclassical argument about savings rates and relative growth of capital stock over time? But what if the capital stock is being used to grow productivity and real wages(?) here in the United States just as much as in the savings powerhouses and if the growth rate of the U.S. in real GDP is greater than the cost of servicing our debt in real interest rate terms. Isn't the spread between real GDP growth and real interest rates in our favor, not theirs, and don't we want them to own the bonds if we get the residual equity and we can cover the nut?

So many thoughts and I ask these questions not in presumption of knowing the answer, but because I want to hear the many more enlightened opinions than my own. Is it me who is failing to get the joke by continuing to think America will prosper?

Sushil Kedia comments:

If China has more savings and more bad loans, while America has negative savings and relatively much lower ratio of bad loans even then the bears would focus only on the negative savings rate of America. Why? Because it suits them.

Since the public is always behind the form, the prevailing 'hammer America' meme exists in abundance for now, and only later the correct answer to the situation will be realized that China is consuming less than it is producing and wasting a good chunk of what it is saving, while America is consuming productively most of what it is producing and wasting little.

For more than a century India has had one of the highest savings rates in the world and, despite being ranked in the top five economies in the world in terms of overall GDP terms, it still remains one of the poorest nations. What is poverty or getting poorer?

Economics being a word derived from Oikos, is a social science of studying the choices made by households at the most rudimentary level. Social progress is what appropriate economic indicators have to be able to measure to be chosen for comparative assessments of poverty or wealth levels between different economies. Numbers like GDP or size of the debt do offer a comparison of the size of aggregates but not a good assessment of the components. So, the search is better focused on per capita ratio numbers between different economies.

Can I thus suggest to re-define the worry in terms of whether on average an American will be able to obtain better quality of housing, sanitation, health-care, social security, education, entertainment etc. over a period of time?

What is mercantilism? If Coke is selling sugared water in 186 countries in the world is the profit from this economic activity accounted on the Balance Sheet of America or of the world? If Nike is selling sports gear in another 180 countries or so, do its profits from that belong to America or to the world?

If consumption goes into hedonistic purchases of trophy towers, wives et al, it is destructive, agreed? However, if consumption gets restricted to the point of tying down the stomachs of a few family members to raise the bank balance, is that productive? The hunger-stricken in the savings powerhouses of the world have been creating an unending cycle of increasingly larger expenses for medical care, delinquency management costs and such other economic leakages. The optimal path is in between. The marginal utility function could very well then be applied even in choosing levels of savings and levels of consumptions. Leverage is never bad so long as it is not getting spent into hedonistic consumption.

If the degree of pessimism prevailing today is ignoring the fundamentals of the competitive advantage of nations, then I can't join an America bear simply because she has some numbers that might appear to suit her hypothesis. The answer is pretty clear as Tyler points out, the real surplus is the excess real GDP growth rate over the real interest rate. Since there is no real good measure of that, the bulls and bears have an undecided contest yet.

Thank you bears, for continually making your case out so compellingly well that it is getting to be so much more rewarding to be an America Bull.

From the President of the Old Speculators' Club:

In the past, when the above argument has been made I've replied that the author (or authors) have obviously been reading materials I'm not familiar with, or watching financial TV unavailable to me. Are there some bears out there? Sure, of course, always have been, always will be. But is it the prevailing sentiment?

Thought I'd never say this but: "Numbers on the table, please."

Stefan Jovanovich comments:

Even in an age of gold, the United States ran "crushing trade deficits". It had to. The "imposts" - i.e. tariffs on imports - were the principal source of Federal revenue, and Americans then as now preferred wherever possible to speculate with OPM. The periodic "panics" of that golden age occurred whenever the chronic savers (principally the Dutch, Scots and English) suddenly decided to curtail purchases of our less than sterling American paper. The Panic of 1907 had a slightly different cast but the same dynamic - an unexpected halt to expected funds transfers. (The difference was that the halt came not from investors but from property and casualty insurers declining to pay the claims from the S.F. earthquake.)

What saved Americans was that, for all our deserved reputations as scamps, we did not (with a notable exception for the poor Germans) exercise the sovereign prerogative of confiscation. You might get sold the Brooklyn Bridge, but the State of New York and the Federal government would not suddenly decide that your title deed was invalid because of your birth certificate. As long as that remains the case, capital will continue flow to the U.S. Foreign savers will need a place to gamble for higher returns with some of their money. As long as our casino remains willing to redeem its chips with no questions asked, we will get the play - even if the visitors usually pick the worst possible time to cash out and go home.

Wavelet Methods for Time Series Analysis, by James Sogi

Wavelet Methods for Time Series Analysis, by Donald B. Percival and Andrew T. Walden, is another wonderful book in the Cambridge Series in Statistical and Probabilistic Mathematics. This series really hits the sweet spot for the spec-listers by discussing the cutting edge subjects from the ground up in a self study format with exercises, (with the solutions provided) and a web site with reference to S-Plus code and computational approaches. The authors carefully cover the underlying basic material on Fourier analysis which is a real bonus in reference to the Minister of Non Predictive Studies Fourier analysis posted on list. This series speaks plain English and S-Plus in addition to the basic statistical and mathematical framework and is accessible to the unwashed with a bit of work.

A wavelet is a small wave set in a limited time that grows and decays, as distinguished from the big wave which is a sine wave that keeps on oscillating up and down. The wavelet analysis is a transform of the data allowing analysis and re-transformation back into the original data form for aid to analysis. The wavelets under the formula are the Haar wavelet which is related to the first derivative of the Gaussian probability density function, and the Mexican Hat wavelet, which is related to the second derivative of the Gaussian probability density function. Wavelets are related to Fourier transform. The changes of the wavelets average amplitude changes over changes in scale allow analysis.

Average values of signals over various scales are used in the physical sciences such as 1)1 second averages of temperature and vertical velocity over a forest, 2) ten minute and hourly rainfall rate in a severe storm, 3) monthly mean sea temperatures on the equatorial Pacific, 4)thirty minute average vertical wind velocity profiles, 5) Yearly average temperatures over England. In physical sciences often it is the changes in the averages that are of interest rather than the absolute values, which of course is of interest to the speculator, the changes, rather than absolute numbers. The analysis looks at non-overlapping discrete intervals. The analysis allows study of time series that have scale based characteristics that are not homogeneous over time...in other words, market time with ever changing cycles,. Statistical analysis is performed on the wavelets. The underlying series can be then recovered. I am quite excited about applying wavelet analysis to the markets with their ability to express an autocorrelated time series in a combination of uncorrelated variables. The variables depend on a limited portion of time series leading to the ability to dealing with time series whose statistical characteristics evolve over time.

An example, by way of illustration rather than prediction, of possible use of wavelets is the moon problem discussed on the List. Fourier analysis did not detect a regular sine wave over the years that coincided with the moon phase, however, the discrete period analysis might show some movement within certain windows that evolve, say over the seasons, that might otherwise throw a sine wave function off. A lunar effect would presumably carry an evolving seasonal component as well frustrating Fourier analysis.

The wavelets can detect signal hidden by noise in a time series. The Professor should have a field day with these ideas and hope we hear from others on the list who have the technical skills to understand these matters better than a mere surfer. Often in these esoteric tomes lay hidden a few gems with code that can be used by specs and it is well worth wading through the tall grass to find them. Finding one could make a career or a meal for life.

The Fallacy of Perfect Knowledge, by Victor Niederhoffer

Perfect Knowledge of the state of the market is not possible. While no great departure from the actual facts of life is involved in assuming this knowledge on the part of dealers when we are considering the course of business in Lombard street, or in a wholesale Produce Market, it would be an altogether unreasonable assumption to make when we are examining the causes that govern the supply of labour in any of the lower grades of industry. ... There may be a good deal of wayward and impulsive actions, sordid and noble motives may mingle their threads together. -- Alfred Marshall, Principles of Economics

One of the more common fallacies in performing market calculations or any others is the assumption of perfect knowledge. Here are some examples of where it comes up.

The bearish Fed signal. Naive commentators with an axe like those who write the Heard in the Street column are often guilty of this. "Okay, we know that the Fed is about to stop increasing the Funds Rate. What's the move in the stock market between the time that they last increased a Federal Funds rate, and the time that they reduced the rate. Well, I calculated it, and ha , ha, the stock market actually declines during that time. So if you're waiting for the Fed to decrease that rate, then don't. Ha, ha. I'm bearish."

The problem is of course that we don't have perfect knowledge of when they're going to end. Indeed there's an extraordinarily active Federal Funds market where depending on the slightest twist of a Governor's attempt to advance his political career, or use us as Guinea Pigs, billions are made and lost, and the implied probability of a rise at a given meeting is calculated to the fourth degree. Also, relevant is that the Fed generally reduces a rate after a stock market decrease. So if you assume perfect knowledge of what the Fed does you're also assuming perfect knowledge of what the stock market did during that period. Also, of course wrong, is the assumption that you can get the exact proper dating vis a vis time "just" before the announcement or time "just" after the announcement. With any event that has a macroscopic momentum like Fed tightenings and easings, there are only going to be a very small number of changes in direction and the variability is going to be so great that you'll always be able to come up with something bearish or bullish depending on how you choose the survival dates, like from the time of the fourth increase to the 10th, or what have you. (The problem of small numbers and the difficulty of predicting when death will occur is one of the reasons survival statistics are so good for studying markets, and why the hazard rate is so difficult to estimate in the game of life and markets.)

"Okay, we know that company x is going to report down earnings next year. How much can we make by shorting it with this perfect knowledge. And, ha, ha, the economy or company x has already announced a shortfall." Or "We've had a bull market now for three years without any 6% decline from a previous top to a bottom within a three-month period. What is the expected market move the next time that there is such a decrease. Ha ha, it's bearish."

We'll have to leave this version of the fallacy and a hundred others now to do some play and kid work but I refer you to An Introduction to Austrian Economics for a nice discussion of the philosophical problems of assuming perfect knowledge in a landscape filled with uncertainty. "Vast numbers of interacting individuals try to make the best use of all available means of want satisfaction... "

Russell Sears adds:

Prof. Gordon Haave said: "Yes... it is not specifics that lead to ruin, but a mixture of arrogance and ignorance."

It takes a lot of confidence to develop a talent, to become a champion. This is on display everyday in sports and art. But it is in the mettle of business, investing and life were we find out if the prefix is "over" or "self" confidence. There is a fine line between arrogance and the courage to try in the face of the unknown. One assumes you are greater than any risk you might face, the other knows you are not, but hopes to learn by trying anyway.

Dr. Michael Cook says:

This is a very important topic, and the Mises's link is one of the best resources on the web. If there was perfect knowledge, there would be no risk. There is no one who will admit that they think they have perfect knowledge, but we all act like we do, sometimes. There seems to be a universal human bias towards "overconfidence", a tendency to think that our interpretation of the limited set of facts we are considering is reality.

There is paradox here - it is hard to focus on what's in the periphery of our consciousness; to know what we don't know; to see what we are not seeing.

The investment implications? The need for humility, and risk controls, and a commitment to these as a policy.

Oedipus Rex is one of the most perfect plays ever written, and addresses these issues in an amazing way. Recall that Oedipus was made King of Thebes because he Solved a Problem! -- the riddle of the Sphinx. When the play opens he needs to solve another problem -- who killed the previous king, Laius? Oedipus sends for the blind seer Tiresias, who says that Oedipus is the criminal. In the end, Oedipus sees the truth, and blinds himself in horror.

Oedipus was guilty of hubris - he thought he knew. But as the old saw goes: "It ain't what you don't know that kills you, it's what you know that just ain't so".

Oedipus didn't have good risk controls. Given the prophecy that he would kill his father and marry his mother he could have instituted a policy of:

  1. Not killing an older man
  2. Not marrying an older woman.

His hubris was not acknowledging that there was a risk that his "knowledge" was false.

A Book Review from Duncan Coker

I just finished Chalmers Johnson's book The Sorrows of Empire. The book is written by an author with a Libertarian perspective, which I happen to agree with so there may be some bias there. But the facts and research are thorough as some 50 pages of footnotes will attest. As a spec always looking for a way to make predictions based on the facts at present, I take some liberties at the end to maybe make a profit.

Most of the book is spent going in to great detail about the infrastructure of US military bases overseas, the history, the costs to build maintain and service (largely private) and the market place for arms and war type training. Much of this I did not know before other than generalities. For example Western Europe is still by far the largest area for troops and bases. After this Japan, Latin America, the rest of Asia then Middle East. The highest growth rate for bases is in Central Asia, Afghan region. The development of bases follows a general pattern of US warfare through out history where we occupy an area during war, then just stay. This started with Spanish American War where we picked up many of Latin American bases and oddly the Philippines (Spanish colony) which up to recently was a huge US base. The Guantanamo Bay base was acquired during this time from Cuban in their liberation from Spain and amazingly we held it through the Castro revolution and obviously still do. WWII was the next big push in bases including those in Western Europe (mainly Germany), and the entire island of Okinawa in Japan. In global total there are 750 bases, with about 500k individuals including families stationed full time. The larger bases can have value over $1 billion like the Prince Sultan base in Saudi Arabia, important prior to the second Gulf war. On average each base has a replacement value (the way the Pentagon values them) ranging from several million to over a billion dollars. The total value for all the base is around $200 billion in overseas real estate. Not a bad portfolio.

The second part of the book deals with the business side of running this not so small overseas business network of bases. Much of the cost to maintain and support these bases is subbed out to private contractors one of the biggest being Kellogg, Brown and Root, which is owned by Halliburton, They take in roughly $500m a year in defense dept contracts. Cheney doubled their sales to DoD during his time at Halliburton. The defense department gets a nice budget every year which has grown steadily through war and peace years. Cold war years saw budgets of around $280 billion. We are now spending $400 billion (all in adjusted 2002 dollars). This is only surpassed by WWII years where we exceeded $500 billion. To help support all of this is of course tax dollars. In addition, there is another lucrative source of income which is the global arms business. The US is the leader in the market accounting for 50% of the global transactions. We buy from companies like Lockheed Martin, recently award a $200 billion multi-year contact, and we also sell, exporting $15 billion a year in arms and training. This is largely coordinated by the DoD who take a commission or sells direct. Since these are issues of national security most of these transactions are classified. Our main customers include many of our allies like Japan, Israel and Western Europe.

The overall gist of the book is that the US via its foreign military empire has entered a period of (M) militarism. That is growth in the power of the military for its own sake and interests. The military has a large voice, 20 times the size of the state department in budget dollars. Characteristics of militarism include an ever increasing number of bases, a self-perpetuating business between DoD suppliers and spenders, a desire for greater resources, and the use of greater power in dictating foreign policy. Further the author makes four specific predictions for the future which are quite dire. He predicts:

  1. a state of perpetual war
  2. loss of democracy and constitutional rights
  3. propaganda, disinformation and glorification of war
  4. bankruptcy for the US

I will make my own predictions. I think 1-3 have and are occurring. The pendulum between security and civil liberties is swinging to the right. I find the size and entrenchment of US bases overseas concerning. I doubt many realize the scope. Not many foreign base here though. I am optimistic the pendulum will swing back the other way but this will take years and more hard lessons to come. Number 4, I think is alarmist and it will not happen. One of the odd comforts I have regarding trade deficits, government debt, social security deficits, bankruptcy, is the Treasury bond market. The 10 and 30 year bond is a real time consensus of global opinion on the long term state of the country. The world is predicting we will sort through these issues and work them out, and I agree.

Regarding how can I predict and profit from reading this book I have several ideas. HAL(Halliburton) and LMT(Lockheed Martin) are already at record highs, so the market is way ahead of me as usual. Is there a niche for getting into the arms trading business for me? It appears that this market is pretty closed off and opaque. This is the exact opposite of markets I like to trade. Transactions are not reported and no bids or offers are listed on any exchanges I know of. Possibly, I could create an electronic market for arms, or for derivative futures/options products. But it would be difficult taking delivery of most products if I get caught long, and hard to value as well; what is the value of a call option on an F-15k fighter, delivery point S. Korea.

Lacking that, I will have to settle for a global macro play. I am long the DoD for the war time years, which could go on for a while. How do you end a war on terror, or a war on drugs, or a war on "insert ideology". So, the Central Asian countries with names I can't pronounce like Turkmenistan, Uzbekistan, Kazakhstan and Kyrgyzstan are good bets. Time to set up a shop, like the merchants who sold supplies to the miners during the California gold rush. Or if they have an exchange or ETF, I'm buying. The boom is on.

The Perfect Storm, by Steve Leslie

Does any man know where the love of God goes when the waves turn the minutes to hours?
-- Gordon Lightfoot, "The Wreck of the Edmund Fitzgerald"

I was reminded of these emotional lyrics written and performed by the Canadian songwriter and balladeer while watching "The Perfect Storm" on television last evening.

The movie was based on the 1997 novel by Sebastian Junger which was an uncompromisingly factual account of a brutal storm that attacked the eastern U.S. in October of 1991.

It was created like a type of a Frankensteins monster storm from a confluence of 3 individual storms fronts converging and thus forming what some called the Nor'easter Halloween storm of 1991 and others merely depicted as The Perfect Storm.

What gave the book instant credibility was that the author Mr. Junger neither speculated on things that no living man had seen nor invented dialogue. He developed a very detailed and descriptive account of the events surrounding the storm. He also gave insights into meteorology, the fishing industry, Coast Guard rescue operations, and how dozens of individuals were affected by the storm.

"The Perfect Storm" the movie is a well-crafted example of a film of pure sensation. It is about ships tossed by a violent storm. The film doesn't have complex and evolving characters, although a competent cast including George Clooney as the Captain of the ship Andrea Gail and Mark Walhberg as his able-bodied first mate has been put together. Both give very credible performances. In fact, one senses a particular strong bond between the two in a very paternal way. Other fine action performances are delivered by the crew which includes John C. Reilly and William Fichtner, two brutish mates who constantly war against each other. This feud has evidently developed over time and over the love of a fair maiden.

But these are not needed. It doesn't tell a sophisticated story and doesn't need to; the main events are known to most of the audience before the movie begins.

The film's best scenes are more or less without dialogue, except for desperately shouted words. They are about men trapped in a maelstrom of overpowering forces and most of the second half of the movie is filmed aboard the Andrea Gail.. The captain and the crew respond heroically, because they must, but they are not heroes; their motivation is need.

We know intellectually that we're viewing special effects. Tanks and wind machines are involved as are computer graphics and mock up models, but it is the impetus of the story which drives us forward, and by the end of the film I was drenched. One can criticize the sketchy character development in the film, but this would be pointless. The movie is about the appalling experience of fighting for your life in a small boat in a big storm. If that is what you want to see, you will see it done here about as well as it can be done.

Weekly Commentary from Dick Sears: "Tasty Pudding "

Tim Melvin Challenges the Kentucky Ladies' Arm-Wrestling Champion

Irrational Love, from Andrea Ravano

Can you fall in love with a stone? Hardly so, would argue any rational mind. One could raise the question of defining rationality, but than again the discussion would enter the realm of the really great ones, ancient Greek philosophers. To short circuit such a lengthy discussion I will assume that a rational human being will, on average, fall in love with another animated being. There have been some exceptions to this well known fact. The guard of the Mona Lisa room who ran off with the painting and kept it under his bed just because he didn't want anybody else to look at "his" Gioconda. Some racing cyclists fall in love with specific races. Lance Armstrong with Tour de France, Michele Bartoli with Paris Roubaix. Some traders have a "special feeling" with a certain financial instrument, some of us can trade the cash market better than the futures even though there is no difference, a part from leverage. I would have never thought something of such an irrational nature would have happened to me, but it did. I fell in love with a mountain, specifically Mont Ventoux.

For an amateur cyclist pedaling on this rock that emerges from the plains of Provence is breath taking. The mountain is some 6,000 feet. At the bottom you start with olive trees and finish in the snow. Everything is exaggerated, the harshness of the slope which is an impressive 7.5 pct average on the easy side (north), but in the end is above 10 pct. But most of all, each stone at every corner, tells you a piece of the epic of the greatest race on earth. There is the memorial stone in honor of Tom Simpson who died on the 13th stage, July 13, 1967 (speak of recurring numbers!) while climbing on the rocky side of the mountain. On that day, eyewitnesses recall, the heat was approximately 50 degrees Celsius, and the Briton was on a shot of amphetamines which proved to be too much for his heart. After each curve of the 21 km uphill your eyes move to the top in the hope of seeing the end to your pain. Because it's pain that you feel when your thighs push your shortest crank. And pain you feel as the sun starts beating on your head and shoulders. Yet when you are close to the top and you see the "observatory" you know you have accomplished a remarkable task. From the top the sight is breathtaking. Your eyes wonder to the extreme limits of the Mediterranean Alps to the north and the sea to the south, while in distance Avignon and Carpentras lie in the plain to the west. I guess less emotional folks wouldn't move an eyelid, but to this old "rouleur" the experience was enough to have him promise "I will return".

The Merrie Monarch Hula Festival: Myth and Legends, from James Sogi

The Merrie Monarch Hula Festival is the world championship hula competition among Hula groups from around the country held in Hilo Hawaii. Hula is performed by singly and groups of beautiful women and handsome men set to ancient beats known as Kahiko, or modern songs known as "Auana". Hula is a dance which tells stories in an ancient and almost forgotten language about legends, myths, tales of bravery, love, wind, weather, romance, revenge, jealousy, humor and deception. Each hand movement and motion carries a meaning, and a story is told. Years of study is required to perform, but also to understand the meaning of various gestures and moves, which together with the enchanting rhythms and songs weave an intricate and compelling tapestry cloaked in majestic costume and choreography. legend of King Kamehameha's battle on the Alinuihaha Channel in war canoes, the revenge of Madam Pele, Goddess of Fire, at her sister Hiaka, who invented the hula according to legend, for her perfidy and the epic battles of the elements that raged.

While enjoying the pageantry, my thoughts (as usual) drifted to the markets. Like Hula, the Mistress of the Market weaves an epic tale in her movements. The moves of the market describe to those who understand legends of the rise and fall of Empires, such as the collapse of Soviet Union and the effects on bond spreads, the legend of the World's richest man, Bill Gates and his historic rise to fortune with Microsoft, the epic battles such as the battle of Baghdad beginning in March 23, 2003, or the story of the Hurricane Katrina in October of 2005. As in Hula, the market reveals her story and charms through her movements, with each movement a meaning. Study of hula and the market reveals meaning within specific movements evoking emotional responses or telling a tale heard before for which the ending may be legendary if you know the story and the rhythm. The Greeks, the originators of rational thought and science, rely on a rich history of mythology and legend. They, like the ancient Hawaiians, sought is to portray the unknowable, the matters of the human heart that science cannot solve, that logic, problem solving and reason are powerless to overcome. This is not to say that years of careful study cannot yield wisdom and knowledge as the myths and legend embody basic human reactions to events that will occur again and again and follow predictable story lines. Here the study of the ancient and modern texts about the legends of the market like Cornelius Vanderbilt, Daniel Drew, J. P. Morgan, and Victor Niederhoffer have timeless lessons to teach us all. The lessons are about the basic human reactions and emotions of hubris, pride, greed, revenge. The lessons are some of the most important to be studied by the speculator to avoid the tragedy that may befall and awaits the unwary.

Counting Nadal vs. Federer, from Peter Gardiner

Here are some numbers from Rafael Nadal's recent victory over Roger Federer at the Monte Carlo Masters:

Total Time: 3 hours, 49 minutes

Score: 6-2, 6-7, 6-3, 7-6

                            Federer               Nadal

Total pts won                140                    155
First Serve %                 61                     70
Aces                           3                      1
Double faults                  3                      4
Unforced Errors               78                     39
Winners                       68                     44
Winner - UE                  -10                     +5
Break Pts Won/ Break pts     4/18                   7/14

Note: Match won by 15 points. Spread of unforced errors between Nadal and Federer: 78-39 = 39 pts. Even at the top it is still a game of errors.

Query: What kind of play in the point (t -1) is likely to produce an unforced error on point ( t ) ?

Winning Points and Winning Matches in Tennis, by Prof. Charles Pennington

Here's a tennis simulation.

Suppose that over the long run, you win 55% of your points against your opponent. What is the probability, then, that you'll win a match against him? The answer's about 90%. A table is given below.

Each simulation simulates 20,000 points, 3278 games, 2795 sets, and 930 matches.

There's some obvious statistical error, and I haven't bothered to analyze it. For example, the table says that if you win 40% of your points, you should win 26% of your games. But it says that if you win 60% of your points, then it says you'll win 72% of your games. Those two numbers should be symmetric around 50%, but they're not quite.

The main point is that a fairly small edge in point-winning gives you a big edge in match-winning. Take that overhead, that aggressive shot, if you think you can put it away successfully 55% of the time.

column 1: probability of winning any given point
column 2: probability of winning any given game (given column 1)
column 3: probability of winning any given set
column 4: probability of winning any given match

          20.0%    2.2%    0.0%    0.0%
          30.0%   10.3%    0.0%    0.0%
          35.0%   17.0%    0.5%    0.0%
          40.0%   25.9%    2.8%    0.2%
          43.0%   32.7%    9.5%    2.5%
          45.0%   37.0%   16.3%    7.1%
          48.0%   44.5%   35.5%   28.8%
          50.0%   50.0%   50.0%   50.0%
          53.0%   57.0%   69.0%   77.0%
          55.0%   61.0%   79.0%   89.0%
          57.0%   66.0%   88.0%   96.0%
          60.0%   72.0%   96.0%   99.5%
          65.0%   82.5%   99.6%  100.0%
          70.0%   90.7%  100.0%  100.0%
          80.0%   97.5%  100.0%  100.0%


Dr. Kim Zussman adds:

  1. You can't win if you don't play.
  2. You should not play if you have no edge or no hope of maintaining one (see the 50% row).
  3. The point/game/match edge is the same as for short/med/long term stock returns.


Trial by Enron Part III: Opinions, by Prof. Ross Miller

Earnings, by Victor Niederhoffer

You can always hit the earnings target, just sell more of the business. It's not something you can say, 'I can't do that'. That's a management decision of whether you want to do that. -- Jeffrey Skilling in his Enron testimony reported by Fortune .

The earnings numbers in the first quarter are always a full-of-information contest since it's the first report for the year, spending and pricing is sticky, and many aspects of financial life are on a budget. So far of the169 S&P 500 companies reported: 119 were positive surprises, 34 were on the mark or no surprises, and just 16 companies reported negative surprises. In terms of percentage surprise, the median positive surprise for the 119 that were positive was 7%, and the median negative surprise was -5% for the 16 that had a negative surprise.

Turning to the reported earnings versus last year's corresponding quarter, the average earning's increase was up 14% to 22% depending on the weighting. And of the 169 reported earnings: 139 were increases, 3 were unchanged , and 27 were below last year's figures. There are many aspects of the earnings reports that interest me, but I would like to focus on the companies that just missed or just beat the estimate. Given there are numerous ways that a company can adjust its earnings up or down, it takes a very honest company to report a one cent decrease relative to estimates. And the vast preponderance of companies that report an earnings increase of a penny or two, must be stretching on average. I hypothesize that the companies that beat by a penny or two are less trustworthy than those that missed by a penny or two. It is good to do this contemporaneously because there are too many adjustments and retrospections involved in looking back at what the estimates were at a given time and how they actually came out.

Here is a list of the positive surprises of two cents (18) and one cent ( 22): Two cent positive surprises: IMS Health, Broadcom, Leggett and Platt, Robert Half, Equifax, Gilead, Baxter, Costco, Regions Financial, Bed Bath, Danaher, Darden, National City, Lilly, Amgen, PNC Financial, Sensient and UnionBanCal. One cent positive surprises: NY Times, Oracle, Schwab, Texas Instruments, Qualcomm, Huntington, North Fork, Coca Cola, Stryker, Am South Banc, Bellsouth, Bank of New York, US Bancorp, Fifth Third, Marshall & Ilsley, Compass Banc, United Parcel, Johnson & Johnson, Torchmark, Auto Zone, North Fork Bank, and Parkvale Fin.

Here's a list of companies that missed their estimate by one cent: Dow Jones, Ford Motor, Motorola, Paychex, Hershey, Walgreen, Supervalu, United Health, Zions Bancorp, Concurrent Computer, Pacific State Bank.

Here's an approximate distribution of surprises:

Positive Surprises thru 4/21/06 of S&P 500 companies:
    Surprise            Number of Surprises
      50 and up           05
      25-49               04
      10-24               12
      05-9                31
      04                  10
      03                  16
      02                  18
      01                  22
       0                  05
      negative 1          09
      negative 2           0
      neg      3          01
      neg      4          02
      neg      5 to 9     03
      neg  10 or more     01

What can we say about a distribution like that. There seems to be many too many one cent and two cent positive surprises (39) relative to one and two cent negative surprises (9). Particularly striking is that there were not one two cent negative surprises, but 18 positive two cent surprises.

Most striking of all, is the accuracy of the Thomson earning's estimates that were used: 79 of 169 were within 4 cents of actual and 69 were within 3 cents of actual. (Differences in totals and enumerations occur because of the unchanged being fuzzy as to positive or negative surprises in various compilations) (These figures are based on pencil and envelope calculations based on Bloomberg reports) (Comparable figures for the % of companies reporting improved sales relative to the corresponding quarter last year and relative to estimate also show this 10 to 1 favorability ratio) ( A much better metric to measure all these numbers is the earnings change or the surprise in cents per share per dollar of price, or equivalently the total earnings change or total earnings surprise per dollar of price. However, as I must play as well as count, that will be left as an exercise for those who want to go beyond the norm.)

There are many interesting queries that strike one as one performs these tabulations. The most important question is what are the predictive qualities of these first quarter results relative to last year's actuals and this year's estimate, subsumed in these numbers. How has that relation changed over time, especially in the post Sarbanes Oxley era. What are the quantum numbers vis-a-vis surprise and actual versus last year that are good and bad for future performance? Are the reversals in actual or surprises a special class in themselves? What other special classes exist?

An Original Perspective from George Zachar

I've always thought of public company financial data first and foremost as highly nuanced signaling devices -- sometimes intentional, sometimes inadvertent.

The classic case, of course, is the company that always "beats the Street" by a penny, showing that it's "playing the game" [nod/wink]. This class of enterprise's financials must be read as one would peruse a simple press release composed by in-house touts. The silo company comes to mind.

Another category would be the precocious adolescent firm unwittingly showing its immaturity. An eponymous search firm and its odd tax burden miss come to mind.

Still another case would be firms with very well-publicized rot [GM, NYT]. Here, the company can be thought of as answering an interrogative, to wit, "How are you coping with that anvil on your toes?"

At the individual company level, there is much to be gained from parsing financials "in context", much as [cough] Fed watchers read the central bank's statements and analyze economic data.

I confess to being at a loss for a way to translate this analysis directly into a countable, predictive technique. I merely offer the above as a philosophic framework for approaching the question.

How to Explain Skewed Distributions Then? asks Prof. Gordon Haave

If we were to expect that the distribution of surprises would be roughly normal, then how does one explain the skewed distribution that the chair describes above? First, as we all know, companies have the ability to skew their reported earnings. So which direction do they skew them, and by how much? Let's make the assumption that any earnings skewing needs to be "made up for" later on. Therefore, one does not want to skew too high because it will not only need to be made up for later, but might also have the problem of increasing expectations as well.

One does, however, want to have positive surprise. The reason is simple. Every day I get a call or meet with a large cap growth manager. Almost every one of them has in their initial screen the necessity that a company have a string of positive earnings surprises. Many of them have in their sell discipline that if a company doesn't surprise, it's run is over and the stock needs to be sold.

Therefore, there is a great incentive to create a positive surprise, and $.01 or $.02 of positive surprise is enough to "have positively surprised" to meet the large cap growth screen.

Over time, however, consistently phony positive surprises need to be made up for. What all this means is that there is absolutely no reason to miss by a tiny bit on the downside. Instead, if you are going to miss on the downside, you make it a doozy of a miss. You frontload all sorts of costs, what that gives you is a multi-year silo to pull an extra penny out of every quarter to create that $.01 positive surprise so that you can get back into that large cap growth game.

Thus, a distribution of lots of small surprises, and very few small misses over big misses compared to small positives over big positives.

Charles Sorkin Reminds Us to Not Forget the Buybacks...

I suppose that it is also possible that the current strong pace of stock buybacks has been underestimated by the sell-side. We are still in the hundred-billion dollar range of open-market share repurchases, and even if an analyst got the gross earnings correct, the shares outstanding is a moving target.

Speed Reading, from Sushil Kedia

Just picked up Tony Buzan's Speed Reading Book this evening with a promise it is the last book purchase for the time being. This had to be after, getting an ultimatum from my better half that any new book purchases adding to the tome of unread and unused books would draw severe penalties.

It appears to be helpful in solving several issues, other than being the perfectly convincing last crime right under the nose of my wife. Those not averse to eDonkey would find therein many of Buzan's other equally interesting material also. Recommend already despite being only on page 27. It's a do-it-yourself course loaded with creativity along with the usual explanations of reading speed logistics.

Why Do Good Problem Solvers Not Make Good Money Makers? from Dr. Michael Cook

Victor asked this question recently, and it's been kicking around my subconscious. Here's an answer that occurs to me.

Gabriel Marcel said that "Life is not a problem to be solved but a mystery to be lived." There's something existential about trading which involves the whole person and is more than solving a problem. Decision making under uncertainty does not come up in problem solving the same way it does in trading. If you explore a possible solution, uncertain as to whether it will be right or not, you can always backtrack. Putting on a trade represents an irrevocable commitment of money - there is no backtracking. You can terminate the trade of course, but you bear the consequences of your decision.

You don't make money by solving problems but by making decisions. Therefore there's no reason why being a good problem solver would be a predictor of being a good trader.

J. T. Holley adds:

This one to has been bouncing around in my noggin as well. One thing that might shed light upon the dilemma is Nietzsche's words in "The Birth of Tragedy" where he discussed the Greek characters of Apollo and Dionysus. That being form, individualism, rationalism of Apollo and charisma, enthusiasm and ecstasy for Dionysus.

The problem solver obviously falls into the Apollo corner, but we can't be good solvers unless we can go outside the forms to find new revealing things to solve the problems that are created in speculation dealing with the ever-changing.

My conclusion is that you have to be both a good problem solver and at the same time not rational but spontaneous and ecstatic in pursuit of profits. The successful speculator would seem to be one that is both Apollonian and Dionsyian. As Vic talks about not just having a good end game but a good Beginning, Middle, and End game. Look at the examples of S0r0s, to me both Greek characters seem present?

Makes me wonder?

Sushil Kedia comments:

Most people say that is it is the intellect which makes a great scientist. They are wrong: it is character. -- Albert Einstein

Fortunately / unfortunately though character remains an uncountable attribute its capability to differentiate two individuals of the same 'level' of intelligence through a measure of their outputs is still clearly possible. In the context of recent discussions on traders vs problem solvers could we substitute the word trader for scientist in this thought from an all time champion problem-solver?

The character of a problem solver is finding answers to what he does not know, while that of a trader is surviving the unknown with what he already knows. A problem solver is working at finding edges, a trader works at living the edges.

It might appear that patience of being in there is a virtue for a problem solver, while for a trader patience is only a virtue before he gets in there. It's more effective to classify trading as a special class of problem solving that is time-bound. There is always a rate (ever-changing that too) which makes or breaks a trader, while the broader class of problem solving may still be beyond the bounds of time.

A long list could be built indeed. But would it be appropriate to treat traders as a mutually exclusive set from problem solvers? I contend that traders be seen as problem solvers who have identified and continue to improve upon the unique attributes of the trading related problem solving universe.

If indeed the market is seen as a perpetual machine then the problem solvers are not going to solve the problem of trading well. That makes an existence in the markets goal-less with ever changing dreams (and possibly nightmares). But, the moment a trader acknowledges the perpetual machine is reconfigured at each next moment of observation problem-solving trader could continue to solve problems of trading.

Undoubtedly, goals are dreams with deadlines. So, the subset of problem solvers who are engaging in trading have goals. If those traders who end up flowing with the intellectual freedom of the broader problem solving class into dreaming, obvious problems arise for them. The argument that wealth is built by investing (long term trading) while traders die broke is also then an incorrect application of generalizations. Across all time frames of trading markets, the differentiating factor to me appears the goal setting faculty and the will to live up to that.

As counters (numerical as well as numerological) all traders are problem solvers. All problem solvers when applying what they have been able to count are traders. Well, even gamblers count. The difference in character that produces the edge is counting the right things as much if not more than counting in the right way.

So, one needs intellect to be a problem solver, and add character to that to be a trader.


If E stands for Enigma in this equation then M stands for Mettle and C for Character.

Would it be agreeable to assume that it is important to understand why somebody does something while trying to understand what he is doing. Add to this yet another simple idea that we are limited in our perceiving with our patterns of existential experience.

A man with a knife could strike thoughts of revulsion, only if one did not know that this man is a soldier or a doctor or such. Now, if I perceive a man with a knife in hand as only being a butcher and nobody else, it is my problem where I come from.

Recall a clip from the Shaolin Temple or another from the 36 chambers of Shaolin. An eager fighter focused on expanding his prospects of improving his own lot, approaches the master grabbing his hand assuming the master has offered his own for a shake. The master kicks butt! Thereafter, a choice exists - cry foul and call names and believe it is all crass or go through the transition to realize that in the Shaolin Temple the Masters have only one choice - kick butt at every grabbing of an extended hand.

I am not arguing this to be the truth. But, then truth is different for each coming from his/her unique experiences. Truth keeps evolving. The more one rubs values of Character perceived by oneself, the more the Enigma expands. Why do I not choose to raise the value of Mettle instead while maintaining myself on the equation within the tolerable range of Enigma leaving aside the urge of raising values of Character higher than I can handle?

The moment such a thought flashed across, the only thing left for me to decide was to figure out if this is no Temple of Shaolin. If it is not, I should go to find the Temple of Shaolin. But, if I reach another temple too, I am not getting in there to worship, but to know how to hold hands. It comes.

"What a Lousy Trade That Was!" from Hany Saad

You often hear traders talk about the best trade of their career being a loser and how they learned what "not to do", etc... Here is the flip side to that coin:

Could the worst trade of your career be a big winner?

I have been selling the naked puts on Google since the day they listed options on the stock. I made a killing. My system was simple: Sell the near month OTM naked puts and double up on the number of contracts every time the stock gaps down or declines by 5%+. I collected those juicy premiums on the out of the money contracts and got only one assignment on 28 trades. Walking on water, no? With the pre-open pointing to the 450+ and with taking the pencil to the paper, and w/ much 20/20 hindsight, this turned out to be the worst trade of my career. I was bullish on Goog when it was first IPO'd, I was right, but instead of using a simple buy and hold, save myself the VIG and participate in the phenomenal rise of the stock, I jumped in and out like a yo-yo making chicken feed, pretending to be the casino while helping the dealer send his kids to school at my expense. As if I didn't read about "the economy of motion" principle.

What a lousy trade that was!

Bill Gross Does it Again, by Dr. Alex Castaldo

After meeting with all his subordinates (and after 2 hours of yoga meditation) Bill Gross has issued his latest and much discussed Investment Outlook.

For those who do not recall a previous foray by Mr. Gross into equity market forecasting, we will republish a comment by Paul DeRosa which appeared here in October of 2002.

Briefly Speaking, by Victor Niederhoffer

The moves in markets these days bring back many pleasant memories of what it was like when I started trading commodities in 1979. Gold went up continuously from $250 to $800 an ounce, silver from $5.00 to $50.00 an ounce and bonds went down every day as interest rates climbed from 5% to 14%. Trend followers were coining money and every chart book showed the 10-day, 30-day and 200-day moving averages all in perfect alignment with the short terms below when trends were down, and the short terms above when the trends were up.

During this year ending April 19th, silver had gone up 75% and gold up 50%, bonds during the last two months lost seven points going from 114 to 107 and the trend following index of S&P managed futures was at 1161, up from 1130 at the end of the 2005, and up from below 1000 in April of 2005.

In my hay day at the start of my commodities career, when I brought $40000 up into 20 million in six months (before losing almost all of it in the subsequent three months) I was often displeased if I didn't make at least a million in a day. But then one day like yesterday, when silver went down 14%, its greatest % decline in 23 years, and gold fell 2 or 3%, the whole edifice fell apart. I was very lucky to survive at that time, and it was only due to my humility having lost so much in athletic pursuits and poker games that I knew enough to force the little woman to sell me out regardless of my pleas. One hopes that other poor shavers will have similar humility.

Sagacious views. It's always bitter sweet to see the edifice of a sanctimonious scoundrel fall, especially when he was protected by a massive public relations foundation and half of the books written on investments touted him as the world's greatest investor ever. As I have pointed out in Pracspec and these pages, his constant message of pessimism about American business and stock market moves, and sticking to the tried-and-true old-faithfuls in the shoe and candy business is one that, like Abelson's, is guaranteed to be the worst advice that new investors could possibly believe. A spec foster student of mine went to lunch with him in Nebraska and had asked me for a few questions to ask him, and one that he asked was "why have you been consistently bearish on US stocks over the past 10 years in spite of the 10 million percent a century returns?" The sage answered that he wasn't bearish but had actually found some good values in Korea. But now comes news down the pike that of 100 pension funds in 2005, Berkshire had the lo west return (4%) of the funds studied by Milliman USA. They had just 10% of their assets invested in US stocks. It seems somewhat fitting that in view of how wrong he has been, that his stock is flirting with a six-month low, is down some 10% relative to the market this year, just suffered a run of seven consecutive daily declines, and is trading at just some 7% above its 1998 and 1999 highs, and that's of course without dividends.

Speaking about seven's, one notes that the last seven times that Intel opened up on the day following a quarterly earnings report, that it closed down from the open as it did today. I own Intel, and must admit that in all the years that I have read earnings reports, there has never been one that seemed on the surface to be more bearish (including the icing on the cake that they plan to cut their stock buybacks by 1/2) than yesterday's first quarter report; except for Pfizer's last year which I also owned.

Also, seven is a number one hopes for when shooting in dice and when hoping for long runs in such things as trend following stocks. Looking at the number of times that the S&P Futures has gone down seven or more days in a row since 1996, I find no occasions when this wish has been fulfilled. On the other side, there was a run of exactly seven daily rises on nine occasions (with a zero expectation the next day). Such numbers are consistent with the results of the Triumphal Trio on a much larger tableaux.

When people have asked me how the trading was going during the last 10 years, I have always answered "Not as bad as before, but then again, you can't go lower than the nadir." I intend to keep my Intel position on similar grounds. How can things get worse?

Might I suggest that this humble attitude is a very appropriate one for specinvestors to consider?

Steve Leslie mentions:

Few may recall this but before there was an LTCC, Van Waggoner, Kevin Landis, Boesky, Milken and others there was Gerald Tsai.

It may bear witness to remember how Mr. Tsai managed The Manhattan Fund through the go-go sixties with a momentum investment style using technical analysis to a destructive finish by the early 70's. How he was exalted as one of the first and greatest celebrity mutual fund managers whose career as a money manager ended as incredibly as it started.

As it was described by George C. Scott in the movie "Patton" after a great victory the Caesar would ride in his chariot with a Roman guard whispering in his ear, "All fame is fleeting."

J. T. Holley adds:

Ask yourself if there really is any other attitude to have? It would only be empathy sharing with the bear camp and fuel to their fire. Not even indifference is appropriate. You got to live on the "Sunny Side of Life". It's amazin' the power of being humble, it a vote cast to the positive side in my book.

Steve Leslie adds:

When I think of a humble attitude, I think of no limit hold em tournament players. You have the young guns who talk smack and after they win a hand get up and scream and pump their fists in the air. Then you look at the veterans like Doyle Brunson, Dan Harrington, Dewey Tomko Howard Lederer. Guys who have been around for decades. When they take down a big pot they do it quietly almost painfully. They understand above all, that one mans good beat is another's misfortune. And just as they have knocked someone out of a tournament, they have been in that same chair many times before. There is a famous phrase among veteran poker players "You play poker by the year and not by the day." Same with speculators.

Potential Difference and the Circuit Breaker, by Sushil Kedia

The near 0% yield in Japan is providing all the potential difference to every other economy and market in the world for an unprecedented spiral of mega-returns and rise of pockets of boom.

The circuit breaker in conventional electrical engineering is a device which pops out when more heat is generated than the "conducting metal" can handle. However, the difference is noteworthy that in such an analogous evaluation of circuitry the zero potential is actually that of the ground wire. So, while hedge funds skim the world’s “establishment” institutions of talent, pace up the flow of the current into potential zero, the circuit breaker concepts of heating economies may not operate and thus there is indeed a risk of batteries going totally dead finally.

I shudder to imagine, how the picture may roll out irrespective of when it rolls out. The establishment is turning increasingly towards a dinosaur-like inflexible attitude while trying to maintain its bulk as it faces the piranhas and the sharks. Imagine, what happens when a well-established, well-connected mesh of intertwined circuits find that the ground wire itself has started participating in the Alternating Current? That’s a short circuit.

The bulkier one’s continue to stay getting loaded further and further on a rising heap of price created value-spiral while the lighter-heeled and the well-heeled are all moving to the Alternative Universe. Short on zero cost cash and short on skills, the dinosaurs are marginalizing themselves to a situation where they would be the worst placed when the next Black Swan shows up.

Dr. Doom might just have another reason to await more eagerly the inevitable Gloom and Doom that are to follow this Boom. But, when, how, where it would all start? The ground wire has never been used to alter currents and why should it ever then be used? But then, if it is not going to be Circuit Breakers either in this phase of the ever changing cycles then what is it going to be?

Probably, the currency traders’ fable that the Taxi Drivers in Tokyo broke the Dollar Yen eons ago by tripping the crucial breakout point on the cha*t might find another incarnation this year. A rehearsal, a trailer of the survival instincts might be played out if the incarnation of the Yen bull comes to temporary life this year, making a re-test of 100 yen to a USD.

If you are in Tokyo, don’t yell, “Taxi”! The cabbie might just figure out who you are – A Specinvestor. The next thing you'll find is a gang of cabbies, could again, be asking you to set off one of the most lethal short-circuits in markets.

Dangerous Poker Hands and Stocks, by Steve Leslie

The recent stratospheric rise in the popularity of poker has been nothing short of phenomenal. It was once a game mostly contested in smoky back rooms in pool halls, lodges and behind locked warehouse doors with armed militia watching guard outside. In fact, it was not so long ago, that casino's were eliminating card rooms and replacing them with slot machines. Now massive poker rooms have sprung up from New England to California and it has quickly become a staple of the American Diet.

Huge television coverage and $500,000-$1MM payoffs, commonplace for tournaments, have brought a visibility and credibility to the game. And it seems as though there is a game to be found anywhere in America. Where else can you sit down next to Ben Affleck, James Woods, Jennifer Tilly and other celebrities for several hours and get to chat with them all for a buy-in at the Bellagio or The Bicycle Club. In many ways, poker has become a modern day fantasy camp for poker players.

The Cadillac of Poker is No-limit Hold'em and it is a common phrase that "it takes a few minutes to learn but a lifetime to master." It is without peer, the most popular form of poker played in tournaments. And as a result, it offers the highest jackpots for winning. To be crowned the World Series of Poker champion, you have to win the main event. Last Years winner and defending champion is Joe Hachem, an Australian who pocketed a cool $7.5 million for his efforts. He survived six grueling days of competition and worked through a field of over 5000 competitors. Past champions have included Johnny Moss, Doyle Brunson, Stu Unger, Johnny Chan, and Phil Hellmuth. Chan had a cameo role in the movie Rounders.

There are many technical skills that one has to learn to become successful at poker, perhaps none more important than learning to play dangerous hands. What are the most dangerous hands in hold'em poker?

For those unfamiliar with the game of hold'em poker it is a variation of the old seven card stud once the most popular game played. Initially everyone is dealt two cards. These are your hole cards. Before the game begins there is a person who is designated a dealer. The person to the left of the dealer puts in a bet called the small blind also called a half bet . The next player puts in a bet called the large blind. These are forced bets. The third person then must either equal the large blind bet, raise, or fold. and so on.

Next, three community cards are placed in the middle of the table. This is called the flop. Everyone shares these cards. And betting resumes for the players who remain, immediately past the dealer. After the betting is complete for that round, another card is laid out front, this is the turn, another round of betting, and then the last card is laid out, called the river and a final round of bets. You combine your cards with the community cards to come up with the best five cards out of seven. The Winner of the pot is then declared.

In hold'em the most important cards you receive are the hole cards. The best cards in order are A-A K-K Q-Q A-K A-Q. They have the highest probability of winning the hand after the community cards are placed on the table. The remaining pairs have diminished value. These are the marginal hands the ones you will most frequently get during your play. What are the most difficult cards to play?

These are the marginal hands. The ones that need to improve for you to win the pot with because they are statistically inferior to other likely pairs. For example J-10 10-9 K-9 suited cards and small pairs like 7-7 5-5 etc.

Here is where you start to get in trouble with marginal hands. And that is when the marginal hands begin to improve after the flop. Now your 8-7 becomes a draw to an open ended straight. Or with a Q-6 you match your queen but you have a weak kicker, or you get a 4 flush. Now what do you do with them? Do you hold on through the turn and the river or do you fold. These are the most frequent plays that you will be faced with, up to 25 times an hour.

The top players have a strategy for these events and a plan. It is the decisions that the professional makes with the marginal hands that separates them from the rank amateur or in tournament parlance, "The dead money." Everyone knows how to play A-A or K-K but those hands are few and far between. In fact, the likelihood of you being dealt A's is 221-1 So the majority of your decisions will center around the marginal hands, thus that becomes critical to your success.

Most stocks as I see it pose a similar challenge. Everybody knows how to play a screamer. A rocket ship. All you have to do is climb on board and let it carry you to dizzying heights. The IPO of GOOG comes to mind. Microsoft in the 1980's You just can't play those wrong. The question isn't if you will make money the question is how much. Once again how many of those do you get to see pre flop. Not many huh?

So we are faced with the marginal stocks. And when they begin to improve what do you do with them then. Or conversely if they don't improve what do you do. Like it or not this is where the majority of you time will be spent. How you choose to play them will determine your success and failure. It is the true professional who recognizes this and is prepared with a methodology to deal with it. I suggest we spend a little time and work on the marginal ones a bit harder, the weaker aspects of the portfolio the strong ones will take care of themselves.

For deeper analysis of poker I recommend poker books by David Sklansky, For tournament poker I recommend Harrington on Hold'em.

Magic of the Markets, by James Sogi

Of course we know it's not magic, but even to an educated person, some of the incantations required to profit in the market take on a mystical aura. The right phrases need to be spoken or written just at the right time, in the right place, with the right conditions in place. The moon needs to be just right, the conditions on the other side of the earth need to be right, the proper ingredients need to have been out in place, with the proper mediums. Much of the work must be performed only in the lonely dark hours of the morning when only creatures of the night lurk about. Whether all, some or none of the ingredients or procedures are critical may not be known. Such alchemical chicanery sets in motion a power set of forces of dark and good which will turn into gold or unleash the evil demons of the underworld on the erstwhile wizard like Mickey in Fantasia's the Sorcerer's Apprentice. Different sorcerers possesses different degrees of mojo and have varying alchemical power or powerful incantations to convert the base elements.

First there are the incantations. "I buy", and with those words, millions are made. But they cannot be said at anytime, only when the moon is in its proper phase, or when the yen has dropped when short. Studying Java requires just the right incantations to be said, words with secret meanings, in just the right order, and chimerical events begin to unfold. Arcane algorithms are needed to decipher the hidden meanings in the markets using arcane and mystical symbols of an ancient and forgotten foreign languages unknown to the lay populace found in ancient texts trigger complex machinations. The sorcerers of the market gaze into liquid crystal balls and see events unfold thousands of miles away and can predict the future! We study ancient and dusty texts from hundreds of years ago to divine the secrets of then ages. How is this not magic?

Many cloak these antics under the rubric of "science" and math, but as I study them more and more, it becomes clear that even the masters of these dark and arcane arts are not so sure about how they work, and there is some degree of mysticism at work. Exotic, rare and expensive earths and metals are fitted together in fantastic precision as magnetic disk whirl, and electro magnetic pulses whir about.

An Interesting Confluence, by Alston Mabry

1985: $354 per oz
2006: $627 per oz

1985: $40 per brl
2006: $73.75 per brl

Median home price - Los Angeles:
1985: $120,000 = 339 oz gold = 3000 brls oil
2006: $442,000 = 705 oz gold = 5993 brls oil
Increase in price in oz gold: 108%
Increase in price in brls oil: 100%

1 unit of the S&P 500:
1985: $195 = .55 oz gold = 4.88 brls oil
2006: $1315 = 2.10 oz gold = 17.83 brls oil
Increase in price in oz gold: 281%
Increase in price in brls oil: 266%

Cycles, by Victor Niederhoffer

It's all so easy in retrospect. The market circa Jan. 31, 2006: S&P was 1300 and Google was 470. News of a slowdown in Google earnings from +1,000% or so to +990% came down the pike, and investors slammed the stock helped by a Barron's article about how stupid the customers were not to know that they were paying for some false clicks and that their cost per inquiry should be much less than the 10% of comparable cost from reaching them through print media. Then on April 17, about three months later the market sets a three-month low at 1287 amid earning's woes and interest rate jitters, falling dollar, inflation fears and loathing of Bernanke.

So on the previous day, the market had that disruptive move, going from 1299 to 1287 in an hour, shaking out all the weak longs. It hit 1299 three times in a day, setting a triple top, and put all the boys who follow the public, or the channels, or the pivots short. Then of course, the biggest one-day black swan move in the last three years.

Not to forget is the TrimTabs insight, that the payment of Service day is an illiquid one, or the writer's mojo that the Service day is one of revulsion, and that the market always goes down on the revulsive days. There it was. All that was needed was for the bearish weekly commentator to have been at his perch cheering on the bears, calling for an imminent move to the Grossian Dow 5000 level, and citing a few of his friends who caught the entire Internet move who were more bearish than ever now.

The Outsider, from E. Lis

My entire professional career has been outside the United States. Born and schooled in Park Slope Brooklyn, I some how managed to enlist as a bond trader in the foreign legion of a large US investment bank. My tours have included extended stints in London, Paris, and London again and now Tokyo. All told, I have been on the road for almost 18 years! It's amazing how much there is to learn about yourself, your surroundings and indeed the markets. I feel like I am just starting to scratch the surface. So here is what I wished I had done sooner rather than later.

And on the bond markets:

Ambushes and Signals, by Victor Niederhoffer

One of the themes of Louis L’Amour novels is how humans can use seemingly intangible signals to ward off danger or plan a proper path to the pot of gold. One of my favorites is that he knows that the Apache always plan the ambush in the unexpected place, because that’s when the victim will be least alert. Also, how he can tell from the sniffing of his dog, or horse, that all is not well, and that something unimaginably terrible is lurking. The unseen signal, the sixth sense led me to consider some unobtrusive signals for markets.

The Donut Indicator

My colleague Mr. Wiz points out that when he brings donuts, as he did this morning, it's very bullish. This one's easy to figure out and doesn’t involve a sixth sense. You see, he stops to buy donuts when he fills up on gas. There's always a lag in gasoline price increases, because it takes a few days for inventory to be refueled at the station and most stations price their gas at refilling cost, i.e. the last cost they faced on refueling or a little less. So Wiz always fills up before the increase and of course the donut store is across the street form the gas station. So he brings the donuts after oil is at a 20 day maximum, and that's usually bearish for oil, and when oil goes down or stays the same, that's bullish for stocks. (this one has to be tested with donuts and oil both as independent variables to tease out the independent effects).

The Romance Indicator

For many years, I've told my other that it's very important for the market that there be a reasonable level of romance in the evenings. I've found that when there isn’t the market tends to go down miserably. The causal chain here may not be due to the romance, but might be due to the fact that when things are really bad, and the adversary is set to go for the jugular, I sense it; there's a day for example, where they had me in their sights, but toyed with me like a cat playing with a mouse, only to make a much bigger kill the next day. I sense this, and thus the association which I use to my advantage to ward off the Evil One, and to make an ill wind bring a little good.

The pain in the back

The Palindrome always used to say that he knew the market was going to crash when he had a bad pain in the back. I have checked with physical therapist Andy Ilowitz, my dearest friend, and he assures me that it is common for pains to increase during times of economic turbulence. The reason is probably biological, having to do with increased bacterial and virus activity during times of stress and lack of sleep. The Palindrome is the one person I knew who had the sixth sense of danger, and he used it often to fire chief operatives when they were about to fall into doom, and to predict my own demise many times before it happened. I don’t know if this signal could be quantified except that he often plays at a certain domed edifice in Long Island City, and a call there to see if he canceled a court, or better yet, a sentry in the parking lot, or best of all, an arrangement with one of the beautiful babes that takes the $500 an hour court reservations should do the trick.

I open the floor to other indicators of this nature and will give a prize to the best three that are forthcoming.

Craig Maccagno adds:

The Amateur Indicator: Seems that after several years of trading whenever the market catches me flatfooted with a large move, and the thought comes to mind "Man I would have caught that move in my first six months of trading, can't believe I missed that one" it tends to be followed by a large contrary move. I can only assume that's due to the fact that whenever it appears the market is doing the same thing over and over again I get cautious while many continue doing the same thing and once the cycle changes and that thing (whatever it may be) stops working, the many become trapped. Of course the lost profits due to my cautiousness always add up to more than the one loss when it fails, or so it appears.

Rod Fitzsimmons Frey says:

I've noticed that my weekly grocery bill is a strong leading indicator of the SP, with a decided negative correlation. Usually when I've had a particularly satisfying week, I stop to buy a bottle of wine on the way home. Since I feel I'm well on the way to the upper classes, I'll splurge for a bottle price higher than the plonk I usually buy.

Of course, that's too good for just me and Heather to drink, so we invite some friends over to share it with supper. Of course, guests call for a better cut of meat on the grill than we have in the fridge, so I'm off to the store to get that. Might as well get another bottle of that stuff while I'm at it -- sure is good.

If my eyes widen a bit when I see the grocery tab at week's end, I know I've been riding a bit too high, and am due for a fall along with the index. This needs to be tested, except I'm trying to lose weight so you'll just have to take my word for it.

Alston Mabry mentions:

I should have let the List know that there would be a major move this week. Such moves always happen when I am on the road on business and unable to take the profitable positions. Sure enough, I was traveling and in meetings all day yesterday and today.

Some Indicators from Dr. Janice Dorn:

The Little Child Shall Lead Them Indicator: One of my friends who trades actively has a four year old daughter. Since he trades only two commodities, he shows the charts to his daughter every morning, and asks her if the market is going up or down. If she says "Up" he buys.

The Newsletter Sign-Up Indicator: One well known newsletter judges the health of the market by the number of new subscribers and the so-called "revolvers." When the market is a full bull phase, there are few new subscribers, but, as soon as downturn is perceived, the new subscriber numbers jump and the "revolvers" come back.

The Virtual Chat Room Abuse Indicator: When the markets are going up, upbeat music is played, people are drinking and smoking and the moderator is King of Kings. When things start going, or are perceived to be going, South, the music turns to sound effects (airplanes crashing) and blues/country songs, people are drinking and smoking more, and invectives are hurled at the moderator who often leaves the room crying. I am not making this up.

The Migraine Headache Indicator ( my personal favorite): When everything on my screen in green except a large position of mine and I have to shut down, take an Extra Strength Excedrin and go to a dark, quiet room. At the first hint of green, the migraine magically abates. Losing leads to stress which exacerbates or causes disease. If you take all diseases known to person-kind, put them on a huge dartboard and throw a dart and hit one, you will land on a disease which is either: stress-related, caused by stress, exacerbated by stress, or-if you get it- you will manifest stress.

The Gym Rat/Meat Market Indicator: I work out harder and others appear to be more emboldened re: making passes at me ( and I am not ungrateful- don't get me wrong) when the markets are in an upswing. So, perhaps I am more attractive and happier when I am in profit than when I am losing.

The Hindenburg Omen Indicator: One perennially bearish newsletter writer issues an Hindenburg warning almost every time the markets go down. With a high frequency (I KNOW that I really do need to learn to count), a nice rally follows over the next few days. Here is part of the warning issued Monday April 17: Monday Market Update, April 17th 2006:

"We received a third Hindenburg Omen Monday, April 17th, 2006. This extends the risk period, as the clock continues to tick on the 73.8 percent probability that equities are about to fall over 5 percent from current levels over the next four months, on the 52 percent probability that equities will drop more than 8 percent over the next four months, on the 39 percent probability that equities will drop 10 to 14.9 percent over the next four months, and on the 26.1 percent probability that the stock market will crash - either fast or slow motion - over the next four months. Only one out of 11.5 times does this signal fail to generate at least a 2 percent decline from current levels. Most declines are well underway within a month of this signal. This is only the 24th confirmed Hindenburg Omen in the past 21 years, and so far has a cluster of three signals. We got one almost exactly two years ago, on April 13th, 2004, which led to a 5.4 percent drop before the PPT stopped it cold with massive infusions of liquidity. We got one on September 21st, 2005, which the PPT also stopped with huge chunks of M-3, that one coming along with the three devastating Hurricanes of 2005. There has not been one major stock market decline over the past 21 years that was not first preceded by a confirmed Hindenburg Omen. Here we go again."

James Sogi Some Indicators of his own:

High Surf Indicator: When the surf is up, things are afoot in our natural world and on a world wide scale. Surf is generated by massive storms an ocean away. These storms travel the globe. Hurricane Katrina caused large surf affecting the markets and the national economy. It tends to elicit the "sky is falling" syndrome and the Chicken Little idea that any dip will continue until Armageddon. Which is silly. Why should a storm end the economy as we know it? There have been storms, and there will be more. Tsunami is large surf and causes global effects, not always what is expected, but reflect large forces at work in the world. El Nino causes warmer water, which causes the wind to blow, which causes large waves and we expect big waves all season during El Nino. El Nino causes rain to fall sooner, and as the weather system rotate around the globe results in drought in the Midwest and causes the price of corn , wheat and soybeans to rise. El Nino affects the fisheries off South America. Large surf is an indicator of large macro events occurring in real time on a global and even cosmic scale, and when they converge, even though some may scoff at the idea, why we start seeing moves like today, like last week. When the surf is up in Hawaii, this trader is happy, fit, tanned and ready to handle the regular beatings the market dishes out, the over the falls, the two wave hold downs, getting caught inside, and near drownings. So when the waves are up, I am ready to trade! Cowabunga dude!

The Private Jet Indicator: This indicator counts the number of private jets lined up in Kona and Aspen. This indicator predicted a good market at the open of this year. As the Titans and Captains of Industry prosper, ride their corporate business jets on personal frivolity, it will result in a trickle down to the economy. When they are riding coach, well times are hard.

The Fishing Boat Indicator: When the divorce comes or the layoffs slips come, the fishing boat is the first to go. When time really get rough, the big late model pick up trucks start to go and is a variation of this indicator. Another good one is the size of the tires on the pick up truck. The kids like to jack up their pick ups and have monster tires. It costs thousands. So there are many monster trucks now. At the other end of the cycle, you see trucks with jacked up suspensions in the Credit Union repo lot with little tiny tires. This is more a bottom up indicator looking at the regular working population as a reflection of the economy. This Easter Everyone and his uncle were out in their boats.

The Rental Indicator: This is part of a group of real estate indicators here in Hawaii along the likes of the the number of rentals available, the price of a rental unit, the number of foreclosures, the number of MLS listings in various price categories, the number of vacant commercial office and retain spaces. They give a good feel for the real estate market here. Another tell is the number of real estate closings and business formations vs. the number of real estate law suits and business dissolution proceedings which track the business cycle.

Jeff Rollert adds:

The Impending Separation Indicator: My truly perfect and wonderful indicator is the number of impending separations by brokers and their spouses. Yes, it could be said that "tail" leads "tails" in/out the door...(that last part is humor BTW).

I find the spouses see income shortfalls coming faster than brokers do. Best data is at the MD level.

Yishen Kuik adds:

Average Age Indicator: I remember reading a few years back about how the petro-chemical industry was experiencing a rising average age as a result of declining interest in college students in studying chemical engineering.

My wife has a degree in chemical engineering and started off with Exxon when crude traded at $20. Morale wasn't great, work was slow moving and she left. In her class, few choose to stay with petrol chemical firms. Today with oil above $70, I wouldn't be surprised if there is more interest in chemical engineering as a degree and the energy sector as an employer of choice.

Whenever there is a boom in an industry, there is a hiring frenzy. I remember how investment banks were poaching auditors from Big 5 firms to be junior bankers, so intense was the war for talent. In quieter years, they wouldn't have deigned to look at mere accountants. Today, back office people, auditors and people fresh out of a financial engineering program are being snapped up by hedge funds. Correct me if I am wrong but I believe hedge funds used to only hire fairly experienced professionals as late as 2000.

Maybe we can construct a general rule - as the average age of professionals in an industry increases, the tide in the cycle is past its trough, and as the average age decreases, the tide in the cycle is reaching a peak.

Hany Saad offers:

We have three indicators that unlike the hemline, we actually traded on and weren't disappointed. I will not elaborate on these indicators much for obvious reasons; they are:

  1. Line ups at thrift stores on certain days.
  2. Traffic on Thursdays ( hint: a payday), also what we call the public transportation sardine phenomenon.
  3. Wait time before you reach a representative at a discount brokerage. ( a very accurate and important indicator).


For argument's sake, let's differentiate between "trading indicators" and "economy indicators". Steve's "donuts" indicator is a trading indicator in the sense that it can be used to predict the mkt short term. Sogi's on the other hand "fishing boats", "private jets", "rentals" and the chair's too familiar "cigarette butts" are all economy indicators or business cycle indicators. The wait time on the phone for an investment representative at a discount brokerage with a decent business volume on a certain day is a short term "trading indicator".

Jeff Sasmor adds:

The Pants Indicator: The stock market is like my pants. Yes, I know that sounds strange, but it's true. I have worn the same size pants for over 10 years, so my theory is based on sound sample sizes - over 3600 data points.

When my pants get tight it's usually because the market is going down and I eat comfort food such as pretzels and ice cream. At some point my pants start to feel too tight and I stop eating so much. Invariably this causes the market to move up from a major low point. This occurred this week! So be advised and go long! Get out those canes!

I have decided to start an email newsletter to report on this important indicator. For only $395 per year you'll get a monthly report with biweekly hotlines.

It's called the Waiste Report.

Jared Albert responds:

The Commodity ETF Indicator: I don't know if there are more than just the GLD for gold and the USO for oil. But from these two examples, it seems that when they start the commodity based ETF, it's best to buy the commodity or the ETF for the reason that people tend to buy rather than sell and these funds use the money to buy near month forward contracts in the underlying. Thus driving the price up. I'm sure most on the list are aware of this and know more about it. Any comments about the relationship btw the ETF and the commodity are appreciated.

Sushil Kedia responds:

Uncounted ideas are being referred to as Signals here, though the temptation to call them indicators is habitual.

Rolls Royce Signal:In India, last year a record 2019 Mercedes Benz cars were sold. Now, today I noticed the first ever in India display cum sales showroom of Rolls Royce is coming up three blocks away. Wonder, what happened to the markets of other countries where Rolls Royce formally moved in to sell locally in the past? This comes in the wake of a recent proposal to the State Govt. from the office of The Municipal Commissioner of Mumbai to allow 50% higher Floor Space Index to realtors who offer 20% of the constructed space for public parking.

Magazine Thickness Signal:The number of pages in the Dalal Street Journal magazine clearly seems to be going up with each rising month on the Sensex. The co-relation was so very evident when in 2001 the magazine could not publish due to want of advertisers in the wake of the internet bubble crash. Could it be worthwhile to test the relationship between the number of advertisements appearing in a magazine like TA of S&C and the monthly performance of S&P?

No. of Analyst-meet cocktails/dinner Signal:In the results season, a crowding up of invitations in the mail box for cocktails/dinner for analysts meet is a potential indicator of too many CFOs worrying together in sustaining shareholder wealth. Whether such worry is a sign of lowered confidence (implying the worry was unnecessary) or it actually was a case of show-casing (a potential reversalist environment) needs again to be tested.

Empty Billboard Signal:Much easier to notice than registering mentally the number of new advertisement hoardings. Too many WANTED (phone number) underneath painted around the town is a sign of marked pessimism.

The Girlie Bars Signal:Recently the High Court of Maharashtra revoked the State Govt. ban on operating girlie bars in Mumbai. One has noticed near the previous multi-year peaks finding a place in the more popular ones was impossible. Which bars in New York / London / Tokyo would qualify as a good proxy for finding most of the indulgent stock brokers and inclined clients?

The Parking Lot Black-market Signal:Specified Parking Zones on each side of the road, around Dalal Street is manned by low-wage employees of private contractors. Each time, you land up in the area after parking is full within the first hour you could still manage by offering extra Rupees 20 for the fellow to take care of your car and park it properly the moment a slot is vacant. As a habit, I always haggle before agreeing to pay the extra 20 to sense the signals around the market. Any day an attendant has agreed to take less than 20 is a clear warning.

The Free-loaders Signal:The websites of brokerages like www.icicidirect.com who continue to offer free information to anyone (not just customers) and thus the hoi-polloi is always there. Days on which the pages take much time to load are potential reversal points (caveat: bandwidth flows are still not reliable). Even the websites of the exchange itself www.nseindia.com which relays live prices is in the same category.

Some of the extinct ones, but underscoring the signalling principles so much more clearly:

The Bhav-copy Signal:Until a decade ago, before the open outcry system was replaced by electronic trading, the Quotations pages (called the Bhav Copy in vernacular) were published in the evening. The Stock Exchange being situated at the Southern tip of the isthmus city Mumbai, everyone generally travels North after work. The quotations pages when being hawked by street-boys right upto the farther stations like Malad (about 30 miles from the exchange) or Kandivli (about 37 miles) from the exchange would produce geese-bumps in every stockbrokers mind. The inevitable corrections followed in the next couple of days as a rule.

The Elevator Queue Signal:During the same era, when every trader was travelling across miles for going each morning as close as possible to the trading ring, the amount of time one would spend in reaching up to the doors of the jumbo-elevators in the exchange would be a reasonable indicator of the prevailing sentiment. Just notice how long is the queue. One old speculators' favourite idea was to abandon the plans of reaching upto the floor of his broker if the queue extended right up to the main door of the exchange building. Instead, he would walk down to the nearest pay-phone, call and sell.

The Dhokla Signal:The majority of the trading community in Mumbai coming from Gujarat patronised a certain lady who would bring boxes filled with homely Dhoklas (a pancake made from lentil floor). If by 11:30 a.m. she was not gone after selling off her merchandise, the older hats in the market knew the day is witness to poor attendance at the exchange and thus a waning sentiment.

From John Lamberg:

No indicators, but an ambush story!

David Higgs comments:

Akin to the sniffing of an animal that something is just not right, on occasion when deep in the money calls or puts where the market going in their direction up or down, all of a sudden stop gaining in price when they should be gaining in price, tends to be a bad smell -- market getting ready to turn on you.

Kind of like the donuts thing, the big joke around here was to buy puts when one went to Europe, the market always crashed when one went overseas. Without fail. I think Peter Lynch was in Europe when the big one hit back in '87. Fortunately, one can take his CPU with him these day, and I highly recommend it.

The good thing about the high oil prices, it's going to turn on the tap to alternative energy, the green energy meme; and now that all of China is on a conservation kick -- a meme one billion strong, and that is one meme worth listening to.

Jared Albert says:

It's a personal indicator, but incredibly accurate: When I feel like telling people that I'm a performance artist and my medium is the stock market, I know that I need to stop trading for a while.

Alan Gillespie adds:

When looking for indicators, I think the best policy is to look for things that are misplaced. For example, when Mark McGwire hit his 50th home run the headline in USA Today was, "A Nifty 50." Shortly there after, in Sports Illustrated under "Sign of the Apocalypse" (a great page on which to look for oddities) there was a blurb about Quotrons on ski slopes. Are you skiing or trading? At the lows, bars went back to ESPN from CNBC. Recently, there has been much ado about a certain Playmate's stock market prowess. Awhile back, on this list, I mentioned an article on how trading rooms for women were being set in in Saudi Arabia. I certainly think females can be successful specs, but I think they are more apt to be of the Hattie Green personality type than this.

Also, I think this is the key to a good indicator - is being able to put an event into context or being able to notice when something doesn't fit. That odd thing like the ##s, double sharps in Dvorak's "New World" Symphony. The little thing that makes something special.

It was two years ago and the Calgary Flames were battling for the Stanley Cup. Thousands of euphoric fans clad in red flocked to a city street known as the Red Mile where, every now and then, a woman lifted her top.

While most commentators disparaged the breast baring as the antics of drunken, foolish women, new research concludes it was motivated by a complex set of factors, including a desire to celebrate the Flames victories, a desire to break the rules, feelings of stardom and a sense of history.

"The context was so important," said Mary Valentich, professor emeritus of social work at the University of Calgary. "You just wouldn't necessarily do this elsewhere. It had to be the right kind of setting."

From Craig Maccagno:

After mentioning this query to my better half she suggested the following signal saying that it has only been seen a handful of times:

The Classifieds Signal: Apparently if you spot this trader thumbing through the local classifieds jobs section it is highly bullish. After much thought the reason would appear to be that it's because I am at or near my maximum allowable long position (which would mean there has been a large down move over several days) and have succumbed to impending end of both my account and trading career. This would mean that one would have to get a 'real job' and in preparation for such begins to see what's available.

Dr. Kim Zussman responds:

This relates to some comments heard at last year's spec party, about some spouses doing better than certain active traders by simply buying after large declines.

The question is whether active traders, whose goal it is to find usable signals every day, are more susceptible to ruin via longer-term tail events. Does scouring the screen hour by hour to find leverageable short term moves expose to more risk than getting a day job and waiting for doomsday headlines in the lay press? Is the volatility regime change post Iraq-II diagnostic of how much trading is now focused on short term patterns?

The Perfect Tell:

The following Article from the collaboratory contains Dr. Brett's classic tell and set in motion many a pleasant and instructive interaction

The Perfect Tell, By Laurel Kenner and Victor Niederhoffer
Special to TheStreet.com 3/2/00 6:31 PM ET

In our column on the "excessive productivity" indicator unveiled by Fed Chairman Alan Greenspan in congressional testimony, we challenged readers to come up with the perfect tell, one that would provide a rudder for investors in the storm of last week's market. As usual, readers responded in heroic fashion. Some readers fingered Greenspan as a contrary indicator ("irrational exuberance -- predictive of pleasingly higher stock prices," wrote Robert W. Elliott).

Almost magically, within a few points of the market bottom, we received a missive from S. H.:

I am a broker. So I speak with quite a few people on a regular basis. But the best indicator I have seen to date is what I call the "Just Sell Everything" indicator. When the majority of calls I receive on a given day begin with, "Just sell everything," it's undoubtedly a short-term market bottom. If it happens to coincide with a spike in the volatility index, huge put/call ratios and a large venue of bears interviewed on CNBC, well, then that's just gravy. Green light. Green light with a police escort. S. H.'s phones must have been ringing off the hook on Thursday, Friday and Monday, when the Dow kept dipping below 10,000.

Tells are appropriate at all times, but the perfect tell should speak a universal language, like music. Rising to the occasion, Brett Steenbarger, a Ph.D. in the Department of Psychiatry and Behavioral Sciences at the State University of New York Health Science Center in Syracuse, came up with the best cultural market indicator we have come across in our combined 100 years:

I hypothesize that there is a positive and significant correlation between the beats-per-minute of popular music and price changes in the stock market. From post-Depression blues, '40s crooners, '50s/'60s rock 'n' roll, late '60s /early '70s psychedelia, late '70s disco, '80s New Wave and now the electronic dance raves (150 beats per minute de rigueur), we've seen a steady ramping up of acoustic adrenaline. Most of life proceeds to a beat of roughly 120 beats per minute, which is the average pace of walking. An accelerated pace is experienced as upbeat; a slowed pace is quieting. Good traders read the nonverbal streams of markets ... their shifts in pace. That's also what good psychologists do.

The Nasdaq's volume records this week support Steenbarger's hypothesis. And speaking of volume, we know traders who like to call their brokers in the Chicago futures pit because they can tell from the noise level where the market is going.

Mark M. McNabb, a Ph.D. at Virginia Tech University and an NASD securities arbitrator, wrote that analysts can't be relied on anymore for guidance, as "They really have become touts for corporate finance and investment banking units." McNabb compares equity to a call option -- "bits and drabs of stock laying around waiting for the next glowing piece of journalism."

Our fourth prize goes to Paul, who has developed an original indicator based on the number and type of "corner crazies" on and around Market Street in San Francisco. We will give the details in a subsequent column devoted to street-level tells.

We're sending Steenbarger and our other winners canes from the shop of Stan Novak in New York's garment district. The world's cane makers have not been putting bulls or bears on cane heads lately, so we chose one with a horse for Steenbarger, good for rides in either direction.

He already has received far better recognition, however: acclamation from daughter Devon, 10, and son MacRae, 8. After we notified him he'd won the contest, he wrote that, on returning home: "I opened the garage and there, greeting me in bright colors, was a large sign hand-drawn by my two little ones. It read: 'Congratulations Cane Winner!' That's enough to melt even the most wizened trader's heart!"

Conducting an Ambush, from Bill Egan

Selecting the kill zone:

When an army is traveling if there is hilly territory with many streams and ponds or depressions overgrown with reeds, or wild forests with a luxuriant growth of plants and trees, it is imperative to search them carefully and thoroughly. For these afford stations for bushwackers and spoilers. (Sun Tzu, The Art of War, Maneuvering Armies)

In addition to finding a covered and concealed position from which to watch and wait for the enemy, the ambushing force should take advantage of any routine movement patterns of the enemy. Easily observed roads, trails, and intersections which have been used multiple times make excellent ambush sites. Both time and place are critical - taking the same one or two routes, even if the time of travel is varied, leaves the enemy vulnerable. Similarly, always moving out at the same time each day is dangerous.

Detecting an Ambush:

If birds start up, there are ambushers there. If the animals are frightened, there are attackers there. If the dust rises high and sharp, vehicles are coming; if it is low and wide, footsoldiers are coming. Scattered wisps of smoke indicate woodcutters. Relatively small amounts of dust coming and going indicate setting up camp. (Sun Tzu, The Art of War, Maneuvering Armies)
From Vietnamprimer:

Lieutenant: "I noticed that between 1700 and 1800 all traffic stopped within the village. That was early and therefore unusual. The workers disappeared. Women came along, rounded up the water buffalo, and quit the area. People in the houses near the perimeter ate a quick evening meal and go out. Everything went silent. I knew then something would happen."

Sergeant: "I saw people leaving the house to my right front about 25 meters. Then directly to my front, 150 meters off, the family left at the same time. We took fire from the house when the enemy came on."

Consequences of Poor Movement Techniques:

Bunching up on the trail is a good way to die. "During Operation Attleboro, a single command-detonated Claymore set in a tree killed or wounded 26 men strung out over 40 meters of trail. It was fired from 5 meters forward of the front man. The column was rushing from battle urgency and the scout element did not take enough time to look over the ground thoroughly. The first scout alone had been permitted to pass uptrail beyond the weapon. Obviously the formation--point and the front of the main body--had become closed too tightly. On the wide trail the advance was moving in a fashion that served only to put more people at the mercy of the weapon. Had they been following exactly in single file, each body would have given more protection to the men that followed.

Too Good to Be True:

"If you come upon a jungle clearing and you see two or three or even one enemy soldier with back turned, or you are moving fairly in the open, and you see a few NVA or VC moving at distance with backs turned, never facing about, watch out! The chances are very good that you are being led into a trap."

The turned back is the surest sign. It is positively enticing. It reads like the invitation on the small airport truck: "Follow Me!" The effect is to nourish the hope that the maneuvering formation has caught the enemy unaware and is on the track of something big. That may be half true, but the something big is as the enemy planned it."

"The rifle company had been moving over fairly open country not far from the Cambodian border since first light. In late afternoon, it several times encountered NVA soldiers moving singly and the scouts or point traded fires with them, with varying results. Then as the company approached a village, it heard the tumult of voices, shouts and cries, from children, men, and women, as of many people making haste to get away before the Americans arrived. But is it a natural thing for people fleeing for cover, in the face of an armed advance, to call attention to their departure? Without firing, the company deployed and surrounded the village, to find it empty. It then moved on, following in the same direction that the "refugees" had taken. Dark was at hand. Not far beyond the village the company came to fairly clear ground slightly elevated that looked suitable for night defense. Watering parties moved out to a nearby creek to replenish supply. Before they could return, and while the perimeter was still not more than half formed, the position was attacked by an NVA force in company-plus strength.

The Best Way to Start an Ambush:

The leader initiates the ambush with his highest casualty-producing weapon. He initiates the ambush when the largest percentage of the enemy are in the kill zone." (FC 7-22 Infantry Squad and Platoon Drills, 3-42) You do not want to have to use a signal to initiate an ambush that may be missed or cause your forces to attack in a staggered fashion. This can let the enemy get away. Use your most lethal, noisy weapon to initiate the ambush. This causes the most surprise and disorientation for the enemy, while your men cannot miss the signal.

You must observe noise and light discipline. Don't move. Tie down and tape all gear. No cigarettes. No deodorant. No talking or radio use. No flashlights. Have weapons charged beforehand; loading a round is noisy. Do not give yourself away.

Easan Katir responds:

The Silver Indicator: Last month early morning on March 2 before arising I dreamt of sitting at a table with a certain trader who lives on the shore of a large lake. On the table was a map. Between my thumb and forefinger, I dangled a small silver chain, about 4 inches in length, from which depended a small cylindrical silver bar. When I held the chain over the state of Nevada, the bar oscillated rapidly. When I moved it away from the state, it stopped. After trying this several times, we looked at each other quizzically ... then I woke up.

If one were to check the chart, one might notice that March day the price of silver first broke $10 with it's biggest one-day move in many a year, and is now well north of $13. Nevada is known as the silver state for the large pure lodes in the hills around Virginia City mined during the past two centuries.

No theory advanced here, just reporting a recent experience of the many senses beyond the commonly acknowledged five.

L'Amour wrote: "You cannot invent people like the silver-mining baron Spencer Penrose who built his house in Virginia City, Nevada, with solid silver doorknobs throughout."

Tom Ryan responds:

The majority of people I meet, including specs, have no idea how reserves are calculated and reported in the mining, oil, and gas industries. There is a common misconception that reserves are primarily defined by physical or geological boundaries. In reality, this is true in only a very small number of cases. Instead, reserves are calculated and reported to the SEC on an economic basis, e.g. $25 oil, 90 cent copper 400 gold etc. That is, what can we pull out of the ground and break even if we sell the resource at the stated reserve price. This is not an academic exercise, as bank loans, cap rates, and asset values depend greatly on these numbers and market capitalizations rise and fall by the billions as numbers change. The salient point is that the commodity price that is used to calculate reserves is not chosen lightly, and there is a tendency in industry to play "follow the leader" when it comes to reserve analysis. In other words the price at which reserves are reported tends to change only rarely over time. When I started over 20 years ago, copper reserves were typically based on a 75 cent basis; today most reserves at the majors are based on 90 cents. Inevitably, whenever the basis price which is used by industry to determine reserves changes, the commodity is near a major cycle top. This has happened over and over and over again in the past 50 years. Its not so hard to understand why the negative correlation exists. As a bull market in a commodity continues, the market price rises far above the reserve basis. With an increasing price, profits rise, production increases, and stock prices rise accordingly. However, inevitably there comes an inflection point where the higher price brings supply and demand back into more of a balance, and markets are quite good at smelling this ambush ahead of time, which means that often the stocks of the producers, the value of which are discounted over a much longer time frame than the futures, begin to fall ahead of the futures. Given that much senior management compensation is stock based, and the fact that this inflection point occurs after several years of "good times", what simpler way for the executives to give a boost to the flailing price of their stock than by raising the price used for calculating reserves. After all, when the market has been valuing copper above 2 dollars a pound for awhile, and your reserve basis is "only" 90 cents, what s the big deal about raising your reserve basis to 95?

Stefan Jovanovich responds:

T. M. Ryan understands the "oil bidness". He also understands the confusion that senior management often has about what drives their own company's stock price. Integrated mining, oil and gas companies and their E&P partners and suppliers are in the long tail logistics business. The average maturity of their delivery liabilities - i.e. the lengths of their supply contracts with major customers - is at least as long as the weighted average of the U.S. Treasury debt. When Wall Street "discovers" the resource business yet again, they view the stocks as a proxy for the spot market and the value of the company's "proven" reserves. Pretty soon the company's own senior management decides that the investment bankers must know what they are talking about; and, as TMR says, they begin marking up the value of their "inventory" even as their own sales people are telling them that the prices for long-term supply contracts are softening. I have no idea whether or not that is happening now, but I would trust Mr. Ryan to let the rest of us know - if he chooses to be so generous.

Pitt T. Maner III offers:

"The rich are not like us." "Yes, they have more money..."(quote by F. Scott Fitzgerald and reply by Ernest Hemingway as remembered by EH).

Being strategically situated southwest of the "middle bridge" (Royal Palm Way) leading into Palm Beach, affords me an observation post for the daily "smoke signals" of the super-rich. They are not always a particularly happy lot and Palm Beach does not quite have the laid-back, resort charms of years past.

Looking across the Intercoastal, the size, length, and quantity of the yachts are impressive this year and their owners are staying around a bit longer---an extended Season? There is not a mega, three mast sailing ship like "The Other Lady" moored up with red flashing lights for low flying aircraft and Onassis is not bringing the "Christina" to town. But there is optimism here.

Meanwhile in the shopping district, the elegant Worth Avenue is packed with beautiful ladies in bright Easter-colored clothes, lilies and the like, buying, buying,...their daughters in tow carrying bags of merchandise. A fantastic, new black Rolls Royce occupies a space near the head of the street where once less ostentatious Bentleys might be found. The merchants will still complain it was a so-so Season and they can't afford the high rents on the Avenue.

A quick run into the post office to check the PO box reveals waste receptacles overflowing and stuffed with stock prospecti, quarterly and annual reports. Someone's looking at banks in this one.....a year or so ago it was supermarkets...they spill out onto the floor with catalogs, and more catalogs as I try to throw away junk mail.

The Shiny Sheet features an article on a top money manager who notes that the "estimated PEs" on cash, bonds, and housing are high and stocks are relatively cheap. Buy, buy the guru has spoken. A used Aston Martin DB7 is for sale in the classifieds.

The private school girls continue their hotly contested game of field hockey (or is it lacrosse) with protective eyeware at the playground as I exit Island west. There is optimism here, I can smell the smoke.

Jan-Petter Janssen adds:

The Laughing Crowd Indicator: Tell people about your investment ideas. The one the most people find ridiculous is the one you buy. And it's vice versa when it comes to selling.

Bizarre "Tells", by George Zachar

Whenever I receive an uber-highend fashion catalogue, I look at where they are adding outlets.

The Giorgio Armani catalogue now lists a Zhukovka location...that's in Belarus!

Martin Lindkvist responds:

I am glad that this bizarre version of tells thread was opened: Whenever I see people out in the street that remind me of trading giants, we are usually in for a good up move. Probably because we have suffered a decline and I am so into wishing it up again that my mind plays tricks on me. The other day, a guy from the water company came to exchange the water meter; and he looked just like Dr. Pennington! No wonder I kept my long position, and I must remember to buy the dear Dr. a beer next time around.

From the Day Trader's Forum: The Fed, by James Lackey

In my short history of a trader anytime some one mentions the Fed to me in conversation I say "please never". If they persist I tell them my favorite story of early in 2001 when I had a few shorts, a sandwich and was sipping a "pop" for lunch. I saw my computer monitor "jump" off the table and with a small line say my tiny profit turn into an immediate loss.

In those days I didn't have a clue. I'd flip from long to short and back several times a day and my brokers loved me for it. Yet we managed to be long in 15 seconds and some one yelled "THE FED" and by the time I let off the buy button I had a nice margin call for buying over my computers limit which I knew how to get around. (it was very common in those days for the broker to arrange timely 3 day loans for those who profited)

Yesterday we've had the 5th -7th "fed is done rally" The sad joke came to mind that never in the history of mankind, has a new Leader, manager, politician or appointee come into an organization and said "well everything looks fine here, let's just leave well enough alone. Let's not change. we are done."

Of course this should be taken with a grain of salt in my wounds. I am the day trading idiot that sold the triple top yesterday before the biggest rally in years. Also I have no idea whether feds or oils or the Chinese visiting Seattle before Washington are bullish or bearish for stocks for the year.

All I do know is the most difficult market to profit in the world is the US bond markets. I mumbled yesterday "bonds don't care" as we blipped a 1/4 point from 21-29 then back down. Then again today, perhaps they do care and this is all part of the "production" or the show, the comedy of the Fed and the markets.

I am reminded of my 10th birthday. My mom took her 3 tidy children to the favorite restaurant. We were all met by her friends in passing that commented how well behaved we were. except for one sharp fellow that came too close to my mother for my liking. I stared him down; he patted me on the back and said, "invest in your future sonny, buy gold." I was reminded of that last night as my good friend sent me an e-mail of silver VS the S&P per the last decade and perhaps it was a good time to sell the old coins. We have an old box full of WW1-WW-2 coins from my grandfather and great uncles that fought abroad. When they passed my cousins asked me what to do with them. I said throw then In a box and by the time our children are 10 maybe gold and silver will go back to the highs when we were 10 years old. My son is 10.

The worst anecdote came in the mid 90's when I was waiting tables and using the GI bill. I British "cheeky fellow" with a hot girl friend said "Lackey" you can make a nice living being a Lackey in England. Its a very respectable job managing estates." I said thank you sir but I have my heart set on trading stocks for a living. He said "stocks? of you want to make real money you need to trade currencies"

I agree with Craig's post below. The life of a day trader is a bit stressful. Not making money is twice as hurtful as losing. From my career at the bucket shops, NASDAQ 5000, S&P 767 and the latest move from 20 day lows to highs in a day we have all from time to time paged through the "help want ads" in the local paper. No doubt, every time it is highly bullish for the trader.

I think its humbling or a change in attitude. Roger Arnold said it best "lack you are a risk junkie" Yet I need an attitude adjustment. It's time to read this Sundays classifieds to set me strait.

Sixth Sense Signal, from Steve Leslie

In Florida we have hurricanes as you know. Well back in 2004 we were struck with 3 major hurricanes in the space of 5 weeks. The first was hurricane Charley which hit the Southwest Coast of Florida and destroyed areas around Tampa in late August. Hurricane Frances came up through the eastern part of the state and made landfall just south of Vero Beach. Hurricane Jean followed in the path of Frances and made landfall in practically the same location 3 weeks later.

We had just acquired a puppy. We already had a full grown dog at the time. Now our large dog would have nothing to do with the puppy at least initially. As puppies do he would go up to our dog and try to play with him but he would have no luck. Every time he would go near our dog he would be pushed away quite forcefully.

Well right before hurricane Jean was building strength and it was uncertain where exactly she would make landfall, the puppy approached our dog and to our amazement our dog let the puppy draw near and he crawled right under his snout and cuddled up underneath. The dog then put his head over the puppy put his large paw on top of the puppies paw as if to protect him and let him know that he would be safe and nothing would happen to him during the impending storm. That gave us a clear indication that something very dangerous was approaching.

I liken this to the phenomenon of when a stock begins to move quite forcefully in a direction. I search the wire and there is no news to attach to the stock. First a 1/4 the 1/2 then 1 and so on. It is at that moment that there is some impending event that the stock is telling me about even though there is no tangible evidence available yet. I think on the tried and true maxim. "If a stock is moving and there is no news to support the movement stick around there soon will be."

Russell Sears mentions:

Genius or Idiot Indicators, or the fractual nature of finding alpha.

This thread seems to be filled with these cycle reversal signals, idiot to genius or genius to idiot indicators. What strikes me is they don't seem to be based on length of time at all, rather they are based on "degree". "Help Wanted" ads due to burning through his capital, or the donut indicator are on much different time scales but still seem to work due to how far the pendulum has swung in those time frames. Further watching my own individual stock portfolio versus an index seems to indicate that the "degree" of having or not having alpha, can be broken into months, weeks, days, even hours and it seems to be in recognizable patterns by "tension" in the alpha.

Admittedly however, I have not tested most of these because for my small capital most of the patterns and transaction cost would not justify trading them. Yet, I do seem to find negative correlations on a cursory count of alpha tension built-up by degree.

What do they have in Common?, by Larry Williams

The Heads on Easter Island
The steps at Petra
The Great Wall of China
The Teracotta Soldiers
Machu Picchu
The bricks under the Emperors Palace
The Castles of Europe

...and most of the major archaeolocial wonders of the world?

They were all defense systems that allowed empires to last defense.

Grandmaster Nigel Davies responds:

One might add Hadrians Wall and Offa's Dyke in the UK.

An Intersection of Sets, from David Wren-Hardin

I tend to read several books at once. At any one time I'll have a fiction book, a non-fiction book, and some sort of work-related theory book on tap. I just finished The Poker Face of Wall Street, by Aaron Brown, in the second category, and am currently reading Probability Theory: The Logic of Science, by E.T. Jaynes in the third. (For those who care, I just finished The Algebraist by Iain M. Banks in the first category). Both Poker Face and Probability Theory are great books on their own, but to add to my reading pleasure, there was an overlap in their commentary that speaks directly to trading.

Jaynes makes a couple of statements in an appendix that compares his view of probability with other practitioners. The first is in reference to de Finetti and his coherence principle: "However, we think that coherence is an unsatisfactory basis in three respects. The first is admittedly only aesthetic; it seems to us inelegant to base the principles of logic on such a vulgar thing as expectation of profit." I had to laugh at that one; oh sure, it may be inelegant, Dr. Jaynes, but think of all the elegant stuff you can buy! He continues, and states "When we apply probability theory as the normative extension of logic, our concern is not with the personal probabilities that different people might happen to have, but with the probabilities that they 'ought to' have, in view of their information ..."

I read the last quote less than an hour after reading the following quotes from the Aaron Brown book: "Your game theory strategy is optimized against the best possible strategy your opponents can choose from their point of view; if they choose anything else you will do at least as well. But since your opponents often won't choose that strategy, a simpleminded person would say that you are walking around with a shield for a weapon nobody has. Game theorists dismiss that criticism because the simpleminded critic is too dense to follow the math. But you can't ignore dense people -- they're not unarmed; they're armed differently. It hurts just as much to be hit by a stupid person as a smart one." Then a few pages later..."To a game theorist, this information is irrelevant. You play assuming your opponent does the worst possible thing for you, so you don't care what he actually does. But I do care what he actually does."

I find that a lot of very smart people who come into trading fall into the trap set by Jaynes's arguments and those of game theorists. They assume that every counter-party has the optimal strategy for their situation. They then become paralyzed, fearing a pick-off behind every corner. Or they crunch the numbers, find their expectation, vulgar as it may be, and charge in, only to get whacked by some "lucky gambler".

Mr. Brown hits the nail on the head throughout his book. We have to know the odds and the probabilities as best we can for our situation based on the knowledge we have. But it is exactly at the times when there is the most uncertainty that there is often the greatest chance for profit. Maybe the smart guys have made a mistake, or are too scared to play, leaving only the stupid and reckless. And we, as traders, have to make sure we do what we can to add uncertainty to our actions. We can't become so predictable that the other side can figure out our strategy by watching our trades. When we're right, we'll simply drive them away; when we're wrong, it'll be obvious and they'll run us over.

The trader's job isn't just to weight the probabilities, it's also to try to make sure he doesn't tip off his measurement to the competition, until it's too late for them to know. That can only be done through careful consideration of order placement and how one deals with other traders and brokers. When you call your broker, don't put your order out the same way every time. Sometimes be firm in your limits, at others, hit bids and take offers with abandon. Make sure that when he calls around to find the other side that he's saying something like "I have no idea which way this guy is going on this." It's not the broker's job to hide our intentions, it's ours.

I recommend both books to any trader interested in theoretical probability discussions and to those interested in reading some great trading stories with practical advice on merging games of chance and trading.

Jason Schroeder comments:

I am glad to see you are reading Jaynes, but I believe you are missing what the master teaches. I too was miffed to see him use the term vulgar in reference to profit expectation when I was new to the work. But rest assured he has no patience with all sorts of poseurs as a close reading this work will reveal: stupid arrogance is far higher on his hit list.

The major topic is inference. Jaynes, via Cox, is defining what are probabilities, he painstakingly uses the term plausibilities until he is satisfied that what he creates is what we want to call a probability.

Do not confuse "probabilities that [others] ought to have" with optimality. Section 2.6.1, for example, informs, "Anyone who has the same information, but comes to a different conclusion than our robot is necessarily violating one of those desiderata. While nobody has the authority to forbid such violations, it appears to us that a rational person, should he discover that he was violating one of them, would wish to revise his thinking (in any event, he would surely have difficulty in persuading anyone else, who was aware of that violation, to accept his conclusions)." That is what he means by "ought to have" it is not optimality but parsimony.

This site should vector you into how rich this stuff is computationally.

And this book is a computationally pragmatic companion text.

A Word on Gold, from Steve Ellison

In the first decade of Greenspan's chairmanship, before ending irrational stock exuberance became the Fed's priority, it was rumored that the Fed was targeting a desired gold price. Gold is up 46% in the last year and 37% in the last six months. Yet the Fed needs additional data to figure out whether inflation is still a threat. It is eerily reminiscent of LBJ's "guns and butter" era.

If You "R" Interested, from James Sogi

Hit the R Jackpot with soon to be published book on R Data Analysis and Graphics Using R : An Example-based Approach by John Maindonald, John Braun, R. Gill (Series Editor), B. D. Ripley in the excellent series Cambridge Series in Statistical and Probabilistic Mathematics.

I am going crazy buying books in this great series with so many well edited and well written books on so many subjects near and dear to Specs with R references and code included. I will be pre-ordering this one and expect it to be good.

Common Fallacies in Market Thinking, by Victor Niederhoffer

The fallacy of multiple "if-then" and "constant" relations in markets is to say "well, bonds are low now, and they've brought stocks down, so let's buy stocks because if bonds go up, and they're low, then stocks will go up". The error is that markets have within them all the information about the future that's relevant, and sell at the expected price relative to the future flows of information and economic events. If bonds were expected to be up or down, in a systematic way, they wouldn't be selling where they are. If you think bonds are too low or high, then you should buy or sell the bonds. The relation that it has as a leader of stocks adds another level of indirection and multivariate dependent distributions to your forecast. This is a common kind of argument that is bandied about in such publications as Barron's these days now that their perpetually bearish columnist has been mercifully put out to pasture. On the days that they don't bandy that about, the related argument surfaces, that stocks have to go down because the dollar is likely to go down, and that will cause foreigners to sell their existing holding of stocks and bonds. This of course is the same fallacy as before as three or four levels of indirection and connection and dependency and "if-thens" not already accounted for and relations that may or may not have existed in the past are involved.

Nothing in what I said has anything to do with whether I am bullish or bearish on bonds or stocks, but I just use this current example of the fallacy of ifs as an example. However, it's one of those reasons that the public always is doing the wrong things for the wrong reasons at the wrong time, I think. Now that I've raised this form of too smart by halfness that always puts the public on the wrong foot, and gives the appearance of looking ahead, and conceals about 100 assumptions about what has to be true for it to have any mojo, I believe I may look at some other fallacies for my own self improvement and that of any others who are interested.

Janice Dorn remarks:

Sometimes I believe there is altogether too much thinking going on. People make themselves crazy trying to outthink the markets or to figure out why something is, might, did, didn't, could, couldn't, should, shouldn't happen, etc. Price tells everything and volume is likely the only technical (apologies if that word offends) indicator which does not lie.

Our cerebral cortices are nothing more than pattern machines. We store patterns and then retrieve them in response to input. We can make new patterns through ongoing plasticity and Hebbian learning, so it is a dynamic situation and goes on throughout the lifespan.

However, it's not quite that simple, because we have to deal with emotions, wants, needs, beliefs and every other sort of old brain process that colors new brain activity. It is this coloring that makes traders act in a less than rational manner. It is this coloring which also makes us human and brings so much richness to our lives. So -- somewhere in there is a balance, and, finding it is part of the secret of success in both the markets and in life.

Steve B. comments:

I myself have believed that as bonds fall, then stocks should rise as funds move to the other - just because there is always a bull market somewhere, commodities (gold) is the other standby alternative. Even when considering a stock I can think of 10 reasons for its rise by week's end but somehow the odds of a drop become lost. I believe we have a tendency to see systems as a whole and begin to make interconnections between ideas and markets. Our core ideas need to mesh and not conflict with one another, to see balance even if the stats indicate otherwise. Our logic (behavioral) conflicts with economics thus often the two schools of technical and fundamental trader's. New ideas are difficult to develop as our minds become linked to the past. Do we always need to control our environment and not leave any variables to chance?

I can't understand why people are frightened of new ideas, I am frightened of the old one's. - John Cage

Cage was an early composer of what he called "chance music" (and what others have decided to label aleatoric music) -- music where some elements are left to be decided by chance.

Jason Schroeder adds:

A chain of "ifs" frequently hides a run-on sentence of ANDs, like young children telling a story. We all know that any chain of ANDs has an uninformed probability of being true as 1/2^n. Inferences, and systems of them, are tricky things. Time and expectations alter even the simplest implications.

Given A="it smokes at 10am" and B="it burns at 9:50am".

The following implications are complicated by time.
H1) if A then B
H2) if B then A

H1 is how we develop probable information, B, from one observation, A.
H2 is how we predict probable future, A, given one observation, B.

After observing both facts, both (A AND B) is true as well as (H1 AND H2). So choosing to hypothesize the implications H1 or H2 after A and B have both occurred purposefully obfuscates the matter.

Supposing "where there is smoke there is fire" (or its converse) is a different matter because one alters H1 (or H2) by removing the time element hoping to produce a general rule of effect (or causation) because the time specifics were thrown away.

AKA, a single observation does not a rule make!

Logic has rules: one cannot mutate statements because the aggregate logical combination is suggestive. It sows confusion. Even one "if" can portend folly when preferred over a simple "and".

Avalanches, by Yishen Kuik

I had the chance to listen to avalanche expert Jill Fredston at the Explorer's Club yesterday. Ms. Fredston lives in Anchorage and organizes avalanche rescue in Alaska. She spoke with great experience, great humility and great humanity. She made several points during her presentation, all of which have market relevance.

  1. Avalanche victims are usually not people with no knowledge. Avalanche victims are usually people with some experience or people with great experience. People with no experience rarely venture out into avalanche areas. It is the experts who venture into such areas with regularity. Expert on terrain that they have been on many times before are greatly at risk to being blind to danger signs.
  2. People have short memories and overestimate their ability to judge risk. Ms. Fredston shows pictures of homes in Juneau on an avalanche path. Homes in those locations have been destroyed 5 times, the most recent being in the 60s. When she asked residents of those homes if they knew they lived on an avalanche path, most said that they did not. When asked if they would move, they invariably gave justifications why they would not ("it's near to town", "I've been here 15 years and it's been okay").
  3. People are not objective in assessing risk. Ms. Fredston talked about how on a nice day, back country skiers want to look at all the reasons why they should go out. They don't want to look at all the signs that might suggest the snow conditions are potentially hazardous. Also, peer pressure in a group usually overwhelms individual caution. Individuals don't want to be wet blankets or seen as being over cautious by the group.

Ms. Fredston leaves an impression of wisdom, anger, sorrow and grace after more than 20 years of retrieving bodies from avalanches. Despite the best efforts of mountain safety experts like herself, it is our stubbornness, our willfulness and our forgetfulness that ensures that avalanches will keep claiming human lives year after year for time immemorial.

More than the public has the right to lose indeed. Those interested in greater detail can take a look at her eloquently written book "Snowstruck : In the Grip of Avalanches"

Another Take on the Iranian Situation by Yossi Ben-dak

Reading the various points of view expressed by colleagues and bringing out this recent very informed comment by an Iranian commentator that often gets into the core of their thinking, let me add a comment or two. Any thought regarding Iran and its recent moves toward gaining a "respectable" place in the world does require in my opinion a certain weighting of facts and nuances vis-a-vis assumed realities.

When Iran chose the route of uranium enrichment utilizing centrifuges, the pivotal question has become when and how will they be able to manufacture the centrifuges on their own. It is no longer an "IF" question. Cascading effectively uranium hexafluoride, or UF6, so that 90% enriched uranium [i.e. U235] becomes available for electricity or mischief is not a trivial step technically. The Iranians stepped up to the plate. Repairing the centrifuge instruments that easily become corrupted or dysfunctional by the impurity of the materials processed is a challenging task. They have up to a few dozen foreign experts, mainly Russians, that have been engaged now, for a few years already, just to deal with this problem, help innovate and tune the control processes and enhance the potential for mass production of the centrifuges. All together, it seems that after moving in the past 12 years much more intensively than in the "American" yellow cake accumulation period and especially before an Islamic- hegemony strategies were to be crystallized--as they are today- Iran is not in any mood or political predicament to be compromised.

To continue reading the expert's thoughts on this timely topic, please follow this link.

So, Is This a Harbinger? by Jeffrey Sasmor

I recall people saying that when everyone was talking about the stock market, from taxi drivers to grocery store clerks, that that was a harbinger of a "top". I had a strange deja-vu of that; here goes:

I had some awful toothaches over the weekend. So yesterday I called the dentist's office a bit after 1 PM (I stupidly forgot to do it early in the day because my teeth were not hurting right then).

The receptionist tried to get me to wait until Wednesday, but I was persistent and finally she said "Well, can you come in right now"

I said "Sure, I'm just sitting here watching the stock market go down after oil hit $70".

She said "Well, I hope you're hedged"

Pamela Van Giessen responds:

Why is it that people assume that if so-called "average" folk are minding the market and attune to its ways that it's a sign of a top and that so-called "average" folk only pay it any mind when it's high and about to crash? This strikes me as elitist thinking where the underlying rationale is that "average" folk are too stupid or sheep-like to pay attention at any time other than when it's at a top -- and about to go down.

Perhaps this was the case when the populace's education was lower, before the advent of mass communications, and cheap information. And it was a very long time before the advent of 401(k)s and IRAs whereby everyone is an investor now -- or, frankly, they're up a creek without the proverbial paddle.

That the receptionist at the dentist's office is attuned to the market strikes me as a very good thing indeed. It means that more people are: 1) engaged in the market, benefiting from the capitalist system; 2) contributing to the capital market that provides us with necessary and luxurious goods and services that have improved the quality of nearly everyone's life; 3) taking personal responsibility for their own wealth creation.

Or should that receptionist just bury her head in the sand and leave the markets to spec's and others who are smarter and/or more privy to the inside workings of the markets? Should we blindly give our money to fund managers or, better yet, Uncle Sam, to redistribute and provide for our children's education, our retirement?

What would you have us do, exactly?

Rod Fitzsimmons Frey counters:

I think it's not so much a matter of elitism as a recognition that speculation is a profession like many others. People are clever enough to realize that it takes time and effort to speculate successfully, and so for the most part they take a passive role. That's not because they're dim, but because they're busy being good dentists, carpenters, cab drivers, parents, etc.

Further, many people simply don't have an interest in the markets and would rather be playing or watching sports, reading novels, or pursuing other interests. Widespread interest in markets may only occur when there's a perception of easy profits -- there for the picking. Then the desire for a bit of extra cash overcomes the natural ennui most feel when considering finance.

I think Jeff's surprise is as justified as mine would have been had I had told the receptionist I had been debugging code all day and she said "I hope you took the opportunity to do a bit of refactoring."

Pamela says:

All very good points but I think that people "in" the markets have a provincial view of those who aren't that is mostly based on anecdote with clients and their circle of friends/family. Carpentry is also a profession yet look at Home Depot and all those weekend renovators who now know what a sawzall is and can talk shop. Turbo Tax and other software programs enable anyone to be a DIY accountant and talk deductions.

Local morning shows, newspapers, websites all cover the markets. Even if you're not actively involved in the markets, some of the terminology and talk seeps in. Google the word "hedged" and you get 4.3 mil results, "hedging" 11.8 mil. CBS 60 Minutes and NBC Jay Leno have Jim Cramer as a guest? Everyone can talk shop now because it's part of the culture.

As for "refactoring": well, that receptionist's children are very much likely to use that kind of terminology in the not too distant future.

England Chess Team Problem, by GM Nigel Davies

A controversy has broken out about the England team selection for the forthcoming Chess Olympiad in Turin, with several higher rated players being 'overlooked'.

Thinking about this issue I find myself wondering if science cannot be applied to the matter so as to ease the onerous burden of the selectors. It seems to me that with the excellent data that is available on chess players' ratings, age, and number of games played, it should be possible to produce a model which predicts future performance. You might expect a players aged 70, who play very little, to show a deterioration over time, whilst 15-year-olds playing 150 games a year might improve very fast. But this is of little help in predicting how an older player with a 2600 rating might compare with a 15-year-old with a 2500 rating.

So how might one come up with a model for predicting their improvement or deterioration, and thus make optimal selections? Seem to be obvious parallels to spec-investing here.

Wind, from Michael Ott

2 wind related posts:

  1. Cramer was on Leno just now and was asked for one stock pick. He suggested HAL, and I wonder what effect it will have in early trading. The exposure to Leno's audience is 4.5M while the usual Mad Money audience is just 170K. Granted, the Mad Money demographic will be more likely to buy stocks, but the exposure should help.
  2. Some of you have sent messages about the tornadoes that hit Iowa City last week. They missed my house by about a mile and a half, but hit several other buildings in town. Some blocks look like a war zone, but the next block is normal. This may be an example of a Random Walk.

Here is a link to some pics: One of the most surprising is of a concrete building with large blocks of wood that were forced into the side by the wind. Also, you can see the Alpha Chi sorority's new permanent open house.

The Art and Science of Seeing, by Isaac Mehary

My favorite quote from Bacon:

He has no right to lose so much. It's almost as if he did it on purpose!

The public loses so much because it cannot "see". They look but they do not see.

There is a world of difference between seeing and looking. Ayn Rand describes this difference best:

The fact is that abstract ideas are conceptual integrations which subsume an incalculable number of concretes--and that without abstract ideas you would not be able to deal with concrete, particular, real-life problems. You would be in the position of a newborn infant, to whom every object is a unique, unprecedented phenomenon. The difference between his mental state and yours lies in the number of conceptual integrations your mind has performed.

Most complex situations in life do not lend themselves to one sided answers. In my opinion, as in science, the supreme task of a trader is to arrive at a broad general principle that addresses the decision or speculative process. You arrive at this principle through a process of integration - in other words experience and maturity.

Such principles can be assimilated, validated, corroborated and verified. Many find it difficult to accept, or to embrace, with conviction principles that have been handed down by those that have gone before us. It's as if they'd rather pay a hefty tuition and learn the lessons themselves the hard way.

Most are conditioned to think in linear terms. They are unable to notice the simpler theory, and how less it will look anything like the world they think they know. The aspects we look at everyday consist of the world of parts. Principles address the world of wholes - the aspect that is hard to see.

To quote Ayn Rand again:

You might say, as many people do, that it is not easy always to act on abstract principles. No, it is not easy. But how much harder is it, to have to act on them without knowing what they are?

Learning is about paying attention to feedback, maintaining a good dose of skepticism, analyzing mistakes and modifying our behavior at every moment to avoid repeating experiences we don't like. We repeat this process until we get things right. This is psychological tasking and no easy process by any means, but the ones that persevere, adapt and adjust do get to claim the prize and wear the crown.

It seems to me, experience is imperative to sustain any kind of conviction in any principle. As they say, "experiencing is believing," I'd surmise to say, "experiencing is seeing."


Kevin Depew notes: "Bacon's advice to always be thinking differently from the public, at first sounds quite reasonable and almost facile, but it might be just a bit more complex."

As human beings we instinctively tend to pay attention to things that keep changing in the moment. We pay attention to short term performance, rather than long term process.

Bacon in "Secrets of Professional Turf Betting," Chapter 10, notes:

"Pittsburgh Phil's system: buy the stuff that no one wants. It takes guts to stick with the system. It killed Pittsburgh Phil at 52. It takes guts, that is why it doesn't matter if everyone knows the system. Guts isn't the ability to ignore fear, it is the ability to stick to your original goal, process and strategy."

With experience we start to notice things like ever-changing cycles, which rarely change -- and we begin to show guts. The key is never to be afraid of failing. But be afraid of ignoring the long run effects of feedback. It usually leads to unintended consequences.

By definition, if you stick to your original goal, process and strategy - your system - you are doing something vastly different from the public.

Fed Model Update, from Tom Downing

The Fed Model expected return of 15 percent has come off a bit due to the fact that the10 yr yield has risen about 40 basis points this year, ern-yield/10year differential now stands at about 1.4 %.

To determine current Fed Model forecast:
Current S&P (as of 04/10/06) stands at 1288.53
Forward Earnings = 12 months consensus forward earnings for the S&P 500 = 82
Forward Earnings Yield = Forward Earnings / S&P = 82/1288.53 = 6.36 percent
10.Year.Yield = The Current Yield on 10-Year government note is 4.97 percent
Substituting these numbers into the regression formula :
0.084 + 5.027 * (0.0636  23/64 0.0497 ) = 15.4 percent
Therefore, Fed Model yields a forecast of about 15.4 percent for next 12 months.

* Webmaster's note: A highly successful Spec and FOC began an illuminating discussion and excellent lesson over the weekend by posing the following innocuous question, "What country's stock market was up the most in the first quarter of 2006? Answer: Zimbabwe." Upon hearing the answer, numerous readers and former citizens of the country who suffered mightily under Mugabe's rule reminded us that not all is what it seems sometimes, especially with regards to the markets. As might be expected, all parties requested anonymity.

A Sad Story, by A Former Citizen

In 1999, my share portfolio in Zimbabwe was worth ZIM $10,729,902. Today with no changes in the portfolio, its value is ZIM $91,837,092,400. I also still hold the title deeds to my farm (30,000 acres) but it is now occupied by Mugabe's so called "war veterans" and the farm has become a wasteland with no crops, livestock or wildlife on it and nothing to show for Mugabe's re-distribution of the land back to its so called "rightful owners".

I was given 30 minutes to vacate my farm by Mugabe's henchmen. When I protested, I was jumped by these hooligans (plus or minus 20 of them) who preceded to beat the living stuff out of me. When I fell to the ground I tried to roll under the car but instead got caught against the wheel of the car. Well that was the end of me, now they laid into me - boots and all. While these "war veterans" proceeded to kick and beat me with knobkerries, my wife and 3 year old son were watching and screaming for them to stop.

Just before I lost consciousness I vowed to myself that I would survive this for my family and that I was tougher than any of these lowlifes and I would not die or give up to them. I woke up in intensive care; all we had left in our lives were 2 suitcases of clothes, everything else was now "owned" by the "people" of Zimbabwe. I decided there and then (I was 43) that I would commit myself to a strong mental model and start to rebuild our lives from scratch and that nothing would stop me or ever take away from me what is mine again!

Zimbabwe once boasted one of sub-Saharan Africa's most vibrant economies but things have become so bad that people have taken to telling a wry joke "what did we have before candles? -electricity." Six years of turmoil have turned back the clock. Ambulances are drawn by oxen; hand guided ploughs have replaced tractors. The state railroad uses gunpowder charges on the track to warn trains of danger ahead.

The violent seizure of thousands of white owned farms for re-allocation to black Zimbabweans has decimated Zimbabwe's economy. The economic free-fall has been marked by regular power black outs, and acute shortages of fuel, spare parts and new technology. The health system has collapsed completely, no medicines, hospital sheets are used for bandages and food is almost non-existent for those unfortunate enough to be hospitalized. Soaring inflation and a shortage of hard currency have made it impossible to import machinery and essentials for the running of the economy. And Mr. Mugabe announced that he is laying claim to half-ownership of all Zimbabwe's privately owned mines and with no compensation.

And finally to show what Africans think of Americans, a few years ago at "The World Summit on Sustainable Development", when General Colin Powell gave a speech, he was booed until he could not be heard and had to stop. But Robert Mugabe, on the other hand, was never booed once, in fact, he was given a standing ovation which came mostly from African delegates! President Thabo Mbeki of South Africa never once mentioned the Zimbabwe crisis during all his speeches at the summit. To top it all, he gave Robert Mugabe twice the allowed speaking time which he gave all the other delegates!

In 1999, the exchange rate US$ 1 = ZIM$ 18

Today you can only deal in the black market the US$ 1 = ZIM$ 160,000

Our Original Questioner Responds:

The fellow above knows the reason the Zimbabwe market has risen so much is that there is great inflation there and there is no other place to put money so it goes into the market. That as he points out is a bit of a black hole.

The great lesson of Zimbabwe is that all gains are not created equal. What looks tempting is a disaster or can be. That is what a speculator has to figure out.

Another Former Resident Reflects on His Dire Experience:

When I was in Zimbabwe in 1995, I was aware of nationalization of the farms of friends and friends' friends. Every white farmer/land owner had employed numerous workers, and they were on guard against theft and pilfering and stealth murders during the night. No one had any money to take out, but schemes were discussed daily about sewing jewels and such into the lining of clothes, and the purchasing of world-tour air tickets as a way of ferrying out hard currency to convert. The lines into the country were beyond belief--I waited 6 hours or so, on a wrong queue, and then waited two more hours on another. The official dealing with me asked for money several times, and when I protested, he flat out said I could turn around or not come in. The money--$16 American, went straight into his capacious pocket. There was so little food around that I bought vegetables and fruit from little boys roving the town, and we bought gasoline and petrol by stopping other boys toting jerry cans. Stores had nothing in their windows and nothing on their shelves. One bakery baked bread once a week. On Wednesday in Bulowayo, the queues were around the town to buy a loaf. I mailed 15 postcards, and two weeks later, when I returned, the same postcards were staring me in the face on a desk --no one had bothered to collect them, or the postal system was a myth popularized for the naive.

The sense of menace was palpable. No one had any liquor; with several tiny bottles of liqueuer from the airplane, I was the envy of all. No one ever dared breathe the name Rhodesia--it was a vile word to them so harsh we had to whisper it if we dared. Corruption among the police was a matter of course. Extortion ditto. The despair among the once-comfortable whites was a miasma resting on every head. There were no new magazines, nothing like a current dress or fashion shop. Everything one could need was scarce. Replacement parts for cars were unobtainable. Brigands seemed to have wrested normal civilization out of the hands of normal civilization.

An In-House Pro at R-Project Software Adds Hard Numbers to the Discussion:

Here's an R finger-exercise inspired by this thread. AFRICA is a mash-up of per-cap GNP data from across Africa derived from the following data sources, IDRC's Farming Systems of the African Savannah (regrettably from 1993), and data from a Wikipedia's collection of African dates of independence.

Using tapply() to organize per-cap GNP as the dependent variable, with former colonial power as independent, it turns out the former colonies of France (!?) have been more prosperous (albeit by just a hair) than those spun off from other European powers

Script -->

AFRICA<- read.table('http://dailyspeculations.com/AFRICA.txt',header=T) AFRICA; attach(AFRICA) round(t(tapply(GNP,list(Cont,10*Date%/%10),mean,na.rm=T)),0) round(sort(tapply(GNP,From,mean,na.rm=T)),0) detach() R.version.string

Pajamas, Americanism and Voluntarism, by Victor Niederhoffer

Here are some preliminary thoughts about what's wrong with the way business is treated in "The Pajama Game" and other media, and how this leads to the destruction of the American Way of Life and the removal of the right to life of immigrants, businesses abroad, the evils of our health care system, and the inordinately low values in the stock market. It's a work in progress and bear with me while I refine it.

Pajama Game

The musical Pajama Game, starring Harry Connick Jr., now playing on Broadway, based on the best selling 1953 novel "Seven And A Half Cents" by Richard Bissell, with a book by the 105-yearr-old George Abbot and Bissel and music and lyrics by Richard Adler and Jerry Ross, is a sold out runaway hit. It tells a story of the daily life, and conflict from a threatened strike over a 7 1/2 cent an hour wage hike in the Sleep-Tite Pajama Factory, an old fashioned business of the 1910 era. And a romance between the factory's above-the-line supervisor, Sid (Harry Connick), and the below-the-line grievance supervisor, Babe (Kelli O'Hara), conquers all as they combine to overcome the evil owner manager, Hasler.

Like all American Business Novels and Plays, except Atlas Shrugged, and Garet Garrett's The Driver, the story pictures the businessmen as evil, immoral, dishonest, manipulative, pompous, inappropriately rich, and McCarthy loving. The workers are pictured as impoverished, exploited, decent, salt-of-the-earth types entitled to their jobs, merely asking for a living wage that everyone else on the planet already has through the good efforts of their union representatives.

What makes this play hold up, aside from the show stopping piano playing and rock singing of Connick, and the great music throughout, is the verisimilitude with which they depict the romance, talk, play, and work of the factory worker's and the third store office staff. Bissel, himself, worked in a pajama factory owned by his grandfather after graduating from Harvard in 1936 and he has a good ear for the kind of every day talk that turned on theater-goers of the 1950's.

The play and novel however, show a basic misunderstanding of the nature of business, the voluntary mutually beneficial relation between worker and employer, purveyor and customer, the forces of competition that are the main protectors of our standard of living, and the opportunity for self-improvement that are the essence of the American way. This misunderstanding is at the root of the backdrop of pessimism, distrust, and anti-business sentiment that so often prevents people from increasing their wealth and improving their standard of living.

Ikea Receipts and Revenues

On October 9, 1999, to great acclaim, for the second time, in a marketing, morale, and recruitment Ikea gave a bonus of one day's sales (on a high turnover day) to each of its some 50,000 employees in each of its 151 branches. The bonus came to $1,500 a worker, a total of about $80 million. Assuming a 250 day selling year, that works out to $20 billion of yearly sales on which Ikea makes about 6% pretax or $1.2 billion. Workers salaries, at $50,000 an employee, however, amount to $2.5 billion and payments to suppliers and others, and taxes comes to $16 billion. (This is consistent with profit figures reported in England where profit figures must be reported for private firms.)

Overall, as far as I can tell approximately, retail sales account for about $4 trillion of sales in the US, provide about 20 million jobs, with wage payments of some $600 billion, after tax profits of $200 billion, and payments to suppliers of $3 trillion. The point is that it's not a zero sum gain. For every 100 dollars of sales, $95 are paid out to employees, suppliers, and taxes. The idea that the employer profits at the worker's expense is an erroneous one. The situation is similar for the manufacturing field, and the ratio of employee and supplier payments to others is even greater for the wholesaling and service sectors.

The fundamental transactions of our economy. There are some 30 million establishments in the US of which 10 million have 120 million employees with sales of 9 trillion, and 20 million have no employees, with total receipts of about 1 trillion (source: 2002 economic census). With this many establishments, there are ample opportunities for employees and employers to enter into mutually beneficial relations. All these transactions are based on the employer hiring until the wage he pays the worker is equal to the marginal revenue that the employee can contribute to the product. Employment occurs if the worker can produce something that people are willing to pay for. Of the 120 million jobs, many are for unskilled work that is relatively in abundant supply. Workers and employers are always searching for a transaction that will enable a profit to be made. If a worker is worth 7 1/2 cents more somewhere, there are millions of establishments and employers ready to take him on. If an employer pays too much, then there are ample competitive establishments who will pay the market rate and be able to take away the business from the overpaying employer.

The transactions between consumer and employer are similarly determined by bargains based on a mutually beneficial exchange of goods for cash. Price provides the signal as to how much the goods are valued relative to substitutes. All goods have substitutes, and the changes in price signal the shortages and surpluses and bring what is produced into harmony with what, when and how much, how high the quality, how timely and where we get our goods. Competition between employers, wage earners, and consumers is the force that protects wage earners from getting shafted by unscrupulous pajama manufactures, and substitutes. And the possibility of competitions from existing or potential entrants is what keeps the rate of profit down to the 1 in 20 level mentioned above.

The American Way

It is the essence of Americanism that the employers have the opportunity to start businesses, workers have the opportunity to work where they want, and consumers have the opportunity to buy where they want. This is what the Signers meant when they said they everyone has a right to life, liberty and the pursuit of happiness. It's a right that flows from the most elemental aspect of humanity, the desire to improve one's condition.

It is regrettable that those who oppose immigration would take away the opportunity to work, produce, and buy from those entering into voluntary transactions of the nature that makes up the 120 million jobs and $9 trillion of goods sold in our economy.

It is regrettable that those who don't understand -- how many businesses there are to compete with others so that revenues can never go to far above costs, and the extent to which one good can substitute for another -- fail to see how this makes it impossible for the prices of commodities to rise above costs, which are always being reduced in real terms.

It is regrettable, also, that those who are opposed to free trade don't see that when we purchase a good at a lower price or higher quality, we have more money to spend or save and this provides work and jobs for others.

Such fallacies and failure to understand the essence of Americana business, and the pursuit of happiness lead to the almost uniformly negative way that business is depicted in all plays, novels, and movies. They also lead to beliefs that give rise to the destruction of the American way of life and the consequent values of the stock market. As these lessons are learned and acted upon, our American life and stock market will rise.

The President of the Old Speculators' Club responds:

Murray Rothbard was right: prevarication should be permissible in advertising and other forms of commercial promotion. My initial reaction to his proposition was disbelief. However, as he explained his theory, it became obvious that his was the better approach. In a world where lying is an expectation, "buyer beware" becomes a reality. We've already achieved this status in regard to our public servants and I think this is a great thing. But where honesty is expected, every disgruntled purchaser (especially in our age of non-responsibility) will find a lawyer who will listen, and a website which will trumpet his complaint (is it just me or does six billion hits sound a tad high for any website?).

We have become a nation of b!tchers. And worse, were proud of it ("so I tell this jerk, 'you better give me my money back or I'll sue your ass off,' and sure enough he said the check will be in the mail tomorrow.") Even worse than that, we're serial b!tchers. We're not only continuously unhappy with the repairs that were made, the prices that were charged, the service we didn't get, and the attitude we didn't appreciate, we fail to recognized that, in many cases, our own work is shoddy, our prices way too high, our service borders on the barbaric, and our attitude is one of whiney condescension. We'd be far better consumers and much better human beings if honesty weren't so rigidly enforced.

Ken Smith responds:

I certainly agree that as described Vic's comments shine a needed light on business and commercial activity.

Yet this descriptive account does not take into consideration the batch of business men and women that are most commonly dealt with by consumers.

This group does not trade, does not offer trade, will not negotiate. Prices are fixed and one can't do anything about it except forego their services. They are painting business black, tarring all with the same brush.

What I speak of here are auto mechanic garages, doctors, dentists, accountants, and just about any other professional class. They don't deal. They tell you what it will cost. And you can go door-to-door searching for a better deal but won't find one because there is collusion - price agreement - among these groups. No competition.

In particular an auto garage will tell you exactly what must be done to your car and you have no idea if truth is involved. If it is true a job needs to be done then the garage down the street has posted on its shop wall a sign listing shop costs for repairs by the hour. All garages have agreed to these costs and post the same sign.

Worse about garages they have two dozen scams to play on any and all customers. The average person does not have the knowledge to understand the ripoffs. The regulatory guys leave garages alone. Garage owners believe since they are "businessmen" they are entitled to use underhanded methods to earn their personal fortune.

A book was written 30 years ago about garage fraud but I can't find it anymore. Reading it won't do much for anyone anyway. Cops regularly arrest pedestrians for jay walking while all the time garage owners are stealing millions from the pockets of car owners.

Thus it is that we think badly of business.

Being at the mouth's orifice of the crocodiles, to show the meat of my testimony, in addition to the site RipOffs I used Google-- you can do your own research; here is a starter:

Auto shop fraud................6,390,000 hits on Google 
Dentist fraud..................8,430,000 hits on Google 
Doctor fraud..................14,600,000 hits on Google
Attorney fraud................39,900,000 hits on Google
Phone company fraud...........96,200,000 hits on Google

Dr. Kim Zussman responds:

Google fraud...................10^100 hits on your dentist

Examples of anyone outside the bible who has never committed a fraud? Deception is part of nature; part and parcel of the natural process of competition between all life forms, and the struggle to survive, thrive, and reproduce.

One can speak to dentistry, and yes there is plenty of fraud. And much good too-idealism, health enhancement, beauty, and even life extension. It is very difficult for patients to know with certainty the veracity of recommendations, or the quality of their execution; and reputation itself is subject to fraud. However if a practitioner's results are substandard on a regular basis word gets out, and the competition will force quality to its proper level. Regression to the mean.

Government the antidote for human nature? Is there no fraud amidst the utility functions of union officials, state licensing boards, or politicians? Despite the various papering agencies that have signed off on all your doctors, what they do when you are asleep is between them and their deities.

What proof is there that the List or even markets are never fraudulent; that all posts and moves are direct truths intended to plant seeds rather than harvest fruit? So many doctors..so many deities.

Sports: Robert Locatelli, from Craig Maccagno

Having just come back from a sad journey to the west coast to put a dear friend to rest I arrived home, and looking for a distraction, decided to catch up on the Moto GP at Qatar on the DVR (Moto GP being the one good reason to have the DVR). It began with the 250cc class and was treated to a marvelous comeback that led one to ponder a question all traders should ask themselves.

The 250 race began with Roberto Locatelli on the front row and taking the hole-shot to begin, staying in the top three until the third lap when he took a trip into the gravel, holding onto the bars as the bike slid across the tarmac and into the dirt pulling the rider along. He lets go just before the bike comes to a stop and quickly jumps up to pick up the bike, restart it and get back into the race. This little adventure costs him several seconds and takes him from battling in the top three positions to 21st out of 21 riders. He was unshaken and like a man possessed he begins putting in some tremendous lap times and making his way through the pack. Now mind you this in only a 20 lap race but Qatar is one of the longer tracks on the circuit. Locatelli remains steadfast in his run for the podium and manages to make it back to 4th place behind Hector Barbera with a couple of laps to the finish. Then, in a sensational riding display and with the checkered flag in sight, the Italian nudged Barbera from the rostrum by 34 thousandths of a second. A truly amazing comeback to take the third spot on the podium.

So after that display, the obvious question that comes to this trader's mind: How do you trade when battling from behind or after taking a huge loss?

From this point forward one hopes to trade even a little bit like Locatelli rides in similar circumstances.